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Blip on the Radar: An Anomalous Refusal to Enforce on Public Policy Grounds in Korea or a Sign of More to Come?

Kluwer Arbitration Blog - Thu, 2022-06-02 01:57

Under Article V(2)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (the New York Convention, “NYC”), a court may refuse to recognize or enforce a foreign award if “recognition or enforcement of the award is contrary to the public policy of that country.”

The NYC does not define the term “public policy” and instead permits each state to interpret the rule. Nonetheless, similar to many other jurisdictions (see, e.g., here and here), the courts in the Republic of Korea have traditionally adopted a narrow interpretation of Article V(2)(b), establishing a high threshold for a given circumstance to be deemed contrary to public policy.

In November and December of 2018, the Supreme Court of Korea issued back-to-back decisions in which the public policy argument failed in the first but prevailed in the second. The latter case was notable because it was a rare publicly available Supreme Court judgment to (partially) deny enforcement of a foreign award on grounds of Article V(2)(b). Although these decisions were rendered a few years ago, they may have slipped “under the radar” to some extent. In light of the relative dearth of publicly available case law on public policy challenges in Korean courts, these ones are worth revisiting.

 

Overview of Korean Arbitration Act and “Public Policy”

Korea’s Arbitration Act is based on the UNCITRAL Model Law. However, the Act does not adopt Chapter VIII of the Model Law concerning enforcement and recognition of foreign awards. Instead, Article 39 of the Act states that “recognition and enforcement of foreign arbitral awards subject to the NYC shall be governed by the NYC.”

Consequently, there is no direct statutory guidance on what constitutes “public policy” in the Korean legal regime. There is a comparable legal term “good customs and other social order” (“good customs”) that appears in Article 217(1)(3) of the Civil Procedure Act, Article 10 of the Act on Private International Law, and Article 103 of the Civil Act. The prevailing view is that “good customs” in the meaning of the Civil Procedure Act is most comparable to the “public policy,” since Article 217 governs the enforcement of foreign court judgments.

 

The Norm: Rejection of the Public Policy Argument

In 2016Da18753, decided in November 2018, the Supreme Court affirmed the decision of the Seoul High Court to grant enforcement of a foreign award despite its inconsistencies with domestic law.

The award in dispute was rendered by a tribunal seated in The Netherlands which ordered a South Korean company, Shinhan Apex, to transfer two of its patents to a Dutch company, Euro-Apex B.V.

Importantly, the tribunal ordered an “indirect compulsory performance” (i.e., a monetary enforcement measure) if Shinhan Apex failed to transfer the patents. On its face, this was contrary to Korean law because indirect compulsory performance is not permitted for transfer of patents, according to the Civil Execution Act.

Nonetheless, the Supreme Court held that the award does not contravene Korea’s public order to the extent that enforcement must be denied. It reasoned, inter alia, that indirect compulsory performance does not amount to a major restriction on the freedom of choice, because it merely applies psychological pressure to induce voluntary performance.

This pro-arbitration approach conforms with previous Supreme Court decisions. Starting from 93Da53054 and reiterated in several other cases, the Supreme Court repeatedly noted that “the fact that a foreign law applied to an award contravenes the mandatory provisions under the Korean law does not necessarily become grounds for non-recognition.” Further, in 2001Da20134, the Supreme Court held that the stability of the international trade order must be considered together with the domestic circumstances. This position, in effect, restricts the scope of the denial of enforcement.

 

The Exception: Acceptance of the Public Policy Argument but in Unusual Circumstances that Only Arose After the Award Was Rendered

However, in December 2018, the Supreme Court accepted the public policy argument in another case, 2016Da49931. LSF-KDIC Investment Company Ltd. (“LSF-KDIC”), a company jointly established by Korea Resolution & Collection Co., Ltd. (“KR&C”), requested that KR&C be held liable for 50% of the additional expenses incurred as a result of the sale of real estate, which included corporate taxes of KRW 23.7 billion. An ICC tribunal sided with the LSF-KDIC, which then sought enforcement in Korean courts.

During the enforcement stage, LSF-KDIC prevailed in a separate lawsuit against the local tax authorities. The corporate taxes were slashed to just KRW 370 million. Based on this decision, KR&C argued that, in light of the public policy exception, the award should not be enforced because, under Article 44 of the Civil Execution Act, a debtor may file a “lawsuit of demurrer” to suspend or block the compulsory execution of a binding decision.

Although KR&C’s public policy argument was unsuccessful in the lower courts, the Supreme Court sided with KR&C and remanded the case to the Seoul High Court.

The Supreme Court determined enforcement would constitute a contravention of “public order and good morals,” given the following circumstances:

  1. The tax was significantly reduced.
  2. LSF-KDIC was already dissolved.
  3. Awards are not subject to appeal, so such changes must be taken into consideration during the enforcement stage.

The Court noted that there were circumstances amounting to Article 451(1)(8) of the Civil Procedure Act – the alteration of an administrative disposition (i.e., taxation) by a different judgment or administrative disposition – which is grounds for a retrial.

However, since retrial is not permitted in international arbitration, the Court reasoned that KR&C must be able to raise such an objection during the enforcement stage as a last resort. In this case, it was clearly contrary to the “good morals” of Korea for KR&C to accept the enforcement of the award.

One notable contrast with 2016Da18753 (i.e., the case decided in November 2018) was that unlike in that case, where the Court found the level of contravention of Korea’s public order and good customs to be minor, here, the Court found the magnitude of contravention to be highly significant. This seems to indicate that the Court takes into account the level of practical impact on the parties.

Subsequently, in 2018Na10878, the Seoul High Court partially denied the enforcement of the award by deducting the exempted tax amount. It could be argued that denial of enforcement in this context is akin to correction of an arbitral award based on new circumstances that arose after the rendering of the award, and one might observe that the main reason why a court is forced to make the correction is that the tribunal has become functus officio.

At the same time, the High Court stressed the importance of maintaining a high threshold for the public policy argument:

  1. Arbitration is a form of alternative dispute resolution based on the parties’ consent.
  2. Parties usually have equal standing in arbitration.
  3. If domestic courts around the world attempt to prioritize local interests and deny enforcement of awards in the name of public policy, international trade will become unstable, and the arbitration will lose its effectiveness.
  4. NYC encourages widespread recognition and enforcement of awards.

As such, the High Court reasoned that the “public policy” under NYC is an “international public order.” Accordingly, denial of enforcement requires a violation of the fundamental principles of the domestic legal system which may not be allowed despite the international character of the dispute.

This case illustrates that even when public policy arguments are partially successful, Korean courts are cautious about denying enforcement of a foreign award.

 

Conclusion

Following the Supreme Court’s reasoning in 2016Da49931, there is a possibility that other grounds for retrial under Article 451(1) of the Civil Procedure Act may provide a basis for a demurrer, and consequently, denial of enforcement according to Korean “public policy.”

The following grounds for a retrial under Article 451(1) appear particularly relevant in the context of a potential public policy challenge of a foreign award:

  • “When a party has been led to make a confession, or obstructed in submitting the method of offence and defense to affect the judgment, due to the criminally punishable acts of another person” (Article 451(1)(5));
  • “When a document or any other article used as evidence for the judgment has been forged or fraudulently altered” (Article 451(1)(6));
  • “When the false statements by a witness, an expert witness or an interpreter, or those by a sworn party or legal representative have been adopted as evidence for the judgment” (Article 451(1)(7));
  • “When a judgment is contrary to the final and conclusive judgment which has been previously declared” (Article 451(1)(10));

It is yet to be seen if the “public policy” argument will prevail under grounds for retrial other than Article 451(1)(8). Given the paucity of Supreme Court cases concerning “public policy,” future judgments are necessary to settle this issue.

Nonetheless, those who seek to rely on the “public policy” argument will face an uphill battle. Korean courts maintain a pro-arbitration approach by presenting a narrow definition of “public policy,” looking beyond the domestic legal system and heeding the international trade order.

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Tulip Trading Limited v Bitcoin Association & Others: What Duties for Blockchain Platforms and Core Developers?

Kluwer Arbitration Blog - Wed, 2022-06-01 01:54

On 25 March 2022, as reported inter alia by Bird & Bird who acted for the successful defendants, the High Court of Justice in England (hereinafter the “High Court” or “Court”) rendered its eagerly-awaited judgment in the dispute between Tulip Trading Limited v Bitcoin Association & others.

An alleged hack had prevented Tulip Trading Limited (“TTL”), or more precisely its CEO, Dr Craig Wright, from accessing over a million dollars’ worth of digital currency assets held at two addresses within the relevant networks (the “Networks”). TTL sought to hold the networks and their core developers accountable, notably on the basis that they owed users a fiduciary duty to counter the effects of the hack and allow Dr Wright access to his assets.

This is a ground-breaking development for the blockchain and cryptocurrency community that provides important insight into the application of English law to the digital economy.

The decision deals with several procedural applications made by the Parties. This comment focuses on the Court’s treatment of the claimant’s allegation that the defendants were in breach of the common-law tort of fiduciary duty and thereby liable for the loss of the claimant’s digital currency as a result of the alleged hack.

 

Facts

Dr Wright explained that, on 8 February 2020, he accessed his wallet and noticed transactions that neither he nor his wife had actioned, and which had occurred a few days before. He further noticed that the system logs had been erased, along with the encrypted files in which he kept his private keys. He reported the hack to the police, however the judgment notes that there was no indication that material progress was ever made in identifying the perpetrators.

Some of the defendants were located abroad and challenged the Court exercising jurisdiction over them. The claimant applied for permission to serve proceedings out of the jurisdiction. In considering whether permission to serve out should be granted, the Court had to apply the general principles governing service out including, importantly, that there be a serious issue to be tried and that the claimant have a good arguable case.

It is in this context that Mrs Justice Falk considered inter alia the possible fiduciary and tortious duties which, on the claimant’s case, the defendants might owe to TTL. While the Court found that no such duties existed, its reasoning is worth exploring in greater detail.

 

Judgment

Serious issue to be tried

Mrs Justice Falk was satisfied that there was a serious issue to be tried that TTL was the owner of the vanished bitcoin, and that there was a plausible evidentiary basis for the claimant’s proposition that a hack had occurred.

 

Good arguable case

TTL claimed that the defendants owed it fiduciary duties, as a consequence of which they were or could be required to take all reasonable steps to provide TTL with access to and control of the stolen bitcoin, and to take all reasonable steps to ensure that effect not be given to the fraud. The failure to take such steps, said TTL, amounted to a breach of fiduciary duty, which justified an order requiring such steps to be taken and/or equitable compensation.

As to this, after an exhaustive review of the caselaw put before her, Mrs Justice Falk said that she was unable to conclude that TTL had a realistic prospect of establishing that the facts pleaded amounted to a breach of fiduciary duty owed by the defendants to TTL. It is worth recalling that the threshold for fiduciary duty in English law is high: it requires a demonstration that the fiduciary has undertaken a duty to act solely in the interests of the principal.

Mrs Justice Falk noted that one “difficult part” of TTL’s case was that it was founded on duties allegedly owed to all owners of digital assets recorded on the Networks, “who are by definition an anonymous and fluctuating class with whom the defendants have no direct communication, and certainly no contractual relationship.”

Against the notion that the developers owed a duty to introduce a software patch to enable TTL to regain control of its assets, Mrs Justice Falk found that:

“[D]evelopers are a fluctuating body of individuals. As a general proposition it cannot realistically be argued that they owe continuing obligations to, for example, remain as developers and make future updates whenever it might be in the interests of users to do so.”

Mrs Justice Falk added that the obligation of undivided loyalty, the distinguishing feature of fiduciary relationship, would be owed to all users of the Networks, and not only to the claimant. Yet the change sought by the claimant might be to the disadvantage of other users. This, Mrs Justice Falk said, was fatal to the claimant’s fiduciary duty argument.

 

Duty of care

TTL claimed that the defendants were in breach of a duty of care by failing to include in the software the means to allow users of the Networks to recover their private keys in the event of a loss or theft and more generally to include sufficient safeguards against wrongdoing by third parties.

As regards the tortious duties, Mrs Justice Falk first set out principles in detail in order to assess whether they could find application in this unprecedented scenario. Mrs Justice Falk considered that the complaint made was of failures to protect or act, as opposed to addressing bugs or other defects that would threaten the operation of the Networks. There was no allegation that any of the defendants was involved in the alleged hack or that they had acted in a way that had created or increased the risk of harm. Bearing in mind that the loss was purely economic, Mrs Justice Falk could not see a basis to depart from the general rule that the law imposes no duty of care to prevent third parties causing loss or damage. The Court also took into account the unlimited nature of the class to whom a tortious duty would be owed, as well as its open-ended scope.

