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Should Political Risk Insurance Payment Be Deducted From Investment Treaty Award Compensation?

Sat, 2018-11-10 02:59

Yashasvi Tripathi

Introduction

Political Risk Insurance (PRI) was discussed as a concept here. In fact, an earlier post discussed PRI as an alternative to investment treaty arbitration (ITA) for investors. The interaction between PRI and ITA is a germane field of study as both are risk mitigation strategies for investors and in some instances an investor can initiate claims under ITA and under PRI, such as, in cases of expropriation, government changes, political violence etc.

This post seeks to answer the topical conundrum: whether the insurance payment received by an investor (insured) under a PRI policy should be deducted from the compensation to be awarded to the investor (claimant) in an ITA if the grounds of claim under PRI and ITA are the same.

Conundrum

The two recent awards of ICSID tribunals, viz., Hochtief AG v. Argentine Republic (ICSID Case No. ARB/07/31, Award dated 19 December 2016) and Ickale Insaat Ltd Sirketi v. Turkmenistan (ICSID Case No. ARB/10/24, Award dated 8 March 2016) have answered the conundrum differently. The conundrum is again in front of an ITA Tribunal in Glencore Finance (Bermuda) Ltd v. The Plurinational State of Bolivia.1) PCA Case No. 2016-39/AA641, Bolivia’s Preliminary Objections, Statement of Defence, and Reply on Bifurcation (18 December 2017). jQuery("#footnote_plugin_tooltip_2920_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });      

In the Hochtief AG award, the tribunal held the respondent state, Argentina, liable for breach of FET obligation and awarded compensation to the claimant. The claimant had received PRI payment prior to the ITA award. Notably, the grounds for initiating both were the same. An issue of contention between the parties was the deduction of claimant’s PRI receipts from the ITA compensation.

The tribunal held the claimant’s PRI receipts would not be deducted from the compensation. The tribunal reasoned that the claimant arranged for the insurance payment on its own by paying for it. It is separate from the ICSID claim. The tribunal espoused that the respondent’s liability shouldn’t be reduced by an arrangement to which the latter was not a party. It agreed that due to such insurance policies the claimant might be obliged to pay some part of the compensation to the insurer.

Some practitioners agree with the principle of non-deduction.

Remarks on the case: Article 6 of the applicable Argentina – Germany BIT 2) Treaty between the Federal Republic of Germany and the Argentine Republic on the Encouragement and Reciprocal Protection of investments, 1991. jQuery("#footnote_plugin_tooltip_2920_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); mentions that if either contracting party makes a payment to its nationals because of a guarantee it has assumed regarding  investments, then the other contracting party shall recognize the assignment, of any right or claim from such national to the paying contracting party. Notably, the article mentions assignment, which means complete transfer of ownership.

Further, the tribunal had a problem with reduced liability of the respondent. However, unequivocally the respondent’s liability is not reduced, as it will have to pay Germany, the paying contracting party as per the agreement. Rather, the respondent will have to pay twice for the same cause of action.

In the case of Ickale Insaat, the tribunal had dismissed the claims of the claimant. The claimant (investor/insured) had a PRI policy for the leased equipment and machinery. However, the tribunal decided to deduct the claimant’s PRI receipts in calculating the compensation, if to be awarded, given the evidence and non-rebuttal by the claimant.

The tribunal reasoned that the compensation should be equivalent to the real value of the expropriated investment. It was on the assumption that the claimant might have been paid and would have recovered the value of the insured investment.

Notably, the dissenting arbitrator, and even the claimant, agreed on deduction principally, which is evident from the claimant’s request for rectification of the award. The parties only differed with respect to the sufficiency of evidence if the claimants actually got the PRI payment.

Way out and why

The following points indicate that PRI and ITA should be alternative, and not simultaneous means of redress for the investors:

i) The wording of treaties and insurance policies and the principles of insurance law: The language in the treaties for incentivizing agreements, like the article 6 above; and in the contracts of insurance, like the one concluded by the U.S. PRI provider, Overseas Private Investment Corporation (OPIC), mention the assignment of the relevant rights of the investor to the paying contracting party or to OPIC, so that the latter then proceeds against the host governments.

The request for arbitration by OPIC also uses assignment: that on making the payment to the insured, the insurer (OPIC) received in return, assignment of certain rights and interests to pursue recovery against the host government under the applicable agreement.

Assignment has specific legal connotations. Black’s Law Dictionary defines assignment as an act by which one-person transfers to another, the whole of the right or interest. It is complete transfer of rights, enabling the insurer to claim on its own without the name of the insured. 3) E.J. Macgillivray, MacGillivray & Parkington on Insurance Law, 8th ed jQuery("#footnote_plugin_tooltip_2920_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

When the whole of the right is transferred from the insured to the insurer, then the same right ought not be exercised by the insured at an ITA.

The request for arbitration by OPIC also states: by subrogation the host government is liable to reimburse the OPIC for payments it made to the investors and to compensate the OPIC to the fullest extent of rights and interests transferred to OPIC from the investors.

Subrogation is a product of equity, which prevents unjust enrichment. Generally, an insurer has the right of subrogation and not the insured. Further, insurer gets rights of subrogation as soon as the payment is made.4) Id. jQuery("#footnote_plugin_tooltip_2920_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As a common law principle, an insurer does not have rights of subrogation against its own insured for the claims arising from the same risk for which the insured was covered. Hence, if an investor is being compensated by a host government, after being paid by the insurer, then too the insurer doesn’t get the right of subrogation against the insured (the investor), as was claimed by a few practitioners agreeing with the non-deduction principle.

ii) Behavior of PRI providers: Some PRI providers, like Multilateral Investment Guarantee Agency, mandate for the insured to engage in arbitration as a precondition for the grant of PRI compensation. They grant PRI payment if the arbitration process has failed. Meaning thereby, the PRI providers deem compensations from PRI and ITA as an alternative to each other and definitely not something to be awarded simultaneously.

Further, after making the payments, the PRI providers initiate arbitration against host governments for the same cause of action. The authority with which PRI providers proceed against the host governments speaks about their understanding of the transferred rights, which is of ownership and complete.

iii) Phenomenon of moral hazards: Morally hazardous behavior of the investors in presence of PRI coverage (as detailed in a study) signifies that investors at times solely rely on PRI payments for their losses and do not care about the outcomes in ITAs. The investors deem their damages to be sufficiently covered by the PRI itself. Investors view PRI as an easy way out of a country in which they do not want to continue. The CalEnergy case in Indonesia is illustrative of this phenomenon.

This moral hazard is also observed in host governments. In the presence of PRI coverage, they have lesser incentive to reform their markets and economy for foreign investments (noted in an OECD policy paper). This illustrates that host governments don’t deem themselves primarily liable to compensate the investor in presence of PRI.

Thus, behavioral understanding of investors and host governments contradicts the non-deduction principle whereby PRI and ITA compensation are paid in addition to each other.

iv) PRI itself as a Dispute Resolution Mechanism: It is possible to equate PRI as one of the dispute resolution mechanisms, like an ITA. The dominance of public PRI providers, eventually changing the dispute to an inter-state dispute, supports this interpretation. For example, the dispute over the Dabhol power plant between an American Company and GOI turned into a state-state dispute between the US and India. It too signifies that PRI is an alternative to ITAs.

v) PRI v. ITA: At times, they have non-intersecting operating spheres. For example, PRI is essential for investors in host countries which haven’t entered into BITs or which are pulling out of the ITA regime. For instance, Venezuela and Ecuador denounced the ICSID Convention. PRI and ITA, as remedies, provide comparable but distinct advantages and remedies. Hence, one can be chosen over another depending on the preference of investors for certainty, speed, amount of compensation, cost etc.

vi) Equity: Making the host governments pay to the investor (the insured) for the same cause of action, as has been paid by the PRI provider (the insurer) is not equitable as the insured is getting compensated twice. If not leading to double compensation of the insured, it will lead to unjust enrichment of the insured, or at least liquidity benefits to the insured for a certain period.

Further, it amounts to the host government compensating twice for the same cause of action. This is equivalent to double jeopardy for the host governments, which is inequitable.

vii) Miscellaneous reasons: The prevailing conditions give rise to confusion as to who should proceed against the host governments regarding the insured investments, the insured or the PRI provider.

The non-deduction practice increases the transaction cost, as then the insured, who has been compensated by the insurer, will have to pay the insurer, as espoused by few practitioners agreeing with the principle. It leads to the same result of compensating the insurer circuitously.

Further, non-deduction leads to seeing the two fields of law: investment arbitration and insurance as mutually exclusive fields and non-integral. This doesn’t bode well for the future of the ITA regime, which already has few disgruntled opinions.

Conclusion 

PRI and ITA should co-exist as alternative ways and not as simultaneous sources of compensation for the same cause. Both provide distinct and comparable remedies in their distinct ways. If the PRI provider has paid an investor, then the PRI payment should be deducted from the compensation out of ITA awards. This will lead to a coherent and equitable system.

References   [ + ]

1. ↑ PCA Case No. 2016-39/AA641, Bolivia’s Preliminary Objections, Statement of Defence, and Reply on Bifurcation (18 December 2017). 2. ↑ Treaty between the Federal Republic of Germany and the Argentine Republic on the Encouragement and Reciprocal Protection of investments, 1991. 3. ↑ E.J. Macgillivray, MacGillivray & Parkington on Insurance Law, 8th ed 4. ↑ Id. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Return of “Forwarding” in the Costa Rican Arbitral World

Thu, 2018-11-08 16:05

Herman Duarte

The Return of the Jedi is a 1983 science fiction movie set in 4 ABY, a year after the Imperial occupation of Cloud City, when Luke Skywalker and his friends travel to Tatooine to rescue Han Solo from the clutches of Jabba the Hutt. The Empire prepares to destroy the Rebel Alliance with a more powerful Death Star, while the rebel fleet attacks it. Luke Skywalker faces his father, Darth Vader, in a final duel under the gaze of Emperor Palpatine. So, the Jedi Luke Skywalker returns triumphantly to overcome the dark forces, which allows the progress of the galaxy. 1) This contribution has been previously posted in Spanish in here. jQuery("#footnote_plugin_tooltip_9402_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9402_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Image: John Williams – Star Wars Episode VI: Return Of The Jedi (Original Motion Picture Soundtrack)2)Source:https://www.amazon.com/ jQuery("#footnote_plugin_tooltip_9402_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9402_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

Something similar happened on July 13, 2018 with the return of the figure of “Forwarding/Re-Sending” (there is no real translation for the “Reenvío” which is the term used in Spanish) to arbitration practice in Costa Rica. By “Forwarding” I refer to the figure created by the First Chamber of the Supreme Court of Costa Rica (see Decision 0941-F-07), that allows arbitrators to recover their competence after the award is rendered, in order to correct defects of nullity affecting such award. Despite of the criticisms against the figure of “Forwarding”, it is a mechanism that keeps parties from wasting time and resources in an arbitration process. Despite the benefits of this figure created by case law of the First Chamber, jurisprudence made a turn, and stopped its application in national arbitration. As a result of that decision, a considerable number of awards were annulled for defects that could have been corrected by the Arbitral Tribunal through this jurisprudential figure.

Faced with this reality, the First Chamber of the Supreme Court has returned to the year 2007 (returning to the past is not necessarily a bad thing) in which “Forwarding” in national arbitration was possible, in order to save the sunk costs and time of an award that gets vacated for an absurd – yet legal – reason.

In Decision 666-S1-18, the First Chamber of the Supreme Court of Costa Rica vacated an award and instead of closing the case, it sent it back to the Arbitral Tribunal because it considered that the reason that lead to the annulment of the award, was something that the tribunal could revise. In this context, the First Chamber ordered the tribunal not to change its decision per se, but to repeat a critical part of the evidence hearings stage, that lead to a due process violation by not allowing each party to present their case.

The problem surged due to the impediment of the respondent to obtain and offer a key witness statement. The Arbitral Tribunal rejected receiving such testimony because the claimant decided not to present the witness. Now, here it becomes tricky and it’s perfectly fine if you are not following the lines, because the witness system in Costa Rica is a bit strange. Let me explain. In some arbitration cases in Costa Rica (not all, but in some) the civil procedural rules are strictly followed, including the traditional rule that “no one can serve as evidence of their own case”. Hence, general managers, CEOs, presidents and other corporate officials cannot be called to testify by the party they represent, they can only be called by the opposing party. The rule, however, allows them to partake in some sort of cross-examination, i.e., they can be questioned by their own attorney, as long as they were initially called to testify by the other party.

In Decision 666-S1-18, the claimant requested the confession of the respondent´s legal representative, a key character of the commercial dispute. After the tribunal granted claimant’s petition, the respondent also requested to examine the same witness, which was his legal representative after all. The problem surged when, after the tribunal granted Claimant´s petition, Claimant withdrew its confession request, and consequently the tribunal decided to deny respondents’ request. This was considered by the First Chamber a violation of due process, and ordered the Tribunal to allow the testimony.

The First Chamber considered that: “it is not explainable or justified how the arbitration body denied the evidence,,, The interest that both parties considered at the time in the information and data that Mr. V.L. could offer for the resolution of the litigation and the current importance that the defendant’s highlights in that statement are evident. Consequently, the Chamber considers the practice of this proving relevant.” (Decision No. 666-S1-2018, First Chamber, Supreme Court of Justice of Costa Rica). To translate it into practical terms: arbitrators must ensure that key evidence to an arbitral proceeding to take place. The other element is that anyone can withdraw its intention to practice an evidence once it has been admitted by the Tribunal, but such withdrawal must be done with the consent of all parties involved. This is a clear manifestation of good faith in arbitral practice and more importantly, the decision traces a route to modernity for the Costa Rican arbitral practice.

Consequently, the First Chamber ordered the Arbitral Tribunal to practice said proof within the following six months. As opposed to the Costa Rican International Arbitration Act that does not provide a fixed term, the country’s Domestic Arbitration Act (Law 7727) states that the tribunal has to render a decision within 6 months from the submission of the statement of claim. The First Chamber’s ruling preserved the right of the Arbitral Tribunal to assess the evidence as appropriate for the purpose of solving the violation of due process affecting the respondent.3)Thanks to Marcela Filoy for sharing the First Chamber ruling. jQuery("#footnote_plugin_tooltip_9402_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9402_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

From the judgment of First Chamber, we can conclude that:

1. ”Forwarding” has returned, which undoubtedly will be a benefit for the arbitration community, in particular for its users that require an expeditious and definitive resolution of the conflicts that arise in a commercial relationship. The component of finality is maintained, even when the arbitrators have a “second chance” (as a result of resubmission) to analyze the errors and correct them. However, the question remains as to whether the “Forwarding” will only operate when the term to issue the award has not expired yet or whether it will be used regardless of the expiration of such term.

2. Respect for the criterion of the arbitrators in regard to the assessment of the evidence, because the interest of the First Chamber is really that there is no breach of due process, and ultimately that the arbitration process is legitimised through the satisfaction of its users, who must be afforded the opportunity to present their case.

3. A fracture – but no rupture – with the system of the Civil Procedure Code that is about to lose validity due to the entry into force of the New Code of Civil Procedure, that moves away from the principle of “Nobody can be a witness of his own cause”. This is, in addition, a positive factor as it goes hand in hand with the dominant arbitration currents in the most developed jurisdictions, in which the restriction on legal representatives to be called as witnesses by their own attorney has been removed.

The emphasis of Decision 666-S1-18 is not on formalism, but on potentiating due process by allowing an intense debate in the evidentiary stage of the process, providing for the possibility to reach the “real truth” as the First Chamber itself points out (Latin American judges love to create classifications of the truth, having a “real truth” to refer to what actually happened; and a “docket true” which refers to what the facts of the case file show). This is covered by two fundamental pillars of arbitration: the principle of defense, and parties’ opportunity to present their cases, which are manifestations of the principle of due process.

In short, the “Forwarding” may have its criticisms, but the perfect is the enemy of the good, and we need good mechanisms to resolve trade conflicts to alleviate social pressure. First Chamber: well done.

References   [ + ]

1. ↑ This contribution has been previously posted in Spanish in here. 2. ↑ Source:https://www.amazon.com/ 3. ↑ Thanks to Marcela Filoy for sharing the First Chamber ruling. 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: Arbitration in Belgium: A Practitioner’s Guide
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Switzerland to Become More Attractive for International Arbitration: Act 2

Thu, 2018-11-08 00:56

Léonard Stoyanov

On 11 January 2017, the Swiss Federal Council issued a draft bill to revise chapter 12 of the Swiss International Private Law Act (“SPILA”) on international arbitration (as well as, to a lesser extent, the Federal Tribunal Act and the Civil Procedure Code (“CPC”)), which was the subject of a previous publication on this blog.

 

On 24 October 2018, the Federal Council issued a revised bill, taking into account some of the comments made and concerns raised by interested parties with regard to the draft bill during the consultation phase, alongside a message for the attention of the Federal Parliament.

 

The goal of the proposed revision remains unchanged, i.e. (i) to update the provisions of the SPILA by implementing elements of the Federal Tribunal’s jurisprudence and clarifying ambiguities, (ii) to reinforce the parties’ autonomy and (iii) to ease the use of the SPILA.

 

I. Implementing the Federal Tribunal’s jurisprudence and clarifying ambiguities

A. Clarification of the scope of application of chapter 12 SPILA

To offset a heavily criticised decision of the Federal Tribunal, it was proposed in the draft bill that article 176 SPILA specify that the parties are those “to the arbitration agreement” so as to make the time when the arbitration agreement was entered into (as opposed to when arbitral proceedings were started) relevant when ascertaining whether chapter 12 SPILA applies. This proposal was maintained in the revised bill.

 

B. Request of the appointment of an arbitrator by the judge when the arbitration clause does not provide for a seat or when the parties merely agreed that the arbitration would take place in Switzerland

Pursuant to article 176 III SPILA, if neither the parties nor the arbitration institution has determined the seat of the arbitral tribunal, the arbitrators will do so. What if the arbitral tribunal is not constituted yet? According to article 179 II SPILA, the judge at the seat of the arbitral tribunal can be seized. To break this vicious circle and avoid the inapplicability of provisions of chapter 12 SPILA (starting with article 176 I according to which chapter 12 applies to any arbitration if the seat of the arbitral tribunal is in Switzerland), article 179 II in fine of the revised bill provides for the competence of the Swiss tribunal seized first.

 

Also, the judge may appoint all arbitrators in case of a multipartite arbitration.

 

C. Duty to disclose

The duty (which is to remain until the arbitral proceedings have come to an end) for any person who is offered to act as an arbitrator to disclose immediately the existence of facts which could raise doubts as to his/her independence or impartiality raised no criticism during consultation and was maintained in the revised bill.

 

D. Duty to object immediately to breaches of procedural rules

By contrast with the draft bill which was silent on this point, the revised bill provides for the duty to immediately raise any violation of procedural rules, failing which the party suffering such violation will be barred from raising it at a later stage. This is typically true for a breach of the right to be heard as per a longstanding jurisprudence of the Federal Tribunal.

 

E. Means of recourse available against an award

The proposal to expressly address the rectification, interpretation, completion and revision of awards remains in the revised bill.

 

Whereas the draft bill provided two revision grounds, i.e. (i) the late discovery of relevant facts or means of proof which existed before the issuance of the award (“although [the] party [challenging the award] showed the required diligence” in the latest version), (ii) the demonstration (preferably by a criminal investigation) that the arbitral proceedings were influenced by the perpetration of a criminal offence to the detriment of the party challenging the award, the revised bill contains a third ground: the discovery after the end of the arbitral proceedings of a ground for recusal provided that no other means of challenge is available.

 

While parties, none of whom/which has his/her domicile, habitual residence, respectively its seat in Switzerland, may renounce the right to seek revision of an award based on the late discovery of relevant facts or means of proof, (even) they may not waive such right if the arbitration was tarnished by the perpetration of a criminal offence. When applicable, the renunciation must be made in writing (with reference to art. 178 I of the revised bill, as for the opting out; infra, II. A.).

 

Besides, the revised bill provides that an award may be challenged before the Federal Tribunal irrespective of the amount in dispute.

  

II. Reinforcing the parties’ autonomy

A. Opting out of the SPILA

The revised bill, as did the draft bill, provides that the parties to an arbitration may waive the application of the SPILA in favour or the CPC (“opting out”) in the arbitration clause or later on, this time however only provided they do so in writing (by reference to art. 178 I SPILA).

 

B. Arbitration clauses in unilateral legal acts

Also unchanged is the proposed amendment whereby chapter 12 is to apply by analogy to unilateral arbitration clauses contained in wills, foundation bylaws, or trust deeds.

 

III. Improving the laws governing arbitration in the users’ interest

A. The SPILA and nothing but the SPILA

As initially contemplated, current references in the SPILA to provisions in the CPC will be replaced with a set of new provisions with a view to making the SPILA a standalone set of rules for international arbitration.

