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Spotlight on Ethiopia as it Annuls a Euro 20 million Arbitral Award

Tue, 2018-08-14 04:53

Sadaff Habib (Assistant Editor for Africa)

Five years after filing the Permanent Court of Arbitration (PCA) Case No. 2013-32 under the European Development Fund Arbitration Rules (EDF Rules), the claimant, Consta JV (an Italian contractor), would have hoped for a successful award against the CDE (a joint enterprise between the Ethiopian and Djibouti government) that would be upheld by the local court.

All such hopes were crushed when, on 24 May 2018, the Supreme Court of the Federal Democratic Republic of Ethiopia (Court) (i) ruled that it has jurisdiction to review an arbitral award issued under the EDF Rules, (ii) found fundamental errors in law in the arbitral award and (iii) set aside the arbitral award.

The dispute involved a breach of contract claim arising out of a repair works contract financed by the EDF relating to rehabilitation works being performed on the Ethiopia-Djibouti Railway. The dispute was brought before a tripartite tribunal and the award issued by the majority. Co-arbitrator, Professor James Thup Gathii dissented.

Several issues arise from the Court’s decision:

  1. Did the Court have jurisdiction and authority to decide on the nullification of an arbitral award issued under the EDF Rules?
  1. Did the Tribunal err on a point of law?
  1. What is the impact of the Court’s decision on arbitration in Ethiopia and on EDF cases?

 Did the Court have jurisdiction and authority to decide on the nullification of an arbitral award issued under the EDF Rules?

The EDF is an intergovernmental fund outside the EU budget with most of its resources being managed by the European Commission. Countries that receive EDF funding include parts of Africa, the Caribbean etc., and are signatories to the Cotonou Agreement. In 1990, the Council of Ministers of the African, Carribean and Pacific Group of States (ACP States) and the European Economic Community approved a new set of rules for the settlement of disputes arising out of construction, supply and service contracts funded by the EDF. The EDF covers disputes between the private sector executing the contract and authorities of the ACP States.

The EDF Rules

The EDF Rules provide that the law applicable to the substance of the dispute and the lex arbitriare those of the State unless otherwise agreed by the Parties. Furthermore, an award rendered under the EDF Rules is final and binding and parties are required to carry out the award without delay. There is a requirement for an award to be recognised and enforced under the EDF Rules and enforcement of the award is regulated by the law relating to the enforcement of judgments which is in force in the State in whose territory the enforcement is to be carried out.

The seat of the PCA arbitration was Addis Ababa and the governing law of the arbitration was Ethiopian law. The Court had jurisdiction to enforce and recognise the award.

The Court’s rationale

The Court determined that the EDF Rules give arbitral awards rendered under such rules the status of a final court judgment of the ACP States. This is not incorrect. The Court appears to have taken into cognisance Article 33.3 of the EDF Rules which require each ACP State to recognise an award under the EDF Rules as binding and ensure it is enforced in its territory as if it were a final judgment of one of its own courts or tribunals. The Court goes further to reason thatbecause the Ethiopian Constitution grants the Court of Cassation the jurisdiction to review final court judgments of all Ethiopian courts for fundamental errors of Ethiopian law, the Court has jurisdiction to review this EDF award as it is analogous to an Ethiopian court judgment under the EDF Rules.

Notably, Ethiopia developed most of its current codes on private law in the last century. Its arbitration law can be found in its Civil Code and Civil Procedure Code. It is generally perceived that Ethiopia’s arbitration law applies to domestic arbitration as opposed to international arbitration.

It is unsurprising that the Court adopted the above approach in finding jurisdiction for itself to decide on whether the law had been applied correctly to the EDF award which in the Court’s eyes under the EDF Rules is akin to an Ethiopian court judgment.

Did the Tribunal err on a point of law?

The CDE challenged the award on the basis that the majority of the Tribunal had seriously erred in deciding on a point of law in their decision.

The Court annulled the award on a number of substantive grounds. Most importantly, it stated that the Tribunal disregarded evidence of fraudulent bidding by the claimant. Interestingly, it is on this point that Professor James Thup Gathi issued his dissenting award.

The Ethiopian Civil Code provides that a contract may be invalidated based on fraud if the other party would not have entered into the contract had it known of the deception.  Without going into detail of the dissenting award and the arbitration case, Professor Gathi relies on this provision and dissents in that he views that CDE would not have entered into the contract if it had known that the joint venture partner in Consta JV, GCF who was to provide technical expertise on railway projects, reduced its share in the JV and its responsibility as a JV partner was significantly and considerably reduced such that it disavowed the responsibility for design. Objectively, this would understandably be an issue for any client in CDE’s position particularly where it is relying on the JV partner’s skills in a project.

The Court reasoned that under the Ethiopian Civil Code, a contract entered based on fraud is invalidated and as such Consta JV’s breach of contract claim cannot be sustained. The Court found that the majority of the Tribunal omitted to address this. The Court went on to say that the only remedy to the parties in such a situation is that they are restored to the position they were in before the contract and they may seek such recourse through a subsequent arbitration. Interestingly, the Court appears to uphold the principle of separability of the arbitration agreement and does not invalidate it.

On the face of it, the Court’s reasoning appears legally sound. However, there is concern that the Court opening up the award could potentially attract more challenges counterintuitive to the arbitration process. Would a better approach have been for the Court to revert the award back to the Tribunal for the Tribunal to re-determine on the issue?

What is the impact of the Court’s decision on arbitration in Ethiopia and EDF cases?

Undoubtedly, the Court’s decision is seen as one of the first of such decisions issued by the highest court of the ACP countries. It is anticipated this will be a ground-breaking precedent that may well affect future EDF cases particularly in Ethiopia.

As of date, Ethiopia is not a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.  This, together with the Court’s decision, may cause private sector companies to reconsider and proceed cautiously in choosing arbitration as a mode of dispute resolution where Ethiopia is the seat of arbitration.

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SOAS Arbitration in Africa Survey Report 2018

Mon, 2018-08-13 03:24

Emilia Onyema

Diversity in arbitration is currently topical, and this drove our engagement with it in relation to race (particularly African) in this survey. Related to this, is the entrenched perceptions against African arbitration practitioners which has negatively impacted on their participation in international arbitration (including Africa-connected disputes). The primary perception is that African arbitration practitioners are not skilled enough to be appointed as arbitrators in international arbitration references. This negative perception has never been supported with hard facts or scientific analysis but relied on “anecdotal evidence”. Our survey aims to fill this gap and provide empirical data to support or disprove this perception.

The survey which was distributed in the Arabic, English and French languages, attracted 191 respondents from 19 African and 12 non-African countries. Not surprisingly, 90.6% of the respondents are lawyers and have acted in various capacities in arbitration: as arbitrator, counsel, tribunal secretary, academic, consultant and legal adviser. The reporting period for the survey was from 2012-2017.

Over this period, 82.2% of the respondents did not sit as arbitrator in any international arbitration reference in contrast to 58% who did not sit as arbitrator in domestic arbitration. As it relates to acting as counsel (or co-counsel) in international references, only 40.8% of the respondents acted in this capacity; while only 2% acted as tribunal secretary in international arbitration. This data supports the claim that African practitioners are under-represented in international arbitration. The top three reasons the respondents gave for their under-representation are: (1) poor perception of African arbitration practitioners (by their foreign colleagues) as lacking in expertise and experience; (2) bias by appointors in favour of foreign counsel and arbitrator; and (3) Africans not appointing fellow Africans as arbitrators. I will examine each of these reasons:

  1. Lack of expertise and experience in arbitration:

This perception is partially disproved because the finding from the survey is that experience is not uniform across the continent. 81.7% of respondents have acquired specialist training in arbitration and the vast majority (72%) were trained by the Chartered Institute of Arbitrators (CIArb). And more importantly, over the reporting period, 41.1% of the respondents sat as arbitrator in at least one domestic arbitration case (this is against 17.8% of respondents who sat as arbitrator in at least one international case).

The acquisition of experience by African arbitration practitioners will increase with the growth of domestic arbitration. 85.3% of the respondents believe domestic arbitration will grow in their jurisdiction. This is important as it assures an increasing pool of arbitration practitioners on the continent of good workflow in which they can participate. However, a surprising finding from the survey is the limited pool of arbitrators sitting in the domestic space in African countries. 10% of the respondents had acted in 11 or more cases over the reporting period against the majority of 58% who did not sit as arbitrator in any dispute. This also raises concerns of diversity of the local pool from which arbitrators are selected or appointed.

  1. Bias by appointors in favour of foreign counsel and arbitrator:

From the findings of the survey, this bias remains a perception although 40.2% of the respondents had acted as counsel or co-counsel in international arbitration over the reporting period. This view is because we do not know the exact number of arbitration references that were Africa-connected during the reporting period. However, we believe this finding is useful for international firms instructed in Africa-connected disputes. Further, this finding may also explain the strong opposition to the opening up of the legal services market in some African countries (notably, Nigeria).

  1. Africans appointing fellow Africans:

This reason for the under representation of Africans in international arbitration references is one the respondents felt was within the control of Africans themselves (either as advisor, in-house counsel, arbitration centre, appointing authority, or government official). We also note the fact that ‘Africans appointing Africans’ has almost become a mantra but there is a caveat. The appointment must be of qualified and skilled practitioners, with an eye on diversity in appointment. It is massively important that African parties (and their advisors) appreciate their role in this rebalancing exercise and seriously consider skilled African arbitration practitioners in their appointment process. The other agencies that can make an impact on this issue of diversity are appointing authorities and arbitration centres and institutions. In informal discussions with heads of arbitration centres and lawyers, they generally accept the need for diversity and confirm they make an effort to include qualified and skilled Africans in their nomination lists but the parties choose not to appoint them. It will therefore, be useful if such appointing agencies include such data in their published statistics. The data should state the number of people falling within the under-represented groups (gender, race, age, etc) they nominated and how many were actually appointed. This data will provide the evidence we need to help us understand where the gap lies with diversity in appointment.

For the African arbitration practitioners, the top three changes they need to make to ensure their fair participation in international arbitration (particularly in Africa-connected disputes) are: continuing professional development, increase in visibility in arbitration circles, and appointing fellow skilled Africans as arbitrator, counsel and tribunal secretary.

Our survey report therefore confirms that, there are skilled African arbitration practitioners who sit as arbitrators and act as counsel and tribunal secretary in not only domestic but also international disputes. Obviously fewer Africans participate in the international arena than in the domestic arena. Our survey did not capture the percentage that act in these capacities in intra-Africa disputes. However, with the growth of intra-Africa trade, increase in the number of African companies that transact business across African borders, the growth in the number of African transnational corporations or investment companies, and the increase in intra-Africa trade and services envisaged with the signing of the African Continental Free Trade Agreement (and further negotiations), it can only be envisaged that intra-African disputes will also increase. Such disputes will need skilled African arbitration practitioners to service them as arbitrators, tribunal secretary, counsel, and arbitration centres or institutions.

As already mentioned, 81.7% of the respondents are trained in the law and practice of arbitration with 72% of these trained by CIArb. The next phase of development, particularly in domestic arbitration, is the diversity in appointments as arbitrator to include women and young practitioners. Inclusion cannot be over emphasised and must be actively pursued by all African arbitration practitioners. This in particular can be driven by arbitration centres and institutions in Africa.

The SOAS Arbitration in Africa survey is an important addition to the growing body of surveys in arbitration led by the Queen Mary International Arbitration surveys. Our survey which shall be conducted biennially shall continue to focus primarily on arbitration practitioners with interest in Africa. Our vision is to provide original data on arbitration in Africa to enrich the global arbitration discourse.

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Controlling Chaos in Parallel Proceedings: A Report from the 30th Annual ITA Workshop

Sun, 2018-08-12 02:59

David Attanasio

ITA

The 30th Annual ITA Workshop on Multiple Proceedings, Multiple Parties, and International Arbitration: What a Tangled Web We Weave, took place in Dallas, Texas on 20-22 June 2018.  Co-chairing were Erica Stein (Dechert), Jean-Christophe Honlet (Dentons), and Frédéric G. Sourgens (Washburn University).  The workshop, a lead event of the ITA, was dedicated to an in-depth exploration of the increasing procedural complexity in contemporary international dispute resolution.

The keynote speech from Prof. Emmanuel Gaillard (Shearman & Sterling, Institut d’études politiques de Paris) identified the major problem for the workshop: how to control the potential chaos resulting from a system where multiple proceedings regularly arise from the same matter.  This blog post will describe several (of many) important contributions from the ITA Workshop, focusing on two principal threads: how arbitrators may coordinate multiple proceedings arising from the same facts and how domestic courts may coordinate multiple set aside and enforcement proceedings arising from the same award.

  1. How to Coordinate Multiple Arbitral Proceedings

One of, if not the, preeminent issues of the workshop was how to coordinate multiple proceedings brought by related entities concerning the same basic facts.   This issue frequently arises in commercial and investment arbitration, when disputes arising from the same or related facts are submitted to multiple fora.

Prof. Hanno Wehland (Lenz & Staehelin) captured the basic problem of multiple proceedings as it pertains to investment arbitration: international investment agreements often extend protection to both direct and indirect investors, so multiple entities in a single corporate structure are often protected investors (and potential claimants) for the same investment.  Such circumstances arose in, among others, the well-known Lauder v. Czech Republic and CME v. Czech Republic cases and the recent Orascom TMT v. Algeria and Orascom Telecom v. Algeria cases.  And, in addition to multiple entities qualifying as investors, one or more may also be parties to contracts concerning the investment, and eligible to bring arbitration on that basis as well.

This potential for multiple claims by related companies concerning the same facts creates serious risks of double recovery and of repeat litigation.  The workshop focused extensively on whether and how arbitral tribunals can coordinate or manage these risks.

The Traditional Doctrine of Res Judicata

Perhaps the most traditional response to the problem is to analyze it through the lens of res judicata (or related doctrines).  Prof. Chiara Giorgetti (University of Richmond) observed that the application of res judicata has the potential to avoid repetition and strengthen the rule of law in the face of repeat proceedings.

However, against the background of multiple arbitrations under different instruments, a tribunal may have to answer a number of difficult questions when invoking the doctrine of res judicata.

What is the governing law for res judicata?  It could be the law of the first arbitration’s seat, that of the second, the national law of one or the other of the parties, or transnational principles.  Prof. Gaillard proposed that transnational principles are most appropriately applied, even if they are not fully developed.  However, Prof. Pierre Mayer emphasized the lack of any transnational consensus on res judicata, as common law and civil law have divergent principles.

What is the scope of res judicata?  The workshop participants evinced agreement that res judicata indeed applies among strictly identical claims (per the traditional triple identity test).  However, beyond that, there were divergent views on the appropriate scope for res judicata.

Prof. Gaillard noted, without endorsement, that the Apotex Holding v. USA tribunal considered that issue estoppel had sufficient recognition to be a genuinely transnational principle.  This would give binding effect not only to an award’s dispositive but also to the legal and factual reasoning supporting that dispositive.  Prof. Giorgetti went a step further and endorsed the broad Apotex approach as better calibrated to the objectives of avoiding repetition and coordinating multiple arbitral proceedings.

By contrast, Prof. Mayer took a more skeptical view.  While he accepted that the dispositive part of an award is binding on subsequent tribunals, he proposed that the nature of arbitration warrants against granting any binding effect to an award’s reasoning in a subsequent arbitration.  The cornerstone of arbitration, in his view, is the parties’ ability to appoint at least one member of the arbitral tribunal, so those tribunals should not abdicate their power of judgment on the dispute entrusted to them.

A Turn toward Abuse of Process?

A more recent response to repeat proceedings is to analyze them for abuse of process, following the model of Orascom TMTProf. Gaillard, who acted as respondent’s counsel in that arbitration, recommended this approach in his keynote speech.  He emphasized that the Orascom TMT decision shows that tribunals can look at the effects on the arbitral system as a whole and not solely on their particular dispute in isolation.

The Orascom TMT tribunal (Gabrielle Kaufmann-Kohler presiding) found the submitted claims inadmissible on the grounds of an abuse of process.  Three similarly-framed disputes, all concerning the same state actions, had been brought at multiple levels of a single corporate chain.  Under the facts of the dispute, the tribunal reasoned that the claimant could not claim for the same harm as in the other arbitrations and, indeed, committed an abuse of right because it sought “to impugn the same host state measures and claims for the same harm at various levels of the chain in reliance on several investment treaties concluded by the host state.”

Ricky Diwan QC (Essex Court Chambers) predicted that the Orascom TMT award will increase future scrutiny of the Lauder and CME approach to the issue of multiple proceedings.   The well-known Lauder and CME disputes concerned the same underlying factual allegations but were brought by different entities in the same corporate chain under distinct investment treaties.  Both the Lauder and the CME tribunals rejected the relevance of the parallel arbitration on the grounds that they concerned formally different parties bringing different causes of action (i.e., under different investment treaties).  In doing so, both tribunals specifically rejected any relevance of the fact that the two claims were for the same injury and both concluded that there was no abuse of process.

Although Orascom TMT identifies a new solution to the problem of multiple proceedings, Mr. Diwan identified multiple open questions that tribunals will have to resolve when following that example.

  • First, at what moment does it become abusive to bring parallel disputes? Is it at the time when both claims are initiated or when both tribunals find that they have jurisdiction?  If, possibly only one tribunal has jurisdiction, then the parallel proceedings might seek to ensure nothing more than that the dispute may find a competent forum.
  • Second, to what degree must two entities be related for parallel disputes to become abusive? Diwan observed that, in Eskosol v. Italy, both an 80% shareholder and the subsidiary company commenced proceedings against Italy.  The Eskosol tribunal concluded that the interests of the shareholder and the company were not fully aligned, so the parallel proceedings were not abusive.

