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The Blockchain ADR: Bringing International Arbitration to the New Age

Tue, 2018-10-09 02:03

Marike R. P. Paulsson

Sometimes, the establishment needs to step aside to let the next promising generation create a new way forward: So it commences with entrepreneurial students at the University of Miami, combining talents of engineering, technology, and international law and arbitration. It is by thinking out of the box that disruptive changes happen and they must in order to break through an outdated status quo. The founder of “Blockchain ADR”, Alexander Fischetti, launched the idea of using blockchain for international arbitration in Sao Paolo, in March 2018. The University of Sao Paolo and the Global Legal Institute for Peace collaborated with the World Economic Forum to understand blockchain from the engineering, the economic, and the legal perspective.

The idea of blockchain is that it is a platform, a technological carrier of data, if one wishes to understand it that way. When an engineer from the University of Sao Paolo, not versed in international arbitration, asks: “Are international arbitrations mostly conducted with written submission and in person hearings?” One could still answer defiantly that in the modern era of electronic communication, institutions handle arbitrations by accepting electronic submissions and facilitating virtual hearings. However, then the engineer asks: “Are those documents submitted through email platforms and similar carriers?” The answer is: “Yes, probably.” Email carriers are far less secure than a blockchain carrier. They are too easy to hack. Blockchain is not. The step from paper submissions to email seemed acceptable when the step to blockchain was not. The resistance to blockchain by the establishment is the resistance to disruptive change but not a rational one, and it is certainly not an informed resistance.

What are the advantages of blockchain? The secure transportation of data, the possibility of storing original data and the almost 100 % guarantee that data will not get lost. What then could the outcome be under the New York Convention? Are there advantages and new challenges? Yes.

Article II of the New York Convention and the Blockchain

Article II of the New York Convention provides that arbitration agreements must be, in principle, recognized as binding. If the requirements listed under Article II are met, a court shall refer the parties to arbitration. This provision was perhaps construed in a timely fashion during the three week conference in 1958 but the consensus to add Article II to the New York Convention was one of the 11th hour and with that came some inevitable drafting errors.

Article II dictates that the arbitration agreement must be valid and its subject matter must be arbitrable. Recognition cannot take place if the agreement would be null and void or incapable of enforcement. Yet, the real hurdle to modern day recognition of the arbitration agreement is the ‘in writing’ requirement of Article II(2) of the New York Convention. The agreement meets the ‘in writing’ requirement if the agreement or the clause has been signed by the parties or has been concluded through an exchange of telegrams or telefaxes. The 2006 UNCITRAL Recommendations addressed the outdated idea of telegrams. UNCITRAL recommends that this requirement must be read to ‘include’ the electronic means of communication, and this would open the door to using blockchain as a means to conclude arbitration agreements.

So what is the advantage of blockchain for arbitration agreements? The arbitration agreement once concluded cannot be altered on this platform. The original is preserved on the blockchain. As far as securing those agreements and not losing the data, it is better placed on the blockchain. Now that UNCITRAL has endorsed the use of electronic communications, parties ought to use a blockchain format rather than other electronic carriers. The blockchain provides the users with unique keys with which only they can access the data. This means that the parties to the arbitration have a unique way to access the original arbitration agreement without being able to alter it (or lose it for that matter). Subsequently, the parties can allow the arbitral institution to have a key as well to the data and they can provide that data to any enforcement court that is called upon to refer the parties to arbitration. Article II with its ‘in writing’ requirement is not simply a matter of evidence as it is under most national arbitration laws. At the time, an ample discussion took place among delegates to feature the idea of tacitly accepting an agreement to arbitrate. At the time, that idea was rejected because the delegates recognized the reality that modern customs in international trade dictated the use of agreements in writing. The takeaway is that the New York Convention including Article II should over time be adapted to modern customs in international trade, and soon that should include arbitration agreements on the blockchain.

Article IV of the New York Convention

If Article II has often led to the premature death of arbitration because most agreements did not meet the now rather stringent ‘in writing’ requirement, one has yet to explore the challenges under Article IV of the New York Convention, which I tend to refer to as the Pandora’s Box. Article III is perhaps the core instruction to courts under the New York Convention: courts of the country where enforcement is sought must recognize awards as binding. There is a presumption of validity. Pieter Sanders, the founding father of the New York Convention, created the allocation of the burden of proof in Articles IV and V (referred to in Article III). Refusal can only take place on the basis of the grounds listed in Article V. A court can grant the enforcement if the applicant has complied with the requirements listed in Article IV. A court will assess the submission of documents under Article IV on a prima facie basis only. Article IV of the New York Convention provides that the successful party in arbitration must supply the original arbitration agreement or a copy thereof, the original award or a copy thereof, and finally, the applicant must provide a sworn translation in the official language of the country where enforcement is sought.

