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ESPF v. Italy: The Broadening Scope of Specific Representations under the FET Standard

Sat, 2021-01-23 23:46

Traditionally, one of the central pillars of the FET standard has been the protection of legitimate expectations. Legitimate expectations can be either based on a host state’s specific representations provided to the investor, or, under certain conditions, such expectation can be based on the regulatory framework that existed at the time of making the investment.

Numerous tribunals have stressed that the specific representations provided to an investor by a host state form the strongest basis for the creation of legitimate expectations.1)White Industries v. India, UNCITRAL, Final Award (30 November 2011) para. 10.3.17; Mamidoil Jetoil Greek Petroleum Products Société S.A. v. Republic of Albania, ICSID Case No. ARB/11/24 Award (30 March 2015) para. 642. jQuery("#footnote_plugin_tooltip_5087_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5087_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Notwithstanding this, the level of specificity required varies from case to case. The common understanding conveyed by numerous investment tribunals is that only a host state’s specific representation to a particular investor can form legitimate expectations subject to treaty protection. However, a broader understanding still finds its place in the investment arbitration community. For example, in the recent renewable energy award in ESPF v. Italy (September 2020), the majority of the tribunal found that a specific representation can also be based on general legislation.

This blog post analyses the part of the ESPF v. Italy award that concerns the assessment of the legitimate expectations of the investor. The inclusion or not of legitimate expectations in the FET standard will have significant impact on investor protection given the protections role and standing in the world of investment arbitration (see discussion on the scope of a FET standard in the context of ECT modernisation process). Moreover, the narrowing or broadening of its scope and application also have significant practical consequences and ramifications.

 

Facts of the case

In ESPF v Italy, the investor “KGAL”, a German investment management company, made investments in Italy between 2009 and 2012. The investments were made by setting up PV-investment funds and investing in multiple solar plants. Through various legislative acts during 2005, Italy had introduced a so-called incentive regulatory regime for renewable energy producers (“incentive regime”). Thus, in making the investments, the claimants primarily relied on this incentive regime, in particular on the Conto Energia Decrees (“Conto Decrees”), which guaranteed incentive payments to PV plants for a period of twenty years.

Despite this, from 2013 and onwards, the Italian authorities undertook a series of measures limiting the application of the incentive regime. This is because Italy was facing the tariff deficit resulted from the difference between the subsidies in the form of feed-in tariffs granted by the state to producers of renewable energy and the tariffs that had to be paid by consumers.. Resultingly, in 2014, the benefits of the incentive regime provided in Conto Decrees were substantially reduced through various state’s measures. E.g., through the changes introduced in the so-called “Spalmaincentivi Decree.” In 2016, the claimants challenged the state’s measures by initiating the ECT arbitration claim against Italy.

 

Claim based on a violation of the legitimate expectations under the FET

The claimants argued that Italy had violated the FET standard by breaching their legitimate expectations arising out of (a) the explicit assurances, as well as (b) implicit assurances. First, explicit assurances were allegedly made in the form of the Legislative Decree No. 387/2003 and in the five implementing Conto Decrees.(para. 469) Furthermore, the investors argued that the GSE Letters,2)GSE is the the state-owned company that Italy created to manage renewable energy support schemes. This company has entered into agreements with claimants’ companies and the GSE sent a formal tariff confirmation letter to claimants. jQuery("#footnote_plugin_tooltip_5087_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5087_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the GSE Agreements, public statements and declarations by state officials had reinforced the explicit commitments made by Italy that investors will receive the specified tariffs for 20 years.  In assessing the legitimacy of the investor’s expectations, the majority of the tribunal upheld the claim of the investors, finding that Italy has undermined investor’s explicit commitments reinforced by implicit promises provided in public statements and declarations.

 

Specific representations arising out of legislation

In its assessment, the tribunal evaluated the existence of the specific representations arising out of Conto Decrees as well as the GSE Letters and the GSE Agreements. At the outset, the majority of the tribunal underlined that “there is no doubt that a clear and specific commitment is required in order to create an enforceable legitimate expectation”.(para. 512) Furthermore, that “there is no reason in principle why such a commitment of the requisite clarity and specificity cannot be made in the regulation itself (…)”.(ibid) Hence, the tribunal asserted that the relevant Conto Decrees qualify as specific representation, and therefore that investors could rely on the assurance that the feed in tarrifs rates will not be reduced in the next 20 years.

In the view of the tribunal, the Conto Decrees did not just form a general framework for investments, but they provided ‘specific incentives to investors who met specific requirements’.(para. 518) Since the plants of investors met the specific qualifying criteria under the Conto Decrees, the investors had the right to expect that the specific rates and duration of the FITs would remain unchanged. Furthermore, the state’s specific representation embedded in the Conto Decrees was further reinforced in the GSE Letters and the GSE Agreements, addressed to each of the claimants’ investments by the Italian authorities.(para. 517) The tribunal also underlined that the promotional statement and reports by Italian officials regarding the incentive tariff regime confirm the commitments included in the Conto Energy Decrees and GSE Letters and GSE Agreements.

 

Analysis

In ESPF v. Italy, the tribunal found that Italy violated the legitimate expectations of the investors by reversing the Conto Decrees and replacing it with the Spalmaincentivi Decree. According to the tribunal, the Conto Decrees amount to specific representation, containing the assurance that the tariffs for which they qualified would remain unchanged for 20 years. Furthermore, it was held that the GSE Letters and GSE Agreements reinforced the state’s specific representation.

The holding and reasoning in ESPF v. Italy is particularly important as there are variations in tribunals’ interpretation and application of the FET standard, in general, and the extent and assessment of what constitute a legitimate expectation, including specific representation, in specific. In a number of decisions (discussed here), the tribunals relied on several criteria in determining whether the state’s representation can be regarded as specific. These are: (i) whether a representation was provided by a competent state authority that has the relevant decision-making power; (ii) whether a representation has a legal force through its legal form, content and wording (e.g. a representation has a formal character, aimed at the purposeful and specific inducement of an investment); and (iii) whether a representation has been addressed directly to the investor. On the third criterion, tribunals are generally consistent in affirming that the state’s representation should be addressed directly to a particular investor and cannot be aimed at large or even small groups of potential investors.

According to the El Paso v. Argentina tribunal, the level of specificity of a state’ assurance should be assessed from the point of view of the addressee. Thus, the specific representation should be ‘directly made to the investor – e.g., in the contract or in a letter of intent, (…) and not simply general statements in treaties or legislation which, because of their nature of general regulations, can evolve ’.(para. 376)

Moreover, in multiple renewable energy cases against Spain, Italy, and Czech Republic, tribunals have been tasked with assessing whether or not there has been a violation of the FET standard arising out of the expected stability of the regulatory framework. In this respect, only a few tribunals have found that general legislation (in combination with some other state’s assurances) may qualify as a specific representation and raise to protection under the FET standard.

The ESPF tribunal was among the renewable energy decisions finding that the general legislation contained a clear inducement on the basis of wording of its provisions. The conclusion in ESPF v. Italy is consistent with Greentech v. Italy (December 2018). The Greentech tribunal provided that the Conto Decrees constitute a specific representation and by reducing the tariffs through the enactment of the Spalmaincentivi Decree, Italy has violated the investor’s legitimate expectations. The Greentech tribunal emphasised that ‘given the specificity of the assurances Italy offered (Conto Energia decrees, statements and conduct of Italian officials, and individual GSE letters and GSE Agreements), those assurances bear the hallmarks of “an agreement, in the form of a stabilisation clause or otherwise’’’.(para. 453)

However, some other renewable energy decisions have reached other conclusion. The tribunals in Belenergia v. Italy (August 2019) and SunReserve v. Italy (March, 2020) provided that no specific representation can be derived from the general Italian legislation. Moreover, in the Spanish renewable case Charanne v. Spain, the tribunal warned against qualifying a regulation that involved a group of beneficiaries as ‘specific’. It emphasized that this could ‘constitute an excessive limitation on the power of states to regulate the economy in accordance with public interest’.(para. 493) The issue of the right to regulate in the context of investment law is high on the political agenda of states. The need to ensure that ‘policy space’ is preserved in the context of the FET standard has been articulated by negotiators and contracting states within the framework of several of the most recent agreements such as the Comprehensive Economic Trade Agreement between Canada and the EU (CETA), the EU-Singapore FTA, the United States-Mexico-Canada Agreement (USMCA).

The debate on specific representation and its scope, nuance, and degree is important. A specific representation can create a strong basis for legitimate expectations, and therefore generate investor protection pursuant to the FET standard. The presence of a specific assurance direct at an investor may often overweight other considerations such as an investor’s due diligence or the proportionality of a state’s measure and therefore substantially limit the sovereign powers of a state to regulate in a public interest. The ESPF v Italy is among the decisions that adopted a broad approach towards the scope of specific representation, where a specific commitment primarily was found in a general legislation. In this decision, a tribunal has not performed a balancing exercise by weighing the subjective interests of investors and the state’s right to regulate.

Thus far, tribunals dealing with renewable energy cases have been inconsistent with respect to the circumstances in which general legislation is considered to constitute a specific representation. It indicates that there is theoretical divergences amongst tribunals on the scope and the legal basis for the creation of legitimate expectations.

References   [ + ]

1. ↑ White Industries v. India, UNCITRAL, Final Award (30 November 2011) para. 10.3.17; Mamidoil Jetoil Greek Petroleum Products Société S.A. v. Republic of Albania, ICSID Case No. ARB/11/24 Award (30 March 2015) para. 642. 2. ↑ GSE is the the state-owned company that Italy created to manage renewable energy support schemes. This company has entered into agreements with claimants’ companies and the GSE sent a formal tariff confirmation letter to claimants. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the COVID-19 Revolution
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2020 in Review: The Pandemic, Investment Treaty Arbitration, and Human Rights

Sat, 2021-01-23 00:00

It will come as no surprise to the readers of this blog that the ongoing COVID-19 pandemic has had a significant impact on international arbitration (see blog coverage here).  In this post, we take a look back at 2020 to consider the intersection of the pandemic, investment, and human rights.  In February 2020, one of us took a look back at 2019 specifically in the context of international investment agreements (IIAs) and human rights.  This post follows in that tradition, while seeking to further understand how the COVID-19 pandemic is likely to shape the intersection of international arbitration and human rights.

This post first considers the ongoing effects of the pandemic on investment and human rights in 2020.  Second, it considers the degree to which human rights considerations have been specifically reflected in IIAs signed in 2020.  Notably, it does not address disputes because 2020 was a quiet year for investment treaty arbitration decisions that substantively engage with human rights considerations.  Third, and finally, it looks ahead to consider the potential trajectory of the intersection of investment and human rights in 2021.

 

Downward Pressure on Both Investment and Human Rights Protections as a Result of COVID-19

UNCTAD’s 2020 World Investment Report notes that the pandemic has caused a severe drop in foreign direct investment (FDI), falling well below the trough reached during the 2008 global financial crisis, with a disproportionate impact on low- and middle-income countries (LMICs).  Altogether, this implies that countries, particularly LMICs, will likely compete for limited available FDI.  In this environment, countries may be willing to forego human rights and other sustainable development considerations in an attempt to attract FDI.

The COVID-19 pandemic has also had severe human rights implications. The pandemic has exacerbated human rights challenges globally, which the UN High Commissioner notes will “create even wider inequalities.”  Alarmingly, Amnesty International has noted that the pandemic is “being exploited as a pretext for oppression in nearly every region of the world.”  In response, UN Secretary General Guterres has called for human rights to be placed “front and center” of any pandemic response.

Finally, as UNCTAD has noted, governments all around the world have taken measures in response to the pandemic. Some of these measures could be challenged by foreign investors for breaching obligations under IIAs. For example, after proposing an emergency measure that would suspend the collection of toll fees on its roads, investors warned Peru of potential ICSID claims in response.

While such cases have not yet emerged, it remains to be seen what impact such cases may have on the landscape of depleting FDI. Indeed, prominent organizations like the Columbia Center for Sustainable Investment have called for a “Moratorium” on ISDS disputes during the pandemic, noting that ISDS awards can “represent sizable percentages of governments’ budgets” and that governments must ensure that ISDS does not “deepen the inevitable fiscal crisis.”  A similar call has been made by the International Institute for Sustainable Development, which has argued that governments must either suspend the application of ISDS claims for all pandemic-related measures or clarify how international law defenses will apply for this “extraordinary” situation.  Until governments or international organizations adopt any such measures, the dual realities of declining foreign investment and downward pressure on human rights and other sustainable development considerations are likely to result in individual governments lowering standards to attract foreign investment.

 

Few Notable Developments in New IIAs in 2020

2020 was a relatively quiet year for new IIAs.  According to UNCTAD, only six new IIAs were signed in 2020, five of which have publicly available texts.  Regarding human rights-related issues, these IIAs contain fairly standard preambular text (Table 1).  The Fiji–US TIFA is a notable exception, both for its specific mention of several environmental-specific concerns and its recognition that “enhancing opportunities for women to participate in civic and economic life contributes to the economic empowerment of women and to prosperity”. Interestingly, we do not yet see a concerted effort to address pandemic-like situations in the future.  Following the cases involving tobacco regulation, there was an increase in provisions that sought to exclude tobacco-related measures.  We have not seen a concerted effort to address pandemic-like situations expressly yet.

 

Table 1 – Preambular Text

  Preambular text regarding human rights (Yes/No) Japan–Morocco BIT Yes (mentions public health, environment, natural resources) Brazil–India CFIA No Fiji–US TIFA Yes (mentions labor, environment, marine litter, illegal logging, illegal fishing, gender) Investment Chapter (Chapter 10) of the RCEP Yes (mentions sustainable development) Hungary–Kyrgyzstan BIT Yes (mentions health, environment, human rights, labor, corporate social responsibility)

 

These IIAs likewise contain fairly standard operative provisions addressing human rights-related issues (Table 2).  Consistent with prior trends, these operative provisions generally do not establish direct obligations on multi-national enterprises and, where they do, are couched in aspirational language (e.g., Art. 12.2 of the Brazil–India CFIA).

 

Table 2 – Operative Provisions

  Prevent and combat corruption Corporate social responsibility Non-lowering of standards General exception for health Seeking to preserve regulatory autonomy FET standard Japan–Morocco BIT Art. 7 (aspirational language) None Art. 19 Art. 21 None Art. 4 (includes access to courts and due process) Brazil–India CFIA Art. 10 (requires the adoption of measures) Art. 12 (directed to investors, but in aspirational language) Art. 22 Art. 23 Art. 22 Art. 4 (includes denial of justice, due process, and “targeted discrimination, such as gender, race or religious belief”) Fiji–US TIFA None None None None None None Investment Chapter (Chapter 10) of the RCEP None None None None None Art. 10 (includes denial of justice) Hungary–Kyrgyzstan BIT None None Art. 2 None Art. 3 Art. 2 (includes denial of justice, due process, and “targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief”)

 

Finally, although not explicitly related to human rights, exceptions and even so-called war clauses may also be relevant for claims arising out of the pandemic, including directly vis-à-vis human rights, based on reference to a state of emergency. Both the Brazil–India CFIA and Hungary–Kyrgyzstan BIT contain such clauses—specifically, as compensation-for-loss clauses—but any reliance by investors will be highly fact-dependent.

 

Two Additional International Agreements Likely to Impact Human Rights and Investment in 2021

Separately, two other international agreements may have subsequent ramifications for human rights in 2021.

First, following Brexit, the recently released draft of the EU–UK TCA contains preambular text recognizing the importance of human rights and generally recognizes the importance of sustainable development in Title XI. However, it largely does not address human rights considerations specifically impacting trade and investment.  At present, the draft only provides for State-to-State dispute resolution.

Second, the Agreement Establishing the African Continental Free Trade Area (AfCFTA), which went into effect on January 1, 2021, provides in the preamble that the State parties recognize “the importance of . . . democracy, human rights, gender equality and the rule of law” and reaffirm the state parties’ regulatory powers in areas like “public health, safety, environment, public morals and the promotion and protection of cultural diversity.”  This agreement is remarkable because it creates the largest free trade areas since the WTO.  As has been previously noted, AfCFTA has not addressed ISDS so far, providing only for State-to-State dispute resolution.

While efforts have been made to establish guiding principles on investment via the G20, these two agreements do not at present fully reflect such principles. In particular, principles VI (reaffirming the right to regulate) and VIII (encouraging responsible business conduct) could serve as a conceptual model for framing core obligations in such agreements.

 

Key Considerations for 2021

Looking ahead, we see two key considerations for the intersection of investment and human rights, and the future trajectory of ISDS.

First, as we have previously written, ongoing ISDS reform efforts offer a crucial opportunity to revisit the role of human rights considerations in the ISDS system.  While such ongoing efforts have primarily focused on procedural rights (e.g., due process), opportunities to address substantive rights, such as social, economic, and cultural rights within the ISDS system could better recognize the shared fate of foreign investment and society.

Second, States are able to satisfy their direct obligations regarding human rights on the international plane by exercising their regulatory autonomy.  Efforts to push back against the so-called regulatory chill, therefore, will remain crucial.  This is particularly the case as States continue to enact domestic measures aimed at combatting the effects of the ongoing pandemic.  States could correspondingly focus on strengthening operative provisions in new IIAs.  As one of us has written, Model Agreements, such as the 2019 Netherlands Model BIT, can offer instructive examples of progressive approaches to drafting new operative provisions.

 

The views expressed herein are personal and do not reflect the views of the authors’ employers or their clients. The authors reserve the right to change the positions stated herein.

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Interviews with Our Editors: In Conversation with Gwen de Vries, Director, International Group Content & Market Development at Wolters Kluwer Legal & Regulatory, U.S.

Thu, 2021-01-21 22:35

Gwen de Vries is Director of International Group Content & Market Development at Wolters Kluwer Legal & Regulatory, U.S. (‘Wolters Kluwer’). She has decades of experience and expertise in information services, focusing on the international legal market, including international arbitration. Among other projects, Gwen leads the team behind Kluwer Arbitration, Wolters Kluwer’s development of content for expert solutions and practical digital tools. She oversees Wolters Kluwer’s publication of the dozens of international arbitration-related books and journals in both digital and print format. In 2009, Gwen helped conceive and establish the Kluwer Arbitration Blog and was the author of its first post. As the Blog completes its 12th year and has more than 3,000 posts, Gwen shares her perspectives on the international arbitration field, growth of the Blog over the years, evolution of the information services industry, and how digital transformation is enhancing both international arbitration practice and the information services industry in unique ways.

 

  1. Gwen, here at the Blog, we are indebted to you for the vision that inspired this platform’s inception. Can you tell us more about the reasons you launched the Blog and why Wolters Kluwer invested in its development?

In 2009, blogging had been around for several years, but it was still a relatively new medium for international lawyers. At Wolters Kluwer, we thought that a Blog platform could become a modernized way for the arbitration community to interact. Until then, there was no ‘middle ground’ and ‘low threshold’ platform to exchange views and information. On the one end of the spectrum, there were informal discussion email groups, and on the other end, academic and heavily footnoted journal articles. In the ‘middle’ we saw scope for publication of short articles with a substantive approach and analytical lens. We did not intend for the Blog to be a place for gossip but rather a platform where the community could share news and opinions. We also expressly wanted it to be freely accessible – something that anyone could contribute to and access. Perhaps it sounds idealistic, but at the time, we saw this as a way to give back to the arbitration community.

We conceived the Blog in partnership with Gary Born, Roger Alford, and Luke Peterson. Roger became its Managing Editor, and he continues today as its General Editor. We assembled a group of correspondents, intending to solicit prospective posts from their networks on hot topics. The goal was to attract both established and new voices.