Identifying the Investor through its Active Investment

Instead of coordinating multiple potential proceedings by related entities through procedural approaches like res judicata or abuse of process, it may be possible to select the proper claimant on substantive grounds.  One approach sometimes adopted in investment arbitration is to identify the proper claimant as the legal entity in a corporate structure with an active investment role.

As Prof. Ursula Kriebaum (University of Vienna) observed, several tribunals have picked out the proper claimant in a multilevel company structure on such grounds.  She noted that, among others, Standard Chartered Bank v. Tanzania, Caratube v. Kazakhstan, and KT Asia v. Kazakhstan had followed such an approach.   Standard Chartered Bank, for example, stated that, to benefit from the investment treaty’s arbitration provision, “a claimant must demonstrate that the investment was made at the claimant’s direction, that the claimant funded the investment or that the claimant controlled the investment in an active and direct manner.”

Prof. Kriebaum critiqued this approach to the problem of multiple investors.  She observed that an active investment requirement would deny protection to an investment if it is ever transferred, as the recipient company would not have made an active investment in the host state.

However, it is unclear whether Prof. Kriebaum intended to apply this critique to all the elements of an active investment requirement.   Standard Chartered Bank proposed several alternative ways to have an active investment.  If active investment requires making the investment at the claimant’s direction, then perhaps the purchase of an investment would not suffice.  But, if active investment requires only that the relevant entity actively and directly control the investment, it is less obvious that the failure to make the initial investment would be disqualifying.

Assisting Arbitrators with Treaty Provisions

Treaty provisions, both present and future, may also assist arbitrators in coordinating repeat proceedings by precluding such proceedings.  Jean Kalicki proposed that a new generation of treaties would be advisable to provide further assistance with the problem of consolidating proceedings.

However, as Prof. Gaillard noted, we have already seen four generations of treaty provisions designed to address the problem. The first generation established a fork in the road clause, where the choice of one forum precludes the submission of the same dispute to any other forum.  The second generation, exemplified by NAFTA, required both the foreign investor and any local operating company to waive the right to submit the same dispute elsewhere.  The third generation added a prohibition on parallel claims by the local operating company as well as by both direct and indirect shareholders.

The fourth, current, generation has sought to require waiver from entities both below and above the level of the investor in the corporate chain.  The objective is to preclude comprehensively parallel claims.  However, in Prof. Gaillard’s view, it is unclear how an investor could force its shareholders to waive potential claims, given that the investor does not have control over its shareholders.  He did not address whether the decision to waive could be left to shareholder discretion discretion (as opposed to being placed under investor control); the shareholders could, potentially, voluntarily elect to waive if they wish the arbitration to proceed.

  1. How to Coordinate Multiple Centers of Control

After an award is rendered, the struggle to enforce that award is often fought across multiple court proceedings in multiple jurisdictions.  These courts can potentially arrive at inconsistent results, or at least results that are in tension with one another.  Thus, a number of participants focused on whether and when a court should defer to a prior court judgment on an award from a different jurisdiction.  The central issue is which courts should exercise control over arbitral awards.  As Mr. Diwan observed, courts could opt for sole control in the place of enforcement, shared control between the place of enforcement and the place of the seat, or sole control in the place of the seat.

Deference to Enforcement Judgments

Prof. Gaillard described a new trend of courts deferring to prior enforcement judgments, rather than making an independent evaluation of the award.  He drew attention to examples from the U.S. and the U.K. where courts considering set aside or enforcement suits have deferred to foreign enforcement judgments.  (Yasmine Lahlou (Chaffetz Lindsey) later suggested that these cases are not representative in the U.S.)

It was Prof. Gaillard’s view that this trend of deference to enforcement judgments is a recipe for chaos.  He considers that it is contrary to the fundamental assumptions of the New York Convention.  This treaty contemplated that each court would independently consider the award and reach its decision, regardless of the views of neighboring courts.

Mr. Diwan agreed that it is a mistake for courts to defer to foreign enforcement judgments.  He asked why, for example, an English court should defer to an Austrian court judgment that applies an incorrect analysis under the New York Convention?  He suggested that this is to apply English private law principles concerning foreign judgments to a subject for which they are not suited.  Ms. Lahlou echoed this sentiment that there is no good reason to apply general legal principles concerning foreign judgments to ancillary enforcement judgments.

Deference to Set Aside Judgments

Mr. Diwan raised the further question of whether enforcing courts should defer to judgments from the courts of the seat on set aside actions.  He observed that the English courts have adopted a policy of deference on the basis of private law principles, where that judgment is given effect unless it violates principles of honesty, natural justice, or public policy.  This approach, in Mr. Diwan’s view, is contrary to the New York Convention’s basic policy that sole control of the award rests at the place of enforcement.

As Ms. Lahlou noted, U.S. courts similarly will not enforce awards set aside at the seat except in extraordinary circumstances.

This attempt to create a new system of coordination, as Mr. Diwan argued, could lead to chaos.  The courts of a single state cannot sensibly attempt to create a system of coordination on a unilateral basis and it is problematic to seek a new consensus among the many member states of the New York Convention.  The legal principles underlying the English approach, most notably that of issue estoppel are not accepted in civil law countries; so the French courts, for example, will not follow the same approach as the English courts.

Prof. Gaillard added that the English approach recreates the very requirement of double exequatur for award enforcement that the New York Convention was designed to eliminate.  He considered that control over the award has to remain with the enforcement courts.  Thus, he believes that the exercise of control over the award elsewhere should be suppressed for the sake of order.

In response, Prof. Mayer took the view that the judgment of the set aside court should indeed have effect.  If the award is set aside, then a second arbitration proceeding will often produce a second award.  By failing to give effect to the judgment setting aside the first award, a court may well recognize that award and refuse to recognize the second award.  But the state of the seat and practically all other states would consider the second award to be the only valid award.

  1. Conclusion

The ITA Workshop did not provide definitive answers to the questions of how to coordinate the complex proceedings that emerge in modern arbitral practice.  But it identified out the chief issues that confront arbitrators and practitioners and provided key direction for the further evolution of the system.

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Another One BIT the Dust: Is the Netherlands’ Termination of Intra-EU Treaties the Latest Symptom of a Backlash Against Investor-State Arbitration?

Sat, 2018-08-11 03:29

Marie Davoise and Markus Burgstaller

On 6 March 2018, the Court of Justice of the European Union (“CJEU“) issued its long-awaited decision in the Achmea case (C-284/16) between the Slovak Republic and Dutch insurer Achmea BV.

In Achmea, the CJEU found investor-state dispute settlement provisions in investment treaties concluded between EU Member States (“intra-EU BITs“) to be incompatible with EU law.

The judgment will fundamentally change the landscape for arbitration in Europe, and it has been argued that as a logical consequence, EU Member States now have an obligation to amend or terminate their BITs under EU law.

The Netherlands: We Will Terminate Intra-EU BITs Through a New Multilateral Treaty

Indeed, it did not take long for the Dutch government to announce its intention to terminate all intra-EU BITs to which the Netherlands is a party. On 26 April 2018, the Dutch Minister for Foreign Trade and Development Cooperation stated that, following the Achmea judgment, the Netherlands saw “no other option” than to terminate its bilateral investment treaty with the Slovak Republic.

Minister Sigrid Kaag set out the government’s view in a letter addressed to the Chairperson of the Dutch House of Representatives. Acknowledging the impact of the Achmea judgment, the letter confirms the Dutch government’s intention to terminate its investment agreement with the Slovak Republic.

Besides the Netherlands-Slovak Republic BIT, the government will also seek to terminate the other 11 investment agreements concluded between the Netherlands and other EU Member States (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania and Slovenia). This, the letter explains, will be done by negotiating a single multilateral treaty for reasons of “clarity, speed and efficiency”.

Interestingly, the Dutch government’s decision to terminate intra-EU BITs does not apply to the Caribbean Netherlands (i.e. the islands of Bonaire, St Eustatius and Saba). Although they are “special municipalities” and considered to be “public bodies” under Dutch law, they are overseas territories of the European Union, a special status under which EU law does not automatically apply. As a result, according to the government, it is up to these municipalities to decide whether or not they want to terminate intra-EU BITs.

The letter addresses another hot topic: the application of Achmea to the Energy Charter Treaty (“ECT“). Signed in 1994, the ECT has generated more investor-state claims between the EU Member States than any other treaty. The Achmea judgment generated a lot of discussion on whether or not a similar argument could be made to render intra-EU claims brought under the ECT illegal under EU law.

On this, the European Commission has made it very clear where it stands: in its view, the ECT does not apply to investors from other Member States initiating disputes against another Member State (see, for example, paragraph 163 of decision SA.4038 in November 2017). Without going that far, the Dutch government nevertheless acknowledges that Achmea “is also relevant” to the dispute settlement mechanism contained in the ECT.

The Writing Is on the Wall for Remaining Intra-EU BITs

There are over 190 intra-EU BITs. Many of these were agreed in the 1990s, before the EU enlargements of 2004, 2007 and 2013. They were mainly struck between existing members of the EU and those who would become the “EU 13”.

According to the European Commission, those agreements’ raison d’être was to provide reassurance to investors who wanted to invest in the future “EU 13”, by strengthening investment protection (e.g., through compensation for expropriation and arbitration procedures for the settlement of investment disputes).

Situated mostly in Central and Eastern Europe, those countries later joined the EU. This opened up a debate on the validity of intra-EU investment treaties. The European Commission took an increasingly active role in challenging intra-EU investment agreements, through amicus curiae interventions, suspension injunctions and initiation of infringement proceedings.

In 2012, Ireland ended all its intra-EU BITs, followed by Italy in 2013.

In 2015, the European Commission formally requested Austria, the Netherlands, Romania, the Slovak Republic and Sweden to end the intra-EU BITs between them, by sending letters of formal notice, i.e. the first stage of the general EU infringement procedure in article 258 of the TFEU.

In 2016, Denmark reportedly reached out to its EU counterparts to suggest mutual termination of intra-EU BITs. The same year, Austria, Finland, France, Germany and the Netherlands also proposed an EU-wide agreement to replace existing intra-EU BITs.

In 2017, Romania formally terminated all of its intra-EU BITs. The same year, Poland initiated the termination of its BIT with Portugal, the first of 23 similar agreements which Poland said it would terminate.

BIT by BIT, EU Member States are inexorably moving towards the termination of all intra-EU investment treaties. The European Commission’s determination to challenge those agreements, and its strong push towards a Multilateral Investment Court, were but one nail in the coffin of intra-EU BITs. In the wake of Achmea, it could be that the Member States consider that they have “no other option” but to end all intra-EU BITs.

The ‘Big Crunch’ of Investor-State Arbitration?

Taking a step back, we see that the Achmea judgment, and the Netherlands’ decision to terminate intra-EU treaties, should have been unsurprising to arbitration practitioners.

Over the last twenty years, investment treaty-based arbitration has grown exponentially (see Figure 1 below).


FIGURE 1 – International investment arbitration cases registered by year (1987–2016). PITAD, PluriCourts Investment Treaty Arbitration Database (PITAD) as of 1 January 2017; 831 cases in total through 1 January 2017. Source

But after investment treaty-based arbitration’s ‘big bang’ is there a ‘big crunch’ to come? It is now commonplace for commentators to note that investment treaty arbitration has suffered an accelerating backlash in the last few years.  In that sense, Achmea is only the latest manifestation of that phenomenon, and the Netherlands’ decision a natural consequence of this evolution.

What are the causes of this backlash against investment arbitration? Although many explanations have been offered (from the panels’ rigid views of contracts to the growing number of cases brought –and won- by investors against sovereign states), two in particular merit singling out. They not only reflect past sentiment about investment arbitration, but also offer a glimpse into the future of investment arbitration as a whole. These two reasons are the pushback against globalisation and the increasing importance of regionalism.

Backlash Against Globalisation and Corresponding Rise in Nationalism

Commentators have frequently mentioned that the US 2016 presidential elections and the Brexit vote were both built on the rejection of globalisation and expressed a wish, on the part of the American and British people, to re-centre policies around nationalism and domestic sovereignty.

President Trump’s proposal to renegotiate NAFTA has led to speculation as to what (if any) investor-state dispute settlement mechanism will be included in the renegotiated treaty.

In Europe, the Comprehensive Economic and Trade Agreement (CETA) and Transatlantic Trade and Investment Partnership (TTIP) were perceived by the general public as imposing North American rule(s). This translated into a rejection of investor-state dispute mechanisms as ‘secret courts’. The Brexit vote was another symptom of this desire to ‘take back control’.

Another sign of the nationalist wave sweeping the globe is the resurgence of resource nationalism – in the Americas, in Africa, in Asia. Will Europe be the next continent to experience increased nationalism in investment protection?

Focus on Regional Mechanisms, Including in Europe

Over the last decade, many states around the world overhauled their investment protection system and terminated some, and sometimes all, of the BITs they were party to.

In 2012, South Africa terminated its BIT with Belgium-Luxembourg and issued cancellation notices for its BITs with Germany and Switzerland.

In 2014, the Indonesian Government indicated that it would terminate all of its 67 bilateral investment treaties.

In 2016, India served notices to 57 countries including the UK, Germany, France and Sweden seeking termination of BITs whose initial duration has either expired or will expire soon.

In 2017, Ecuador terminated all 16 of its remaining BITs, having previously ended treaties in 2008 and 2010.

A global pattern starts to emerge, with various states terminating BITs and relying on regional multilateral frameworks instead.

For example, Indonesia explicitly embraced regionalism in its approach to foreign investment, relying on the ASEAN Comprehensive Investment Agreement (which provides BIT protections, including investor-state dispute settlement provisions).

Similarly, in 2017 MERCOSUR signed a Protocol on Investment Cooperation and Facilitation, which coordinated the regional bloc’s approach to investment disputes and most notably excluded investor-state arbitration.

Regional instruments are being increasingly used to grant investment protection, and regional organisations are a force to be reckoned with on the international investment legal scene.

This is, of course, particularly poignant in Europe. As noted above, the European Commission has been a vocal opponent of intra-EU treaties. It recently received the green light to negotiate, on behalf of the European Union, a convention establishing a multilateral court for the settlement of investment disputes (the “MIC”). The MIC would be Europe’s permanent body to settle investment disputes, eventually replacing the bilateral investment court systems included in EU trade and investment agreements.

Much has been written about Achmea and its consequences. However, it is crucial for practitioners and academics to also look at the judgment through a global and cross-disciplinary lens.

In particular, the investment arbitration community would be well-advised to actively engage with regional organisations and to take heed of the growing discontent against investor-state dispute mechanisms.

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Bribery, Corruption, and Fraud in Investor-State Disputes: How Should Tribunals Approach Economic Crimes?

Fri, 2018-08-10 03:00

Yarik Kryvoi

Investor-state tribunals frequently face allegations of economic crimes, especially in jurisdictions with a weak rule of law.

For instance, the largest ever investor–State award of $50 billion in Yukos v Russian Federation, primarily concerned a criminal investigation of alleged tax evasion, fraud and embezzlement by what was then the largest Russian oil company. The tribunal ruled that instead of collecting taxes, Russia’s main objective was to bankrupt the investor and expropriate its assets.

Economic crimes which arise in investor-State disputes include bribery, tax evasion, bank, accounting and securities fraud, and other forms of malpractice. Allegations of money laundering may arise in the context of claims related to fake asset sales, intentional selling of overpriced goods, and in reimbursement scams.

Investor-State tribunals are not normally expected to deal with criminal liability because they normally do not have the necessary expertise, powers and resources to conduct independent criminal investigations. The ICSID Convention and investment treaties also do not regulate these matters. Nonetheless, allegations of economic crime may have a profound impact on the disputes before them.

Jurisdiction or Admissibility?

At the very beginning, tribunals may decide to decline jurisdiction over claims tainted by economic crimes or rule that such claims are inadmissible.

The practice of tribunals remains largely inconsistent, as it ranges from exonerating the State from its responsibility for involvement in an economic crime (e.g., World Duty Free v Kenya) to awarding investors significant amounts of compensation (e.g. Yukos v Russian Federation). In this context, the language of the treaty, or other instrument, in which the parties consent to arbitration, helps to distinguish jurisdiction from admissibility.

In case the treaty or the arbitration agreement requires the investment to be made in accordance with law, tribunals usually consider economic crimes at the jurisdictional stage of arbitration (See, e.g. Methanex v United States of America, Inceysa v El Salvador). Otherwise, committing an economic crime when acquiring an investment may result in the claim being ruled inadmissible at the merits phase (See, e.g. Churchill Mining v Indonesia).

At the same time, it appears that the autonomous nature of the arbitration agreement presumes that tribunals should assert their jurisdiction, even if the investor breached its obligations when securing the investment. With occasional exceptions, such as that of Plama v Bulgaria, which relied on the separability concept to explain the nonapplication of most-favoured-nation clauses to dispute settlement provisions of a treaty, it is difficult to find cases when tribunals rely on this essential principle of arbitration law.

It Takes Two to Bribe?

In cases where economic crimes have allegedly occurred in an investor–State dispute, the State is more than just a party to the arbitration. The State also remains the entity which regulates, investigates, adjudicates and enforces in relation to such crimes within its territory. Prosecuting economic crimes might itself breach a State’s international obligations, leading to an investor-State claim against it. On the other hand, the State can assert a counterclaim for the investor’s misconduct.

When State representatives commit economic crimes themselves, investment tribunals should pay more attention to the principle of contributory fault. For instance, bribery typically presumes misconduct of two parties — the one making an illicit payment and the other accepting it. Penalizing only the investor by rejecting its claims or only the State would seem unfair and contradict generally accepted principles of international law, such as those reflected in the ILC Articles on State Responsibility.

