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Non-existence of Contract: An Often Raised Challenge at Recognition and Enforcement Stage in China

Tue, 2018-01-02 18:54

Wei Sun

When applicants seek recognition and enforcement (“R&E”) of foreign arbitral awards in PRC courts, a challenge often raised by respondents is the non-existence of the main contract between the parties, where the arbitration agreement is contained. Respondents contend that the contracts provided by the applicants as the basis for arbitration are not authentic or duly executed, thus non-existent. In particular, the lack of an original copy, of the signature by an officer authorized to sign the particular contract, and of an official stamp of the company being affixed may all call into question the authenticity and existence of the main contracts and, consequently, the arbitration agreement included therein. The note takes a closer look at the facts and the reasoning employed by PRC courts in relevant cotton arbitration cases, intending to show how PRC courts approached the issue of non-existence in R&E proceedings due to negligence occurring during execution of contracts.

Allenberg Cotton v. Jiangsu Nijiaxiang Group (2013) Wuxi, Jiangsu

Allenberg Cotton (“Allenberg”) applied to enforce an International Cotton Association (“ICA”) award (A01/2010/80) against Jiangsu Nijiaxiang Group (“Nijiaxiang”) before the Wuxi Intermediate People’s Court.

Background: The dispute arose out of a sales contract (No. 395080). The parties listed in this contract were Allenberg and Nijiaxiang, but the contract was only signed by a person named Zhang Yongzhong and not stamped by Nijiaxiang. Zhang was the general manager of Tiangong, a subsidiary of Nijiaxiang. In the past, Zhang signed one contract (No.381950) on behalf of Nijiaxiang and several contracts on behalf of Tiangong, with Allenberg. All these contracts had original paper copies and were respectively stamped by Tiangong and Nijiaxiang. However, Contract 395080 as submitted by Allenberg was a fax copy and Zhang denied that the signature was genuine.

Court decision: The court held that, first, Allenberg failed to provide further proof to establish authenticity of Zhang’s signature on Contract 385080. In particular, when the court asked if Allenberg wanted to apply for technical verification of the signature, Allenberg refused to do so. Second, all the previous undisputed contracts between Tiangong/Nijiaxiang with Allenberg were executed by placing Zhang’s signature as well as the company stamp on printed copies of contracts. In contrast, Contract 395080 was a fax copy with only Zhang’s signature, a notable deviation from the past practices. Thus, the court was unable to ascertain whether there was an arbitration agreement between the parties.

Further, the court proceeded to conclude that, under English law, even if Zhang’s signature on Contract 395080 was authentic, Allenberg failed to prove that Zhang was authorized to sign the contract on behalf of Nijiaxiang. The main reasons relied by the court were: (i) Allenberg failed to prove that Zhang was expressly authorized by Nijiaxiang; (ii) based on past practices, Allenberg should check if Zhang was authorized or should request Nijiaxiang to stamp the contract; (iii) except for Contract 381950 (which was also stamped), Zhang had never represented Nijiaxiang in dealing with Allenberg; and (iv) Nijiaxiang declined to ratify Zhang’s signature by applying for non-recognition.

On these grounds, the court concluded that there was no arbitral agreement and the condition for an arbitration agreement set forth in Article II of the New York Convention was not met. Thus, in accordance with Article V.1(a) of the Convention, the court refused to recognize and enforce the ICA award.

In another case Louis Dreyfus v. Jiangsu Nijiaxiang Group (2013) Wuxi, Jiangsu, the factual background and the court’s ground for non-recognition were almost the same.

ECOM Agroindustrial Asia v. Qingdao Golden Yangtze Group Penglai Textile (2014) Yantai, Shandong

ECOM Agroindustrial Asia (“ECOM”) applied to enforce an ICA award against Qingdao Golden Yangtze Group Penglai Textile (“Golden Yangtze”) before the Yantai Intermediate People’s Court.

Background: The dispute arose out of a sales contract and the corresponding confirmation letter between ECOM and Golden Yangtze, both signed and stamped. However, the contract was sent through faxing so there was no original copy. During the R&E proceeding, Golden Yangtze categorically denied the authenticity of the signature and stamp on the copy. ECOM did not provide supplementary evidence in response. Instead, ECOM argued that the authenticity of the contract was a matter of substantive law and should only be decided by the ICA tribunal and not the Chinese court.

Court Decision: The court reasoned that it had the power to determine whether there was an arbitration agreement and whether it was valid on the basis of evidence. In this case, the dispute was whether the signature on faxed copy was genuine or not. This could only be ascertained by analyzing the faxed copy and other evidence materials provided by the parties. As ECOM failed to provide any other evidence materials except for the faxed copy and an ICA statement, there was not sufficient evidence to establish that there was any arbitration agreement between the parties. Hence, the application by ECOM did not meet the requirement set forth in Article II of the New York Convention and should be denied.

In contrast, in ECOM USA v. Foshan Nanhai Zhaoli Cotton Spinning (2014) Foshan, Guangdong, the court upheld the authenticity of a contract only with a fax copy because ECOM used a witness to prove the signing of the contract, whose testimony was supported by the fax number and time of transmission on the fax copy.

Compass Cotton B.V. v. Shandong Yanggu Shunda Textile Co., Ltd (2014) Liaocheng, Shandong

Compass Cotton B.V. (“Compass Cotton”) applied to enforce an ICA award against Shandong Yanggu Shunda Textile Co., Ltd (“Shunda”) before the Liaocheng Intermediate People’s Court.

Background: The dispute arose out of a sales contract between Compass Cotton and Shunda, concluded with the help of an agent company in Shanghai. Compass Cotton only had a fax copy of the contract, signed by a person named Zhang Jie and stamped. Along with other challenges, Shunda also contested the existence of the contract. In particular, Shunda provided payroll and social security records to prove Zhang was not an employee of Shunda and sample contracts to show the stamp on the contract was not the official and registered stamp of the company. In response, Compass Cotton submitted a group of supplementary evidence. First, Compass Cotton provided two contracts between Shunda and two international companies, which were executed in the same pattern, i.e. signed by Zhang and affixed with the unofficial stamp, and records from the Qingdao Customs showing that one of the two contracts was actually carried out by Shunda and Shunda used to recognize such contracts. Second, Compass Cotton provided webpages where Zhang was listed as a representative of Shunda. Third, Compass Cotton provided Shandong precedents to establish that using an unofficial stamp did not affect the contract’s validity in international trade. In addition, the court, at the request of Compass Cotton, interviewed Zhu Xuesong, executive director of the agent company in Shanghai.

Court decision: The court affirmed the existence of contract between Compass Cotton and Shunda based on the testimony of Zhu Xuesong and the supplementary evidence submitted by Compass Cotton. As the court also found other issues in Compass Cotton’s favor, it recognized the ICA award in the end.

Suggestions for Executing Contracts

As analyzed above, arbitral awards may be denied recognition in China for omissions made during execution of the sales contracts. By observing some simple precautions, the possibility of non-recognition can be dramatically reduced.

(a) Legal Representative

Every company in China has a registered legal representative, either the general manager (CEO) or chairman of the board of the company. The legal representative, as the title indicates, does not need any further authorization to represent the company. On the other hand, other directors, officers or employees of a company can only represent the company within their respective authorizations. Thus, it is always a good idea to request the legal representative of a Chinese trade partner to sign the sales contract. If a person other than the legal representative is signing the contract on behalf of a Chinese company, it is prudent to request for a power of attorney.

(b) Official Stamp

Every company in China has an official stamp, which is registered at the local Administration of Industry and Commerce. Companies, however, may use other unofficial stamps, such as so-called accounting stamps, trade stamps, etc. Even if not signed or signed by a person other than the legal representative, a contract affixed with the official stamp is usually sufficient to bind the company. It’s prudent to request a Chinese trade partner to affix its official stamp on the contract.

(c) Keep records

Although, execution of contracts by faxing executed copies or emailing scanned copies can be more efficient, it could relatively hard to verify the authenticity of signatures and stamps on these copies. Records such as original fax transmission pages (showing fax number and transmission time) and email correspondences should be kept for future possible use as evidence. Similarly, it would be a good idea to keep records evidencing prior transactions with repeat trade partners.

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Some Critical Observations on the EU’s Foreign Investment Screening Proposal

Tue, 2018-01-02 02:00

Nikos Lavranos

The EU Foreign Investment Screening Proposal

Last September, European Commission President Juncker presented a proposal for a European foreign investment screening regulation – apparently following a request by Germany, France and Italy.

The proposal follows-up on the Commission’s “Reflection Paper on Harnessing Globalisation”, published in May 2017. The Reflection Paper notes, inter alia, that

“Openness to foreign investment remains a key principle for the EU and a major source of growth. However, concerns have recently been voiced about foreign investors, notably state-owned enterprises, taking over European companies with key technologies for strategic reasons. EU investors often do not enjoy the same rights to invest in the country from which the investment originates. These concerns need careful analysis and appropriate action.”

In other words, this proposal aims at providing a tool for the Commission and the Member States to respond to planned foreign investments of, for example, Chinse state-owned enterprises in sectors, which are considered sensitive and critical.

Screening mechanisms are not a novel tool but are used by about half of the EU Member States, i.e. Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom, as well as many states outside the EU, most notably the American CFIUS mechanism.

Accordingly, the main argument for this European screening mechanism for foreign investments is “harmonization”, by providing first and foremost legal certainty for Member States that maintain a screening mechanism or wish to adopt one. Thus, this Regulation would empower Member States to maintain their mechanisms or to create new ones in line with this Regulation.

Second, the Regulation aims at creating a “cooperation mechanism” between the Member States and the European Commission in order to inform each other about foreign direct investments that may threaten the “security” or “public order”. This cooperation mechanism enables other Member States and the Commission to raise concerns against envisaged investments and requires the Member State concerned to take these concerns duly into account. In other words, this “cooperation mechanism” is an “intervention mechanism” in disguise by giving the Member States and the Commission a tool to review and intervene against planned foreign investments in other Member States.

Third, the proposal also enables the Commission itself to screen foreign investments on grounds of security and public order in case they “may affect projects or programmes of Union interest”.

In short, Member States and the Commission will effectively be enabled to review any screening of any foreign investments and to intervene if they think that their interests may be affected.

However, the question arises whether this proposal will be an effective tool to review and ultimately prevent investments in sensitive sectors by foreign investors such as for example Chinese state-owned enterprises?

If one looks at the description of the screening grounds (“security” or “public order”), it immediately becomes clear that this proposal essentially can cover any foreign investment.
Article 4 titled Factors that may be taken into consideration in the screening of the proposal states:

In screening a foreign direct investment on the grounds of security or public order, Member States and the Commission may consider the potential effects on, inter alia:
– critical infrastructure, including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities;
– critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology;
– the security of supply of critical inputs; or
– access to sensitive information or the ability to control sensitive information.

In determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is controlled by the government of a third country, including through significant funding.

The first point to note is the fact that this list is only an indicative list of potential effects of planned foreign investments. This means that the Member States and the European Commission can also take other potential effects into account. Nonetheless, this indicative list illustrates the sectors which the Commission considers particularly sensitive such as energy, communications, IT and cybersecurity.

The second noteworthy point is the cooperation framework between the Member States and the Commission. This cooperation framework requires the Member States to inform each other and the Commission of planned foreign investments and allows them to review and comment on them. The Commission is able to issue its comments in the form of non-binding opinions, while the affected Member State is required to take such comments duly into account.

Consequently, in order to be effective, this Regulation essentially will require all Member States – in particular those which have not yet a screening mechanism in place – to create one, otherwise these Member States and the Commission will not be able to share the required information about planned new foreign investments and the review them.

As a result, if this proposal is approved, the screening of foreign investments will become a standard practice in all Member States.

However, the proposal fails to specify what happens if an affected Member State fails to take any concerns of other Member States and/or the Commission into account. This seems an important missing element since the views among the Member States as to whether or not a certain foreign investment by – for example a Chinese state-owned enterprise – may have dangerous effects could very well differ. Also, some Member States may value the creation of jobs as more important than a potential negative impact on for example cybersecurity.

Also, the proposal does not specify who will be financially responsible if planned foreign investments fail to materialize due to the market distorting interventions by other Member States and/or the Commission.

Moreover, if seen in the context of the EU’s investment policy and FTAs, which it has already negotiated (CETA, EU-Singapore FTA, EU-Vietnam FTA) or is currently negotiating (EU-Japan FTA), the proposal raises the question to what extent this is conducive to the proclaimed aim of more openness to foreign investors and their investments. Indeed, the application of such a screening mechanism could lead to discriminatory treatment of foreign investors and hence to investment arbitration cases as result of breaches of the FTA provisions.

The same risk exists for the 1,500 bilateral investment treaties (BITs), which the Member States currently have signed with third states. After all, the aim of these investment treaties is to promote and protect foreign investments from discriminatory or unfair treatment, which could arise if the screening mechanism is applied in certain way. Interestingly, the explanatory memorandum to the proposal does not discuss this issue, neither was the EU proposal accompanied by any impact assessment.

Thus, some important issues have not been addressed and it remains to be seen whether this proposal will gain sufficient support by all Member States, and if so, to what extent it will be modified by the Council.

Convergence between the EU’s screening proposal and CFIUS

In this context, it is important to note that the scope of application of the American Committee on Foreign Investment in the United States (CFIUS system) is currently more restrictive than the proposed EU screening mechanism.

First, the CFIUS system is a “voluntary” system, which means foreign investors are not required to submit their planned investments for review but can voluntarily decide to do so if they think the planned investment may fall within the jurisdiction of the CFIUS.

Second, the current scope of review of the CFIUS is limited to “mergers, acquisitions, or takeovers” of US businesses, although the CFIUS jurisdiction may extend to international transactions, which involve one or more US subsidiaries or significant US assets or operations.

Third, the current scope of the CFIUS is limited to “national security considerations”.

However, in November 2017, a bipartisan group of lawmakers introduced a long-awaited Foreign Investment Risk Review Modernization Act of 2017 (“FIRRMA”), which would modernize the CFIUS review and approval process.

The proposed bill would broaden the scope of transactions subject to CFIUS review to include:

  • any non-passive (even non-controlling) investment by a foreign person in any US “critical technology” or “critical infrastructure” company;
  • any change in the rights that a foreign investor has with respect to a US business if that change could result in foreign control of the U.S. business or a non-passive investment in a US critical technology or critical infrastructure company;
  • any contribution (other than through an ordinary customer relationship) by a US critical technology company of both intellectual property and associated support to a foreign person through any type of arrangement, such as a joint venture;
  • the purchase or lease by a foreign person of real estate that is in close proximity to a US military installation or other sensitive US government facility or property; and
  • any transaction or agreement designed or intended to evade or circumvent CFIUS review.

If the CFIUS review system would indeed be updated and expanded as proposed by the FIRRMA, the scope of review of the CFIUS would be rather similar to the EU’s proposed screening mechanism.

In conclusion, a convergence on both sides of the Atlantic is currently taking place by expanding the available toolbox for screening planned foreign investments with the purported aim of preventing foreign – in particular Chinese – investments in sectors that are considered sensitive and critical. However, there is a risk that the screening mechanism could be abused for disguised protectionism and for gaining domestic political support.

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Delhi High Court’s decision in GMR v. Doosan: Two steps forward, two steps back?

Mon, 2018-01-01 06:00

Shalaka Patil and Jeet Shroff

The Delhi High Court (Court) recently rendered a decision in GMR v. Doosan (“GMR”) on two critical points related to Indian arbitration– a) joinder of non-signatories to arbitration and b) whether two Indian parties can choose a foreign seat. Both issues have had conflicting decisions from courts leading to confusion in jurisprudence. Did the Court’s decision in GMR help clarify the law? In our view, no. Instead, it addled precedent by issuing a tenuously reasoned decision.

Facts

GMR Chhattisgarh (“GCEL”) and Doosan India (“Doosan”) entered into 3 EPC contracts in 2010 (“EPC Contracts”) which provided for SIAC arbitrations in Singapore.

GMR Infrastructure Ltd. (“GIL”) furnished a corporate guarantee to Doosan, on behalf of GCEL in 2013 (“Corporate Guarantee”) containing an arbitration clause (SIAC administered, in Singapore).

Two MOUs were executed between Doosan and GMR Energy (“GE”) in 2015 where GE agreed to repay Doosan in installments for GCEL’s liability under the EPC contracts. The MOUs did not contain arbitration clauses and were terminated before commencing arbitration.

Doosan invoked SIAC arbitration under the EPC contracts and the Corporate Guarantee making GCEL and GIL parties. Doosan sought GE’s joinder based on the MOUs and theories of joinder of non-parties including alter ego, group companies’ doctrine, and common directors, seeking repayment jointly and severally from GCEL, GIL and GE. In response, GE filed a suit seeking a permanent injunction against Doosan from continuing arbitration since GE was not a party to the arbitration agreement in the EPC Contracts and the Corporate Guarantee. The Court stayed the constitution of the SIAC tribunal. Doosan sought vacation of this order and applied under the Arbitration and Conciliation Act, 1996 (“AA”) to compel GE to participate in the arbitration. In this hearing, GE’s motion for injunction and Doosan’s motion for vacation and arbitral reference were heard together and decided.

Was GE’s joinder justified?

The Court examined whether Doosan had made out a prima facie case in its notice of arbitration justifying GE’s joinder. In accepting GE’s joinder was proper, it found as follows:

  • That GE, GCEL, and GIL freely “co-mingled” funds and were family run.

 

Family run businesses are common amongst Indian group companies. There was not much evidence of funds being co-mingled other than the corporate guarantee and MOUs. This, by itself, does not validate piercing the corporate veil to subject a party to the arbitration.

  • That the entities had common directors.

 

In India, common directorship or even the holding company’s control in the appointment of directors in the subsidiary does not remove the juristic and legal independence of such subsidiary. The Supreme Court’s (“SC”) landmark decision in Vodafone International Holdings B.V. v India espouses this principle and holds that directors of subsidiaries have a separate responsibility to the subsidiary. Vodafone observed that in liquidation, such subsidiary’s assets would go to the liquidator, not the parent. The Court has not taken this into account at all.

 

  • That there was no “corporate formality” between the various group companies.

 

However, it did not explain the absence of “corporate formality” when overlooking distinct corporate personalities. In fact, there are some cases that caution against the overzealous use of this power of piercing the veil (see Balwant Rai Saluja v. Air India). In India, while principles of public interest and single economic entity are accepted to pierce the veil, for the argument of agency, alter ego and control in a parent-subsidiary relationship, a high degree of control needs to be shown (see New Horizons v India).