With that, the request for enforcement ought to be simple which supports the idea that enforcement of an award by the successful party in the arbitration should be relatively simple which is in line with the purpose of the New York Convention, which contributes to the effectiveness of international arbitration. Yet, in practice, Article IV became a volatile article and the subject of unscrupulous use by counsel and judges alike. This is because Article IV also requires that copies must be certified and signatures authenticated. However, not a single guideline was provided as to who should do this, where this should be done and what should be authenticated: the daunting ‘Ws’.

If the parties were to use the Blockchain ADR as a platform for international arbitration and enforcement under the New York Convention, many of these obstacles under the New York Convention could be disposed of.

The Blockchain ADR, as discussed above, would be the platform holding all documents and data related to an international arbitration procedure from beginning to end, meaning that the arbitration agreement and the arbitral award(s) would be stored here. This means that the party requesting the enforcement of the award under Article IV of the New York Convention, can simply access the blockchain server with its unique key to find not a copy but the original arbitration agreement and the original arbitral award. Because the data on the blockchain is authentic, no certification of copies or authentication of signatures is required. Blockchain holds originals that are secured, that cannot be altered or lost. It provides an answer to the many questions raised under Article IV of the New York Convention. It would, therefore, be wise for users in arbitration and stakeholders to implement the idea of blockchain in order to preserve some of the core provisions of the New York Convention and transplant those sixty year old texts to the next era.

Moving Forward

In order for users to rely on this, it will again be necessary for institutions and legislators to adapt rules and laws. First, the New York Convention – Article IV – does not include the possibility of using the Blockchain for international arbitration, surprisingly in 1958. UNCITRAL would have to issue recommendations as they did in 2006, to endorse the use of blockchain in addition to the other forms of electronic communication that provides a legitimate basis for including blockchain-based ADR – with its secured storage of data that are originals and authentic – in Article IV. It would have to issue a recommendation that provides that originals are not only paper originals but ‘blockchain originals’ that do not require authentication or certification given the nature of blockchain. No more daunting ‘Ws’. Admittedly, the status of those recommendations under Article 31 of the Vienna Convention on the Law of Treaties is one of soft law only. But realism compels us to resort to this, as one could not imagine a replacement of the treaty itself or even an amendment or supplement to the treaty. Yet, we must allow our disruptive game changers to bring this pivotal form of dispute resolution to the New Age of international trade.

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The Contents of Journal of International Arbitration, Volume 35, Issue 5

Mon, 2018-10-08 02:45

Maxi Scherer

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

Klaus Peter Berger, The Direct Involvement of the Arbitrator in the Amicable Settlement of the Dispute: Offering Preliminary Views, Discussing Settlement Options, Suggesting Solutions, Caucusing

This article explores the question whether and to what extent international arbitrators should become directly involved in the parties’ efforts towards an amicable settlement of their dispute. It demonstrates that the controversy over the international arbitrator’s role in the facilitation of settlements is just one example of a wider and long-standing debate on the proper role of a tribunal in international arbitral proceedings. The article favours a pragmatic approach based on party autonomy as the foundation of arbitration. The parties may very well agree to expand the tribunal’s mandate so that the arbitrators may also act as conflict resolvers by facilitating a settlement of the parties’ dispute. However, arbitrators may never impose their preliminary views on the parties or employ any other means to promote an amicable settlement against their will.

Michael W. Bühler, Out of Africa: The 2018 OHADA Arbitration and Mediation Law Reform

Almost twenty years after it adopted the Uniform Act on Arbitration (UAA), the Organization for the Harmonization of Business Law in Africa (OHADA) revised its UAA and adopted a new Uniform Act on Mediation (UAM), along with a fresh set of arbitration rules of the Common Court of Justice and Arbitration in Abidjan (the ‘CCJA Rules’). These three texts were revised with the assistance of an external consultant, the author of this article. Among other changes, the 2018 UAA has provided arbitral tribunals with an express power to determine whether compulsory pre-arbitral steps (such as mandatory mediation) have been complied with, and to suspend the arbitration until such requirements have been met. It has also fixed strict time limits for local judges asked to act in support of arbitration. This article further questions whether the few limited improvements to the CCJA Rules will positively impact the future of the CCJA’s arbitration centre, given its very low caseload. With the 2018 UAM, a solid legal platform for the use of mediation in the region is now in place. The training of mediators and arbitrators, and their ability to carry out both the acts and rules in an efficient manner and effectively coexist with the judiciary, remain major challenges for the region.