Tribunals should also take into account the failure of a State to comply with its international obligations, including the obligation to effectively combat bribery and corruption. Furthermore, the commission of an economic crime by an investor should be reflected in damages awards, as the Yukos tribunal did by reducing the amount due to be paid to the investor.

Towards Greater Certainty on the Effect of Economic Crimes

The system of investor-State dispute settlement has been recently criticized for a lack of predictability, legitimacy and for excessive intervention with the exercise of the sovereign powers of States.

As States rely on criminal law to deal with economic crimes, they expect predictability from international tribunals reviewing their conduct. Investors too would benefit from greater consistency exercised by tribunals on issues related to economic crimes.

The silence of investment treaties on the consequences of economic crimes combined with the inconsistent application of internal law results in increased uncertainty, expensive proceedings and controversial decisions. In deciding on the admissibility of claims related to economic crimes, tribunals could draw inspiration from national best practices, such as the UK Bribery Act.

Instead of introducing strict liability on businesses for bribery, this Act reverses the burden of proof and introduces an offence of failing to prevent bribery for all companies, including parent companies. The Bribery Act also establishes an ‘adequate procedures’ defence to avoid liability for bribery.

The Act’s official guidance on the defence of adequate procedures lists risk assessment procedures, due diligence, engagement by senior management, communication and training, as well as monitoring and review of existing procedures. Hence, organizations would not be liable for bribes paid on their behalf under the Act if they could prove, on the balance of probabilities, that they had ‘adequate procedures’ in place to prevent them.

The Act’s logic could help tribunals in approaching issues not properly regulated in other domestic legal systems and help to build consensus on the ‘adequate procedures’ expected of States and investors when it comes to bribery, corruption and other economic crimes.

To ensure legal certainty concerning the effect of bribery, money laundering and other economic crimes in international investment law, treaties must include provisions on the effect of economic crimes. States should facilitate the consolidation of international investment agreements by adopting joint interpretative statements on previously concluded treaties, or by replacing old treaties with modern bilateral treaties, either one at a time or through regional agreements.

A new generation of investment treaties should take into account both applicable domestic law and the existing sources of international law concerning economic crimes together with national best practice. The same holds true for the practice of investment tribunals.

More legal certainty within the investor-State dispute resolution system will facilitate international efforts to reform investment agreements. It would also improve the legitimacy and predictability of the system of investor-State disputes and reconcile the combating of economic crime with the protection of foreign investors.

 

A longer article on this topic appeared in the International and Comparative Law Quarterly in July 2018.  It is available here.

 

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India’s Treatment of Interconnected Agreements to Arbitrate

Thu, 2018-08-09 07:00

Ritvik Kulkarni

A plethora of business transactions today have evolved into complex structures of multi-faceted sub-transactions. Multiple parties enter into several distinct, yet interconnected and interdependent agreements towards achieving a common commercial goal.

Every so often, however, one or more of these interconnected agreements will lack an arbitration agreement; whereas the others will contain similar/related arbitration clauses. Disputing parties may then initiate parallel litigation and arbitration proceedings against each other.

One disputing faction would most likely request the relevant State Court to refer all the parties to one tribunal. Conversely, the other faction would resist any request for arbitral reference on grounds that it is a non-party to the arbitration agreement; and/or oppose a composite reference on grounds that the parties have clearly entered into several separate agreements.

I argue here that in such disputes, the Indian Supreme Court (SC) has realigned its focus on determining the commonality and end goal of composite transactions, instead of merely dissecting them into separate agreements based on a strict interpretation.

One Agreement, One Tribunal

India’s treatment of these issues has been previously analysed here on this blog. The most recent judgment discussed in the aforesaid post is the SC’s decision in Duro Felguera v. Gangavaram Port  (2017 SCC OnLine SC 1233) [Duro].

In Duro, the SC was faced with a request for a composite arbitral reference in relation to disputes arising out of six agreements. An original tri-partite agreement between all parties was subsequently restructured into five new agreements. The sixth agreement was a related bank guarantee. All six agreements were entered into in respect of one main project and had identical arbitration clauses.

In Chloro Controls v. Severn Trent (2013) 1 SCC 641 (Chloro Controls), the SC had referred even non-signatories to a single international arbitration since the ‘mother agreement’ among the agreements in question, contained an arbitration clause. However, the SC distinguished Chloro Controls because the arbitration clauses in Duro lacked the wide terms: [disputes arising] ‘under and in connection with’ [this agreement].

Even though it was observed in Duro that there had been “no novation by substitution of all five agreements”, the SC declined a composite reference mainly on grounds that Section 11(6A) of the Arbitration Act, 1996 (the Act) restricts the scope of judicial inquiry merely to determining the existence of an arbitration agreement. Having found six separate arbitration agreements, the parties were referred to four domestic and two international arbitrations, albeit presided over by the same set of arbitrators.

Paradigm Shift?

In this backdrop, the SC was yet again required to adjudicate a similar dispute in Ameet Lalchand Shah & Ors. v. Rishabh Enterprises and Another (Ameet Shah) [Civil Appeal No. 4690 of 2018].

Briefly put, four parties executed a total of four contemporaneous agreements for the purpose of commissioning a photovoltaic solar plant in Uttar Pradesh, India (the Solar Plant). Three of these four interconnected agreements contained an arbitration clause. When disputes arose, one of the parties issued a notice of arbitration, whereas the opposing party filed a suit before a Single Judge of the Delhi High Court (HC). In the suit, the plaintiff levelled serious allegations of misrepresentation and fraud in respect of the subject matter covering all four agreements. In Ameet Shah, the SC has also discussed a few contours of arbitrability of fraud. However, I have not delved into this aspect of the judgment in this post.

The defendant in the suit then filed an application under Section 8 of the Act and sought the dispute to be referred to arbitration. This request was rejected by the Single Judge, as also by the Division Bench (DB) on appeal.

While deciding the request for a single reference, the SC first revisited its ratio in Chloro Controls. Here, it will be recalled, the SC had given a purposive construction not only to the arbitration clause in the mother agreement, but also to the transaction as a whole. Importing its formative analysis from Chloro Controls, the SC in Ameet Shah observed that all parties could be covered by the arbitration clause in the main agreement as all four agreements were clearly interconnected and meant for achieving the single commercial goal of setting up the Solar Plant at Uttar Pradesh, India. Unlike in Duro, the Apex Court did not mandate the presence of a particular widely worded arbitration clause, as the one in Chloro Controls, to enable a single arbitral reference.

Further, the SC in Ameet Shah steered clear of its earlier decision in Sukanya Holdings v. Jayesh H. Pandya (2003) 5 SCC 531 (Sukanya). In Sukanya, it was held that a matter cannot be referred to arbitration if all parties to a civil suit are not privy to the arbitration agreement; as there is no provision in the Act for a partial reference to arbitration. The SC in Ameet Shah rightly adverted to the 2015 Amendments to the Act, and noted that the amended in the amended Section 8(1) clearly entitles even persons claiming through or under a party to the arbitration agreement to seek an arbitral reference, notwithstanding any judicial precedent. The SC then went on to refer all disputing parties to arbitration. Notably, while the SC has not returned a concrete finding to this effect, Sukanya should effectively stand overruled in light of the amended Section 8 and the SC’s decision in Ameet Shah.

Missed Chances

Interestingly though, Duro does not feature at all in the Ameet Shah analysis; and as such it has not been expressly overruled. Parties in future disputes may still seek to rely upon Duro to resist a composite reference if governed by both domestic as well as international agreements.

The SC has rightly applied Chloro Controls in Ameet Shah. However, it has done so only after having identified a principal/mother agreement among the four agreements. Therefore, Ameet Shah may impede the application of Chloro Controls in a similar multi-contract dispute which lacks the centrifugal force of a mother agreement. Hopefully, Indian Courts will nevertheless discard a Shylockian interpretation of contract and apply the Chloro Controls ratio in all multi-contract disputes where the overall transaction is common and comprises inextricably linked components.

Concluding Remarks

As Lord Hoffman has remarked in Fiona Trusts v. Primalov [2007] UKHL 40, the construction of an arbitration clause should start with the assumption that parties, as rational businessmen, are likely to have intended that any dispute arising out of their commercial relationship should be decided by the same tribunal. Perhaps India had a good opportunity to have formally adopted this presumption in Ameet Shah. Nonetheless, the SC’s purposive approach towards commercial transactions is a refreshing development in India’s arbitration landscape.

That said, would a party be permitted to reintroduce its grievance to consolidation as a ground for challenging the arbitral award? Most leading arbitral institutions now provide for consolidation (Article 28 of the 2013 HKIAC Rules, Article 8 of the 2016 SIAC Rules, Article 10 of the 2017 ICC Rules, Article 15 of the 2017 SCC Rules, and Article 22(ix) and (x) of the 2014 LCIA Rules). It has been previously argued on this blog that an institution’s decision on consolidation is administrative in nature and cannot by itself be challenged. However, the tribunal of the consolidated proceedings can determine the validity of the consolidation order since it retains kompetenz-kompetenz to decide its own jurisdiction, including a challenge based on the institution’s decision to consolidate.

Insofar as a tribunal’s decision on consolidation is jurisdictional, parties in an Indian arbitration may raise it as a ground for setting aside an award before the relevant Court (Sections 16(6) and 34(2)(a)(v) of the Act). In PR Shah v. BHH Securities (Civil Appeal No. 9238/2003), an award was challenged because the tribunal had permitted a common arbitration when a party raised related claims against two parties under separate arbitration agreements. The SC dismissed the objections against consolidation and observed that denying the benefit of a single arbitration against the two parties would lead to multiplicity of proceedings, conflicting decisions and cause injustice.

Where the decision of consolidation is made by a court of the arbitral seat in accordance with its laws, as argued in the above post, it would be difficult to sustain a challenge to the award on the ground that the arbitral procedure and/or constitution of the tribunal was not in accordance the parties’ agreement(s) or with the law of the seat of arbitration.

Of course, this is not to suggest that every dispute with multiple contracts must automatically be referred to a single arbitral tribunal. Even in multi-party transactions involving several related contracts, parties may consciously structure the agreements to create distinct obligations on each set of contracting parties.

In Trust Risk Group v. AmTrust Europe [2015] EWCA Civ 437, the parties’ contractual arrangements comprised (i) a standard London-form agreement with  dispute resolution under English law and jurisdiction and (ii) a subsequent framework agreement structured closer to the Italian market, which provided for arbitration in Milan under Italian law. It was observed that both agreements dealt with different parts of the parties’ commercial relationship, and the parties’ decision to have different dispute resolution was founded on a rational basis. The Court dismissed the argument that all disputes between the parties must be referred to arbitration under the latter agreement. Accordingly, such disputes could indeed be referred to separate tribunals even though they arise out of related transactions.

 

Views expressed in the post are the personal opinion of the author and do not necessarily reflect those of his law firm.

 

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Can the Application of Blockchain Technology Broaden the Horizons for Arbitration?

Wed, 2018-08-08 02:45

Dena Givari

In recent years, consumers, governments, and public interest groups have increasingly raised concerns over human rights abuses in the mining sector. Businesses are facing growing pressure from the public in this regard and various countries have as a result adopted legislation imposing a variety of due diligence and reporting obligations on corporations sourcing and using in their supply chains and products, minerals extracted from known conflict areas.1)UK Modern Slavery Act, French Due Diligence Law, USA Section 1502 of the Dodd-Frank Act (although this is currently under threat from the Financial Choice Act which seeks to undo the regulations imposed on financial institutions post 2008 economic crash) and in 2021 the EU’s Regulation 2017/821 of the European Parliament and of the Council will come into force across the EU. jQuery("#footnote_plugin_tooltip_5001_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5001_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The possibility of being tainted by human right violations can harm the reputation of businesses as well as that of the host countries and weaken a corporation’s social license to operate in those jurisdictions.

While public scrutiny and the adoption of such legislation constitute commendable efforts to protect human rights globally, these measures can impose a significant burden on businesses that are part of the supply chain. Blockchain technology can reduce this burden by facilitating transparency in the supply chain. The application of this technology in the mining sector has the potential to have a significant effect on the arbitration of mining-related disputes.

CSR legislation and the role of Blockchain

On August 22, 2012, the United States implemented a law which impacts thousands of companies globally: section 1502 of the U.S. Dodd-Frank Wall Street Reform Act (“DF 1502”).  The statute for the first time required all companies listed on the U.S. Stock Exchange to declare the use of minerals determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo (DRC) or in adjoining countries.

This imposes a significant due diligence burden on industries which use such minerals when producing goods such as those in the electronics and automotive industries. The burden is exacerbated by the fact that mining supply chains consist of complex multi-tiers with multiple actors, all of which militates against a transparent and traceable record.

On January 1, 2021 the European Union’s Regulation (EU) 2017/821 (the “EU Regulation”) is set to come into effect. This legislation was motivated by the concept of “responsible sourcing” touted by the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights as the principle of encouraging businesses to verify, via due diligence procedures, that they are not purchasing minerals from sources which fund armed group activities in designated conflict areas.

The EU regulation is anticipated to directly affect between 600 and 1000 EU importers and indirectly affect about 500 smelters and refiners. It requires importers to identify smelters and refiners in their supply chains and to check whether they have the correct due diligence practices in place. Specifically, the regulation requires importers to follow a five-step framework set out by the OECD:

  1. Establish strong company management systems;
  2. Identify and assess risks in the supply chain;
  3. Design and implement a strategy to respond to identified risks;
  4. Carry out an independent third-party audit of supply chain due diligence at identified points of the supply chain; and,
  5. Report on supply chain due diligence.

In the European Commission’s Executive Summary of the Impact Assessment for this legislation, an “opaque supply chain” is cited as one of the main obstacles to European Union companies complying with these requirements.

Organizations such as the ITRI Tin Supply Chain Initiative (iTSCi) are attempting to address this issue. iTSCi is a joint initiative of governmental authorities, companies and civil society organizations working with mineral supply chains in Burundi, the DRC, Rwanda, and Uganda to carry out due diligence on mineral supplies in accordance with the OECD due diligence framework. The process used is to audit mines for human rights violations and then apply a bag and tag system whereby each sack of minerals is given a barcode that identifies details such as the miner’s name and weight of the sack. This information is then recorded in a paper logbook. The logbooks are stored in boxes secured by three padlocks which are controlled by each of the Service for Assistance and Supervision of Artisanal and Small-Scale Mining (SAEMAPE), mining cooperatives and the concession owner. The problem is that this process is not very efficient and is vulnerable to corruption.

Blockchain technology can help address this very issue of supply chain transparency and efficiency by providing a platform on which ownership information of tagged minerals is recorded on a digital ledger that can only be updated or modified upon pre-determined conditions such as when all members of the blockchain network agree to the modification.

This is exactly the kind of initiative that Cobalt Blockchain, a mineral resource company, is launching. As reported in the article, “Cobalt Blockchain tries new model in DRC”2)R. Quarisa, “Cobalt BlockChain tries new model in DRC”, The Northern Miner, April 16-29, 2018, VOL. 104 Issue 8. jQuery("#footnote_plugin_tooltip_5001_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5001_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the company’s goal is to produce ethically sourced cobalt from artisanal mines in the Congo using a bagging and tagging system and adhering to the iTSCi requirements regarding supply chain information. Cobalt Blockchain believes blockchain can close loopholes in the iTSCi system and protect it from tampering. The company plans to partner with DLT Labs, the creator of a supply chain and logistics management product called DL Asset Track, to develop a new blockchain-based platform for tracking base and precious metal supply chains.

How Might Arbitration Benefit?

Disputes arising from mining are often the subject of domestic, international and investor-state arbitrations. Such disputes invariably pit the often-foreign mining company seeking to exploit a natural resource against local or national governments seeking to regulate it, with indigenous populations on whose land or territory the extractive activities take place in the middle and being the most affected.

Arbitrators should be prepared for the arrival of blockchain technology in the realm of mining sector disputes and should welcome it. This is because automating transparency in the supply chain will help manage the evidence and will make it easier to make findings relating to the origin of a mineral. It will do this by removing the need to spend time and energy backtracking the chain of ownership and sifting through the evidence to establish whether the mineral was sourced from a mine in a conflict area and whether anyone benefitted from human rights violations when doing so.

Blockchain technology will also assist in the determinations that an arbitrator will be called upon to make relating to breaches of contract amongst members of the supply chain. The Working Group on International Arbitration of Business and Human Rights described the impact that can be expected from inserting human rights commitments and arbitration clauses into contracts between members of a supply chain in this way:

These contracts could contain perpetual clauses that require each member of a supply chain, in turn, to insert such clauses in contracts with its own suppliers. An entire supply chain could be covered by an arbitration arrangement that allows the originating business to instigate arbitration against any supplier in the chain that breaches the commitment to observe human rights. This would not be expanding its own liability, only exposing any breaching supplier to relatively prompt enforcement.3)C. Cronstedt, J. Eijsbouts et. al, “International Arbitration of Business and Human Rights: A Step Forward”, Kluwer Arbitration Blog, November 16, 2017, http://arbitrationblog.kluwerarbitration.com/2017/11/16/international-arbitration-business-human-rights-step-forward/?print=print, <June 3, 2018>. jQuery("#footnote_plugin_tooltip_5001_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5001_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

By adopting the smart contract functionality of a blockchain, members of the mining supply chain can ensure compliance with such clauses by creating a blockchain whose protocol will only allow the transfer of ownership of minerals if the transferor transfers ownership of the mineral through a smart contract which obligates the transferee to agree to be subject and to adhere to the human rights commitment and arbitration clause. In this way, a subsequent transferee will have certainty that all the members of the supply chain have contractually committed to the human rights standard. This will reduce the risk of exposure to human rights related liability arising from the acts or omissions of another member of the supply chain. The blockchain protocol can even be made to notify all the members in the supply chain when supply chain members have commenced arbitration over a human rights related matter.

