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Consolidation of Arbitral Proceedings and its Ramifications on a Party’s Right to Challenge the Jurisdiction of the Tribunal and the Arbitral Award

Tue, 2018-03-20 22:19

Eunice Chan Swee En

YSIAC

The potential ramifications on a party’s right to challenge an award made in a consolidated proceeding should inform a party’s decision to adopt institutional rules or national arbitration laws that allow for consolidation. Ensuring as a preliminary matter that the mechanism for consolidation and any waiver provisions in the institutional rules or national arbitration laws adopted accords with the parties’ intent would avoid any unintended waiver of any grounds to set aside and/or challenge the enforcement of an award made in the consolidated proceedings.

The nature of a consolidation decision and its ramifications on a party’s right to challenge the Tribunal’s jurisdiction

A consolidation decision may be characterised as purely administrative or jurisdictional in the sense that the consolidation decision creates the jurisdiction of the tribunal of the consolidated proceedings. The characterisation of the nature of a consolidation decision is important as it may have ramifications on a party’s right to challenge the jurisdiction of the tribunal of the consolidated proceedings.

It may be said that the consolidation decision by an arbitral institution under institutional rules (such as Article 10 of the 2017 ICC Rules, Article 28.1 2013 of the HKIAC Rules and Article 15 of the 2017 SCC Rules) which allow such consolidation may be regarded as administrative in nature. There are two common features of such a consolidation decision. First, there is no requirement for reasons to be given (for example, see Article 8 of the 2014 ICDR Rules and Rule 40.1 of the 2016 SIAC Rules). Secondly, there is no stipulated avenue for a party to challenge an institution’s decision to consolidate proceedings. The institution’s decision on consolidation is final.

An institution’s decision to consolidate proceedings may be distinguished from an award or a ruling on jurisdiction. Unlike the institution’s decision to consolidate proceedings, the latter typically contains reasons and may be set aside under the law of the seat of the arbitration and/or challenged at the enforcement stage. Thus, the institution’s decision to consolidate, being administrative in nature, does not preclude a tribunal of the consolidated proceeding from making a determination on the validity of the consolidation in a ruling on its own jurisdiction. The 2016 SIAC Rules appear to adopt this view.

SIAC Rule 8.4 and Rule 8.9 clarify that the consolidation provisions (as with the joinder provisions in Rule 7.4 and Rule 7.10) in the SIAC Rules set out the procedural mechanism for consolidation. The SIAC Rules do not create the jurisdiction of the tribunal in respect of the consolidated proceedings. The tribunal of the consolidated proceedings retains kompetenz-kompetenz to decide on its own jurisdiction, including any challenge to its jurisdiction on the basis of the institution’s decision to consolidate.

In contrast, there are institutions that appear to treat the consolidation decision as jurisdictional in nature. Article 28.8 of the 2013 HKIAC Rules states that “parties waive any objection, on the basis of HKIAC’s decision to consolidate, to the validity and/or enforcement of any award made by the arbitral tribunal in the consolidated proceedings, in so far as such waiver can validly be made”. The underlying premise of this waiver provision appears to be that the tribunal of the consolidated proceedings has valid jurisdiction to make an award pursuant to the institution’s decision to consolidate proceedings.

However, having regard to the fundamental principle in international arbitration that the tribunal has kompetenz-kompetenz to rule on its own jurisdiction, the better view is that the initial decision by the arbitral institution to consolidate should be regarded as administrative in nature, and should not purport to create the jurisdiction of the tribunal of the consolidated proceedings. After all, the initial decision to consolidate does not bear the hallmarks of a jurisdictional ruling or award (i.e. containing reasons and subject to challenge). The tribunal of the consolidated proceedings should retain the competence to rule on its own jurisdiction, including any challenge to its jurisdiction on the basis of the initial decision to consolidate.

This view might be regarded as procedurally inefficient because a party objecting to the consolidation is effectively given a second bite at the apple. However, it upholds the fundamental principle in international arbitration that the tribunal of the consolidated proceedings has competence to rule on its own jurisdiction. It further acknowledges the fact that the initial decision-maker (institution or tribunal) may not have been in the best position to make a decision on consolidation at an early stage of the proceedings because there might have been insufficient information available at that time.

The agreement to consolidate and its ramifications on a party’s right to challenge the award

Consolidation of proceedings contrary to parties’ consent negates party autonomy and would jeopardise the enforceability of an award made by the tribunal of the consolidated proceedings. However, even where parties have consented to apply institutional rules or national arbitration laws which allow for the consolidation of proceedings, such agreement may have ramifications on the grounds available to a party to challenge an award made by the tribunal of the consolidated proceedings. Three potential ramifications are discussed below.

First, by agreeing to adopt institutional rules that grant the institution the power to decide to consolidate proceedings, parties may be deemed to have waived their right to challenge an award made by the tribunal of the consolidated proceedings on the basis of the institution’s decision to consolidate. Article 28.8 of the HKIAC Rules which has been mentioned above provides such an example. Notably, parties can waive their right to set aside an arbitral award in some jurisdictions: see Article 1522 French Code of Civil Procedure and Noble China Inc v Lei (1998) 42 O.R. (3d) 69; 42 B.L.R. (2d) 262.

Even if the institutional rules do not contain such a waiver provision, it would be prudent for parties to expressly reserve their rights to challenge any award made by the tribunal of the consolidated proceedings on the basis of the initial decision to consolidate. In Karaha Bodas v Pertamina (No 2) [2003] 4 HKC 488, the Hong Kong Court observed (at [29] and [36]) that the fact that the defendant had made no challenge to the decision on consolidation (and appointment of arbitrators) to the supervisory court and had remained silent until the enforcement stage “may be construed as a waiver, if indeed there had been an irregularity”.

Secondly, by agreeing to adopt arbitral intuitional rules that grant the institution the power to decide to consolidate proceedings, parties may be deemed to have waived their right to designate an arbitrator.

There are several institutional rules which provide that parties waive their right to designate an arbitrator in the event of a consolidation of proceedings. Examples of these rules include Art 4 of the SRIA Rules and SIAC Rule 8.12. Parties’ agreement to adopt such rules endangers a party’s right to set aside and/or challenge the enforcement of an award made by the tribunal on the basis that the composition of the tribunal was not in accordance with the parties’ agreement under Article 34(2)(a)(iv) of the Model Law and Article V(1)(d) of the New York Convention.

Thirdly, parties may have agreed to apply the law of the seat of the arbitration which allows the national court to order consolidation of arbitrations (for example, the Hong Kong Arbitration Ordinance). Such agreement may affect a party’s right to challenge the award made by the tribunal of the consolidated proceedings. For instance, where the consolidation decision is made by the court of the seat of the arbitration in accordance with the law of the seat, it would be difficult for a party to challenge an award made by the tribunal of the consolidated proceedings on the basis that the arbitral procedure and/or constitution of the tribunal was “not in accordance with the law of the country where the arbitration took place” (i.e. the law of the seat) under Article 34(2)(a)(iv) of the Model Law and Article V(1)(d) of the New York Convention.

Concluding remarks

Fidelity to efficiency in international arbitration demands that multi-contract disputes should be consolidated before a single arbitral tribunal. Consolidation reduces time and costs of resolving the dispute and prevents inconsistent / duplicative decisions on related claims and factual issues. However, before agreeing to consolidation, parties should be forewarned of the potential ramifications on their rights to challenge the jurisdiction of the tribunal of the consolidated proceedings and/or an award made in the consolidated proceedings.

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Novenergia v. Kingdom of Spain, the ECT and the ECJ: Where to now for intra-EU ECT claims?

Tue, 2018-03-20 02:12

Richard Power

Clyde & Co.

There has been much comment about recent awards in Energy Charter Treaty (‘ECT’) arbitrations concerning investors’ claims against Spain and other EU states regarding renewable energy projects . The fortunes of investors and states have waxed and waned over the last few years, but overall it seemed that investors faced a considerable hurdle. In recent weeks, the rollercoaster ride has accelerated, with Novenergia v. Kingdom of Spain, SCC Case No. 063/2015, giving hope to investors, and EC Decision 2017/C 442 (‘the Decision’) and the European Court of Justice’s (‘ECJ’) decision in Case C-284/16 Slovak Republic v. Achmea BV apparently dashing those hopes.

Background

In the mid-2000s, many EU states encouraged foreign investors to undertake renewable power projects, particularly solar energy. Legislation offered incentives such as specified feed-in tariffs for lengthy periods and no limit on energy generation/distribution.

The global economic crash made such schemes became unbearably costly, and relevant legislation was repealed or amended. Those legislative changes undermined or even destroyed the profitability of investments predicated on the basis of the existing legislative frameworks. Consequently, many investors brought arbitration claims under the ECT, which protects foreign investments in the energy sector of signatory states from expropriation and unfair treatment.1)At the time of writing, for example, around 30 ECT claims against Spain are underway jQuery("#footnote_plugin_tooltip_9170_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Charanne, Eiser, Isolux and Blusun

In 2016 and 2017, four awards were made in respect of claims by investors from one EU state against another EU state: Charanne v. Spain2)Charanne B.V. and Construction Investments S.á.r.l v. Kingdom of Spain (SCC Case No. V 062/2012) jQuery("#footnote_plugin_tooltip_9170_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; Eiser v. Spain3)Eiser Infrastructure Limited and Energia Solar Luxembourg Sarl v. Kingdom of Spain (ICSID Case No.ARB/13/36) jQuery("#footnote_plugin_tooltip_9170_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; Isolux Netherlands, BV v. Kingdom of Spain4)Isolux Netherlands, BV v. Kingdom of Spain (SCC Case No. V 2013/153) jQuery("#footnote_plugin_tooltip_9170_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Blusun v. Italy5)Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic (ICSID Case No. ARB/14/3) jQuery("#footnote_plugin_tooltip_9170_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. The awards displayed some consistency in that:

1. They rejected submissions by the respondents, and the European Commission (‘EC’) via amicus curiae briefs, that the tribunals lacked jurisdiction to hear ECT claims between an EU member state and an investor from another EU state.6)Similar arguments have been heard, and dismissed, in other cases, e.g. RREEF Infrastructure v. Kingdom of Spain (ICSID Case No. ARB/13/30) jQuery("#footnote_plugin_tooltip_9170_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Broadly the arguments were that:

(a) As the EU itself is a signatory of the ECT and both parties are from the EU, Article 26(1) ECT was not fulfilled i.e. the claimant was not from an “Area” of “another Contracting Party”;
(b) The ECT impliedly included a disconnection clause, barring EU states from applying the ECT inter se; and
(c) EU law is an independent legal system taking precedence over other international law and domestic law, which provides an exclusive source of legal rights and remedies for intra-EU relations, including investor protection. The tribunal must apply EU law in reaching its decision. Therefore, the courts of the EU are the only appropriate jurisdiction to apply and enforce EU law.

The tribunals dismissed those arguments, holding that:
(i) individual EU states are also individual signatories to the ECT and the parties are of different nationalities;
(ii) the plain wording of the ECT did not allow for an implied disconnection clause; and
(iii) the claims are based on the provisions of the ECT, not EU law; the ECT expressly gives the tribunal exclusive jurisdiction; and there is no clash between ECT protections and EU law which would require a decision by the ECJ.

2. The tribunals accepted that fair and equitable treatment protections such as that in Article 10(1) ECT do not prevent a state from amending its regulatory regime, unless (i) it has given specific assurances to keep that regime in place for the lifetime of the investment (such as a contractual ‘stablisation clauses’); and/or (ii) such changes are disproportionate to the aim of the legislative changes, and fail to take due regard to investors’ legitimate expectations, formed before such reforms were mooted.

However, the awards also differed on some key issues:

3. The only award in favour of an investor was Eiser. This distinguished the 2010 amendments to Spain’s solar incentives regime7)The focus of the claim in Charanne. jQuery("#footnote_plugin_tooltip_9170_7").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); from the more extensive 2013/14 reforms. The tribunal held that Article 10(1) ECT entitled the claimants to expect that Spain would not revise the regime upon which their investments were based to such a degree that all value in them was lost. Those legitimate expectations were based on the 2007 legislation and Spain’s further conduct in 2010-2011. The 2013/14 reforms amounted to a “total and unreasonable change” in violation of those legitimate expectations. The tribunal awarded the claimants damages of €128m.

4. When considering the circumstances in which a state may have breached Article 10(1) by modifying its regulatory framework, the Blusun tribunal rejected the tripartite criteria in Charanne (public interest, unreasonableness and disproportionality). The tribunal concluded that “in the absence of a specific commitment”, a state has no obligation to grant or maintain subsidies, but any modification should be done “in a manner which is not disproportionate to the aim of the legislative amendment, and should have due regard to the reasonable reliance interests of recipients who may have committed substantial resources on the basis of the earlier regime.”

The awards indicated the difficulties of establishing actionable legitimate expectations of stability in the absence of a stabilisation clause. Even the one result in favour of an investor, Eiser, is being challenged via annulment proceedings.8)Spain has applied for annulment for a failure to state reasons and a manifest excess of power, based upon the finding of a breach of Article 10(1) in circumstances where the tribunal held that Spain had a sovereign right to amend its legislation and had made no commitments as to a stable regulatory environment. Spain’s application also alleges that the claimant’s nominated arbitrator breached his obligation of independence and impartiality by failing to disclose a longstanding relationship with the claimants’ valuation experts. jQuery("#footnote_plugin_tooltip_9170_8").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Novenergia v. Kingdom of Spain

However, in February 2018, the tribunal in Novenergia v. Spain ordered Spain to pay €53 million to Novenergia, a Luxembourg fund which had invested in photovoltaic plants in Spain. The award was significant in that adopted a more expansive approach to investor claims than in the previous cases (including Eiser).

Novenergia’s claim related to the same 2013/14 reforms as in Eiser and Isolux. As in the previous awards, the tribunal confirmed that Article 10(1) ECT does not create an independent obligation to provide stable investment conditions. The key question is whether the investor has legitimate expectations of stability.

Contrary to Charanne, however, the tribunal held that such expectations “arise naturally from undertakings and assurances” given by the state. These do not need to be specific undertakings and/or contractual stabilisation clauses – state conduct or statements which objectively create such expectations (irrespective of whether the state intended to create them) are sufficient. Novenergia was entitled to form legitimate expectations as to the 2007 regime based on statements by officials to Spain’s Congress of Deputies, as well as Spain’s marketing documents which, the tribunal said, constituted “bait”.

As in Eiser, the tribunal held that Spain’s 2013/2014 reforms, which replaced the 2007 regime with a new regime guaranteeing only a ‘reasonable rate of return’, were a “radical and unexpected” departure from the 2007 regime. At the time of its investment decision, Novenergia had a legitimate expectation that the 2007 regime would remain relatively stable.

While Novenergia’s investments had not been destroyed by the 2013 reforms,9)In fact, they were still achieving a reasonable rate of return jQuery("#footnote_plugin_tooltip_9170_9").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); going further than Esier, the tribunal held that it was sufficient that Novenergia could show “quantifiable prejudice” compared with its position when it initially made its investment. The tribunal found that the 2013/14 reforms had a “significant damaging economic effect” on Novenergia’s plants, decreasing revenues by 24% – 32%, and awarded damages accordingly.

Enter the EC

One might think that the tide has turned in favour of investors. However, two interventions from EU institutions seem to have swung the pendulum in the other direction:

(a) In Decision 2017/C 442, published on 10 November 2017, the EC attacked ECT claims brought by investors against Spain (and other EU states). Spain had established the 2007 regime, and reformed it, without obtaining prior approval from the EC. That constituted the granting of state aid without first notifying the EC, and under EU law investors cannot form legitimate expectations with regard to such schemes. The applicable law of the dispute must be EU law as each party was or was from an EU state; and since “the principle of fair and equitable treatment [in the ECT] cannot have a broader scope than the [EU] law notions of legal certainty and legitimate expectations in the context of a state aid scheme”, no investor could form legitimate expectations with regard to the Spanish 2007 regime and its reforms.

The Decision went on to criticise the concept of the ECT claims, stating that the EC considers that “any provision that provides for investor-State arbitration between two Member States is contrary to [European] Union law…Union law provides for a complete set of rules on investment protection…Member States are hence not competent to conclude bilateral or multilateral agreements between themselves”. The Decision concluded that “[f]or those reasons, ECT does not apply to investors from other Member States initiating disputes against another Member States”.

