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ECT Modernisation Perspectives: An Update

Kluwer Arbitration Blog - Thu, 2021-08-05 01:00

From 20-26 July last year, this Blog ran a series on the Energy Charter Treaty (ECT) modernisation process. The Energy Charter Conference (the Conference) had recently established a Modernisation Group (the Subgroup) to conduct the modernisation negotiations, and the series aimed to provide updates to readers on various aspects of that process. At the time of the series, the Conference had just finished its first formal round of modernisation negotiations. Fast forward a year later to this update and a second (8-11 September 2020), third (3-6 November 2020), fourth (2-5 March 2021), fifth (1-4 June 2021), and sixth (6-9 July 2021) negotiation round have been conducted. This post provides an update on these latest rounds, to provide a snapshot of where the modernisation process is up to. As the post highlights, while things have moved forward since our series last year major divergences remain unresolved.

 

Is the ECT Moving Closer towards Protecting Cleaner, Greener Energy Investments?

The ECT has come under intense scrutiny and criticism for allegedly protecting the fossil fuel industry, on the one hand, and undercutting sovereignty, on the other. The criticism can be summarised as follows:

The ECT is an antithesis to the Paris Agreement, allowing fossil fuel companies to sue countries over their climate policies rather than strengthening the global response to climate change. … It protects all investments in the energy sector, including coal mines, oil fields and gas pipelines. Any state action that harms a company’s profits from these investments can be challenged outside of existing courts, in international tribunals consisting of three private lawyers. Governments can be forced to pay huge sums in compensation if they lose an ECT case.

The ECT modernisation process has continued to bring these issues into sharp focus. One key issue has been the connection between the environmental objectives that have become a focus in the modernisation process, and the definition given to the concept of “economic activity in the energy sector” (EAES). This defines which economic activities may benefit from investment protection under the ECT. It has been suggested that such concept could be redefined, for example, to exclude protection for fossil fuel investments. A more detailed overview of the concept of EAES in the ECT is available here. The negotiations have continued to focus on potential innovations to the scope and coverage of the ECT in this regard. During the fifth negotiation round, for example, it was suggested that there was a “need to amend the relevant provisions [on EAES] in light of the Contracting Parties’ individual climate goals and their specific energy mixes”. It was further noted that various proposals had been put forth, yet, “while there are different proposals on the definition of economic activity in the energy sector, all proposals favour the transition to a low carbon consumption society”.

In future negotiating rounds, a particularly relevant question will remain how best to balance investment protection with broader environmental goals. While adjustments to the definition of what constitutes an EAES might bring some degree of recalibration, States parties to the negotiations are also considering broader reform options. This includes, inter alia, the possibility for reforming the treaty to more objectively acknowledge goals related to sustainable development, the environment, climate change, and corporate social responsibility (CSR). The summary of the second negotiation round indicates, for example, that:

The discussions included comments and proposals on the right to regulate, relevant multilateral environmental agreements, climate change and the clean energy transition such as the Paris Agreement, international standards of labour protection, responsible business practices, the conduct of environmental impact assessment and good governance (transparency).”

The EU, in particular, has been characterized as a key stakeholder capable of making the ECT “the greenest investment treaty of them all”. The European Commission has indicated as part of the modernisation process its determination to reform investment protection standards and ISDS, on the one hand, while including new provisions on sustainable development and climate change, on the other. The Commission has stated that “[o]ne of the objectives of this reform is to align the ECT with the Paris Agreement and the objectives of the Green Deal”. Such mission is manifested in, for example, suggested definitional changes. The Commission is committed to pursuing the modernisation negotiations but has indicated that it will not abandon “core EU objectives, including alignment with the Paris Agreement”. It has even indicated that it may withdraw from the ECT altogether if these “core EU objective[s]” are not achieved.

The crux of the matter is whether the ECT, in its current form, “restricts countries’ ability to regulate and speed up the green transition of the energy sector”, or unduly privileges and protects coal and other dirty energy sources. At the same time, the origins and purpose of the ECT must not be forgotten. It is a treaty designed foster energy cooperation and to ensure the protection of energy investments. How then should the treaty be reformed so that the move towards a cleaner, greener treaty does not unintentionally undercut the investment protection needed to promote and attract energy (including green energy) investments? Such balancing and reconciliation is a daunting task.

 

Changes to Substantive and Procedural Investment Protections: What is Needed and What has Been Achieved?

Authors on this Blog have previously discussed possible reforms to the ECT’s denial of benefits clause, the fair and equitable treatment provision, as well as possible reforms to the valuation approaches adopted by ECT tribunals. These issues have continued to dominate the focus of the ECT modernisation process in subsequent negotiation rounds. In the third negotiation round, for example, the Subgroup discussed inter alia the definitions of investor and investment, the incorporation of a right to regulate clause, and the scope of the treaty’s most constant protection standard. So, too, in the fourth negotiation round, the Subgroup discussed inter alia possible adjustments to the treaty’s fair and equitable treatment, denial of benefits, indirect expropriation, most favored nation protection, and umbrella clauses. The parties “continued to clarify similarities and differences in their positions with a view to advance negotiations to the drafting of compromise proposals”. Reportedly, good progress was made and the Secretariat was mandated “with the drafting of draft compromise proposals to be considered during one of its next negotiation rounds in 2021”. The sixth negotiation round focused on several of these proposals, with the Subgroup reportedly making considerable progress on reforms to the definitions of “investment” and “investor”, “indirect expropriation” and denial of benefits. As the draft text being proposed and discussed has not been publicly released, it remains to be seen whether such adjustments largely replicate the status quo or result in significant innovations.

Authors on this Blog have also widely discussed possible ISDS reform, much of which is relevant with respect to the ECT. The ECT modernisation process has engaged in each negotiation round with possible ISDS reforms. This includes, for example, provisions to regulate frivolous claims, third party funding, security for costs, increased transparency, etc. The negotiation rounds have indicated the intention of ECT States Parties to reflect on the discussions taking place in UNCITRAL and ICSID vis-à-vis such reform options. The EU, for example, has indicated that its “ultimate goal is to make a future multilateral investment court applicable to disputes under the ECT”. Meanwhile, however, Japan, Kazakhstan, Azerbaijan and other States have indicated reluctance to agree to such reforms. As with every negotiation in a multilateral setting, give-and-take is key. As the ECT Secretary-General has stated: “Undermining the ECT modernisation process through unrealistic requirements might be dangerous as such calls could easily become a self-fulfilling prophecy”.

 

ECT Reform: Impossible or Imaginable?

We provide this update on ECT modernisation efforts with a moderately optimistic feeling. Serious discussions have been undertaken and compromises are likely to slowly emerge. Indeed, even at the outset of the modernisation process, sceptics predicted that the Contracting Parties would not be able to agree on a list of topics for negotiations, yet they did. Now, sceptics claim that reform is “extremely unlikely”. One thing is – at least – as clear now as it was when our ECT series was published last year: “certain provisions in the treaty are simply outdated” and, as Dr. Baltag explained, “[m]ost Contracting States to the ECT are in favor of modernisation. The disagreement, if any, will be on the wording of the provisions.”

It is therefore hoped that ECT States Parties can come together to improve the treaty. If not, the ECT stands only to fail. As the ECT Secretary-General said: “The stakes are high. If the modernisation process fails, I don’t see a future for the Treaty.” Yet, the dismantling of the ECT could itself “seriously hamper the ability of the world to meet the Paris climate targets. The Paris Agreement does not protect investment. The Energy Charter Treaty does. It’s a complement to the Paris agreement.” The bottom line is this: the ECT is still important, it has an important role to play, but it needs to “modernise” to meet the demands of the future.

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SCC Express: A Shortcut or A Detour?

Kluwer Arbitration Blog - Wed, 2021-08-04 01:00

In late May 2021, the Swedish Chamber of Commerce (“SCC”) announced its most recent dispute resolution tool – SCC Express, a process conducted under the SCC Rules for Express Dispute Assessment (the “Rules”). SCC Express is marketed as “… a fast and simple way to get a neutral, legal assessment of the disputed matter – enabling you and your counterparty to move on faster”. As this blog post shows, this holds true in a limited array of situations.

 

What is SCC Express?

SCC Express is a confidential consent-based dispute assessment process. In order to initiate it, parties are required to explicitly consent to the same. The consent may be given at any time – in a prior contract between the parties or when the dispute arises (Art 2(2) of the Rules).

Once the presence of consent is confirmed, SCC appoints a legal expert (a “Neutral”) who provides a legal assessment of the parties’ dispute within three weeks for a fixed fee of EUR 29,000. The Neutral is appointed by the SCC Board taking into consideration any proposals made by the parties (Art 6(1) of the Rules). In practice, parties should also be able to agree on the specific type of Neutral when providing their consent to participate in the proceedings.

 

What Do You Get for EUR 29,000?

SCC Express is a hybrid between mediation and arbitration. The proceedings may therefore be more inquisitorial compared to a typical arbitration. For the same reason, the legal assessment delivered by the Neutral is neither a decision nor an award but consists of the Neutral’s findings. These findings are not enforceable under the New York Convention and are not binding on the parties unless they contractually agree to make them binding, i.e. through the transformation of the findings into a binding decision (Art 2(4) of the Rules) through, for example, a recorded settlement agreement. It should be possible for the parties to agree on this at any time, meaning both before, during, or after the delivery of the Neutral’s findings.

As an alternative, and in line with general arbitration principles, the parties may of course agree to appoint the Neutral as an Arbitrator whereby the SCC Express proceeding and resulting findings would be transformed into an arbitration proceeding and an arbitral award respectively (Arts 2(4) and 6(5) of the Rules). Besides consent from the disputing parties, this alternative also requires the consent of the appointed Neutral (Art 2(4) of the Rules).

Where the parties agree to transform the SCC Express proceeding into full-fledged arbitration – and thereby also agree on arbitration rules applicable to such proceeding – the cost for the arbitration proceeding will be in line with those rules. It is currently unclear if in this case the parties would be charged for the initial SCC Express proceedings in addition to the arbitration, especially if the parties agree on one of the available SCC arbitration rules.

In sum, what you get for your EUR 29,000 is either (i) a non-enforceable and non-binding summary of findings, (ii) a non-enforceable but binding decision, or, at a presumed additional cost, (iii) an arbitral award.

 

Is it Worth it?

In all honesty – and very much cliché – it depends. There might be certain situations, for example between two disputing parties with a long-standing relationship, where the sort of “mutual counsel” that the Neutral represents may be respected by both parties and their findings or decision accepted by both sides. The likelihood of acceptance is of course greater where the parties – before the dispute arises – choose to agree on a contractually binding decision rather than mere findings of the Neutral. That said, such parties may already be inclined to settle the dispute without the need to pay the SCC Express fee.

However, for most other parties, where a dispute of a certain magnitude arises, it is not a given that both parties will honour the findings or agree to make them contractually binding. One reason for this may be the costs attached to such course of action.

With the fee of EUR 29,000, the disputed amount would have to be at least EUR 300,000 for SCC Express to be financially competitive with the costs of a full-fledged arbitration. In comparison, the SCC’s cost for arbitration proceedings (with one arbitrator) under the ordinary SCC arbitration rules would be approximately EUR 32,000 with an amount in dispute of EUR 300,000. The SCC’s cost for proceedings under the SCC expedited rules with the same amount in dispute would only amount to approximately EUR 21,000. In such a case, a party may well ask itself whether it is willing to spend money on a Neutral or simply attempt to obtain a final and enforceable award as soon as possible.

At the cost of EUR 29,000, the dispute that a party seeks to settle must be sizeable to warrant an early additional cost of a Neutral. Alternatively, the dispute must be such that early determination by the Neutral is likely to limit further legal costs. It is hard to imagine that many parties would engage with SCC Express without involving their counsel. In essence, SCC Express proceedings will incur legal fees as well as any other proceedings, albeit for a shorter period than in ordinary or expedited arbitration. The latter costs are harder to control than the costs related to SCC Express and an investment into such costs must be counter-balanced by the likelihood of early settlement.

In considering whether to agree to SCC Express, parties may also want to keep in mind that under SCC expedited arbitration, there is a 50 % chance that the tribunal renders an enforceable award within 3 months from referral and a 90 % chance that the award is rendered within 6 months from referral.

Other reasons that may tip the balance in favour or against SCC Express can include, e.g. the factual complexity of the dispute, the availability of evidence without a document production phase and the need to obtain a swift decision.

 

Is SCC Express a Shortcut or an (Expensive) Detour?

On the one hand, the parties may end up spending EUR 29,000 plus legal fees to obtain non-enforceable and non-binding findings at the end of three-week-long proceedings. If one party chooses not to adhere to the findings, the disputing parties would have no choice but to initiate arbitration at a cost (given above example) of additional EUR 21,000 plus legal fees and lost time resulting from the SCC Express proceedings. On the other hand, the parties may be able to resolve their dispute as a result of the Neutral’s findings, making the investment worthwhile. This may be the case, for example, where the parties to the dispute are willing to settle but need that little extra nudge in the right direction by a person perceived as more neutral than both parties’ counsel.

All things considered, SCC Express may be a shortcut to both parties’ satisfaction in a limited number of situations. However, prospective adopters should be aware that – given the obvious alternative of expedited arbitration under SCC rules – starting SCC Express proceedings might simply become a detour entailing higher costs, more time, and additional frustration between the parties.

Considering the cost of SCC Express, it is clear that this innovative tool is targeted at the early resolution of larger disputes. As disputed amounts must be above EUR 300,000 before it is worthwhile to pay the fixed SCC Express fee and still risk going through another process, it becomes evident that parties to smaller disputes are better off resolving their dispute through negotiations or referring the dispute to expedited arbitration.

In case of larger disputes, however, SCC Express may well prove to be efficient. Parties to larger disputes often conduct settlement negotiations in the background and this tool may well assist them in moving those discussions forward, or avoiding them altogether. In such multi-million or billion disputes, the price tag related to the early evaluation of the case is less relevant. What matters in those instances is the authority that the evaluation by a Neutral can provide. That authority is, however, dependent on SCC’s ability to find a capable and diligent Neutral to provide her or his findings under the relevant applicable law, and on the diligence and clarity of the Neutral in formulating her or his findings. Time will tell whether SCC can find the right people for the job and whether parties will trust the process and turn this innovative tool into a revolutionary way of precipitating dispute resolution instead of adding yet another step to it.