 

B. Submissions in English before the Federal Tribunal

The proposal that submissions before the Federal Tribunal may be drafted in English remains despite some criticisms, notably from the Federal Tribunal itself.

 

C. Summary proceedings to apply to ancillary procedures

The proposal that the proceedings applied in case the judge acts as a “juge d’appui”
(e.g. with regard to the appointment, challenge, replacement of arbitrators) be conducted in the form of summary proceedings remains.

 

D. Assistance by the judge to enforce interim measures

Today, article 183 II SPILA provides that the arbitral tribunal with a seat in Switzerland may seek assistance from the judge to enforce interim relief or conservatory measures it rendered. The revised bill extends this right to the parties to the arbitration, as supported by most scholars.

 

E. Assistance by the judge to foreign arbitral tribunals

An arbitral tribunal, the seat of which is abroad, or a party to a foreign arbitration may seek assistance from the judge at the place where interim relief or a conservatory measure is executed. Equally, such arbitral tribunal or a party to an arbitration abroad with such arbitral tribunal’s agreement, may seek assistance from the judge at the place where evidence must be administered.

 

The aim is to spare the trouble of going down the often lengthy and burdensome road of international assistance in civil matters.

 

F. Laws applied by the judge when his assistance is sought to administer evidence

Today, whenever the judge’s assistance is sought to administer evidence, he applies his own law. The revised bill enables the judge, if so requested, to take into account “other forms of procedures” and thereby mirrors article 11a II and III SPILA, which deals with the law applicable to judicial assistance carried out in Switzerland.

 

IV. What main substantial additions does the revised bill contain as compared to the draft bill of 2017?

Both the duty to object immediately to breaches of procedural rules (supra I. D.) and the assistance by the judge to foreign arbitral tribunals (supra III. E.) are novelties.

 

V. What has been left behind as compared to the draft bill?

A. No lesser standard for the arbitration agreement to be formally valid

Today, article 178 I SPILA reads “[a]s regards its form, an arbitration agreement is valid if made in writing, by telegram, telex, telecopier or any other means of communication which permits it to be evidenced by a text”.

 

With its draft bill, the Federal Council, thereby taking example on other national legislations, had proposed that an arbitration agreement be valid as to its form also if only one of the parties had met the form requirement with the addition of the sentence “[t]his condition is deemed met even though it is met by only one of the parties to the arbitral agreement”.

This proposed amendment was mostly rejected in the consultation phase and is therefore not included in the revised bill. It was essentially feared that it would affect legal certainty, notably in the context of the recognition and enforcement of awards under the New York Convention.

 

B. The arbitrators do not get to determine the amount and dividing up of the fees and expenses

According to article 189 III of the draft bill, the arbitral tribunal was competent to set the arbitration fees and expenses and divide them among the parties. This initial proposal was strongly rejected during consultation and was accordingly abandoned.

 

VI. Conclusion

The tuned proposed revision of the SPILA offers slightly more balance between the will to modernise it and the need for legal certainty and will likely achieve its triple purpose if accepted by the Parliament and not challenged by way of a referendum, in which case the updated SPILA and the related amendments in other laws will enter into force at the very earliest in
January 2020.

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The 2018 Revision of the Rules of the Court of Arbitration Attached to the Chamber of Commerce and Industry of Romania – An Important Upgrade

Wed, 2018-11-07 01:31

Catalina Bizic

A heated debate has been ignited by the results of the 2018 Queen Mary Survey, which highlighted time and cost as the most fervid complaints respondents had regarding arbitration. In order to address these issues, a series of measures have been implemented by major international arbitral institutions in recent years in order to counteract significant delays as well as excessive expenses.

Aligning themselves to the necessities and evolution of arbitration, the Rules of the Court of International Commercial Arbitration attached to the Chamber of Commerce and Industry of Romania (hereinafter “the Rules” and “CICA-CCIR”) have been revised in 2018 to enable parties to dispose of their dispute in a more efficient manner.

The much needed upgrade follows a series of efforts to revive flexibility and efficiency of arbitration in Romania after previous versions of the Rules severely damaged the principle of party autonomy. In a 2014 study conducted by the Directorate-General for Internal Policies of the European Parliament on arbitration in Romania, parties expressed discomfort concerning “the traditional freedom of arbitration from governmental and institutional control”. However, the conclusion of the study described the problems Romania faced at the time as “far from insoluble” as well as its capacity to “increase substantially as an arbitral State”. This was due to the 2011 and 2012 versions of the Rules providing for the “exclusive prerogative of the appointing authority” to appoint the presiding arbitrator of a dispute and, later on, all the members of the arbitral tribunal, annihilating the parties’ involvement in such a crucial matter, defects which have since been cured.

In this context, the endeavors of the institution become even more laudable, with considerable improvements generated by the 2014 and the now 2018 revisions respectively. These have also synchronized with the 2014 revision of the Romanian Code of Civil Procedure regulating domestic and international arbitration, an inspiration from the UNCITRAL Model Law. Although traditional litigation is still the preferred method of resolving disputes nationwide, despite an overly burdensome caseload beset upon courts, it has been held that “[c]ommercial disputes in Romania are increasingly being submitted to arbitration, particularly in sectors such as construction, concessions, public-private arrangements and corporate joint-venture type investment schemes” 1) Florian Nitu, Raluca Petrescu, Catinca Turenci, Arbitration Procedures and Practice in Romania: Overview, Practical Law, 1 August 2016 jQuery("#footnote_plugin_tooltip_1663_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1663_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. This demonstrates that the discomforts expressed in 2014 are slowly dissolving, with the new provisions amounting to yet another stepping stone, particularly in terms of combating concerns over time and costs.

Emergency Arbitrator

The emergency arbitrator is provided for under Annex II of the 2018 Rules. The President of CICA-CCIR decides upon the jurisdiction of CICA-CCIR and proceeds to appoint an emergency arbitrator within 48 hours of receipt of the application. In two days’ time after his or her appointment, the emergency arbitrator establishes a procedural timetable to be followed by the parties, with a decision being rendered within 10 days as of his or her designation. One particularity pertains to the impossibility of ex parte proceedings, the request for an emergency arbitrator being communicated to all the parties in dispute.

Contrasting the expedited proceedings that apply under art. 6 of Annex V to disputes arising out of arbitration agreements concluded after the entry into force of the 2018 Rules, there is no mirroring text for the emergency arbitrator provisions. This significant intermission has already been contemplated in what has been the first dispute submitted to CICA-CCIR this year under the emergency arbitrator provisions. The respondents filed an action for annulment of an order rendered by an emergency arbitrator arguing that, procedurally, the emergency arbitrator was not competent because the arbitration agreement had been concluded prior to the entry into force of these provisions and had provided for a number of three arbitrators and that, substantially, the requirements for granting the interim measure were not met.

The Bucharest Court of Appeal granted the request submitted by the respondents and annulled the order. Although the reasoning of the Court of Appeal has not yet been rendered in order to determine the procedural or substantive grounds for the decision, parties should mind the gap left open in the 2018 Rules as well as keep an eye on the publication of the reasoning (it can take courts up to one year to have the reasoning published) as it might create an important precedent for future cases.

Expedited Proceedings

The expedited proceedings provisions regulated under Annex V of the 2018 Rules apply automatically if the value of the dispute is below 50,000 lei (approximately 10,700 EUR or 12,500 USD) or as an opt-in alternative. The advantages of this procedure is that it consists of a sole arbitrator, a tighter procedural timetable, administering only necessary evidence, undergoing communications solely via e-mail and a time limit of 3 months for rendering the award.

Case management conference

A number of techniques have been put in place under art. 31 of the 2018 Rules relating to the case management conference and under Annex IV of the Rules relating to case management techniques. The former takes place at the first hearing date, addressing the necessity of filing an additional memorandum to the statement and answer to the statement of claim respectively, the general course of proceedings, the choice of having the arbitral tribunal decide ex aequo et bono, jurisdictional objections, requests for multi-party proceedings and the manner of appointing experts. The latter addresses, among others, the bifurcation the proceedings, the issuance of partial awards, the identification of issues that need to be addressed only in writing, the limitation of the parties’ submissions to only some key aspects of the dispute and the usage of audio and video means of communication instead of in-person hearings.

Although the 2018 version of the CICA-CCIR Rules is still perfectible in certain aspects, the modifications will enhance both the expeditiousness and the quality of arbitration proceedings. However, these advantages can only prove fruitful if parties themselves or, more precisely, legal counsel meet the commitment threshold the institutions adhere to when maintaining and improving the attractive but “deceptive simplicity” of having “no flags, maces, orbs or scepters” 2) Alan Redfern, Martin J. Hunter, Nigel Blackaby, Constantine Partasides, Redfern and Hunter on International Arbitration, 6th edition, Ed. Oxford University Press, Oxford, 2015, par. 1.06. jQuery("#footnote_plugin_tooltip_1663_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1663_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of arbitration as opposed to litigation.

 

This article has been adapted from the author’s dissertation presented in June 2018 for the LL.M. in International Arbitration at the University of Bucharest with updates that have intervened since. The author would like to thank Cristiana Irinel Stoica, Phd., for her coordination of the dissertation.

References   [ + ]

1. ↑ Florian Nitu, Raluca Petrescu, Catinca Turenci, Arbitration Procedures and Practice in Romania: Overview, Practical Law, 1 August 2016 2. ↑ Alan Redfern, Martin J. Hunter, Nigel Blackaby, Constantine Partasides, Redfern and Hunter on International Arbitration, 6th edition, Ed. Oxford University Press, Oxford, 2015, par. 1.06. 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: Arbitration in Belgium: A Practitioner’s Guide
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Singapore High Court Upholds Multi-Million Dollar ICC Award Relating To A Power Plant Project In Guatemala

Mon, 2018-11-05 18:05

Maximilian Clasmeier

On 26 April 2018, the Singapore High Court (“Court”), in China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] – SGHC 101, has upheld an ICC award of a truly international nature. The case raised intriguing procedural questions in international arbitration: The impact of an “attorney-eyes-only order” (“AEO Order”), handling allegations of corruption and the possible use of “guerilla tactics”.

Two Guatemala-based companies invited bids for the erection of a coal-fired power plant near Puerto Quetzal, Guatemala in October 2007. One bid – and ultimately the successful one – was submitted by AEI Services LLC, based in Houston, Texas. It manages and controls its subsidiaries, Jaguar Energy Guatemala LLC and AEI Guatemala Jaguar Ltd (collectively referred to as “AEI”). AEI entered into a contract for the engineering, procurement and construction of the power plant (“EPC Contract”) with Chinese construction company CMNC for an approximate amount of USD 450 million to be paid progressively in milestone payments. The EPC Contract provided for expedited ICC arbitration seated in Singapore applying New York substantive law.

The financial structure of the project envisaged external funding by a syndicated loan facility. However, AEI and CMNC later agreed to a deferred payment security agreement (“DSPA”), pursuant to which AEI was to issue debit notes secured by security interests over assets to CMNC instead of making milestone payments. On 29 March 2010, AEI authorized CMNC to commence works under the EPC Contract.

In 2013, AEI complained about delays while CNMC alleged that security interests were neither evidenced nor perfected pursuant to the DSPA. Tensions between the parties increased and on 29 November 2013, AEI notified CMNC that it considered terminating the EPC Contract. Two e-mails by CMNC followed, containing threats to AEI affiliates that would later be subject to review by an arbitral tribunal and the Court. On 11 December 2013, AEI erected a fence around the work site. It further stationed armed guards at the premises and prevented CMNC’s employees from entering. Only four days later, on 15 December 2013, the dispute between the parties escalated. In a violent confrontation between CMNC’s employees and the stationed guards, the latter fired plastic pellets, used pepper spray and wooden sticks.

Between 19 and 24 January 2014, CMNC claimed, AEI harassed and intimidated certain individuals that would later serve as witnesses in the arbitration (the “Arbitration”). AEI claimed that it had validly terminated the EPC Contract and was entitled to liquidated damages. CMNC filed a counter-claim, alleging that it had exercised so-called “step-in rights” under the DSPA, leaving AEI with no right to termination and seeking payment of around USD 900 million. The arbitral tribunal conducted hearings in London, Singapore, Toronto and Hong Kong. During the Arbitration, the arbitral tribunal issued an AEO Order, restricting review of certain documents to the parties’ counsel. The arbitral award found AEI to have validly terminated the EPC Contract. It granted USD 129.4 million in liquidated damages plus interest and costs to AEI.

CMNC sought to have the arbitral award set aside in Singapore as the seat of the Arbitration on various grounds: (i) a breach of rules of natural justice, (ii) a breach of the arbitration agreement, particularly by unequal treatment, a lack of opportunity to present its case and failure to arbitrate in good faith, (iii) a breach of rules of Singaporean public policy in view of employed guerilla tactics and (iv) the arbitral tribunal’s failure to investigate allegations of corruption. The Court simplified its reasoning by distinguishing between what it termed the “Due Process Ground”, the “Defective Arbitral Procedure Ground” and the “Public Policy and Corruption Ground”.

As regards the Due Process Ground, CMNC argued that the use of the AEO Order denied it the opportunity to know the evidence against it and to meet that evidence, breaching its right to natural justice. The Court rejected CMNC’s argument. It found that determining the scope of natural justice in each case would depend largely on the arbitration agreement. In view of the expedited nature of the Arbitration, the Court ruled that the arbitral tribunal was to give effect to such arbitration agreement despite the scale and intricacy of the dispute. Thereby, the Court predominantly highlights the importance of far-sighted drafting of arbitration agreements,  strengthening party autonomy: the explicit parameters of such arbitration agreements may implicitly impact the threshold for a breach of natural justice.

As regards the Defective Arbitral Procedure Ground, the Court dwelled on a possible duty to arbitrate in good faith. The Court highlighted that no Singaporean court has yet decided the matter. However, neither did the Court, ruling that, in any case, AEI did not breach such duty and a decision was thus not necessary. Nevertheless, the Court deemed it “clear that an arbitration agreement includes a duty to cooperate in the arbitral process” and opined that “it may be that most or all arbitration agreements include a duty of good faith”.

At the same time, the Court touched upon the use of “guerilla tactics” in international arbitration, a  novel issue in Singaporean jurisprudence. CMNC argued that AEI’s conduct between 19 and 24 January 2014, which predated the arbitration, constituted such “guerilla tactics”. These, it argued, (i) reflect bad faith, (ii) amounting to a breach of the duty to arbitrate in good faith and thus finally (iii) constituting a breach of the agreed arbitral procedure. The latter link is crucial and the Court described it as possessing “forensic attraction”. However, the Court did not follow CMNC’s argument. In relying upon commentaries, the Court stressed that “guerilla tactics” refer to the “use of illegal or unethical means with the aim of obstructing, delaying, derailing or sabotaging an arbitration”. It ruled that such conduct was not at hand. It noted, however, that conduct predating an arbitration may amount to a breach of the duty to arbitrate in good faith. It follows that certain conduct may affect the enforcement stage of an arbitration, even if it occurred prior to the commencement of such. The Court appears to view the arbitration agreement as providing an underlying protective notion towards the parties’ choice for arbitration and the subsequent arbitral process. Such “pre-arbitration safeguard” is a powerful derivative of party autonomy, capable of balancing certain misconduct by a party aimed at sabotaging the other party’s recourse to legal relief.

As regards the Public Policy and Corruption Ground, the Court held that the threshold for a public policy violation “would only be crossed if upholding the award would ‘shock the conscience’, or would be ‘clearly injurious to the public good…wholly offensive to the ordinary reasonable and fully informed member of the public’, or would violate ‘the forum’s most basic notion of morality and justice’ ”.

As regards corruption, the Court provided a broader analysis. It held that “in appropriate cases, an arbitral tribunal would be required to investigate allegations of corruption”. However, certain requirements must be fulfilled for an omitted investigation of corruption to be contrary to public policy: First, there must be a nexus between the allegations of corruption and the issues under consideration in the arbitration. The allegations must be relevant to the claims in dispute. An arbitral tribunal does not investigate corruption as an end in itself. Second, the breach of the duty to investigate must carry “the risk that upholding the award that is subsequently issued may legitimize the corrupt activities”. On this basis, the Court rejected the argument of a public policy violation. It relied on the arbitral tribunal’s (factual) finding that no nexus between the allegations of corruption and the claim in the arbitration existed, stating that such factual finding was not subject to appeal. The approach is in line with the Court’s (limited) mandate at the enforcement stage and contributes to the efficiency of the proceedings.

The ruling by the Singapore High Court touches on myriad contentious issues in international arbitration: An AEO Order, handling allegations of corruption and the possible use of “guerilla tactics”. First, the reasoning is clear evidence of the parties’ responsibility in concluding an arbitration agreement. It gives effect to their autonomy and that of arbitral tribunals empowered by the will of the parties, adopting an approach of minimal intervention and ensuring utmost efficiency. Second, the ruling confirms the power of an arbitral tribunal to make AEO Orders in arbitrations seated in Singapore. Such AEO Orders are still a rare occurrence in international arbitration. Third, there exists a duty to arbitrate in good faith. Conduct contrary to such duty may even – albeit on a very narrow basis – lead to an arbitral award being set aside. Fourth, public policy remains a concept that may only cause the setting aside of an arbitral award in highly exceptional circumstances. Tribunals should be alert to allegations of corruption and apply a two-prong test. Only such test may then, if the requirements are fulfilled, lead a tribunal to investigate further.

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Ongoing Territorial Challenges in Crimea Cases: Putting Everest v. Russia in Context

Sun, 2018-11-04 22:00

Mykhaylo Soldatenko

After the 2014 Russian annexation of Crimea, the new local “authorities” have taken a number of privately and state-owned assets in the peninsula.  Ukrainian companies have commenced at least eight investment arbitrations against the Russian Federation under the Russia-Ukraine BIT (the “BIT”), seeking compensation for the lost property in Crimea.1) NJSC Naftogaz of Ukraine et al. (its 6 subsidiaries) v. Russia, UNCITRAL, PCA Case No. 2017-16 (commenced in 2016); Oschadbank v. Russia, UNCITRAL (commenced in 2016); Aeroport Belbek LLC and Mr. Igor Valerievich Kolomoisky v. Russia, UNCITRAL, PCA Case No. 2015-07 (commenced in 2015); Stabil et al. v. Russia, UNCITRAL, PCA Case No. 2015-35 (commenced in 2015); Everest Estate LLC et al. v. Russia, PCA Case No. 2015-36, Award, 2 May 2018; Privatbank and Finilon v. Russia, PCA Case No. 2015-21 (commenced in 2015); PJSC Ukrnafta v. Russia, PCA Case No. 2015-34 (commenced in 2015); Lugzor and others v. Russia, PCA Case No. 2015-29, (commenced in 2015). Two other companies – DTEK and Ukrenergo – notified Russia about the future arbitrations, see here and here. jQuery("#footnote_plugin_tooltip_3874_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  A number of tribunals have already found jurisdiction in Crimea cases.  Only some of the reasoning behind these decisions is publicly available.  Even where available, the relevant information is unfortunately second-hand, see here and here.

 

On 2 May 2018, the first final award was issued in one of the “Crimea cases.”  The investors in Everest Estate LLC etl. v. The Russian Federation, were awarded 150 million USD for the expropriation of several hotels and real estate properties.3) Everest Estate LLC et al. v. The Russian Federation, PCA Case No. 2015-36, Award, 2 May 2018, see ’RUSSIA HELD LIABLE IN CONFIDENTIAL AWARD FOR EXPROPRIATION…’, Investment Arbitration Reporter. jQuery("#footnote_plugin_tooltip_3874_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });   A number of other decisions are expected in the near future.

 

The Russian Federation has recently filed a challenge to the Everest awards at the seat of arbitration in The Hague, Netherlands. At the same time, the Swiss Federal Tribunal dismissed Russia`s challenge of jurisdiction in two other Crimea cases Stabil and Ukrnafta seated in Geneva.2) ‘Crimea awards upheld in Switzerland’, Global Arbitration Review, 16 October 2018. jQuery("#footnote_plugin_tooltip_3874_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

In this post, we will address some difficult jurisdictional hurdles of the post-annexation investment protection, which Russia may be bringing up in The Hague after the failure in Switzerland.  Namely, whether Crimea is Russian territory within the meaning of the BIT and whether the BIT covers investments made in Ukraine before the annexation.

 

Russia – Ukraine BIT’s application to a de facto state territory

 

The Crimea cases involve a unique jurisdictional issue of the BIT’s territorial scope.  Namely, whether occupied Crimea is now a Russian territory within the meaning of the BIT.  De jure Russian sovereignty over the peninsula has been widely rebutted,4) For example, Territorial Integrity of Ukraine, UNG Res 68/262, 27 March 2014. jQuery("#footnote_plugin_tooltip_3874_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); however, even Ukraine agrees that Crimea is under de facto Russian control.5) Ukraine in its third-party submission confirmed the relevant fact before the tribunal. See ‘FULL JURISDICTIONAL REASONING COMES TO LIGHT IN CRIMEA-RELATED BIT ARBITRATION VS. RUSSIA’, Investment Arbitration Reporter, 9 November 2017. jQuery("#footnote_plugin_tooltip_3874_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  So what is the status of de facto controlled territory under the BIT?  The answer will very much affect whether the Ukrainian investors or the Russian Federation prevail on the Dutch set-aside proceedings.

