by Stephan Balthasar

Just a few weeks ago, an arbitral award made headlines in the German press: “Advisors in Märklin deal to pay multi-million euro fine”, “Märklin: advisors to pay damages”, “Märklin fallout: Former owner awarded $18.7 million in judgment against consultant”, to name but a few examples. According to the newspapers, the US-based consulting firm AlixPartners was declared liable for damages for giving wrongful advice to the financial investor Kingsbridge Capital Advisors with regard to the takeover of the German model railroad manufacturer Märklin in 2006. It is said that an arbitral tribunal awarded €14m in damages to Kingsbridge because of irregularities in the due diligence for which AlixPartners was responsible at the time.

The decision comes as a surprise in the market – not least because consulting firms ordinarily limit liability to cases of gross negligence or wilful misconduct. However, the case will not only have implications for the consulting industry. The unusual publicity it has gained raises questions concerning the conduct of arbitral proceedings generally, namely, what confidentiality obligations there are for the parties to an arbitration. The topic has repeatedly been debated in this blog (see, for example, Ileana Smeureanu’s post on the situation in the Philippines) and in the arbitration community generally. Confidentiality is, in fact, said to be one of the most important advantages of arbitration as a dispute resolution mechanism.

Practical experience such as the Märklin case shows, however, that confidentiality in arbitration is not guaranteed. Notwithstanding the long debate, numerous court decisions and legislative activity, there is still no generally accepted answer to the controversial question of whether an agreement to arbitrate implies an obligation to treat the proceedings and the attendant information as confidential. In England, there is a long line of case law according to which the confidentiality of arbitral proceedings is an implied obligation of the parties to an arbitration agreement (for a recent decision see Emmott v. Michael Wilson & Partners Ltd. [2008] EWCA Civ. 184 at [81] per Collins LJ). A similar position has been adopted by legislators elsewhere (see, for example, section 18(1) of the recent Hong Kong Arbitration Ordinance 2011 which expressly forbids the parties to disclose information relating to the arbitral proceedings).

However, senior English judges have expressed doubts as to the merits of this “confidentiality by default” rule (Associated Electric and Gas Insurance Services Ltd v. European Reinsurance Co of Zurich, [2003] UKPC 11 at [20] per Lord Hobhouse), and the English approach has, in fact, met with little sympathy elsewhere. In other jurisdictions such as Australia, Sweden and the U.S., the courts have refused to recognise an “implied confidentiality obligation”. In France, some court decisions have held that there was such an obligation (Aïta v. Ojjeh, [1986] Revue de l’Arbitrage 583; Bleustein v. Société True North et Société FCB International, [2003] Revue de l’Arbitrage 189). However, the new arbitration law of 2011 now provides specifically that in international arbitration, a duty to treat information confidentially cannot be implied from an arbitration agreement (there is an implied confidentiality for domestic arbitration under art. 1464(4) of the Nouveau Code de Procédure Civile, but under art. 1506, this does not apply in international arbitration). When the ICC prepared the edition of its new 2012 Arbitration Rules, it was decided not to include a general duty of confidentiality. Under the new rules, an arbitral tribunal may make orders to enforce confidentiality obligations (art. 22(3) ICC Rules 2012), but the legal basis for such obligations must be found elsewhere, for example, in an express agreement between the parties.

Several arguments have been put forward in favour of an implied duty of confidentiality: Allegedly, confidentiality is part of the legitimate expectations of the parties to an arbitration agreement. Moreover, it is said that the private conduct of arbitral proceedings would become meaningless if the parties were at liberty to communicate freely about the arbitration. It is also feared that, without a duty of confidentiality, parties may face what is described as “trial by press release” instead of the neutral and objective dispute resolution mechanism that arbitration is expected to provide.

The latest legislative reform in France shows, however, that these arguments are far from compelling. There is little evidence that parties to an arbitration agreement actually expect that this agreement implies a confidentiality obligation. At any rate, against the background of widely diverging approaches of statutory law and case law, it is doubtful whether such expectations are legitimate. In fact, recent research from Queen Mary University suggests that for many users, confidentiality may not be that important after all (2010 International Arbitration Survey: Choices in International Arbitration, p.30). To imply a duty of confidentiality may also conflict with the principle of party autonomy, because it leads to confidentiality by default even where the parties never considered the issue at the time when the arbitration agreement was concluded. Where parties actually wish to secure confidential treatment of the proceedings, they are free to make an express agreement to that effect, and it is universally accepted that courts and arbitral tribunals will enforce such an agreement (subject to few exceptions such as legal provisions requiring the parties to make information public or requiring the public conduct of court proceedings in support of arbitration). In such circumstances, there is no need to imply an obligation of confidentiality.

A specific feature of the Märklin case suggests that there may be another argument against an implied confidentiality obligation: in fact, AlixPartners announced that it will apply to have the partial award set aside. Most recent figures suggest that about 20% of arbitral awards are not being complied with voluntarily and have to be executed. This figure is unsatisfactorily high and shows that in many instances, arbitration fails to provide a resolution of the dispute that is accepted by all parties. One way to improve this situation is to increase the degree of transparency in arbitration. Such transparency may have positive effects on the quality of arbitral awards: it would, in fact, create an additional incentive for arbitrators to conduct the proceedings in a way that stands the test of public debate, and to make persuasive and diligent decisions. In that respect, the recent legislative reform in France has much to commend itself.

At any rate, the debate on confidentiality is far from being settled. The latest trend in case law and legislation is, however, not to imply a duty of confidentiality in an agreement to arbitrate. Against that background, potential litigants will have to determine well in advance what needs they have with regard to confidentiality, and to include appropriate and express agreements in the arbitration clause, or at least in the terms of reference set up at the beginning of the arbitral proceedings. Without express agreements of that sort, confidentiality is certainly not a feature which parties should rely on when choosing arbitration as a dispute resolution mechanism.

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Kingsbridge Capital Advisors v. AlixPartners: What Confidentiality in Arbitration?

by Matthias Scherer

By Matthias Scherer and Sam Moss

In a recent decision issued on 7 November 2011 on a request for annulment of a partial award on jurisdiction rendered by the Court of Arbitration for Sport (“TAS”), the Swiss Supreme Court recalled and applied its previous jurisprudence on the interpretation of pathological arbitration clauses (Case 4A_246/2011).

The case arose out of a contract between a football club and an agent relating to the transfer of a player. The contract contained a dispute resolution clause which provided that “[t]he competent instance in case of a dispute concerning this Agreement is the FIFA Commission, or the UEFA Commission, which will have to decide the dispute that could arise between the club and the agent.” After a dispute arose between the parties, the agent initiated arbitral proceedings before the FIFA Players’ Status Committee, a body tasked with adjudicating disputes arising from transfers of professional football players. However, on the basis of its internal rules, the Committee declined jurisdiction on the grounds that the agent was a legal person and not a natural person. The agent therefore requested the Zurich High Court (Obergericht) to appoint an arbitrator, which it did. However, the sole arbitrator subsequently found that he did not have jurisdiction on the grounds that the parties had agreed to submit disputes to arbitration under the rules of a sports arbitral institution.

Finally, the agent initiated arbitration before the CAS. In a partial award issued on 17 March 2011, the CAS ruled that it had jurisdiction over the dispute. However, the football club appealed to the Swiss Supreme Court pursuant to Article 190(2)(b) of the Swiss Private International Law Act (“PILA”) to annul the partial award on the ground that the CAS had erroneously held that it had jurisdiction, one of only two grounds available to a party to challenge a partial award (Article 190(3) PILA).

The football club first disputed that the Parties had even agreed to exclude the jurisdiction of the State courts. However, the Supreme Court, interpreting the Parties intentions according to the principle of normative consensus (“Vertrauensprinzip”), found that this was not the case (para. 2.3.1). The Court noted that while the dispute resolution provision did not expressly mention arbitration, the use of the terms “competent instance” and “decide the dispute” could be understood in good faith to mean that any disputes would be decided by one of the two football bodies in a binding manner, to the exclusion of the State courts. According to the Court, the provision did not give rise to doubts which would warrant a restrictive interpretation of the Parties’ alleged intention to exclude the jurisdiction of the State courts.

Of greater interest, however, is the manner in which the Court addressed the football club’s arguments that the arbitration clause was defective to the degree that it was impossible to apply, or alternatively that it had been extinguished by the decision of the FIFA Commission not to accept jurisdiction.

The Court began by setting out the approach in Swiss law to pathological provisions in arbitration agreements, which it defined as provisions which are incomplete, unclear, or contradictory (para. 2.2.3). As the Court explained, as long as such provisions do not relate to essential elements of the arbitration agreement, such as the binding submission of disputes to an arbitral tribunal, they will not in and of themselves lead to its invalidity. Rather, Swiss law requires courts and tribunals to look for a solution, either through interpretation or if need be by means of completing the contract, which respects the fundamental will of the parties to submit their dispute to arbitration. In this sense, Swiss law imposes a broad approach to interpretation of pathological arbitration clauses, once the parties’ intention to exclude State courts in favour of arbitration is established.

On this basis, the Court ruled that the fact that neither institution identified in the arbitration clause could have, according to their own rules, decided on a dispute between the parties, did not necessarily entail the nullity of the entire arbitration clause. According to the Court, the CAS had properly sought to determine whether the designation of the institutions was so essential to the arbitration agreement that the parties would not have agreed to submit their disputes to arbitration had they known that those institutions could not assert jurisdiction (para. 2.3.2). It further found that the CAS’s determination that the parties would nevertheless have agreed to submit their disputes to arbitration was not based on abstract considerations but rather on concrete indications arising from the facts of the case. In particular, the CAS considered that the parties’ designation of two alternative football associations in the arbitration clause indicated that they were not attached to one particular institution, and that, above all, they wanted to submit their dispute to an arbitral tribunal which was familiar with issues surrounding transfers of professional football players.

Having established that the institutions designated by the parties did not constitute essential conditions of their arbitration agreement, the Court turned to determining whether submitting the dispute specifically to the CAS was consistent with the Parties’ intentions. In doing so, the Court sought to correct the partial nullity of the arbitration clause, to the extent possible, by means of filling in the missing elements. The test applied by the Court was to ask what the parties would hypothetically have agreed to had they been aware of the defects in their arbitration clause (para. 2.3.3). After a review of the facts, the Court concluded that the parties would have agreed to submit any disputes directly to the CAS. In reaching its decision, the Court was particularly influenced by the fact that, by designating FIFA and UEFA, both of which are based in Switzerland, the parties indicated their intention to submit their disputes to an arbitral tribunal with seat in Switzerland, and that they intended such disputes to be decided by a sports organisation which was familiar with the football transfer market. In this context, the Court took into consideration that decisions of the FIFA Players’ Status Committee on transfers of players could in fact be appealed to the CAS.

In sum, the Supreme Court’s decision in case 4A_246/2011 is a good example of the broad and flexible pro-arbitration approach which has characterised the Court’s jurisprudence on pathological arbitration clauses in cases in which the parties’ intention to arbitrate is established. Despite being faced with an arbitration clause with clear references to two institutions which could not adjudicate the parties’ dispute, the Court did not find the clause to be invalid as a whole, but rather engaged in an exercise of filling in the missing elements in order to ensure that the fundamental intention of the parties to arbitrate their dispute was upheld. It is also noteworthy that in the first step of its analysis, namely establishing the intention of the parties to submit their dispute to arbitration, the Court did not consider the absence of the words “arbitration” , “arbitral tribunal”, “arbitrator”, or similar terms in the dispute resolution clause (which it itself acknowledged in para 2.3.1), to be decisive.

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on A primer on pathological arbitration clauses in Swiss law

by Phillip Capper

This is an update on the post of 27 January 2012 dealing with the African Fertilisers decision. Last week, the English Court of Appeal handed down its judgment in the latest episode of the West Tankers dispute, upholding the first instance decision and approving the decision of the Commercial Court in African Fertilisers. The decision affirms the continued pro-arbitration stance of the English courts, the Court of Appeal emphasising that “the efficacy of any award by an arbitral body depends on the assistance of the judicial system”.

The factual background to West Tankers has been widely discussed (and is summarised in paragraphs 1 to 14 of the judgment) and there is no need to do so again here. Before the Court of Appeal, West Tankers submitted that judgment be entered under s. 66(2) of the English Arbitration Act 1996 (the “Act”) against the insurers on the terms of a declaratory arbitral award. This was on the basis that such a judgment would allow West Tankers to establish the primacy of the award over any judgment by Italian courts in ongoing proceedings of the same dispute. The High Court held that “[t]he purpose of s. 66 (1) and (2) [of the Act] is to provide a means by which the victorious party in an arbitration can obtain the material benefit of the award in his favour other than by suing on it” and that “[w]here … the victorious party’s objective in obtaining an order under s. 66 (1) and (2) is to establish the primacy of a declaratory award over an inconsistent judgment, the court will have jurisdiction to make a s. 66 order because to do so will be to make a positive contribution to the securing of the material benefit of the award”.

The insurers appealed, arguing that Field J had erred in his construction of s. 66 of the Act, specifically in the meaning of the word “enforced”, and that a declaratory judgment (and in particular a negative declaratory judgment) is incapable of being “enforced” under the meaning of the section. Lord Justice Toulson, in the leading judgment, however agreed with West Tankers that a broader interpretation of the phrase ‘enforced in the same manner as a judgment to the same effect’ in s. 66 is “closer to the purpose of the Act and makes better sense in the context of the way in which arbitration works”. He rejected the insurers’ argument that in the present case the court would not be enforcing an award but only the rights determined by an award as being “an over subtle and unconvincing distinction [that] sits on shaky foundations”, emphasising that “the enforcement of any judgment or award is the enforcement of the rights which the judgment or award has established”. However, Toulson LJ emphasised that the language of s. 66 is permissive and requires the court to determine whether it is appropriate in the situation before it to enter judgment – it is not “an administrative rubber stamping exercise”.

Although Toulson LJ emphasised that the issue before the Court of Appeal “is not a question with a distinctively European flavour”, the consequences of the judgment, and more generally of the approach of the English courts, clearly are (as illustrated earlier in African Fertilisers). It remains uncertain whether the judgment falls under the arbitration exception to the Brussels Regulation 44/2001, thereby underlining the need for reform of the Regulation. As any such reform is likely to take time, there remains the real possibility that the English courts may, before any such reform, be faced with enforcement proceedings under the Regulation of an (inconsistent) judgment of the Italian courts. The questions presented by African Fertilisers remain unanswered for the time being.

Phillip Capper and Christian Blank

White & Case LLP
London

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Declaratory award held enforceable by English Court of Appeal: further support for reform of the Brussels Regulation

by Roger Alford (Editor)

Last week was a blockbuster one in the ongoing battle between Chevron and Ecuador. On Wednesday, the arbitral tribunal adjudicating Chevron’s BIT claim issued an Interim Award ordering Ecuador “to take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within or without Ecuador of any judgment against [Chevron] in the Lago Agrio Case.”

The tribunal was at pains to emphasize the interim award was final and binding under Article 32 of the UNCITRAL Rules, which means that Chevron could pursue recognition and enforcement of the award in jurisdictions around the world. It could do so offensively by seeking declaratory relief in Ecuador (or elsewhere), or defensively in response to an attempt by the Ecuador plaintiffs to seek enforcement of the Ecuador judgment. Of course, the Interim Award is only binding on Ecuador and Chevron, so it is not clear what a domestic court outside Ecuador would do with an award imposing injunctive relief on Ecuador.

Meanwhile, on Thursday the Second Circuit issued its long-awaited opinion in Chevron v. Naranjo. The Second Circuit’s crucial holding was that New York’s Uniform Foreign Money-Judgments Recognition Act precludes declaratory injunctive relief by a foreign judgment debtor. “There is … no legal basis for the injunction that Chevron seeks, and, on these facts, there will be no such basis until judgment-creditors affirmatively seek to enforce their judgment in a court governed by New York or similar law.”

The Second Circuit had little sympathy for Chevron’s attempt to pursue an antienforcement injunction, particularly given the comity concerns at stake.

“[W]hen a court in one country attempts to preclude the courts of every other nation from ever considering the effect of that foreign judgment, the comity concerns become far greater. In such an instance, the court risks disrespecting the legal system not only of the country in which the judgment was issued, but also those of other countries, who are inherently assumed insufficiently trustworthy to recognize what is asserted to be the extreme incapacity of the legal system from which it emanates. The court presuming to issue such an injunction sets itself up as the definitive international arbiter of the fairness and integrity of the world’s legal systems.”