Gordon Blanke, Free Zone Arbitration in the United Arab Emirates: DIFC v. ADGM: (Part I)

This article is published in two parts and discusses the concept and practice of free zone arbitration in the United Arab Emirates (UAE). More specifically, the article seeks to highlight the status quo of arbitration in the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), both of which may serve as an offshore seat of arbitration in their own right. Both the DIFC and the ADGM offer a common law alternative to arbitration in onshore UAE. Part I of the article focuses on arbitration in the DIFC. It provides an introduction to the judicial and legislative framework of the DIFC, including in particular the main provisions and the operation of the DIFC Arbitration Law, the institutional framework of arbitration in the DIFC, the curial function of the DIFC Courts in DIFC-seated arbitrations, and the recognition and enforcement of domestic DIFC and foreign arbitral awards in the DIFC. Part I also discusses the DIFC Courts’ status as a conduit jurisdiction facilitating the recognition and enforcement of non-DIFC awards for onward execution in onshore Dubai and beyond.

Edgardo Muñoz, Mexican Punitive Damages in Commercial Arbitration: Forecasting the Future

In February 2014, the Supreme Court of Mexico, citing US scholarship and case law, held that punitive damages had to be awarded to a tort plaintiff as part of the indemnity afforded by Mexican law under the heading of moral damages (daños morales). Before this landmark decision, nothing similar to punitive damages existed in the Mexican legal system. In the context of arbitral proceedings, this new interpretation of moral damages gives rise to two questions at the core of the international discussion on punitive damages and arbitration. The first has regard to the power of arbitral tribunals with seat in Mexico to award punitive relief when the applicable substantive law, including Mexican law, contemplates it. The second is the possibility of enforcing foreign-based law punitive damages awards in Mexico. Despite the early stage and still incipient discussion regarding the true nature and application of punitive damages in Mexico, the author forecasts that, while they may be an available relief in arbitration proceedings in Mexico, this decision is a rare exception and their quantum limited. In addition, Anglo-American law based punitive damages awards may still find a public policy obstacle for their enforcement or grounds for their nullity in Mexico.

Mauro Megliani, Thou Shalt Not Arbitrate: Sovereign Debt and Investment Arbitration

This article addresses the issue of the interaction between sovereign debt and investment arbitration. The point has been recently highlighted by the Report of the UN Independent Expert on Sovereign Debt. In this context, investment arbitration has been regarded as capable of disrupting an orderly debt restructuring, since creditors may prefer operating outside a restructuring process and submitting their claims to arbitration. Arbitration becomes an escape route for creditors who do not want to accept take-it-or-leave-it conditions and are faced with domestic courts who decline to hear the case on the basis of the immunity doctrine. Arbitration may well be the ideal venue to balance the interests at stake. Under a human rights approach, creditors are called not to lend or have to cease lending when doing so would affect the socio-economic rights of the population. Under a necessity approach, the obligation of paying interest and reimbursing capital would be suspended to the extent that it would affect the duty of a state to provide essential services to the population. Under a transnational public policy approach, a claim is not enforceable when doing so would infringe the socio-economic rights of the population. Under an expropriation approach, the compensation for a default should consider the speculative intent in purchasing bonds after the default and award not the nominal value but the purchase price.

BOOK REVIEW

Philip Wimalasena, Die Veröffentlichung von Schiedssprüchen als Beitrag zur Normbildung [The Publication of Arbitral Awards as a Contribution to Legal Development] Tübingen: Mohr Siebeck. 2016.

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Beyond USMCA: ISDS à la carte

Mon, 2018-10-08 00:17

Nikos Lavranos

Zooming out from the excellent analysis of Robert Landicho and Andrea Cohen on the specific changes that the USMCA as the intended successor of NAFTA will bring for investment protection and ISDS, this contribution will place the USMCA in a global perspective, in particular regarding the efforts of the EU to replace ISDS system with the ICS/MIC.

The à la carte approach of Canada and Mexico

Canada is an interesting example of the very flexible à la carte approach regarding ISDS provisions. When CETA was first finalized, Canada agreed to an old school ISDS approach with a few minor tweaks. However, after the backlash against ISDS in Europe, which was mainly focused on TTIP, Canada accepted – after a two year long ‘legal scrubbing’ process – the EU’s proposal for the so-called investment court system (ICS). In parallel though, Canada accepted the old school ISDS system in the CTTP, whereas in the context of the USMCA, Canada was ready to give up ISDS with the US, while maintaining it in a restricted version regarding Mexico.