 

  1. Can you briefly reflect on the past 12 years of the Blog and its achievements?

Over the years, we have been impressed by the interest in the Blog and the community that it has garnered. Today, on a monthly basis, the Blog welcomes thousands of readers and contributors from every corner of the world. We are proud of its success. It has become acknowledged as a meeting place for the international arbitration community members to consider and debate important topics.1)James Clanchy and Cherine Foty “Conflicting Perceptions of Ethics in International Arbitration,” Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, Vol. 85, Issue 2 (2019) p. 185 (‘New arbitration communities are developing on the internet around the Kluwer Arbitration Blog and OGEMID, for example. For Professor Emmanuel Gaillard, such fora “strongly contribute to the shaping of values underpinning international arbitration.”’). jQuery("#footnote_plugin_tooltip_4864_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Blog is even respected as a source of commentary, having served as resource material in important cases. For example, it has been cited in party submissions in investment arbitrations (like EDF International S.A. v Argentina2)EDF International S.A. v. Argentina, ICSID Case No. ARB/03/23, Annulment Proceedings, Argentine Republic’s Additional Observations on the Proposal to Disqualify Teresa Cheng (Spanish), n. 43 (citing Joanne Greenaway’s May 1, 2015 blog post). jQuery("#footnote_plugin_tooltip_4864_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Gabriel Resources Ltd. v. Romania3)Gabriel Resources Ltd. and Gabriel Resources (Jersey) v. Romania, ICSID Case No. ARB/15/31, Respondent’s Additional Preliminary Objections, n. 67 (citing Marcin Orecki’s August 8, 2017 blog post). jQuery("#footnote_plugin_tooltip_4864_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });); in party submissions before several courts (such as U.S. Supreme Court proceedings concerning Belize v. BCB Holdings4)Belize v. BCB Holdings, Petition for a writ of certiorari (citing Charles H. Brower II’s January 20, 2012 blog post). jQuery("#footnote_plugin_tooltip_4864_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });); and also by decisionmakers themselves (see the decisions of tribunals and committees in Renco v. Peru,5)The Renco Group, Inc. v. Republic of Peru [I], ICSID Case No. UNCT/13/1, Decision as to the Scope of the Respondent’s Preliminary Objections under Article 10.20.4, n. 2 (citing Bernardo Cremades’ September 4, 2013 blog post). jQuery("#footnote_plugin_tooltip_4864_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Pezold v. Zimbabwe,6)Bernhard von Pezold and Others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Decision on the Applicant’s Application for Provisional Measures, n. 48 (citing Mallory Silberman’s June 10, 2013 blog post). jQuery("#footnote_plugin_tooltip_4864_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Caratube v. Kazakhstan,7)Caratube International Oil Company LLP v. The Republic of Kazakhstan, ICSID Case No. ARB/08/12, Decision on the Annulment Application of Caratube International Oil Company LLP, n. 46 (citing David Bigge’s December 29, 2011 blog post). jQuery("#footnote_plugin_tooltip_4864_7").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Philip Morris v. Australia8)Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12, Procedural Order No. 8, n. 109 (in citing party submissions, which referred to Inna Uchkunova and Oleg Temnikov’s August 15, 2013 blog post). jQuery("#footnote_plugin_tooltip_4864_8").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });). This is not to mention the Blog’s citation in important commentaries, books, and journals – there are hundreds of such references on Kluwer Arbitration alone, including in Gary Born’s recently published International Commercial Arbitration (Third Edition).9)See e.g., n. 661 (citing Hassan Raza’s April 24, 2018 blog post); n. 921 (citing Robert Landicho and Andrea Cohen’s October 5, 2018 blog post). jQuery("#footnote_plugin_tooltip_4864_9").tooltip({ tip: "#footnote_plugin_tooltip_text_4864_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

  1. You have the unique vantage point of observing the international arbitration field’s development as both an insider and outsider over a long period. How has the field evolved over the years?

The first international arbitration-related conference that I attended was ICCA’s Biennial Congress in Seoul in 1996. That conference saw about 200 attendees, who were mainly middle-aged men from Europe or the U.S. At the time, Albert Jan van den Berg and Jan Paulsson were among the community’s younger and emerging voices. Wolters Kluwer was one of the few exhibitors and the only one displaying books (mostly ICCA publications, a partnership we continue today). Believe it or not, we distributed cigars as giveaways at the exhibition table!

Arbitration conferences look very different these days. Seeing 1,000+ participants and many exhibitors is common, and there are of course many women and individuals from different backgrounds joining. This reflects the significant growth of arbitration as a practice: today, there is more arbitration work available and it demands a greater diversity of people doing the work.

This emerging landscape makes a platform like the Blog even more important. It helps members of the community connect with each other. It also allows our contributors to build their profiles and stand out among the crowd. In some ways, I feel that the Blog itself has contributed to achieving increased diversity within the arbitration community, as it offers an accessible platform for anyone with a valuable perspective to share it.

 

  1. You’ve already previewed that, over the years, the Blog has changed and grown significantly. How does this evolution reflect on changes in the information services field?

At its core, Wolters Kluwer, is on a mission to support arbitration specialists in their work. As the arbitration field has evolved to keep up with the changing market, Wolters Kluwer has done the same. We are in an era of information overload. With more arbitration cases, more individuals involved, and more to cover, it becomes difficult for anyone to keep up. We have addressed this challenge by evolving Kluwer Arbitration from a research service into a professional work flow tool. Kluwer Arbitration Practice Plus, that launched end of 2019, includes a suite of practical and data-driven tools to provide guidance and answers that support the case strategy of arbitration lawyers.

While we continue to commission high-quality original publications, we focus on offering increasingly clever and useful search engines, filters, and tools that make the task of identifying relevant sources easier – because once those important sources are identified, an arbitration lawyer can truly focus on legal problems and innovative solutions.

Meanwhile, understanding the arbitration community is still crucial for our success. The Blog is a mutually beneficial platform. Arbitration lawyers can easily share their perspectives, and we can connect with practitioners and academics who may later help us develop our content and solutions. In this way, we keep track of what is interesting and important to the community. In addition, it reinforces our brand as a market leader in arbitration, by allowing us to promote the work of our partners, including ICCA, CIArb, ITA, and others, while also highlighting our innovative content and tools. Most importantly, the Blog allows us to achieve our original vision of quickly highlighting important developments in the field with high-quality commentary in real-time.

 

  1. What are your thoughts on the need for a digital community as we continue through the COVID-19 pandemic era? Are there any related implications in the information industry?

Perhaps unsurprisingly, I expect that a digital community will become even more important. Years ago, an arbitration lawyer would establish his or her brand by going to as many conferences as possible and networking extensively. COVID-19 has also widened how we think about connecting with each other. This carries several positive effects – only a small group of individuals had the resources (time and money) to travel to conferences. Meanwhile, establishing a digital presence in this community can be achieved simply by sharing your perspectives. For Wolters Kluwer, this is now also one of the ways we identify new prospective authors. In the past, we would have mainly relied upon networking at conferences to achieve this same goal!

Again, I can return to the important role of the Blog. It is an established platform that, in 2020 alone, saw more than 500,000 visitors. This, coupled with the fact that a blog post is easier to write than a journal article, creates a huge opportunity for prospective contributors to gain visibility. I encourage arbitration lawyers to add their voice to the Blog and consider submitting a post to the editorial board for consideration.

As our focus is on serving the community, I must say that none of this would be possible without the enthusiasm, dedication, and active contribution of the Blog’s editorial team and contributors (past and present). We owe a big thanks to all of them and the current team, led by Dr Crina Baltag, who review contributions and guide prospective contributors to ensure that the Blog continues to be a place of thought leadership and innovation.

 

  1. Are there any latest initiatives at Wolters Kluwer that you’d like to highlight?

We continue to explore new ways to bring useful digital content to our community, sometimes with partners. For example, we are currently offering a pick of 3 free arbitrator reports from our partner Arbitrator Intelligence to subscribers of Kluwer Arbitration Practice Plus. This offer is valid until the end of April. Recently we launched the International Law Talk podcast series, which presents a new digital medium for us to share opinions and news with the community. Several episodes have focused on arbitration and we were privileged to host established and emerging voices from the community as both interviewees and interviewers. We will continue releasing new episodes periodically, I hope you will have a listen!

 

We look forward to supporting Wolters Kluwer in its future initiatives! In the meantime, on behalf of our fellow editors and readers, we thank you for everything you do behind the scenes to support the arbitration community!

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

References   [ + ]

1. ↑ James Clanchy and Cherine Foty “Conflicting Perceptions of Ethics in International Arbitration,” Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, Vol. 85, Issue 2 (2019) p. 185 (‘New arbitration communities are developing on the internet around the Kluwer Arbitration Blog and OGEMID, for example. For Professor Emmanuel Gaillard, such fora “strongly contribute to the shaping of values underpinning international arbitration.”’). 2. ↑ EDF International S.A. v. Argentina, ICSID Case No. ARB/03/23, Annulment Proceedings, Argentine Republic’s Additional Observations on the Proposal to Disqualify Teresa Cheng (Spanish), n. 43 (citing Joanne Greenaway’s May 1, 2015 blog post). 3. ↑ Gabriel Resources Ltd. and Gabriel Resources (Jersey) v. Romania, ICSID Case No. ARB/15/31, Respondent’s Additional Preliminary Objections, n. 67 (citing Marcin Orecki’s August 8, 2017 blog post). 4. ↑ Belize v. BCB Holdings, Petition for a writ of certiorari (citing Charles H. Brower II’s January 20, 2012 blog post). 5. ↑ The Renco Group, Inc. v. Republic of Peru [I], ICSID Case No. UNCT/13/1, Decision as to the Scope of the Respondent’s Preliminary Objections under Article 10.20.4, n. 2 (citing Bernardo Cremades’ September 4, 2013 blog post). 6. ↑ Bernhard von Pezold and Others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Decision on the Applicant’s Application for Provisional Measures, n. 48 (citing Mallory Silberman’s June 10, 2013 blog post). 7. ↑ Caratube International Oil Company LLP v. The Republic of Kazakhstan, ICSID Case No. ARB/08/12, Decision on the Annulment Application of Caratube International Oil Company LLP, n. 46 (citing David Bigge’s December 29, 2011 blog post). 8. ↑ Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12, Procedural Order No. 8, n. 109 (in citing party submissions, which referred to Inna Uchkunova and Oleg Temnikov’s August 15, 2013 blog post). 9. ↑ See e.g., n. 661 (citing Hassan Raza’s April 24, 2018 blog post); n. 921 (citing Robert Landicho and Andrea Cohen’s October 5, 2018 blog post). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Surveying the Clean Energy Investment Landscape in Australia: Investment Arbitration Lessons for Foreign Investors

Wed, 2021-01-20 23:43

The Renewable Energy Target (RET), Australia’s key policy instrument for encouraging electricity generation from renewable sources, has been described as a policy hampered by politicisation. Notwithstanding such criticism, in 2019, it was reported that Australia’s energy system is undergoing the transition to renewables faster than any other country in the world.1)Blakers et al., (2019) “Pathway to 100% Renewable Electricity”, IEEE Journal of Photovoltaics, Vol. 9, No 6, cited in the 2020 Integrated System Plan at pages 8, 10, 21. jQuery("#footnote_plugin_tooltip_9785_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9785_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Against this backdrop, Australia remains attractive for investments in clean energy, and there continues to be a considerable inflow of foreign capital, particularly from overseas solar and wind developers.

 

Investment protections for renewable energy projects

The uncertainty faced by investors in the renewable energy sector over recent decades is not unique to Australia. It is largely a symptom of the long lead-time and capital-intensive nature of large scale renewable energy projects, resulting in a reliance – at least in part – on favourable regulatory frameworks and supportive government policies. That support can take many forms, including improvements in energy efficiency, the implementation of tradable certificate schemes (as adopted in Australia under the RET model), and the payment of fixed feed-in tariffs or market premiums to electricity producers from renewable sources.

As the experience in Spain and other European states has demonstrated, incentive schemes can be prone to reduction and retraction, particularly in times of financial crisis. Such changes can have a dramatic impact on the profitability of renewable projects. In this context, renewable energy investors in several European states have looked to the protections available to them in international trade agreements and treaties. The treaty most frequently invoked for this purpose is the Energy Charter Treaty (ECT), an international multilateral investment agreement which has the aim of promoting international cooperation in the energy sector. The ECT – and the ongoing discourse surrounding its modernisation – has been the subject of several recent Kluwer Arbitration Blog posts.

There are numerous examples of how the investment protections set out in the ECT have been invoked through ISDS where political or regulatory changes have eroded the profitability of renewable energy projects. Indeed, available data suggests that of the ISDS claims initiated under the ECT (as at 31 July 2020), approximately 60% (or 78 of 131) are claims made by investors in the renewable energy sector. The dramatic increase in ISDS claims initiated by renewable energy investors under the ECT over recent years is illustrated below.

Source: Statistics of ECT Cases (as of 1/6/2020), Energy Charter Secretariat (2020) 

 

Investment arbitration lessons for foreign investors in Australia?

Australia has signed, but not ratified, the ECT. As such, its provisions are not strictly binding on Australia. However, the investment protections set out in the ECT are broadly representative of the types of protections available to foreign investors under Australia’s (binding) treaty commitments. These mechanisms are found in the numerous bilateral and multilateral agreements to which Australia is a signatory.2)Australia–New Zealand Closer Economic Relations Trade Agreement (ANZCERTA); Singapore-Australia Free Trade Agreement (SAFTA); Australia–United States Free Trade Agreement (AUSFTA); Thailand–Australia Free Trade Agreement (TAFTA); Australia–Chile Free Trade Agreement (AClFTA); Malaysia–Australia Free Trade Agreement (MAFTA); Korea–Australia Free Trade Agreement (KAFTA); Japan–Australia Economic Partnership Agreement (JAEPA); China–Australia (ChAFTA); Australia-Hong Kong Free Trade Agreement (A-HKFTA); Peru-Australia Free Trade Agreement (PAFTA); Indonesia–Australia Comprehensive Economic Partnership Agreement (IA-CEPA); ASEAN–Australia–New Zealand Free Trade Agreement (AANZFTA); Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). jQuery("#footnote_plugin_tooltip_9785_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9785_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is also relevant to note that on 16 November 2020, it was announced that Australia had joined 14 other states in signing the Regional Comprehensive Economic Partnership (RCEP), which has been described as the ‘world’s largest free trade deal’. Although there is no ISDS mechanism in the RCEP, it constitutes a landmark statement in favour of free-trade and multilateralism by the new Indo-Pacific trading bloc.

While Australian companies have successfully enforced the protections available to them under Australia’s investment treaty commitments (in respect of their investments abroad), Australia has so far managed to shake off claims brought against it. The only claim made against Australia to date was that advanced by Philip Morris Asia in respect of the introduction of plain packaging for tobacco products, which Australia successfully defended on jurisdictional grounds.

Recognising Australia’s limited experience as a respondent to ISDS claims (and notwithstanding its status as a non-ratifying signatory of the ECT), the ECT arbitrations against Spain and other European states offer important lessons about the interpretation of investment protections in a renewable energy context:

  1. The apolitical nature of ISDS decisions: Where renewable energy investors have been successful, it is not because their projects have been given ‘special treatment’ or deemed so important as to outweigh the operation of the host state’s sovereign right to regulate. Rather, the outcome is arrived at following a distinctly apolitical process. Throughout that process, tribunals are plainly concerned with the need to strike a balance between, on the one hand, the investors’ desires for a fair and consistent regulatory framework and, on the other, the host states’ mandates to implement legal and regulatory changes. This demands a nuanced application of the relevant investment protections, with due regard for the relevant political, economic, and social factors at play. In this way, the broad (and on one view, vague) wording of the investment protections allows tribunals the flexibility to determine the appropriate standard of treatment owed to investors in each case.
  2. The consequences of the host state’s commitment to investors: In considering whether there has been a breach of the ‘fair and equitable treatment’ (FET) standard, tribunals have considered whether – on an objective analysis – the host state actively fostered or instilled an expectation in the mind of the investor that its investment would be treated with a certain degree of stability. If the investment was procured on the basis of a specific promise or commitment by the host state (for example, that the host state would not make changes to a favourable regulatory framework, or that if it did, those changes would not impact the investment in question), the host state will likely be held to that promise. As the Tribunal in Cube Infrastructure v. Spainobserved (at [409] – [410]), if the host state makes a representation that induces investment, it must either deliver on that representation or ensure that any adjustments do not significantly alter the economic basis of the investments made in reliance on that representation.
  3. The relevance of the public interest objective: In considering the specific act of the host state that has given rise to the claim (for example, the retraction or significant reduction of a guaranteed feed-in tariff), the public interest objective underscoring that act will be a relevant consideration. For example, in Charanne v. Spain (at [535]), the Tribunal considered the pressing need to limit the tariff deficit in the solar energy sector, which had been worsening year by year. However, this does not involve the making of a value judgment about the perceived necessity or quality of the regulatory measure in question. Rather, the measure is assessed through the lens of whether or not the investor, in the precise circumstances of each case (and taking into account the nature of any specific promise or commitment by the host state), ought to have expected it.
  4. The investor’s duty to assess the regulatory landscape, including the likelihood of change: On the other side of the coin, tribunals have considered whether the investors’ expectations were rigid and unrealistic, or allowed for reasonably foreseeable changes. Investors cannot eliminate the possibility that the host state will exercise its sovereign prerogative to implement new measures, or to increase the impact of existing measures, in accordance with a legitimate public interest objective. Since economic, environmental, and social considerations are necessarily dynamic, an investor must be able to demonstrate that it exercised due diligence in appraising the landscape of its potential investment. In other words, the pursuit of stability must be largely driven by the investor’s own efforts. In Cube Infrastructure, the Tribunal emphasised (at [357]) that investors were never entitled to expect that the regulatory regime would remain completely unchanged.
  5. The limitations on an investor’s duty to predict (and accept) change: Like Cube Infrastructure, the Tribunal in SolEs Badajoz v. Spain considered the impact of changes to Spain’s renewable energy incentive scheme (known as the ‘Special Regime’) in 2013 and 2014, in addition to the original amendments that were made to the Special Regime in 2010. The Tribunal found (at 449]-[453]) that the 2010 amendments had an adverse impact on the claimant’s revenue, but did not fundamentally change the key features of the Special Regime, nor were they disproportionate to the policy objectives of those measures (i.e. the reduction of the tariff deficit). Accordingly, the amendments were found to be consistent with Spain’s obligation to accord fair and equitable treatment to the claimant’s investment. However, the 2013 – 2014 amendments were found to have fundamentally changed the basic features of the Special Regime, exceeding the changes that the claimant could have reasonably anticipated when it made its investment. Accordingly, the Tribunal concluded that Spain had violated the FET standard. 

 

Conclusion

The question of whether there is a causal link between the availability of ISDS under any international investment agreement and increased foreign direct investment has not been answered in any definitive way. It is even less clear whether Australia’s commitment to treaties which include investment protections (and recourse to ISDS) makes Australia a more attractive prospect for foreign investors than it would otherwise be (and relevantly, the Australian government is presently conducting a review of its bilateral investment treaty program – discussed here). In the circumstances, it is difficult to make the positive assertion that the availability of ISDS in Australia offers renewable energy investors the kind of comfort that would sound in tangible financial benefits, such as reduced risk premiums.

That said, regulatory and political risk continues to impact the flow of foreign capital and technology into the renewable energy sector in Australia, and if treaty protections were not available at all, they could not be factored into a broader assessment of the risk associated with a potential project. At the very least, Australia’s acceptance of ISDS-backed treaties demonstrates to foreign investors that its legal framework, as applicable to the prospective investment, is aligned with international norms and standards. There are enough examples of those standards being enforced by renewable energy investors in Europe, in a wide array of different factual and technical contexts, to provide investors with an understanding of what they are entitled to expect from host states.