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New Dispute Boards Rules from CRCICA

ADR Prof Blog - Tue, 2021-08-03 23:36
The Cairo Regional Centre for International Commercial Arbitration (CRCICA) has recently announced the launch of its new Dispute Board Rules.  In doing so, it joins a relatively small and rarefied group of international institutions and arbitration centers that currently have such rules.  CRCICA has been working on drafting the Rules since about 2019 in consultation … Continue reading New Dispute Boards Rules from CRCICA →

New Survey on Costs and Disputes Funding in Africa

ADR Prof Blog - Tue, 2021-08-03 23:27
The Africa Arbitration Academy (AAA) and The African Legal Support Facility (ALSF) have launched a Survey on Costs and Disputes Funding to understand from the perspectives of users of litigation and arbitration in Africa. This is a significant effort to gather important empirical data about the costs of dispute resolution in Africa, which will help … Continue reading New Survey on Costs and Disputes Funding in Africa →

When Does a Party’s Conduct Impact its Ability to Enforce an Arbitration Agreement and Stay a Court Proceeding?

International Arbitration Blog - Tue, 2021-08-03 11:05

In CSI Toronto Car Systems Installation Ltd. v. Pittasoft Co., Ltd., 2021 ONSC 5117 (“Pittasoft”), Justice Sharma of the Ontario Superior Court of Justice refused to grant a stay of proceedings in favour of arbitration due to the conduct of the defendant, which estopped them from enforcing their arbitration agreement.

Recognition, Enforcement or Execution? The Full Federal Court’s Nuanced Examination of Foreign Awards in Australia

Kluwer Arbitration Blog - Tue, 2021-08-03 01:38

The International Convention on the Settlement of Investment Disputes (ICSID Convention) contains two provisions regulating compliance with arbitral awards. Article 53(1) provides that an award shall be binding on the parties. Article 54(1) requires each contracting State to recognise an ICSID award as binding. In this regard, it is common for parties to comply with ICSID awards without the need for court intervention.1)ICSID Convention, Regulations and Rules, ICSID/15 April 2006. jQuery('#footnote_plugin_tooltip_38298_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38298_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); However, States do sometimes seek to resist their Convention obligations, in which case the matter may end up before a domestic court. In Kingdom of Spain v Infrastructure Services Luxembourg [2021] FCAFC 3 (Judgment), the Full Federal Court of Australia allowed an appeal in relation to the application of the Foreign States Immunities Act 1985 (Cth) (FSIA) to ICSID awards rendered against contracting States to the ICSID Convention. Doing so, it confirmed that no defence of sovereign immunity will be available to a State seeking to resist recognition of an ICSID award. It also laid down clear principles for the recognition of awards made under the ICSID Convention.

 

First Instance Decision

The two ICSID disputes at issue in the Australian court proceedings related to the investment of EUR 139,500,000 in solar power generation projects, and a series of financial incentives which the investors had relied upon when investing in Spain. The investors successfully obtained two ICSID awards against Spain for its failure to accord fair and equitable treatment of the investors, in breach of Art 10(1) of the Energy Charter Treaty. The Australian Federal Court granted the applicant investors leave for the recognition and enforcement of the awards. This decision was appealed by Spain. The principal issue upon appeal remained sovereign immunity, and whether ratifying the ICSID Convention constituted submission to jurisdiction.

 

Decision on Appeal

The Full Federal Court allowed the appeal. Doing so, it distinguished between “recognition” and “enforcement” of the awards, noting that the orders to which the applicant was entitled were those that reflected the outcome of a recognition proceeding, not one of enforcement.

The Court held that, as a general concept, recognition refers to the formal confirmation by a court that an arbitral award is authentic and has legal consequences under municipal law. In essence, the purpose of recognition is for the award to be recognised as binding. Enforcement, however, goes a step further, and refers to the process by which a successful party seeks the municipal court’s assistance in ensuring compliance with the award (as recognised) and obtaining the redress to which it is entitled. Execution refers to the formal process by which enforcement is carried out (at para 26).

Despite this broad outline, which the Court acknowledged was “simplistic”, the Court concluded that the proceeding was one of recognition. This is not a straightforward conclusion, as the ICSID Convention does not prescribe how to make an application for recognition; this is left to the domestic law of a contracting State.

In the Australian context, the International Arbitration Act (Part IV, and particularly s35) governs ICSID awards. The Court acknowledged that interpretation of section 35 is not without difficulty (at para 43). While it is headed ‘Recognition of awards’, this section does not explicitly confer an entitlement on a party to seek recognition of an award, it instead refers only to enforcement. The Court concluded that a construction that gives effect to Australia’s international obligations should be preferred, and as such “enforced” should be read as including “recognised” in the International Arbitration Act.

Whether Spain could rely on a defence of State immunity in response to an application for recognition required analysis of the text of Articles 54 and 55 of the ICSID Convention.

In its analysis of Articles 54(1) and (2) of the ICSID Convention, the Court concluded that two distinct applications are contemplated. If the term enforcement in Article 54(2) were synonymous with recognition, this distinction would be redundant (at para 27). A party may seek recognition of an award without seeking its enforcement. Article 54(2) also provides for a party to apply for enforcement of an award without first applying for its recognition (at para 29).

The question then was whether Articles 54(1) and (2) constituted a submission to jurisdiction. If execution were read as including recognition in Article 55, the qualification of State immunity would consume the entire operation of Article 54. The recognition procedure in Article 54(2) would never be available against a State, rendering the obligation for a contracting State to recognise an award in Article 54(1) obsolete (at para 33). The Court held that such a conclusion would be perverse; Article 55 does not refer to recognition and there can be no warrant for reading it as if it did.

The Court concluded that Spain had agreed to submit to the jurisdiction of the Federal Court by virtue of those Articles in relation to a recognition proceeding, and Article 55 could have no impact on that conclusion. The Full Court thus held that sovereign immunity did not prevent parties from seeking recognition of an ICSID award, but made no decision as to the defence of sovereign immunity from enforcement proceedings.

 

Comments

The decision of the Full Court draws a clear distinction between recognition and enforcement of ICSID awards, and leaves open the extent to which a foreign State can rely on its immunity to defeat enforcement proceedings and execution against its assets. The position in Australia is that Article 54(2) constitutes a submission to jurisdiction for the purpose of recognition. There are distinct questions remaining as to how the Court would settle the issues of State immunity from jurisdiction for the purpose of enforcement proceedings, and immunity from execution against foreign State property.

The orders for recognition made in relation to Kingdom of Spain were published on 25 June 2021. These shed light on what is contemplated by recognition. The Court made an order that:

The Court hereby and in these orders recognises as binding on the respondent (the Kingdom of Spain) the award of the International Centre for Settlement of Investment Disputes… and pursuant to s 35(4) of the International Arbitration Act 1974 (Cth) the Court orders that judgment be entered in favour of the applicants against the respondent for the pecuniary obligations under the Award…

The orders go on to explicitly state that “Nothing in Order 1(a) shall be construed as derogating from the effect of any law relating to immunity of the respondent from execution.” These orders clarify that the Court sees its role in recognition proceedings as being limited to acknowledging the binding nature of ICSID awards on the parties (including State parties). The question of whether a State could claim a form of immunity (from execution or jurisdiction) against an attempt to compel compliance is expressly reserved and would be a matter for future consideration if the respondent did not voluntarily comply with the award (as recognised).

The recognition and enforcement of judgments made by foreign courts in Australia under the Foreign Judgments Act 1991 (Cth) (Foreign Judgments Act) faces similar hurdles. In Firebird Global Master Fund II Ltd v Republic of Nauru [No 2] [2015] HCA 53, the High Court of Australia held that foreign State immunity does not prevent proceedings to register a foreign judgment in circumstances where that judgment concerns a commercial transaction.

In that case, Nauru applied to have registration and garnishee orders (made by the Supreme Court of New South Wales) set aside, claiming, amongst other things, that proceedings to register a judgment invoked “the jurisdiction of the courts of Australia in a proceeding” within the meaning of section 9 of the FSIA, and Nauru was accordingly entitled to immunity from jurisdiction. The High Court held that Nauru was not immune from jurisdiction because the proceedings “concerned a commercial transaction” and therefore fell within an explicit exception to immunity in section 11 of the FSIA. Notably, the High Court dismissed the argument put forward by Firebird, that proceedings for registration of a judgment were not captured by section 9 of the FSIA; section 9 would have applied, but for the exemption.

Following the decision in the High Court, we know that a sovereign State’s immunity against suit extends to the registration of a foreign judgment under the Foreign Judgments Act, but can be lost where there is a statutory exception in the FSIA. The text of the Foreign Judgments Act clearly contemplates that enforcement (as defined in that Act) will follow registration. However, whether a judgment can be executed will depend on whether a State could then claim immunity of assets; as was the case in Firebird; this involves an assessment of whether State property in the jurisdiction can be classified as “in use” for “commercial purposes”.

With regard to guidance on recognition and enforcement of ICSID awards from other jurisdictions, courts in the UK have repeatedly affirmed the primacy of the UK’s obligation to recognise and enforce awards under the ICSID Convention. However, they have not drawn or considered a distinction between recognition (known in the UK as registration) and enforcement.

The Arbitration (International Investment Disputes) Act 1966 (UK Arbitration Act), and the Civil Procedure Rules 1998 part 62.21 outline a procedure for registration and enforcement of ICSID awards in the UK that reinforces a non-interventionist regime. The UK legislation expressly sets out how parties may apply for registration of an award and prescribes the effect of registration; a registered award “as respects the pecuniary obligations which it imposes, [shall] be of the same force and effect for the purposes of execution as if it had been a judgment of the High Court”. The UK Arbitration Act goes on to explain that proceedings may be taken on the award, interest will accrue, and the High Court has control of execution. While there is greater clarity as to the process for applying for registration and enforcement in the UK, the same issues of State immunity from jurisdiction and immunity of State property could arise if investors seek to execute ICSID awards in the UK, as the State Immunity Act 1978 would apply.

So where do we go from here? In relation to ICSID awards, sovereign immunity defences will only be available to a State at the point that the creditor seeks to enforce and execute that ICSID award against assets located in Australia. In earlier recognition type proceedings, Article 54(2) will be considered a submission to the jurisdiction of the courts of Australia as a contracting State to the ICSID Convention. In distinguishing recognition from enforcement and execution, the Court has clarified what recognition in relation to ICSID awards entails. The orders made by the Federal Court on June 2021, unlike those at first instance, do not grant leave for the applicant to enforce the award, rather they are limited to an acknowledgment of the binding nature of the ICSID award and recording a judgment in favour of the award creditor for amounts payable under the award. Recognition of an award by another contracting State may apply some pressure on a debtor State to comply with its obligations under the ICSID Convention. However, if there is further recalcitrance an investor may have to combat arguments of State immunity in relation to enforcement and execution.

References[+]

References ↑1 ICSID Convention, Regulations and Rules, ICSID/15 April 2006. function footnote_expand_reference_container_38298_30() { jQuery('#footnote_references_container_38298_30').show(); jQuery('#footnote_reference_container_collapse_button_38298_30').text('−'); } function footnote_collapse_reference_container_38298_30() { jQuery('#footnote_references_container_38298_30').hide(); jQuery('#footnote_reference_container_collapse_button_38298_30').text('+'); } function footnote_expand_collapse_reference_container_38298_30() { if (jQuery('#footnote_references_container_38298_30').is(':hidden')) { footnote_expand_reference_container_38298_30(); } else { footnote_collapse_reference_container_38298_30(); } } function footnote_moveToReference_38298_30(p_str_TargetID) { footnote_expand_reference_container_38298_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38298_30(p_str_TargetID) { footnote_expand_reference_container_38298_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Teaching Students to Think Like Practitioners

ADR Prof Blog - Mon, 2021-08-02 14:38
People often say that dispute resolution processes aren’t “one size fits all.”  When practitioners are asked to opine about hypothetical problems, they often say “it depends” and they make “case by case” decisions. They are telling the truth.  Lawyers make complex decisions as negotiators, litigation advocates, and mediators based on a lot of factors, so … Continue reading Teaching Students to Think Like Practitioners →

The Still (Somewhat) Muddied Waters of Court-Ordered Interim Measures in Support of Commercial Arbitration in Ukraine

Kluwer Arbitration Blog - Mon, 2021-08-02 01:00

In recent years, arbitration has been gaining traction in Ukraine as a fast and efficient method for dispute resolution. It was against this background that in December 2017 a long-awaited reform of procedural legislation was carried out (hereafter referred to as the ‘Reform’). The Reform introduced several pro-arbitration measures. Among these, the Reform sought to better facilitate the capacity of parties to obtain interim measures in support of international arbitration from the state courts before an award on the merits is delivered. However, as will be seen below, there are still several hurdles that need to be tackled before one can speak of an effective regime for interim measures in Ukraine.

 

Before and After the Reform: Overview

Before the Reform,1)To find out more about the Reform, please see two posts published by Kluwer Arbitration Blog, available here and here. jQuery('#footnote_plugin_tooltip_38219_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38219_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); the Code of Civil Procedure of Ukraine (CCPU) contained no provisions on granting interim measures in support of arbitration. In spite of that, Ukrainian courts received three requests for the enforcement of awards on interim measures. The courts stated that those requests were duly submitted and initiated proceedings under the CCPU provisions designated for enforcement of final awards. However, all three applications were dismissed for different substantive reasons.2)Case No. 2к-13/2011, Case No. 519/459/16-ц, and  No. 757/5777/15-ц jQuery('#footnote_plugin_tooltip_38219_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38219_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

As a result of the Reform, Chapter 10 of Section I of the CCPU (regulating the application of interim measures in civil proceedings) was complemented with a provision providing that a court can grant interim measures at a request of a party in either domestic or international arbitration.

This innovation was warmly welcomed by arbitration practitioners. However, we are yet to see a significant increase in the number of interim measures requests granted. The International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry decides 300-600 cases annually, yet fewer than 30 applications for interim measures have been successful in more than three years.