 

  • The parent-subsidiary relationship and that at the material time GCEL was GE’s 100% subsidiary.

 

In transactions that are admittedly “sham” where entities are merely created as funnels, the corporate veil should be pierced but not in other circumstances (Balwant Rai). In this case, while GCEL was an SPV, it was not camouflaged. Creation of SPVs is routine for infrastructure projects. There was no written agreement binding GE to arbitration, the MOUs had terminated, and the 100% subsidiary relationship also did not exist.

While this case may be fit for piercing the corporate veil on merits, there was not enough to bind GE to arbitration. This matter could have been resolved by Doosan filing a civil suit against all the entities. While extending the arbitration to GIL was appropriate even in the context of the well-worn Chloro Controls regime, it is hard to find any express or implied term by which GE agreed to submit to arbitration. GE may or may not have breached its commitment to pay, but it made no commitment to arbitrate.

The Court overstated the factors purportedly evidencing GE’s intention to arbitrate. Illustratively, one of the clauses in the contracts stated that parties could consolidate disputes in one arbitration under the various contracts; but such consolidation was only permissible if all parties consented. Such consent was however absent. The Court also failed to account for lack of an arbitration clause in the MOUs.

GE relied on a clause in the contracts which stated that parties were entering into this agreement on their own behalf and not on behalf of, amongst others, shareholders and agents and that neither party shall have recourse to them including through piercing the corporate veil. The Court ignored the clear mandate of this clause.

Can two Indian parties choose a foreign seat?

There has been judicial divergence on whether two Indian parties can choose a foreign seat. The GMR judgment further muddies the waters. Relying on SC decisions in Atlas Exports and Sassan Power, the Court concluded that two Indian parties can choose a foreign seat. However, the Court’s reasoning is feeble.

Two objections have been made against Indian parties choosing a foreign seat – a) this arrangement runs afoul of Section 28 of the AA which requires the governing law of the underlying contract for all India-seated, domestic arbitrations (between Indian parties) to be Indian law; b) Under Sections 28 of the Indian Contract Act, 1872 (“CA”) two Indian parties must not be prevented from accessing legal proceedings in India. The Court conflates these objections.

The Court misread the Atlas decision where the contract was executed between two Indian and a Hong Kong party. The arbitration clause provided for London arbitration. Relying on Section 28 of the CA, it was argued that denying two Indian parties remedy of Indian courts was contrary to public policy. The SC relied on the arbitration exception under the CA to enforce the award ruling that no public-policy argument could stand merely based on the arbitration being foreign-seated. The Court’s reliance on Atlas is problematic because Atlas does not examine the legality of Indian parties submitting to a foreign seat in the context of substantive law of the contract being foreign law (and therefore hit by Section 28 of the AA). The facts in Atlas do not fit the conclusion that the Court attributes to it.

Court’s reliance on Sasan is misplaced. In Sasan, two Indian parties agreed to arbitrate in London; English law governed. The lower court had ruled that two Indian parties could arbitrate in a foreign country under foreign law. In appeal, SC skirted the issue, ruling that the American parent of the Indian company was also party to the dispute. Since the dispute involved a foreign element, English law could apply. The court made no determination on the seat.

Holding Addhar Mercantile to be per incuriam for its failure to consider Atlas was also incorrect. In Addhar, two Indian parties had agreed to arbitrate “…in India or Singapore and English law to apply.” The Bombay HC held (relying on SC’s decision in TDM Infrastructure) that Indian nationals should not be permitted to derogate from Indian law. It, therefore, ruled that the arbitration would be India seated and accordingly Section 28 of the AA would not be breached. How has the Court misread these precedents? By suggesting that Atlas and Aadhar dealt with the same issue. The decision in Atlas is not a precedent for the proposition that two Indian parties cannot have their disputes determined by foreign law. Atlas dealt with Section 28 of the CA (not, Section 28 of the AA). Aadhar, on the other hand, deals with applicability of Section 28 of the AA to arbitrations involving two Indian parties.

In ruling that two Indian parties can opt for foreign-seated arbitrations, the Court advances party autonomy. The Court’s reasoning, however, is tenuous. The Court could have arrived at the same conclusion as follows:

  • Atlas confirms that there are no public policy grounds that prevent two Indian parties from choosing a foreign seat;
  • Section 28 of the AA requires Indian law be applied only for India-seated arbitrations between two Indian parties; and
  • The SC’s decision in Sassan is not a precedent for either proposition.

In attempting to enforce the arbitration agreement, the GMR decision mirrors a welcome pro-arbitration trend adopted by Indian courts. Yet, its reasoning casts serious doubts on its standing as a precedent. Within their overarching pro-arbitration approach, Indian courts would do well to examine each case critically.

 

The views expressed herein are solely of the authors and do not represent any organizations or companies to which either author belongs.

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Judicial Reform in Saudi Arabia: Recent Developments in Arbitration and Commercial Litigation

Sat, 2017-12-30 16:19

John Balouziyeh

Since oil prices have reached historic lows in 2014, the Kingdom of Saudi Arabia, the world’s largest oil exporter, has recognized the need to reduce its dependence on oil and diversify its economy. As part of a slew of reforms known as Vision 2030, Saudi Arabia has taken steps designed to prepare for the day when renewable energy becomes the new norm, when alternate energy effectively replaces fossil fuels and oil revenues no longer sustain state spending. In diversifying its human capital and economy, Saudi Arabia has recognized the need to cultivate an environment attractive to foreign investors, which the Kingdom views as essential partners in transferring knowhow and expertise to its local workforce.

Attracting foreign investment in turn requires building an environment that reassures investor confidence in legal institutions, courts and the rule of law. Such an environment must guarantee that decisions will not be taken arbitrarily but rather, in accordance with predictable rules. Recognizing the need to foster a landscape where foreign investors can resolve disputes fairly and with efficiency, Saudi Arabia has recently undertaken myriad reforms in the area of dispute resolution, including in international and domestic arbitration and commercial litigation. Recent developments include a Saudi legal judgment enforcing a multi-million dollar ICC arbitral award, the launch of the Saudi Center for Commercial Arbitration, the issuance of decisions in which Saudi courts deferred to foreign choice of forum and arbitration clauses and the establishment of the Commercial Courts as a forum for dispute resolution independent of the Board of Grievances.

Developments in the arbitration arena

Arbitration has deep roots in Middle Eastern culture and Islamic law, which encourages parties to peacefully resolve their disputes through the mediation of an elder or sheikh before resorting to the courts. Yet despite this rich heritage, arbitration has traditionally been underutilized as a method of dispute resolution in Saudi Arabia. This underutilization has been due to various causes, including concerns relating to the enforceability of arbitral awards in Saudi Arabia, the potential conflict between awards and Saudi public policy and the possibility that the Saudi courts would review arbitral awards on their merits.

Developments in Saudi Arabia indicate a change of direction, with the Saudi courts repeatedly upholding arbitration clauses and recognizing foreign arbitral awards in recent years, notable examples of which are discussed below. At the same time, the Saudi government has in recent years made several landmark decisions to bring the Kingdom in line with international arbitration standards. These include the 2016 launch of the Saudi Center for Commercial Arbitration (SCCA) and enactment of the 2012 Arbitration Law, issued by Royal Decree no. M/34, dated 24/5/1433 H., corresponding to 16/4/2012 G. (new Arbitration Law). These developments reflect a shift in the policies of the Saudi government, which is taking steps to encourage arbitration and streamline the dispute resolution process.

Saudi Center for Commercial Arbitration

The SCCA, which was formally launched in the fall of 2016, was created by Cabinet Decree no. 257, dated 14/6/1435 H., corresponding to 15/03/2014 G.. The purpose of the SCCA is to administer arbitration procedures in civil and commercial disputes where parties agree to refer their disputes to SCCA arbitration, in accordance with regulations in force and judicial principles of civil and commercial procedure. The SCCA has broad authority to adjudicate disputes brought before it, but personal status, administrative and criminal disputes remain excluded from SCCA jurisdiction.

Saudi case law

Finally, several cases in recent years have given deference to arbitral tribunals and have upheld arbitration clauses, thus signaling a further change in direction for Saudi Arabia. One prominent example includes the decision of a Riyadh court in 2016 to confirm that a USD 18.5 million ICC arbitral award would be enforced against a Saudi data communications service company. The Saudi-domiciled debtor was ordered to make the payment to the United Arab Emirates subsidiary of a Greek telecommunications company. Prior to enforcing the foreign arbitral award, the judge was required to find that the country in which the award was rendered (the UK) would reciprocate by enforcing awards issued in Saudi Arabia. This element was met by reference to the UK’s accession to the New York Convention, thereby becoming, to the author’s knowledge, the first arbitral award to be enforced under the New York Convention in Saudi Arabia. The judge also held that the Saudi courts had no jurisdiction to hear the dispute owing to an arbitration clause in the contract; that the arbitration complied with due process; and that the award was in final form, was not inconsistent with a judgment or order in relation to the same dispute issued by a local court and did not contradict Saudi public policy.

The judgment of the Board of Grievances in Case number 881/2/J (November 2013), which was initiated against a company and its shareholders, further indicates a shift of direction in Saudi Arabia’s dispute resolution landscape. The claimant sold his shares in the company to other shareholders, with the shares valued in accordance with the company’s financial statement. However, the claimant found out after the sale of his shares that the Company financial statement was inaccurate. The respondents submitted a motion alleging that the Court had no jurisdiction due to the arbitration clause and all rights and obligations arising out of contract had been transferred to them. The Court dismissed the case, agreeing with the respondents and holding that the arbitration clause was binding. The Court of Appeal affirmed the judgment.

The decision of a court in Mecca Al Mukarama in Case number 23699557 (January 2012) is a further example in which a court, deferring to an arbitration clause, refused to exercise jurisdiction over a case. In this case, where the parties had agreed to arbitrate any dispute that arose between them relating to the interpretation of the contract. The claimant brought the case before the Court, alleging that the scope of the arbitration agreement was limited to the interpretation of the contract, while the dispute related to non-arbitrable matters of implementation. The Court dismissed the case and ruled that a dispute related to the implementation of the contract would necessarily raise issues related to its interpretation and therefore was to be resolved by arbitration.

These cases demonstrate an important shift of direction in Saudi legal practice, where the commercial courts under the Board of Grievances have historically asserted jurisdiction, applying Saudi law in contract disputes, notwithstanding foreign choice of law or arbitration clauses. While the cases discussed above indicate a shift, a Saudi commercial court would still likely assert jurisdiction in a dispute that involves public documents, such as articles of association or bylaws registered with the Ministry of Commerce and Investment, regardless of whether the parties enter into side agreements subject to foreign law or arbitration.

Developments in the litigation arena

Dispute resolution in Saudi Arabia has historically been criticized as being riddled with uncertainty and inefficiency, with cases taking as long as two to three years or longer to find resolution. In October of 2017, in an effort to increase judicial efficiency and enhance investor confidence, the Ministry of Justice launched the opening of the Commercial Courts in Jeddah, Damam and Riyadh as independent institutions directly under the Ministry of Justice rather than as a branch of the Board of Grievances, as was historically the case. The Minister of Justice stated at the launch day that the move was part of the Vision 2030 initiative to revitalize the business environment, fuel investment and accelerate economic development in the Kingdom. The Commercial Courts opened on 1 Muharram 1439 H., corresponding to 21 Sept. 2017.

The Ministry of Justice announced that the new Commercial Courts issued more than 1,181 judgments in their second month of operation. This judicial reform indicates a shift in the practice of the Saudi courts, which have historically been criticized for their slow pace in meting out judgments and inefficiency in judicial resolution.

The creation of the SCCA, coupled with recent case law upholding arbitral clauses, the creation of the Commercial Courts as independent legal institution and the issuance of the new Arbitration Law have been hailed as signaling a change of direction for Saudi Arabia, which has historically been seen as hostile to the enforcement of foreign judgments and arbitral awards. The creation of independent Commercial Courts will further boost investor confidence by ensuring that foreign companies have an efficient forum in which to resolve their disputes. Together, these developments indicate a positive shift for foreign investors wishing to invest in Saudi Arabia’s rapidly diversifying economy.

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Mind the Label: Loyalists and Reformists and ISDS

Fri, 2017-12-29 01:49

Anne-Karin Grill

Schoenherr

In late November, the UN Headquarters in Vienna saw the first meeting of Working Group III of the United Nations Commission on International Trade (UNCITRAL). The meeting marked the initiation of a process of analysis and reform – whatever shape it may ultimately take – of the existing Investor State Dispute Settlement (ISDS) regime. At the meeting, the Working Group agreed to proceed first by identifying concerns regarding ISDS, then considering whether reform is desirable in light of any identified concerns, and, if it concludes that it is, developing relevant solutions to be recommended to the UNCITRAL.

As per the UNCITRAL mandate, the Working Group is more government-led than is typical of UNCITRAL Working Groups (more than 300 participants representing 80 states and 35 observers, including the European Union, UNCTAD ICSID, OECD and the PCA, while a number of other intergovernmental and non-governmental organisations also participated). This is a direct reflection of the express request of UNCITRAL that the deliberations of the Working Group, while benefiting from the widest possible breadth of available expertise from all stakeholders, should be government-led with high-level input from all governments, consensus-based and fully transparent.

Unsurprisingly, participants described the Vienna debates as “highly political”.1)Anthea Roberts, UNCITRAL and ISDS Reform: Not Business as Usual, 11 December 2017 jQuery("#footnote_plugin_tooltip_5173_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5173_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Internationally, there is a schism over whether to embrace ISDS and, if so, whether international claims by investors would be better heard by ad hoc arbitral bodies or a permanent investment court. Domestically, ISDS has stirred controversy at best and outright rejection at worst. While the need for fact-based analysis of the current ISDS regime was emphasised at the Vienna meeting, it was also noted that various perceptions of the relevant issues needed to be considered. The concerns of developing states, as well as access of small- and medium-sized enterprises to ISDS, were mentioned as well.

The initial discussions of Working Group III took place against the background of a note prepared by the UNCITRAL Secretariat, “Possible reform of investor-State dispute settlement (ISDS),” issued on 18 September 2017. This document lists well-known concerns regarding ISDS. Essentially, they fall within two broad categories: (i) concerns relating to the arbitral process and its outcomes (inconsistency in arbitral decisions, limited mechanisms to ensure the correctness of arbitral decisions, lack of predictability, lack of transparency, increasing duration and costs of the procedure), and (ii) concerns relating to arbitrators/decision-makers (appointment of arbitrators by the parties, the impact of party appointment on the impartiality and independence of arbitrators). Potential reform measures to be considered by the Working Group cover a broad spectrum, from relatively minor adjustments to the existing ISDS regime (eg the introduction of alternative methods for appointing arbitrators, such as designing a system with a pool of members and the strengthening – or establishing – of ethical requirements) to further institutionalising the existing ISDS regime through the creation of a permanent adjudicatory body (such as a permanent investment court or dispute settlement body).

Non-state stakeholders in the reform process that is unfolding may appreciate the following:

1. Not everyone immediately appreciated putting the UNCITRAL in charge of ISDS reform. In fact, the Working Group usually dealing with questions of arbitration is Working Group II. Since the issues discussed are usually technical in nature (eg the development of model rules), many states have delegated their representation to arbitration practitioners. There was a concern that having states represented by arbitration practitioners in the reform discussions was inappropriate. Giving the reform mandate to Working Group III created a welcome loophole to allow states to reassess who should represent them without affront. What could possibly be expected from those practitioners anyway, if not attempts to delay or even frustrate any reform? Would not that be the case given that they have a vested financial interest in maintaining the status quo?

2. The arguments of advocates for the introduction of a permanent investment court or dispute settlement body – most notably the European Commission – are remarkably divorced from reality. Where arbitrator appointments are made by disputing parties, it is argued, attention is distracted from what is assumed to be their true long term interest: recourse to adjudicative bodies that faithfully interpret and apply the substantive provisions underlying their dispute. According to the self-proclaimed reformists of the current arbitration-focused ISDS regime, this leads to a continued high concentration of persons who have gained their experience as arbitrators primarily in the field of commercial disputes and who are therefore believed to be less familiar with public international law. Throw in the regional and gender diversity cards and you have the perfect storm: incompetence, non-diversity, political colouring. Are standing adjudicative bodies as we know them indeed above suspicion?

3. While ISDS served to depoliticize conflicts between investors and states and prevent them from escalating into interstate conflicts, its reputation does not mirror its benefits – in fact, quite the contrary. While States themselves have established and consented to the current ISDS regime and confirmed its legitimacy under international law, this legitimacy is increasingly challenged by their constituencies. Public opinion is weighing heavily and the statistics have added fuel to the fire. As of 1 January 2017, there were 767 publicly known treaty-based ISDS cases, in which 109 states were respondents in one or more of them. The apparent tensions are being channelled into comparisons of the relative merits of investor-state arbitration and a multilateral investment court system, with states staking out positions as “loyalists” or “reformists”. But let’s mind the labels here: how “reformatory” is it to press ISDS into the mould of a standing investment court system? Is “same but different” really the universal cure? In terms of political marketing, the answer may be a clear yes. In terms of treating the apparent diseases of arbitration-based ISDS, which undeniably exist, would it not be more essential to focus on improving the existing ISDS regime?

Arbitration practitioners, experts, loyalists – let your voices be heard!

References   [ + ]

1. ↑ Anthea Roberts, UNCITRAL and ISDS Reform: Not Business as Usual, 11 December 2017 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 Rule of Law
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2017 Year-in-Review: Top 5 in International Arbitration

Wed, 2017-12-27 20:49

Kate Apostolova

YSIAC

2017 was a busy year for international arbitration. Taking a walk down memory lane, we saw new players and new industries entering the game, institutions adopting new rules, and we have some new challenges to tackle.

This note summarizes some highlights and low lights in international arbitration during 2017 from across the globe.

Happy Holidays and Happy New Year!

1. New Players: third party funders arrive in Singapore and Hong Kong

Third party funding involves a third party funder paying for the costs of a legal proceeding, in return for a share of the proceeds if the claim is successful.

Previously, Singapore prohibited third party funding and Hong Kong did not have a legal framework expressly permitting it.

In 2017, third party funding expanded its footprint to both markets. This is a welcomed development, bringing Singapore and Hong Kong in line with other common law jurisdictions.