Similarly, the ever-growing body of case law in this field should be closely examined by state signatories – Australia included – who have committed to afford foreign investors a certain standard of treatment under international law. These case examples offer valuable insight into the importance of regulatory and political consistency in the renewables sector, which cannot be overstated at such a critical juncture in Australia’s clean energy transition.3)The authors wish to acknowledge the research assistance provided by Rebecca Lucas, a solicitor in Herbert Smith Freehills’ Disputes team. The authors are members of ACICA45, a group established by ACICA with the aim of responding to the needs of young and emerging arbitration practitioners keen to learn more about arbitration and be involved in the arbitration community. The views expressed by the authors are their own. jQuery("#footnote_plugin_tooltip_9785_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9785_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

References   [ + ]

1. ↑ Blakers et al., (2019) “Pathway to 100% Renewable Electricity”, IEEE Journal of Photovoltaics, Vol. 9, No 6, cited in the 2020 Integrated System Plan at pages 8, 10, 21. 2. ↑ Australia–New Zealand Closer Economic Relations Trade Agreement (ANZCERTA); Singapore-Australia Free Trade Agreement (SAFTA); Australia–United States Free Trade Agreement (AUSFTA); Thailand–Australia Free Trade Agreement (TAFTA); Australia–Chile Free Trade Agreement (AClFTA); Malaysia–Australia Free Trade Agreement (MAFTA); Korea–Australia Free Trade Agreement (KAFTA); Japan–Australia Economic Partnership Agreement (JAEPA); China–Australia (ChAFTA); Australia-Hong Kong Free Trade Agreement (A-HKFTA); Peru-Australia Free Trade Agreement (PAFTA); Indonesia–Australia Comprehensive Economic Partnership Agreement (IA-CEPA); ASEAN–Australia–New Zealand Free Trade Agreement (AANZFTA); Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). 3. ↑ The authors wish to acknowledge the research assistance provided by Rebecca Lucas, a solicitor in Herbert Smith Freehills’ Disputes team. The authors are members of ACICA45, a group established by ACICA with the aim of responding to the needs of young and emerging arbitration practitioners keen to learn more about arbitration and be involved in the arbitration community. The views expressed by the authors are their own. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Revamping of P.R.I.M.E. Finance Arbitration Rules Underway

Tue, 2021-01-19 21:11

What makes disputes in banking and finance different? After all, like most commercial disputes, their determination often requires the interpretation of contracts, deciding whether a party is liable in contract or tort, and quantifying damages. Furthermore, financial institutions are, in many respects, no different from other commercial parties to disputes.

Yet, in practice banking and finance disputes require special expertise to resolve them. Amongst other things: banking and financial markets are strictly regulated sectors, and regulatory compliance may need to be taken into account when determining potential breaches of contract; perceived risks may trigger bank runs; statutory duties of secrecy may prevent financial institutions from disclosing customer information, affecting evidence-gathering; and minimum capital and asset ring-fencing on local bank branches may present challenges to enforcement.

As a result, courts in several countries have established specialist chambers to deal with complex banking disputes. These include the High Court of England and Wales’ Financial List and the Singapore International Commercial Court. In arbitration, while institutions like the ICC, ICDR, SIAC, SCCA, and LCIA offer their general rules and administrative services for disputes across all sectors, others have sought to increase their attractiveness to the finance sector. For example, the CIETAC Financial Disputes Arbitration Rules are designed for financial disputes, and the HKIAC’s Panel of Arbitrators for Financial Services Disputes offers a tailored panel of arbitrators with requisite expertise.

The number of banking and financial disputes reported by arbitral institutions is growing. In 2018, the ICDR-AAA reported a 78% increase (more than any other sector), and the LCIA reported that 29% of its cases were banking and finance disputes. While the ICC merges the finance and insurance sectors in its statistics, preventing a precise comparison, this author’s first-hand knowledge of the ICC Court’s docket confirms a similar increase in banking-related cases in recent years.

The case for arbitration as an alternative to litigation in the finance sector has been compellingly made in several recent studies. They include the ISDA Arbitration Guide of 2013 and the second edition of the guide published in 2018, the 2014 Report on Arbitration in Banking and Financial Matters by the French Arbitration Committee, the ICC Arbitration Commission’s monumental 2016 Report on Financial Institutions and International Arbitration and its supplements, and the Legal High Committee for Financial Markets of Paris’ 2020 Report on Arbitration in Banking and Financial Matters. All of these studies were conducted by working groups of bankers and arbitration practitioners and can be found on the website of the University of Cologne’s Center for Transnational Law Institute for Banking Law. Other initiatives include Hong Kong’s Financial Dispute Resolution Centre, established to resolve by mediation or arbitration disputes resulting from the demise of the local affiliate of Lehman Brothers and now enjoying comprehensive jurisdiction over disputes between customers and financial institutions, and the interbank dispute settlement mechanism Servicio para dirimir incidencias entre Bancos (DIRIBAN), established by the Spanish Banking Association. DIRIBAN boasts a 100% voluntary compliance rate by award debtors.

Among the competing fora in this field, P.R.I.M.E. Finance stands out. Based in The Hague, P.R.I.M.E. Finance is a specialist organisation for the resolution of banking and financial disputes, with users offered a panel of experts and arbitrators with the expertise to resolve complex financial disputes. Financial institutions have consistently ranked technical expertise in banking and finance of sitting arbitrators as key when considering an alternative dispute resolution mechanism. In addition, all cases referred for arbitration under the P.R.I.M.E. Finance Arbitration Rules are administered by the Permanent Court of Arbitration (PCA), the world’s oldest arbitral institution. The combination of the subject-matter expertise of P.R.I.M.E. Finance’s Panel and the PCA’s efficiency in administering arbitral proceedings brings significant advantages for users. ISDA has listed P.R.I.M.E. Finance in both its 2013 Arbitration Guide and its 2018 Arbitration Guide as among the few arbitral institutions recommended for financial arbitrations. The PCA administers disputes under the P.R.I.M.E. Finance Arbitration Rules regardless of the seat of arbitration and the nature of the dispute. Examples of disputes that may be submitted include those arising in relation to derivatives, sovereign lending, investment and advisory banking, financing (export, project, Islamic, trade, asset, and commodities), private equity, asset management, and smart contracts. Importantly, non-bank parties and financial institutions conducting ordinary business transactions, with no distinctive credit component, can choose to submit their treat or contract-based disputes to P.R.I.M.E. Finance.

In 2020, P.R.I.M.E. Finance launched an in-depth review of its arbitration rules. The first comprehensive draft has now been posted online for public comments. The draft rules aim to offer arbitrators and users a comprehensive and clear set of procedural rules for their arbitrations, and are the result of work undertaken by pre-eminent banking experts and dispute resolution practitioners representing the world’s major legal systems. It is expected that specialist firms, financial institutions, and arbitrators from around the world will comment on the draft, ensuring the geographical and sectoral representativity that is essential to global rule-setting. The deadline for the submission of comments is 21 March 2021.

Features of particular interest include:

  • Transparency. The drive for transparency is evident across the draft rules. By way of example, parties are required to disclose any third-party funding arrangement of any claim or defence, and the identity of that third party (Articles 5, 6, and 12). Another application of transparency in the draft rules flows from the fact that banking is a highly standardised sector, with syndicated lending generally following the template of the Loan Market Association (LMA) or the Loan Syndications and Trading Association (LSTA) and derivatives using the ISDA Master Agreement. The draft rules give the tribunal the power to invite or grant leave to an industry body to appear before it as amicus curiae and make submissions on any issues relevant for the proceedings (Article 29). In addition, unless the parties object, final awards will be published (redacted as appropriate) (Article 39.9), permitting the emergence of a body of jurisprudence similar to the case law of the courts in the major financial centres. This will increase predictability and transparency of the arbitral process.
  • The administering institution. The PCA has a key role throughout the arbitral process. It enjoys all the customary prerogatives of an administering institution (Article 4). Under the draft rules, in exceptional situations, the PCA is also granted the power to decline the confirmation of arbitrators nominated by the parties or a tribunal president nominated by co-arbitrators, such as when the agreed nominee and/or nomination process creates a risk of unfairness and endangers the enforceability of the award (Articles 11 and 15).
  • Complex arbitrations. Complex banking transactions may involve hundreds of parties, sometimes with adverse interests, and multiple contracts. The draft rules deal with the treatment of complex situations such as these, for example with detailed joinder and consolidation provisions (Articles 31 and 32). Where separate arbitrations are not eligible for consolidation, the tribunal can also coordinate the proceedings after consulting with the parties. Such coordination ensures that common questions of fact or of law are determined consistently.
  • Emergency and expedited rules. The draft rules contain provisions on emergency arbitration (Article 25), interim measures (Article 25) and, in response to financial institutions’ requests for efficiency in the rendering of awards, expedition (Article 17); arbitrations with an amount in dispute of EUR 4 million or less are automatically subject to expedited arbitration rules, with a sole arbitrator expected to render the final award within 180 days of the constitution of the tribunal. The system under the proposed expedited rules still retains flexibility: at any juncture, the parties may opt for a three-member tribunal, and either the parties or the PCA may decide that proceedings initiated under the expedited rules will revert to the standard rules.
  • Efficiency. The draft rules are built on efficiency. Tribunals are expected to convene a case management conference with the parties within 30 days from their constitution (Article 16). The convening of additional procedural conferences is encouraged throughout the proceedings. Tribunals are also given deadlines to ensure the rendering of final awards in a timely fashion. Tribunals with three or more members are required to render the final award within 90 days of the closing of the hearing (or the receipt of the last submissions authorised by the tribunal); for sole arbitrators, the time limit is 60 days (Article 39). Tribunals are also explicitly empowered to assist the parties in discussing a settlement when appropriate.

In addition, tribunals enjoy all powers necessary to manage the case. In particular, tribunals may decide, after consulting the parties, that any hearing will be conducted through means of communication that do not require physical presence (Article 18). The logistical experience of the PCA in organising remote hearings will be particularly helpful in this regard. In fact, the draft rules provide the option for the entire procedure to be paperless, under which even hard copies of awards with wet signatures are only required when the law of the seat or the place for enforcement explicitly requires them.

One concern raised by financial institutions is the need for tribunals’ decisiveness in dismissing evidently unmeritorious claims or defences, without having to go through the full procedure on the merits. Thus, early determination is a power explicitly conferred upon tribunals in the draft rules (Article 35).

The emphasis on efficiency also includes cost-optimisation. The draft rules offer parties a choice between a time-based arbitral fee system and a system based on the value of the dispute (Article 49). Absent an agreement, the rules default to a time-based fee system.

***

The revised P.R.I.M.E. Finance draft arbitration rules are rules of their time. They draw on the drafters’ vast experience accumulated over decades of litigating and arbitrating disputes, both specific to the banking and financial sector and in a plethora of other contexts. They achieve a delicate balance between empowering tribunals to rule on all the situations that may arise in the course of the proceedings, while requiring the transparent, fair, and equal treatment of the parties. It is now essential for the drafters’ vision to be put to the test and allow users, be they arbitrators, counsel, or corporate officers, to consider whether these rules meet their expectations. At the end of this process, P.R.I.M.E. Finance will emerge with rules better fitted to offer a credible alternative dispute resolution mechanism to financial institutions, their customers, and counterparties. This will lead to greater and more secure business for all.

 

The author, Professor Georges Affaki, is Partner at AFFAKI and chairs the revision of the P.R.I.M.E. Finance Arbitration Rules.

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Interviews with Our Editors: In Conversation with Ndanga Kamau, Vice President of the ICC International Court of Arbitration and President of the ICC Africa Commission

Mon, 2021-01-18 22:24

Ndanga Kamau is a Vice President of the International Chamber of Commerce (ICC) International Court of Arbitration and the President of the ICC Africa Commission. She is an international lawyer who specialises in international dispute settlement and international law. She sits as arbitrator and represents clients in international disputes. She also provides consultancy work and teaches as independent/adjunct lecturer. Ndanga holds an LLM in International Dispute Settlement from the University of Geneva/Graduate Institute, postgraduate diplomas in law from City Law School/Inns of Court School of law, and a degree in Economics from the University of Cape Town.

Welcome to the Kluwer Arbitration Blog, Ndanga!  This will be a great opportunity to learn more about you, your trajectory, and your experience in international arbitration. Thank you for your time.

  1. Let us begin with your personal trajectory. How did you become interested in international arbitration?

My interest in international arbitration was nurtured while trying to sit, and sometimes stand, unobtrusively in the back of various conference rooms in the late 2000s! In between my studies in London, I spent a year as an intern at the British Institute of International and Comparative Law (BIICL). One of the perks of a BIICL internship was that interns could attend the Institute’s rich programme of events for free. Speakers at these events were leading experts in international dispute resolution and international law, drawn from private practice, academia, government, institutions, and international courts. It was at one of these events that I first encountered an agreement to arbitrate.

I went on to do the MIDS programme in Geneva, which covered international dispute resolution more broadly – negotiations, WTO, ICJ, commercial arbitration, investment arbitration, and WIPO. I maintain this broad interest in international dispute resolution.

 

  1. Turning to your work on international arbitration in Africa, are there discernible trends in how international arbitration is developing on the continent? Please feel free (actually, please do!) to bring nuances and distinctions in trends you see in different Sub-Saharan African regions and jurisdictions.

It is difficult to discern any trends in a region that contains such diverse countries. But, with that caveat, I would make four generalisations.

Firstly, states in the region are increasingly committed to modernising their legal and institutional frameworks for international dispute resolution – this year alone, Ethiopia and Sierra Leone have ratified the New York Convention, and Tanzania has enacted a new international arbitration law.

Secondly, African stakeholders are becoming more sophisticated and assertive. They are calling for the use of African seats, for the engagement of African counsel, and for the appointment of African arbitrators in international disputes.

Thirdly, there is more intra-Africa collaboration, especially between the younger generation of lawyers. These pan-African exchanges can only increase as African states start to implement the African Continental Free Trade Agreement (AfCFTA) in 2021.

Finally, there is considerable interest in Africa from the international arbitration community outside the continent.

 

  1. In a recent webinar, you shared your passion about ‘the development of affordable, accessible, efficient and inclusive dispute resolution systems in the world, particularly in Africa’. How can we achieve this in a world disrupted by Covid-19?

If I may focus on Africa, I think that the disruption caused by Covid-19 has given us the impetus to think about how we can leverage technology for dispute resolution. Now is the time for all stakeholders to invest in multi-year plans to ensure better connectivity across the continent.

 

  1. In the same webinar, you suggested that we should broaden the data points that we rely on when talking about and measuring diversity. Could you elaborate a bit more on this?

You may have been listening too attentively to the webinar! I suppose I was making two broad points.

The first was that to achieve diversity and inclusion in international arbitration, we must look beyond gender, and do that in a way that does not prioritise one category of diversity over another – I think this has already started.

The second was that we may be guilty of overemphasising arbitral appointments as a proxy for diversity and inclusion in our field. We focus on data on arbitral appointments to tell us how well (or badly) we are doing on diversity and inclusion, but we should really be looking at data from the full field – in-house counsel, counsel in law firms, barristers, counsel in arbitral institutions, academics, etc. We can only achieve diversity and inclusion in international arbitration if we achieve it across the board, not just in arbitral appointments. More than that, it is unlikely that we can achieve diversity in arbitral appointments without first achieving it in these other areas.

 

  1. Among the many interesting projects you are involved with, you are currently an observer in the UNCITRAL Working Group III on Investor-State Dispute Settlement Reform. From your perspective, how are African states approaching ISDS reform?

As can be expected from a continent with 54 countries, there is great diversity in the way in which African states are approaching ISDS reform. There are states which have been vocal about dismantling the current system, others that are actively working to reform the system, and many others which do not have a discernible position. As African states prepare to negotiate the Investment Protocol of the African Continental Free Trade Agreement (AfCFTA), these differences will impact the outcome of their negotiations.

At UNCITRAL Working Group III, which is mandated with procedural reform, it has been striking to see the increase in attendance by African states between the first session in late 2017 and the last in-person session in January 2020. I think it would enrich the discussions to have more active participation by African delegations during the sessions and I am working with others to support that participation.

Separately, on substantive reform, African states are actively reforming their investment laws and international investment instruments (IIAs) – at bilateral and regional levels. The reforms are generally aimed at rebalancing rights and obligations between investors and states, eliminating overly broad provisions, and linking investment to sustainable development.

In the coming years, I expect to see more assertiveness from African states on ISDS reform. But, in the short term, I anticipate that some reform ambitions will be tempered by the urgent need for foreign direct investment (FDI) to rebuild African economies in a post-pandemic world.

 

  1. What would have surprised your younger self about a career in international dispute resolution?

That international dispute resolution is more than just law – it is history, culture, politics, economics, international relations, and much more besides. This confluence of disciplines is part of what makes the work so rewarding.

Many thanks, Ndanga!

 

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

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Investor-State Mediation: Insight and Inspiration from the First Virtual Pre-Intersessional Meeting of UNCITRAL WGIII

Sun, 2021-01-17 23:16

There may have been a lot of government restrictions limiting physical gatherings this year, but these restrictions surely did not limit our enthusiasm in gathering (virtually and intellectually) for the first-ever United Nations Commission on International Trade Law (‘UNCITRAL’) Working Group III (‘WGIII’) Pre-Intersessional Meeting. The virtual event, with the theme “The Use of Mediation in ISDS”, was successfully held in Hong Kong on 9 November 2020, attracting more than 500 registrations from over 74 countries.

The panel discussion among the promising line-up of ISDS experts engaged with UNCITRAL’s ongoing work on ISDS reform and the speakers indicated a hope that the event could contribute to the Secretary’s preparatory work on the topic and pave the way for further discussions to be held by WGIII. This post provides an overview of the Pre-International Meeting, highlighting some of the key themes, including challenges to ISDS mediation, multi-tiered dispute resolution, hybrid models for ISDS, and possible reform options.

Videos of the event and related materials are available here. Interested readers may also visit this page for more Kluwer blog posts on investor-state mediation.

 

Overcoming challenges to ISDS mediation

The first panel (Shane Spelliscy as moderator, and Justin D’Agostino, Meg Kinnear, Professor Jaemin Lee, and Mairée Uran Bidegain as speakers) discussed the challenges associated with the use of mediation in ISDS and how to overcome these challenges. The panel observed that the overall settlement rate for ISDS is quite low relative to settlement rates in commercial litigation and arbitration. Various reasons for this were discussed, including the lack of incentives for early settlement, the lack of coordination and consensus between different ministries and officials, and inadequate awareness and confidence in mediation generally.

The panellists then moved on to consider the ICSID mediation mechanism and the Korean experience in ISDS mediation. The panel concluded with a number of proposals to overcome the challenges that had been identified. These include, among other things, developing internal awareness about mediation as well as capacity to mediate and having more detailed treaty provisions to provide a stronger foundation for mediation in future.

 

Multi-tiered dispute resolution

The second panel (Dr Anthony Neoh QC SC JP as moderator, and Wolf von Kumberg, Professor Jack J. Coe Jr., and Ronald Sum as speakers) considered the use of mediation as part of a multi-tiered dispute resolution process. The panellists first examined the multi-tiered provisions in a few bilateral agreements, such as the Comprehensive and Economic Trade Agreement (CETA). They pointed out that while these provisions appear to be intended to encourage the use of mediation in conjunction with arbitration, obstacles may arise. One example is the fact that these systems are often geared towards preparing for arbitration during cooling off periods.

In light of the obstacles, the panel proposed a number of solutions to make the multi-tiered dispute resolution process more effective. The proposals include considering the use of Med/Arb/Med models; continuing the evolution of institutional frameworks; and designing more effective mediation protocols.

Finally, the panel explored the innovative aspects of the investment mediation rules under the CEPA (Closer Economic Partnership Arrangement) between Mainland China and Hong Kong SAR, highlighting the requirements in relation to the qualifications and skills of CEPA mediators, the provisions on enforcement of mediated settlements, confidentiality, and the compulsory Mediation Management Conference procedure. The panellists suggested that the CEPA mediation mechanism, which is a clear set of rules with an open and transparent mechanism affording protection to foreign investors, may be a potential model for reference for UNCITRAL’s work in future.