But at the same time, the Second Circuit emphasized that it expressed “no views on the merits of the parties’ various charges and counter-charges regarding the Ecuadorian legal system and their adversaries’ conduct of this litigation, which may be addressed as relevant in other litigation before the district court or elsewhere.” It also avoided any decision with respect to the underlying RICO claims that Chevron has filed against the Ecuador plaintiffs and their lawyers, focusing simply on the improper procedural device that Chevron sought to employ to enjoin enforcement of the Lago Agrio judgment abroad.

Where does the case go from here? In Ecuador, Chevron has appealed to Ecuador’s highest court to review the case. No word yet as to whether Chevron will seek to have the arbitral tribunal’s Interim Award recognized and enforced in Ecuador. The arbitral tribunal is scheduled to hold hearings on February 11-12 to determine what steps Ecuador is taking to prevent enforcement of the Lago Agrio judgment.

As for the Ecuador plaintiffs’ efforts to enforce the judgment, there is no indication that Chevron will post an appeal bond, which means that the Ecuador plaintiffs are free to pursue enforcement anywhere in the world where Chevron has assets.

It appears that the Ecuador plaintiffs will not seek to have the judgment enforced within the United States. Ecuador Plaintiffs’ lawyer James Tyrrell stated yesterday that “The Ecuadorean plaintiffs are not coming to New York to enforce this judgment.” Given the locus of Chevron’s assets, it is not obvious why the plaintiffs have adopted this strategy, unless they have reason to believe that there is a high probability that the judgment would not be enforced.

There is, of course, the option of pursuing enforcement abroad. If the Invictus Memo is reliable, the Ecuador plaintiffs have identified twenty-seven nations where Chevron has substantial activities, including countries that are friendly with Ecuador, such as Colombia and Venezuela. That memo candidly states the ultimate end game strategy for the Ecuador plaintiffs:

“After approximately seventeen total years of litigation in the United States and Ecuador, the case against Chevron now enters its most critical, multi-faceted, and labor intensive…. With the ultimate goal of effecting and swift and favorable settlement, the strategy of the Plaintiffs’ Team will incorporate the following components: … managing the public relations impact of Chevron’s manipulation of the Cabrera narrative … [and] identifying jurisdictions globally that are most hospitable to an enforcement action.”

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Chevron Ecuador Dispute Heats Up

by J. Martin Hunter

In February 2010, Philip Morris International (PMI) filed a request for arbitration under the ICSID Convention against the Republic of Uruguay. 1 The claim relates to two pieces of legislation enacted by Uruguay which require tobacco companies to comply with strict plain packaging measures. These regulations limit the use of registered tobacco trademarks, allowing the brand name of the tobacco product to be written in a standard font only. In addition, health warnings will be displayed on the package, which will leave tobacco corporations with no option but to sell cigarettes in generic packages.

PMI contends that the Uruguayan regulations violate several provisions of the Switzerland-Uruguay BIT. Furthermore, PMI is arguing, inter alia, that the intellectual property rights of Abal Hermanos (PMI’s subsidiary in Uruguay) have been infringed as a consequence of the limitations imposed on the right to use its legally protected trademarks.2 This is not, however, the only case where this international corporation has launched an arbitration claim against a state as a result of similar plain packaging measures.

In November 2011, Hong Kong-based Philip Morris Asia Limited (PM Asia), which owns Australian affiliate Philip Morris Limited, initiated arbitration proceedings against the Australian government over new legislation on plain packaging of cigarettes. The new Australian law imposes strict limitations on the use of registered trademarks. For instance, it requires cigarettes to be sold in generic olive green packages, without brands or logos. This legislation is expected to come into force in December 2012. 3

As in the claims of PMI against Uruguay, PM Asia is arguing, inter alia, that it has, whether as owner or licensee, rights to use registered and unregistered trademarks. PM Asia claims that the new Australian legislation infringes its intellectual property rights and diminishes the value of its trademarks. Furthermore, it contends there has been a violation of the Australia-Hong Kong BIT. 4

At this stage, it is important to distinguish between two different types of trademarks: non-word marks and word marks. Plain packaging of tobacco products involves the prohibition of the use of non-word marks (such as logos, colour schemes and graphics) and the limitation on the use of word marks (brand name).

Several questions arise in relation to these two arbitration claims. One of them is whether these anti-tobacco schemes contravene the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the Paris Convention for the Protection of Industrial Property (Paris Convention). In particular, whether plain packaging infringes the right to use trademarks as well as affects the core function of trademarks.

There are strong arguments to suggest that the plain packaging measures adopted by Uruguay and Australia are consistent with their international obligations under the TRIPS Agreement and the Paris Convention. In this sense, it is important to point out that these measures do not impose limitations on the sale of tobacco products but on the use of trademarks related to such products.

The tobacco corporation claims that plain packaging unfairly limits its rights to use its legally protected trade mark. However, the right to use trademarks is not expressly granted by the TRIPS Agreement and the Paris Convention. Trademark owners only have the exclusive right to prevent third parties from using their trademarks without their consent. This is a negative right relating to the ‘exclusion’ of use rather than to the use per se. 5 Neither PMI nor PM Asia are claiming protection from an unlawful use of their trademark by a third party.

It can nonetheless be argued that the registration of a trademark provides an inherent right to use it. In this sense, under the TRIPS Agreement, WTO Members may make registrability depend on use.6 This argument could therefore be sustained in cases where the WTO Member in question established that the use of a trademark is a compulsory requirement for obtaining its registration.

In addition, it might be argued that plain packaging prevents consumers from distinguishing PMI´s tobacco products from others competitors, thereby affecting the core function of a trademark. 7 A trademark would lose its value if it creates the likelihood of confusion with other trademarks. However, the fact that the brand name can be displayed in the package raises doubts as to the strength of this argument.

The outcome of these cases will certainly set a precedent that could be adopted by future arbitral tribunals and national courts deciding disputes arising out of plain packaging schemes. Furthermore, the decisions adopted by the respective tribunals will have significant repercussions on the investment relationships between PMI and the countries in which it operates.

This ‘anti-tobacco movement’ has just begun. In fact, other countries, such as the United Kingdom, Canada and New Zealand, are considering introducing similar measures in their national laws, which will inevitably lead to an increasing wave of investment claims brought by tobacco companies against states.

There are of course further questions that arise in the context. For example, does plain packaging amount to indirect expropriation? Is it possible to strike a balance between the WTO Members’ obligations under the World Health Organisation Convention on Tobacco Control (WHO FCTC) and the intellectual property rights conferred to investors such as PMI? Does plain packaging amount to an unfair and inequitable treatment under the said BITs? Such questions will be examined in upcoming blogs. For now, we open the floor for discussion and invite the readers to comment on what has been discussed in this blog.

By Martin Hunter and Javier García Olmedo

1. Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A. (Uruguay) v. Oriental Republic of Uruguay (ICSID Case No. ARB/10/7). Pending (the Respondent filed a memorial on jurisdiction on September 24, 2011). See http://icsid.worldbank.org/ICSID/FrontServlet?requestType=GenCaseDtlsRH&actionVal=ListPending ↩
2. Request for Arbitration, FTR Holdings S.A. (Switzerland) v. Oriental Republic of Uruguay, ICSID case no. ARB/10/7 (February 19, 2010), available at http://www.smoke-free.ca/eng_home/2010/PMIvsUruguay/PMI-Uruguay%20complaint0001.pdf ↩
3. The text of the bill is available at http://www.aph.gov.au/house/committee/haa/billtobaccopackage/documents/doc01.pdf ↩
4. Written Notification of Claim by Philips Morris Asia Limited to the Commonwealth Australia pursuant to Australia/Hong Kong Agreement for the Promotion of Investments. Available at http://www.dfat.gov.au/foi/downloads/dfat-foi-11-20550.pdf ↩
5. Article 16 TRIPS Agreement ↩
6. Id, Article 15.3 ↩
7. Id, Article 15.1 ↩

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Investor-State Arbitration and Plain Packaging: The New ‘Anti-Tobacco Movement’ Has Begun

by Andrew Cannon

The judgment in the case of Mary Harvey v. Motor Insurer’s Bureau (QBD (Merc) (Manchester), Claim No: 0MA40077, 21 December 2011) just before Christmas provided another opportunity for the English courts to rule on their ability to consider appeals on a point of law.

This controversial power, retained in the UK’s Arbitration Act notwithstanding its absence from most other national legal systems, has often been criticised. Perhaps for this reason, the trend of the English courts in recent years has been increasingly to restrict its application. This latest, fully reasoned, judgment is no exception.

The Claimant, Mary Harvey, was a victim of a road traffic accident, and applied to the Motor Insurer’s Bureau (‘MIB’) for compensation for her injuries. Dissatisfied with the amount of compensation awarded, she served notice on the MIB requiring the matter to be submitted to arbitration. After an oral hearing, the arbitrator concluded that there was no evidence to infer that the driver of the vehicle that struck her was driving negligently, and concluded that the Claimant was not entitled to any compensation. She applied to the court, seeking leave to appeal under section 69 of the UK Arbitration Act on a question of law arising out of the Award.

In his judgment, Judge Hegarty QC reiterated certain features of appeals under section 69. It was clear that its provisions were ‘of a highly restrictive nature’. First, the only type of appeal that the courts can entertain is one involving a question of law arising out of an award, and that question must be one which the tribunal was asked to determine. Second, in the absence of an agreement between the parties, leave of the court is required before an appeal can be pursued, and, unless the question is one of ‘general public importance’, leave can be granted only if the decision is ‘obviously wrong’.

The court dismissed the application on the grounds that in essence this was an appeal on a question of fact, not of law. Citing the judgment of Steyn LJ in Geogas SA v. Trammo Gas Limited (The Baleares) [1993] 1 Ll Rep 215 at 228, the Judge affirmed the principle that any question as to the admissibility, relevance or weight of any evidential material was a matter solely for the arbitrator. The arbitrator’s findings of fact were ‘effectively immune from scrutiny’ by the courts, and this included not only primary facts but also any secondary findings or inferences of a factual nature.

The Judge commented further that: ‘I very much doubt if even a total absence of any evidential basis for a finding of fact can give rise to a question of law for the purposes of section 69’, though ‘it might conceivably amount to a serious irregularity under section 68(2)(a) of the Act’. A question of law might arise if, on the basis of the facts found by the tribunal, the conclusion which it reached was ‘outside the range which could properly have been arrived at by a tribunal which had properly directed itself as to the applicable law’. But it must still be possible to conclude that the error arose from a misapprehension or misapplication of law.

The case also raised questions regarding the application of the maxim res ipsa loquitor in this context, but after a full review the judge concluded that any failure to apply this maxim would not necessarily constitute an error of law, since ‘it simply refers to the way in which factual inferences may be drawn from other factual findings’.

Under English law (and virtually all other national systems) appeals are not possible from arbitral awards on questions of fact, probably even if the parties expressly so agree (Guangzhou Dockyards Co Ltd v. ENE Aegiali 1 [2010] EWHC 2826). Nevertheless, in contrast to the UNCITRAL Model Law and most other national systems, the provisions of the UK Arbitration Act are clear that there may be circumstances in which an appeal on a point of law will be available – the underlying justification focusing on the general public interest in the law being correctly applied. But this case reaffirms the very limited grounds on which an appeal on a point of law may be available. As Judge Hegarty noted, this limited right reflects ‘the increasing recognition accorded to the autonomy of the arbitral process’.

Of course, section 69 is a non-mandatory provision: in contrast to rights to challenge awards under sections 67 (lack of jurisdiction) and 68 (serious irregularity), the parties can, by agreement, opt out of it. This requires clear language, however (see, for example, Shell Egypt West Manzala GmbH v. Dana Gas Egypt Ltd [2009] EWHC 2097 (Comm)). An opt-out is also achieved where parties elect to apply institutional rules such as those of the ICC or the LCIA, whose articles 34(6) and 26.9 respectively provide for a waiver of a right to any form of recourse regarding the award, insofar as such waiver can validly be made.

As mentioned, there are few other legal systems where a right to appeal on a point of law exists, and it seems their number is diminishing. There is no express right under the US Federal Arbitration Act (‘FAA’) to appeal an arbitral award on a point of law. US courts have found in the past that awards could be set aside where there has been a ‘manifest disregard of the law’ (following the dictum in Wilko v. Swan 346 US 427 (1953)). But recent cases suggest that this may no longer be the correct position, and Awards may only be challenged on the basis of the specific categories set out in the FAA (Hall Street Associates, LLC v. Mattel, Inc 522 US 576 (2008), followed in Medicine Shoppe International, Inc v. Turner Investments, Inc  614 F3d 485 (8th Cir. 2010)). Under English law, the right to appeal on a point of law is enshrined in statute, but the circumstances in which it can be invoked are applied by the courts only on a very restrictive basis.

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Appeals on a Point of Law in the English Courts: Further Restrictions

by Jean E. Kalicki

It has become fashionable in recent years, each time an ICSID annulment decision is released that takes issue with the procedures or reasoning of an ICSID tribunal, for commentators to bemoan the lack of certainty, predictability and finality that this reflects in the ICSID system for adjudicating investment treaty disputes between investors and host States. Some commentators urge a return to greater use of ad hoc UNCITRAL arbitration, or arbitration before institutions other than ICSID, to avoid the perceived vagaries of the ICSID annulment process. Yet commentators often forget that these alternatives carry their own risks of uncertainty, inherent in the national court review process that can be invoked with respect to any arbitration subject to challenge and enforcement under the New York Convention. Last week’s U.S. court decision in Argentina v. BG Group (D.C. Court of Appeals, No. 1:08-cv-00485) reminds us that whatever arbitral mechanism the parties select, some risk of uncertainty is unavoidable. The debate between ICSID and alternative forums thus should not be framed as one about avoiding uncertainty and promoting finality, but rather about a more fundamental question: who decides?

Much to the surprise of many seasoned international arbitration practitioners, the D.C. Circuit vacated a US$ 185.3 million Final Award against Argentina, essentially nullifying a hard-fought, four-and-a-half year arbitration between the parties. The court vacated the Award on the basis that the “arbitral panel rendered a decision . . . without regard to the contracting parties’ agreement establishing a precondition to arbitration,” namely the clause in the Argentina-UK bilateral investment treaty (BIT) requiring claimants to submit disputes to the Argentine courts for 18 months before resorting to arbitration. In the underlying UNCITRAL arbitration, the tribunal had considered whether the dispute was admissible without having been first submitted to the Argentine courts. It ruled that such submission was not essential because it in this case it would have been an exercise in futility: the claimant could not have obtained relief anyway from the Argentine courts, given the Republic’s apparent interference with access to the courts and its punishment of all would-be local court litigants by excluding them from contract renegotiations. The tribunal concluded that in these circumstances, the 18-month provision could not “be construed as an absolute impediment to arbitration,” and therefore deemed BG Group’s arbitration claims admissible.

By contrast, the D.C. Circuit concluded that this entire analysis was misplaced, since in its view the BIT terms—which it analyzed principally by reference to U.S. domestic law on contractual intent to arbitrate, rather than under the Vienna Convention—were clearly designed to require prior recourse to the Argentine courts. The court found that the tribunal had exceeded its powers by permitting direct access to arbitration contrary to that expressed intent. Indeed, the court suggested that under U.S. case law, the tribunal should not have even engaged in an analysis of the feasibility or usefulness of prior resort to the Argentine courts, because as a threshold matter it had no proper authority under the BIT to admit such issues for substantive consideration.