 

The BIT’s substantive protections are expressly limited to the Contracting State’s territories.6) BIT, Article 1 (1): “Investments” shall denote all kinds of property and intellectual values, which are being invested by the investor of one Contracting Party on the territory of the other Contracting Party in conformity with the latter’s legislation”. jQuery("#footnote_plugin_tooltip_3874_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Article 1(4) of the BIT defines territory as “the territory of [the Contracting State], and also their respective exclusive economic zone and the continental shelf, as defined in conformity with international law”.  The question for the set-aside court will therefore be whether the definition includes a territory under state de facto control and whether the phrase “in accordance with international law” only relates to the Contracting State’s EEZ and continental shelf or whether it also defines the territory.

 

A number of the arbitral tribunals have already decided that Crimea is Russian territory within the meaning of the BIT, regardless of whether the Russian control is legal or not.  Relying on the VCLT,7) VCLT, Article 31 (1) (“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”). jQuery("#footnote_plugin_tooltip_3874_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); each of the Tribunals in the known Crimea cases to date have construed the ordinary meaning of “territory” as covering de jure and de facto territory under state effective control.  The Ukrnafta and Stabil tribunals, referred to English, Ukrainian and Russian legal dictionaries, which defined the term “territory” without the sovereignty criteria.8) ‘FURTHER RUSSIA INVESTMENT TREATY DECISIONS UNCOVERED, OFFERING BROADER WINDOW INTO ARBITRATORS’ APPROACHES TO CRIMEA CONTROVERSY’, Investment Arbitration Reporter, 17 November 2017. jQuery("#footnote_plugin_tooltip_3874_8").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Also, the Tribunals reportedly cited the default rule under Article 29 of the VCLT, which provides that treaties apply to state’s “entire territory” without any qualifications.9)Id. jQuery("#footnote_plugin_tooltip_3874_9").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Moreover, the Tribunals noted that over the text of the BIT the term “territory” is closely connected to the states’ ability to legislate, and only the Russian Federation now legislates in Crimea.10) See Russian Federal Constitutional Law On Admitting to the Russian Federation the Republic of Crimea and Establishing within the Russian Federation the New Constituent Entities of the Republic of Crimea and the City of Federal Importance Sevastopol dated March 21, 2014. jQuery("#footnote_plugin_tooltip_3874_10").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  The Tribunals further noted that it would be contrary to the BIT’s object and purpose to leave investments in Crimea without any legal protection under the BIT.  Finally, the Tribunals invoked the good faith principle to assert that Russia cannot “blow hot and cold” by claiming territorial control over Crimea and at the same time deny the applicability of the BIT.

 

In Everest v. Russia, the Tribunal reportedly avoided detailed interpretation of the term “territory” and did not explain the meaning of the qualifier “in accordance with international law” at all.11) ‘FULL JURISDICTIONAL REASONING COMES TO LIGHT IN CRIMEA-RELATED BIT ARBITRATION VS. RUSSIA’, Investment Arbitration Reporter, 9 November 2017. jQuery("#footnote_plugin_tooltip_3874_11").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  The Tribunal found it persuasive that the BIT was applicable to Crimea upon its entry into force, irrespective of whether the investors would have qualified at the time, and it should remain applicable after Russia got control over Crimea. It remains to be seen whether this difference in reasoning from the Ukrnafta and Stabil awards will play a role in The Hague.

 

The Russian Federation, which did not participate in the arbitrations, may choose to push the set-aside court on the territorial question.  Without denying its allegedly “sovereign rights” over Crimea, Russia may argue that the Tribunal was required to address the legality issue mindful that without a positive answer to this question the jurisdiction cannot be established.  In this context, it may challenge the tribunals’ mandate under the BIT to touch territorial disputes between states.

 

It is likely that the set-aside court will have to deal with the qualifier “in accordance with international law” in light of the Russia’s potential argument that it defines the territory as well.  At least the Ukrainian version of the BIT allows the phrase to be susceptible to a double meaning.  Namely, the phrase may relate only to the EEZ and the continental shelf or to the territory as well.12) A reputable Ukrainian linguist, Olexander Avramenko, confirmed to us that at least in the Ukrainian language the phrase is susceptible to the double meaning (last contacted, 29 July 2018). jQuery("#footnote_plugin_tooltip_3874_12").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

In light of this textual ambiguity, other factors for interpretation may take a greater relevance including the object and purpose and context of the BIT.  For example, the BIT`s object and purpose likely suggests that the investments shall not be left without the BIT`s protection.  At the same time, the proposition that at the time of the treaty conclusion the parties potentially did not mean to encompass a de facto control scenario may have some relevance.  Also, Russia might argue that legality is a default criterion for a state territory under international law, which prohibits illegal acquisition of a state territory.13) For example, the Charter of the United Nations, Article 1(4): “All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state”. jQuery("#footnote_plugin_tooltip_3874_13").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  At a minimum, it remains to be seen whether reliance on de facto control is enough for review of the jurisdictional award by set-aside court in the Netherlands.

 

Timing of the investments under the BIT

 

The Ukrainian investments in the Crimean cases were made before the Russian Federation’s de facto control of Crimea.  Articles 1(1) and 12 of the BIT requires that investments shall be made by a national of the Contracting Party on the territory of another Contracting Party. Consequently, the question is whether the Ukrainian investments shall be initially made into the Russian “territory” to be covered by the BIT.

 

In Ukrnafta and Stabil cases, the Tribunals noted that the only temporal requirement is contained in Article 12 of the BIT, namely that the investments shall be made after January 1, 1992.14) BIT, article 12: “This Agreement shall apply to all investments carried out by the investors of one Contracting Party on the territory of the other Contracting Party, as of January 1, 1992.”. jQuery("#footnote_plugin_tooltip_3874_14").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Both Tribunals noted that the text does not require that the investments shall be made to the Contracting State from the beginning and reasoned that the wording of Article 1(1) evinces geographical rather than temporal criteria for investments.

 

In Everest v. Russia, the Tribunal similarly concluded that the text of the BIT does not suggest that the Contracting Parties intended to limit its application to investments made within the host state territory ab initio. The arbitrators opined that finding otherwise would unreasonably exclude from the treaty protection a number of investments and would contradict the BIT’s object and purpose.  In support of this proposition, the Tribunal cited, inter alia, PacRim v. El Salvador, where the Tribunal found that the investor was not required to have proper nationality ab initio as long as it possessed it prior to the state breach. (Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on Jurisdiction, 1 June 2012)

 

Nevertheless, the set-aside court will need to grapple with the text of the BIT itself.  Both the Ukrainian and the Russian versions of Article 1 (1) of the BIT contains a phrase “are being invested” in the present tense, while defining the term “investments”.  At the same time, Article 12 on the temporal scope uses the phrase “carried out” in the past tense.  Thus, the Russian Federation will likely argue that the past tense of Article 12 (Application of the Agreement) indicates a requirement that investments shall be initially made into the Russian territory.  Russia might also say that a change of control over the territory cannot be understood as an act of investment making into Russia under the BIT.  Consequently, it might add that the active investors’ conduct is required in this regard, for example, reregistration of the companies under the Russian law.

 

Conclusion

 

The Ukrainian investors face thorny jurisdictional challenges before the set-aside courts.  They were able to protect the jurisdictional awards in Switzerland. However, the majority of the Crimea cases are seated in The Hague, and consequently the Dutch setting aside proceedings are essential. Success at the seat is often an important prerequisite for effective enforcement of the awards against a resisting state.  The fate of the Crimea awards primarily depends on the local courts’ attitudes and approaches to interpretation of the Russia – Ukraine BITs’ provisions under the VCLT.

 

The submission is made in my personal capacity. The views contained in this article are not necessarily the views of Asters or its clients. Many thanks to Patrick W. Pearsall, Chair of Public International Law at Jenner & Block LLP for his valuable comments and suggestions.

References   [ + ]

1. ↑ NJSC Naftogaz of Ukraine et al. (its 6 subsidiaries) v. Russia, UNCITRAL, PCA Case No. 2017-16 (commenced in 2016); Oschadbank v. Russia, UNCITRAL (commenced in 2016); Aeroport Belbek LLC and Mr. Igor Valerievich Kolomoisky v. Russia, UNCITRAL, PCA Case No. 2015-07 (commenced in 2015); Stabil et al. v. Russia, UNCITRAL, PCA Case No. 2015-35 (commenced in 2015); Everest Estate LLC et al. v. Russia, PCA Case No. 2015-36, Award, 2 May 2018; Privatbank and Finilon v. Russia, PCA Case No. 2015-21 (commenced in 2015); PJSC Ukrnafta v. Russia, PCA Case No. 2015-34 (commenced in 2015); Lugzor and others v. Russia, PCA Case No. 2015-29, (commenced in 2015). Two other companies – DTEK and Ukrenergo – notified Russia about the future arbitrations, see here and here. 2. ↑ ‘Crimea awards upheld in Switzerland’, Global Arbitration Review, 16 October 2018. 3. ↑ Everest Estate LLC et al. v. The Russian Federation, PCA Case No. 2015-36, Award, 2 May 2018, see ’RUSSIA HELD LIABLE IN CONFIDENTIAL AWARD FOR EXPROPRIATION…’, Investment Arbitration Reporter. 4. ↑ For example, Territorial Integrity of Ukraine, UNG Res 68/262, 27 March 2014. 5. ↑ Ukraine in its third-party submission confirmed the relevant fact before the tribunal. See ‘FULL JURISDICTIONAL REASONING COMES TO LIGHT IN CRIMEA-RELATED BIT ARBITRATION VS. RUSSIA’, Investment Arbitration Reporter, 9 November 2017. 6. ↑ BIT, Article 1 (1): “Investments” shall denote all kinds of property and intellectual values, which are being invested by the investor of one Contracting Party on the territory of the other Contracting Party in conformity with the latter’s legislation”. 7. ↑ VCLT, Article 31 (1) (“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”). 8. ↑ ‘FURTHER RUSSIA INVESTMENT TREATY DECISIONS UNCOVERED, OFFERING BROADER WINDOW INTO ARBITRATORS’ APPROACHES TO CRIMEA CONTROVERSY’, Investment Arbitration Reporter, 17 November 2017. 9. ↑ Id. 10. ↑ See Russian Federal Constitutional Law On Admitting to the Russian Federation the Republic of Crimea and Establishing within the Russian Federation the New Constituent Entities of the Republic of Crimea and the City of Federal Importance Sevastopol dated March 21, 2014. 11. ↑ ‘FULL JURISDICTIONAL REASONING COMES TO LIGHT IN CRIMEA-RELATED BIT ARBITRATION VS. RUSSIA’, Investment Arbitration Reporter, 9 November 2017. 12. ↑ A reputable Ukrainian linguist, Olexander Avramenko, confirmed to us that at least in the Ukrainian language the phrase is susceptible to the double meaning (last contacted, 29 July 2018). 13. ↑ For example, the Charter of the United Nations, Article 1(4): “All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state”. 14. ↑ BIT, article 12: “This Agreement shall apply to all investments carried out by the investors of one Contracting Party on the territory of the other Contracting Party, as of January 1, 1992.”. 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: Arbitration in Belgium: A Practitioner’s Guide
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The Ethical Paradox Put to Play by Guerilla Tacticians

Sun, 2018-11-04 01:59

Alban Dautaj

Some rules, although made to protect the integrity of an arbitration procedure, open up opportunities for bad faith actors to utilize “legislative” shortcomings. Too often these actors engage in guerilla tactics. Soft law has developed to remedy these grievances. For example, the IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines) seek to remedy situations where a relationship potentially can lead to bad faith conduct in the course of the arbitration procedure, e.g. where a third-party funder has a pre-existing relationship with an arbitrator. This post will demonstrate how new, untested rules risk paving the way for another set of unethical behaviors. This post’s central thesis is that the IBA Guidelines have used analogies (or legal fictions) to rein in third-party funders in circumstances where an alleged bias and independence can occur in their relationship with an arbitrator. This is good, but can also have unintended consequences—I highlight only one. However, guerilla tacticians will stand ready to further exploit any regulatory opening.

Regulating conduct is hard and often invites unintended and unwelcome consequences. The world of modern international arbitration is relatively transparent, rules-based, and judicialized. With this move towards a judicialized arbitration system comes advocates for further ethical standards, including but not limited to, “disclosure requirements.” While building an institution that can sustain criticism and foster legitimacy, best practices must be drawn from other sectors. The contemporary uncertainty—and unfortunate craving for detailed rules—can leave the door half-open to a great regulatory fallacy—i.e. that reactive, detailed ethical rules solve issues. Without delving too far into speculations, I want to highlight the paradoxical nature of regulating ethics by rules, rather than custom, practice, and markets. Reactive regulation often solves backwards, but the unknown can never be anticipated in detail. 1) For a good discussion of “governance techniques” in the financial sector, see Julia Black, Paradoxes and Failures: New Governance Techniques and the Financial Crisis. jQuery("#footnote_plugin_tooltip_1376_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); We ought to operate with caution before developing too detailed soft laws or we might be caught unprepared when rogue actors prove very capable and creative in using detailed rules to their advantage.

One example on regulating reactively

The IBA Guidelines treat third-party funders as a party in order to decide whether a conflict of interest exists.2) IBA Guidelines on Conflicts of Interest General Standards 6(b). jQuery("#footnote_plugin_tooltip_1376_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); I will outline how this, albeit well-intended, legal fiction can create unfortunate opportunities for unethical parties to use the rules to disqualify an arbitrator. Arbitrators have a duty to be and remain unbiased throughout the proceeding. An arbitrator can be determined to be unbiased at any point.

Existing rules on independence often concern relations between arbitrators and parties to the underlying agreement, and these parties are known and can be identified when an agreement is entered into. Arbitrator bias that stems from these known relations is almost always existent since before the appointment of the arbitrator. The parties and the arbitrator can anticipate these and choose an arbitrator accordingly. Third-party funders, on the other hand, are not parties to the underlying agreement and therefore they cannot be identified when the agreement is entered into because they are not involved with the parties until after a dispute has occurred.

Having rules where a third-party funder bears the identity of a party creates a situation where a party could bring in a funder at any point to create an appearance of bias. This could be used as a guerilla tactic. With the freedom to bring in a third-party funder at any stage of an arbitration, a party has the power to create an appearance of bias at any time and potentially disqualify an arbitrator. Traditional parties cannot be brought in to create a conflict and even if they would, a tribunal can use its discretion to minimize their influence.

Creating a tool for removing arbitrators was not the desire of IBA. The immutability of an arbitral tribunal is essential to secure the integrity and efficiency of the procedure as well as to protect the independence of the tribunal. This principle could be undermined if a challenge to an arbitrator would successfully lead to a removal of him or her due to one party’s inclusion of a funder. Also, efficiency favors a non-disruption of the arbitration procedure. Furthermore, a challenge to one of the arbitrators in a functioning tribunal can cause delay and expenses.

Guerrilla tactics

As described in the scenario above, while certainly unethical, guerrilla tactics may not always violate written rules. However, these “tricks” interfere with a fair arbitral proceeding. All unethical behavior are not illegal. According to a survey made on this topic, “fifty-five out of eighty-one international arbitration practitioners had witnessed the use of guerrilla tactics in cases in which they were involved.”3)Günther J., and Stephan Wilske. Guerrilla tactics in international arbitration. Kluwer Law International, 2013. jQuery("#footnote_plugin_tooltip_1376_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Sometimes “guerrilleros” utilize the unintended consequences of a rule. Paradoxically, rules that are intended to “protect the integrity of the process are abused.”

How to solve the third-party funding problem?  

Third party funders and their involvement in conflict of interest situations is and has been a talking point for a while. Still, we have no clear view on how to treat these funders when a situation appears where an arbitrator’s independence is questioned because of his/her relationship to the funder.4) Rogers, Catherine A. Ethics in International Arbitration. Oxford University Press, 2014, pg 183. jQuery("#footnote_plugin_tooltip_1376_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Rogers writes “As with any new phenomenon, the inclination is to search for similar activities as points of reference. Several possible analogies have been suggested.”

Some argue that a third-party funder is no different from an equity funder, others that the funder is a counselor – a “super-counselor.” Because of differing opinions on this, discussions are held on whether and how it should be regulated. The IBA Guidelines have solved this by creating a legal fiction where a third-party funder “may be considered to bear the identity of [a] party” to decide on whether a conflict exists.

Treating a third-party funder as an equity funder or a counselor is not the solution for reasons discussed below.

Legal fiction (Third-party funder = Equity funder)

The involvement of an equity funder only needs to be disclosed if the funder reaches a sufficient threshold of ownership in a party. Therefore, it is attractive to some third-party funders to identify as something analogous to an equity funder. 5)Id, pg 204. jQuery("#footnote_plugin_tooltip_1376_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The proponents of this view argue that “private equity investors may (and sometimes do) control aspects of case management in ways that are similar to third-party funders.” As discussed on this blog previously, in some cases, equity funders even exercise more influence in the case than a third-party funder could or would.

In clear and convincing language, using “the concentration effect,” Rogers argues that a third-party funder, investing the same amount, will have a more significant interest in a case than an equity funder. Rogers illustrates this by a hypothetical scenario where a party with an overall value of 100 US dollars, 10 US dollars being the value of a claim owned by the party. In the hypothetical scenario, an equity funder investing 1 US dollar would have a 1% ownership of the company and therefore also a 1% interest in the claim. In this scenario, the 1% ownership need not be disclosed. If, on the other hand, a funder invests 1 US dollar directly in the claim, this funder would have a 10% interest in the claim. Two investments with the same dollar value will lead to two different situations with differing amounts of interest in the claim.

Legal fiction (Third-party funder = counselor)

An arbitral tribunal has broad discretion over procedural matters.6) Redfern, Alan, and Martin Hunter, Law and practice of international commercial arbitration, Sweet & Maxwell, 2004, Page 309; This has been expressed in Art.44 ICSID Convention, Art.IV4(d) European Convention, §1, 34(1) English Arbitration Act, Art.1494 & 1460 French New Code of Civil Procedure, Art.15(a) Revised Uniform Arbitration Act, Art.15(1) UNCITRAL Arbitration Rules, Art.15(1) ICC Rules, and in Art.14(1) LCIA Rules. jQuery("#footnote_plugin_tooltip_1376_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This discretion stems from the principle of party autonomy and the procedural autonomy of arbitrators. It provides for efficiency and flexibility and prevents parties from abusing the process in arbitration. A tribunal can, therefore, disqualify a counselor from participating in an arbitration. This was the case in Hrvatska Elektroprivreda v. Republic of Slovenia, where a conflict of interest based on a relationship between a counselor and an arbitrator led to the disqualification of the counselor. However, disqualifying a third-party funder is not as effective as disqualifying a counsel.

Creating a legal fiction where a third-party funder is identified as a counselor or as a part of the counsel’s team would not be adequate to solve a conflict of interest. A tribunal has discretionary powers to prevent a counselor from participating in hearings, receiving briefs/information and more. A counselor cannot function in a practical way when restricted by a tribunal. A funder can function effectively despite the above-mentioned restrictions.

Conclusion

The question that lingers here is the very one asked in the book “Guerrilla Tactics in International Arbitration”: How can a protective rule itself be protected from abusive employment as a guerilla tactic?

Treating a third-party funder as a party, as provided by the IBA Guidelines, creates opportunities for unethical behavior. Other legal fictions and their shortcomings have been discussed. Maybe we need a complementary rule to the one in the IBA Guidelines, and then a complementary rule to that rule.

References   [ + ]

1. ↑ For a good discussion of “governance techniques” in the financial sector, see Julia Black, Paradoxes and Failures: New Governance Techniques and the Financial Crisis. 2. ↑ IBA Guidelines on Conflicts of Interest General Standards 6(b). 3. ↑ Günther J., and Stephan Wilske. Guerrilla tactics in international arbitration. Kluwer Law International, 2013. 4. ↑ Rogers, Catherine A. Ethics in International Arbitration. Oxford University Press, 2014, pg 183. 5. ↑ Id, pg 204. 6. ↑ Redfern, Alan, and Martin Hunter, Law and practice of international commercial arbitration, Sweet & Maxwell, 2004, Page 309; This has been expressed in Art.44 ICSID Convention, Art.IV4(d) European Convention, §1, 34(1) English Arbitration Act, Art.1494 & 1460 French New Code of Civil Procedure, Art.15(a) Revised Uniform Arbitration Act, Art.15(1) UNCITRAL Arbitration Rules, Art.15(1) ICC Rules, and in Art.14(1) LCIA Rules. 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: Arbitration in Belgium: A Practitioner’s Guide
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Legitimacy of Arbitral Appointments in India

Fri, 2018-11-02 21:56

Shweta Sahu, Payel Chatterjee and Moazzam Khan

YSIAC

Independence and impartiality of arbitrators are the hallmarks of arbitration. The amendments to the Arbitration and Conciliation Act 1996 (“Act”) in 2015, which adopted the international best practices from the International Bar Association Guidelines on Conflict of Interest (“IBA Guidelines”), aimed to bolster not only the neutrality of arbitrators, but also the perception of neutrality.