Singapore was first to establish a framework for third party funding in March 2017, adopting legislation which (i) abolished the common law torts of maintenance and champerty, and (ii) provided that third party funding by qualifying third party funders in relation to international arbitration and related court or mediation proceedings is not contrary to public policy or illegal.

Shortly thereafter, in June 2017, Hong Kong passed long-awaited legislation making it clear that third party funding of arbitration is permitted under Hong Kong law. Unlike Singapore, though, the Hong Kong legislation has not yet come into force: watch this space in 2018.

2. New Industries: arbitration continues to aim at financial industry disputes (with the rise of expedited and summary procedures)

Arbitration is widely used in some sectors, such as the oil and gas industry, but less widely used in others, such as the financial industry. The reason for this relative lack of popularity of arbitration in the financial services sector is partly because, among financial institutions, there are perceived shortcomings of arbitration: at the core of those shortcomings is the perceived lack of availability of “summary judgment” or similar mechanisms for early disposition of simpler cases.

Arbitration institutions continuously have been refining their procedural rules in order to address this issue. SIAC was a leader, having introduced its expedited procedure rules in 2010, and last year having made available a summary disposition procedure. Tribunals have arguably always had the authority and discretion summarily to dispose of cases, pursuant to their broad case management powers. However, concerns about due process and the enforceability of arbitration awards, which is sometimes criticized as “due process paranoia,” appear to have deterred many tribunals from exercising that power.

Other institutions have met critiques of the efficiency of the arbitral process by including provisions for early dismissal or summary determination. In January 2017, the Stockholm Chamber of Commerce (SCC) adopted a new procedure which allows for summary proceedings when certain conditions are met.

In August 2017, the HKIAC also invited practitioners to weigh in on whether it should adopt a similar new procedure for the early determination of disputes.

The latest effort that has led to new rules came in March, with the ICC Arbitration Rules revisions incorporating expedited proceedings which apply automatically to any arbitration in which the amount in dispute is less than USD$2 million. Notable features of this procedure include: (i) the dispute is normally decided by a sole arbitrator; (ii) the Terms of Reference phase is dispensed with; (iii) awards must be made within six months; and (iv) the Tribunal has discretion to decide the case with no hearing, no document production and no witness examinations.

Elsewhere, in January 2017, Russia’s most prominent arbitral institution, the Moscow-based International Commercial Arbitration Court at the Chamber of Commerce and Industry, and the Vietnam International Arbitration Centre also introduced similar expedited arbitration procedures in their revised rules.

It remains to be seen whether these changes in arbitration rules will influence parties in the financial services sector to choose arbitration as their preferred method for dispute resolution.

3. New Rules: investment arbitration rules

“Investment arbitration” refers to investment disputes between a foreign investor and a host State under a treaty between the host State and the investor’s home State. Even as debates about the legitimacy and future of investment arbitration have raged, there has been a steady increase in the number of investment arbitrations around the world. Historically, investment arbitrations have been administered mainly by ICSID under the ICSID rules, as ad hoc arbitrations under the UNCITRAL Arbitration Rules, or administered by the SCC.

In an effort to increase the number of investment arbitrations it administers, in January 2017, SIAC released separate rules for investment arbitration: the SIAC Investment Arbitration Rules (SIAC IA Rules). In recognition of the differences between commercial and investment arbitrations, the SIAC IA Rules include unique features such as (i) the possibility of submissions by third parties, (ii) discretionary publication of the Tribunal’s decisions and award, and (iii) different time limits for certain filings, for the challenge of arbitrators, and for the decisions by the Tribunal.

The SCC also introduced a separate set of investment arbitration rules in Appendix III of the 2017 SCC Rules.

SIAC and the SCC were the first major arbitration institutions to offer rules for commercial arbitrations and specialized rules for investment arbitrations, but they are not the only ones. In August 2017, the HKIAC also invited practitioners to weigh in on whether it should develop its own investment arbitration rules. On 1 October 2017, in preparation for “One Belt, One Road” disputes, CIETAC also adopted new rules for investment disputes.

4. New Challenges: TPPA and NAFTA trumped

Sticking with treaties and controversy: President Donald Trump lived up to his campaign promise and on his first full day in office, took action to withdraw the US from the Trans-Pacific Partnership Agreement (TPPA). Trump described the move as a “great thing for the American worker.”

The TPPA is a free trade agreement signed on 5 October 2015 by 12 States responsible for an estimated 40% of the global economy: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. It is (or, was) intended to create major links between the Americas and Asia ex-China. It includes investor-State dispute settlement protection through binding arbitration.

As currently drafted, the TPPA can only enter into force if it has been ratified by the US. Thus, Trump’s withdrawal from the TPPA scrapped those plans…or so it seemed. The remaining 11 TPPA Member States are still considering whether to abandon the TPPA or to find a way to preserve it, without the US. In October and November 2017, they held formal negotiations. It remains to be seen whether a new deal will be reached, but there is indication the 11 TPPA Member States are serious about it.

Trump has also lived up to his promise to go after NAFTA. Trump’s Administration started renegotiations of NAFTA in August. It remains unclear whether the Administration will keep the investor-State dispute settlement in its current form or whether it will reform or replace it.

5. The Next Big Thing: IA meets AI?

Many say the legal industry, including the practice of international arbitration, needs updating. With the rise of new technology, it is undergoing a technological revolution. This is particularly apparent in Singapore where the importance of technology is impressed upon lawyers by the government in its effort to position Singapore as a legal hub and make it a “Smart Nation.”

The buzz phrase in the legal industry in 2017 was certainly “technological innovation,” including artificial intelligence (AI).

Legal technological innovation tools have been used in litigation and corporate work for some time, with software used to review large sets of documents for document production or due diligence, to do legal drafting or research through automated processes, for general case management and document organization, and to complete such mundane tasks as proofreading, formatting and editing legal documents. It is also making its way into ADR proceedings, with the latest being the use of DRExM in Egypt to resolve construction disputes. In March 2017, the Swiss Chambers Arbitration Institution held its first legal innovation conference where technological innovation in the practice of international arbitration was discussed.

Legal technological innovation has been and can be highly beneficial in international arbitration, providing numerous benefits for a more efficient and effective way of working, including by reducing costs, avoiding mistakes, and lowering lawyer stress, saving time and identifying risk early on. The demand for quality work at a reduced price to be done within a limited time frame requires the right base systems in place so that lawyers can add value where it matters most.

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The Key to Unlocking the Arbitrator Diversity Paradox?: Arbitrator Intelligence

Wed, 2017-12-27 03:34

Catherine A. Rogers

A strange paradox marks the debate about international arbitrator diversity.

Public consensus increasingly reflects a pervasive concern about the lack of diversity among international arbitrators. ArbitralWomen can claim much credit for focusing attention on the lack of gender diversity, as evidenced by now more than 2500 signatures on The Pledge. Meanwhile, many corporate users now insist that firms include diverse candidates on lists of proposed arbitrators.

Concern about the lack of diversity is also reflected in the results of a survey on diversity by Berwin Leighton Paisner (BLP). In that survey, 80% of respondents believe that tribunals contain too many white arbitrators, while 84% believe that they contain too many men, and 64% felt that there were too many arbitrators from Western Europe or North America.

The good news is that these efforts seem to have nudged arbitral institutions toward greater diversity in institutional appointments. In 2016, women constituted, on average, around 17% or institutionally appointed arbitrators, considerably up from 12% just a year earlier in 2015, and dramatically up from the mere 6% in 2012.

The bad news is that institutions account for only a fraction of all arbitrator appointments. And concerns about lack of diversity are not having a similar effect in the estimated 75% of cases in which parties appoint arbitrators. As Lucy Greenwood cautions, there is a “stark disconnect between the rate at which institutions appoint women and the willingness of the parties to do so.”

This lack of “willingness” is underscored in other findings from the BLP survey. While 84% responded that tribunals had too many men, only 50% of respondents thought that it was desirable to have gender balance on arbitral tribunals, and 41% thought that “it makes no difference.” Responses on ethnicity and national background followed a similar pattern. 80% and 64%, respectively, said too many arbitrators were white or from Western Europe and North America, but only 54% responded that ethnic balance on a tribunal was desirable, with 31% saying that “it makes no difference.”

These responses reveal an apparent contradiction. On the one hand, they demonstrate widespread concern about the lack of diversity. On the other hand, they suggest an apparent inability to translate those concerns into actual appointments in individual cases. This gap is captured not only in the BLP statistics cited above, but also in the comments of an anonymous commentator, who explained “when asked by a client to select an arbitrator, the desirability of promoting diversity is the last feature on anyone’s mind. ‘We are not being asked to make a statement’ he said, ‘we are asked to pick the best person for the job.’”1)Anonymous posting to [email protected] (9 February 2012, 03.27 CST), cited in Lucy Greenwood & Mark Backer, Getting a Better Balance on International Arbitration Tribunals, 28 Arbitration INTERNATIONAL 653, 661 at n. 42 (2012). jQuery("#footnote_plugin_tooltip_9269_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9269_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Therein lies the diversity paradox.

The key to resolving this paradox is to close the gap between the altruism that animates abstract concerns about diversity, and the strategic pragmatism that dominates arbitrator selection in individual cases. To achieve a more representative pool of arbitrators, in other words, we should appeal not only to the “better angels of our nature,”2)The phrase “better angels of our nature” comes from a post-Civil War speech by U.S. President Abraham Lincoln: “We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory will swell when again touched, as surely they will be, by the better angels of our nature.” jQuery("#footnote_plugin_tooltip_9269_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9269_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); but also to the more Machiavellian instincts that inform our case-specific arbitrator appointments.

Our better angels do not have to be strangers to our inner Machiavellis—they meet in the many contexts in which we “do right by doing good.”3)David B. Wilkins, Doing Well By Doing Good? The Role of Public Service in the Careers of Black Corporate Lawyers, 41 HOUSTON L. REV. 1 (2004). jQuery("#footnote_plugin_tooltip_9269_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9269_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); With respect to diversity, for example, a robust and growing body of literature demonstrates that group decisionmaking can be markedly improved when decisional bodies have a diverse composition.4)David Rock & Heidi Grant, Why Diverse Teams Are Smarter, Harvard Business Review, November 4, 2016. jQuery("#footnote_plugin_tooltip_9269_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9269_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Other studies have long confirmed, not surprisingly, that representativeness of judges improves perceived legitimacy of adjudicatory apparatus.5)See, e.g., Tom R. Tyler, Governing Amid Diversity: The Effect of Fair Decisionmaking Procedures on the Legitimacy of Government, 28 LAW & SOC’Y REV. 809, 818 (1994). jQuery("#footnote_plugin_tooltip_9269_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9269_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These studies suggest we would all benefit from greater diversity among arbitrators.

These studies have limited impact on actual behavior, however, because they measure the benefits of diversity in the abstract. Arbitrator selection, by contrast, is hyper-individualized and highly personal—both in the process and substance of assessing potential arbitrators. So, to unlock the diversity paradox, let’s look more closely at parties’ actual practices and priorities when they are selecting individual arbitrators.

If not diversity, what are parties looking for when they appoint arbitral tribunals? Going back to the BLP survey, 93% of respondents identified “expertise” and 91% identified “efficiency” as the most important features in appointing arbitrators. In the words of our anonymous commentator cited above, they are looking for “the best person for the job.”

As we all know, this information is generally not available on arbitrators’ CVs. Given the confidential nature of arbitration, the traditional (and still only) way to collect this information is through personal phone calls with individuals who have appeared before a potential arbitrator or, better yet, sat as a co-arbitrator with that person.

For those concerned about diversity,6)This is the first in a series of five Kluwer blog posts about Arbitrator Intelligence and the market for arbitrator services. jQuery("#footnote_plugin_tooltip_9269_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9269_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); there are two main problems with this approach.

The first problem with arbitrator research based only on person-to-person inquiries is that it creates an information bottleneck. The limited number of individuals who can provide such information stifles the ability of newer and more diverse arbitrators to develop international reputations that the BLP statistics tell us are key to getting appointments.

To illustrate, let’s take a hypothetical.

Imagine a young Brazilian woman has been appointed by arbitral institutions in three sizable and complex arbitrations. And she was simply AWESOME. The parties were wowed. Her co-arbitrators were impressed. And the institutions were delighted. How many attorneys worldwide now know about her exceptional abilities? Maybe 20? 30? 40 tops? And what are the chances that one of those 40 people will receive a phone call about her future appointment? To borrow from the philosophical question about a tree silently falling in the woods: What happens if an arbitrator has a fantastic reputation, but no one knows about it?

The second problem with ad hoc person-to-person research is that such research largely confines assessment of potential arbitrators to subjective evaluation by a limited number of individuals. This research technique functions more as a telephonic lottery than systematic evaluation. Workplace research in the United States suggests that cognitive biases—those implicit biases we all have but are often unaware of—most easily translate into employment discrimination when hiring is premised on subjective evaluations and processes that do not involve systematic evaluation.

Arbitrator Intelligence seeks to promote diversity both by breaking the information bottleneck, and by providing an alternative to the highly subjective, ad hoc nature of arbitrator assessments.

The means to these ends is our Arbitrator Intelligence Questionnaire, or AIQ. If parties and counsel complete an AIQ at the end of each arbitration, Arbitrator intelligence will compile the collected about arbitrators, analyze it, and compile it into AI Reports on individual arbitrators. These reports will then be made available (for a fee) through our partner, Wolters Kluwer.

The content of the AIQ was developed to replicate the same kinds of information currently sought, and available only, through personal phone calls. Unlike phone calls, however, the AIQ seeks to disaggregate the abstract qualities of “expertise” and “efficiency” into objective, measurable data points. For example, to paraphrase a few questions from the AIQ: Did the arbitrators grant document production? Did they ask questions that demonstrated familiarity with the record? Based on data collected through the AIQ, Arbitrator Intelligence will also be able to determine the overall duration of arbitrations and time to issue the award, and numerous other valuable objective data.

Can the Arbitrator Intelligence, through data from the AIQ, promote diversity in international arbitration? We are optimistic for two reasons.

First, we hope to tap into arbitration specialists’ self-interest (not, or not only, their commitment to improving arbitrator diversity). Looking again to the BLP survey, there is reason to be optimistic. A staggering 92% of respondents indicated that they would welcome more information about new and less well-known candidates whom they could appoint. To generate this information, we need parties and counsel (and third-party funders) to complete AIQs. Lots of them! This may seem like a big ask for busy lawyers, but again looking to the BLP survey, 82% of respondents indicated an interest in providing feedback about arbitrators.

Second, by increasing information and reducing subjectivity in arbitrator assessment and selection, Arbitrator Intelligence undertakes to promote a more robust meritocracy. With more information, newer arbitrators can be more fairly evaluated based on their actual performance and more effectively compared to other arbitrators based on objective criteria. They can also develop reputations for excellence and efficiency that are independent of personal vouching through ad hoc phone calls that currently impedes their progress.

AI’s ability to succeed, of course, depends on parties and counsel submitting AIQs at the end of each arbitration. So, as the 2018 New Year begins, consider taking the few minutes necessary to complete AIQs at the end of each case. Join the several law firms that have agreed to provide retrospective AIQs on cases completed in the past few years. Sign the Arbitrator Intelligence Pact, promising to support our mission of promoting transparency, accountability and diversity.

In other words, in 2018, do your part to solve the diversity paradox—both by acting both in your (and your clients’) own self-interests and by answering to the better angels of your nature.

References   [ + ]

1. ↑ Anonymous posting to [email protected] (9 February 2012, 03.27 CST), cited in Lucy Greenwood & Mark Backer, Getting a Better Balance on International Arbitration Tribunals, 28 Arbitration INTERNATIONAL 653, 661 at n. 42 (2012). 2. ↑ The phrase “better angels of our nature” comes from a post-Civil War speech by U.S. President Abraham Lincoln: “We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory will swell when again touched, as surely they will be, by the better angels of our nature.” 3. ↑ David B. Wilkins, Doing Well By Doing Good? The Role of Public Service in the Careers of Black Corporate Lawyers, 41 HOUSTON L. REV. 1 (2004). 4. ↑ David Rock & Heidi Grant, Why Diverse Teams Are Smarter, Harvard Business Review, November 4, 2016. 5. ↑ See, e.g., Tom R. Tyler, Governing Amid Diversity: The Effect of Fair Decisionmaking Procedures on the Legitimacy of Government, 28 LAW & SOC’Y REV. 809, 818 (1994). 6. ↑ This is the first in a series of five Kluwer blog posts about Arbitrator Intelligence and the market for arbitrator services. 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 Rule of Law
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The Quest for Uniformity in Ethical Standards for Party Representatives in International Arbitration

Mon, 2017-12-25 20:45

Daniel Waldek

Herbert Smith Freehills

The lack of consensus on ethical standards of conduct for counsel in international arbitration has given rise to two enduring problems. First, lawyers may find it hard to know how they should act where the professional rules of their home jurisdiction differ from, or conflict with, those at the seat of arbitration. Second, parties themselves may be unfairly disadvantaged where their counsel is subject to more restrictive ethical obligations than counsel for the other side.

A common example of the ethical challenges faced by counsel in practice is witness preparation. In the United Kingdom, the solicitors’ code of conduct prohibits lawyers from preparing their witnesses for testimony. This restriction is also imposed upon lawyers from many other common law jurisdictions. By contrast, lawyers in the United States are allowed, and indeed expected, to do so. In an international arbitration, a prudent U.S. counsel will thus proceed as usual and prepare his witnesses for testimony; the U.K. lawyer, on the other hand, could be disbarred for the same conduct. In this case, the U.K. lawyer’s client could be disadvantaged for no other reason than that, under the professional rules of his home jurisdiction, their counsel is more restricted when it comes to their dealings with witnesses.

This is clearly an undesirable state of affairs. It would instead be preferable to level the playing field of ethical obligations in international arbitration without offending local codes of conduct. Precisely how we should do this remains the challenge to the question.

A Global Arbitration Ethics Council

One potential solution that has been put forward by the Swiss Arbitration Association (“ASA”) is to create a transnational body – the Global Arbitration Ethics Council – with its own set of core ethical principles. The council would comprise arbitration practitioners from the major international arbitration associations and institutions. Its primary responsibility would be to resolve all claims of ethical misconduct in international arbitration, taking into account the cultural, geographical and other idiosyncrasies of the case. A complaint brought before the council would be entirely separate from the main arbitration proceeding.

Vesting the regulatory function in a single, transnational body would also remove the risk of fragmentation and inconsistency. Also, if the major arbitration institutions and associations were to endorse the council, the council could have access to a far broader range of sanctions than is currently available to tribunals.