In the most narrow sense, the D.C. Circuit’s decision did not directly repudiate the years of fairly consistent rulings by ICSID and UNCITRAL tribunals with respect to the 18-month local court requirement under similar Argentine BITs. That is because the BG Group tribunal had not relied on the BIT’s most-favored-nation (MFN) clause, upon which prior tribunals had rested their decisions, even though BG Group did argue that point. Nonetheless, the D.C. Circuit’s analysis implicitly suggests that it also might have overturned an MFN-based decision, since by the Court’s logic, the tribunals who rendered those decisions likewise would have had no authority to bypass the BIT parties’ allegedly clear intent to require local court proceedings in all circumstances. If the decision is read in this broader way, it can be seen as impugning the core logic of many prior decisions. This would include Maffezini v. Spain (ICSID Case No. ARB/97/7, 1 September 2000), where the tribunal allowed an Argentine investor to invoke (by way of an MFN clause) the Chile-Spain BIT to avoid the domestic court prerequisite in the Argentina-Spain BIT; Siemens v. Argentina (ICSID Case No. ARB/028, Decision on Jurisdiction, 3 August 2004), where the tribunal permitted a German investor to invoke the Argentina-Chile BIT to proceed directly to arbitration; National Grid plc v. Argentina (UNCITRAL, Decision on Jurisdiction, 20 June 2006), where the tribunal permitted a British investor to invoke a more favorable term in the Argentina-US BIT to avoid 18 months of litigation in the Argentine courts; and several other cases in the same line. Until the D.C. Circuit’s opinion, the jurisprudence appeared to be converging on consensus regarding the 18-month waiting requirement, even though much controversy remained about the broader application of MFN clauses in other, less procedural, contexts.

Now, with one 17-page decision, a national court not only has completely up-ended the result in one major case, but also in the process unsettled what most observers had thought to be a progression towards certainty, predictability and finality with respect to this issue. Much can—and undoubtedly will— be written about the substance of the court’s analysis. But at heart, it serves as a reminder that some degree of uncertainty is inherent in international arbitration in any forum, so long as there is any mechanism for review and challenge of arbitral awards. This is just as true for the “alternative” routes of ad hoc UNCITRAL or non-ICSID institutional arbitration as it is for ICSID arbitration, since all non-ICSID mechanisms allow for national court challenges under the New York Convention, and national courts (once vested of the matter) may be tempted to apply their own national laws, including on core issues such as arbitrability. Arguably, the uncertainty of national court review may be even greater than that of ICSID annulment review, since most national court judges are comparatively unfamiliar with investment treaty jurisprudence and may be less concerned about contributing to the growth of consensus or emerging doctrine. The choice between the two systems, thus, should not be framed as a quest for predictability and finality, but rather as something more fundamental: a decision about which decision-makers will evaluate challenges, and what rules and standard of review they will use in deciding.

By Jean E. Kalicki and Dawn Yamane Hewett

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on The Unavoidability of Uncertainty: One Lesson from the Recent U.S. Court Ruling in Argentina v. BG Group

by Phillip Capper

Following the path of the hotly debated West Tankers decision, in African Fertilizers v BD Shipsnavo, the English Commercial Court held that a declaratory award is enforceable, allowing judgment to be entered on the same terms as the arbitral award. Such an order enables a party to obtain the material benefit of the award and indicates the continuing trend of the English courts in favour of arbitration and the enforcement of arbitral awards. However, this approach does raise questions for the health of the inter-twining co-existence of the arbitration and court systems.

The declaratory award (on the tribunal’s jurisdiction) was made pursuant to an arbitration agreement contained in a bill of lading for the carriage of African Fertilizer’s cargo from Romania to Nigeria. The English court had given the claimant, Shipsnavo, leave to enforce the arbitration award and to enter judgment again the defendant, African Fertilizers.

The English court had previously issued an injunction restraining African Fertilizer from continuing an arbitration in Romania, as well an interim declaration that such arbitration proceedings, together with court proceedings commenced in Romania, were both in breach of the arbitration agreement.

Shipsnavo had sought an order for enforcement under s66 of the Arbitration Act 1996 because it was concerned that, should African Fertilizer be successful in its Romanian court proceedings, then it would seek to enforce that judgment under Article 34 of the Brussels Regulation 44/2001, notwithstanding the arbitration award. If Shipsnavo had already obtained an English judgment, then it could seek to resist the recognition of an irreconcilable judgment of the Romanian court.

African Fertilizers resisted the application on the ground that the English court had no jurisdiction to make such an order because the material terms of the award were in purely declaratory terms.

First, it argued that enforcement of an award of a purely declaratory nature is not possible (notwithstanding the ruling – albeit on appeal – in West Tankers). Second, it argued that a judgment entered under s66 of the 1996 Act does not constitute a judgment within the meaning of Article 34 of the Brussels Convention, relying on the ECJ case Solo Kleinmotoren v Boch.

The first limb raised questions of the distinction between “recognition” and “enforcement” in the context of New York Convention awards. African Fertilizers argued that the West Tankers decision was incorrect, that Shipsnavo really intended simply “recognition” of their award in order to defend any adverse Romanian court judgment, and enforcement was not appropriate. The court disagreed, aligning itself with the West Tankers decision and giving primacy to the party’s right to the benefit of the award. The court preferred the plain meaning of “enforce” in s66 of the Act, and cited both textbooks and case law in support of its jurisdiction to enforce a declaratory award.

The second limb was also rejected. The court distinguished the Solo Kleinmotoren decision as being a case about a court approved settlement, in which the ECJ held that a settlement agreement recorded in a court order is not a judgment for the purposes of Article 34(3). Beatson J commented that a settlement is essentially contractual, and while the “submission to arbitration is consensual, the outcome of the arbitration and contents of the award are not”. Further, there were public policy considerations. Citing Briggs on Civil Jurisdiction, Beatson J noted that an English court could not give “leave to enforce an arbitral award and then be required to recognise and enforce a foreign judgment which undermined or contradicted that arbitral award”.

However, there are public policy considerations not considered by the court. Shipsnavo’s objective in seeking to enforce the declaratory award was to pre-empt the enforcement of any irreconcilable judgment that may be given by the Romanian court. What happens if the Romanian courts do find in favour of African Fertilizers? The parties could each have irreconcilable judgments from England and Romania, arising from the same agreement.

While the pro-arbitration stance of the English courts is welcome, this approach can result in inconsistent judgments within Europe. It may be that the current proposals to reform the Brussels Regulation will go some way to temper this risk. The European Parliament’s Legal Affairs Committee (LAC) has proposed maintaining the arbitration exception to the Regulation, but with clarifications for the interface between arbitration and the courts. The first reading of the LAC’s report is reported to take place on 18 April 2012 and the process can take several years to pass through the European parliament. Are those reforms appropriate? And meanwhile, are there risks for the health of the inter-twining systems of justice that are arbitration and litigation?

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Declaratory award held enforceable by English court: a healthy move for arbitration?

by Anthony Charlton

This is the second article in a three-part series summarising the main valuation methodologies used for the purposes of determining economic loss. In part one, I provided an overview of the market-approach methodology. I now turn to the income-based approach, focusing on the discounted cash flow (DCF) methodology.

In my previous article, I noted that a business is only worth what someone is prepared to pay for it. Under the market-approach to valuation, Company A’s worth may be informed at least in part by recent transactions in Company A itself and/ or businesses sufficiently comparable to Company A. The ability to apply usefully the market-approach ultimately depends on the availability of relevant and timely transaction data.

Whilst the market-approach provides a useful insight as to what price was paid for any given asset or business, it may be of less help if one wishes to know how the purchase price of a business was determined. Understanding the underlying value of a business, and the drivers of that value, is often central to the quantification of damages in international arbitration.

Although the purchase price of an asset can be determined by many factors, the underlying value of an asset is based on the future economic benefits that accrue to its owner. This notion is at the heart of the income-based approach to valuation. Within the overall income-based approach, one needs to distinguish between earnings methods and cash flow methods.

Earnings are analogous to the accounting profits that are generated by a company, and attributable to the ordinary shareholders. Since a company’s earnings can be heavily influenced by the specific accounting policies it adopts and applies, comparisons of earnings across different companies can sometimes be difficult. For this reason, valuers often choose to focus on a business’s actual cash flows as this avoids the distorting impact of accounting. On the other hand, where one does not have sufficient detail about the accounting treatments used, it may be easier to focus on earnings. There are a number of different valuation methodologies focusing on either cash flows or earning methods, a few of which are described very briefly in the footnote to this article.

Introduction to DCF

DCF continues to generate much discussion within the arbitration community; certainly, it is being used ever more frequently in support of claims, if anecdotal and personal experience is any guide. In my experience, however, DCF is not always properly understood by non-valuation professional and/ or is on occasions applied incorrectly. I do wonder if this explains, at least in part, why certain arbitrators are sometimes wary of making awards in respect of claims that are based on DCF valuations.

Although the basic principles may appear simple, great care needs to be taken when constructing a DCF model to avoid nullifying its value to the arbitral process. The output of a DCF model is a single number, representing the net present value (NPV) of a project’s or business’s projected future cash flows, discounted to take into account the time value of money and the uncertainty – both upside as well as downside – over the projected future earnings. Crucially, DCF focuses on cash movements rather than accounting profits. When DCF is applied correctly, the calculated NPV can approximate to the fair market value (FMV) of a project or business since it reflects the present value of the future cash flows and hence determines a price at which a well-informed and willing vendor and purchaser could transact.

The quality and relevance of the output from a DCF model depends on the quality of the inputs e.g. the reasonableness of the growth assumptions and the discount rate. As we shall see below, far from being a purely ‘mechanical’ exercise, the derivation of a business’s value under DCF requires considerable skill and judgement.

Overview of a DCF model

In order to prepare a DCF valuation, one needs to determine inter alia the following:

• The relevant time-period – a cash flow model will comprise firstly an explicit forecast period, e.g. the first 5-10 years. An explicit forecast period may seek to capture the initial growth of a company until net cash flows stabilise. For example, the net cash flows of a start-up business might grow by 200% in the first year, 100% in the second year, 50% in the third, and decline each year until stabilising at say 3% per year after year 10. Where the duration of a project is fixed (e.g. a non-renewable 20 year concession over a mine), one would normally expect to see an explicit forecast period only. Where a project has an indefinite life, a terminal growth calculation is usually added to value the cash flows from the end of the explicit forecast period to perpetuity.
• The future cash flows themselves – central to producing a robust DCF model is the ability to produce reasonable forecasts of future cash flows. The model should include, in cash terms, all revenues, direct and indirect costs, capital expenditure, working capital movements etc. Since we are only interested in cash, it will not include non-cash (accounting) items like depreciation and amortisation.
• What is being valued – Defining what precisely is being valued is key; for example, valuers distinguish between the enterprise value of a business (being the value to both debt holders and shareholders) and the equity value (the value to equity holders only). The precise DCF approach used will depend on what is being valued.
• The discount rate – discussed below

Determining the discount rate

As noted above, the projected cash flows need to be adjusted to reflect both the time value of money (€100 today is worth more than the right to €100 for certain in a year’s time) and the uncertainty of the future cash flows; the greater the relevant uncertainty over the projected earnings, the greater the discount rate needed. Another way of looking at this is to say that the discount rate reflects the expected or required return from investors; the greater the risks to which the investor is exposed, the higher the return required.

The calculation of the discount rate will depend on what is being valued; for example, if we are interested in the enterprise value of a business, the discount rate will typically be based on the weighted average of the returns required by debt holders (cost of debt) (after taking into account the tax benefits of debt finance) and equity holders (cost of equity); this is referred to as the after-tax weighted average cost of capital.

The usual starting point in calculating both the cost of debt and the cost of equity is the use of a so-called risk-free rate of return, being the yield on a ‘risk-free’ asset such as a long-term US government bond. [NB: In some contexts it is important to consider the risks in fact associated with an investment in US government debt]

Dealing firstly with the cost of debt, in general, since they are paid ahead of shareholders, and hence are exposed to less risk, debt holders require lower returns than equity holders. In addition to the risk-free rate, a premium will typically be added to take into account the additional risk of lending to a company rather than a government; this premium will be determined by factors such as existing indebtedness, the size of the business, ability to cover interest payments from profits etc.

Whereas the calculation of the cost of debt is relatively straightforward, the calculation of the cost of equity can include many risk premia. A common method of calculating the cost of equity is known as the capital asset pricing model (CAPM). In very general terms, one builds up the cost of equity by taking account of several risk premia including:

• the equity risk premium (the additional return required by holders of stocks over bonds) multiplied by beta (a measure of the sensitivity of a given stock to the overall market);
• a country risk premium (CRP) – The assessment of a suitable discount rate for an investment in a developing market or emerging economy (e.g. countries in the former soviet union) requires the investor to consider risks in addition to those related to investments in more mature, developed economies (such as the United States or Germany). The exercise is one of assessing a risk premium over the return required on investments in more mature, stable economies; and
• a small company risk or ‘size’ premium – whilst this is debatable, some valuers add an additional premium for small companies to reflect the perceived additional risks when compared with larger, more established companies

This is a complicated area, and a detailed treatment is beyond the scope of this article, but it suffices to say that selecting an appropriate discount rate is an art rather than a science. A major part of the quantum expert’s role is to demonstrate to the arbitral tribunal, in as clear and transparent a fashion as possible, that he has considered all relevant issues and has been reasonable in the calculation of the discount rate.

Strengths and weaknesses of the DCF approach

A major attraction of the DCF approach is its inherent flexibility in that it can be applied in many different contexts; it is a commonly accepted basis for assessing the present value of a project, company or asset and can also be used to appraise investment decisions. Importantly, DCF is company or project-specific. Finally, DCF expresses future cash flows in present day terms.

On the other hand, like all valuation methods, a DCF model is only ever as good as the data used and the underlying assumptions. On occasions, it may simply not be possible to make a reasonable estimate of projected future cash flows e.g. because there is insufficient contemporary and/ or historic data; were one to plough on regardless, the output from the DCF model is unlikely to be anything other than pure speculation. In such circumstances, it may be more appropriate to use different valuation methodologies. In any event, the DCF methodology is not the only approach and, as explained in part 1 of this series, best practice requires that a valuation produced under one approach is cross-checked against valuation(s) produced under (a) different approach(es). I discussed approaches to dealing with uncertainty in an earlier article which can be accessed here.

Common mistakes made with DCF

As noted above, it is this writer’s experience that DCF is sometimes applied incorrectly, rendering the results of a model useless at best and, at worst, dangerously misleading. Whilst the below is not intended to be an exhaustive list, here are some of the more common errors to watch out for:

• Overlooking capital expenditure – a DCF valuation which assumes steady growth in annual cash flows should also take into account the capital expenditure required to generate that growth. The re-investment of cash in the business is something which can easily be overlooked, resulting in unrealistically high valuations where capital expenditure is ignored. Where a DCF model includes a terminal period, it is critical that the final year of the explicit period reflects the likely annual capital expenditure going forward
• Overly-aggressive terminal growth assumptions – for the purposes of determining the terminal value component of the DCF valuation, the assumed long-term rate of growth should not exceed the sum of inflation and real GDP growth at the most.
• Double-counting of risk – the uncertainty of future cash flows can be taken into account either by directly adjusting the cash flows in the model or through the discount rate. Normally, one should not make adjustments to both as this would constitute double-counting of the risk
• Explicit period too long – uncertainty increases over time. For this reason, the explicit period should not be excessive.
• Scenarios / sensitivity analysis – best practice requires that the use of sensitivity analysis and/ or considering various scenarios (best case, worst case, base case) showing how the valuation changes as adjustments are made to the various inputs. It is not uncommon for small changes (e.g. to the assumed growth rate) to have a major impact on the valuation. Alas, best practice is not always followed, with the result that some valuations are not accompanied by sensitivity analysis.
• Mathematical errors – as a general rule, the risk that a DCF model will contain formulaic errors, errors in referencing data etc increases in direct proportion to the complexity of the model and the number of assumptions.

Impact of the financial crisis on the application of the DCF approach

Having provided above a very high-level overview of the DCF approach, I will consider briefly what implications the financial crisis has for the use of DCF valuations in international arbitration.
In some ways, the financial crisis has arguably changed nothing at all; as a mere methodology for quantifying damages, DCF remains as applicable as it was prior to autumn 2008. The financial crisis has, however, made the application of DCF, including the calculation of an appropriate discount rate, a far more challenging exercise than it was previously, for reasons I touch upon below.

Dealing firstly with factors impacting on the estimation of future cash flows, it cannot be forgotten that the current global economic climate is characterized by tremendous volatility and uncertainty. In constructing a DCF model, the valuer needs to undertake rigorous analysis to ensure that projections of revenue growth and profitability can be justified. The now common sight of major financial institutions and other businesses with household names going insolvent demonstrates clearly we are living in a time of unprecedented change. The valuer must try to make sense of this volatility and make sensible predictions of future cash flows. This is not the same as saying, however, that such projections need always be excessively conservative. Just as the word ‘crisis’ in Chinese is translated by two symbols representing respectively ‘danger’ and ‘opportunity’, so might the DCF model take into account the reality that some businesses (particularly those well-financed and with excess cash) stand to gain from others’ demise due to reduced competition, availability of key assets at fire-sell price etc.