 

Hybrid Models for ISDS

The third panel (Natalie Morris-Sharma as moderator, and Barton Legum, Francis Xavier SC, Cao Lijun, Blanca Salas-Ferrer, and Professor Hi-Taek Shin as speakers) considered the use of hybrid models, which are dispute resolution mechanisms involving both arbitration and mediation, in resolving ISDS disputes. The panel discussed a number of legal issues arising from the use of hybrid models. For instance, some hybrid ISDS provisions fail because the language is unclear. Another potential issue is that mediation and arbitration are not kept separate from one another. This can be problematic where confidential information or admissions from mediation get intertwined with the arbitration proceedings, with the result that the arbitral award may be challenged on due process grounds.

A number of recommendations emerged from the panel session. The panel recommended mandatory mediation because, among other benefits, it provides a valid basis for state respondents to have recourse to alternative approaches outside arbitration without the need to worry about criticisms or allegations of corruption. It also helps to preserve the relationship between the investor and the State. Another recommendation is the development of a permanent investment court structure, which is capable of bringing much needed predictability and structure to mediation.

The panel also considered the potential for arbitrators to also act as mediators in ISDS cases. The panel acknowledged the potential benefits of such practice, such as time and cost savings. However, in light of some of the issues raised earlier, such as concerns over confidentiality as well as impartiality of arbitrators when mediation fails and arbitration resumes, the panel suggested a cautious approach for ISDS cases whereby only the presiding arbitrator will act as mediator, with the understanding that if mediation fails, he or she will resign and a new president will be appointed.

 

Reform options for ISDS mediation

The fourth panel (Anna Joubin-Bret as moderator, and Alejandro Carballo-Leyda, Charlie Garnjana-Goonchorn, and Dinay Reetoo as speakers) discussed the possible reform options for ISDS mediation. The panel highlighted three broad categories of recommendations – (1) improving the legal framework; (2) capacity building; and (3) leveraging mediation’s synergy with other ISDS reform options.

It was suggested that there is a need to improve the legal framework for investor-State mediation at both the international and domestic levels. At the international level, the panel called for the development of model treaty clauses and ISDS mediation protocols. As for the domestic level, there needs to be better domestic institutional frameworks to facilitate the use of mediation by States.

Capacity building is important for a variety of reasons. For instance, it helps to demystify the use of mediation as a means of resolving ISDS disputes (in particular, it helps address concerns relating to corruption and concerns that the government is not acting in the best interest of the people if it agrees to settle). Capacity building can be achieved through education and promotion initiatives, such as conducting training courses and promoting the literature cited and developed in the Working Group III process.

Lastly, the panel considered the synergy of mediation with other possible ISDS reform options. In particular, the panel highlighted the potential of an Advisory Centre on International Investment Law (‘ACIIL’). The panellists considered that an ACIIL can (1) help state officials understand mediation; (2) take on the role of both neutral institution and legal advisor to provide an evaluation as to whether and when mediation is appropriate; and (3) facilitate the mediation process (by proposing mediators and ensuring that State representatives have the appropriate authority to negotiate and reach an agreement).

 

The way forward

Following a Q&A session in which the audience eagerly participated, the event finally came to an end. Just like the novel format of this first-ever virtual Pre-Intersessional Meeting, the ideas emerging from the panel discussion proved equally forward-looking and there was a lot of food for thought for everyone. It is hoped that all these discussions could give us some inspiration on how we can shape the future of ISDS mediation going forward and contribute to the work of WGIII as well as the ongoing dialogue among the wider ISDS community.

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The Contents of the Brazilian Arbitration Journal, Volume XVII, Issue 68 (December 2020)

Sat, 2021-01-16 21:03

In this issue, the Brazilian Arbitration Journal pays tribute to Professor Theophilo de Azeredo Santos, one of the pioneers of arbitration in Brazil, in a Note In Memoriam by Selma Ferreira Lemes and Fabiane Verçosa.

This edition also marks the last one coordinated by our Editor-in-Chief Flavia Mange, who has diligently and competently directed the RBA in these last years. Our sincere gratitude to Flavia. Fabiane Verçosa will replace her in the conduction of the Journal’s activities.

In its National Doctrine section, the Journal introduces the work of José Victor Palazzi Zakia, who examines the possibility of a party lacking financial resources to disregard the effects of the arbitration agreement. Moreover, Heitor Vitor Mendonça Sica and Wilson Pimentel analyze and compare the cost allocation regime of judicial proceedings and arbitration proceedings in Brazil. The Professors Kazuo Watanabe and Daniela Monteiro Gabbay address the admissibility and adequacy of collective arbitration as a mechanism for access to justice in the capital markets and its procedural aspects.

Whereas in the International Doctrine section, Brian D. Burstein presents a forecast on how disputes regarding investments in renewable energy will evolve in the context of climate urgency.

In the Nacional Judicial Case Law section, Natália Mizrahi Lamas discusses a judgement, delivered by the São Paulo Court of Appeal, that ruled on the setting aside of an arbitral award on the grounds of a failure, perpetrated by the President of the Arbitral Tribunal, of his duty of disclosure. Luis Fernando Guerrero comments on a decision rendered by the Superior Court of Justice regarding the existence of an arbitration agreement between the parties and the consequent derogation of the state court’s jurisdiction. In addition, Giovana Perette Leites assesses the judgement of the Superior Court of Justice concerning the transferability of arbitration clauses by subrogation.

In the International Judicial Case Law section, James E. Berger, Charlene C. Sun and Paula Miralles de Araujo provide insights into the U.S. Court of Appeals for the Fourth Circuit’s decision on the use of section 1782 in aid of foreign commercial arbitrations and thoughts for the Brazilian arbitration scenario.

In the General Information, Ana Paula Montans introduces LCIA’s new Arbitration Rules in force since 1 October 2020. Fernando Freire Lula de Souza reports the Young Practitioners Forum of the 19th CBAr International Arbitration Congress. Furthermore, Luíza Kömel and Maúra Guerra Polidoro present their notes on the 19th CBAr International Arbitration Congress – “Arbitration and Digital Transformation”.

The Article “Ethics of the International Arbitrator” by Professor Martin Hunter is this edition’s Arbitration Classic, containing an introductory note by Renato Stephan Grion and Thiago Del Pozzo Zanelato.

Lastly, the present edition includes Thiago Marinho Nunes’s review of the book “Vinculações Arbitrais”, authored by Paulo Magalhães Nasser.

Stay safe in these times of pandemic!

João Bosco Lee, Director

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Representation of Venezuela in Investment Arbitration

Fri, 2021-01-15 23:09

Nicolas Maduro was “reelected” President of Venezuela for the constitutional period from 2019 to 2025. This presidential election was the subject of serious questions by large representative sectors of Venezuelan society, as well as by the United States, the European Union, and most Western Hemisphere countries. Given this situation, Juan Guaidó, as head of the National Assembly of Venezuela, announced that he would assume the powers of the executive branch, and was sworn-in as Interim President of Venezuela on January 23, 2019.

On the same day that Guaidó took the oath, the US government expressly recognized him as President and rejected the legitimacy of Maduro, which was followed by the governments of more than 50 countries, including the US, the UK, Canada, Japan, Switzerland, Israel, Australia, South Korea, almost every Member State of the European Union, and most Latin American nations.

Despite the above, Maduro continues to control the real and effective functions of the government. In addition, Maduro is backed by some countries of a certain geopolitical weight such as China, Russia, Turkey, Cuba, and Iran.

This unusual political situation leads to the introduction of the problem that this post seeks to address: who holds the right to represent Venezuela in investment arbitrations?

 

A brief overview of two disputes under the ICSID Convention in which the problem has been presented

This dilemma has already arisen in several ICSID cases. The first case is ConocoPhillips v. Venezuela (ICSID Case No. ARB/07/30) for which, the tribunal issued its final award on 8 March 2019. On 16 April 2019, the law firm Curtis, Mallet-Prevost, Colt & Mosle LLP (“Curtis”), claiming to act on behalf of Venezuela, submitted a rectification request, alleging that there were errors in the final award. Curtis enclosed with its request a power of attorney to represent Venezuela, granted by Hernández, Special Attorney appointed by the Guaidó Administration.

However, on 19 April 2019, the law firm De Jesús & De Jesús (“De Jesús”) submitted a letter to the tribunal, in which it stated that on 7 March 2019, De Jesús had been granted a power of attorney to represent Venezuela by Muñoz, Attorney General appointed under the authority of the Maduro Administration. Interestingly, in the 19 April 2019 letter, De Jesús made the following statement: “on behalf of the Republic the Application that was previously submitted by our colleagues from Curtis, which you will find enclosed.”

In short, two separate law firms claimed to be the exclusive representatives of Venezuela in the same dispute. How did the tribunal address this issue? The tribunal determined that there was no conflict because both law firms had filed the same request for rectification.

In the case of Global Values v. Venezuela (ICSID Case No. ARB/13/11), the same issue arose during the annulment proceedings. The Special Attorney appointed by the Guaidó Administration filed a request alleging that only Guaidó had the authority to assert the interests of Venezuela, seeking to exclude the Attorney General of the Maduro Administration. The Ad Hoc Committee rejected this request, considering that the Special Attorney appointed by the Guaidó Administration did not demonstrate – even though he had the burden of doing so – that he represented an independent government exercising effective authority and control within Venezuela. In this regard, the Ad Hoc Committee clarified that the recognition that several states of the international community had given to Guaidó did not demonstrate the effectiveness of his authority.

 

How should future tribunals address this issue?

It is an inherently political exercise to assess the legitimacy of one’s claims of being the rightful government of a sovereign State. Recognition, or lack thereof, of one particular government over another has significant implications, including with respect to a country’s sovereignty and independence, and its ability to engage with the international community. It is worth questioning whether arbitral tribunals are the appropriate bodies to make determinations as to which political leader has the right to represent a sovereign nation. Moreover, it seems undesirable to burden tribunals with the task of recognition of governments, given that the implications of such recognition are of significant political importance. There is, in addition, an attendant risk that different tribunals will arrive at divergent views, adding to the political turmoil.

Prima facie, it would appear that the Maduro faction is the de facto government of Venezuela because it exercises effective authority within the country. This has probably been the reason Russia, China, Turkey, and Iran, among other States, have granted recognition to the Maduro government.

Despite this, Guaidó’s international status as de jure President has been recognised by the governments of more than 55 countries, including almost all major trading nations and host countries with large investment flows. On that basis, it is possible that the national courts of those States may treat officials appointed by Guaidó as the only legal representatives of Venezuela. US Courts have taken this approach in Rusoro Mining Limited, Gold Field Limited v Venezuela and OI European Group v. Venezuela. In these cases, the respective domestic courts held that the decision of what government is to be regarded as representative of a foreign State is a political rather than judicial decision; as such, they recognized the Guaidó government lawyers as the appropriate representatives of Venezuela because the United States has recognized Juan Guaidó as the Interim President of Venezuela.

This approach taken by the US national courts, accompanied by the possibility that other national courts may follow suit, raises particular concerns about enforceability of arbitral awards. Arbitral tribunals are not empowered to enforce the pecuniary obligations imposed by their awards. Such power only belongs to courts of the countries in which the award is intended to be enforced. Therefore, it may well be that a court of one of the countries whose government has expressly recognized Guaidó as president will need to set aside a final international arbitration award issued as part of an arbitral process where the representation of Venezuela has been denied to lawyers appointed under the authority of Guaidó.

As such, it may be prudent for arbitration tribunals to hear the arguments of counsels empowered by both factions when they each ask to act on behalf of Venezuela. It could also help ensure that the different perspectives on key issues in a matter are fully represented, allowing the arbitral tribunal to obtain a better understanding of the facts. Of course, such an approach, albeit more politically neutral, is not without its risks and setbacks.

Firstly, this approach could lead to increased costs and delays. Tribunals would need to proactively mitigate that risk by drafting procedural orders with strict parameters.

Secondly, this approach could make it difficult and expensive for claimants to defend their case, considering they will have to simultaneously respond to submissions made by both factions. In the disputes mentioned above where this issue has arisen, the competing submissions did not lead to issues relating to substantive law or facts, because the substance of each faction’s submission was identical. In the event that the two factions take conflicting positions in future disputes, tribunals would be faced with the unenviable position of having to balance their political neutrality with ensuring procedural justice for the claimant.

Nevertheless, it would not be justified for an arbitration tribunal to make such a significant political decision (i.e., who has the right to govern Venezuela), simply to make the arbitration process less procedurally complicated for claimants. Instead, tribunals would most likely have to focus on setting strict boundaries for how each Venezuelan political faction may engage in the dispute.

It is worth noting, of course, that if a tribunal finds that counsels of one faction did not present their case with diligence and in good faith, in due compliance with the applicable rules of professional conducts and ethics, then the tribunal would be able to exclude them from the proceedings, keeping in mind that some ICSID decisions support a tribunal’s powers to exclude counsel from arbitrations in compelling circumstances, e.g., Hrvatska Elektropriveda d.d. v Republic of Slovenia.

The existing political crisis in Venezuela will undoubtedly raise some concerns for arbitral tribunals presiding over disputes involving Venezuela. It remains to be seen whether future tribunals would be able to take the politically neutral approach that ICSID tribunals have opted for thus far.

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2020 Review: Latin America and Commercial Arbitration

Fri, 2021-01-15 00:00

Corruption, annulment of arbitral awards and court intervention mark the main developments for 2020 in Latin America.  Our contributors this year reported on the most important judicial decisions and legislative measures impacting the legal framework of various jurisdictions in the region.

A new ‘hot topic’ arising from the COVID-19 pandemic is the interplay between arbitration and insolvency.  This has led to the creation of a new arbitration platform Arbinsol, as well as a new IBA Arbitration Committee group, which will issue a toolkit for arbitrators and counsel to provide a framework for identifying the various issues that might arise when a party to an arbitration is subject to insolvency proceedings, and which will be accompanied by a series of National Reports.  In this regard, Lucila Marchini provided an overview of the current legal framework in Latin American jurisdictions.

Below, we will discuss the most relevant developments in the region.

 

While Mexico faces a tumultuous regulatory battle, commercial arbitration appears unaffected

During late 2019 and the first quarter of 2020, Mexico’s regime issued a series of decrees to modify renewable energy regulations which adversely impacted national and international companies operating in Mexico.  As Fernando Pérez-Lozada anticipated earlier this year, these measures subsequently led to the companies’ recourse to local courts for temporary injunctions against the government measures, as well as threats of investment claims against the country.

Despite the regulatory battle between private companies and the Government, it appears that commercial arbitration remains unaffected.  In fact, Sylvia Sámano Beristain, Secretary General of the Arbitration Center of Mexico (CAM) reports that disputes relating to energy and oil and gas have actually increased in the center.  Ms. Sámano also shared with our team that CAM plans to amend its Arbitration Rules of 2009 to offer an updated framework that meets all the current trends of the arbitration practice including the participation of tribunals’ secretaries, expedited procedures, and third-party funding.

 

Important developments in the arbitration landscape in Chile

On April 2, 2020, Chile’s legislative body enacted an Emergency Law to regulate how courts and arbitral tribunals would function during the state of emergency declared by President Piñera. This law grants arbitral tribunals the power to suspend hearings unless due process is affected; it also allows a party to rely on an impediment attributed to a situation caused by the pandemic to excuse its non-compliance with a procedural deadline. Pablo Correa and Liat Tapia discuss whether the provisions of the Emergency Law apply to international arbitrations seated in Santiago.  Specifically, the authors analyze whether the suspension of evidentiary terms would apply to arbitrations where the evidence is not submitted during a specific procedural phase but it accompanies the parties’ written submissions.

Macarena Letelier Velasco, Executive Director of the Center for Arbitration and Mediation of Santiago (CAM Santiago) shared her views on the arbitration landscape in Chile. Impressively, CAM Santiago is the only center in Latin America that has its own Rules on the use of Dispute Boards; it implemented a remote work system in response to the COVID-19 pandemic; provided the local community with 1,000 online, pro bono mediations for cases with disputes not higher than US$ 100,000, and very recently launched a book compiling Chilean arbitral jurisprudence from 2002 to 2020.

Finally, on September 14, 2020, the Chilean Supreme Court entered a final judgement in case CCF SUDAMERICA SPA resolving a complaint appeal (recurso de queja) against a lower court’s rejection of an appeals recourse against a domestic arbitral award. In this case, the parties agreed in their arbitration agreement that an appeal and certiorari recourses would be admissible against the final award.  Once the award was issued, the losing party brought an appeal which the Appellate Court of Santiago dismissed. However, the Supreme Court later reversed the decision.  Cristián Conejero, Juan M. Rey Jiménez de Aréchaga and María Jesús Hadwa discussed this decision which, on the one hand, endorses the basic premise that consent is the cornerstone of arbitration, but on the other hand, ignores basic principles of international arbitration, i.e. the finality of arbitral awards and the fact that annulment is the sole remedy against arbitral awards.

 

In Colombia, the Council of State stands out for its review and annulment of awards

Three important decisions stand out for commercial arbitration in Colombia.  The first refers to the Ruta del Sol II case whereby a domestic arbitral tribunal declared a concession contract null and void due to corruption in its procurement; despite the fact that the concession contract had already been terminated through the parties’ mutual agreement.  On October 8, 2020, the Council of State (the “Council”) upheld the validity of the award.  Juan Sebastián Arias and Laura Lamo discussed the importance of the tribunal’s determination for future cases in Latin America relating to public contracts procured through unlawful practices.

The second important precedent refers to the February 27, 2020 Council’s decision on the GECELCA case.  The Council annulled an international award due to the tribunal’s failure to comply with the agreed arbitral procedure.  During the arbitration, the tribunal denied the claimant to produce an expert report in response to the expert evidence the respondent filed with its rejoinder submission.  The Council considered this to be a departure of the parties’ procedural agreement, without considering the materiality of the tribunal’s order on the underlying merits decision.  Alberto Madero and Manuela Sossa reported on this judgement which departed from previous standards set forth by Colombia’s Supreme Court of Justice on the annulment of arbitral awards, and adopted a more expansive criterion to annul international awards based on procedural defects.

Finally, on a more positive note, on October 28, 2020, the Council rejected a tutela petition sought by the Refinería de Cartagena SA (Reficar) against a domestic arbitral award rendered against it.  The dispute referred to a contract for the expansion of the refinery.  In dismissing Reficar’s petition, the Council pointed to the exceptional nature of this type of relief against arbitral awards.

 

Achieving transparency continues to be a priority for Peru’s arbitration community

In recent years, arbitration users began to raise queries concerning the legitimacy of arbitration because of the lack of publicly available information, especially with respect to arbitrators and their accountability. Some of these queries arose from the uncovering of bad practices and acts of corruption associated to the Lava Jato investigation.  As a result, the National and International Arbitration Center of the Lima Chamber of Commerce (the “LCC Arbitration Center”) developed transparency mechanisms to guarantee the legitimacy of arbitration such as the “Faro de Transparencia” initiative (discussed here).  The Transparency Lighthouse is a publicly accessible digital platform aimed at providing public access to key pieces of information with regard to arbitrations administered by the LCC Center (including the arbitrators’ information).

Additionally, on January 24, 2020, Peru enacted the Emergency Decree No. 020-2020, (the “Decree”) which amended the Arbitration Act to provide protections to any arbitration in which the Peruvian Government is involved.  Rafael Boza reported earlier this year the content and risks of this new legislative development over commercial arbitration in the country. The recitals of the Decree state that the Arbitration Act is “not well suited” for arbitrations in which the state is a party, and declare that the purpose of the amendments is to “assure transparency.”  Among others, the Decree (i) bans ad-hoc arbitration in cases in which the state is a party; (ii) hints the possibility of a state arbitral institution; (iii) requires that a judge granting provisional measures (an attachment or injunction) obtains security for such remedy (thereby making it harder for a private to obtain interim relief against a governmental entity); and (iv) limits the capacity of individuals to serve as arbitrators.