This article attempts to explore and analyze these changes along with the Indian Supreme Court ruling in HRD Corporation v GAIL (Civil Appeal No. 11126 of 2017), a landmark case dealing with issues of arbitral conflicts.

Legislative Framework

Pre-amendment

Prior to the amendment, Section 12(3) of the Arbitration and Conciliation Act 1996 provided that:

“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality.

(3) An arbitrator may be challenged only if-

(a) Circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) He does not possess the qualifications agreed to by the parties.”

Post-amendment

The Arbitration and Conciliation (Amendment) Act 2015 (“Amendment Act”) further explained the circumstances under which such arbitral appointments may be challenged. Section 12(1) of the Arbitration and Conciliation Act 1996 was replaced with the following section:

“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, —

(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and

(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular their ability to complete the entire arbitration within a period of twelve months.”

The Amendment Act also inserted a new Fifth Schedule, which lists the grounds and circumstances that would give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Additionally, Section 12(5) of the Arbitration and Conciliation Act was inserted:

“(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator.”

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

Analysis of the Post-Amendment Framework

Distinguishing “ineligibility” from “justifiable doubts as to independence and impartiality” of an arbitrator

While the Fifth Schedule (read with Section 12(1)(a)) lists the various instances giving rise to “justifiable doubts as to the independence and impartiality” of an arbitrator, the Seventh Schedule (read with Section 12(5)) of the Arbitration and Conciliation Act relates to instances which directly result in the “ineligibility” of a person from being appointed as an arbitrator unless the parties had expressly waived the applicability of the provision in writing after the agreement was entered into.

Appointment of employees of an arbitrating party as arbitrators

Courts in India have distinguished between serving and past officials of an organization, relying on Entry 1 of the Seventh Schedule for the former and Entries 2, 5, 9 and 12 of the Fifth Schedule for the latter. While the former would be de jure ineligible1) West Haryana Highways Projects Pvt. Ltd. v National Highways Authority of India (2017) 242 DLT 44; Orissa Concrete and Allied Industries Limited 2017 SCC OnLine Chh 904 jQuery("#footnote_plugin_tooltip_6236_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the latter would not.2) M/s. Voestalpine Schienen GMBH v Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 jQuery("#footnote_plugin_tooltip_6236_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The distinction is done considering former employees are seen as neither related to a party as employees, consultants or advisors, nor do they have any other past or present business relationship with the party, as required under Entry 1 of the Seventh Schedule.3) Reliance Infrastructure Ltd. v Haryana Power Generation Corporation Ltd Arbitration Case No. 166 of 2016 (O&M), decided on 27 October 2016 (“Reliance Infrastructure v HPGCL”) jQuery("#footnote_plugin_tooltip_6236_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This pertains to cases where technical expertise of such retired officials is sought, involving niche disputes. An appointment of a former employee may be subsequently challenged if certain situations arise, such as revelation of the involvement of the appointee with the project under dispute.4) Afcons Infrastructure Ltd. v Rail Vikas Nigam Limited 2017 SCC OnLine Del 8675 jQuery("#footnote_plugin_tooltip_6236_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Indian Supreme Court recently reiterated the law by stating that, although prior to the Amendment Act the arbitrator being a current employee of any of the parties was ipso facto not a ground for disqualification, pursuant to the Amendment Act, such appointments would be illegal.5) Aravalli Power Company Ltd. v Era Infra Engineering Ltd Civil Appeal No. 16727-16728 of 2017 jQuery("#footnote_plugin_tooltip_6236_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Appointment of practising counsels (including those briefed by lawyers of either party) as arbitrators

In a recent judgment of the Bombay High Court,6) Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors (2017) 3 AIR Bom R 68 jQuery("#footnote_plugin_tooltip_6236_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); it was affirmed that a counsel’s acceptance of a brief from an attorney or law firm for a different client or for an unrelated matter does not amount to automatic disqualification or ineligibility to being an arbitrator in an arbitration in which the same attorney or law firm is acting. Under the Fifth and Seventh Schedules of the Act, for a connection to cause disqualification, there must be a sufficiently proximate relationship between the arbitrator-counsel and the litigant specifically.7) Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors (2017) 3 AIR Bom R 68 jQuery("#footnote_plugin_tooltip_6236_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Following the statutory amendments described above, the disputes before the Indian courts have primarily revolved around the appointment of former or serving employees as arbitrators, and whether there were “justifiable doubts as to independence and impartiality” and “ineligibility” of arbitrators. The Act does not lay down any conditions to identify the “circumstances” which may give rise to “justifiable doubts”. Thus, the threshold for disqualification of arbitrators continues to be highly subjective, even though the Schedules of the Act intended otherwise. In a recent judgment of HRD Corporation v GAIL, the Indian Supreme Court dealt with the appointment of former judges as arbitrators, who may be associated in previous disputes involving one or more parties to the arbitration.

HRD Corporation v. GAIL (Civil Appeal No. 11126 of 2017)

Overview of facts

The parties entered an agreement on April 1, 1999 for the supply of wax. Subsequently, disputes arose between the parties on the pricing and withholding of products. HRD Corporation (“Appellant”) invoked the arbitration clause, initiating a total of four arbitrations on the above issues.

Arbitration No. Relevant period Arbitrators 1. 2004-2007 Justice A.B. Rohatgi (presiding arbitrator), Justice J.K. Mehra and Justice N.N. Goswamy 2. 2007-2010 Same as above 3. 2010-2013 Justice T.S. Doabia, Justice A.B. Rohatgi replaced by Justice S.S. Chadha and Justice J.K. Mehra 4. 2016-2019 Justice K. Ramamoorthy replaced by Justice Mukul Mudgal (nominated by Appellant)

Justice T.S. Doabia (nominated by Respondent)

Justice T.S. Doabia and Justice K. Ramamoorthy appointed Justice K.K. Lahoti

The present dispute arises from the fourth arbitration. Two applications were filed by the Appellant under Sections 12(3), 12(5), 13 and 14 of the Act read with the International Centre for Alternative Dispute Resolution Rules 1999, seeking termination of Justice T.S. Doabia and Justice K.K. Lahoti due to an alleged prior association. The challenge was on the grounds that Justice Lahoti had previously given an opinion on a legal issue between GAIL and another public-sector undertaking in the year 2014; whereas Justice Doabia had previously rendered an award between the same parties in an earlier arbitration concerning the same disputes, but for an earlier period. These allegations were rejected by the arbitral tribunal.

While deciding the case, the Indian Supreme Court scrutinized the Schedules of the Act through an itemized comparison between the Fifth Schedule of the Act and the IBA Guidelines.

On the existence of justifiable doubts as to independence and impartiality, the Indian Supreme Court held that a broad common-sensical approach was to be adopted.

Regarding the Seventh Schedule of the Act, the Supreme Court held as follows:

Entries 1 and 2 of Seventh Schedule

Entries 1 and 2 refer to circumstances where the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party; and where the arbitrator represents or advises one of the parties or an affiliate of one of the parties.

Justice Lahoti was neither a serving employee nor a consultant nor an advisor to the party. He had only given a professional opinion (not emanating from any business relationship) to the Respondent which was unrelated to the present dispute. Therefore, disqualification under Entry 1 did not arise.

Furthermore, Entry 2 was inapplicable since it concerns “current” representation or advice rendered to the Respondent, which was inapplicable in this case.

With respect to Justice Doabia’s appointment, it was held that the appointment of a person as an arbitrator is not equivalent to a “business relationship.”

Entries 8, 15 and 16 of Seventh Schedule

Entries 8, 15 and 16 refer to circumstances where the arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom, where the arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties, and where the arbitrator has previous involvement in the case.

These entries were held to be inapplicable in the present case as no advice was rendered by Justice Lahoti to the Respondent on a regular basis.

Entry 15 was similarly inapplicable, because the Indian Supreme Court found that no legal advice or expert opinion was provided on the dispute in hand. Justice Lahoti’s legal opinion which was given way back in 2014 was in relation to another issue. Similarly, in Justice Doabia’s case, it was held that an award rendered by an arbitrator in a previous arbitration cannot be read as a grant of a legal opinion under this Entry.

Lastly, “previous involvement in the case” under Entry 16 was read as referring to previous involvement in the “present dispute”, rather than merely the same agreement. Consequently, despite Justice Doabia having previously been an arbitrator between the same parties, he would not be rendered ineligible under Entry 16.

Identical entries in the Fifth and Seventh Schedules

With respect to the presence of the same Entries 1 to 19 in both Schedules, the Indian Supreme Court explained that arbitrators would have to make disclosures of their independence and impartiality as per the entries in the Fifth Schedule, which would otherwise be unknown to the parties. Based on such disclosures, eligibility would be determined under the Seventh Schedule read with Section 12(5) of the Act.

Conclusion

With the avid usage of extrinsic aids to interpretation e.g. the IBA Guidelines, 246th Indian Law Commission Report etc. and intrinsic aids like the headings in the Schedules, the Indian Supreme Court sought to decipher the exact meaning and intention of the relevant entries in the Schedules and adopt a purposive interpretation of the provisions. However, this exercise was limited to the extent of the contentions raised and referred to by the parties. It is yet to be seen whether the Indian courts would continue to upkeep the spirit of these amendments, especially that of the Schedules, in the years to come.

References   [ + ]

1. ↑ West Haryana Highways Projects Pvt. Ltd. v National Highways Authority of India (2017) 242 DLT 44; Orissa Concrete and Allied Industries Limited 2017 SCC OnLine Chh 904 2. ↑ M/s. Voestalpine Schienen GMBH v Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 3. ↑ Reliance Infrastructure Ltd. v Haryana Power Generation Corporation Ltd Arbitration Case No. 166 of 2016 (O&M), decided on 27 October 2016 (“Reliance Infrastructure v HPGCL”) 4. ↑ Afcons Infrastructure Ltd. v Rail Vikas Nigam Limited 2017 SCC OnLine Del 8675 5. ↑ Aravalli Power Company Ltd. v Era Infra Engineering Ltd Civil Appeal No. 16727-16728 of 2017 6, 7. ↑ Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors (2017) 3 AIR Bom R 68 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: Arbitration in Belgium: A Practitioner’s Guide
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Hong Kong Arbitration Week Recap: 2018 HKIAC Rules and How They May Help in Resolving IPP Project Disputes

Thu, 2018-11-01 20:00

Kyongsoon Park and Benson Lim (Assistant Editor for PR China, Hong Kong and Central Asia)

2018 HKIAC Rules Come into Force

1 November 2018 marked 5 years from the date on which the 2013 HKIAC Administered Arbitration Rules came into force. 1 November 2018 was also the day on which the new 2018 HKIAC Administered Arbitration Rules (“2018 Rules“) came into force.

The 2018 Rules showcased the latest thinking in arbitration and these amendments – made after much public and internal consultation within HKIAC – are in line with HKIAC’s constant push to improve HKIAC arbitration users’ experience. A succinct summary of the key changes was published on this blog last week.

We discuss our brief views on the likely impact of the changes in the 2018 Rules – specifically from the angle of handling disputes in independent power producer (“IPP“) projects.

Typical characteristics of disputes in IPP projects

The imbalance of bargaining power often drives a foreign investor to accept unbalanced terms of a host country when negotiating project agreements. In a competitive bidding process, a lot of terms can be non-negotiable in practice. For example, in the some Middle East countries, the construction and operation of a power plant are often procured by a government agency or a state-owned enterprise which may be legally prohibited from adopting a foreign governing law (e.g. English law).

Disputes usually arise over, amongst others, the following issues:

  • lower than anticipated revenue for power due to ending of government subsidies or changes in tax laws;
  • exchange rate fluctuations because investors tend to pay in hard currency for IPP project costs while revenue may be in a different currency;
  • obtaining various consents and permits which can involve multiple parties such as landowners and public agencies;
  • parties’ obligations with regard to the construction and operation of the underlying infrastructure for the IPP project; or
  • different dispute resolution provisions in the power purchase agreement and the construction and operation agreements such as the engineering, procurement and construction and the operation and management agreements.

How 2018 HKIAC Rules may aid resolution of IPP project disputes

On balance, we think the latest amendments in the 2018 HKIAC Rules may help in resolving disputes in IPP projects more effectively. We say so because:

1. IPP projects tend to be document-intensive.

Resolving disputes in IPP projects would likely require a tribunal to consider these project documents in arriving at its determination. The 2018 Rules now recognize a new method of document delivery and provide for documents to be delivered by parties through the use of a secured online repository.

Under the 2018 Rules, parties may agree to use their own repositories or a dedicated repository provided by HKIAC. Using, for example, existing document repositories in an IPP project for the purposes of submitting project documents to an arbitrator will make it more cost-efficient and expedient for parties.

2. IPP projects tend to involve multiple parties across multiple contracts.

Parties would want to have all relevant parties added to any action commenced to resolve a dispute. For example, offtakers are key parties in IPP projects with their payments for power generated being key revenue sources for IPP projects. Whilst offtakers may well be involved in a dispute, they – as with other parties – are not necessarily be signatories to every contract for an IPP Project.

Under the 2018 Rules, the scope of the provisions on single arbitration under multiple contracts has been broadened by allowing a party to commence a single arbitration under several arbitration agreements. This is so even if the parties are not bound by each of the arbitration agreements. Under the 2018 Rules the tribunal may also conduct multiple arbitrations at the same time, one immediately after another, or suspend any of the arbitrations. This is possible if the same tribunal is constituted in each arbitration and a common question of law or fact arises in all the arbitrations. What this means for the parties is that concurrent proceedings may now be conducted where consolidation is not possible or desirable.

3. IPP projects are long-term projects.

Early resolution of disputes as they arise in the course of the IPP project timeline can be helpful. Taking the peculiarity of a long-term project period of the IPP into account (frequently, more than decades), a foreign private party is incentivised to develop an amicable long-term partnership with the host country. In practice, an employer (a state-owned private enterprise) and an EPC contractor (a foreign co-sponsor) would try to settle disputes by themselves and as they arise. If the foreign investor participates in operating and/or maintaining the plant, both parties are more likely to be keen to resolve disputes as early as they can.

The 2018 Rules lend themselves to such quick resolution in two ways.

First, there is greater clarity in the emergency arbitrator procedure under the 2018 Rules. The clarifications include the timing of filing an application for emergency relief, the test for issuing such relief being that applied in deciding on interim relief applications, and the maximum fees payable. Time limits have been shortened. These updates will make the emergency arbitrator procedure more attractive when parties need resort to emergency relief in the course of the long project period.

Second, the early determination procedure is now available under the 2018 Rules. It allows the tribunal to determine a point of law or fact that is manifestly without merit or manifestly outside of the tribunal’s jurisdiction, or a point of law or fact that, assuming it is correct, would not result in an award being rendered in favour of the party that submitted such point. This would help put an end to unmeritorious claims at an early stage.

The innovations in the 2018 Rules will be tested before courts and tribunals in the years to come, not just in relation to IPP project disputes, but also other sectors.

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Hong Kong Arbitration Week Recap: ADR in Asia Conference – The Vision in Revision

Wed, 2018-10-31 20:00

James McKenzie and Wilson Antoon

HK45

Yesterday, participants at this year’s Hong Kong Arbitration Week came together to attend the centrepiece ADR in Asia conference.  The conference, titled “The Vision in Revision,” featured a veritable smorgasbord of speeches, panels and mocks and was held again at the Four Seasons Hotel.

Welcome Address and Keynote Speech

The conference was kicked off with a welcome address by current HKIAC Chair Matthew Gearing QC who announced the appointment of seven new council members to the HKIAC Council: Jianan Guo, José-Antonio Maurellet SC, Andrea Menaker, Catherine Mun, Ronald Sum, Robert Tang GBM, SBS, QC, SC, JP and Rimsky Yuen GBM, SC, JP.  Mr Gearing spoke to a number of positive developments at HKIAC, including the adoption of new rules which come into force on 1 November 2018 and a growing caseload.

Mr Gearing then yielded the conference floor to Professor George Bermann of the Columbia University School of Law who gave a keynote speech posing the question: why, when faced with recent scrutiny and an assortment of challenges, should the international arbitration community look to the future of arbitration with considerable equanimity?   Professor Bermann had three reasons for this.

  • First, he noted that the promised features of international arbitration had not receded in value. Confidentiality, party autonomy in constituting tribunals, finality of awards, ease of enforceability, and above all, the promise of neutrality, remain elementary advantages for arbitration that have not diminished over time.
  • Second, in his view, international arbitration has delivered further benefits that were not part of the “original promise”. These include an aptitude for procedural reform and adaptation that cannot be matched by national systems of litigation, the embrace of new technology, and the development of a dynamic and vibrant community of international arbitration practitioners.
  • Third, he noted that international arbitration has been able, relatively speaking, to avert anticipated risks, including arbitrators cutting procedural corners and not faithfully applying the law chosen by the parties. Professor Bermann said that whilst these might be occasional problems, they are not chronic.

So whilst challenges abound there was, according to Professor Bermann, much for arbitration practitioners (and indeed the day’s attendees) to look forward to.

Who Governs, Who Decides, And How? Arbitral Institutions Under Review

The first panel of the day delved into the inner workings of arbitral institutions in Asia and Europe, attempting to open up the doors in the major institutions’ decision making processes.   The panel was composed of leading members of arbitral institutions: Mr Gearing; Judith Gill QC, LCIA President; Alexis Mourre, President of the International Court of Arbitration (ICC); and Lucy Reed, Vice President, SIAC Court of Arbitration (SIAC) and chaired by Neil Kaplan QC.

Mr Kaplan kicked off discussion about the levels of transparency at the institutions in the decision making process posing the question: who decides things at each of the panel members’ respective institutions?  Each of the panellists introduced the decision-making bodies in their centres, with Mr Gearing noting that its key governing body, the HKIAC Council, has just been “revamped” with new term limits for its members and the aforementioned broadening of the Council.  Mr Kaplan questioned the panel about the transparency of these arbitral centres’ decision making processes and quizzed the panel on what their organisations have and are doing to increase transparency in this area.  All the panellists noted that their organisations publish decisions, particularly in relation to arbitrator challenges and (in most cases) where requested by parties with the ICC making these decisions available on its website.  Ms Gill noted however that not all decision making processes are susceptible to publication and cautioned that a balance needed to be struck.

Mr Kaplan then turned the conversation to the composition of the administrations’ governing bodies and the panellists’ attitudes regarding individuals sitting on governing bodies of multiple institutions.  Ms Gill pointed out the concern at the LCIA that, where there is functional matrix or similarity between roles held at different institutions there is a risk of conflict, though that each situation needed to be looked at individually.

After discussion of transparency in arbitrators’ and counsel’s rates, the panel discussed the topic of arbitration clauses in which parties agree a set of arbitration rules different from their usual administering institution.  All the panellists agreed that this was a vexed topic and that institutions have tried to work together to try to ensure that parties didn’t end up falling between the cracks of the institutions with a pathological clause and recourse only to the courts.  A protocol agreement between institutions on how this should be dealt with was suggested by Mr Kaplan and welcomed by all the panellists.  When queried from the floor whether the institution or the rules should be preferred in such a protocol the panel was unanimous: the rules should prevail.

One-On-One Session with Former Secretary for Justice Rimsky Yuen SC And Address by the Current Secretary for Justice

The first panel session was followed by two sessions with the former and current Secretary of Justices of Hong Kong: Rimsky Yuen SC and Ms Teresa Cheng GBS, SC, JP.  Mr  Kaplan remained on stage to interview Mr Yuen SC who said that in his five and a half years as Secretary for Justice, he had the privilege of participating in many interesting matters, both legal and political, including handling the Snowden case about which (when pressed by Mr Kaplan) he could unfortunately say very little!  When asked about his interests outside of law, Mr Yuen SC said that he is partial to a cigar dipped in whisky, but (of course) after rather than before any court hearings!  The session was rounded off with Mr Kaplan asking Mr Yuen a series of rapid-fire questions:

  1. International arbitration or litigation? A. Arbitration.
  2. Beatles or Rolling Stones? A. Beatles.
  3. Rugby or soccer? A. Soccer.
  4. Apple or Samsung? A. Samsung.
  5. Hong Kong or Singapore? A. Hong Kong, of course!
  6. Institutional or ad hoc arbitration? A. Institutional.
  7. Fine dining or bowl of noodles? A. The latter.
  8. If you were on desert island, what book would you take? A. A book on how to fish, in order to survive.
  9. What one luxury would you pick? A. Cigar. (of course)

 Ms Teresa Cheng then gave a forward looking address focussing on the future business and economic opportunities in Hong Kong, including the Belt and Road Initiative and the Greater Bay Area, and the Government’s policies to promote Hong Kong as an international hub for deal-making and dispute resolution.