 

The disclaimer in the software licence

Interestingly, the Court referred to the disclaimer contained in the software licence, which reads as follows: “[…] In no event shall the authors or copyright holders be liable for any claim, damages or other liability, whether in an action of contract, tort of otherwise, arising from, out of or in connection with the software or the use or other dealings in the software.”

On this point, Mrs Justice Falk considered the wording to be broad and possibly not reasonably understood as meaning that controllers of the relevant Networks assume no responsibility. The Court’s remarks may offer guidance for drafters wishing to ensure the exclusion of liability through software licences.

In addition, the High Court included an interesting, albeit probably not unexpected, observation regarding the possibility for legislative developments to cater for similar situations. While the Court considered that there was no foundation for TTL’s claims under existing law, it expressly referred to the Law Commission’s project on digital assets, which considers inter alia the appropriate legal remedies and/or actions, and the possible resulting future developments of the law.

 

Comments

The Court made several references to the Law Commission’s project on digital assets, as well as the UK Cryptoassets Taskforce. These references demonstrate the Court’s recognition of the practical importance of the reports, statements and analyses carried out by these bodies.

The core of the Court’s decision pits the values of blockchain against off-chain, legacy principles of law. The blockchain is premised on a decentralised, a-legal space (here it may be of interest to point out that Dr Wright, the claimant’s CEO, claims to be Satoshi Nakamoto, the creator of bitcoin). The claimant’s decision to frame its case as one of fiduciary duty was risky given that, in English law, the evidentiary hurdle of demonstrating that the defendants agreed to act in the sole interests of users of the Networks is high. While somewhat rare, breaches in network happen, as evidenced by the recent Ronin breach. With increasingly important on-chain activity, the provision of an efficient and reliable dispute resolution mechanism will need to be addressed. Whether the release of a specific patch to give back control, as per the claimant’s request, or the option to activate a fork, like in the case of the Ethereum DAO Hack, are viable remains to be assessed.

Finally, the impact of this decision on the arbitration of future blockchain disputes is an open question. A different applicable law might recognise that duties of care are owed to users by blockchain platforms and/or core developers. Against this background, considerations relating to forum shopping and principles of private international law are relevant. Indeed, a harmonized legal framework for blockchain-related legal issues, whilst it is the subject of emerging initiatives, does not appear likely in the foreseeable future; thus, outcomes are likely to vary depending on the relevant law and/or jurisdiction. As part of a wider discussion, one would encourage arbitration services providers to design a version of the arbitral process that provides blockchain disputes with the flexibility and speed that are the staples of the Web3 economy.

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Leases of Uncertain Appeals - D Lands Inc. v. KS Victoria and King Inc., 2022 ONSC 1029

International Arbitration Blog - Tue, 2022-05-31 17:09

In D Lands Inc. v. KS Victoria and King Inc., 2022 ONSC 1029, the Ontario Superior Court of Justice summarized the legal principles to be applied when determining whether parties have a right of appeal in contracts that are silent on the issue of appeals, and more particularly, where the agreement was executed under the former Ontario Arbitrations Act and was then arbitrated under the Ontario Arbitration Act, 1991, which provided for different default rights of appeal. 

Investment Claims Against Russia in the Economic Sanctions Era

Kluwer Arbitration Blog - Tue, 2022-05-31 01:00

The commencement of the war in Ukraine triggered the imposition of unprecedented sanctions affecting almost all sectors of the Russian economy. Many foreign companies operating in Russia ceased or temporarily put on hold their business activities. In response, the Russian government adopted several retaliatory measures.

This post offers an overview of these measures and their legal implications for foreign investors; investigates avenues available to foreign investors to assert their rights through investor-state dispute settlement (ISDS) proceedings; and discusses challenges that foreign investors may face at the enforcement stage as a result of economic sanctions currently in place.

 

FDI in Russia

Until recently, Russia accounted for more than 40% of foreign direct investment (FDI) inflows in the so-called transition economies of South-East Europe, the Commonwealth of Independent States (CIS), and Georgia. In 2020, the level of FDI into Russia amounted to USD 8,6 billion and Russia was, up until the military conflict, still ranked among the top 20 European investment destinations.

 

Measures Affecting Foreign Investments

In response to the brisk suspension of business operations by foreign companies after Russia’s invasion of Ukraine on 24 February 2022, the Russian government adopted retaliatory measures directed primarily against companies from designated “unfriendly countries,” i.e. countries that had imposed sanctions against Russia, including the US, all EU member states, the UK, and Japan.

The key measure is a proposal for a federal law On External Administration for the Management of an Organization. The draft law, which proposes to impose external administration on companies that discontinue their operations without clear economic reasons, was adopted by the Duma on 24 May 2022 and is expected to come into force shortly. External administration, which may be imposed only by way of court decision, could affect any company that is at least 25% owned or controlled by a person with a connection to an “unfriendly country,” and whose activity is crucial to the stability of the Russian economy, e.g. a manufacturer of first necessity products. The stated objective of the draft law is not to nationalise foreign assets, though it remains to be seen whether, in practice, the law will effectively be applied only in limited circumstances with a forced bankruptcy solely as a remedy of last resort.

Other measures that can interfere with foreign investments and limit the free transfer of funds are restrictions on transactions with persons and companies from “unfriendly countries,” laid down in the Governmental Decree dated 6 March 2022 (No 295). The Decree provides that the transfer of shares and securities as well as real estate transactions must be approved by the Government Commission on Monitoring Foreign Investment, which oversees foreign investments in Russia. Authorisations must also be obtained for the transfer of foreign currency outside of Russia. If an investor decides to sell its assets to a Russian company, the approval of the board of directors of the Central Bank of Russia must be obtained according to the Decree of the President of 18 March 2022 (No 126).

 

Claims Under BITs

The measures discussed above have far-reaching consequences and will inevitably affect foreign investments in Russia.

As Russia has entered into bilateral investment treaties (BITs) with most of the said “unfriendly countries,” a foreign investor adversely impacted may have recourse to investment arbitration proceedings under any such applicable BIT. BITs between Russia and “unfriendly countries” consistently guarantee foreign investors inter alia fair and equitable treatment (FET), protection against expropriation and discrimination under most-favoured nation (MFN) and national treatment (NT) clauses, as well as the right to freely transfer funds. The scope of arbitration clauses varies, however, from one BIT to another, with some clauses encompassing only disputes regarding compensation in case of expropriation and/or the guarantee of free transfer of funds (though such limitations may potentially be overcome through use of MFN provisions in the relevant treaties1)RosInvestCo v. Russia, SCC No. V079/2005, Award on Jurisdiction, 2007, ¶ 133. jQuery('#footnote_plugin_tooltip_41725_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41725_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });).

 

Enforcement Challenges in Case of Asset Freeze

Arbitral awards rendered against the Russian Federation are binding and enforceable under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC).2)Russia ratified the NYC on 24 August 1960. It has not ratified the ICSID Convention. jQuery('#footnote_plugin_tooltip_41725_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41725_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Given, however, Russia’s systematic failure to honour awards, enforcement proceedings appear virtually inevitable. Such proceedings, challenging in and of themselves, become all the more burdensome when economic sanctions are in place.

Even if Russian assets that are not shielded by sovereign immunity are identified, Russia will likely seek to rely on some of the grounds laid down in Article V NYC in order to resist enforcement, including public-policy-related arguments (Article V(2)(b) NYC). Enforcement endeavours may yet be further complicated if assets against which enforcement could be sought are frozen, as is currently the case of the assets of hundreds of Russian individuals and entities, including state-owned enterprises and subsidiaries thereof.

Under blocking sanctions, all assets and economic resources owned, held or controlled by designated persons and entities are blocked and no funds or economic resources may be made available, directly or indirectly, to them or for their benefit (see, for example, Council Regulation (EU) No 269/2014, Article 2). That said, many sanctions programs provide that an authorisation (or licence) may, in certain circumstances, be granted for the release of frozen assets. Accordingly, the question to be investigated is whether an award-creditor might be able to secure such an authorisation so as to enforce an award against frozen assets. Note that should a licence for the release of frozen funds be granted by the competent authorities of the state of enforcement, this obviously means that the use of such assets for purposes of satisfying the award is no longer prohibited; a fortiori, enforcing the award against released assets cannot be deemed to be in conflict with the public policy of the enforcement state, even if the award-debtor itself remains listed.

The question of the need to secure a licence might in fact arise even before the actual enforcement, if the award-creditor is seeking to attach the award-debtor’s frozen assets. An attachment may be necessary, under the laws of the place of enforcement, to create a forum for enforcement proceedings or it may simply be sought as a protective measure if the award-creditor wishes to ensure the right to be paid on a priority basis over other creditors. Should an attachment be deemed, under the applicable law, to have the legal effect of changing the destination of frozen assets (this is not the case under all laws), the attachment might itself require a licence or authorisation from the competent authority, even if it does not entail an actual removal of frozen assets from the designated person’s estate.3)See the ECJ Judgment of 11 November 2021 in Case C-340/20, ¶¶ 38 et seq. jQuery('#footnote_plugin_tooltip_41725_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41725_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Switzerland’s Ordonnance instituant des mesures en lien avec la situation en Ukraine du 4 mars 2022 stipulates that payments from frozen accounts, transfers of frozen assets and the release of frozen economic resources may exceptionally be authorised to honour debts pursuant to a judicial, administrative or arbitral decision (Article 15(5)(c)).

As regards US sanctions against Russia, Executive Order 14065 of 21 February 2022 provides that the assets of listed individuals and entities are frozen “except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order […]” (section 2(b)). § 589.506(d) of the Ukraine-/Russia-Related Sanctions Regulations also stipulates, inter alia, that “[…] the enforcement of any […] arbitral award […] purporting to transfer or otherwise alter or affect property or interests in property blocked pursuant to § 589.201 is prohibited unless licensed pursuant to this part.” Thus, an award-creditor must secure a licence from the US Department of the Treasury Office of Foreign Assets Control (OFAC) to be able to enforce an award against blocked property. This was recently confirmed in the Opinion of 2 March 2022 (Case No. 17-mc-151-LPS) of the US District Court for the District of Delaware in Crystallex International Corporation v. Bolivian Republic of Venezuela. Crystallex had obtained an ICSID award against Venezuela and sought to enforce it against the assets of the state-owned enterprise Petróleos de Venezuela S.A. (PDVSA). The US District Court stated, in respect of the auction of shares owned by PDVSA, that while it would “proceed with the sale process, up to and including selecting a winning bid[,] [it would] not, however, permit the sale to be executed unless and until OFAC grants a specific license (or unless and until the sanctions regime is materially changed).

As to the EU sanctions program, Article 5(1)(a) of EU Council Regulation No 269/2014 only allows authorisations for the release of funds intended to satisfy arbitral awards rendered prior to the relevant listing (in stark contrast to the possibility of funds being released to satisfy judicial and administrative decisions rendered in the EU even thereafter). In addition, it is required that “the funds or economic resources will be used exclusively to satisfy claims secured by such a decision or recognised as valid in such a decision […]; the decision is not for the benefit of a [listed] natural or legal person, entity or body […]; and recognition of the decision is not contrary to public policy in the Member State concerned” (Article 5(1)(b) through (d)). Importantly, granting enforcement of an award against released assets is compatible with Article 11 of EU Council Regulation No 269/2014, which prohibits only the satisfaction of claims made bydesignated natural or legal persons, entities or bodies listed in Annex I [or] any natural or legal person, entity or body acting through or on behalf of one of the [latter],” not the satisfaction of claims (including claims for the recognition or enforcement of arbitral awards (Article 1(a)(v))) made against listed individuals and entities.4)Regarding the interpretation of Article 38(1) of EU Council Regulation No 267/2012, the wording of which is close to that of Article 11(1) of EU Council Regulation No 269/2014, see Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd (24 July 2019) High Court of Justice [2019] EWHC 1994 (Comm) and Court of Appeal [2020] EWCA Civ 145. jQuery('#footnote_plugin_tooltip_41725_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41725_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Finally, it is noteworthy that some states, such as the US and Canada, have initiated procedures to adopt statutes intended to allow the seizure and repurposing of frozen assets. The legality of such measures and whether they could somehow be relied upon to satisfy investment claims against Russia remains to be seriously investigated.