 

Brazil continues to be active in arbitral developments

As one of the most active jurisdictions in Latin America, Brazil did not disappoint this year.  First, Pedro Guilhardi and Amanda Bueno Dantas reported on a judicial decision favorable to the secrecy of arbitral proceedings in Brazil.  The dispute arose out of a summons from the state’s tax authority against the Centro Brasileiro de Mediação e Arbitragem (CBMA) to exhibit documents concerning arbitrations proceedings it had administered. Albeit not relying on confidentiality protections inherent to arbitration, on February 12, 2020, the Regional Federal Court of the Second Region enjoined the tax authority from seeking disclosure of the Center’s documents.

Second, on August 11, 2020, the Court of Appeals of the state of São Paulo annulled an arbitral award on the Fazon case on grounds that the chair of an arbitral tribunal had failed to timely disclose his appointment to another arbitration by one of the parties. The arbitration started in 2015, and a final award in favor of the respondent was issued in February 2018. Before deciding the claimant’s request for clarification, the arbitral tribunal issued a procedural order informing the parties, for the first time, that in August 2016, the chair of the tribunal had accepted an appointment as co-arbitrator by the respondent in a different proceeding. Guilherme Rizzo Amaral discussed the court’s reasoning and potential implications for future judgements on this subject.

Finally, another development worth noting is Brazil’s new Franchising Law (in force as of March 27, 2020) which expressly provides that franchising disputes may be subject to arbitration.  This has brought a lively debate in the country (discussed by Caio de Faro Nunes and Victoria Romero here) of whether this express reference was necessary at all, and whether its scope now addresses the issue of arbitrability of adhesion contracts – given that franchise agreements can often take the form of adhesion contracts.

 

Venezuela – is the integrity of arbitration in danger?

On February 20, 2020, the Constitutional Chamber of the Venezuelan Supreme Court of Justice (the “Court”) issued an interlocutory judgment ordering the Business Center for Conciliation and Arbitration (CEDCA) to stay an arbitration and to forward the arbitration file in order to decide on a request for “avocamiento” filed by one of the parties before the Court.  Avocamiento refers to the Court’s power to take over the review of a case from the lower judicial courts, or reassign it to a different court when certain exceptional circumstances are met.

As Luis Capiel and Alicia Larrazabal discuss here, the fact that the Court decided to stay the arbitration and could eventually take over the resolution of the case is troubling because the court could effectively seize the decision on the merits from the arbitral tribunal.  Naturally, this development raised concerns from the Venezuelan Arbitration Association, which issued a statement condemning the decision; as well as from the IBA Arbitration Committee which sent an open letter to the President of the Caracas Bar Association expressing concerns that this decision may result in a “disquieting precedent” for arbitration in Venezuela.

To date, the Court’s decision on the request for avocamiento is still pending.

 

Conclusion

As gleaned from this review, the developments for the region in 2020 mainly focused on decisions from the states’ judiciaries and measures enacted by their legislative bodies.  This has raised concerns regarding the intervention of courts in arbitration proceedings as well as their reasoning for annulment of arbitral awards.

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Imposing Virtual Arbitration Hearings in Times of COVID-19: The Swiss Perspective

Wed, 2021-01-13 23:36

On 6 July 2020 the Swiss Federal Tribunal has issued a decision in which it has held that the COVID-19 pandemic does not serve as a sufficient justification to impose virtual hearings in state court proceedings against a party’s will. With a view to field of arbitration, the question thus arises whether the respective reasoning of the highest Swiss court may have any impact on the practice of arbitral tribunals seated in Switzerland.

In this post we submit that the reasoning of the Swiss Federal Tribunal is based on specific state court related premises which do not properly reflect the flexibility and further features of arbitration proceedings. Therefore, the decision of the Swiss Federal Tribunal cannot be transposed to international arbitration and arbitral tribunals may, under specific circumstances such as the COVID-19 pandemic, order the holding of virtual hearings against the will of a party.

 

Background

It was interesting to see how differently state courts on one hand and arbitral tribunals on the other hand reacted to the lockdowns imposed by the COVID-19 pandemic in large parts of the world in spring 2020. Whilst local courts were forced to temporarily suspend operations, numerous arbitral tribunals swiftly adapted to the new normal by shifting the proceedings into virtual space. Accordingly, various international arbitration institutions, including the ICC, have been proactively encouraging arbitral tribunals to conduct virtual hearings. The implementation of remote settings was straightforward where both parties were in consent with virtual proceedings.

But can the COVID-19 pandemic serve as a sufficient justification for arbitral tribunals to impose the holding of virtual hearings on a party actually insisting on a physical interaction with the witnesses?

Swiss arbitration law does not address this issue. A party having objected to the holding of a virtual hearing may feel that it was not in a position to properly present and develop its case on a remote basis. It may therefore be inclined to challenge the arbitral award on the basis of a perceived violation of its right to be heard pursuant to Art. 182(3) of the Swiss Private International Law Act (“PILA“).1)See Saunders, Chapter 7: COVID-19 and the Embracing of Technology: A ‘New Normal’ for International Arbitration, in Calissendorff/Schöldström (eds), Stockholm Arbitration Yearbook 2020, Volume 2, p. 108. jQuery("#footnote_plugin_tooltip_3396_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3396_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Arbitral tribunals should, therefore, refrain from imposing virtual hearings without regard to due process considerations.

Yet, these fundamental procedural rights need to be balanced against the principle of procedural efficiency.2)Art. 15(7) Swiss Rules; Berger/Kellerhals, International and Domestic Arbitration in Switzerland, 3rd ed., Bern 2015, p. 419 no. 1204. jQuery("#footnote_plugin_tooltip_3396_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3396_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Despite the reported breakthroughs in the development of COVID-19 vaccines, it remains unclear at what point in time unrestricted travelling and physical contacts will become possible again. It can thus not be excluded that a party’s insistence on holding a conventional hearing will unduly delay the respective arbitration process.

 

The decision of the Swiss Federal Tribunal

The Swiss Federal Tribunal has recently addressed the conflicting interests of physical interaction and procedural efficiency in the context of state court litigation. In its decision DFT 146 III 194 dated 6 July 2020, the Swiss Federal Tribunal upheld the appeal of a party who had objected to the lower court’s order to virtually conduct the main court hearing via Zoom. The highest court in Switzerland found that, contrary to other instances for which the law explicitly provides for the possibility to use electronic means, there is no legal basis in the Swiss Civil Procedure Code (“CPC“) to hold the main hearing virtually against the will of a party (DFT 146 III 194 cons. 3.2 and 3.6.). To underline this finding, the Swiss Federal Tribunal pointed out that the publicity of civil proceedings (Art. 54 CPC) could not be ensured when hearings were to be held electronically (DFT 146 III 194 cons. 3.5.). However, the current project for the revision of the CPC foresees the possibility to take certain evidence by video conference.

 

Comment

Yet, it does not appear that the reasoning of the Swiss Federal Tribunal can be directly transposed to the field of international arbitration. Quite to the contrary, the publicity of state court proceedings is often one of the concerns leading parties to choose the largely confidential arbitration proceedings over litigation (see Art. 44 Swiss Rules). Art. 25(6) Swiss Rules even explicitly provides that arbitration hearings shall be held in camera unless the parties agree otherwise.

Moreover, Swiss arbitration law as codified in chapter 12 of the PILA is known for its flexibility leaving a wide discretion to arbitral tribunals in shaping the proceedings.3)Liatowitsch, Schiedsgerichtsbarkeit: 12. Kapitel IPRG und das UNCITRAL Model Law on International Commercial Arbitration, in Bonomi/Ritaine (eds.), La loi fédérale de droit international privé: vingt ans après, p. 218 et seq. jQuery("#footnote_plugin_tooltip_3396_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3396_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This discretion is solely limited by the parties’ common agreement, their right to be heard and the principle of equal treatment (Art. 182(2)(3) PILA).4)Stacher, Einführung in die internationale Schiedsgerichtsbarkeit der Schweiz, Zurich 2015, p. 21. jQuery("#footnote_plugin_tooltip_3396_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3396_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Accordingly and as opposed to the CPC, the PILA does notably not provide for a catalogue of constellations in which arbitral tribunals may make use of electronic means of communication, thereby implicitly excluding other applications. Hence, it does not appear that a party’s right to a hearing necessarily implies the entitlement to physical interaction.5)Scherer, Chapter 4: The Legal Framework of Remote Hearings, in Scherer/Bassiri, et al. (eds), International Arbitration and the COVID-19 Revolution, p. 418. jQuery("#footnote_plugin_tooltip_3396_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3396_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This seems to be even more so where the right to be heard must be weighed against the principle of procedural efficiency, such as in times of a pandemic.

It was on the basis of such considerations that the Austrian Supreme Court, in a recent decision, previously discussed on the blog, came to the conclusion that the imposition of a virtual hearing against the will of an arbitrating party did not violate the right to be heard. In support of this finding, the Austrian Supreme Court referred to Art. 6 of the European Convention on Human Rights (ECHR) and pointed out that this provision not only grants the right to be heard but also the right to effective legal protection. It concluded that, in case of an impending standstill of the judiciary, video conferencing may be an effective way to reconcile these potentially conflicting principles.

The binding nature of the ECHR in Switzerland leaves no room for Swiss based arbitral tribunals to ignore considerations of this kind.6)Göksu, Schiedsgerichtsbarkeit, Zurich 2014, p. 695. jQuery("#footnote_plugin_tooltip_3396_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3396_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Moreover, the long-lasting reputation of Switzerland as a place for efficient and flexible arbitration proceedings gives additional reason to believe that the Swiss Federal Tribunal would be inclined to likewise consider virtual hearings to be compatible with the right to be heard. This expectation seems to be further supported by a general tendency in international arbitration to increasingly grant arbitral tribunals the competence to order the holding of virtual hearings if the circumstance so require.7)Saunders, Chapter 7: COVID-19 and the Embracing of Technology: A ‘New Normal’ for International Arbitration’, in Calissendorff/Schöldström (eds), Stockholm Arbitration Yearbook 2020, Volume 2, p. 108; Scherer, Remote Hearings in International Arbitration: An Analytical Framework, in Scherer (ed.), 2020 Journal of International Arbitration, Volume 37, Issue 4, p. 420 et seq.; see references cited in Gielen/Wahnschaffe: Die virtuelle Verhandlung im Schiedsverfahren, in SchiedsVZ 2020, 257, p. 262. jQuery("#footnote_plugin_tooltip_3396_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3396_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As from 1 January 2021, arbitral tribunals acting under the revised ICC Rules will even be explicitly authorised by the parties, after consulting them, to conduct “any hearing […] remotely by videoconference, telephone or other appropriate means of communication” (Art. 26(1) ICC Rules 2021).

It is to be expected that this forward-thinking approach will further strengthen the reputation of international arbitration as a flexible and effective means to resolve cross-border commercial disputes.

References   [ + ]

1. ↑ See Saunders, Chapter 7: COVID-19 and the Embracing of Technology: A ‘New Normal’ for International Arbitration, in Calissendorff/Schöldström (eds), Stockholm Arbitration Yearbook 2020, Volume 2, p. 108. 2. ↑ Art. 15(7) Swiss Rules; Berger/Kellerhals, International and Domestic Arbitration in Switzerland, 3rd ed., Bern 2015, p. 419 no. 1204. 3. ↑ Liatowitsch, Schiedsgerichtsbarkeit: 12. Kapitel IPRG und das UNCITRAL Model Law on International Commercial Arbitration, in Bonomi/Ritaine (eds.), La loi fédérale de droit international privé: vingt ans après, p. 218 et seq. 4. ↑ Stacher, Einführung in die internationale Schiedsgerichtsbarkeit der Schweiz, Zurich 2015, p. 21. 5. ↑ Scherer, Chapter 4: The Legal Framework of Remote Hearings, in Scherer/Bassiri, et al. (eds), International Arbitration and the COVID-19 Revolution, p. 418. 6. ↑ Göksu, Schiedsgerichtsbarkeit, Zurich 2014, p. 695. 7. ↑ Saunders, Chapter 7: COVID-19 and the Embracing of Technology: A ‘New Normal’ for International Arbitration’, in Calissendorff/Schöldström (eds), Stockholm Arbitration Yearbook 2020, Volume 2, p. 108; Scherer, Remote Hearings in International Arbitration: An Analytical Framework, in Scherer (ed.), 2020 Journal of International Arbitration, Volume 37, Issue 4, p. 420 et seq.; see references cited in Gielen/Wahnschaffe: Die virtuelle Verhandlung im Schiedsverfahren, in SchiedsVZ 2020, 257, p. 262. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Interviews with Our Editors: In Conversation with Sylvia Sámano Beristain, Secretary General of the Arbitration Center of Mexico – CAM

Wed, 2021-01-13 00:35

Welcome to the Kluwer Arbitration Blog, Ms. Sámano!  We are grateful for this opportunity to learn more about the Arbitration Center of Mexico – CAM; the type of disputes it handles and the way it is addressing recent developments, such as the COVID-19 pandemic and the adoption of new policies from the Andrés Manuel López Obrador (AMLO) administration. 

 

  1. To start, can you briefly introduce yourself and explain your role at the Center?

I truly appreciate being part of this interview, thank you for the invitation.

Since 2016, I have been serving as Secretary General at the Arbitration Center of Mexico. I directly oversee the administration of the arbitration proceedings and all the other academic activities at the center.

I studied law at National Autonomous University of Mexico. Before practicing arbitration, I worked at law firms concentrating on commercial, civil and environmental law matters. My involvement in arbitration started through an LLM degree at Hong Kong University, where I had the opportunity to witness the development of international arbitration.

I was lucky enough to have the opportunity to intern at the ICC Hong Kong office. During those months, I honed in on everything I learned through the LLM, and realized the importance of administered arbitration.

Over the last few years, I have been teaching arbitration at different law schools throughout Mexico. This has provided me with a platform to always keep studying and researching legal issues related to arbitration.

 

  1. Please tell us more about CAM’s users and their disputes. What kind of parties do you usually serve, and are there particular industries or types of disputes prevalent among them?

The arbitrations at CAM are mostly domestic. The highest percentage of disputes relate to construction contracts. The second largest percentage is related to commercial contracts and thirdly to franchise contracts. In the last few years, due to Mexico’s energy reform of 2013, there have been new types of controversies related to electricity and the oil and gas industry.

 

  1. What percentage of CAM arbitrations relate to international disputes?

Even though most arbitrations are domestic, over the last years, there has been an increase of international cases that have been administrated in English. About 5% of our cases are international, and have involved parties from Europe, North America and Latin America.

 

  1. Apart from the administration of arbitrations, what other initiatives does the Center undertake to promote the use of arbitration in Mexico?

In the academic area, the Center has two main projects:

  • Moot Mexico competition – which was organized in 2002, with the goal of providing students with a practical insight into arbitration procedures. Renowned universities from Mexico as well as other countries, such as Guatemala, Perú, Colombia and Honduras, currently participate in this competition. This project is fantastic as it involves universities, practitioners, law firms and the Center. We all participate and enrich the development of the arbitration practice in the region. The results are already visible, as there are many arbitration practitioners who started their career participating in Moot Mexico.
  • The essay competition, “Guillermo Aguilar Álvarez”, was launched in 2020, to encourage young practitioners to research and write an essay in Spanish about commercial and investment arbitration. The result of the first edition was very positive, we received over30 essays from authors throughout 11 or more countries.

This competition provides a US$ 5,000 prize for the first place winner; additionally, due to the collaboration with Tirant lo Blanch, the top 5 essays will be published. The competition will be offered annually with the aim of increasing arbitration related scholarships in the Spanish language.

In addition to these projects, we constantly collaborate with universities, lawyer associations and other arbitral institutions in the organizing of seminars and courses.

 

  1. In your experience, what is the approach by Mexican courts to annulment and enforcement actions? Are they considered arbitration-friendly?

The Mexican judicial system can definitely be considered as arbitration-friendly. Since 1993, Mexico counts with regulations consistent with the UNCITRAL model law on International Commercial Arbitration. Commercial arbitration is regulated in Mexico’s Code of Commerce, specifically articles 1415 to 1480. During the latest reform to the arbitration regime in 2011, the amendments focused on promoting a clearer text regarding the process to request interim measures.

Regarding local and federal court approaches to arbitration, the result has been positive as courts generally recognize awards, and only annul awards if the limited terms established in the law are found.

Furthermore, there are currently several decisions from the courts which have confirmed the limited intervention courts may have in arbitration, and the role of the courts regarding annulment and enforcement of the award. These decisions refer to relevant topics such as the enforcement of arbitration agreements, the recognition of the exclusive competence of the judge of the seat regarding the annulment of the award, and the recognition of the competence-competence principle.

 

  1. The election of Andrés Manuel López Obrador (AMLO) was seen by many as a turning point in Mexico’s politics toward a more nationalistic ideology. Have measures taken by the AMLO administration impacted commercial arbitration in Mexico in any way, for example, in terms of frequency or availability?

Taking into consideration the Center´s statistics over the last 3 years, the number of cases have been growing at an average rate. However, it is noticeable that cases related to specialized controversies such as telecommunications, energy projects and intellectual property issues, that have been referred to the center have increased.

I believe that the effects of the energy reform of 2013 will continue to have an impact in the increase of arbitration cases in Mexico, as many foreign companies began businesses in the country and trusted arbitration as the most efficient mean for solving disputes.

 

  1. In recent years, Mexico has been fairly active in the international arena, concluding treaties with a direct impact on international disputes (USMCA, ICSID, EU-Mexico FTA). How do you think these measures will change the arbitration landscape in Mexico and what measures is the CAM taking to face such changes?

The conclusion of these treaties has a stronger impact on investment arbitration. Without a doubt, a new era for investment arbitration is coming. With a variety of BITs and FTAs in existence, I consider that there will be a growth in national practice in this forum.

Regarding commercial arbitration, I trust that these treaties will boost international arbitrations in which a Mexican jurisdiction may be selected as a seat. As I mentioned previously, Mexico has a suitable framework for arbitration and is ready to become a renowned seat for international arbitration.

With this in mind, specifically in CAM, we plan to amend our Arbitration Rules of 2009. The aim is to offer an updated framework that meets all the current trends of the arbitration practice such as the participation of tribunals’ secretaries, expedited procedures, and third-party funding.

 

  1. The COVID-19 health crisis has caused and is expected to keep causing unprecedented disruptions to several sectors of the economy and business relationships. How is the Center facing the challenges brought by this new reality?

These past months have been challenging and at the same time have strengthened the advantages of an arbitration process. Even though for the last few years we have provided the option of conducting 100% remote procedures, there still was some resistance from some practitioners. The pandemic has now evidenced that the whole arbitration process may be completed through electronic means.

The tools we have for managing arbitrations are: (i) the use of an electronic file in which all parties involved may access the documents of their proceeding, and (ii) an internal guide to assist in the administration of remote hearings and electronic exchange of documents.

In addition to the administrative actions, taking into consideration the economic situation caused by the pandemic, the Center offered a reduction of 25% on the cost of all arbitrations. This policy has been available since June 2020, and will remain in effect until June 2021. Our initiative has been well received by businesses. There have been instances in which parties did not have an arbitration agreement in place, decided to adopt one, and refer the controversy to arbitration.

A positive response has also been received from the arbitrators who have accepted appointments and fulfilled their role with the highest professional quality. This shows that the Mexican arbitration community is committed in supporting arbitration as a true effective and efficient means for dispute resolution.

Thank you for your time and perspectives – we wish you and CAM continued success!

 

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

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Is Arbitration Helping or Hindering the Protection of the Environment and Public Health? Salient Questions from the 6th Edition of the Casablanca Arbitration Day

Mon, 2021-01-11 23:13

The Casablanca International Mediation and Arbitration Centre (“CIMAC”) convened its sixth edition of the Casablanca Arbitration Day (“CAD”) on December 3, 2020. The virtual CAD presented four panels focusing on one burning issue: “Is Arbitration Helping or Hindering the Protection of the Environment and Public Health?” This question deepens the discussion focused on during the 2019 CAD, “Is Arbitration Contributing to the Revolution?”