Corporate social responsibility requirements on businesses together with smart contract enabled blockchain are creating opportunities for arbitration to become a more effective dispute resolution mechanism4)If it is stipulated that every member in the network is notified when a dispute is submitted to arbitration over a human rights matter, members in the supply chain (i.e. members of the network) are incentivized to comply with due diligence requirements. A system that requires compliance with due diligence requirements and which exposes human rights violations to your business partners will incentivize members of a supply chain to comply thereby becoming a self-regulating system and reduce the need to resort to the regulator or to the court system. jQuery("#footnote_plugin_tooltip_5001_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5001_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); in this context. The increased concerns over transparency in the mining supply chain and the burden that related legislation impose on businesses together call for the application of novel technologies that can help facilitate compliance. As companies are drawn to the application of blockchain, arbitrators should be considering and preparing for how this development will impact the process of arbitrating disputes. At a minimum, the smart contract capability of blockchains will assist arbitrators to play a more effective role in arbitrating issues as to the formation, verification and performance of agreements among the members of the mining supply chain.

References   [ + ]

1. ↑ UK Modern Slavery Act, French Due Diligence Law, USA Section 1502 of the Dodd-Frank Act (although this is currently under threat from the Financial Choice Act which seeks to undo the regulations imposed on financial institutions post 2008 economic crash) and in 2021 the EU’s Regulation 2017/821 of the European Parliament and of the Council will come into force across the EU. 2. ↑ R. Quarisa, “Cobalt BlockChain tries new model in DRC”, The Northern Miner, April 16-29, 2018, VOL. 104 Issue 8. 3. ↑ C. Cronstedt, J. Eijsbouts et. al, “International Arbitration of Business and Human Rights: A Step Forward”, Kluwer Arbitration Blog, November 16, 2017, http://arbitrationblog.kluwerarbitration.com/2017/11/16/international-arbitration-business-human-rights-step-forward/?print=print, <June 3, 2018>. 4. ↑ If it is stipulated that every member in the network is notified when a dispute is submitted to arbitration over a human rights matter, members in the supply chain (i.e. members of the network) are incentivized to comply with due diligence requirements. A system that requires compliance with due diligence requirements and which exposes human rights violations to your business partners will incentivize members of a supply chain to comply thereby becoming a self-regulating system and reduce the need to resort to the regulator or to the court system. 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 Fear Of The Sole Arbitrator

Tue, 2018-08-07 02:45

María Angélica Burgos

During a recent conference on international arbitration, an in-house lawyer mentioned that whenever faced with the possibility of agreeing to an arbitration clause that provides for a sole arbitrator, she noted certain resistance within the company. There seemed to be a certain apprehension on placing the burden of deciding a dispute on a single person who may face greater difficulty in detecting and addressing errors and mistakes. During the discussion, an additional reason was pointed out for the general preference to select a multiple member tribunal: the possibility for a party to assert its right to select the tribunal and, in certain cases, to choose a party-appointed arbitrator.

These reasons appear convincing and create a tenable fear of the sole arbitrator: three persons can surely better spot a mistake than a single individual and a party has a better chance to influence the selection of its tribunal in a collegiate body in which it can at least nominate one of its members.

In response to this fear, parties often expressly select the number of arbitrators in the arbitration agreement,1)For example, in 2016 the ICC reported that in 91% of the cases parties chose the number of arbitrators. ICC Dispute Resolution Bulletin, 2018, issue 2, 2017 ICC Dispute Resolution Statistics jQuery("#footnote_plugin_tooltip_7913_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7913_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); usually opting for a sole arbitrator in cases of lower quantum and less complexity.2) White & Case and Queen Mary University School of London, 2010 International Arbitration Survey: Choices in International Arbitration. jQuery("#footnote_plugin_tooltip_7913_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7913_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The 2010 International Arbitration Survey confirmed that there was an overwhelming preference for three arbitrators – 87% of survey respondents – mainly because of a perception of greater neutrality and balance in the award, less risk of a poor decision, the possibility of appointing one of the arbitrators and of benefiting from diversity of background and experience in the panel. The ICC caseload for 2017 shows that parties opt for a three-member tribunal in 67% of the cases. Interestingly, the Court has submitted more cases to a sole arbitrator than to a three-member arbitral tribunal3)ICC Dispute Resolution Bulletin, 2018, issue 2, 2017 ICC Dispute Resolution Statistics jQuery("#footnote_plugin_tooltip_7913_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7913_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); which suggests that arbitral institutions may fear the sole arbitrator less than parties do.

Specifically regarding quantum, a recent LCIA study on costs and time of arbitrations between 2013-2016 found that three-member tribunals tend to handle cases in which there are larger amounts in dispute (over 60% of the three-arbitrator cases refer to amounts in dispute exceeding USD 10 million) and that the median amount in dispute in a three-arbitrator case is approximately five times greater than that of a single arbitrator case.4)London Court of International Arbitration, Facts and Figures: Costs and Duration 2013-2016. jQuery("#footnote_plugin_tooltip_7913_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7913_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Other factors that are weighed in to decide the number of arbitrators include the characteristics of the parties involved, the complexity of legal issues, the non-financial impact of the dispute and the budgetary concerns of the parties.

These considerations are not fixed as rules of thumb, but may lead to an excessive fear of the sole arbitrator and to overlook its advantages in certain circumstances.

Although opting for a sole arbitrator might reduce the influence the party will have on the selection of the tribunal (more so in cases in which it appoints one of the members of the tribunal), this does not necessarily imply that the party will not be able to partake in this decision (for instance, by attempting to jointly nominate the arbitrator) or that appointing authorities will select unfit individuals. In certain cases, users might even find that their preferred qualities in an arbitrator are better found in a single individual, rather than in a collegiate body. Moreover, in a single member tribunal it is not possible to distribute tasks, and arbitrators will exercise greater caution in order to avoid mistakes and errors. As one of the respondents in the 2010 International Arbitration Survey pointed out “a sole arbitrator may assess the law and facts more fully, whereas with three arbitrators the result reflects closed door bargaining”. Further, the decision-making process might be swifter for a sole arbitrator than for a multiple member tribunal in which deadlocks can arise.

All in all, the decision on the number of arbitrators can benefit from taking multiple factors into consideration, which vary from one case to the other. Limiting this decision to a single factor – for example, the amount in dispute -, might overly exaggerate the fear of the sole arbitrator and disregard the advantages that it may have in certain types of disputes.

Dispute Resolution Data (DRD)

References   [ + ]

1. ↑ For example, in 2016 the ICC reported that in 91% of the cases parties chose the number of arbitrators. ICC Dispute Resolution Bulletin, 2018, issue 2, 2017 ICC Dispute Resolution Statistics 2. ↑ White & Case and Queen Mary University School of London, 2010 International Arbitration Survey: Choices in International Arbitration. 3. ↑ ICC Dispute Resolution Bulletin, 2018, issue 2, 2017 ICC Dispute Resolution Statistics 4. ↑ London Court of International Arbitration, Facts and Figures: Costs and Duration 2013-2016. 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 Investor-State Dispute Settlement System: The Road To Overcoming Criticism

Mon, 2018-08-06 04:38

Justine Touzet and Marine Vienot de Vaublanc

Young ICCA

Recent events such as the NAFTA re-negotiations have drawn leading newspapers around the world to turn their attention to ISDS tribunals. Often in an effort to make their stories sensational, they speak of “obscure tribunals,” “secret trade court,” and “justice behind closed doors,” most of the time giving it an unfair and biased image.

In this context, the UN Commission on International Trade Law entrusted the Working Group III (the Working Group) with a broad mandate to work on the possible reform of the ISDS framework.  The Working Group is one of the six working groups to perform the substantive preparatory work on topics within the Commission’s program of work. Within its mandate, the Working Group is working on identifying and considering expressed concerns about ISDS (I) and desirable reforms and solutions to be recommended to the Commission (II).

1. THE ISDS SYSTEM: THE NEED FOR REFORM

Procedural criticisms

The Working Group first identified that the length and costs of arbitral proceedings are rising. Delays are mainly due to the growing complexity of cases, the fragmented nature of investor protection provisions and the multiplication of interlocutory proceedings. Both sides to a proceeding also incur higher costs as monetary awards, legal fees and related costs can often be relatively high. While some States struggle to find resources to properly defend themselves, small-claim or impecunious investors might never be able to get their “day in court.”

Other major concerns relate to the independence and impartiality of arbitrators, which focus on arbitrators’ fees, qualifications and the lack of diversity in their appointments as reports show numerous repeated appointments and an important concentration of arbitrators from a certain region, age, gender and ethnicity. The means of appointing arbitrators are also under review, including the increased use of appointing authorities or the use of rosters established by States.

 Closely related are criticisms about the lack of transparency and possibilities for third parties to participate in proceedings. Disclosure of third party funders is also highly controversial as it raises risks of conflict of interests, which may result in the removal of the arbitrator or an effective challenge of the award.

Substantive issues

Arbitral awards in the investor-state dispute context are criticized for their lack of consistency and for being contradictory. A good example is the widely different interpretations of the fair and equitable treatment standard. Some States have even modified their treaties to either include a “minimum standard of treatment” or an exhaustive definition. Another example is the lack of uniform standards for awarding damages. As a result, tribunals are free to choose their valuation methods, which often leads to the use of various methodologies and contradictory decisions.

According to the UN Secretariat, this may be the result of “the fragmented nature of existing underlying investment treaties” which, themselves, have varying standards of applicability. See A/CN.9/WG.III/WP.142, p. 7. Moreover, some treaties restrict ISDS to claims arising from breach of certain provisions or claims relating to expropriations. See Vigotop Limited v. Hungary, ICSID Case No. ARB/11/22.

Lastly, a particularly scrutinized public question turns upon State sovereignty and arbitral infringement. For example, taxation measures are generally prohibited from international arbitration claims, but significant exceptions have severely undercut this protection. Also, recent arbitral interim measures can be seen as infringing on a State’s sovereignty when, for example, judicial domestic proceedings are not only stayed but are also ordered not to be enforced. The most recent example is Puma Energy Holdings v. Benin, where Christer Söderlund, the emergency arbitrator, ordered Benin, i.e. the executive power, to immediately take all available measures to prevent its court, i.e. the judiciary, from enforcing the Court of Appeal’s judgment until the arbitral dispute before the CCJA was resolved.

2. MAIN OPTIONS TO OVERCOME CRITICISMS OF THE ISDS SYSTEM

Between 23 – 27 April 2018, the Working Group met in New York to study the reform suggestions, including: the amendment of investment treaties containing vague wording, the provision of joint interpretative statements or guidelines on interpretation of standards, the introduction of stare decisis and the adoption of a systemic approach through institutional solutions (e.g., appeal mechanisms or permanent adjudicatory bodies).

Reforming the current system

 Transparency – Some adjustments have already been implemented to overcome the criticisms on transparency. The new transparency standards have been adopted by ICSID in 2006 and UNCITRAL in 2013. Additionally, the Mauritius Convention on Transparency, which entered into force in October 2017, aims at applying the 2014 UNCITRAL Rules on Transparency in treaty-based investor-state arbitration. The Rules now apply by default to all investor-State arbitrations conducted under the UNCITRAL Arbitration Rules pursuant to treaties concluded on or after 1 April, 2014.

Appointment of arbitrators – The Working Group is considering new arbitrator-appointment procedures such as referring to a pre-established group of arbitrators under Article 37 of the ICSID Convention and its Additional Facility Rules and Article 6 of the UNCITRAL Arbitration Rules.

Aiming for consistency in arbitral awards: setting up of an appellate body – When the ICSID arbitral system was designed, despite the desirability of a consistent interpretation, proposals for the possibility to appeal on grounds such as an error of law/substantial error were rejected.

Consistency, which encompasses the coherent interpretation of applicable principles and standards of law, is fundamental to improve predictability, enhance trust in the ISDS system and to develop a homogenous international investment law. The inconsistency of the interpretation of the fair and equitable treatment standard has led not only to the modification of treaties by states to either include a “minimum standard of treatment” obligation instead or an exhaustive definition of fair and equitable treatment but it has also led to contradictory decisions about the same facts, such as in CME v Czech Republic and Lauder v Czech Republic.

 A permanent or semi-permanent appellate body might be seen as a solution, but the very idea of its creation in the existing system raises several questions.

First, filing appeals might become the norm for losing parties and, as such, there are concerns regarding the length, costs and complexity of proceedings which could prove detrimental for parties with limited resources. Another concern is the appellate body’s coexistence within the ICSID self-contained system, which excludes any appeal or other remedies, except for those provided for in the Convention itself (Article 53) and existing annulment mechanisms.

Then, the creation of such an appellate body raises questions regarding framing the grounds for appeal (broad/narrow) and the applicable standards of review to identify alleged errors of law as well as stare decisis and the scope of the decision’s binding effect. Should decisions be limited to the parties or whether a principle of law stated in its decisions could be constitutive of a precedent. The absence of a doctrine of precedent is often explained based on Article 53, according to which awards shall be binding on the parties.

Creation of a permanent dispute settlement body

 Replacing the current ad-hoc arbitration system administered, for instance, by ICSID or other centers, and where arbitral tribunals are only set up on a case by case basis, with a permanent dispute settlement body is a more radical approach strongly advocated by the European Union, in order to build public confidence. On 20 March 2018 the European Council adopted the negotiating directives authorizing the European Commission to negotiate a convention establishing a multilateral court. The Council also decided to make the negotiating directives public.

The EU’s emphasis on the systemic nature of the concerns surrounding the ISDS system and on the need for a complete reform. Creating a multilateral court would indeed be a major departure from the ISDS system and would aim at addressing the fragmentation of the current regime.

The idea was put forward in the public consultation conducted in 2014, in the context of the development of the EU’s policy on investment protection and investment dispute settlement in the Transatlantic Trade and Investment Partnership (TTIP) agreement and has recently been in the spotlight after the Achmea case. Pioneer steps have already been taken in several BITs towards the creation of permanent investment bodies with notably, Chapter 8, Section F of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) or Chapter 8.II, Section 3 of the European Union-Vietnam Free Trade Agreement.

*  *  *

In conclusion, if reforming the current ISDS system is certainly needed, it seems unlikely that either the creation of an appeal mechanism or a permanent body could address all public concerns. However, in its last report regarding the work of the thirty-fifth session, dated 18 May 2018, the Working Group concluded that “while perceptions should be taken into account, they should not be the driving force for the current work.” If reforms will “deal with the public perception of ISDS,” “perceptions alone would not justify the need for reform and as a subjective concept, would need to be grounded on empirical evidence and facts.” So even if there are no “magic solutions,” reforms are underway.

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Will Mexico Lead The Next Wave of Investment Arbitration Claims?

Mon, 2018-08-06 02:06

Damián Vallejo

Young ICCA

Mexico held its general elections (including presidential election) on July 1st. The Government of the country has shifted from a center-right president, Enrique Peña Nieto from the Partido Revolucionario Institucional (Institutional Revolutionary Party), to the favorite candidate for the recent elections, the left-wing politician Andrés Manuel López Obrador (“AMLO”).

AMLO, a member of the Movimiento de Regeneración Nacional (National Regeneration Movement), achieved the presidency in his third run for the job. Although he started as a member of the PRI, he is now seen as a populist and a nationalist. There has been an increasingly growing fear in Mexico’s business community for the past few months fueled by AMLO’s lead in the polls that recently materialized with 53% of the votes. AMLO’s continuous public statements and electoral promises have intensified these fears.

Among other proposals, AMLO has suggested conducting a widespread audit of the oil sector, which includes revisiting the privatization of Mexico’s state owned oil company, Petróleos Mexicanos. He has also mentioned the cancellation or suspension of the latest wave of private contracts to develop the oil industry. Other electoral promises include suspending the construction of the new international airport of Mexico City, valued in over $11 billion. He has stated that contractors should not expect cancellation fees if the project is abandoned.

In light of the current political climate, foreign investors should review the foreign direct investment protections in place and determine whether it is time to restructure existing investments. Mexico is party to thirty plus bilateral investment treaties (“BITs”) and a handful of other international agreements granting investment protections. A large number of these international agreements are with European Union (“EU”) Member States.

Although many of the foreign investors currently operating in Mexico will probably have some degree of investment protections in place under existing BITs and free trade agreements (“FTAs”), attention should be brought to the modernization of a particular international agreement: the EU-Mexico Global Agreement. The new agreement, currently in the works, will replace the existing agreement between the EU and Mexico.

Negotiations of the EU-Mexico Global Agreement (the “Global Agreement”) kicked off in May 2016. After almost two years, on 21 April 2018, Mexico and the EU reached an agreement in principle. The latest public official draft of the agreement, still under negotiation, includes some interesting provisions in its “Investment Chapter” that foreign investors from both regions should be aware of.

The definition of “Enterprise of the EU / Enterprise of Mexico” in article 3, for example, includes a footnote whereby both parties agree that the concept of “effective and continuous link” with the economy of a European Union Member State enshrined in Article 54 of the Treaty on the Functioning of the European Union (“TFEU”) is equivalent to the notion of “substantive business operations”. Thus, under the current version of the agreement, a foreign investor would not be able to claim access to the substantive protections of the agreement simply by incorporating a shell corporation or holding company in the home state. Many BITs currently in place with EU Member States do not have this jurisdictional requirement.