References[+]

References ↑1 RosInvestCo v. Russia, SCC No. V079/2005, Award on Jurisdiction, 2007, ¶ 133. ↑2 Russia ratified the NYC on 24 August 1960. It has not ratified the ICSID Convention. ↑3 See the ECJ Judgment of 11 November 2021 in Case C-340/20, ¶¶ 38 et seq. ↑4 Regarding the interpretation of Article 38(1) of EU Council Regulation No 267/2012, the wording of which is close to that of Article 11(1) of EU Council Regulation No 269/2014, see Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd (24 July 2019) High Court of Justice [2019] EWHC 1994 (Comm) and Court of Appeal [2020] EWCA Civ 145. function footnote_expand_reference_container_41725_30() { jQuery('#footnote_references_container_41725_30').show(); jQuery('#footnote_reference_container_collapse_button_41725_30').text('−'); } function footnote_collapse_reference_container_41725_30() { jQuery('#footnote_references_container_41725_30').hide(); jQuery('#footnote_reference_container_collapse_button_41725_30').text('+'); } function footnote_expand_collapse_reference_container_41725_30() { if (jQuery('#footnote_references_container_41725_30').is(':hidden')) { footnote_expand_reference_container_41725_30(); } else { footnote_collapse_reference_container_41725_30(); } } function footnote_moveToReference_41725_30(p_str_TargetID) { footnote_expand_reference_container_41725_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_41725_30(p_str_TargetID) { footnote_expand_reference_container_41725_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 Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Heidi Brown’s Books Promoting Flourishing and Effective Practitioners

ADR Prof Blog - Mon, 2022-05-30 17:41
The ABA has published three books by Brooklyn Law Professor and Director of Legal Writing Heidi K. Brown to help law students and lawyers improve their well-being and function optimally. It just released The Flourishing Lawyer: A Multi-Dimensional Approach to Performance and Well-Being (2022).  She previously published The Introverted Lawyer: A Seven-Step Journey Toward Authentically … Continue reading Heidi Brown’s Books Promoting Flourishing and Effective Practitioners →

A Controversial Turkish Precedent on Arbitrators’ Jurisdiction on Claims Initiated Through Bankruptcy Proceedings?

Kluwer Arbitration Blog - Mon, 2022-05-30 01:31

The General Assembly of the Civil Chambers of Turkish Court of Cassation (“Court”) rendered a controversial decision on 21 December 2021 with No. K.2021/1710 (“Decision”).

The Decision provides that, notwithstanding a valid arbitration agreement, Turkish courts, not arbitrators, shall have jurisdiction to determine whether an alleged debtor, against whom a bankruptcy proceeding has been initiated, is indebted or not. This practically means that, when creditors initiate bankruptcy proceedings, they can circumvent the arbitral tribunal’s jurisdiction and facilitate Turkish courts to hear the merits of the dispute although the parties agreed to arbitrate and thus not to litigate.

This post first summarizes the Turkish enforcement and bankruptcy proceedings, and their interplay with arbitral tribunals’ jurisdiction. It then elaborates on the reasoning of the Decision and its potential practical impacts on the arbitration practice in Turkey.

 

Turkish enforcement and bankruptcy proceedings

The Decision revolves around the particularities of Turkish enforcement and bankruptcy proceedings. As these are unfamiliar to most jurisdictions, this section summarizes these proceedings first.

Turkish law provides creditors with mainly two legal routes to directly initiate enforcement through enforcement offices without resorting to litigation or arbitration:

  • They can directly initiate debt collection proceedings before enforcement offices; or
  • The creditors can also pursue enforcement by way of requesting (again from the enforcement offices) the bankruptcy of the debtor. The debtors can be subject to this bankruptcy proceedings for their due and payable debts, even for insignificant amounts. It is, therefore, irrelevant whether the assets of the debtors cover their liabilities.

The defining difference between the two proceedings relates to the role and rights of the creditors. Namely, if the creditor prevails in bankruptcy proceedings and the debtor is eventually declared bankrupt, not only the creditor who initiated the bankruptcy proceedings, but all creditors of the debtor shall be entitled to satisfy their receivables from the bankrupt debtor’s estate. In contrast, in debt collection proceedings, the procedure only concerns the debtor and the creditor, and other creditors are not involved unless they similarly initiate such proceedings.

In both proceedings, the enforcement office issues a payment order to the debtor where it states that the debtor must either pay, or object to the order within seven days.

In bankruptcy proceedings, the procedure to be followed upon the creditor’s objection is provided under Article 156(3) of the Enforcement and Bankruptcy Code, No. 2004 (“Bankruptcy Code”):

If the debtor objects to the payment order, the proceedings stop, and the creditor can ask the Commercial Court with a petition to lift the objection and decide on the bankruptcy of the debtor.

Only courts can decide on the bankruptcy of the debtor. This is clear. The controversial point is the first prong of the claim under Article 156(3), i.e., “lifting the objection”. To lift the objection, commercial courts must render a decision on the merits and confirm the indebtedness of the debtor to the creditor.

 

Arbitrators’ Jurisdiction

Turkish law is silent on the question whether arbitrators have jurisdiction to lift such objection. In view of this silence, Turkish jurisprudence developed two schools of thought:

  • The first school argues that the two prongs of the claim (i.e., “lifting the objection” and “deciding on bankruptcy”) are intrinsic and thus not separable. Given this, and as it is established that only courts can decide on bankruptcy, it must also be the same commercial courts to decide on whether the objection would be lifted (“First Approach”). The argument follows that, since Article 156(3) is mandatory and concerns public policy, the parties cannot sever this intrinsic structure with an arbitration agreement to confer jurisdiction on arbitrators to decide on lifting the objection. There are precedents following this approach (e.g., the decision of the 19th Civil Chamber of Court of Appeal dated 13 October 2005, and numbered K. 2005/10004).
  • The second school argues that the claims are separable. As such, if there is a valid arbitration agreement, the decision on bankruptcy can be rendered by the courts only after the arbitrators decide on the merits that the debtor is indebted (“Second Approach”). This is mainly based on the premises that (i) Turkish law does not prevent the arbitrators from deciding on lifting the objection; and (ii) Turkish arbitration law (including Article II of the New York Convention) requires the courts to refer this matter to arbitration. The Court of Cassation has also rendered decisions in line with the second school of thought (e.g., the decision of the 23rd Civil Chamber of Court of Appeal dated 28 June 2013, and numbered E. 2013/4113.).

 

The Decision

The dispute subject to the Decision is based on the loss of revenue claims of the employer under the construction agreement due to the contractor’s delay in completing the work. The parties agreed their disputes to be resolved by arbitration in accordance with the Rules of Arbitration of the Istanbul Chamber of Commerce Arbitration and Mediation Center (also known as ITOTAM).

The employer (creditor) initiated bankruptcy proceedings against the contractor (debtor). The debtor objected and the creditor filed a claim before the court of first instance under Article 156(3) of the Bankruptcy Code. The court dismissed the claim based on the Second Approach. The Court of Appeal upheld this decision. Having referred to the First Approach, however, the 15th Chamber of Court of Cassation quashed these decisions. On remand, the court of first instance resisted and reiterated its initial decision. Following this, the Court decided that the arbitrators shall not have jurisdiction to decide on lifting the objection claims under Article 156(3) of the Bankruptcy Code.

 

Going forward

The Court’s Decision is final and binding on the parties. However, it is not a binding precedent for Turkish courts, and they can still render decisions based on the Second Approach. Having said that, traditionally, Turkish courts rarely deviate from the precedents of the Court unless and until it is changed by the Court itself. In other words, although the Turkish courts have been divided on this issue, this may no longer be the case and the First Approach might be practically more decisive in questions surrounding arbitrators’ jurisdiction in cases where the bankruptcy proceedings are initiated.

If applied by the Turkish courts, the Decision will have significant impacts. This is because, by initiating bankruptcy proceedings, a claimant can effectively circumvent arbitration proceedings (and in fact jurisdiction of the foreign courts, if chosen) and facilitate Turkish courts to decide on the merits of the dispute as part of the lifting the objection claim.

On a final note, we would like to underscore two possible mitigants against such impacts.

First, as a practical mitigant, the disadvantages of the bankruptcy proceedings from a creditor perspective are likely to limit the number creditors who would be inclined to follow such bankruptcy route. That is to say; a creditor may not be willing to take the risk of competing with other creditors as they might end up empty-handed if the entire bankruptcy estate is allocated to the receivables of, for instance, preferred creditors.

Second, another mitigant might be found within the Decision itself. The Court noted, obiter dictum, that “[…] the parties have not stipulated a limitation that no bankruptcy proceedings shall be initiated in the event of a dispute” (par. 38). This implies that the Court might have decided differently if the parties explicitly agreed to exclude the jurisdiction of Turkish courts in respect of the bankruptcy proceedings. Out of an abundance of caution, the parties may wish to provide such exclusion in their agreements. It is doubtful, however, whether this will be an effective mitigant. This is mainly because Article 156(3) of the Bankruptcy Code is a mandatory rule concerning Turkish public policy and thus cannot be excluded by the parties, this being one of the main arguments of the First Approach and the Decision itself.

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The Russian Ruble Decree-Crisis: Can European Gas Buyers “Pay in Rubles without Paying in Rubles”? What May Be the Consequences if Not?

Kluwer Arbitration Blog - Sat, 2022-05-28 01:00

The Russian aggression in Ukraine has not only brought immense human tragedy, but also unprecedented uncertainty upon the European energy markets. Gas supply has emerged as a particularly weak spot of the entire European economy, being massively overdependent on Russian supplies. When Russian President Vladimir Putin issued the infamous Presidential Decree No. 172 of 31 March, requiring payments for the delivery of gas to be made in Rubles (the “Ruble Decree”), the situation grew even more complex. Not only is the Russian demand contrary to the payment terms of existing Gas Supply Agreements (“GSAs”), but it is also at variance with EU sanctions. Securing continued gas flows from Russia may, hence, require buyers to square a circle.

In this post, we will attempt to untangle some of the legal issues buyers face at this critical time, the resolution of which may have implications beyond the gas sector.1) Zeiler Floyd Zadkovich recently hosted a public webinar, discussing some of the problems triggered by the Ruble Decree and the disputes it may create. jQuery('#footnote_plugin_tooltip_41787_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41787_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Events are quickly unfolding as we write, with many European GSAs currently at a watershed moment: Whilst the Russian Gazprom Export has already halted supplies to Poland and Bulgaria in late April, and lately also to Finland, payment is due under many European contracts these days. At this turning point, we may see gas supply contracts – including the arbitration of disputes – evolve into an extended battlefield of economic warfare.

Sanctions and Countersanctions – the Russian “Ruble Decree”

In response to the Russian invasion of 24 February 2022, the EU introduced new economic sanctions against Russia, building on the existing framework established after the annexation of Crimea in 2014. To date, the EU has introduced five sanction packages, each addressing different segments of the Russian economy. None of these packages expressly targeted Russian natural gas supplies to Europe.

In reaction to these sanctions, Russia issued its own countersanctions. Of these, the Ruble Decree is probably the most notorious. To comply with the terms of the Ruble Decree, European buyers must open two special (conversion) bank accounts with Gazprombank JSC (“Gazprombank”), one denominated in the foreign currency designated in the GSA – i.e. Euros or US Dollars – and one in Rubles. To make payments under the GSA, buyers must first transfer the owed amounts to their foreign currency account with Gazprombank. This initial payment constitutes an irrevocable order to Gazprombank to convert the funds into Rubles, triggering a cascade of transactions whereby Gazprombank purchases Rubles at the Moscow Stock Exchange on behalf of the buyer, credits these Rubles to the second newly opened account of the buyer, and finally, credits the Rubles to the designated account of the seller. Importantly, the buyer’s payment obligation is only deemed fulfilled once this final transfer is completed.

If a buyer fails to comply with those terms, the Russian supplier Gazprom Export will be prohibited from delivering gas: such failure hence prompts an export ban. As can be seen above, the change in payment terms is beyond a mere technical shift, but extends the buyer’s risk sphere substantially.

The Ruble Decree caused a considerable stir among European leaders as well as key market players. The initial reactions ranged from complete refusal by the German chancellor to quick acceptance by the Hungarian president. Importantly, however, the Commission issued a statement, suggesting that compliance with the Ruble Decree would be in violation of the EU sanctions. This made the lives of the European importers even more difficult, adding the question of how to make payments in line with the Ruble Decree, whilst complying with EU sanctions.

