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Time to Re-Evaluate the Common Law Approach to the Proper Law of the Arbitration Agreement

Sun, 2020-07-05 04:00

Three recent decisions of the Courts of Appeal in Singapore and England (BNA v BNB and another [2019] SGCA 84 (“BNA v BNB”); Kabab-JI S.A.L v Kout Food Group [2020] EWCA Civ 6 (“Kabab v Kout”); and Enka Insaat Ve Sanayi A.S. v OOO “Insurance Company Chubb” and others [2020] EWCA Civ 574 (“Enka v Chubb”)) provide an opportunity to re-evaluate the common law approach to the proper law of the arbitration agreement.1)The English Supreme Court will hear an appeal on Enka v Chubb between 27 to 28 July 2020. jQuery("#footnote_plugin_tooltip_7219_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7219_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

All three cases have been discussed on this blog previously, here, here, here, here and here. The focus in this post is whether the English common law approach, going back to the English Court of Appeal decision in Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 (“Sulamérica”), accords with the New York Convention.

English cases have vacillated between giving primacy to the substantive law of the contract and the law of the seat when implying the proper law of the arbitration agreement; with the caveat that the presumptive law may be rebutted if it invalidates the arbitration agreement. The proper law of the arbitration agreement is most significant where it is invalid under one of the possible applicable laws. Instead of laying down a presumptive implied law, it makes more sense, and is more transparent, to apply the validation principle which expressly aims to validate the arbitration agreement. This gives effect to the parties’ commercial intentions to agree an effective and workable international dispute resolution mechanism. It is also required by articles II and V(1)(a) of the New York Convention.

 

BNA v BNB, Kabab v Kout, Enka v Chubb

In BNA v BNB the Singapore Court of Appeal endorsed the three stage test in Sulamérica (also endorsed earlier by the Singapore High Court in BCY v BCZ [2017] 3 SLR 357 (“BCY v BCZ”)):

  1. Did the parties express a specific choice of law for the arbitration agreement?
  2. If not, is there an implied choice of law? (There is a rebuttable presumption the law of the main contract is the implied choice. If the arbitration agreement is invalid under this law, the fallback implied choice is the law of the seat.)
  3. Failing determination of an implied choice, what law has the closest and most real connection to the arbitration agreement?

The Sulamérica test follows English contract law precedent for determining the proper law of contracts – it appears this was accepted as “common ground” and so was not argued before the court (Sulamérica at [9]). This departs from the New York Convention in one aspect; where no express or implied choice of law is found, the Convention provides for the default selection of the law of the seat, not the law with the closest connection – see article V(1)(a) which points to:

  1. the law to which the parties have subjected it” (including both express and implied choices of law); and
  2. failing any indication thereon”, “the law of the country where the award was made” (i.e. the law of the seat).

While article V(1)(a) deals with awards, the same choice of law principles also apply to arbitration agreements under Art II.2)Gary Born, The Law Governing International Arbitration Agreements: An International Perspective (2014) 26 SAcLJ 814 at [30] and [59]. jQuery("#footnote_plugin_tooltip_7219_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7219_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The difference in the third leg of the Sulamérica test compared to the New York Convention may not have much import on its own. Absent an express choice, the choice of law is most likely resolved by an implied choice (as English precedent recognises, the implied choice usually also has the closest connection to the arbitration agreement (Enka v Chubb at [70(2)]); likewise under the New York Convention recourse to the default choice of the law of the seat is rare). However, as Kabab v Kout shows, reliance on English contract precedent can potentially lead to greater divergence.

In Kabab v Kout (at [70]) the English Court of Appeal questioned, but did not decide, whether the requirement of business efficacy for implied terms can be satisfied under the Sulamérica test, or the New York Convention choice of law principles, where there is a fallback default choice of either the law of the country with the closest connection or where the award was made.  Counsel for Kabab submitted the Sulamérica test did not depend on showing the implied choice of law was necessary for business efficacy. The court queried (at [53]) whether this was correct given the Supreme Court decision in Marks & Spencer plc v BNP Paribas Security [2015] UKSC 72; [2016] AC 742 – where it was held a term will only be implied into a contract if it is necessary for business efficacy.

Reliance on English contract law principles conflicts with the choice of law principles in the New York Convention, which calls for consideration of an implied choice.

In Enka v Chubb the English Court of Appeal endorsed the three stage test in Sulamérica but differed on the weight to be given to the law of the substantive contract versus the seat. The court held there is a strong presumption the parties have impliedly chosen the law of the seat as the proper law of the arbitration agreement. The court gave primacy to the law of the seat for two reasons:

  1. The validity, existence and effectiveness of the arbitration agreement is treated (by the separability doctrine) as separate from the main contract; therefore, the governing law should also be treated as separate (at [92] and [94]).
  2. The overlap between the law governing the arbitration and the arbitration agreement (e.g. formal validity, separability of the arbitration agreement, the power of the tribunal to rule on its own jurisdiction, application of choice of law rules) strongly suggests that they should usually be the same (at [96]).

There is, however, authority (Sulamérica at [26]; and see also BCY v BCZ at [60] and [61]) and commentary3)Choosing the Law Governing the Arbitration Agreement, Glick and Venkatesan in Jurisdiction Admissibility and Choice of Law in International Arbitration (2018), Kaplan and Moser, at [9.05]. jQuery("#footnote_plugin_tooltip_7219_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7219_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); that separability of the arbitration agreement is limited to its validity, existence or effectiveness and does not make the arbitration agreement an entirely separate contract. Moore-Brick LJ said in Sulamérica at [26]:

The concept of severability itself, however, simply reflects the parties’ presumed intention that their agreed procedure for resolving disputes should remain effective in circumstances that would render the substantive contract ineffective. Its purpose is to give legal effect to that intention, not to insulate the arbitration agreement from the substantive contract for all purposes.

Also, the Model Law (article 16) and English Arbitration Act 1996 (section 7) expressly restrict separability of the arbitration agreement to its existence and validity.

Where the seat adopts the Model Law (which applies the same choice of law principles to the proper law of the arbitration agreement as in the New York Convention) the seat court is required to determine the validity of the arbitration agreement according to the law “to which the parties have subjected it or, failing any indication thereon” the law of the seat (article 34(2)(a)(i) of the Model Law). The law of the seat is only applied by default where there is no express or implied selection of choice of law. There is no assumption in the Model Law that the proper law of the arbitration agreement will be the same as the law of the seat (see also BCY v BCZ at [64]).

Even though the court said it was time to “impose some order and clarity on this area” (at [69]), it is not clear the decision in Enka v Chubb achieves this. English authority has vacillated between giving primacy to the substantive law of the contract and the law of the seat. Instead of laying down a presumptive implied law, it makes more sense, and is more transparent, to apply the validation principle as required under articles II and V(1)(a) of the New York Convention.

 

Conclusion on Validation Principle

In BNA v BNB the Singapore High Court rejected the application of the validation principle in Singapore law. The court found the validation principle:

  1. Was impermissibly instrumental (BNA v BNB [2019] SGHC 142 (“BNA HC”) at [53]).
  2. Could be inconsistent with the parties’ intentions (BNA HC at [55]).
  3. Was unnecessary because Singapore law already endorsed the principle in the latin maxim verba ita sunt intelligenda ut res magis valeat quam pereat e. words are to be understood in a manner that the subject matter be preserved rather than destroyed (BNA HC at [62]).
  4. Could create problems at the enforcement stage because article V(1)(a) of the New York Convention contains choice of law provisions for determining the proper law of the arbitration agreement, the starting point of which is the parties’ intentions, whereas the validation principle seeks to validate an arbitration agreement without “necessary regard to the parties’ choice of law” (BNA HC at [65]).

Even though the court rejected the validation principle, it appeared to apply a validation approach (by reading “arbitration in Shanghai” as designating venue only and not seat). The validation principle is not inconsistent with the parties’ intentions; it gives effect to the parties’ agreement to arbitrate. There is no conflict between the validation principle and article V(1)(a) (and article II) of the New York Convention as the validation principle is derived from the choice of law principles and pro-enforcement policy in both articles II and V(1)(a).4)Gary Born, The Law Governing International Arbitration Agreements: An International Perspective (2014) 26 SAcLJ 814 at [27], [56] and [59]. jQuery("#footnote_plugin_tooltip_7219_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7219_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Court of Appeal in BNA v BNB did not address the application of the validation principle because it was not necessary to do so (at [95)). Since both the New York Convention and Model Law apply in Singapore, when this issue next comes before the court, argument should focus on these instruments and not English authority, which conflicts with both. It is also time for the English courts to reassess the Sulamérica test and its confusing progeny and realign with the New York Convention.

References   [ + ]

1. ↑ The English Supreme Court will hear an appeal on Enka v Chubb between 27 to 28 July 2020. 2. ↑ Gary Born, The Law Governing International Arbitration Agreements: An International Perspective (2014) 26 SAcLJ 814 at [30] and [59]. 3. ↑ Choosing the Law Governing the Arbitration Agreement, Glick and Venkatesan in Jurisdiction Admissibility and Choice of Law in International Arbitration (2018), Kaplan and Moser, at [9.05]. 4. ↑ Gary Born, The Law Governing International Arbitration Agreements: An International Perspective (2014) 26 SAcLJ 814 at [27], [56] and [59]. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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How the Auditory Dominates the Visual: A Case for Online Advocacy

Sat, 2020-07-04 21:00

While the hurdles of virtual hearings have been documented with numerous intelligible solutions, little attention has been turned towards how advocacy is faring in the offline-online migration. It is an attractive notion to think that advocacy, in its subjective glory, can be seamlessly transplanted from the offline world and into the virtual dimension with little opportunity costs to fear of. However, such a notion ignores the fact that the thrust of advocacy is the ability to connect with one’s audience. With one’s audience now rendered onto a 12×8” screen, the way we advocate must accordingly adapt.

After participating in the Willem C. Vis Moot’s first virtual iteration as a student, and later conducting a cross-examination assessment online as part of the Bar Professional Training Course (‘BPTC’), this author respectfully submits that offline advocacy, for lack of a better phrase, uses both visual and auditory cues in equal effect. Online advocacy, on the other hand, gives auditory cues more persuasive terrain than it does for visual cues. In a virtual hearing, there is greater persuasive weight placed on how we are heard rather than how we are seen.

In advocacy, eye contact and body language make up the bulk of visual presentation; auditory presentation is comprised of pitch and pace. In advocacy, we instinctively adjust, like sliding scales, the amount of visual and audio cues we deploy in order to present our arguments with persuasive effect.

Claiming that the auditory dominates the visual in a virtual hearing may perhaps be counterintuitive, as we may naturally think of ourselves as ‘viewers’ online. However, much of advocacy is about putting forth a sense of gravitas. A good advocate understands the importance of commanding a room – online advocacy takes the room away. Conducting virtual hearings in lock-down dampens any remnant of gravitas the advocate hopes to convey. Only the auditory remains largely intact; the only opportunity cost lost through the offline-online migration is that our speech is projected through speakers, but we nonetheless remain heard. It is even arguable that advocates are heard to a greater effect in a virtual hearing than in an offline hearing, for virtual hearings benefit from having the tribunal hear you up close from their personal headset.

Consider the rhetorical question by way of an example. It is a technique to be used carefully, and perdition awaits those who throw out a rhetorical question without first gauging where the tribunal stands with you on your point. Rhetorical questions thus rely on visual cues; eye-contact is used by an advocate to accurately assess where, and when, the rhetorical question should be used for maximum effect. Rhetorical questions also use audio cues for persuasive effect. We may pause to allow the full effect of a question left unanswered to audibly hang over a tribunal’s head like a damoclean sword. Even the humble technique of emphasizing a single word relies on both visual and audio cues for persuasive effect, for we make eye-contact and adjust to a slow pace as we muse over the chosen word.

Given the fact that most persuasive techniques naturally rely on how they are visually and orally presented for persuasive effect, it is worth reviewing our advocacy in the offline-online migration. Visual cues cannot be relied upon as they normally would be in a virtual hearing. Instead, greater emphasis should be placed on how an advocate sounds. Preparation for an audio hearing should, therefore, include preparation for how an advocate is going to be heard.

To prescribe an exhaustive list of what makes for good online advocacy is a herculean effort. Advocacy, in its primal offline context, is a slippery craft to master. It is tiresomely subjective. A combination of innate instinct and intuition is sometimes all an advocate has left when the unexpected rears its, painfully and poetically, expected head.

Instead, the author hopes that the following points will prompt the reader to explore ways to maximise the persuasive weight of their own advocacy in their next virtual hearing.

 

General Advocacy

• Never lose sight of the fact that the tribunal is hearing your oral submissions for the first time. The act of parties muting themselves offers the advocate the floor, albeit virtually, more so than they would in an offline hearing. Subject to tribunal’s intervention, the advocate is promised absolute attention. Therefore, concinnity becomes a powerful tool. Each point should flow from one to the next, and be watertight against an arbitrator innocuously asking you ‘why?’. After all, this makes for more efficient advocacy, and efficiency is a valuable commodity in our present times. Also, consider that, sometimes, it may be worth drawing out why the point one is making, or about to make, is relevant. It would indicate to a tribunal that a point has come to an end.

• Do not let the best be the enemy of good. Make your point once, and make it twice if you have to. Understand that the tribunal can hear you very well, and are likely to pay more attention to your voice than how you appear. This means that repetition in a virtual hearing may saturate the point, and backfire more quickly than it would in an offline hearing.

• The line between being assertive and being aggressive is fine in a virtual setting. An advocate speaks with full confidence that other parties, excluding the tribunal, have muted themselves. The mute button is effectively a physical representation of parties surrendering themselves and their time to the speaker. Such a mechanism of absolute surrender does not exist in a real hearing. Therefore, it is worth considering whether points need to be submitted as forcefully as an advocate might naturally incline to in an offline hearing. In a virtual hearing, the proximity between the advocate and the tribunal is effectively the proximity between the arbitrator and their screen/headset. We are closer to our tribunal in a virtual setting. Unfortunately, this runs in acute juxtaposition to a virtual hearing conducted during lockdown.

• Not everything needs to be said aloud. A written memorandum offers the opportunity to air out all arguments an advocate may have. We may flex our critical muscles gently in a written memorandum, and feel at liberty to try including as many good points as possible. Those reflexes are usually discarded in an oral hearing, where there is emphasis on making the best points first and foremost. In a virtual hearing, advocates should strenuously strive for brevity, and consider that a large proportion of ‘good’ points should be kept in their back-pocket, so to speak, as material to use during tribunal intervention. It is increasingly accepted that virtual hearings are more tiring than offline hearings, and it may be in the advocate’s interest not to overwhelm the tribunal. If it is agreed that not everyone can withstand, and process, an hour-long podcast, then it is agreed that not everyone can similarly withstand an hour-long hearing.

 

Cross-examination

• Choose your witnesses, wisely. Party autonomy allows parties to select which of their factual/expert witnesses should be called for cross-examination, and cross-examining for cross-examination’s sake may backfire spectacularly in a normal offline hearing. The same applies for a virtual hearing. Witness testimony gets breathed new life when spoken aloud, and will be further uplifted in an online setting where the auditory dominates the visual.

• Consider a list in cross-examination. Cross-examination is about the advocate’s questions. To demonstrate, students on the BPTC course are marked on their questions, and on how they incorporate a witness’ answers. Little regard is given to what the witness gives as an answer. Online advocacy places emphasis on audio presentation over visual presentation. This need not be fatal to the persuasiveness of cross-examination if one is critical in how they present. Consider making a list of all the things the witness says that are in disagreement with one’s case, and make it a point to transition from one discrepancy to the next, tying any strings up along the way. This list will go towards the earlier point of helping narrow down witnesses to call for cross-examination. Not all discrepancies will need to be picked up on, and listing all the issues down may make clear what is an important matter and what needs to be placed in one’s back-pocket. The tribunal, in return, may appreciate your brevity, especially when members of a tribunal are not from a common-law background. To those not trained in common-law, cross-examination has long run the risk of coming across as irritating, or worse, as hostile. Because virtual hearings are more auditory than an offline hearing, the risk of sounding aggressive in a virtual hearing is something an advocate should be alert to.

• Put your case. ‘Putting your case’ is a phrase often thrown around at the BPTC, because there is an ethical dimension letting the witness and opposition know the case they have to meet. But in an online context, putting your case may be crucial as well. It is not just enough to bring up one’s version of the case, but to bring up what the witness’ version of the case is. If one is persuading the tribunal that their client’s case is to be chosen over the other side’s version, it is worth mentioning in cross-examination what the opponent’s version is e.g. “You did not [insert opponent’s case] as you say. Instead, [insert client’s case]”, or “You are fabricating XYZ because ABC”.

• Lastly, be creative in showing credibility. A witness’ credibility is harder to show offline, much less so online. Cultural differences often come into play when assessing credibility – some tribunals may perceive hesitancy or stuttering as a lack of candor in a witness. Thus, drawing comparisons may be a creative way to overcome this hurdle. Consider posing a few questions to the witness which you believe they will answer credibly. Often, this means asking questions one knows the witness will answer yes to, before then moving to grounds of contention. It may be very persuasive for a tribunal to hear a stream of ‘yes’s before a sharp turn into a stream of uncomfortable ‘no’s and a series of fumbled explanations. Sometimes the witness’ answers is less important than the manner in which they answer, and if an advocate can creatively make use of how a witness is heard, this may go towards showing credibility effectively in a virtual hearing.

***

To conclude, online advocacy makes a case for brevity, and cross-examination emphasizes how an advocate will need to re-consider their usual cross-examination techniques. The room for persuasion lies in the auditory in a virtual hearing, and visual presentation accessorizes how we are heard.

Where an advocate may endeavour to be heard in an offline hearing, the advocate is perhaps heard too well in a virtual hearing.

 

The author would like to kindly thank Professor Gary Watt, for he has been a tireless source of inspiration.

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Interviews with Our Editors: Arbitrating Silicon Valley Disputes with Lester Schiefelbein, CEO of the Silicon Valley Arbitration & Mediation Center (SVAMC)

Sat, 2020-07-04 03:00

Mr. Schiefelbein, welcome to the Kluwer Arbitration Blog!  We are grateful to have the opportunity to share your unique perspectives with our readers.

  1. Please give our readers a brief introduction to yourself and your route to becoming CEO of the SVAMC.

Following law school I was in the United States Air Force Judge Advocate General’s Corps (JAG) as a legal officer, which provided me the introduction to government contracts and international law. I then joined the Lockheed Corporation (now Lockheed Martin) and was the Vice-President and Deputy General Counsel of Space Systems. In this role, I oversaw legal functions and drafted and negotiated international contracts with governments and private parties across the globe. I had the good fortune of working with leaders in the White House, Congress and the Executive Branch, as well as leaders in many foreign countries. I served as an advocate in numerous international commercial arbitrations with the amount in dispute for these arbitrations totaling in the billions of dollars.

Today, I act as an arbitrator and mediator with a specialty in aviation, aerospace, national defense and technology matters. I became a founding member and Director of SVAMC in 2014 and was honored to be elected CEO in 2017.

 

  1. What role does SVAMC have in the international arbitration scene? How are its services beneficial to companies, practitioners, and arbitrators / mediators?  Can you explain SVAMC’s efforts to support arbitration and mediation centers around the world?

SVAMC is a leading not-for-profit organization that advances the use of arbitration and mediation in technology-related business disputes around the world. Our International Committee, with members including corporate counsel, law firms, neutrals, law schools and arbitration institutions, provide programs, webinars and thought leadership initiatives on ADR in technology disputes.

Two exciting SVAMC initiatives today are a Task Force on Tech Disputes, Tech Companies & International Arbitration and a study focusing on the use of blockchain and smart contracts in technology ADR. We provide an annual “Tech List” naming the top arbitrators and mediators with expertise in technology disputes, which arbitration and mediation institutions and law firms have acknowledged using in arbitrator and mediator selections. SVAMC has also partnered with many major arbitration institutions both in the US and around the globe on programs, webinars and initiatives.

 

  1. Historically, what approaches have Silicon Valley-based companies taken toward dispute resolution? Over the years, has there been an increase in Silicon Valley toward the use of ADR services?  If so, what do you think are the prime factors motivating its increased use?

As a former Silicon Valley General Counsel, I have insight into the approaches companies have taken toward technology dispute resolution. My experience is that a phased approach to dispute resolution is preferred, starting with settlement negotiations, and if this step is not successful, then parties transition to mediation, and finally arbitration if required. This phased approach is favored to resolve difficult issues and to foster and sustain business relationships with customers and suppliers. However, one size does not fit all and there have been high-profile litigation matters filed by Silicon Valley companies, particularly in patent disputes, that take three to five years to resolve through the courts.

There has been an increase in the use of arbitration by technology companies that operate globally. They are motivated by (1) the ability to select an arbitrator with specialized expertise and a strong background in technology industry law and practice, (2) the shortened time for resolution, (3) confidentiality and (4) the ability to enforce international awards.

 

  1. Many California litigators and in-house counsel (perhaps U.S. lawyers in general) still view litigation as the preferred method of settling a dispute. What fundamental steps would help American litigators and in-house counsel understand the benefits of ADR?

This is a hot button issue. In-house corporate counsel are accountable to the corporation for the outcome of a dispute resolution matter. They approve and manage payment of bills for outside counsel, neutrals, arbitration institutions, expert-witnesses and court reports. With such a critical and central role, it is time for corporate counsel to step up to the plate and engage with ADR.