 

Current Challenges

What is it that (still) prevents parties to arbitration from obtaining court-ordered interim measures in Ukraine?

(i) Request Submission: Finding the Appropriate Document(s)

Article 151 of the CCPU requires a party seeking an interim measure to provide a copy of:

  • a document initiating arbitration proceedings (Initiation document), which can either be a request for arbitration or statement of claim, depending on the Rules chosen, and
  • a document confirming the submission of the Initiation document to an arbitration institution (Confirmation document).

While the arbitration rules will generally define what document will serve to initiate arbitration, the same cannot be said for the Confirmation document. Unfortunately, the CCPU gives no clarification as to what can be used as the Confirmation document, leaving this matter to the courts. In practice, this has caused some confusion as many parties would, as a matter of convenience, submit a document that for them was the easiest to procure, but the court would reject it as inadequate.

So, what would a Ukrainian court accept as a valid Confirmation document? Looking at the case law, the following non-exhaustive list emerges:

  • a postal delivery confirmation document with a list of enclosures (not a postal confirmation related to sending the Initiation document),
  • a copy of the Initiation document stamped by the arbitration institution with an incoming number and date,
  • a copy of a ruling on commencement of proceedings duly certified by the arbitration institution, or
  • a confirmation letter from the registrar of the arbitration institution.

An interesting question arises as to whether an e-mail can be used as a Confirmation document. Similar to the documents listed above, an electronic Confirmation document must be an answer from an arbitration institution confirming receipt of a letter and not the mere fact of sending it. Further, the CCPU requires an electronic document submitted as evidence to contain a qualified electronic signature. Ukraine is currently creating an extensive network of treaties on mutual recognition of electronic trust services allowing parties to international arbitration to present e-mails from non-Ukrainian arbitration institutions as a Confirmation document. However, a major practical hurdle is that no treaty has been signed to this end so far.

(ii) Provision of Security: An Off-Putting Requirement

If the claim is rejected or left without consideration,3) According to the CCPU, if a requesting party fails to provide required documents or information, a court leaves the request without consideration instead of rejecting it. This means the requesting party can address the court again by submitting the documents and information needed. jQuery('#footnote_plugin_tooltip_38219_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_38219_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); the CCPU entitles the respondent to recover compensation for any damage caused by the interim measures. However, if such a recovery may be precluded in the future, the court may require the requesting party to provide security.

Generally speaking, a court has discretion to require provision of security. However, in two cases it is mandatory: (1) the applicant is neither registered in Ukraine nor has property on its territory sufficient to cover possible damages, and (2) the court is satisfied that the applicant’s actions or property status may complicate recovery of the respondent’s damages.

Under the CCPU, a request for interim measures shall inter alia contain the applicant’s suggestions on security. Para. 4 of Article 154 of the CCPU provides three options for security: (1) placing funds into the court’s deposit account, (2) providing financial assurance or (3) taking any other relevant actions.  The first option is the most frequently used one. That being said, under the current legislation, the Ukrainian courts have deposit accounts only in the national currency – Ukrainian hryvnia (UAH).

Failure to comply with the requirement to suggest a method for security ranks among the most common reasons for leaving the request without consideration. In a number of cases[fn]e.g. cases No.812/223/19, 812/816/19, 812/808/19[fn] the requesting parties claimed that there was no need for security as no damages would be inflicted to the responding party. In turn, the courts left the requests without consideration, noting that the suggestion for security was still necessary. Nevertheless, in the proceedings No. 61-15925ав20, the Supreme Court stated that a statement that the requesting party agrees to any security a court deems necessary is acceptable.

Ultimately, the requesting party bears all the risks and expenses connected to security. The CCPU provides neither protection of the deposited sums from inflation nor reimbursement of expenses connected to obtaining financial assurance. Deciding cases No.785/1018/18 and No.194533, the courts put forward a rather controversial opinion as regards the assessment of security: it was required to be equal to the amount of requested preservation.

 

New Case Law: Paving the Way in the Right Direction (i) Criteria clarified

Despite Ukraine being a civil law jurisdiction, statutory regulation of the criteria for interim measures is rather limited, thus requiring courts to develop the applicable standards through case law. Interim measures in aid of commercial arbitration fall within the jurisdiction of the Ukrainian civil courts. Compared to commercial courts, the civil courts have a less established case law on the criteria applicable to interim measures requested in commercial disputes. And when it comes to granting interim measures in support of commercial arbitration, the civil courts tend to simply adapt the commercial courts’ approach. However, they do so in an inconsistent manner.

Existing case law indicates that an applicant seeking provisional measures will be required to show:

  • a prima facie case on the merits and reasonable possibility of success on the merits,
  • that the requested measures correspond with the type of claim and will not hinder respondent’s business activity or breach the rights of third parties,
  • that the balance of hardships weighs in the applicant’s favor, and
  • a reasonable assumption that in case of refusal, enforcement of the award on the merits would be unlikely or impossible.

The fourth point is emphasized as the key condition for granting interim measures. However, what precisely constitutes a reasonable assumption is still unclear. For example, in the proceedings No.06.08/824/311/2019 and No.22-з/824/620/2020, the applicants showed identical circumstances: claimant makes an advance payment under a supply agreement; respondent neither delivered the goods nor returned the payment. While in the first case the request for provisional measures was successful, in the second it was rejected. The court in the second case adopted a higher probability requirement by resorting to the degree standard set in the resolution of the Plenum of the Supreme Commercial Court No.16 dated 26.12.2011, requiring demonstration of the respondent’s exact actions aimed at making a future award unenforceable.

In the proceedings No. 61-16635ав20, the Supreme Court ruled that the requesting party shall show that the respondent failed to act in good faith and took certain actions to make enforcement of the award on the merits unlikely or impossible e.g. sells or prepares for sale property in possession. Although Ukraine is a civil law jurisdiction, the legal position of the Supreme Court must be heeded by lower courts, thus bringing us a much needed clarification as to what shall constitute a reasonable assumption.

(ii) Enforcement of Awards on Interim Measures

The Reform left enforcement of orders and awards on interim measures in a vacuum. No explicit provisions on these topics were introduced into the CCPU and no amendments were made to the Ukrainian Arbitration Law, which is still based on the UNCITRAL Model Law as of 1985.

Recently, a case reached the Supreme Court in which the applicant had petitioned for enforcement of an emergency decision on interim measures delivered by the Emergency Arbitrator of the Arbitration Institute of the Stockholm Chamber of Commerce. Deciding the case No. 824/178/19, the Supreme Court applied the provisions of Chapter 3 of Section IX of the CCPU on enforcement of arbitral awards and made no reservations as to the non-final character of the emergency decision.

This gives us an explicit answer as to whether awards on interim measures can be enforced in Ukraine.

 

Conclusion

Currently, a party to arbitration aiming to obtain interim measures from a court in Ukraine is sure to face certain difficulties. However, case law developed by the Ukrainian courts has produced much needed clarity. Furthermore, it can be said that the Reform of the Ukrainian legislation regarding interim measures was overall a successful endeavor. In other words, although there is still work left to be done, great strides have been made. Given the fact that the regime of interim measures in Ukraine is still a work in progress, I would advise arbitration practitioners to be both aware of possible intricacies that remain and to become engaged in constructive discussions and contribute to legislative initiatives to help Ukraine become a solid pro-arbitration jurisdiction.

References[+]

References ↑1 To find out more about the Reform, please see two posts published by Kluwer Arbitration Blog, available here and here. ↑2 Case No. 2к-13/2011, Case No. 519/459/16-ц, and  No. 757/5777/15-ц ↑3 According to the CCPU, if a requesting party fails to provide required documents or information, a court leaves the request without consideration instead of rejecting it. This means the requesting party can address the court again by submitting the documents and information needed. function footnote_expand_reference_container_38219_30() { jQuery('#footnote_references_container_38219_30').show(); jQuery('#footnote_reference_container_collapse_button_38219_30').text('−'); } function footnote_collapse_reference_container_38219_30() { jQuery('#footnote_references_container_38219_30').hide(); jQuery('#footnote_reference_container_collapse_button_38219_30').text('+'); } function footnote_expand_collapse_reference_container_38219_30() { if (jQuery('#footnote_references_container_38219_30').is(':hidden')) { footnote_expand_reference_container_38219_30(); } else { footnote_collapse_reference_container_38219_30(); } } function footnote_moveToReference_38219_30(p_str_TargetID) { footnote_expand_reference_container_38219_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38219_30(p_str_TargetID) { footnote_expand_reference_container_38219_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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A Tale of Two Negotiators

ADR Prof Blog - Sun, 2021-08-01 18:26
When President Trump was in office, I wrote a series of posts about his negotiation skills (or lack thereof) based on contemporary news accounts.  Despite having Republican majorities in both houses of Congress for his first two years in office, he generally was unable to negotiate for enactment of his policy objectives, most notably to … Continue reading A Tale of Two Negotiators →

Advocate General Szpunar in Micula: Achmea Irrelevant, but Commission Competent to Assess Award under EU State Aid Law

Kluwer Arbitration Blog - Sun, 2021-08-01 01:00

According to Advocate General Maciej Szpunar, the Micula case is symbolic of the ‘conflictual relationship’ between EU law and international investment law. Indeed, the European Commission has persistently objected to the execution of the ICSID award issued in Micula, not because of the principles of autonomy and mutual trust that underpinned the Achmea judgment, but on grounds of EU state aid law. On 1 July 2021, Advocate General Szpunar issued his opinion in Micula, advising the Court of Justice of the European Union (‘CJEU’) to set aside the Micula judgment of the General Court, which had found against the Commission. In the view of the Advocate General, the General Court had erred when ruling that the European Commission was not competent to assess whether the implementation of the ICSDID award was compatible with EU state aid law.

 

The Long Road to Luxembourg

In 2005, the Swedish brothers Micula and some of their companies commenced ICSID proceedings against Romania, challenging the withdrawal of tax incentives which were originally scheduled to remain in place until 2009 but had been terminated in order to ensure Romania’s compliance with EU state aid law upon accession. In 2013, the ICSID tribunal awarded approximately EUR 178 million in damages to the claimants, finding that Romania had breached the fair and equitable treatment standard prescribed in the Romania-Sweden BIT. Already during the arbitral proceedings, the European Commission had argued that any compensation granted for the withdrawal of the tax benefits would be subject to EU state aid law. In 2015, the Commission adopted a decision, finding that any compensation paid by Romania under the ICSID award constituted incompatible state aid which would have to be recovered by Romania. In 2019, the General Court annulled the Commission’s decision, ruling that the latter had lacked the competence to assess the compatibility of the ICSID award with EU state aid law, since the award effectuated a right to compensation which arose when Romania repealed the tax incentives, i.e. before Romania’s accession to the EU (see earlier blog here).

 

The Nuances of Achmea

Since the Micula arbitration was based on an intra-EU BIT, it is unsurprising that arguments based on Achmea appeared during the proceedings in Luxembourg. The General Court had briefly addressed the point, dismissing the relevance of Achmea to the Micula case. Since the General Court had found that the Micula case, unlike the Achmea case, concerned events predating Romania’s accession to the EU, the Micula tribunal was not bound to apply EU law. Nonetheless, it was argued in cross-appeal by Spain, supported by the Commission and Poland, that the rationale of the Achmea judgment applied to the Micula arbitration and that, for that reason, the Miculas’ application for annulment of the Commission’s state aid decision was inadmissible.

Advocate General Szpunar expressed ‘some doubts’ as to whether the annulment application would be inadmissible even if the arbitration would have been incompatible with EU law. He noted, in footnote 11 to the opinion, that the incompatibility of the arbitration with EU law would not automatically have ‘the effect of placing an obligation on the applicants to repay the compensation’, while ‘the annulment of the decision at issue would necessarily have an impact on their situation, since that decision determines whether they may keep the payments made by Romania’.

In any event, the Advocate General rejected the substance of Spain’s cross-appeal. While Achmea implied that all arbitration proceedings initiated on the basis of an intra-EU BIT are incompatible with EU law, this approach was ‘debatable’ in respect of proceedings initiated before a state’s accession to the EU. The Advocate General agreed with the cross-appellants that EU law applied to the Micula arbitration proceedings as of Romania’s accession to the EU on grounds of the principle of the immediate applicability of EU law to the future effects of a situation that arose before accession, but this did not yet answer the question of compatibility.

The Advocate General noted that Achmea was concerned with the risks posed to the autonomy of EU law by arbitration proceedings in which EU law might be interpreted or applied. In the view of the Advocate General, all intra-EU BITs carry this risk, irrespective of whether it can be conclusively determined that a specific dispute involves the interpretation or application of EU law. Nevertheless, in the case of an arbitration initiated before accession, ‘no dispute capable of concerning the interpretation or the application of EU law is removed from the judicial system of the European Union’. The Advocate General considered that if instead of an arbitral tribunal, a Romanian court had been hearing the Micula dispute, it would not have been able to make a preliminary reference to the CJEU even after accession, since ‘the Court does not have jurisdiction to rule on the interpretation of EU law in a dispute concerning a situation that arose before accession’.

As to the principle of mutual trust, the Advocate General observed that this principle does not apply in relationships between the EU and third states. Precisely because of the lack of trust between EU member states and third states, the European Commission had promoted the conclusion of BITs between member states and aspiring member states in central and eastern Europe. The arbitration clause in these BITs served to compensate for the absence of mutual trust and to ensure an effective remedy for investors of member states in these states prior to their accession to the EU. Accordingly, the Advocate General considered it ‘lawful’ that a tribunal that was validly seized on the basis of a BIT whose conclusion had been encouraged by the EU would not relinquish jurisdiction upon the respondent state’s accession to the EU, ‘since the arbitration proceedings made it possible before accession, on the same basis as the principle of mutual trust after accession, to ensure the protection of investors’ rights’.