Perhaps more importantly, Article 22 of the Investment Chapter on “Relationship with Other Agreements” provides that the new agreement shall replace and supersede all the existing investment treaties in force between Mexico and the European Union Member States listed in “Annex YY”. To date, no agreements have been added to “Annex YY” and the question of which specific agreements will be effectively derogated by this new treaty remains uncertain. Nevertheless, it is safe to assume that a number of BITs and FTAs in place between Mexico and EU states will fall in this category, even though many of them include sunset clauses. This likely outcome is confirmed by paragraph 3 of Article 22, which stipulates that investors may only bring investment claims under the previous treaties when two cumulative conditions are met. First, the acts triggering the claims must have been conducted before the entry into force or provisional application of the new agreement. Second, no more than three years should have elapsed since the entry into force or provisional application of the new agreement.

The foregoing should inform foreign investors’ strategies when conducting nationality planning or investment restructuring. If the current BITs/FTAs are used for investment planning, the underlying protections may not be available for the foreseeable future. This is a complex and somewhat uncertain situation as there are many variables at play that could affect the entry into force of the new agreement and its impact on foreign investment. Will Mexico sign the deal after the elections? Will the EU modify certain provisions considering the newly elected Mexican president? Both fair questions that have no clear answer at this stage.

Faced with this uncertain landscape, foreign investors may find some solace in the timeline pursuant to which other free trade agreements recently concluded by the EU have been implemented. A good example is the Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA”). CETA’s negotiation began in June 2007 at the EU-Canada Summit in Berlin. A final text was adopted in August 2014. Nevertheless, CETA’s provisional application did not begin until the 21 September of 2017. There is thus a three-year gap between the adoption of CETA’s final text and its provisional application.

Taking CETA as an example, three or more years could elapse before the new Global Agreement is rolled out. Mexico and the EU are aiming to have a final text by the end of 2018, so a provisional application of the new agreement could be expected for the beginning of 2022, at the earliest. Considering this, the aforementioned provisions of the new EU-Mexico agreement would leave the ISDS provisions form all the BITs/FTAs included in “Annex YY” without effect. Claims under such treaties or agreements could only be brought against the States if the acts triggering those claims occurred before the provisional application or entry into force of the new agreement (beginning in 2022, hypothetically), provided that no more than three years have elapsed since such entry into force.

With this in mind, foreign investors in Mexico are left with three choices: (i) structuring/restructuring investments in the country through the international agreements currently in place, considering that the protections granted by these agreements will not be enforceable after the beginning of 2025 (provided the agreements are included in “Annex YY” of the new agreement and this is finalized); (ii) do nothing and therefore remain unprotected; or (iii) structure/restructure investments through international agreements entered into by parties which will not be affected by the new Global Agreement.

The later should leave the US and Canada outside of the equation, for the time being. Although these two countries will not be affected by the new EU-Mexico agreement, the current status of the NAFTA negotiations might also leave US and Canadian investors with no other choice but to structure/restructure investment through other jurisdictions.

It is also important to consider that the Mexican Constitution provides for a six-year presidential mandate, starting on the 1st of December of the electoral year. This implies that AMLO’s mandate will extend through late 2024. Bearing this in mind, structuring/restructuring investments through international agreements currently in place might seem like a good choice after all.

Mexico is not a unique example. Foreign investors should embark in the worthwhile endeavor of analyzing which are the optimal protection alternatives for their investments in jurisdictions that have recently witnessed nationalist and populist ideas.

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Consolidation of Arbitration under “Entire Agreement” Clauses

Sat, 2018-08-04 23:38

Hu Ke

YSIAC

Introduction

In many commercial transactions, there will be multiple agreements among various parties, and those agreements often contain “entire agreement” clauses to ensure that the parties are bound only by the terms of the agreement(s) they sign. However, such a clause may be invoked and interpreted in a way surprising to the parties, especially in terms of dispute resolution.

While an entire agreement clause typically reads as “this Agreement contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements on any subject matter of this Agreement”, its variation in a complex transaction with multiple instruments may provide that the agreement containing the clause and another agreement constitute the entire agreement between the parties and so on. When the former has an arbitration clause and latter does not, a party to the former may rely on the entire agreement clause, to file an arbitration consolidating claims under both contracts; to make the case more challenging, the latter may have its own disputes resolution clause providing for a different mechanism, or the claim may be pursued against a party not bound by the latter, in accordance with terms thereof.

One West vs. Greata Ranch

The issue has been emerging in M&A disputes, according to a presentation by Tunde Ogunseitan, counsel at the ICC International Court of Arbitration, and in energy disputes according to David R Haigh QC and Paul Beke of Burnet, Duckworth & Palmer LLP, often involving different dispute resolution clauses in different instruments.

So far few cases have come into public knowledge, except One West Holdings Ltd. v. Greata Ranch Holdings Corp., 2014 BCCA 67, an interesting case before the courts of British Columbia.

The case involves three agreements, a Limited Partnership Agreement (LPA) with an arbitration clause, and a Project Management Agreement (PMA) and a Purchase Agreement (PA) both without such. One West is a party to the PMA but not a party to the LPA; Greata Ranch is a party to the LPA but not to the PMA.

The “entire agreement” clause in the PMA reads as:

“This Agreement, [the LPA] and [the PA] and any documents expressly contemplated by this Agreement, constitute the entire agreement between the parties and/or affiliates of the parties and supersede all previous communications, representations and agreements, whether oral or written, between the parties with respect to the subject matter hereof.”

The arbitration clause in the LPA reads as:

“All disputes arising out of or in connection with this Agreement, or in respect of any legal relationship associated therewith or derived therefrom, shall be referred to and finally resolved by arbitration administered by the British Columbia International Commercial Arbitration Centre pursuant to its Rules. The place of arbitration shall be Vancouver, British Columbia, Canada.”

Disputes arose and Greata Ranch initiated an arbitration against other parties to the LPA and One West, relying on the arbitration clause in the LPA. One West asserted that it should not be joined to the arbitration because it did not sign the LPA and is not a party to any arbitration agreement with Greata Ranch. The arbitrator determined the issue in favor of Greata Ranch, concluding as follows:

“The intention of the parties is explicit that the LPA and PMA are to be part of one comprehensive agreement and the only reasonable interpretation of the [Arbitration Clause] is that all disputes connected with that agreement ‘shall be referred to and finally resolved by arbitration…’”

One West sought judicial review. The Supreme Court agreed to One West, holding that the entire agreement clause in the PMA does not incorporate terms of the LPA and the PA by reference, and set aside the award.

On appeal, the Court of Appeal reversed, opining that:

“[The entire agreement clause] does two things: it defines the agreement of the parties and it limits the scope of inquiry. The [Supreme Court]’s approach appears to eliminate the first part of the provision merely because it is called an ‘entire agreement’ clause.”

Comments

As one commenter said, the One West decision gave to entire agreement clauses “greater implications than expected”.

There is no dispute to the function of “limiting the scope of inquiry” of entire agreement clauses. Black’s Law Dictionary defines “entire agreement clause” (also called “integration clause”, “entire contract clause”, “merger clause” and “whole agreement clause”) as “[a] contractual provision stating that the contract represents the parties’ complete and final agreement and supersedes all informal understandings and oral agreements relating to the subject matter of the contract.” It points to “parol evidence rule”, which is described as “[t]he common law principle that a writing intended by the parties to be a final embodiment of their agreement cannot be modified by evidence earlier or contemporaneous agreements that might add to, vary, or contradict the writing.” The Court of Appeal also agreed that entire agreement clauses “set out the document or documents to which the court may refer” and “attempt to limit the scope of contractual relevance to the four corners of the specified document or documents”.

The key inquiry is whether, and how, do they “define the agreement of the parties”. In my view, the reasoning of the arbitrator and the court is doubtful in three aspects.

Firstly, the arbitrator might be wrong in concluding that “the intention of the parties is explicit that the LPA and PMA are to be part of one comprehensive agreement and the only reasonable interpretation of the ss. 13.13 is that all disputes connected with that agreement ‘shall be referred to and finally resolved by arbitration…’” (emphasis added). There is no language to create one comprehensive agreement (with the word “agreement” used as a countable noun) – the parties agreed that the three instruments should constitute the entire agreement (with “agreement” probably used as a non-countable noun), and nothing beyond. If the parties intended to make “one comprehensive agreement” explicitly, the parties would have used languages to that effect, such as “a comprehensive agreement” or “a single agreement”, but they did not. And from a linguistic perspective, it makes little sense to have “entire” describe “agreement” as a countable noun in the context, and neither the arbitrator nor the appellate judges used the counterintuitive “an entire agreement”.

Secondly, going further from the analysis, that these instruments constitute “the entire agreement between the parties” does not necessarily lead to the conclusion that all the parties are bound by each instrument within the entire agreement. It could reasonably be read as that each party is bound by the instrument(s) it signed, and nothing beyond, as a reasonable business person (and their legal advisor) would expect in entering into such agreements in a complex transaction. The use of “and/or” rather than “and” before “affiliates of the Parties”, is simply indicative that not all of them are bound by each instrument, otherwise the “or” is simply redundant. On the other end, it would cause absurdity to drag a party into a contractual relationship when the language of the instrument defines no right or duty of that party, and provides bad incentives for an opportunistic disputant.

Thirdly, the court perhaps understated the fact that in a transaction with multiple contracts many terms cannot be incorporated into each other and some terms conflict with each other. A common rationale for the parties to sign multiple contracts, instead of “one comprehensive agreement”, is to define different aspects of their relationships with different conditions and among different persons; the asserted “consolidation” of agreements would find great difficulty in reconciling these agreements in a “battle of forms”. The commercial reality is that entire agreement clause is indeed a term of legal art, and it should be interpreted as common lawyers intend it.

That said, incorporation clauses, including “integral part” clauses, which incorporate the terms of a contract into another, should be distinguished from entire agreement clauses, as in the case of Karah Bodas Co LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (2004), 364 F 3d (5th Cir), where the Tribunal correctly consolidated disputes under two contracts.

Conclusion

“If there is such an ambiguity in the words used, the court should interpret them in a manner that accords with commercial reality and that avoids a commercial absurdity.” Cross-referencing other agreements in an entire agreement clause is usually not intended to incorporate other agreements or terms thereof into the agreement between the parties; the latter stays as it is. The consolidation of agreements and consequent consolidation of disputes, through entire agreement clauses, probably will go against the genuine intention of the parties and bring consequential chaos. Though it can never go wrong to ask parties to be more careful in contract drafting, the misinterpretation of “entire agreement” clauses for consolidation purpose should be, and can be, ceased.

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The ‘Professionalization’ of International Arbitrators: What Role for the Professional Arbitral Associations?

Fri, 2018-08-03 17:48

João Ilhão Moreira

The unique way arbitrators organize and regulate themselves has been increasingly an interest of mine. Being within the world of arbitration it is easy to forget how unique the arbitration ‘market’ and the arbitrators’ ‘function’ is. Undoubtably one of the most curious aspects of international arbitration is how distinctive the process of ‘professionalisation’ of arbitrators has been.

I – The concept of ‘professionalisation’                                                       

The process of ‘professionalisation’ – i.e. the way by which certain occupations have over time developed institutionally autonomous or semi-autonomous systems of regulating members of a profession – has long been a staple of sociological enquiries.

Classical studies, such as Wilensky’s influential ‘The Professionalization of Everyone?’ (1964, American Journal of Sociology), have attempted to demonstrate how many professions tend to organize, monopolize, and self-regulate through predictable steps. These studies often explained how the members of a certain number of high prestige professional occupations, most often those that required advanced and specialized education, were able to organize and extract legal protection and the right to determine who was able to join their ranks.

While specific jurisdictions and specific professions have developed their unique stories, what is clear is that often a grand bargain between the state and a profession emerges. In return for the ‘guarantee’ by the profession of developing a framework of self-regulation that ensures that the members defend public interest goals, the state often offers protection from ‘unfettered’ competition.

II – The special case of ‘professionalisation’ of international arbitrators          

The readers of this blog are well-aware that arbitrators’ organization, regulation, and function is not comparable to that of other professions. Their process of ‘professionalization’ – assuming that such a process has occurred at all – has been unique in the sense that the ‘state’ does not offer protection to arbitrators from would-be competitors.

The particularities of the arbitration market and of the arbitral function have led to the fact that arbitrators generally do not act or perceive themselves as full-time service providers. Most often being an ‘arbitrator’ is still an occupation that is combined with another legal activity, such as being a lawyer, a university professor, or less often other professions such as engineers or accountants. Differently from most other professions, no specific education or training is legally mandated. Also, differently from other professions, arbitrators are not subject to the disciplining powers of specific arbitral professional associations.

The specificities of the ‘arbitrator’ as a ‘profession’ means that the regulatory framework in which they operate is not comparable to that of any other profession. International arbitrators operate under a system of almost ‘radical’ self-regulation. With states most often establishing only an outline of the duties and obligations of the arbitrator, it has been most often the arbitral community to detail and expand ideas for regulation. Such self-regulatory rules, despite their undeniable influence, however, have rarely been more than ‘soft law’. Further, the enforcement of such rules does not involve the kind of sanctions found in other professions such as the threat of being expelled from the profession.

III – The role of professional arbitral organizations: how different are they?

Another stark difference between the arbitral landscape and that of other professional services is the characteristics of the professional associations. For most of the so called ‘learned professions’ it is often possible to identify the existence of a national, regional or local professional association that organizes the professionals working in that particular jurisdiction. Participation in these professional associations is often mandatory and a requirement to legally operate in that market. Further, these associations often have an exclusionary nature, having strict requirements for entrance: often requiring members to have a particular education and undertake training and/or examinations. Finally, in many of these professional associations it is possible to identify a dual nature in terms of their goals: i) at times they function as regulators of the profession; ii) at other times they operate as ‘defenders’ of the interests of the professionals they represent.

The situation is considerably different regarding arbitral associations. Most often arbitral associations are open to entrants, having as members not only arbitrators but also legal practitioners and others interested in arbitration. Entrance often does not demand more than paying an entrance fee and rarely demands commitment to a specific code of ethics. Perhaps most strikingly, arbitral associations do not seem to be directly interested in playing the role of ‘regulators’ of international arbitrators. While some of these institutions have played an important role in developing ethical rules, they have rarely stepped in to actually play the role of ‘enforcers’ of arbitrators’ professional obligations.

Instead, arbitral associations are mostly concentrating on advancing arbitration as a dispute resolution system. They further most often function as centres where those involved with arbitration get to know each other, exchange experiences and further their professional endeavours. While some arbitral institutions offer training, this is by no means a function that seems to be central to most arbitral associations’ goals.

IV – The future of arbitral professions associations: how are they perceived and what are they to ‘do’?

The arbitral profession has changed considerably in the last few years. Accompanying the growing number of cases, there has been an increase on the number of people acting as arbitrators. At the same time, some arbitrators appear to approach this role in a more full-time capacity. The increasing number of arbitration boutiques is a strong signal of how some are looking to this function more and more as a full-time endeavour. Further, the environment has been noted to be increasingly competitive especially at the institution level but also at the arbitrators’ level.

Altogether, there seems to be plenty of indications that arbitration and arbitrators are changing. How much these changes are welcomed by the arbitral community and how they expect their associations to change in reaction to them, if at all, is, however, still very much an open question.

Against this background, I would like to invite the readers of this blog to participate in the following survey I am conducting. Your responses will remain anonymous.

https://oxford.onlinesurveys.ac.uk/professional-associations-in-ica-wc

Your views and opinions on this topic will be welcomed.

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Oil and Gas Arbitration Involving States and State Entities: #YoungITATalks in London

Fri, 2018-08-03 03:37

Caroline Le Moullec

The first of the Young ITA Talks in London, organized by Young ITA, kicked off on 1 May 2018 at White & Case’s London offices. The theme for the evening was ‘Oil and Gas Arbitration Involving State and State Entities’, and the event featured two panel discussions, with leading practitioners offering their insights on traps and pitfalls of procedure and substantive issues in the area.

 

The first panel, chaired by Tomas Vail and composed of Margaret Clare Ryan (Shearman & Sterling LLP), Olivia Valner (Freshfields Bruckhaus Deringer) and Scott Vesel (Three Crowns) focused on procedural issues: parallel proceedings, the service of documents on a state and the search for efficiency by bifurcating proceedings.

 

Ryan opened the session by explaining that parallel proceedings are common phenomena in investment treaty disputes as investment treaties typically allow claims to be brought by foreign investors even if they have no direct loss. The direct loss is usually suffered by a local company, but investment treaties often allow shareholders to bring claims, even where those shareholders have invested through intermediary companies. This can lead to the same issue giving rise to multiple arbitrations, brought by the local company, the holding company and any number of shareholders. Drawing from her experience acting as counsel, Ryan explored how investment treaties and practice can mitigate and minimize the risk that multiple claims will lead to spiraling costs, double (or even multiple) recovery and conflicting decisions.  Thankfully it appears tribunals are becoming more alive to these risks and increasingly taking steps to address them, for instance requesting undertakings from the claimants that they are not seeking multiple recovery.

 

Olivia Valner followed-up by highlighting a procedural pitfall when using court proceedings in support of an arbitration against a state. It is common for the parties in an arbitration to require the support of the courts at some stage during an arbitration, particularly when there is a state or government entity involved, as is often the case in oil and gas disputes. Applications presented to the English Courts  are wide ranging, and may be seeking a stay of proceedings, removal of an arbitrator, injunctive relief, to challenge on a point of law, or enforcement of the arbitral award.  However valid service on a state can be expensive and time consuming. In the U.K. unless the state has specifically agreed to waive its service rights, a party must comply with requirements of statute and the Civil Procedure Rules. This includes translating all documents in the state’s official language, regardless of the language of the arbitration. Complying with that procedure will often prove tedious, is difficult to comply with at the last minute, and has clear cost implications, all factors to be taken into account when approaching the courts.