Educating corporate counsel is fundamental. SVAMC recently formed a Corporate Counsel Task Force to discuss with corporate counsel the benefits of ADR for their particular business disputes. The Corporate Counsel Task Force Members are current and former corporate counsel, leading neutrals and law firm members from across the globe with know-how from thousands of ADR matters. This initiative does not stop with discussion. The SVAMC International Committee is drafting a tool kit with detailed information on the “how to “ in dispute resolution to include everything from reviewing characteristics of candidate mediators and arbitrators to enforcing awards. I doubt if many outside counsel will balk at the direction of the General Counsel that the new preferred method in technology dispute resolution is ADR.

 

  1. In July 2018, California enacted a law that finally allowed foreign attorneys to participate in international arbitrations seated in California. This was a long-time coming, and was spearheaded in large part by the burgeoning international arbitration community in California.  Two years later, have advancements been made to recognize California as a hospitable seat for international arbitration?  [If not, please elaborate.]  What do you see as the next most important steps toward making California a more recognized seat?

A noted achievement is that the California International Arbitration Council was formed in 2019 to promote international arbitration in California through educational, promotional and organizational initiatives and programs. Going forward the California international arbitration community needs to focus on the positive points of having the seat the legal home of the arbitration in California. The selection of the seat determines the law governing the arbitration procedures and often, and more importantly, the process and rights of the arbitration award. In my former role as a corporate counsel, I felt the selection of the seat was more important than the choice of law. The Chartered Institute of Arbitrators and the Global Arbitration Review rank the safest seats for international arbitration. It will be a positive point in California’s favor, as it should be, for the global international community to become more aware that California is now the center of both technology and arbitration innovation in the United States.

 

  1. What are SVAMC’s short-term goals? In the longer term, where do you see SVAMAC ten years down the line?  Does the SVAMC ever envision itself transitioning into administering arbitrations or mediations? 

The COVID-19 pandemic has presented an immediate new goal while courts are closed or clogged, SVAMC is increasing its webinars and thought leadership with emphasis that ADR is the key to technology dispute resolution. Why?

First, Purpose: parties need to find commercial solution paths to address contract non-performance and preserve business relationships.

Second, Process: a mediation or arbitration can be conducted in a few days an example is use of the emergency procedures in arbitration institution rules.

Third, Person: an outstanding neutral with  ADR experience and knowledge of the law and subject matter can be appointed in a day.

Fourth, Processvia the virtual platforms that we are now using on a daily basis.

Ten years down the line I foresee an explosion in membership and SVAMC will be an invited partner to every ADR program and initiative on technology dispute resolution. Further, SVAMC continues to champion diversity and a culture of inclusion. Also, our “Tech List“ appointees will continue to be in high demand as neutrals in technology dispute resolution matters.

I do not see SVAMC administering cases. SVAMC best serves the international business community by advocating for ADR in technology disputes. However, in the tech space innovation is in our DNA let’s revisit this issue in ten years.

 

  1. We know that space arbitration is a true passion of yours, where you have both written and spoken at conferences on the subject. What do you see as the most interesting aspects of space law that have yet to be fully examined by the arbitration community?  What role can SVAMC play in space arbitration, and what are the key ways that role can expand? 

Admittedly, I am a space junkie. Space has been the centerpiece of my legal career. I act as a mediator and arbitrator in aerospace and aviation matters, and make presentations to school children on space activities and space junk. What’s new in space is New Space aerospace companies working independently of governments and traditional major contractors to develop faster, better and cheaper access to space and space technologies. With private companies now involved in space activities there needs to be a new look at fault and damages under the 1967 Outer Space Treaty and 1972 Space Liability Convention. Satellites and space junk do smack into each other. There are 1,900 operational satellites in orbit. There are 160 million pieces of space junk (human made objects in space which no longer serve a useful function) in orbit. Consider that a 150 million dollar communications satellite launched and owned by a private party collides with a space junk satellite, the size of a car, which is owned by a state. This collision generates thousands of pieces of new space junk which may collide with other operational satellites. Concepts of fault and liability negotiated over 50 years ago need clarification based on 2020 realities. A leading role for SVAMC is to advise that emergency and expedited dispute resolution procedures may be best suited for New Space companies that value optimum results provided by effective, efficient and low cost processes.  An industry built on innovation resulting in competitive edge would continue this advantage in having disputes resolved in days and months rather than years.

 

  1. Do you have any advice for young practitioners who would like to begin arbitrating or mediating disputes? What steps can young practitioners take to become a part of the SVAMC lists of neutrals?

My advice to young practitioners is to take advantage of the many opportunities now available to learn about and become a participant in arbitration and mediation activities. The COVID-19 pandemic has created learning experiences not available in the past, including virtual events and webinars on varied arbitration and mediation topics. Once you finish a webinar send an email to each speaker thanking them for the program or asking a question. Join the young professional groups associated with arbitration institutions. SVAMC also has a Young Professionals group.

But my best advice to young practitioners is to find a mentor. An arbitrator or mediator who you know or respect who can assist and guide you in a career path. Don’t be bashful: send that email to the person you want to be your mentor. Neil Kaplan, a good friend and colleague, is now conducting interview webinars in collaboration with Delos Dispute Resolution. In this series, he interviews top arbitrators and part of the discussion is the career path of the interviewee. A common thread in each interview is a discussion of being in the right place at the right time and just how important good luck can be in a career-progressing step. But make no mistake, good fortune is the product of a tireless work ethic. In the Silicon Valley and technology-related arbitration and mediation worlds, the SVAMC can offer a number of tools to support a career path and I encourage you to visit our website for more information.

 

Thank you for sharing your time and perspectives with us!

This interview is part of Kluwer Arbitration Blog’s “Interviews with our Editors” series.  Past interviews are available here.

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The Dark Cloud of the Global Pandemic: Silver Linings for Young Arbitrators in Africa

Sat, 2020-07-04 02:00

“When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.” (John F. Kennedy, Former US President). The current Covid-19 pandemic has wreaked havoc globally impacting people in grievous ways. The resultant containment measures by governments have severely limited or otherwise rendered physical interactions impossible. As many individuals and organisations operate from fixed stations, a lot of activities in the arbitration community have also gone online. To a group of young arbitrators from jurisdictions that are usually disadvantaged in accessing these opportunities in physical spaces, this represents a rare opportunity to level their skills and connections with their colleagues in international arbitration.

 

Professional Training and Skills Development

As new methods of engagement and keeping continuity of activities crop up, arbitration webinars and courses have increased immensely. The Chartered Institute of Arbitrators in March offered its student members a rate of 10 GBP for both its ‘Introduction to ADR’ course and online assessment (normal rates 36 GBP and 95 GBP respectively). The offer included a free application to membership. The cost barrier to this membership has previously been too high for the majority of student members from Africa and other economically disadvantaged jurisdictions. The International Investment Law Centre Cologne also recently ran its Advanced Course on ICSID Arbitration online. The course was opened up to non-students of the University of Cologne who could attend it from anywhere in the world and be certified at no cost. Through these incredible opportunities and many more, young arbitrators in Africa are getting opportunities to upskill. CIArb has also accelerated the process to embrace the BigBlueButton technology to moving its crucial modules online during this period.

Several webinars have been hosted tackling a range of topics. The Singapore International Arbitration Centre has notably run priceless skills development webcasts online with field experts like Gary Born leading the sessions. The masterclass on drafting international arbitration agreements on 3rd June was just one of the excellent skills development opportunity from SIAC that was accessible online. The Oxford Commercial Law Centre, in collaboration with several other law schools, also held a very informative conference online titled ‘Arbitration Online: Law and Practice.’ Tagtime by Delos Dispute Resolution and Career Advice by Bali International Arbitration & Mediation Centre are some of the other incredible skill development opportunities. In Africa, the Association of Young Arbitrators’ 1st Virtual Symposium and CIArb-Kenya webinar series are just some of the leading opportunities.

 

Virtual Networking

Most of the sea of webinars that continue to be organised within the arbitration community encourage interactions and active virtual networking in the chat boxes. Participants are encouraged to often identify themselves, their areas of practice as well as countries in which they are based during these events. Since the events are attended by practitioners from all around the world with convenience, the networking opportunities availed to the participants has a massive impact on their career development. Granted many of the participants are senior or mid-level practitioners who are used to attending such events and who already have a decent network in the field, this is hardly ever the case for young arbitrators especially from Africa.

Apart from the other barriers to entry to such events, young African arbitrators do not often see top arbitration events being hosted in their cities. This invariably sets them even further behind young arbitrators from other jurisdictions. Digital Coffee Break in Arbitration and Arbitration in the Afternoon have been some of the most wonderful virtual networking events. Another incredible networking opportunity that has come up during these times is the ‘arbitration idol’ competition where for a small donation towards UNICEF, young practitioners get paired with a senior practitioner for a 30 minutes conversation.

Additionally, LinkedIn presents a wonderful opportunity to reach out to and network with peers and seniors within the international arbitration community. This is particularly important now that most of these senior arbitrators are working remotely and may afford to spare more time to respond to these networking requests as opposed to the pre-pandemic period when they were mostly otherwise engaged.

 

Expert-led discussions on emerging areas in arbitration

Other tremendous professional development opportunities that have come up during this period are expert-led discussions and free or subsidised resources on international arbitration. Wolters Kluwer in collaboration with Professor Gary Born, have made Born’s International Arbitration Lectures available at a subsidised cost of $ 10 per month from 8th April to 31st July. The Paris Arbitration week dubbed its 2020 event as ‘#PAW2020-We Adapt’ in announcing that it will go virtual this year between 6th and 10th July. CIArb extended the online viewing of the 2020 Roebuck Lecture to the entire ADR community on the night of the event, free of charge. It is worth noticing that this lecture is one of the highlights of CIArb’s event calendar. In the same spirit, the 2020 Alexander Lecture, now in its 46th year has also gone online and accessible free of charge upon registration.

In Africa, the Kigali International Arbitration Centre has been running expert-led knowledge sharing sessions online. The 8th East Africa International Arbitration Conference, scheduled to take place between 27th to 28th August 2020 has now gone online. Reputed as a premier event that attracts delegates from around the globe, the organisers have shared optimism that this virtual edition will offer even better networking opportunities within the international arbitration community. The African Arbitration Association also continues to share African focused events in international arbitration on its website. Young African arbitrators now, more than ever, have the amazing opportunity to access and participate in all these incredible events. There is hardly a better way and time to be part of high-level discussions on emerging areas in international arbitration for this group.

 

Virtual Mooting

The 27th edition of the Vis Moot moved its oral hearings online owing to current circumstances. This was earlier scheduled to be held in Vienna from 3rd to 9th April 2020 and would have required physical attendance. The 2020 global oral rounds of the FDI Moot has also been scheduled to take place between 4th to 9th November 2020 via the Zoom platform. These are just some of the biggest and most revered moot competitions in the field of international arbitration. Year in year out, African students miss out on the oral rounds of these competitions due to lack of funds or inability to secure travel documents within the timelines. This has negatively affected their interest in the field and limited their opportunities to grow their careers in these spaces. During the current global lockdown, these inhibiting circumstances have been lifted.

 

Lingering Challenges

Even as otherwise hard to access opportunities continue to open up to young arbitrators in Africa, there are still immense challenges that need to be overcome. First, not every young arbitrator in Africa can access these platforms even with the incredibly low barrier to entry. Those who have been trapped in rural parts of their countries following the various lockdown measures continue to miss out.

Secondly, diversity remains a serious issue. This is specifically true with regards to gender. Many young, female African arbitrators face increased domestic responsibilities during these periods when most people are confined at home. For them, even the time spent following these events online is a luxury they may not always afford. This is not to mention the increased cases of domestic violence that affect them disproportionately with reports of gender based violence cases rising in this pandemic.

Thirdly, many prospective young arbitrators in Africa have experienced certain levels of disillusionment with their growth in the field over the years. Now that opportunities are opening up, they are not active enough in the field to spot them. This is also partly because there are very few mentorship opportunities in arbitration in Africa and the few that exist are unstructured. This has discouraged many young practitioners along the way.

Several mechanisms are being adopted to address some of these challenges. CIArb Ibadan Chapter (Nigeria), recently organised a well-attended webinar to discuss the gender challenge during these disrupted times. Arbitral Women, continues to push for diversity even in virtual events all-round the globe. CIArb-Kenya Young Members Group also recently held a webinar on ‘The Journey & the Pitfalls: Chartering a Path for Young Arbitrators.’ This was in a bid to sensitize disillusioned young members to opportunities out there and to encourage them to take advantage, especially during these times. Due to their tech-savvy skills, some young practitioners are also getting co-opted by senior arbitrators into their arbitration sessions providing them with a good mentorship platform.

 

Conclusion

The prevailing global pandemic has brought with it momentous destructions. But, as Albert Einstein said all those years ago, “In the midst of every crisis, lies great opportunity.” While physical interactions are severely limited and events seek to go online, a group that have always struggled to surmount these event’s barriers to entry are arriving at the table. Some challenges persist but so do the efforts to rectify them. The current circumstances were not foreseen by anyone but now that we are all here, this might as well be the greatest chance for young African arbitrators to level up with their colleagues around the globe. The biggest hope is that, even as we navigate a post-pandemic world, most of these opportunities will retain some form of online accessibility.

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Awarding Beyond the Claims of The Parties: The Swiss Perspective

Fri, 2020-07-03 02:00

Arbitral awards can be annulled on exhaustive grounds prescribed in the lex arbitri. Under UNCITRAL Model Law Art. 34/2/a/iii an award can be challenged, if arbitrators award differently than the submissions of the parties (ultra or extra petita). In a recent judgment, the Swiss Federal Supreme Court (hereafter “SFSC”) partially annulled an ICC-award on extra petita (4A_294/2019), as the sole arbitrator awarded compensation despite the party’s request for a declaratory judgment. Moreover, it has ruled a payment order, which was not claimed.1)You may also see: Nathalie Voser / Katherine Bell: Swiss Supreme Court Partially Sets Aside ICC Award on Grounds of Extra Petita, Thomson Reuters Practical Law UK. jQuery("#footnote_plugin_tooltip_2233_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2233_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

The Dispute and Award

The dispute arose out of a contract on the design, production, and delivery of armored vehicles between an Israeli company (herafter “A” or “Claimant”) and two Turkish companies (hereafter “B and C” or “Respondents”). After several conflicts, A partially rescinded from the contract, initiated an ICC arbitration against B and C with a seat in Zurich. In its pleadings, A requested from the tribunal to declare that Respondents should compensate its damages stemming from their contractual breach. On the other hand, Respondents objected to the validity of A’s rescission, filed claims for the compensation of their damages amounted to 8,5 Million USD, and for the restitution of the already paid contractual consideration amounted to 8,7 Million USD.

The tribunal rendered its award on 6 May 2019, in which it ruled inter alia that (1) Respondents shall compensate the Claimant in the amount of 1,6 Million USD due to contractual breach, (2) Respondents shall reimburse to the Claimant 1,2 Million USD (Repayment of the surplus amount of Claimant’s bank guarantee, from which Respondents’ awarded damages are drawn down), (3) Claimant shall repay Respondents the contractual consideration amounted to 6,5 Million USD. In sum, the tribunal awarded Respondents 3,7 Million USD.

 

The Decision of the Swiss Federal Supreme Court on Annulment

Following the issuance of the award, both Parties applied for its annulment. Upon Claimant’s application, Respondents argued that Claimant lacks the legitimate interest to file a challenge –which is a pre-condition for an appeal-, as it was granted damages and therefore benefits from the award. The SFSC found that A, who is seeking declaratory judgment, has a legitimate interest in applying for the annulment, as in case that the award for compensation takes res judicata effect, A will not be able to demand a higher amount by commencing future proceedings. Conversely, the Claimant could ask for higher compensation, if the arbitrator had ordered a declaratory ruling, as requested.

In the merits of their application, both parties contended that the award is extra petita, as it grants compensation despite the claim for a declaratory judgment. Respondents further argued that by setting off Respondents’ damages from Claimant’s bank guarantee and ordering Respondents to reimburse the remaining amount –which is not demanded-, the sole arbitrator decided extra petita. Subsequently, the SFSC accepted both objections and partially annulled the award.

 

The Background of the Legal Concept & Previous Judgments of the Swiss Federal Supreme Court 

Under the Swiss Law, an arbitral award can be annulled, if one of the grounds counted within the Article 190/2 of the Swiss Private International Law Act (hereafter “SPILA”) is met. The subparagraph C of the article lays down that an arbitral award can be set aside if the arbitrators decide beyond parties’ submissions:

The award may only be annulled:

(….) c) if the arbitral tribunal’s decision went beyond the claims submitted to it (…)”

However, if the award orders something beyond the arbitration agreement, the subparagraph B of the article will be applied, instead of the former:

The award may only be annulled:

(….) b) if the arbitral tribunal wrongly accepted or declined jurisdiction (…)

The restriction under Article 190/2/c SPILA –which is referred to as the principle of ne ultra petita– is an extension of parties’ right to be heard. It aims to protect a party from an unexpected award beyond the submissions, to which it did not have the opportunity to respond and defend itself. The principle further intends to save a party from being awarded more than it has claimed, herewith respecting the party’s right to dispose of its assets.

The rationale behind ne ultra petita is that arbitrators’ jurisdiction is placed on parties’ consent. Hence, they may only decide on matters, which are presented to them, i.e. their decision-making is limited to the latest version of parties’ prayers (4A_464/2009) (and not to the issues listed in the Terms of Reference.2)Elliott Geisinger and Alexandre Mazuranic, International Arbitration in Switzerland: A Handbook for Practitioners (Second Edition), Kluwer Law International, 2013, p. 243. jQuery("#footnote_plugin_tooltip_2233_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2233_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, arbitrators are bound with and restrained from excessing, correcting parties’ claims in the final version of their prayers.

The prohibition of excessing the claims of parties may come up when either (i) an award grants a party more than claimed i.e. ultra petita (e.g. “awarding interest although it was not claimed” (as in 4A_440/2010)) or (ii) arbitrators order another legal relief than requested i.e. extra petita (e.g. “refusing the claim for compensation and ordering specific performance”).3)Manuel Arroyo, Arbitration in Switzerland: The Practitioner’s Guide, Kluwer Law International, 2013, p. 219. jQuery("#footnote_plugin_tooltip_2233_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2233_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Ne Ultra Petita and Jura Novit Curia

Nonetheless, ne ultra petita does not restrict arbitrators with parties’ implementation of the law. The principle of jura novit curia (“the judge/arbitrator knows the law”) compels arbitrators to determine the legal provisions applicable to the dispute, without being bound with parties’ legal interpretation. Thus, considering both principles, arbitrators are independent when determining the relevant provisions of law, notwithstanding that they should remain within parties’ prayer for relief. For instance, the award is not extra petita when despite the party’s request for the annulment of the contract, arbitrators find that it is void.4)Christian P. Alberti, Iura Novit Curia in International Commercial Arbitration: How Much Justice Do You Want?, International Arbitration and International Commercial Law: Synergy, Convergence, and Evolution, Kluwer Law International, 2011, p. 18. jQuery("#footnote_plugin_tooltip_2233_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2233_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Further, arbitrators may order compensation despite the party’s request for a pecuniary performance claim (4P. 260/2000), whereas vice versa would constitute extra petita. Likewise, in case that a party submits multiple claims, arbitrators may decide for some claims more than demanded, provided that the total awarded amount may not be higher than the one that the party has claimed (4P. 54/2006). Lastly, an award should be described as extra petita, if a party requests negative declaratory relief that the debt does not exist, but arbitrators not only declare that the debt exists, and they also order that party to pay it, although it was not claimed (4P.20/1991).

In line with these judgments, the SFSC summarizes that if arbitrators implement a different legal qualification, but order the same as or less than the party’s claim, the award would not be extra petita (4A_404/2017). To put it differently, as long as arbitrators’ re-shaping of parties’ claims falls within the ambit of their original prayers, ne ultra petita would not be violated (4P. 260/2000).

 

Set-off or Counterclaim?

To avoid a further extra-petita ground, a distinction should be made between the defense of set-off and the counterclaim. A counterclaim should be respected as a separate legal action from a claimant’s request. The thing that the latter is declined does not bar an arbitrator to decide on a counterclaim. On the contrary, a respondent’s defense for set-off can only be accepted and can be drawn down from a claimant’s request (or receivable), as long as the latter is accepted (or acknowledged). For this reason, if a respondent files a set-off and an arbitrator not only declines the request of a claimant, but it also awards respondent the amount designated in the set-off defense, the award will be extra-petita. An award would come to the same result when an arbitrator sets off a claim from a party’s receivable and orders the party declaring the set-off to pay the remaining amount, although the payment of that receivable is not requested (as in the case at hand).

 

Conclusion

To prevent the annulment of an award under the Article 190/2/c SPILA, parties’ counsel should diligently draft their prayers for relief and clearly express their claims, whereas arbitrators should carefully analyze parties’ pleadings and ask the parties for clarification in case of doubts on the meaning of their prayers. If the claims remain unclear, arbitrators should interpret them with good faith, by considering all relevant circumstances.

However, in cases where the party’s prayers are clear, arbitrators should not convert a claim in a way that makes sense to them, which may contradict the party’s real intention. In casu, the sole arbitrator probably found the Claimant’s demand for the declaratory ruling insufficient and awarded compensation. In the same vein, the arbitrator set off Respondents’ damages from the Claimant’s bank guarantee and ordered Respondents to pay the excess amount, although the Claimant did not demand any payment. Consequently, the SFSC set the extra-petita award aside, which conforms with its previous case-law. For this reason, the tribunal should have respected the Claimant’s demand and should have awarded a mere declaratory ruling, even the requested remedy did not make sense in its eyes. It should also have ended its analysis with only setting off Respondents’ damages, rather than deciding on a payment order.