 

The Timing of State Aid

The main appeal questioned whether the European Commission had been competent to assess the arbitral award under EU state aid law. In this context, the parties debated the moment in time when any state aid allegedly granted in connection with the award was actually granted. Citing Magdeburger Mühlenwerke, the Advocate General noted that state aid is granted at the moment ‘that the right to receive it is conferred on the beneficiary under the applicable national rules’. For that reason, not the moment of payment was the decisive criterion, but the moment of ‘the acquisition, by the recipient of the aid measure at issue, of a definitive right to receive it, and the corresponding commitment, by the State, to grant the aid’. In the view of the Advocate General, the Micula tribunal retroactively established the existence of a right to compensation that, prior to the award, did not definitively exist but was actually contested by Romania. Accordingly, the alleged aid measure was granted at the moment when the right to compensation was recognised by the tribunal or when the award was implemented by Romania, i.e. after accession. Accordingly, contrary to the General Court’s ruling, the Advocate General concluded that the Commission was competent to assess the compatibility of the award with EU state aid law.

The Advocate General’s conclusion on the timing of the state aid measure logically implied a rejection of the General Court’s finding that the Commission had wrongly qualified the award as an ‘advantage’, which is one of the criteria of state aid as defined in Article 107 TFEU. According to the General Court, EU law was not applicable to the compensation at issue and the Miculas could therefore rely on the Asteris judgment, which draws a distinction between compensation for damages and an advantage in the sense of EU state aid law. Advocate General Szpunar, however, had already established that EU law applied to the compensation, since it was awarded after Romania’s accession to the EU.

Moreover, he noted that the General Court had failed to address other reasons why the award might not qualify as compensation for damages in the sense of Asteris. For instance, the Commission had argued that Asteris only applied in the context of the general rules on civil liability under domestic law and not in the context of arbitration proceedings, and that the Romanian Competition Council had classified the original tax incentives as state aid under the 1995 association agreement between the European Economic Communities and Romania. In the view of the Advocate General, the General Court should have engaged with these arguments.

 

Concluding Remarks

Timing is everything in the Micula saga. Because of the complex timeline of the events, including arbitration proceedings commenced before Romania’s accession to the EU but concluded after accession, a variety of arguments have been raised in respect of the applicability of EU law to this particular case. According to Advocate General Szpunar, the Micula proceedings are not affected by the Achmea judgment because the arbitration concerned events before accession and was commenced before accession. At the same time, the fact that the award was rendered after accession gave the European Commission competence to assess the award under EU state aid law. If the Court follows this opinion, the case will be referred back to the General Court which will have to assess whether the Commission was not only competent but also right to qualify the award as incompatible state aid. The answer to this question will likely have implications beyond the Micula case, given the Commission’s continuing reliance on the state aid argument.

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The Contents of Journal of International Arbitration, Volume 38, Issue 4 (August 2021)

Kluwer Arbitration Blog - Sat, 2021-07-31 02:09

We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:

 

Gary Born, The 1933 Directives on Arbitration of the German Reich: Echoes of the Past?

In 1933, the National Socialist government of the German Reich issued a collection of directives regarding the use of arbitration to resolve disputes, focused specifically on disputes between the Reich and private parties. The 1933 Directives made a number of general criticisms of the arbitral process as a means of adjudication, and relied upon these criticisms to significantly restrict the use of arbitration to resolve disputes with German state entities. The Reich Directives provide a neglected, but instructive, historical perspective on arbitration law and practice in Germany, both in the 1930s and before. At the same time, parts of the 1933 Directives also have unmistakable parallels to current debates about investor-state and commercial arbitration. Among other things, the Directives contain recommendations regarding the drafting of arbitration agreements and the conduct of arbitral proceedings which, while in some areas outdated, could in other respects be mistaken for current discussions regarding best practices in international commercial and investment arbitration. More importantly, the Directives’ criticisms of the arbitral process, and the National Socialists’ rationales for those criticisms, have striking analogues to aspects of contemporary debates about investment arbitration and proposals to abandon or restrict investment arbitration. Those parallels raise important, if uncomfortable, questions about these contemporary critiques and proposals for reform.

 

Darius Chan & Sidharrth Rajagopal, To Stay or Not to Stay? A Clash of Arbitration and Insolvency Regimes

In the wake of the global Coronavirus disease 2019 (COVID-19) pandemic, a rise in creditor-initiated winding-up proceedings is likely to be impending in coming years (See e.g., RCMA Asia Pte. Ltd. v. Sun Electric Power Pte. Ltd. [2020] SGHC 205). At the same time, geopolitical developments, such as the scale and ambition of Belt & Road Initiative projects, have raised questions over the issue of debt sustainability. Given the prevalence of arbitration clauses in modern international commercial and project agreements, the interplay and relationship between insolvency and dispute resolution, and especially arbitration, requires careful attention. While the intersections between the arbitration and insolvency regimes are numerous and multi-faceted, (Jennifer Permesly et al., ‘IBA Toolkit on Insolvency and Arbitration’, International Bar Association (March 2021, last accessed 18 April 2021) the impact of an arbitration clause on winding-up petitions has attracted recent case law. The English, Hong Kong, and Singapore courts have each taken differing approaches to the question of how to deal with winding-up petitions presented over disputed debts that are subject to an arbitration clause. On one end of the spectrum, the Hong Kong courts currently appear to prefer a relatively more creditor-friendly approach. On the other hand, the Singapore Court of Appeal recently laid down a relatively more debtor-friendly approach. Undertaking a comparative analysis of the approaches taken by different common law jurisdiction, this article argues that the Singapore Court of Appeal’s approach is preferable. However, at least for courts in United Nations Commission on International Trade Law (UNCITRAL) Model Law jurisdictions (or jurisdictions where the mandatory stay regime of the Model Law is adopted), they ought to find that a disputed debt subject to an arbitration clause falls within the scope of the mandatory stay regime under the Model Law. This article further suggests a possible way in which the approach of the Singapore Court of Appeal can be reconciled with the mandatory stay regime under Singapore’s enactment of the Model Law.

 

Rekha Rangachari, Kabir Duggal & Peter L. Schmidt, Evolution of 28 U.S.C. § 1783: An Unexplored Tool to Support International Arbitration?

In certain disputes, it may be important to acquire evidence from the other party, but it is difficult to do so because the international arbitration process envisions only a limited form of discovery from the opposing party in the form of document production. There is, however, the potential of an unexplored option in US law to help fill this void. 28 U.S.C. § 1783, also known as the ‘Walsh Act’, enables a United States court, under certain circumstances, to subpoena a national or resident of the United States who is in a foreign country to personally appear as a witness before the court, or before someone designated by the court, or to produce specific testimony or documents. Considering the ubiquity of American parties in international disputes, section 1783 has the potential to become an important tool in the arsenal of a disputes lawyer. Indeed, considering how section 1782 has been increasingly applied in international arbitration, it is possible that section 1783 might evolve as an important component in considering strategies for international arbitration. Like section 1782, however, due to its lack of use to date and vague statutory language, its applicability to various forms of international arbitrations remains an unfortunately open question. But it still has the potential to change international arbitration as we know it.

 

Bianca Böhme, Recent Efforts to Curb Investment Treaty Shopping: How Effective Are They?

In recent years it can be observed that states increasingly introduce explicit limitations to the practice of treaty shopping in their investment agreements. Accordingly, substantive ratione personae requirements, denial of benefits clauses, and anti-circumvention clauses are often included in newly signed investment treaties. In addition to these new drafting trends, arbitral tribunals have developed an implicit limitation in the form of the abuse of process doctrine to sanction the most egregious forms of treaty shopping. While these drafting trends as well as arbitral practice can curb undesired treaty shopping to a certain extent, this article argues that only a multilateral reform effort is able to truly prevent this practice from occurring.

 

Joshua Paine, Global Telecom Holding v. Canada: Interpreting and Applying Reservations and Carve-Outs in Investment Treaties

Within investment treaties, reservations and carve-outs perform a crucial role in balancing investment protection and liberalization with competing regulatory interests of States. While carve-outs for taxation matters have been interpreted and applied by a significant number of investment treaty tribunals, carve-outs concerning other issues and reservations have been adjudicated much less frequently. The recent Award in Global Telecom Holding v. Canada raises several key questions of treaty interpretation concerning a reservation by Canada in the Canada–Egypt Bilateral Investment Treaty (BIT), and a carve-out, which removed from investor-State arbitration decisions by either Party not to permit the establishment or acquisition of a business enterprise. This case comment critically analyses the approach to interpreting reservations and carve-outs adopted in the Award and the associated Dissenting Opinion. I suggest that it is through the application of the ordinary rules of treaty interpretation that adjudicators will locate the appropriate limits of reservations and carve-outs, and there is little justification for adopting a restrictive interpretation of such provisions. The case also demonstrates that interpretative inferences based on one treaty party’s other investment treaties must be approached with care.

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All Bark and No Bite? The Russian Supreme Court’s Refusal to Grant an Anti-Arbitration Injunction to a Sanctioned Company

Kluwer Arbitration Blog - Fri, 2021-07-30 02:00

In mid-2020, changes were enacted to the Russian Arbitrazh (Commercial) Procedure Code (“APC”) which established the exclusive jurisdiction of Russian Arbitrazh courts over cases where a Russian party is subject to sanctions or where the dispute has arisen out of sanctions. This raised concerns that sanctioned Russian parties would be able to easily avoid arbitration clauses they had entered into. However, the Russian Supreme Court has recently found that arbitration clauses with sanctioned Russian parties are only invalidated when sanctions render them incapable of being performed.

 

Background: The June 2020 Changes to the APC

On 18 June 2020, changes to the APC were enacted allowing sanctioned Russian parties to bring a claim at their place of residence or incorporation, provided that the same dispute had not already been brought before a foreign court or before an arbitral tribunal seated outside of Russia (Article 248.1(3) of the APC). Sanctioned Russian parties were also given the right to apply for an anti-suit injunction – a form of relief previously unknown to Russian law – in relation to such proceedings in foreign courts or arbitrations (Articles 248.1(3) and 248.2 of the APC). Article 248.1(4) of the APC notes that the provisions of this article “also apply” when the arbitration agreement is “incapable of being performed” due to the application of sanctions to one of the parties.

 

Uraltransmash Case

On their face, the jurisdictional provisions of the amended Article 248.1 of the APC are very broad. The decision of the Russian Supreme Court in the Uraltransmash case confirming the restrictive interpretation of this provision is thus welcome news.

In 2013, Uraltransmash, a Russian company, entered into a contract for the purchase of tramway cars with PESA Bydgoszcz (“PESA”), a Polish company. The Polish-law-governed contract contained an SCC arbitration clause. In May 2019, PESA commenced arbitration against Uraltransmash claiming over EUR 55 million in damages. Having initially participated in the arbitration for over two years, Uraltransmash – whose parent company Uralvagonzavod has since 2014 been subject to EU sanctions – later applied to the Arbitrazh Court for the Sverdlovsk Region seeking an anti-arbitration injunction against PESA.

Uraltransmash argued that the fact that it was subject to EU sanctions was in itself sufficient to grant the injunction under Articles 248.1(3) and 248.2 of the APC. The Arbitrazh Court for the Sverdlovsk Region disagreed, finding on 24 November 2020 that these provisions should be interpreted together with Article 248.1(4) of the APC, and that thus an anti-suit injunction may only be granted when sanctions render the arbitration agreement incapable of being performed.

With this in mind, the Arbitrazh Court noted that, despite the sanctions, Uraltransmash was able to fully participate in the SCC arbitration: it appointed a respected arbitrator, filed a number of submissions, appointed a Polish accounting expert witness and was advised by well-regarded Russian and Polish lawyers. The court was also unconvinced that the sanctions prevented Uraltransmash from paying advances on arbitrators’ fees, or from making payments to PESA. It found that Uraltransmash was subject only to fairly limited sectoral EU sanctions and not to more stringent sanctions envisaging asset freezes and travel restrictions. The fact that Uraltransmash was also subject to US sanctions was deemed irrelevant. For these reasons, the court refused to issue the anti-suit injunction.

On appeal, on 10 March 2021 the higher instance Arbitrazh Court for the Urals District upheld the decision of the lower court, agreeing with its reasoning and endorsing its interpretation of Article 248.1 of the APC. The Arbitrazh Court for the Urals District also noted that a contrary interpretation of the APC provisions would render international commercial transactions unstable and unpredictable.

The Russian Supreme Court likewise agreed with this interpretation of the relevant provisions of the APC, rejecting on 28 May 2021 an appeal in relation to the decisions of the lower courts.

While there is no system of binding precedent in Russia, it is nevertheless significant that the Russian Supreme Court adopted this stance in relation to the interpretation of the conditions for issuing an anti-suit injunction in relation to arbitrations involving sanctioned entities.

 

A Word of Caution: Instar Logistics v Neighbors Drilling

The Russian courts’ decisions in Uraltransmash can be contrasted with an earlier decision of the Ninth Arbitrazh Appellate Court of Moscow in the case of Instar Logistics v Neighbors Drilling (Case № А40-149566/2019). In that case, the claimant, who was subject to US sanctions, applied to the Russian courts to amend the ICC arbitration clause in its English-law-governed storage agreement with a US counterparty, citing the impossibility of performance of the arbitration clause due to the US sanctions with which the US respondent had to comply. While the claim was filed before the amendments to the APC had entered into force, the Ninth Arbitrazh Appellate Court on 10 February 2020 agreed with the decision of the lower court and held that the dispute should be heard in Russian courts. This decision was confirmed on appeal by the Arbitrazh Court for the Moscow District on 6 July 2020 and by the Russian Supreme Court on 12 October 2020. The fact that the US-incorporated respondent would have been unable to comply with an arbitral award against it due to US sanctions, somewhat bafflingly, was a key consideration (with the courts thus confusing the enforceability of the arbitration clause and that of the resulting award). In the view of the Russian courts, this created a procedural “imbalance” between the sanctioned Russian claimant and the US respondent. Unlike the courts in Uraltransmash, the courts in Instar Logistics did not undertake a detailed analysis as to whether the sanctioned claimant – who had not attempted to commence arbitration – would have been able to participate in it.

 

Conclusion and Implications

The Uraltransmash decision of the Russian Supreme Court limits the availability of anti-suit injunctions, as well as the avoidance of foreign arbitration clauses, to situations where the sanctions make the sanctioned entity’s participation in the arbitration impossible. This is undoubtedly a welcome development. As confirmed in a joint article by the ICC, LCIA and SCC, sanctions do not prevent sanctioned Russian parties from participating in arbitrations before these institutions. To the extent that the APC provisions dealing with sanctioned entities are interpreted in such a restrictive way, the risk of Russian parties being able to successfully avoid foreign-seated arbitrations and obtaining anti-suit injunctions against them would thus be relatively low.