Finally, the Decision stated that if an arbitral tribunal awarded an investor compensation in respect of losses caused by Spain’s reform of the Special Regime, that would constitute state aid; and if Spain paid such an award, it would require EC approval. For good measure, the Decision stated that “this Decision is part of Union law, and as such also binding on Arbitration Tribunals, where they apply Union law. The exclusive forum for challenging its validity are [sic] the European Courts”.10)The Decision was considered in the Novenergia award and dismissed as irrelevant, since the tribunal held that they were not applying EU law, but rights arising under the ECT. jQuery("#footnote_plugin_tooltip_9170_10").tooltip({ tip: "#footnote_plugin_tooltip_text_9170_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

(b) In March 2018, the ECJ handed down its judgment in the Achmea case, holding that investor-state arbitration clauses in intra-EU BITs are not compatible with EU law. However, it is not clear whether this affects intra-EU ECT claims. The ratio decidendi appears to be that EU member states cannot derogate from the provisions of EU instruments, especially the Treaty on the Functioning of the EU, which provide for the primacy of EU law and the necessity for it to be tested in the courts of member states, by reference to the ECJ if necessary. However, in contrast to the Netherlands and Slovakia BIT which is the subject-matter of Achmea, the EU itself is a signatory to the ECT, and hence it can be argued that it has agreed to claims under the ECT being determined by the arbitration mechanism specified in the ECT. The EU clearly has the power to enter into arbitration agreements – c.f. the EU’s free trade agreements with third parties.

Nevertheless, the Decision and the Achmea judgment make it likely that any attempt to enforce an ECT award in an EU state will be resisted, e.g. under Article V(2) of the New York Convention (dispute not capable of settlement by arbitration/contrary to public policy). Investors may of course try to enforce outside the EU.

Where to now?

It remains to be seen if claimants will press ahead with their outstanding ECT claims against Spain and other EU states; or whether fresh claims will be commenced in another forum (and if so, what and where?). However, the Decision and Achmea may not necessarily be the death-knell for intra-EU ECT arbitrations that they might seem at first glance.

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References   [ + ]

1. ↑ At the time of writing, for example, around 30 ECT claims against Spain are underway 2. ↑ Charanne B.V. and Construction Investments S.á.r.l v. Kingdom of Spain (SCC Case No. V 062/2012) 3. ↑ Eiser Infrastructure Limited and Energia Solar Luxembourg Sarl v. Kingdom of Spain (ICSID Case No.ARB/13/36) 4. ↑ Isolux Netherlands, BV v. Kingdom of Spain (SCC Case No. V 2013/153) 5. ↑ Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic (ICSID Case No. ARB/14/3) 6. ↑ Similar arguments have been heard, and dismissed, in other cases, e.g. RREEF Infrastructure v. Kingdom of Spain (ICSID Case No. ARB/13/30) 7. ↑ The focus of the claim in Charanne. 8. ↑ Spain has applied for annulment for a failure to state reasons and a manifest excess of power, based upon the finding of a breach of Article 10(1) in circumstances where the tribunal held that Spain had a sovereign right to amend its legislation and had made no commitments as to a stable regulatory environment. Spain’s application also alleges that the claimant’s nominated arbitrator breached his obligation of independence and impartiality by failing to disclose a longstanding relationship with the claimants’ valuation experts. 9. ↑ In fact, they were still achieving a reasonable rate of return 10. ↑ The Decision was considered in the Novenergia award and dismissed as irrelevant, since the tribunal held that they were not applying EU law, but rights arising under the ECT. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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The Structural Implications of Belt-and-Road Arbitration: China’s Legal Gamble across Eurasia

Sun, 2018-03-18 21:00

Horia Ciurtin

The Belt-and-Road Initiative (“BRI“) is a grand vision about connectivity, infrastructure, trade and unimpeded foreign direct investment (“FDI“) flows. It is a path to China’s largest export market  – the European Union – which does not only propose to ‘transit’ Eurasia (and coastal East Africa), but to radically transform it. And, thus, mere construction and outpours of capital do not suffice for such an ambitious project. The scale and depth of the BRI require a substantial ‘investment’ in establishing a common normative nexus. For connectivity to actually exist as a functional feature of the project, it must also – on the long-term – take the shape of legal harmonization.

However, in this initial phase of the BRI, more modest objectives need to be achieved. And China has taken small – but firm steps – in this direction. Thus, while previously considered a problematic jurisdiction for arbitrating commercial disputes (and a difficult Respondent in investment litigation), China’s status has significantly improved in the last few years. As it envisions itself to rather be the source of investors and contractors along the Belt-and-Road (and not a destination for FDI), Beijing is seeking legal mechanisms to ensure the protection of Chinese companies’ interests abroad.

For this reason, China is well set on the course of strengthening CIETAC and also offering it – for the first time – a clear set of rules that will deal with investor-state disputes. However, if ADR as a whole is considered, it must be noted that China still favors mediation (usually state-to-state driven) as a manner of solving disputes, seeing arbitration as a measure of last resort. Nonetheless, it got involved in ensuring that this legal ultima ratio is circumscribed within a discernable pattern which is not so different from similar measures proposed by Western states. It might be a form of globalization with Chinese characteristics – as Beijing likes to portray it – but it does not diverge too much from the beaten track regarding international arbitration.

Returning to the BRI’s intrinsic (and necessary) relationship with arbitration, it must be ascertained that it is the only viable way to ensure a stable and predictable framework for solving disputes over such a large area, with dozens of different jurisdictions, legal cultures and diverging geoeconomic interests. Most of the states that will become part of the BRI are not consolidated democracies, lacking independent judiciaries and national courts that uphold the rule of law. And that might be a problem for Chinese investors which will – inevitably – face the risk of (creeping) expropriation or breaches of the FPS and FET standards. And thus, although arbitration might not be the preferred solution for China, it is the best answer to such systemic risks.

On the other hand, for companies along the Belt-and-Road that trade, construct and invest in the opposite direction, targeting the Chinese mainland as a destination for their goods and FDI, arbitration against China (and within China) still remains problematic. Especially on the enforcement side. The judiciary is sometimes less than collaborative and – although it might permit enforcement on a regular basis – it strongly takes into consideration matters of public policy and personal ties to the Party members involved. Most large Chinese private entities are linked with the Party nomenklatura one way or another, representing a matter that BRI investors need to carefully take into account.

In this sense, China might seek to improve some procedural aspects of arbitration within its territory, but it will stick to its ‘systemic’ approach of favoring state-owned entities and Party-linked companies, even by making enforcement against them extremely difficult. On the short term, it is unlikely that significant improvements will take place where there are high stakes involved. Especially if they are in any way linked to the political scene. However, what can be expected is a more predictable framework and improved procedures in the statutes. How they will work in practice, it is difficult to tell.

Thus, even the recent enactment of the CIETAC ‘investment arbitration rules’ seems to be – at this stage – more an exercise in wishful thinking and PR for the BRI. Its practical effects upon existing BITs from the third generation that offer ICSID rules or UNCITRAL rules as possibilities. But such new rules might – nonetheless – impact the manner in which the Belt-and-Road contracts and treaties will be further modelled. If ‘legal traditions’ and ‘customs’ are taken into consideration when developing the arbitration framework, that will give a high margin of appreciation to the arbitrators that will be called to rule upon those disputes. Of course, if China has sufficient leverage on one country, it can renegotiate the existing BIT and introduce a mandatory reference to its new rules, but it is unlikely that many states will switch ICSID or UNCITRAL rules for CIETAC. Or choose an arbitral seat anywhere in Chinese mainland territory.

And that is why the Belt-and-Road is dependent upon a ‘string’ of regional arbitral venues that fulfil all the impartiality and quality requirements for every party involved. More precisely, in East and Southeast Asia, Hong Kong proves to be an excellent choice for the seat’s jurisdiction when arbitrating with Chinese entities. Its legal system comes from a long Anglo-Saxon tradition of upholding the rule of law and an independent judiciary. The quality of the arbitral institutions is extremely high (see the HKIAC, ICC-HK), as well as of local arbitrators. The enforcement is quite swift (compared to mainland China) and it is within the bounds of what a Western-based investor would expect. In addition, for this region, the Singapore International Arbitration Centre is also a good choice, benefitting from the same qualities as Hong Kong and – even more – a total disconnection with Chinese authorities.

On the other hand, in Central Asia, the Middle East, the Balkans or Eastern Europe, the offer is quite scarce. The projected arbitral venue in Astana is still just in blueprint phase, while Moscow and Teheran do not have a consistent track record in large commercial arbitration (and no experience in investment disputes). That could, perhaps, leave Istanbul on-route and – for the BRI end-point – one could consider the Vienna International Arbitral Centre. Otherwise, almost all other parties will consider using Hong Kong, Singapore or a traditional Western-based institution.

For these reasons, China must seriously invest in developing a network of sister-institutions along the entire BRI, each having a regional focus. Unitary rules could be adopted, drafted along the UNCITRAL ones, but with additional provisions that allow the BRI specifics to emerge. CIETAC ones might work just fine for Chinese companies that wish to settle a dispute against foreign entities or sovereigns, but they could prove insufficient and inadequate for a litigation going the other way round. And that is where such regional centers – ‘decoupled’ from China’s state apparatus – need to emerge. As a measure to build confidence and to symbolically reveal all other parties that Beijing is accepting to be bound by clear and transparent rules, well beyond its jurisdiction.

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Tips from the Top: Young ICCA interviews Augustin Barrier, Lalive

Sun, 2018-03-18 02:18

Young ICCA

Young ICCA

1. What drew you to the world of International Arbitration?

I never had an epiphany regarding International Arbitration. I was drawn to it one small touch at a time, during internships. It started with discussing the field with fellow interns. I was from time to time asked to assist briefly on arbitration cases during a more intense period where the team was not sufficient to deal with the existing workload. These experiences progressively resulted in a certain attraction to the field.

2. When did you start laying the groundwork for a career in International Arbitration? (e.g., was it while in law school, during a moot court, during your career or placed on a case within your firm)

I have been playing hide and seek with International Arbitration for a while. Although familiar with arbitration thanks to my studies, I was not particularly interested in the field, from an academic point of view. If I had to pick a specific time when I really started thinking about a career in International Arbitration, it would be a course, in which the professor assigned us on a specific case, which we would have to summarise for the class and eventually defend one of the parties’ position. I was randomly assigned to an ICC arbitration case. While reviewing the materials and getting familiar with the facts and the procedure for the presentation, I felt like this was the type of work I would gladly be doing.

3. What kind of groundwork did you do to set yourself up? (e.g., what steps did you take to enter the field?)

As my appetite for the field grew over time, I started applying for intern positions focusing on international dispute settlement, including international litigation and arbitration. I also attended many conferences available for young practitioners, in order to meet more experienced players and discuss their experience.

4. Describe a pivotal moment in your career in arbitration and how did that affect your career (e.g., an opportunity to work with a prominent arbitrator/on a pioneering case?)

I remember a case, which started as a regular construction case, in which we represented the claimant against a State party in relation to a medium-size housing project. The parties had already exchanged a significant amount of correspondence, which made their respective positions rather transparent. The case appeared straightforward. However, during the process of appointing the arbitral tribunal, the respondent suddenly decided to use all guerrilla tactics in the book in order to derail the arbitration. On the same day, the local representatives of our client were arrested and deported, the State called all the performance bonds, which triggered cascading calls of first demand bank guarantees in several countries, and initiated criminal proceedings for alleged fraud in no less than three jurisdictions and a commercial case before its own courts.

Our client was obviously shocked and asked us to react on all fronts as swiftly as possible. In the blink of an eye, the case had transitioned from a solid monolithic dispute to a myriad of smaller cases in multiple jurisdictions, which we had to supervise and keep coherent, while trying to expedite the appointment process in the main arbitration case. After several months of efforts, we managed to get a tribunal appointed as well as emergency measures that forced the other side to put a halt to the various proceedings it had initiated. The case then moved on peacefully as initially anticipated. This thrilling episode made me realise that, not only is predictability alien to International Arbitration, but also that, to fully support and defend a client, an arbitration practitioner must be ready to wear as many different hats as circumstances dictate, simply because no one else will.

5. If we look at arbitration as a battlefield, what are the three metaphorical weapons any lawyer needs, and why?

Always simultaneously having one eye for the overall battle plan and one for the details of the operations, as well as an intact intellectual curiosity. Regardless of seniority, it is necessary to know the overall strategy of the case, even when assigned tasks that seem small and limited in scope. To make even the simplest tasks meaningful, one needs to know where they fit in the grand scheme of things. Attention to detail is essential and can make a huge difference when it comes to winning very complex cases. Finally, curiosity is, in my view, what makes a good practitioner. Being willing and ready to enter a whole new field for each new case is key. It is tempting to seek assignments on lines of similar cases, in which one has gained expertise. However, getting acquainted with new sets of facts, substantive laws and industries is what makes International Arbitration truly challenging and unique.

6. Upon reflection, are there any decisions you made that you feel aspiring arbitration practitioners could learn from?

When I started working, I managed to share my time between arbitration and domestic litigation for almost three years. Although I ended up focusing on International Arbitration, I do not regret having made this initial decision and the experience gained as a result. One may sometimes get the impression that International Arbitration exists and may be studied and practiced in a vacuum. However, the fundamental principles, which guide arbitration proceedings are similar as those guiding domestic proceedings. The procedural tools that the parties are free to devise and agree on in international arbitration, which make the field so rich and diverse, frequently come from domestic litigation. Having practised commercial and criminal litigation on the side, an arbitration practitioner is bound to benefit from decades of procedural creativity and guidance developed in a specific legal system.

7. Is there any additional candid advice or insight that you can offer to assist those who are entering the field, deciding whether to enter the field, or already are in the field of International Arbitration?

Knowing from the beginning that you are attracted to International Arbitration is a considerable strength. Students can plan ahead and shape their academic curriculum in accordance with their goal. However, some can be tempted to cut corners and neglect an essential feature of what makes a good arbitration practitioner: actual legal skills. Having an in-depth knowledge of International Arbitration as a field is of course very important. However, it is necessary to have legal instincts that one can only develop on the basis of a thorough knowledge of a domestic legal system. Things like statute of limitations, mandatory rules, defective consent are not identical throughout legal systems, but often share similar features. The instincts and reflexes gained by studying your own legal system thus generally pay off, even when you are confronted with an applicable law that you have neither studied, nor practiced.

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After Achmea: The Need for an EU Investment Protection Regulation

Sat, 2018-03-17 03:22

Nikos Lavranos

The Achmea judgment, passed on the 6th of March 2018, and addressed in the Kluwer blog posts available here and here, prompted us to think about what could be the way forward for an effective investment and investor protection within the EU.

Now that the CJEU decided that investment treaty arbitration based on intra-EU BITs is not compatible with EU law, the focus of attention must now shift towards the domestic courts of the Member States as the guardians of protecting the rights of European investors.

The question arises which legal instruments can be invoked by investors before domestic courts?

Obviously, domestic laws, including constitutional law. Since the domestic laws of the Member States differ, the level of protection will vary, thereby leading to a discriminatory treatment of investors and to varying degree of protection in the respective Member States.

In addition, investors may be able to rely on EU law, including the EU Charter of Fundamental Rights and the European Convention on Human Rights, as far as it is incorporated in domestic law or via reference by the CJEU jurisprudence.

Finally, as long as the existing intra-EU BITs are not terminated, investors should still be able to rely on the substantive protection standards contained in those BITs before domestic courts, since the BITs are part of the domestic legal order of the Member States. Accordingly, domestic courts have an extensive toolbox of instruments available enabling them to provide investors with the necessary legal protection.

However, the reality is that in many Member States the judicial system is slow, malfunctioning, corrupted and under political control or pressure. The 2017 EU justice scoreboard, which the European Commission publishes every year, illustrates the shortcomings in the judicial systems of the Member States. Hence, in reality, domestic courts currently are often not an effective alternative for European investors.