Options for Urgent Relief – Which Ones are Most Effective and When?

The first afternoon panel, moderated by Charles Manzoni SC, QC, was on urgent relief and the options available to parties and tribunals.  Claudia T. Salomon outlined that the options available to a party seeking urgent relief include: (1) appointing an emergency arbitrator; (2) seeking interim relief once the full tribunal is constituted; or (3) applying to national courts for relief.

David W. Rivkin outlined a number of considerations in deciding between the three options: (1) confidentiality, (2) level of urgency, (3) degree of impartiality of a national court, (4) nature of the relief requested, (5) the kind of security it might have to provide in order to obtain the requested relief, and (6) the seat of the arbitration and whether an emergency arbitrator’s award will be enforceable in that jurisdiction.

Taking on board these considerations, the second panel on this topic sought to demonstrate them in practice in case scenario showcasing a request for interim relief before the Hong Kong courts and a parallel request for interim relief before an arbitral tribunal operating under expedited proceedings.   Christopher Moger QC introduced the scenario to the audience which involved an apprehended exercise of a contractual put option which was (on the Claimant’s case) a danger to the subject matter of underlying arbitral proceedings.  Simon Chapman appeared as Counsel for the Claimant, Sheila Ahuja as Counsel for the Respondent with Swee Yen Koh acting as arbitrator and José-Antonio Maurellet SC acting as judge.  Catherine Munn was as a commentator to the proceedings.

The respective Counsel took the mock tribunal and court (and of course the audience) through the relevant tests demonstrating the not insubstantial room for argument on the interpretation of the tests for interim relief under the 2018 HKIAC Rules (which, although yet to be in force until the next day, were held to apply) and the Arbitration Ordinance in arbitral and court proceedings.

In the end, Mr Chapman was successful in obtaining part of his relief before Ms Koh, who emphasised her deference to maintaining the status quo over prejudice to the Respondent’s contractual rights.  In the court proceedings, Ms Ahuja was successful as Mr Maurellet SC was not persuaded that the applicant had properly exhausted his avenues through arbitration and was therefore minded to make no order on the basis that the Mr Chapman might come back to the court if it was unable to do so.  Of course, Mr Maurellet SC noted, it would still be open to Ms Ahuja to argue that the applicant could not meet the test for injunctive relief at that juncture.

Summary Proceedings and their Enforcement in Asia – Are They a Positive Development?

On the final topic of the day, a panel consisting of Caroline Kenny QC, Professor Anselmo Reyes SC and William D. Stone SBS, QC and chaired by Cameron Hassall discussed the addition of summary proceedings and whether or not they are a positive development.    Ms Hassall introduced the newly introduced process for early determination under the HKIAC Rules and posed the question: if the Tribunal has wide powers to control and manage the arbitration why introduce an express provision for early determination.  There was divergence on the panel on this.

Ms Kenny QC, on the one hand, conceded that while the provision was not strictly necessary there are two points recommending inclusion of the rule:

  • First, having the rule meant in her view that it will be more likely to be used; and
  • Second, the fact that the rule is expressly included in the rules will reduce the likelihood of challenged to awards on the basis of a lack of due process.

Professor Reyes SC, on the other hand, was less sure because by putting in the rule it might imply that in previous versions of the rules such relief is not available and might lead to additional challenges.

All of the panel raised concerns with meeting the particulars of the procedure and timetable, with Professor Reyes SC noting his worry about doing so under a recent SIAC procedure. He noted the difficulty, given the seriousness of the decision yet the brevity of timeframes under the SIAC procedure that formulating and providing the parties with adequate reasons for a decision was difficult.  Ms Kenny QC noted that the strict process in a sense might be welcomed in that it forces the Tribunal to be more rigorous about setting deadlines for the parties and thinking differently about the application.  The panel also discussed the differing legal tests under the summary determination procedures under the SIAC and HKIAC Rules and the meaning of “manifest” in that context with Mr Stone QC putting it somewhat tongue in cheek as “you know it when you see it”.  The panel concluded that whilst there were concerns about the adoption of the early dismissal proceedings in the new HKIAC Rules and indeed summary procedures in general, it was too early to tell their success or otherwise.

Closing Remarks

It fell finally to the current Secretary-General of HKIAC, Ms Sarah Grimmer, to close the conference by re-capping the day’s events and detailing an exciting roster of activities for HKIAC in the coming year.  Amongst these events: the renovation of HKIAC’s premises; the launch of the inaugural HKIAC Lecture in Beijing; a legal summit focusing African arbitration; and (of course) next year’s Hong Kong Arbitration Week, to be held from 21-25 October 2019 and in which, no doubt, another packed day of ADR in Asia will again be a centrepiece.

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Hong Kong Arbitration Week Recap: Making Arbitration Fit for the Future

Tue, 2018-10-30 20:00

James Kwan, James Ng and Kathy Tang

Hogan Lovells hosted an event yesterday, 30 October 2018, at its Hong Kong office, as part of the Hong Kong Arbitration Week, titled “Making Arbitration Fit for the Future”.  The event was graced by the presence of Bernard Hanotiau as the keynote speaker, followed by speeches from HKIAC’s Sarah Grimmer and Hogan Lovells’ James Kwan, Julianne Hughes-Jennett and Dan González.

Keynote Speaker: Bernard Hanotiau

Bernard Hanotiau kicked off the seminar by noting its fascinating theme of making arbitration fit for the future, which in his view is to make arbitration as efficient as possible by adapting it to match the evolution of society.  Hanotiau believes that there is still room for institutional rules to be improved from an efficiency standpoint, such as expanding grounds for complex arbitrations, introducing summary or early determination procedures and providing secured online repository where documents can be uploaded.

To make arbitration fit for the future, Hanotiau said that practitioners and arbitrators need to step up to the plate by adapting and improving their practice of the arbitral process.  This can be done by making use of modern and appropriate technology, and take the initiatives to shorten the procedure where possible.  On technology, Hanotiau highlighted its importance to shrink a large number of files, and suggested that site visits may possibly be replaced by 3D models or augmented reality very soon.

When met with an audience question on how to balance party autonomy against a party’s demand for a 40-page post-hearing briefs, Hanotiau said that the Tribunal should first discuss with the parties on the way forward.  If the parties are in total disagreement and the Tribunal considers them to be unreasonable, it will need to make a final decision.  Hanotiau thought that parties should approve of Tribunals that put their foot down to make decisions.

Innovation: Improving Institutional Rules as the Answer

HKIAC’s Sarah Grimmer then took the floor and introduced the audience to the brand new HKIAC Administered Arbitration Rules, which will come into effect on 1 November 2018.  Grimmer explained that there were three key objectives behind the amendments in essence: time and cost saving measures, efficiency in complex arbitrations and relevance to developments in international arbitration.

Some of the noteworthy amendments that Grimmer highlighted include: a cap on the total fees charged by an emergency arbitrator; introduction of an early determination procedure; imposition of a three-month time limit to render an award after close of proceedings; amended deadlines to appoint an emergency arbitrator and to render an emergency decision; possibility to file an emergency arbitrator application before commencing an arbitration; express reference to concurrent proceedings; encouraging the effective use of technology and delivery of documents through an online repository system.

Artificial Intelligence in International Arbitration

James Kwan, an international arbitration partner at Hogan Lovells’ Hong Kong office, spoke about the tongue-twisting concept of “AI in IA”.  Drawing on the 2018 Queen Mary University of London International Arbitration Survey, Kwan pointed out that there is a sentiment towards the greater use in the future of artificial intelligence (“AI“) technology, with 61% of the survey respondents noting that “increased efficiency, including through technology” is the factor that is most likely to have a significant impact on the future evolution of international arbitration. Kwan then highlighted for the audience how AI is used in international arbitration, ranging from enhancing case management to predictive justice and even having AI arbitrators.

While enhancing case management is quite innocuous, predictive justice and AI arbitrators are certainly the more heated topics.  Some of the concerns highlighted by Kwan include the failure for predictive justice to take into account the “human factor”, due process and the right to be heard.  On AI arbitrators, while the idea is tempting, Kwan said that such concept is unlikely to happen in the immediate future given the various hurdles such as: whether machines can be qualified as arbitrators; nationality and security of AI arbitrators; and whether AI arbitrators are capable to render reasoned awards or suitable to decide disputes at all, given their lack of understanding of emotions.  As such, Kwan foresees that although AI is here to stay, in its current form AI can only assist and facilitate, but is nonetheless useful and will play an increasingly significant role in arbitration.  Referring to the Terminator series, Kwan concluded that lawyers and arbitrators can be assured that their services are still needed until the judgment day comes.

Human Rights and Arbitration

Julianne Hughes-Jennett, a partner at Hogan Lovells’ London office, then took the stage to talk about the relationship between businesses and human rights (“BHR“) as well as international arbitration. Drawing from both soft laws (such as the OECD Guidelines) and hard laws (such as national legislations), Hughes-Jennett said that states have the duty to respect, fulfil and protect human rights while corporations have the responsibility to respect the same.  In the context of investment treaty claims, human rights can be used both as a sword (e.g., breach of access to justice and due process obligations) and a shield (e.g., claimant’s breach used to either mitigate the compensation owed).

Hughes-Jennett pointed out that the types of BHR disputes referred to arbitration will either involve a victim against a business, or a business against another business.  However, there are certain challenges to overcome for this type of dispute such as consent to arbitrate, applicable law, public policy, inequality of arms and spurious claims.  Notwithstanding these challenges, BHR disputes have already been filed previously, such as the arbitrations brought before the Permanent Court of Arbitration based on the Accord on Fire and Building Safety in Bangladesh.  Hughes-Jennett concluded that BHR arbitration is undoubtedly a welcome initiative, but it would be important to carefully consider the legal, practical and policy challenges as well as to continue to consult stakeholders on this matter.

Increasing Efficient Access to International Arbitration

Last, but certainly not least, Dan González (Global Head of Hogan Lovells’ International Arbitration practice) spoke about increasing efficient access to international arbitration. González  pointed out the consistency from different surveys that arbitration is the preferred tool for dispute resolution, but that the top complaints about international arbitration from these surveys include costs, delay and time taken to resolve the dispute.

On technology, he noted that electronically stored information (“ESI“) is overwhelming practitioners, as an average employee now generates around 800 megabytes of electronic information per year.  González then shared some tips for promoting better efficiency in arbitral proceedings, which include:

  • Working with the opposing counsel at an early stage. To improve efficiency, parties should try to agree on the procedural order, reduction in the number of pleadings and the discovery procedure. Parties could consider putting mediation on the schedule, as this may lead to early resolution of the dispute, or narrowing down of the issues.
  • Avoid raising every dispute with the arbitral tribunal. Parties should attempt to reach an agreement with the opposing counsel on some issues, and avoid the temptation of raising every disagreement to the Tribunal. However, González reminded the audience that it may be appropriate in some cases to raise significant disputes, which may provide an opportunity to advance one’s own case.
  • Conduct the discovery process in a more efficient manner. Counsel should only ask for the documents we need, rather than engaging in a fishing expedition. González also pointed out the need to identify key custodians, develop intelligent search terms, understand ESI and use technology assisted review (predictive coding) wherever possible.

Questions and Answers

As a parting gift to the audience, Hogan Lovells’ Kent Phillips asked each of the speakers to look into their crystal balls and predict on the future of international arbitration.

Kwan was of the view that there will be a greater influence by Chinese parties in international arbitration, which is evident from the increase in caseload across arbitral institutions such as HKIAC, SIAC and ICC.  He also said that this influence can be felt by the recent amendments to institutional rules like the “med-arb” procedure.

Both Hanotiau and Hughes-Jennett agreed with Kwan, with Hughes-Jennett noting that the bulk of her caseload now involves Chinese parties in commercial arbitrations.  Her prediction, however, is that there will be a rise in BHR disputes.  This is because there are already clauses in place for these disputes, and that it all takes is for them to spring.

González thought that more ADR processes will surface alongside international arbitration, which was traditionally thought to be a form of ADR in the United States but now became the method of dispute resolution.  While it is possible that there will be more and more mediations being conducted by necessity and to save costs, it may be challenging to conduct mediation in other parts of the world due to cultural diversity.

Finally, Grimmer shared González’s view that arbitration will continue to be utilized by more and more parties, which is clear from the arbitral institutions’ recent case load performance and improvement in case management quality.  Grimmer agreed with Kwan that Chinese parties will be engaging more frequently in the arbitral process, and that arbitration – from across the spectrum of dispute resolution – will remain absolutely strong.

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Kick Off: HK Arbitration Week 2018

Mon, 2018-10-29 20:00

Andrew Chin, Eugene Thong and Edern Coent

The week-long series of events for Hong Kong Arbitration Week 2018 kicked off with a seminar hosted by Latham & Watkins entitled “Ensuring Efficiency in International Arbitration  Proceedings: Tips for Asian Users”. The seminar consisted of two roundtable discussions with practitioners and professionals in the field of international arbitration.

The first roundtable featured Mr. Bernard Hanotiau and Mr. Ng Jern-Fei QC, and was moderated by Mr. Philip Clifford QC.

Mr Hanotiau said that quality can never be compromised, and questioned what it means to have a speedy arbitration if both sides agreed to have six months to serve memorials. While the expedited arbitration facility is provided for under the rules of many arbitral institutions, he has not encountered many cases where it has been used.  Mr. Ng agreed that the expedited facility would be favoured by users who prize speediness, but he also noted that expedited arbitrations are not necessarily simpler, explaining that the expedited procedure often leads to what would otherwise have been a typical arbitration being crammed into a shorter timeframe. The usual consequence of this is an extension of the six-month time limit.

Powers of early dismissal of claims or defences that are manifestly unmeritorious and/or over which the tribunal lacks jurisdiction have emerged in the upcoming HKIAC Arbitration Rules (2018 edition) and the SIAC Rules (2016 edition). Mr. Ng considered these powers to be a useful tool that gives comfort to arbitrators that they can summarily deal with such claims or defences without breaching a party’s right of due process, particularly in view of recalcitrant respondents who run unmeritorious defences to filibuster the arbitral process.

Mr. Hanotiau also shared some personal tips on how to conduct arbitrations efficiently. Whilst telephone conferences save travelling time and costs, in-person meetings are often helpful to defuse tensions.  He also tends to impose page limits on submissions, having once received a post-hearing brief of 3,000 pages following a hearing in Dubai.

On whether there should be shorter awards, Mr. Hanotiau emphasised that the main objective in investment treaty arbitrations is to ensure that an award is not annulled, after sharing that one of his awards, at 280 pages, was challenged with annulment because he did not deal with one argument. Mr. Ng had similar views: he expressed the view that a well-reasoned award dealing with the losing party’s arguments is “therapeutic” for the losing party, who will want to know why it lost, because such an award reassures the losing party that it had a full and fair hearing.

As to whether there should be more sole arbitrator tribunals, Mr. Ng likened arbitrators to elephants, and quipped that both move better in herds. He explained that while there is no one-size-fits-all approach, collective wisdom and experience can be drawn on with a three member tribunal.

The second roundtable featured Ruth Stackpool-Moore (Harbour Litigation Funding) and Wang Wenying (CIETAC HK, CMAC).

Ms. Wang shared some innovations in the CIETAC Arbitration Rules (2012 edition) to promote efficiency. The CIETAC Arbitration Rules allow for expedited procedures and provide mechanisms such as joinder and consolidation to deal with multi-party arbitrations. Further, med-arb is often used in CIETAC arbitrations and these procedures have found favour with CIETAC users.

Ms. Stackpool-Moore expressed optimism for the third party funding landscape in Hong Kong as the draft Code of Practice is already available for consultation. Meanwhile, third party funding has been available in Singapore for 18 months and the future looks bright for the region. Ms. Stackpool-Moore also agreed that arbitrations must be efficient as this affects when the third party funder can get its returns. The key factor for third party funders in deciding whether to fund cases is detailed information about the merits of the case. It is not sufficient to expect a funder to base its decisions on the pleadings alone. The funder will then analyse the chances of success and prepare a budget for the case. Although a funder does not normally dictate how a case is run, a funder will usually provide some advice on strategy.

The identity of the lawyers involved are also important to the funder. As the funder will not have active control of the case, the funder will want to ensure that competent lawyers are on board, otherwise they may either decide not to fund the case or may want to engage co-counsel to assist.

To end the event, Mr. Yang Ing Loong noted that it is the responsibility of the arbitral institutions, arbitrators and parties to ensure that arbitrations are efficiently conducted.

COMMENTARY

Discussing efficiency from different perspectives, the two panels hosted by Latham & Watkins showed that arbitration, like any craft, relies heavily on the tools available and the people that use them.

Expedited Procedures

The first and most familiar tool related to procedural efficiency is expedited rules. These have been inserted in the latest revisions of institutional arbitration rules that users are most likely to encounter in Asia, i.e., CIETAC, HKIAC, ICC and SIAC. The discussion from the first panel pointed to two typical issues with expedited procedures.

First, they are still not used that often, even though most of them have been in place for some time now. Given that most of these provisions are triggered by default when the amount in dispute falls below a certain amount, it can be inferred that in a fair number of cases where expedited procedure provisions should apply, the parties agree to opt out. The tool is there, but people are reluctant to pick it up.

Second, expedited procedures are not necessarily simpler. As discussed several times since institutions started to apply these provisions, a low amount in dispute is no guarantee of low complexity. Institutions have an interest in attracting more cases by providing services tailored to smaller disputes, and users are also keen generally to see straightforward issues decided rapidly, but these rarely mirror each other. Even when they do, and the parties agree that an expedited procedure is preferable, conducting the matter efficiently might well rely on how experienced the arbitrator is. Yet institutions will tend to use smaller disputes to promote new arbitrators, to give them experience and expand the pool and therefore the options available to the parties in the future, even though it might take a more seasoned arbitrator to conduct an expedited procedure efficiently and use it to its fullest potential.

Early Dismissal and Long Awards

Another tool available for increased efficiency, which is newer, is early dismissal. Included in the latest versions of HKIAC and SIAC rules, this option does not depend on the parties opting in or out. This does not mean, however, that we will see it more often used or that it will drastically improve efficiency. If the now familiar emergency arbitrations, another tool arguably orientated toward speedy resolution, are any indication, the manifestly unmeritorious nature of a claim or the tribuna’s evident lack of jurisdiction is never so obvious as to be so promptly dealt with. Parties will argue those points extensively and exhaustively, and arbitrators will want to make sure that they cover every argument.

This procedural economy resonates with another point made by the panels with respect to the length of awards. A shorter award might be delivered more quickly, from the tribunal’s drafting to the institution’s scrutiny and the parties’ receipt, but can efficiency be measured by speed here? The parties will of course want to present every possible argument that might improve their case, tribunals will have to tackle and address all of them and institutions will make sure that they do. At the end of the day, the award has to resolve the dispute and it has to be enforceable in order to do so. For all involved, the question is not really to balance efficiency and quality, but to combine them.

Institutions and Third Party Funders

Parties and tribunals have to work towards a combination of efficiency and quality, and other players in the field can help them achieve just that. It is apparent from these two panels that institutions are pushing new tools and procedural devices in order to meet their users’ needs and market expectations. Third party funders provide a budget, advice on choice of counsel and strategy, which will make sure that the tools available are properly used. Time is money, but so is an enforceable award.

In that respect, hearing about efficiency yesterday morning raised familiar questions. Do parties push for unreasonably long pleadings and proceedings? Are arbitrators too busy or conservative? Should institutions be more hands-on? Less so? What about funders? Are they too close to the action? These issues are likely to fuel debates within the arbitration community for the foreseeable future. All in all, this session was a proper kick-off to the Hong Kong Arbitration Week.

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The Asymmetrical Fork-in-the-Road Clause in the USMCA: Helpful and Unique

Mon, 2018-10-29 02:15

Alexander Bedrosyan

Introduction: The Pro-State Orientation of the USMCA

Chapter 14 of the United States-Mexico-Canada Agreement (USMCA) presents a model of investor-state dispute settlement (ISDS) that fundamentally realigns the balance between investors and states in favor of the latter.