 

Summary of EU Sanctions

Since the system of EU sanctions is quite intricate, for the purposes of this blog post we shall focus only on EU Regulation 833/2014 (“Regulation”). The Regulation contains a number of sectoral sanctions, among others, the prohibition of certain exports to Russia or the prohibition of any dealings with listed entities. Importantly, neither of the rules explicitly targets supplies of Russian natural gas as such.

Nevertheless, as a consequence of the Regulation’s general language, some sanctions now may as well affect natural gas supplies indirectly. For example, Art. 3a prohibits, among others, financing of any entity operating in the Russian energy sector. “Financing” is defined as any action whereby the entity concerned disburses its own funds or economic resources. The only exception to this definition is payment of the agreed price made “in line with normal business practice”. The sanction includes a carve out for gas supply, which, however, applies only for steps which are “strictly necessary”.

Other sanctions which could become relevant for gas supplies include the prohibition of engaging in certain financial transactions with listed Russian credit institutions under Art. 5. It is conceivable that the purchase of Rubles at the Moscow Exchange could be considered as such a transaction. Furthermore, sanctions in Art. 5a prohibit certain transactions with the Central Bank of Russia. Therefore, its involvement in the prescribed payment scheme could also lead to a breach of EU sanctions. With regard to this last point, the subsequent Decree No. 254 clarified that conversions – currently – do not involve the Russian Central Bank.

Also, the EU sanctions regime is new and untested, and there is only very little authoritative interpretation. Cases of violation would be addressed locally by authorities of individual EU members states, whose approaches may not be fully harmonized due to the lack of CJEU case law. Finally, the Regulation prohibits not only breaches of the individual sanctions, but also their circumvention. While the circumvention must be intentional, according to the CJEU, it is sufficient that the actor be aware that its participation may lead to circumvention and accept this possibility, making for a relatively low threshold.

 

Impact on Gas Supply Agreements

Evidently, all this puts EU importers of Russian gas in a difficult spot. In order to keep gas flowing, the Russian side demands full compliance with the Ruble Decree and as evidenced by Gazprom’s recent curtailment of supplies to Bulgaria, Poland and Finland, it appears poised to stay true to its word.

However, compliance with the Ruble Decree is fraught with serious risks for European buyers.

First, as discussed above, although the EU sanctions regime was not originally intended to target gas supply, the language of the relevant provisions is general and unclear. Therefore, the risk of committing a violation appears to be significant. Against this background, the EU Commission issued a guidance paper indicating that European buyers may open accounts with Gazprombank and pay in the designated currency on the first conversion account, as long as buyers declare unilaterally that they consider their payment obligation fulfilled with that first payment. This seems to offer a compromise, however, as of the date of writing, the Russian reaction to the procedure suggested by the Commission remains unknown. At the very least, the EU guidance paper makes it clear that plain abidance by the Ruble Decree would fall foul of EU sanctions.

Second, the payment mechanism provided for in the Ruble Decree significantly disrupts the risk allocation in European GSAs, not only by changing the agreed currency – invariably USD or EUR – but also by adding a third-party risk on the buyer’s side. As indicated above, the Ruble Decree stipulates that the payment obligation of the buyer is discharged only once Gazprom Export receives the Rubles in its account. Therefore, there is a gap of several days during when the buyers bear all risks that follow Gazprombank’s conversion and transmission of the sum, hence effectively acting as an agent for the buyer. It is unclear what would happen if the currency exchange was delayed or where the Russian government decided to seize the funds before the final Ruble payment is made, although the Russian Central Bank “explained” that payment irregularities caused by Gazprombank transactions should not lead to an export ban where the buyer had made timely payments “in good faith” and in compliance with the Ruble Decree. However, the official explanation contained an important caveat: Where conversion fails due to sanctions issued by unfriendly states, the export ban still applies. Therefore, overall, this falls short of addressing EU buyers’ concerns.

Also, while it may depend on the specific terms of an individual GSA, the Russian supplier will likely not be entitled to unilaterally impose the Ruble Decree payment scheme. This will hold particularly true where such GSAs are legally rooted in the jurisdiction of an “unfriendly state”, e.g. by choosing an EU, British or Swiss seat of arbitration and governing law.

It remains to be seen whether European efforts to allow buyers to “pay in Rubles without paying in Rubles” will suffice to keep the gas flowing. Given the volatility of this extraordinary situation and the stakes involved, arbitration lawyers may soon see a host of disputes come their way, a new wave of gas supply arbitrations, if you will: If the Russian side stops gas deliveries because payments made by European buyers in compliance with EU guidance would – despite all efforts – be deemed contrary to the Ruble Decree, would that be a breach of contract? Would it give rise to damages? What if, conversely, buyers refuse to comply with the Ruble Decree altogether? Would that give rise to any claims by Gazprom? All of these and many other questions will have to be addressed by arbitral tribunals, whose constitution may be particularly challenging these days.

References[+]

References ↑1 Zeiler Floyd Zadkovich recently hosted a public webinar, discussing some of the problems triggered by the Ruble Decree and the disputes it may create. function footnote_expand_reference_container_41787_30() { jQuery('#footnote_references_container_41787_30').show(); jQuery('#footnote_reference_container_collapse_button_41787_30').text('−'); } function footnote_collapse_reference_container_41787_30() { jQuery('#footnote_references_container_41787_30').hide(); jQuery('#footnote_reference_container_collapse_button_41787_30').text('+'); } function footnote_expand_collapse_reference_container_41787_30() { if (jQuery('#footnote_references_container_41787_30').is(':hidden')) { footnote_expand_reference_container_41787_30(); } else { footnote_collapse_reference_container_41787_30(); } } function footnote_moveToReference_41787_30(p_str_TargetID) { footnote_expand_reference_container_41787_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_41787_30(p_str_TargetID) { footnote_expand_reference_container_41787_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 Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Georgetown Brazilian Arbitration Day: Report on the Current Brazilian Arbitration Landscape

Kluwer Arbitration Blog - Fri, 2022-05-27 01:26

Organized by the Georgetown International Arbitration Society and the Georgetown Brazilian Law Association, in cooperation with the Arbitration Channel, the I Georgetown Brazilian Arbitration Day took place on April 8, 2022. The first edition of the conference discussed some of the main topics of interest in international arbitration as well as the latest developments in arbitration in Brazil.

The recording of each panel can be accessed in the Arbitration Channel page on Youtube.

 

Introduction

The keynote speaker, Professor Anne Marie Whitesell (Georgetown University Law Center, Washington DC), opened the conference reminding the audience that Brazil nowadays is one of the leading examples for how arbitration can flourish and be effective. Professor Whitesell stated that this is, in part, due to the number of Brazilian lawyers interested in international arbitration and seeking to specialize on the subject. Professor Whitesell then started the program by sharing her excitement about the enormous advancements and developments that have taken place in international arbitration in Brazil in recent years.

 

Is Brazil a truly arbitration-friendly jurisdiction? Current challenges and next steps for Brazil to become a more popular seat of arbitration

Mr. Lucas Passos (LL.M Candidate at Georgetown University Law Center, Washington DC) moderated the first panel of the day, and provoked the panelists Mrs. Ana Carolina Beneti (Beneti Advocacia, São Paulo), Mr. Jose Sanchez (Vinson & Elkins LLP, New York), Mrs. Laura França Pereira (Three Crowns LLP, Washington DC) and Mr. Marcelo Roberto Ferro (Ferro, Castro Neves, Daltro & Gomide, Rio de Janeiro) on giving their views on the state of play of arbitration in Brazil.

Mrs. Beneti commenced her presentation by stating that Brazil is a force to be reckoned with in the field. Although the history of arbitration is recent in Latin America, when compared to other countries in the region, Brazil has been a case of success. Mrs. Beneti shared that the latest ICC Report placed Brazil as the preferred seat for arbitration in Latin America and 5th place worldwide, 2nd place in terms of number of parties for 2020 and 2021, and 5th place in number of arbitrators.Mr. Ferro presented an overview of recent – and controversial – decisions by the Superior Court of Justice (“STJ”) in relation to conflict of jurisdiction (“conflito de competência”), a unique device to Brazil where an incidental motion is filed in proceedings when a conflict arises between two competent adjudicatory bodies. In 2022, the STJ admitted a conflict of jurisdiction motion discussing a conflict between two arbitral tribunals. Mr. Ferro warned that this could represent a denial of the competence-competence principle in the country. Another relevant decision was issued in 2019 by the STJ, in relation to a case involving the state-owned Petrobras, where the STJ reopened the discussion on whether state-owned companies are authorized to arbitrate, which had been extinct with the amendment to the Brazilian Arbitration Act (BAA) in 2015 that expressly included a provision authorizing state-owned companies to have recourse to arbitration (BAA, Article 1, paragraph 1).

Mrs. Laura França Pereira (Three Crowns LLP, Washington DC) followed with a presentation on the potential for Brazil to become even more prominent in international arbitration as a seat involving foreign parties. Mrs. Pereira commented that even though data shows that arbitration proceedings seated in Brazil have grown 20% over the past few years, only 8% involved foreign parties.

With the growth in Investor-State Disputes throughout Latin America, Mrs. Pereira stated that Brazil may effectively host ISDS cases, as the country offers superior arbitration regulation compared to neighbor countries. Brazil’s solid track record for recognition and enforcement procedure, neutrality and impartiality of local courts as well as a modern and well drafted national arbitration statute should aid Brazil’s case for being a preferred seat.

Closing the first panel of the conference, Mr. Jose Sanchez (Vinson & Elkins LLP, New York) commented on how Brazil is a significant player in international arbitration, as well as on the trend to conduct arbitration proceedings in Portuguese and governed by Brazilian law. With Brazil being the largest economy in Latin America with great prospects of investment growth, the Brazilian market is significant for the economic activity of the region, which directly impacts the dispute resolution market. Mr. Sanchez also commented on how courts in different states in Brazil are highly deferential to arbitrators’ findings of their own jurisdiction – something not seen elsewhere in the region. Mr. Sanchez concluded that Brazil is a world-class jurisdiction and the best choice for a seat in Latin America.

All panelists concurred that Brazil indeed is an arbitration friendly jurisdiction, but challenges to arbitration practice in the country still exists, and efforts to further improve the system in Brazil are still warranted.

 

The Brazilian litigation culture: Impressions from international arbitrators

The second panel, moderated by Mr. Leandro Felix (Machado Meyer Advogados, São Paulo), kicked-off the panel by asking questions regarding the differences between Brazilian and international arbitration practice to each member of the panel, composed of Mr. Hermes Marcelo Huck (Huck Otranto Camargo, São Paulo), Mrs. Maria Claudia Procopiak (Procopiak Arbitration, London), Mr. José Gabriel Assis de Almeida (J.G. Assis de Almeida Advogados, Rio de Janeiro) and Mr. Mauricio Gomm Santos (GST LLP, Miami).

On the advantages and disadvantages of lawyers who practice both litigation and arbitration, Mr. Huck pondered that arbitration is a much more light and flexible process than litigation, and that lawyers working exclusively in this field understand this and behave accordingly. In this regard, Mrs. Procopiak commented that arbitration is a type of litigation and that practicing advocacy skills, be it in litigation or arbitration proceedings are advantageous. However, practices exclusive to litigation should not be replicated in arbitration. Likewise, Mr. Gomm warned the audience on the risks of bringing too much of a domestic and litigation mindset to arbitration proceedings.

In relation to the main differences between legal submissions, Mr. Huck considered that cultural differences might impact the style or even content of a legal submission, but the art of legal writing is to be clear, objective and understandable, without being tiresome. Mr. Gomm also advised against the abuse of citation of case law and scholarly opinions and the use of passive voice by civil law practitioners.

In terms of different approaches to the taking of evidence, witness testimony, cross-examination, and the conduct of hearings, Mr. Huck opined that different cultures and different approaches to each case affect counsel behavior, but in practice, no basic difference in evaluating evidence between domestic and international arbitration exists. Mrs. Procopiak shared her view that common law tradition prevails when it comes to the production of evidence in international arbitration.

In turn, Mr. Gomm stated that with more foreign practitioners, lawyers and arbitrators fine-tuning their Portuguese skills, the common law and civil law systems receive inputs from one another and meet halfway, creating what he called the phenomenon of “internationalization of the Anglo-Saxon system”.  In regard to document disclosure issues, Mr. Almeida stated that the key point for counsel is to anticipate potential conflicts and where the evidence can be gathered from and stored throughout the parties’ contractual relationship.