One way to improve the situation could be to draft and adopt an EU regulation on investment protection that would incorporate the substantive and procedural standards currently contained in the gold standard BITs, such as in particular the Dutch BITs.

Accordingly, this regulation would contain the Fair and Equal Treatment, Most-Favored-Nation, National Treatment standards as well as an (in)direct expropriation with full compensation provision and an umbrella clause. The procedural standards would include specified timelines for concluding the proceedings and guarantees for the impartiality and independence of domestic courts.

The main advantage of an EU regulation would be that it would be directly applicable in all Member States, without any implementing acts necessary, and would have a legal status that would be superior to all laws and even the constitutions of the Member States. In this way, the EU could with immediate effect create a harmonized system of investment and investor protection within the EU – at least on paper.

In addition, now that the European Commission has successfully concluded its crusade against investment treaty arbitration based on intra-EU BITs, it is particularly responsible for effectively and significantly improving the judicial systems, and more generally, the Rule of Law in the Member States. This would not only benefit foreign investors, but also domestic investors and all EU citizens generally. Indeed, this would be a positive contribution, which might help improve the rather poor image of the EU, which it has in broad sections of the EU population.

In sum, while the Achmea judgment certainly was not helpful from the perspective of the protection of fundamental rights and the Rule of Law, it does provide for the EU an opportunity to deliver something positive and thereby increase trust and legal certainty. This, in turn, may also boost the desperately needed foreign and domestic investments in the Member States, and thus create jobs.

It remains to be seen whether the European Commission will propose such a regulation on investment protection, or instead continue its rather destructive approach against the remaining investment treaties such as the ECT and the 1500 extra EU BITs of the Member States.

 

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BOOKED for 17 March 2018: BREXIT – anti-suit injuctions

Sat, 2018-03-17 03:14

Patricia Živković (Associate Editor)

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The Death of ISDS?

Fri, 2018-03-16 00:48

Sergio Puig

ITA

For many years, investor-state dispute settlement (ISDS), supported by thousands of bilateral investment treaties (BITs), has served as the main mechanism for deciding investment disputes. This controversial system permits affected investors to sue states for damages before arbitral panels on the grounds that their investments have been treated unfairly. For many commentators, the main problem with the current system is that it is based on a model of commercial arbitration with ad hoc tribunals consisting of party-appointed arbitrators and limited oversight even though it implicates public law and policy. These tribunals lack any appeal process that can provide interpretative guidance (other than a narrow annulment process), giving rise to inconsistent results that, it is charged, violate basic rule of law norms. While serving as arbitrators, the professionals also represent clients, thus wearing “double hats,” raising challenges to their legitimacy and impartiality.

In response to increased critique of this system, countries and commentators have proposed a range of alternatives involving more or less judicialization. On one side, the E.U. has promoted a two-tiered multilateral investment court alternative before which investors would have a private right of standing. On another side, Brazil and others have proposed alternatives involving mediation, possibly backed by state-state dispute settlement processes, or public enforcement in which the state decides whether to espouse an investor’s claims, thus screening the claims that are brought. Yet, the international court system (ICS) has drawn unparalleled attention.

To be sure, this is not the first time that a foreign investment courts is proposed. In fact, the 1974 Convention of the Settlement of Investment Disputes between Host States of Arab Investments and Nationals of Other Arab States (superseded by the Unified Agreement in 1981), called for the creation of the now active Arab Court of Investment. Unlike such regional effort, the proposed new system has the potential and the political backing to extend beyond a discrete geographical region and be widely used. Though subject to many hurdles, it has a running chance of replacing the current ISDS system. At its core, the new ICS would create permanent bodies, consisting of a court of first instance and an appellate court, with the judges nominated from a pre-vetted list of panelists who will be bound by rules that eliminate or severely limit the ability of judges to also serve clients (“double hatting”), among other important innovations. The EU has already crystallized its proposal in new free trade agreements signed with Canada (in October 2016) and Viet Nam (in December 2015), and it proposes the ICS alternative in its current trade and investment treaty negotiations, including with the United States under the proposed Transatlantic Trade and Investment Partnership (TTIP).

The implications of the proposed ICS model need to be carefully thought through and debated. The issue of structural bias in the different models is a critical aspect to be assessed. So far however, the important issue of deciding who decides on investment disputes has been insufficiently nuanced as it has almost entirely focuses on comparing the potential ICS with ISDS, the current system in place. This comparison is understandable given the attention that ISDS attracts among legal scholars and uneasiness among civil society organizations. But, these are only two types of alternative forms of adjudication, and other non-adjudicatory options also exist, such as market mechanisms (i.e., insurance for political risk, and ad hoc state-investor contractual negotiations). While I believe that an adjudicatory mechanism makes much sense, the question is not whether ICS is more or less bias than ISDS, but rather what the relative tradeoffs of them are—their merits and limitations—compared to a range of other institutional alternatives.

In a forthcoming Article, Greg Shaffer (UC-Irvine) and I explore this question and present a conceptual framework for assessing governance mechanisms of investment adjudication comparatively. We chart the myriad ways in which different options allocate decision-making authority and the tradeoffs resulting from each choice. Unlike most critics of the ICS proposal, we argue that the issue is not whether biases exist in such a system, but rather, how it compares to its non-idealized alternatives, including ISDS in terms of particular goals: fairness, peace, and efficiency. We argue, not without important caveats, for the serious consideration of the ICS as well as other mechanisms for investment dispute settlement, including an improved (and more constrained) version of the current ISDS system.

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Is International Arbitration in a Race to the Top?

Thu, 2018-03-15 01:35

Catherine A. Rogers

Before answering the titular question, let’s start with the more basic question: What is a race to the top? The phrase seems self-explanatory. It is a compelling and vivid metaphor that has by now entered to the public lexicon. But the phrase “race to the top” originated as a counterpart to the more ominous phrase: “race to the bottom.”

The concept of a race down to bottom is often credited to two 1930s US corporate law scholars, Adolf Bearle and Gardiner Means. They used the phrase to describe a potential negative consequence when individual states in the United States compete to attract businesses to incorporate or reincorporate in their states.

Berle and Means hypothesized that, to increase their revenue by attracting more corporations, states would relax their corporate laws, including those that regulate corporate governance, disclosure obligations, minimum capitalization requirements, and the like. Corporations, the theory goes, would be drawn to those jurisdictions with the most appealing (TRANSLATE: most lax) corporate law, leading to a systematic decline in corporate governance standards as states raced downward to outdo each other.

By the 1970s, corporate law scholars developed a competing hypothesis about the effect of US corporate regulatory competition. Instead of a race to the bottom, they argued, regulatory competition would produce a race to the top. States would compete not (or not only) to develop more lax corporate law rules. They would compete to develop rules that accommodate corporate efficiency and promote more effective corporate governance. In racing to the top, these scholars point to development of specialized commercial courts, of protections against hostile takeovers, of efficiencies that reduce the cost of capital, and the like.

All these years later, scholars are still hotly debating whether regulatory competition in US corporate law is leading to a race to the top or a race to the bottom. While interesting, we now will leave the debate about corporate law to the corporate law scholars, and instead turn back to what these concepts might mean in international arbitration. The first question is whether and to what extent regulatory competition exists in international arbitration.

The most obvious parallel to US states competing to be chosen as the seat for corporations is nation States competing to be chosen as the seat for arbitrations.1)In the United States, unlike many civil law jurisdictions, a corporation can be incorporated or have its legal “seat” in one state but have its principal operations in another. Although apparently coincidence, both corporate law and international arbitration use the term “seat” to describe the juridical home, which can be separate from a company’s operations in corporate law, or the location of hearings for an international arbitration. jQuery("#footnote_plugin_tooltip_9666_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9666_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Back in the 1980s, Rusty Park identified a “scramble among Western European nations” to compete for international arbitration business.2)William W. Park, ‘National Law and Commercial Justice: Safeguarding Procedural Integrity in International Arbitration’, 63 Tul. L. Rev. 647, 680 (1989) jQuery("#footnote_plugin_tooltip_9666_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9666_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Today, that scramble is not only in Western Europe, but also in Asia, Latin America, the Middle East, and Africa. States compete by signing on to the New York Convention, by enacting new international arbitration laws (most typically some version of the Model Law), by (in some instances) funding new arbitration facilities or judicial training, and by removing legal obstacles to foreign attorneys appearing in locally seated international arbitrations. Meanwhile, national court decisions on arbitration are systematically reported in industry publications and subject to global scrutiny. Decisions that support the efficacy of international arbitration are lauded, while those decisions that unduly favor local interests or misapply New York Convention or the Model Law are derided.

The result of all this regulatory competition among States appears to be a race to the top, where the summit is effective and predictable enforcement of arbitration agreements and awards, and reduced judicial and State interference with arbitral proceedings. But States are not the only entities competing in international arbitration.

Apart from States, arbitrators compete for appointments, attorneys compete for clients, institutions compete to administer proceedings, experts compete to provide opinions, various arbitration organizations and academics compete to influence developments in the field, third-party funders compete to finance cases, and the parties compete to prevail in the substantive disputes. Does some or all of this competition involve some form of “regulatory competition?”

The answer to that question turns on the definition of “regulation.” While the term is often used in common parlance to refer to government imposed rules, competition in international arbitration is not limited to conventional forms of States-sponsored regulation. Given States’ intentionally limited role, other sources order most aspects of international arbitration. And, for the purposes of this discussion, many of those sources would constitute “regulation,” at least as that term is understood under broad definitions. For example, Professor Julie Black defines “regulation” as “the sustained and focused attempt to alter the behaviour of others according to defined standards or purposes with the intention of producing a broadly identified outcome or outcomes….”3) Julia Black, Critical Reflections on Regulation, 27 Austl. J. Legal Phil. 1, 26 (2002) jQuery("#footnote_plugin_tooltip_9666_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9666_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In addition to reforms by States, rules promulgated by arbitral institutions would easily fit within this definition. Arguably, so would sources of soft law, such as Guidelines promulgated by entities like the IBA, and potentially certain decisions by arbitrators.

To take stock of where we are, competition exists in international arbitration not only among States, but among other sources generate different forms of regulation. Before considering whether this regulatory competition will lead to a race to the top or a race to the bottom, let’s consider what the bottom would look like.

The bottom is where parties can use international arbitration to launder money and enforce illegal contracts. The bottom is where arbitrators can fail to disclose known conflicts of interest confident that “pro-arbitration” courts will nevertheless enforce the award, and where arbitrators can take years to render an award reassured that complicit institutions will look the other way and the opacity of the system will hide these indiscretions from public glare. The bottom is where attorneys can engage in any form of guerilla tactics, including knowingly presenting false evidence to the tribunal, without any objection from the arbitrators who want to preserve their potential future appointments from those attorneys. And finally, the bottom where third-party funders recruit leading arbitrators, tout their affiliation, but then adamantly deny even the possibility of a conflict of interest and the need for disclosure.

While the bottom certainly looks bleak and dismal, it does not seem to be where we are headed. To illustrate that, instead, international arbitration appears to be racing uphill, let’s examine, first, competition among arbitral institutions and, second, sources that regulate arbitrator conduct.

Just as more States are joining the completion to host arbitrations, more institutions are competing to be selected to administer those arbitrations. This competition among institutions has both prompted and been pushed by greater transparency so that the relative strengths of institutions can be assessed by parties and attorneys. For example, we see institutions not only publicizing rule changes, but also more detailed statistics about costs, duration, and diversity and other variables about arbitrators. This transparency has made competition among institutions more possible and obvious, prompting in turn a rather fantastic and break-neck pace of reforms to make arbitral proceedings more effective and efficient.

For example, 10 years ago, the availability of interim relief in international arbitration was uncertain, the concept of an emergency arbitrator was virtually unheard of, and the notion of consolidation was pretty much unthinkable. But the need for these innovations, and the perceived advantage of enacting new rules to respond to these needs, has fueled a race among institutions to produce new rules facilitating these practices.

Now let’s turn to competition with respect to regulation of arbitrator conduct. Variables that affect this race are parties’ interest in winning, arbitrators’ interest in lots of appointments (with as little work, as much discretion, and as little oversight as possible), and national courts’ interest in demonstrating that they are “arbitrator friendly” by enforcing awards. Add to these features the fact that historically arbitrators not only lead but were more directly involved in the daily management of institutions. In that context, we might imagine an incentive to accommodate fellow arbitrators and help them (and the institution) avoid embarrassing challenges. Moreover, historically arbitrator disclosure obligations were governed by vague standards such as “justifiable doubts” about independence and impartiality. Under these standards, arbitrators enjoyed broad discretion in deciding whether to disclose or consider themselves disqualified. Under these standards, parties were in a precarious position in deciding whether to raise a challenge because they could not know the likelihood of that challenge’s potential success. In the absence of countervailing forces against these factors, the race downhill would be on. Instead, arbitral institutions put the brakes on.

Arbitral institutions generally manage arbitrator challenge and disqualification processes—it might be reasonable to estimate that as a practical matter institutions are the final word on 90% or more of challenges. In fulfilling this function, institutions have introduced some important regulatory innovations. Most notably, institutions competitively (lead by the LCIA) began publishing results of disqualification decisions under their rules. Publication of such information was not only a means of increasing transparency, which is a prerequisite for healthy regulatory competition, but also in itself a form of regulation—parties and arbitrators could look to these rulings to assess future conflicts.

Another important innovation was introduction of the IBA Guidelines on Conflicts of Interest in International Arbitration, which were first enacted in 2004 and later revised in 2014. The IBA Guidelines both expanded the bases for disclosure and transformed vague, value-laden qualitative terms into fact-based quantitative terms. Clearer, fact-based criteria reduced arbitrator discretion in determining what constitutes a disclosable conflict. For example, an arbitrator has much more discretion in deciding whether repeated appointments by a party raise justifiable doubts about the arbitrator’s impartiality than in determining whether the arbitrator has had three appointments in the past two years under Guideline 3.1.3. This reduction of arbitrator discretion limits the potential for less scrupulous arbitrators to exercise discretion unwisely, to benefit their own interest (to get or retain an appointment) instead of the parties’ interest in having a conflict-free tribunal.

I do not have space here to develop fully a thesis about regulatory competition in international commercial arbitration. From the examples above, however, the preconditions that seem essential to produce a race to the top may be summarized as follows:

1) The market is dynamic and sufficiently transparent;

2) Stakeholders in the market enjoy a shared sense of their collective, long-term self-interest;4)It is beyond the scope of this blog to consider whether international investment arbitration is similarly in a race to the top, and certainly some critics would seem to suggest it is instead on a race to the bottom. In examining why two similar processes could have different vertical trajectories, the absence of a shared sense of collective self-interest in investment arbitration is an important consideration. jQuery("#footnote_plugin_tooltip_9666_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9666_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and

3) Regulation effectively recalibrates the balance when stakeholder incentives undermine the shared collective self-interest.

In a future publication, I hope to explore in more detail the function of these preconditions and the effect they have on various sources and forms of regulatory competition in international commercial arbitration.

This discussion was originally presented, in a slightly different form, as the keynote address for the 2018 Cambridge Arbitration Day. For this reason, it is fitting to close by identifying one last area of competition that is not among regulators, but is nevertheless important: competition among law school sponsored arbitration days. Over the years, I have been fortunate enough to participate in many such events at Harvard, Columbia, University of Pennsylvania, Penn State, Georgetown (which has now expanded to an arbitration month!), as well as Oxford and most recently Cambridge. Law school arbitration days bring a unique energy, eagerness, and curiosity to the otherwise constant drumbeat of international arbitration events. They bring fresh perspectives and an optimism about new opportunities as young aspirants seek not only to learn, but to imagine what might be possible in their professional futures. The enthusiasm and thoughtfulness of these young practitioners will undoubtedly fuel international arbitration in its continued race to the top.