 

Is Commercial Arbitration Apt to Resolve Environmental Issues?

The first panel dove into the main theme of the CAD focusing on international commercial arbitration, inquiring whether it is apt to resolve environmental issues. The panel was composed of Ms Lucy Greenwood (Greenwood Arbitration), the mastermind behind the Greener Arbitration Pledge, and Mr Patrick Thieffry (Independent Arbitrator), co-chair of the ICC Task Force on “Arbitration of Climate Change Related Disputes”. It is worth noting that the Report of the Task Force was published last year on “Resolving Climate Change Related Disputes through Arbitration and ADR”.

The speakers retraced the historical development of environmental disputes to consider the procedural and substantive suitability of commercial arbitration to resolve those disputes. Mr Thieffry reminded attendees that, historically, arbitrators performing an adjudicative function were not primarily concerned with environment protection issues. They gained, however, significant experience in the domain (climate change and environment-related disputes) by the wide range of disputes referred to them, including disputes arising out of environmental representations and warranties, mining and infrastructures industries, among others.

As to the suitability of commercial arbitration for environmental disputes, both panelists concurred that it provides for a guarantee of expertise already tested, for example, in disputes arising out the UNFCCC’s Green Climate Fund and the Kyoto Protocol. Arbitration rules, if necessary, may be amended to encourage parties to appoint arbitrators with relevant expertise and knowledge of environmental law. Such an option – a sample clause – was proposed in the Report above-mentioned, in the context of an ICC proceeding. Commercial arbitration provides mechanisms such as emergency arbitration and interim measures which play a major role in urgency characterizing environmental and climate change related disputes. It is also marked by confidentiality, as awards and decisions are not always published. Ms Greenwood argued that for the sake of “social acceptability”, confidentiality rules should accommodate transparency and public participation through existing mechanisms such as amicus curiae.

As both speakers observed, when it comes to arbitrating environmental disputes, the problem is less a question of regulations than a question of applicability. There are indeed more than 2,000 laws and covering environment and climate change related issues. Ms Greenwood stressed in this regard the role played by domestic courts, compelling States to reduce their greenhouse gas emission, e.g. Urgenda Foundation v The Netherlands. In the same vein, Mr Thieffry mentioned the practice of the French Conseil d’Etat, which, in a recent landmark decision dated November 19, 2020, compelled France to take concrete measures to meet the 40% greenhouse reduction target. With these court-ordered greenhouse gas emission reductions, disputes are likely to rise sharply in the coming years. Arbitration is well suited to deal with them.

 

Arbitrating in a More Environmentally-Friendly (and Healthier) Way 

The second discussion revolved around the significant carbon footprint of international arbitration and the different ways the arbitral community could overcome such challenge. This topic welcomed panelists Ms Laetitia De Montalivet (Director, Arbitration and ADR, Europe, ICC International Court of Arbitration) and Professor Dr Maxi Scherer (Special Counsel, Wilmerhale, London / Member of the Court of Arbitration of CIMAC).

Professor Dr Scherer addressed the underestimation of the impact of arbitration on the environment and recalled figures on the carbon footprint of the arbitration industry. She referred to a study conducted by Campaign for Greener Arbitrations Steering Committee which revealed that up to 20,000 trees would need to be planted to offset the effect on the environment of the carbon footprint of one medium-size arbitration.

This issue recently made its way on the arbitration scene mostly thanks to Ms Greenwood who campaigned for the Green Pledge and emphasized the importance of being able to arbitrate in a more environmentally-friendly way by following the nine concrete steps of the Pledge, such as avoiding traveling by air, corresponding only through electronic means and requesting that electronic rather than hard copies of documents be provided.

Based on her significant experience at the ICC, Ms De Montalivet further provided insight on the role of institutions in reducing the carbon footprint of international arbitration. She recalled the ICC’s strong commitment to the objectives of the Paris Agreement and the Sustainable Development Goals (“SDGs”), which is reaffirmed in its strategy to promote sustainable and inclusive economic growth in the context of responsible trade on the political level, but also on an essential personal and corporate level.

Ms De Montalivet suggested that one of the answers to reducing the carbon footprint of arbitration is to always take a critical look at consumption patterns and take modest yet concrete measures. At the ICC in general, and at the Court of Arbitration in particular, the ICC staff has been integrating new practices for several years now in a charter of good conduct, in daily gestures and in arbitration practices. This commitment resulted, among others, in a total digital revolution of the ICC and in the launching of the ICC application. Such commitment to “Greener Arbitration” will also be reflected in the new 2021 ICC Arbitration Rules.

In an interactive debate, the panelists and the audience later discussed the environmental issues that still come with the digital industry and expressed concerns about the carbon footprint of digital communications. If eliminating excess paper and flying less are major contributions towards improvement, the digital industry itself is, however, not carbon neutral and its impact on the environment, increasing exponentially with the development of the new technology uses, is not to be underestimated.

Indeed, it is worth noting that this digital evolution requires infrastructures that consume substantial energy. Ms De Montalivet recalled estimations stating that in 2023, digital technology will use about 20% of the world electricity, taking into consideration that two-thirds of the world’s electricity is produced using fossil fuels. Added to this energy-consuming process, the need for equipment, plastics, metal spares, raw material issues, geopolitical conflicts over access to these resources and the issue of electronic waste, the carbon impact of the digital industry is not to be underestimated. Thus, there are points of vigilance with the digital asset, and faced with these exponential needs, one question remains: is the digital a hope or threat to the environment?

The panel also addressed other concerns that come with the use of digital tools. Some pertain to procedural aspects of such use: whether arbitrators can impose a paper-less arbitration process on the parties and vice-versa. Some other concerns are health oriented. Indeed, one additional aspect to address would be the health impact of digital use, with the appearance of concepts such as “zoom fatigue” and how to limit it.

 

Protecting the Environment through Investment Arbitration

The third panel discussed the protection of the environment through investment arbitration. Professor Jorge Vinuales (University of Cambridge) and Professor Arnaud de Nanteuil (University Paris Est Créteil) empirically shared three figures with the audience:

  1. treaties that have clauses or references to the environment are about 10%;
  2. from 2008, 89% of treaties contained references or clauses relating to the environment;
  3. between 15 and 20% of all cases have an environmental component.

Professor Arnaud de Nanteuil explained that environmental questions in investment arbitration have gone through four evolutions. In the first stage of investment arbitration, environmental issues were not considered because arbitrators did not give deference to state measures citing to Metaclad. In the second stage, the cross-polinization of investments in environment related fields (i.e. the peak of disputes in renewable energies, with the example of the Spanish ECT saga) helped in the numerical growth of environmental issues in investment arbitration.

In a third stage, environmental provisions have permeated investment treaties, in the preambles with references to international conventions, and subsequently in the bodies of treaties, for instance with obligations towards the investors. The Moroccan Model BIT of 2019 is a prime example of making sustainable development a condition for the application of the treaty, for instance the preamble elevates sustainable development to an overarching goal, as well as forming part of the definition of investment “contributing to the sustainable development of the host country” (article 3.3.). Finally, the last phase of the evolution points to the consideration of environmental issues by arbitral tribunals.

Professor Jorge Viñuales referenced the Morocco-Nigeria 2016 BIT, as a remarkable instrument that raised the precautionary principle to the level of international law. He indicated that an alternative way to deal with the application of specific environmental clauses is to recuperate non compliance in the damages phase, by reducing compensation. The panelists collectively concluded  ]that environmental clauses should continue to be included in investment treaties, favoring more concise language, as opposed the more elusive clauses that are currently common.

 

Procedural Challenges and Substantive Aspects of Covid-19 Related Disputes

The last session touched upon the topic du jour “COVID-19 and Arbitration” with a focus on procedural and substantive aspects of virtual hearings. On the procedural aspects, the challenges and protocol for virtual hearings were discussed. Jalal El Ahdab (Bird & Bird) pointed out that visas could be an issue, however virtual hearings tackle this hurdle especially in the Gulf region or politically sensitive states.

Whilst there has been a cost reduction regarding travels and accommodation, online platforms with golden standards signify a new line of costs. Overall as regards big cases, Dr. Mohamed Abdel Wahab (Zulficar & Partners) stressed that there is still a significant cost saving.

Protocols are still a work in progress, with a common denominator of protocols is the use of technology. Dr. Wahab presenting the 2020 Africa Arbitration Academy Protocol on Virtual Hearings in Africa, explained that the Protocol opted for goals rather than specific requirements. He highlighted that there is now a new constant element which is the presence of technical service providers. The audience raised the point that some witnesses may be less forthcoming in testifying through a screen. This point ultimately will depend on whether the arbitral rules allow it or not, as discussed on the Blog by Dr. Wahab here, noting that the newly adopted ICC rules explicitly provide the tribunal with the power to conduct a virtual hearing at article 26(1).

This point tied the discussion to the second part of the panel, which focused on how Covid-19 is impacting the substance of arbitration proceedings. Although investors are considering claims related to Covid19 measures, Dr Wahab pointed out that options should be weighed before the filing for a dispute. This view echoes the prudent prognostics expressed in other conferences organized 11 months after Covid-19 was declared a global pandemic. Beyond Covid-19, Dr. Wahab predicted there would be a rise in disputes in biotechnology and the construction sector post-pandemic.

 

Conclusion

The CAD differentiated itself from global virtual events by gathering speakers involved in dispute resolution in the MENA region to bring a regional flavor. The CAD also continued its tradition to center discussions on one critical central theme, with a particular focus this year on the environment, and inter-connected topics such as virtual hearings. In his Closing remarks, Laurent Lévy recalled it is about time to adopt a proactive and not a reactive attitude, referencing to UNCTAD’s 2020 International Investment Agreement Reform Accelerator, whereby Morocco is mentioned extensively in the inclusion of environmental provisions. The interactive nature of the CAD signified the involvement of the arbitral community with environmental concerns, thus contributing to the revolution.

 

Disclosure: the participants all spoke at CAD in their personal capacity.

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Covid-19 and Investment Treaty Claims by Insolvency Administrators

Sun, 2021-01-10 23:02

COVID-19 has already destroyed many businesses, and insolvencies will only increase as governments withdraw temporary protections. Recent decisions highlight the potential for external administrators of these insolvent companies to use investment treaty arbitration to recover assets, even from the state that appointed the administrators.

Generally, external administrators are appointed by directors, creditors or courts to administer companies that are unable to pay their creditors. Those administrators can either help the company try to survive or liquidate the company’s assets to pass on to creditors. Either way, insolvency administrators often pursue claims on behalf of the companies. Sometimes, these claims are under investment treaties.

Such claims have been less controversial when the insolvency administrator had the same nationality as the foreign investor. So, for example, Thailand did not object to the claim by the German company, Walter Bau, under the investment treaty between the two countries, even though it was pursued by a German insolvency administrator (but Thailand – like other respondent states in similar situations – did argue that the insolvent claimant should provide security for any adverse costs award). Indeed, the administrator ultimately won an award of over €30 million for Walter Bau’s creditors.

However, claims pursued by administrators of the same nationality as the respondent state have been more controversial.

Such claims are facilitated by investment treaties that confer a right on a company in the state hosting the investment to claim against that state, so long as it is controlled by an investor from another party to the treaty. Thus, Article 26 of the Energy Charter Treaty (“ECT”) gives standing to claim against a “Contracting State” to a “national of another Contracting State”, but provides that such a national includes a local company so long it is “controlled by Investors of another Contracting Party”. Indeed, the ICSID Convention, which provides the platform for many investment treaty arbitrations, contains similar wording in Article 25(2)(b).

These provisions were recently relied on by the Italian administrator of the Italian company to pursue a claim against Italy – the very state whose courts appointed it.

Eskosol was one of many companies affected by some European countries withdrawing incentives to produce solar energy. After Eskosol became insolvent, its administrator commenced arbitration with Italy in 2015 under the ECT. Even though Eskosol and the administrator were Italian, Eskosol argued it had standing to claim against Italy under the ECT and ICSID Convention provisions noted above because it was 80% owned by a company incorporated in Belgium (which, with Italy, is a party to the treaties).

Italy challenged that standing, arguing that Eskosol could not be foreign controlled as it had an Italian administrator. The tribunal the challenge (but ultimately denied the merits of the claim).

The tribunal acknowledged at paragraph 234 that “[i]t is of course true that a bankruptcy receiver exercises significant influence over the management of a company’s assets, under the supervision of a bankruptcy court, while the company remains in bankruptcy proceedings”. But it went on to state that “the receiver does not exercise such authority on his own behalf, making him the ultimate party-in-interest to the company’s fate, and therefore supporting some conclusion that it is his nationality that properly should govern for ECT and ICSID Convention purposes”.

For the tribunal, “the receiver acts essentially as trustee or agent – not as a principal – on behalf of those with dominant legal and financial interests in the company (e.g. shareholders and priority creditors)”. Moreover, “[t]hat agency … is a temporary power, not a permanent one, and it remains in place only so long as the entity remains in bankruptcy”.

The tribunal was also guided by the objects and purposes of the ECT and the ICSID Convention, which, according to the arbitrators, include “facilitating the neutral resolution of disputes between investors and States, regarding those States’ treatment of investments made within their borders”. The tribunal said in paragraph 236 that it would be inconsistent with this object and purpose “to divest local companies that indisputably were owned by foreign investors from the ability to pursue potentially well-founded ECT claims, simply because of a collapse in the company’s economic fortunes, particularly in circumstances where it is alleged that the collapse was attributable to the State’s own wrongful conduct”.

These conclusions of the tribunal are consistent with another recent decision.

In the dispute between the Latvian company PNB Banka and Latvia under the Latvia-United Kingdom investment treaty, the tribunal considered an argument by British shareholders of the bank that their lawyer, rather than the bank’s Latvian insolvency administrator, was the proper representative of the claimant in the arbitration.  In a January 2020 procedural order,  the tribunal allowed the administrator to represent the bank, at least until the end of the jurisdictional phase when it would revisit the issue if required.1)The details of the January 2020 order are reproduced in AS PNB Banka and others v Republic of Latvia, ICSID Case No ARB/17/47, Decision on the Proposals to Disqualify Messrs James Spiegelman, Peter Tomka and John M. Townsend, 16 June 2020, at paragraph 43. jQuery("#footnote_plugin_tooltip_1505_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1505_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

While PNB Banka and Eskosol highlight the possibility of using investment treaties as a means for external administrators to recover insolvent companies’ assets, even from the states that appointed them, the precise scope for investment treaties to provide relief in these circumstances is still not yet known. Public decisions until now have not addressed critical questions that naturally arise from such claims. For example, no tribunal has yet publicly addressed if there are any limits to an insolvency administrator pursuing a claim in which its own appointment is one of the state’s measures that is challenged in that claim. Accordingly, the precise utility of investment treaties to external administrators of the many companies that have been, and that will be, ruined by COVID-19 is also not yet known.

References   [ + ]

1. ↑ The details of the January 2020 order are reproduced in AS PNB Banka and others v Republic of Latvia, ICSID Case No ARB/17/47, Decision on the Proposals to Disqualify Messrs James Spiegelman, Peter Tomka and John M. Townsend, 16 June 2020, at paragraph 43. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the COVID-19 Revolution
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2020 in Review: Institutional Reform Efforts and Developments in Investment Arbitration

Sun, 2021-01-10 00:00

Introduction

In spite of delays and shifting priorities owing to the pandemic, institutional efforts to reform the investor-state dispute settlement (ISDS) regime have continued throughout 2020.

In this post, we look back at our coverage of the work of UNCITRAL Working Group III (“WGIII”) on investor-State arbitration reform, especially in light of the 2021 reform agenda. Recognizing a paradigm shift, we also reflect on the rise of investor-State mediation as a precursor or alternative to arbitration.

 

The 39th session of the UNCITRAL Working Group III

The 39th session of the UNCITRAL Working Group III (”WGIII”) was scheduled to take place in New York from 30 March to 3 April 2020 but was postponed due to the unfolding COVID-19 situation. The session later convened from 5 to 9 October 2020 in Vienna (WG report here), focusing on the following areas of reform:

  • dispute prevention and mitigation as well as other means of ADR;
  • treaty interpretation by States parties;
  • security for costs;
  • means to address frivolous claims;
  • multiple proceedings including counterclaims; and
  • reflective loss and shareholder claims (together with the OECD).

Throughout 2020, our Blog contributors reflected on reform proposals to address these issues – with the most popular lens being to examine whether, in practice, the proposals are fit to achieve the overarching goals driving the reform process.

 

Discussions on the Multilateral Investment Court and Appellate Mechanism

In a post dated March 2020, Marike R. P. Paulsson observed that in addressing the criticism of the current system of ISDS, WGIII has established two pathways: one is the (total or partial) replacement of the system; and the second is incremental reforms within the system. The first pathway proposes two alternatives. One is the Multilateral Investment Court (“MIC”) that replaces the system in total and the other is the Appellate Mechanism (“AM”) that replaces crucial parts of the system such as annulment mechanisms, enforcement, and finality of awards. Both are premised on the idea of abandonment of party autonomy; and with that the right of disputing parties to appoint an arbitrator.

Assessing the AM proposal’s ability to achieve overarching reform goals, Paulsson noted that while an AM could improve consistency in substantive norms application (and therefore contribute to confidence in ISDS), much of the motivation for reform has been driven at the backdrop of duration and costs. Conversely, the introduction of an AM would incidentally increase both, requiring further consideration about its fitness for purpose.

Similarly, assessing the MIC proposal, Fernando Dias Simões queried whether the creation of a MIC without the traditional party-appointed arbitrator regime, could by and of itself, really succeed in its goal of de-politicizing ISDS “by break[ing] the link between disputing parties and adjudicators”. Simões argued that a political element will inevitably be associated with any dispute that involves public policy, with no irrefutable evidence that international judges are more independent and impartial than arbitrators. To that end, Simões advocated for certain procedural tools to mitigate the risk of politicization.

Even though the negotiation process on the MIC has been slow and “one cannot predict when an implementable conclusion will be reached,” Andreea Nica observed that there had been a strategic shift in the WG’s engagement on the MIC proposal, with “what initially looked like delegations anchored in rigid positions now resembles a common engineering exercise in search for solutions.”

It remains to be seen whether Nica’s optimism is borne out at the 40th session, scheduled to take place in February 2021, where the Working Group is expected to continue its consideration of the following reform options: (i) selection and appointment of ISDS tribunal members (ii) appellate mechanism and enforcement issues; and (iii) the draft Code of Conduct (discussed below).

 

Discussions on incremental reform

Turning to efforts for incremental reform within the existing ISDS system, our Blog contributors, similar to above, have applied a fitness-for-purpose lens to discussions with respect to security for costs and counterclaims.

Leading up to the 39th session, the General Assembly Secretariat had issued a note on issues to be considered on the topic of security for costs and frivolous claims. Examining the proposed reforms to the security for costs regime against its intended purpose of reducing frivolous claims, Johan Sidklev and Bruno Gustafsson argued that while a loosening of the strict standards for granting security for costs may be warranted, it is ultimately of limited utility for averting frivolous claims in ISDS.

In separate posts here and here, Anna De Luca, and Nicholas Diamond and Kabir Duggal, discussed the role of counterclaims in ISDS, particularly as a possible avenue for holding investors accountable for alleged human rights violations.

Luca observed WGIII’s silence on the issue of counterclaims due to its standing as “inextricably intertwined with substantive aspects”, thereby falling outside the scope of procedural ISDS reform. However, noting that the WGIII has not foreclosed such consideration, Diamond and Duggal find that counterclaims could play a role in advancing certain civil and political rights, such as the right to a fair trial.

Discussions relating to ISDS and both security for costs and counterclaims have previously been covered in the Blog – see here and here.

 

Code of conduct for arbitrators

An important development in 2020 was WGIII’s publication of a draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement. This document was prepared jointly by the ICSID and UNCITRAL Secretariats, partly in response to concern over arbitrators’ independence and impartiality. Its text provides policymakers with a range of options on issues including disclosure obligations, repeat appointments, issue conflicts, and more.