However, the fundamental flaw in this proposal is that it is overly idealistic to suggest that the major international arbitration institutions and associations would be able to suddenly reach a consensus as to the “core principles” of ethical conduct in international arbitration. As appealing as this proposal might appear, it expects too much of the major international arbitration institutions and associations as things currently stand.

Other unanswered questions involve the council’s jurisdiction and the extent of the council’s disciplinary powers. Proponents of the idea have suggested that all that is needed would be for the major arbitration institutions to require lawyers participating in arbitrations under their rules to be subject to the council’s jurisdiction. But how far would this jurisdiction reach? Would the council have the power to sanction lawyers for conduct that is in breach of the council’s core principles, even though such conduct is permitted under the counsel’s local bar rules? And would the council’s powers be limited to admonishment or would they include the power to exclude counsel from future arbitrations? Clearly there are many important issues that would need to be addressed before a transnational body such as the Global Arbitration Ethics Council can be established and, perhaps more importantly, obtain global recognition.

Binding Codes of Ethical Conduct

Another potential solution would be for the major arbitration institutions to individually adopt binding codes of ethical conduct which would automatically be incorporated into their rules of arbitration. One such example is the LCIA’s General Guidelines for the Parties Legal Representatives (2014). The LCIA Guidelines are binding on any counsel who appears in an arbitration administered under the LCIA Rules. They provide guidance in areas such as ex parte communications with arbitrators, submissions to the tribunal, disclosure and the preparation of evidence. In the event of a breach, the LCIA Guidelines empower the tribunal to reprimand the relevant counsel and take any other measure to fulfil the tribunal’s general duties under the LCIA Rules.

The benefit of such an approach is that if key international arbitration institutions were to adopt similar binding codes of conduct, more and more parties to institutional arbitration would be forced to adopt them and thus become familiar with them. This, in turn, would lead to greater uniformity in ethical standards of conduct in international arbitration.

However, the key problem with this proposal is that a mandatory, binding code of conduct may not cohere well with the inherently flexible nature of arbitration. Moreover, compelling party representatives to comply with a binding code of conduct seems to overlook the fact that standards of ethical conduct may vary across regions and jurisdictions. This does not solve the immediate problem of bridging the ethical gap. While the end goal would be the creation of a universal and uniform code of ethical conduct, we should not, in our attempts to move towards that goal, think that standards of ethical conduct are independent of culture and context.

The ability of a tribunal to use adverse costs orders as a sanction for unreasonable conduct by counsel can be a powerful tool to regulate procedural conduct – although such orders inherently penalise the end user, not their lawyer. Therefore, another problem is whether a tribunal, which has power over the parties to an arbitration, should also have the power to adjudicate on the conduct of the parties’ representatives. Critics of this approach argue that decisions regarding the ethical conduct of counsel are alien to the arbitral process and should remain separate from it. On this view, the responsibility of the tribunal is simply to resolve the arbitration proceedings in an orderly manner; decisions about whether a lawyer has acted unethically should be left to the local bar association. Indeed, one concern is that requiring tribunals to determine whether counsel have acted unethically may compromise the impartiality and independence of the tribunal when it comes to deciding on the merits of the case.

Non-Binding Codes of Ethical Conduct

A third potential solution, which has drawn recent support from former Singaporean attorney-general V.K. Rajah, would be for international arbitration institutions to adopt non-binding ethical codes of conduct. The IBA Guidelines on Party Representation in International Arbitration (2013) are one such example. The IBA Guidelines cover similar areas to the LCIA Guidelines, though they provide for broader sanctions including adverse costs orders. The key difference between the two is their legal force. Unlike the LCIA Guidelines, the IBA Guidelines only apply where the parties or tribunal agree that they shall apply, and subject to any amendments that they might make.

The main benefit of an approach based on non-binding instruments is that it would facilitate greater uniformity in ethical standards while preserving the parties’ freedom to adopt and amend them. However, this approach does have its limitations. First, the IBA Guidelines were intended to provide guidance in areas where party representatives commonly encounter some degree of ethical uncertainty. They do not, however, cover all aspects of party representative conduct in international arbitration. Second, there is still the risk of conflicting ethical obligations where the institution’s code of conduct conflicts with or remains silent on areas covered by applicable national bar rules. Third, the sanctions available to a tribunal under the IBA Guidelines are directed largely at the parties rather than their counsel. There therefore remains some doubt as to the efficacy of such guidelines in actually shaping the conduct of party representatives. Finally, as the ASA has pointed out, there is the concern that the IBA Guidelines draw primarily on common law practices, thereby limiting its applicability in civil law jurisdictions. The extent to which such guidelines can bridge the common and civil law divide, remains to be seen.

The Future

Clearly, the IBA Guidelines are not perfect. However, they do provide a blueprint for a practical, short-term approach, which, in the long run, will help bring party representatives closer to a common understanding of what should and should not be done. Admittedly, there will be some practices, such as witness preparation, on which a consensus will not easily be reached. That being said, non-binding codes of conduct should go so way to helping establish a common ground in many other areas of practice in international arbitration. The immediate challenge lies in garnering support for non-binding codes of conduct among major international arbitration institutions like the SIAC. In the longer term, this approach could be improved by making the codes of conduct more comprehensive, ensuring that they draw on both common law and civil law practices, and transferring the regulatory function from tribunals to the arbitration institutions themselves. Though non-binding codes of ethical conduct may not create international consensus overnight, they provide a meaningful way forward in the quest for uniformity in ethical standards for party representatives in international arbitration.

*With thanks to Tim Tabalujan for his assistance.

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From the Editors of Kluwer Arbitration Blog

Sun, 2017-12-24 22:14

Crina Baltag (Acting Editor)

In January 2018, Kluwer Arbitration Blog will enter its 9th year of existence and we are pleased to see the Blog developing into such a successful forum of international arbitration. The scope of the Blog – as unveiled in 2009 – is to include high quality discussions on international arbitration, commercial and investment related, and to offer a platform to established, as well as to new voices in the arbitration community. We believe that the Blog reflects the arbitration world, a diverse and unique community, which brings together professionals from all corners of the world, with their specific cultures and interests, gathered under the common umbrella of international arbitration.

2017 was a busy year for arbitration: from third-party funding, with relevant changes in the legislations of some jurisdictions such as Singapore, to the ongoing reform of the ISDS and of the relevant treaties, including the NAFTA, and with a rich development of the case law in both commercial and investment arbitrations (Maximov case, ConocoPhillips etc.).

Kluwer Arbitration Blog had a productive 2017 and we would like to highlight here some of these developments. In August 2017, Prof. Roger Alford, the Editor of the Blog, was appointed to a leadership position at the U.S. Department of Justice. Dr Crina Baltag was invited to replace Prof. Alford during his leave from the Blog and to continue as the Acting Editor.

Mindful to the developments in different industries, and with a growing number of jurisdictions actively promoting arbitration, in November 2017, the Editorial Board welcomed the new Assistant Editors of Kluwer Arbitration Blog. It is a pleasure to introduce to our readers the Kluwer Arbitration Blog team:

Dr Crina Baltag, Acting Editor, Senior Lecturer in Law, University of Bedfordshire
Dr Gloria Alvarez, Associate Editor, Lecturer in Law, University of Aberdeen
Dr Patricia Zivkovic, Associate Editor, Chief Legal Officer NSoft d.o.o.
Jawad Ahmad, Associate Editor, Private Law Clerk to Judge Charles N. Brower
Sadaff Habib, Solicitor, Beale & Company; and Liilnna Kifle, Associate, Mehrteab Leul and Associates, Assistant Editors for Africa;
Esme Shirlow, King’s College, Assistant Editor for Australia and New Zealand;
Fabian Bonke, Associate, Hogan Lovells; Deyan Dragiev, Associate, CMS Cameron McKenna Nabarro Olswang LLP; and Nevena Jevremovic, Association ARBITRI, Assistant Editors for Europe;
Catherine Gibson, Associate, Covington, Assistant Editor for North America;
Benson Lim, Associate, Hogan Lovells, Assistant Editor for PR China and Hong Kong;
Daniela Paez-Salgado, Associate, Herbert Smith Freehills, Assistant Editor for Central and South America;
Irene Mira and Christine Sim, Research Associate, Centre for International Law Singapore, Assistant Editors for South-East Asia;
Noor Kadhim, Vanin Capital, Assistant Editor for the Middle East;
Janice Lee; Mary Mitsi, Teaching Assistant, Queen Mary University of London; and Ashutosh Ray, Associate, Three Crowns LLP, Assistant Editors.

We are sure that we are all expecting a 2018 rich in developments in international arbitration. Some outcomes are already at the horizon, such as the ruling of the CJEU in the Achmea Case and of the GCEU in the Micula Case, the final report of the ICCA-QMUL Task Force on Third Party Funding in International Arbitration and the upcoming project of ICCA on Cybersecurity in International Arbitration, the UNCITRAL Working Group on ISDS or the dispute resolution scheme under the Belt and Road, just to name a few. Arbitration institutions are also promising interesting discussions on the arbitration proceedings (see SIAC proposal on cross-institution consolidation). We are also seeing an increase in the activities of the young arbitration associations and also new young associations established at regional level (see INOVARB in Brazil) and these initiatives shall be properly encouraged here on this Blog. The Young ICCA Mentoring program is one of the most successful programs of this kind, linking young professionals with the reputable names in arbitration. ICC YAF announced its new representatives in early 2017, with a good number of events planned for 2018. The Young ITA named its new leaders, joining Silvia Marchili, Chair, Elizabeth Devaney, Vice-Chair and Robert Landicho, Communications Chair: Dr Crina Baltag, Thought Leadership Chair; Laura Sinisterra, Mentoring Chair; and Rocio Digón, Tomas Vail, James Egerton-Vernon, Karima Sauma, Pedro Guilhardi, José María De la Jara, Regional Chairs.

We would like to thank you for following Kluwer Arbitration Blog and for your contributions in posts, comments and valuable feedback. We are always available at [email protected]

Wishing you the best for the Festive Season and a prosperous 2018!
Dr Crina Baltag, Acting Editor, on behalf of the Editorial Board

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Journal of International Arbitration

Sat, 2017-12-23 16:03

Maxi Scherer

Issue 34/6

ARTICLES SECTION

Mauro Rubino Sammartano, A Second (Quasi-Perfect?) Storm Also in Arbitration?
Abstract: Many users of international arbitration, particularly in-house counsel, have repeatedly expressed concern about the lack of adequate information on arbitrators, resulting in arbitrator selection based on a vague and general reputation often informed by word of mouth or anecdotal information. Arbitral institutions and arbitration circles cannot remain indifferent to this need. A first step to deal with this issue is the disclosure by arbitrators of the information contained in the arbitrator’s pledge launched by the European Court of Arbitration; another step is the issuance of an official acknowledgement as a ‘certified arbitrator’ by arbitral institutions, and eventually the requirement that certified arbitrators abide by a universal code of ethics.

Michael Polkinghorne & Benjamin Ainsley Gill, Due Process Paranoia: Need We Be Cruel To Be Kind?
Abstract: Due process paranoia is one of arbitration’s ‘hot topics’, but does it merit the heat? This article takes a view of the sources of and supposed justifications for due process paranoia in those (fortunately rare) cases where parties or counsel try to rig the arbitral process. It looks at who might be to blame for the reluctance of arbitrators to take measures to combat such activity, and considers some of the solutions that have been proposed to help deal with it. Overall, the authors suggest that all arbitration stakeholders are to a certain extent to blame, although arbitrators perhaps have the most work to do. It is therefore fortunate that they have the wide support of domestic judges and the arbitral institutions, as well as a substantial toolbox at their disposal with which to combat recalcitrant or bad faith parties.

Hanno Wehland, Blue Bank International v Venezuela: When Are Trust Assets Protected Under International Investment Agreements?
Abstract: The award rendered by a tribunal in proceedings conducted under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) between Blue Bank International and Venezuela in April this year is the first public decision addressing in detail the question of whether trustees can be considered protected investors with regard to trust assets under International Investment Agreements. This article analyses the findings of the Blue Bank tribunal with a view to more generally identifying requirements for the protection of trust assets under investment treaties. Based on a review of the relevant treaty provisions and the jurisprudence of arbitral tribunals it concludes that, in the absence of beneficial ownership, trustees will typically not be protected. By contrast, trust assets can be protected either where a treaty admits trusts themselves as investors or where the rights of beneficiaries are specific enough to amount to beneficial ownership.

Luke Nottage & James Morrison, Accessing and Assessing Australia’s International Arbitration Act
Abstract: This review identifies many positive trends in international commercial arbitration law and practice in Australia, especially over the last decade. Yet much work remains to be done, in light of some ongoing uncertainties in the statutory regime and associated case law, and comparatively few international arbitration case filings. The biggest challenge is for law reformers in relation to more controversial issues such as the arbitrability of various types of disputes, mandatory laws impacting on forum selection and choice of laws, the precise contours of the competence-competence principle, and confidentiality of arbitration-related court proceedings. Hopefully, a new phase of comprehensive legislative reform will be conducted through more open and structured public consultation than the three piecemeal amendments since 2015.

Lucian Ilie & Amy Seow, International Arbitration and EU Competition Law Complement Rather than Contradict One Another
Abstract: The relationship between international arbitration and EU competition law is of practical importance because of the increasing number of cases in which arbitrators are called on to apply competition rules. This article addresses both the theoretical and practical aspects of arbitrating competition law disputes, to give an overall picture of the relationship between international arbitration and competition law.
This article shows that the two are not in conflict. Rather, they complement each other, and arbitration can be a method of resolving competition law disputes. This article considers the arbitrability of competition law disputes (section 2); the powers and duties of arbitrators in applying competition law (section 3); the relationship between arbitrators and public enforcers of competition law (section 4); and the scrutiny of awards in which competition law issues are implicated, under both the New York Convention and the International Centre for Settlement of Investment Disputes (ICSID) Convention (section 5).

BOOK REVIEW
Prof Dr Gerhard Wagner, Jake Lowther & Anastasios P. Andrianesis, Orsolya Toth, The Lex Mercatoria in Theory and Practice (Oxford University Press, 2017; ISBN 978-0-199-68572-1)


Readers would be interested in the End of Year Sale of Wolters Kluwer. Until 31 December 2017, the titles from our extensive Arbitration collection have a 20% discount. Use discount code SRECCADCFM.

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The Duty of Disclosure and Conflicts of Interest of TPF in Arbitration

Fri, 2017-12-22 21:40

Napoleão Casado Filho

Arbitration, especially in its international perspective, has experienced such a tremendous growth in the past few decades that it has now become a victim of its own success. Current debates are centered on the prohibitive costs, the difficulty in finding high-level arbitrators and conflicts of interests often exclusive to relatively diminished groups, demonstrating that themes once considered to be “hot topics”, such as the separability of the arbitration agreement and competence-competence, are now slightly relegated to the past.

One of such controversial circumstances is the recent interest that arbitration has piqued in investors, who have suddenly found the frequently elevated costs of arbitral proceedings and the millionaire awards thereof to be an investment opportunity. It is the so-called Third-Party Funding, a phenomenon that was born in Australia, spread throughout Common Law jurisdictions and is today commonplace in countries that had never once imagined it, such as France, Brazil and Peru.

Wherein there is money, therein interests lie. It should come as no surprise that a desire for regulation has likewise surged. As soon as the topic gained relevance in 2014, the ICCA (International Council for Commercial Arbitration), alongside the prestigious Queen Mary University of London, created a joint Task Force to study the theme and propose best practices. For that, experts from all corners of the world were assembled. After three long years, an initial Draft was made available for public and professional scrutiny in September 2017.

The initiative warrants praise. Firstly, for assembling many relevant figures to debate a theme that, indeed, deserves attention from the international arbitration community.

Secondly, because the Task Force seems genuinely interested in listening to the market and its practitioners, as before publishing the Final Report, it made a preliminary iteration available for public debate. The debate has been intense and last month we had the opportunity to join it in the II Oxford Symposium on Comparative International Commercial Arbitration. The core of the dispute was an a apparent regulatory appetite from the members of the Task Force.

This regulatory appetite must, in our view, be slightly halted, lest we experience increases both in the duration of proceedings and in the costs of funding methods such as Third-Party Funding. If I may elaborate.

One of the Task Force’s pressing wishes is to render a general duty to disclose the existence of a third-party funder in any and all arbitral proceedings. On Chapter 4 of the Report, entitled “Disclosure and Conflicts of Interest”, the Task Force suggests two options:

[ALTERNATIVE A]: 1. A party should, on its own initiative, disclose the existence of a third-party funding arrangement and the identity of the funder to the arbitrators and an arbitral institution or appointing authority (if any), either as part of its first appearance or submission, or as soon as practicable after funding is provided or an arrangement to provide funding for the arbitration is entered into.

[ALTERNATIVE B]: 1. Arbitrators and arbitral institutions have the authority to, during the selection and appointment process, expressly request that the parties disclose whether they are receiving support from a third-party funder and, if so, the identity of the funder

The qualm seems to be centered on whether arbitrators should be given the power to order the disclosure of an investment or if it falls entirely upon a Party’s own will. And yet, under both scenarios, a general and unrestricted duty of disclosure is established, even if an investor has no relation at all with the arbitrators. The ostensible consensus within the arbitral community that “it falls upon the arbitrator to analyze whether or not a conflict of interest exists” is adopted as a premise. In fact, this consensus is enshrined in the Report itself, when it says: “there is a general agreement that disclosure of the identity of a funder is necessary for an arbitrator to undertake analysis of potential conflict of interests”. (pg. 78 ICCA-QMUL Report).

Generally, I am cautious of consensus and unanimities. I’ve had the opportunity of defending, when analyzing the Third-Party Funding phenomenon on a purely academic level, that it would be desirable to have some limits on the duty of disclosure [1]. In that opportunity, I had already defended that a breach of this duty should not amount to a presumed nullity of the arbitral award rendered in proceedings that had been funded, as it should instead be a burden of the party challenging the validity of the award to prove, for example, an effective conflict of interest between the investor and any of the arbitrators or experts.

However, practical experience denotes that even my once-defended extension of the duty of disclosure must be relativized. What we have observed on case-by-case analyses wherein disclosure does in fact occur is the outbreak of extremely complex and unnecessary procedural challenges. Effective due diligence on the investor is thus initiated, entailing devastating effects on arbitral practice itself.