Nevertheless, the Uraltransmash decision is fact-specific, with the sanctioned entity in question having participated in the SCC arbitration for over two years without any difficulties. A risk remains that, should, for instance, a sanctioned entity claim it is unable to participate in a foreign-seated arbitration at an earlier phase, or should there be any purported enforcement difficulties as a result of sanctions as per Instar Logistics, Russian courts may adopt a less arbitration-friendly approach.

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Ecuador’s Constitutional Court Rules in Favor of Ratification of the ICSID Convention

Kluwer Arbitration Blog - Fri, 2021-07-30 01:31

On 15 January 1986, Ecuador signed the Convention on the Settlement of Investment Disputes between States and Nationals of other States (“ICSID Convention”). During President Rafael Correa´s administration (2007-2017), President Correa publicly expressed his hostility towards the ICSID Convention and the international investment protection system. In 2008, Ecuador denounced over a third of its bilateral investment treaties (BITs). Later in 2009, President Correa issued Executive Decree Nº 1823 denouncing the ICSID Convention, terminating its application to Ecuador.

In the 2021 presidential elections, Guillermo Lasso, a former banker, was elected as the President of Ecuador. President Lasso has vowed to attract foreign investment and break away from the leftist policies adopted during the former administration. On 21 June 2021, Ecuador´s Ambassador to the United States, Ivonne Baki, signed the ICSID Convention. Pursuant to articles 147 and 418 of the Ecuador’s Constitution, the President has the power to sign and ratify international treaties. After signing a treaty, the President has the obligation to notify the National Assembly in the following 10 days before he can ratify it. Soon after the signature of the Convention, there was an ongoing discussion as to whether ratification of the ICSID Convention required the prior approval of the National Assembly pursuant to article 419 of the Constitution.

On 30 June 2021, the Constitutional Court ruled that the National Assembly did not need to approve the ratification, and therefore, the President can sign and ratify ICSID directly, under the condition that he notifies the National Assembly 10 days prior its ratification. President Lasso ratified the ICSID Convention on 16 July 2021, through the issuance Executive Decree No. 122.

 

Did the ICSID Convention require prior legislative approval according to the Constitution?

Pursuant to article 419 of the Constitution of Ecuador, the ratification of international treaties shall require the approval of the National Assembly where they: 1) refer to territorial or boundaries matters; 2) establish political or military alliances; 3) contain the commitment to enact, modify or repeal a law; 4) refer to rights guaranteed in the Constitution; 5) compromise the State´s economic policy to international financial institutions or international companies; 6) compromise the country to integration and trade agreements; 7) confer competences of the internal legal order to an international or supranational organization; or 8) compromise the country´s natural resources, water, biodiversity, etc. Local practitioners have different opinions on the scope of this article and its applicability to the ICSID Convention.

Under domestic laws, the Constitutional Court has the power to rule on the constitutionality of international treaties and the necessity of prior legislative approval. On 21 June 2021, President Lasso´s General Legal Secretary sent a petition to the Constitutional Court asking them to clarify whether the ratification of the ICSID Convention required legislative approval. In the office’s view, it did not.

As mentioned, the Constitutional Court ruled that ratification of the ICSID Convention did not require prior legislative approval. The Court reasoned that the Convention is an international treaty whose purpose is to create an international institution (ICSID) for the resolution of investment disputes. Since ICSID does not refer to territorial or boundary matters, does not create political or military alliances, does not contain a commitment to enact, modify or repeal a law, does not compromise the economic policy of the Ecuadorian State or compromise cultural or genetic heritage, it does not fall under the categories 1, 2, 3, 4, 5 and 8 established in article 419.

The Court then went on to analyze the two most debated categories under article 419:

Does the ICSID Convention bind the country to integration and trade agreements? The Court clarified that the ICSID Convention does not contain clauses creating obligations intended to regulate trade between its Member States, nor are there any provisions forcing States to enter into a process of economic integration. Although the preamble of the ICSID Convention does consider “the need for international cooperation for economic development” this does not imply that a trade or integration obligation is being acquired. The Court made a distinction between the purpose of a treaty and the effects that it creates, explaining that the sole mention of cooperation and economic development matters does not trigger article 419(6) of the Constitution.

Does the ICSID Convention confer competences of the internal legal order to an international or supranational organization? The Court reasoned that ICSID establishes the possibility, but not the obligation, to submit a dispute to its dispute resolution system. In other words, Ecuador is not forced by the ICSID Convention to submit to arbitration (or conciliation) all disputes falling under its jurisdiction. At the end of the day, investment arbitration, as commercial arbitration, is a creature of consent.  Hence, being a party to the ICSID Convention does not translate to automatic consent to arbitrate. Ecuador would have to consent on a separate instrument such as a BIT, a bilateral investment contract, or an investment protection law to arbitrate a specific investment dispute in order to be bound by such agreement. The Court also clarified that the ICSID Convention does not confer competences of its internal legal order to international bodies, because “the resolution of disputes between States is not a competence of internal legal order”. In the Court´s view, submitting investment disputes to ICSID arbitration (or to any other international forum) does not imply conferring competences of domestic legal order to international organizations.  Thus, the Court concluded that the ratification of the ICSID Convention did not fall under article 419 (7) of the Constitution.

It is worth noting that the voting in the Court´s Plenary was not unanimous. Six out of the nine Justices voted in favor of this decision, two Justices issued one dissenting opinion and one Justice voted against the ruling. On the dissenting opinion, Justices Ramiro Ávila and Enrique Herrería explained that article 422 of the Constitution contains a prohibition for the State to submit disputes to international arbitration, with the exception of controversies between States and Latin American nationals resolved in regional forums. The dissenting opinion went on and said that the most appropriate decision would have been to discuss such an important topic before the National Assembly, as it is the highest public deliberation institution representing the entire society. However, Article 422 of the Constitution prohibits Ecuador from signing treaties that submit jurisdiction to international arbitral tribunals in contractual or commercial disputes. Given that investment arbitration is a completely different creature from commercial arbitration, in the author’s opinion, there is no such a constitutional prohibition; and ICSID arbitration is therefore not incompatible with the Constitution.

 

Conclusion

 The ratification of the ICSID Convention did not require prior legislative approval and the Constitutional Court confirmed this by issuing a well-reasoned decision, which is very positive for the country. Ecuador´s return to the ICSID Convention shows the current administration´s compromise of protecting foreign investment and allows Ecuador to enter into important new agreements within the international community, which will contribute to Ecuador´s economic growth.

 

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A Conversation about Whiteness and Mediation

ADR Prof Blog - Thu, 2021-07-29 13:58
FOI Alyson Carrel (Northwestern) and LCSW Jasmine Atwell (Loyola ‘JD22) recently discussed Sharon Press and Ellen Deason’s new article, “Mediation: Embedded Assumptions of Whiteness?,” published in the Cardozo Journal of Conflict Resolution (and available on SSRN). Press and Deason’s article explores concepts from the book, Me and White Supremacy, as applied to the practice, process, … Continue reading A Conversation about Whiteness and Mediation →

The ECtHR Judgment in BEG SpA v Italy: A Human Right to a Conflict-Free Arbitrator? Part I

Kluwer Arbitration Blog - Thu, 2021-07-29 01:17

The relationship between commercial arbitration and European human rights law raises a number of conceptually difficult issues. How can the State be regarded as responsible at all for conduct of private arbitral proceedings? And how does the concept of an independent and impartial tribunal apply to a decision-making body appointed by the parties themselves?

The European Court of Human Rights (“ECtHR) has gradually assembled a jurisprudence on these questions in the context of the procedural guarantees of Article 6(1) of the European Convention on Human Rights (“Convention). Its latest contribution to the field is its judgment of 20 May 2021 in BEG SpA v Italy (BEGor the “judgment).

 

BEG SpA v Italy: The Facts

In 2000, BEG concluded a co-operation agreement with Enelpower SpA to develop and operate an Albanian hydroelectric power plant. Enelpower was a wholly owned subsidiary — previously an internal division — of ENEL, Italy’s State-owned power operator (which in 2000 was in the process of privatisation). The agreement contained a clause referring disputes to arbitration under the rules of the Arbitration Chamber of the Rome Chamber of Commerce (“ACR”). Under Article 21 of the ACR Rules, the agreement operated as a waiver of the right to bring a nullity appeal under Article 827 of the Italian Code of Civil Procedure (“CCP”).  In November 2000, BEG commenced an arbitration seeking termination of the agreement and the equivalent of some €130m in damages for breach.  BEG appointed GG as its arbitrator. Enelpower appointed NI. The parties appointed PDL as presiding arbitrator. He resigned and was replaced by AV.

Following a meeting of the tribunal on 25 November 2002, an award dismissing BEG’s claim was signed by a majority of the tribunal – NI and AV – without GG’s signature. The award was deposited with the Rome District Court on 6 December 2002 with a view to obtaining a decree of enforceability (Article 825 CCP).

At the heart of the subsequent Convention complaint lay an alleged conflict of interest affecting NI. At the time of his appointment by Enelpower, NI acted as counsel to its parent entity, ENEL, in unrelated judicial proceedings.  NI had also previously served as Vice-Chair and a Board member of ENEL between 1995 and 1996, overlapping with negotiation of the co-operation agreement. BEG maintained that it did not become aware of those matters until 5 December 2002 when its lawyers learned the information by chance.  ACR had invited the party-appointed arbitrators in February 2001 to disclose in writing any conflict of interest. GG stated that he had no conflict, but NI simply accepted appointment without explicitly declaring the absence of a conflict. On 6 December 2002, some 15 minutes after the deposit of the award, BEG submitted a request for NI’s removal.

As the domestic proceedings unfolded there were complex disagreements among the parties, the arbitrators and ACR about the sequence of events surrounding the award and BEG’s objection to NI. Following proceedings in the Rome District Court and Court of Appeal, the Court of Cassation eventually dismissed BEG’s nullity appeal in April 2009 (judgment, 24-37). BEG lodged its complaint with the ECtHR in January 2010, alleging violation of the Article 6(1) right to an independent and impartial tribunal.

 

A Short Detour: Mutu and Pechstein

The ECtHR previously analysed the relationship between Article 6 and arbitral proceedings in  Mutu and Pechstein v. Switzerland (2018). There, the ECtHR found Switzerland responsible for the conduct of proceedings before the (entirely private) Court of Arbitration for Sport (CAS), but dismissed on the facts the applicants’ complaints of lack of independence and impartiality on the part of the tribunal (see also here).

The ECtHR reasoned that a State is responsible for a dispute resolution procedure before a private law body such as the CAS because of its interaction with the State legal system. It held that determination of a dispute by arbitration is not necessarily incompatible with the Article 6(1) right of access to a court. Parties may agree to divert their private pecuniary disputes from a “classic” court to arbitration. However, because this results from a waiver of a Convention right, the ECtHR distinguishes between “voluntary” and “compulsory” submission to arbitration. A “voluntary”, and thus effective, waiver of Convention rights must be made “willingly, lawfully and unequivocally” and attracts “minimum safeguards” commensurate with its importance.  But where the applicant had no real choice but to agree to arbitration, the guarantees of Article 6 apply with full force.

The ECtHR recalled that under Article 6(1), a court must be sufficiently independent and must meet “subjective” and “objective” tests of impartiality. However, in arbitration “to which consent has been given freely, lawfully and unequivocally, the notions of independence and impartiality may be construed flexibly” given the role of the parties themselves in appointing the tribunal (judgment, 147).

On the facts, the ECtHR accepted that the Federal Supreme Court had fully investigated the question of independence and impartiality.  The constitutional arrangements of the CAS made it “similar to a judicial authority independent of the parties” (judgment, 157). However, Ms. Pechstein – unlike Mr. Mutu – had not made a “free and unequivocal” waiver of her Article 6(1) rights. Absent valid waiver of the right to a public hearing, the private hearing under the then CAS rules violated that element of Article 6(1).

Mutu and Pechstein left important questions unresolved. In what circumstances might the ECtHR go behind the evaluation of independence and impartiality by the domestic court? What does the “flexible” standard of independence and impartiality connote in practice? Is there a real difference between the “full” guarantees of Article 6(1) which apply to “compulsory” arbitration, and the standards applicable to “voluntary” arbitration (a question obscured by the significant factual differences between the two applicants’ cases)? What does the ECtHR’s case-law tell us about its attitude to arbitration more broadly?

 

BEG SpA v. Italy: The ECtHR’s Reasoning

This case – in which the Italian courts were seised of the matter between 2002 and 2010, and the ECtHR between 2011 and 2021 – is hardly a triumph of judicial expedition. The ECtHR was not assisted by having to address an exhaustive series of procedural objections by the Italian government to the admissibility of the claim, eventually resolved in BEG’s favour. That left admissibility turning on jurisdiction ratione personae – that is, the issue of State responsibility for the arbitral proceedings.

The ECtHR noted that Italian law “conferred jurisdiction on the domestic courts to examine the validity of arbitral awards”. Here, the courts had exercised that jurisdiction. The District Court’s decree gave the award “the force of law in the Italian legal order”, and the appellate courts “examined and dismissed” the nullity appeal (judgment, 65). The ECtHR therefore had jurisdiction to examine “the acts and omissions of the ACR as validated by the Italian domestic courts” (judgment, 66).

On the merits, the ECtHR first had to determine whether the right relied on had been effectively waived. It affirmed that the Article 6 “right to a court” does “not necessarily” mean access to a “court of law of the classic kind, integrated within the standard judicial machinery of the country”. A “tribunal” may be a body “set up to determine a limited number of specific issues”, so long it offers “the appropriate guarantees”. Thus “[a]rbitration clauses, which have undeniable advantages for the individuals concerned as well as for the administration of justice, do not in principle offend against the Convention” (judgment, 126). The ECtHR once more referred to the distinction between “voluntary” and “compulsory” arbitration. Here, it was common ground that the arbitration proceedings were voluntary in nature. Thus the focus was on whether the applicant waived “in an unequivocal manner… its right to have its dispute with Enelpower settled by an independent and impartial tribunal” (judgment, 136).