The financial crisis has a number of potential impacts on the calculation of the discount rate. Firstly, the sovereign debt crisis and the well-publicized downgrading of US debt has called into question whether there exists a truly risk-free rate. Until recent events, bonds issued by the United States and other stable countries were widely considered the best proxy for the risk-free rate – a key component of the cost of capital – and, in many experts’ eyes, still are. With the threat of outright default in some countries and/ or destruction of the currency through monetary inflation in others, the idea of a risk-free rate can seem quaint! If the risk-free rate is not to be derived from US bond yields, however, what possible alternatives are there?

Two further factors to be considered in the calculation of the discount rate include the market-risk premium and the beta (explained above). Given high volatility, the observed premium of required equity returns over government bond yields can fluctuate significantly over short amounts of time. In a similar way, the beta of a given company in a given industry can also vary a great deal; it may be the case for example, that Company A had a beta of 1.5 on 1 January 2011 but that this subsequently increased to say 2.0 by the summer of 2012. It goes without saying that such changes are by their nature difficult to predict and yet this is precisely what the valuer is required to do.

Conclusion

In my experience, there are few circumstances in which a DCF method, properly applied, cannot be usefully adopted. On occasion, however, applying a DCF method properly can be both costly and difficult. Where such difficulties arise, if the same degree of relevance and reliability is required from the result, the issues giving rise to the difficulty and cost do not ‘go away’ simply by selecting a different method; on occasions where there is not an observable market price, all valuation methods (properly applied) – in one way or another – require one nonetheless to form a view about possible future outcomes and the uncertainty surrounding those outcomes.

Notes
Cash flow methods include Discounted Cash Flows or “DCF” (the focus on this article), and Capitalised Cash Flows, which derive a value for a company based on the company’s historical cash flows.

Earnings methods include Capitalised Earnings and Discounted future earnings. Whilst a detailed discussion of these methods is outside the scope of this article, under the capitalised earnings method, a company’s valuation is derived by dividing the expected annual maintainable earnings of the company (often based on an average of historical earnings) by the required earnings yield. This method is typically used where future earnings growth is expected to be minimal. If future earnings growth is expected to be high, the discounted future earnings method may be more appropriate. This method aims to calculate the present value of the expected future earnings of a business by using an appropriate discount rate.

A further methodology in the income-approach is the Discounted Dividends Model (DDM). Under the DDM, the value of an investor’s shares is based on the present value of the likely current and future dividends earned from those shares. DDM is typically used in the case of minority shareholdings and/ or where the relevant shareholder exercises little control.

©FTI Consulting, Inc., 2012. All rights reserved.
The views expressed in the article are held by the author and are not necessarily representative of FTI Consulting, Inc, or its other professionals. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual, entity or transaction. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on DISCOUNTED CASH FLOWS – PART 2, VALUATION AND THE FINANCIAL CRISIS

by Annalise Nelson

What makes an international arbitrator different from a national judge? All of us in the arbitration world have a pretty solid answer to this question. At what point do the distinctions between an international arbitrator and an international judge melt away? That’s a bit of a trickier question, depending on the case.

With the increase in investment law jurisprudence in recent years, we’ve become accustomed to seeing international judges sit on the same investment arbitration panels as commercial arbitrators with their own private practices. In any given arbitration, international judges serving as arbitrators are subject to the same challenge standards as their commercial arbitration peers. And they are not necessarily more immune to accusations of appointing-party bias than their commercial-world co-arbitrators.

But are there times when an international judge, sitting as an ad hoc arbitrator, should be nonetheless judged by the ethics applicable to international judges? On the wide spectrum of international dispute settlement — from private-to-private commercial arbitrations, to private-state disputes in investment arbitration, to state-to-state arbitrations, and finally, to state-to-state permanent tribunals — is there a point at which an arbitrator’s independence and impartiality standards have more in common with those of an international judge than to those of a commercial arbitrator? And if that tipping point isn’t to be found in hybrid public-private disputes like investor-state arbitrations, where is it to be found?

An arbitrator challenge decision released this month by the Permanent Court of Arbitration in the United Nations Convention on the Law of the Sea (“UNCLOS”) case between Mauritius and the United Kingdom gives one answer: the tipping point occurs with state-to-state arbitrations.

The decision concerns Mauritius’ challenge of the UK-appointed arbitrator, Sir Christopher Greenwood. Sir Greenwood currently sits as a Member of the International Court of Justice. Prior to his election to the Court, he served as a professor and a barrister, in the course of which he represented and advised both the UK and foreign governments. In the challenge decision, the remaining four members of the Tribunal, including Mauritius’ party-appointed arbitrator and three arbitrators appointed by the President of the International Tribunal for the Law of the Sea, addressed whether Judge Greenwood’s relationship to the UK Government should result in his disqualification from the dispute.

Mauritius did not argue that Judge Greenwood had advised the UK on the specific dispute before the tribunal (concerning a UK regulation regarding the Chagos Archipelago). Rather, it asserted that he has a “long-standing” and “close” working relationship with the UK Government. Mauritius was particularly concerned by the Judge’s participation in 2011 as a member of a Board to appoint the post of Legal Advisor to the British Foreign and Commonwealth Office (“FCO”). (The Legal Advisor has overall responsibility for the work of the FCO legal advisors, including their work on the Mauritius v. United Kingdom dispute.)

While Mauritius didn’t allege that Judge Greenwood was actually biased, it asserted that in light of his close relationship with the UK and his recent role in the FCO appointment, his participation on the tribunal permitted the appearance of bias or lack of independence. Mauritius argued, drawing on case law under the UNCITRAL Rules, the LCIA, ICSID, and the IBA Guidelines on Conflicts of Interest in International Arbitration, that an “appearance of bias” standard should apply to Judge Greenwood. According to Mauritius, the “appearance of bias” standard is “applicable to all arbitrations” and “there is no justification in law or policy for a different or lower standard of arbitral ethics in inter-State arbitrations, especially where the tribunal must resolve disputes that involve issues of national importance and great public interest.”

The United Kingdom, in contrast, argued the following:

Under the law and practice of these forums, “close past relationship” has never been a ground for challenging an arbitrator. In fact, according to the United Kingdom, “the law and practice applicable in inter-State arbitrations fully supports the election of judges with a close professional relationship to their own State, as shown by the record of most serving and previous ICJ and ITLOS judges, and the limited basis on which they are disqualified from sitting in particular cases.”

According to the UK, the law and practice of arbitrator challenges in international commercial and investment protection arbitrations are irrelevant. Those disputes involve “repeat arbitral appointments, whether by the same party or by the same law firm; potential for influence where arbitrators may be perceived as worrying about where their next appointment will come; [and] cross-overs, where individuals repeatedly switch between the roles of counsel and arbitrator”—in other words, a situation that the UK sees as different from Judge Greenwood’s appointment and role in the present state-to-state arbitration.

The Tribunal sided with the United Kingdom. In determining the applicable challenge standard for Judge Greenwood, the Tribunal first determined that all members composing an arbitral tribunal under Annex VII of the UNCLOS are required to maintain the highest reputation for “fairness, competence and integrity.” The Tribunal then drew on the law and practice of the International Court of Justice and the International Tribunal for the Law of the Sea. The Tribunal noted in particular the following provisions of the Statute of the International Court of Justice:

Article 16 requires that “no member of the Court may exercise any political or administrative function, or engage in any other occupation of a professional nature.” (The Tribunal noted, however, that Article 16 applies to judges only after their election to the Court, and does not disqualify those who exercised such functions before their election.)

Article 17 provides that (1) “No member of the Court may act as agent, counsel, or advocate in any case,” and that (2) “No Member of the Court may participate in the decision in any case in which he has previously taken part as agent, counsel, or advocate for one of the parties, or as a member of a national or international court, or of a commission of enquiry, or in any other capacity.”

The Tribunal rejected Mauritius’ reliance on the “appearance of bias” standard and the IBA Guidelines. It explained:

The Tribunal recalls that the system of inter-State dispute settlement is based upon the consent of the Parties, and more specifically upon the rules of public international law, the sources of which are set out in Article 38(1) of the Statute of the ICJ. In the Tribunal’s view, Mauritius has not demonstrated that the rules adopted by non-governmental institutions such as the IBA have been expressly adopted by States, nor do they form part of a general practice accepted as law, nor fall within any other of the sources of international law enumerated in Article 38(1) of the Statute of the ICJ.

The Tribunal stressed that Article 287(1) of the UNCLOS permits States the option alternatively to submit their case to ITLOS, the ICJ, or arbitration under Annex VII, and that these three options comprise the States’ consent to dispute settlement under the UNCLOS. The Tribunal considered that that the States parties could not have intended to apply different conditions of independence and impartiality to an Annex VII arbitration than to a dispute adjudicated by the ICJ or ITLOS.

The Tribunal’s decision is unlikely to prove controversial. Nonetheless, it’s worth asking whether the distinctions we tend to draw between arbitrators and judges — including the incentives that may affect their behavior and the ethics that should apply to them — are obsolete in the context of state-to-state disputes.

Certainly, some technical distinctions remain between international judges and appointed ad hoc arbitrators adjudicating state-to-state disputes. Unlike an ad hoc arbitrator, the Members of the ICJ are elected by the UN General Assembly to serve 9-year terms at the Court. They generally sit on all cases, unless they have been recused or unless a smaller Chamber of the Court has been constituted for a specific case. As such, ICJ Members receive their caseload (and their pay) from the Court, rather than from the State parties appearing before them.

The Tribunal in Mauritius v. United Kingdom did not address these distinctions. It’s tempting, nonetheless, to speculate as to why this distinction may not matter. Is it, as the UK suggests, that state-to-state arbitration occurs relatively infrequently, and that arbitrators are therefore less likely to focus their careers and income streams around securing future state-to-state arbitration appointments than other kinds of arbitration? Or is it that the arbitrators appointed to state-to-state disputes are more likely to come from a tiny pool of candidates, most of whom are public international lawyers and judges, who might all be disqualified if more stringent challenge standards were applied? Or is it something even more intangible? Is it that there is inherently a diplomatic culture or sensitivity that pervades inter-State disputes and sets them apart from other forms of arbitration? (See, e.g., the “Notes to the Text” of the PCA Optional Rules for Arbitrating Disputes Between Two States state that they are based on the UNCITRAL Arbitration Rules, with certain modifications, including, inter alia, modifications “to reflect the public international law character of disputes between States, and diplomatic practice appropriate to such disputes.”)

I’m inclined to think it’s a combination of all of the above. I’d welcome readers’ thoughts on the subject.

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on A judge by any other name? Arbitrator challenges in state-to-state disputes

by Charles H. Brower II

On December 14, the Second Circuit rendered its decision in Figueiredo Ferraz e Engenharia de Projecto Ltda. v. Republic of Peru, 2001 WL 6188497 (2d Cir. Dec. 14, 2011), which represents a significant development in the court’s jurisprudence on forum non conveniens dismissals of actions to enforce foreign arbitral awards. As explained below, the decision also reveals anomalies in the New York Convention and the Federal Arbitration Act (FAA), which take the instruments beyond the scope of international commercial arbitration and, thus, may encourage forum non conveniens dismissals in certain cases.

As previously discussed in this blog, the Second Circuit drew criticism in 2002 by applying the forum non conveniens doctrine to dismiss an action brought by the Russian state gas company’s insurer to enforce an award not only against the Ukrainian state gas company named in the award, but also against the Ukrainian government. See Monegasque de Reassurances S.A.M. (Monde Re) v. Nak Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002); Charles H. Brower II, Reflection on Forum Non Conveniens: Monde Re Was Right?!?.

Contrary to general opinion in the field, this author supported the Second Circuit’s decision in Monde Re because the plaintiff did not only seek summary enforcement of the award against its counterparty to the arbitration, but also sought relief against a third-party government based on veil-piercing theories that would have raised difficult questions of foreign law, required the collection of evidence from government sources in foreign capitals, and drawn U.S. courts into a politically charged dispute about energy security in Europe. See Brower, supra.

At a high level of generality, the alignment of parties and the procedural history in Figueiredo called forth memories of Monde Re: the claimant brought an arbitration and received an award against a state-controlled program in Peru (“Water for All”), then sought enforcement in New York not only against the named counterparty, but also against the Republic of Peru based on veil-piercing arguments. Figueiredo Ferraz e Engenharia de Projecto Ltda. v. Republic of Peru, 655 F. Supp. 2d 361, 367 (S.D.N.Y. 2009). However, the similarity stops there. Contrary to the situation in Monde Re, the district court held that the veil-piercing arguments could be resolved without further collection of evidence because the Peruvian Ministry of Housing, Construction and Sanitation had itself: (1) made partial payments of sums due under the award; (2) asserted, in intra-governmental correspondence, that the Ministry of Economy and Finance had an obligation to satisfy the award; and (3) initiated proceedings to set aside the award in Peruvian courts. Id. at 371.

Also contrary to the situation in Monde Re, the case did not raise questions that would have drawn U.S. courts into explosive political controversies involving two or more foreign states. Given the simplicity of the issues and the absence of political baggage, the district court exercised its discretion not to dismiss the enforcement action on forum non conveniens grounds. Id. at 374-77.

In a final contrast to Monde Re, the Second Circuit reversed the district court’s denial of forum non conveniens dismissal, based almost exclusively on Peru’s interest in applying a domestic statute that prohibits state agencies from paying more than three percent of their annual operating budgets to satisfy any particular judgment. Figueiredo, 2011 WL 6188497, at *4-*5. Many observers read the Second Circuit’s decision as an unwelcome December surprise that (1) lowers the threshold for forum non conveniens dismissals in enforcement proceedings, and (2) increases opportunities for second-guessing of district courts inclined to retain jurisdiction over enforcement proceedings.

As in Monde Re, however, observers seem to have lost sight of critical facts underlying the Second Circuit’s decision in Figueiredo. These include the facts that: (1) Peru represented the legal seat of arbitration; (2) the arbitral tribunal rendered its decsion “ex aequo et bono” and awarded the claimant more than $21 million; (3) the Ministry requested a Peruvian court to set aside the award on the grounds that Peruvian law limits recovery to the amount of the contract for international arbitrations involving a non-domestic party; (4) the Peruvian court denied set-aside because the claimant “had designated itself a Peruvian domiciliary in the agreement and the arbitration,” with the result that “the arbitration was a ‘national arbitration’ involving only domestic parties”; (5) when seeking enforcement of the award in New York, the claimant described itself as a Brazilian corporation; and (6) Peru’s appellate brief stridently argued that the claimant should be deemed a Peruvian national, given the position it had taken in the agreement, the arbitration and the set-aside proceedings. Id. at *1 (emphasis added); Brief of Peru at 57-59; Reply Brief of Peru at 29. In short, one might describe the claimant’s tactics as vexatious, cloaking itself in a Peruvian flag to secure the higher measure of damages available in “national” arbitrations, then cloaking itself in a Brazilian flag to avoid the three-percent payment cap for national arbitrations.

As one reads the appellate briefs of the parties on the topic of nationality, the claimant distinguishes between corporate domicile and nationality, whereas Peru seems to equate the two—an outcome that seems consistent both with the Peruvian court’s conclusions in the set-aside proceedings and with U.S. definitions of corporate citizenship for purposes of diversity jurisdiction. Compare Brief of Figueiredo Ferraz e Engenharia de Projecto Ltda. at 70-72, with Brief of Peru at 57-59, and Reply Brief of Peru at 29. See also Figueiredo, 2011 WL 6188497, at *1; 28 U.S.C. § 1332(c)(1) (assigning citizenship to corporations based on place of incorporation and principal place of business).

While the district court’s analysis accepted the claimant’s distinction between domicile and nationality, the Second Circuit (1) emphasized the Peruvian court’s description of the arbitration as a “‘national arbitration’ involving only domestic parties,” and (2) seemed exceedingly reluctant to allow an ostensibly Peruvian entity to use enforcement proceedings to avoid the application of Peru’s statutory cap on payments when dealing with the Peruvian government in a contract both executed and performed in Peru. Compare Figueiredo, 655 F. Supp. 2d at 372, with id., 2011 WL 6188497, at *1, *5.