Concerning the differences in term of time frame for arbitration proceedings, Mr. Almeida stated that international arbitral tribunals usually have a higher degree of predictability and efficiency when compared to domestic cases.

Finally, Mrs. Procopiak and Mr. Gomm addressed the fact that arbitration is a melting pot for international practitioners, bringing together professionals from different backgrounds, experience and culture. Both agreed that various language skills are a must in order to break into the market.

 

Enforceability of foreign arbitral awards and international judicial cooperation

The third panel was chaired by Antonia Azambuja (Machado Meyer Advogados, Rio de Janeiro), the panel was composed of Mrs. Carmen Tibúrcio (Barroso Fontelles, Barcellos, Mendonça & Associados, Rio de Janeiro), Mrs. Emily Westphalen (Herbert Smith Freehills, New York), Mr. Fabio Peixinho (Tauil & Chequer Advogados in association with Mayer Brown, São Paulo) and Mrs. Marcela Kohlbach (ICC YAF Representative for Latin America, Rio de Janeiro).

Mrs. Tibúrcio provided an overview of the Brazilian legal system regarding the recognition and enforcement of foreign arbitral awards. She presented statistics showing the number of cases filed before the STJ regarding the recognition of US arbitral awards in Brazil and addressed important practical issues. She was followed by Mrs. Westphalen, who analyzed recognition and enforcement proceedings under a US perspective by addressing the relevant provisions of the Federal Arbitration Act (“FAA”), the requirements for the confirmation of arbitral awards and defenses to the enforcement of arbitral awards in the US.

Mrs. Kohlbach focused on the failure to disclose and impacts on the enforceability of arbitral awards. She addressed the Abengoa v. Ometto case, where issues of public policy were raised regarding the neutrality and impartiality of the arbitrators. In spite of this precedent, the STJ took a different turn in Levi Strauss v. Ganaderia Brasil, where the Court only analyzed whether the formal requirements of the enforcement proceedings were met, since its analysis should not overrun the merits of the case.

In his presentation, Mr. Peixinho discussed whether state courts could grant enforcement of arbitral award if the award was set aside in the seat of arbitration. Finally, he spoke about the problems that arise from “enforcement races” of arbitral awards in different jurisdictions as a result of the absence of a harmonized international approach to deal with this issue.

 

Corruption in international commercial arbitration: Key issues and Brazilian specificities

The last panel, moderated by Mrs. Mônica Murayama (LL.M Candidate at Georgetown University Law Center, Washington DC), focused on corruption in arbitration, and was composed of Mr. Carlo Verona (Demarest Advogados, São Paulo), Mrs. Érica Franzetti (King & Spalding LLP, Miami; Georgetown University Law Center, Washington DC), Mrs. Michelle Grando (White & Case LLP, Washington DC), Mr. Pedro Jardim de Paiva Barroso (Petrobras, Rio de Janeiro) and Mr. Rafael Francisco Alves (MAMG Advogados, São Paulo).

Mrs. Franzetti and Mr. Barroso discussed whether allegations and possible findings of corruption could impact the jurisdiction of arbitration tribunals and concluded that it would occur when corruption affects the consent to arbitrate or the arbitrability of the dispute. They added that, unless the arbitration clause itself is tainted by corruption, allegations or findings of corruption should not impact the jurisdiction of an arbitral tribunal. They further explained that the jurisdiction analysis considering corruption allegations is different in commercial and investment disputes.

Mrs. Grando and Mr. Barroso addressed that there are different views on the standard of proof for proving corruption. Some argue that there should be a high standard of proof, such as the criminal standard of beyond reasonable doubt or the clear and convincing evidence standard. However, others argue that the standard of the preponderance of evidence should apply. Regardless, a party can rely on circumstantial evidence or red flags to prove corruption.

Mrs. Franzetti and Mr. Barroso discussed parallel proceedings, since it is common that internal or administrative criminal investigations be undertaken concerning entities or individuals involved in corruption allegations during the pendency of an arbitration. Mrs. Franzetti argued that there are tribunal decisions confirming that corruption findings in administrative or internal proceedings are not binding on an arbitral tribunal, but may be treated as probative evidence of corruption.

Mr. Verona and Mr. Alves addressed the duty of the arbitrators to corruption investigations. The speakers discussed different views on whether arbitrators have a duty to disclose and to investigate sua sponte potential corruption practices and to report potential acts of corruption to authorities – or, contrarily, the arbitrator would only have powers to investigate and report, but no duty. Mr. Rafael Alves also addressed the topic of misuse of arbitration for the corrupt purposes or money.

Lastly, Mrs. Grando commented on the annulment of arbitral awards on corruption grounds, which can occur when there is corruption in the arbitral proceeding, highlighting that courts are asked to analyze these issues based on public policy grounds, which serves as grounds for annulment.

 

Conclusion

The First Georgetown Brazilian Arbitration Day provided insightful discussions on a variety of important topics in international arbitration and arbitration in Brazil, as well as under an international and comparative law perspectives, which was obtained by the participation of brilliant Brazilian and non-Brazilian practitioners and arbitrators. In so, the question raised in the first panel can be answered affirmatively: Brazil is an arbitration friendly jurisdiction, given its modern and solid legal framework, limitations on state courts intervention in arbitration and the strong influence of international arbitration principles and institutes.

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Living, Dying, and Life After Death

ADR Prof Blog - Thu, 2022-05-26 17:02
We all live, and we all will die some day. For most of our lives, our deaths seem like they will happen at some unknown time far in the future. Not so for Australian writer Cory Taylor when she died of cancer at age 61.  In the last few weeks of her life, she produced … Continue reading Living, Dying, and Life After Death →

4-word-build, A Conflict Resolution Exercise and Teamwork Exercise

Communication and Conflict Blog - Thu, 2022-05-26 07:45
4-word-build - a conflict resolution exercise for gaining a shared understanding of a concept in a group or team. The exercise enables all present to participate in the creation of the shared view.

Some Highlights of the Amended ICSID Arbitration Rules

Kluwer Arbitration Blog - Thu, 2022-05-26 01:00

On 21 March 2022, the Administrative Council of the International Centre for Settlement of Investment Disputes , or ICSID, approved extensive amendments  of ICSID’s Regulations and Rules. The Regulations and Rules prominently include the rules of procedure for arbitration proceedings initiated under the constituent treaty of ICSID, the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. These rules of procedure are commonly called the ICSID Arbitration Rules. They have governed most of the many so-called ISDS cases—investor-State arbitrations initiated pursuant to international investment agreements, or  IIAs—that have been brought during the last three decades.

The recently approved amendments have thoroughly overhauled the ICSID Arbitration Rules. This post examines some highlights of the amended Arbitration Rules. It looks at amended Arbitration Rules 14, 23, 41, 53, and 62. These have introduced improvements in the system of investor-State arbitration under the ICSID Convention while remaining within the broad and mostly flexible confines of that system (since amendments of the ICSID Convention itself are exceedingly difficult to make, requiring ratification by all States parties to the Convention, which now number 156).

Amended ICSID Arbitration Rule 14 is a new provision on third-party funding. It will obligate parties to disclose the name and address of any non-party funding their participation in the proceeding. The disclosure requirement will apply throughout the proceeding. Potential or serving arbitrators are to be informed, to enable them to avoid inadvertent conflicts of interest. While not extending the disclosure requirement to the funding agreement, the amended rule provides that the arbitral tribunal may order the funded party to divulge “further information” regarding the agreement. (For an extensive analysis of risks of requiring the disclosure of third-party funding agreements, see here.)

Under the ICSID Convention, a challenge of an arbitrator for lack of independence, or ineligibility to serve on the arbitral tribunal, is to be decided by the other members of the tribunal unless they are evenly divided, in which case the challenge will be decided by the Chairman of the Administrative Council (the President of the World Bank).  Amended ICSID Arbitration Rule 23 should temper this much-criticized feature of the system of the ICSID Convention, of having the possible disqualification of a member of a tribunal normally determined by his or her colleagues on the tribunal. In accordance with amended Rule 23, the other members of the tribunal will, if they are unable to decide the challenge “for any reason,” be deemed to be “equally divided” for the purpose of the ICSID Convention, with the result that the challenge will instead be decided by the Chairman of the Administrative Council. (For a blog noting the problematic “optics of relying on arbitrators for a neutral ruling on their colleague’s challenge,” see here.)

The 2006 amendments of the ICSID Arbitration Rules provided an innovative procedure for the early dismissal of claims manifestly lacking legal merit. In cases in which the procedure was invoked, it was seen as covering claims that were unsustainable from the jurisdictional as well as the substantive viewpoint, even though this was not clear from the 2006 provision. Newly amended ICSID Arbitration Rule 41 eliminates the ambiguity, making it clear that the procedure allows for the early dismissal of claims that are manifestly ill-founded as to jurisdiction.

The ICSID Convention authorizes arbitral tribunals to issue provisional measures to preserve the respective rights of either party. Tribunals have commonly been requested to exercise this authority to order a party to provide security for costs. But the requests have seldom been granted. In several cases, this was because the tribunals considered that they could not issue provisional measures in respect of rights that were hypothetical or to be created only in the event of the requesting party prevailing in the arbitration. Amended ICSID Arbitration Rule 53 confirms the power of an arbitral tribunal to order a party to post security for costs as a stand-alone authority, separate from the power to grant provisional measures. The amended rule also affirms that the tribunal may discontinue the proceeding in the event of non-compliance with such an order to furnish security.

In accordance with the ICSID Convention, the Centre may not publish an award without the consent of the parties. The earliest amendments of the ICSID Arbitration Rules, in 1984, included one permitting ICSID, even in the absence of consent of the parties, to publish excerpts of the legal holdings of an award. Such publication by ICSID of award excerpts was made mandatory when the provision was again amended in 2006. Newly amended ICSID Arbitration Rule 62 takes the bold further step of deeming the parties to have given their consent to the publication of the entire award by ICSID if neither objects within 60 days after the dispatch of the document. The amended rule should help to foster greater consistency among arbitral awards by assuring the wider dissemination of their full contents.

In 2018, at the outset of its current efforts on the reform of ISDS in general, Working Group III of the United Nations Commission on International Trade Law identified various concerns as meriting the development of reforms. Several of the identified concerns have been addressed in these amended ICSID Arbitration Rules: concerns pertaining to third-party funding, concerns over the adequacy of mechanisms to deal with challenges of arbitrators and unmeritorious claims, concerns about security for costs, and concerns regarding inconsistency of investment awards.

A challenge for Working Group III has been to bring reforms in these and other areas to bear on proceedings under the very large number pre-existing IIAs. This problem, however, has had limited relevance in the ICSID ISDS context. The Arbitration Rules applicable to the conduct of an ICSID Convention arbitration proceeding are, unless the parties agree otherwise, those in effect on the date of the parties’ consent to arbitration. When the parties consent on different days, the date of consent is the date on which the second party acts. Thus, to determine the applicable version of the ICSID Arbitration Rules—in an ICSID Convention ISDS case—the date of the consent of the parties will normally be the date of the investor’s consent, which will ordinarily be given on or soon before submitting the case to ICSID. In other words, ICSID Convention ISDS proceedings initiated after the adoption of amendments of the ICSID Arbitration Rules are, in general, subject to the rules as amended, irrespective of the date of the underlying IIA containing the consent to arbitration of the State.

Along with the other amended Regulations and Rules, the newly amended ICSID Arbitration Rules will come into force at the start of the next fiscal year of ICSID, on 1 July 2022. They generally will apply to all ICSID Convention ISDS proceedings initiated on or after that date. Responding to widely shared concerns about ISDS in several areas, the now concluded process of amending the ICSID Arbitration Rules is therefore poised for immediate implementation.