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References   [ + ]

1. ↑ In the United States, unlike many civil law jurisdictions, a corporation can be incorporated or have its legal “seat” in one state but have its principal operations in another. Although apparently coincidence, both corporate law and international arbitration use the term “seat” to describe the juridical home, which can be separate from a company’s operations in corporate law, or the location of hearings for an international arbitration. 2. ↑ William W. Park, ‘National Law and Commercial Justice: Safeguarding Procedural Integrity in International Arbitration’, 63 Tul. L. Rev. 647, 680 (1989) 3. ↑ Julia Black, Critical Reflections on Regulation, 27 Austl. J. Legal Phil. 1, 26 (2002) 4. ↑ It is beyond the scope of this blog to consider whether international investment arbitration is similarly in a race to the top, and certainly some critics would seem to suggest it is instead on a race to the bottom. In examining why two similar processes could have different vertical trajectories, the absence of a shared sense of collective self-interest in investment arbitration is an important consideration. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Challenging Arbitral Awards before the Singapore Courts for a Tribunal’s Failure to Give Reasons (Part 2 of 2)

Wed, 2018-03-14 07:00

Jordan Tan and Andrew Foo

Professor Stacie Strong has noted on this blog that “[c]ritics of international arbitration often express concerns about the quality of legal reasoning in arbitration, even though conventional wisdom…suggests that international arbitral awards reflect relatively robust reasoning that is often on a par with that of decisions rendered by commercial courts” .

 

However, adopting a more close-up view, it is the users of arbitration themselves who are often most directly affected by the quality of an arbitral tribunal’s reasoning in its award.  Take the example where, at the end of a lengthy and complex arbitration, the tribunal issues an award that summarises the evidence and submissions of both parties, and concludes with a single paragraph that states, “For the reasons given by the Claimant, which are accepted by this Tribunal, the claim is allowed in full.” Can an award of this nature be set-aside for lack of reasons?

 

In the first of this two-part series, we examined the arbitrator’s duty to give reasons.  This second part of this series examines the remedies parties may seek in cases where this duty has been breached, in particular with respect to the following two issues.

 

  1. Is a party seeking to set-aside an award for lack of reasons obliged to first apply for an additional award?

 

  1. What is the appropriate remedy where an award lacks reasons?

 

It concludes with a number of key practical tips for arbitrators and users of international arbitration.

 

Obligation to First Apply for an Additional Award?

Under Singapore law, pursuant to Article 33 of the Model Law and section 43 of the Arbitration Act (for awards emanating from international arbitration and awards emanating from domestic arbitration, respectively), a party to an arbitration is entitled to request the arbitral tribunal to make an additional award.  This position is similar to that under the laws of other leading jurisdictions for arbitration, e.g. England and Wales (cf. s57 of the English Arbitration Act 1996) and Hong Kong (cf. s69 of the Hong Kong Arbitration Ordinance (Cap. 609).

 

One may therefore attempt to argue that a party should be obliged to first apply for an additional award, before applying to challenge an arbitral award for lack of reasons – and that if a party has not first applied for an additional award within the statutory timeframe, it should be barred from challenging an award for lack of reasons.

 

However, it is clear that a failure to first apply for an additional award is no bar to an application to set aside an award for an arbitral tribunal’s failure to give reasons.

 

  1. In BLB v BLC [2014] 4 SLR 79, the Singapore Court of Appeal in considering Articles 33 and Articles 34 of the Model Law, recognised that requesting an additional award was optional – something a party “may” seek.

 

  1. The Court also observed at [116] that the risks of failing to first apply for an additional award are as follows:

 

…whilst a party is not obliged to invoke Art 33(3) [i.e. to request an additional award], he takes the risk that the court would not, in a setting-aside application, exercise its discretion to set aside any part of the award or invoke the powers of remission under Art 34(4) of the Model Law… [emphasis added].

 

  1. Where the Arbitration Act is concerned, the legislative drafters have expressly made the exhaustion of recourse under section 43 (including requests for additional awards) a prerequisite to a section 49 appeal (see s50 titled “Supplementary provisions to appeal under s 49” at s50(1)(2)(b)). The legislative drafters did not make this a requirement for a section 48 setting aside application. The expressio unius est exclusio alterius maxim applies to prevent the Court from judicially ‘legislating’ the equivalent of section 50 for section 48.

 

***

 

Appropriate Remedy

If an applicant is able to establish that a breach of the duty to provide adequate reasons warrants setting aside the award or a part of it under section 48(1)(a)(v) of the Act, or if the inadequacy of reasons forms the applicant’s primary complaint about the award, what is the appropriate remedy?

 

The key question is whether the Court should set aside the award, or remit it back to the tribunal, as it is empowered to do under Article 34(4) of the Model Law and section 48(3) of the Arbitration Act.

 

There are a number of competing considerations.

 

In favour of setting aside the award is the overarching point that if the courts resort to remission too readily, this practice may undermine key principles of arbitration: party autonomy, minimal curial intervention, and arbitrator discipline.

 

  1. Party autonomy: When a party succeeds in establishing that an arbitrator has breached his duty to give adequate reasons, that party’s dispute-resolution bargain has been breached. Arguably, the party is therefore entitled to have the dispute resolved in accordance with its bargain, by having the award set aside.

 

  1. Minimal curial intervention: Remittance is a classic case of curial intervention with the arbitral process, in particular the tribunal’s decision-making process.

 

  1. Arbitrator discipline: Regular remittance may reduce the motivation for arbitrators to be thorough and diligent in setting out their reasons, since they know that the court will likely give them a second bite of the cherry should they fail to do so.

 

However, in favour of remission is the fundamental benefit of self-correction. Remission of an award enables the arbitral process to correct itself before the severe stage of setting aside is reached. Indeed, a case of inadequate reasons can be said to be the paradigm case for remission.

 

  1. Assistance to the Court. Remission may allow the supervisory court to better determine whether an award should ultimately be set aside. This is because inadequacy of reasons in an award directly affects the court’s ability to determine whether any other grounds for setting aside the award are well‑founded (e.g. whether there has been a breach of natural justice, failure to give a party the opportunity to be heard).

 

  1. Finality unaffected. Remission typically does not require the re-opening of proceedings which have closed, e.g. for additional disclosure, evidence or submissions. Remission also cannot result in any change of outcome on the merits, and there is therefore no direct impact on the finality of the award.

 

  1. Time and costs. Generally, the cost and delay of going back to the tribunal on a remission for it to provide additional reasons is likely to be less than the cost and delay of starting fresh proceedings in respect of the matters covered by the award if the award is set aside.

 

It may therefore be preferable to remit an award as the first resort, in a case where the only or primary ground for setting aside which has been established is inadequate reasons, rather than require the parties to re-arbitrate their dispute.

 

This conclusion is supported by the judgment of Lord Phillips of Worth Matravers MR for the English Court of Appeal in English v Emery Reimbold & Strick Ltd [2002] 1 WLR 2409 at [24]-[25], albeit given in the context of litigation:

 

Where the judge who has heard the evidence has based a rational decision on it, the successful party will suffer an injustice if that decision is appealed, let alone set aside, simply because the judge has not included in his judgment adequate reasons for his decision. … If an application for permission to appeal on the ground of lack of reasons is made to the trial judge, the judge should consider whether his judgment is defective for lack of reasons, adjourning for that purpose should he find this necessary. If he concludes that it is, he should set out to remedy the defect by the provision of additional reasons refusing permission to appeal on the basis that he has adopted that course…

 

***

 

Conclusion

 

As stated in the first of this two-part series, arbitrators should be conscious of their duty to render adequately reasoned awards. They should not regard the appointment of experts as exculpatory of the arbitrator’s duty, and, in giving reasons, should go beyond mere regurgitation of evidence / submissions.

 

Ultimately, arbitrators can expect the analysis set out in their awards – and in particular, any lack thereof – to be closely scrutinised by the parties, and potentially, the courts. The courts can, and will in the appropriate circumstance, remit awards back to arbitrators, to provide supplemental reasons for their decisions within a stipulated timeframe.

 

On the other hand, parties should be made aware that if they are unsuccessful in an arbitration, they should carefully scrutinise not only the arbitral procedure, but also the tribunal’s reasoning in its award. They should also properly consider the remedies that may be available – and in particular, whether they can request the remittance of the award back to the arbitral tribunal.

 

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Finally, Iraq Says Yes to the New York Convention.

Tue, 2018-03-13 02:58

Noor Kadhim (Assistant Editor for the Middle East)

 

It has been on the cards for many years. But on 6 February 2018, days before the Kuwait reconstruction conference, the Iraqi cabinet officially agreed to endorse the ratification of New York Convention of 1958 and table it with Parliament. The decision finally to accede to the treaty coincides with the eradication of Da-esh (ISIL) terrorist cells from the last of their strongholds in the north, and the perception that the country has consequently become ‘safer to invest in’. The World Bank has also significantly contributed to the efforts in this turnaround, in the last few months.

Although Iraq has in principle accepted for a long time, at least in theory, that the New York Convention is necessary (see my blog post) the timeline for its accession has only recently been given attention. As such, accession will be subject to the non-retroactivity exception: it will apply only to contracts arising post-ratification of the Convention.

As explained above, it is no coincidence that the decision to ratify the treaty precedes the International Conference for Reconstruction of Iraq which was organized by the World Bank and co-chaired by the European Union, and convened in Kuwait on 12 -14 February 2018. The objectives of the reconstruction programme are set out in a framework paper issued in the same month (Framework). The conference garnered commitments from international investors to provide Iraq with a sizeable (over £30 billion) reconstruction package. The commitments emanated from different regions globally, including the United States and Europe. They were also linked to and supported by the World Bank and IMF commitments to Iraq.

Amongst the largest ‘donations’ agreed by international investors were loans. The biggest donors included the United Arab Emirates ($5.5 million in guarantees for investments), the Islamic Development Bank, the European Union,Britain (considerable export credits) and the Kingdom of Saudi Arabia. The United States agreed to provide over $3 billion in loans and financing to American firms wishing to invest in Iraq. The financing is complicated and the figures reported in the press do not give an accurate picture, but consensus is that the package represents a major commitment from those involved. The five recovery ‘pillars’ include strengthening economic development. As part of this pillar, at chapter 3 of the Framework, Iraq’s reform priorities include “improving the business and investment environment”. Pillar 1, governance, also places emphasis on the need to promote accountability, equity and fairness.

It is clear, therefore, that the Kuwait conference is a crucial backdrop to the New York Convention decision. In fact, it is understood from internal sources that one of the World Bank’s conditions was that Iraq approve ratification of the New York Convention, prior to agreement of the reconstruction package. This is because one of the first things that investors would have been asking is: what if everything goes pear-shaped in Iraq again? What if the billions of dollars invested in the country fall into the wrong hands, the business environment rapidly alters, or the Iraqi counterparties (whether they are State-affiliated, or private companies) breach their contracts?

Some of the deals being negotiated are complex and cross-jurisdictional, and include multi-faceted financing arrangements. For instance, Iraq aims to enter into significant export credit agency financing agreements whose counterparties will include the Ministry of Finance, major banks (JP Morgan and Deutsche Bank), and export credit agencies. The financing components will be governed by English law – but will also need reliable jurisdictional (forum selection) clauses. The funding arrangements should also not lose sight of another crucial feature of the reconstruction agenda: boosting the private sector. One of Iraq’s main goals is to increase its non-oil revenue (currently less than 10%). The issue is that capacity building will take time. As a result, many of the contracts to be negotiated off the back of these financing deals will be fraught with obstacles and with unknowns.

Therefore, given the value and significance of the Iraqi projects and their connected international financial commitments, donors and investors need assurance that if any disputes arise, they will be resolved in a neutral forum (arbitration) and that the resulting award will be enforceable in the local courts, and subject to avoidance only on limited and objective criteria. The New York Convention, if observed correctly, should guarantee the second and most vital step of this process: enforcement. Accordingly, a condition of the investments and loans was that Iraq provide legal comfort to businesses through its accession to the New York Convention.

One recalls that Iraq signed and acceded to the ICSID Convention of 1965 last year (see my second blog post). Currently, there are two ICSID cases proceeding against Iraq: Ittisaluna Iraq LLC and Others, and Agility Public Warehousing Company K.S.C. (both telecommunications cases). These cases are discussed by reference to the investment law context in Iraq, in this third blog post.

ICSID provides legal assurance to qualifying investors with qualifying investments in Iraq, where disputes arise over those investments. The restrictions, of course, are that not every investor will be a qualifying one (they need to be nationals of a state that has also signed up to ICSID). Also, not every investment will qualify (one-off sales contracts will not normally meet the requirements for an ‘investment’, for example). In addition, the investor needs to have contracted with Iraq directly or an entity whose actions are directly attributable to the State. If there is no direct contract that mentions ICSID, a treaty would need to be utilised. Currently, there are only three bilateral treaties in force between Iraq and third states: Japan, Kuwait and Jordan. As such, the investment would need to have been structured to take advantage of these treaties, but in sufficient time before the dispute arises, to avoid any allegations of last-minute ‘treaty-shopping’.

Given these limitations, and the increased costs of pursuing a claim using the ICSID forum, it makes abundant sense that investors should be cautious about the ICSID route being an accessible one for disputes that may arise under their investments or the new and substantial contracts with Iraq in its major country reconstruction. Notably, for commercial disputes, an international arbitration award backed by the existence of the New York Convention and its limited grounds for annulment and non-recognition is the standard option when dealing with a State whose national justice system will not afford an internationally recognised and neutral forum for dispute resolution.

To an extent, Iraq will seek to protect itself at the State level by requiring government entities to obtain collective approval from a special committee at the Secretariat of the Council of Ministers wishing to enter into an arbitration that could possibly bind the State. Otherwise, the validity of contracts between private parties will depend on the usual laws applying to capacity to enter into arbitration.  As a consequence of this important step, negotiations between foreign investors and State-owned, as well as between commercial parties transacting at arm’s length, will hopefully find greater comfort in the legal regime underpinning their transactions. These developments should, with a lot of effort and a bit of luck, help steer a crippled country onto the path to recovery.

(Image: courtesy: nuaire).

 

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Challenging Arbitral Awards before the Singapore Courts for a Tribunal’s Failure to Give Reasons (Part 1 of 2)

Mon, 2018-03-12 07:00

Jordan Tan and Andrew Foo

At the end of a lengthy and complex arbitration, the tribunal issues an award that summarises the evidence and submissions of both parties, and concludes with a single paragraph which states, “For the reasons given by the Claimant, which are accepted by this Tribunal, the claim is allowed in full.” Can an award of this nature be set-aside in Singapore for lack of reasons? In the first of a two-part series, we examine the arbitrator’s duty to give reasons.

 

Introduction

 

Under Singapore legislation, an arbitral award may be set aside if “the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place” (under Article 34(2)(a)(iv) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) for awards emanating from international arbitration; section 48(1)(a)(v) of the Singapore Arbitration Act, concerning awards emanating from domestic arbitration, is similar).

 

The foregoing raises a number of issues:

 

  1. What is the content of an arbitrator’s duty to give reasons?

 

  1. In what circumstances is an arbitrator held to a “judicial standard” in discharging his or her duty to give reasons?

 

  1. Is there a difference in standard if an arbitrator is an expert in the subject-matter, as compared with the situation where the arbitrator is not an expert?

 

 

***

 

Content of an Arbitrator’s Duty to Give Reasons – a Judicial Standard?

 

One of the duties of an arbitral tribunal is to give reasons for its decision (Article 31(2) of the Model Law).

 

However, while curial intervention may be warranted if the tribunal’s reasons and explanations lack sufficient detail, the level of detail required is a question of degree (see TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972 (“TMM“) at [99]).

 

In TMM, Justice Chan Seng Onn considered this question and noted that in this regard, the standards applicable to judges are useful indicia for arbitrators, given that arbitral tribunals are subject to the same ideals of due process and justice as courts (see TMM at [102]–[103]).

 

The duty to give reasons entails the duty to give sufficient reasons that adequately engage with the circumstances of each case  (see Thong Ah Fat v Public Prosecutor [2012] 1 SLR 676 (“Thong Ah Fat”) at [30], [33]).

The seminal case of Thong Ah Fat, which sets out the scope and content of the court’s duty to give reasons, was recognised as an instructive parallel to arbitrators (see TMM at [102]).

 

Thong Ah Fat concerned a criminal appeal against the decision of the trial judge convicting the appellant and sentencing him to the mandatory death penalty for a drug offence.

 

In that case, the Singapore Court of Appeal noted that it was an elementary principle of fairness that parties are not only given a fair opportunity to be heard, but also apprised of how and why a judge has reached his decision (see Thong Ah Fat at [14]–[15]).