The ECtHR concluded:

  • BEG’s acceptance of the ACR arbitration pre-dated Enelpower’s appointment of NI as arbitrator (judgment, 137).
  • BEG’s omission to challenge NI’s original failure to make an explicit declaration about conflicts was not a waiver of its right to an independent and impartial tribunal. Article 6 of the ACR Rules compelled each arbitrator to indicate in their written declaration any relationship with the parties or interest in the subject-matter, hence the absence of an explicit disclosure entitled BEG to “legitimately presume” that none existed (judgment, 138-139).
  • The Government’s suggestion that BEG was “most probably aware”, through GG, of the links between NI and ENEL was “based on a presumption of knowledge which does not rest on any concrete evidence” of BEG’s knowledge (judgment, 140).
  • BEG had sought NI’s withdrawal as soon as it discovered his professional links with ENEL. BEG had appealed against the award on that basis, and the domestic courts duly considered the merits of its complaint. The facts “radically differed” from Suoveaniemi and others v. Finland, in which the ECtHR found an “unequivocal” waiver where a party failed to seek an arbitrator’s withdrawal after becoming aware of grounds of challenge. (judgment, 141-142).
  • There had therefore been no unequivocal waiver of impartiality, and the arbitration proceedings “had to afford the safeguards” of Article 6(1) (judgment, 143).

Turning to the substance, the ECtHR largely reiterated well-established principles including those stated in Mutu and Pechstein (compare BEG 128-133 with Mutu and Pechstein 140-144). However, it added some observations – nearly all based on previous authority about judicial proceedings – that provide interesting insight into its thinking on the application of Article 6(1) to arbitration.  Thus “…a tribunal’s member must be independent vis-a-vis the executive, Parliament, but also the parties” (judgment, 128).  As regards impartiality, “the objective test is functional in nature: for instance, professional, financial or personal links between a judge and a party to a case… may give rise to objectively justified misgivings as to the impartiality of the tribunal”. Thus the “nature and degree” of the connection is important (judgment, 131). As in Mutu and Pechstein, appearances matter because “what is at stake is the confidence which the courts in a democratic society must inspire in the public” (judgment, 132).

Applying those principles, the ECtHR held:

  • The “public” or “private” status of ENEL and Enelpower was irrelevant to NI’s independence and impartiality. What mattered were “the relationships between ENEL and Enelpower” (judgment, 144).
  • There was no evidence of “personal prejudice or bias” on NI’s part, hence no subjective lack of impartiality (judgment, 145).
  • NI served as Vice-Chair and Board member of ENEL when ENEL itself was directly negotiating the power plant project with BEG. Given the “importance and economic stakes” of the project, and regardless of whether he was personally aware of the negotiations, “NI’s senior role in the entity… whose subsidiary Enelpower would later oppose [BEG] in the arbitration proceedings, seen from the point of view of an external observer, could legitimately give rise to doubts as to his impartiality” (judgment, 148-149).
  • NI had acted as counsel to ENEL in concurrent civil proceedings, albeit concluded by a judgment of the Court of Cassation before appointment of the tribunal in the present case. However, when the concurrent dispute began, Enelpower was an internal division of ENEL and even after 1999 was still its wholly-controlled subsidiary. Since the domestic courts’ consideration of BEG’s nullity appeal, the CCP had been amended to broaden the grounds for removing an arbitrator “to an extent similar to ordinary courts of law” (a change the ECtHR noted “with interest”, judgment 150-152).

Overall, “NI’s impartiality was capable of being, or at least appearing, open to doubt and that [BEG’s] fears in this respect can be considered reasonable and well-founded.” There had been a violation of Article 6(1). (judgment,153-154). The ECtHR awarded €15,000 for non-pecuniary damage as just satisfaction under Article 41 (162-163).

In the wake of BEG, is a contracting State now in principle answerable under the Convention for the conduct of all private arbitral proceedings taking place within its jurisdiction? What does the case tell us about the relationship between the independence and impartiality test developed in the international arbitration context on the one hand, and the ECtHR’s application of Article 6 to arbitral proceedings on the other? These questions are addressed in the remaining post in this series (Part II).

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The ECtHR Judgment in BEG SpA v Italy: A Human Right to a Conflict-Free Arbitrator? Part II

Kluwer Arbitration Blog - Thu, 2021-07-29 01:15

In the wake of BEG (see Part I), what conclusions can we draw about the place of arbitral independence and impartiality in the ECtHR’s Article 6 jurisprudence?

 

State Responsibility and Private Arbitral Proceedings

Is a contracting State now in principle answerable under the Convention for the conduct of all private arbitral proceedings taking place within its jurisdiction, or is the position more nuanced?

The ECtHR has rejected any suggestion that the responsibility of the State, or the operation of the guarantee of independence and impartiality itself, is dependent on there being some “public” character to the underlying arbitral proceedings – whether in the shape of a public law arbitral institution (Mutu and Pechstein) or a public sector party to the proceedings (BEG).  In BEG, the ECtHR affirmed that the key mechanism for engaging responsibility is the interaction between arbitration and the State’s legal order. Interestingly the ECtHR noted that the Rome Chamber of Commerce was a “local authority established under public law” (judgment [63]). However, its articulated reasons for accepting jurisdiction ratione personae make no reference to that and essentially match those in Mutu and Pechstein (where the ECtHR expressly recognised the private character of the CAS).

On that basis, it is not easy to see what sort of arbitral proceeding taking place within a Contracting State might escape the ambit of the Convention. Every Contracting State confers some jurisdiction on its courts to assist or supervise arbitral proceedings seated within its territory, and to enforce awards made in proceedings seated there or elsewhere. The requirement to exhaust domestic remedies means that any case reaching the ECtHR merits stage has been the subject of an exercise of jurisdiction by the competent national court. The territorial limitation in Article 1 of the Convention to matters within a State’s “jurisdiction” may raise interesting questions at the margins – for example, where the alleged breach arises in arbitral proceedings seated, and physically held, outside the State concerned. Investor-State arbitration under the auspices of ICSID, a creature of public international law, raises delicate issues of allocation of responsibility. Even then, a Convention issue could conceivably arise if the Contracting State authorities enforce an award alleged to result from patent disregard of the safeguards contemplated by Article 6.

 

Waiver

It is now firmly settled that in applying the doctrine of waiver to arbitration, the ECtHR will carefully distinguish between different elements of the rights guaranteed by Article 6(1). The ECtHR affirmed in BEG its relaxed approach to parties conferring jurisdiction – over “pecuniary” disputes at any rate – on a body other than a “classic” State court. The ECtHR made clear that it recognised the benefits, for the parties themselves and the wider public interest, of enabling parties to opt for arbitration by waiving their Article 6(1) “right to a court”.  But equally clear is the much finer-grained approach the ECtHR takes to any suggestion that a party has consequently renounced the procedural guarantees ordinarily expected of civil justice.  BEG demonstrates that even in a “voluntary” case, the ECtHR will carefully scrutinise not only the arguments of the respondent State but the conclusions of the national courts themselves.

This last point is of interest given the ECtHR’s repeated disclaimers of the role of “fourth instance” appeal against domestic judicial decisions (see generally, here and here).

Once more, the exhaustion requirement means that the domestic courts will nearly always have formed a view on the subject-matter of the Strasbourg complaint. But the crucial point is that the rights in play before the ECtHR are by definition human rights. The Italian courts focused on whether the challenge to NI was technically brought in time, and on supposed common knowledge about his background in the parties’ sphere of activity. But that fell far short of enquiring whether the evidence established BEG’s “free and unequivocal” renunciation of a Convention right.  It is precisely the need to ask the right question, and to answer it through a searching analysis of the facts, that constitutes the “minimum safeguard” commensurate with the importance of the right allegedly waived. In the absence of such an exercise by the domestic courts, the ECtHR not surprisingly conducted its own review of the evidence and reached a different conclusion.

This element of BEG carries important lessons for Contracting State courts – and arbitral tribunals and institutions themselves – determining questions of waiver of arbitrator conflicts under national law or arbitral rules. Those decisions must take proper account of the high value of the right to an independent and impartial tribunal. They must focus on evidence of what a party actually knew, rather than on what might supposedly be “common knowledge” within the arbitral or business community.

Also noteworthy is the ECtHR’s position on arbitrator disclosure. Its rejection of the domestic courts’ approach to NI’s silence on his links with Enel, which effectively placed the onus on BEG to discover those matters for itself, reinforces developments elsewhere such as the UK Supreme Court’s recognition in Halliburton v. Chubb (see also here) of a positive duty of disclosure of facts that might reveal a conflict.

 

Independence and Impartiality in Arbitral and Judicial Proceedings: Same Difference?

There is now a welcome convergence between the test for a disqualifying conflict developed in the international arbitration context and the ECtHR’s articulation of the Article 6 test for independence and impartiality. Neither requires actual proof of subjective bias. Compare the ECtHR’s repeated references to “legitimate doubts” with Gary Born’s 2014 formulation:

It is not necessary for a party challenging an arbitrator to demonstrate that the individual lacks independence or impartiality; it is instead sufficient to show that there is enough ‘doubt’ or ‘suspicion’ as to an arbitrator’s impartiality to justify either not appointing or removing the arbitrator.

(here pp. 1911 et seq. On the importance of appearances see also Halliburton 1, 54-55.)

However, in determining what is “enough” doubt, does the ECtHR now expect an arbitrator to meet the same measure of independence and impartiality as a State court judge?

As noted in Part I, in Mutu and Pechstein the ECtHR referred to the “flexible” application of the Article 6 standard to arbitration bearing in mind the parties’ role in appointing the tribunal, but gave no indication how that “flexibility” might manifest itself in practice. In Ms. Pechstein’s “compulsory” case the ECtHR appeared to assimilate the arbitral standard closely to the judicial standard. BEG was explicitly treated as a “voluntary” case. Yet every indication in the ECtHR’s formulation and application of the test is that there is no discernible difference between the judicial and arbitral standards of independence and impartiality. There is some logic to that. While the parties, rather than the State, appoint “their” tribunal, the whole point of examining the links (past and present) between an arbitrator and a party is precisely to ensure the tribunal’s objective separation from the parties.

The only explicit indication in BEG of a material difference in the standards applicable to judicial and arbitral proceedings concerned the question of waiver. At judgment, 141, the ECtHR commented:

By employing such a test… as regards the need for a voluntary and unequivocal waiver of the right to an impartial adjudicator… the Court emphasises that it has been developed in the context of arbitral proceedings…  without having to decide whether a similar waiver would be valid in the context of purely judicial proceedings

So it might be harder to establish an effective waiver of independence and impartiality in relation to a State court than an arbitral tribunal.  But once the ECtHR finds no valid waiver, the quality of independence and impartiality expected of an arbitral tribunal is essentially the same as, or not materially less than, that expected of a civil court hearing a comparable case. That appears to be so whether the submission to its jurisdiction was “compulsory” or “voluntary”.

 

Protection of Arbitral Integrity: Tough Love?

What about the ECtHR’s overall attitude to arbitration? Not everyone in the dispute resolution community will welcome the growing prospect of parties to arbitral proceedings “having a go” in Strasbourg after losing an arbitrator challenge in the domestic courts. In BEG, however, the ECtHR expressly acknowledged arbitration as a beneficial form of dispute resolution.  In other words the ECtHR’s insistence that arbitral proceedings observe the high procedural standards set by Article 6(1) is founded in a desire to ensure that arbitration maintains those beneficial qualities and thus its attractiveness. Just as insufficient guarantees of a judge’s independence from the executive may harm public confidence in the administration of justice (as the ECtHR observed in Mutu and Pechstein and BEG), the insufficiency of an arbitrator’s independence from a party is liable to harm the business community’s confidence in arbitral justice – to the detriment of arbitration itself. Tough love indeed.

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VIAC Rules Revision 2021 Part II: The New VIAC Rules of Investment Arbitration and Mediation

Kluwer Arbitration Blog - Wed, 2021-07-28 02:23

The Vienna International Arbitral Centre (VIAC) has further strengthened its arbitration offering by adopting brand new, stand-alone investment arbitration and mediation rules, the VIAC Rules of Investment Arbitration and Mediation (VRI), which entered into force on 1 July 2021. The VRI apply to disputes involving a State, a State-controlled entity or an intergovernmental organization that arise under a contract, treaty, statute or other instrument. The VRI are based on the well-tried Vienna Rules for commercial arbitration (which have been revised with effect of 1 July 2021), but contain certain adjustments to account for the unique features and needs of investment disputes involving the participation of sovereign parties and the consideration of public interest issues and matters of public policy. The VRI are a set of modern, flexible, cost-effective and efficient rules that address some of the major concerns expressed by States in the context of the ICSID Rules Amendment process and the UNCITRAL Working Group III discussions on ISDS reform. The working group that drafted the new Vienna Investment Rules was chaired by Claudia Annacker and consisted of representatives of the VIAC Board and Secretariat (in alphabetical order: Alice Fremuth-Wolf, Günther Horvath, Johanna Kathan-Spath, Dietmar Prager, Lucia Raimanova, Franz Schwarz and Nathalie Voser).

 

Some of the key features of the new VRI are presented below:

Jurisdictional requirements (Article 1): Although the VRI are a separate and specialized set of investment arbitration rules similar to the ICSID Convention and Rules, they do not lay down any particular requirements for the submission of disputes for resolution pursuant to the VRI. It is up to the parties to decide whether the VRI are suitable for the resolution of their dispute and if so, to agree their use in a contract, treaty, statute or any other instrument. As a result, there should be less time and cost spent on jurisdictional battles than in the case of ICSID arbitrations.