Also, Mexico has been applying the à la carte approach, depending on the demands of the other Contracting Parties. Like Canada, Mexico also signed up to the old school ISDS system in the CTTP and accepted to maintain it for the USMCA, whereas it recently signed up to the ICS proposal in the updated EU-Mexico FTA.

Thus, on the one hand, both Canada and Mexico have accepted the ICS as the purported successor of ISDS in their bilateral FTAs with the EU, while on the other hand, they are keeping ISDS in the CTTP – and as far as Mexico is concerned in the USMCA.

In contrast, US President Trump has been more consistent in withdrawing completely from the CTTP (formerly known as TTP) on his first day in office and successfully removed ISDS in USMCA regarding Canada. These steps reflect his apparent aversion against ISDS, despite the fact that the US never lost a NAFTA case and US investors have been heavy (and often successful) users of the ISDS system under NAFTA and other US FTAs and BITs.

The à la carte approach of the EU

Whereas the EU has successfully imposed its ICS proposal on Canada, Singapore, Vietnam and Mexico in its FTAs, thereby effectively making the ICS the blueprint for all its future FTAs, it failed to convince Japan to accept it in the recently concluded EU-Japan FTA. Moreover, the EU did not even bother to put it on the table for the currently on-going FTA negotiations with Australia and New Zealand.

The reason for that is not so much that the EU does not want to include some sort of ISDS/ICS provisions in its FTAs, but rather due to the competence debacle after the CJEU determined in its Opinion 2/15 on the EU-Singapore FTA that the EU does not have exclusive competence over ISDS and the “Wallonia-drama” when Wallonia threatened to block the finalization of the CETA negotiations. In other words, the EU now prefers to conclude purely old school trade FTAs, leaving investment protection and ISDS chapters out of the FTAs unless all Member States sign up to them.

Nonetheless, the EU continues its efforts to create traction for a multilateral investment court (MIC), which is currently negotiated within UNCITRAL. In this context, it is interesting to note that Canada is a strong supporter of the EU in the UNCITRAL negotiations and coincidentally managed (together with the EU) to get a Canadian investment treaty negotiator to become chair of the UNCITRAL working group. In stark contrast to that, the US and Japan have been and continue to be the strongest critics of the MIC proposal. The next UNCITRAL negotiation round will take place at the end of October/early November in Vienna. After that, it will be clear to what extent the MIC is supported.

Thus, the bottom line is that far from creating uniformity and consistency with regard to ISDS provisions at a global level, States are in fact introducing different ISDS/ICS configurations and thus create more fragmentation and potential inconsistency. Indeed, the US, Canada and the EU are even dropping ISDS completely from their FTAs, which is exactly what many NGOs, academics, national parliaments and the European Parliament, are calling for.

Accordingly, the future ISDS menu, depending on the States involved, could look as follows (with various combinations possible):

• no ISDS
• ISDS light and restricted
• old school ISDS
• ICS
• MIC

Less Rule of Law and less access to justice

So what are the consequences of restricting or even completely eliminating ISDS?

Firstly, access to justice is limited and made more expensive because it will require – as rightly noted by Robert Landicho and Andrea Cohen – more sophisticated nationality planning and treaty shopping, which in turn means additional expenses to set-up and finance subsidiaries with actual or substantial business activities in countries like Switzerland or post-Brexit UK, which still maintain numerous BITs with old school ISDS provisions. Obviously, many SMEs, who hardly can afford the current ISDS system, will be completely shut out of the system, unless they bring Third Party Funders (TPFs) on board. In other words, increasingly only large multinationals will be able to go through the whole ISDS procedure, including the recognition and enforcement phase.

Secondly, States will increasingly be able to get away with behavior against foreign investors, which otherwise would fall foul of their legal obligations under their BITs and FTAs. Prudent investors are aware of that and will put a risk premium on their products and services, which eventually will have to paid by the end consumers, including those in developing and transitional countries.

So, the main conclusion to be drawn from the above is that States, such as the US, Canada, the EU and its Member States, which used to be the champions of promoting ISDS and thus improving the Rule and access to justice worldwide are now the ones who actively undermine exactly those virtues.

Thus, in future the menu carte will be increasingly accompanied by a note of the Chef stating that “unfortunately, ISDS is not served anymore” or that “unfortunately, as of today, certain ISDS ingredients have been replaced by ICS/MIC ingredients”.