 

Indeed, the spirit behind the court’s duty to provide reasons is to enable the parties to be apprised of why and how a decision turned out the way it did (see Ten Leu Jiun Jeanne-Marie v National University of Singapore [2015] SGCA 41 at [53]).

 

The Court of Appeal in Thong Ah Fat articulated the following principles:

 

  1. There should be a summary of all key relevant evidence, although not all detailed evidence need be referred to (see Thong Ah Fat at [34]).

 

  1. The parties’ opposing stance and the judge’s findings of fact on the material issues should be set out; however, the judge does not have to explicitly rule on every factual issue (see Thong Ah Fat at [35]–[36]).

 

  1. The decision should demonstrate an examination of the relevant evidence and the facts found, with a view to explaining the final outcome on each material issue (see Thong Ah Fat at [36]).

 

  1. The judge has to explicate how he arrived at a particular conclusion, and impressionistic statements are generally not helpful (see Thong Ah Fat at [37]).

 

In TMM, the Judge considered, but ultimately rejected, the argument that the arbitrator had failed to give reasons:

 

  1. It would not have sufficed if the tribunal had merely stated that it had considered both parties’ submissions and evidence (see TMM at [106]).

 

2. However, the tribunal in TMM had done more – it had summarised the relevant facts and evidence, crystallised the parties’ cases, and set out its conclusions on the construction of the relevant documents and the merits of certain arguments (see TMM at [106]).

 

3. Accordingly, the plaintiff evidently knew how and on what basis the tribunal had arrived at its decision, and also knew that the tribunal had preferred a particular version of events (see TMM at [106], [120]).

 

This issue has also been given careful analysis by the Australian courts. On the question of whether arbitrators should in all cases be held to the same standards as judges, i.e. obliged to give reasons of a “judicial standard”, the Australian courts have opined as follows.

 

  1. In BHP Petroleum Pty Ltd v Oil Basins Ltd [2006] VSC 402, the Supreme Court of Victoria held that an arbitrator must give reasons commensurate to those provided by judges in their determinations.

 

  1. However, the High Court of Australia subsequently rejected the notion that a single judicial standard of reasoning should apply to all arbitrations (see Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37 at [168]-[169]).

 

It may therefore be appropriate to abandon a one-size-fits-all conception of the requisite standard of reasoning, and instead consider, in each case, what standard of reasoning is required to inform the parties of the bases on which the arbitral tribunal reached its decision on critical issues, taking into account:

 

  1. Complexity of the dispute, e.g. whether there are multiple complicated issues of fact and law;

 

  1. Legal qualification(s) (or lack thereof) of the arbitral tribunal;

 

  1. Whether the parties have agreed that the tribunal may state its reasons in summary form (see e.g. Arbitration Rules of the Singapore International Arbitration Centre, 6th Edition, Rule 5.2(e) – expedited procedure, Rule 29.4 – early dismissal of claims and defences, Schedule 1, Article 8 – emergency arbitrator); and

 

  1. Whether the arbitrator(s) are experts in the subject-matter of the dispute. We explain below the relevance of the tribunal’s subject-matter expertise.

 

In summary, while the rules of natural justice dictate that parties should be apprised of how and why an arbitrator has reached his decision, the ultimate question is whether the contents of the arbitral award, taken as a whole, inform the parties of the bases on which the arbitral tribunal reached its decision on the material or essential issues.

 

This is consistent with the views of the New Zealand Courts, which have been discussed in two prior posts on this blog here and here.

 

***

 

Expertise of the Tribunal

 

An arbitral tribunal’s duty to give reasons includes a duty to inform the parties of the bases on which it has decided key issues of expert evidence.

 

In particular, in arbitrations where the arbitral tribunal does not possess qualifications or experience in a particular area of expertise and the parties have adduced expert evidence on issues within that area of expertise, the arbitral tribunal is obliged to explain why it prefers the evidence of one expert over the other’s, or indeed why it does not accept either expert’s evidence.

 

The appointment of experts, even by the tribunal itself, does not negate this duty. This is because experts are appointed to report on specific issues, but not to determine them (s27 of the Arbitration Act, Article 26 of the Model Law, and the definitions of “Party-Appointed Expert” and “Tribunal-Appointed Expert” in the IBA Rules on the Taking of Evidence in International Arbitration (the “IBA Rules”).

 

It is instead the tribunal that is expressly empowered to determine the relevance, materiality, and weight of evidence, including evidence given by experts (s23(3) of the Arbitration Act, Article 19(2) of the Model Law, and Article 9(1) of the IBA Rules).

 

Therefore, the following practices cannot, without more, discharge an arbitral tribunal’s duty to give reasons where expert evidence is in issue:

 

  1. Summarising expert reports, or fixating on isolated aspects of expert reports, and not dealing with other relevant aspects;

 

  1. ‘Splitting the difference’ between experts (e.g. as to quantum to be awarded);

 

  1. Where an expert’s views are explicable, brushing aside those views on the basis that the expert’s explanations are ‘unclear’ or ‘difficult to follow’; and

 

  1. Asserting without explanation that the tribunal’s determination of a particular expert issue is ‘prudent’, ‘reasonable’, or ‘fair’.

 

In summary, even if an expert issue pertains solely to a relatively small claim among numerous large claims (e.g. a $1,000 claim for variations in a $100 million construction dispute), the tribunal’s decision must demonstrate that it has grappled with the expert evidence put forward, and explain why it has decided as it has, e.g. why it is more persuaded by one expert than the other.

 

***

 

Conclusion

 

Arbitrators should be conscious of, and conscientious to fulfil, their duty to render adequately reasoned awards: that is, awards that inform the parties of the bases on which the tribunal reached its decision on the material or essential issues.

 

Arbitrators should not regard the appointment of experts as exculpatory of the arbitrator’s duty, and should go beyond mere regurgitation of evidence / submissions and glib statements of agreement and disagreement.

 

In the second part of this series, we shall examine the remedies parties may seek in cases where this duty has been breached.

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The CJEU in Slovakia v Achmea or Is Justice Best Served Cold?

Sun, 2018-03-11 03:47

Lucia Bizikova

On 6 March 2018, the Court of Justice of the European Union issued a long-awaited decision on a preliminary ruling from Germany’s Federal Court of Justice in the Slovak Republic v Achmea case (available here and already addressed in a different KluwerBlog entry here) [Case C-284/16]. By concluding that the arbitration clause in the Slovakia-Netherlands bilateral investment treaty (BIT) applicable in arbitration between Achmea and Slovakia had an adverse effect on the autonomy of EU law and declaring that it was incompatible with EU law, the CJEU has put an end to the controversy regarding the legality of intra-EU BITs. This question has been haunting legal professionals and academics at least since 2007, when the Tribunal in Eastern Sugar v Czech Republic handed down its decision refusing to accept the Respondent’s argument that the application of the BIT was limited because it had been superseded by EU law since the Czech Republic’s accession to the European Union [Eastern Sugar v Czech Republic, SCC. Case No. 088/2004]. It has gained even more prominence in recent years in the context of the CETA and the debate on the establishment of a (European) multilateral investment Court. Consequently, the CJEU issued a clear signal as to where the intra-EU investment arbitration might be heading.

Liberalising and De-Liberalising of the Health Insurance Market

The dispute between Achmea and Slovakia arose out of the measures adopted by the Slovak Government in 2006 that reversed the previous liberalisation of the Slovak health insurance market. Slovakia underwent reforms of its health system in 2004 opening the market to private sickness insurance providers. Following this, Achmea set up a wholly owned subsidiary in Slovakia offering private sickness insurance services. In 2006, Slovakia stepped back from its policy and prevented private health insurers from distributing profits to shareholders. Achmea challenged this change and commenced arbitration proceeding against Slovakia before the PCA in October 2008, according to the UNCITRAL Rules [Achmea v Slovakia (I), PCA Case No. 2008-13]. By the arbitral award of 7 December 2012, the Tribunal composed of Professors Vaughan Lowe, Albert Jan van den Berg and V. V. Veeder found for Achmea and ordered Slovakia to pay EUR 22.1 million worth of damages. Interestingly, this is the only case in which the investor was successful in challenging Slovakia’s changes to its health system reforms. Coupled with the subsequent plans to establish a single health insurance company, the deliberalisation of the health insurance market gave rise to three other investment arbitrations, all of which failed on jurisdictional grounds (see ad hoc arbitrations initiated by HICEE, EURAM Bank and Achmea II, all heard by the PCA).

Slovakia’s Legal Battle Against the Award

Slovakia challenged the Tribunal’s decision and submitted an application to set aside the award to the Higher Regional Court in Frankfurt am Main on 31 January 2013. After the Court rejected its application, Slovakia appealed on a point of law to the Federal Court of Justice in Germany. Slovakia took the view that the tribunal lacked jurisdiction because the Slovakia-Netherlands BIT was contrary to several provisions of the Treaty on the Functioning of the European Union (TFEU), which in the event of conflict should take precedence over the BIT. The Federal Court of Justice accepted the appeal and referred the question of compatibility of the contested BIT with the TFEU to the CJEU.

First, the CJEU noted that the disputes leading to the constitution of arbitral tribunal in accordance with Article 8 of the BIT may relate to the interpretation or application of EU law by that tribunal. Still, an arbitral tribunal could not be classified as “a court” or “tribunal” of a Member State within the meaning of Article 267 TFEU (in this case, the Tribunal was neither a court of Slovakia nor one of Netherlands), which meant that it had no power to make a reference to the Court of Justice for a preliminary ruling. This has important consequences as under the BIT, the tribunal’s decision is final. While it is possible to conduct a judicial review of the validity of the award, this has to be carried out in accordance with the law of the seat of arbitration, which is subject to the tribunal’s choice. More importantly, such judicial review can be exercised by the national court only to the extent that the respective national law permits. In this sense, the limited ground for review of awards issued in commercial arbitration is not suitable for arbitration proceedings like the present case, that derived from a treaty by which the Member States effectively displaced the jurisdiction of their own courts, which (by implication) could lead to limiting the application or interpretation of the EU law.

The CJEU concluded that the mechanism for settling disputes established by the BIT failed to ensure that those disputes would be decided by a court within the judicial system of the EU. The arbitration clause in the BIT had an adverse effect on the autonomy of EU law and was, therefore, incompatible with EU law.

CJEU’s Decision in Slovakia v Achmea Finally Bringing Justice to the Most Recent Members of the EU

We will have to wait and see what the German Federal Court makes from the CJEU’s decision, but it is likely that it will end up setting aside the Award. This puts an end to a long-going saga of arbitrations Slovakia was facing following its deliberalisation of health insurance market. And while arbitrations in HICEE v Slovakia and Achmea v Slovakia II were dismissed on different procedural grounds, the Tribunal in the 2012 decision EURAM Bank v Slovakia have already had an opportunity to deal with the issue of the conflicting application of the BIT (in this case, Austria-Slovakia BIT) and one of the European Treaties, specifically the Treaty Establishing the European Economic Community (ECT) and the subsequent treaties [EURAM Bank v Slovakia, PCA Case No. 2010-17].

The Tribunal adopted a different approach to the CJEU and analysed the conflict between the different instruments in light of Article 59 Vienna Convention on the Law of Treaties (VCLT). By considering the two-step inquiry under Article 59 of the VCLT, the Tribunal rejected Slovakia’s arguments because the BIT in question and the ECT did not have the same subject-matter. The Tribunal even relied on the reasoning in Achmea (I) that had come to a similar conclusion (and was the subject of the CJEU’s decision)! The EURAM Bank Tribunal then added that even if it had reached a different conclusion on the subject-matter point, it would nevertheless have found that the other requirements of Article 59 were not met.

Significantly, the question regarding the conflicting application of the intra-EU BITs and the European Treaties is not exclusive to Slovakia’s health insurance controversy. As mentioned above, it has been raised (and dismissed) in Eastern Sugar but also in a more recent ICSID arbitration Micula v Romania [Micula v Romania (I), ICSID Case No. ARB/05/20]. This case is an extreme illustration of the clash between the “traditional” investment regime and the obligations imposed under the European law. Indeed, it led to an extreme result, whereby the Tribunal held that Romania’s revocation of tax incentives and benefits targeting foreign investment in disfavoured regions breached the BIT, while at the same time, those very incentives were held contrary to the EU State Aid Rules. Furthermore, once the Award has been issued, the European Commission prohibited Romania from complying with it. In fact, Romania sought to have this award annulled and the European Commission appeared as an amicus curiae. Despite this, the Final Award was upheld by the ad hoc Committee [See Decision on Annulment dated 26 February 2016]. But, significantly for our purpose, the European Commission invoked Article 59 of the VCLT and argued that the Award should be annulled because the Tribunal had lacked jurisdiction as the EU Treaties superseded the Sweden-Romania BIT as a result of Romania’s accession to the EU. The Committee rejected this argument albeit it failed to give any reasons for this conclusion.

It is no accident that all arbitrations that dealt with the validity of intra-EU BITs were brought against the new Members of the EU. After the fall of the communism, these countries were a target of the 1990s “BITs Baby Boom”. More often than not, BITs concluded during this period imposed extensive obligations on the Parties, which remain burdensome despite the fact that many of these countries are full Members of the EU. Read in this context, the CJEU’s decision represents a welcome development of the (European) investment regime. By protecting the autonomy of the EU law, it will provide more legal certainty in future disputes in which conflicting grounds for jurisdiction exist under both the intra-EU BITs and the EU laws.

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Africa, stand up for Africa

Sat, 2018-03-10 02:30

Rubin Mukkam-Owuor

It is trite that economic growth in Africa and the scale of investment into the region has thrust international arbitration to the forefront of dispute resolution on the continent. Indeed, the proliferation of African international arbitration centres (there are more than 40 currently in existence) is testament to the fact that African governments are alive not only to an international preference for arbitration as a mechanism for the resolution of disputes, but also to the potential of arbitration as an economic activity, with local lawyers, hotels, conference centres, and transcribers set to benefit.

It is also well-known that while Africa-related arbitration is on the rise, this is not reflected in an increase in the appointment of African arbitrators, or in the popularity of African seats. This is borne out in the oft-quoted statistics published by the ICSID, ICC and LCIA.    

Misunderstood

There is a false perception that arbitration as a practice is under-developed in Africa, and that there is a lack of expertise in arbitration on the ground. There is also a perception that African governments may not be pro-arbitration, and that enforcing international arbitral awards in African countries is difficult.

Evidence shows that the reality is quite different. In fact, there are very many well-qualified and experienced African arbitration counsel and arbitrators, and some of the arbitration centres on the continent are well-established and have a reasonably large international arbitration case load. The Cairo Centre for International Commercial Arbitration (CRCICA) is a notable example in this regard. Many African countries’ arbitration laws are based on the UNCITRAL model law, and have been through reform in the last 10 years. 36 of the 54 African countries are party to the New York Convention, while 47 are signatories to the ICSID Convention.

As for enforcement, though there is insufficient data from which to establish a trend, African courts generally do not take an adverse approach to enforcement. Au contraire, we have seen the upholding of arbitral awards by local courts, even when it is against a state-owned company, the most high profile example of which is probably the Tanzanian courts’ enforcement of a $65 million award against the Tanzania Electric Supply Company (TANESCO) in the Dowans case. Between 2011 and 2014, the Kigali International Arbitration Centre (KIAC) issued three arbitral awards against government parties, and not a single one of these were challenged in the Rwandan courts. The exclusion of the public policy argument as a ground on which to refuse enforcement of a foreign arbitral award in the laws of Nigeria and Tanzania show a strong commitment to honouring international arbitral awards. Even where grounds exist in local legislation to avoid enforcement (such as in South Africa – there is a specific provision requiring approval of the Minister of Economic Development for the exequatur of certain foreign arbitral awards), we have seen that these provisions are interpreted narrowly in practice so as to permit enforcement.

Notwithstanding the above, the exclusion of African counsel, arbitrators, seats and centres from amongst internationally preferred choices has led to a lack of African experience in these spheres, for which there is no substitute. This must be urgently resolved, so that African experience can catch up to African demand for arbitration services, and start shaping the very dispute resolution mechanism that will increasingly impact the continent.