 

 

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15th Annual WIP Conference

ADR Prof Blog - Wed, 2022-05-25 13:23
This October, the University of Oregon School of Law will be hosting the 15th annual AALS ADR Section Works in Progress Conference. This is one of the best ADR conferences of the year, and we are thrilled to be hosting it again in Eugene! Please check out the conference website for more information and to … Continue reading 15th Annual WIP Conference →

Breaking Traditions in Favor of German Efficiency? Frankfurt As a “Safe Seat” for International Arbitration

Kluwer Arbitration Blog - Wed, 2022-05-25 01:00

Frankfurt am Main (“Frankfurt“) – Germany’s No. 1 city for international arbitration – could serve as a cost-effective and safe seat for international disputes. A “safe seat” of arbitration offers a fair, just and cost-efficient dispute resolution mechanism by offering effective arbitral law and practice (see here). The criteria for distinguishing a safe seat of arbitration is based upon objective parameters, as enshrined in the London Principles. Reputation, tradition, and recognition are therefore not relevant aspects for classifying a seat as safe but are rather crucial factors that determine the seat’s final selection in the arbitration agreement (see here). In this sense, safe and traditional seats of arbitration (e.g. London, Paris, Singapore, New York, Geneva, and Hong Kong – see here) are usually at the forefront of a party’s mind for good reasons. Frankfurt however could join the race of arbitral seats and be considered as a viable alternative.

 

A Safe and Cost-Efficient Seat

Frankfurt, known as the most important financial centre in continental Europe, could serve as a safe and cost-efficient seat for international arbitration users. This is mainly due to its excellent legal infrastructure, arbitral practice, accessibility, and reasonable costs.

The German law of arbitration is substantially based on the UNCITRAL Model Law on International Commercial Arbitration from 1985 (the “Model Law“). In this sense, the Tenth Book of the German Code of Civil Procedures (available in English here) is inspired by the Model Law and conforms with Germany’s modern legislation for both domestic and international arbitration (Sections 1025-1066). With regard to the few deviations made in respect of the Model Law, practitioners have considered the German arbitration law as more “arbitration-friendly” than the Model Law (see here). Importantly, Germany is also a signatory to the New York Convention (here).

As to the arbitration rules, parties are always free to choose the rules that they prefer when selecting Frankfurt as the seat of arbitration (such as the ICC Rules or the DIS Rules). Regarding the latter, the latest DIS statistics reveal that one third of the arbitration proceedings carried out pursuant to the DIS Rules are conducted in the English language (here).

From a practical perspective, the courts of Frankfurt have demonstrated experience with arbitration. Courts have traditionally been receptive to the notion of arbitration both at a regional and federal level:

  • The Higher Regional Court of Frankfurt (“OLG Frankfurt“) carries out most of the judicial functions for international arbitrations seated in Frankfurt. The OLG Frankfurt has a specialized chamber (No. 26) dealing with arbitration-related matters (here). This feature highlights the level of competence of the Frankfurt judiciary in arbitration.
  • The 26th Chamber of the OLG Frankfurt has stressed that an arbitral award may only be set aside in extremely exceptional cases (26 Sch 1/19), interprets arbitration clauses broadly to uphold the parties’ choice to pursue arbitration (26 Sch 1/18), and has refused to review whether tribunals had wrongly admitted belated evidence (26 Sch 18/20 and here). Recent studies show that only 3.31% of the cases before this court from 2012 to 2016 have been successful whereby a party raised a public order ground to set aside an award (here).
  • German courts are also known for strongly favoring arbitration, and can generally be relied upon to uphold, recognize, and enforce arbitral awards (see here, and here). The German Supreme Court has also adopted a non-interventionist approach towards international arbitration (here, here, or here). Furthermore, after reviewing more than 500 decisions concerning the setting aside and enforcement of awards in Germany, a study concluded that German courts generally treat foreign and domestic parties equally (here).

In terms of convenience, Frankfurt is one of the most accessible cities in central Europe (and worldwide). The Frankfurt International Airport is one of the largest passenger airports in the world and is located only 12 km away from the city centre (here). The Frankfurt Hearing Centre also offers rooms and accommodating services for arbitration hearings in the middle of Frankfurt (here). These features strongly highlight the attractiveness of Frankfurt as a place where in-person (or hybrid) arbitration hearings could be conducted. In this sense, it is not uncommon for Frankfurt to be considered as a place for arbitration in investment disputes as well.

In terms of costs, which are often perceived as arbitration’s worst feature, daily hotel rates in Frankfurt have been reported to be less expensive than in other European cities. Hourly rates for German counsel are also very competitive, especially the rates of boutique law firms specializing in international arbitration. German counsel may also be more inclined to avoid or limit the use of discovery and document production, thereby reducing the overall cost of the arbitration.

The above affirms that, due to its legal framework, judiciary, accessibility, and cost-efficiency, Frankfurt can be catalogued as a safe and cost-effective seat for international disputes.

 

Frankfurt as an emerging seat for international arbitration

If Frankfurt is such a safe and convenient seat, then why is it only now improving its visibility within the top ranked arbitration seats?

First of all, it is important to mention that Frankfurt has seen an exponential growth of international arbitrations in the last few years (here). Frankfurt was mentioned as one of the preferred seats in the 2021 International Arbitration Survey by Queen Mary University and White & Case, and was listed by 4% to 2% of the respondents, together with other eminent seats such as Zurich, Vienna, Washington DC, Miami, Shenzhen, São Paolo, and The Hague.

The fact that Frankfurt is not in the current “top 10” of the most preferred cities could be due to the parties’ unwillingness to grant a home-field advantage. As the world’s third largest exporter (after the US and China), German parties are largely involved in international transactions. Thus, non‑German parties may protest against the selection of a German seat or opt for a seat, which they perceive as being more neutral.

Furthermore, due to the German federal system, Frankfurt closely competes with other German cities (e.g., Hamburg, Munich, Düsseldorf, Stuttgart, Berlin, Cologne) that are known for offering arbitration‑related services. Thus, there may be a decentralization of arbitral seats in Germany. As competition tends to improve quality, this factor may ultimately contribute to a higher degree of sophistication in the German arbitration market at competitive prices.

The use of language may also be a relevant factor within this discussion. The standard rule is that German is the court language in German court proceedings pursuant to Section 184 of the Courts Constitution Act. Nonetheless, courts in Frankfurt are well acquainted with international proceedings. This is highlighted by the introduction of an English-speaking Chamber for International Commercial Disputes at the Regional Court (Landgericht) of Frankfurt in 2018. Furthermore, lawyers in Germany usually have a very high proficiency in English.

Finally, tradition and biases may play an important role in the selection of an arbitral seat and, as described above, Frankfurt may not yet be perceived as the “go-to” city in international arbitration.

 

Conclusion

The newly launched GAR CIArb Seat Index rates various seats of arbitration in one-page reports in accordance with each of the London Principles. Right now, the index only covers six jurisdictions (namely, Hong Kong, London, New York, Paris, Singapore, and Switzerland). According to the page, the index will be expanded over time to include additional cities and will be sorted according to grades in the style of bond ratings, or country risk (AAA, AA, A, BBB, BB, B, CCC, etc.). For the reasons mentioned above, Frankfurt should be included in the next round of expansions with a high rank, revealing Frankfurt as a hidden gem for international arbitration.

 

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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HBO Documentary on Social Critic George Carlin

ADR Prof Blog - Tue, 2022-05-24 18:55
HBO recently presented a great two-part documentary, George Carlin’s American Dream.  He started as a conventional, clean-cut comic in the 1960s, and evolved into a counterculture icon in the 1970s.  He continued performing until shortly before his death in 2008. This post is another in my What I’m Reading series. Mr. Carlin really came to … Continue reading HBO Documentary on Social Critic George Carlin →

New Directions in International Investment Law: Towards Energy Transition

Kluwer Arbitration Blog - Tue, 2022-05-24 01:53

The investor-State dispute settlement system (ISDS) is increasingly confronted with disputes related to climate-related measures. Consequently, this fora has been described as the new frontier in climate-change disputes, as tribunals are slowly becoming a de facto source of climate policy making that directly impacts the regulatory landscape. This blog post discusses the following issues: (i) whether the international investment arbitration system protects fossil fuels, and (ii) whether the international investment system can be used to foster investments in renewable energies.

 

Does The International Investment Arbitration System Protect Fossil Fuel Investments? 

Both the latest IPCC Report and the International Energy Agency (IEA) Net- Zero by 2050 Report emphasized the need to reduce carbon emissions from fossil fuels to limit global temperature rise to a maximum of 1.5°celcius. Nonetheless, international investment treaties continue to protect investments in fossil fuels. The mere threat of an investment proceeding may forestall a State from taking climate change measures to limit fossil fuel exploitation, resulting in regulatory chill. On this basis, civil society and other that international investment law (and ISDS) conflict with the imperatives of the Paris Agreement.

Certain ISDS cases indicate that such criticisms may be correct. For example, in Grenada Private Power & WRB Enterprises Inc v. Grenada, Grenada sought to implement its Nationally Determined Contributions (NDCs) under the Paris Agreement, diverging from fossil-fuel energy to renewable energy. To accomplish this, Grenada enacted legislation that ended the monopoly of GRENLEC – a fossil fuel energy provider and the island’s sole energy provider – over the energy sector. In response, GRENLEC swiftly commenced investment arbitration against Grenada. In the arbitration, Grenada made several policy arguments invoking, inter alia, its national interest in renewable energy development, the failure of GRENLEC to act as a good corporate citizen, and the energy cost savings for Grenadians that would be gained from renewable energy. In a unanimous decision, the Tribunal rejected these arguments stating: “the task of the Tribunal is to determine whether the complex contractual arrangements between the Parties have been complied with and, if not, what remedy should be awarded.” (para. 8) The Tribunal ultimately found that Grenada’s 2016 energy restructuring legislation violated the investment contract between Grenada and GRENLEC and ordered Grenada to repurchase shares in the investment vehicle.

Such a decision illustrates the capacity for ISDS awards to act as de facto tools of climate governance. The Tribunal’s award prevented Grenada from ending GRENLEC’s monopoly, and thus, limited the capacity of the island to reform its regulatory environment to foster investment in renewable energies to comply with its NDC commitments. In this regard, the award limited the capacity for Grenada to implement its energy transition policy, thereby exemplifying civil society’s criticism that the international investment law system may undermine the capacity for States to adopt energy transition measures.

 

Can the International Investment System Foster Investments in Renewable Energy? 

The nature of clean energy projects makes it critical that countries create a stable operating environment for investors. Clean energy projects are highly capital intensive, require long repayment periods, and are exposed to regulatory risks. Confronted with these risks, without investment protection, there are weak prospects for long-term return on renewable energy investments. Additionally, countries that do not provide a strong framework for the protection of renewable energy investments may find it challenging to attract foreign investors, compared to countries which offer a protective investment environment. Therefore, the international investment law system may foster investments in renewable energy because it grants foreign investors a sense of security over their investments.

Thus, international investment law may be used to encourage and protect investments in renewable energy and low-carbon technology, by creating a stable operating environment for investors. Post-COP 26, the IEA estimates that annual clean energy investments must more than triple by 2030 to around USD 4 trillion if States are to fulfill their decarbonization pledges. For emerging and developing economies, receiving trillions of dollars in private investment will be key to achieving decarbonization. Thus, many countries are designing incentive regimes to attract foreign investment in clean energy.

ISDS has indeed been used to protect investments in renewables. The Energy Charter Secretariat reports that 60 % of ISDS filed under the ECT have been to protect investments in renewables. UNCTAD Dispute Navigator shows that foreign investors have initiated at minimum 35 arbitrations in  , Italy and the Czech Republic over the rollback of incentive regimes. In at least 18 of the arbitrations against Spain investors have been successful. The saga of arbitrations against Spain show that, despite the lack of uniformity in these rulings, some tribunals do favor stability and certainty in the legal frameworks of renewable energy cases. In arbitration cases  against Italy, at least 3 awards have been rendered in favor of the investor. Given the success of ISDS in protecting renewables, it would be inappropriate to generalize the international investment law system as inimical to the energy transition.

ISDS being invoked to protect renewables shows no sign of abatement. In 2021, investors initiated arbitrations against Currently, there are many investment arbitration scenarios confronting Mexico because of the Electricity Industry Law 2021, which  reverses incentives initially granted to renewables.

 

New Trends in IIAs Can Incentivize Investments in Renewable Energy

International investment arbitration is changing with the introduction of new generations IIAs containing carve-outs, a state’s right to regulate and the obligation of investors to protect the environment and respect human rights. These novel provisions in new generation IIAs are welcome considering that, historically, environmental provisions were not a feature of most IIAs. OECD  research shows that since 2008, 89% of newly concluded IIAs contain references to environmental matters. This development highlights the growing concern of States to balance their environmental policies with the commitments made to foreign investors.