 

Scott Vesel closed the first panel by inviting the audience to re-evaluate conventional approaches to bifurcation and deciding cases in stages. Traditionally arbitration proceedings are split into to three phases, dealing with jurisdiction, liability and quantum separately. This is to allow the respondent to “get to no faster”, as defeating a claim at any one of these phases should prove fatal to the claimant’s case. This has led to issues only being decided separately if they have the potential to resolve the entire arbitration. While the conventional approach has a natural appeal (for example where a tribunal lacks jurisdiction it follows that it should not decide liability and quantum) Vesel argued there could be value in using bifurcation to look at other issues, ones that have the potential to narrow down the issues between the parties at later stages of the arbitration. This would fulfil the objective of getting to an award at a lower cost, rather than simply trying to resolve matters quickly. Absent special circumstances, cost should be the primary consideration. Vesel had brainstormed an approach where issues would be broken down into pure legal issues, mixed law and fact questions, and ‘gateway’ factual issues (which could be decided to avoid parties having to present submissions at a later stage based on several ‘alternative’ scenarios). Reframing bifurcation in this way would allow arbitrations to be decided in multiple, shorter, hearings on issues rather than one hearing with lengthy briefs, and should result in lower overall costs.

 

The second panel, moderated by Margaret Clare Ryan, covered substantive issues: how to hold a state responsible for actions of state entities, gas price arbitrations and the potential for tax measures to breach investment treaty provisions.

 

Sylvia Tonova began by looking at the legal framework for state attribution, a recurring issue in the oil and gas arbitrations. Arbitral case law provides numerous examples of claimants seeking to hold the host state responsible for the actions of state entities, whether that be the State Committee for oil and gas, thte Ministry of Energy or a national oil company with oversight over the national oil transportation network. Tonova explored some of the gateways through which an investor can establish attribution under the International Law Commission’s draft Articles on State Responsibility, as well as a selection of specific issues, such as the role of domestic law in establishing attribution and the significance of state attribution in umbrella clause disputes.

 

Next, Saadia Bhatty discussed gas price arbitrations, which arise out of the performance of long-term agreements for the supply of gas (GSAs). The seller will typically be a state entity and as GSAs tend to have a lengthy term, rather than agreeing a fixed price parties tend to negotiate a price formula, which values the gas by reference to one or more indices (historically this would be based on the indices for the price of oil or oil products). Most GSAs will also contain a price review clause allowing the parties to periodically request a review of the price formula. Due to the sums at stake,  where negotiations fail it is not rare to see the dispute be taken to an arbitral tribunal for determination. Bhatty explored some of the key features of gas price arbitrations, highlighting the important commercial considerations underlying the disputes, the arbitrators’ and experts’ key roles, recurrent issues in the interpretation of price revisions clauses and the impact of time on a price revision.

 

Vail closed the evening with a talk on tax disputes in the oil and gas sector. While the sovereign right to tax is in theory unlimited (and tends to be preserved in investment treaties), in practice this right may be limited by contracts and treaties often in the form of a stabilization clause. Different types of stabilization clauses are found in treaty practice, although they all tend to constitute explicit commitments by the host state or state entity to stabilize the tax legal regime for the investor. Other potential limitations of the right to tax can be found under general (customary) international law, as states may not enact tax measures which are either discriminatory or confiscatory towards the investor. Vail looked at the extent to which tax measures could potentially breach investment treaty standards, in particular the protections against expropriation and fair and equitable treatment standard, and in light of the investor’s legitimate expectations.

 

The event was co-sponsored by White & Case and The Center for American and International Law. Further information on Young ITA can be found here.

***

Young ITA is pleased to launch the annual Young ITA Writing Competition and Award “New Voices in International Arbitration”, as a unique opportunity for young professionals to contribute actively to the research of international arbitration The Competition is open to practitioners and students who are members of Young ITA. The papers must be submitted via email to [email protected] under subject line “Young ITA Competition” by on or before January 2, 2019. For more information, please visit the webpage of Young ITA where you can find more information. Alternatively, please feel free to send an email to the Young ITA Thought Leadership Chair, Dr Crina Baltag, at [email protected]. The Competition is organized with the support of Wolters Kluwer.

***

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New Ruling by the Madrid High Court of Justice: Arbitration and Public Policy

Thu, 2018-08-02 03:31

Emma Morales

Linklaters

On 5 April 2018, the Civil and Criminal Chamber of the Madrid High Court of Justice (Tribunal Superior de Justicia de Madrid, TSJM) set aside an arbitral award as contrary to public policy, because the challenged award contained “an unreasonable assessment of the evidence and unreasonable failure to apply applicable rules”.1) Competent Court to deal with the challenge of awards of arbitration proceedings with seat in Madrid. The influence of the award is due to the fact that a large part of the arbitrations based in Spain have its seat in Madrid. jQuery("#footnote_plugin_tooltip_3042_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3042_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In this case, the applicable arbitration clause, which provided for arbitration with seat in Madrid2) It was a domestic arbitration for more than 10M€ in dispute and with a tribunal of three arbitrators. jQuery("#footnote_plugin_tooltip_3042_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3042_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); was valid. The parties were duly notified and were able to assert their rights. The arbitrators resolved matters that could be and were submitted to their arbitration. The arbitration clause was respected in terms of the appointment of arbitrators and in the procedure.

Despite all of the above, the Madrid court decided to invoke public policy to annul the award. The approach of the court, as discussed below, is problematic as, if followed, it risks perverting, in Spain, the process of application for annulment of an award.

How did the court end up ruling in such a way? First, the Madrid court permitted itself to get into a discussion of all the disputed matters, procedural and substantive, originally before the tribunal and within these considered the appropriateness and suitability of the legal grounds contained in the award. It also allowed itself to review all findings relating to the tribunal’s overall assessment of the evidence. In fact, in the judgment itself (fifth point of law, page 31) the court acknowledges openly, when referring to the authority it considers itself to have, that: “what it is for this court to do is to check whether the probatory assessment that was made in the arbitral award is not arbitrary because it is deviates markedly from the probatory result or by unjustifiably omitting assessment of evidence that is essential to resolve the matters discussed”.

From this starting point, the Madrid court went on to annul the award because in its view it is relevant that “in view of a singular deviation from the wording of the provisions of an agreement (…) which appear to be an expression of the parties’ intentions, drawn up after a long negotiating process as the award highlights, the content of certain emails and not others is taken as the sole basis to substantiate a transactional intention different to that stated in the agreement, without explaining in any way why no reference is made to the emails that apparently do not support the majority thesis accepted by the arbitral tribunal”.

Faced with this conclusion, one may ask what all this has to do with public policy. It is worth recalling that public policy is a delineated concept which, applied strictly, should be prevented from becoming a catch-all through which the Madrid court, with clearly defined authority for annulment, gives itself the prerogative for review.

The well-known Spanish Supreme Court judgment of 5 April 1966 [RJ 1966/1684] states that public policy is “the set of legal, public and private, political, economic, moral and even religious principles, which are absolutely obligatory for the preservation of social order in a population and in a particular time”.

More recently, in its judgment of 5 February 2002(54/2002), the Supreme Court expanded on this a little further and updated the concept, to declare that public policy

“is formed by the legal, public and private, political, moral and economic principles, which are absolutely obligatory for the preservation of social order in a population and in a particular time (Supreme Court judgments of 5 April 1966 and 31 December 1979) and further, an obvious scientific approach finds it to be the principles or directives that inform legal institutions from time to time; a modern position of legal science also indicates that public order is the expression given to the function of general principles of law in the realm of private autonomy, consisting of limiting its development where it violates these principles. Essentially, what must be taken into account today, as forming part of public order, are the fundamental rights contained in the Spanish constitution”.

In the reasoning given in the judgment, there is not a single reference to this concept or to the legal principles necessary to preserve the social order that are threatened because the overturned award did not mention “why no reference is made to the emails that apparently do not support the majority thesis accepted by the arbitral tribunal”. In its fifth point of law (pages 28 to 34 of the judgment), which is the only one in the whole ruling in which annulment of the award is discussed, there is no reasoning which justifies setting aside the award on the basis of public policy.

In view of such absence of thorough legal grounds, this leads to the conclusion that the court’s decision is one whose legal basis is difficult to understand. Furthermore, it is not one which is necessarily helpful to Madrid’s status as a seat of arbitration as parties, of course, choose arbitration to be free of court interference. For both reasons, it represents an approach which seems hard to justify.

References   [ + ]

1. ↑ Competent Court to deal with the challenge of awards of arbitration proceedings with seat in Madrid. The influence of the award is due to the fact that a large part of the arbitrations based in Spain have its seat in Madrid. 2. ↑ It was a domestic arbitration for more than 10M€ in dispute and with a tribunal of three arbitrators. 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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Human-rights-based Claims by States and “New-Generation” International Investment Agreements

Tue, 2018-07-31 17:55

Naomi Briercliffe and Olga Owczarek

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Allen & Overy, nor those of its clients.

  1. Introduction

Recent years have witnessed an unprecedented level of attention on corporate responsibility for human rights. As public calls for action in this area intensify, States are signing up to a growing list of codes and protocols focused on the regulation of business activity.[1]Yet few of these instruments have binding legal force, and even fewer impose obligations directly on companies.  As a result, the scope for claims against companies for alleged human rights violations remains limited.

Against that background, recent developments in the sphere of international investment agreements (IIAs) are of note.  Unlike bespoke business and human rights instruments, a number of “new-generation” IIAs (or proposed IIAs) arestarting to include direct and binding human rights obligations on companies. The 2012 South-African Development Community (SADC) Model bilateral investment treaty (BIT), the 2016 draft Pan-African Investment Code (the draft PAI Code) and the 2016 Morocco-Nigeria BIT are notable examples.  Although a draft copy is currently not available, it appears from reports that Ecuador’s recently-announced 2018 model BIT (the Ecuador Model BIT) will also contain human-rights-related investor obligations.[2]This post examines the historical context of these IIAs, the nature and scope of the obligations imposed by them on investors, and, should any of them (or IIAs based on them[3]) enter into force, the potential for them to give rise to human-rights-based claims by States against investors.

  1. The approach of most IIAs to corporate responsibility for human rights

IIAs are typically asymmetrical: they offer substantive rights to investors, which may be enforced against States, and do not impose obligations on investors in return (whether human-rights-related or otherwise).  In fact, historically, most IIAs have not addressed human rights at all.  Where they have, references have typically been limited to the IIAs’ preambles.[4]Such references are significant in that they indicate the IIA’s object and purpose.  They may, therefore, influence the interpretation of the IIA’s text.[5] They do not, however, create human rights obligations for investors, which the State could seek to enforce.

In fact, the limited scope of dispute resolution clauses in IIAs means that it is typically impossible for a State to bring a claim (of any nature) against an investor.  States give a standing offer to arbitrate disputes under IIAs in the dispute resolution clauses of IIAs.  An arbitration agreement between the State and an investor is only formed once an investor accepts that offer by filing a request for arbitration.  Claims must, therefore, always be initiated by an investor.

An IIA could conceivably provide for a State to commence proceedings against an investor before national courts.[6]However, even if an IIA were to allow a State to commence such a claim, since traditional IIAs do not impose obligations on investors, establishing the basis for the claim would likely be difficult. It would instead have to be founded on legal obligations arising outside of the IIA itself, but few international human rights law instruments impose obligations on companies, and human rights obligations under the national law of the host State may not be binding on the foreign investor that is a party to the IIA proceedings (assuming such an investor is a corporate entity incorporated outside the jurisdiction and several corporate layers removed from the investment).

Counterclaims by a State against an investor are possible under some IIAs.[7]For the reasons explained above, however, establishing a breach by an investor of an obligation applicable to it is rarely straightforward.  Moreover, even if the investor’s breach of a relevant obligation can be established, a State must typically also show that there is a sufficient connection between the legal obligation breached and the investor’s own claim (as required, for example, by the ICSID Convention, if applicable[8]).  That is often difficult.[9]

  1. Investor obligations in “new-generation” IIAs

In an effort to overcome these issues, some “new-generation” IIAs (or proposed IIAs) are starting to impose obligations on investors.  As noted above, the 2012 SADC Model BIT, the 2016 draft PAI Code and the 2016 Morocco-Nigeria BIT are all examples of this trend.  By way of illustration, Article 20(1) of the draft PAI Code requires (among other obligations) that “investors shall adhere to socio-political obligations including, but not exclusively…(a) respect for socio-cultural values; …and (e) Respect for labor rights”, and Article 24 sets out a number of principles that “should govern compliance by investors with business ethics and human rights”, which include “[s]upport[ing]and respect[ing] the protection [of] [sic] internationally recognized human rights”.

The SADC Model BIT and the Morocco-Nigeria BIT go further; they impose a direct obligation on investors to respect human rights in general.  Specifically, Article 15(1) of the SADC Model BIT states that:

“Investors and their investments have a duty to respect human rights in the workplace and in the community and State in which they are located.  Investors and their investments shall not undertake or cause to be undertaken acts that breach such human rights.  Investors and their investments shall not assist in, or be complicit in, the violation of the [sic] human rights by others in the Host State, including by public authorities or during civil strife.”

Article 18(2) of the Morocco-Nigeria BIT similarly provides that “[i]nvestors and investments shall uphold human rights in the host state.”  Both instruments also establish defined minimum standards with which investors must comply.  They each provide that “[i]nvestors and their investments shall act in accordance with core labour standards as required by the ILO Declaration on Fundamental Principles and Rights of Work, 1998.”[10] In addition, both specify that “[i]nvestors and their investments must not manage or operate investments in a manner inconsistent with the international environmental, labour, and human rights obligations binding on the home State and/or host State”.[11] As the commentary to the SADC Model BIT explains, this is intended to require investors and investments to ensure that their practices are consistent with the international human rights obligations of the host State or their home State (i.e. as agreed in relevant human rights treaties), regardless of whether those obligations have been incorporated into domestic law.[12]

  1. The possibility for States to bring human-rights-related claims against investors under “new-generation” IIAs

The new provisions described above open up the possibility of positive human-rights-related claims by States against investors in the event of their breach, subject to the scope of the applicable dispute resolution provisions. The jurisdiction clauses in the Morocco-Nigeria BIT, the SADC Model BIT and the draft PAI Code, however, remain relatively restrictive.  Significantly, none of them contains a dispute resolution provision broad enough to allow States to initiate claims for breaches of them against the investors concerned.  The dispute resolution clauses in the Morocco-Nigeria BIT and the SADC Model BIT are explicitly one-directional (allowing claims by investors only).[13] While the dispute-resolution clause at Article 42(1) of the draft PAI Code is broader, allowing any “investment dispute between an investor and a Member State pursuant to this Code” to be resolved directly between the investor and the State, it only envisages investor-State arbitration.  As explained above, State initiated claims against investors are not possible in that forum.

Nevertheless, there is scope for States to raise non-compliance by an investor with its IIA obligations in the form of a positive human rights counterclaim all three of these IIAs.  Both the SADC Model BIT and the draft PAI Code provide for this expressly.[14]Specifically, they both permit the relevant tribunal/court hearing a claim by an investor to take into account an alleged breach by an investor of its obligations under the relevant instrument and to consider “whether this breach, if proven, is materially relevant to the issues before it, and if so, what mitigating or off-setting effects this may have on the merits of a claim or on any damages awarded in the event of such award.”[15]  In addition, both allow a host State to initiate a counterclaim against an investor “for damages or other relief resulting from an alleged breach” of an investor obligation.[16]

The Morocco-Nigeria BIT does not expressly address counterclaims.  However, the jurisdiction clause permits tribunals to determine “any dispute between the Parties”, which seems wide enough to allow a counterclaim by a State that an investor has breached an obligation under the IIA.  In addition, an investor may choose to submit a claim under the ICSID or UNCITRAL Rules, both of which contemplate host State counterclaims.[17]The requirement under Article 46 of the ICSID Convention for counterclaims to have arisen directly out of the “subject-matter of the dispute” may, however, operate as a restriction.[18]

  1. Conclusion

The imposition of human-rights-related obligations on investors by “new generation” IIAs is an important innovation in that it establishes a clear expectation as to investors’ behaviour. If the relevant instruments (or instruments based on them) enter into force, the inclusion of these obligations will go some way to assuage concerns regarding the imbalance between investor and State obligations in traditional IIAs.  A number of issues remain, however, relating to the enforcement of such obligations. As explained above, the “new generation” IIAs do not make it possible for States to initiate claims.  Allegations of breach will, therefore, have to be addressed by way of a counterclaim in the event proceedings are commenced by an investor, which is a significant restriction and assumes a State must commit, or be alleged to have committed, a wrong.  If an investor commences its claim in arbitration under the ICSID Rules, a State will – moreover – still be required to demonstrate that its counterclaim arises out of the “subject-matter of the dispute” in order to establish the jurisdiction of the arbitral tribunal over the counterclaim.

In addition to potential jurisdictional problems, where investors’ human-rights-related obligations are drafted very broadly, or by reference to human rights obligations binding on States rather than investors, issues may arise in establishing their content (which will be necessary in order to prove a breach).  To the extent that the “new generation” IIAs are not implemented or directly applicable in the law of the relevant State parties, a question also arises as to whether the obligations imposed by them can be considered binding on investors.[19]

Finally, it is also not clear what remedies a State should be able to claim for violations.  The ultimate beneficiaries of human rights are individuals; it is individuals that typically suffer losses as a result of human rights transgressions.  A State would have to somehow establish a right to claim damages from an investor on behalf of its citizens, or otherwise demonstrate how the violation by an investor of its obligations has caused the State itself to suffer losses.  While it may be that neither of these obstacles is insurmountable, claims are unlikely to be straightforward.  Even if those hurdles are overcome, there is the further difficult question of how such losses should be quantified.