One solution is to build a track record by actively promoting the use of African counsel, arbitrators, seats and centres in arbitrations originating within Africa (“intra-African arbitration”). This is a good starting point, and would demonstrate to the outside world that African parties have faith in African arbitration, and therefore they should too.

Gaining Experience: (i) counsel; (ii) arbitrators; (iii) seats; and (iv) centres.

Counsel

An analysis of the ICSID cases involving East African state parties shows that all of them, save for one involving Burundi, involved the state being represented by an international law firm (ILF). In many cases, these ILFs partnered with co-counsel who were based locally. This should be formalized in the legal policy of African states, such that partnership between ILFs and locally-based firms is mandatory in any arbitration involving the government. This will enable the transfer of knowledge and skills, and the opportunity to gain from the wealth of experience which ILFs have to offer, in order to build local capacity. The ICSID cases involving Kenya seem to evidence that this policy has been adopted in Kenya. This has been taken to an extreme in Nigeria, where the Legal Practitioners Act has once before been interpreted as precluding parties from being represented by international counsel, and requiring that all oral advocacy be conducted by Nigerian counsel in order to avoid potential challenges to the resulting arbitral award.

Arbitrators

There is a strong case for appointing an African arbitrator in any arbitration which involves African parties and/or a contract which is substantially performed in Africa. Arbitrators from the same cultural background as the parties, who understand the local conditions, are in the best position to resolve these disputes. There is no dearth of training afforded to African arbitrators, with the African Legal Support Facility and Africa International Legal Awareness carrying out various trainings, and many conferences having taken place in African cities, particularly over the last four years. That said, training is no substitute for experience in a live arbitration. African arbitrators should be allowed to observe ongoing arbitration proceedings (with the necessary restrictions in place of course), to gain experience.

Seats

Although generally, the suitability of African countries as arbitral seats has not yet been tested, there are specific improvements which can be made to ensure that they are viable seats. Concerns surrounding bureaucracy and delay can be dispelled by allowing arbitration-related matters to be fast-tracked to experienced specialist judges. This has worked particularly well in Mauritius. It is also important that English is universally accepted for use in court – for example, the mandatory use of Arabic in court submissions in Morocco has limited its attractiveness as an arbitral seat in non-Arabic language arbitrations. It is also critical that local arbitration laws are modern and keep up with developments in international arbitration law – for obvious reasons, this is often cited as one of the most important factors in choosing a seat.

Mauritius and Egypt have shown themselves to be sound choices for African arbitral seats, and their use in intra-African arbitrations should be promoted.

Centres

Part of the reason that no one African arbitration centre has gained traction, is that there are simply too many of them. Limited resources should be channeled efficiently for the development of three or four regional centres, which are fully equipped with state-of-the-art facilities and information technology. If establishing a regional centre faces too much red-tape, then governments should consider simply promoting those African institutions which have successfully established themselves (such as the CRCICA, Mauritius International Arbitration Centre and the KIAC which have all struck the right balance between being supported by their respective governments, without control or interference from them), and making them the default choice in their contracts. This removes an item from public expenditure, and may have benefits in terms of the political leverage to be gained from encouraging the use of one or more of these centres.

The Arbitration Foundation of South Africa (AFSA) has potential to become a powerhouse in international arbitration in southern Africa. Its strong domestic arbitration caseload demonstrates that it has gained the trust and acceptance of the local community, and this should be a good springboard from which to build an international arbitration centre.

If these centres were promoted in intra-African arbitrations, then they would build a track record of international arbitrations (albeit from other African countries), and gain enough credence to administer non-African arbitrations.

Telling the World

Africa must be cognizant of its bargaining power. In the scramble for resources, investors will be forced to accept local or regional arbitral systems and/or African seats, or risk losing deals. Indeed, in a survey conducted by Simmons & Simmons in 2015, 72% of respondents said that they would consider using local or regional arbitral systems, and 58% said they would use an African seat.

In order to correct the misconception that Africa is not arbitration-friendly, it is incumbent on us to take active steps to increase awareness. We must build up the capacity of our arbitration centres, then market them aggressively. We must make legislative reforms an agenda priority, then publicise them widely. In all these efforts, it is important to act quickly and capitalize on the current interest in the continent, as this will eventually wane.

If we are successful, perhaps what might emerge is a more mature African arbitration jurisprudence, and evolution of an African-centric style of arbitration, or at the very least, one in which Africa has had an influence.

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Hungary: New Arbitration Rules of the HCCI

Fri, 2018-03-09 02:21

Kinga Hetényi and Alexandra Bognár

Schoenherr

Following the entry into force of the new act on arbitration (Act LX of 2017 on Arbitration, the “Act”) this year, the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry (“HCCI”) adopted its new procedural rules (“Arbitration Rules”) effective and applicable as of 1 February 2018.

It was to some degree expected that the HCCI would devise a new set of rules to comply with the innovations of the Act and with recent international developments to make arbitration more efficient, modern and attractive for market players.

Among these innovations, a so-called preliminary case management meeting was introduced, to be held within 30 days following the establishment of the tribunal. The meeting should determine the framework of the arbitration, e.g. whether the parties intend to deviate from the Arbitration Rules, the necessity of expert opinions or whether an oral hearing is requested. In line with the needs of modern disputes, this meeting can take place not only in person, but also via teleconferencing. In light of the result of the case management meeting, the tribunal sets the sequence and the deadline of the various steps and actions of the arbitration proceedings, thereby streamlining the procedure and making it more predictable.

Efficiency is also improved by introducing the option to consolidate pending proceedings upon the joint request of the parties. Prior to the Arbitration Rules, this was only possible in regular court cases, due to a paucity of resources rather than the intention of letting the parties decide on the rules of the procedure. Nonetheless, consolidation may in some circumstances fall under the parties’ will (e.g. for the avoidance of duplication of the very same evidentiary materials in proceedings, saving on costs, etc.). The Arbitration Rules now allow consolidation, which is a highly welcome improvement of party autonomy.

Options for interim measures were also rather limited under the prior arbitration legislation, which did not contain any rule thereon. However, the Act broadened the possibilities and the Arbitration Rules now contain related procedural provisions and vest the tribunal with the power to rule on interim measures at the party’s request. Nevertheless, the tribunal generally may not decide on an interim measure ex parte. If letting the other party express its views on an interim measure leads to a risk of the successful implementation of the interim measure, the Arbitration Rules also allow the tribunal to decide on the motion without notifying this other party.

In addition to the procedural rules of arbitration, the Arbitration Rules also address the rules of mediation by dedicating a separate chapter to Mediation Rules. This new chapter was inspired by the UNCITRAL Model Law on International Commercial Conciliation 2002 and was drafted to be in compliance with its provisions.

It is expected that the Arbitration Rules will have a bright future, because they offer a modern set of arbitration rules which hopefully meet the expectations of market players for a speedier, more cost-efficient and flexible arbitration proceeding, qualifying it as a viable alternative to commercial litigation.

The Arbitration Rules apply to procedures commenced on or after 1 February 2018. Parties who initiated arbitration between 1 January and 31 January are informed that they may choose to apply the Arbitration Rules, provided they agree.

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10 Hot Topics for International Arbitration in 2018

Thu, 2018-03-08 07:40

Jonathan Mackojc

2017 was yet another significant year for international arbitration.

Many arbitral institutions amended their arbitration rules, including:
– the Stockholm Chamber of Commerce (SCC) Arbitration Rules and Singapore International Arbitration Centre (SIAC) Investment Arbitration Rules which both came into effect on 1 January 2017,
– the Thai Arbitration Institute (TAI) Arbitration Rules on 31 January 2017,
– the International Chamber of Commerce (ICC) Arbitration Rules on 1 March 2017,
– the Kuala Lumpur Regional Centre for Arbitration (KLRCA) Arbitration Rules on 1 June 2017,
– the Arbitrators’ and Mediators’ Institute of New Zealand (AMINZ) Arbitration Rules on 22 May 2017, and
– the Chinese Arbitration Association, International (CAAI) Arbitration Rules on 1 July 2017.
– It is anticipated that the Hong Kong International Arbitration Centre (HKIAC) will release a new version of its current Administered Arbitration Rules later this year, in time for the 2018 Hong Kong Arbitration Week.

Undoubtedly, many are looking forward to the results of the 2018 International Arbitration Survey: ‘The Evolution of International Arbitration’, which invited comments from stakeholders in 2017. While the results from the joint study between the Queen Mary University of London and White & Case will be a good indication of international arbitration’s trajectory up until 2020, they will not be the only indication of its growth and direction. The theme of the upcoming 2018 ICCA Conference in Australia is centered on ‘Evolution and Adaptation’.

‘Evolution’ as a shared theme is a strong indicator that international arbitration will not experience radical shifts in 2018 but will instead gradually respond and adapt to the changing forces and demands of the international community – a rise in disputes, the increased need for flexibility in dispute resolution, and increased protectionism among nation states.

How exactly it will respond and adapt is yet to be seen. The following ‘10 Hot Topics’ are one perspective on upcoming trends and developments that are likely to shape international arbitration’s evolution and adaptation.

1. Cross-border Partnerships, and Collaboration

Despite international arbitration’s inherently cross-border nature, more can be done to promote partnerships across regions and institutions. Notably:
a. ICC, SIAC, and KLRCA have focused on cross-border relations within the last few years, and may be regarded as the current leaders in this space.
b. KLRCA notes that it has entered into 50 strategic partnerships since its inception.

Some recent partnerships include:

17 October 2017: SIAC and Institute of Modern Arbitration (IMA) signed a memorandum of understanding (MoU) to ‘support and promote the development of Singapore and Russia’s arbitration regimes’.
1 November 2017: ICC and KLRCA signed an MoU with the intention of ‘promoting Malaysia as a safe seat and venue for arbitration in Asia’.
9 November 2017: ICC and New York Arbitration Centre (NYIAC) signed an MoU to ‘reaffirm the Court’s commitment to North America’.

It is likely that 2018 will see more institutions enter into strategic partnerships with other institutions, universities, business councils, firms, and other stakeholders. For arbitration to truly experience explosive growth, such partnerships must be meaningful and serve to promote genuine collaboration.

2. Increasing Access to International Arbitration

Another area which will likely come under scrutiny in 2018 is that international arbitration is often inaccessible to many parties. Initiatives such as Expedited Procedures have helped to significantly reduce costs.

The HKIAC’s recently published statistics on costs and duration of arbitrations indicate that, on average, parties pay less than a third of the total costs of a standard arbitration if this mechanism is used. Initiatives such as these will continue to assist small and medium sized businesses utilise international arbitration in a cost-effective manner.

An additional concern is that international arbitration is seen as a specialised area of law, and that it has become exclusive. For the most part, this is far from the truth, as arbitration practitioners are open to collaborating with other stakeholders and often share know-how. Unfortunately, misinformed perceptions may exist which the arbitration community must address this year.

The immediate step is to connect with, and communicating its benefits to, a broader group of stakeholders, some of which may include: financial institutions, SMEs, business councils, universities, and other small-scale business associations. Allowing these stakeholders to take an active role in the development of international arbitration is crucial.

Surprisingly, many executives have never been introduced to international arbitration, and even more alarming many in-house counsel are still unaware of the benefits of proceeding with arbitration over litigation. Unfortunately, no reliable statistics regarding international arbitration awareness exist, as surveys such as those conducted by Queen Mary and White & Case are targeted at stakeholders with some form of experience.

It is interesting to observe that the 2017 ICC Arbitration Rules and 2016 SIAC Arbitration Rules are both available in ten other languages. The 2013 HKIAC Rules are available in six other languages, and the proposed amendments include a provision dealing with multilingual procedures. In contrast, the 2016 ACICA Arbitration Rules are only available in one other language (Chinese). The importance of ensuring that institutional rules are accessible to parties in other regions cannot be overstated.

3. Educating a New Generation of Practitioners

One of the most overlooked areas which must be addressed, as international arbitration evolves, is the importance of educating and empowering a new generation of emerging practitioners.

While universities and institutions currently offer degrees and diplomas for students interested in international dispute resolution, many are broad in nature and are therefore unable to address the issues, complexities, and developments in international arbitration.

Further, if the focus is solely on postgraduate opportunities, we have failed to communicate the importance of international commercial and investment arbitration to a significant number of university students who graduate without an appreciation that international arbitration is a legitimate and effective form of dispute resolution.

Moving forward, we must form more meaningful partnerships with academic institutions, and encourage the emerging generation of practitioners to form and lead new societies and associations, particularly ones with a cross-border mandate. The further growth of arbitration depends greatly on collaboration, interdependence and genuine reform at a grassroots level.

4. Arbitrator Selection Process

Last year, one hot topic was the need for greater transparency and guidance as to the selection and appointment of arbitrators. It is still the author’s view that discussion and developments will begin to surface around this area in 2018.

One sign that this issue may develop into a serious conversation in 2018 is that several questions (12, 26, 27 and 28) of in the 2018 International Arbitration Survey address the arbitrator selection process, and suggest that it may be necessary to provide publicly available information to appease current stakeholder concerns.

Arbitral institutions must be proactive and take the lead on this matter, rather than wait for survey results or further market pressure.

5. The Role of Technology

The international arbitration community must embrace technological developments, and the shift towards artificial intelligence, big data, and the Internet of Things (IoT). Rather than view these trends as a threat, we must take advantage of the various benefits associated with such change as it is capable of entirely transforming dispute resolution. Developments in technology will:

• assist institutions conduct hearings more efficiently;
• improve security, data breaches, and privacy for parties;
• enhance online repositories, databases and statistics;
• help parties overcome geographic constraints; and
• assist stakeholders to interpret big data via artificial intelligence.

ACICA has highlighted the importance of embracing technology in its Draft Procedural Order for use of Online Dispute Resolution Technologies. In 2017, the ICC Commission on Arbitration and ADR released a comprehensive report on the role of technology in arbitration, which considers a range of issues. The 2018 ICCA conference will discuss the challenges and opportunities associated with technological change and its ability to increase efficiency and disrupt the market. One of HKIAC’s proposed amendments to its arbitration rules includes the use of secured online document repositories, which will allow for an alternative means of service and either to be controlled by HKIAC itself, or by the parties’ representatives. Other developments are discussed in a previous post. Questions 46 and 47 of the 2018 International Arbitration Survey are focused on technology, and classify developments according to the following five categories: artificial intelligence, cloud-based storage, hearing room technologies, videoconferencing, and virtual hearing rooms.

6. Diversity

Diversity has been, and will continue to be, a hot topic this year.

Instead of further developing arguments as to why arbitration needs to remain inclusive and diverse, we instead need to see some concrete frameworks in 2018.

ArbitralWomen have worked tirelessly in 2017 to ensure that voices are heard, and these efforts have lead to other initiatives such as the Equal Representation in Arbitration Pledge, which has received over 2,500 signatures. The most recent development is the Women in Arbitration Initiative. It is likely that other arbitral institutions will follow suit in 2018, to further support individual organisations and associations in promoting diversity.

It is at the same time important to acknowledge that diversity requires more than the mere commitment of promoting equal gender representation. The 2018 International Arbitration Survey acknowledges this, and question 22 lists five categories: age, cultural, ethnic, gender, and geographic. Each of these must be addressed when discussing and addressing matters relating to diversity. The Alliance for Equality in Dispute Resolution, founded in 2018, is a fine example of a not-for-profit organisation which acknowledges this point in its mission statement.

7. Innovation

2016-17 was a period in which most institutions chose to revise their arbitration rules. As most will now have a modern set of rules, other innovative developments must be announced in order that institutions remain competitive and in the spotlight.

One strong example of an innovation in 2017 was the KLRCA’s (soon to be called the Asian International Arbitration Centre) decision to publish a set of standard form building contacts: main contract, standard-sub contract, and minor works contract. As mentioned in an earlier point, innovation in arbitration will likely take the form of more cross-border partnerships and collaboration in 2018, as well as BRI-related initiatives.

8. Belt & Road Disputes

It is inevitable that China’s highly ambitious Belt & Road initiative (BRI) will lead to a significant number of disputes being referred to arbitration. Chinese parties seem to regard international arbitration as a viable form of dispute resolution, evident in CIETAC’s 2016 statistics, which reported a caseload of 2,183 cases.