References   [ + ]

1. ↑ You may also see: Nathalie Voser / Katherine Bell: Swiss Supreme Court Partially Sets Aside ICC Award on Grounds of Extra Petita, Thomson Reuters Practical Law UK. 2. ↑ Elliott Geisinger and Alexandre Mazuranic, International Arbitration in Switzerland: A Handbook for Practitioners (Second Edition), Kluwer Law International, 2013, p. 243. 3. ↑ Manuel Arroyo, Arbitration in Switzerland: The Practitioner’s Guide, Kluwer Law International, 2013, p. 219. 4. ↑ Christian P. Alberti, Iura Novit Curia in International Commercial Arbitration: How Much Justice Do You Want?, International Arbitration and International Commercial Law: Synergy, Convergence, and Evolution, Kluwer Law International, 2011, p. 18. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Panorama of Arbitration in Malaysia: Developments in Review

Thu, 2020-07-02 03:00

Amid the rise of arbitration-friendly regimes, Malaysia has emerged as one of the preferred seats of arbitration in Asia. Several coordinated factors support Malaysia’s emergence as a pro-arbitration jurisdiction. These include significant amendments to the Arbitration Act 2005 (the “Act”), the pro-arbitration position taken by the Malaysian Judiciary, and the rise of the Asian International Arbitration Centre (the “AIAC”) as a premier arbitration institute in the region.

 

Significant Changes in Malaysia’s Arbitration Laws

The amendments to the Act, both in 2011 and 2018, brought Malaysia’s arbitration law in line with international expectations. The Act, like many similar arbitration acts, embodies the spirit of the UNCITRAL Model Law. The amendments to the Act include provisions related to the minimal intervention of courts in the arbitration process, expansion of the scope of the powers of the arbitral tribunal, and the recognition of Emergency Arbitration proceedings, which aligns with the AIAC Arbitration Rules 2018. Significantly, in 2019, the AIAC completed its first Emergency Arbitrator application and appointment. It has also received a growing number of enquiries regarding such. Additionally, changes in respect of confidentiality, interim measures, and the definition of an arbitration agreement and party representatives have also been included. Arguably, the most topical amendment was repealing the power to appeal of an award on a question of law, implicitly enhancing the finality of Malaysian-seated awards.

 

Developments in Arbitration from the Bench

Recently, the Chief Justice of Malaysia highlighted the importance of ADR in her Keynote Speech at the China-ASEAN Forum (the “Forum”) on 13 November 2019 which was co-organised by the AIAC, the Hainan International Arbitration Court, the ASEAN Law Association of Malaysia, and the China ASEAN Legal Corporation Centre. She mentioned how the judiciary has, in recent times, recognised the advantages of arbitration as well as other ADR mechanisms in developing a robust framework for dispute resolution.

In discussing the AIAC, her Ladyship stated that

the significant role of the AIAC cannot be understated [and] the work it has done in the past has greatly improved the arbitration scheme in Malaysia [by not only its] tremendous job in establishing its own set of rules that parties may feel free to adopt … [but] drafting of rules aside, the AIAC constantly undertakes efforts to ensure that our arbitration laws remain up to date”.

The Malaysian courts have also clarified the legal position on numerous issues relating to and arising out of arbitration, leading to more predictability in Malaysian-seated arbitrations.

In NFC Labuan Shipleasing I Ltd v Semua Chemical Shipping Sdn Bhd [2017] MLJU 900 (“NFC”) and Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd [2019] MLJU 1365 (“Awangsa”), the High Court considered the issue of stay of winding-up proceedings in the event of an arbitration clause. These two decisions appear to conflict but read closer, they clarify Malaysia’s position. The Court in NFC held that a winding-up proceeding could not be stayed pursuant to Section 10 of the Arbitration Act itself. In contrast, the Court in Awangsa held that the Court could exercise its discretion to dismiss the winding-up petition and allow the dispute to be referred to arbitration. However, to dismiss the winding-up petition, the debtor must demonstrate that there is a prima facie dispute of debt, and the purported dispute falls within the ambit of the arbitration clause.

The High Court in Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2019] 10 MLJ 693, examined the newly inserted Section 41A of the Act and its application to non-parties to an arbitration. The Court held that non-parties to arbitrations are not bound by the statutory duty of confidentiality. Accordingly, as a non-party, the plaintiff was not required to obtain consent from the parties, nor did it need to apply for an exemption under Section 41A(2) to disclose information related to the arbitration even though it was confidential.

The High Court in WRP Asia Pacific Sdn Bhd & Anor v TAEL Tijari Partners Ltd & Ors [2019] MLJU 1244, set aside an earlier granted interim measure in aid of arbitration under Section 11 of the Act. The Court justified its decision on the material change in circumstances and the discovery of material facts suppressed at the original hearing.

Under Section 37 of the Act, an award can be set aside on the grounds of breach of public policy and natural justice. In Jan de Nul (M) Sdn Bhd v Vincent Tan Chee Yioun [2019] 2 MLJ 413, the Federal Court examined its high threshold. The Court clarified that public policy ought to be read narrowly and restrictively in the context of an application to set aside an award, namely that the arbitral process itself must be compromised, rather than a mere mistake of fact and/or law. In Allianz General Insurance Company Malaysia Berhad v Virginia Surety Company Labuan Branch, the High Court ruled that the amount of arbitrator’s written reasoning when addressing an issue in an arbitral award is not enough to establish a breach of natural justice under Section 37 of the Act.

The Court of Appeal’s decision in Tune Talk Sdn Bhd v. Padda Gurtaj Singh [2019] MLJU 67 reinforces the pro-enforcement position taken by Malaysian courts. The Court held that Sections 38 and 39 of the Act are exhaustive. Thus, if the substantive requirements of Section 38 are fulfilled, and no grounds for refusal under Section 39 exist, the Court must recognise and enforce the award. Additionally, the Court clarified that Order 69 of the Rules of Court 2012 is merely the means by which enforcement and recognition of an award are obtained, and non-compliance with it is not fatal.

In Siemens Industry Software Gmbh & Co Kg (Germany)(formerly known as Innotec Gmbh) v Jacob and Toralf Consulting Sdn  Bhd (formerly known as Innotec Asia Pacific Sdn Bhd)(Malaysia) & Ors, the Federal Court overturned the Court of Appeal’s decision and held that only the dispositive section of an arbitral award, as opposed to the entire arbitral award, is to be registered for enforcement under Section 38 of the Act so to uphold confidentiality of the arbitration.

Decisions have also been rendered on the nexus between a party’s dilatory tactics in arbitration and the assessment of damages, as well as the ambit of party autonomy in a third-party’s anti-arbitration injunction to restrain the conduct of arbitral proceedings.

These decisions demonstrate the Malaysian judiciary’s support of arbitration. The courts are cautious about interfering with arbitration, or setting aside arbitral awards, and seek to uphold the objectives of the Act. However, at the same time, due regard is given to the rights of third parties and individuals not bound by the arbitration, successfully establishing a justified balance.

 

A Peek at the Emerging Trends

The Malaysian Government and the legal community in Malaysia have shown sustainable efforts in promoting arbitration as a dispute resolution process, with the AIAC at the forefront. The steady increase of domestic and international arbitrations seated in Malaysia is reflected by the continuing growth of the AIAC’s arbitration caseload. In fact, the number of appointments and confirmations of arbitrators by the Director of AIAC doubled, from 75 in 2018 to 150 in 2019. A good year for arbitration, 2019 saw 27 new ad-hoc cases and 98 new administered cases at the AIAC, indicating parties’ preference for institutional arbitration.

 

The Emergence of Malaysia as a Dispute Resolution Hub

Malaysia’s strategic location and involvement in various significant projects facilitate its development into a sophisticated dispute resolution hub.

In keeping with this goal, the AIAC has undertaken numerous steps to foster the development of ADR processes for projects under the BRI. During the Forum, delegates discussed issues such as harmonisation of law, cross-border enforcement of arbitral awards, and a call for cooperation between ASEAN and China as partners in the BRI. Following the introduction of the Singapore Convention, and to promote the use of mediation in resolving disputes with Chinese parties, the AIAC translated its Mediation Rules into Chinese.

India has also developed strong relations with Malaysia and the ASEAN countries as a leading trade and investment partner. The AIAC has been instrumental in partnering with several leading law firms and dispute resolution centres in India by conducting ADR training programs designed for practitioners, advocates, and in-house counsel. Notable initiatives by the AIAC include “The Malayan Tiger’s Journey to India: A New Dawn of ADR” conference, which was organised in New Delhi in September 2019. The conference successfully addressed issues relating to different aspects of arbitration law and practice.

 

Conclusion

While the growing popularity of arbitration can be attributed to its features of party autonomy, flexibility, neutrality, and enforceability, its use is boosted by the rise of arbitration-friendly regimes, especially in the Asia-Pacific. Malaysia has also joined suit by embracing the changing standards of international arbitration. The recent developments in the country and the rising number of arbitration cases all indicate a bright future for arbitration in Malaysia.

 

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“Major Milestones in Canadian Arbitration Law”: Highlights from the Canadian Journal of Commercial Arbitration’s Launch

Thu, 2020-07-02 02:00

With a feature presentation on “Major Milestones in Canadian Arbitration Law”, the Canadian Journal of Commercial Arbitration launched last week before an online audience of several hundred arbitration practitioners, scholars, and students from around the world.

“Our aspiration for the Journal is to contribute materially to bringing together, and strengthening the professional bond, among all those interested in and involved with Canadian Arbitration”, stated Executive Editor Barry Leon, in his opening remarks on behalf of the Editorial team. “Canada and Canadian practitioners should speak and act together on issues on common interest. Our journal—your journal—is an important step in that direction. It is an expression our desire to build the community, and in doing so, to help raise the profile globally of Canada as a seat and venue, and of Canadian arbitration and its participants.”

The launch webinar, held on June 25th, was hosted and sponsored by Arbitration Place Virtual. Executive Editor Gerry Ghikas thanked the Editorial Advisory Board (EAB) for its support and contributions. Speaking on behalf of the EAB, Yves Fortier remarked, “the journal is another indication that Canadians are at the forefront of arbitration, not only in Canada but throughout the world”.  Another EAB member, Louise Barrington, praised the Journal for filling a notable gap in the Canadian arbitration scene: a forum for regular discussions on salient issues, to promote commercial arbitration in Canada and raise standards for Canadian lawyers. “The Journal’s launch marks”, observed Barrington, “the maturation of the Canadian arbitration community and a sign that Canadians need no longer leave home to build a practice and find success in international arbitration.”

The webinar featured a panel discussion on “Major Milestones in Canadian Arbitration Law”, for which the panelists were the contributors to Journal’s inaugural issue: J. Brian Casey (Bay Street Chambers), Joel Richler (Bay Street Chambers), Douglas F. Harrison (Harrison ADR), Prof. Alyssa King (Queen’s University), Prof. Janet Walker (Osgoode Hall Law School, York University, Arbitration Place, CJCA Executive Editor), and Prof. Anthony Daimsis (University of Ottawa Faculty of Law, Littleton Chambers), CJCA Case Comments and Recent Developments Editor). The discussion was moderated by CJCA Managing Editor Prof. Joshua Karton (Queen’s University).

 

Canadian courts and competence-competence

Joel Richler, whose article in the inaugural issue dealt with Canadian courts’ attitudes toward competence-competence, referred to two Supreme Court of Canada judgments as the key milestones: Dell v Union des consommateurs, 2007 SCC 34, and Seidel v TELUS Communications, 2011 SCC 15. Under those decisions, a Canadian court will only decide a jurisdictional question if the dispute over the tribunal’s jurisdiction relates to questions of law alone, or where, on a question of mixed fact and law, the question can be determined by a superficial review of the evidence and the stay application was not brought only for dilatory purposes.

Richler characterized the principle as signifying Canadian courts’ deference to arbitration and arbitrators’ decisions on their own jurisdiction. Pure questions of law are rare, given the Supreme Court’s decision in Sattva Capital Corp. v Creston Moly Corp. (2014 SCC 53) that contractual interpretation is generally a question of mixed fact and law. Richler concluded that Canadian courts are following Dell and Seidel, and construing the exceptions to competence-competence narrowly. He described respect for competence-competence as a key measure metric of Canada’s arbitration-friendliness. On that score, he concluded, Canadian courts are in good shape.

 

Setting-aside applications and the standard of review

Brian Casey also discussed the relationship between courts and arbitrators, but from the other end of the arbitral process: setting-aside applications. Casey observed that setting-aside applications under the provinces’ domestic and international arbitration legislation have been confused by some courts with judicial review of administrative tribunal decisions, leading to inconsistent approaches to the standard of review. In Sattva, at issue was a right of appeal on a point of law from a domestic arbitration award, where the court held that on the appeal itself, the standard of review will in most cases be reasonableness; that is, courts will only overturn unreasonable determinations of law by arbitrators. Sattva may have led some lower courts to wrongly import the standards for judicial review into setting-aside applications. (See, e.g., FCA Canada Inc v Reid-Lamontagne, 2019 ONSC 364; Elchuck v Gulansky, 2019 SKQB 23, aff’d 2019 SKCA 108.) However, the recent Ontario Court of Appeal decision in Alectra Utilities Corporation v Solar Power Network, 2019 ONCA 254 gives reason for optimism. The Court held that on a setting-aside application, it is irrelevant whether the arbitrator’s decision was reasonable or unreasonable, correct or incorrect; it matters only whether the arbitrator had the jurisdiction to make their decision. Casey expressed a hope Alectra will be a milestone on the road to better judicial treatment of setting-aside applications.

 

Removal of arbitrators for incapacity or undue delay

Douglas Harrison’s presentation examined a delicate subject, the removal of arbitrators who are unwell, overcommitted, or just plain slow. When will courts intervene to remove an arbitrator in the name of supporting the arbitration process? These cases are governed by the seldom-invoked Article 14 of the UNCITRAL Model Law, and the provisions of Canadian legislation that implement this article. Harrison’s research showed that Canadian courts and arbitration institutions will do almost anything they can to preserve ongoing arbitrations, so the bar to remove an arbitrator for incapacity or delay is extremely high. Harrison described this as a sign of Canada’s arbitration-friendliness as a jurisdiction. Arbitration-friendliness is often reduced to non-intervention by courts. However, a well-functioning arbitration system needs occasional court intervention to support the arbitration process or to defeat challenges to the system.

 

The development of the international arbitration bar in Canada

Prof. Janet Walker’s remarks were of a different character, and surveyed the development of the international arbitration bar in Canada. Not that long ago, the arbitration community was tiny, and most of the figures who developed international arbitration in Canada are still active. Professional societies like the ICC’s Canadian Committee, the Chartered Institute of Arbitration (CIArb)’s Canadian Branch, and the ADR Institute of Canada—and, as in many countries, the Willem C. Vis International Commercial Arbitration Moot—have expanded, strengthened, and united the arbitration community. The newly established CanArbWeek will give Canada not just a place in the world but a place on the calendar, where the community can focus its energies and pool its talents. The Canadian Journal of Commercial Arbitration constitutes the last piece of the puzzle: to provide thought leadership, foster collaboration, and advance understanding of arbitration in Canada.

 

Contrasting perspectives on recent case law

The remaining speakers focused on some recent case law coming from the Ontario Court of Appeal. Profs. Alyssa King and Anthony Daimsis offered contrasting opinions of the 2019 ONCA decision in Heller v Uber Technologies Inc. (The Supreme Court’s decision on the appeal in that case was released the day after the webinar, and was the subject of some speculation by the panelists; the decision has already been discussed on the Blog.) At issue in Heller is the enforceability of the arbitration clause in Uber’s service agreement with UberEats drivers, which required all disputes be mediated and then arbitrated in the Netherlands under the ICC Rules. The majority at the Court of Appeal held that the arbitration clause was invalid both because it was unconscionable and because it purported to contract out mandatory provisions of Ontario’s Employment Standards Act.

Daimsis criticized the decision on a number of bases. In particular, he took the ONCA to task for ignoring the international origin of the Ontario legislation—the UNCITRAL Model Law—and failing to interpret it in accordance with the principles of uniform interpretation codified in Article 2A. Daimsis contrasted the ONCA’s somewhat parochial approach in Heller (and in another ONCA judgment issued around the same time, Disney v American International Reinsurance), with a recent decision of the Eastern Caribbean Supreme Court, Commercial Division, Hualon Corp v Marty Limited, which he described as a positive example of a court taking the Model Law seriously. By surveying recent decisions interpreting the Model Law from around the world, considering leading treatises, and taking into account the Model Law’s travaux, the court seated in the British Virgin Islands took an approach properly aligned with international practice.

Alyssa King put cases like Heller v Uber and the Supreme Court’s 2019 decision in Telus v Wellman into an international context, contrasting them in particular with developments in the United States. The arbitration clause in Heller recalls the debate over arbitration clauses the United States, and the US Supreme Court’s apparent hostility to class arbitration. The American courts seem to have in mind a narrow conception of arbitration as an individualized and quick system of justice outside of the courts, and have given free rein to American business to draft individual arbitration clauses, combined with class action waivers, to deter employees and consumers from making legal claims. Such arbitration clauses are, ironically, designed to prevent arbitration. King queried how Canadian courts might come up with a more nuanced response to this access-to-justice problem than the US Supreme Court’s blanket pro-individual arbitration stance. Her proposed solution was to bring forward new legislation to protect parties harmed by abusive arbitration agreements, or through the development of case law such as Uber, in which the Ontario Court of Appeal applied the doctrine of unconscionability to preserve the ability of weaker parties to adhesive contracts to bring their claims in court.

The milestones of Canadian arbitration law mark out a road toward greater sophistication and stronger court support for arbitration. But there have been some wrong turns, especially on the confused Canadian jurisprudence on the standard of review. This issue has been further complicated by the Supreme Court’s decision in Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65, which reset the standard applied by courts when reviewing the decisions of administrative tribunals, but may (it seems unintentionally) have affected the standard of review for (at least domestic) arbitral awards as well. (The Vavilov controversy has previously been discussed on the Blog.) The Uber case as well (Uber Technologies Inc. v Heller, 2020 SCC 16), has generated uncertainty about the impact of unconscionability doctrine on the validity of arbitration clauses, uncertainty that may not be resolved by the Supreme Court’s decision in that case. The overall trend is toward greater differentiation between domestic and international arbitrations, and between commercial and employment or consumer arbitrations. That road may lead to greater fairness, but also to greater unpredictability.

 

The CJCA is hosting a free webinar discussing the important new Canadian Supreme Court’s decision in Uber v Heller, and its implications for both arbitration law and the gig economy. The Webinar is this Friday, July 3, from 12:00-1:30pm EDT. You can view the program and register for the webinar here. Registration will be kept open until 1 hour before the webinar.

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Supreme Court of Canada Deals Blow to Uber, Declares Arbitration Clauses Invalid as a Result of ‘Surge Pricing’

Wed, 2020-07-01 04:00

On June 26, 2020, the Supreme Court of Canada (“SCC”) released a decision with significant implications for international businesses by placing significant limits on the application of arbitration clauses.

 

Background

The case, Uber Technologies Inc. v Heller (2020 SCC 16 ) (“Heller”), involved a challenge to Uber’s standard agreement with drivers requiring disputes to be resolved by private arbitration pursuant to the International Chamber of Commerce’s (“ICC”) rules and in accordance with Netherlands law.

Mr. Heller, an Uber driver, commenced a class action against Uber alleging that it breached the Ontario Employment Standards Act, 2000 (SO 2000, c 41) (“ESA”) by not treating drivers as employees and not providing them the benefits and protections employees are entitled to under the ESA. He sought over $400 million CAD in damages. Uber moved to stay the class action on the basis that the service agreement between Mr. Heller and the company required all disputes to be resolved by arbitration under the ICC rules. The agreement designated Amsterdam as the place of arbitration and was governed by Dutch law. The administrative fee to commence such a claim before the ICC arbitration is approximately $14,5000 USD, which did not include further administration of the proceedings by the ICC, attorney’s fees, or other costs.

The Ontario Arbitration Act, 1991 (SO 1991, c 17) requires all court proceedings in respect of matters subject to arbitration to be stayed except in limited circumstances – reflecting Ontario’s longstanding policy of promoting itself as an arbitration-friendly jurisdiction. One such exception is if the arbitration agreement itself is invalid (ss 7(1) and 7(2), para 2).

Mr. Heller asserted that his arbitration clause with Uber was invalid because it was unconscionable. In the normal course, under Canadian law, a dispute about an arbitrator’s jurisdiction would first be resolved by the arbitrator. There are limited exceptions to this rule, including for so-called “pure” questions of law and questions of mixed fact and law that could be resolved with only “superficial” consideration of the record.

 

The SCC’s Decision

Until Heller, Canadian courts were divided on the proper test to determine whether a contract or contractual provision is void for unconscionability, including on the extent of unfairness required and whether a party has to know and actively take advantage of the other party. The majority at the SCC seemingly resolved the dispute in Heller, holding that a party challenging a contract as unconscionable need only show an inequality of bargaining power that results in an improvident bargain.

Applying this test, the majority at the SCC held that the Uber arbitration clause was unconscionable and set it aside. First, it held that there was an inequality of bargaining power, pointing to the fact that the agreement was a standard form “contract of adhesion.” Mr. Heller had no say into the terms of and that there was a gulf in sophistication between individuals like Mr. Heller and large, multi-national companies like Uber. In particular, the majority found that a person in Mr. Heller’s circumstances likely would not appreciate the financial and legal implications of the arbitration clause, noting that the Uber agreement did not attach a copy of the ICC rules and that Mr. Heller therefore would not have known of the commencement fee even if he had read the agreement in its entirety.

Second, the majority held that the agreement was improvident because the cost to arbitrate effectively deterred any meaningful resolution of the dispute. It noted that the $14,500 USD fee to commence a claim was close to Mr. Heller’s annual income and that the costs of traveling to Amsterdam, the place of the arbitration, to assert the claim would generally be well beyond the means of someone in his circumstances.