Whatever the proper legal designation of the claimant’s nationality, the case reveals anomalies in the New York Convention and the Federal Arbitration Act. If one assumes that the claimant donned Peruvian nationality as a matter of law, the case clearly escapes the scope of international arbitration, inasmuch as it represents a legal relationship solely between Peruvian entities, with contractual performance solely in Peru, and conduct of the arbitration proceedings solely in Peru. Viewed from that perspective, the case represents a national arbitration that falls squarely outside the scope of most instruments on international commercial arbitration.

Going back to the early history of international instruments on the topic, the 1923 Geneva Protocol on Arbitration Clauses applies only to agreements “between parties[] subject respectively to the jurisdiction of different contracting parties.” Geneva Protocol on Arbitration Clauses, art. 1, Sept. 24, 1923, 27 L.N.T.S. 157. The 1927 Geneva Convention on the Execution of Foreign Arbitral Awards applied only to awards “made in pursuance of an agreement . . . covered by the [1923 Geneva Protocol],” meaning an agreement between parties having diverse nationalities. Geneva Convention on the Execution of Foreign Arbitral Awards, art. 1, Sept. 26, 1927, 92 L.N.T.S. 302.

Similarly, the 1961 European Convention on International Commercial Arbitration applies only to agreements and awards “arising from international trade between physical or legal persons having . . . their habitual place of residence or their seat in different Contracting States.” European Convention on International Commercial Arbitration, art. I(1)(a), Apr. 21, 1961, 484 U.N.T.S. 364.

Likewise, in the preamble to the 1975 Inter-American (Panama) Convention on International Commercial Arbitration, states parties express their desire to “conclud[e] a convention on international commercial arbitration.” Inter-American Convention on International Commercial Arbitration, pmbl., 1438 U.N.T.S 248. While none of the operative articles expressly limits that instrument’s coverage to international commercial disputes, the limitation finds confirmation in Article 3, which provides: “In the absence of an express agreement between the parties, the arbitration shall be conducted in accordance with the rules of procedure of the Inter-American Commercial Arbitration Commission [(IACAC Rules)].” It seems unlikely that states parties, such as the United States, contemplated application of the IACAC Rules to purely domestic arbitrations in which the disputing parties failed to identify a set of arbitration rules. See H.R. Rep 101-501, reprinted in 1990 U.S.C.C.A.N. 675, 676-77 (emphasizing the Panama Convention’s role in facilitating “international commerce,” “trade,” and “foreign investment”). Cf. John P. Bowman, The Panama Convention and Its Implementation Under the Federal Arbitration Act, 11 Am. Rev. Int’l Arb. 1, 37 (2000) (“Application of the Panama Convention to international commercial arbitration permeates the Convention from beginning to end.”).

Finally, and most recently, the UNCITRAL Model Law on International Commercial Arbitration applies only to “international commercial arbitration,” defined to encompass situations where: (1) the parties have their places of business in different states; (2) the arbitration is seated outside the state in which the parties have their places of business; (3) a substantial place of contractual performance lies outside the state in which the parties have their places of business; or (4) the parties have expressly agreed that the subject matter of the dispute relates to more than one country. UNCITRAL Model Law on International Commercial Arbitration, art. 1(1), (3), U.N. Doc. A/40/17/Annex I (June 21, 1985).

In other words, on one view, Figueiredo involved relationships so squarely grounded in Peru that the resulting arbitration could not possibly have qualified for coverage by almost any of the leading instruments on international commercial arbitration—except, of course, the New York Convention.

True to its official name, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, applies to any award rendered on the territory of a foreign state (or, if the state of enforcement has adopted the reciprocity reservation, the Convention applies to any award rendered on the territory of a foreign state party). Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. I(1), (3), June 10, 1958, 330 U.N.T.S. 38.

Unlike almost every other leading instrument, the New York Convention does not require the disputing parties to have diverse nationalities or to engage in transactions that cross national borders. While the New York Convention aims primarily “to facilitate arbitration in international commerce,” and while an early ICC prototype had referred to “international awards,” concerns about a-national awards and the difficulties of defining international commerce prompted delegates to the New York Convention’s 1958 drafting conference to reorient that instrument’s coverage towards foreign awards. Albert Jan van den Berg, The New York Arbitration Convention of 1958, at 17 (1981). As a result, the New York Convention technically applies to foreign awards grounded in a single jurisdiction. Thus, for purposes of enforcement in the United States, an award falls under the Convention even if rendered in Paris between two French wine merchants under a contact for the sale of French wine. Id.

In his seminal work on the New York Convention, Albert Jan van den Berg described this phenomenon as a “harmless ‘side-effect’” that “scarcely occurs in practice” and had “not occurred in any of the reported cases.” Id. at 18. In addition, he opined that the New York Convention’s uniquely broad scope might prove useful in cases where the losing parties to domestic arbitrations possess substantial bank accounts in foreign jurisdictions. Id. While van den Berg’s assessment holds true as a general matter, one wonders if the “side-effect” remains so “harmless” when private parties exploit it to reach the assets of their own governments, thus draining the national treasury in violation of otherwise applicable national laws.

Confirming the potential for mischief in the circumstances just outlined, one need not search long for precedent rejecting the efforts of disgruntled national corporations to circumvent the limits of domestic redress against their own governments by invoking the machinery of international dispute settlement. Cf. Loewen Group, Inc. v. United States, ICSID Case No. ARB(AF)/98/3, Award ¶ 223 (June 26, 2003) (finding it “inconceivable” that states would negotiate treaties to provide their own citizens with international avenues for redress of regulatory disputes). This holds true even in the context of the New York Convention, where the only court to address the issue outside the Second Circuit invoked the forum non conveniens doctrine to dismiss an enforcement action brought by a foreign entity against its own government with respect to an arbitration involving public utilities and seated in the state of the disputing parties’ nationality. Termorio S.A. E.S.P. v. Electrificiadora del Atlantico S.A. E.S.P., 421 F. Supp. 2d 87, 103-04 (D.D.C. 2006).

Of course, the New York Convention’s unusually broad scope should not apply to cases that, like Figueiredo, arise under the Panama Convention. As mentioned above and recognized by some courts, the Panama Convention does not cover foreign awards involving parties, transactions, and arbitral proceedings grounded in a single foreign jurisdiction. See Energy Transport Ltd. v. M.V. San Sebastian, 348 F. Supp. 2d 186, 199 (S.D.N.Y. 2004) (“For example, if parties sought enforcement in the United States of an award rendered in Panama, involving only Panamanian citizens conducting a domestic transaction, the New York Convention would likely apply but the Inter-American Convention would not because of the award’s purely domestic character.”); Bowman, supra, at 39 (“Under the Panama Convention, . . . a foreign award rendered . . . in Uruguay, involving only Uruguayan citizens engaged in a domestic transaction, may not be enforceable.”).

However, this clear understanding of the Panama Convention’s scope reveals an anomaly in the FAA. Despite the obvious differences between the respective scopes of the Panama and New York Conventions, the United States inexplicably implemented the Panama Convention through a statutory provision that incorporates by reference most of the New York Convention’s implementing legislation. See 9 U.S.C. § 302. As a result, while the Panama Convention applies only to international commercial arbitration, the United States has extended its coverage by statute to awards grounded in a single foreign jurisdiction. Bowman, supra, at 39 n.104, 75. While “harmless” in most cases, this little-known “side-effect” could prove both unexpected and aggravating to foreign governments dealing with their own citizens in domestic transactions, on matters of public importance.

Given the United States’ relative lack of interest in localized disputes between foreign governments and their own nationals on matters of local importance, it seems wise for U.S. courts to preserve forum non conveniens dismissals as a possible antidote for the rare situations in which the New York Convention’s and the FAA’s unusually broad scope threatens to produce surprising results. Far from provoking allegations of treaty violations, such dismissals seem more likely to draw appreciation from states parties dealing with their own citizens on matters of the public interest.

For the reasons stated above, the Second Circuit’s decision in Figueiredo deserves more sympathetic consideration than accorded by most observers. Likewise, the forum non conveniens doctrine deserves slightly better treatment than the categorical rejection adopted by the draft Restatement on the U.S. Law of International Commercial Arbitration. By failing to leave any opening for forum non conveniens dismissals, the Restatement’s drafters run the risk that their final product will draw the same respect expressed by the majority in Figueiredo, which damned the ALI’s work by failing to mention it at all.

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 33rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on December Surprise: New Second Circuit Ruling on Forum Non Conveniens in Enforcement Proceedings

by Roger Alford (Editor)

On behalf of the many contributors to this blog and the good folks at Kluwer Law International, I am pleased to announce that this blog has won CPR’s 2011 award for best electronic media focused on ADR. The press release is here.

As most of you know, the CPR Institute is a nonprofit think tank and alliance of global corporations, law firms, scholars, and public institutions dedicated to the principles of commercial conflict prevention and alternative dispute resolution. The “Best Electronic Media Award” is presented annually to “a company, group, or individual that has produced exceptional electronic media that was focused on the field of Alternative Dispute Resolution.”

CPR presented the award at a wonderful dinner in New York last week as evidenced by the photo.

(Tali Finkelstein (left), Roger Alford (center), and Leslie Alford (right))

Without sounding cliché, the award recognizes the outstanding work of all of our permanent and guest contributors, and the tireless support from Kluwer Law International (with a special shout out to KLI superstars Gwen de Vries, Eleanor Taylor, Vincent Verschoor, and Raymond Blijd).

Others CPR winners include:
ADR Center in Italy for Outstanding Practical Achievement;
Roselle Wissler for Outstanding Professional Article;
Stacie Strong for Outstanding Short Article;
Michael Diamond and Nate Mealey for Outstanding Student Articles;
Douglas Noll for Outstanding Book.

Congrats to all!

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 32rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Kluwer Arbitration Blog Wins CPR Award

by Daniella Strik

The P.R.I.M.E. Finance dispute resolution services and its Arbitration and Mediation Rules were launched at the opening conference of P.R.I.M.E. Finance in the Peace Palace in The Hague on 16 January 2012. Dutch Minister of Finance Jan-Kees de Jager officially opened P.R.I.M.E. Finance, which offers dispute resolution services in the area of complex financial products.

The P.R.I.M.E. Finance foundation (Panel of Recognized International Market Experts In Finance) was established with the aim of facilitating dispute settlement, reducing legal uncertainty and fostering stability in the global financial markets. Jeffrey Golden, visiting professor at the LSE, has been a strong advocate for founding an arbitral institute for complex financial disputes. See here. After a round table meeting with leading legal and financial experts organized by the Dutch not-for-profit organization World Legal Forum Foundation in the Peace Palace on 25 October 2010, it was decided that a world financial tribunal would be established in The Hague. See here.

The panel includes internationally renowned experts in the field of both finance as well as dispute resolution. Among the panel members are retired and sitting judges, central bankers, regulators, representatives from private practice and derivative market participants (both dealer and buy side). For the Finance experts list see here and the dispute resolution experts list see here. The composition of the panel is very diverse, in terms of gender and geographic reach (e.g. from England to Nigeria).

These experts are eligible to be appointed as arbitrator under the P.R.I.M.E. Finance Arbitration and Mediation Rules. Also, these experts are available to assist in judicial training and the development of library resources relevant to complex product and standard form financial contract disputes. P.R.I.M.E. Finance aspires to represent the greatest source in the world of collective knowledge and experience of documentation, law and market practice for derivatives and other complex financial products.

Secretary-General of P.R.I.M.E. Finance, NautaDutilh’s arbitration specialist Gerard Meijer, presented the first edition of the institute’s Arbitration Rules during the opening conference. These rules have been inspired by the 2010 UNCITRAL Arbitration Rules and have been adjusted, to tailor to the needs of arbitration in the financial markets. Input has been sought from the dispute resolution experts on the panel, including Johnny Veeder, Judge Stephen Schwebel, Albert Jan van den Berg and Jan Paulsson. The P.R.I.M.E. Finance Arbitration Rules will be published on the website of the institute on 18 January 2012. See here. The Secretary-General announced that the board will take into account feedback from users and may adopt a second edition of the rules after 6 to 12 months.

Distinctive features of the P.R.I.M.E. Finance Rules include the following. First of all, the P.R.I.M.E. Finance Rules provide for an arbitration institute that will administer the arbitral proceedings, whereas UNCITRAL Rules have been written for ad hoc arbitration. The Secretary-General of the Permanent Court of Arbitration (“PCA”) in The Hague has accepted to serve as appointing authority, if so requested by a party. Exclusively persons identified on the panel of experts will be eligible to be appointed as arbitrator, unless otherwise agreed by the parties. See article 8 P.R.I.M.E. Finance Rules. For reasons of transparency, this list of experts is public.

The P.R.I.M.E. Finance Rules oblige a candidate arbitrator pursuant to article 11 to disclose any circumstances likely to give rise to justifiable doubts as to availability (as well as impartiality and independence). This provision should contribute to an efficient and speedily arbitration process.

One of the conclusions from the market sounding process that took place before the P.R.I.M.E. Finance Rules were drafted was that market participants value a speedily resolution of these type of conflicts. The Rules have been tailored to this need by including rules on interim measures and fast track arbitration.

Article 26 of the P.R.I.M.E. Finance Rules provides that the arbitral tribunal may, at the request of a party, grant interim measures if it finds that it has prima facie jurisdiction to decide the claim. A party in need of urgent provisional measures that cannot await the constitution of the arbitral tribunal may make an application for such measures to be rendered by an emergency arbitrator in the form of an order under article 26a and the Emergency Arbitration Rules attached to the P.R.I.M.E. Finance Rules. Such order shall not bind the arbitral tribunal and shall not prejudice a final decision of the tribunal on the merits. In addition parties may make an application for provisional measures in referee arbitral proceedings, as referred to in article 1051(1) Dutch Code of Civil Procedure. It is noted that the parties should agree that the seat of arbitration is located in The Netherlands, in order to benefit from Dutch law that provides that the referee arbitral award is an arbitral award.

Another distinctive feature of the P.R.I.M.E. Finance Rules is that awards may in principle be made public with the consent of all parties. Also, P.R.I.M.E. Finance may publish an award or an order in its entirety, in anonymised form, under the condition that no party objects to such publication within one month after receipt of the award. These provisions, set out in article 34 of the P.R.I.M.E. Finance Rules, aim to support the overall goal of P.R.I.M.E. Finance, which is to create a vast body of case law in the area of complex financial products to increase legal certainty.

The fact that P.R.I.M.E. Finance has based its Arbitration Rules on the UNCITRAL Rules should form a solid basis for the arbitral proceedings under these rules. These rules have been well-tested and are widely accepted around the world. In combination with the list of internationally recognized experts, this should be a good basis for market participants to start including references to the P.R.I.M.E. Finance Rules in their contracts. At the opening conference Gay Evans, Vice Chairman of the Board and Non-Executive Chairman Europe of the International Swaps and Derivatives Association, Inc., (“ISDA”) stated that although ISDA does not officially endorse the P.R.I.M.E. Finance Arbitration Rules – nor the rules of any other arbitral institute for that matter – ISDA “highly supports” this initiative. Originally bankers were deemed to have an antipathy against arbitration (see here), but recent years have seen a marked increase in the use of arbitration in the financial sector. Last year, ISDA organised a consultation process on the use of arbitration in ISDA Master Agreements. See here. ISDA’s support may be a critical success factor for P.R.I.M.E. Finance arbitration. Should ISDA proceed with including model arbitration clauses for use in conjunction with the ISDA Master Agreement, it would be wise not to limit the model seats of arbitration to each of England and New York, as suggested in its November 2011 consultation memorandum. One of the main drivers of the establishment of P.R.I.M.E. Finance is that many counterparties in emerging countries are increasingly reluctant to accept that any dispute will be resolved in England or the United States. As a result, the Netherlands was elected as base for P.R.I.M.E. Finance, due to its neutral position in the financial markets and it renowned infrastructure for international dispute resolution. Also in view of the fact that the PCA has authorised the conduct of arbitral hearings at the Peace Palace, The Hague would be a logical choice for the seat of arbitration in such arbitration clauses.