Joinder and Consolidation (Articles 14 and 15): In the case of contract-based arbitrations, the VRI specifically allow for the joinder of third parties. Unlike other arbitration rules, the VRI do not lay down any particular conditions for or limitations on joinder, but leave it to the tribunal to decide, upon hearing all parties and considering all relevant circumstances, whether a joinder is warranted in a given case. The VRI further provide that the VIAC Board may consolidate two or more proceedings pending before VIAC – irrespective of whether they arise under a contract, treaty, statute or other instrument and whether they involve the same parties, the same legal relationship or the same arbitration agreement – if the place of arbitration is the same and the parties agree to consolidation or the same arbitrator(s) were appointed. The VRI’s provisions on joinder and consolidation thus give tribunals and VIAC the flexibility and discretion needed to resolve complex, multi-party disputes in a fair and (cost-) efficient manner, and offer a response to the concerns arising from multiple proceedings identified by States in the context of the UNCITRAL Working Group III discussions.

Non-disputing party participation (Article 14a para. 1): In case of treaty and statute-based arbitrations, the VRI provide that the tribunal, after considering all relevant circumstances, may allow or invite submissions from non-disputing parties on factual or legal issues that are within the scope of the dispute submitted to arbitration.

Non-disputing treaty party participation (Article 14a para. 2): During the discussions in UNCITRAL Working Group III, States have expressed the need to enhance the consistency, coherence, predictability and correctness of ISDS awards inter alia by ensuring a better State control over the interpretation of investment treaties. In response, the VRI specifically allow, in cases where the dispute arises under a treaty, the non-disputing treaty party to make written submissions on the interpretation of the treaty. The tribunal may also invite such submissions on its own initiative. A similar provision is also being discussed as part of the ICSID Rules Amendment process.

Early dismissal of frivolous claims (Article 24a): To decrease the length and cost of the arbitration, the VRI allow for the dismissal of frivolous claims at an early stage of the proceedings in an expedited process. A party may apply for early dismissal of a claim, counterclaim, or defense on the grounds that it is manifestly outside the jurisdiction of the tribunal, manifestly inadmissible or manifestly without legal merit. The application must be filed no later than 45 days after the constitution of the tribunal or the respondent’s first submission on the merits, whichever is earlier. The tribunal must rule on the application within 60 days of receiving the parties’ last written submission on the application.

Third party funding (Article 13a): In the ICSID Rules Amendment process and the UNCITRAL Working Group III, States have identified third party funding (TPF) as a major concern that calls for reform inter alia to address conflicts of interest of arbitrators and security for costs. To meet these concerns and ensure the independence and impartiality of arbitrators, the VRI require early disclosure of the existence of TPF. In addition, the VRI explicitly provide that the tribunal may, if it deems it necessary, order the disclosure of specific details of the TPF funding arrangement, the TPF’s interest in the outcome of the proceedings and whether the TPF has committed to undertake adverse costs liability. The VRI define TPF broadly to include any arrangement – whether for-profit or non-profit – to provide material support to a party to fund the costs of the proceedings, with the sole exception of contingency fee agreements with party representatives.

Efficient and speedy conduct of proceedings: Several provisions of the VRI aim to encourage the efficient and speedy resolution of the dispute. Thus, for example, under the VRI, jurisdictional objections must be raised no later than the first submission on the merits (Article 24(1)), disputes under 10 million EUR are to be decided by a sole arbitrator (Article 17(2)), hearings may be conducted other than in person (Article 30(1)), and the tribunal must render its award no later than 6 months after the last hearing or the last submission of the parties on the merits (Article 32(2).

Costs and security for costs (Articles 42-44 and 33(6)-(7)): One of the main practical attractions of arbitrating under the VRI are VIAC’s very affordable costs, especially when compared with other arbitral institutions. According to VIAC’s cost calculator, the fees charged for a 10 million EUR dispute with a panel of three arbitrators would be a maximum of 322.850,- EUR. Arbitration thus remains a viable option also for smaller investors and lower value disputes, which will likely be an important consideration particularly for parties from the CEE/CIS region. In addition, the VRI explicitly affirm the power of the tribunal to order security for costs. Contrary to tribunals sitting under other rules which have required the showing of exceptional circumstances amounting to bad faith or evidence of the investor’s impecuniousness to grant an order for security for costs, a tribunal sitting under the VRI will only require a showing that the “recoverability of a potential claim for costs is, with a sufficient degree of probability, at risk” (NB TPF is not in itself sufficient for a security for costs order under the VIR). Furthermore, if a party fails to comply with a security for costs order, the tribunal may, upon request, suspend in whole or in part, or terminate the proceedings. From the States’ perspective, the inability to recover awarded costs has been identified as an important concern, therefore, the security for costs provision of the VRI should provide comfort.

Transparency (Article 41): The VRI provide that VIAC may publish certain limited information on the arbitration proceedings as well as anonymized summaries or extracts of decisions and awards. The parties cannot opt out from this provision, but may agree on greater transparency for their proceedings, including by choosing to apply, in the case of treaty-based arbitrations, the UNCITRAL Transparency Rules.

Investment mediation: The VRI contain separate rules for the conduct of mediation of investment disputes as a flexible and cost-effective alternative to arbitration. Disputing parties may employ mediation independently from, or in conjunction with, arbitration. Where a mediation is followed by arbitration (or vica versa), VIAC will charge administrative fees only once. The VRI further provide that the tribunal may at any stage of the proceedings help the parties reach a settlement (Article 28(3)). The VRI thus service the need for effective dispute prevention and mitigation tools and alternative forms of dispute resolution solutions for investor-State disputes expressed by States in UNCITRAL Working Group III.

 

Conclusion:

The new VRI are a modern, cost-efficient alternative for States and State-controlled entities from the CEE/CIS region and elsewhere to resolve their investment disputes by way of arbitration and/or mediation. Some of the States in the region, such as Hungary, Belarus and Kyrgyzstan, have in recent years been rather active in concluding new BITs, and may well decide to include the VRI in their future treaties. The VRI are also a welcome new solution for SME investors and investors who seek to protect lower value investments, including investors from and in the CEE/CIS region.

With the adoption of the VRI, VIAC further strengthens its position as one of the favorite arbitral institutions for parties from the CEE/CIS region and beyond, and the VRI will no doubt quickly become a real competitor to the more traditional rules for the resolution of investment disputes.

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Arbitral Institutions’ Conflicts of Interest

Kluwer Arbitration Blog - Wed, 2021-07-28 01:00

Conflicts of interest between parties and arbitrators are common in arbitration proceedings. However, the academic community has not yet examined whether arbitral institutions may also run into conflicts of interest. This post will deal with this question and also examine measures that can mitigate any such risks of conflicts of interest for arbitral institutions.

The management and employees of arbitral institutions perform important procedural functions in support of arbitration proceedings. This can include, for example, providing and applying procedures for the selection, appointing or deciding on challenges of arbitrators, keeping records of the proceedings, and collecting and distributing arbitration fees. However, international legal instruments and best practice guidelines do not directly regulate any conflicts of interest on the side of arbitral institutions. For example, recent free trade agreements and investment protection agreements such as the CETA (see e.g. Annex 29-B); the Canada-Chile FTA (Article G-24), the EUSIPA (Art. 3.11); or the 2019 Netherlands Model BIT (Art. 20(6)), and rules of arbitral institutions (see e.g. Art. 11.4, 13.4 of the 2018 HKIAC Rules; and Art. 5(5) of the 2020 LCIA Rules) include broad lists of addressees of rules on disclosures of conflicts of interest but do not always include arbitral institutions. Even the IBA Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”) do not regulate conflicts of interest arising within arbitral institutions. Perhaps the lack of regulation comes from the generally accepted assumption of neutrality surrounding the activities of arbitral institutions.

That said, some guidance on the issue can be found in internal regulations of arbitral institutions and occasionally in national legislation. For instance, one can consider this problem based on the regulations of the Russian Arbitration Center (“RAC”) at the Russian Institute of Modern Arbitration (“RIMA”):

 

The RAC Administrative Office Employees

Depending on the position of the RAC Administrative Office employee, the following situations may arise in case:

1) The employee acts as a tribunal assistant

The IBA Guidelines General Standard 5(b) imposes a duty of independence and impartiality on tribunal assistants, similar to the one imposed on arbitrators. Tribunal assistants, therefore, may be required to sign declarations of independence and impartiality. Accordingly, in the event of a conflict of interest, a RAC Administrative Office employee acting as a tribunal assistant must notify the parties, the tribunal and the RAC Executive Administrator of the conflict, and may even be required to terminate his/her mandate in the respective arbitration (Article 40 (3) RAC Arbitration Rules). In the latter case, the RAC Executive Administrator would appoint another employee of the RAC Administrative Office as tribunal assistant.

 

2) The employee is involved in case management activities

An employee may be involved in case management activities by, for example, preparing the case and other files in relation to the constitution of the arbitral tribunal. Article 3.4 of the RAC Internal Rules obliges RAC Administrative Office personnel to avoid any conflicts of interest, and if a conflict occurs, to immediately stop the performance of functions concerning the relevant arbitration proceedings1)There is a discrepancy between the English and Russian versions of the RAC Arbitration Rules: the English version states that “If a conflict of interests occurs, the personnel shall immediately cease performance of their functions with respect to the relevant arbitrator and notify the Executive Administrator” (emphasis added), while the Russian version provides that the performance of the respective functions shall be ceased “…with respect to the relevant arbitration…”. The authors believe the broader provision in the Russian-language version prevails in that case. This provision is under revision in the updated version of the RAC Arbitration Rules, which are available for public consultation. jQuery('#footnote_plugin_tooltip_38105_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38105_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and notify the RAC Executive Administrator. In this case, the RAC Executive Administrator should appoint another employee to perform the relevant case management functions.

 

3) The employee performs administrative secretary functions unrelated to a specific case

When there is no direct connection to the participants of the arbitration, no conflicts of interest arise. However, if an administrative secretary becomes aware of any circumstances that may lead to a conflict of interest, Article 7.4 of the RAC Internal Rules obliges the employee to inform the RAC Executive Administrator, who should take appropriate measures. In practice, this may involve, amongst other things, the exclusion of the employee from case-related correspondence, calls, denial of access to the case file in the RAC Online System of Arbitration.

 

The RAC Executive Administrator (Head of the RAC Administrative Office)

The RAC Executive Administrator is responsible for managing RAC’s day-to-day activities, including the activities of the RAC Administrative Office, and the administration of arbitration proceedings under the RAC Arbitration Rules.

As the RAC Executive Administrator’s powers are unique, it is difficult to resolve any potential conflicts of interest arising in relation to the RAC Executive Administrator. However, if such conflict does arise, despite the lack of direct provisions, it seems that the duties of the RAC Executive Administrator can be performed by a specially appointed RAC Administrative Office’s employee or a nominated deputy.

Another solution may be the delegation of the RAC Executive Administrator’s powers to a member or the Chairman of the RAC Board. Obviously, any such delegation shall suspend the execution of the member’s or Chairman’s duties in the RAC Board.

Similar options are offered by the VIAC (Article 4.5 VIAC Arbitration Rules) and the DIS (Article 7.2 DIS Rules): if it is impossible for the Secretary General to perform his/her duties, then one of the Board’s members (VIAC) or the Deputy Secretary General or another employee (DIS) shall perform these duties.

Alternatively, the SIAC Rules (Rule 1.3) widely define the term “President” by including President, any Vice President and Registrar, thus overcoming possible conflicts of interest situations.

 

Members of the RAC Board

It is commonplace that members of a decision-making body such as the RAC Board shall not perform their functions of appointing arbitrators, deciding challenges and others if they run into conflicts of interest (Art. 7.6 RAC Internal Rules).

In this case, the RAC Board member shall immediately notify other Board members and the RAC Executive Administrator of a conflict and shall not participate in any decision-making with respect to that arbitration.

National laws also remain relevant. For instance, in Russia, a conflict of interest is prohibited in the performance of arbitral institution’s activities (Article 46 of the Federal Law on Arbitration), if one of the parties is:

(1) the non-profit organization, under which the institution was established;

(2) its founder(s); and/or

(3) the person(s) and its affiliates, who are part of the institution’s governing bodies and are competent to decide questions about the appointment, challenge and termination of the arbitrator’s powers.

Thus, given the importance of conflict-free arbitration proceedings, members of the appointing authority are strongly encouraged to avoid and disclose any conflicts of interest.

 

Conclusion

Arbitration institutions are represented by individuals, with their own ties and connections. This may result in conflicts of interest with the participants in arbitral proceedings. Taking into account the duty of neutrality that arbitral institutions should adhere to, connections of the institutions’ employees and affiliates should be disclosed.

With the increase in the number of arbitral proceedings, we may see the development of principles on the topic of conflicts of interest within arbitral institutions. At the moment, the interplay between arbitral institutions and the participants of arbitral proceedings has not been sufficiently developed, but knowledge of institutional rules and domestic law on these matters may assist parties and tribunals to navigate at least some of these issues as they arise.

References[+]

References ↑1 There is a discrepancy between the English and Russian versions of the RAC Arbitration Rules: the English version states that “If a conflict of interests occurs, the personnel shall immediately cease performance of their functions with respect to the relevant arbitrator and notify the Executive Administrator” (emphasis added), while the Russian version provides that the performance of the respective functions shall be ceased “…with respect to the relevant arbitration…”. The authors believe the broader provision in the Russian-language version prevails in that case. This provision is under revision in the updated version of the RAC Arbitration Rules, which are available for public consultation. function footnote_expand_reference_container_38105_30() { jQuery('#footnote_references_container_38105_30').show(); jQuery('#footnote_reference_container_collapse_button_38105_30').text('−'); } function footnote_collapse_reference_container_38105_30() { jQuery('#footnote_references_container_38105_30').hide(); jQuery('#footnote_reference_container_collapse_button_38105_30').text('+'); } function footnote_expand_collapse_reference_container_38105_30() { if (jQuery('#footnote_references_container_38105_30').is(':hidden')) { footnote_expand_reference_container_38105_30(); } else { footnote_collapse_reference_container_38105_30(); } } function footnote_moveToReference_38105_30(p_str_TargetID) { footnote_expand_reference_container_38105_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38105_30(p_str_TargetID) { footnote_expand_reference_container_38105_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Anti-Arbitration Injunctions in Malaysia: Where to Now?