In arriving at its conclusion, the majority engaged in a lengthy discussion of the traditional bases for respecting freedom of contract generally, noting that the classic paradigm underlying freedom of contract is the “freely negotiated bargain”, which presumes a semblance of equality between contracting parties such that the contract is “negotiated, freely agreed, and therefore fair” (Heller, at para 56, citing Mindy Chen-Wishart, Contract Law (6th ed 2018), at p 12 (emphasis in original)).

Regarding arbitration clauses specifically, in addition to freedom of contract arguments, the majority also held that,

“Respect for arbitration is based on its being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all.” (Heller, at para 97)

Accordingly, the majority held, when these implicit preconditions are absent, the court need not enforce an arbitration clause. The court can refuse to stay a court proceeding if there is a “real prospect” that referring a challenge to an arbitrator’s jurisdiction to the arbitrator would result in the challenge never being resolved, such that the arbitration clause functions to insulate against any meaningful dispute resolution rather than facilitate it. This could occur, for example, because of high commencement fees, if a claimant cannot reasonably reach the physical location of the arbitration, or because other practical factors render the likelihood of resolving the challenge through arbitration unlikely. Notably, it could also be the result of a foreign choice of law clause that circumvents mandatory local policy, such as the clause in Uber’s agreements with its local drivers that would prevent an arbitrator from giving effect to the protections in the ESA by rendering the agreement subject to the law of the Netherlands.

In separate reasons, the lone dissenting member of the SCC observed that the majority’s analysis depended on the kind of individualistic, factual analysis regarding the dispute that the SCC has routinely eschewed in assessing whether to stay a court proceeding in lieu of arbitration. These factors included Mr. Heller’s income, his circumstances in entering into the Uber agreement, the likely value of his claim relative to the cost of arbitration, and the extent to which providing for Amsterdam as the place of arbitration would actually require him to travel to Amsterdam for the arbitration. She also observed that, even if the majority’s analysis was correct, its concerns could be addressed by conditionally staying the arbitration unless Uber paid the commencement fee or by severing the provisions requiring the arbitration to proceed according to the ICC rules and the place of arbitration such that it was unnecessary to declare the entire arbitration clause invalid and greenlight a court proceeding when the parties expressly agreed to resolve their disputes by private arbitration.

 

Impact of the Decision on Canadian Law and Policies

At a conceptual level, Heller pitted the SCC’s historical pro-consumer protection and pro-class action stance against its historic respect for and promotion of arbitration as an alternative dispute resolution mechanism that complements the work of courts. In seemingly prioritizing the former over the latter, the majority held that the courts’ respect for arbitration is based on it being a cost-effective and efficient procedure, such that when it does not provide those benefits, arbitration provisions need not be enforced. Notably, this ignores other reasons parties frequently incorporate arbitration clauses into their agreements: ensuring decision makers with appropriate expertise, the legitimacy of decisions arising from party-controlled processes, and confidentiality.

There is no denying that Heller deals a blow to the breadth and strength of arbitration clauses under Canadian law. The inevitable consequence of the SCC’s decision will be more frequent challenges to arbitration clauses as a result of the individual and fact-specific nature of the factors Canadian courts will now need to consider in deciding whether to stay court proceedings in lieu of arbitration.

At the same time, one should resist the temptation to be melodramatic. Heller is not a death knell for arbitration clauses in Canada. If anything, the decision provides a roadmap for parties to strengthen arbitration clauses and ensure their validity going forward. The SCC’s decision is highly fact-specific and future cases will be determined on their own facts. The majority was clearly off put by the notion that an Uber driver should be required to pay close to $20,000 CAD (which, the evidence suggested, was close to Mr. Heller’s annual income) and travel to Amsterdam merely to challenge the validity of the arbitration clause in the first place. One may well ask whether the outcome in Heller would have been different if the arbitration clause provided for a seat (or even merely place) of arbitration in the same jurisdiction as where the driver was located or virtually, that the commencement fee would be fully recoverable in the event that the claimant was successful, or even, perhaps, if the agreement attached the ICC rules and fee schedule and expressly drew the driver’s attention to them. There are, of course, numerous other ways in which the arbitration clause could have been tailored to ensure that arbitration provided an accessible and pragmatic way for disputes to be resolved.

In that respect, Heller’s true legacy is to remind drafters of commercial agreements to give equal consideration to dispute resolution provisions as they do to the main clauses in their agreements and to challenge and provide an opportunity for arbitral institutions to develop specific rules that promote the underlying policy goals of arbitration relating to flexibility, accessibility, and efficiency.

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Painting the Complete Picture: Issues Surrounding Art Arbitration in India

Wed, 2020-07-01 03:00

The Status of Art Arbitrations in India

As per a 2018 report, the Indian art industry is plagued by legal ambiguities, forgeries and lack of transparency, and infrastructural support, making it a fertile ground for disputes. A steady increase in the number of high-net-worth individuals and a surge in online auctions have contributed to the growth of the Indian art market, which is estimated to reach a global turnover of USD 195-260 million in the 2020s. In December 2014, Justice Gururajan delivered an 81-page arbitral award, ending a four-year-long legal battle concerning the authenticity of a 126 years old Raja Ravi Varma painting in a one-of-its-kind arbitral precedent on art disputes in India.

Art lawyers and other stakeholders have time and again iterated the suitability of arbitration for resolving art disputes. Contracts signed between stakeholders in the Indian art industry frequently have arbitration clauses. Moreover, Indian legal practitioners expect an exponential increase in the popularity of such arbitrations owing to the opening of the Court of Arbitration for Art (“CAfA”) at the Hague in 2018, and the option to include a CAfA arbitration clause in art contracts. This raises an inescapable question: will the existing arbitral jurisprudence in India provide a foundation strong enough to meet the requirements of the stakeholders in the art industry?

Sections 34 and 48 of the Arbitration and Conciliation Act (“1996 Act”) render an award arising out of an ‘inarbitrable’ dispute unenforceable in India. Art disputes generally include title and authenticity disputes, disputes arising out of testamentary matters, art fraud as well as copyright issues. In light of Booz-Allen, art disputes arising out of testamentary and succession matters are inarbitrable in India. Further, arbitrability of a dispute involving art fraud would depend on the facts as judicial precedent favours arbitrability of art fraud involving internal affairs of the parties while going against arbitrability of criminal charges and other complex art fraud cases.

While there is clarity regarding these issues, a few other potential issues arising out of art disputes merit a detailed analysis in light of the conflicting Indian arbitral jurisprudence.

 

Arbitration of Artists’ Resale Royalty Disputes

Since the monetary value of artwork generally grows with subsequent resale, visual artists remain at a huge disadvantage if they are not paid a share of the resale price. With the growing recognition of resale royalties around the world as a moral right of visual artists, resale royalty can also be incorporated as a contractual obligation in the sales contract. India has statutorily recognized the right to resale royalties under Section 53A of its Copyright Act which gives the Intellectual Property Appellate Board (“IPAB”), a quasi-judicial body, the power to resolve disputes concerning resale royalties. However, IPAB has remained dysfunctional for the majority of its existence and lacks the requisite infrastructure and personnel to effectively resolve disputes. Although IPAB’s incompetence acts as an additional impetus for stakeholders in the art market to resolve disputes concerning resale royalties via arbitration, there are few hurdles in the path.

In Booz-Allen & Hamilton Inc v. SBI Home Finance Ltd., the Indian Supreme Court (“SC”) ruled that disputes involving adjudication of action in rem, and disputes whose adjudication is exclusively reserved for public forums as a matter of public policy, are both inarbitrable. The question is whether contractual disputes concerning resale royalties pass the ‘Booz-Allen test’.

Despite the lack of clarity on arbitrability of IP disputes, the recent judicial trend suggests that IP disputes arising out of contracts are arbitrable as long as the rights of third parties are not affected by the decision of the arbitrator. High Courts 1)EROS International v. Telemax Links India Pvt. Ltd., 2016 (6) Arb L.R. 121 (Bom.), ¶ 16; H.D.F.C. Bank Ltd. v. Satpal Singh Bakshi, (2013) I.L.R. 1 Delhi 583, ¶ 14. jQuery("#footnote_plugin_tooltip_4254_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4254_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); have also held that mere creation of forums under special enactments would not oust the jurisdiction of arbitral tribunal unless that particular enactment gives ‘special powers to the tribunals which are not with the civil courts’. These decisions augur in favour of arbitrability of resale royalty disputes.

However, the SC seems to have disregarded this line of reasoning while determining arbitrability of trusts disputes. The Indian Trusts Act does not expressly confer ‘exclusive jurisdiction’ on the civil courts to adjudicate trust disputes. Nonetheless, the SC referred to several provisions of the Trusts Act that specifically conferred jurisdiction on civil courts to rule that the scheme of the Trusts Act was of such nature that it impliedly excluded arbitration of trust disputes.2)see paras 54-58 of the decision. jQuery("#footnote_plugin_tooltip_4254_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4254_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); One can draw a similar analogy to IPAB as several provisions of the Copyright Act specifically confer jurisdiction on IPAB to adjudicate various copyright issues.3)See for example, Copyright Act, ss. 6, 11, 12, 19A, 31, 31A, 31B, 31C, 31D, 32, 33A and  53A. jQuery("#footnote_plugin_tooltip_4254_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4254_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Further, on some instances, courts have employed the same reasoning to rule that the Copyright Act impliedly confers ‘exclusive jurisdiction’ on IPAB to deal with matters entrusted to it by the Copyright Act.4)Data Infosys Ltd. and Ors. v. Infosys Technologies Ltd., 2016 S.C.C. OnLine Del. 617; Music Choice India Private v. Phonographic Performance, 2009 S.C.C. OnLine Bom. 121. jQuery("#footnote_plugin_tooltip_4254_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4254_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These decisions go against the arbitrability of resale royalty disputes, bearing testimony to the obscurity in the law on this issue.

 

Art Arbitration and the Antiquities and Art Treasures Act, 1972 (“AATA”)

The Government of India enacted the AATA in 1972 to regulate the trading of antiquities and art treasures in India. Paintings older than 100 years have been classified as ‘antiquities’ under AATA. The age of the painting or artefact can be a decisive factor in resolving certain authenticity disputes.

Section 24 of AATA makes it incumbent on the Archaeological Survey of India (“ASI”) (or an Expert Advisory Committee in the proposed 2017 bill) to determine whether an object is antiquity or not. In fact, in the arbitration concerning the Raja Ravi Varma painting, the arbitrator while deciding the question of authenticity gave precedence to the ASI certification over the opinion of the buyer’s experts.

The ASI’s incompetence is apparent from a number of cases where it did not employ any forensic tests to check the age of the artifact and declared certain items as ‘antique’ by ‘merely looking at them’. It has also been criticised for being short-staffed and riddled with red tape. In light of the above, parties ought to have the freedom to appoint experts who employ techniques that stand up to the parameters of the art market. Section 26 of the 1996 Act gives the parties and the arbitral tribunal the power to appoint an expert for assistance in deciding specific issues. However, in cases where the tribunal fails to refer the question of authenticity to ASI or does not rely on ASI’s opinion, there is a likelihood of the resultant award being successfully challenged.

In 2019, the SC ruled that in case of conflict, provisions of AATA will override the provisions of a general enactment covering the same aspect. In that case, the SC gave primacy to the ASI’s power under Section 24 in case of a prosecution under the Customs Act. The SC has previously ruled in favour of special enactments while dealing with conflicts with the 1996 Act (see here and here). Following this line of reasoning, Section 24 of AATA, being a special provision, would override the right to appoint experts under Section 26 of the 1996 Act. Consequently, reliance upon any expert opinion on the age of the concerned work will be in contravention of the ASI’s statutory power. Now, the question arises whether such contravention would be fatal to the validity of the award? It is settled law that a ‘mere contravention of substantive laws of India’ does not amount to a breach of public policy of India. However, if a law relates to ‘core values of India’s public policy’ or protects its national interest, its violation would constitute a violation of India’s public policy. In the authors’ opinion, the correct view would be to not elevate Section 24 of AATA to the pedestal of public policy. Despite this, in April 2020, the SC in NAFED v. Alimenta refused to enforce a foreign award as it was made in contravention of a government order prohibiting exports, which, according to the SC was part of India’s ‘public policy relating to export’. A similar argument can be made on these lines to bring AATA within the ambit of public policy. AATA was enacted in line with India’s policy to preserve its cultural heritage. The government intended to exercise control over the trading of antiquities5)See, ss. 3, 7, 13, 14, 19, 24 of AATA. jQuery("#footnote_plugin_tooltip_4254_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4254_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and conferred the power to determine whether an object is an antiquity on ASI. Thus, a future court may rely on NAFED to opine that the power of the ASI to decide the status of antiquities is a matter within the fundamental policy of India in preserving its cultural heritage. Such a view amounts to excessive judicial interference and is bound to harm the future of art arbitration in India.

 

Conclusion

A major step towards tapping into the economic potential of Indian art is understanding and strengthening the dispute resolution mechanism for dealing with it. Courts themselves are of the opinion that they are not best suited to resolve art authenticity issues.6)Thome v. The Alexander & Laura Calder Foundation, 890 N.Y.S.2d 16, 26 (N.Y. App. Div. 2009). jQuery("#footnote_plugin_tooltip_4254_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4254_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); A decision given by a specialised art tribunal is far more likely to be revered and accepted by the art market.

Unfortunately, the existing arbitral jurisprudence in India is woefully inadequate to support the art industry. The newly added Section 42A in the 1996 Act on confidentiality of arbitral proceedings has been rightly criticized for being marred by vagueness. Considering how much people “prize their anonymity” in the art world, such equivocal provisions will prove to be a dampener for parties wishing to arbitrate their art disputes.

Such ambiguities undermine the utility of arbitration agreements in art transactions. Thus, art lawyers need to factor in these considerations while advising their clients on contractual terms. Further, positive legal developments in areas such as expert training and confidentiality will go a long way in supporting the incipient art industry of India.

References   [ + ]

1. ↑ EROS International v. Telemax Links India Pvt. Ltd., 2016 (6) Arb L.R. 121 (Bom.), ¶ 16; H.D.F.C. Bank Ltd. v. Satpal Singh Bakshi, (2013) I.L.R. 1 Delhi 583, ¶ 14. 2. ↑ see paras 54-58 of the decision. 3. ↑ See for example, Copyright Act, ss. 6, 11, 12, 19A, 31, 31A, 31B, 31C, 31D, 32, 33A and  53A. 4. ↑ Data Infosys Ltd. and Ors. v. Infosys Technologies Ltd., 2016 S.C.C. OnLine Del. 617; Music Choice India Private v. Phonographic Performance, 2009 S.C.C. OnLine Bom. 121. 5. ↑ See, ss. 3, 7, 13, 14, 19, 24 of AATA. 6. ↑ Thome v. The Alexander & Laura Calder Foundation, 890 N.Y.S.2d 16, 26 (N.Y. App. Div. 2009). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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That Other Crisis: Extraterritorial Application of Investment Standards During Occupation and Annexation

Tue, 2020-06-30 06:00

The Crimea crisis has received attention by UNCLOS and investment tribunals, as well as by the Swiss Federal Tribunal in appeals and annulment proceedings. However, their analyses have been limited to jurisdiction. The implicated issue was whether the (bilateral) investment treaties (BIT) of the occupying, and a fortiori annexing, State could be applied extraterritorially. These bodies have held so, at least implicitly. Most authors, including this one, have agreed and tried to provide some reasoning. As most jurisdictional hurdles have been overcome, this post will highlight some substantive issues for the upcoming merits phases and future cases of occupation/annexation.

 

Which treaty should apply in cases of occupation and annexation? 

The claimant in formulating its claim will have to elect an applicable BIT. Thus far, only Ukrainian claimants have claimed under Article 9 of the Russia-Ukraine BIT. As Russia’s occupation and subsequent annexation cannot be recognised legally, they have alleged interference with their investments by the acting de facto sovereign. Accepting that the aggressor-State’s treaties apply may lead to a straightforward application of their provisions/obligations. Yet, applying treaties extraterritorially may create important dilemmas. First, it seems counter to the very concept of investor-State arbitration, namely that investors of one contracting State invoke a BIT against the other State.

Second, such claims place before tribunals several issues, including the assessment of the occupation’s (il)legality and thus legitimisation of an illegal but acquiesced status quo, over which they have respectively no jurisdiction nor competence. Inter-State arbitration for the “interpretation and application” of e.g. “territory” could offer a way out in that regard (exceptionally provided for in Article 10). Moreover, the latter could restore the concept of heightened damages for serious breaches of international peace and security (Chorzów Factory), now prevalent in investor-State arbitration, to its former glory. Likewise, heightened competence of arbitrators, preferably versed in general international law, should also be required.

This post suggests that, to overcome these issues, the question could be reframed. Instead of adopting jurisdictional legal fictions to apply the Russia-Ukraine BIT to Russia as de facto sovereign of Crimea, one could apply the obligations of the Russia-Ukraine BIT to Russia extraterritorially. This would obviate the need, and ius cogens prohibition, of recognising Russia’s de facto effective control. Crimea could thus still be considered territorially part of Ukraine. The difference would be that Russia would be argued to have violated its investment obligations extraterritorially on that soil rather than within its own territory. This could, moreover, circumvent the Soviet/Russian practice of limiting arbitral jurisdiction to the assessment of damages (Renta 4 v Russia, Preliminary Objections, §§17–67), by postponing the responsibility decision to the quantum phase.

An investor seeking to invoke a BIT to make a claim about (Russia’s) extraterritorial conduct (in Crimea) might invoke the provisions protecting against expropriation, fair and equitable treatment (FET), or provisions applicable to armed conflict, such as full protection and security (FPS) and ‘war’ clauses. This post considers the potential extraterritorial reach of each of these obligations in turn.

 

Expropriation

The prohibition of (in)direct expropriation without compensation seems the most obvious – and popular – choice. In Ukrnafta, claimants alleged that Russia’s economic measures after the Crimea Accession Treaty constituted expropriation of petrol investments under Articles 5 and 9(2(c) Russia-Ukraine BIT. Such a direct expropriation would normally presuppose legal sovereignty over the territory, triggering questions of recognition (see e.g. Wichert v Wichert, Swiss Federal Tribunal, 1948). Any finding of a direct expropriation (or confiscation: Article 46 Hague Rules of Land Warfare) during occupation/annexation might therefore indirectly also recognise Russia’s sovereignty over the territory. It ought to be noted that many expropriation provisions (including Article 5(1)) limit the prohibition to expropriations in “the territory of” the host State. However, a less territorially-based argument might be a claim of indirect expropriation. Leaving an object/purpose and evolutionary approach aside, the concept of indirect expropriation – a substantial deprivation of the investor’s investment – could encompass remote expropriation. The analysis in such a case would turn on attribution rather than an argument that the tribunal has competence based on a given territorial jurisdiction. A parallel for the Crimea situation could be drawn from the Loizidou case before the European Court of Human Rights (Preliminary Objections, §62), only awarding damages for the denial of ownership and access by the aggressor-State’s or separatist forces (cfr. Judgment, §13). Likewise, Ukrainian investors would still be considered the legal owner in this scenario.

 

Fair and Equitable Treatment

FET comes into play for situations outside physical violence (FPS) and substantial economic deprivation (expropriation). It includes the availability of a stable and predictable legal framework, non-discrimination, and due process. FET provisions usually state that protection is granted “at all times” and should thus subsist during occupation/annexation. FET’s language  is indeed the easiest to apply extraterritorially. Occupation and annexation may raise additional challenges like asset-freezing and new laws, including re-registration of companies. Crimean banks had to stop their operations under Russian law of April 2014 with almost immediate effect (Privatbank). FET will thus probably be invoked as an additional basis to expropriation, possibly permitted under the language of Articles 2 and 4 Russia-Ukraine BIT.

It has been argued that domestic investors whose State no longer controls the territory of the investment can be discriminated against if one excludes occupied territory from the BIT’s definition of “territory”, triggering the underlying non-discrimination standard of FET. All claims regarding Crimean investments have been filed by Ukrainian investors. Such a prima facie intraterritorial application seems a factually desirable rather than a legal solution. Furthermore, arguably re-registration is a requirement for intuitu personae investments in Russia as host State. Under this post’s alternative, however, the original BIT still applies, without the need to include former intra-State investors: all investments are covered, whether or not they have re-registered, as long as they have a material investment in Crimea within the definition of Article 1.

 

Full Protection and Security

The most significant protection for investments in occupied/annexed territory is the FPS standard. Often cited in one breath with FET, FPS could overlap or be interpreted separately. Prima facie, there is no FPS provision in the Russia-Ukraine BIT, at least not in the usual wording of “full [legal] protection and security”. However, imposing “complete and unconditional legal protection of investments” (Article 2(2)) could support legal rather than mere physical protection (e.g. Siemens §303). If so, the re-registration requirement could fall within its scope, especially since FPS continues after armed hostilities have ended (Wena Hotels v Egypt, §§82-95).

No matter who has legal sovereignty, investors enjoy full and physical protection through the host State’s due diligence obligations. The related duty to take precautionary measures places not only the occupying State’s population, but also foreign investors and other temporary subjects “under its control” (cfr. Article 58 Additional Protocol II to the Geneva Conventions), implying mere de facto rather than legal control over the territory. The presumption is that having no control over territory (anymore) will lead to the lack of responsibility of the State, and vice versa. However, a FPS claim against the occupied State, Ukraine, will be unlikely as it could invoke force majeure.