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 32rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Launch of P.R.I.M.E. Finance Arbitration Rules: dispute resolution in global financial markets

by Georg von Segesser

At its session of 15 November 2011, the International Council of Arbitration for Sports (ICAS) amended Article 14 of the Statutes of the bodies working for the settlement of Sport-related Disputes (Article S14) and abandoned the old regime which provided that with regard to the list of CAS arbitrators, the ICAS had to respect a specific distribution, namely 1/5th of the arbitrators selected from among the persons proposed by the International Olympic Committee (IOC), chosen from within its membership or from outside; 1/5th of the arbitrators selected from among the persons proposed by the International Federations for the Summer and Winter Olympics (IFs), chosen from within their membership or outside; 1/5th of the arbitrators selected from among the persons proposed by the National Olympic Committees (NOCs), chosen from within their membership or outside; 1/5th of the arbitrators chosen, after appropriate consultation, with a view to safeguarding the interests of the athletes; and 1/5th of the arbitrators chosen from among persons independent of the bodies responsible for proposing arbitrators, in conformity with this Article.

Under the new Article S14 which came into effect on 1 January 2012, the ICAS is free to call upon personalities with full legal training, recognized competence with regard to sports law and/or international arbitration, a good knowledge of sport in general, and a good command of at least one CAS working language, whose names and qualifications are brought to the attention of the ICAS, including by the IOC, the IFs and the NOCs. This is the major amendment of the January 2012 revision and is to be welcomed as it further enhances the already existing independence of CAS arbitrators.

Other significant modifications relate to the Consultation Proceedings and to consolidation. The special provisions applicable to Consultation Proceedings (Articles 60 – 62 of the Procedural Rules of the CAS), pursuant to which the above-named organizations and associations could request advisory opinions from the CAS, were indeed abandoned. Moreover a new subsection of Article 39 of the Procedural Rules now provides for the possibility to consolidate two arbitration proceedings.

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 32rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on CAS Code Amendments in force as from 01.01.2012 – CAS arbitrators selected more freely

by Jean E. Kalicki

The recent decision in Spyridon Roussalis v. Romania (ICSID Case No. ARB/06/1) is prompting renewed debate over whether ICSID arbitration, now the leading mechanism for investors to pursue treaty-based claims against host States, may also be used by those States to assert related counterclaims against the investors, allowing all such claims to be settled in a single forum. At issue are certain fundamental questions about the relationship between the ICSID Convention and investment treaties as an extrinsic source of consent to arbitrate.

Article 46 of the ICSID Convention expressly requires a tribunal, if requested by a party, to determine “counterclaims arising directly out of the subject-matter of the dispute”— unless the parties have agreed otherwise, and provided as a threshold matter that such claims “are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.” Yet few parties have made these requests. Even fewer parties have succeeded.

When consent to ICSID arbitration is founded on a contract rather than a treaty, few threshold jurisdictional issues arise in connection with State counterclaims, because contractual dispute resolution provisions are generally bilateral, allowing either party to the contract to assert claims for breach of the contract’s terms. In such cases, ICSID tribunals have not hesitated to hear State counterclaims. In Atlantic Triton v. Guinea (ICSID Case No. ARB/84/1), the respondent’s ability to bring its own claim for breach of contract worked against it on the merits; in rejecting the counterclaim, the tribunal stated that “it must be underscored that if Guinea itself considered Atlantic Triton responsible for the significant damages it claims to have suffered, it is surprising that Guinea did not take the initiative and institute arbitration proceedings following the rescission of the management Agreement but waited until Atlantic Triton filed its request for arbitration before making its claims” (¶ 4.2). In another case against Guinea where jurisdiction was also contract-based, Maritime International Nominees Establishment v. Guinea (ICSID Case No. ARB/84/4), the tribunal not only exercised jurisdiction over Guinea’s counterclaim, but also upheld it, awarding Guinea damages resulting from the claimant’s initiation of AAA proceedings in violation of the parties’ agreement to resolve their disputes through ICSID jurisdiction.

With respect to treaty-based arbitrations, some tribunals have entertained respondent counterclaims but rejected them on the merits. In Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. Estonia (ICSID Case No. ARB/99/2), for example, without expressly addressing the issue of jurisdiction, the tribunal found that Estonia’s counterclaim was belied by contradictory evidence in the record. Other tribunals have cited a respondent’s failure to substantiate its counterclaim. This was the case in Gustav F. W. Hamester GmbH & Co. KG v. Republic of Ghana (ICSID Case No. ARB/07/24), where respondent Ghana, after presenting a counterclaim in the relief section of its counter-memorial, failed to make any further arguments in favor of either jurisdiction or a decision on the merits. The tribunal highlighted that “the BIT recognises that the State party may be ‘aggrieved’ and ‘shall have the right to refer the dispute to’ arbitration,” but it ultimately held that “in the absence of any submissions on the nature of the Respondent’s counterclaim under the BIT, the Tribunal is unable to analyse whether it is capable, in accordance with Article 46 of the Convention, of falling within the parties’ scope of consent” (¶¶ 354–55).

By contrast, the recently-decided Roussalis case squarely presented the question of jurisdiction over treaty-based counterclaims by a respondent State. The majority of the tribunal held that the BIT in question contained no consent for the submission of respondent State counterclaims.

Primarily a dispute about a dispute, the case in Roussalis centered around the alleged breach by the claimant of a share purchase agreement, and, in response, the pursuit by Romanian authorities of various domestic remedies. Claiming that Romania’s actions constituted “a series of malicious and unjustifiable acts” (¶ 10), the claimant initiated proceedings before ICSID, under the Greece-Romania BIT. Romania, for its part, submitted a counterclaim alleging that the claimant had breached its obligations under the share purchase agreement. It agreed to suspend any domestic proceedings making similar claims during the pendency of the ICSID arbitration.

After considering — and rejecting — each of the claimant’s treaty claims, the tribunal proceeded to determine whether it had jurisdiction over Romania’s counterclaim. Consistent with the decisions on counterclaims under the UNCITRAL Rules (see, e.g., Saluka v. Czech Republic), the tribunal noted that “[b]eing the party asserting that the Tribunal has jurisdiction to hear and determine the counterclaims which it seeks to bring before the Tribunal, the Respondent carries the burden of establishing that jurisdiction exists” (¶ 860). The threshold issue, according to the tribunal, was one of consent. Romania had argued that, because the ICSID Convention permits counterclaims — and the BIT did not expressly preclude them — by selecting ICSID as the forum to resolve the dispute, the claimant implicitly had consented to the submission of counterclaims.

A majority of the tribunal rejected this interpretation. The tribunal found that consent “must be determined in the first place by reference to the dispute resolution clause contained in the BIT. The investor’s consent to the BIT’s arbitration clause can only exist in relation to counterclaims if such counterclaims come within the consent of the host State as expressed in the BIT” (¶ 866).

To this end, the tribunal noted that Article 9 of the BIT provided that “Disputes between an investor of a Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement, in relation to an investment of the former shall, if possible, be settled . . . If such disputes cannot be settled . . . the investor concerned may submit the dispute . . . to international arbitration” (emphasis added). The majority found that this language “undoubtedly limit[s] jurisdiction to claims brought by investors about obligations of the host State. Accordingly, the BIT does not provide for counterclaims to be introduced by the host state in relation to obligation of the investor. The meaning of the ‘dispute’ is the issue of compliance by the State with the BIT” (¶ 869).

In dissent, Professor Michael Reisman stated that “when the States Parties to a BIT contingently consent, inter alia, to ICSID jurisdiction, the consent component of Article 36 of the Washington Convention is ipso facto imported into any ICSID arbitration which an investor then elects to pursue.” Though Professor Reisman stated he understood “the line of [the majority’s analysis,” he also stated that it produced “an ironic, if not absurd, outcome,” in that the State was directed “to pursue its claims in its own courts where the very investor who had sought a forum outside the state apparatus is now constrained to become the defendant.”

As Professor Reisman noted, the majority’s decision in Roussalis marks the first time that jurisdiction over counterclaims has been rejected based on an absence of consent. It remains to be seen whether different tribunals, interpreting different and perhaps less narrow treaty language, will follow suit. At the very least, Roussalis has re-sparked the counterclaim debate among commentators. The case and the issue of State counterclaims more generally will be the subject of the first-ever OGEMID Mini-Seminar — a virtual panel intended to facilitate debate among members of the arbitration community — next week.

By Jean E. Kalicki and Mallory Silberman

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 32rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Can States Assert Counterclaims Against Investors in BIT Proceedings?

by Justin D'Agostino

Last month’s judgment of the Hong Kong Court of Appeal (“CA“) in Gao Haiyan and Xie Heping v. Keeneye Holdings and another CACV 79/2011, is the latest in a long line of cases demonstrating the pro-enforcement approach of the Hong Kong courts. The decision makes clear that it is not the place of the Hong Kong courts to comment on the merits of an arbitral award. Rather, the courts’ role in enforcing arbitral awards should be as mechanistic as possible. This is consistent with existing caselaw on enforcement and reinforces the respect of the Hong Kong courts for the finality of arbitral awards.

The CA in Keeneye reversed the much-discussed decision of the Hong Kong Court of First Instance (“CFI“) to refuse enforcement of a PRC arbitral award on grounds of public policy. The CFI had held that the conduct of an arbitration in which one of the arbitrators and the General Secretary of the Xian Arbitration Commission acted as mediators (a so-called “arb-med” procedure) was tainted by apprehended bias. The CFI therefore refused enforcement of the award on the basis that it would be against the public policy of Hong Kong, pursuant to section 40E(3) of Hong Kong’s old Arbitration Ordinance (Cap. 341) (which was then in force, but has since been superseded by section 95 of the new Arbitration Ordinance, Cap. 609).

The CA allowed Gao and Xie’s appeal against the CFI decision, and approved the enforcement of the award in Hong Kong on two principal grounds.

First, Keeneye had failed to raise any objection to the “arb-med” procedure during the arbitration itself, and had therefore waived its right to do so in the enforcement proceedings. This decision was underpinned by the governing arbitral rules (the Xian Arbitration Commission Arbitration Rules), which specifically provided for waiver of the right to object in such circumstances. (Similar rules on waiver exist in many institutional rules, including Article 28.1 of the HKIAC Administered Arbitration Rules, Article 39 of the new ICC Rules (which came into effect on 1 January this year), and Article 36.1 of the SIAC Rules.) On this point, the CA also emphasised the principle that a party may not keep a complaint about impropriety or bias “up his sleeve” for potential use at a later stage.

Secondly, the “arb-med” procedure adopted in the arbitration did not disclose apprehended bias giving rise to an issue of public policy in any event. This part of the CA’s decision may come as a surprise to some, given the striking factual circumstances in this case. These included the facts that (i) the mediation took place in the form of a private meeting over dinner at the Xian Shangri-la Hotel, (ii) the mediation was not held in the presence of both parties, and (iii) the mediators appeared to make a settlement proposal on their own initiative. However, in reaching its conclusion that there was no apprehended bias, the CA indicated that due consideration should be given to how mediation is typically conducted in the jurisdiction of the seat (here, the PRC). In this regard, the CA placed considerable weight upon the fact that the local court in Xian (which had supervisory jurisdiction over the arbitration) had refused an application to set aside the award – citing with approval English authority that such circumstances will be a “very strong policy consideration” for the court to take into account in deciding whether or not to enforce an award.

According to the CA, the test for determining what is contrary to public policy in Hong Kong is whether the relevant matter is contrary to “fundamental conceptions of morality and justice” in Hong Kong. Thus, if the procedure is acceptable practice in the jurisdiction in which it took place, it will not be in breach of public policy in Hong Kong unless it was so serious as to be contrary to fundamental conceptions of morality and justice.

Although this “when in Rome” approach might seem slightly troubling at first sight, the conclusion of the CA appears to be the right one. In particular, when a party consents to arbitration in a particular jurisdiction, it agrees to be bound by the rules and procedures of that seat. Whilst there is a public policy ceiling on adopted procedures beyond which the enforcing courts will be unwilling to cross, this outer limit will be narrowly construed in practice. For those engaging in “arb-med” procedures in the PRC (where practices often differ significantly from those in Hong Kong and other jurisdictions), the Keeneye judgment may provide some comfort that the mediation procedure will not in itself threaten the enforceability of any award in Hong Kong on the basis of public policy.

The CA’s recent judgment is likely to generate much (further) discussion about the development of arb-med in Hong Kong. Whilst the judgment acknowledges that arbitrators can act as mediators in the course of arbitration proceedings (a practice which is recognised expressly in section 33 of Hong Kong’s new Arbitration Ordinance, Cap. 609), the acceptable boundaries of that role in Hong Kong are far from clear. Moreover, the concept as a whole can be rather alien to common law lawyers.

It is suggested that parties and counsel should keep an open mind to the possibility of adopting arb-med in the light of the pivotal role such procedures have played in the settlement of disputes in other jurisdictions. That said, for a number of reasons (including the fact that arbitrator-mediators are compelled by Hong Kong’s arbitration legislation to disclose to all parties any confidential but materially relevant information they learned during private caucus sessions), it is likely that arb-med procedures in Hong Kong will favour an evaluative, rather than a facilitative, approach (with appropriate waivers from the parties). Such an approach would avoid the risk of any subsequent complaint about ex parte communications between a party and the arbitrator-mediator – as was featured in Keeneye.

It remains to be seen which direction the development of arb-med in Hong Kong will take. In the meantime, the Keeneye judgment serves as a powerful reminder to parties to raise any objections they may have to the arbitral procedure promptly. Failure to do so may result in a waiver of the right to object at a later date, including in the context of enforcement proceedings.

Justin D’Agostino, Martin Wallace and Ula Cartwright-Finch

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 32rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Arb-med procedures and enforcement in Hong Kong: The crest of the waiver?

by Merryl Lawry-White

The International Bar Association annual conference in Dubai in November put the spotlight on the arbitral regime in Dubai. Several “hot topics” were discussed, including the possibility that counsel representing parties in arbitrations in Dubai would be charged a hefty fee by the Dubai government and the prospect of a new United Arab Emirates (UAE) federal arbitration law based upon the UNCITRAL Model Law. We learned that the former was not a real concern for lawyers not based in the country full-time; while the latter is apparently back on the table after it was first raised in 2008.

Questions regarding arbitration in Dubai usually focus on enforcement in general, and, particularly, the interrelation between the civil law “onshore” regime and the common law “offshore” jurisdiction of the Dubai International Financial Centre (DIFC). Certain key developments in relation to these regimes from the last few years are set out below.

I. BACKGROUND: THE ARBITRAL REGIME OF THE DIFC

The DIFC is an example of ‘a jurisdiction within a jurisdiction’, a construct adopted in several Middle Eastern countries and adapted to provide certainty and familiarity to international business in an attempt to attract investment.

The DIFC is a financial free zone, located in the Emirate of Dubai (known as “offshore” and “onshore” Dubai respectively). In spite of its location in the centre of a civil law jurisdiction, the DIFC is an autonomous common law jurisdiction, empowered, pursuant to UAE law, to enact its own legal and regulatory framework for all civil and commercial matters. The language of the supervisory court, the DIFC Court,1 is English.

The DIFC Arbitration Law is modelled on the UNCITRAL Model Law, as amended in 2006, and entered into force in 2008. Pursuant to this law, there is no requirement for parties to have any connection with the DIFC in order to provide for an arbitration to be seated in the jurisdiction.2 In contrast, arbitrations seated in “onshore” Dubai are governed by Articles 203-218 of the UAE Code of Civil Procedure 1992, largely based on the former Egyptian Civil Procedure Law.3

In February 2008, the DIFC inaugurated the DIFC-LCIA Arbitration Centre (the Centre), which is the product (as the name suggests) of a joint venture between the London Court of Arbitration (LCIA) and the DIFC. The DIFC-LCIA Arbitration Rules (the Rules) are closely modelled on the LCIA Arbitration Rules. The Centre functions with the assistance of the LCIA Secretariat and has full access to its expertise and general systems.