In any event, one thing is certain: the food will not taste as good as it used to be and the bill will be much higher.

Bon appétit!

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Swiss Federal Supreme Court Confirms the Principles for the Admissibility of a Success Fee

Sat, 2018-10-06 23:41

Georg von Segesser and Petra Rihar

In a decision dated 26 July 2018 and published on 29 August 2018, the Swiss Federal Supreme Court (the “Supreme Court”) dismissed an appeal to set aside an arbitral award as it found that Swiss public policy was not violated by a sole arbitrator’s confirmation of a success fee owed to a Swiss law firm by its client. With reference to its previous case law, the Supreme Court held that the disputed success fee did not raise any issues despite the disproportion between its fixed and variable parts and the lack of alignment it created between the client’s and counsel’s interests (4A_125/2018).

Background

B. AG, a Zurich based law firm (“B”), and A. SA, a Portuguese company seated in Oliveira de Frades (“A”), entered into two Engagement Letters agreeing that B would represent A, as claimant and counter-respondent, in two ICC arbitration proceedings: the first against C GmbH and the second against D GmbH. With respect to B’s remuneration, B and A agreed on a combination of a reduced hourly fee and a success fee. The Engagement Letters were subject to Swiss law and contained an arbitration clause in favour of Swiss Rules arbitration in Zurich.

The Engagement Letter concerning the ICC arbitration against D GmbH provided for different remuneration scenarios in case that the amount sought by A would be determined by a decision or a settlement:

“A success fee consisting of 15% on (i) any amount claimed by and awarded to A. SA (ignoring any successful set-off defence) applies.
The success fee becomes payable in addition to the reduced blended hourly rate. The amounts in question do not include any compensation for attorney’s fees or other costs of arbitration and apply irrespective of whether the amount is determined by a decision of [sic] settlement.
In the event of a full settlement disposing of all claims in the arbitration, the success fee is reduced to 4% calculated based on the difference between the aggregate amount in dispute (total of claim, counter-claim and sett-off defence).
Should B. AG consider a settlement offer made by D. GmbH to be appropriate, it may request A. SA to consent to such offer. Should A. SA not wish to agree to the settlement offer, B. AG in its own discretion may opt to be compensated in line with this success fee arrangement as if the settlement offer had been accepted.
In no event may (i) the success fee be negative or (ii) exceed CHF 1’500’000 or its equivalent in other currencies (success fee cap).”

The amounts in dispute for the two proceedings were EUR 10.2M for A.’s claim and EUR 147.2M for the counterclaim in the dispute with C., respectively EUR 3.1M for A’s claim and EUR 1.8M for the counterclaim in the dispute with D.

After A had reached a settlement with respect to both ICC arbitrations for a total amount of EUR 11.5M to be paid by A, B invoiced A for unpaid hourly fees in the amount of CHF 168,633.60 and the payment of a success fee in the amount of CHF 2M, reduced at B’s discretion from CHF 2.5M (i.e. the sum of the fee caps for the two disputes). A contested the invoice.

B initiated arbitration proceedings against A in Zurich seeking the payment of CHF 2.5M plus interest and expenses. The sole arbitrator ordered A to pay B fees in the amount of CHF 1,666,722, plus interest. When analyzing the admissibility of the disputed success fee, the sole arbitrator considered the principles set out by the Swiss Federal Supreme Court in its decision 4A_240/2016 dated 13 June 2017 (BGE 143 III 600). Regarding the permissible amount of the success fee however, the sole arbitrator expressly deviated from said Supreme Court decision.

A appealed before the Supreme Court arguing that the decision of the sole arbitrator violated Swiss public policy (article 190(2)(e) of the Private International Law Act, “PILA”) because his interpretation of the Engagement Letters disregarded the principle of a lawyer’s duty of independence due to both the amount of the contingency fee and the fee arrangement’s different outcomes for resolving the dispute by decision or settlement.

Decision

The Supreme Court begins its considerations with an analysis of the contested fee agreement. It notes in particular that the agreed upon difference in the calculation of the success fee in case of settlement rather than an arbitral award, resulted in an incentive for counsel to get A to settle the dispute. Indeed, the success fee cap amount of CHF 1.5M could only be reached if 97% of the appellant’s claims were granted by an award. By contrast, in case of a settlement, the reduction of the counterclaims by a mere quarter would suffice to reach the cap. The Supreme Court also refers to the sole arbitrator’s determination that the success fee cap amount would be owed in most cases where the parties reached a settlement. Moreover, the Supreme Court notes that the option granted in the third paragraph of the success fee clause effectively guarantees counsel the settlement-based success fee even if the client were to reject the settlement offer.