This realignment consists in the USMCA’s structure and specific provisions. Structurally, the USMCA eliminates ISDS between Canadian investors and the United States and vice versa. It provides for ISDS between American investors and Mexico and vice versa for only certain types of claims (except for investors in five “covered sectors,” who retain ISDS for all claims.).1) This paragraph implies no criticism of the quality of protection foreign investors can expect to receive in the courts of the USMCA parties. jQuery("#footnote_plugin_tooltip_4567_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4567_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Specific provisions, meanwhile, explicitly codify pro-state interpretations of debated questions in investment arbitration.  Some of these provisions are familiar. For example, Article 14.1 requires an investment to satisfy the Salini criteria in order to be protected, 2) The investment must have “such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.” jQuery("#footnote_plugin_tooltip_4567_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4567_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); while Article 14.6(2) limits the content of the “fair and equitable treatment” and “full protection and security” obligations to the customary international law minimum standard of treatment of aliens.

Other such provisions are unprecedented. Footnotes 22 and 29, in Annexes 14-D and 14-E, respectively, provide that the “most favored nation” (MFN) clause cannot be used to import substantive or arbitration provisions from other treaties.  No other investment treaty explicitly restricts MFN clauses in this way.

It is therefore unsurprising that Roberto Landicho and Andrea Cohen describe the USMCA as effecting a “veritable sea change” compared to ISDS in the predecessor North American Free Trade Agreement (NAFTA), while Nikos Lavranos characterizes the USMCA as providing only a “light and restricted” version of ISDS.

 

The Asymmetrical Fork-in-the-Road Provision in the USMCA

One exceptional provision adopts a pro-investor position on a debated question in investment arbitration: the fork-in-the-road provision, found in Appendix 3. It provides:

An investor of the United States may not submit to arbitration a claim that Mexico has breached an obligation under this Chapter . . . if the investor or the enterprise, respectively, has alleged that breach of an obligation under this Chapter in proceedings before a court or administrative tribunal of Mexico.

The USMCA does not contain a parallel provision concerning Mexican investors looking to submit to arbitration claims against the United States. Appendix 3 is therefore an “asymmetrical” fork-in-the-road provision – the first of its kind.

This asymmetry reflects the drafters’ recognition of the different status that international treaties have in the domestic legal systems of Mexico and the United States.

Like many countries with a civil law tradition, Mexico is a “monist” legal system. Its international treaties are automatically part of its domestic law (i.e., without the need for implementing legislation) and directly enforceable in its courts. 3) Adrián Cisneros Aguilar, The Position of International Treaties in PRC and Mexican Law: Using the Chinese “Dialectical Model” to Implement and Enforce a Hypothetical Mexico-China FTA, as Related to Foreign Investment, 13 Arrelano L. & Pol’y Rev. 29, 35-36 (2015). jQuery("#footnote_plugin_tooltip_4567_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4567_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As a result, an American investor could bring a claim for violation of the USMCA directly before Mexican courts.

The United States, by contrast, like many common-law countries, is much closer to a “dualist” legal system. A treaty does not automatically become part of American domestic law unless it conveys an intention to be “self-executing.” 4) See Medellin v. Texas, 552 U.S. 491, 504-05 (2008). jQuery("#footnote_plugin_tooltip_4567_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4567_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Even then, the American constitutional separation of powers presumes that the treaty must be enforced by the executive branch through diplomacy, rather than by the judicial branch. A self-executing treaty is therefore not enforceable in American courts unless it clearly confers a private right of action – a rare proposition. For example, in McKesson v. Islamic Republic of Iran, the Court of Appeals for the D.C. Circuit found that the 1955 Treaty of Amity, Economic Relations, and Consular Rights between the United States and Iran, although it was self-executing and conferred property rights to individuals, did not allow individuals to enforce these rights through domestic litigation. 539 F.3d 485, 488-91 (D.C. Cir. 2008). Therefore, it is highly unlikely that a Mexican investor could bring a claim for breach of the USMCA in American courts.

 

The Asymmetrical Fork-in-the-Road Provision and the debate surrounding Fork-in-the-Road Provisions

The USCMA parties drafted the asymmetrical fork-in-the-road provision in the context of a debate among investment arbitration practitioners on how broadly fork-in-the-road provisions in investment treaties should be interpreted. This debate has two camps.

One camp argues that a fork-in-the-road clause prohibits an investor from bringing claims arising out of the same facts in both international arbitration and a host state’s domestic courts only if the claims share the same cause of action.  Under this view, a party could claim before the host state’s domestic courts that a given measure by the host state breached domestic law, and claim in international arbitration that the same measure breached the investment treaty, because each claim would have a different cause of action. 5) CMS Gas Transmission Company v. Republic of Argentina, ICSID Case No. ARB/01/8, Award on Jurisdiction, ¶ 80 (17 July 2003); Ronald S. Lauder v. Czech Republic, Final Award, ¶¶ 159-66 (3 Sept. 2001); Occidental Exploration and Production Company v. Republic of Ecuador, LCIA Case No. UN3467, Final Award, ¶¶ 47-59 (1 July 2004); Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award on Jurisdiction, ¶¶ 89-92 (8 Dec. 2003); Toto Costruzioni Generali S.p.A. v. Republic of Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, ¶¶ 211-12 (11 Sept. 2009); Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. Republic of Estonia, ICSID Case No ARB/99/2, Award, ¶ 332 (25 June 2001). jQuery("#footnote_plugin_tooltip_4567_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4567_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The second camp, by contrast, argues that a fork-in-the-road clause prevents an investor from bringing claims arising out of the same facts in both international arbitration and a host state’s domestic courts, regardless of the cause of action underlying each claim. Under this view, it is irrelevant that the claim in the domestic court is brought under domestic law and the claim in international arbitration under international law. 6) Pantechniki S.A. Contractors & Engineers v. Republic of Albania, ICSID Case No. ARB/07/21, Award, ¶¶ 61-68 (30 July 2009); Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Decision on Annulment, ¶¶ 55, 113 (3 July 2002); H&H Enterprises Investments, Inc. v. Arab Republic of Egypt, ICSID Case No. ARB 09/15, Award, ¶¶ 359-70 (6 May 2014); Chevron Corp. & Texaco Petroleum Corp. v. Republic of Ecuador, PCA Case No. 2009-23, Third Interim Award on Jurisdiction and Admissibility, ¶¶ 4.72-4.77 (27 Feb. 2012). jQuery("#footnote_plugin_tooltip_4567_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4567_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The asymmetrical fork-in-the-road provision in the USMCA suggests that its drafters side with the first camp. The provision applies only to claims brought by an American investor in Mexican courts for breach of the USMCA. It prohibits an American investor who has brought a claim for breach of the USMCA in Mexican courts from bringing a claim for the same breach of the USMCA in international arbitration.  Because American law prevents a Mexican investor from alleging a breach of the USMCA before United States courts, the drafters felt no need to include a similar provision addressing Mexican investors. In other words, they agreed that a fork-in-the-road provision is meant to prohibit only parallel claims arising both out of the same facts and under the same cause of action (in this case, under the treaty itself).

 

Conclusion

The asymmetrical fork-in-the-road provision of the USMCA is unique, both in isolation and in context of the USMCA as a whole. It is the only known fork-in-the-road provision that applies to claims brought by investors of only one party to an investment treaty, and it reflects a rare occasion where the USMCA adopts a pro-investor view of a debated question in investment arbitration.

More important, the provision serves as a reminder for drafters of investment treaties to take into account the role that international law plays in the domestic legal systems of the parties to the treaty, particularly where the parties come from both common-law and civil-law traditions.  If the fork-in-the-road clause in the USMCA were symmetrical, a question would arise as to whether Mexican investors who challenged measures by the United States in American courts as breaching domestic law would retain their rights to challenge the same measures in international arbitration as breaching the treaty. Instead, the drafters of the USCMA appropriately took into account the different role that international treaties play in the Mexican and American legal systems, in order to draft a uniquely asymmetrical fork-in-the-road clause that communicates clearly that the clause has a narrow application.

If more investment treaties follow the innovative lead of the USMCA on similar issues, it would bring welcome clarity for investors, states, and ISDS arbitrators alike.

References   [ + ]

1. ↑ This paragraph implies no criticism of the quality of protection foreign investors can expect to receive in the courts of the USMCA parties. 2. ↑ The investment must have “such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.” 3. ↑ Adrián Cisneros Aguilar, The Position of International Treaties in PRC and Mexican Law: Using the Chinese “Dialectical Model” to Implement and Enforce a Hypothetical Mexico-China FTA, as Related to Foreign Investment, 13 Arrelano L. & Pol’y Rev. 29, 35-36 (2015). 4. ↑ See Medellin v. Texas, 552 U.S. 491, 504-05 (2008). 5. ↑ CMS Gas Transmission Company v. Republic of Argentina, ICSID Case No. ARB/01/8, Award on Jurisdiction, ¶ 80 (17 July 2003); Ronald S. Lauder v. Czech Republic, Final Award, ¶¶ 159-66 (3 Sept. 2001); Occidental Exploration and Production Company v. Republic of Ecuador, LCIA Case No. UN3467, Final Award, ¶¶ 47-59 (1 July 2004); Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award on Jurisdiction, ¶¶ 89-92 (8 Dec. 2003); Toto Costruzioni Generali S.p.A. v. Republic of Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, ¶¶ 211-12 (11 Sept. 2009); Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. Republic of Estonia, ICSID Case No ARB/99/2, Award, ¶ 332 (25 June 2001). 6. ↑ Pantechniki S.A. Contractors & Engineers v. Republic of Albania, ICSID Case No. ARB/07/21, Award, ¶¶ 61-68 (30 July 2009); Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Decision on Annulment, ¶¶ 55, 113 (3 July 2002); H&H Enterprises Investments, Inc. v. Arab Republic of Egypt, ICSID Case No. ARB 09/15, Award, ¶¶ 359-70 (6 May 2014); Chevron Corp. & Texaco Petroleum Corp. v. Republic of Ecuador, PCA Case No. 2009-23, Third Interim Award on Jurisdiction and Admissibility, ¶¶ 4.72-4.77 (27 Feb. 2012). 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: Arbitration in Belgium: A Practitioner’s Guide
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Attribution in Investment Arbitration: From Stricto Sensu to Lato Sensu

Mon, 2018-10-29 00:33

Csaba Kovacs

In the recently published award in Georg Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia (ICSID Case No. ARB/12/39)1) Georg Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia (ICSID Case No. ARB/12/39), Award, dated 26 July 2018. jQuery("#footnote_plugin_tooltip_9213_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9213_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the tribunal considered whether the notion of attribution extends to the non-wrongful conduct of various State or State-linked actors.

 

The dispute concerned Croatia’s alleged expropriation of properties and contract rights of a meat business acquired by the investor through a controversial bankruptcy sale, which was validated by Croatia’s bankruptcy court. The claimants also complained of Croatia’s alleged interference with the claimants’ attempts to register ownership over the properties claimed to have acquired through the bankruptcy sale. The claimants did not challenge the involvement of the State in the bankruptcy process. Instead, the claimants relied on the attribution of the conduct of the liquidator, the Bankruptcy Council, the Bankruptcy Court, the Bankruptcy Judge and the Croatian Privatisation Fund in order to establish Croatia’s breach of the fair and equitable treatment standard through violation of a legitimate expectation. The claimants argued that attribution could be used to establish who can make representations on behalf of the State, on which an investor is legitimately entitle to rely. In particular, the claimants argued that the State’s involvement in the bankruptcy process gave rise to legitimate expectations concerning the registration of properties that the investor had reasonably and legitimately believed to have acquired through the bankruptcy sale. Citing serious irregularities in the bankruptcy sale, the respondent challenged the validity of the bankruptcy sale and contended that the rules of attribution operate only for the purposes of establishing conduct that is wrongful under international law.

 

The tribunal distinguished between the strict sense of attribution, which it held to apply in the context of the State’s international responsibility for the wrongful acts of its organs and officers, and the ‘broader questions of what constitutes the State’. It correctly observed (in paragraph 779) that the ILC Articles’ rules on attribution apply to the wrongful conduct of the State, noting that the ‘principles of attribution do not operate to attach responsibility for “non-wrongful acts” for which the State is assumed to have knowledge.’ It then observed that the involvement of the host State in the bankruptcy sale was not a matter of attribution because there was no third party seeking to hold the State liable for that conduct.

 

The author submits that attribution establishes whether there is an act of the State through the examination of legal and factual factors connecting the actor, the act or both to the State. The question of the involvement of the host State arises in a number of different factual or legal contexts in investment disputes. For example, it may be necessary to examine if non-wrongful conduct is attributable to the State when a representation, as a predicate of an internationally wrongful act, is alleged to have engendered a legitimate expectation, which is then purportedly violated by the State.

 

The Gavrilovic tribunal’s narrow conceptual approach to attribution, while correct from a normative angle, does not acknowledge that the premise of the concept of legitimate expectations is a promise or representation, which must necessarily be attributable to a competent organ or representative of the state in order to engender the investor’s legitimate expectations. The issue of the normative framework is, of course, another matter: it is largely settled in the jurisprudence that the ILC rules on attribution do not apply outside the realm of State responsibility, which implies a complaint of a wrongful conduct. Instead, the attribution of lawful conduct is governed by the law applicable to the conduct in question.

 

Finally, attribution is not concerned with the legality of an act of the State. The question of whether the lawful conduct thus attributed to the State entitles the investor to rely on it or, put simply, the legitimacy of the investor’s expectation is a matter for the merits of the case. Nevertheless, there can be no legitimate expectation without a representation attributable to the State. Indeed, the Gavrilovic tribunal found that Croatia was not named as a party and did not sign or represented that it intended to be a party to the purchase agreement by which the investor acquired the business in bankruptcy. The tribunal correctly noted (in paragraph 856) that ILC rules on attribution ‘cannot be applied to create primary obligations for a State under a contract.’ Although it found that Croatia orchestrated the bankruptcy in order to return the family business to the investor as a quid pro quo for his currency smuggling services, the tribunal’s conclusion that the State was not a party to the purchase agreement meant that the claimants could not have had a legitimate expectation in respect of property that formed the object of that transaction.

 

The author submits that, in international investment law, the concept of attribution, as the means by which the State’s multi-faceted involvement in an investment dispute is ascertained, goes beyond the traditional realm of State responsibility under international law. The concept of attribution lends itself to a number of uses specific to the substantive and procedural framework of investor-State arbitration, which do not necessarily turn on the legality of the examined conduct under international law. The purpose for which the attribution of a particular – wrongful or non-wrongful – conduct is considered determines its relevant normative framework. These and other related issues are examined in-depth in the author’s book entitled ‘Attribution in International Investment Law’ (Kluwer Law International, 2018).2) Csaba Kovacs, Attribution in International Investment Law (Kluwer Law International 2018. jQuery("#footnote_plugin_tooltip_9213_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9213_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Csaba Kovacs is a solicitor-advocate with a long-standing practice and expertise in international commercial and investment arbitration. The views expressed in this post are the author’s own.

References   [ + ]

1. ↑ Georg Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia (ICSID Case No. ARB/12/39), Award, dated 26 July 2018. 2. ↑ Csaba Kovacs, Attribution in International Investment Law (Kluwer Law International 2018. 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: Arbitration in Belgium: A Practitioner’s Guide
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Tailwind for Arbitration in Uruguay: the Model Law Finally Reaches Safe Harbor

Sat, 2018-10-27 16:16

Noiana Marigo, María Julia Milesi, Santiago Gatica and María Paz Lestido

Uruguay’s long journey to approve an international commercial arbitration law has finally come to an end. Act Nº 19.636 (the “Arbitration Act”) was passed at the beginning of July, almost fourteen years after the Executive first sent a draft bill to Congress to regulate arbitration. The Arbitration Act largely incorporates the 1985 UNCITRAL Model Law on International Commercial Arbitration and some of its 2006 amendments (the “Model Law”). The objective of the Arbitration Act is to align Uruguay with accepted international legislative standards, although certain provisions are tailored to adjust them to the country’s procedural regulations, long-standing judicial practices and private international law principles.

Arbitration in Uruguay before the Arbitration Act

Uruguay’s legislative recognition of the institution of arbitration dates back to the second half of the nineteenth century. The Commercial and Civil Codes of 1865 and 1868 respectively included provisions making arbitration mandatory for certain disputes (such as those arising out of commercial lease agreements or between partners in any business entity). Although these provisions requiring mandatory arbitration were repealed in 1975, the country kept its longstanding tradition of recognizing arbitration as a valid dispute resolution mechanism in its general procedural legislation. For example, Uruguay’s first procedural code of 1878 included several provisions on, inter alia, the enforceability of arbitration clauses, the appointment of arbitrators, and the conduct of proceedings, which provided the foundation for domestic arbitration in the country. Subsequently, the 1988 procedural code (the General Procedure Code or “GPC”) included a specific chapter on arbitration.

Uruguay has also adopted, since 1977, numerous bilateral and multilateral treaties, including the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958,  the Panama Inter-American Convention on International Commercial Arbitration of 1975 and the Montevideo Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards of 1979.

More recently, amendments to the GPC in 2013 brought a number of improvements to the field of commercial arbitration, including the express recognition, for the first time, of the kompetenz-kompetenz principle (art. 475.2), regulation on preliminary measures granted by a court before arbitration is commenced (art. 488) and the inclusion of some additional grounds for the annulment of an award (art. 499).

However, under the GPC, which is still applicable to domestic arbitration in Uruguay, an arbitration clause is not sufficient to submit a dispute to arbitration, and a submission agreement (or compromis) is required once a dispute has arisen. If one of the parties refuses to execute a submission agreement, the other party can request specific performance to a judicial court. This pitfall, coupled with the fact that it is relatively inexpensive to submit a dispute to Uruguayan courts, has traditionally undermined the appeal of arbitration as a dispute resolution mechanism for Uruguayan parties.

Other aspects of the GPC’s provisions on arbitration are also troublesome. For example, arbitrators must ensure that the parties had a chance to conciliate the dispute before commencing the arbitration proceeding (art. 490). Failure to do so could cause subsequent proceedings to be void. Moreover, by default arbitration proceedings will be decided ex aequo et bono unless the parties expressly state in the submission agreement that the dispute will be decided by the application of the law (art. 477).

International Commercial Arbitration under the new Arbitration Act

The recently enacted Arbitration Act has come to solve most of these difficulties for international commercial arbitration.

The Arbitration Act’s scope is limited to international arbitration. According to its provisions, an arbitration is international only if: (i) the parties to the arbitration agreement have their places of business in different countries when such agreement was executed (art. 1.3.a); and (ii) the place of the performance of a substantial part of the commercial obligations, or the place with the closest relation to the subject matter of the dispute, are located outside the country where the parties have their places of business (art. 1.3.b). Hence, the Arbitration Act deviates from the Model Law in the sense that “[t]he sole will of the parties cannot determine the internationality of the arbitration” (art. 1.4). This limitation is rooted in Uruguay’s restrictive approach to party autonomy under its private international law rules, embodied in art. 2403 of the Appendix to the Civil Code which states that the “[t]he rules of legislative and judicial competence […] cannot be modified by the parties’ will. They can only act within the margin conferred by the competent law”. The Arbitration Act continues to reflect the conservative predisposition of the Uruguayan legislator in relation to party autonomy.

A second aspect regulated by the Arbitration Act is what constitutes an “arbitration agreement”. The Act adopted the definition included in art. 7 of the 1985 version of the Model Law, with the purported intention of being consistent with the NY Convention.

Third, the Arbitration Act also recognizes that the tribunal shall decide the merits of the dispute in accordance with the rules of law chosen by the parties (art. 28.1). This provision ratifies the criteria already adopted by scholars and case law, rejecting the application of art. 2403 of the Appendix to the Civil Code to international arbitration (which prevents parties from choosing the applicable law to a contract when the conflict of law rules point to Uruguayan law). However, the Arbitration Act establishes that in the absence of such an agreement, the tribunal will choose the applicable law based on the criteria it deems more convenient (art. 28.2). In contrast, under the Model Law, the tribunal should apply the law determined by the applicable conflict of law rules.

Fourth, the Arbitration Act adopted art. 17 of the original 1985 Model Law on interim measures, incorporating some of the 2006 amendments and additional provisions to harmonize it with the GPC. The Arbitration Act recognizes the binding character of interim measures adopted by an arbitral tribunal (art. 17.2) and incorporates the definitions provided in art. 17.2 of the 2006 version of the UNCITRAL Model Law (art. 17.3). The Arbitration Act requires that notice to the non-requesting party be given before the measure is granted, unless the tribunal determines otherwise due to the harm that would be caused by the delay (art.17.5). Interim measures granted before an arbitration begins will expire in 30 days unless the proceedings are initiated (art. 17.8).