In the Crimea scenario, rather than whether the State has failed its due diligence obligations, the question is one of which State has to offer the protection (attribution of responsibility). In terms of evidence, the American Manufacturing & Trading Inc. v Zaire tribunal (§6.13) held the fact that soldiers wore official uniforms irrelevant, “without any one being able to show either that they were organized or that they were under order, nor indeed that they were concerted” (§§7.08-7.09). Requiring the claimant to prove the absence of military necessity, as in Asian Agricultural Products Ltd. v Sri Lanka (§56-64) seems too high a burden of proof for investors in Crimea. At the outset, the aggressor-State’s actions are often difficult to trace. The solution seems to lie in the Corfu Channel case, allowing the use of inferences when territorial control precludes the victim from providing direct proof.

 

‘War’ Clauses

The basic ‘war’ (or armed conflict) clause prohibits discrimination between investors in armed conflict areas and investors of the most-favoured nation (Article 6 Russia-Ukraine BIT), the host State’s nationals, or both, but only if reparations are paid (distinguishing them from compensation-for-loss clauses). The claimant should prove that (s)he has received less than others, less than e.g. German investors in the Crimea. The development of war clauses further supports the claim that (investment) treaties stay in place during armed conflict, and a fortiori occupation/annexation. Moreover, arguably ‘free-transfer-of-funds’ clauses (Article 17 Russia-Ukraine BIT), heavily depending on a functioning financial market, become operative again during a stabilised occupation.

To conclude, although a “straightforward” extraterritorial application of treaties would be preferred, this proposal circumvents the ius cogens prohibition of (recognising) annexation and gives Ukrainian investors non-artificial standing. This solution does not preclude foreign claims under respective BITs with Russia (though those seem unlikely given that 60% of foreign direct investment in Crimea was Russian). However, arguing that investment provision can apply extraterritorially does not mean that those obligations are necessarily violated, and the burden of proof may be higher.

 

The views expressed in this post are solely those of the author. They do not necessarily reflect the views of any institution with which he is or has been affiliated. Nor do they necessarily reflect the views of any of his current or former clients.

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The LCIA 2019 Annual Report: An Analysis of the Developments in International Arbitration

Tue, 2020-06-30 05:00

On 19 May 2020 the London Court of International Arbitration (hereinafter the LCIA or the Court) issued its annual casework report for 2019.

This paper aims to present and analyse the numbers revealed in the report. The focus will be on the development of international arbitration in terms of market, diversity and inclusion, and applicable law and seat.

 

International Arbitration Market

A record number of 406 cases were reported by the LCIA (346 arbitrations administered pursuant to the LCIA Rules). This is the highest number of cases to be ever received by the Court and a 25% increase from 2018. These numbers reflect the consistent popularity of the reliance on international arbitration as a dispute resolution mechanism, also seen in the reports provided by other leading arbitration institutions such as the ICC Court of Arbitration1)The ICC Court announced that 869 new cases in 2019, compared to 842 cases administered by the ICC Court in 2018. The full statistical report for ICC Dispute resolution will be published in the coming months. See relevant communications here and here. jQuery("#footnote_plugin_tooltip_8085_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8085_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Singapore International Arbitration Centre (SIAC).2)The SIAC 2019 Annual Report announces a record of 479 new case fillings 2019, compared to 402 in 2018 (report available here). jQuery("#footnote_plugin_tooltip_8085_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8085_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Interestingly, the LCIA also registered that it has provided mediation and other alternative dispute services for 11 cases. This rate represents an increase compared to 9 requests in 2018. As with international arbitration, these numbers suggest a rise in the use of mediations, particularly bearing in mind the recent release of the Singapore Convention of International Commercial Mediation, discussed previously on the blog, which will enter into force on 12 September 2020.

This convention has the potential to become a relevant tool for the applicability of international commercial mediation in avoiding conflicts arising from business relationships, including when affected by the Coronavirus outbreak. An increase in the number of conflicts due to the impossibility or hardship of companies to comply with their contractual obligations is expected, so it will be interesting to see if and how the 2020 Annual Report will reflect the pandemic and the users resorting to international arbitration and mediation.

 

Diversity and Inclusion

First, the LCIA reported a 29% rate of female arbitrator appointments in LCIA arbitrations (162 out of 566), compared to 23% in 2018.

This gender diversity increase is also a result of the institution’s initiatives to promote diversity, since 48% of all arbitrators selected by the LCIA were female arbitrators (5% more than in 2018). Female candidates selected by parties and co-arbitrators also increased to 12% and 30% (from 6% and 23% in 2018), respectively.

Second, there was a rise in the number of appointments by the Court of non-British arbitrators. The LCIA appointed arbitrators from 40 different countries (compared to 34 in 2018), and appointments of British arbitrators dropped from 65% in 2018 to 51% in 2019. In comparison, the parties and the co-arbitrators selected non-British arbitrators 51% and 34% of the time, respectively.

The authors welcome these findings. It suggests an increase in appointments of a number of well-skilled international arbitration professionals coming from jurisdictions which are not among the ones traditionally appointed in respect of international arbitrations.

However, it is important to also highlight that there is room for improvement. It appears that some geographic regions are still misrepresented, such as Latin America and Africa. This can be due to the existing geographic representation in terms of party origin and choice of seat with the LCIA. In any case, considering the growing number of practitioners, professional associations, well-established arbitral institutions and academic courses originals from or/and focusing on Latin America and Africa, it is expected that appointments of international arbitration actors coming from such regions will continue to grow over time.

Third, there was an increase in first-time appointees. 19% of arbitrators appointed in 2019 (105 of 566) in LCIA arbitrations were first-time appointees. This represents an increase from 14% in 2018. For these first-time appointments, the parties selected the arbitrator in 51% of cases, the LCIA in 31% of cases, and the co-arbitrators in 17% of cases.

Moreover, 60% of all arbitrators appointed in LCIA arbitrations in 2019 were only appointed once during the same calendar year, 23% of arbitrators were appointed twice, and 8% of arbitrators three times. The average number of appointments per arbitrator was one, regardless of gender.

This change also evidences efforts to implement diversity in international arbitration. In this case, it relates to diversity in the level of openness of the market for new professionals acting as arbitrators. The relevance of these numbers cannot be understated. As mentioned, the number of international arbitrations is also increasing, so the flexibility of the market to welcome new professionals is crucial for its dynamism and avoidance of the traditional scenario in which well-established arbitrators handle several proceedings. This could compromise procedural efficiency and hinder other well-suited professionals from being able to develop expertise. This is particularly detrimental if we consider the global nature of disputes involved in international arbitration.

 

Applicable Law and Seat

First, among the 352 agreements under which disputes arose which resulted in LCIA arbitrations in 2019, 62% were entered into between 2015 and 2019.

These numbers show a modest increase in the number of claims based on older agreements, compared to 2018, where 70% of LCIA arbitrations arose from agreements entered into between 2014 and 2018.

Second, English law remained the most frequently chosen lex causae, governing 81% of arbitrations administered pursuant to the LCIA Rules (compared to 76% in 2018). Besides this, the LCIA administered 10 cases applying Mexican law, 6 cases with Pakistan law, UAE law in 5 cases, BVI law in 4 cases, and Russian law in 3 cases.

Although arguably showing a less diverse case range, the preference for English law also reflects the relevance of this law in international trade and in some of the sectors represented in the LCIA’s caseload, notably banking and finance, which experienced growth in cases from 29% in 2018 to 32% in 2019. Similarly, there was an increase in the number of loan or other facility agreements seen in LCIA arbitrations, representing 30% of all agreements (rising by 8% compared to 2018).3)For a discussion of the factors that lead or influence parties to opt-in or opt-out of certain governing contract laws, see Gustavo Moser, Rethinking Choice of Law in Cross-Border Sales, Eleven Publishing, 2018, pp. 93-116. jQuery("#footnote_plugin_tooltip_8085_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8085_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Third, although users continued to select a range of seats, England remained the most frequently chosen arbitral seat, in 89% of cases under the LCIA Rules (similar to 88% of cases in 2018). However, the LCIA verified a wider range of combination between seats and applicable laws, which demonstrate the parties’ willingness to “mix and match” their choice of law and seat.

 

Looking to the Future

The LCIA report shows an encouraging effort to promote diversity and inclusion by the LCIA, by encouraging gender diversity, geographical diversity and “new blood” in arbitration panels. This effort in maintaining record and statistics of gender and ethnic diversity is welcomed, since it allows for transparent scrutiny from the general public, and demonstrates a conscientious policy regarding appointments, at least from the institution’s side. This is in line with the role of arbitral institutions on this issue.

Moreover, the data also shows that English law and England remained the most chosen applicable law and seat for LCIA users in 2019, despite Brexit preparations. However, the report does not indicate which governing law and seat were selected in the contracts concluded after 23 June 2016, the date of the Brexit referendum.

Of course, only long-term data can confirm whether or not London will be able to rely on the consistency and predictability of English courts, and the wide adoption of English law generally due to the perception of it being contract-friendly.4)for a previous reflection on this issue, see Ana Coimbra Trigo and Gustavo Becker, ‘Rethinking Choice of Law and International Arbitration in Cross-Border Contracts: A Roundtable with Stakeholders’, in João Bosco Lee and Flavia Mange (eds), Revista Brasileira de Arbitragem, Kluwer Law International 2020, Volume XVII Issue 65 pp. 221 – 223). jQuery("#footnote_plugin_tooltip_8085_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8085_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Finally, the LCIA also noted on its webpage that in the first quarter of 2020, it experienced a spike in new cases. In addition, it is expected that in the medium-term, the COVID-19 crisis may lead to additional cases. We look forward to the reports that will follow to see how the current crisis may impact international arbitration cases.

References   [ + ]

1. ↑ The ICC Court announced that 869 new cases in 2019, compared to 842 cases administered by the ICC Court in 2018. The full statistical report for ICC Dispute resolution will be published in the coming months. See relevant communications here and here. 2. ↑ The SIAC 2019 Annual Report announces a record of 479 new case fillings 2019, compared to 402 in 2018 (report available here). 3. ↑ For a discussion of the factors that lead or influence parties to opt-in or opt-out of certain governing contract laws, see Gustavo Moser, Rethinking Choice of Law in Cross-Border Sales, Eleven Publishing, 2018, pp. 93-116. 4. ↑ for a previous reflection on this issue, see Ana Coimbra Trigo and Gustavo Becker, ‘Rethinking Choice of Law and International Arbitration in Cross-Border Contracts: A Roundtable with Stakeholders’, in João Bosco Lee and Flavia Mange (eds), Revista Brasileira de Arbitragem, Kluwer Law International 2020, Volume XVII Issue 65 pp. 221 – 223). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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U.S. Supreme Court Applies International Law Without Saying So: GE Energy v. Outokumpu Stainless

Mon, 2020-06-29 03:00

On June 1, 2020, the United States Supreme Court issued its opinion in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA. The Court held that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) does not prohibit a Contracting State from applying the domestic law doctrine of equitable estoppel to allow enforcement of an arbitration agreement by a non-signatory.

Commentators have noted that the Court’s decision is “narrow,” and “make[s] no mention of international law,” despite purporting to apply an international treaty.

However, in the author’s view, this decision is noteworthy because it applies (implicitly) a cornerstone doctrine of public international law known as the Lotus principle. Under this principle, a state is free to engage in certain conduct unless it can be shown that international law prohibits that conduct. In other words, international law does not need to affirmatively permit certain conduct for that conduct to be legal; it is enough that international law does not prohibit it.

 

The Lotus principle: States can engage in any conduct that is not prohibited

The Lotus principle comes from a 1927 decision by the Permanent Court of International Justice (“PCIJ”) in a dispute between France and Turkey. That dispute arose after Turkey arrested, imprisoned, and convicted a French captain for causing a fatal collision with a Turkish ship on the high seas. France argued that Turkey’s exercise of criminal jurisdiction over a French national under the circumstances violated international law. (pp. 5, 10-11.) It argued that in order to have jurisdiction, Turkey needed to “point to some title to jurisdiction recognized by international law,” and none existed. By contrast, Turkey argued that it was free to exercise jurisdiction unless France could prove that such exercise was prohibited under international law. (p. 18.)

The PCIJ sided with Turkey. It found that Turkey’s “way of stating the question is . . . dictated by the very nature and existing conditions of international law,” under which states are sovereign. The only limits on their sovereignty are those that they voluntarily assume, by including in their treaties or accepting as custom. “Restrictions upon the independence of States cannot therefore be presumed.” (Id.)

Thus, under international law, states are free to engage in conduct unless it can be shown that that conduct is prohibited.

The PCIJ’s successor, the International Court of Justice (“ICJ”), has often reaffirmed this principle. For example, in 1986, it rejected the United States’ claim that Nicaragua’s military build-up was unlawful, because the United States had not identified any applicable rule of international law that limited a state’s permissible level of armaments. (p. 135 ¶ 269.) Likewise, in 1996, the ICJ analyzed the legality of the threat or use of nuclear weapons. It found that while international law did not specifically “authorize” the use of nuclear weapons, “state practice shows that the illegality of the use of certain weapons as such does not result from the absence of authorization but, on the contrary, is formulated in terms of prohibition.” (p. 247 ¶ 52 (emphasis added)). It then went on to analyze whether a prohibition on nuclear weapons existed. Finally, in 2008, the United Nations General Assembly asked the ICJ to render an advisory opinion on whether “the unilateral declaration of independence by the [authorities] in Kosovo [was] in accordance with international law.” The ICJ found that, “[T]he answer to that question turns on whether or not the applicable international law prohibited the declaration of independence.” (pp. 407, ¶ 1, 425, ¶ 56 (emphasis added)).1)But see Anne Peters, Does Kosovo Lie in the Lotus-Land of Freedom, 24 Leiden J. Int’l L. 95, 100-01 (2011), (questioning whether the Kosovo advisory opinion should be viewed as a strict application of the Lotus principle, in part because that principle applies only to the conduct of states and not non-state entities like the Kosovar authorities). jQuery("#footnote_plugin_tooltip_6567_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6567_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

A critical caveat to this principle is that the prohibition of the relevant conduct need not be explicit. A rule of international law could prohibit certain conduct even if the rule does not address the specific conduct by name. For example, in the aforementioned opinion on nuclear weapons, while the ICJ found that no rule of international law “specifically proscrib[ed]” the threat or use of nuclear weapons “per se,” it nonetheless analyzed whether the threat or use of such weapons would be inconsistent with principles of international humanitarian law and thus prohibited. (p. 256, ¶ 74.)

 

Framing the issue in GE Energy v. Outokumpu as one of international law

The issue at the heart of GE Energy v. Outokumpu was one of international law, to which the Lotus principle applied. In the author’s view, a proper statement of the issue was the following:

Whether the New York Convention prohibits a Contracting State from applying the domestic doctrine of equitable estoppel to permit the enforcement of arbitration agreements by non-signatories.

However, in its petition seeking Supreme Court review, GE Energy described the “Question Presented” in the following way:

Whether the [New York Convention] permits a non-signatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel. (p. i.)

This framing arguably ignores the international law nature of the issue in the dispute in two ways. First, it suggests that the relevant conduct is that of private parties, namely a non-signatory to an arbitration agreement. However, as an international treaty, the New York Convention establishes obligations for Contracting States and their courts; the relevant inquiry is therefore the extent to which the Convention constrains state conduct. Second, the framing suggests that the New York Convention must affirmatively “permit” certain conduct for that conduct to be allowed. However, under the Lotus principle, the relevant inquiry is only whether the New York Convention prohibits certain actions by Contracting States.

Writing for the Supreme Court, Justice Thomas framed the issue as follows:

The question in this case is whether the [New York Convention] conflicts with domestic equitable estoppel doctrine that permit the enforcement of arbitration agreements by non-signatories. (slip op. at p. 1.)

While Justice Thomas abandoned the problematic “permits” language from the petition, his framing does not bring into relief the fact that the relevant conduct here is that of a state party to an international treaty. That framing would have made more obvious the applicability of the Lotus principle.

 

The Supreme Court implicitly followed the Lotus principle

In any event, Justice Thomas’s approach was ultimately consistent with the Lotus principle (although he cited neither that principle nor any other part of international law). He observed that the New York Convention “does not address” and “is simply silent” on non-signatory enforcement. He then concluded that “this silence is dispositive here because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.” Furthermore, while Article II(3) requires Contracting States to enforce arbitration agreements in certain circumstances (i.e. when requested by a signatory), “it does not state that arbitration agreements shall be enforced only in the identified circumstances.” (pp. 6-7.)

Thus, Justice Thomas correctly recognized that the relevant inquiry was not whether the New York Convention contained “permission” for Contracting States to engage in the relevant conduct (to allow the enforcement of arbitration agreements by non-signatories). Rather, the relevant inquiry was whether the Convention prohibited them from doing so. Since the Convention did not contain such a prohibition, Contracting States remain free to apply domestic law doctrines allowing the enforcement of arbitration agreements by non-signatories.

 

Conclusion

The GE Energy Power Conversion v. Outokumpu Stainless USA case serves as a reminder for litigants and courts to identify the international law issues before them, and apply the correct international law principles to these issues. Here, the Lotus principle ensures that, unless a prohibition can be shown in a treaty or customary international law, states are free to adopt and apply policies that are hospitable to international arbitration.

References   [ + ]

1. ↑ But see Anne Peters, Does Kosovo Lie in the Lotus-Land of Freedom, 24 Leiden J. Int’l L. 95, 100-01 (2011), (questioning whether the Kosovo advisory opinion should be viewed as a strict application of the Lotus principle, in part because that principle applies only to the conduct of states and not non-state entities like the Kosovar authorities). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Open Position: Assistant Editor of Kluwer Arbitration Blog

Sun, 2020-06-28 22:16

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

 

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

 

For this position specifically, we prefer the Assistant Editor to be based in Japan and be effectively bilingual in English and Japanese.

 

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 [email protected], with cc to Dr Crina Baltag, [email protected]. We will only reach out to shortlisted candidates for an interview.

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The USMCA/CUSMA/T-MEC’s Entry into Force: Evolution, Innovation, and Reform

Sat, 2020-06-27 21:00

Throughout this week, our contributors from around the globe have offered insights into the USMCA/CUSMA/T-MEC, which enters into force next week. Our contributors have contextualised USMCA against both regional and global developments. Many of them noted the link between USMCA and NAFTA, between USMCA and regional politics, and between USMCA and broader global trends related to investment treaty reform. Consistently, they engaged with the idea that USMCA is an “evolutionary,” and in some respects, “innovative” treaty. Today we pull these threads together to contextualise USMCA further by examining its additional dispute resolution features, to draw connections between USMCA and broader investor State dispute settlement (“ISDS”) reform efforts, and to offer forward-looking thoughts.

 

Chapter 31 of USMCA: Innovations to the State to State Dispute Settlement Framework

In addition to the unique features of the USMCA ISDS mechanism that have been highlighted by our contributors this week, USMCA also provides noteworthy innovations in State-to-State arbitration. USMCA Chapter 31 (Dispute Settlement) provides a mechanism that largely adopts the approach of NAFTA Chapter 20, while also addressing some of its flaws, which many commentators believe led to its infrequent use.

The scope of dispute settlement under USMCA Chapter 31 is narrower than NAFTA’s State-State dispute settlement framework. NAFTA Chapter 20 permitted panels to be convened to hear both violation complaints and nullification and impairment cases (non-violation cases) for all substantive NAFTA rights, except trade remedies and the labour and environment side agreements. Meanwhile, USMCA Chapter 31 denies panels the ability to hear violation cases for trade remedies, and it further excludes non-violation cases for claims under USMCA’s chapters on labour, environment, digital trade, financial services, telecommunications, alongside a number of other chapters. Procedurally, once a Party identifies a dispute, consultation with technical experts and the Free Trade Commission is required. Upon failure of such consultations, a binational panel may be convened to assist the Parties to resolve their dispute.

Chapter 31 further offers detailed rules and procedures to govern the establishment of a roster of panellists, their necessary qualifications, and how panellists are then selected from the roster to hear disputes. A key critique of NAFTA was the ability of a State to engage in “panel blocking”, employing its own failure to maintain an active and complete roster of candidates to prevent panel formation. This issue is resolved in USMCA through a commitment among the States to establish their rosters by the date USMCA enters into force (July 1, 2020). To protect from any future lapse in appointments, roster members maintain their position for a minimum of three years or until the Parties constitute a new roster. To this end, for example, in March this year the U.S. concluded its open call for applicants to the roster.

Once a panel is appointed, Chapter 31 provides detailed guidance on the conduct of proceedings, including requirements for evidentiary submissions, hearing format, e-filing, third-party participation, and the use of experts. This detailed guidance is unique to Chapter 31 and is not mirrored in Chapter 14’s ISDS mechanism. In large part, this detail was added to USMCA through the December 2019 Amendment, which immediately preceded the Parties’ rapid and successive domestic ratification processes. Finally, Chapter 31 indicates processes for release and implementation of panel decisions, as well as the consequences of non-implementation of such decisions.

The nuances and details of Chapter 31 are welcome additions to USMCA and reflect a thoughtful evolution of NAFTA’s Chapter 20. However, many commentators question the efficiency of both the negotiating process and even of the dispute settlement mechanism itself. An obvious alternative path would have been to draw upon the dispute settlement provisions of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Both Canada and Mexico are already parties to the CPTPP. CPTPP negotiations also took into account American input, as the U.S. was involved with Trans-Pacific Partnership (TPP) negotiations until President Donald Trump signed an executive order to withdraw prior to domestic ratification. The TPP provisions were negotiated to account for flaws in NAFTA Chapter 20 that were well-known to American, Mexican, and Canadian TPP negotiators. As explained by Jennifer Hillman the approach of the TPP dispute settlement system was “designed to be broader, deeper, faster, and more transparent than either the WTO’s Dispute Settlement Understanding or [NAFTA Chapter 20.]”1)Jennifer Hillman, “Dispute Settlement Mechanism” in Assessing the Trans-Pacific Partnership, Jeffrey J. Schott and Cathleen Cimino-Isaacs, eds, Peterson Institute of International Economics (2016), p. 214. jQuery("#footnote_plugin_tooltip_7854_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7854_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Where Does USMCA Fall in the Spectrum of Broader Global ISDS Reform?