II. THE ENFORCEMENT REGIME: AN UPDATE

A. Enforcement in “Onshore” Dubai

1. Awards rendered in Dubai

Pursuant to Article 215 of the UAE Code of Civil Procedure, a “domestic” arbitration award must be recognised by the local court, with the effect of converting it to a court judgment. As there is no system of precedent nor comprehensive court reporting system in the UAE, there is no consistent barometer of the Dubai Courts’ attitude to domestic awards. However, key cases are often reported at conferences or are the subject of publications by counsel. Concerns regarding the Dubai Courts’ attitude to enforcement of awards have a long history, harking back to the widely reported case of Bechtel v. the Department of Civil Aviation of the Government of Dubai in 1994, in which the Dubai Court of Cassation refused to enforce a US$ 25 million award in favour of the Claimant on the grounds that the arbitrator had failed to require the witnesses to swear an oath in the manner prescribed by the UAE Civil Procedure Code. Since 1994, arbitration practitioners in the region have developed a list of “dos and “don’ts”, in an effort to minimise the risk of annulment.4 Practitioners are periodically reminded of the need to follow this list. In 2009, for example, the Court of Cassation was faced with an appeal of a Court of Appeal decision to set aside an award on the basis that the arbitrator had not signed each page of the award. The Court of Cassation’s judgment confirmed that an award could be set aside if the signature of the arbitrator (or majority of the tribunal) did not appear on the pages of the award containing the final relief granted and the tribunal’s reasons for granting that relief. In this particular case, the arbitrator had signed the page setting out its decision and part of the reasoning for its decision. The Court of Cassation deemed this sufficient to uphold the validity of the award and proceeded to reverse the decision of the Court of Appeal.5

Recently, local practitioners have expressed confidence that the Dubai Courts’ attitude towards arbitration awards has changed since Bechtel.6 It is worth noting that, awards rendered under the rules of the Dubai International Arbitration Centre (DIAC) are almost always seated in Dubai, and when compared with DIAC’s large caseload, the discussion of enforcement “scare” stories is limited.

However, a new arbitration law, based upon the UNCITRAL Model Law, would obviously provide greater certainty as to the boundaries of the Dubai Courts’ authority to set aside awards.

2. Awards Rendered in the DIFC

Further to Article 43 of the DIFC Arbitration Law, a party may apply for an order of the DIFC Courts recognising an arbitration award rendered in the DIFC.

Article 7 of Dubai Law No 12 of 2004 (Article 7), states that any judgment “ratified” by the DIFC Courts will be enforceable in “onshore” Dubai (and thereafter, in the other Emirates, pursuant to Federal Law No (11) of 1973 Regulating Judicial Relations between Member Emirates in the Federation) without any further review by the Dubai Courts, provided the judgment is final, has been translated into Arabic and is “appropriate for enforcement”.7 Recognition pursuant to Article 43 of the DIFC Arbitration Law qualifies as “ratification” for the purposes of Article 7.8 To date there has been no judicial guidance as to the meaning of “appropriate for enforcement”. The 2009 Protocol on Enforcement between the DIFC Courts and the Dubai Courts signed in April 2009 (the Protocol), reiterates the contents of Article 7, particularly that the Dubai Execution Court is to enforce a DIFC judgment without re-reviewing the case, and sets out the procedure by which enforcement pursuant to Article 7 is to take place.

Two key developments occurred in 2011 in relation to Article 7 and the Protocol. The first arbitration award rendered in a DIFC-seated arbitration and recognised by the DIFC Courts pursuant to Article 43, was enforced “onshore” pursuant to Article 7 and the Protocol. At the time in question, approximately 40 DIFC court judgments or orders had already been enforced pursuant to the Protocol. This sets an important precedent, and allows for tentative advice to be provided as to the practice, rather than simply the theory, of “onshore” enforcement of an “offshore” award. The award in question, Property Concepts FZE and Lootah Network Real Estate & Commercial Brokerage, was ratified by the DIFC Court of First Instance on 19 October 2010 and ordered the Defendant to pay damages of approximately US$ 7.2 million plus interests and costs.9

Secondly, on 31 October 2011, Dubai Law No 16 of 2011 (Law No 16), passed primarily to expand the jurisdiction of the DIFC Courts, also amended Article 7. The test for enforcement remains the same, but the procedure for enforcement as set out in the Protocol is now enshrined in law. It is worth noting that the phrase “final and appropriate for enforcement” (as per the English translation of Article 7 and the Protocol) is worded as “final and executable” in the English translation of Law No 16. However, the phrase in Arabic is the same in all three instruments, and the test therefore appears unchanged.

3. Foreign Arbitration Awards: Enforcement under the New York Convention

Following the UAE’s accession to the New York Convention (the Convention) in 2006, any arbitration awards rendered in the UAE will be enforceable in the 146 states party to the Convention subject to the limitations specified in its Article V. Conversely, the UAE has an obligation to enforce foreign arbitration awards in accordance with the terms of the Convention. Even though the focus of this discussion is Dubai, it is worth noting that the first foreign arbitration awards enforced in the UAE under the Convention were enforced by the Fujairah (one of the seven Emirates that make up the UAE) Courts in late 2010. Two London Maritime Arbitration Association awards, rendered in 2007, were enforced “in absentia” on the basis of “documents-only”. The defendant did not contest the enforcement.

Decisions of the Dubai Courts are not systematically reported. However, the existence of two enforcement actions under the Convention before the Dubai Courts are generally known amongst the local arbitration community. In the first, the Dubai Court of First Instance refused to enforce a Stockholm Chamber of Commence award with no reasons. The decision is being appealed. The second enforcement action, in respect of an award in a dispute between a subsidiary of Macsteel International, incorporated in the Jebel Ali Free Zone, and a Dubai-incorporated company, rendered under the Rules and seated in London, was upheld by the same court. As a contested action, the decision has been hailed as a key “step forward”. It is generally understood that the disputing party relied upon technical arguments that drew upon the pre-Convention enforcement regime. It is notable that not only did these arguments not prevail in the Dubai Court of First Instance, but that the Fujairah court, in its judgment, made no reference to the pre-Convention regime.

B. Enforcement in “Offshore” Dubai

As there are limited or no relevant precedents, the legal regime set out below is discussed on more of a theoretical basis, simply to complete the picture.

1. DIFC Arbitration Awards

As set out above, a DIFC award is recognised pursuant to Article 43 of the DIFC Arbitration Law (as occurred in Property Concepts FZE and Lootah Network Real Estate & Commercial Brokerage). The DIFC Courts will then proceed to enforce the award.

Subject to the parties’ agreement and any request for interpretation or correction of an award, an application for an award to be set aside (and therefore any attempt to resist recognition on this basis) must be made within three months of the applicant receiving the award.10 The grounds on which an application to set aside can be made are adopted from the UNCITRAL Model Law, as amended in 2006, and are largely limited to safeguarding the procedural integrity of the process, for example, relating to violation of due process rights. In addition, the DIFC Courts may set aside an award on their own volition if they deem that the dispute is not arbitrable under DIFC Law or the outcome of the award is contrary to the public policy of the UAE.11

2. “Onshore” Dubai Arbitration Awards

Arbitration awards rendered in “onshore” Dubai would, theoretically, be enforced in accordance with Law No 16, following ratification by the Dubai Courts (Law No 16 operates equally in respect of Dubai court judgements being enforced in the DIFC as for DIFC judgments being enforced in Dubai, subject to slightly different formalities). No relevant precedent has yet been reported.

3. Foreign Arbitration Awards

The DIFC, as a financial free zone, has an obligation to comply with the international obligations of the UAE.12 As part of the UAE, awards rendered in the DIFC also benefit from rights granted to the UAE under international law.

It has been suggested that a more certain way of enforcing foreign arbitration awards in “onshore” Dubai, rather than to seek direct enforcement under the Convention before the Dubai Courts, is to combine two of the enforcement routes described: (i) firstly, obtaining recognition of a foreign award under the Convention before the DIFC Courts where the judges are more familiar with the UAE’s international obligations under the Convention and where the grounds for refusing enforcement are drafted in line with those under the Convention (they mimic the grounds for setting aside domestic arbitration awards set out above); and (ii) secondly, enforcing the DIFC-ratified award in “onshore” Dubai pursuant to Law No 16. The developments described above would appear to support this view.

III. CHOOSING THE DIFC AS AN ARBITRAL SEAT

In light of recent developments and its geographical location, the DIFC is likely to be viewed as an attractive seat of arbitration, whether as a neutral seat for two non-UAE parties or for disputes involving one or more UAE parties. In fact, lawyers often enquire about the possibility of seating any arbitration with a Middle East connection in the DIFC. However, given the DIFC’s position as a second jurisdiction within the Emirate of Dubai, and further to a judgment rendered by the (as he then was) Deputy Chief Justice of the DIFC Courts, Michael Hwang, in July 2009, parties wishing to choose the DIFC as the juridical seat of their arbitration should be reminded of the need to express their intention in specific terms.

The case in question, Amarjeet Singh Dhir v. Waterfront Property Investment Limited and Linarus FZE,13 was the first case heard by the DIFC Courts in connection with the DIFC Arbitration Law and the Centre. In spite of the Claimant’s arguments to the contrary, Michael Hwang considered that, in the circumstances and given the parties’ knowledge of the different jurisdictions, the arbitration was seated in “onshore” Dubai, pursuant to an arbitration clause which specified: (i) the applicable law as the “laws of the Emirate of Dubai”; (ii) any dispute (following a period for amicable settlement) to be resolved through arbitration conducted in accordance with “the DIFC-LCIA rules of arbitration applicable to the Dubai International Financial Centre”; and (iii) the place of arbitration as “Dubai”. In essence, the choice of the Rules will not protect a party that has not expressly stated the DIFC as the arbitral seat. Michael Hwang summarised the position as follows:

The moral of this case is that, if parties want the DIFC Arbitration Law to apply and the DIFC Court to have jurisdiction over an arbitration, they should expressly select the DIFC as the seat in their arbitration agreement.14

IV. THE DUBAI WORLD TRIBUNAL

No discussion of arbitration in the UAE would be complete without mention of one recent decision of the Special Tribunal to decide Disputes related to the settlement of the financial position of Dubai World and its subsidiaries (the Dubai World Tribunal or DWT). Although the DWT and its rulings in respect of arbitration clauses require their own blog entry to be developed fully, we set out the ruling in a recent case that exemplifies its policy in respect of arbitration agreements. The DWT is composed of three DIFC judges,15 and, therefore may also be informative as to the line such judges will take in the DIFC Courts.

By way of introduction, the DWT was established pursuant to Dubai Decree No 57 of 2009, as amended by Dubai Decree No 11 of 2010 (the Decrees), to hear disputes brought by or against Dubai World and its subsidiaries in the aftermath of Dubai World’s restructuring first announced in late 2009. The DWT formed part of a legislative insolvency package aimed at offering Dubai World’s many creditors a degree of certainty and a neutral forum to pursue their claims. The Decrees had the effect of mandatorily excluding the jurisdiction of the Dubai Courts (including the DIFC Courts) in respect of these claims. The DWT’s jurisdiction and decisions draw upon the laws of various jurisdictions: it is seated in the DIFC; many of the claims brought before the DWT arise out of contracts governed by UAE law;16 and the court procedure was determined, prior to October 2011, by the Rules of the DIFC Courts (modeled largely on the English Civil Procedure Code) and since October 2011, in accordance with the Rules of the DWT (a variation on the Rules of the DIFC Courts). Its decisions are final and not subject to appeal.

In its judgment dated 11 July 2011, in the case of Hedley International Emirates Contracting LLC v. Nakheel PJSC,17 the DWT upheld its “policy” position towards arbitration clauses, to “respect and enforce arbitration agreements made between the Corporation and its creditors” and to expect parties to continue with pending arbitration proceedings in accordance with the terms of the relevant contract.18 The DWT dismissed jurisdiction in the case on the basis that the claim in question was subject to an arbitration clause. In its decision, the DWT noted that it was bound by Article II(1) of the Convention, which prescribed that it must recognise binding arbitration agreements. More telling was the warning, in the final paragraph of its decision, that applicants in future claims presented to the DWT, but dismissed for lack of jurisdiction because they are governed by a binding arbitration agreement, would find themselves faced with an adverse costs award on an indemnity basis.

Reza Mohtashami & Merryl Lawry-White19

1. The DIFC Court was established under Dubai Law No 9 of 2004 in respect of the Dubai International Financial Centre and Dubai Law No 12 of 2004 in respect of the Judicial Authority at Dubai International Financial Centre. ↩
2. The DIFC Arbitration Law (DIFC Law No 1 of 2008) repealed DIFC Law No 8 of 2004. ↩
3. Essam al Tamimi (ed.), The Practitioner’s Guide to Arbitration in the Middle East and North Africa (JurisNet, LLC, 2009), at page 486. ↩
4. For an overview of arbitration in the UAE and the main formalities required by the UAE Civil Procedure Code, see Habib Al-Mulla’s “Overview of arbitration in the UAE 2011”, particularly paragraphs 29-40, available here. ↩
5. Suzanne Abdallah, Al-Tamimi and Co., “Arbitration in the UAE: the Formalities of an Arbitration Award”, dated 1 March 2011, available here. ↩
6. Comments of Essam Al-Tamimi at the DIFC-LCIA Symposium, held on 31 October 2011. ↩
7. Article 7 of Dubai Law No 12 of 2004 states:

   “(…)

   (2) Should the subject of execution fall outside the Centre (the DIFC), judgments, awards and orders issued by the Courts and Arbitral Awards ratified by the Courts shall be enforced by an executive judge at the Dubai Courts, subject to the following: (a) the judgment, award or order is final and is appropriate for enforcement; and (b) the judgment, award or order has been translated into Arabic.

   (3) The executive judge at Dubai Courts has no jurisdiction to review the merits of a judgment, award or order of the Courts.” ↩

8. As per Article 42(4) of the DIFC Arbitration Law. ↩
9. A copy of the order is available here. ↩
10. Article 41 of the DIFC Arbitration Law. ↩
11. Article 41 of the DIFC Arbitration Law. ↩
12. Article 5 of Federal Law No 8 of 2004. ↩
13. Amarjeet Singh Dhir v. Waterfront Property Investment Limited and Linarus FZE (Claim No CFI 011/2009), Grounds of Decision, 8 July 2009, available here. ↩
14. Amarjeet Singh Dhir v. Waterfront Property Investment Limited and Linarus FZE (Claim No CFI 011/2009), Grounds of Decision, 8 July 2009, at para 92. ↩
15. Sir Anthony Evans, Michael Hwang and Sir John Chadwick. ↩
16. The DWT is bound by Dubai Decree No 57 of 2009, at Article 4, to decides dispute in accordance with the DIFC Insolvency Law and Regulations, the DIFC Law No 10 of 2004, UAE Law, commercial custom and principles of justice, and rules of righteousness and equity. DIFC Law No 10 of 2004 provides for application of DIFC Laws and any law agreed by the parties. ↩
17. Hedley International Emirates Contracting LLC v. Nakheel PJSC (Claim DWT/0017/2011), Reasons for Judgment dated 11 July 2011, available here. ↩
18. See DWT Practice Direction No 1/2010, dated 30 March 2010, available here. ↩
19. Reza Mohtashami is a Partner and Merryl Lawry-White is an Associate based in the Dubai office of Freshfields Bruckhaus Deringer LLP. The views expressed herein are the authors’ own and do not reflect those of Freshfields Bruckhaus Deringer LLP. ↩

More from our authors: Challenge and Disqualification of Arbitrators in International Arbitration
by Karel Daele
€ 160
The 32rd America's Cup Judicial and Arbitral Decisions
by Henry Peter, Hamish Ross, Graham McKenzie
€ 125
Yearbook Commercial Arbitration. Volume XXXVI. 2011
by Albert Jan van den Berg
€ 255


• Leave a comment on Key Developments in Relation to Arbitration in Dubai

by Promod Nair

On Tuesday, 10 January 2012, a Constitution Bench of the Indian Supreme Court began hearings in Bharat Aluminium v Kaiser Aluminium (Civil Appeal No. 7019 of 2005) and related matters to reconsider its earlier judgment in Bhatia International v Bulk Trading SA, (2002) 4 SCC 105 (“Bhatia”).

In Bhatia, the court held that the Indian courts could intervene to order interim measures of protection even in relation to arbitrations seated outside India. The court’s jurisdiction was invoked by a party seeking interim measures of protection in relation to an ICC-administered arbitration seated in Paris. Although section 9 of India’s Arbitration Act expressly empowers Indian courts to grant interim relief, this provision is contained in Part I of the Act which was designed to apply only where an arbitration is seated in India. The Supreme Court was thus faced with a situation where it could not order interim measures of protection since the arbitration clause provided for a Paris seat. Faced with this legal hurdle, the Supreme Court adopted a result-driven approach and held that the general provisions of Part I would also apply also to offshore arbitrations, unless the parties impliedly or expressly excluded the applicability of the Act.