Our contributors reported on this development here and here. The WGIII will further consider the draft Code of Conduct in its 40th session.

 

All reforms don’t lead to arbitration: the rise of investor-State mediation

This year we have seen a stronger push towards expanding the ISDS reform agenda to explore alternative mechanisms for settling investor-State disputes – in particular, investor-State mediation.

In a series of posts, contributors to the Blog marked the entry into force of the Singapore Convention on Mediation (“Singapore Convention”), by reflecting on mediation as an alternative to arbitration.

Contributor Rachel Tan welcomed the revamped mediation regime established by the Singapore Convention, highlighting the fact that the Convention introduces to mediation a characteristic that has long contributed to arbitration’s popularity: enforceability. The Singapore Convention –“in substance the mediation equivalent to the New York Convention” – now enables settlement agreements between parties to be directly enforced across national borders. Teamed with what she considers to be the inherent benefits of mediation (i.e., the possibility of a more holistic outcome and of a settlement by consensus), Tan purported that the process established by the Singapore Convention “compels a deeper look at dispute resolution design for investor-State disputes”, encouraging a tipping of balance in favour of mediation.

While the Singapore Convention’s entry into force has amplified the focus on investor-State mediation, an increasing appetite for this mechanism has been demonstrable in recent years, making its way to even WGIII discussions.

Reflecting on WGIII discussions on mediation, Charalampos Giannakopoulos argued for the importance of institutionalising mediation to “introduce a degree of internal monitoring and transparency in a process that is often conducted under complete confidentiality”.

In support of this hypothesis, Mr Giannakopoulos cited a 2018 survey indicating that States were generally reluctant to mediate due to, among other reasons, an unwillingness to assume responsibility for voluntary settlements, and the fear by government officials of being subjected to allegations for corruption or prosecution.

Further examining the broad acceptance of confidentiality in investor-State mediation, Esmé Shirlow situated this practice against increasing calls to reform the perceived lack of transparency in investor-State arbitration. Cautioning against reforming one mechanism without considering the unintended consequences for others, Dr Shirlow highlighted the need for a holistic and integrated approach to ISDS reforms.

 

Conclusion

Dr Shirlow’s word of caution fits well within what has emerged as a strong theme among our contributors covering ISDS reform in 2020: a call to carefully balance interests, and to ensure that the different reform proposals, in attempting to fix specific problems, do not end up undermining the overarching goals at the very heart of the reform process.

Going into 2021, we will continue to monitor the development of these highly-debated issues – both in institutional reform processes – and through their manifestation at the regional and bilateral level, as was evident from our coverage of the new dispute settlement paradigms established by the USMCA and ECT modernization process.

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Investment Protection in the EU-UK Trade and Cooperation Agreement

Fri, 2021-01-08 23:13

The EU-UK Trade and Cooperation Agreement (“TCA”), concluded on 24 December 2020 and provisionally applicable since the end of the transition period on 31 December 2020, regulates the relationship of the EU and the UK after Brexit. It forms a basis for an evolving relationship between the Parties and may further change, depending on scrutiny by the European Parliament or upon review by the Parties (Articles SERVIN.1.4 and FINPROV.3 of the TCA). It contains limited substantive protections for the Parties’ investors and no investor-state enforcement mechanism. The TCA cannot be directly invoked before domestic courts, and its dispute resolution mechanism is limited to a “WTO-like” state-to-state arbitration.

This is a striking move away from recent treaties concluded by the EU with third states, such as CETA with Canada or the recently agreed in principle Comprehensive Agreement on Investment (“CAI”) with China. These provide for or envisage further negotiations on investor-state dispute resolution (“ISDS”) mechanisms in the form of investment court systems, that the EU aims to replace by a single Multilateral Investment Court. It also remains to be seen what position the UK will adopt with respect to ISDS in its future trade agreements.

The fate of the bilateral investment treaties (“BITs”) concluded by the UK with certain EU member states before their accession to the EU remains uncertain. The same is true for the recognition and enforcement of intra-EU BIT awards in the UK.

 

The scope of investment protection included in the TCA

The crux of the matter is set out in Part Two (Trade, Transport, Fisheries and Other Arrangements), Heading One, Title II of the TCA (Services and Investment).

The TCA includes a strict definition of protected investors. Namely, an “investor of a Party” is defined as a natural or a legal person of a Party that seeks to establish, is establishing or has established an enterprise with a view to creating or maintaining lasting economic links in the territory of the other Party. Mere shell companies are excluded, as legal persons must be engaged in “substantive business operations” in their home state (Article SERVIN.1.2(h), (j) and (k)).

Also, the investment protection standard of the TCA does not apply to air services or related services (with some exceptions), to audio-visual services, to national maritime cabotage and inland waterways transport, or to measures regarding public procurement and subsidies (Article SERVIN.1.1(5)-(7)).

 

Substantive standards of protection under the TCA

The standards of protection under the TCA are similar to those under the WTO, but differ from the protection available under the CETA. These substantive standards of protection include:

  • market access, which is limited to the prohibition of a number of enumerated limitations such as those concerning the number of enterprises that may carry out a specific economic activity, the participation of foreign capital or the types of legal entity through which an investor may perform an economic activity (Articles SERVIN.2.2/3.2);
  • national treatment (Articles SERVIN.2.3/3.4);
  • most favoured nation treatment (“MFN”) with respect to investors of a third country and their enterprises (Articles SERVIN.2.4/3.5). Under the MFN provision, investors will not be able to import ISDS procedures provided for in other international agreements (Article SERVIN.2.4(4)). This means that investors will not be able to invoke the TCA before an independent arbitration tribunal (see also Article SERVIN.2.4(5) regarding additional limitations to the MFN clause); and
  • provisions preventing the introduction of: nationality restrictions for senior personnel (Article SERVIN.2.5); enumerated performance requirements based on trade, such as to export a given level or percentage of goods or services or to purchase, use or accord a preference to goods produced or services provided in its territory (Article SERVIN.2.6); requirements that a service supplier has a local presence as a condition for the cross-border supply of a service (Article SERVIN.3.3).

These standards of protection do not apply to non-conforming measures and exceptions which are listed, respectively, by the EU and the UK (Article SERVIN.2.7/3.6). As an example, the obligation to grant national treatment does not require the EU to extend to UK investors the treatment granted in an EU member state to natural persons or residents of another EU member state pursuant to the Treaty on the Functioning of the European Union (“TFEU”). The TCA also includes a denial of benefits clause (Article SERVIN.1.3).

The TCA does not include a Fair and Equitable Treatment (“FET”) provision nor a clause protecting against expropriation. However, the TCA does not affect the application of the European Convention on Human Rights (“ECHR”) (see also Article LAW.GEN.3), which protects, amongst others, the right to property (Article 1 of Protocol No. 1 to the ECHR).

 

Absence of ISDS mechanism but “WTO-like” state-to-state arbitration

Disputes arising under most of Part Two of the TCA are subject to a state-to-state arbitration mechanism (cf. Part Six of the TCA (Dispute Settlement and Horizontal Provisions)). This is an exclusive mechanism, meaning that the EU and UK courts will have no jurisdiction for the resolution of disputes under the TCA (Article INST.29(4A)). This answers the UK’s demand to end the jurisdiction of the Court of Justice of the European Union (“CJEU”) under the TCA (and so differs to the dispute resolution provisions of the earlier concluded Withdrawal Agreement, which provided for jurisdiction of the CJEU; see more here). Also, any interpretation of the TCA given by the courts of either the EU or the UK shall not be binding on the courts of the other Party (Article COMPROV.13(3)).

The TCA includes additional explicit limitations to the role of the arbitration tribunal in state-to state-arbitration under the agreement. Its decisions cannot add to or diminish the rights and obligations of the Parties under the TCA (Article INST.29(3)). In addition, the arbitration tribunal shall have no jurisdiction to determine the legality of a measure alleged to constitute a breach of the TCA under the domestic law of a Party. Also, no finding made by the arbitration tribunal shall bind the domestic courts or tribunals of either Party as to the meaning to be given to the domestic law of that Party (Article INST.29(4)).

As mentioned above, the TCA does not contain an ISDS mechanism, and it expressly provides that it cannot be construed as conferring rights or imposing obligations on investors or be invoked in the domestic legal systems of the Parties (Article COMPROV.16). Investors facing state measures contrary to the TCA will thus have to convince the UK or the EU to take on their case before the arbitration tribunal in state-to-state arbitration. Investors will have the possibility to file amicus curiae submissions once an arbitration is instituted (Article INST.26(3)). The arbitration tribunal shall consider such amicus curiae submissions (Article INST.26(3)), but shall not be obliged to address, in its report, the arguments made therein (Annex INST: Rules of Procedure for Dispute Settlement, para. 41).

The state-to-state arbitration mechanism provides for ad-hoc arbitration (potentially with the assistance of a registry in the future, see Annex INST: Rules of Procedure for Dispute Settlement, para. 9a), but the applicable procedural rules are set out in the TCA (Part Six and Annex INST). These rules can be further amended by the Partnership Council (Article INST.34A(2)). In a way, reminiscent of the WTO dispute settlement process (although without an Appellate Body and with shorter timelines), the proceedings start by “good faith” consultations between the EU and the UK, which may last 30 days. The Parties can decide to prolong these consultations or refer the matter to an arbitration tribunal consisting of three independent arbitrators.

 

Procedures for state-to-state arbitration under the TCA

Unless the Parties agree on the composition of the arbitration tribunal within an allotted timeframe (Article INST.15(2)), each Party shall appoint an arbitrator from the sub-list for that Party established pursuant to Article INST.27 (such list is yet to be compiled, but a similar list has recently been compiled for the Withdrawal Agreement). If a Party fails to appoint an arbitrator from its sub-list or if the Parties do not agree on the (non-EU/UK national) chairperson of the arbitration tribunal, the co-chair of the Partnership Council from the complaining Party shall select the relevant arbitrator by lot from the respective sub-list.

The arbitration tribunal may make use of assistants, who may be permitted to be present (but not take part) in the deliberations (Annex INST 14). Also, the drafting of any decision and report shall remain the exclusive responsibility of the arbitration tribunal and shall not be delegated (Annex INST 15). These provisions may be a reply to the Russian Federation’s setting aside arguments regarding the role of the assistant to the tribunal in the Yukos arbitration.

According to Article INST.29(1), the arbitration tribunal can decide by majority vote. In no case shall separate opinions of arbitrators be disclosed.

The arbitration tribunal has up to 160 days to render a ruling on the basis of an interim report (and address eventual comments by the Parties) (Article INST.20). The rules to be used for the interpretation of the TCA are customary rules of interpretation under public international law (Article COMPROV.13). It is not clear whether rulings of the arbitration tribunal under the TCA, the definition of which also refers to the interim report (Article INST.20(6)), may be considered arbitral awards for the purposes of the New York Convention.

In case of a finding of a breach of the TCA by the arbitration tribunal, the respondent Party must take the necessary measures to comply immediately with the arbitration tribunal’s ruling or notify the complaining Party of the length of the reasonable period of time required for compliance or agree to provide temporary compensation. In certain cases, a Party can even engage in cross-sector proportionate retaliation, including the suspension of parts of the TCA (Articles INST.21 to INST.25).

Mirroring the absence of standing for investors before the arbitration tribunal, the rulings of the tribunal are only binding on the EU (leaving it unclear whether this includes the EU member states as such) and the UK; they cannot create rights or obligations with respect to investors (Article INST.29(2)).

Article INST.2(2)(e) of the TCA also provides the Trade Partnership Committee with powers to explore the most appropriate way to prevent or solve any difficulty that may arise in relation to the interpretation and application of the TCA. The Partnership Council may even adopt decisions which shall be binding on the Parties and on the arbitration tribunal (Article INST.4).

Other topics covered by the TCA (relating to the level playing field on, inter alia, labour and social standards as well as environmental protection) are subject to a procedure before a Panel of Experts.

 

Recent trends in the EU and UK treaty landscapes

Perhaps surprisingly, although in line with its “WTO plus” context, the TCA departs from recent treaties concluded or currently negotiated by the EU – including with Mexico, Canada, Vietnam, and Singapore – which provide for ISDS mechanisms in the form of investment court systems (that the EU aims to replace by a single Multilateral Investment Court; see more here). As further discussed here, in its Opinion 1/17 of 30 April 2019, the CJEU distinguished such investment court systems from the conclusions it reached in Achmea with respect to arbitral tribunals established under intra-EU BITs, and ruled that CETA’s investment court system is compatible with EU law.

The absence of an ISDS mechanism in the TCA is even more striking in light of the announcement made by the EU and China in the context of the conclusion in principle of the CAI on 30 December 2020, that their common objective is “to work towards modernised investment protection standards and a dispute settlement that takes into account the work undertaken in the context of UNCITRAL on a Multilateral Investment Court”. According to the European Commission’s summary of the CAI, whose legal text is not yet published, the CAI includes a commitment by both sides to pursue negotiations on investment protection and investment dispute settlement within two years of its signature and provides for a state-to-state dispute resolution mechanism similar to the one contained in the TCA.

It remains to be seen what the UK’s policy will be with respect to the inclusion of ISDS mechanisms in trade agreements with third states. While the UK was historically in favour of the inclusion of such mechanisms, the International Trade Committee of the House of Commons requested to carefully consider and fully evaluate specific alternatives to conventional ISDS provisions in a July 2019 report on UK investment policy.

Before the TCA, the UK concluded another trade agreement, the Comprehensive Economic Partnership Agreement (“CEPA“), with Japan. Akin to the EU-Japan Economic Partnership Agreement (“EPA“), the CEPA does not contain provisions on investment protection and ISDS. However, if either Party concludes an agreement containing such provisions with a third party (negotiations on this subject are ongoing between Japan and the EU), the CEPA allows the other Party to request a review of the investment provisions in the CEPA with a view to the possible inclusion of such provisions.

 

The BITs concluded by the UK with EU member states and the enforcement of intra-EU BIT awards in the UK

The TCA leaves unresolved the fate of the BITs concluded between the UK and 12 EU member states (namely Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland (unilaterally denounced by Poland on 22 November 2019, but the agreement contains a 15 year-sunset clause), Romania, Slovakia and Slovenia) prior to their accession to the EU. As the UK did not sign the 5 May 2020 agreement for the termination of BITs between EU member states (see more here) – and although the European Commission issued a reasoned opinion to the UK on this issue – these BITs have remained intact.

Finally, it also remains to be seen whether the UK will attract more interest when it comes to enforcement of intra-EU BIT/ECT awards now that it left the EU (on the new developments with respect to the intra-EU application of the (revamped) ECT, see more here). As a nod in this direction, the UK Supreme Court ruled in early 2020 in the Micula case, i.e. with respect to an ICSID award rendered by a tribunal constituted under the 2002 Sweden-Romania BIT, that the UK’s enforcement obligations under the ICSID Convention could not be affected by the EU duty of sincere co-operation, as the UK’s ratification of the ICSID Convention preceded its accession to the EU (see more here).

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Dealing with Public Policy Concerns and Due Process: The Rising Arbitrators Initiative Tackles a Thorny Issue

Fri, 2021-01-08 20:10

On 1 October 2021, the Rising Arbitrators Initiative brought together an esteemed group of arbitration practitioners for the organization’s inaugural event, which tackled due process concerns.

The event, which was divided into two sessions to allow participants to join from Asia, Australia, Europe, Africa, and the Americas, addressed substantive and procedural due process.

 

Substantive Due Process

The first session, which was kicked off with a keynote speech by Yves Derains, addressed substantive due process. In his keynote, Yves Derains started by distinguishing between three national concepts of public policy: (i) public policy within the applicable law (rules that the parties cannot contract out from); (ii) public policy as defined in private international law; and (iii) national mandatory rules defining their own scope of application.  Parallel to the national concepts of public policy, Mr. Derains highlighted truly (transnational) international public policy rules, such as the prohibition of corruption, forced labour, etc.  He then moved to the concept of applicable law in arbitration, which is more difficult because the arbitrator has no forum and thus no lex fori.  Mr. Derains distinguished between situations where the parties have chosen the applicable law and those where, in the absence of choice by the parties, the arbitrator is free to determine the applicable law. According to Mr. Derains, the principle of iura novit curia is somewhat an “artificial concept” because it is not possible to say that a judge knows the law; rather, a judge has general knowledge of the law.  Pursuant to this principle, when the parties do not prove the law, a judge can make his or her own inquiries about the law applying to the merits of the case. But an arbitrator is not in the same position as a national judge; hence, according to Mr. Derains, the principle of iura novit curia (iura novit arbiter) does not apply in arbitration in the same way it applies in national State court proceedings.

As a matter of principle, an arbitrator cannot refer to public policy rules not raised by the parties without submitting them first for comment by the parties, in light of the principle of due process.  Where the parties have specified the applicable law but have contracted out of a certain public policy rule, arbitrators should think twice before raising this rule.  This is because in arbitration the parties are free to designate any law, including one that does not include this public policy rule.  If the parties have not chosen the applicable law, Mr. Derains suggested that an arbitrator should not choose to apply a rule of public policy that would effectively nullify the parties’ contract.  Further, an arbitrator should only consider raising public policy rules other than those belonging to the applicable law, if the former could render the award unenforceable.  Mr. Derains concluded that if an arbitrator wants to raise public policy rules sua sponte, he should seek comments from the parties on the same for due process reasons, bearing in mind that he is not the guardian of any legal system.  According to him, arbitrators should raise public policy rules if there is a risk of non-enforcement of the award and if truly international public policy is at stake.

Paul Tan moderated a panel comprised of Dr Crina Baltag, Isabelle Michou, and Sara Koleilat-Aranjo. Dr Crina Baltag touched upon “due process paranoia”.  She cautioned against abuse of the rules of due process by a party to the detriment of the efficiency of proceedings, noting a decision of the Hong Kong Court of Appeal in Pacific China Holdings Ltd (In Liquidation) v Grand Pacific Holdings Ltd [2012] 4 HKLRD, which found that the requirement that a party be granted a full opportunity to be heard does not mean that the party is entitled to present its case at any point in time for any length of time. Sara Koleilat-Aranjo explained that “due process paranoia” may also have regional considerations.  She explained that, according to the UAE’s Federal Supreme Court, notification of procedural correspondence and submissions is a matter of public policy (unlike in other jurisdictions).  A defect in notification, which may be particularly relevant where one party seeks to avoid notification or refuses to participate, may lead to annulment of an award. Isabelle Michou addressed new emanations of “due process paranoia” created by the COVID-19 crisis, invoking the recent decision of an UNCITRAL tribunal in The Estate of Julio Miguel Orlandini-Agreda and another v Bolivia (PCA Case No. 2018-39) to refuse a request for suspension of proceedings due to the COVID-19 crisis while granting the parties extensions for further steps in the arbitration.  She also noted that the issue of virtual hearings can give rise to disputes between the parties – with one party urging for suspension until an in-person hearing is possible and another urging a virtual hearing.

 

Procedural Due Process

The second session, which tackled procedural aspects of due process, began with a keynote by Carolyn Lamm.  Noting that due process rests at the heart of the integrity of any arbitral proceeding (and the confidence that parties have in the process), she addressed a number of areas in which procedural due process issues may arise, for example:

  • Waiver of due process challenges: While most all systems provide for an automatic waiver if due process issues are not properly raised, Ms. Lamm argued that, even if such a waiver occurs, an arbitrator or tribunal should consider whether its conduct is sufficiently balanced to avoid any challenge of the award.
  • Bad Faith Tactics: Lamm also warned against bad faith tactics, which, she said, have become more prevalent in international arbitration.  She urged arbitrators to be up front with the parties when they perceive bad faith tactics.  She noted that arbitrators can use their powers (for example, interim cost awards or adverse inferences) where such tactics go unchecked (for example, where one party obstructs access to documents).
  • Transparency: Lamm also urged arbitrators to be up front where they believe that there is a central issue that the parties have not addressed.