TPP is also relevant to USMCA’s position with respect to global ISDS reform discussions. Many will recall that the TPP’s ISDS mechanism and the “risks” it posed to State sovereignty were among the U.S.’ reasons for withdrawing from the TPP. This position aligned with the “America First” rhetoric, which inspired the American negotiating position in USMCA. Yet, USMCA remains evolutionary in that it does not dispense with ISDS altogether. As Dr. Sheargold explained in yesterday’s post, the approach adopted in USMCA as between the U.S. and Canada is comparable to that adopted by Australia and the U.S. in their free trade agreement, where the exclusion of ISDS was justified – at least in part – by reference to the developed domestic legal systems of both States.

Compared to other more radical reform efforts, such as the European Commission’s proposal to implement a multilateral investment court, USMCA is not particularly revolutionary in its approach to structuring ISDS. It nonetheless incorporates many of the substantive and procedural reforms that differentiate new generation investment treaties from earlier models. As our contributors this week have noted, this includes various innovations concerning the scope and availability of ISDS itself. The treaty also imposes certain procedural safeguards for USMCA host States, including a requirement for would-be ISDS claimants to pursue local remedies for 30 months prior to filing their USMCA claim. Such innovations are reminiscent of reforms adopted in other contexts, including for example the inclusion in the 2015 Indian Model investment treaty of a five-year recourse to domestic remedies requirement.

Where ISDS is provided, USMCA builds on the legacy of NAFTA and the broader context of modern ISDS reform efforts to endorse a number of procedural safeguards and innovations. USMCA contains, for instance, detailed guidance as to the transparency frameworks applicable to ISDS proceedings. USMCA does not adopt the UNCITRAL Transparency Rules by reference, but nonetheless contains many of the same disclosure requirements set out in those Rules and in some cases, like other modern treaties, USMCA signals a willingness to go beyond the provisions on transparency contained in the UNCITRAL Rules. It imposes, for instance, obligations upon respondent States to make available to the public and the non-disputing USMCA State various documents associated with the proceeding (subject to certain safeguards). This includes the notice of intent, notice of arbitration, pleadings, memorials and briefs, minutes and transcripts of tribunal hearings and orders, awards, and decisions of the tribunal (Article 14.D.8). The USMCA further provides for the holding of open hearings and filing of amicus curiae submissions.

While USMCA provides for significant elements of procedural transparency for ISDS, it misses others. This includes certain more specific elements of transparency, including for example transparency associated with third party funding arrangements (a topic currently under discussion in UNCITRAL’s Working Group III). USMCA nevertheless addresses other aspects of transparency even if indirectly. Article 14.D.6, for instance, governs the selection of arbitrators, including to stipulate that arbitrators shall comply with the IBA Guidelines on Conflicts of Interest in International Arbitration “or any supplemental guidelines or rules adopted by the Annex Parties”. It is therefore possible that additional guidance could be provided by the USMCA Parties for assessment of arbitrator conflicts, including in the event Mexico and the U.S. endorse the recently-published Draft Code of Conduct for Adjudicators in ISDS.

USMCA also confronts the increasingly divisive issue of “double hatting”, where arbitrators also serve in other roles linked to ISDS proceedings (most commonly, as counsel). Would-be Chapter 14 arbitrators, once appointed, are prohibited from acting as counsel or in any other capacity in another pending USMCA Chapter 14 arbitration while the arbitrations in which they sit as arbitrators remain pending. Some critics suggest that banning “double hatting” may, as a side effect, decrease diversity among the pool of prospective arbitrators in ISDS proceedings, claiming that a ban effectively limits opportunities available to younger emerging arbitrators who are “transitional” in their practice and working to move to full-time arbitrator practices, while still acting as counsel.

There are no easy answers to the arbitrator diversity problem, but commentators agree that the system itself is only one piece of the puzzle. Counsel and their clients maintain decision-making power and should select (or at least consider) diverse candidates. Important projects are being developed in relation to diversity in ISDS more broadly, and stakeholders should continue to monitor appointment practices under USMCA to ensure appropriate diversity is achieved. Even broader ISDS reform efforts focused on diversity only can go so far. For example, the roster approached recently adopted by Comprehensive Economic and Trade Agreement between Canada, the European Union and its member states (CETA) failed to reflect diversity goals, that failure was acknowledged, and improvement efforts are apparently underway. In this respect, the selection criteria of USMCA Article 14.D.6 are helpful. Arbitrators are not required to have any specific experience or training (e.g., in public international law and/or in international investment and trade law), thereby creating avenues for entry by diverse and/or emerging arbitrators who may provide complementary expertise, for example, in international commercial arbitration or in specific relevant industries.

USMCA is noticeably silent on a range of other matters, particularly when compared to the ISDS mechanisms developed in other new generation treaties. This includes on the issue of potential investor obligations, a topic gaining increased traction in other negotiation settings. While a corporate social responsibility clause is included in USMCA Article 14.17, the clause focusses upon the responsibilities of each USMCA party and is likely too permissive to result in a legal obligation on investors to make or operate their investment consistently with such standards. Further, while the ISDS Annex between the U.S. and Mexico refers in passing to possible “counterclaims” by respondent States (Article 14.D.7), it is largely structured to focus upon claims filed by investors against their host State and not vice-versa.

 

What’s Next?

Placing USMCA amongst these broader discussions on evolution and innovation highlights the many challenges associated with modern treaty negotiation and ISDS reform. Yet, USMCA’s entry into force remains a historic and encouraging development regionally and globally. As mentioned in the introductory post to this series, NAFTA, despite the unprecedented trade flows it heralded, needed modernization because global commerce has changed dramatically over the past quarter century. USMCA thus brings North American regional trade into the 21st century in a manner that, at the very least, takes into consideration emerging global trends in treaty law and ISDS.

While today in 2020 our focus is on NAFTA’s termination and legacy claims provisions, soon it will be time to reconsider USMCA’s efficacy and future. A sunset provision at Article 34.7 provides that the agreement is subject to review and renewal by mutual agreement after six years (in 2026). At that time, its Parties would need to agree to a further 16-year extension, and absent mutual assent, USMCA would expire in 2036. The six-year review deadline is promising as it may provide an opportunity to revisit the challenges and opportunities already hotly debated among commentators, some of which are also discussed in this week’s series. We will continue to watch these North American developments closely in the months and years to come. For now, we thank you and our contributors again for helping us mark this momentous occasion on the Blog!

 

For the full scope of our coverage of USMCA to date, click here.

References   [ + ]

1. ↑ Jennifer Hillman, “Dispute Settlement Mechanism” in Assessing the Trans-Pacific Partnership, Jeffrey J. Schott and Cathleen Cimino-Isaacs, eds, Peterson Institute of International Economics (2016), p. 214. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The USMCA/CUSMA/T-MEC’s Entry into Force: USMCA as Part of a Global Trend Away From ISDS – An Australian Perspective

Sat, 2020-06-27 03:00

The investor-state dispute settlement (ISDS) arrangements provided in Chapter 14 of the United States-Mexico-Canada Agreement (USMCA) are a radical shift from those that have been in force for the past 25 years under Chapter 11 of the North American Free Trade Agreement (NAFTA). As explored in Wednesday’s post, Canada has effectively opted-out of ISDS under USMCA with the exception of legacy claims and any pending NAFTA claims (see USMCA Annex 14-C). Although the United States (US) and Mexico have consented to ongoing ISDS under USMCA, the scope of obligations which can be the subject of a claim under Annex 14-D is highly restricted (although a wider range of claims can be brought with respect to government contracts covered by Annex 14-E).

In an early examination of Chapter 14 of USMCA on this blog, Robert Landicho and Andrea Cohen asked whether, in light of contemporaneous developments in Europe, USMCA is ‘part of a global trend away from investor-state arbitration?’ In a subsequent post Nikos Lavranos continued this inquiry, situating USMCA within a trend in recent North American and European treaty practice which he aptly termed ‘ISDS à la carte.’ This contribution offers an Australian perspective on USMCA’s unique ISDS arrangements and whether there is a global trend away from ISDS. Australia’s evolving position on ISDS shows increased caution about consenting to investor-state arbitration, but also that the exclusion or limitation of access to arbitration under one treaty does not necessarily signal a permanent rejection of ISDS.

 

A Brief History of Australia’s Evolving Approach to ISDS

Although Australia was a relative latecomer to the world of bilateral investment treaties (BITs), its approach to ISDS has undergone several significant shifts. From 1988 through to the early 2000s, Australia concluded BITs with twenty-one states in the Asia Pacific, Europe and Latin America. These BITs were based on a model agreement, and all included consent to ISDS.1)However, in the Australia – China BIT this consent was ostensibly limited by article XII:2(b) to disputes concerning the amount of compensation payable for expropriation. jQuery("#footnote_plugin_tooltip_4618_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4618_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the mid-2000s Australia’s approach to ISDS became more varied, as it began to enter into free trade agreements (FTAs) with chapters on investment. In 2004, Australia rejected the inclusion of ISDS in the Australia – US Free Trade Agreement (AUSFTA), making Australia something of a pioneer of the à la carte approach to ISDS.

In April 2011 the government of then-Australian Prime Minister Julia Gillard issued a trade policy statement which pledged that Australia would not pursue the inclusion of ISDS in any future trade or investment agreement. At that time ISDS was a relatively prominent domestic political issue, in large part because of the arbitration brought by Philip Morris regarding Australia’s tobacco plain packaging rules. However, the absolute rejection of ISDS by Australia was short-lived. A change of government in September 2013 saw a return to the policy of considering whether to consent to ISDS in each treaty on a case-by-case basis. All but one of the FTAs which Australia has concluded since 2013 have incorporated ISDS mechanisms,2) ISDS was absent from the 2014 Japan – Australia Economic Partnership Agreement (JAEPA), which states in article 14.19.1 that the parties may consider adopting an ISDS mechanism as part of a review of the agreement. However, ISDS is available as between Australia and Japan under Chapter 9 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). jQuery("#footnote_plugin_tooltip_4618_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4618_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and concerns about the impact of these treaties on regulatory sovereignty has been addressed through other international investment agreement (IIA) reforms, such as clarifying that ‘distinguish[ing] between investors or investments on the basis of legitimate public welfare objectives’ will not violate the national treatment obligation, and by providing general exceptions for measures that may be found to be in breach of an obligation (such as Articles 18 and 19 of the Hong Kong – Australia Investment Agreement (2019)).

 

Non-Participation in ISDS: Canada’s Approach under USMCA Compared to Australia’s Treaty Practice

The USMCA marks a notable shift in Canadian policy, since all previous Canadian IIAs have included ISDS mechanisms. As USMCA is a tripartite agreement, Canada’s non-participation in the ongoing ISDS mechanisms established by Annexes 14-D and 14-E has been achieved by defining a ‘qualifying investment dispute’ as ‘a dispute between an investor of an Annex Party and the other Annex Party’, where ‘Annex Party’ means only the US or Mexico. Mexican investors will still have a potential avenue for claims against Canada under the Comprehensive Agreement on Trans-Pacific Partnership (CPTPP) (and vice-versa for Canadian investors). But, by opting-out of ISDS under the USMCA, Canada will no longer face claims from US investors once the period for legacy claims expires three years after the termination of NAFTA under paragraph 3 of Annex 14-C.

Australia has excluded ISDS arrangements from treaties with some of its close allies and trading partners, most notably the US and New Zealand.3)The 2014 Japan – Australia Economic Partnership Agreement (JAEPA) and the 2012 Malaysia – Australia FTA (MAFTA) also do not include ISDS. However, ISDS is provided for these treaty parties through the CPTPP and, for Malaysia, under the AANZFTA. jQuery("#footnote_plugin_tooltip_4618_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4618_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Prior to the conclusion of USMCA, AUSFTA was the only US IIA which did not allow for recourse to ISDS. AUSFTA contains no consent to ISDS from either party, although Article 11.16 of AUSFTA states that the treaty parties will consult on the possible creation of ISDS procedures if either party ‘considers that there has been a change in circumstances affecting the settlement of disputes.’ To the knowledge of the author, no consultations have been initiated under this provision. Australia has also excluded ISDS from its treaties with New Zealand. The Investment Protocol to Australia and New Zealand’s Comprehensive Economic Relations and Trade Agreement (ANZCERTA) does not make any mention of investor-state arbitration. Australia and New Zealand have used side letters to exclude the operation of ISDS as between themselves under the Australia – New Zealand – Association of South East Asian Nations (ASEAN) FTA (AANZFTA) (2009) and the CPTPP.

The Australian Department of Foreign Affairs and Trade explained the exclusion of ISDS from AUSFTA was a ‘reflecti[on of] the fact that both countries have robust, developed legal systems for resolving disputes between foreign investors and government.’ Although not officially stated, an additional motivation was likely that Australia was not willing to expose itself to the risk of litigation from US investors, having witnessed Canada’s experience as a respondent in early NAFTA Chapter 11 arbitrations.4)See William S Dodge, ‘Investor-State Dispute Settlement between Developed Countries: Reflections on the Australia-United States Free Trade Agreement’ (2006) 39 Vanderbilt Journal of Transnational Law 1. jQuery("#footnote_plugin_tooltip_4618_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4618_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Despite its unwillingness to include ISDS in AUSFTA, in 2016 Australia signed on to the Trans-Pacific Partnership Agreement (TPP), which would have allowed US investors to bring investor-state claims against Australia under Section B of Chapter 9. In the domestic review of the TPP, specific concerns were raised about the prospect of allowing US investors to bring claims against Australia. At the time, ISDS was an issue which received significant public attention due to the high-profile Philip Morris arbitration. However, the decision to sign on to ISDS in the TPP was justified by the government on the basis that the ‘qualifications and definitional limitations in the TPP ISDS process intended to protect Governments that regulate in the public interest [were] sufficient to prevent an ISDS finding against Australia.’ Despite the US later withdrawing from the TPP, the willingness of Australia to sign a treaty that opened up the possibility of claims from US investors was a significant change from the AUSFTA, and demonstrates the potential for opposition to ISDS to fluctuate over time.

 

The Restricted Scope of ISDS Between the US and Mexico Under USMCA

Although USMCA provides Mexican investors with ongoing access to ISDS against the US (and vice-versa), the scope of claims that can be made is relatively restricted. Under Article 14.D.3.1 claims can only be made with respect to expropriations (but excluding indirect expropriations), or for breach of the obligations to accord national treatment or most-favoured nation treatment (but excluding claims relating to the establishment or acquisition of investments). Only Annex 14-E allows claims for breach of any obligation, but that Annex is restricted to claims relating to government contracts in covered sectors (such as oil and gas or electricity generation). Explaining the US’s reticence to include wide consent to investor-state arbitration in the USMCA before a Congressional committee, US Trade Representative Robert E. Lighthizer asked ‘why should a foreign national … have more rights than Americans have in the American court system?’.

Similar concerns to those expressed by Ambassador Lighthizer were part of the motivation for the Gillard government’s policy of rejecting the inclusion of ISDS provisions in future IIAs. But as noted above, Australia’s absolute rejection of ISDS was short-lived. Rather than excluding ISDS, recent Australian IIAs contain a range of other safeguards for regulatory autonomy. In particular, some contemporary Australian IIAs have shielded certain categories of measure from ISDS claims, such as the well-known denial of benefits provisions for tobacco control measures under Article 29.5 of the CPTPP and the exclusion of public health measures from the scope of ISDS under Article 14.21.1(b) of the Indonesia – Australia Comprehensive Economic Partnership Agreement (IA-CEPA).

In contrast to Annex 14-D of USMCA, Australia has generally not sought to protect its regulatory autonomy by limiting the range of obligations which can be the subject of ISDS claims. The notable exception is the China – Australia FTA (2015) (ChAFTA), which states in Article 9.12.2 that ISDS claims can only be brought for breach of the national treatment obligation. However, the investment chapter of ChAFTA is unusual because it only contains a narrow range of obligations – omitting typical IIA provisions such as fair and equitable treatment and expropriation – and it co-exists with the China – Australia BIT (1988).5)Under Article 9.9 of ChAFTA, the parties committed to a future work program to negotiate a more comprehensive investment chapter. To date, no newer investment chapter has been concluded. jQuery("#footnote_plugin_tooltip_4618_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4618_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Under Article 14.6 of the IA-CEPA an investor-state claim cannot be made for breach of the prohibition on performance requirements. Aside from these examples, Australia has generally not sought to minimise the risks of ISDS by limiting the range of substantive obligations which can be the basis for an investor claim. It will be interesting to see whether, in future treaties, Australia is inspired by the approach taken in Annex 14-D of USMCA.

 

Conclusions – USMCA, Australia and the Global Trend Away from ISDS

The ISDS provisions of USMCA are a major departure from NAFTA, and represent part of a wider trend in which states are approaching investor-state arbitration with greater caution. For countries that share at least some concern about the extent to which ISDS impacts on regulatory autonomy, such as Australia, Annex 14-D of USMCA may provide a novel model for future IIAs. However, Australia’s varied approaches to ISDS over the past fifteen years demonstrate that trends away from ISDS are not necessarily linear. Australia rejected ISDS in the AUSFTA back in 2004, but it signed on to the TPP in 2016 – a time at which the global tide had already started to turn against ISDS. It is possible that the USMCA parties may have similar fluctuations in their policy on ISDS in future.

 

For the full scope of our coverage of USMCA to date, click here.

References   [ + ]

1. ↑ However, in the Australia – China BIT this consent was ostensibly limited by article XII:2(b) to disputes concerning the amount of compensation payable for expropriation. 2. ↑ ISDS was absent from the 2014 Japan – Australia Economic Partnership Agreement (JAEPA), which states in article 14.19.1 that the parties may consider adopting an ISDS mechanism as part of a review of the agreement. However, ISDS is available as between Australia and Japan under Chapter 9 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). 3. ↑ The 2014 Japan – Australia Economic Partnership Agreement (JAEPA) and the 2012 Malaysia – Australia FTA (MAFTA) also do not include ISDS. However, ISDS is provided for these treaty parties through the CPTPP and, for Malaysia, under the AANZFTA. 4. ↑ See William S Dodge, ‘Investor-State Dispute Settlement between Developed Countries: Reflections on the Australia-United States Free Trade Agreement’ (2006) 39 Vanderbilt Journal of Transnational Law 1. 5. ↑ Under Article 9.9 of ChAFTA, the parties committed to a future work program to negotiate a more comprehensive investment chapter. To date, no newer investment chapter has been concluded. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The USMCA/CUSMA/T-MEC’s Entry into Force: Investment Arbitration in the Financial Services Chapter: What Changed and What Remains?

Fri, 2020-06-26 03:00

As North America embarks into a post-NAFTA era with the USMCA, it is crucial to analyze the new agreement’s disciplines. The USMCA Investment Chapter, for instance, has been the subject of many articles that have reviewed relevant differences with respect to NAFTA, particularly on investment arbitration. This post will explore the arbitration rules applicable to investment disputes under the USMCA Financial Services Chapter.

 

From NAFTA to the USMCA: Structure and Framework for Financial Services Disputes

The disciplines on investment in NAFTA (including those applicable to arbitration) are mainly encompassed in Chapter 11 (Investment). However, in NAFTA Chapter 14 (Financial Services), Canada, Mexico, and the United States designed a separate chapter that applied to measures of a Party relating to financial institutions of another Party, cross-border trade in financial services, and an investor of another Party, and investments of that investor, in a financial institution in the Party’s territory.

NAFTA Chapter 14 provided, among others, the standards of protection to investors and investments in financial institutions, as well as the rules on investment arbitration. Some of those provisions were incorporated by reference to the NAFTA Investment Chapter, according to Article 1401(2):

Articles 1109 [(Transfers), 1110 (expropriation),] 1111 [(Special Formalities and information requirements)], 1113 [(Denial of Benefits)], 1114 [(Environmental Measures)] … are hereby incorporated into and made a part of this Chapter. Articles 1115 through 1138 are hereby incorporated into and made a part of this Chapter solely for breaches by a Party of Articles 1109 through 1111, 1113 and 1114, as incorporated into this Chapter.

Thus, measures adopted or maintained by a Party that applied to investments in the financial sector were regulated outside Chapter 11 (Investment). NAFTA Article 1101.3 drew that line providing that “Chapter [11] does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Fourteen (Financial Services).” Therefore, a claim against a measure within the scope of Chapter 14 could only be arbitrated according to that chapter.

The USMCA preserves the same structure designed in NAFTA by providing a separate framework for investments in the financial sector, and related investment claims, in Chapter 17 (Financial Services). The arbitration rules for investment claims under Chapter 17 are contained in Annex 17-C (Mexico-United States Investment Disputes in Financial Services), which will be reviewed in the next section.

 

The USMCA: Substantive Modifications for Investment Arbitration in the Financial Services Sector

Similar to NAFTA, the USMCA builds an exclusive arbitration regime applicable to the financial services sector by incorporating the investment arbitration framework set out in Annex 14-D and introducing some modifications. Annex 17-C provides that the investment arbitration provisions set out in the Investment Chapter (Annex 14-D) will apply to investment disputes under the Financial Services Chapter, as modified by that annex. This section reviews the main modifications.