The establishment of a general duty of disclosure, regardless of potential conflicts of interest with the investor, seems to be misguided, as it overlooks the economic consequences of such a duty and fails to foresee the practical effects thereof.

Investment funds have increased their investments in arbitral proceedings. In addition to individual investments, portfolio investments comprising all cases of a given law firm are ever more common, even amongst some of the largest global firms. This is the solution that the arbitral system has found to provide further access to a means of dispute resolution that would otherwise not concern itself with such access.

In creating such a general duty, the cost of compliance will fatally upsurge, forcing parties to disclose, under ALL circumstances and at the very first moment, information that may have been disclosed anyway in a near future, that is, upon enforcing an award that has possibly favored the funded Party.

Another practical consequence will be an increment of notorious “guerrilla tactics”, also highly debated and faced by modern arbitration. After all, Respondents are usually the ones to employ these delaying tactics. With the establishment of such an overarching duty, these Parties will be awarded with yet another reason to seek information on the investor, trying to pierce multiple levels of the corporate veil until finding the very individuals backing the investment, as to maximize their procrastinating maneuvers. The result will inevitably be a greater delay in the conclusion of arbitral proceedings.

With longer proceedings and higher expenses for the investor to fulfill a duty of disclosure, an increase in the costs of such investment is certain, as these are upscale from the outset, often reaching ten times the value of the original investment. It is market price. And the market follows a rather clear logic: increase the risks and the costs, and prices shall follow.

Another nefarious consequence of a general duty of third-party investment disclosure is that, in breaching this duty, the Party and the investor are presumed to be tainted by some irregularity, which may make life easier for a losing Respondent seeking to annul the arbitral award.

Therefore, it must be pondered: would it not be the case of rethinking this ostensible consensus that it falls upon the arbitrator to effect a preliminary analysis on whether a conflict of interest exists?

In the context of Third-Party Funding, the Party interested in an enforceable award, not subject to challenges, is precisely the investor. He is fully capable of ascertaining if an arbitrator, in the case that may be invested, has any relation to the Fund itself, its members and relevant parties. This relation may, in fact, render the investment prima facie unfeasible. If any relation exists, it would then seem that a duty of disclosure should be placed upon the Arbitral Tribunal, so that it may analyze the effects of this relation on its independence and impartiality.

Should the funded Party remain silent and the other Party come to know of some ulterior motive behind the funding (for instance, if the funder and an arbitrator are relatives), the consequences are obvious: any award issued in this proceeding would be null and void, for being rendered by one who could not be an arbitrator (art. 32(II) Brazilian Arbitration Act), which would also probably warrant grounds for non-recognition of the award in other jurisdictions, as per art. 5(1)(d) New York Convention.

However, in the absence of any such relation between investor and arbitrators, what would be the reason for disclosure? It seems to be a relevant obstacle that promotes no real protection or safeguard for any of the parties concerned.

It would thus seem that the Task Force should halt its regulatory ambitions and instead adopt a path similar to that of Brazil’s leading Arbitral Institution: the CAM-CCBC. Last year, the Center issued a Recommendation on the disclosure of Third-Party Funding, a mere recommendation that is not encompassed by the institution’s Procedural Rules. Something that does not oblige ALL Parties (and currently their lawyers) to indistinctly disclose their financial strategies; and yet, should it remain unfulfilled when ulterior motives in fact existed, it shall bolster any ostensible wrongfulness that may amount to the nullity of the arbitral award.

To regulate a market is always a complex task, with potentially terrible consequences. Almost 100 years ago, Lord Keynes stated that “[c]ontemporary experience of trade restrictions in post-war Europe offers manifold examples of ill-conceived impediments on freedom which, designed to improve the favorable balance, had in fact a contrary tendency.” May this attempt to regulate a market still in its infancy, that has promoted access to the arbitral system, not be faced with a similar fate.

[1] In this sense, see CASADO FILHO, Napoleão. Acesso à Justiça e Arbitragem: o novo Paradigma do Third Party Funding, São Paulo: Editora Saraiva, 2017 – pg. 211.

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How to Enforce an ICSID Award in Spain: The Legal Framework, the Competent Authority, and the Procedure

Fri, 2017-12-22 02:48

Danilo Ruggero Di Bella

A court of a Contracting State shall recognize an ICSID award as binding and enforce pecuniary obligations per that award within its territory as if it were a final judgment of the court in that State. The enforcement creditor is not required to obtain a declaration of enforceability (viz. the exequatur). At the same time, the interested party cannot file an appeal or seek annulment of the award outside of the ICSID self-contained mechanism.

Following the principle of lex fori regit processum, the governing law is the relevant procedural law of the State where the enforcement of an ICSID award is sought. Thus, the enforcement procedure varies from country to country.

Thus far, Spanish courts enforced only one ICSID Award.1)Victor Pey Casado and President Allende Foundation v. Republic of Chile, ICSID Case No. ARB/98/2 jQuery("#footnote_plugin_tooltip_4103_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4103_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The enforcement procedure was carried out in 2013 under the former framework. This post addresses the enforcement of an ICSID Award in Spain under the new, reformed, legal framework that encompasses the Civil Procedure Law (LEC) and the Spanish Arbitration Act (SAA).

The Current Legal Framework

Articles 3 LEC and 523 LEC, regarding the territorial scope of the procedural law2) Article 3 LEC. Territorial scope of civil procedural rules. With the sole exceptions which may be stipulated in international treaties and conventions, civil procedure taking place in Spain shall only be regulated by Spanish procedural rules. jQuery("#footnote_plugin_tooltip_4103_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4103_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and foreign enforcement titles3)Article 523 LEC. Enforceability in Spain. Law applicable to the procedure. 1. For the definitive judgements and other enforcement titles that entail enforcement in Spain, the provisions in the International Treaties and the legal provisions on international judicial co-operation shall apply. 2. In any case, the enforcement of foreign judgements and enforcement titles shall be carried out in Spain in accordance with the provisions herein, unless otherwise provided in the International Treaties in force in Spain jQuery("#footnote_plugin_tooltip_4103_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4103_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, permit the Spanish procedural rules to be adjusted to international treaties and conventions (if necessary). Thus, the ICSID Convention supplements the LEC and SAA insofar as it relates to the enforcement of an ICSID award. As a result, the Spain’s national framework is adjusted to the peculiarities of an ICSID award that has no seat, does not require any exequatur, and is the outcome of an International Organization’s autonomous legal system.

Under this framework, the enforcement creditor should file an enforcement action with the competent court or other designated authority. Such a motion for enforcement should be accompanied by a copy of the award certified by the ICSID Secretary-General.

The Competent Authority

Spain recently, and rightfully so, designated the First Instance Court as the competent authority for recognition and enforcement of awards rendered under the auspices of the ICSID.
Such choice is in line with Article 54(1) ICSID Convention as it implicitly equates ICSID awards with the national arbitral awards (instead of foreign awards rendered outside Spain per Article 46(1) SAA).

The national awards are, in turn, equated with the final judgments of the national courts: they do not require the exequatur as opposed to other types of foreign arbitral awards. Specifically, the First Instance Court enforces national arbitral awards (Article 8(4) SAA), while the Civil and Criminal Chamber of the High Court of Justice of the Region decides on the prior recognition of foreign arbitral awards (Article 8(6) SAA). In terms of territorial jurisdiction, the competent chamber will generally be the one where the enforcement debtor has his place of business or residence.
The procedural nuance of the two provisions reflects the particularity of an ICSID exequatur-free award: the interested party does not have to apply for the prior recognition before the competent Civil and Criminal Chamber of the High Court of Justice.

The First Instance Court where the national award was rendered is competent for the enforcement of an ICSID award (Article 8(4) SAA, in conjunction with Article 545(2) LEC). However, an ICSID award is essentially not a national award, nor it has a seat – being the product of a “delocalized” system. As a result, the place where the ICSID award was rendered is irrelevant for the purpose of its enforcement. The competent First Instance Court, therefore, is the one in the place where the enforcement is sought.

The Enforcement Procedure

A party seeking to enforce its ICSID award in Spain should file the enforcement action accompanied by a certified copy of the award to the First Instance Court in the place of the debtor’s assets. The seized court will automatically consider the certified copy as a valid enforcement title (Article 517 LEC).

Once the enforcement creditor files his/her enforcement action, the judge will dispatch the general order of enforcement for the sum claimed. If the enforcement creditor so requests, the amount corresponding to the new maturities of principal and interests will extend the order of enforcement (Article 578 LEC). In case the sum claimed is in a foreign currency, the judge will order enforcement to obtain both the principal and interests in that foreign currency (Article 577(1) LEC). The order will also include the procedural delay interests, as the costs and expenses of the enforcement proceedings. The judge provisionally estimates the procedural delay interests pending the enforcement (Article 576 LEC).

On the same day, or on the working day following the day of the issuance of the enforcement order, the Court Clerk will issue a decree implementing the order of enforcement (Article 551(3) LEC). The implementing order contains the specific enforcement measures, including inter alia:

  • the attachment of the enforcement debtor’s assets as detected by the enforcement creditor,
  • the further identification of debtor’s assets as detected by the Court, and
  • the request addressed to the enforcement debtor to indicate, within ten days, sufficient assets and rights to cover the amount of the outstanding enforcement, subject to a penalty for serious disobedience to the judicial authority.

The Court directly localizes the debtor’s assets through its own mechanism. This mechanism is combined with the limited and exhaustive grounds for objecting the enforcement (Articles 556 and 559 LEC). In doing so, the Court lays down the basis for an effective enforcement procedure.

State Immunity Issues

Needless to say, the possibility of punishing a losing State for serious disobedience would spark quite interesting scenarios. The enforcement debtor could commit an offense in the event it fails to cooperate with the authority in charge of the enforcement by delaying, hindering or failing to provide the Court Clerk with a list of its assets necessary for the recovery of the sum claimed and the relevant interests (Article 258 of the Spanish Criminal Code).

At the enforcement stage, the losing State may invoke immunity exceptions to shield its assets. Article 55 of the ICSID Convention establishes that “nothing in Article 54 shall not be interpreted as derogating from the laws in force in any Contracting State relating to immunity of that State or of any foreign State from execution.” Nevertheless, on this point, Spanish national law seems to root for the enforcement creditor by providing him/her with a strong weapon enshrined in Article 2(2) SAA:

“In international arbitration, when one of the parties is a State or a State-controlled company, organization or enterprise, that party may not invoke prerogatives of its own law to circumvent obligations stemming from the arbitration agreement.”

The cited provision can be construed as a compulsory immunity waiver, barring a State from relying on its immunity, since it may not invoke the prerogatives of its own law. Undoubtedly, among those prerogatives, is State’s immunity before a foreign court. Moreover, since the pecuniary obligations resulting from an ICSID award are inherent to the obligations stemming from the arbitration agreement, this mandatory immunity waiver before the First Instance Court may cover the assistance provided by a Spanish judge to the arbitration both in the pre-award as well as post-award phase. Such assistance encompasses the court’s support for taking evidence, adopting interim measures, and enforcing such awards. Arguably, it is not coincidental that Article 8 SAA enlists, one after the other, all these judicial ancillary functions as if there was no difference in terms of immunity hurdles. In doing so, Article 8 SAA seems to be overturning the approach that no waiver of immunity could be extended to enforcement measures.

The Organic Law on Privileges and Immunities of Foreign States in its Article 16(1)(d) further backs up this interpretation: a foreign State that consented to an arbitration with a national of another State shall not assert immunity before a Spanish court in proceedings concerning “the recognition of the effects of the foreign award.”

Conclusion

Although just one ICSID Award has been enforced in Spain thus far, clearly, this jurisdiction is bound to become an “awards enforcing destination” thanks to this friendly-arbitration platform consisting of a legal framework fully complying with the ICSID Convention’s requirements under Article 54(1)-(2), an effective enforcement procedure and confined state immunity exceptions.

References   [ + ]

1. ↑ Victor Pey Casado and President Allende Foundation v. Republic of Chile, ICSID Case No. ARB/98/2 2. ↑ Article 3 LEC. Territorial scope of civil procedural rules. With the sole exceptions which may be stipulated in international treaties and conventions, civil procedure taking place in Spain shall only be regulated by Spanish procedural rules. 3. ↑ Article 523 LEC. Enforceability in Spain. Law applicable to the procedure. 1. For the definitive judgements and other enforcement titles that entail enforcement in Spain, the provisions in the International Treaties and the legal provisions on international judicial co-operation shall apply. 2. In any case, the enforcement of foreign judgements and enforcement titles shall be carried out in Spain in accordance with the provisions herein, unless otherwise provided in the International Treaties in force in Spain 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 Rule of Law
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Enforcement of Annulled Awards: A Restatement for the New York Convention?

Thu, 2017-12-21 02:00

Marike R. P. Paulsson

On the 24th of November, the Supreme Court of The Netherlands issued a judgment pertaining to the request for enforcement of an award annulled at the seat, Russia. The Supreme Court applied Article V(1)(e) of the New York Convention (hereinafter the “NYC”) and refused to enforce the award in favor of Nikolay Viktorovich Maximov for an amount of USD 153 million against OJSC Novolipetsky Metallurgichesky Kombinat, one of Russia’s largest steel companies.

The request of enforcement was denied by the District Court in Amsterdam and that refusal to enforce was confirmed by the Court of Appeal of Amsterdam.

The Supreme Court confirmed: ‘a court may refuse to enforce an award if that award had been set aside by a competent authority in the country where the award was rendered’ [emphasis added] (Article V(1)(e) of the NYC). Refusing to enforce an award when it is set aside is the rule of thumb and is in the spirit of ex nihilo nil fit (“out of nothing follows nothing”). I would call this ‘traditional’ because since the drafting of Article V(1) in 1958, courts and commentators have created various theories that allow for the enforcement of annulled awards. Thus the question as to whether an annulled award can be enforced elsewhere can no longer solely be addressed under the NYC: one must look locally. Article V(1)(e) has become somewhat of a hollow phrase, perhaps much to the chagrin of those who drafted it, if they would be here to witness the demise of this provision.

The first shockwave was in the 1990s in various parts of the world with Hilmarton in France and Chromalloy and Baker Marine in the US. 1)Hilmarton v. Omnium de Traitement et de Valorisation (OTV) (Supreme Court 1994), in Yearbook Commercial Arbitration XX (1995) (France no. 23), at 663-665, Chromalloy Aeroservices Inc. v. The Arab Republic of Egypt (District Court of Columbia 1996), in Yearbook Commercial Arbitration XXII (1997) (United States no. 230), at 1001-1012, Baker Marine (Nig) Limited v Chevron (Nig) Limited, Chevron Corp., Inc. and others v Danos and Curole Marine Contractors, Inc. (2nd Cir. 1999), in Yearbook Commercial Arbitration XXIV (1999) (United States no. 288), at 909-914. jQuery("#footnote_plugin_tooltip_8877_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8877_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); And then the noise died. The rule of thumb became predominantly Article V(1)(e) of the NYC in its traditional sense: an annulled award cannot be enforced. The debate had lost interest and relevance.

The second shockwave came in 2010, with the Netherlands creating its version of the enforcement of annulled awards in Yukos v. Rosneft.2)Yukos Capital s.a.r.l. (Luxembourg) v. OAO Rosneft (Russian Federation) (Court of Appeal 2009), in Yearbook Commercial Arbitration XXXIV (Netherlands no. 31) at 703-714. jQuery("#footnote_plugin_tooltip_8877_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8877_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The US, in its Second Circuit, relied on Termo Rio to enforce an annulled award in Pemex.3) TermoRio S.A. E.S.P. (Columbia), LeaseCo Group and other v. Electrantra S.P. (Columbia), et al. (District for Columbia 2007), in Yearbook Commercial Arbitration XXXIII (2008) (United States no. 621), at 955-969, Corporacion Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v. PEMEX – Exploracion y Produccion (Southern District for New York 2013), in Yearbook Commercial Arbitration XXXVIII (2013), at 537-541. jQuery("#footnote_plugin_tooltip_8877_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8877_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Both engrained in ideas of public policy.

The Dutch Supreme Court on the Enforcement of Annulled Awards

In the case at hand, the setting aside in Russia was based on the following grounds and was found relevant by the Dutch Supreme Court:

  1. The experts assisting the Russian Federation in the arbitration procedure worked at the same Institute as one of the arbitrators. Moreover, one of the experts was the Dean of the Institute and thus fulfilled a higher position than the arbitrator in question.
  2. The tribunal failed to disclose the above.
  3. The Russian court held that the subject matter was not arbitrable.
  4. The method used by the tribunal to assess the validity of the agreement violates Russian mandatory law.

The Dutch Supreme Court held that the annulment of the award stopped enforcement.

The annulment grounds listed above could be considered similar to Article V(1)(b), V(2)(a) of the NYC (due process violation and arbitrability) and the latter could be similar to Article V(2)(b) of the NYC (public policy) but perhaps also Article V(1)(c) if one could argue it as part of the mandate. The first pertains to the impartiality of the arbitral tribunal. A ground that is often a basis for a setting aside; under many national laws it falls under the due process umbrella.

The Yukos v. Russia case that has made headlines around the world where the tribunal had ordered Russia to pay USD 50 billion, was different in that the award was annulled based on the lack of a valid arbitration agreement (provisional application of the Energy Charter Treaty), an annulment ground quite different from annulment grounds based on due process and public policy. Verifying whether there was a valid arbitration agreement is taken seriously by courts as they are the guardians of a party’s fundamental right to access to courts. It must be clear that parties – on the basis of freedom of contract – gave up that fundamental right.

The question is: if an annulment is based on something that falls under any notion of public policy or due process (arbitrability, lack of impartiality, etc) is this subject to a local standard (the so-called Local Standard Annulment (“LSA”))? If so, how would that impact the rule of thumb under Article V(1)(e) of the NYC?

The Supreme Court – in line with most lower court judgments in The Netherlands – held that the award could not be enforced because the award had been set aside and thus applied Article V(1)(e). However, it did reiterate the test developed by the Court of Appeal in the 2010 Yukos case: if a court cannot recognize a foreign judgment annulling an award because that recognition would violate Dutch public policy, it will enforce the award.4)See for an analysis of the case, M.Paulsson, The 1958 New York Convention in Action (2016 Kluwer), pp. 210-211. jQuery("#footnote_plugin_tooltip_8877_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8877_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Its result is similar to the doctrine applied by the US courts – Termo Rio and Pemex – which also finds it origin in public policy.