New generation IIAs such as the Netherlands Model BIT, Morocco- Nigeria BIT or the Singapore- Indonesian BIT, contain progressive features recognizing an explicit right to regulate and investors’ environmental obligations. For instance, Article 11 of the Singapore – Indonesia BIT expressly grants the host State the right to regulate for environmental objectives. Similarly, Article 8 (2) of the Morocco- Nigeria BIT provides that investors have the obligation not circumvent international environmental law duties. Such language in new generation IIAs rebalances the States’ environmental policy against the investors’ economic interests by expressly protecting the State’s environmental concerns in activities conducted by foreign investors.

Additionally, new generation IIAs, for example, Article 6.6 of the Netherlands Model BIT, incentivize foreign investment that aligns with the imperatives of the Paris Agreement. This provision reminds the Parties they are not free to opt-out of their obligations under the Paris Agreement, but what is more, they reaffirm their commitments within the scope and application of international investment law.. In this regard, in sectors difficult to decarbonize, investments should consider carbon set-offs, and where available, carbon capture and storage technologies. The strength of language in new generation IIAs is that, if drafted accurately, they are capable of limit new fossil-fuel investments and encourage renewable energy investments aligned with the Paris Agreement.

Another benefit and incentive from new generations IIAs, is that investors in renewable energy can structure their investment to take advantage of investment protection. For example, new generation IIA containing an environmental non-regression provision may potentially safeguard an investor from a state derogating environmental standards and incentives existing at the time when the renewable energy investment was made. For instance, Article 1114(2) of NAFTA first introduced a non-regression clause in an IIA, providing that parties shall not induce investment by relaxing measures of general application introduced to protect, among others, the environment in their territories. Similarly, Article 24.4.3 of the USMCA provides that parties recognize that it is inappropriate to encourage trade or investment by relaxing environmental law protection. This is particularly useful for renewable energy investments, which are capital intensive and immovable, such as photovoltaic plants or wind energy project, that require predictable investment environments. As noted before, despite the lack of uniformity in the rulings, the Spanish Saga Cases, are again, proof that international investment law fosters a stable legal framework where investors are entitled to have a legitimate expectation of legal certainty at the initial time of investment and throughout the life of the investment.

 

Conclusion

The foregoing analysis has examined how IIAs and ISDS create a predictable and secure operating environment for foreign investors, including guaranteeing a fair and equitable standard of treatment and protection against indirect expropriation. Despite this, the global energy transition has many questions including whether ISDS protects fossil fuel investments and whether it is subject to fostering investments in renewable energies. The new trends in ISDS are likely to foster investment in renewables. Thus, the future of IIA suggests that tribunals can become a tool of global climate governance, serving as a de facto source of climate policy that impacts the internal regulatory landscape of host countries.

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Arbitration Tech Toolbox: Interview with Dr. Nikos Lavranos and Ewa Cairns-Szkatuła on the Wolters Kluwer Data-Driven Profile Navigator and Relationship Indicator Tools

Kluwer Arbitration Blog - Mon, 2022-05-23 01:32

Wolters Kluwer recently launched the Profile Navigator and Relationship Indicator tools within the Kluwer Arbitration Practice Plus suite of arbitration products. Kluwer Arbitration Blog recently met with Dr. Nikos Lavranos and Ewa Cairns-Szkatuła to discuss this new development.

Dr. Lavranos is Founder of NL-investmentconsulting and acts as legal counsel, arbitrator, mediator and offers a broad range of services covering investment law and arbitration, EU law and WTO law.

Ewa Cairns-Szkatuła is Associate Director for Technology Product Management at the International Group within Wolters Kluwer Legal and Regulatory US.

 

  1. Selecting arbitrators can be a laborious process. What are the Profile Navigator and Relationship Indicator tools, and how can they facilitate better decision-making during arbitrator selection?

Ewa: Indeed, putting the pieces together to gain confidence in the choices you make can be time-consuming. Our tools are based on data extracted from Kluwer Arbitration’s rich collection of commercial and investment awards and from appointment data published by arbitral institutions. Collating the data, the tool can assist in the selection of an arbitrator and in the investigation of potential conflicts of interest of arbitrators as well as other stakeholders involved in the case, such as expert witnesses and counsel. The tools also provides links from the profile to awards and publications associated with the arbitrator, for easy navigation and review of their views and approach.

Nikos: The advantage of these tools is that they help to verify the initial selection of a potential arbitrator by using objective and comprehensive data. They also allows for the consideration of potential arbitrators that were not initially considered. In this way the selection process can be more inclusive and thus help achieve a better balance regarding gender, age, experience and geographical representation.

 

  1. How do the new Profile Navigator and Relationship Indicator tools complement existing solutions offered by Kluwer, such as the “practical insights” modules within Kluwer Arbitration Practice Plus?

Ewa: Kluwer Arbitration Practice Plus (KAPP) is a practical extension of Kluwer Arbitration. KAPP provides enhanced support in case preparation and strategy by combining deep domain expertise and comprehensive collection of international awards with practical tools and guidance. Other tools of Practice Plus, such as Practical Insights by Topic or Quick Answers cover, among other arbitration steps, the appointment and challenge of an Arbitrator, including the opportunity to compare by jurisdiction or institutional rules. An advantage of these tools is that they quickly direct users to key information about the topic, thereby allowing users to focus on the subsequent steps of their legal work, such as developing their legal strategy.

 

  1. Why are data-driven decisions so important for the field of commercial and investment arbitration?

Nikos: Using data to support decision-making ensures that the decisions taken are supportable and comprehensive. It allows for a comprehensive analysis of all relevant aspects both regarding the suitability of a potential Arbitrator as well as any potential conflicts of interest or issue conflicts. It also helps to reduce the risk of challenges of a selected Arbitrator. Finally, it helps in discussions with the client, who is ultimately the one that must feel comfortable with the selection of the Arbitrator.

Ewa: The stakes in arbitrator selection are high and using data to support these decisions provides confidence in your case strategy and chosen arbitrator.  Below is a sneak preview of the Profile Navigator and Relationship Indicator tools, but it only shows a small portion of the extensive information available.

  1. How do the Profile Navigator and Relationship Indicator tools approach issue conflicts, particularly with regard to the disclosure obligations found within the draft Code of Conduct being discussed at UNCITRAL Working Group III?

Nikos: The new Code of Conduct that will soon be adopted by UNCITRAL Working Group III will impose significant disclosure obligations on potential and selected Arbitrators (more analysis of the UNCITRAL code of conduct, including earlier drafts, here, here and here). These obligations include inter alia the disclosure of all the cases in which the prospective arbitrator was involved in various roles, not only as arbitrator but also as counsel or expert. The comprehensive data provided by KAPP allows all parties involved to verify the information disclosed by the arbitrator. It also enables the user to analyse with whom a prospective arbitrator has worked in past cases. In this way KAPP’s comprehensive tools are already taking into account this development, which in no doubt will spill over into commercial arbitration practice.

 

  1. How do you ensure the accuracy and currency of information?

Ewa:  Over more than 30 years Wolters Kluwer has developed a reputation for delivering high quality expertise to support decision making. That is where the expertise of Nikos Lavranos comes in as one of our lead Subject Matter Experts (SMEs). We are grateful to have excellent SMEs working on this project in combination with machine learning. Regarding currency of information – we are continuously adding awards from various sources and use robot/automated scraping. Importantly, our technology makes sure to retrieve the information on any new award released publicly and accounts for data that reflects any changes to the tribunal’s composition.

Nikos: Generally, it is important to highlight that all information is double checked by the various layers of SMEs, so that the information in the system is as accurate as possible. If necessary, the data is verified by confirming it with other publicly available information. The system is also constantly updated and new data is rigorously double checked. In this way the combination of machine learning and human data collection and verification ensures the highest possible standard.

 

  1. Can arbitrators supplement their own profiles?

Ewa: The data-driven arbitrator profiles that already exist in our database can be supplemented by information that is presented in a structured way. Please contact [email protected] if you would like further information.

 

  1. There is still much work to do within the international arbitration community to boost diversity. Do you see the Profile Navigator and Relationship Indicator tools as playing a positive role in profession-wide initiatives to promote diversity, equity and inclusion?

Ewa: Our database includes nearly 14,000 (and growing) professionals including arbitrators, expert witnesses and counsel at all stages of their career, with expertise across all geographies and sectors. All the information is based on data so the user can easily assess the expertise and fit for the case. Our advanced search allows users to search by criteria that fit the case needs and suggests profiles that otherwise would have not been considered. As Nikos has previously mentioned, using objective and comprehensive data allows the selection process to be more inclusive.

 

  1. Do you have plans for further enhancements to the Profile Navigator and Relationship Indicator tools?

Ewa: Absolutely. The obvious one is adding more profiles, more awards, more data, and increasing the involvement of artificial intelligence (AI).

The practice of international arbitration has been evolving and our products do as well. By use of technology, combined with our rigorous quality control measures, we want to equip our users with the most comprehensive database of arbitrators and other stakeholders involved in the arbitration process. Applying the data opens many doors and new options on how technology can be applied to other aspects of the arbitration process and decision making.

 

  1. What parting words do you have for Kluwer Arbitration Blog readers?

Ewa: We are continuing to expand Kluwer Arbitration’s capabilities as a full-service solution that provides our customers with the right tools to drive to the best possible outcomes during the arbitral process. However, we cannot do it without you. Kluwer Arbitration and KAPP have been developed in collaboration with the arbitration community. Any feedback, including constructive criticism, suggestions and ideas are welcome! We will consider them all.

Nikos: Ultimately, the aim is to provide accurate and comprehensive information to serve the arbitration community in resolving disputes as well and as cost-effective as possible.

Arbitrators wishing to amend their profiles on the Profile Navigator and Relationship Indicator tool can contact Wolter Kluwers here.

Further posts on our Arbitration Tech Toolbox series can be found here.

The content of this post is intended for educational and general information. It is not intended for any promotional purposes. Kluwer Arbitration Blog, the Editorial Board, and this post’s authors make no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information in this post.

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Communication and Conflict

Communication and Conflict Blog - Sun, 2022-05-22 16:24
A website about the relationship between communication and conflict. Articles on conflict resolution, mediation, why effective communication is important for conflict management in relationships.

Open Position: Assistant Editor of Kluwer Arbitration Blog

Kluwer Arbitration Blog - Sun, 2022-05-22 01:51

The Editorial Board of Kluwer Arbitration Blog announces the opening of the following position with Kluwer Arbitration Blog: Assistant Editor for South and Central America.

The Assistant Editor reports directly to the coordinating Associate Editor and is expected to (1) collect, edit and review guest submissions from the designated region for posting on the Blog, while actively being involved in the coverage of the assigned region; and (2) write blog posts as contributor. You have the opportunity to work with a dynamic and dedicated team and liaise with the best arbitration counsel in the world.

The Assistant Editor will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email to Dr Crina Baltag, [email protected]. Only shortlisted candidates will be contacted. The deadline for receiving the applications is 5 June 2022.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
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Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
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KluwerArbitration ITA Arbitration Report, Volume No. XX, Issue No. 7 (May 2022)

Kluwer Arbitration Blog - Sat, 2022-05-21 03:15

The Institute of Transnational Arbitration (ITA), in collaboration with the ITA Board of Reporters, is happy to inform you that the latest ITA Arbitration Report was published: a free email subscription service available at KluwerArbitration.com delivering timely reports on awards, cases, legislation and current developments from over 60 countries and 12 institutions. To get your free subscription to the ITA Arbitration Report, click here.

 

The ITA Board of Reporters have reported on the following awards/court decisions.

 

A. v. B and C. Ltd, Court of Appeal of Turku, Case No. S 21/334, Decision No. 68, 01 February 2022

Ina Rautiainen and Anna-Maria Tamminen, Hannes Snellman Attorneys, ITA Reporters for Finland

The Turku Court of Appeal evaluated whether the decision of the District Court regarding the appointment of an arbitrator may be appealed. Pursuant to Section 17(3) of the Finnish Arbitration Act, a decision of a court regarding the appointment of an arbitrator is not subject to appeal. The Court of Appeal found, however, that the decision can be appealed because a prohibition of appeals would not be acceptable on the grounds presented. Without a possibility to appeal, the parties’ legal protection could be compromised as well.

The Court of Appeal also evaluated whether the court should appoint an arbitrator in the dispute between the parties. Pursuant to Section 17(1) of the Arbitration Act, when a party has requested the court to appoint an arbitrator (except for certain exceptions), the court should make the appointment, unless it is apparent that there are no legal grounds for the arbitration. The Court of Appeal found that in this case, contrary to the District Court’s decision, the lack of legal grounds for the arbitration was not apparent. As the parties had intended to resolve their disputes in arbitration, the matter was returned to the District Court for the purposes of appointing an arbitrator.