ISDS for investments in the financial sector does not include CanadaUnlike NAFTA, in the USMCA, Canada does not consent to arbitrate investment claims under the scope of the Financial Services Chapter, which only involves Mexico and the United States. Therefore, just like in the general ISDS regime contained in Annex 14-D of the USMCA Investment Chapter (discussed in Wednesday’s post), US and Mexican investors will no longer be able to have recourse to investment arbitration in the financial sector against Canada (and vice-versa concerning Canadian investors). However, alternatives remain. Mexican and Canadian investors continue to have the ability to arbitrate disputes against Canada and Mexico, respectively, under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Chapter 11 (Financial Services), Article 11.22. For any disputes involving US and Canadian claims against Canada or the United States, respectively, the only option to settle a dispute under the Financial Services chapter would be the State to State dispute settlement mechanism, as provided in USMCA’s Article 17.21 (Dispute Settlement).

Limited consent to arbitrationThe USMCA Financial Services Chapter incorporates the following obligations from the Investment Chapter: Article 14.6 (Minimum Standard of Treatment), Article 14.7 (Treatment in Case of Armed Conflict or Civil Strife), Article 14.8 (Expropriation and Compensation), Article 14.9 (Transfers), Article 14.13 (Special Formalities and Information Requirements), Article 14.14 (Denial of Benefits), Article 14.16 (Investment and Environmental, Health, Safety, and other Regulatory Objectives).

However, similar to the investment claims allowed under Annex 14-D of the USMCA Investment Chapter examined in other posts, the United States and Mexico limited their consent to arbitrate disputes under the Financial Services Chapter. An investor can only submit to arbitration claims for alleged breaches to the National Treatment (Article 17.3(1) and (2)), and Most-Favored-Nation Treatment (Article 17.4.1(a) to (c)) obligations set out in the Financial Services Chapter (except for the establishment or acquisition of an investment), and Expropriation (Article 14.8), except for indirect expropriation.

In comparison, under CPTPP, Canada and Mexico limited their consent to arbitrate disputes in the financial sector to the following obligations of the Investment Chapter:

Minimum Standard of Treatment (Article 9.6) (Mexico did not consent to the submission to arbitration for a breach of this provision before the seventh anniversary of the date of entry into force of CPTPP); Treatment in the Case of Armed Conflict or Civil Strife (Article 9.7); Expropriation and Compensation (Article 9.8); Transfers (Article 9.9); Special Formalities and Information Requirements (Article 9.14), and Denial of Benefits (Article 9.15).

Under NAFTA, the three States granted the same consent to arbitration to investors of all three States, but not anymore under the USMCA because Canada is not a Party to Annex 17-C. Furthermore, when CPTPP is brought to the analysis, the contrast between the different access to investment arbitration for investors of the three States is more evident.

Litigation in domestic courts. Under the general regime for investment arbitration set out in Annex 14-D, the USMCA imposes the obligation on US and Mexican investors (or the enterprise, when a claim is brought on behalf of it) to pursue domestic litigation before the courts of the host State, before submitting a claim to arbitration (Article 14.D.5.a.). It also requires that the investor or the enterprise obtain a final decision from the court of last resort in the host state, or that 30 months have elapsed from the initiation of the domestic litigation. Under Annex 17-C, the same restrictions apply, except that the 30-month requirement to pursue such domestic remedies is reduced to 18 months (Annex 17-C.4). This requirement did not exist in NAFTA.

Exceptions. In NAFTA, when an investor submitted a claim to arbitration under the Financial Services Chapter, the respondent could invoke as a defense an exception under Article 1410 (prudential exception or monetary and exchange rate policies exception). Upon request of the respondent, the tribunal was required to refer the matter to the NAFTA Financial Services Committee (comprised by the Parties’ financial authorities) for a decision as to whether the invoked exception was a valid defense. This effectively interrupted the arbitration while the matter was being resolved. If the Committee failed to decide the matter within 60 days, an arbitral panel established under the State-to-State dispute resolution mechanism could decide the matter and issue a report. Both the decision and the report were binding for the tribunal. In case no request to establish a panel was made, the tribunal had to decide the matter.

This mechanism in NAFTA was not used. In Fireman’s Fund, the only arbitration under NAFTA’s Financial Services Chapter, Mexico invoked an exception under Article 1410 for measures adopted for prudential reasons, as a defense against an expropriation claim. Mexico, however, did not request the matter to be referred to the Committee for a decision. The tribunal did not assess the validity of the defense in the end, because it found that the challenged measures did not constitute expropriation under the NAFTA.

The USMCA retains the possibility for a respondent to invoke Article 17.11 (Exceptions) as a defense, allowing a careful consideration of the matter while the arbitral procedure is suspended. However, USMCA eliminates the phase of the State-to-State dispute resolution mechanism but includes a more detailed procedure in Annex 17-C.5. Some of the new features are reviewed below.

Once the respondent invokes an exception under Article 17.11, it must submit to the financial authorities of the Party of the claimant, a request for a joint determination by the authorities of both Parties, as to whether and to what extend the exception invoked is a valid defense. The request must include the text proposed for a joint determination. As mentioned above, under NAFTA, the tribunal had to refer the matter to the Committee only upon request of the respondent. Also, NAFTA did not require to propose the text for a joint determination.

Under USMCA, the authorities must seek to agree on a joint determination within 120 days, and in extraordinary circumstances, they can extend the date 60 days. Under NAFTA, the Committee had 60 days to decide the matter.

The following aspects described were also not present in NAFTA and are new features added to the arbitration proceeding under the USMCA. Within 120 or 180 days if an extension is agreed, the authorities of the Party of the claimant must notify the authorities of the respondent whether they agree with the proposed joint determination, offer an alternative resolution, or do not accept a joint determination.

In case no notification is made, it shall be presumed that the authorities of the Party of the claimant, take a position consistent with that of the authorities of the respondent. In that case, a joint determination shall be deemed to be agreed as set out in the proposed joint determination. A joint determination shall be binding on the tribunal.

The arbitration may continue (i) 10 days after the disputing parties and, if constituted, the tribunal, receive the join determination, or (ii) 10 days after the expiration of the 120 days or the extended time agreed. However, if the authorities have not resolved within the 120 days, or the extended time agreed, the tribunal must decide the issue left unresolved by the authorities on the request of the respondent. In that case, the tribunal must decide the issue before the merits of the claim.

Specialized Arbitrators. The USMCA Financial Services Chapter requires that presiding arbitrators of the tribunal “ha[ve] expertise or experience in financial services law or practice such as the regulation of financial institutions.” The same rule applies to the other arbitrators “to the extent practicable” (Annex 17-C.3.a.). This requirement did not exist in NAFTA for investment tribunals, although it existed as a requirement for panelists under the State-to-State dispute settlement mechanism. This approach in NAFTA shows the preference of the three States to decide financial matters by experts in the field of financial services law, either by the Financial Services Committee or State-to-State panels. Although under the USMCA Financial Services Chapter, State-to-State panels will no longer intervene in deciding exceptions invoked by the respondent in investment arbitration, Mexico and the United States favored the NAFTA approach of appointing arbitrators specialized in financial services law in Annex 17-C.

 

Conclusion

In the USMCA, the three States decided to continue the approach agreed in NAFTA and devoted a specific regime to investments in the financial sector. However, only Mexico and the United States consented to arbitrate investment disputes, with limited scope as described above. Despite those limitations, Mexico and the United States designed a more detailed set of rules for investment arbitration in the financial sector, particularly when the respondent invokes an exception under Article 17.11.

In Fireman’s Fund, the investor alleged (unsuccessfully) that the measures challenged were not within the Financial Services Chapter’s scope as an attempt to have access to a broader set of claims under the Investment Chapter (e.g., Minimum Standard of Treatment). Under the USMCA, that situation is unlikely to occur because in both chapters 14 (Annex 14-D) and 17 (Annex 17-C) Mexico and the United States have granted a similar and limited consent to arbitrate investment disputes.

This post was prepared by the author in his personal capacity. The opinions expressed in this post are only the author’s own.

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The USMCA/CUSMA/T-MEC’s Entry into Force: USMCA and U.S. Investors – A Reversal of Fortune?

Thu, 2020-06-25 03:00

The Investment Chapter of the United States-Mexico-Canada Agreement “USMCA,” Chapter 14 has had a controversial trajectory.  Chapter 14 reflects a remarkable evolution in United States (“U.S.”) policy on the protection of its investors and their investments in Canada and Mexico.  It is remarkable because – from 2023 – it will limit the scope of protected investors, and will also prioritize some investors over others. In short, it is a reversal of U.S. investment protection policy as outlined in the NAFTA, and even in post-NAFTA agreements.  Nonetheless, given the rhetoric from the Trump Administration over the last three years to the effect of eliminating investment protection, its mere existence is remarkable.  Ultimately, it reminds, or informs, beneficiaries that the grant of investment protection is a political decision made in the context of larger political and economic considerations.  In this post, I focus on what the new landscape will look like for U.S. investors in Canada and Mexico, and offer some perspective on the balance struck in Chapter 14.

 

The USMCA’s Substantive Investment Protections Track Those in Post-NAFTA Treaties

Unlike investment chapters in recent U.S. free trade agreements (“FTAs”) and the U.S. Model bilateral investment treaty, the USMCA sets up a tiered system of investment protection.  Chapter 14 begins with a section outlining the substantive provisions (normally “section A” of investment chapters).  As is normal, the substantive obligations are set out after the preliminary provisions (Definitions, Scope and Relation to Other Chapters).  The National Treatment (“NT”), Most Favored Nation (“MFN”), and Minimum Standard of Treatment (“MST”) provisions (14.4-14.6) all reflect iterations found in recent U.S. agreements.  For example, the NT and MFN obligations explain that the “in like circumstances” limitation on the obligation to provide such treatment requires a “totality of the circumstances” analysis, including whether any different treatment of investors is due to legitimate public welfare objectives.  Similarly, the MST provision is the post-NAFTA iteration, anchored in customary international law (Annex 14-A), and includes the notice to tribunals that the obligation generally does not cover breaches of an investor’s expectations (See 14.6.4).

Further, the Expropriation and Compensation provision is linked to the modern explanatory annex that requires tribunals considering indirect expropriation claims to understand that non-discriminatory regulatory actions designed to further legitimate public welfare objectives are not, except in rare circumstances, violations (See Annex 14-B).  In addition to the other standard provisions, Article 14.17 “Corporate Social Responsibility” also reflects the latest U.S. thinking. This provision is aspirational and directs the Parties to encourage enterprises in their territory to “voluntarily incorporate” various international principles, standards, and guidelines.

 

USMCA’s Innovations with Respect to Investor-State Dispute Settlement

The above substantive standards of protection are the largely non-controversial modernizing elements of Chapter 14.  From there, things get interesting.  Chapter 14 is divided into Annexes that explain which investors can bring claims and when.  In essence, the USMCA provides different access to dispute settlement to certain investors.  Under the tiered protection structure of the Chapter, the drafters first included a “tail” (which did not exist in NAFTA 1994) – Annex 14-C – denominated “Legacy Investment Claims and Pending Claims.”  So, investors – Canadian, Mexican, U.S. – are permitted to bring claims under the provisions of existing NAFTA 1994 Chapter 11 Section B for three years after NAFTA is terminated for investments made during the life of NAFTA (See Annex 14-C, 14.1-14.4).

In the next tier is the first of two annexes that apply only to Mexican and U.S. investors for claims arising out of investments made after the USMCA goes into effect.  The annex limits claims to NT, MFN (post-establishment), and direct expropriation violations.  There are a few things to highlight about Annex 14-D.  First, the lightning rods of NAFTA investment arbitration – the MST standard and indirect expropriation – do not feature (See Annex 14-D, article 14.D.3).  In addition, a hallmark of U.S. investment protection policy – pre-establishment protection – is no more (See Article 14.2.3 and Annex 14.D.3.1(a)).  Annex 14-D also incorporates the now standard U.S. position that MFN does not apply to dispute resolution provisions (See footnote 22).

Addressing another controversial feature of NAFTA investment arbitration, Annex 14-D requires that local remedies be exhausted for a period of at least 30 months, subject to an open-ended futility exception (See Annex 14.D.5.1(a),(b) and footnote 25).  Notwithstanding, investors are also required to submit waivers of the right to initiate or continue litigation along with their notice of arbitration (Annex 14.D.5.1(e)).  Furthermore, Appendix 3 prohibits U.S. investors from submitting claims based on the USMCA if they have already been submitted to Mexican courts.  Finally, Appendix 2 excludes investment arbitration related to public debt disputes (a feature of recent U.S. FTAs).  Annex 14-D also incorporates now standard U.S. provisions regarding the conduct of arbitral proceedings, including amicus curiae and non-disputing party submissions, expedited preliminary question proceedings, costs for frivolous claims, transparency measures, and the role of the Free Trade Commission in interpreting the agreement’s commitments (See 14.D.7 and 14.D.8, 14.D.9, 14.D.10).  The  USMCA also seeks to address concerns regarding tribunals’ damages awards.  In Article 14.D.13.1.2 there is a directive that “satisfactory evidence,” that is not speculative, be established in order to recover loss or damages.  Moreover, tribunals cannot order States “to take or not to take actions, including the amendment, repeal, adoption, or implementation of a law or regulation.” See also footnote 27. Finally, at the top tier of Chapter 14’s protections is Annex 14-E “Mexico-United States Investment Disputes Related to Covered Government Contracts” in which investors with disputes related to government contracts or activities in the oil and gas, power generation, telecommunications, transportation and road, railway, bridge or canal concessions are granted additional rights (See Annex 14-E, paragraphs 2 and 6).  These investors receive the full panoply of the modern substantive protections found in the Chapter.  Moreover, these types of claims are not subject to the exhaustion of local remedies requirements and restrictions found in Annex 14-D (See Annex 14-E, footnote 32).  In fact, claims must be brought within the more traditional three years from discovery of a breach (See Annex 14-E, paragraph 4).

 

The Politics behind the Agreement

Chapter 14 of the USMCA is a complicated investment protection vehicle and we can only speculate as to why it was structured in this manner.  The contemporaneous political context may offer the most plausible answer.  The Trump Administration came into office promising to get rid of NAFTA and expressing particular hostility to investment protection, which the U.S. Trade Representative views as an insurance policy for U.S. investors moving manufacturing operations south to Mexico.  For some time, the official U.S. position was that there would be no investment arbitration in a new agreement.  The hostility of Andrés Manuel López Obrador, who took office as president of Mexico at the end of 2018, to the privatization of the energy sector by his predecessor may have led to a shift in U.S. policy.  If the change in the Mexican government led the Trump Administration to reconsider the scope of investment protection in the USMCA, the shift was prescient. López Obrador’s hostility to his predecessor’s reforms was recently manifested when recent regulations were introduced that could adversely affect U.S. investments in the power generation sector.

The USMCA Investment Chapter also reflects certain policy and practical considerations.  First, with respect to the elimination (in three years) of the right of U.S. investors to sue Canada, it is worth remembering that pre-NAFTA there was the Canada-United States FTA (CFTA).  CFTA had limited substantive protections, there was no MST, and it did not include investment arbitration.  Claims under NAFTA by Canadian investors related to sensitive issues such as environmental regulation, “Buy America” provisions, trade policy, and judicial decisions, have been the lightning rod for opposition to investment arbitration in the United States.  It is also worth remembering that a primary justification for investor-state arbitration is the perceived inadequacy or prejudice of foreign courts.  Neither U.S. nor Canadian investors can seriously argue that the other’s courts are not capable of fairly resolving their disputes with the U.S. and Canadian governments, particularly given similarities in the countries’ common law-based justice systems.  Similarly, the Australia-United States FTA does not include an automatic right to investor-state arbitration, a recent precedence with a similar type of trading partner.  In FTAs, the final provisions are the result of a balancing by states parties between market access (trade and investment), other bargained-for benefits, and exposure to trade regulation.  Canada got an arguably stronger trade remedies dispute resolution provision than exists in NAFTA, and perhaps, given remedies available for its investors in U.S. courts, that was worth more to it than investment arbitration.

From a policy perspective, the Mexico-U.S. investment provisions protect U.S. investors in a lop-sided manner – most noticeably favoring investors in the oil and gas and power generation sectors where there has been significant investment in the last five years.  Obviously, this disparity concerns investors and practitioners, but it has to be viewed within the context of the original position of the Trump Administration – no investment arbitration at all. It also provides some insight into the Administration’s thinking on investment protection that could be useful for those who want to persuade the Administration to reconsider CP-TPP.

 

Future Complexities

There are practical or interpretative concerns with the two annexes governing investor access to arbitration.  First, in maintaining NAFTA 1994 for the next three years (and it can be presumed there will be a flood of claims prior to termination), is the Administration creating an unintended bifurcation in investor rights?  For example, it is not clear that NAFTA 1994 includes the incorporation of the 2001 Interpretation which has largely been followed by NAFTA tribunals.  Or is the Administration relying on future tribunals to make that determination? So much of what exists in the main section of Chapter 14 reflects years-long efforts to address deficiencies in NAFTA 1994 or what the Parties have viewed as stray awards.

From a policy and strategic litigation standpoint, this bifurcation may create certain challenges.  Mexico, or the United States, could find itself having to simultaneously defend claims that require different interpretations of provisions that are supposed to be the same in cases brought under both NAFTA 1994 and the USMCA.  Since the likely objective was to protect extant Canada-related claims, as well as some U.S.-Mexico claims, why not “grandfather” such claims but to Chapter 14?  On the other hand, arguably there is fertile ground in the various “tiering” of rights in the USMCA for practitioners to protect effectively their clients’ interests.  In addition, as with the NAFTA, it remains to be seen what tribunals will do with any textual uncertainty.  So, while there may be valid concerns regarding policy consistency, it remains to be seen whether the change in policy as reflected in the USMCA text is really a reversal of fortune for extant investors.

 

Mélida Hodgson is the Head of International Arbitration, New York, at Jenner & Block LLP. The views expressed are solely those of the author.

 

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The USMCA/CUSMA/T-MEC’s Entry into Force: SAVE THE DATE: July 1, 2023 – Canada is Out. Legacy Investors, Get Your Investment Claims In!

Wed, 2020-06-24 03:00

Amid global economic uncertainty, the years-long project of the United States-Mexico-Canada Agreement (“USMCA”) (also known as “the new-NAFTA” or “NAFTA 2.0”) has finally reached fruition. On March 13, 2020, Canada became the final North American party to ratify the agreement and now the treaty will enter into force on July 1, 2020. Kluwer Arbitration Blog has featured analysis of several USMCA developments leading up to ratification. While the deal as a whole is regarded by each of the governments as a much needed upgrade to the economic integration between the countries, there is one standout development in the USMCA for Canada: its non-participation in the investor-State dispute settlement mechanism (“ISDS”).

To be clear, Chapter 14 of the USMCA continues to provide ISDS for Mexican investors in the U.S. and U.S. investors in Mexico (albeit in a distilled manner, discussed in greater detail below). ISDS proceedings involving Canada – that is to say either Canada acting as the host State respondent or Canadians as foreign investor claimants for disputes levied against the U.S. or Mexico – is eliminated. Aggrieved Canadian investors investing in Mexico and the U.S. are, however, not completely without recourse. The Comprehensive and Progressive Agreement for Trans Pacific Partnership (“CPTPP”) provides for ISDS for Canadians and Mexican investing in Mexico and Canada respectively. There is no similar arrangement between Canada and the United States. For these stakeholders going forward, investment claims may only be raised through local courts, through the operation of a separate arbitration agreement between the parties (e.g., an arbitration clause of an investment contract with a State-owned entity), or as part of a state-to-state arbitration. The USMCA preserves “legacy claims”, by which it permits ISDS claims between Mexico, Canada and the United States for existing investments to be raised under NAFTA for a period of three years after its termination, i.e., until July 1, 2023.

 

Canada’s Perspective

On the one hand, Canada’s non-participation may be regarded as an affront to the advancement of ISDS. Under NAFTA, Canada has faced 27 claims raised by U.S. investors and tribunals have ordered Canada to pay damages in eight of those cases. Critics of Canada’s involvement with NAFTA highlight that the total known amount for settlements and damages now tops over $219 million, with legal costs in the range of $95 million. Compared to the pristine NAFTA record of the United States, which presently sits at 17-0 (16 of which were raised by Canadian investors), Canada’s refusal to enter into any form of ISDS with the United States may be apparent from the countries’ respective scorecards.

On the other hand, Canada’s non-participation may make strategic sense. NAFTA Members have long flirted with supplanting the 1994 Agreement. However, after the parties were unable to close the Transnational Pacific Partnership (“TPP”) – which was derailed when President Donald Trump announced his decision to withdraw in 2017 – there was less incentive for Mexico and Canada (as they joined the CPTPP, the TPP’s successor) to renew what President Trump referred to as “the worst trade deal in history”. Nonetheless, U.S. Trade Representative Robert Lighthizer was able to strong-arm Canada and Mexico back to the table. Pressed against tight politically-driven deadlines, Canada’s non-participation in Chapter 14 of USMCA may have been the way forward to ensure an agreement was reached. It also leaves on the table a blue chip for future negotiations between the parties. Canada has a built-in reset button in the USMCA’s sunset clause, which sets USMCA’s termination date 16 years after its entry into force but permits Members to revisit their commitment to the treaty every six years. While it is unlikely these negotiations would center on the investment chapter of the treaty, Canada at least has the opportunity to reassert its stance on ISDS in the near future, potentially to counter-parties more amenable to its position.

The content of Chapter 14 of USMCA may have also been the cause for Canada’s non-involvement. The USMCA departs significantly from the NAFTA by providing different degrees of protection for potential investor claimants. Annex 14-E of the agreement establishes a privileged regime for those with federal level government contracts in “covered sectors”: (i) oil and gas, (ii) power generation, (iii) telecommunications; (iv) transportation, and (v) infrastructure. A less favourable regime, outlined in Annex 14-D, applies to all other ISDS claims, which includes a new 30-month resort to domestic court requirement and limits protection to claims involving direct expropriation, national treatment and most favoured nation treatment.