Remarkably, the court also analyzed another doctrine: that of the Local Standard Annulment (LSA) v. the International Standard Annulment (ISA) theory and the question of discretionary power under Article V(1) of the NYC. It holds that an annulment of a foreign arbitral award does not per se stop a court from allowing the enforcement of such annulled award because of the discretionary power allocated to the court on the basis of the word ‘may’ in Article V(1) of the NYC, albeit in exceptional cases only. The court states that one of those exceptional cases present itself if the annulment judgment is based on grounds that do not align with Article V(1)(a-d) of the NYC or if the annulment grounds are not acceptable on the basis of internationally acceptable standards (the latter have been referred to as International Standard Annulments (“ISAs”))) The court in effect reproduces Article IX of the 1961 European Convention, stating that any grounds similar to Articles V(1)(a-d) of the NYC are proper annulment grounds. Article IX of the European Convention provides that a court will refuse to enforce an annulled award if that annulment was based on Article V(1)(a-d) of the NYC. This doctrine is referred to as the theory of the Local Standard Annulment and it has been codified in the 1961 European Convention, Article IX.

What is confusing and troubling is that the annulment grounds in the case at hand seem not to align with Article V(1)(a-d) of the NYC nor do all of them they seem to be ISAs (if one is to understand that an ISA may not be based on any idea of public policy). Yet, the court applied Article V(1)(e) of the NYC in its traditional sense. The decision demonstrates again that when courts develop, adopt and apply theories such as the above, one is no longer able to predict the outcome under Article V(1)(e) of the NYC.

This decision, along with the decisions of the US 2nd Circuit (Termo Rio and Pemex) with respect to any questions under V(1)(e) of the NYC ought to be a source of concern: first, because it demonstrates the restraints of the NYC that is now 59 years old and second, it reveals the practice of judicial rewriting of the NYC. No more is left of its provisions than a mere framework that will be read differently by courts around the world and notably by courts in important trading nations. It is time to consider the cracks and revisit the idea of the New York Convention now that it is about to celebrate its 60th anniversary. The NYC has become a box of chocolates: it doesn’t matter anymore what the text of the treaty says: what matters is the reading glasses used by every single court in the world. ‘If it ain’t broken, don’t fix it?’ At the 50th Anniversary that was the adagio but one would be dishonest to say that the cracks have not become visible this past decade. If not a new treaty, perhaps one single set of reading glasses designed by a reputable organization with a mandate based on the treaty’s Final Act of 1958 could be gifted to the treaty at the occasion of its 60th Anniversary.

References   [ + ]

1. ↑ Hilmarton v. Omnium de Traitement et de Valorisation (OTV) (Supreme Court 1994), in Yearbook Commercial Arbitration XX (1995) (France no. 23), at 663-665, Chromalloy Aeroservices Inc. v. The Arab Republic of Egypt (District Court of Columbia 1996), in Yearbook Commercial Arbitration XXII (1997) (United States no. 230), at 1001-1012, Baker Marine (Nig) Limited v Chevron (Nig) Limited, Chevron Corp., Inc. and others v Danos and Curole Marine Contractors, Inc. (2nd Cir. 1999), in Yearbook Commercial Arbitration XXIV (1999) (United States no. 288), at 909-914. 2. ↑ Yukos Capital s.a.r.l. (Luxembourg) v. OAO Rosneft (Russian Federation) (Court of Appeal 2009), in Yearbook Commercial Arbitration XXXIV (Netherlands no. 31) at 703-714. 3. ↑ TermoRio S.A. E.S.P. (Columbia), LeaseCo Group and other v. Electrantra S.P. (Columbia), et al. (District for Columbia 2007), in Yearbook Commercial Arbitration XXXIII (2008) (United States no. 621), at 955-969, Corporacion Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v. PEMEX – Exploracion y Produccion (Southern District for New York 2013), in Yearbook Commercial Arbitration XXXVIII (2013), at 537-541. 4. ↑ See for an analysis of the case, M.Paulsson, The 1958 New York Convention in Action (2016 Kluwer), pp. 210-211. 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 Rule of Law
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Has the Public Policy Exception Returned to Haunt Indian Courts?

Wed, 2017-12-20 06:00

Wasiq Abass Dar

On 1 November 2017, a division bench of the Supreme Court of India (hereinafter SCI) referred the matter between Venture Global Engineering LLC and Tech Mahindra Ltd. to a larger bench, in view of the diverging opinions emerging from the division bench. In substance, the SCI was looking at the legality of the order of the High Court, which reversed the Trial Court’s decision to set-aside the award on grounds of violation of public policy of India.

 

Facts:

Venture Global Engineering LLC (hereinafter VGE), a company incorporated under the U.S. laws; and Tech Mahindra Ltd., formerly known as Satyam Computers Pvt. Ltd (hereinafter Satyam), an Indian Company, entered into a joint venture and shareholder agreement in Oct 1999. Section 8 of the Agreement defined ‘events of default’, and the rights and obligations of parties upon the occurrence of the ‘event of default’. One of the clauses in Section 8 of the Agreement provided that, within 30 days after becoming aware of the occurrence of the ‘event of default’, the non-defaulting party shall have the option to either purchase the defaulting shareholder’s shares at the book value or cause the immediate dissolution and liquidation of the joint venture company.

 

Between March 2003 and May 2004, 21 members of the Group of Companies, of which the VGE was a member, filed for bankruptcy and were declared bankrupt. Bankruptcy, as per Section 8 of the Agreement, was categorized as ‘event of default’. Consequently, disputes arose between the parties, and Satyam invoked the arbitration clause that provided for LCIA arbitration, with laws of State Michigan, United States, as the governing law of the agreement. The clause also provided for compliance with the relevant laws of India.

 

The award was delivered in April 2006, where the arbitrator rejected claims of VGE, and inter alia, directed VGE to sell their 50% shares to Satyam at book value. This was followed by litigations both in the U.S. and India.

 

VGE filed a civil suit in India before the City Civil Court in Secunderabad – where it sought a “declaration that the award is illegal and without jurisdiction”, and “a decree for granting of permanent injunction” against Satyam from getting the award enforced. The court granted an ex parte injunction order, restraining Satyam from enforcing the award. Satyam challenged the order before the High Court of Andhra Pradesh, where the said appeal was allowed, and the City Civil Court was directed to adjudicate afresh on merits.

 

Satyam’s prayer before the City Civil Court for rejection of the plaint and dismissal of the suit was accepted. VGE’s appeal against the order before the High Court was dismissed. VGE approached the SCI, which allowed the appeal (Venture-I); directing, inter alia, that VGE was entitled to challenge the award before Indian Courts, as Part I of the Arbitration and Conciliation Act of India (hereinafter ACA) was applicable even to a foreign award according to the law laid down in Bhatia International’s case. The SCI, without expressing any opinion on the merits of the claims made by parties, directed that “the Trial Court was at liberty to transfer the case to the competent court to decide the case…”. Accordingly, setting-aside proceedings under Section 34 of the ACA were initiated before the Court of 2nd Additional Chief Judge (hereafter Trial Court), Hyderabad, in 2008.

 

Meanwhile, in January 2009, B. Ramalinga Raju, who was the Chairman and Founder of Satyam, disclosed that balance sheets of Satyam had been manipulated to present inflated profits. Upon this disclosure, VGE filed an application before the court to present additional facts and argued for setting-aside of the award on an additional ground of being against the public policy of India. The Trial Court allowed VGE’s application. Satyam challenged the order before the High Court, arguing that application for setting-aside was not filed within the prescribed limitation period under the Indian law, and new ground of challenging the award could not be invoked after the expiry of the limitation period. The High Court allowed the application of Satyam, which led to another round of litigation before the SCI. VGE challenged the decision of the High Court, and the SCI in Venture II allowed the appeal – restoring Trial Court’s order. The SCI emphasized that the facts revealed after the making of the award are relevant, in order to establish whether the making of the award has been induced by fraud.

 

Following the Venture II SCI judgment, the Trial Court allowed the application of VGE, and set-aside the award. The Trial Court reasoned that the transfer of 50% shares of the Joint Venture Company to Satyam at book value, as directed in the award, as against fair value, violated the provisions of the Foreign Exchange Management Act, 1999 (hereinafter FEMA) – hence against the public policy of India. It also held that the facts revealed by Ramalinga Raju constitute fraud and misrepresentation on part of Satyam – having a causative link with the facts that formed the basis of the award, therefore against the public policy of India. Satyam challenged the award before the High Court. Allowing the appeal, the High Court reversed the Trial Court’s decision. VGE, aggrieved by the decision of the High Court, filed an appeal before the SCI.

 

Decision:

Justice Sapre observed that the Trial Court correctly found the direction to transfer shares at book value instead of fair value as a violation of FEMA – hence against public policy. He largely relied on the definition of expression ‘public policy’ discussed in Associate Builders’ case. It was held that violating FEMA provisions would amount to patent illegality and, thus, public policy of India was violated. Taking a cue from the findings of the SCI in Venture I and Venture II, he observed that suppression of material facts on part of Satyam clearly has a causative link inter se the companies involved. He further reasoned that had the facts been brought before the shareholder of the joint venture, VGE would have been able to get first right to terminate the agreement and seek relief against Satyam – as a breach on Satyam’s part happened prior to VGE’s bankruptcy. Also, as suppression of material fact continued during the arbitration proceedings, the proceedings and the subsequent passing of the award cannot be said to have held fairly or reasonably. Finding that the award was tainted by fraud committed by Satyam, it was held to be against public policy of India

 

Justice Chelameswar, had a different opinion. In substance, he observed that the Trial Court had failed to provide reasons as to how the award, which directed the transfer of shares on book value instead of fair value, would violate the public policy of India. Criticizing the Trial Court, he observed that in absence of any basis in facts, or identification of the provision of law with which the award is in conflict with, the conclusions drawn cannot legally be sustained. On the issue of the alleged fraud committed by Satyam and its influence on the award, Justice Chelameswar sided with the finding of the High Court that fraud was not proved before any court. He observed that the Trial Court’s theory that concealment and misrepresentation of facts by Satyam establish a causative link, making the award opposed to the public policy of India, was also not supported by cogent reasons. He stressed that in Venture II, the SCI emphasized only upon the relevance of pleading those ‘concealed facts’, and did not hold that the ‘concealed facts’ constituted material facts rendering the award liable to be set-aside. He supported the decision of the High Court, that the appeal be dismissed, and the award restored.

 

Comment:

Venture III, is a reminder that dealing with the public policy exception continues to be a struggle for the Indian courts. Although the SCI produced diverging opinions in the case at hand, as far as the making of the award being induced by fraud is concerned, one cannot ignore to notice that both opinions agree upon the legal position that if the causative link is proved between the frauds committed and the award rendered, then such an award would be in violation of public policy of India. Justice Sapre’s observation that violation of FEMA is contrary to public policy of India takes us back to the same debate as to whether patent illegality, on the face of it, should be taken as violation of public policy of India. It is pertinent to note that the SCI on multiple occasions, for example in Associate Builders, Mc Dermott International, Centrotrade Minerals, J.G. Engineers, has stressed that patent illegality, if of trivial nature, should not be held against public policy. Patent illegality must go to the very root of the matter. The amended version of ACA, in Explanation (2A) of Section 34(2)(b)(ii), also seems to support this proposition. Now that the matter has been referred to a larger bench, it will be interesting to see how the legal issues will finally be settled, and how the decision will shape the approach of Indian courts as far interpretation of the public policy exception is concerned.

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Recent Development of Ad hoc Arbitration in China: SPC Guidance and Hengqin Rules

Mon, 2017-12-18 17:57

Wei Sun

On 30 December 2016, the Supreme People’s Court of China (“SPC”) released Opinion on Providing Judicial Protection for the Development of the Pilot Free-Trade Zones (“Opinion”), which was regarded as allowing ad hoc arbitration in China. On 23 March 2017, the Management Committee of Hengqin New Zone and Zhuhai Arbitration Commission (“ZAC”) jointly published the Ad hoc Arbitration Rules of (Guangdong) Pilot Free Trade Zone Hengqin Area of Zhuhai (“Rules”). As the first ad hoc arbitration rules in China, the Rules will to some extent implement the Opinion. However, a lot has to be done before ad hoc arbitration can truly become a practical dispute resolution method in China.

Overview of the Opinion

Article 9.3 of the Opinion reads,

“In case companies registered within the Pilot Free-Trade Zones agree to arbitration in certain locations in mainland China, with certain arbitration rules, and by certain persons, such arbitration agreement may be recognized as valid. In case a people’s court finds such arbitration agreement to be invalid, it shall report the matter to a higher court for review. In case the higher court agrees with the lower court, it shall further report the matter to the SPC and shall only decide on the matter upon the SPC’s reply.”


There are some issues arising from this Opinion:

1. Issue of authority. According to the PRC Law on Legislation, litigation and arbitration mechanisms can only be set forth in laws. In other words, only the legislative branch (i.e. the National People’s Congress or its standing committee) has the power to create or recognize a new form of arbitration in China. Without authorization from the legislative branch, the Opinion appears to be flawed from the start.

2. Limited ad hoc arbitration. Broadly speaking, ad hoc arbitration means arbitration conducted totally in accordance with parties’ agreements, which does not have to follow certain arbitration rules. The Opinion allows arbitration in certain locations, with certain arbitration rules and by certain persons, in which certain arbitration rules reflect that the SPC only allows ad hoc arbitration to be conducted under arbitration rules. This is in fact limited ad hoc arbitration.

3. Obstacles to implementation. The current legal framework and unique Chinese legal environment pose plenty of barriers for the implementation of the Opinion. The obstacles include:

a) The lack of local ad hoc arbitration rules. Although there are several ad hoc arbitration rules available, they may not be fit for arbitrations conducted in China. For example, Article 6(2) of the UNCITRAL Arbitration Rules states any party may request the Secretary-General of the Permanent Court of Arbitration to designate the appointing authority. Unlike international arbitration institutions which are willing and have specific rules to act as an appointing authority, local Chinese institutions such as CIETAC and BAC are not able to play such role.

b) Traditional reliance on institutions and lack of trust in arbitrators. Due to the more prominent role of the government in Chinese legal culture, Chinese parties and even law practitioners tend to rely more on court institutions rather than individuals. Choosing institutional arbitration over litigation is already a leap of faith because arbitration institutions are, in the eyes of many people, not as official as courts.

c) Lack of arbitrators in PRC with experience in ad-hoc arbitration: In ad hoc arbitration, arbitrators have to adeptly predict and deal with important procedural issues and ensure the quality of the substantive award, with no or very limited institutional supervision and support. Even veteran institutional arbitrators with substantial experience will need special training to be competent. As China never had a tradition for ad hoc arbitration, it is difficult to imagine there are many arbitrators in PRC up to this job.

d) Personal risk for ad hoc arbitrators. In recent years, there have been a few widely reported cases where judges are threatened, insulted, or even killed by discontent parties. In ad hoc arbitration, since the tribunal cannot “hide” behind an institution but has to directly deal with the parties in both procedural and substantive matters, the personal risk is also a concern.

e) The need for reform of PRC arbitration laws: The current Chinese arbitration legal framework does not permit ad hoc arbitration, so the procedural rules set forth in the PRC Arbitration Law cannot accommodate the special issues of ad hoc arbitration. This is not limited to the legitimacy issue discussed above.

Highlights of the Rules

The Rules went into force on 15 April 2017. The Rules apply when two companies registered in any free-trade zones agree to arbitration under the Rules. There are some highlights of the Rules:

1. Competence-competence: According to Article 9.4, the arbitral tribunal is capable of deciding on its jurisdiction in the case. Before the Rules, it was always the arbitration commission rather than the tribunal that was to decide on jurisdictional issues. So, the Rules actually established the real competence-competence of the arbitral tribunal. Despite this, the fact that the court can to a large extent intervene still remains unchanged.

2. Appointment and replacement of arbitrators: The Rules provide that, the parties may directly appoint arbitrators, or agree on a method for appointing arbitrators, or agree on an appointing authority. The default appointing authority is ZAC. Similarly, the Rules provide that the appointing authority has the power to decide on the withdrawal and replacement of arbitrators.

3. Qualifications of arbitrators: The Rules require ad hoc arbitrators to meet the same criteria for institutional arbitrators set forth in the PRC Arbitration Law. However, Article 21.3 also states that, in case that ZAC acts as the appointing authority, it will appoint arbitrators in accordance with its list of arbitrators. Due to the local nature of ZAC, the flexibility of parties to appoint arbitrators who do not meet the criteria for institutional arbitrators in China would be greatly discounted by this limitation.

4. Determination of fees and costs: In this regard, the Rules are nearly identical to the UNCITRAL Rules. The fees of arbitration are first determined through agreement between the parties and the tribunal. If they cannot agree on fees, the appointing authority decides. On the other hand, the Rules are less clear in the actual procedures to determine arbitration fees.

5. Tribunal secretarial support: The Rules provide that, with the parties’ consent, the arbitral tribunal may use third party services including financial management, tribunal secretaries, and lease of venues.

6. Provisional measures: Article 13 of the Rules allows the parties to apply for provisional measures directly from the court or through ZAC. However, since the PRC Arbitration Law does not permit ad hoc arbitration, the rules about provisional measures in the PRC Arbitration Law can only apply to institutional arbitration. The PRC Civil Procedure Law and the Opinion do not include such rules either. Therefore, it is doubtful whether provisional measures are legally available for ad hoc arbitration.

7. ZAC’s confirmation of awards: The Rules provide for ZAC to confirm an ad hoc award. After an award is made by the ad hoc tribunal, each party may apply to ZAC for confirmation of the award. Once ZAC decides to confirm it, the award will be deemed an institutional arbitral award made by ZAC. As an attempt to reduce the risk of non-enforcement of ad hoc awards, its actual effect remains to be seen.

Suggestions

1. Legitimacy. The PRC Arbitration Law needs to be amended to resolve the legitimacy issue of ad hoc arbitration. If not, ad hoc arbitration in PRC cannot take place, let alone prosper.

2. Detailed procedural rules in PRC Arbitration Law. For example, the court in the seat of arbitration should assist in the appointment of ad hoc arbitrators, as well as the revocation of mandate of arbitrators. These mechanisms are available in arbitration laws of other jurisdictions, but are lacking in China. Therefore, it is suggested that the National People’s Congress and SPC conduct a thorough research on ad hoc arbitration, and then introduce a comprehensive and detailed legal framework. One or two local ad hoc arbitration rules are far from enough to motivate ad hoc arbitration.