In conclusion, the Court of Appeal found that an error in an arbitration clause does not render the arbitration clause entirely invalid if that has not been the intention of the parties. There is no prior publicly available case-law regarding the issue.

 

Parties Not Indicated, Supreme Court of Greece, A.P. 35/2019, 10 January 2019

Ioannis Vassardanis, Ioannis Vassardanis & Partners, ITA Reporter for Greece

Following the rendering of an arbitral award in Athens (seat of arbitration), one of the Parties submitted a request to the Athens Court of Appeal in order to annul the arbitral award on the grounds that the arbitration agreement was not valid under the law the parties had chosen (Greek Law). The arbitration agreement formed part of a public procurement multi-page contract which was signed on all pages (and on the last page), except for the pages on which the arbitration clause was written. Both before the arbitral tribunal and before the Greek Courts, the party seeking the annulment of the Award claimed the invalidity of the arbitration agreement. The Athens Court of Appeal annulled the arbitral award, ruling that the arbitration agreement contained in the contract was void. However, the Supreme Court of Greece (‘Areios Pagos’) held that, in finding that the arbitration agreement is void, the Athens Court of Appeal incorrectly interpreted the applicable law; therefore, it annulled the Court of Appeal decision.

 

Parties Not Indicated, Supreme Court of Greece, A.P. 760/2019, 01 July 2019

Ioannis Vassardanis, Ioannis Vassardanis & Partners, ITA Reporter for Greece

Arbitral award. Invalidity of the advance waiver (ex ante) of the right to annul an arbitral award. Validity of the advance waiver of the right to annul an arbitral award when the ex ante waiver of the right to annul an award has been ratified by law. The ICC Rules have the force of law. Implied waiver of the right to object to any irregularity of the constitution of the arbitral tribunal since it has not been brought before it (Art 39 2012 ICC Rules). This procedural forfeiture should be invoked by the defendant. Criteria for qualifying an arbitration as international.

 

SSK Ingeniería y Construcción S.A.C. v. Técnicas Reunidas de Talara S.A.C., Superior Court of Justice of Lima, Expediente Judicial Electrónico N°00207-2021-0-1817-SP-CO-01, 15 February 2022

Fernando Cantuarias Salaverry, Law School of Universidad del Pacìfico, ITA Reporter for Peru

The Commercial Chamber of the Superior Court of Justice of Lima recognizes a foreign award under the 1958 New York Convention.

 

CC/Devas (Mauritius) Ltd. v. Republic of India, United States District Court, District of Columbia, No. 1:21-CV-106-RCL, 24 March 2022

Viva Dadwal, King & Spalding LLP, ITA Reporter for the United States of America

A court adjudicating recognition and enforcement proceedings may grant a motion to stay before deciding its own jurisdiction using the court’s ‘inherent powers.’  In such instances, the court will weigh the ‘competing interests’ of judicial economy and potential hardship.  A request for security is premature if a court has not yet established jurisdiction.

 

Olin Holdings Limited v. State of Libya, United States District Court, Southern District of New York, No. 1:21-cv-4150 (JGK), 22 March 2022

Hanna Azkiya, King & Spalding LLP, ITA Reporter for the United States of America

The Court had two items before it: (1) the petition by Petitioner Olin Holdings Limited (‘Olin’) to confirm a Final Award (‘Award’) issued by the Arbitral Tribunal of the International Chamber of Commerce (the ‘Tribunal’), pursuant to an arbitration Olin brought against Respondent the State of Libya (‘Libya’) under the Agreement on the Promotion and Reciprocal Protection of Investments between the Government of the Republic of Cyprus and the Great Socialist Libyan Arab Jamahiriya dated 30 June 2004 (the ‘Agreement’), and (2) Libya’s motion to dismiss the Olin’s petition on forum non conveniens grounds.

The Court stated that a petition to confirm an arbitral award is treated as a motion for summary judgment, which must be granted if the movant can show that no genuine dispute as to any material fact exists and the movant is entitled to judgment as a matter of law.

The Court treated the Tribunal’s jurisdictional ruling with ‘considerable deference,’ as opposed to reviewing it ‘de novo,’ agreeing with Olin that the threshold issue between the parties was not an issue of arbitrability (i.e., whether there is a contractual duty to arbitrate at all), but a procedural gateway issue about when the contractual duty to arbitrate arises. The Court also held that ‘there is clear and unmistakable evidence’ that the parties intended to arbitrate arbitrability, thus ‘the Tribunal’s jurisdictional ruling is entitled to deferential review.’

Under the ‘deferential review’ standard, the Court must confirm the Award so long as the arbitrators ‘explain their conclusions in terms that offer even a barely colorable justification for the outcome reached,’ no matter how persuasively litigants argue for a different result.

The Court held that Libya failed to carry its heavy burden to prove that one of the seven grounds under the New York Convention to refuse enforcement of an arbitral award applies. Libya relied on only one ground under the New York Convention to refuse enforcement, i.e., Article V(1)(c), which the court of appeals has explained should be ‘construed narrowly’ and not be used to second guess the arbitrators’ decision. The Court found that this was precisely what Libya asked from the Court, despite the issue being one already agreed by the parties to be submitted to the arbitrators.

The Court further found that the Tribunal unanimously agreed that Olin’s decision to bring proceedings in Libya did not preclude a subsequent arbitration proceeding, and that such a conclusion was obtained after considering several factors, all of which the Court found to be reasonable or ‘there is at least a barely colorable justification for it.’

With respect to Libya’s motion to dismiss, the Court followed the three-step framework established by the United States Court of Appeals for the Second Circuit in Iragorri v. United Techs. Corp., 274 F. 3d 65, 73-74 (2d Cir. 2001), and held that (1) on balance of various factors, and heeding the United States Supreme Court’s guidance in Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947) that the petitioner’s choice of forum should rarely be disturbed, Olin’s choice of forum is entitled to a small degree of deference; (2) there is one adequate alternative forum to adjudicate this dispute, however; (3) upon weighing the private and public interest factors, in this case neither the private interest factors nor the public interest factors weigh in favor of forum non conveniens dismissal. The Court therefore denied Libya’s motion to dismiss.

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LIDW 2022: Back to the Future: A Look at the Future of Energy Disputes in a Post-Covid World

Kluwer Arbitration Blog - Sat, 2022-05-21 01:32

On the last day of the #LIDW22, Herbert Smith Freehills, Linklaters, Norton Rose Fulbright, Twenty Essex, Vinson & Elkins, and Clyde & Co hosted a session on “The future of energy disputes in a post-covid world”.

The speakers – Michael Ashcroft QC (Twenty Essex), Rebecca James (Linklaters), Colin Johnson (HKA), Richard Power (Clyde & Co), James Robson (Herbert Smith Freehills), Holly Stebbing (NRF), Louise Woods (Vinson & Elkins), and Rachel Lidgate (Herbert Smith Freehills) – shared their perspectives on how the energy disputes landscape will look in the years to come.

 

An Increase in Price Reviews and Force Majeure Claims

The session kicked off with one panellist reflecting on contractual disputes amid volatility in energy prices. The last couple of years has put a lot of uncertainty in the energy markets. The post-covid recovery has not been steady, and there are still disruptions in both the demand and supply. On top of that, the war in Ukraine has added an extra layer of pressure on energy prices.
The panellist anticipated an increase in the number of disputes regarding price reviews, hardship clauses, contractual flexibility, and force majeure. In particular, one recent case before the Commercial Court, MUR Shipping BV v RTI LTD, highlights the effects of force majeure clauses in international sanctions disputes.

 

Trends in Climate Change and Environmental Disputes

In line with this year’s #LIDW22 focus on sustainability and awareness of climate change issues, the panel also addressed current developments in climate change litigation. Two panellists expressed their views on climate change disputes, and particularly on how strategic climate litigation, shareholder activism, and government pressure are shaping the future of the energy sector.

They explained that climate change litigation is often pursued for strategic reasons, with claimants seeking to change States’ regulations and individual companies’ corporate policies. There are examples in the recent wave of claims seen against governments in relation to climate change, as well as significant cases brought against multinationals in relation to climate change impacts and climate change transition plans, some of which have succeeded. This increase reflects that claimants are being increasingly creative in pleading their cases and is a trend which is set to continue; it also underscores that the climate disputes landscape is rapidly evolving on a global scale.

The panellists then analysed three trends to watch:

  1. Consumer behaviour is increasingly shaped by concerns for the environment, leading to so-called “greenwashing” when companies are trying to advertise themselves as eco-friendly and use misleading environmental representations. Both regulators and the public may inquire about the accuracy and evidence supporting claimed sustainability commitments.
  2. More claims against States in response to climate actions are expected. Claimants will rely on bilateral investment treaties and contract-based stabilisation clauses to obtain redress for amendments to the regulatory framework affecting investments. The RWE v The Netherlands case is one example, though many such cases are expected to follow. Whether these cases will be successful is yet to be seen. However, as some have argued before, they might serve a strategic purpose aiming at having “chilling” effects.
  3. Amid corporate environmental commitments, there is room for conventional contract claims for breaching specific climate obligations in an agreement. For example, a company may require that its suppliers meet specific climate commitments. A breach of environmental obligations could give rise to the right to terminate the contract or obtain liquidated damages.

Ultimately, they encouraged the conference attendees to “become climate lawyers” by staying informed about new developments in the field and understanding climate litigation hotspots.

 

Issues Arising from Incomplete or Inaccurate Information and Assumptions

Another panellist referred to the issues arising from incomplete or inaccurate information and assumptions in contracts for offshore decommissioning. The analysis was based on the LOGIC General Conditions (2018) and its Guidance Notes. The panellist argued that in these standard conditions, numerous indications suggest that a gap in the information provided to the contractor may justify a variation under the agreement.

 

Impact of Climate Change on Valuation and Risk

The next panellist emphasised that, in general terms, climate change is not factored into the valuation of companies. The panellist predicted a shift in this trend, as environmental risks become more evident. In fact, disclosure obligations are stricter than they were a few years ago, and companies will soon be compelled to disclose the impact of climate change on their business. Be that as it may, there is no clear way to factor climate change risks into business valuations. The audience was left with a thought-provoking statement regarding valuations: will we eventually see a premium for climate change risks equivalent to the premium we have for country risks?

 

Low Carbon Hydrogen Projects

The panel then focused on the industry of low carbon hydrogen projects. In one panellist’s view, there will be disputes in three main areas. First, this industry will require substantial infrastructure investments in order to be viable in the future. And since it is a relatively new sector, not many experienced contractors are suitable to undertake these types of construction projects. As a result, this is an area with significant risks of construction disputes. Second, similar to other energy industries, joint venture agreements to develop hydrogen projects will be a source of potential conflicts. Third, the lack of regulation poses a risk to ongoing projects. The enactment of new regulations may negatively impact existing facilities, including by leading to delay, disruption, and devaluation of certain projects.

 

Decarbonisation, Decentralisation, and Digitisation

Finally, the panel shared some views on dispute resolution in decentralised and digitised networks. The energy transition requires three “Ds”: decarbonisation, decentralisation, and digitisation. It is not only about producing green energy. Transmission and distribution are also issues, as there will be enormous pressure placed on the transmission and distribution network.

A panellist described a scenario where part of the demand for energy in a particular area could be satisfied by locally producing and distributing energy, effectively decentralising the process in microgrids. Buildings could produce small amounts of renewable energy (i.e., solar energy) and sell the excess to other consumers or energy aggregators.

As for digitisation, the panellist argued that it would play a key role in the development of microgrids. “Prosumers” (producers and consumers) do not have the time or ability to track and record all the small-scale energy sales between each other. This process must happen automatically. Therefore, self-executing smart contracts will be central to operations. In this context, digitisation could have a potentially dramatic effect on the future of energy disputes. They will be driven by an increasing number of small players with low-value claims, which may be challenging to litigate cost-effectively. Additionally, many of these disputes will be related to the operation of smart contracts.

 

Conclusion

In conclusion, this session offered an insightful overview of the recent developments in energy disputes. Whilst there are relevant issues in more traditional energy industries, renewable energies and climate change concerns are shaping the future of energy disputes and, in consequence, litigation and arbitration practices.

 

More coverage from LIDW is available here.

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