A deeper analysis also reveals that some provisions slightly favour the American position. For example, the U.S. rarely utilizes public contracts in the power generation and transportation sectors at a federal level, whereas Mexico does so. Further, recent liberalizations in the aforementioned sectors of the Mexican market are geared to incentivize American investors (despite a notable volte-face in Mexican energy policy). While a different annex could have been custom-made for U.S. and Canadian investment relations, the fact that it was not, given the privileged / non-privileged regimes proffered by the U.S.-Mexican template, is demonstrable of just how far apart the U.S. and Canada are when it comes to ISDS.

By all standards, where some countries have voiced strong opposition to ISDS by terminating investment agreements (European Union, Indonesia, India), denouncing institutions (Bolivia, Ecuador, Venezuela) and advancing other forms of dispute resolution (Brazil, South Africa), Canada has remained a steadfast champion of ISDS and associated reform efforts. Canada embraced the possibility of a multilateral court of arbitration when it signed the (Comprehensive Economic and Trade Agreement between the European Union and Canada (“CETA”). It has also kept open the traditional forms of ISDS in its contemporaneous BIT practice (see e.g., Article 23, Canada-Moldova BIT, which was concluded nearly four years after the CETA negotiations had ended in August 2014). When six of the eleven Members of the CPTPP signed side letters that eschewed ISDS in favour of each jurisdiction’s domestic courts, Canada declared its commitment to the “evolution of ISDS”. Canadians also sit in influential positions advancing global reform efforts. Shane Spellisey, Director of Canada’s Trade Law Bureau, is the elected Chairperson of the United Nations Commission on International trade Law (UNCITRAL) Working Group III (Investor-State Dispute Settlement Reform), mandated to address ISDS reform options. Meg Kinnear, Secretary General of the International Centre for Settlement of Investment Disputes (“ICSID”) and Canadian, is leading the ICSID Rule Amendment Project. Canada’s non-participation in Chapter 14 appears less an abandonment of ISDS than an educated and strategic move, especially given the state of global reform to ISDS, Canada’s role in those developments, and the thinned protections offered by the USMCA along with the haste involved in its negotiation.

 

Investor Prospectus under the USMCA

With Canada out and investment protection set to significantly diminish under the USMCA as of July 1, 2023 (and a veritable coronavirus boom of investment arbitration cases on the horizon), NAFTA, Chapter 11 investment protection is looking mighty attractive. Timing is now a paramount consideration. Investors facing the expiration of NAFTA protections must determine when their investments were established, and if a dispute is imminent with a host State under NAFTA, they must determine concretely when that dispute can be said to have arisen. Above all else, they must know if, when and how their claims expire. These factors will be consequential in determining which procedural route applies to them and their investments going forward.

Will it result in a Black Friday rush of legacy claims before the USMCA’s cut-off date of July 1, 2023? Maybe. When Venezuela denounced ICSID on January 24, 2012, nine cases were registered with ICSID within six months (as prescribed by Article 71 of the ICSID Convention). If investors wish to avoid their host State’s local judiciary, which may be particularly untenable when raising certain claims (e.g., national treatment), or to avoid taking  a backseat chance on a politicized state-to-state arbitration, then there may be a spike in NAFTA legacy claim cases over the next three years.

Investors can and should also be proactive, by cultivating new forms of foreign investment relations (either under a government contract or investment contract that provides alternative routes to international arbitration). Established investors must take care with this step, especially if they are harbouring a potential claim. Under USMCA, Annex 14-C, an investor loses recourse as a “legacy investment” status holder if they qualify as an Annex 14-E “investor”. This also means that those investors sitting on a claim who would already qualify under Annex 14-E may wish to raise such a NAFTA claim before it expires next week on July 1, 2020. Notably, the USMCA adopts more restrictive language to describe the substantive protections compared to similar ones found in NAFTA, Chapter 11 (Compare e.g., NAFTA, Article 1105(1) with USMCA, Article 14.6 and Annex 14-A).

Similarly, treaty planning – i.e., jurisdictionally re-structuring investments so as to maximize protection under the global network of investment protection – may be the way forward. The United States has in force 41 BITS and 50 treaties with investment chapters. Mexico has in force 33 BITs and 16 treaties with investment chapters. It would not take long to find an agreement that provides greater back-end economic relationship protection (e.g., Netherlands-Mexico BIT). Care must be taken as switching nationalities before a dispute has been resolved can negate the international claim, even despite egregious conduct by the host State.

What is clear is that the introduction of Chapter 14 of USMCA is a change that will spark reaction. Equally clear is that the collateral damage of this chapter will be small- and medium-sized firms involved with foreign investment opportunities. These stakeholders may not possess the clout or capability to secure government contracts in the protected sectors, negotiate separate arbitration clauses, or restructure internationally to ensure a greater degree of investment protection, but they will most likely be first in line to save the date: July 1, 2023.

 

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The USMCA/CUSMA/T-MEC’s Entry into Force: An Obituary for NAFTA’s Investment Chapter

Tue, 2020-06-23 03:00

On July 1, 2020, the investment chapter of the North American Free Trade Agreement (NAFTA) expired quietly in its North American home, at the age of 26.  It left behind a generation of investment treaties and investment chapters in free trade agreements that are its direct descendants.  It served as inspiration for many other agreements.  It is succeeded by the investment chapter of the US-Mexico-Canada Agreement (USMCA).  DNA testing to ascertain the progeny of that chapter is ongoing, as discussed below.

NAFTA’s investment chapter was born following an intensive negotiating process – likely the most intensive one in history at that point.  The first text was tabled in December 1991.  The text then underwent an astonishing 40 iterations before it became final.  Most unusually, the negotiators continued revising the text after the treaty was signed in 1992.  The investment chapter, with the rest of the treaty, came into the world on its effective date of January 1, 1994.

Its parents recognized that this would be a busy child.  Unlike prior investment agreements, the capital flows among the United States, Canada and Mexico were enormous.  While the policy objectives of the US and Canada were to protect their investors in Mexico, the negotiating dynamic at the time required reciprocity in the investment obligations.  The likelihood of substantial claims inspired closer scrutiny of the provisions than was the case in other negotiations.

The result was an investment chapter that was spare in its statement of obligations (except for the innovative attempt to define performance requirements), expansive but precise in its statement of exceptions and detailed in its crafting of the investor-state dispute resolution system.  Its comprehensive investment promotion and protection system looked different and was different in important respects from any other agreement at the time.

The adolescence and young adult life of NAFTA’s investment chapter was indeed an active one.  The first claim came just a few years after its birth.  Dozens followed, including some of the most controversial of the era.

NAFTA quickly proved to be a trendsetter.  It opened its proceedings to the world long before other systems did.  It was a beacon of transparency in arbitration.  Other systems of investment arbitration slowly and sometimes grudgingly followed.

The flow of cases, inevitably, illustrated some of the defects in the conception of the NAFTA investment chapter.  The negotiators could not anticipate every permutation that might arise in practice.  With time, a few cracks in the treaty became apparent.

The result was the first generation of direct descendants of the NAFTA investment chapter:  the model investment chapters and bilateral investment treaties that Canada and the US developed in 2003 and 2004 based on their experience with NAFTA investment disputes.  The basic structure of the NAFTA’s investment chapter, and indeed many provisions word-for-word, were retained.  But a number of provisions were improved in their wording, and a number of innovations added.

These new models served as the basis for many of the most important investment agreements of the past 15 years, including the Central American Free Trade Agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Canada-European Union Trade Agreement.  Indeed, computational analysis of the TPP’s investment chapter has noted that 81% of the text has been taken from previous US investment treaties, with 58% of its text similar or identical to the NAFTA itself.

In addition, the NAFTA served as the starting point for the investment chapter of the Free Trade Agreement of the Americas – an ambitious project that never saw the light of day.  However, a generation of investment treaty negotiators in Latin America learned their trade in the FTAA negotiations.  The NAFTA served, again, as inspiration for a whole range of agreements when those negotiators had the leverage to propose new text.

Comparatively, the USCMA’s investment chapter is a significant break from the evolution of investor-state dispute settlement that began with NAFTA.  Even though the investment chapter contains several instances of innovation and evolution from the NAFTA’s Chapter 11, such provisions are largely overshadowed by the foreign policy approach to investment dispute resolution and the corresponding significant limitations on access to investor-state dispute settlement.

At the outset, Canada is not a party to the investment chapter’s dispute resolution procedures. In some respects, this is not such a departure.  As noted, it was never an objective of the US and Canada to have investor-State dispute resolution as between the two countries.  They accepted it in order to ensure dispute settlement with Mexico.  But the dynamic in the late 2010s was different, and reciprocity was no longer such an important issue for Mexico.  Further, within the USMCA negotiations, at least two parties, Canada and Mexico, knew that investments made by their own nationals were already governed by the terms of the Trans-Pacific Partnership, a NAFTA descendent.  The real departure is in ISDS between the US and Mexico.

The US-Mexico dispute resolution mechanisms are included in Annex 14-D and 14-E and align with the Trump administration’s doctrine of economic nationalism.  Under these Annexes, dispute resolution is tiered between privileged government contracts in oil and gas, power generation, telecommunications, transportation and infrastructure sectors, with a less favourable dispute resolution process for all other covered investment disputes.  While contract claims may proceed directly to international arbitration, general investment claims are relegated to a Calvo-esque procedure with a requirement to commence local dispute resolution proceedings for 30 months as a condition precedent to access to international arbitration.  Further, general investment claims are limited to claims of national treatment, most favoured nation treatment save for claims related to establishment and acquisition, which are specifically excluded, and direct expropriation, also explicitly excluded.

While the USMCA’s investment chapter contains certain procedural and substantive evolutions and innovations, the significance of the above-noted limitations far outweighs any innovations contained therein.  That said, it remains noteworthy that the USMCA’s investment chapter contains important procedural advances through the inclusion of provisions on transparency of arbitral proceedings, the explicit public access to hearings and pleadings, arbitrator compliance with the IBA Guidelines on Conflicts of Interest in International Arbitration, and a prohibition on arbitrators acting as counsel or party-appointed expert or witness in any pending arbitration under the agreement for the duration of the proceedings.

On a substantive level, certain investment protections under the USMCA follow the trend of states narrowing and further defining substantive investment protections, with many provisions drafted responsively to previous investment award interpretation.  For example, the USMCA’s expropriation provision further qualifies what constitutes indirect expropriation through detailed criteria in Annex 14-B, most favored nation treatment is limited to substantive obligations, and article 14.6(5) effectively writes out claims based on legitimate expectations from the minimum standard of treatment.  Further, the USMCA does mirror new provisions such as article 14.17 on corporate social responsibility, also found within the CPTPP.  However, given the overall limitations on access to dispute resolution, and what may be claimed by investors that are not parties to covered contracts, such developments may be all for not. Indeed, it will remain to be seen whether US and Mexican investors will ever bring non-contract claims.

In sum, the NAFTA led a long life (by investment agreement standards), fathered a large family of other investment chapters and agreements and led a rich if controversial existence before passing on July 1, 2020.  It is succeeded by the USMCA, which although contains certain elements of further evolution from the NAFTA; it marks a distinct and separate direction for ISDS by limiting international access to justice in lieu for local and contract-based dispute resolution.  In doing so, at its core, the USCMA rejects certain core elements of NAFTA’s Chapter 11 and related underlying foreign policy doctrine.  While legacy claims based on NAFTA are likely to be still brought after July 1, 2020, until July 2023, the North American investor-state dispute settlement landscape has been significantly altered, at least for now.

 

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The USMCA/CUSMA/T-MEC’s Entry into Force: Introducing a New Era in Regional ISDS with NAFTA 2.0

Mon, 2020-06-22 03:00

On July 1, 2020, the United States – Mexico – Canada Agreement (USMCA) will enter into force. Although the media widely refers to the treaty by its American name, USMCA, it also carries two other names: Canada has adopted it as the Canada – United States – Mexico Agreement (CUSMA), while Mexico has settled on the title El Tratado entre México, Estados Unidos y Canadá (T-MEC). Regardless of which name is utilised, the trade deal serves as the successor to the North American Free Trade Agreement (NAFTA), which will officially terminate when the USMCA enters into force, although certain enumerated provisions will continue in force for a limited time period.

In anticipation of this milestone, we dedicate this week on the Blog to the USMCA and its origins, features, and goals. Through this series, we aim to provide insight into this new era of regional treaty law, including the innovations it heralds with respect to investor-State and State-State arbitration. To introduce the series, this post provides background concerning the rise of USMCA as NAFTA’s successor and discusses its relationship to, among other topics, global investor-State dispute settlement (“ISDS”) reform efforts. It then briefly introduces the posts that will feature as part of this week’s series.

 

NAFTA to USMCA: How Did We Get Here?

When NAFTA entered into force in 1994, it was considered both remarkable and unremarkable in the same breath. NAFTA was lauded for the increased trade it facilitated across North America and its unprecedented economic benefits. In 1998, Daniel Griswold (former director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute in Washington, DC) explained:

Trade among the United States, Canada, and Mexico has flourished since the passage of NAFTA, benefiting American consumers and exporters. Since 1993, two-way trade with our NAFTA partners has increased by 44 percent, to $421 billion in 1996. That compares with a 33 percent increase in American trade with all other countries. Mexico has now become America’s second largest market for exports, just ahead of Japan and behind only Canada.

To support investor confidence, Chapter 11 of NAFTA provided an ISDS mechanism. In 2001, Judge Charles N. Brower and Lee A. Steven explained:

The only potentially unique aspect of NAFTA Chapter 11 is that the governments of two nations with developed economies agreed to enter into an investment protection treaty between themselves. The overwhelming majority of BITs to date have been North to South, between capital-exporting countries and capital-importing countries, and the private investors who actually have benefited from such treaties have been those from the North. (at pp. 193-94.)

Nearly twenty-five years of trade facilitation and numerous ISDS claims aided the NAFTA parties’ understanding of the benefits and drawbacks of their trade deal. Despite its successful run, most commentators in recent years have agreed that the time had come for NAFTA’s renegotiation and modernization.

In 2016, then-presidential candidate Donald Trump announced his intention to either renegotiate or terminate NAFTA should he become President. He vowed to revise NAFTA in a manner consistent with his “America First” ideology and applied aggressive import tariffs on Canadian and Mexican goods to influence renegotiation. From May 2017 to September 2018, Mexico, the United States and Canada embarked on a renegotiation and modernisation process through a series of negotiating rounds. In October 2018, the States completed the agreement and released a draft text of agreed provisions. The treaty covers a range of trade-related issues, and includes chapters on rules of origin, technical barriers to trade, intellectual property, competition policy, labour, the environment, and investment.

Mexico was the first to ratify USMCA in June 2019. Unexpectedly, on December 10, 2019, all three prospective USMCA States executed a “Protocol of Amendment” (Amendment). The 26-page Amendment included modifications to key elements of the USMCA, most importantly dispute settlement, labour and environmental provisions, intellectual property rights, and steel and aluminium requirements in the rules of origin for automobiles. Following this Amendment, the States followed their respective domestic ratification processes, with Mexico again as the first to ratify, and Canada as its final party on April 3, 2020.

 

USMCA: Providing New Balance for ISDS

Since the announcement of negotiations, our contributors have commented on the shifting contents of and vision for USMCA’s ISDS mechanism. At a policy level, our contributors have considered the interplay between USMCA negotiations and public policy, the possible impact on the North American energy industry, and the impact on parties participating in ongoing NAFTA arbitrations. Meanwhile, since the unveiling of USMCA’s draft text, our commentators have focused on the substantive rights available to prospective claimants and the procedural means to assert them.

While Chapter 14 of USMCA provides an ISDS mechanism, it departs in many ways from Chapter 11 of NAFTA. Glaringly, Canada is not a party to the ISDS mechanism provided in Chapter 14. This means that ISDS claims cannot be asserted by Canadian investors, nor asserted against Canada. Canada’s consent for legacy claims will expire three years from the termination of NAFTA (i.e., July 1, 2023).1)USMCA, Annex 14-C (Legacy Investment Claims and Pending Claims), Article 6(a). jQuery("#footnote_plugin_tooltip_2173_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2173_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); For many commentators, this is surprising: Canada remains committed to multilateral trade deals and continues to participate in ISDS through other trade agreements. Some speculate that Canada’s opt-out may reflect Canada’s mixed success with arbitrations involving American investors under NAFTA. Others cite Canada’s perceived lack of bargaining power during USMCA negotiations and an ultimate decision simply to abstain.

ISDS survives for the benefit of American and Mexican investors only, and even then, with changes to the types of claims investors may pursue, and the procedural means to do so. Chapter 14 of USMCA (Investment) now includes a local litigation requirement as a prerequisite for ISDS claims. Once that requirement is exhausted (or 30 months have elapsed), claims may be asserted for: (1) direct (but not indirect or “creeping”) expropriation (Annex 14-B (Expropriation), Article 2), (2) violations of national treatment (Article 14.4.1), or (3) violations of the USMCA’s Most Favored Nation (MFN) provision (Article 14.5.1). There is a carve-out for MFN claims concerning “the establishment or acquisition of an investment.”2)Id., Annex 14-D (Mexico-U.S. Investment Disputes), Art. 14.D.3 (Submission of a Claim to Arbitration), Article 14.D.3 (Submission of a Claim to Arbitration), note 22. jQuery("#footnote_plugin_tooltip_2173_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2173_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Chapter 14 also includes a novel asymmetrical fork-in-the-road provision that applies to American investors only. In many ways, USMCA reflects ideas currently circulating globally on ISDS reform.

Further substantive or procedural rights are also provided for claims concerning government contracts in several highly regulated sectors including energy, telecommunications, transportation, and infrastructure.3)Id., Annex 14-E (Mexico-U.S. Investment Disputes Related to Covered Government Contracts), Article 6. jQuery("#footnote_plugin_tooltip_2173_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2173_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Some commentators have referred to these sectors as “privileged” sectors under the USMCA. These provisions allow investors to pursue claims for violations of the minimum standard of treatment under customary international law, indirect expropriation, and the establishment or acquisition of an investment.4)Id. jQuery("#footnote_plugin_tooltip_2173_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2173_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Placing the USMCA Within Broader Treaty Renegotiation and ISDS Reform Efforts

Most commentators accept that NAFTA needed modernization because commerce in the region has changed dramatically over the past quarter century. In this regard, some commentators have lauded USMCA for bringing North American regional trade into the 21st century. USMCA allows for the free flow of cross-border data, seeks to prevent discriminatory trade barriers, and offers protections to online services to facilitate global competitiveness. Indeed, drawing on the assessment of some American businesses, USMCA is described as a step toward “transparency” and “predictability,” while providing increased intellectual property protections, and sorely needed modern customs procedures. Accounting for these goals is a priority for many other treaties currently being renegotiated and modernized. For example, the WTO’s General Agreement on Trade in Services (GATS) prioritizes liberalizing the digital sector, the Canada-Israel Free Trade Agreement (CIFTA) seeks to liberalize trade and the cross-border flow of goods, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) Agreement offers enhanced and modern intellectual property rights.

With respect to ISDS, the differences between NAFTA’s Chapter 11 and USMCA’s Chapter 14 (and particularly Canada’s non-participation in the ISDS mechanism) reflect concrete ISDS “evolution” for regional ISDS, and, perhaps, offers a template for future global trends. Optimistically speaking, the story of USMCA may demonstrate that evolution, and not death, is the answer to the modern ISDS debate.

 

Overview of This Week’s Series

Each day this week, a different contributor will spotlight an aspect of USMCA from a variety of national and regional perspectives:

  • On Tuesday, Barton Legum and Sean Stephenson will offer an obituary to memorialize NAFTA’s Chapter 11 and its historic importance and legacy, as well as its imprint on USMCA’s Chapter 14.
  • On Wednesday, Dr. Devin Bray and Jason Czerwiec will examine Canada’s position towards Chapter 14 of the USMCA and provide observations and implications for stakeholders affected by the upcoming changes to the North American investment-treaty regime.
  • On Thursday, Mélida Hodgson will examine in detail the investor protections offered by USMCA’s Chapter 14. In doing so, she will highlight its evolutionary aspects, political implications, and future complexities.
  • On Friday, Aristeo Lopez will focus on USMCA’s Chapter 17 (Financial Services). He will discuss the stages and elements for investor claims under this Chapter and offer comparisons to the approach previously provided in NAFTA for the arbitration of disputes concerning investments in the financial sector.
  • On Saturday, Dr. Elizabeth Sheargold will provide an Australian perspective on USMCA. Her big-picture insights, gleaned through comparisons to the Australian experience, will contextualize the various choices adopted by the USMCA Parties within the modern ISDS debate.
  • On Sunday, we will end the series by drawing focus to USMCA’s Chapter 31 on State-State arbitration and provide some concluding remarks.

Through this series, we aim to provide insights into the unique features of USMCA’s investor-State and State-State arbitration mechanisms, and place the agreement within the context of a broader global discourse concerning treaty law and ISDS reform. We are proud to be able to mark this momentous occasion on the Blog with this series of posts by leading experts and practitioners from the region and beyond. We hope you enjoy the series!

 

For the full scope of our coverage of USMCA to date, click here.

References   [ + ]

1. ↑ USMCA, Annex 14-C (Legacy Investment Claims and Pending Claims), Article 6(a). 2. ↑ Id., Annex 14-D (Mexico-U.S. Investment Disputes), Art. 14.D.3 (Submission of a Claim to Arbitration), Article 14.D.3 (Submission of a Claim to Arbitration), note 22. 3. ↑ Id., Annex 14-E (Mexico-U.S. Investment Disputes Related to Covered Government Contracts), Article 6. 4. ↑ Id. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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