Kluwer Arbitration Blog - Tue, 2021-07-27 01:00

AIAC YPG

An increasing number of anti-arbitration injunctions applications have come before the Malaysian courts within the last two years. Anti-arbitration injunctions can take various forms but are essentially judicial orders restraining the initiation or continuation of arbitration proceedings in Malaysia or, as the case may be, a foreign jurisdiction. What has emerged from the Malaysian courts is a two-track approach that lowers the bar for curial intervention where an anti-arbitration injunction is sought by a non-signatory to an arbitration agreement. Notably, this deviates from the reluctance of other common law jurisdictions to grant this exceptional relief (here). Additionally, when restraining foreign-seated arbitrations, Malaysian courts have also appeared to adopt a lighter touch approach than that used in other parts of the Commonwealth. These post discusses the question whether a reconsideration of the current Malaysian approach to anti-arbitration injunctions might be beneficial.

 

The modern treatment of anti-arbitration injunctions in Malaysia were studied in the line of cases leading to the Malaysian Federal Court’s decision in Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors [2019] 5 MLJ 1. Jaya Sudhir involved a dispute between three shareholders as to whether a shareholders’ agreement (containing an arbitration clause) permitted an executed transfer of shares to a third party investor. The shareholders commenced a Malaysian arbitration to which the investor was not privy. Concerned that an arbitration award given in its absence could adversely affect its proprietary rights to the shares, the investor applied to the Malaysian High Court for an injunction to restrain the arbitration.

 

The Malaysian Federal Court allowed the anti-arbitration injunction and delivered a noteworthy decision. It found that an anti-arbitration injunction sought by a non-party to an arbitration agreement should not be determined any differently from an ordinary interlocutory injunction. This was because the Malaysian Arbitration Act 2005 and its policy objectives were inapplicable to non-arbitral parties, and should be disregarded when determining such applications. Therefore, the Federal Court held that when a non-party applies to restrain arbitral proceedings, Malaysian courts should apply the general test for interlocutory injunctions – in essence, the test in American Cyanamid.

 

In so assessing, the Malaysian Federal Court placed significant weight on achieving the “fairest approach to all parties [in the application]”, in particular whether:

 

  • the target arbitration would affect the interests of non-parties;
  • there is a risk of parallel proceedings; and
  • there is a risk of inconsistent decisions arising from the arbitration.

 

A Departure from Wider Common Law?

An argument throughout the Jaya Sudhir cases was that anti-arbitration injunctions should be assessed differently from ordinary interlocutory injunctions and that the court’s discretion to grant anti-arbitration injunctions should be exercised sparingly with due regard to the principles of domestic arbitral legislation. To that end, anti-arbitration injunctions should be subjected to the more stringent test in the English case of J Jarvis and Sons Ltd v Blue Circle Dartford Estates Ltd [2007] EWHC 1262 (TCC), requiring applicants to demonstrate the following to obtain an anti-arbitration injunction:

 

  • the injunction must not cause injustice to the claimant in the arbitration; and
  • the continuance of the arbitration must be oppressive, vexatious, unconscionable or an abuse of process.

 

The higher threshold is generally thought to apply as an anti-arbitration injunction involves an interference with the fundamental principle of international arbitration that courts should generally uphold, and therefore not interfere with arbitration agreements. However, the Federal Court found that the J Jarvis test would only apply to injunctions sought by a party to an arbitration agreement, and not the scenario before it where the application was brought by a non-party. This effectively created a two-track approach to determining anti-arbitration injunctions in Malaysia that would depend on the contracting status of the applicant.

 

It is interesting to note that this finding was based upon the Federal Court’s survey of English and Hong Kong case law, which it concluded did not support the application of the J Jarvis test to non-parties to an arbitration agreement. However, it appears that prior to the Federal Court’s decision, the English courts have applied the J Jarvis principles in situations where anti-arbitration injunctions were sought by non-parties. An example is Excalibur Ventures LLC v Texas Keystone Inc and others [2011] EWHC 1624 (Comm) where the English court, applying J Jarvis principles, granted an injunction to restrain a New York-seated arbitration where there was a strong arguable case that the applicant was not a party to the arbitration agreement.

 

Post-Jaya Sudhir

Following the Federal Court’s decision in Jaya Sudhir, anti-arbitration injunctions have again come before the Malaysian courts on several occasions. On two such occasions, the High Court demonstrated the differential approach to anti-arbitration injunctions applications by parties and non-parties to a Malaysian arbitration, as adopted by the Federal Court in Jaya Sudhir (FELDA Investment Corporation Sdn Bhd v Synergy Promenade Sdn Bhd [2020] MLJU 1465; Federal Land Development Authority v Tan Sri Haji Mohd. Isa Bin Dato’ Haji Abdul Samad [2021] 8 MLJ 214).

 

Interestingly, the Malaysian courts also had two opportunities to consider injunctions to restrain arbitrations seated outside Malaysia, specifically London (MISC Berhad v Cockett Marine Oil (Asia) Pte Ltd [2021] MLJU 563) and Madrid (Government of Malaysia v Nurhima Kiram Fornan & Ors [2020] MLJU 425). The injunctions sought were granted by the High Court in both instances. These are noteworthy decisions as they illustrate the Malaysian court’s approach to anti-arbitration injunctions in its capacity as a court not having supervisory jurisdiction over the relevant arbitration proceedings.

 

The High Court did not consider Jaya Sudhir on both occasions above but  focussed on whether there was a valid arbitration agreement binding the applicants. This was found in the negative in both cases. In Nurhima, this negative finding (premised on sovereign immunity) was sufficient for the granting of the relief sought and the court did not consider any tests for interlocutory injunctions. Meanwhile, in MISC Berhad, the High Court applied the general test for interlocutory injunctions. At first glance, this mirrors the substance of the Federal Court’s decision in Jaya Sudhir.

 

Two observations arise from the MISC Berhad and Nurhima decisions. First, the High Court did not refer to the possibility of a more stringent test applying to granting of anti-arbitration injunctions. Second, and more fundamentally, there was also no discussion of the wider common law position that where the arbitration to be restrained has a foreign seat, a court should be cautious about intervening and should do so only as an exceptional step (see Sabbagh v Khoury and others [2019] EWCA Civ 1219). Although Malaysian law has consistently strived to align itself to English law, these cases appear to be different. In general, supervision of an arbitration is reserved to the courts of the arbitral seat, which the English courts have recognised is a principle of the New York Convention.

 

Conclusion

The Malaysian experience with anti-arbitration injunctions over the past two years shows that there are unanswered questions in its jurisprudence on this relief. It is hoped that the Malaysian courts will give further guidance on its approach in restraining foreign-seated arbitration, in particular its views on the general reservation of judicial intervention to curial courts. It is also hoped that the courts will grant anti-arbitration injunctions sought by non-parties sparingly. A potential risk of the current two-track approach is that applications for anti-arbitration injunctions could be used as a backdoor to ventilate substantial jurisdictional challenges before national courts where such issues are generally reserved for arbitral tribunals, as reflected in the court’s approach to applications to stay of court proceedings pending arbitration. That said, anti-arbitration injunctions raise complex questions where arbitration law and policy intersect with third party interests. It is hoped that the Malaysian courts will deal with these anti-arbitration injunctions with a view to preserve the integrity of arbitration agreements, prevent unnecessary delays and give effect to parties’ choices on desired dispute resolution forum.

 

 

 

 

 

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The Paris Court of Appeal Rules that the Brussels I Recast Regulation is Inapplicable to Liability Claims against Arbitrators

Kluwer Arbitration Blog - Mon, 2021-07-26 02:00

In a judgment dated 22 June 2021, the Paris Court of Appeal ruled that liability claims against arbitrators fall within the “arbitration exception” of Article 1(2)(d) of the Brussels I recast regulation, leading to the application of French private international law rules to determine the competent courts. The Paris Court of Appeal further considered that French courts have jurisdiction to hear the claim on the basis that the seat of the arbitration, located in France, constituted the place where the arbitrators’ services were performed (the applicable jurisdiction criteria under French private international law rules). This post discusses the jurisdictional question raised before the Paris Court of Appeal, as regards liability claims against arbitrators.

 

Factual Background and First Instance Decision

A Qatari and an Emirati company, both active in the automotive industry, started ICC arbitration proceedings pertaining to the non-renewal of contractual arrangements. The seat of the arbitral tribunal was formally in Paris, but the three arbitrators were domiciled in Germany and the hearing and the deliberation took place in Germany. The award, rendered in favour of the Emirati company, was challenged by the Qatari company before the French courts on the basis that one of the arbitrators omitted to mention the links between his law firm and the group of the Emirati company. The Paris Court of Appeal annulled the award by a judgment dated 27 March 2018 because of the arbitrator’s breach of his disclosure obligations. Said judgment was confirmed by the French Supreme Court.

The Qatari company then claimed damages against this arbitrator before the French Court of First Instance (Tribunal judiciaire), which held – on 31 March 2021 – that the Brussels I recast regulation was applicable to the claim but that French courts did not have international jurisdiction on the basis of Article 7(1) of the Brussels I recast regulation. Pursuant to this provision, the courts competent to hear claims pertaining to an agreement for the provision of services are the courts of the Member State where, under the contract, the services were provided or should have been provided. In the opinion of the Tribunal judiciaire, the fact that the award was deemed to be rendered in Paris (as stated by the applicable terms of reference and Article 32(3) of the 2021 ICC Rules), the seat of the proceedings, would be “fictitious” and insufficient to consider that the parties’ intention would have been for the services to be performed in France. The Tribunal judiciaire ruled that the arbitrator’s activities were primarily performed in Germany, which was the country of domicile of the arbitrator and where the hearing and the arbitral tribunal’s deliberation were held.

The Qatari company appealed this decision before the Paris Court of Appeal on 26 April 2021.

 

Is the Brussels I Recast Regulation Applicable to Liability Claims against Arbitrators?

According to Article 1(2)(d) of the Brussels I recast regulation, the regulation is not applicable to “arbitration”. In view of the debates of the scope of this so-called “arbitration exception” under the Brussels Convention and the Brussels I regulation, the predecessor to the Brussels I recast regulation, a new recital 12 was added to the latter, which provides that:

“[…] this Regulation should not apply to any action or ancillary proceedings relating to, in particular, the establishment of an arbitral tribunal, the powers of arbitrators, the conduct of an arbitration procedure or any other aspects of such a procedure, nor to any action or judgment concerning the annulment, review, appeal, recognition or enforcement of an arbitral award”.

As underlined by the Paris Court of Appeal, the list of excluded proceedings encompassed in the arbitration exception is thus not exhaustive.

Referring to the CJEU’s Marc Rich case (Case C-190/89 of 25 July 1991), where the CJEU held that Member States “intended to exclude arbitration in its entirety, including proceedings brought before national courts” (para. 18), the Paris Court of Appeal considered that:

An action to hold an arbitrator liable after the annulment of an arbitral award based on the arbitrator’s failure to disclose is closely linked to the constitution of the arbitral tribunal and to the conduct of the arbitration, since it aims at assessing whether the arbitrator has carried out, in accordance with their obligations under his arbitration contract, his mission, which is part of the implementation of the arbitration.

This action is thus an arbitration matter, even if it is governed by general tort law” (paras. 26-27; free translation).

It could be argued that, following West Tankers (Case C-185/07 of 10 February 2009), where the CJEU ruled that anti-suit injunctions based on the existence of an arbitration agreement fell within the scope of the Brussels I recast regulation, the case law of the CJEU has evolved towards a more restrictive approach of the arbitration exception than its approach in Marc Rich. However, according to many commentators (see, for instance, this contribution), the decision may have been explained by the specificity of the case and the willingness of the CJEU to preclude anti-suit injunctions among EU courts. What the position of the CJEU would have been with respect to liability claims against arbitrators, if the Paris Court of Appeal had referred the question to the CJEU, is thus uncertain.

If the solution reached by the Paris Court of Appeal were to be upheld, it would mean that the recognition and enforcement of judgments over the liability of arbitrators would not benefit from the regime provided for by the Brussels I recast regulation (which provides for limited grounds for refusal of enforcement and recognition, and abolishes the necessity to go through exequatur proceedings in the Member State where enforcement is sought).

 

Where do Arbitrators Provide their Services?

Having concluded that the Brussels I recast regulation was inapplicable, the Paris Court of Appeal had to apply French domestic private international law. In accordance with Article 46 of the French Code of Civil Procedure, the defendant may, in addition to the courts of the domicile of the defendant, seize the courts of the country where the contractual services were performed.

The Court ruled that such place was determined by the seat of the arbitration, on the basis of the below reasoning:

In international arbitration, unless otherwise agreed by the parties, the State court of the place where the service was provided for the purpose of ruling on an action for liability brought against the arbitrator in the performance of the arbitration contract is the court in whose jurisdiction the seat of the arbitration is located.

Indeed, the arbitrator’s contract is part of the mixed nature of arbitration, contractual by its source and jurisdictional by its purpose, and derives from the arbitration agreement to which it is closely linked.

Thus, an arbitrator’s service consists in the performance of his or her mission to settle the dispute submitted to him or her by the parties and includes the rendering of an award at the seat of the arbitration chosen by the parties or in agreement with them.

There is therefore a need, in view of the particular nature of the arbitrator’s contract, closely linked to the arbitration agreement, to consider that the place of performance of the arbitrator’s services is at the seat, even though the arbitration proceedings and the arbitrators’ deliberation may, by agreement between the parties, have taken place at other places.” (paras. 30-33, free translation)

As the seat of the arbitration was Paris (France), the Paris Court of Appeal held that French courts had international jurisdiction over the claim and quashed the Tribunal judiciaire’s decision.

Favouring the seat of the arbitration as the applicable criterion in order to localise the performance of the arbitrator’s services, rather than a number of factual circumstances (as held by the Tribunal judiciaire), has the benefit of enhancing legal certainty. While it was clear in this case that the all of these factual circumstances pointed to Germany (as the three arbitrators were domiciled in Germany and all the procedural steps took place in Germany in practice), this may be less clear in many international arbitrations where the factual circumstances do not point to a single state. Focusing on the seat, rather than these factual criteria, also appears to be more in line with the parties’ intent in a case, such as the one at hand, where the terms of reference provide that (i) the arbitral tribunal may hold the hearing wherever it deems appropriate without impacting the seat of the arbitration and (ii) awards are deemed to be rendered at the seat.

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