The ratio in Bhatia was subsequently extended to permit the Indian courts to reopen and set aside awards rendered in arbitrations seated outside India, and even appoint arbitrators in such arbitrations. The judgment has been subjected to much criticism in India and beyond for authorising Indian courts to exercise long-arm jurisdiction and for introducing substantial uncertainty in offshore arbitrations involving Indian parties. Indeed, in a sign of judicial discomfort with the broad scope of the Bhatia ruling, the Supreme Court itself and various High Courts in the country have subsequently sought to narrow down the scope of the decision. They have also displayed a greater willingness in recent years to infer implied exclusions of the Indian Arbitration Act in relation to arbitrations seated outside India.

Nevertheless, in order to mitigate the risk of excessive judicial intervention, it has now become standard market practice in India-related international commercial transactions to exclude the application of Part I in arbitrations seated outside India.

Although legislative intervention has been proposed to remedy the ill-effects of the Bhatia ruling, most recently in a Consultation Paper circulated by the Indian Ministry of Law and Justice, such attempts have failed to take off in any meaningful way.

In these circumstances, the Supreme Court’s decision to reconsider its own ruling in Bhatia is a welcome step. The court also adopted a refreshingly novel approach by inviting interested parties to intervene in order to assist the court as amicus curiae. In response to this invitation, LCIA India, the Singapore International Arbitration Centre and the Nani Palkhivala Arbitration Centre have all intervened in the proceedings.

The hearing commenced this week with observations from the court to the effect that (i) it was of the prima facie view its earlier judgment in Bhatia International should be reconsidered, and (ii) it was keen to ensure that foreign investors should not be deterred by the prospect of long-winded litigation in relation to India-related commercial contracts. The court also indicated it was in favour of recommending to Parliament that all matters relating to enforcement of awards be heard directly by the Supreme Court which would cut through the delays caused by enforcement issues having to pass through multiple layers of the Indian court system (as is presently the case).

The Indian Supreme Court has been criticised (sometimes unfairly) in the past for being arbitration-unfriendly. In Bharat Aluminium v Kaiser Aluminium, it now has an excellent opportunity to change that perception, and firmly put the development of Indian jurisprudence on a pro-arbitration trajectory.

(Promod Nair is a partner at J Sagar Associates in Bangalore)

More from our authors: International Civil Litigation in United States Courts - 5th edition
by Gary B. Born & Peter B. Rutledge
€ 105
Arbitration with the Arab Countries
by Abdul Hamid El-Ahdab, Jalal El-Ahdab
€ 185
International Arbitration and International Commercial Law. Synergy Convergence and Evolution
by Stefan Kröll, Loukas A. Mistelis, P. Perales Viscasillas, V. Rogers
€ 180


• Leave a comment on A new year, a new start in India

by Daniella Strik

After the 2011 Decree which reformed French arbitration law, the number of countries having arbitration acts expressly providing for the possibility of waiving setting aside proceedings at the seat has increased. In view of the fact that arbitration rules of some institutions provide for a waiver of “any form of recourse” against awards rendered under such rules, the topic of waiver of setting aside proceedings is becoming of increasing importance for practitioners.

Article 1522 of the French Code of Civil Procedure, which applies to international arbitrations, provides that “by way of a specific agreement the parties may, at any time, expressly waive their right to bring an action to set aside”. For more information on the new French Arbitration Act, see here. Other European jurisdictions that permit parties to waive or exclude judicial review of an award are: Switzerland (Article 192(1) of the Swiss Private International Law Act), Belgium (Article 1717(4) of the Belgian Judicial Code) and Sweden (Article 51 of the Swedish Arbitration Act). In contrast to the relevant provisions in these jurisdictions, Article 1522 of the French Code of Civil Procedure permits the exclusion of an application to set aside an award in any arbitration which qualifies as “international” within the meaning of the Code, regardless of the nationality of parties. The parties’ waiver will not affect, however, their rights to appeal any decision to enforce an award in France.

National courts in some countries have reached different conclusions with respect to the validity and enforceability of a waiver of the right to bring an application to set aside an award where the lex loci arbitri does not expressly allow such a waiver. Moreover, in a number of countries, this question has not yet been submitted to courts, leaving the position uncertain. Article 34 of the UNCITRAL Model Law (“Model Law”), which sets out the grounds for setting aside an award, is silent on the issue of waivers. A waiver by parties of the right to challenge an award at the seat in jurisdictions that have adopted the Model Law therefore constitutes a waiver of Article 34 of the Model Law. Examples of such Model Law countries are Canada and New Zealand.

In the Canadian case of Noble China Inc v Lei (1998) 42 O.R. (3d) 69; 42 B.L.R. (2d) 262, the parties, a Hong Kong resident and a Toronto listed company, attempted to settle a dispute by means of a settlement agreement, in which the parties had included the following arbitration clause: “No matter which is to be arbitrated is to be the subject matter of any court proceeding other than a proceeding to enforce the arbitration award”. The Ontario Court (General Division) held that parties may exclude the grounds for setting aside an award, provided that their agreement does not conflict with a mandatory provision of the Model Law or principles of public policy. The Court took the view that Article 34 of the Model Law was not a mandatory provision, largely on the basis of an earlier draft of the Model Law and the fact that Article 34 of the Model Law did not contain any of the usual mandatory language, such as the word of “shall”.

Six years later, a New Zealand court had to consider this issue in a more or less similar case, Methanex Motonui Ltd v Joseph Spellman and Ors CA 171/03 of 17 June 2004. The court took a different approach and concluded that there was “no contemplation that parties to arbitral proceedings could seek to limit further the rights of review contemplated by Article 34”. In the view of the New Zealand court, Article 34 of the Model Law was of fundamental importance and therefore parties could not exclude this provision. The same position was taken by the District Court of New York in the case Hoeft v MVL Group 343 F.3d 57 (2003)(2d Cir (US)). In this case, the parties had tried to waive Article 10 of the US Federal Arbitration Act (“FAA”), a provision similar to Article 34 of the Model Law, which also does not provide for a waiver of applications to set aside an award. The District Court of New York held that the grounds for setting aside an award contained in Article 10 of the FAA were the “floor” for judicial review of arbitration awards “below which the parties cannot require the courts to go”. However, not all U.S. courts have decided accordingly: a limited number of (older) U.S. authorities have held that parties are able to waive Article 10 of the FAA.

The jurisdictions that allow a waiver to set aside an award require the waiver to be express and sufficiently clear. Parties should not be held to have taken this step absent evidence that they really meant to do so. In view of the mixed results in countries that do not expressly allow for parties to agree to a waiver, parties that want to ensure that such a waiver will be effective would be well advised to choose a seat of arbitration in jurisdictions like France, Switzerland, Sweden or Belgium.

Nevertheless, a waiver of annulment proceedings is not desirable in all cases. By excluding setting aside proceedings at the seat, parties try to avoid lengthy and costly challenges to awards before state courts. Where an arbitral award contains a serious flaw, opposition to enforcement can be expected – despite the exclusion of the remedy of annulment. If enforcement proceedings are expected to be initiated in a number of countries, the investment of time and costs associated with multiple challenges to enforcement is likely to be quite burdensome for both parties. In such a situation, it may be more efficient to have the the main debate on the validity of the award take place in the context of annulment proceedings at the seat, although this will not necessarily prevent an enforcement court from taking a different view as the cases Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46 and Amsterdam Court of Appeal 28 April 2009, JOR 2009, 208 (Yukos Capital v Rosneft) have shown. For more information on these cases, see here and here.

Moreover, parties are not likely to agree to a waiver of the right to bring annulment proceedings at the seat in “bet-the-company” type claims. With respect to such claims, parties may want to keep open all of their options to challenge an award, given the importance of the proceedings. In other cases, there may be a greater need for a quick and less costly resolution of the dispute. In such circumstances, a waiver could be a viable option.

Another point of view is that a waiver may have added value in cases where the law of the country in which enforcement of the award will be sought provides for grounds for refusing enforcement that are less strict than the grounds for setting aside an award at the lex loci arbitri. In this respect, agreements which provide for punitive damages come to mind. Courts in certain civil law jurisdictions have repeatedly held that punitive damages constitute a penalty rather than compensation for losses and thus violate public policy. Courts in common law countries tend to enforce awards for punitive damages. Yet such considerations do not often play a role when parties are deciding whether or not to opt for a waiver of annulment proceedings.

In conclusion: for each individual arbitration agreement, the merits of the relevant legal relationship and potential claims should be the leading considerations when deciding whether a waiver of the right to set aside an award is desirable. Particular attention should be given to draft (international) arbitration clauses which refer to institutional arbitration rules and provide for a seat of arbitration in a country where the national law allows a waiver of setting aside proceedings. Whereas, for example, the UNCITRAL Rules and Stockholm Chamber of Commerce Arbitration Rules do not contain waiver clauses, article 34(6) of the ICC Rules (2012) provides that: “[…] By submitting the dispute to arbitration under the Rules, the parties […] shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.” Article 24(2) of the CEPINA Rules contains a similar waiver, but states that it does not apply where an explicit waiver is required by law. Article 26(9) of the LCIA Rules contains such a waiver for “appeal, review or recourse”. Whether a general reference to the ICC, LCIA and CEPINA Rules would satisfy an “express provision” as required for a valid waiver in these jurisdictions is still unclear. Some Swiss courts have held that a general reference to the ICC Rules does not suffice to constitute a valid waiver of setting aside proceedings. How French courts will rule on this issue under the recently amended French Code of Civil Procedure remains to be seen. Therefore, where parties to an international arbitration are contemplating the selection of the ICC or LCIA Rules, with a seat of arbitration in a city such as Paris, to avoid arguments as to the availability of the right to seek annulment of any award, it is advisable to state expressly in the arbitration agreement that parties will retain that right.

Daniella Strik and Justus Hoefnagel, Linklaters LLP

More from our authors: International Civil Litigation in United States Courts - 5th edition
by Gary B. Born & Peter B. Rutledge
€ 105
Arbitration with the Arab Countries
by Abdul Hamid El-Ahdab, Jalal El-Ahdab
€ 185
International Arbitration and International Commercial Law. Synergy Convergence and Evolution
by Stefan Kröll, Loukas A. Mistelis, P. Perales Viscasillas, V. Rogers
€ 180


• Leave a comment on Growing number of countries allowing exclusion agreements with respect to annulment warrants greater scrutiny of arbitration clauses

by James Rogers

Yograj Infrastructure Ltd. Vs. Ssang Yong Engineering and Construction Co. Ltd. (on 1 September 2011)

As reported in this blog, in May 2011 the Supreme Court of India (SCI) moderated the controversial principle it established in 2002 that allowed the Indian courts to intervene in arbitrations held outside of India unless that possibility was expressly excluded by the parties (see Videocon Industries Ltd. Vs. Union Of India & Anr. (2011) 6 SCC 161). In a decision which should be welcomed by the international legal and commercial communities, on 1 September 2011 the SCI further restricted the scope for the Indian Courts to interfere in international arbitrations seated outside the country in its decision in Yograj Infrastructure Ltd. Vs. Ssang Yong Engineering and Construction Co. Ltd.

Legal background

In Bhatia International Vs. Bulk Trading SA (2002) (4) SCC 105 it was held that the provisions of Part I of the Indian Arbitration and Conciliation Act 1996 (the Act) (which allow the Indian Courts to grant interim measures (Section 9), to make arbitral appointments in the absence of agreement by the parties (Section 11) and to set aside arbitration awards (Section 34) among other measures) would apply to international arbitrations held outside of India unless the parties agreed to exclude their application.

Since the Bhatia case, the requirement of “express exclusion” appears to have been relaxed through judgments given by the Gudjarat High Court in Hardy Oil & Gas Vs. Hindustan Oil Exploration (2006) 1 GLR 658 and the SCI in Videocon Industries Ltd. Vs. Union Of India & Anr. (2011) 6 SCC 161. However, the courts’ reasoning in those decisions was not without fault.

In Hardy Oil the Gudjarat High Court confirmed that Part I of the Act could be impliedly excluded, in that case by express agreement by the parties to a contract providing that “[t]he place of arbitration shall be London and the … law governing the arbitration shall be English law”. Hardy Oil suggests that the reference to a law governing the arbitration, in other words, the law of the seat of the arbitration, should have been determinative.

In Videocon, the SCI followed that line of reasoning but appeared to misjudge the distinction between the law of the arbitration agreement and the curial law, relying instead on the law governing the arbitration agreement as determinative. The SCI held that, since the parties had agreed to an arbitration clause governed by English law, even though the main contract was governed by Indian law, they too had implied an exclusion to Part I of the Act. Had the SCI correctly applied Hardy Oil the result may have been no different, as the curial law in Videocon was not Indian law either and therefore Part I of the Act should have been excluded in any event. However, it is concerning that this fundamental distinction was mishandled at all.

In Yograj Infrastructure the SCI gets the distinction right.

Facts

In April 2006 a Korean incorporated Company, SSang Yong Engineering and Construction Co. Ltd. (SSY) entered into a sub-contract (the Agreement) with Indian-incorporated Yograj Infrastructure Limited (YAL) for a highways infrastructure project in the province of Madhya Pradesh which had been granted to SSY by the National Highways Authority of India, New Delhi. In September 2009, SSY terminated the agreement with YAL on the grounds that YAL had delayed in performing the construction work.

SSY (who was the Respondent in the present proceedings) and YAL (who was the Applicant) each applied for interim relief before the Indian courts. The court referred the parties to arbitration in Singapore in accordance with Clause 27 of the Agreement which specified that “All disputes, differences arising out of or in connection with the Agreement shall be referred to arbitration. The arbitration proceedings shall be conducted in English in Singapore in accordance with the Singapore International Arbitration Centre (SIAC) Rules as in force at the time of signing of this Agreement … [t]he arbitration shall take place in Singapore…”.

Once the arbitral tribunal was composed, the Respondent applied for, and was granted, certain relief against the Applicant in an interim order. The Applicant appealed the tribunal’s interim order to the Indian District Court which rejected the appeal. Following another appeal to the Madhya Pradesh High Court (also rejected) the Appellant brought an appeal to the SCI.

The SCI’s decision

The SCI examined the arbitration clause in the Agreement noting that there was “no ambiguity” surrounding the fact that the governing law (or “proper” law) of the Agreement was the law of India (provided for at Clause 28 of the Agreement). However, quite correctly, the SCI differentiated the proper law from the “curial” law governing the arbitration itself, which the parties were free to nominate.

As is normal, the parties had not expressly provided for a curial law governing the arbitration, rather they had simply referred to Singapore as the seat of the arbitration. While this should not normally lead to any ambiguity regarding the correct curial law, as the Videocon decision demonstrates the Indian courts have not always appreciated the distinctions between the various laws at play in the international arbitration context. However, that Singaporean law was the applicable curial law in this case was beyond issue by application of the Singapore International Arbitration Centre (“SIAC”) Rules 2007.

Article 32 of the SIAC Rules 2007 (which has since been replaced by Article 27 of the 2010 SIAC Rules which allows the tribunal greater discretion in this regard) provides that “Where the seat of arbitration is Singapore, the law of the arbitration under these Rules shall be the [Singaporean] International Arbitration Act … or its modification or reenactment thereof”.

Accordingly, as the parties had by implication of the SIAC Rules 2007 agreed Singaporean law as the curial law, the SCI concluded that they had impliedly excluded the application of Part I of the Act.

Commentary

It is encouraging that the SCI has correctly distinguished between the general law of the arbitration clause (Indian law in this case) and the law governing the procedure and conduct of the arbitration (Singaporean law). While the decision as a whole is welcome insofar as it further reduces the scope for the Indian courts to interfere in arbitral proceedings seated outside of India. The SCI is to be applauded for further restricting the application of the controversial principle established in the Bhatia case.

However, it is hoped that the SCI may yet go further. At the time of writing, the SCI had just begun hearing a number of consolidated appeals that could lead to full reversal of the Bhatia line of authority. The SCI has invited amici curiae briefs and those submitting briefs include the LCIA India and the SIAC. Commentators are therefore quietly hopeful that this may spell the end for Bhatia.

More from our authors: International Civil Litigation in United States Courts - 5th edition
by Gary B. Born & Peter B. Rutledge
€ 105
Arbitration with the Arab Countries
by Abdul Hamid El-Ahdab, Jalal El-Ahdab
€ 185
International Arbitration and International Commercial Law. Synergy Convergence and Evolution
by Stefan Kröll, Loukas A. Mistelis, P. Perales Viscasillas, V. Rogers
€ 180


• Leave a comment on Further Encouraging Developments in the Indian Treatment of Foreign Seated International Arbitrations