Many BRI disputes will have a high dispute value, and institutions such as HKIAC are preparing for what may be exponential growth due to this transnational development programme.

HKIAC is ideally positioned to hear these disputes as foreign parties seeking to enter into contacts with Chinese parties will want to select a neutral seat, and one which offers strong institutional support, language capabilities, and geographic convenience. Hong Kong also has a strong legal system which showcases utmost respect for the rule of law and judicial independence.

Other arbitral institutions such as SIAC are also keen to attract these disputes, and BRI (formerly OBOR) was discussed throughout the KLIAW 2017 conference. For jurisdictions and institutions to remain competitive, 2018 must be the year that bold BRI-related initiatives are announced.

9. A Voice for Regional Players

The international arbitration community must ensure that it works towards giving regional players a voice. Other jurisdictions which are less recognised include: Vietnam, Thailand, Indonesia, PNG, FIJI, and New Zealand. An interesting development is the upcoming Regional International Arbitration Conference which will be held in FIJI. These regions are increasingly important due to the increase in energy, construction and environment-related disputes. For a recent discussion energy-related arbitrations refer to this post.

10. Emergence of Regional Arbitration Hubs

2018 will see certain regions further voice their desire to be recognised as Regional Arbitration Hubs. Positioning these regions is not overly ambitious, but part of the evolution of international arbitration. Refer to this previous post for a discussion on the differences between various arbitration hubs, and which regions are fighting for the title.

The views expressed in this article are solely those of the author.

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The Judgment of the CJEU in Slovak Republic v. Achmea – A Loud Clap of Thunder on the Intra-EU BIT Sky!

Wed, 2018-03-07 07:24

Clément Fouchard and Marc Krestin

Linklaters

Introduction

In a much anticipated judgment in Slovak Republic v. Achmea B.V. (Case C-284/16), the Court of Justice of the European Union (“CJEU”) ruled yesterday that the arbitration clause contained in Article 8 of the 1991 Netherlands-Slovakia BIT (the “BIT”) has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law. With this judgment, the CJEU decided not to follow Advocate General Wathelet in his opinion of 19 September 2017, in which he had proposed to the CJEU to rule that EU law did not preclude the application of an investor-state dispute settlement mechanism (“ISDS”) established by means of a BIT between two EU Members States.1)The opinion has been extensively commented on in previously published posts on this blog (published here, here and here). jQuery("#footnote_plugin_tooltip_9440_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9440_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In what will most certainly be regarded as a landmark decision, the CJEU set the first precedent with respect to the incompatibility of arbitration clauses contained in intra-EU BITs with EU law. Although not binding upon investment treaty tribunals, the CJEU’s ruling is likely to have far-reaching consequences for investor-state disputes under the 196 intra-EU BITs currently in force and may be the first step towards more profound changes affecting intra-EU investment treaty arbitration as we know it today.

Background of the case

The CJEU’s judgment is predicated on a dispute between Dutch insurer Achmea B.V. (formerly known as Eureko B.V.) and Slovakia. In 2006, Slovakia partly reversed the previous liberalisation of its health insurance market, thereby prohibiting the distribution of profits generated by Achmea’s Slovak insurance activities. In 2008, Achmea brought arbitration proceedings against Slovakia under the BIT on the grounds of violation of substantive treaty standards. In its final 2012 award, the ad-hoc arbitral tribunal constituted under the UNCITRAL Rules and seated in Frankfurt, found that Slovakia had violated the BIT and ordered it to pay approximately EUR 22.1 million of damages to Achmea.

In the setting-aside proceedings subsequently brought by Slovakia before the German courts, Slovakia challenged the arbitral award on jurisdiction. It argued that the arbitral tribunal lacked jurisdiction to hear the claims because the arbitration clause embedded in Article 8 of the BIT was incompatible with EU law, more specifically articles 18, 267 and 344 of the Treaty on the Functioning of the European Union (“TFEU”). In these proceedings, the Higher Regional Court of Frankfurt (Oberlandesgericht Frankfurt, decision of 18 December 2014 – Case 26 Sch 3/13) rejected Slovakia’s arguments, finding that the BIT was not incompatible with the aforementioned provisions of the TFEU. The German Federal Court of Justice (Bundesgerichtshof, decision of 3 March 2016 – Case I ZB 2/15), hearing the case on appeal, referred questions on the compatibility with EU law of the BIT’s arbitration clause to the CJEU for a preliminary ruling, thereby offering its view that the arbitration clause was not contrary to the provisions of the TFEU.

AG Wathelet’s opinion

In his opinion, AG Wathelet concluded that neither intra-EU BITs, nor the ISDS clauses contained therein, were in breach of EU law. In particular, AG Wathelet noted that:

• the BIT did not constitute discrimination on grounds of nationality and thus did not violate Article 18 TFEU by granting preferential treatment to Dutch investors;
• the arbitral tribunal constituted under Article 8 of the BIT was a “court or tribunal of a Member State” within the meaning of Article 267 TFEU and was therefore able to request the CJEU to issue a preliminary ruling on questions of EU law; and
• investor-state disputes – contrary to intra-Member State disputes – did not fall within the scope of Article 344 TFEU and such disputes did not concern the interpretation or application of the EU Treaties.

The CJEU judgment

In its 6 March 2018 judgment, the CJEU drastically departs from Wathelet’s opinion and the position taken by the German courts, ruling that the arbitration clause in the BIT is not compatible with EU law. In the CJEU’s view, this arbitration clause removes disputes involving the interpretation or application of EU law from the mechanism of judicial review provided for by the EU legal framework.

The primacy of EU law

Before considering the questions referred to it by the German Federal Court of Justice, the CJEU recalls the principle of autonomy of the EU legal system, enshrined in particular in Article 344 TFEU. The CJEU states that EU law is characterised – inter alia – by the fact that it stems from an independent source of law, the EU Treaties, and by its primacy over the law of the EU Member States. These characteristics, according the CJEU, “have given rise to a structured network of principles, rules and mutually interdependent legal relations binding the EU and its Member States reciprocally…”. Based on this fundamental premise, Member States are obliged to ensure, in their respective territories, uniform and consistent application of EU law. According to the CJEU, one of the keystones of the judicial system established by the EU Treaties and intended to ensure consistency and uniformity in the interpretation of EU law is the preliminary ruling procedure embodied in Article 267 TFEU.

The arbitral tribunal may be called on to interpret or apply EU law

In light of these considerations, the CJEU first finds that the arbitral tribunal constituted under the BIT must rule on the basis of the law in force of the contracting state involved in the dispute as well as other (international) agreements between the contracting parties, which includes EU law. In the context of resolving an investment dispute under the BIT, the arbitral tribunal may be called on to interpret or even apply EU law, particularly the provisions concerning freedom of establishment and free movement of capital.

The arbitral tribunal is not a court or tribunal of a Member State

The CJEU then considers whether an arbitral tribunal such as the one constituted under Article 8 of the BIT can be regarded as a court or tribunal of a Member State within the meaning of Article 267 TFEU. Contrary to AG Wathelet, it answers this question in the negative, finding that the arbitral tribunal concerned is not part of the judicial system of either the Netherlands or Slovakia. The exceptional nature of its jurisdiction, so the CJEU, is one of the principal reasons for the existence of the BIT’s arbitration clause. Consequently, the arbitral tribunal has no power to make a reference to the CJEU for a preliminary ruling.

The arbitral award is not subject to review by a court of a Member State which ensures compatibility with EU law

The CJEU further observes that the arbitral award rendered by the tribunal under the BIT is, in principle, final and – by virtue of the applicable procedural law which is determined by the tribunal itself through the choice of the arbitral seat – subject only to limited judicial review by the competent national courts. Although the CJEU acknowledges that in relation to commercial arbitration, it previously held that limited review of arbitral awards by the courts of the Member States may be justified under certain conditions, such considerations could not be applied to arbitration under Article 8 of the BIT. The CJEU reasons that while commercial arbitration is based on the parties’ express consent, investor-state arbitration derives from a treaty by which Member States agree to remove disputes concerning the application or interpretation of EU law from the jurisdiction of their own courts, and hence from the system of judicial remedies which the TFEU requires them to establish on questions of EU law. Consequently, the CJEU finds that, by concluding the BIT, the Netherlands and Slovakia established a mechanism for settling investment disputes which is not capable of ensuring the proper application and full effectiveness of EU law.

In those circumstances, the CJEU concludes that the arbitration clause contained in the BIT is incompatible with certain key principles of EU law and that it has an adverse effect on the autonomy of EU law.

Commentary

The CJEU judgment is likely to send a shockwave through the ranks of proponents of investment treaty arbitration and large parts of the wider arbitration community. At the same time, one can see the judgment as the next step in the evolution of a trend marked by years of opposition by the European Commission against investor-state arbitration under existing intra-EU BITs, its relentless efforts to push several EU Member States to terminate their intra-EU BITs and the recent public backlash against ISDS more generally. As such, the CJEU’s decision may need to be read within the political context in which it is rendered.

As some scholars have already noted, one should be careful not to jump to conclusions too hastily on the judgment’s implications. Although one may expect an increase in the number of (successful) challenges of non-ICSID awards rendered under intra-EU BITs by arbitral tribunals seated within the EU, Professor Stephan Schill, for example, correctly points out that the implications for ICSID disputes and non-ICSID disputes before tribunals seated outside the EU, as well as intra-EU disputes under the Energy Charter Treaty (ECT), may be less clear. It also remains to be seen how investment treaty tribunals, who thus far tend to uphold the validity of intra-EU BITs, will react to the CJEU’s judgment in pending and future intra-EU investment disputes.

The CJEU’s judgment will undoubtedly fuel the ongoing policy debate about intra-EU investment protection and the future of ISDS in Europe. The pending preliminary ruling on Belgium’s recent questions regarding the compatibility with EU law of the Investment Court System, as provided for in CETA, may offer further indications in that respect.

References   [ + ]

1. ↑ The opinion has been extensively commented on in previously published posts on this blog (published here, here and here). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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FAI Arbitral Tribunal’s Decision concerning the Disqualification of Counsel in Arbitral Proceedings

Tue, 2018-03-06 07:15

Mika Savola

Introduction

It is generally accepted in international arbitration that an arbitral tribunal has an inherent power, and duty, to preserve the fairness and integrity of the arbitral proceedings and the enforceability of the award. On the other hand, it is equally uncontested that a party to an arbitration has a right to be represented by a counsel of its choice. Occasionally, these two principles may collide, e.g. if one party’s counsel engages in some highly inappropriate procedural conduct and the other party raises a request for the disqualification and exclusion of the counsel from the proceedings. Can the arbitral tribunal entertain such a request?

The historical view has been that arbitral tribunals do not have the power to disqualify or sanction counsel (see the case law and literature referred to in Rogers, Catherine A.: Ethics in International Arbitration, Oxford University Press, 2014, p. 135-136). However, a well-known procedural ruling in ICSID case Hrvatska Elektroprivreda, d.d. v. Republic of Slovenia (ICSID Case No. ARB/05/24, May 6, 2008) is often viewed as supporting a conclusion that tribunals have inherent power to disqualify counsel in order to protect the integrity of the proceedings. In said case, the arbitral tribunal disqualified a British barrister retained by respondent from representing the latter in a situation where he was added to the respondent’s legal team after the tribunal had been constituted, and where his involvement was disclosed only ten days before the final hearing; the barrister in question was a member of the same Chambers as the president of the tribunal. In reaching its decision, the arbitral tribunal referred to an overriding principle of the immutability of properly-constituted tribunals, which in the tribunal’s opinion meant that a party cannot amend its legal team after the constitution of the tribunal in such a fashion as to imperil the tribunal’s status or legitimacy.

The issue that lies at the heart of the Hrvatska/Slovenia case is now specifically addressed in Guidelines 5 and 6 of the IBA Guidelines on Party Representation (the “IBA Guidelines”). According to the IBA Guidelines, also other forms of counsel misconduct may lead to sanctions set forth in Guideline 26. These include admonishment, the drawing of adverse inferences, and the allocation of costs. Interestingly, however, exclusion or disqualification of counsel is not explicitly mentioned as a remedy for other misconduct than breach of Guideline 5, which provides that “once the Arbitral Tribunal has been constituted, a person should not accept representation of a Party in the arbitration when a relationship exists between the person and an Arbitrator that would create a conflict of interest”. Still, exclusion of counsel arguably falls within the ambit of the general rule contained in Guideline 26(d), which gives the arbitral tribunal the power to “take any other appropriate measure in order to preserve the fairness and integrity of the proceedings”. This catch-all provision probably empowers the tribunal to disqualify a counsel in extreme instances of manifest misconduct, subject to any applicable mandatory rules.

In practice, requests for disqualification and exclusion of counsel have occasionally been made also in circumstances not directly covered by the IBA Guidelines. For example, in a recent case governed by the Arbitration Rules of the Finland Chamber of Commerce (the “FAI Rules”), Respondent B (i) first nominated Mr. X – counsel for Claimant A – as a fact witness in the arbitration on the grounds that Mr. X had also participated in the negotiation and drafting of the contract that constituted the subject-matter of the dispute, and (ii) then requested that the arbitral tribunal exclude him from appearing as Claimant’s counsel at the hearing where Respondent was going to ask questions to him.

The arbitral tribunal dismissed the request but ordered that, at the hearing, Mr. X shall be examined as the first fact witness immediately after the parties’ opening statements with a view to ensuring that Claimant will not enjoy any procedural advantage on account of Mr. X’s involvement in the contract negotiations. Below is an anonymized extract of the arbitral tribunal’s reasons and ultimate decision.

Reasons for the arbitral tribunal’s decision

In its Statement of Defence, Respondent B stated as follows: “B nominates Mr. X as one of its witnesses with the evidentiary themes noted later on (…) Mr. X has central first-hand information (he actually created a part of the central information) important to this arbitration. B’s position is that Mr. X cannot act as a counsel of A in the upcoming oral hearing. This is based on general procedural principles in western democracies related to fair trial, and the Finnish Procedural Code 17:50.2 §.”

Claimant A has objected to M. X not being able to represent Claimant at the hearing. In its submission of [date], Claimant states: “Mr. X is willing to testify on all non¬-privileged matters relating to the negotiations. A nevertheless respectfully requests the Arbitral Tribunal to order that Mr. X is allowed to be present during the Parties’ opening presentations [and that he] is examined as the first witness and thereafter allowed to be present in the hearing room (…) Respondent should not be allowed to interfere with A’s selection of its legal representation (…)”

The Parties have exchanged submissions on [dates]. In its submission of [date], Respondent, inter alia, makes the following statement: “Respondent notes that it is highly unusual that an attorney-at-law acts as counsel in both negotiating a contract and litigating the same contract. Normally a counsel negotiating a contract would act as a witness, and litigation would be handled by another counsel (…) Respondent does not dispute A’s freedom to choose its own representation. However, in case the representation chosen by Claimant limits Claimant’s options or has other consequences, those (…) shall be borne by Claimant.”

The Arbitral Tribunal has carefully considered the arguments relied on by the Parties and hereby unanimously renders the following decision regarding the possible exclusion of Mr. X to act as counsel to Claimant at the hearing and his presence at the hearing:

The Finnish Procedural Code (“FPC”) 17:50.2 § contains the following provision: “A person who has been called as a witness (…) may not be present during the consideration of the case beyond what is necessary for his or her examination”. First of all, the Arbitral Tribunal notes that the provisions in the FPC, including FPC 17:50.2 §, do not apply as such to this international arbitration. The Arbitral Tribunal further notes that neither the Finnish Arbitration Act nor the FAI Rules contain provisions similar to the FPC.

Moreover, it is a general and fundamental principle in international arbitration that a party may be represented by a legal representative chosen by that party. In this regard, the Arbitral Tribunal refers to e.g. Born: International Commercial Arbitration (2nd Ed 2014) at pages 2833 ff. and 2845 ff. This principle is acknowledged by Respondent in its letter of [date] (…) This entails that only if the representation violates the integrity of the arbitration, will an arbitral tribunal have reason to interfere in this regard. Furthermore, outside possible egregious instances of misconduct, it is not for an international arbitral tribunal to police any possible professional ethics rules (in casu bar ethics rules) applicable under the lex arbitri.