Noting that a success fee arrangement can only lead to a better representation of a client if it keeps the interests of client and counsel aligned, the Supreme Court finds that the necessary incentive for counsel was absent from the present fee arrangement. Under these circumstances, the acceptance of a settlement may have been an appropriate solution for the client, but not necessarily also the most economically beneficial.

The Supreme Court goes on to state that an arrangement such as the one under review, where the success-based fee amount outweighs the fixed (hourly) amount by a factor of five, is especially problematic with regard to the independence of counsel as well as certain other provisions of the domestic Swiss law governing the legal profession (“BGFA”). However, in light of its restricted scope of review in appeals against arbitral awards pursuant to art. 190 (2) PILA, the Supreme Court deems these issues not decisive for the present appeal.

Delving into its examination of the alleged violation of Swiss public policy (“ordre public”), the Supreme Court restates its longstanding practice in the matter as follows: the substantive determination of a disputed claim only violates public policy if it fails to recognise fundamental legal principles and, as a result, becomes wholly incompatible with the essential, largely recognised system of values, which, according to the prevailing view in Switzerland, should form the basis of every legal system. These principles include pacta sunt servanda, the prohibition of abuse of rights, the principle of good faith, the prohibition of expropriation without compensation, the prohibition of discrimination, the protection of vulnerable persons and the prohibition of excessive commitment (cf. Art. 27 para. 2 CC) if this constitutes an obvious and serious violation of personality.

The Supreme Court then classifies the present dispute as an issue of the conflict between counsel’s pecuniary interests and those of the client, rather than an issue of the lawyer’s independence from the client’s counterparty. It is in this context, that the Supreme Court goes on to review the following precedents regarding the question whether lawyers’ success fees are compatible with the Swiss public policy.

In an enforcement decision, an award granting a success fee of USD 1,837,500 (corresponding to approximately 2% of the total settlement amount) was classified as compatible with Swiss public policy (5A_409/2014). In another decision, the Swiss Federal Supreme Court held that a foreign arbitral award granting a success fee amounting to 30% of the procedural profit did not violate Swiss public policy (5P.201/1994). Even with a success fee of more than CHF 6,500,000, corresponding to approximately 6.5% of the financial interest, a violation of Swiss public policy was denied, even though the fee agreement in question was a pactum de quota litis, which would be inadmissible under domestic Swiss law (5P.128/2005).

Against this background, the Swiss Federal Supreme Court finds that the success fee under the first engagement letter does not raise any issues. With regard to the second engagement letter, it notes that the total amount of fees confirmed by the sole arbitrator amounts to less than 2% of the amount in dispute, which cannot be considered a violation of Swiss public policy. As for the disproportion between the fixed (“Fixhonorar”) and variable parts (“Erfolgshonorar”) of the fee and the lack of aligned interests resulting from the increased fee in case of a settlement, the Supreme Court finds that these elements also fail to amount to a violation of public policy. Consequently, the Supreme Court dismissed A’s appeal.

Comment

In the present decision, the Supreme Court confirms that a success fee (“pactum de palmario”) is in principle admissible under Swiss law. However, due to the international nature of the arbitral award under appeal and its correspondingly restricted scope of review with regard to alleged violations of Swiss public policy pursuant to art. 190 (2) of the PILA, it does not examine the admissibility parameters under domestic Swiss law as set out in BGE 143 III 600. Instead, it validates the sole arbitrator’s explicit departure from those domestic requirements and refers to its established jurisprudence on the compatibility of success fees with Swiss public policy to validate the award. In doing so, it indicates that only the nominal amount of fees or the ratio between the total fees and the amount in dispute are relevant with regard to an alleged violation of public policy; not however any detrimental effect on lawyerly independence or conflicts of interest created by such a fee arrangement.

For reference, under Swiss law, a lawyer’s success fee is admissible only under the following conditions:

(1) Regardless of the outcome of the proceedings, the lawyer must earn an hourly fee which not only covers his own costs, but also enables him to make a reasonable profit.

(2) There must be a reasonable ratio between the performance-related component and the hourly fee which is owed regardless of the outcome of the case to ensure that lawyer’s independence is not impaired and there is no risk of unfair advantage.

(3) The Supreme Court further sets a time limit: The remuneration agreement containing a success fee, may be concluded at the beginning of the mandate or after the end of the legal dispute, but not during the ongoing representation in a dispute.