Finally, the Arbitration Act departs from the provisions of the Model Law in several other aspects:

  1. Where a State or a public entity appoints a public official as an arbitrator in a proceeding to which it is a party, this shall not necessarily provide grounds for challenge (12.3).
  2. A specific definition and chapter on costs is included, inspired by the UNCITRAL Arbitration Rules, which shall be applicable in the absence of the parties’ agreement (arts. d and 34-38).
  3. In order to guarantee the celerity and efficiency of the procedure, the Arbitration Act provides that certain arbitration-related issues submitted to judicial courts must be decided within a 60-day period: (i) judicial review of arbitrator challenges rejected by the arbitral tribunal, when requested by the challenging party within 30 days as from the rejection ( 13.3); (ii) judicial review of the de iure or de facto inability of an arbitrator to perform his or her functions (art. 14.1); and (iii) judicial review of the arbitral tribunal’s decision upholding its jurisdiction as a preliminary question, when requested by any of the parties within 30 days as from the decision (art. 16.3).

The Uruguayan judiciary’s approach to arbitration

Uruguayan courts have traditionally shown themselves to be favorable to arbitration. Case law had resolved certain issues that were not addressed in the previous legislative framework governing arbitration in the country. For example, case law had recognized the doctrine of separability, and that parties could choose the applicable law to a contract when international arbitration was agreed. This pro-arbitration stance was also reflected in annulment proceedings, and proceedings on the recognition and enforcement of foreign arbitral awards.

The pro-arbitration approach of the courts combined with the Arbitration Act will likely position Uruguay well to compete with other jurisdictions as a reliable seat of arbitration in the region.  As a first step to making this a reality, the Government has signed an agreement with the Permanent Court of Arbitration establishing Uruguay as a seat country. Furthermore, Uruguay’s leading arbitral institution, the Conciliation and Arbitration Centre of the Chamber of Commerce of Uruguay (International Court for MERCOSUR)—which has so far been used mainly for domestic disputes—may also capitalize on the opportunity to administer more international arbitration proceedings.

Conclusion

The Arbitration Act has at last filled a significant lacuna in the legal framework governing international arbitration in Uruguay and will hopefully position the country as a reliable seat, promoting arbitration as an effective mechanism to resolve international controversies. The application of the Arbitration Act will also hopefully pave the way for future changes to the current domestic arbitration framework.

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Arbitral Precedent: Still Exploring the Path

Sat, 2018-10-27 16:05

Paula Costa e Silva, Beatriz de Macedo Vitorino and Filipa Lira de Almeida

Is there such a thing as an arbitral precedent? Is it binding to judicial courts? The answer to these questions will depend on the clarification of another set of broader issues relating to the existence of precedents themselves and their inevitable role in shaping today’s possible conceptions of the law. We will analyse these matters and attempt an answer to the initially posed questions.

We have already spoken of this theme in our paper Arbitral Precedent: Once and Again. However, while we previously analysed this matter in an international point of view, now we wish to focus on the arbitral precedent in the context of a national legal framework. We will explain why we believe that arbitral awards may furnish innovative norms, susceptible of being applied by decision-makers in future cases, given that a rational decision-making process is what it takes to arrive to the best decision according to the legal order applied: we believe that formal or institutional criteria which limit and define the precedential value of arbitral and judicial decisions are fictitious, although presenting a practical utility related to judicial uniformization.

For starters, a precedent may be defined, as does Duxbury, “a past event – in law the event is nearly always a decision – which serves as a guide for present action”. Guilherme Rizzo Amaral starts off his study about the possibility of arbitrators being bound by judicial precedents with this quotation followed up by the phrase: “In that sense, one can even maintain the existence of non-judicial precedents”, going on further by stating that “the existence of arbitral precedents could be contended to be somewhere between judicial and non-judicial precedents”.1) Guilherme Rizzo Amaral, Judicial Precedent and Arbitration: Are Arbitrators Bound by Judicial Precedent? 2nd ed, Wildy, Simmonds and Hill Publishing. jQuery("#footnote_plugin_tooltip_9021_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9021_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The precedent differs from the decision from which it originates. It is the ratio decidendi that may provide elements prone to establish such relevant connections with posterior cases that they present themselves as precedent. There are binding and persuasive precedents and while the former are as such recognized by all courts pertaining to a national legal order – even if only few of them are actually bound by said precedents (might it be because the law says so or because courts themselves take the responsibility of following certain courts’ decisions’ ratio decidendi) – the latter are extracted from whichever decision a decision-maker finds adequate to solve (or help solve) the case in hands: we may, at this point, already conclude that every decision that applies the law of a certain country may be considered a precedent and that it is considered as such whenever another decision-maker applying said law finds so to be adequate. This means the ratio decidendi of a first instance judicial court decision, appellate court decision, as well as arbitral decision may be a precedent, taken into account by a decision-maker in the deciding process. It is, of course, natural for a judicial court judge to decide the same way an arbitrator previously did, whenever the relevant facts (as considered as so by the judge) are analog to those that the arbitrator considered in order to decide a certain way, so far as the judge thinks the conclusion to which the arbitrator arrived is the correct one – if they think so, the judge must be able to explain the thought process leading up to such conclusion, justifying the decision taken.

This said, we understand arbitral decisions may form precedent because arbitrators too apply the law of the country (except when equity is the criterium chosen by the parties for the formation of the decision, which is not a particularity of the arbitral process, since certain judicial court decisions, depending on each country’s rules, are also based on equity and these ones also do not form precedent). W. Mark C. Weidemeier explains it is clear arbitrators cite other arbitrators’ decisions. This is particularly true when it comes to institutionalized arbitration, such as sports arbitration, where the lack of a set of principles or rules applicable means one of the tasks of the arbitrator is to develop the substantive system, which implies that each arbitrator is aware of creating a new rule (which will guide future arbitrators).

Yet, we admit they might not only form precedents for other arbitrators but also for judicial court judges. Arbitration is often seen, as W. Mark C. Weidemeier states, “as an ad hoc forum in which arbitrators do justice (at best) within the confines of particular cases”, but we do not see in this a differentiated characteristic of arbitration, since the judicial court judge also decides the particular case he is faced with: that is what doing justice means. If the arbitrator is set on the goal of doing justice by applying the national Law, then he or she cannot be oblivious to previous decisions, whether rendered by arbitral or judicial courts.

In fact, this discussion only makes sense when dealing with Civil Law, since it is clear the arbitrator in Common Law orders could never only rely on written laws. And it is when considering Civil Law systems that it is most pertinent (yet paradoxical) to assert that arbitration does not mean a positivistic view of the Law: it is not a field in which decision-makers are only to consider written laws. This observation may seem bizarre, since it contradicts the most common and intuitive thoughts about arbitration, often pictured as a more open and resourceful environment to solve a conflict; yet, when seen as an instance where the arbitrator is to read a law and interpret it without resorting to other interpretations, the result is precisely a positivistic approach. We mean to distance ourselves from it.

Both arbitrators and judges pertain to the Law, since they are the highest expression of its interpretation and application, and, therefore, creation of such Law – as Jhering declares, what only exists in the parliamentary statutes and in paper is nothing but a phantom of Law.

All we have said can lead us to a disturbing conclusion: if arbitral decisions were not to be considered by judicial courts, the State would be failing at one of its most crucial duties – delivering justice through its courts, for they would be reporting to incomplete, stale laws (for their application is also their formation), thus creating a parallel legal context in which former solutions are to be ignored, while the reasoning of solutions found without using all possible tools would be legally binding.

In other words, and consequently, we do not think that the contractual nature of arbitral courts should imply that they be excluded from the idea of jurisdictional system, which consistency depends – even more so if we consider the Common Law family – on the concept of preceding rulings being, at some extent, taken into account by decision-makers.

The definition of precedent has already made us arrive to these conclusions, which will be the starting point to the second part of this paper where we will ponder the weight of the traditional distinction made between binding and persuasive precedents and its usefulness, in an attempt to understand which nature an arbitral precedent (which we have just now clarified as existent) may have. As for now, we will take a short look into how precedents are framed by the legal families of Civil and Common Law.

According to the traditional fons iuris theories, only judicial courts decisions could form binding precedents. In the Common Law tradition, the stare decisis principle implies that previous decisions, rendered by the same or by an hierarchically higher court – therefore, either operating horizontally or vertically – should define not only a pattern to subsequent ones, but peremptory criteria for case resolution. Civil Law orders face the same challenges regarding predictability, equality and, ultimately, the deliverance of Justice in the form of just decisions. However, and although past judgments (more precisely, their reasoning) are presented as relevant arguments both by the parties and the judge, they are challengeable and can almost always be diverted from, for they are not equivalent to parliamentary legal dispositions, save for rare exceptions. Nonetheless a remark is to be made: in both families, the formation of precedents – both binding and persuasive – is taken as a consequence of the hierarchic position of the court that renders the decisions, often sustained by assumptions. They regard the quality of the decision-maker (thus implying another set of assumptions), the jurisdiction of the court or even its composition; more profoundly, and considering that, if binding, court decisions are equivalent to written law – which making power belongs to the State – arbitral decisions are not usually accepted as able to form precedent.

We are left – and leave the reader – with this question: according to the aims of the judgment and its generally accepted conditions of validity, does it make sense to justify the binding force of only some precedents based on a classic fons iuris theory when it only concerns institutional legitimacy? This question is one we will attempt to answer from the premise we started this one off with: every decision that applies the Law of a certain country may be considered a precedent and it is considered as such whenever another decision-maker applying said Law finds so to be adequate (which is a decision he or she will have to justify, as well as the decision to dismiss a previous decision’s ratio decidendi when it concerns a similar case).

In the introductory part to this blog post, we took a stance on what a precedent is – a past decision which serves as a guide for present action – and considered that arbitral awards may create self-standing rules with precedential value for both arbitrators and judges deciding a case. We concluded this by considering that the contractual nature of the arbitration agreement does not exclude arbitral decisions from the jurisdictional system and the Law of the country, when the arbitrator is bound to decide by applying such Law: in such case, arbitrators both interpret, apply and create Law. What this means is that state court judges must also consider arbitral decisions when deciding a case. However, we do not think these conclusions can sustain themselves solely based on the definition of precedent and on the nature of arbitration. We must now better understand what deciding is, what a valid and legitimate decision is, what differs persuasive from binding precedents and why States only consider binding the preceding decisions coming from high courts.

If regarded as previously developed schemes for the resolution of an ensuing conflict, it is easily understandable that the binding content of precedents does not lie on the operative part of the judgment, for the final decision cannot be separated from the situation that requires it.

Those schemes – the ratio decidendi – result from the intellectual effort of selecting from the reality, as presented to Court, what might be relevant for the final goal of delivering a judgment. That process is not crucial only for the purpose of reasoning the final decision. It is also the exercise that enables the construction of a pattern: identifying the general contours and the specifying elements of any given situation.

The selection process itself involves a certain understanding of the facts and knowledge of the applicable legal dispositions. From the choosing of elements and their – at least simultaneous – logical concatenation, a chain of deductions can be made, ideally syllogistically culminating in one sole conclusion, but often leading to a plurality of potential valid options, from which one is to be chosen by the decision-maker.

“Valid” is not a naively chosen word. The processes we are discussing are eminently rational and it is in this rationality that the crucial condition of legitimacy for the rendition of a judgment is. It may be argued that a court’s legitimacy derives from its powers being assigned by the State (even if an arbitrator may be perceived as to having less of a public legitimacy) – this would be the positivistic approach to the much wider question of knowing what makes everything binding and an understanding of the word “jurisdiction” that we cannot follow.Even if we were to accept this statement, it would be now helpful to recall what we have previously written: it is not the operative part of the judgment that must be applicable to subsequent situations. It is not the previous court’s given order that must be followed, thus the cornerstone of the precedent doctrine cannot be the mere power to order.

Even though it may be true that only certain entities may, by law, validly pronounce judgments, it is not true that the conditions for that political kind of validity apply to the legal and philosophical validity of a judgment. Coherence between premises and conclusion does not depend on any kind of hierarchy or institutional criteria, but on the prevalence of reason over randomness and, consequently, unpredictability, which is the enemy to be fought against by any legal thinker.

Trying to explain the existence and functioning of precedents using the topoi from which we discuss institutional legitimacy is an incomplete manner of analysing such matter and tends to deny the possibility of formation of binding arbitral precedents. In one word: the only acceptable justification for the very existence of binding legal precedents also implies accepting arbitral precedents, if the process to achieve the final judgment is submitted to the same rationalizing elements. What we mean to say is that, while a decision is only legitimate when formed by a rational process which can be communicated, and rendered by a competent entity, there is no competent entity to say whether the ratio decidendi of a decision may form a binding precedent, since it is the necessity of a rational decision able to put to terms the conflict taking place that may oblige the decision-maker to follow a previous set of decisions.

The idea we want to make clear is that the source of validity of every precedent rests in its ratio decidendi, which can only be achieved by the rationalizing process of sorting and applicating facts and legal criteria, a process which must be linguistically expressed and comprehensible: as Castanheira Neves explains, the relevant rationality is not the one that simply aims to achieve a necessary inference or demonstration or a true and universal knowledge or explanation, but a finalistic, practical and relational rationality that aims to solve definitively the conflict in a way that is understandable by the parties and third persons.2) Castanheira Neves, “Entre o ‘legislador’, a ‘sociedade’ e o ‘juiz’ ou entre‘sistema’, ‘função e problema’ – os modelos atualmente alternativos de realização jurisdicional do direito”, Boletim da Faculdade de Direito de Coimbra, v. LXXXIV. jQuery("#footnote_plugin_tooltip_9021_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9021_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This is what we meant by writing that the goal of achieving one decision is merely ideal – it is not incompatible with the potential validity of several judgments. The correspondence between a logical conclusion and a court decision is its most fundamental condition of validity. However, it is not because the conclusion derives logically from the premises – as taken to court by the parties – that the judgment is binding, for that would imply an ontological leap: this is where institutional legitimacy plays its most relevant role. It transforms the judiciary syllogism into an order. Indeed, the correctness of an intellectual construction that supports a final illation does not instantly correspond to the reasons of judgment or to the judgment itself. These are different realities, interlocked by institutional powers, assigned to courts by Law. The gap between logic and a declaration that alters a parties’ juridical situation and consubstantiates an enforceable order is both linguistical and logic itself; yet, the chasm is filled by the implicit transformative power that comes along with the power to render a judgment. We are not contradicting our previous statements, for there are two different kinds of legitimacy at presence – the legitimacy derived from a justified and therefore comprehensible reasoning process of deciding (jurisdictional legitimacy, which allows the validity of the decision) and the institutional legitimacy.

There is, in the end, only one optimal decision: the one reasoned (which means it must be driven by practical motives: obtaining the definitive composition of the conflict and the harmonization of the system and all its rules) and institutionally legitimate.

This obliges us to conclude that, institutional legitimacy checked, binding judicial precedents cannot be accepted without also accepting the formation of arbitral precedents and their binding effects. Why? Because the condition of validity for both judgments lies on the same justification: both judge and arbitrator must reach a reasoned decision to stabilize the legal situation of the parties at conflict.

This is why we understand that, in a legal system in which the law aims to reach a definitive solution to a conflict that is not incompatible with any other decisions and legal rules, the difference between binding and merely persuasive precedents ought to not exist, even though it exists in the praxis of both Civil and Common Law. We sustain that, if the mainstay of the precedent doctrine is, as we argued, the validity of the judgment, all decision-makers must try to achieve that rational decision and therefore make use of every source of Law, both formal and informal. Only institutional and political-legislative structures may make use of hierarchic and judicial vs. arbitration differential criteria, for validity criteria are common and equivalent whether they concern arbitral or state court judgments.

This said and if our premises stand, there is no alternative but to perceive both Civil and Common Law as a rational and, therefore, systematic core of legal rules. The word “systematic” might raise some eyebrows, considering that one of the main distinctions made between Civil and Common Law is the systematic nature of Civil Law – however, the path we rationally traced in this paper forces us to conclude that, in Common Law, it is precedents and not legal codes that reveal its systematic nature, preventing contradictory rulings and guaranteeing predictability and equality before the Law.

Traditional – but still taking effect nowadays – constructions only confer binding effects to precedents derived from decisions rendered by higher courts, basing such option on assumptions of various kinds. These constructions stem from the realization of the inexistence of Dworkin’s Judge Hercules and, therefore, the practical impossibility of having a system able of discovering the absolute best (past) decision. The deliverance of Justice is as limited as we are, for the systems chosen are designed by men who have limited amounts of knowledge, experience and time. Yet, we still need to decide; what is most, we need to decide in the best, longest-lasting way possible. Therefore, these constructions are based on assumptions, on the penalty of facing the impossibility to decide in reasonable time. Binding precedents coming only from higher courts are meant to save the judge from the burden of looking into every past decision and deciding which is best, and are meant also to help enforce judicial certainty and predictability. These assumptions aim to help more the system’s continuity than the specified decision taken, for they might not be verified in a certain case. As we understand it, there is no relation of causality between one instance (legal or jurisdictional) saying which precedents (judicial or arbitral) are or are not binding and their actually binding effects, for it is the process of decision making itself that forces a judge to investigate past decisions and juridical opinions to better interpret laws and apply rules and principles. It is the goal – rectius, the judge’s duty – of reaching the optimal decision for the case in hands that might lead him or her to decide according to a past decision.

References   [ + ]

1. ↑ Guilherme Rizzo Amaral, Judicial Precedent and Arbitration: Are Arbitrators Bound by Judicial Precedent? 2nd ed, Wildy, Simmonds and Hill Publishing. 2. ↑ Castanheira Neves, “Entre o ‘legislador’, a ‘sociedade’ e o ‘juiz’ ou entre‘sistema’, ‘função e problema’ – os modelos atualmente alternativos de realização jurisdicional do direito”, Boletim da Faculdade de Direito de Coimbra, v. LXXXIV. 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: Arbitration in Belgium: A Practitioner’s Guide
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Deep Sea Mining, Arbitration and Environmental Rules: What Role for Standards?

Sat, 2018-10-27 03:18

Marc-Antoine Carreira da Cruz

Deep sea mining regulation is an extremely young field of international law. Recently, there have been some important evolutions in the debate around the contractual and environmental rules that will organize the exploitation of mineral resources in the areas of the seabed beyond the continental shelf – hereafter referred to as “the Area”. Nevertheless, few people know that arbitration can be the stage for the settlement of some specific disputes in this field, with important impacts on the interpretation of environmental duties for the contractors.

The International Seabed Authority (ISA) is in charge of regulating and administrating deep sea economic exploitation according to articles 151 and 153 of the United Nations Convention on the Law of the Sea (UNCLOS).

The dispute settlement around deep sea mining is organized under a complex scheme, with various options and exceptions. Basically, article 187 of the UNCLOS confers a wide jurisdiction upon the Seabed Disputes Chamber of the International Tribunal for the Law of the Sea over disputes arising from activities in the Area. But there are exceptions under articles 188 and 189 of the Convention. Amongst these exceptions, one opens the door to commercial arbitration. Indeed, article 188 (2) (a) of the Convention states that disputes between parties to a contract concerning the interpretation or application of a contract or work plan under article 187(c) (i) shall be submitted, at the request of any party to the dispute, to binding commercial arbitration unless the parties otherwise agree, and unless it concerns the interpretation of UNCLOS.

On the arbitration procedure – and by extension the applicable law and rules – the UNCLOS gives a short indication in its article 188 (2) (c): In the absence of a provision in the contract on the arbitration procedure to be applied in the dispute, the arbitration shall be conducted in accordance with the UNCITRAL Arbitration Rules or such other arbitration rules as may be prescribed in the rules, regulations and procedures of the ISA, unless the parties to the dispute otherwise agree.

For years, this provision has led to an unknown scenario mainly because the ISA is still working on the main legal framework for deep sea mining, the Exploitation Regulations, the standard contract clauses and its annexes. Therefore, there could have been some uncertainty around some important points, notably the way environmental duties would have been defined in ISA regulations, contracts, and work plans and how they can be interpreted in cases of commercial arbitration.

There have been debates on this issue with stakeholders since the decision and first regulation by the ISA in 2011 and 2012 on the Environmental Management Plan for the Clarion Clipperton Zone, notably with the workshop in collaboration with the ISA dedicated to Environmental Assessment and Management for Exploitation in the Minerals in the Area, in May 2016.

Eventually, in April 2018, the ISA Legal and Technical Commission issued the revised draft regulations on the exploitation of mineral resources in the Area for consideration and adoption. What does it tell us?

Firstly, draft regulation 104 reaffirms the regime of dispute settlement set by the UNCLOS and thereby reaffirms the regime of arbitration set by article 187(c) (i) of the Convention.

Secondly, when looking at the Annex X of the document, section 3.2 the standard clauses for exploitation contract specify that the contractor shall implement the work plan in particular which includes the environmental and monitoring plan. At the same time, the document includes schedules that are integrated to the contract and Schedule 1 is dedicated to the use of terms and scope of the contract. This schedule includes several key terms related to environmental duties such as “best environmental practices”, “environmental effect”, “serious harm”, “mitigation”. But, interestingly, it is mentioned that the content and the terms defined are indicative at this stage and that definitions will evolve as regulations content evolves and a common approach towards terms based on internationally accepted definitions is established.