 

[1]                See e.g. UN Guiding Principles on Business and Human Rights; ILO Declaration on Fundamental Principles and Rights at Work (1998); Voluntary Principles on Security and Human Rights (2000); OECD Guidelines on Multinational Enterprises (2011).

[2]                http://www.cancilleria.gob.ec/ecuador-propone-nuevos-acuerdos-de-inversion-que-protegen-al-pais-y-defienden-los-derechos-humanos/

[3]                In the case of the SADC Model BIT and the Ecuador Model BIT.

[4]                For example, in the preamble to their BIT, Switzerland and Georgia[r]eaffirm[…]their commitment to democracy, the rule of law, human rights and fundamental freedoms in accordance with their obligations under international law”.  See also Preamble to EFTA-Lebanon FTA (2004)).

[5]                Perhaps influencing an arbitration tribunal to adopt an interpretation of an investor’s rights under an IIA which is more balanced as between the investor’s interests and the need for the State to regulate in the public interest where such interest involves human rights considerations.

[6]                Provided the IIA had effect under national law so as to extend the national court’s personal jurisdiction to claims against foreign investors.  An IIA could also provide that an investor must give advance consent to arbitration (potentially as part of an investment registration process) in order to benefit from investment protection.  However, where indirect investments are protected by an IIA, the scope of consent would have to be broad enough to capture all of the investor’s shareholders.

[7]                http://arbitrationblog.practicallaw.com/holding-investors-to-account-for-human-rights-violations-through-counterclaims-in-investment-treaty-arbitration/

[8]                Most IIAs limit a tribunal/court’s jurisdiction under it to disputes arising out of an “investment“.  The ICSID Convention requires that a counterclaim arises directly out of the “subject matter” of the dispute.

[9]                We are aware of only one case in which jurisdiction over a human rights based counterclaim has been upheld: https://www.italaw.com/sites/default/files/case-documents/italaw8136_1.pdf

[10]              SADC Model BIT, Article 15(2) and Morocco-Nigeria BIT, Article 18(3).

[11]              SADC Model BIT, Article 15(3) and Morocco-Nigeria BIT, Article 18(4).

[12]              SADC Model Bilateral Investment Treaty with Commentary, p. 36.  The relevant clause in the Morocco-Nigeria BIT requires the relevant human rights obligations to be binding on both the host State and host State.

[13]              Morocco-Nigeria BIT, Article 27; SADC Model BIT, Article 29.4.

[14]              SADC Model BIT, Articles 19(1)-(2), 29(9); draft PAI Code, Article 43.

[15]              SADC Model BIT, Article 19(1) and draft PAI Code, Article 43(1).

[16]              SADC Model BIT, Article 19(1) and draft PAI Code, Article 43(2).

[17]              ICSID Rules, Article 46; UNCITRAL Rules, 21(3).  An investor may also submit a claim under any other arbitral rules, with the consent of the host State.  To the extent the State intends to bring a counterclaim it would be unlikely to agree to rules which did not permit that.

[18]              This will also impact counterclaims in ICSID proceedings brought under the dispute resolution clause in the SADC Model BIT.

[19]              As non-parties to the IIAs.

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ISDS: The Brexit Lawsuits the UK Should Be Worried About

Tue, 2018-07-31 03:38

Ioannis Glinavos

It is widely acknowledged that the departure of the UK from the EU, commonly referred to as Brexit, gives rise to multiple legal problems, some of which are bound to lead to actions. While there is a widespread coverage of public law related litigation, there is less knowledge of potential private actions, including those taking place in arbitration. On the assumption that Brexit will have severe negative consequences on a number of industries, it is worthwhile exploring the potential of private actions, specifically through investment treaty arbitration to offer redress to those affected. For the sake of brevity, this post is not addressing the ‘cakeist’ scenario that everything will change yet remain the same after the UK’s departure from the EU. While Brexit continues to be shrouded in ambiguity, there is more clarity now than there was in 2017, or 2016, as to what Brexit might entail. We certainly know the exit will not entail a continuation of the UK’s membership in the European Single Market. You will have noticed that while a grand debate is being held around border controls and the Custom’s Union, the Single Market is a much less prominent topic of discussion. Everyone seems to assume that Brexit means (at least) no participation in the Single Market.

As we are graduating, however, from projecting Brexit scenarios to mapping the consequences of concrete government choices, we are moving to a situation where affected businesses have stopped trying to manage the situation and get ready to call their lawyers to explore avenues of legal redress for what are now understood to be inevitable losses. Still, what can legal advice achieve on the individual level, when litigation has failed to stop the Brexit process altogether, or at least to guide it towards less radical paths? The government itself has revealed that its concern lies with ISDS. Liam Fox (the UK’s Int. Trade Secretary), when asked in 2017 if the government could face dispute settlement cases from companies whose investments are damaged by Brexit, said that the government was preparing for any eventuality:

“But again, the sort of market access that we would hope to reach would mean that they [ISDS cases] were not necessary.”

What we now know in 2018 is that the sort of market access that the government will reach for UK’s most significant industry means precisely that those suffering losses will try and use ISDS to seek compensation. And this industry is financial services. How could a financial firm based in London, lucky to benefit from the protection of a treaty between its home country and the UK, use all this? Brexit will most likely result in London becoming a much different business proposition. London can no longer be the gateway to European finance, as it is projected to lose its place in the Single Market, as well as it can no longer guarantee access to one of the world’s biggest consumer markets. One could argue that leaving the Single Market, losing the financial passport, is an abrupt, wholesale upending of the entire regulatory background of an investment, rendering such investment practically worthless.

As I argue in my recently published paper in the ICSID Review, foreign-owned financials could seek legal redress, arguing that the changes brought about by Brexit (from the point of exit onwards) will violate legitimate expectations protected by Bilateral Investment Treaties (BIT) the UK has signed with their country of origin. Considering the historical importance and magnitude of the UK’s departure, however, what is it that entitles lawyers to use ISDS as a potential spanner in the Brexit works? The answer is contained in a single word. That word is Spain.

The reason why Spain is central to the relation of investor claims with Brexit is the fact that this South European country is the closest example of a western, developed economy which has faced an avalanche of ISDS claims due to a significant change in regulatory conditions. In the Spanish case, the change involved a reworking of the regulatory framework for clean energy generation. The cases generated by the reaction of investors are of particular importance to our understanding of the role investment treaty violations can play in the context of Britain disentangling itself from the EU.

In these Spanish cases investors claim that, amongst other violations, Spain did not afford them fair and equitable treatment as required to by its treaty obligations. The Energy Charter Treaty (ECT), under which these claims are brought, demands that states shall encourage investment, create “stable conditions”, and ensure “fair and equitable treatment” (FET) of investors. Investments “shall also enjoy the most constant protection and security” while “unreasonable or discriminatory measures” are strictly forbidden. In the first of the cases to conclude, Charanne and Construction Investments v. Spain, a Dutch solar energy investor argued that the FET standard demands the maintenance of a stable and predictable legal framework for investments. Spain, they claimed, had frustrated their legitimate expectations through wholesale changes to the regulation of solar energy generation. Spain countered that legislative changes introduced in the energy sector were an expression of its sovereign right to regulate. Meeting the FET standard under its treaty obligations, in its view, did not mean freezing a legal framework in place, as would happen under a stabilization clause (an explicit commitment to maintain regulatory environments for the duration of the investment).

In Charanne, the Tribunal agreed that, in the absence of specific commitments adopted by Spain, the threshold for a finding of FET violation was not reached. Specific commitments could have found expression in an express stabilization clause or by means of a declaration by Spain addressed to the investors, but this had not taken place. It is well established that the host State is entitled to maintain a reasonable degree of regulatory flexibility to respond to changing circumstances in the public interest. Consequently, the requirement of fairness must not be understood as the immutability of the legal framework. So far so good, but there is a catch. A state is deemed to be allowed to regulate so long as it does not fundamentally and abruptly alter the whole regulatory environment causing major losses to the investor. Spain won its first challenge, but celebrations did not last long.

The second important decision on these Spanish claims, Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, resulted in a win for the investor and goes to the core of what the protection of legitimate expectations is about. In this case, brought by a British energy company, the Tribunal underlined that treaties protect investors from a fundamental regulatory change – total and unreasonable – in a manner that does not take into account the circumstances of existing investments made in reliance on the prior regime. Fundamentally, the Tribunal recognized that the regulatory power of the state has a limit that is established by the commitments assumed under investment treaties, one that cannot be ignored. Spain eliminated a favourable regulatory regime previously extended to the investors to encourage their investment in its territory and replaced it with an unprecedentedly different regulatory approach, based on wholly different premises. This new system was profoundly unfair and inequitable as applied to the claimant’s existing operation, stripping them of virtually all of the value of their investment. The investor won a payout of 128 million Euros (plus interest).

Could someone actually win such a case against Britain? I conclude that in the field of financial services, if a foreign-owned bank from a jurisdiction that has a BIT with the UK (containing FET protection and recourse to ISDS) were to sue the UK after a no-deal or a hard exit from the EU has taken place, they could win if they satisfy the following criteria. First, they must have been established in the UK to carry out predominately European operations, using the financial passporting arrangements as a gateway to Europe. Second, they must have been established in the City of London after being attracted here due to the strength of government, local authority, and foreign direct investment-promoting institutions, which invited them specifically to take advantage of the UK’s European links (before a referendum on an EU membership was aired as a viable policy aim). Third, the loss due to Brexit must be catastrophic, leading to the negation of almost the totality of their investment. Fourth, the Tribunal must be convinced that a State act (for instance, the Withdrawal Bill coming into force) has radically changed the conditions under which the investment was made to the detriment of the investor.

Brexit has just become a lot less boring if you are an investment treaty arbitrator.

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The Diversity Dilemma in Arbitrator Appointments

Sun, 2018-07-29 17:35

Dipen Sabharwal and Mona Wright

The results of the 2018 Queen Mary/White & Case International Arbitration Survey were launched on 9 May 2018. The survey explores “The Evolution of International Arbitration”: how international arbitration has evolved, the key areas for development in the future, and who and what will shape the future evolution of the field. This is the 4thsurvey conducted by the School of International Arbitration, Queen Mary University of London, in partnership with White & Case, and is the most comprehensive yet. Record participation from stakeholders around the world reflects the uniquely global nature of international arbitration.

Diversity is an inherent hallmark of international arbitration: commercial disputes resolved by international arbitration in virtually all jurisdictions, involving parties from all over the globe operating in a wide range of sectors. It should follow that the diversity across the global community of arbitration users is reflected in the make up of arbitral tribunals. The available statistics on arbitral appointments, however, tell a different story. The big questions that this raises for the arbitration community are what can be done to change this, and by whom?

Making decisions: does diversity make a difference?

Few, if any, would argue against the proposition that diversity is a good thing. But do users of arbitration think diversity across a tribunal can make a difference to the quality of its decision making? As our 2018 Survey reveals, around 40% of respondents feel that diversity across an arbitral tribunal may have a positive effect on the quality of its decision-making. A quarter of respondents (26%), however, took a more nuanced approach: they felt that the extent to which diversity across a tribunal might affect the quality of its decision-making would depend upon the particularities of the dispute in question. A completely different take on this question was shared by almost a fifth (19%) of respondents, who consider diversity to be so inherently valuable in and of itself that, in their view, it is redundant to ask whether there is any substantive, qualitative impact to be gained through greater diversity. Despite the different views articulated by the respondents, however, there can be little doubt that most, if not all, users of arbitration welcome diversity both across the community generally and across arbitral tribunals.

The diversity spectrum

The increasing emphasis that has been placed on diversity in recent years is perhaps reflected in the growing practice amongst arbitral institutions to publish statistics on arbitral appointments showing, amongst other things, the gender and nationality of appointees. It is to be hoped that statistics relating to diversity of appointments continue to show an upward trend in favour of greater diversity and inclusion. We sought to explore whether the general perception of arbitration users is that progress has been made over recent years and, if so, to what extent and in relation to which aspects of diversity?

The results were clear: of the five different examples of aspects of diversity on which we focused, almost 60% of respondents agreed with the proposition that progress has been made in relation to gender diversity on arbitral tribunals. Much of the credit for this was given to the excellent work of global organisations and initiatives such as ArbitralWomen and The Pledge for Equal Representation.

A less positive story emerged in relation to the other aspects of diversity we profiled: a third or less of respondents agreed that progress has been made over the past five years in relation to age (35%), geographic (34%), cultural (31%) and especially ethnic (24%) diversity. Respondents expressed hope that inspiration can be derived from the efforts made to increase representation of women on arbitral tribunals to encourage greater representation of other aspects of diversity as well.

The drive for diversity: who is in pole position?

It is clear that the arbitration community as a whole recognises that more needs to be done towards achieving the goal of greater diversity across arbitral appointments. We asked respondents which participants in the international arbitration community they feel are best placed to act in this regard. Almost half of them (45%) voted for arbitral institutions. Apart from the obvious role played by arbitral institutions when called upon by parties to appoint tribunal members, interviewees stressed that arbitral institutions typically hold more information on potential arbitrators than other stakeholders in the arbitral community. Others added that even where parties select the arbitrators themselves, they are often aided by institutional lists of suggested or recommended arbitrators; moreover, even where co-arbitrators are chosen by the parties, arbitral institutions are frequently called upon to select the presiding arbitrator.

Only 27% of respondents thought the parties (including their in-house counsel) are best placed to ensure greater diversity across arbitral tribunals, and only 23% selected external counsel (with a mere 7% opting for co-arbitrators who are often asked to jointly select their presiding arbitrator).

Who is really in the driving seat?

Do these statistics, however, reflect the real story? Arbitral institutions hold a unique and multi-faceted role and, in addition to appointing arbitrators, are able to contribute to and influence change in many positive ways, both directly and indirectly – for example, the ICC recently announced it has achieved gender parityamongst the members of the ICC Court and is planning to launch a dedicated Africa Commission. Given the prevalence of party-nominated arbitrator appointments, however, do arbitral institutions really have significantly more power to influence the composition of tribunals than the parties and their counsel (both internal and external)? And, in any event, could parties and their counsel do more than they currently are to further diversity objectives?

The statistics collated by arbitral institutions certainly suggest much room for improvement in this regard. For example, the LCIA has reported that 34% of the arbitrators selected by the LCIA Court were female, as opposed to only 17% of the arbitrators chosen by the parties. Respondents to our 2018 Survey also noted that even where a diverse pool of potential arbitrators are available, for example on lists circulated by arbitral institutions or drawn up by counsel teams, parties and their counsel still exhibit a tendency towards repeat nominations. Ultimately, our 2018 Survey found that despite the prevailing view that greater diversity is a greater good, diversity meets its fiercest resistance from parties and, by extension, their in-house or external counsel, rather than arbitral institutions.

Perhaps, then, the real question is not who has the most power to effect change, but are we all making the most of the power that we have to help this process. The only way in which the goal of greater diversity across arbitral tribunals will be properly realised is for all stakeholders in the arbitral community to fully commit to making this happen.

Dispute Resolution Data (DRD)

 

 

 

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Third Party Funding in Investment Arbitration: Time to Change Double Standards Employed for Awarding Security for Costs?

Sun, 2018-07-29 03:36

Umika Sharma

Introduction

Security for costs is a controversial territory in international arbitration, especially in investment arbitration. On one side is the respondent State which seeks security for defending a claim with the taxpayers’ resources. However, on the other side, there is the claimant who might become financially incapable of accessing justice if it is asked to put up security for costs. Add a Third-Party Funder to the mix, and a tribunal’s challenges get multiplied. Moreover, the unclear standards as to an award for the security of costs adds more layers to the considerations that any tribunal needs to keep in mind while making an award for security for costs.

It is possible that the existence of a TP Funder might be a red flag and has the potential to raise concerns as to the claimant’s poor financial situation that might affect its ability to pay an award for costs. Also, the presence of a TP Funder might create an imbalance in the arbitration equation because of the possibility of an “arbitral hit and run”. 1)Nadia Darwazeh and Adrien Leleu, “Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding’, Journal of International Arbitration” (2016) 33 (2) Kluwer Law International 125 jQuery("#footnote_plugin_tooltip_3877_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3877_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Higher Threshold for awarding of security for costs in the ICSID mechanism

ICSID tribunals tend to employ a higher threshold for awarding security for costs and rely on exceptional considerations, broadly including abuse of process or bad faith in addition to the impecuniosity of the claimant. It is possible to argue that the presence of TPF may be taken as the exceptional considerations that a tribunal requires to award security for costs. 2)Report of ICCA-QM Task Force on Third-Party Funding in International Arbitration (2018) jQuery("#footnote_plugin_tooltip_3877_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3877_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

There has been only one case where the presence of TPF influenced the awarding of security for costs. 3)RSM Production Corporation v Saint Lucia [2014] ICSID Case No. ARB/12/10 jQuery("#footnote_plugin_tooltip_3877_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3877_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the case, the claimant’s conduct and the fact that the identity of the TP Funder was not revealed were essential issues that were noted. The Tribunal also doubted the unknown funder’s willingness to comply with a cost award. The case was peculiar because the Tribunal, while holding the claimant liable for security for costs, referred to the conduct of the claimant in two unrelated previous ICSID arbitrations, noting that the claimant had defaulted on a cost award 4)Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Corporation v Grenada [2010] jQuery("#footnote_plugin_tooltip_3877_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3877_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and had also failed to pay an advance on costs. But there are cases where Tribunals have shown a tendency not to attach value to the presence of TPF. 5)South America Silver Limited v The Plurinational State of Bolivia, [2016] PCA Case No. 2013-15 jQuery("#footnote_plugin_tooltip_3877_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3877_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The fact that Tribunals set up a high threshold for the award of security for costs can be easily attributable to its awareness in ensuring that the claimant’s access to justice is not hampered. At the same time, the Tribunal also needs to consider that the respondent State needs protection against frivolous and unmeritorious claims and is likely to spend vast resources in defending the claim. It is particularly onerous for States that have limited resources that could be better employed elsewhere.