(4) The Supreme Court also states that success fees must be scrutinized against the background of Art. 12 lit. e and lit. i of the BGFA warranting the lawyer’s independence as well as the maintaining of clear conditions with regard to the invoicing.

One question that the Supreme Court’s decision does not address is whether a fee agreement such as the present one could lead to the sanctioning of counsel by the supervisory body for violation of professional conduct rules.

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CIETAC Arbitration Award Enforced in the U.S. Despite Alleged Forgery in the Underlying Agreement

Fri, 2018-10-05 20:00

Katharine Menéndez de la Cuesta and Arantxa Cuadrado Pérez-Broseta

Allegations of fraud and forgery of a sales agreement are for an arbitral tribunal to decide and a party should not ignore a notice of arbitration. This is according to a federal judge who enforced an award against a party that claimed the agreement was forged and did not participate in the arbitral proceedings. On May 30, 2018, U.S. District Court Judge Joanna Seybert of the Eastern District of New York granted a petition to enforce an arbitral award rendered in Tianjin, China, by the China International Economic and Trade Arbitration Commission (“CIETAC”) and denied a motion to dismiss the petition to enforce. The Court found that none of the grounds to deny enforcement of an arbitral award alleged by the Respondent under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NYC”) were satisfied. The case is Tianjin Port Free Trade Zone Int’l Trade Serv. Co., Ltd. v. Tiancheng Chempharm Inc.USA, No. 17-CV-4130 (JS)(AYS), 2018 LEXIS 90106 (E.D.N.Y., May 30, 2018).

The dispute arose out of an agreement for the sale and purchase of dietary supplements entered into between Tianjin Port Free Trade Zone International Trade Service Co., Ltd., (the “Seller”) and Tiancheng Chempharm, Inc. USA (the “Buyer”) (the “Sales Agreement”). According to the Seller, the goods were delivered, but the Buyer failed to pay the agreed purchase price. The arbitrator found in favor of the Seller and ordered the Buyer to pay the purchase price, including interest, and the costs of the arbitration.

The Buyer asserted three grounds to oppose the enforcement of the award, namely, that (i) it did not receive “notice of the arbitration proceedings;” (ii) the Sales Agreement “in question was in fact fabricated, and the Buyer’s representative signature was forged;” and (iii) the Seller failed to make “a good faith effort to amicably settle [the] dispute” before starting the arbitration as required by the Sales Agreement. 1) Resp’t Mem. Of P. & A. In Supp. Of Its Mot. To Dismiss Pet. To Confirm Arbitration Award, ECF No. 23, Jan. 4, 2018. jQuery("#footnote_plugin_tooltip_2156_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2156_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Judge Seybert rejected all three arguments.

The Notice of Arbitration

Article V(1)(b) of the NYC provides that the party against whom an award is sought to be enforced must have been given “proper notice of the appointment of the arbitrator or of the arbitration proceedings” and must have been “able to present his case.” Here, the Buyer claimed it “never received any notice of the arbitration proceeding in China” being “unable to appoint an arbitrator” and “deprived of its right to have the opportunity” to serve a petition to vacate the award. 2) Resp’t Mot., p. 7. jQuery("#footnote_plugin_tooltip_2156_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2156_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In the EDNY, the party opposing enforcement under Article V(1)(b) must show that it was not given “ ‘notice reasonably calculated’ to inform [it] of the proceedings and ‘an opportunity to be heard’ ” Jiangsu Changlong Chem., Co., Inc. v. Burlington Bio-Medical & Sci. Corp., 399 F. Supp. 2d 165, 168 (E.D.N.Y. 2005). Consistent with this standard, the Court in Tianjin Port Free found that “CIETAC provided Tiancheng with the opportunity to participate in the arbitration in a meaningful manner.” CIETAC verified that the notice of arbitration and the other documents were properly delivered to the Buyer who, according to the Court, “simply chose not to participate in the arbitration proceedings.” Tianjin Port Free, at 4.

The Alleged Forgery of the Sales Agreement

The second argument alleged by the Buyer was that the Sales Agreement was forged. The Buyer alleged that the Sales Agreement was “fraudulent and void” because the Buyer’s representatives never signed the document, never had a direct business relationship with the Seller and never traveled to Tianjin, China, the city where the Sales Agreement was allegedly signed.

The Buyer’s attack was to the contract as a whole. Judge Seybert rejected the Buyer’s argument because “the issue of whether the underlying contract that is the subject of the arbitrated dispute was forged or fraudulently induced [is] a matter to be determined exclusively by the arbitrators.” Tianjin Port Free, at 5 (citing the Second Circuit’s landmark decision on this issue, Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 315 (2d Cir. 1998)). The decision is consistent with Second Circuit precedent.