This leads to a rather open situation in the case of arbitration. And in this context, what seems interesting is to think about the way some tools could be used to make the debate around the interpretation of terms regarding environmental duties easier. In this view, there is one interesting option in the toolbox of international law instruments: standards.

Standards – or more precisely ISO technical and management standards, are a key soft law instrument with powerful legal implications as deeply analyzed by various works, notably in various contributions by the Perelman Center for Legal Philosophy. They can have significant advantages as applicable rules or tools for interpretation in international commercial law and in arbitration especially when it comes to complex technical matters.

Has the ISA considered this option during the drafting process and consultation of stakeholders? There is no answer on the specific issue of arbitration and interpretation. Nevertheless, the ISA and its stakeholders are aware of the subtle but crucial importance of standards to consolidate and make the environmental rules of deep sea mining operational in the contract and work plan framework.

Indeed, standards were already scrutinized in the Discussion Paper of January 2017 published by the ISA on the development and drafting of Regulations on Exploitation for Mineral Resources in the Area (Environmental Matters). The way standards such as ISO: 14001 (environment management) and ISO 31000 (risk management) could be appropriate was mentioned, even if it was not in a discussion on rules of interpretation in the arbitration procedure. This tentative working draft contained a commentary inside section 3, stating that the regulation sets the benchmark for an Environmental Management System equivalent to the principles of ISO 14001:2015. In this proposed option, the provision 3 of the Draft regulation 28 stated that where an applicant possesses or proposes to implement an Environmental Management System which is not equivalent to the principles of ISO 14001:2015, the Authority would have the option – without obligation – to consider the alternative Environmental Management System. This would imply a de facto kind of conformity presumption.

Actually, this has been already pushed for and brought up in contractual obligations by the ISA in its Environmental Management Plan for the Clarion Clipperton Zone of 2011 that stated in the management objectives (contract areas- B.41) that the management objectives for the contract include that the contractors will apply the principles of ISO 1400133 to the development of their site-specific environmental management plans.

But what about the revised draft regulations of April 2018? It does not actually contain the same explicit mention. Nevertheless, there are some important indications on the consideration of standards related to the environment, with interesting consequences on interpretation in arbitration cases. Regulation 1 – on the use of terms and scope, indicates that the regulations shall be supplemented by standards in particular on the protection and preservation of the Marine Environment. At the same time, Annex X related to Standard Clauses for exploitation contract specifies in provision 3.2 that the Contractor shall in particular implement the work plan which integrates the Environmental Management and Monitoring Plan, in accordance with Good Industry Practice. One can remark on several interesting points here.

Firstly, the definition of “good industry practice” in Schedule 1 notably says that the requirements under applicable standards adopted by the ISA are one implementation of the skills and diligence reasonably expected to be applied as good industry practice. As the ISA may adopt ISO standards in its guidelines, it will shape this definition in the light of standards on risk assessment, environmental management, environmental assessment and deep sea mining industrial processes.

Secondly, the Environmental Management and Monitoring Plan, ruled by Annex VII, also introduce standards in the process, as it must include a description of relevant environmental performance standards, indicators and details of the quality control and management standards.

Thirdly, the Environmental Management and Monitoring Plan must be read in parallel with Part IV of the Regulations related to the Protection and Preservation of the Marine Environment which have also opened the door to the standards – directly and indirectly. Directly, with some provisions such as Regulation 47 which states that the Contractor shall take necessary measures to prevent, reduce and control pollution and other hazards to the Marine Environment as far as reasonably practicable, and in accordance with the applicable standards. And indirectly, with Regulation 46 stating that contractors shall integrate Best Available Scientific Evidence in environmental decision-making, including all risk assessments and management undertaken in connection with the management measures taken under or in accordance with Good Industry Practice.

Thus, all in all, the situation is the following: one must be careful and wait for the results around the draft regulations of ISA, notably the draft of Schedule 1 on the terms of the standard clauses for exploitation contracts. But it can observed that the door is potentially open to the use of standards in helping to interpret environmental terms and obligations if an arbitration takes place under the specific case set by art. 188 (2) (a) of the UNCLOS.

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CJEU Opinion re CETA – Opinion AG Bot

Fri, 2018-10-26 07:11

Guillaume Croisant

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Do Party Appointments Encourage Compliance With Awards?

Thu, 2018-10-25 02:58

Paul Baker

YIAG

Party-appointed arbitrators have recently been the subject of much debate in the arbitration community. There are those who see the ability to ‘choose’ an arbitrator as one of the fundamental pillars of arbitration. For others, it is a time- and cost-consuming exercise leading to potential conflicts and an increased likelihood of arbitrator challenges, both of which undermine the arbitral process and its reputation.

One arbitration textbook (which shall remain nameless) contains the comment that the parties’ ability to participate in the appointment of the tribunal makes the parties more likely to comply with the resulting award. At first glance this would appear to make some sense. Where the competence of the tribunal is known and respected then a ‘correct’ result is anticipated and there should be no reason to challenge or appeal the award or resist enforcement (save in exceptional circumstances). In this vein, even a losing result should be perceived as fairly reached and, as such, complied with.

In this paper we consider whether it is really the case that parties’ ability to nominate an arbitrator impacts their attitude to enforcement.

Appointing the tribunal

In the 2018 Queen Mary International Arbitration Survey: The Evolution of International Arbitration, 39% of survey participants placed the ability of parties to select their own arbitrator as one of the three most valuable characteristics of arbitration. This is consistent with anecdotal evidence both from parties and advisors that it is ideal, but not imperative, to have nominated or appointed a member of the tribunal. Such engagement with the make-up of the tribunal should naturally encourage confidence that the tribunal possesses the skills that party desires to determine the dispute in hand.

For this reason, many arbitration agreements set out the tribunal appointment mechanism. Commonly this will be the joint appointment of a sole arbitrator or a panel of three with each party nominating one arbitrator and the co-arbitrators nominating a Chair.

Other arbitration agreements make no provision for appointment and instead default to the relevant arbitral rules or legislation. Others will, perhaps deliberately, leave the appointment structure to those relevant rules and institutions or courts.

Under the LCIA Rules (whereby parties nominate rather than appoint arbitrators) if the parties have not agreed the mechanism by which the tribunal will be appointed, the default position, absent any agreement of the parties for the mechanism for appointment, is that the LCIA appoints all members of the tribunal. In practice, the LCIA leave it open to the parties to agree on party-nominations and a variety of methods can be used (names provided by LCIA, ranking/striking out from a list of names etc.) Often, though not always, the appointment of a three-member tribunal will be resolved by one party nomination per side and a joint Chair nomination by the two tribunal members or appointment of the Chair by the LCIA.

Under the ICC Rules, where the parties have provided for a sole arbitrator but no mechanism for appointment, they may agree a joint nomination or the sole arbitrator will be appointed by the ICC Court. Where the parties have provided for three arbitrators but no mechanism for appointment, each party shall nominate one arbitrator failing which the appointment will be made by the ICC Court.

It is therefore clear from these institutional rules that party autonomy in choosing the tribunal is encouraged by the institutions.

There is, however, usually a degree of compromise in any tribunal. In the case of a sole arbitrator, while a party may have the opportunity to agree a jointly appointed arbitrator, it is standard for that appointment to be one of compromise rather than either party’s first choice. Where a party appoints its arbitrator to a panel of three, the parties have participated in the appointment of one third of the tribunal but they could well be dissatisfied with two-thirds of the tribunal (particularly if it had no involvement in the appointment of the Chair). In these ways, party-appointment may not result in the appointment of a tribunal in which either party has its complete confidence.

Independence and impartiality

The important topics of independence and impartiality come into play too. While parties and their advisors will always try to appoint an arbitrator who they believe will correctly determine the dispute, the arbitrator remains independent and impartial. Yes, concerns such as bias, repeat appointments and ‘hidden’ conflicts related to the involvement of funders are topics that take up a lot of column inches in arbitration but, on the whole, international arbitrators are not appointed to be partisan, they are appointed to understand the case and reach the correct result on the law and facts.

Why comply?

There are of course a myriad of reasons why a party would comply with an award including acceptance of the result following a fair process, resignation to the finality of the result and reputational concerns.

A review of case law under Arbitration Act 1996, s.103 under which parties resist enforcement of awards yields no supporting evidence either way.

a. In 2015 there were three s103 decision:
one Court of Appeal decision which was considered by the Supreme Court in 20171) IPCO (Nigeria) Ltd v Nigeria National Petroleum Corporation [2017] UKSC 16 jQuery("#footnote_plugin_tooltip_4289_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4289_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (so won’t be double-counted here)
in the second2) H & C S Holdings Pte Ltd v Rbrg Trading (UK) Ltd [2015] EWHC 1665 (Comm) jQuery("#footnote_plugin_tooltip_4289_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4289_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); a sole arbitrator was appointed but the judgment does not say how he was appointed
in the third3) Malicorp Ltd v Government of the Arab Rpublic of Egypt and others [2015] EWHC 361 (Comm) jQuery("#footnote_plugin_tooltip_4289_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4289_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the parties each appointed one arbitrator and the two co-arbitrators appointed the Chair

b. In 2016 there is only one reported decision4) Pencil Hill v US Citta Di Palermo S.p.A [2016] EWHC 71 (QB) jQuery("#footnote_plugin_tooltip_4289_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4289_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); which involved a three-person tribunal. While the judgment does not say how the panel was appointed, it is not unreasonable to think that the parties would have appointed one arbitrator each.

c. In 2017 there were five reported decisions on AA 1996, s.103,5) Lexis Library search 2 July 2018. Zavod Ekran OAO v Magneco Metrel UK Ltd [2017] EWHC 2208 (Comm) – enforcement resisted on grounds that defendant was not given proper notice of the arbitration proceedings. Defendant did not participate in appointment of the tribunal; Viorel Micula and others v Romania and another [2017] EWHC 1440 (Comm) – each party appointed one arbitrator; Eastern European Engineering Ltd v Vijjay Construction (Proprietary) Ltd [2017] EWHC 797 (Comm) – it is unclear from the judgment how the tribunal was constituted or appointed though it is likely that the tribunal was a sole arbitrator (there is reference to arbitrator rather than arbitrators in the judgment); IPCO (Nigeria) Ltd v Nigeria National Petroleum Corporation [2017] UKSC 16 – it is unclear from the judgment how the tribunal was constituted; Sinocore International Co Ltd v RBRG Trading (UK) Ltd [2018] 1 All ER (Comm) – each party appointed an arbitrator, the Chair was appointed by CIETAC. jQuery("#footnote_plugin_tooltip_4289_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4289_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of these:
in two the parties appointed their own arbitrators;
in two it is unclear how the tribunal was constituted; and
in one the party was resisting enforcement on grounds that defendant was not given proper notice of the arbitration proceedings and as such the defendant did not participate in appointment of the tribunal.

With the benefit of educated guesses, in half of the cases the parties were involved in the appointment of the tribunal. This is of course insufficient and not sufficiently accurate data to draw any firm conclusion.6) Expanding the search to include another popular arbitral seat – Hong Kong – yields similarly inconclusive results. Utilising the same three year sample size (2015-2017) provides just one relevant case from each year. In none of the three cases does the judgment specify the means by which the tribunal was appointed. jQuery("#footnote_plugin_tooltip_4289_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4289_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Perhaps what it does indicate is that the numbers of applications seeking to resist enforcement remain low. This in turn, indicates that a large number of awards are complied with without enforcement being challenged. With a degree of frustrating circularity this brings us to the question of why parties comply with awards and if the presence of a party-appointed arbitrator is a factor.

It appears that regardless of the parties’ participation in the appointment process, unsuccessful parties will regularly consider whether there is scope for challenge or appeal a final award and consequently whether there is any just cause for resisting enforcement. Presumably in the majority of the cases this is not intended to be disrespectful to the tribunal or the arbitral process, it is simply seeking to understand whether additional steps can be taken in the best interests of the unsuccessful party. While it may be the case that the users of arbitration like to think that parties comply with awards following the fair outcome of a legitimate process parties agreed to enter into, we have seen no definitive evidence to link this to the parties’ ability to participate in the appointment of the tribunal.

References   [ + ]

1. ↑ IPCO (Nigeria) Ltd v Nigeria National Petroleum Corporation [2017] UKSC 16 2. ↑ H & C S Holdings Pte Ltd v Rbrg Trading (UK) Ltd [2015] EWHC 1665 (Comm) 3. ↑ Malicorp Ltd v Government of the Arab Rpublic of Egypt and others [2015] EWHC 361 (Comm) 4. ↑ Pencil Hill v US Citta Di Palermo S.p.A [2016] EWHC 71 (QB) 5. ↑ Lexis Library search 2 July 2018. Zavod Ekran OAO v Magneco Metrel UK Ltd [2017] EWHC 2208 (Comm) – enforcement resisted on grounds that defendant was not given proper notice of the arbitration proceedings. Defendant did not participate in appointment of the tribunal; Viorel Micula and others v Romania and another [2017] EWHC 1440 (Comm) – each party appointed one arbitrator; Eastern European Engineering Ltd v Vijjay Construction (Proprietary) Ltd [2017] EWHC 797 (Comm) – it is unclear from the judgment how the tribunal was constituted or appointed though it is likely that the tribunal was a sole arbitrator (there is reference to arbitrator rather than arbitrators in the judgment); IPCO (Nigeria) Ltd v Nigeria National Petroleum Corporation [2017] UKSC 16 – it is unclear from the judgment how the tribunal was constituted; Sinocore International Co Ltd v RBRG Trading (UK) Ltd [2018] 1 All ER (Comm) – each party appointed an arbitrator, the Chair was appointed by CIETAC. 6. ↑ Expanding the search to include another popular arbitral seat – Hong Kong – yields similarly inconclusive results. Utilising the same three year sample size (2015-2017) provides just one relevant case from each year. In none of the three cases does the judgment specify the means by which the tribunal was appointed. 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: Arbitration in Belgium: A Practitioner’s Guide
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Proposed 2018 Amendments to Indian Arbitration Law: A Historic Moment or Policy Blunder?

Thu, 2018-10-25 01:11

Pranav Rai

YIAG

The lower house of the Indian Parliament recently passed the Arbitration and Conciliation (Amendment) Bill 2018 (“Bill”) to amend the arbitration law. If also passed by the upper house of Parliament, and upon receiving the President’s assent, this will become a law. It will then come into force when the Government so notifies.

The Law Minister termed this Bill as a historic moment. It is largely based on the report (“Report”) of a High Level Committee (“Committee”), which was given a mandate to identify the roadblocks to institutional arbitration (“IA”), examine issues which affect the arbitration landscape, and prepare a roadmap for making India a robust center for international and domestic arbitration.

This post argues that the Report has taken a myopic view of the problems and has made some suggestions which do not have a sound basis in policy. To be fair to the Committee, it was given a flawed mandate by the government – to implement rhetoric, disguised as an objective. The Report, however, instead of correcting this flawed objective, had a one-dimensional focus of improving IA. In this process it ignored the more importunate issues which plague Indian arbitration landscape. Below is an analysis of some important policy flaws in the Report which have crept into the Bill.

Making India a global arbitration hub – a wrong premise to start with

For some time now, statements made by the government on the issue of arbitration have contained more rhetoric than substance. One such rhetoric has been to make India a global arbitration hub (“Hub”). It is important to point out that, due to similarity of terms there is a scope of confusion over the meaning of the term Hub, especially at the government level. However, a reading of government statements, here and here, and an earlier Law Commission report suggests that the intent has indeed been to make India a Hub i.e. making India a globally preferred seat when both parties are foreign.

Consequent to such an objective, one of the aims of the Committee was to formulate a roadmap to achieve this. This, in my view, was an opportunity for the Committee to set the record straight by pointing out the impossibility of this objective (at least in the near future) and instead suggest a more modest objective with a clear roadmap and timelines. It however ended up presenting an ambiguous picture of this objective coupled with an equally ambiguous roadmap.

These are some fundamental flaws with the objectives which the Report fails to properly address.

a) All of the existing Hubs are cities or city states. It would be nothing short of a miracle if a country of India’s size becomes a Hub. As a proposition, this is a non-starter and the Committee should have advised the government accordingly. If the other flaws with such objective (explained below) could be resolved, the Report should have first suggested that some cities should be identified for this purpose. Priority should have been given to new smart cities such as GIFT City which would have complemented the larger plans of the government in the financial space. A model suitable in the Indian context should have then been applied to such cities, differently if necessary. But since neither of this was done, it is still not clear what will be the government’s objective going forward.

b) This idea of a Hub seems to have been developed by the government without a clear understanding of its rationale. The Report suggests that improving the arbitration landscape in India and making India a Hub will help in improving the ease of doing business and will also promote India as an investor-friendly country. While an improved arbitration landscape should help in the ease of doing business and should also promote India as an investor-friendly country, these are not plausible reasons to endeavor to become a Hub. Generally, it is the other way around – ease of doing business and being investor friendly are more like a pre-requisite to be a Hub. The case of Singapore and Hong Kong are good examples here. There are on the other hand several reasons for not aiming so high. Substantial costs for considerable period of time is one such reason. It would have been helpful if the Report could have included a cost-benefit analysis and financial feasibility study of this objective before even attempting to provide a solution.

c) None of the existing Hubs have directly become a Hub. A possible process which could have been followed here is – first improve upon the international arbitration landscape and identify the cities and arbitral institutions which need to be developed. Care should be taken so that the arbitral institutions are evenly spread across the cities and do not exceed beyond a point. An opportunity to be a regional or global player can only arise later once the arbitration system is well developed. The Report however did not provide any roadmap or timelines here, except for suggesting that an Arbitration Promotion Council should be set up to grade arbitral institutes and that as of now one arbitral institution has been identified for this purpose. With the aims so high the Report’s roadmap should have been more robust than this.

More immediate problems overlooked

The ambiguity surrounding the objectives of the Committee has also resulted in the more immediate problems being overlooked. For example, the Law Commission’s earlier report (see above) noted that the shortcomings in the arbitration law resulted in even the Indian parties preferring arbitration seat abroad. The judiciary has also been unable to resolve this issue and has instead given contradictory signals. This should have set the alarm bells ringing and, in my view, calls for a legislative fix. This was an achievable goal and should have been the first priority for the Report. But instead, the Report seems to suggest that IA is a general medicine which will cure all problems. These could have been resolved if the Committee would not have mixed all problems together and could have clearly prioritized its objectives.

One-dimensional focus on institutional arbitration

The Report and the Bill clearly favour IA at the cost of ad hoc arbitration (“ad hoc”). This is an important arbitration policy deviation because until now the arbitration law has been IA agnostic. Being an important deviation, the Report should have at least provided plausible reasons for favoring IA over ad hoc. But all it seems to suggest is that ad hoc should be discarded gradually as they are costly and cause delay. There was, however, one favourable change suggested in the Report – to provide model arbitration rules. Although this was not intended to directly benefit ad hoc, this could have been beneficial for ad hoc. These model rules, however, do not form part of the Bill.

The problem of ad hoc was not only with respect to cost and delay, as has been pointed out by the Report, but also of independence and impartiality along with the unique problem of unilateral clauses. However, all of these have to a large extent been resolved by the 2015 amendment, but the Report discounts this fact. This amendment inter alia made provisions for: a) reduction in arbitrators’ fee on account of delay; b) model fee; and c) adoption of a modified version of IBA Guidelines on Conflicts of Interest in International Arbitration. These problems are thus not inherent in the system and a cure is possible. Also, most of the problems are common to both IA and ad hoc, so if the Report suggests a resolution of the problems for IA then it is difficult to comprehend why cannot the same be done for ad hoc.

While the Committee was constantly looking at other models for inspiration, it could have also studied India’s history and culture of alternative dispute resolution. This culture continues even today and is also one possible reason why majority of Indian parties prefer ad hoc over IA. Some versions of Ramayana, for example, cite attempts by deities to settle the dispute between Rama and his twin sons, which is akin to modern day alternative dispute resolution. Informal arbitration proceedings have been conducted by the panchayats (village councils) since ancient times and there is some evidence to suggest that it is still preferred over litigation. This not only shows that ad hoc has been functioning reasonably well since ages, but this could have also been used as a model even today, with some modifications to suit the current day requirements. The Report completely ignored these indigenous sociocultural aspects of ad hoc.

In view of the above, rather than out rightly rejecting ad hoc, there was at least a case to improve the existing ad hoc systems and provide it an equal playing field in the domestic arbitration sphere.

Conclusion

The above analyses show that there are some vital flaws in the Report and consequently in the Bill. The legislature should thus reconsider this Bill. In its eagerness to make India a robust center for arbitration, the government is perhaps missing the point that all successful models of arbitration have their own uniqueness. Hence, instead of blindly following a foreign model, India should first weigh in all options to see which model suits best from an Indian context and how best to utilize India’s rich history and experience in this sphere.

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