3. More ad hoc arbitration rules. The Rules are the first and only ad hoc arbitration rules currently in China, and their implementation largely rely on the support of ZAC. To stimulate healthy competition and accumulate experiences, other arbitration institutions should also be motivated to promulgate their own ad hoc arbitration rules.

4. Training of professionals. Besides experienced ad hoc arbitrators, professional counsels are also likely to conduct ad hoc arbitration. They can help the client conclude feasible ad hoc arbitration agreements, and avoid unnecessary delays in arbitration proceedings. When legal assistance of ad hoc arbitration has been established by law, there is also need for judges who understand and grasp the practice of ad hoc arbitration. The training of these professionals demands an urgent solution.

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The DIFC Courts as a Conduit: Saving Grace or Just a Lifeline?

Sun, 2017-12-17 16:02

Gordon Blanke

A recent decision of the Dubai-DIFC Judicial Tribunal (the “JT”) (see Cassation No. 6/2017 (JT) – Assas Investments Limited v. Fius Capital Limited) – even though not quite a saving grace – appears to throw a lifeline to the DIFC Courts in their role as a conduit jurisdiction. Regular readers of this Blog will recall that the JT was established by Decree (19) of 2016 by the Ruler of Dubai in an attempt to deal with conflicts of jurisdiction between the onshore Dubai and the offshore Dubai International Financial Centre (DIFC) Courts. Such conflicts are prone to arise where an award creditor seeks the enforcement of an award before the DIFC Courts whilst the award debtor challenges the same award before the onshore Dubai Courts pursuant to Art. 216 of the UAE Arbitration Chapter.

By way of reminder, the DIFC Courts have extended their jurisdiction on the basis of Art. 42 of the DIFC Arbitration Law to the recognition and enforcement of both domestic and foreign arbitral awards – even absent any assets of the award debtor in the DIFC – for onward execution before the onshore Dubai Courts, thus operating as a conduit of enforcement between the offshore DIFC and onshore Dubai. The DIFC Courts’ role as a conduit is in particular facilitated by the operation of Art. 7 of the Judicial Authority Law as amended, which establishes a regime of mutual recognition between the offshore DIFC and the onshore Dubai Courts and which prohibits the review on the merits by either court of the respectively other court’s legal instruments. The Dubai Courts have not taken well to the DIFC’s Courts role as a conduit and have declared the DIFC’s conduit jurisdiction null and void at first instance, setting aside the DIFC Courts’ findings in the Banyan Tree line of cases, which are widely recognised as the locus classicus of the DIFC Courts’ role as a conduit for the enforcement of domestic arbitral awards (see Commercial Case No. 1619/2016, ruling of the Dubai Court of First Instance of 15 February 2017 and my previous reporting here, http://arbitrationblog.kluwerarbitration.com/2017/06/11/dubai-difc-judicial-committee-difc-conduit-jurisdiction-sequel-four-parts-dubai-court-first-instance-attack-part-3/). The JT, too, has pronounced itself against the proper jurisdiction of the DIFC Courts in matters of onshore enforcement on the mistaken basis of the onshore Dubai Courts’ “general jurisdiction” (see my previous reporting here, http://arbitrationblog.kluwerarbitration.com/2017/10/16/dubai-difc-judicial-committee-difc-conduit-jurisdiction-sequel-four-parts-game-part-4/). This approach ignores the proper scope of Art. 42 of the DIFC Arbitration Law and the fact that constitutionally speaking, both the onshore Dubai and the offshore DIFC Courts are UAE courts at the same level of hierarchy.

The JT’s most recent decision in Cassation No. 6/2017 brings some welcome clarification to the subject by emphasising that the question of the proper competence of the UAE courts – whether onshore or offshore – is one of the location of the award debtor’s assets: To the extent that an award debtor has assets in the DIFC, the award creditor may seek enforcement and execution of an award there. The JT equally clarifies that an award creditor may commence parallel enforcement and execution actions against assets of the same award debtor in relation to the same award in both the DIFC and in onshore Dubai provided the presence of assets both on- and offshore. More specifically, the JT rejected the proposition that there was a conflict of jurisdiction between the onshore Dubai and the offshore DIFC Courts in this respect.

By way of background, Assas Investment Limited (“Assas”), a Dubai-based investment company, applied to the JT for a decision as to which court – the onshore Dubai or the offshore DIFC Courts – was properly competent to hear an application for enforcement of a DIFC-LCIA award rendered in favour of Fius Capital Limited (“Fius”), a company incorporated in the DIFC and regulated by the DIFC Financial Services Authority (DFSA), for Assas’s failure to pay the balance of an outstanding debt advisory fee to Fius. This followed an unsuccessful challenge of the award before the Dubai Courts, where execution proceedings are presently pending. Assas then applied to the JT out of a concern of multiplicity of proceedings on the same subject matter between the same parties, two parallel execution proceedings having been initiated by Fius, one before the onshore Dubai Courts and the other one before the offshore DIFC Courts. Pursuant to Assas, this may result in double recovery and hence unjust enrichment on part of Fius or in inconsistent outcomes before the onshore and offshore courts.

The JT rejected Assas’s arguments as unmeritorious. Pursuant to the JT:

“9. […] Any award creditor is entitled to pursue the award debtor for execution on the award in whatever jurisdiction that the award is recognized for enforcement. Presumably Dubai Courts [sic] accepted the DIFC-LCIA Arbitration Centre Award for execution pursuant to Article 7(2) of the Judicial Authority Law (Dubai Law no. 12 of 2004 as amended by Law No., 16 of 2011). If so, that is simply the law taking its natural course.

10. Pursuing execution proceedings in respect of an arbitration award in a jurisdiction which recognizes that Award does not mean that the award creditor is not permitted also to commence execution proceedings in the jurisdiction in the seat of arbitration. This is the same process as for court judgments whereby award creditors are not restricted in their execution process to a single jurisdiction but can at any time take the award to any other jurisdiction that recognizes the award, and then proceed to execute on assets of the award debtor in that jurisdiction.

11. Of course, the award creditor cannot carry out execution proceedings which will result in the creditor being able to recover more than 100% of the sum due under the relevant award, but the execution proceedings in force in various jurisdictions will keep a careful account of:

(a) The amount due to the award creditor; and

(b) The amount realized on the execution.

The award debtor will also be made aware of these figures, and can inform each enforcing court of the amount paid under the Award at the time of the execution so that the enforcing court does not overpay the creditor.

12. This is not a question of conflict of jurisdiction because each set of execution proceedings is carried out in respect of different assets. The award (unless it is set aside […]) will have equal force in all other states where it is recognized as in the seat of the arbitration.

13. It is indisputable that arbitration awards from the DIFC will be recognized in mainland Dubai. There is simply no reason in principle or in law why multiplicity of execution proceedings cannot proceed simultaneously and/or cumulatively.” (see Cassation No. 6/2017 (JT), paras 9-13)

The bottomline is that pursuant to the JT’s decision in Cassation No. 6/2017, enforcement and execution of an arbitral award go hand in hand and require the presence of an award debtor’s assets in the chosen enforcement jurisdiction. This questions the proper operation of Art. 7(2) of the Judicial Authority Law as amended to the extent that it allows an award creditor to apply directly to the onshore Dubai Court execution judge for execution of an award ratified by the DIFC Courts (in a situation where the award debtor does not have any assets offshore). The JT’s decision – albeit slightly confusing on the subject – appears to insist that execution of an award in onshore Dubai will ultimately depend upon the proper recognition of that same award by the onshore Dubai Courts and thus require a separate recognition and enforcement process in onshore Dubai. That said, the JT appears to recognise at the same time the “natural course” of Art. 7(2) of the Judicial Authority Law as amended, pursuant to which the onshore Dubai Courts may accept a DIFC-LCIA ratified award for execution (without a separate ratification process). It remains to be seen whether this requires the presence of any of the award debtor’s assets in offshore DIFC. If not, then the DIFC’s role as a conduit appears to stand unaffected and as such confirmed (at least in relation to the recognition and enforcement of domestic awards).

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Korean Government’s Vigorous Move to Nurture Arbitration “Industry”

Sat, 2017-12-16 18:58

Hongjoong (Paul) Kim and Sejin Kim

Bae, Kim & Lee LLC

Arbitration Industry Promotion Act of Korea

In South Korea, the Arbitration Industry Promotion Act (“Promotion Act”), which was enacted on 27 December 2016, finally took effect on 28 August 2017. The purpose of this legislation is to promote arbitral procedures within Korea by expanding required infrastructures such as dispute resolution facilities, arbitration professionals, arbitration system, etc. and to ultimately develop Korea as the “hub” of international arbitration. (Promotion Act, Article 1) To this end, the Promotion Act focuses on “arbitration industry” rather than “arbitration” itself. The Promotion Act defines the arbitration industry as “various industries related to dispute resolution facilities, services, etc. required to attract arbitration cases and conduct arbitral proceedings.”(Promotion Act, Article 2(2)) A similar language is found in the International Conference Industry Promotion Act, which defines the international conference industry to mean “industry related to international conference facilities, services, etc. necessary to attract and hold international conferences.” Stated otherwise, the Promotion Act intends to maximize certain economic benefits to be collaterally derived from arbitral proceedings conducted within Korea.

Policy Consideration behind the Promotion Act

The industrial aspect of arbitration is well illustrated by Hong Kong’s experience. Recognizing international arbitration as a service sector generating national wealth, Hong Kong has actively provided legislative and financial supports to nurture arbitration “industry” in the past decade. As a result, for the first time in Asia, it succeeded in hosting the Regional Office of ICC Arbitration Court in September 2009. Such efforts did lead to the revitalization of other industry sectors such as aviation and tourism.

Indeed, if a certain city or country is designated as an arbitration seat or venue, many practitioners, law firms, and parties to international disputes (including various interested parties) from all around the world travel to that place and often stay for a long period of time for hearings. This in-bound flow of resources has also prompted an increasing number of law firms to newly open or expand their local branches in cities that are frequently designated as arbitration venues like Hong Kong and Singapore. Such large-scale residence of foreign talent has proven to greatly contribute to the growth of related service industry. The Promotion Act envisions similar collateral benefits experienced by these countries.


Activities Envisioned in the Promotion Act

In this connection, the Promotion Act gives the Korean Ministry of Justice (a competent authority that principally enforces the Act) the authority and responsibility to play an active role in promoting the arbitration industry. Specifically, the Promotion Act requires the Minister of Justice to establish and implement a basic plan for promoting the arbitration industry every five years.(Promotion Act, Article 3) Furthermore, the Minister should establish a plan for the overall development of the arbitration industry by nurturing arbitration practice and culture in Korea, and training professionals with relevant expertise, etc.(Promotion Act, Article 3) The Minister may also request cooperation from the head of a local government for the purpose of achieving the basic plan. However, arbitration institutions, including the Korean Commercial Arbitration Board (“KCAB”), would not be included in the plan, because the Ministry of Justice would serve only as a control tower in preparing the plan; these institutions, therefore, would independently operate outside the government’s influence. Notably, the Korean Arbitration Act (“Arbitration Act”) has already allowed the government to financially support all or part of the expenses required by arbitration institutions in Korea.1)Arbitration Act, Article 40: “In order to ensure impartial and rapid settlement of domestic or international commercial disputes and to establish the order in international transactions pursuant to this Act, the Government may fully or partially subsidize an incorporated association designated by the Minister of Trade, Industry and Energy as one that conducts commercial arbitration for necessary expenses”. jQuery("#footnote_plugin_tooltip_8519_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8519_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This, in fact, has enabled the KCAB, which is the only institution in Korea that autonomously publishes its own domestic/international arbitration rules, to receive government funding. However, such financial support for arbitration institutions is different from various supports for the overall arbitration industry as set out in the Promotion Act. Accordingly, the Promotion Act is a new step taken by the Korean government to nurture arbitration practice as a main driving force to collaterally vitalize the markets of various industry sectors in Korea.

Further, the Minister of Justice may establish and operate dispute resolution facilities, and conduct related research and international cooperation to create a basis for promoting the arbitration industry;(Promotion Act, Article 4) and financially support the establishment, operation and promotion of “dispute resolution facilities”. (Promotion Act, Article 5) In addition, the Minister should also prepare certain measures to effectively train manpower with relevant expertise and skills(Promotion Act, Article 6) and to promote Korea as arbitration seats of many international arbitration cases. (Promotion Act, Article 7) These requirements appear to be based on the understanding that Korea should expand arbitration-related infrastructures and cultivate professional manpower to gain high recognition as an attractive venue for international arbitration. Indeed, a large-scale investment is essential to create such an arbitration-friendly environment. For example, in Singapore, Maxwell Chambers, which the government provided to arbitration institutions free of charge, played a key role in a rapid increase of arbitration cases conducted in Singapore.

Anticipated Expansion and Direction of Arbitration Practice Market in Korea

The most important factors that arbitration practitioners often consider when choosing arbitration places are known to be a pro-arbitration legal regime and arbitration-friendly courts. In Korea, The Arbitration Act, which closely modeled the UNCITRAL Model Law, has already provided a stable legal framework for fair resolution of international disputes through arbitration. Also, given that Korea is a signatory to the New York Convention, Korean courts have been well known to recognize and enforce foreign arbitral awards without any difficulty. Furthermore, the Korean peninsula, located between the land power (China, Russia, other European countries, etc.) and the sea power (the U.S., Japan, etc.), is in the middle of the geopolitical equilibrium that can provide parties from both regions with equal access to independent legal services free of any legal/political/economic influences.

Given these unwavering merits as an arbitration seat, Korea is likely further improve legal infrastructure to attract arbitration cases to Seoul as required by the Promotion Act, particularly, in certain industry sectors that currently enjoy relative advantages. For example, there has been outstanding expansion of Korea’s entertainment industry as illustrated by the recent phenomenon of the “Korean Waves” in dramas, movies, music, concerts, and games with high recognition at a global level. Thus, it is very likely that various players in this business sector will be encouraged by the government to resolve their cross-border disputes through international arbitration in Korea. This will also lead to a demand on more arbitration practitioners with relevant expertise and experience in the Korean legal market. Similar promotional effects are anticipated in other sectors as well, including information technology and medical industry.

Based on the above, the Promotion Act would likely prompt the Korean government to fully gear up in preparation for promoting arbitration in various industry sectors, anticipating certain “spillover effect” for economic benefits. This would demand further and consistent attention of arbitration practitioners from all around the globe.

References   [ + ]

1. ↑ Arbitration Act, Article 40: “In order to ensure impartial and rapid settlement of domestic or international commercial disputes and to establish the order in international transactions pursuant to this Act, the Government may fully or partially subsidize an incorporated association designated by the Minister of Trade, Industry and Energy as one that conducts commercial arbitration for necessary expenses”. 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 Rule of Law
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Four Key Takeaways of the Decision in Bear Creek Mining Corp v Republic of Peru

Fri, 2017-12-15 21:40

Daniela Páez-Salgado (Assistant Editor for South America)

The latest decision in Bear Creek Mining Corp v Republic of Peru (ICSID Case No. ARB/14/21) presents some interesting takeaways for international investment arbitration case law.  This note briefly introduces the case’s relevant facts before addressing the reasoning of the Tribunal in relation to (i) illegality as a bar to investment protection, (ii) indirect expropriation, (iii) the measure of damages awarded to the claimant, and (iv) the relationship between the action of foreign investors and local communities.

 

  • Introduction

This case concerned a Canadian mining company’s (the “Investor”) investment in Peru for the development of the Santa Ana mining project, located close to the border with Bolivia.  In November 2007, the Investor had obtained through Supreme Decree 083-2007 the authorization to acquire, own and operate the corresponding mining concessions (“Decree 083”).

The development of the Santa Ana mine was strongly opposed by local communities, which included violent protests against the mine operations and the Investor.  In an attempt to deal with social unrest in the area and improve the situation, the government issued Supreme Decree 032-2011 which prohibited mining in nearby areas (“Decree 032”).  Decree 032 had the effect of revoking the rights granted to the Investor under Decree 083, preventing the Investor from continuing its future operations of the mine.

The Investor thereafter filed an international claim against Peru arguing (among others) that Decree 032 constituted an indirect expropriation of its investment under the Peru-Canada Free Trade Agreement (the “FTA”).  The Investor claimed damages of US$ 522 million.

 

  • Illegality as a bar to investment protection

First, the Respondent objected to the Tribunal’s jurisdiction to adjudicate the Investor’s claims on the basis that the Investor had used a strawman to obtain Decree 083 in violation of Peruvian law.

Second, and in the alternative, the Respondent also challenged the admissibility of the Investor’s claims, alleging that the Investor had obtained its investment unlawfully.

In adjudicating the Respondent’s allegations relating to the alleged illegal conduct by the investor in the obtaining of Decree 083 and the operation of the investment, the Tribunal looked at the plain language of the FTA to assess whether it contained any pre-conditions for a finding of jurisdiction based on the legality of the investment.

Because the FTA did not contain a specific provision requiring that the “investment be made in accordance with the law” or a good faith requirement, the Tribunal dismissed the jurisdictional objection.  Likewise, the Tribunal found no basis in the FTA to deny admissibility, as there was no clear wording in the FTA providing for admissibility requirements.

The Tribunal held, though, that the allegations of illegality could be relevant to its analysis of the merits of the case.  Indeed, the Tribunal looked at those allegations when deciding whether the Investor should be found liable on the basis of contributory fault.  In the end, the Tribunal also dismissed Respondent’s claims for liability of the Investor because Peru did not meet its burden to prove contributory fault.

 

  • Indirect expropriation under the FTA

Consistent with the new generations of FTAs (such as DR-CAFTA), the FTA contains an annex that sets forth the test for determining whether an indirect expropriation has taken place.  The Tribunal therefore interpreted and applied each of the elements in Annex 812.1 of the FTA to determine whether Decree 032 had constituted an indirect expropriation.

The first factor provided by Annex 812.1 refers to the economic impact of the “expropriatory measure”.  The Tribunal found that “there was an obvious economic impact” which had deprived the Investor of all major rights it had obtained through Decree 083 (¶ 374).

Second, the Tribunal found that Decree 032 had also interfered with the reasonable expectations of the Investor, who expected to develop its project in the next years based on the express governmental authorization it had acquired, i.e. Decree 083.