Why the standards for awarding security for costs need to be lowered down?

The first reason why there is a need to lower the standards is that it levels the playing field for the respondent. If tribunals readily award security for costs, the respondent gets a shield against a disbalanced situation where the claimant can go scot-free against an adverse costs award if it is funded by a TP Funder who has no liability to meet such costs.

Secondly, the respondent might also be protected from frivolous claims if the tribunal more readily awards security for costs. It is so because, if the claimant or its funder is asked to put up security for costs, the odds of a funder still supporting a worthless claim gets lowered down because once a financial liability is imposed, it is only prudent for an investor to support claims that are strong on merits.

Lastly, lower and set standards will also result in predictability. An impecunious claimant who has relied on TPF to bring a claim can now reasonably be expected to put up security for costs. It might also affect the terms with the TP Funder and might lead to the desired result of the funder being prepared to put up security for costs.

How can standards for awarding security of costs be lowered?

Clear principles for security for costs

Investment arbitral tribunals are still in the process of evolving set standards and principles for an award of security for costs. A move from the traditional ‘pay your own way’ to the ‘costs follow the event’ mindset is becoming common in investment arbitration. But there are no definite rules or principles that guide tribunals in deciding the question of awarding security for costs and often, a cautious approach is adopted and that too in exceptional circumstances. This approach might then turn into reluctance in a situation where a TP Funder is present.

To tackle unclear standards, it is possible to use tests that clarify the standards for awarding security for costs. Tribunals ought to attach value to the presence of TPF and order security for costs readily in such scenarios. A two-stage test can be developed that might be useful in shifting the burden of proof concerning awarding security for costs from the respondent to the claimant6)Nadia Darwazeh and Adrien Leleu, “Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding’, Journal of International Arbitration” (2016) 33 (2) Kluwer Law International, 132 jQuery("#footnote_plugin_tooltip_3877_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3877_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and ought to be taken as meeting the exceptional circumstances requirement. At the first stage, the tribunal should take into account the presence of TPF. It is largely dependent on the claimant’s disclosure and could be the starting point for the tribunal. Secondly, the claimant’s unwillingness or inability to satisfy an adverse costs award may be a relevant issue. Inability can be gauged through ‘appearance of mere insolvency’ or ‘lack of assets of the claimant’.7)Ibid, at 133 jQuery("#footnote_plugin_tooltip_3877_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3877_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is here that the tribunal should consider ordering security for costs. Further, the unwillingness of the claimant can be established through its previous conduct or through terms of the TPF arrangement which protect the funder from any adverse costs liability. Once both of these criteria are met, the burden of proof ought to be shifted to the claimant to prove as to why security for costs should not be awarded. The claimant can always discharge such a burden by disclosing its financial position to establish that it is willing and able to pay a security for costs award.8)Ibid, at 134 jQuery("#footnote_plugin_tooltip_3877_8").tooltip({ tip: "#footnote_plugin_tooltip_text_3877_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Limited disclosure of third-party funding

A cautionary tale where the respondent was at the receiving end of a possible arbitral hit and run is the case of S&T Oil v Romania, ICSID case no. ARB/07/13 [2010]. In the case, the claimants had filed an expropriation claim against the respondent. The claim was filed after the backing of a TP Funder. Issues arose when the counsel for the claimant resigned after the TP Funder’s withdrawal. After another arrangement between the claimant and the funder, the case was revived. However, the TP Funder withdrew again, and consequently, the claimant was unable to pay advance on costs leading to discontinuation of the arbitration. The whole saga came to light because of the litigation between the claimant and the funder. The respondent was not aware of the claimant’s difficult financial position or the existence of TPF and thus never applied for security for costs. Such a case could have quickly turned into a scenario where the respondent State could not have been able to recover its costs because of the impecuniosity of the claimant.

Limited disclosure can be the way out of such a risky proposition. The disclosure of the existence of a TP Funder could be a pre-requisite for investment arbitration. The idea has recently been incorporated by the Singapore International Arbitration Centre in Rules 24(1) of its Investment Arbitration Rules. It provides that the tribunal has additional powers to order disclosure of third-party funding arrangements. Furthermore, it also provides for the tribunal to seek disclosure of the funder’s commitment towards adverse costs liability. A similar provision can be found in newer generation BITs like the Iran-Slovakia BIT [Article 21(6)] which expressly provides for the circumstances in which the tribunal may order security for costs if it considers that there is a reasonable doubt that claimant would be not capable of satisfying a costs award or consider it necessary because of other reasons. Such provisions are a move toward ensuring that the presence of a TP Funder does not unduly affect a party and its ability to seek security for costs. It is also essential to ensure that there are safeguards against respondents using disclosure of TPF as a weapon instead of a shield. For instance, it is unnecessary to seek disclosure of all the aspects of the TPF agreement. The liability as to the costs for the TP Funder should be the focal point for disclosure.

Therefore, the presence of a TP Funder has the possibility of creating disbalances in the arbitral process which tilts the scales against a respondent who faces the danger of being stuck with a worthless costs award. These disbalances need to be corrected by the Tribunal to ensure that the arbitral process remains fair through awarding security for costs.

References   [ + ]

1. ↑ Nadia Darwazeh and Adrien Leleu, “Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding’, Journal of International Arbitration” (2016) 33 (2) Kluwer Law International 125 2. ↑ Report of ICCA-QM Task Force on Third-Party Funding in International Arbitration (2018) 3. ↑ RSM Production Corporation v Saint Lucia [2014] ICSID Case No. ARB/12/10 4. ↑ Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Corporation v Grenada [2010] 5. ↑ South America Silver Limited v The Plurinational State of Bolivia, [2016] PCA Case No. 2013-15 6. ↑ Nadia Darwazeh and Adrien Leleu, “Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding’, Journal of International Arbitration” (2016) 33 (2) Kluwer Law International, 132 7. ↑ Ibid, at 133 8. ↑ Ibid, at 134 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 Contents of Journal of International Arbitration, Volume 35, Issue 4, 2018

Fri, 2018-07-27 17:33

Maxi Scherer

We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:

Cherie Blair, CBE, QC, Ema Vidak-Gojkovic & Marie-Anaïs Meudic-Role, The Medium Is the Message: Establishing a System of Business and Human Rights Through Contract Law and Arbitration

This article seeks to paint a picture of an emerging system of business and human rights (BHR) law by following certain developmental trends across normative, substantive and procedural realms. These trends show that there is acknowledgment for the concept of corporate responsibility for BHR, and that the lines between ‘soft’ and ‘hard’ law are becoming blurred. Through contractual and arbitral mechanisms, a binding system of law is taking shape.

At the forefront of recent trends, international arbitration is increasingly becoming a procedural venue of choice for BHR disputes. Furthermore, arbitration promises to offer an environment that will both kindle the evolution of substantive rights and permit their enforcement and effective redress. The medium, indeed, is the message.

 

Paul Lefebvre & Dirk De Meulemeester, The New York Convention: An Autopsy of Its Structure and Modus Operandi

The purpose of the New York Convention is to facilitate the enforcement of arbitral awards. It introduces different regimes, i.e. the regime provided by the New York Convention itself, and the two regimes referred to by Article VII.1 of the New York Convention. Little attention has so far been given to those different regimes and, especially, to the possibility of an interaction between those regimes and whether or not such should be authorized. The aim of this contribution is to highlight that the New York Convention is structured and worded precisely to avoid interferences between those different regimes which each operate independently, even if complemented by provisions of domestic law. It is the enforcing party’s privilege to choose between the different regimes. However, in order to respect the rights of defence of the party against whom the award is enforced, this choice should be express, in toto, final and binding for the judge. Failure to expressly opt for a regime leads to the application of the New York Convention regime. Such an approach offers not only the advantage of clarity and simplicity as far as the applicable rules are concerned, but also enhances the equality between foreign and domestic awards, and puts an end to the nineteenth century era of bilateral treaties.

 

Tamás Szabados, EU Economic Sanctions in Arbitration

Sometimes, the application of the economic sanctions imposed by the European Union (EU) arises in arbitration proceedings. This article examines the extent to which unilateral EU sanctions are applied uniformly in arbitration. Opting for arbitration between the parties instead of court proceedings, as well as the selection of a particular arbitration venue, may be used to avoid the application of EU sanctions. Although arbitral tribunals have considerable freedom in deciding whether to give effect to EU economic sanctions, which involves an inherent uncertainty in terms of their claim for uniform application, the fact that the parties choose arbitration does not necessarily exclude their application. EU sanctions constitute the public policy of the Member States. The potential for the annulment of the arbitral award by a competent court in an EU Member State or the denial of the recognition and enforcement of the arbitral award in the EU may therefore be an incentive for the arbitrators not to disregard these sanctions and may discourage the parties from choosing arbitration or a particular location for arbitration only to escape the application of EU sanctions.

 

Stepan Puchkov, Psycholawgy: What Dispute Resolution Practitioners Overlook?

This article brings to the readers’ attention several particular subconscious ‘blinders’ together with their potential implications in the field of dispute resolution and offers practical recommendations in relation thereto from both the counsel and judge/arbitrator perspective.

The article does not aim to provide the readers with an exhaustive theoretical background of the psychology of decision-making. Instead, it will put into the spotlight only ‘blinders’ that (1) are likely to emerge in dispute resolution; (2) are easy to explain and exemplify without going too deeply into psychology; (3) suggest very concrete practical inferences; and (4) can be used to produce tips for practitioners.

Finally, it is suggested that it may be the time to rethink the approach to dispute resolution by taking more account of non-legal influences affecting disputes’ outcomes, which might in some cases be as influential as blackletter law.

 

Michael Kotrly & Barry Mansfield, Recent Developments in International Arbitration in England and Ireland

This article considers developments in international arbitration in England and Ireland by way of a review of arbitration-related judgments rendered in 2017 by the countries’ respective courts.

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Investment Arbitrations: Do Tribunals Take the Role of a Supra-National Appellate Court above National Courts?

Fri, 2018-07-27 04:00

Asaf Niemoj

  1. State Responsibility for State Organ’s Conduct

The fact that a state can be held liable for its organs’ conduct is part of a wider notion that sees states as responsible for their internationally wrongful acts. This notion was codified in the ILC Articles of State Responsibility. Article 1 states that “every internationally wrongful act of a State entails the international responsibility of that State”. Article 4 continues by stating, inter alia, that “the conduct of any State organ shall be considered an act of that State under international law…”.

In my previous post which can be found here, I have reviewed an Israeli Supreme Court decision that declined a request to set aside a multi-million class action suit against foreign investors. Among other things, I mentioned that the Israeli Attorney General was a party to the proceedings and that in his submissions to the Court, he took the same position as the investors, namely: that the class action should indeed be set aside. I then noted that if an opposite approach was to be taken by the Attorney General (namely, one which sided with the public rather than with the investors) then in light of the fact that the Attorney General is a state organ then this could, potentially, be seen as a breach of the state’s undertakings under the BIT, and hence could potentially also lead to arbitration proceedings against that state.

Recent cases and awards show that proceedings in national courts entail risks that could be greater than described above. In fact, recent developments show that proceedings in national courts could potentially themselves be the subject of international arbitration proceedings.

 

  1. Eli Lilly and Company v Government of Canada

The award rendered in Eli Lilly and Company v. Government of Canada [ICSID Case No. UNCT/14/2] was already discussed in this blog here, but in the context of judicial economy. The case concerned two patents which belonged to the Claimant and which the Canadian Courts invalidated because they did not meet certain requirements of Canadian law. The basis for the invalidation was a legal doctrine adopted by the Canadian Courts in the mid-2000s. The Claimant argued that the doctrine was radically new, arbitrary and discriminatory against pharmaceutical companies and products. It therefore initiated NAFTA arbitration proceedings against Canada and argued that the Court’s decision can serve as a ground for Canada’s liability.

The parties to the proceedings agreed that a state is responsible for the conduct of all of its organs, including the judiciary. They also agreed that a state is responsible for the acts of judicial authorities when they are a result of denial of justice. However, the question was whether a state can be liable for the conduct of its judicial authorities based on grounds other than denial of justice.

The Claimant argued that a judicial act that violates a substantive rule of international law can also serve as ground for state liability in international arbitration. In the context of expropriation, for example, the Claimant argued that judicial measures qualify as indirect expropriations when they result in a substantial deprivation and violate a rule of international law. In other words, according to the Claimant, judicial measures may constitute an expropriation, even in the absence of a denial of justice. A similar argument was raised by the Claimant in the context of alleged breach of minimum standard of treatment. The Claimant argued that denial of justice is not the only legal basis that offers protection to investors.

The Respondent, on the other hand, argued that the only substantive obligation under NAFTA with respect to judicial measures is to ensure that an investor is not denied justice. Therefore, according to the Respondent, denial of justice is the only basis on which a domestic court judgment on the validity of a property right could constitute an expropriation. It further argued, with regard to the minimum standard of treatment of aliens, that denial of justice is the only rule of customary international law applicable to state organs exercising an adjudicative function.

The decision of the Tribunal is quite interesting. It first noted, with regard to expropriation claims, that “it is possible to contemplate circumstances in which a judicial act (or omission) may engage questions of expropriation”. It then went on to say, with regard to the minimum standard of treatment requirement, that it “is unwilling to shut the door to the possibility that judicial conduct characterized other than as a denial of justice may engage a respondent’s obligations under NAFTA Article 1105”.

Despite those interesting remarks, the Tribunal was unwilling to sustain the claim because it had found that the necessary facts were not established.

 

  1. GPF GP S.a.r.l. v. Republic of Poland

The second interesting case is GPF GP S.a.r.l. v. Republic of Poland [SCC Case no. V.2014/168] which was also discussed in this blog here. Although the documents of this case (which is still pending) are not publicly available, an English High Court judgment delivered this year [2018] EWHC 409 (Comm)] reveals some of the factual background and the legal arguments.

Here the Claimant is a company based in Luxemburg named Griffin and the dispute concerns a property located at 29 Listopada Street, Warsaw, which was the subject of a Perpetual Usufruct Agreement (PUA) – an agreement the aim of which was to commercially develop the property.

In 2007, a recommendation was issued by the Warsaw Monuments Conservator supporting the development of the property. Based on that recommendation, the Claimant invested in the property and provided the financing required to obtain the ownership rights. However, thereafter the recommendation was reversed on the basis that the development was unacceptable from a conservation point of view. A permit to develop the property was therefore not granted.

Following legal proceedings, the PUA was terminated by the Warsaw Regional Court, for failure to develop the property within the time limits specified. Appeals to the Warsaw Court of Appeal and to the Supreme Court were dismissed.

In its judgment, the English High Court states that the Tribunal found that it had jurisdiction to rule upon one aspect of Griffin’s claim in the arbitration, namely: whether the judgment of the Warsaw Court of Appeal, as confirmed by the Polish Supreme Court, constituted an “expropriation, nationalization or any other similar measures affecting investments” in violation of the BIT.

The Tribunal’s award is, therefore, interesting. Although not dealing with the merits of the case, it found that it had jurisdiction to examine a judgment of the Warsaw Court of Appeal. This means, in practice, that the Tribunal is of the opinion that the judgment of the Polish court could be the subject of investment treaty arbitration. We do not know, however, whether in its award the Tribunal goes into discussing possible ground for review of national court judgments by an investment arbitration tribunal. If so then this discussion is highly interesting and important.

 

  1. The Interface Between Decisions Rendered by National Courts and Investment Treaty Arbitrations

The cases discussed above demonstrate that tribunals are willing to attribute acts of the judiciary to the states in which they operate and, potentially, also hold states as responsible for the outcome of judgments rendered by their national courts.

At first glance it seems reasonable to argue that at least in certain circumstances arbitral tribunals should indeed have the power to examine judgments rendered by national courts, particularly because in some countries the legal system is not detached from the political system and the former can be influenced by the latter. However, such an approach also entails risks. Among them is the risk that arbitral tribunals will become a supra-national appellate court overseeing judgments rendered by national courts, including national supreme courts. Indeed the Eli Lilly Tribunal was aware of the risk and so it emphasized “that a NAFTA Chapter Eleven tribunal is not an appellate tier in respect of the decisions of the national judiciary”. The Tribunal therefore noted that such intervention should be reserved only to rare circumstances.

The issue is therefore complicated. The first question that arises is whether tribunals should indeed be allowed to examine judgments of national courts. If not, then one can argue that common-law based countries will be placed in a better position because in those countries courts take a substantive role in shaping the legal system and because a court judgment in those countries may lead to a shift from the regular jurisprudence (indeed this was one of the arguments asserted by the Respondent in Eli Lilly).

If the answer is yes, then different questions may arise. For example, what are the circumstances in which decisions rendered by national courts can be the subject of an investment treaty arbitration? Even if denial of justice is the only legal basis from which liability can be drawn, then still there would be a need to define the term denial of justice and its limits.

Although these questions are yet to be answered, it is clear that more developments are expected in this area.

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