The panel that followed Ms. Lamm’s keynote was moderated by Andrea Carlevaris. Flavia Mange argued that arbitrators should agree to consider transnational principles and other soft laws subject to the agreement of the parties.  She noted that the principle of iura novit curia is such a procedural law principle, although, like Professor Derains, she cautioned that it is advisable to consult the parties before applying any such principles. Montserrat Manzano echoed the comments of the keynote speaker, noting that arbitrators should make the parties aware, for example, of how it expects evidence to be adduced.  She explained, however, that arbitrators’ discretion – even to ascertain the contents of the applicable law – is not absolute and must obey three limitations: (i) the confines of the mission granted by the parties (ultra petita), (ii) foreseeability (i.e. the idea that a party should not be taken by surprise with respect to issues that may influence decision-making, and (iii) due process. While all panellists agreed that parties should be given a fair chance to address the applicable law, Tai-Heng Cheng looked at “What is a fair chance?” and “How should that chance be given?”  He explained that these questions should be resolved by the arbitrators as a matter of consensus from a position of knowledge.  He added that, following the hearing, the arbitrators should assess whether any further points of law should require elaboration.  He stressed that, even where such a point should arise in deliberation, it is important to canvas that issue with the parties.

*          *          *

The Rising Arbitrators Initiative is a new organization founded by Rocío Digón (Legal Consultant, White & Case), Ana Gerdau de Borja (Senior Associate, Derains & Gharavi), and Alexander G. Leventhal (Of Counsel, Quinn Emanuel), which seeks to support arbitration practitioners under 45 who either have already received their first appointment as an arbitrator or have at least seven years of professional experience in the practice of international arbitration by inter alia creating a support network and encouraging best practices. Its Advisory Council, which is presided by Yves Derains (Derains & Gharavi) and Carolyn Lamm (White & Case), also includes Andrea Carlevaris (BonelliErede), Chiann Bao (Arbitration Chambers), Essam Al Tamimi (Al Tamimi & Company), Gabriela Alvarez-Avila (Curtis, Mallet-Prevost, Colt & Mosle), Isabelle Michou (Quinn Emanuel), Mohamed Abdel Wahab (Zulficar & Partners), Renato Grion (Pinheiro Neto), and Tai-Heng Cheng (Sidley Austin). The Executive Committee is comprised of Dr Crina Baltag (Stockholm University), Flavia Mange (Mange Gabbay), Joanne Lau (Allen & Overy), Kabir Duggal (Arnold & Porter), Montserrat Manzano (Von Wobeser y Sierra), Paul Tan (Clifford Chance Asia), Sara Koleilat-Aranjo (Al Tamimi & Company), and Shirin Gurdova.

The Rising Arbitrators Initiative is currently organizing its next series of events on the promises and perils of first appointments, with events in North America, South America, Europe, Asia, and Africa. On 21 January 2021, the Rising Arbitrators Initiative’s founders will interview incoming ICC Court of Arbitration President Claudia Salomon. To learn more, click here.

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The Conflicting Lore of Applicable Law: How Australian and Chinese Courts Determine the Governing Law of Arbitration Agreements

Thu, 2021-01-07 23:18

The doctrine of separability of arbitration agreements recognises that an arbitration clause contained in a broader agreement is separate and valid despite the invalidity of the rest of the agreement. The doctrine also raises a fundamental question: what is the governing law of the separable arbitration agreement as compared to the remainder of the contract in which it is found?

This question has vexed commentators and practitioners alike for a number of years because there is a myriad of different views.  The Supreme Court of the United Kingdom gave some much needed guidance in its recent decision of Enka v Chubb (see summary here). The Court determined that the parties’ explicit choice of law in respect of the overall contract also applies to the arbitration agreement.  However, the Court stated that in the absence of an explicit choice, there is a presumption in favour of the law of the seat of the arbitration, being the law that has the “closest connection” to the arbitration agreement. This approach has not been adopted by courts in other jurisdictions, such as in Singapore (see here).

The diversity of approaches to the governing law of the arbitration agreement may, depending on the enforcing court, lead to inconsistent outcomes around the world. This could also result in an outcome that is contrary to the parties’ intention when selecting the governing law of their overall contract.

While the doctrine of separability and the question of the applicable law governing the arbitration agreement may seem more theoretical than practical, determining with precision the proper governing law of the arbitration agreement is important. This is not only to ensure the proper interpretation of arbitration agreements, but also to assess the substantive validity of arbitration agreements and the recognition of arbitral agreements.

Article II(1) of the New York Convention obliges national courts to:

“… recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration”.

Article II(3) of the New York Convention obliges national courts to refer the parties to arbitration, upon request of one of the parties,  “unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”  Unlike Articles V(1)(a) and V(2)(a) of the New York Convention, Article II provides no guidance as to what law governs the question of the validity of the arbitration agreement or the arbitrability of disputes referred to arbitration under it.

Because of this lacuna, national courts have taken inconsistent and sometimes idiosyncratic approaches to assessing the validity of arbitration agreements and arbitrability of disputes.  In some cases, national courts determine these questions by reference to the law governing the arbitration agreement chosen by the parties, and in other cases, national courts ignore the parties’ choice of law and determine these questions by reference to the law of the enforcing court. In this post, we will examine three decisions of the Australian and Chinese courts where these issues have arisen.

 

The conflicting Australian case law

Article II of the New York Convention is incorporated into Australian law under section 7 of the International Arbitration Act 1974 (Cth) (Arbitration Act). According to section 7, Australian courts are obliged to enforce arbitration agreements and stay court proceedings in favour of the parties’ choice to submit their dispute to arbitration.  That obligation is, however, subject to the following exceptions: a court is not obliged to enforce the arbitration agreement if “the arbitration agreement is null and void, inoperative or incapable of being performed” or if “the proceedings [are not] capable of settlement by arbitration.”  Like the New York Convention, the Arbitration Act is silent as to the law to be applied by the court in determining whether the arbitration agreement is “null and void, inoperative or incapable of being performed” or whether the dispute is not “capable of settlement by arbitration.”  This lack of clarity has given rise to two competing and conflicting lines of authority.

In Recyclers of Australia Pty Ltd v Hettinga Equipment Inc (2000) 100 FCR 420, the Federal Court of Australia considered an agreement governed by Iowa law. The Court determined that:

[t]he question arising under s 7(2) [of the IAA] is whether the proceeding involves the determination of a “matter” that, under the arbitration clause, is capable of settlement by arbitration.  As the arbitration clause and the sale agreement are to be governed, construed and interpreted “under the law of the State of Iowa’”, the issue of whether any of the matters involved in the proceeding are arbitrable under the clause is to be determined in accordance with the law of Iowa” (at para 10).

The reasoning in Recyclers v Hettinga was cited by the Federal Court subsequently in Casaceli v Natuzzi SpA (2012) 292 ALR 143 regarding a contract and arbitration agreement governed by Italian law.  In that case, the Court rejected the Applicant’s argument that the question of arbitrability ought to be determined by reference to Australian, not Italian, law (at para 38).

However, in a more recent decision of the Federal Court of Australia in WDR Delaware Corp v Hydrox Holdings Pty Ltd [2016] FCA 1164, the Court stated: “the question of whether a dispute is arbitrable is to be determined by the application of the nation[al court’s] domestic law alone” (at para 125).  While the Joint Venture Agreement in issue was governed by New South Wales law, the Court opined that:

[t]he issue of arbitrability goes beyond the scope of an arbitration agreement.  It involves a consideration of the inherent power of a national legal system to determine what issues are capable of being resolved through arbitration.  The issue goes beyond the will or the agreement of the parties.  The parties cannot agree to submit to arbitration disputes that are not arbitrable” (at para 124).

Given that the three decisions cited above were all made by the same court, there is no clear precedent as a matter of Australian law as to what law a national court should apply in determining the validity of an arbitration agreement and the arbitrability of disputes referred to arbitration under it.

 

Approach of the Chinese courts

Australian courts have entertained the notion that the questions of validity of the arbitration agreement and arbitrability of disputes are matters to be settled by reference to the governing law of the arbitration agreement. Chinese courts on the other hand have applied PRC law when asked to refuse enforcement of arbitral awards on the basis that the underlying arbitration agreement is invalid (see Article V(1)(a) of the New York Convention).

For example, in the 2014 case of Application for the Recognition and Enforcement of Foreign Arbitral Awards between Beijing Chaolaixinsheng Sports and Leisure Co Ltd and Beijing Suowangzhixin Investment Consulting Co Ltd, the Supreme People’s Court refused enforcement of an award rendered by a tribunal operating under the auspices of the Korean Commercial Arbitration Board (KCAB). It did so because the reference to foreign arbitration under the arbitration agreement was invalid as a matter of PRC law.  In that case, a dispute arose between two Chinese entities, one of which was a wholly foreign-owned enterprise (WFOE) registered in Beijing and owned by a Korean national, in respect of a contract for the operation of a golf course in Beijing.  The key issue in the case was whether the status of one of the parties as a WFOE was sufficient to make the agreement ‘foreign-related’ and the reference to foreign arbitration valid as a matter of PRC law.  Despite the parties’ choice for KCAB arbitration in the contract, the Supreme People’s Court refused enforcement of the resulting award on the basis that a purely domestic dispute could not be referred to foreign arbitration. The Court concluded that “the applicable law of the underlying contract and its arbitration clause, whether explicitly or [implicitly] agreed by the parties, shall be deemed as PRC law”, and so the question of the validity of the arbitration agreement was to be determined by reference to PRC law (see more detailed summary of the case here).

 

Conclusion

The lack of clarity in Article II of the New York Convention has certainly given rise to some confusion among national courts.  This has led to inconsistent case law regarding the law applicable to determining the validity of the arbitration agreement and the arbitrability of disputes referred to arbitration under it.

As discussed above, there are cases in both Australia and China where the courts have applied local law in determining the validity and arbitrability of disputes arising under contracts and arbitration agreements that, following a choice of law analysis, would not be governed by that local law.  It is questionable whether the application of the local law of a recognising or enforcing court to determine the validity of an arbitration agreement is the preferred approach.  This may lead to inconsistent outcomes across enforcing courts around the world, potentially undercutting the objectives of the New York Convention to achieve consistency and uniformity in recognising and enforcing arbitral agreements and awards.

Moreover, application of the local law of the enforcing court is likely inconsistent with the intention of the parties to the arbitration agreement. This is because parties would most likely only turn their minds to whether the arbitration agreement is valid according to the law they chose to govern their overall contract, rather than to the various national laws of the innumerable jurisdictions where recognition of the arbitration agreement or enforcement of the award may be sought.

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The Contents of the ASA Bulletin, Volume 38, Issue 4 (December 2020)

Thu, 2021-01-07 22:02

We are happy to report that the latest issue of the ASA Bulletin is now available and includes the following articles and cases:

 

ARTICLES

Felix DASSER, The Revised Swiss Lex Arbitri: A Story of Two Dozen Jewels

In his message, ASA President Felix DASSER commends the light touch revision of the Swiss lex arbitri which entered into force on 1 January 2021.

Hamish LAL, Brendan CASEY, Josephine KAIDING, Léa DEFRANCHI, Multi-Tiered Dispute Resolution Clauses in International Arbitration – The Need for Coherence

Hamish LAL, Brendan CASEY, Josephine KAIDING and Léa DEFRANCHI submit that more coherence is needed in the treatment of multi-tiered dispute resolution clauses in international arbitration.

Reto Andrea TETTAMANTI, Intertemporales Schiedsrecht. Die für die Revision des 12. Kapitels IPRG relevanten Übergangsbestimmungen

Reto Andrea TETTAMANTI examines the transitional law provisions applicable to the revision of Chapter 12 of the Swiss Private International Law Act (PILA), Switzerland’s lex arbitri.

Simon BACHMANN, The Impact §of Third-Party Funding on Security for Costs Requests in International Arbitration Proceedings in Switzerland. Why and how third-party funding should be considered under the Swiss lex arbitri

Simon BACHMANN assesses the impact of third-party funding on requests for security for costs in international arbitration proceedings seated in Switzerland.

Giulio PALERMO, Panagiotis KYRIAKOU, Leveraging the Standard of Ex Aequo et Bono to Increase Diversity, Flexibility and Efficiency: Insights from the Basketball Arbitral Tribunal

Giulio PALERMO and Panagiotis KYRIAKOU advocate in favour of the ex æquo et bono standard in international arbitration in light of the case law of the Basketball Arbitral Tribunal.

Andreea NICA, Case Note on the Decision of the Swiss Federal Tribunal in Clorox v. Venezuela

Andreea NICA presents the recent decision of the Swiss Federal Supreme Court rendered on 25 March 2020 in Clorox v. Venezuela (4A_306/2019), which is the first time an award in an investment treaty arbitration seated in Switzerland is set aside.

Samantha NATAF, Jurisdiction over Non-signatories, the Irreconcilable Approaches of French and English Courts. Case Note on: (i) English Court of Appeal Decision of 20 January 2020 and (ii) Paris Court of Appeal Decision of 23 June 2020

Samantha NATAF reports on two recent decisions of the English and French Courts relating to the enforcement of the same award which highlight the divergent approaches of the two jurisdictions regarding the law applicable to international arbitration agreements.

Mahmoud Anis BETTAIEB, Le juge tunisien et la promotion de l’arbitrage

Mahmoud Anis BETTAIEB discusses the important role played by the Tunisian judiciary in promoting arbitration as a private dispute resolution mode.

Nadia SMAHI, Due Process Under the Swiss Rules of International Arbitration

Nadia SMAHI analyses due process under the Swiss Rules of International Arbitration and provides an overview of all decisions rendered by the Swiss Federal Supreme Court in relation to Swiss Rules arbitrations seated in Switzerland since June 2012.

 

DECISIONS OF THE SWISS FEDERAL SUPREME COURT

 

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The Chilean Supreme Court’s Heart Is In The Right Place, But Its Arguments Are Not

Wed, 2021-01-06 23:17

The Chilean Supreme Court recently issued a decision that, on its face, respects party autonomy in international arbitration. But, it could do more harm than good.

On September 14, 2020, the Chilean Supreme Court (the “Court”) entered a final judgement in the case CCF SUDAMERICA SPA, Rol Nº 19568-2020 (“CCF Sudamericana” or the “Decision”). The Court’s judgement decided a complaint appeal (recurso de queja) brought by Sudamérica SpA and CCF Sudamérica SpA (“Sudamérica”) against the Appellate Court of Santiago’s rejection of an appeal lodged by Sudamérica against a final award issued by an arbitral tribunal constituted under the rules of the Mediation and Arbitration Centre of the Santiago Chamber of Commerce (the “CAM Santiago”) on February 12, 2020.

Under Chilean Law, international arbitration is regulated by Law 19.971 (the “Ley de Arbitraje Comercial Internacional” or “LACI”). The LACI is inspired in the 1985 UNCITRAL Model Law on International Commercial Arbitration. In particular, articles 1.3 and 1.4 of the LACI that determines when an arbitration is international are exact copies of articles 1.3 and 1.4 of the 1985 UNCITRAL Model Law.

 

Facts of the case

The parties entered into a Share Purchase Agreement (“SPA”) of several companies known in Chile as Farmacias Cruz Verde. The law applicable to the contract was Chilean law and at least one party to the contract set domicile in Mexico. The arbitration clause contained in the SPA submitted all controversies relating to the contract to arbitration in accordance with the International Arbitration Rules of the CAM Santiago, seated in Santiago, Chile. According to the Decision, the terms of reference of the arbitration provided that the final award could be challenged through appeal and certiorari (casación).1)Decision, ¶ 3. (“Todas las disputas que surjan de o que guarden relación con el presente Contrato o la ejecución de los actos aquí pactados o respecto de cualquier motivo relacionado con el presente Contrato, se resolverá mediante arbitraje, de acuerdo con el Reglamento de Arbitraje Comercial Internacional del Centro de Arbitraje y Mediación de la Cámara de Comercio de Santiago, vigente al momento de su inicio”). jQuery("#footnote_plugin_tooltip_8282_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8282_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

During the course of the proceedings, the parties established the rules applicable to the procedure, expressly agreeing that (i) an appeal and certiorari would be admissible against the final award; and (ii) the Civil Procedure Code and the Court Organization Code (Código Orgánico de Tribunales) applied in a subsidiary fashion.

 

The appeal 

After the arbitration tribunal issued its award, Sudamérica filed an appeal against it. Under Chilean Law, the appeal is first submitted to the arbitral tribunal directly, and only then the appeal is brought to the attention of the judicial appellate body. In this case, the arbitral tribunal sent the appeal to the Appellate Court of Santiago.

The Appellate Court of Santiago dismissed the appeal, correctly noting that the appeal was inadmissible, since international arbitration in Chile is regulated under Law No. 19.971 (inspired in the 1985 UNCITRAL Model Law on International Commercial Arbitration), which provides in Article 34 that final awards can only be challenged through annulment.

The appellant then filed a complaint appeal against the Appellate Court of Santiago’s judgement. The Supreme Court proceeded to reject the complaint appeal but invalidated the Appellate Court of Santiago’s judgement. The Court reasoned as follows. First, that the intent of the parties is quintessential in arbitration. Second, that the parties agreed that the applicable remedies against the final award in both the arbitration clause as well as the procedural rules of the case, would be appeal and certiorari. Third, that regardless of the international or domestic nature of the arbitration, the courts must take into consideration the intent of the parties. Fourth, it would be against the parties’ prior acts to disregard the fact that the parties did not mention Law No. 19.971 while drafting the procedural rules applicable to their arbitration. Fifth, in other disputes relating to the same contract, the parties eliminated the reference to the appeal in order to adequate their terms to Law 19.971. Therefore, the Court concluded that both parties considered that the appeal was a valid remedy against the award.

 

The decision and comment 

The best intentions pave the way to hell. As most things in life, the Decision has a bright side, and a dark side.

On the one hand, the Decision defends the basic premise in arbitration that consent is its cornerstone. In this case, the parties (adequately represented by counsel) expressly agreed that, even though one of the parties was domiciled outside Chile (thus fulfilling the internationality requirement of Law 19.971), that (i) appeal and certiorari would be admissible against the final award, and (ii) the Civil Procedural Code (and the Court Organization Code) applied in a subsidiary fashion, without reference to Law 19.971.

On the other hand, the decision ignores basic principles of international arbitration. The fact that annulment is the sole remedy against an international arbitration award is one of the mainstays of international arbitration practice. More so, the fact that this is specifically mentioned in Law 19.971, should be hard to argue that parties could, in this case, contract away from such provision. Having said this, the Decision does not go into whether article 34 of the LACI can be contracted away from, as discussed in other jurisdictions.2)See for instance, Popack v. Lipszyc, 2015 CarswellOnt 8001, 2015 ONSC 3460 discussed here. jQuery("#footnote_plugin_tooltip_8282_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8282_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Between a rock and a hard place. It appears that the Court found itself between the will of the parties, and the text of Law 19.971. The decision will hopefully be treated as a highly fact specific case and will not be treated as an authority in future cases.3)Under Chilean Law, prior court decisions do not constitute precedent. jQuery("#footnote_plugin_tooltip_8282_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8282_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

References   [ + ]

1. ↑ Decision, ¶ 3. (“Todas las disputas que surjan de o que guarden relación con el presente Contrato o la ejecución de los actos aquí pactados o respecto de cualquier motivo relacionado con el presente Contrato, se resolverá mediante arbitraje, de acuerdo con el Reglamento de Arbitraje Comercial Internacional del Centro de Arbitraje y Mediación de la Cámara de Comercio de Santiago, vigente al momento de su inicio”). 2. ↑ See for instance, Popack v. Lipszyc, 2015 CarswellOnt 8001, 2015 ONSC 3460 discussed here. 3. ↑ Under Chilean Law, prior court decisions do not constitute precedent. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the COVID-19 Revolution
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