Although the Arbitral Tribunal agrees with Respondent that it is unusual for a person who has been involved in drafting and negotiating a commercial contract to appear as counsel to a party in a subsequent dispute relating to that same commercial contract, the Arbitral Tribunal does not find sufficient grounds for excluding Mr. X from acting as counsel to Claimant in the hearing and Mr. X may be present during the Parties’ opening statements which should, in any event, reflect the submissions made by the Parties in their written pleadings.

However, the Arbitral Tribunal is mindful that this should not entail that Claimant will enjoy any, even very remote or merely theoretical, procedural advantage during these proceedings. In order to dispose of any such risk arising from the fact that Claimant elects to be represented by Mr. X, who was also to a certain extent involved in the drafting and negotiation of the suite of documents, the construction/interpretation of which is at the centre of this dispute, entails that, at the hearing, Mr. X must be examined before any other witnesses, i.e. as the first witness of fact immediately after the opening statements.

After giving evidence, Mr. X may resume his role as counsel to Claimant and participate in the hearing, including making submissions etc. on behalf of Claimant. Moreover, Mr. X is not prevented from examining witnesses but he must, obviously, respect the different roles of a witness and counsel to one of the parties. Respondent’s counsel will be able to object to a certain line of questioning or the way a question is framed and the Arbitral Tribunal will be vigilant in making sure that due process is observed and adhered to by all parties and their counsel and expects and requests that counsel conduct themselves accordingly.

Decision

Mr. X may act as counsel to Claimant in the hearing and Mr. X may in this capacity be present during the Parties’ opening statements and subsequent parts of the hearing. Mr. X shall be examined as the first witness immediately after the Parties’ opening statements.

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ACHMEA

Tue, 2018-03-06 06:28

Crina Baltag (Acting Editor)

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Will the Commercialisation of Blockchain Technologies Change the Face of Arbitration?

Mon, 2018-03-05 01:11

Charlie Morgan

Herbert Smith Freehills

Blockchain and its potential applications are well-documented by technologists and early-adopters. Over the last 12 months, however, this technology has started to take centre stage in more mainstream industry discussions. With the price of Bitcoin spiking early this year (following which the cryptocurrency lost over 50% of its value), blockchain has become big news and regulators are also starting to consider what new legislation is required to account for blockchain’s popularity.

Most of the headlines still focus on digital currencies. However, blockchain has far wider-reaching potential and has the prospect fundamentally to disrupt modern business practice in many sectors. Indeed, in a number of sectors, blockchain applications are already being tested as a means to streamline industrial processes and make cross-border trade more transparent, efficient and cost-effective.

In many of those industries, arbitration is currently the prevailing mechanism for resolving commercial disputes. As users of arbitration are rushing to understand and evaluate how blockchain can enhance their business, arbitration practitioners need to appreciate what impact this trend could have for the popularity and physiognomies of arbitration in the future.

Blockchain and smart contracts explained

In simple terms, blockchain is a way of recording data. It is a decentralised public ledger of transactions that is maintained by its users, rather than by a trusted third party. Each blockchain ‘protocol’ operates on cryptographic technology and acts as a dynamic registry for the exchange of digital assets and verification of digital information.

Transactions on the blockchain are divided into encrypted, irreversible and time-stamped ‘blocks’ which are shared and corroborated by the users of the blockchain (or a selection of such users). Users of the blockchain can see the block (and, in some cases, approve it), but nobody can unilaterally modify any block that has been approved. Each ‘block’ is then chained to the next block, using cryptographic signatures to ensure validity and prevent tampering.

‘Smart contract’ is the term that is used to refer to software programmes that are built on the blockchain. A smart contract is not a contract in the traditional sense, and this term therefore causes some confusion. Instead, a smart contract is the execution via software code of an agreement (or part of an agreement) reached between two or more parties.

How will disputes evolve as blockchain grows in popularity and application?

Some technologists argue that blockchain and smart contracts eliminate the need for disputes altogether on the basis that the parties’ bargain is automatically implemented in a decentralised manner, when the conditions agreed between the parties are fulfilled. However, this assumes that parties transact in a perfect world in which their agreements are limited to digital transactions. That is of course a very different world to the one in which we live.

Indeed, much of the performance required under commercial contracts takes place in the physical world. As a result, while self-executing smart contracts and blockchain applications have the potential to increase the efficiency of dispute resolution dramatically, disputes will not disappear altogether. It is therefore of central importance that ‘smart contracts’ are anchored within a valid legal framework and that parties identify, at the outset, the applicable dispute resolution mechanism.

A sensible solution, at this stage, is for parties to enter into ‘smart agreements’, meaning traditional legal agreements (entered into in compliance with traditional principles of contract formation), which contain one or more clauses that will be executed through smart contracts on the blockchain.

This approach ensures that parties preserve their ability to resolve both blockchain and real-world disputes in a single chosen dispute resolution forum (or tailored mechanisms for different types of disputes, if the parties so elect). It also ensures that all of the parties’ rights and obligations pertaining to a legal relationship (or a particular aspect thereof) can be identified readily in a single document.

In the event that parties develop ‘smart contracts’ without a sound legal basis for their enforcement in the real world, those parties will face very real issues in determining the applicable laws and relevant decision makers for resolving their disputes (for instance, if there is a software bug in the code of their smart contract, an external data source is discontinued or a future disagreement arises between the parties regarding the way in which the software executed). Indeed, the decentralised and extra-territorial nature of transactions that take place on the blockchain makes conflict of law questions extremely complex.

Is arbitration the best forum for resolving disputes under ‘smart agreements’?

Assuming that parties heed the advice of entering into ‘smart agreements’, should they refer their ‘blockchain disputes’ to arbitration?

In the author’s view, arbitration is a perfect candidate for resolution of blockchain-based disputes.

Arbitration is a non-national and neutral dispute resolution forum which enables parties to nominate a tribunal of industry or technical specialists to efficiently and effectively resolve the different types of disputes that may arise from their relationship (which, as mentioned above, may include real world as well as digital world disputes, in each case ranging from a simple contract law claim to claims of a highly technical and complex nature).

The relative ease of cross-border enforcement of awards under the New York Convention also gives arbitration a huge advantage in the context of blockchain disputes, given the transnational nature of this technology and of the players involved in blockchain transactions.

But arbitration also offers a further material benefit in this context, compared to court litigation. Indeed, the inherent flexibility of the arbitral process (its procedure being tailored in material respects by the parties’ agreement) enables efficient conflict management approaches to be developed and for the dispute resolution process itself to harness the benefits of blockchain technology. This means that arbitration has the potential to keep pace with a new breed of disputes.

The flexibility of arbitration can also enable parties to agree an arbitration procedure which helps to head off the challenges that arise from the pseudonymity of users on the blockchain and the immutability of published ‘blocks’.

Indeed, arbitration offers parties the ability to resolve all or some of the issues in dispute ‘via the blockchain’. Indeed ‘blockchain arbitration’ can enable an arbitral tribunal to draw upon evidence available on the blockchain in reaching its decision. That decision can then also be recorded directly on the blockchain in encrypted form (such that it can automatically be enforced, if the operative parts of the award entail a transaction of digital assets).

Several companies are developing arbitration protocols that parties can include as part of the code of their smart contracts. Indeed, successful ‘mock’ arbitrations have also taken place ‘on the blockchain’ to evidence the viability of this concept.

However, notwithstanding the exciting potential for ‘blockchain arbitration’, the same message applies as for any other smart contract: an arbitration protocol on the blockchain must be enforceable in the real world. Again, this militates in favour of parties entering into smart agreements, before publishing to the blockchain the relevant smart contracts agreed thereunder (including in relation to their agreed dispute resolution mechanism).

Conclusion

Blockchain technology and its applications are filtering into mainstream industries. This technology has the potential to create widespread efficiency savings, including in the context of contract execution and dispute resolution.

As a result, we should expect to see changes in how disputes arise and how they are resolved. However, arbitration is well-placed to cater for a new breed of disputes, as long as its practitioners are prepared to evolve rapidly to meet their clients’ developing needs. New dispute resolution procedures must seek to preserve the efficiency gains made through the use of blockchain, even when disputes arise. This may require arbitration procedures that narrow the scope of disputes at an early stage (e.g. to focus on a particular failed step in the blockchain), permit the gathering of evidence on the blockchain and, subsequently, full resolution of digital world disputes – and enforcement of their outcome – through virtual platforms.

However, in developing protocols and smart contracts for ‘blockchain arbitration’, it is important to remember that a smart contract is merely a piece of software code. In order for parties operating on the blockchain to be able to enforce their arbitration agreements, the relevant smart contracts must be anchored within a valid legal framework.

Parties who disregard these questions due to the so-called self-executing nature of these digital ‘contracts’ will increase their legal risk, and likely encounter the very real world problems of increased uncertainty and exacerbated cost in determining how and by whom disputes will be resolved. This in turn could delay the global adoption of blockchain applications more widely.

The solution, at this stage at least, may be for parties to enter into smart agreements, entered into in compliance with traditional principles of contract formation, which provide for all those clauses which are capable of self-enforcement to be implemented on the blockchain but ensure that the underlying rights and obligations are nonetheless enforceable in the real world too, if anything goes wrong.

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International Energy Arbitration: Is A New Wave Of ‘Resource Nationalism’ On Its Way?

Sun, 2018-03-04 01:47

Lee Rovinescu

ITA

The 5th Annual ITA-IEL-ICC Joint Conference on International Energy Arbitration was held in Houston last month, and the focus was on the year past and the year ahead in the arbitration of international disputes in the energy industry. From the topics discussed, predictions rendered and questions raised at the conference, attendees departed considering whether the next wave of resource nationalism – the meaning of the term itself engendering debate among conference panelists (discussed below) – would come from a North American state.

Key developments in North America: Naturally, the re-negotiation of NAFTA was an issue that received lots of attention over the course of the two-day conference, not least because the keynote address was delivered by US Department of State Senior Advisor, Richard Westerdale. The status of the negotiations and the form that investor-state dispute settlement (ISDS) will take has been the subject of much analysis by the arbitration community over the past 12 months.

While the future of NAFTA received the requisite air time at the conference, a different North American development on which (depending on your preferred source of arbitration news) the community has focused less was one of the headline points from the conference’s first panel – “Mexican Energy Disputes: A New Era”, chaired by Silvia Marchili with panelists Prof. Julián de Cárdenas Garcia, Cecilia Ibarra-van Oostenrijk, Raymundo Piñones de la Cabada and Gabriel Salinas. The issue is the potential impact that Mexico’s July 2018 Presidential election will have on the country’s energy sector. The leading candidate, Andrés Manuel López Obrador of the National Regeneration Movement (abbreviated as MORENA in Spanish) was a staunch opponent to the opening of Mexico’s energy sector in 2013, and has alluded to unwinding those reforms if elected.

A look back – opening of Mexico’s energy industry (2013): In December 2013, Mexico introduced constitutional amendments ending the state’s monopoly over the oil and gas sector, which had persisted since the industry’s nationalization in 1938. Congress voted in favor of opening the sector to private and foreign investment (the Apertura). The state’s proven oil reserves rank in the top 15 to 20 worldwide, and so the Apertura created significant opportunity for foreign investors. In particular, the state sought private investment for its deep-water oil resources, as well as its shale oil and gas fields. Since then, Mexico has held at least ten tenders for private participation in the industry. According to a government website, the state has since signed 74 contracts for the exploration and extraction of hydrocarbons, with 70 different companies from 18 different countries (including Mexican companies).

The standard form contracts issued for the various bidding rounds – discussed by the panel at the conference – are publicly available. The contracts used in the more recent bidding rounds contain what Professor Cárdenas considers to be a rather unique provision acknowledging the existence of protections under investment treaties. For example, the September 2017 contract used in the third bidding round for shallow water blocks provides: “The Contractor shall enjoy the rights provided for in the international treaties to which the State is a party” (Article 27.9). During the panel discussion, Ms. Marchili asked whether such provisions confer on tribunals constituted under the contracts jurisdiction to consider treaty breaches, but the answer from the panel was that there are different possible interpretations.

As noted by Professor Cárdenas, the standard form contracts used across all of the bidding rounds have arbitration clauses that are favorable to foreign investors: arbitration under the UNCITRAL Rules, seated in The Hague (see, e.g., Article 26.5 in the standard form contract for the first bidding round for deep water blocks). However, he also noted that the contracts contain a carve-out for disputes arising from the “administrative rescission” of a contract, which are instead referred to the Federal Courts of Mexico (see, e.g., Article 26.4).

Under the standard form contracts, the National Hydrocarbons Commission (the state entity signing the contracts) may rescind a contract based on, among other grounds, a failure by the contractor to: (i) comply with a minimum work program, or (ii) make payment or deliver hydrocarbons in accordance with the contract (see, e.g., Article 23.1). Naturally, there is scope for differing interpretations on the manner in which the grounds for rescission may be applied. And, depending on the outcome of the July election, the provisions concerning administrative rescission may be brought to the fore – especially if a new Administration attempts to renegotiate or unwind the contracts and wishes to creatively avoid resolving disputes arising therefrom in an international forum (for further discussion on administrative rescission under Mexican law, see recent Kluwer blog post by Jaramillo).

A look ahead – Mexico’s general election (July 2018): Predicting election results has proven to be a fruitless endeavor. Notwithstanding, the current reports are that Mr. López Obrador is the leading candidate in Mexico’s July 2018 Presidential election, and that should be of interest to the international arbitration community.

Mr. López Obrador’s policies were considered at the conference during a discussion on “Resource Nationalism in Emerging Markets.” The panel was moderated by Sylvia Noury, and included panelists R. Doak Bishop, E. Ned Mojuetan, Kate Brown de Vejar, and Juan Carlos Boué. As mentioned above, Mr. López Obrador was an opponent of the 2013 Apertura, and, for the upcoming election, he has campaigned on a nationalist / protectionist agenda. He has expressed a desire to revisit the regulatory changes introduced through the Apertura. Ms. Brown de Vejar – who is based in Mexico City – explained that Mr. López Obrador’s camp has promised respect for the rule of law, but indicated that he would still consider pursuing the renegotiation of contracts that do not align with his view of the energy sector.

Since the conference, Mr. López Obrador’s intentions have become clearer. On 5 February 2018, speaking about the many contracts signed with foreign oil companies since December 2013, he was reported as saying in no uncertain terms: “We will revise all these contracts, we will not allow the oil, which is owned by the people and the nation, to go back into the hands of foreigners” (see local and international press reports).

Is a new wave of resource nationalism afoot? In Ms. Brown de Vejar’s view, there is a risk that the deals that have been struck since the Apertura may be so vulnerable to abuse by the foreign contracting parties that there may be a call for their renegotiation irrespective of the outcome of Mexico’s election. A discussion on this issue would not be complete without acknowledging the lively debate on her panel concerning the definition of resource nationalism. Half the panel rejected the term as being unfairly pejorative; the term, those panelists said, is used to imply that there is something improper with a state taking action to ensure that sufficient returns from its natural resources enure to the benefit of the state and its people. The other half of the panel accepted the term, explaining that it is used to refer to circumstances when a state reneges on undertakings made in contract or to induce foreign investment in order to increase government take.

In any event, whatever label is assigned to Mr. López Obrador’s threat to revisit Apertura contracts, if he is elected, and if he does ultimately act on such threats, foreign investors certainly will consider what actions can be brought under the arbitration agreements in their contracts and/or pursuant to investment treaties in force.

This leads to an important issue of timing, and full circle to the NAFTA re-negotiation: whether the treaty will be renegotiated and agreed before Mexico’s general election. Given the constitutional constraints preventing foreign investment in Mexico’s energy industry when NAFTA was agreed in 1992, Mexico made a general reservation in Annex 602.3 reserving to itself the exploration and exploitation of crude oil and natural gas. NAFTA was not amended after the 2013 Apertura to reflect the changes in Mexico’s energy policy referenced above. Meanwhile, American and Canadian companies already have signed contracts to participate in the sector. If NAFTA’s renegotiation is completed prior to the election, then those companies may receive significantly better investment protection than will be available if NAFTA’s renegotiations are completed under an Administration run by Mr. López Obrador.

With thanks to Amy Tam for research assistance.

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