Third, to determine the “character of the measure” pursuant to Annex 812.1, the Tribunal engaged in a fact finding exercise.  In particular, the Tribunal looked at the circumstances under which the governmental authorities issued Decree 032, noting that: (i) the authorities met on June 23, 2011 without inviting the Investor to participate, (ii) the evidence upon which Decree 032 was issued was not produced in the arbitration, so it was not able to assess the reasonableness of the revocation, (iii) the participation of a strawman in the authorization procedure was fully known and approved by the government so it could not have constituted a legal justification to revoke Decree 083, and (iv) the social unrest in the area was not caused by the Investor’s conduct because its conduct was repeatedly endorsed by governmental authorities.

Having found that Decree 032 had an economic impact on the investment, that it violated the Investor’s reasonable expectations and that the measure was not legally justifiable, the Tribunal found that Decree 032 constituted an indirect expropriation in the sense of Article 812 of the FTA.

 

  • “Cost approach” applied to the measure of damages

When assessing the damages owed to the Investor due to the indirect expropriation, the Tribunal noted that the FTA was silent on the rules applicable to the calculation of damages.  Both parties agreed on the use of the fair market value to quantify the damages, but disagreed as to  whether the calculation should rely on the amounts invested (cost approach) or the potential profitability of the investment (calculated through the Discounted Cash-Flow methodology).

According to the Investor (relying on the test for early-stage projects from Vivendi v Argentina [II]), a willing buyer would have paid a price for the project calculated by the DCF method.  The Tribunal concluded that the DCF method was not appropriate.  The Tribunal pointed to the problems a hypothetical purchaser would have faced if interested in purchasing the Santa Ana project, such as: the project was at an early stage and had not received many governmental and environmental permits; the project faced opposition from local communities which would have made it hard to obtain the necessary social license to operate; and no track record of successful operation in the same area existed.  Those facts for the Tribunal meant that a DCF approach would be too speculative for this case.

The Tribunal therefore adopted a cost approach methodology and awarded damages for the costs incurred in the development of the project prior to the issuance of Decree 032, totaling around US$ 18 million.

 

  • Investor’s relationship with local communities

One of Respondent’s illegality allegations was that the Santa Ana Project lacked a social license to build and operate in Peru and that the Investor had contributed to the social unrest and therefore to the issuance of Decree 032.  The majority of the Tribunal found that Peru had not met its burden to show a causal link between the social unrest and the Investor’s operations, and dismissed all illegality related allegations.

However, Prof. Philippe Sands QC (arbitrator appointed by the Respondent) disagreed.  In his Dissenting Opinion, Prof. Sands appealed to the ILO Convention 169 to assess whether all the rights of the local communities located in the nearby areas of the Santa Ana project were given sufficient effect.  In his analysis of the evidence presented by the parties, Prof. Sands concluded that a possible explanation for the adverse responses of certain communities to the Investor’s project could be that the Investor did not engage the trust of all potentially affected communities and that even if the Investor was on notice of those numerous communities, it failed to take the appropriate steps to address the concerns of those communities (¶ 19).  On this point, Prof. Sands would have reduced the amount of damages awarded to the Investor by one half for its contribution to the events that led to the issuance of Decree 032.

The approach taken by Prof. Sands is interesting in light of the increasing number of cases dealing with the interaction of investment protection and rights of indigenous communities. Other recent examples include, Álvarez y Marín Corporación S.A. and others v Panama (involving claims of invasion of the investors’ properties by indigenous groups) and South American Silver Limited v Bolivia (involving claims of investor misconduct in its relationship with neighboring local communities to a mining project).

Finally, on a curious note, notwithstanding this dispute, Bear Creek Mining will keep doing business in Peru developing other project.  The company’s official press release after the award states that Bear Creek “look[s] forward to accelerating the advancement of our Corani project in conjunction with the Government of Peru and the Corani communities.”

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Law of Foreign Arbitration in Turkmenistan: An Introduction

Fri, 2017-12-15 02:00

Hannepes Taychayev

The specter of communism that was once lingering over the Europe has long faded away, and the alliance, one of the biggest socialist experiments in the history of mankind, that stood to safeguard and promote its ideals has failed. In 1991 out of the remains of the Soviet Union emerged five independent Central Asian states. The current legal system of Turkmenistan is primarily rooted into the one the Turkmen Soviet Socialist Republic (“Turkmenistan,” 2017) used to have. Up until recently international arbitration was a novel concept to the region and alternative dispute resolution mechanisms (ADR) as means for settling disputes between two private parties was an alien idea (Rubins & Sur, 2008). Consequently, the most widely used mechanism for dispute resolution was the judiciary (Knieper & Ziyaeva, 2017). The judiciary has been supplemented by state-organized arbitration courts which are attached to the ordinary civil courts of general jurisdiction, with the exception of the Arbitration Court of the City of Ashgabat, with jurisdiction over disputes between corporations and other commercial disputes (Knieper & Ziyaeva, 2017).

Turkmenistan is a civil law country, which is to a great extent based on the legal system and institutions from the Soviet era. The judiciary of Turkmenistan represents a three-tier system: local trial courts; regional appeal courts; and the Supreme Court. However, according to Article 32 (2) of the Law on the Judicial System and the Status of Judges of Turkmenistan arbitration courts of the country act as the first instance for settlement of commercial disputes with the Supreme Court acting as the court of appeals. The Supreme Court of Turkmenistan can review appeals against the court and arbitral awards.

Sources of Arbitration Law

There are a number of sources that form the body of arbitration law in Turkmenistan. According to Article 3 (1) of the Arbitral Procedural Code, the arbitral proceedings in Turkmenistan are based on the Constitution of Turkmenistan, the Law on the Judicial System and the Status of Judges of Turkmenistan and the Arbitral Code of Turkmenistan. The law allows not only the nationals but also foreign natural and juridical persons to bring their claims before the arbitration courts of the country. International commercial arbitration is governed by the International Commercial Arbitration Law (ICA) and other relevant domestic laws of the country.

In 2016 the government of Turkmenistan adopted the ICA, which in a number of ways follows the UNCITRAL Model Law. For instance, it allows ad hoc arbitration, recognizes the doctrine of kompetenz-kompetenz, as opposed to domestic law on arbitration which sets rather stringent requirements (see Article 4 of Annex 1 to the Civil Procedural Code (CPC)), the ICA grants the parties to a dispute the freedom of selection and the procedure of selection of arbitrators and sets rather lenient requirements for definition of the arbitration agreement. With the new Law in force, now many disputes of transnational commercial character, as well as many types of civil disputes, involving foreign investors, can be resolved by international commercial arbitration within Turkmenistan where the parties so agree.

Recognition and Enforcement

Turkmenistan is not a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Thus, the recognition and enforcement of arbitration awards that were rendered abroad between Turkmen and non-Turkmen parties are governed by the relevant laws of Turkmenistan and other international or regional treaties.

As to applicable law, it is also important to note that if an award of a foreign tribunal has been overruled by a judgment of a foreign court, the judgment revoking the award will be subject to the CPC not the ICA.

Article 3 on the Objectives of enforcement proceedings of the Law of Turkmenistan On Enforcement Proceedings and the Status of Enforcement Agents holds that the order of enforcement of judgments of international and foreign courts and arbitral tribunals in Turkmenistan shall be determined based on international treaties of Turkmenistan and the Law of Turkmenistan On Enforcement Proceedings and the Status of Enforcement Agents in accordance with legal norms of Turkmenistan. With regard to foreign judgments revoking awards, Article 421 of the CPC, the courts of Turkmenistan can recognize and enforce the judgement of a foreign court based on the principle of reciprocity with certain exceptions. Article 420 (1) of the CPC defines judgments of foreign courts as the ones pertaining to civil cases and excludes ones dealing with economic and other disputes related to business and economic relations. Its enforcement is subject to a ruling of a corresponding court on its enforcement. A court reviewing the enforcement application has the right to rule only on the condition of enforcement and not the merits of the judgment.

The recognition and enforcement of foreign arbitral awards is governed by Article 46 of the ICA. The language of the Article in many ways is based on the UNCITRAL Model Law. Namely, the Article holds that “an arbitral award, irrespective of the country in which it was made, upon application in writing to the courts of Turkmenistan, shall be recognized and be enforced subject to the provisions of part 2 of this article and article 47 of the present law, and in accordance with procedural legislation of Turkmenistan and its international treaties.” Further, part 2 of Article 46 holds that “the party relying on an award or applying for its enforcement shall supply the original award or a certified copy thereof, the original of the arbitration agreement, stipulated in Article 7 of the present law, or a certified copy thereof. If the award is not made in an official language of this State, a party to the dispute has to present a certified copy of the documents in the State language of Turkmenistan.”

Article 6 (2) of the ICA holds that a party seeking enforcement of a foreign arbitral award can apply with such request to provincial courts (welayat) in the regions of Turkmenistan, but in Ashgabat the enforcement action has to be brought before the Arbitration Court of Ashgabat.

Grounds for Refusal

Under the domestic law of Turkmenistan, Article 47 provides grounds for the refusal recognition or enforcement, irrespective of the country in which it was made, of an award rendered by an international arbitration tribunal. The grounds for refusal stipulated in the Article reflect the one provided in the UNCITRAL Model Law with a few tweaks.

International and Regional Treaties

Turkmenistan has concluded a number of bilateral and multi treaties that are regional or international in character. Important regional conventions are the Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Matters (2002 Chisinau Convention), the Kiev Convention on Settling Disputes Related to Commercial Activities (Kiev, 1992), and the Minsk Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Matters (Minks, 1993). The regional conventions regulate and provide rules on various aspects of legal cooperation on the matters related to civil, family and criminal issues between the Commonwealth of Independent States (CIS). They are also of note here because they also deal with issues related to the recognition and enforcement of foreign court judgments, arbitral tribunals and conflict of laws among the signatory States. The importance of these two Agreements for arbitral procedures is manifold. For instance, Article 3 of the Kiev Convention holds that the market participants of the CIS region shall have unhindered access to courts, arbitration and other competent bodies of member states.

There are two key multilateral investment agreements Turkmenistan is a party to: the Energy Charter Treaty and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”). According to the data provided by UNCTAD, Turkmenistan has also concluded 27 Bilateral Investment Treaties.

Conclusion

The ICA is a step in the right direction and meets the basic requirements set by the UNCITRAL Model Law. However, there is further room for development such as ratifying the New York Convention. For international arbitration to be effective, its awards must be enforceable across borders. As it stands now, in case the arbitration is seated in Turkmenistan, its enforcement abroad will be subject to the laws of a jurisdiction where the enforcement is sought. Basically, under international law its enforcement will depend on the principle of reciprocity. However, with adoption of the New York Convention, it could be enforced across the borders. In other words, if an arbitration award is unenforceable in the jurisdiction in which the losing party has assets, the award does not hold much of a legal currency. Enforcement is what gives value to an international commercial arbitration. Ratification of the New York Convention is also associated with a number of other benefits such as increase in trade, inflow of foreign investment, more importantly it would allow Turkmen companies to enforce contracts in other jurisdictions (Knieper & Ziyaeva, 2017).

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The Arbitrability of Oil & Gas Disputes under Brazilian Law

Wed, 2017-12-13 21:42

Ricardo Aprigliano and Fábio Cavalcante

There is no doubt that Brazil is recognized world-wide as one of the most pro-arbitration nations. Brazilian law regulating arbitration is quite innovative, especially after its reform in 2015, which instated clear provisions on relevant topics such as interim measures, the effects of arbitration agreements contained in a company’s bylaws before its shareholders, and arbitration involving public entities. In addition, Brazilian courts have adopted an approach in favor of arbitration, such that there is practically no room for the disregard of valid arbitration agreements.

In that regard, past years have seen the formation of important case law that has certainly furthered the development of arbitration in Brazil, considering that it has provided more legal certainty in the system.

However, despite that the recent reform of Brazilian Arbitration Law allows the participation of public entities in arbitration procedures, the legislature has not dealt with some particularities: for example, the election of arbitral institutions to administer proceedings, the appointment of arbitrators, the allocation of costs, the seat of arbitration, language, and confidentiality, among others.

Although it is conceivable that some obstacles related to this subject have been overcome — such as, for instance, the argument that public interest would prevent the participation of public entities in arbitration procedures — there is still room for debate on other relevant issues, especially considering the important interplay between public and private entities.

In this sense, several interesting recent cases may prove useful to practitioners and academics in light of the hottest topics under discussion in the international arbitration community.

This article aims to provide information on a recent case in which the Superior Court of Justice (“STJ”) dealt with the arbitrability of oil & gas disputes, the so-called Conflict of Competence nº 139.519/RJ (“Case”). The Case refers to the discussion of the power to decide the existence, validity, and effectiveness of an arbitration clause contained in a concession agreement executed between Petróleo Brasileiro S/A —Petrobrás (“Petrobrás”) and the National Agency of Petroleum, Natural Gas and Biofuels (“ANP”).

The dispute between the Parties, which amounted to approximately US $600 million, arose because the ANP attempted to collect financial compensation (participação especial) from Petrobrás due to its exploitation of oil & gas in a complex of offshore fields in the State of Espírito Santos called Parque das Baleias.

According to Brazilian legislation, which regulates the subject matter (Law nº 9.478/1997), the payment of financial compensation (participação especial) fundamentally depends on the localization of the extraction field, the number of years of production, and the volume of oil & gas produced quarterly.

In summary, the Parties disagreed as to whether the offshore fields should be considered separately or not, which would have substantially affected the obligation to pay the financial compensation under discussion.

Regarding the method of dispute resolution, Petrobrás alleged that the arbitration clause agreed upon by both Parties in the concession agreement was valid and effective, and that the dispute should be resolved through arbitration. On the contrary, ANP sustained that the Brazilian judiciary should have competence to rule on the matter, given that the subject matter would not refer to freely transferable property rights, which would imply a lack of arbitrability.

Therefore, Petrobrás requested the STJ to issue an injunction declaring that an arbitral tribunal constituted under the Rules of Arbitration of the International Chamber of Commerce (“ICC”) should have jurisdiction to decide the issues in dispute between the Parties until the STJ provided a definitive decision concerning the conflict of competence.

On April 9, 2015, the STJ granted the injunction and decided that, before the Court reached a final decision on the matter, the arbitral tribunal to be constituted under the Rules of Arbitration of the ICC would have competence to rule on the matter, and that Petrobrás therefore had the right to commence an arbitration proceeding. In addition, the STJ ordered that any other lawsuits and administrative procedures filed by the ANP and the State of Espírito Santos should be suspended until the Court issues a final judgment on the conflict of competence.

To reach this conclusion, Justice Napoleão Nunes Maia Filho held that as the arbitration agreement under discussion was executed by the Parties many years ago, a sudden unilateral modification of its content would affect the activities performed by Petrobrás, and would also impact the credibility of the market in which Petrobrás acts. In addition, the Justice highlighted that the high number of international investments in the field of oil & gas should be considered, given that these are protected by the good faith principle.

On October 11, 2017, the STJ ruled in favor of Petrobrás, ruling that the arbitral tribunal to be constituted under Rules of Arbitration of the ICC had jurisdiction to decide the issues in dispute related to the concession agreement executed between Petrobrás and ANP.

Initially, the STJ emphasized that arbitration has a jurisdiction nature, which shall be understood as taking into account important principles, such as Kompetenz-Kompetenz, party autonomy, and the severability of arbitration agreements. In addition, the Court pointed out that the new Brazilian Code of Civil Procedure promotes in its article 3º, section 2, the use of alternative (or adequate) dispute resolution methods (mediation, conciliation, and arbitration).

Following this introduction, the STJ stressed that Brazilian law contains a considerable set of rules providing for arbitration to resolve disputes involving public entities (Law nº 8.987/95, Lei de Concessões; Law nº 9.478/97, Lei do Petróleo), which indicates the pro arbitration approach of the national legal system.

Next, the Court analysed whether the subject matter of concession agreements could be deemed “freely transferable property rights”, a requirement for parties to make use of arbitration to resolve conflicts under article 1 of the Brazilian Arbitration Law.

In that regard, the Court clarified that the public interest could not be freely transferred. However, the Court explained that whenever a public entity executes a contract with a private party, the subject matter of the agreement is a freely transferable property right, and that this fact does not imply any disregard of the public interest. On the contrary, by making use of arbitration to resolve conflicts involving concession agreements, public entities promote the relevance of the public interest.

After the issuance of the decision, Petrobrás stated that “The decision reaffirms the validity of arbitration clauses contained in concession agreements, which shall increase the legal certainty in the field of oil & gas in Brazil.” Moreover, Petrobrás also asserted that it would immediately commence arbitration proceedings to resolve the dispute with ANP.

It shall be noted that this decision is in line with the global trend to resort to arbitration to resolve cross-border disputes, as indicated by research recently published by Queen Mary University of London (QMUL) in partnership with White & Case (2015 International Arbitration Survey: Improvements and Innovations in International Arbitration).

Furthermore, as Professor Carmen Tiburcio and Suzana Medeiros demonstrate [1. Carmen Tiburcio and Suzana Domingues Medeiros. Arbitragem na indústria do petróleo no direito brasileiro. Revista do Direito da Energia, São Paulo, v. 3, 2006, pp. 54-57], there are many advantages to the use of arbitration as a dispute resolution method to resolve conflicts related to concession agreements for the exploitation of oil & gas.

These include: (i) increase of legal certainty among foreign investors; (ii) more celerity; (iii) arbitral tribunals consisting of specialists in the field; (iv) freedom of both parties to agree on laws applicable to substantive issues; (v) flexibility to determine procedural rules; and (vi) higher effectiveness of arbitral awards issued in the context of international arbitrations, as most states have ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

As to the autonomy of the parties related to the applicable substantive law, it is important to bear in mind that the oil & gas market has so many particularities that some authors have suggested the institution of a lex petrolea in the international context, which would codify a set of rules specifically applicable to parties facing disputes in this field.

In any case, disputes related to oil & gas tend to be complex and involve large quantities of resources. It is necessary that all players be prepared to render a valid proceeding and a good decision. Arbitration is the natural and most appropriate method for disputes related to specific industries and complex matters. Parties need specialized lawyers, consultants, and arbitrators on whom they can rely on from the very beginning. The Brazilian Superior Court of Justice has sent a very good signal that arbitration agreements in these contracts are acceptable and will be enforced.

In conclusion, it is important to highlight that the increase of international transactions involving Latin American countries inevitably has led economic actors to observe the growth of arbitration in Brazil. Although in recent years there has been considerable development of the subject in the country, there is still room for debate on relevant subjects, as demonstrated in the case analysed above, which illustrates that Brazil has come to play an increasingly important role in current debates on arbitration.

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