In Europcar, the party resisting enforcement alleged that enforcement of an award based on a forged contract would be contrary to United States public policy, invoking Article V(2)(b) of the NYC. The Second Circuit found that the enforcement would not violate public policy and distinguished two separate issues, “the issue of a fraudulently obtained arbitration agreement or award, which might violate public policy and therefore preclude enforcement,” and “the issue of whether the underlying contract that is the subject of the arbitrated dispute was forged or fraudulently induced—a matter to be determined exclusively by the arbitrators.” Europcar, at 315. The Second Circuit relied on Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967) to frame the discussion within the old distinction between attacks to arbitration agreements in particular—for the court to decide—or attacks to the contract in which they are contained as a whole—for the arbitrators to resolve. But Prima Paint dealt with the issue of the validity of the entire contract tainted with fraud in its inducement. It did not involve allegations of forgery, which would arguably go to the existence of the contract instead of its validity.

Other U.S. circuits have approached the issue of forged contracts containing arbitration agreements differently. In China Minmetals Materials Imp. & Exp. Co v Chi Mei Corp., 334 F.3d at 290 (3d Cir. 2003), the Third Circuit vacated a district court decision confirming a CIETAC arbitration award holding that under First Options, a party opposing enforcement of a foreign arbitration award under the NYC on the grounds that the contract which contains the arbitration agreement “was void ab initio is entitled to present evidence of such invalidity to the district court, which must make an independent determination of the agreement’s validity…” China Minmetals, at 289. The China Minmetals court distinguished the case from Europcar reasoning that in Europcar “the party resisting enforcement did not argue that the agreement containing the arbitration clause (…) was forged or fraudulent; rather, it argued that one of the agreements on which the arbitrators based their substantive decision (…) [which did not include the arbitration clause] was forged.” China Minmetals, n. 12.

In Will-Drill Resources, Inc. v. Samson Resources Co., 352 F.3d 211 (5th Cir. 2003), another case dealing with allegedly forged contracts, the Fifth Circuit concluded that “where a party attacks the very existence of an agreement, as opposed to its continued validity or enforcement, the courts must first resolve that dispute.” Will-Drill Resources, at 219.

Accordingly, for the Third and Fifth Circuits, attacks to the validity of the contract as a whole are distinct from attacks to its existence. The U.S. Supreme Court has not yet decided the question of whether challenges to the existence of an agreement to arbitrate are for the court or for the arbitrator to decide. In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), the Supreme Court held that a challenge to the validity of a contract as a whole must go to the arbitrator. Buckeye, at 1210. However, in a frequently cited footnote, the Supreme Court clarified that, “[t]he issue of the contract’s validity is different from the issue [of] whether any agreement between the alleged obligor and obligee was ever concluded,” and that the Court was only deciding the former. Buckeye, at 441 n.1.

The Pre-Arbitration Negotiations

The third argument raised by the Buyer was also dismissed because the Court found that the Seller did attempt to amicably settle the dispute before commencing the arbitration. The Buyer claimed the arbitration clause provided that “entering into ‘friendly negotiations’ for the settlement of a dispute is a condition precedent to instituting arbitration” but the Seller failed to do so. 3) Resp’t Mot., p. 9. jQuery("#footnote_plugin_tooltip_2156_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2156_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court determined that the Seller tried to resolve the dispute with the Buyer before starting the arbitration but that, “as the arbitration panel found,” the Seller did not cooperate (Tianjin Port Free, at 5). In other words, the Court did not decide the issue de novo but gave deference to the arbitrator’s finding that the condition precedent to the obligation to arbitrate had been satisfied.

The Court’s conclusion is consistent with BG Group Plc. v. The Republic of Argentina, 134 U.S. 1198 (2014), where the U.S. Supreme Court held that the issue of whether the parties complied with a prerequisite to an obligation to arbitrate set forth in an arbitration agreement is a procedural arbitrability issue that is for the arbitrator to decide.

New York is an international transactions hub and, accordingly, a leading jurisdiction for recognition and enforcement proceedings of foreign arbitral awards. The E.D.N.Y. decision is consistent with the liberal federal policy in the U.S. favoring arbitration of commercial disputes.

References   [ + ]

1. ↑ Resp’t Mem. Of P. & A. In Supp. Of Its Mot. To Dismiss Pet. To Confirm Arbitration Award, ECF No. 23, Jan. 4, 2018. 2. ↑ Resp’t Mot., p. 7. 3. ↑ Resp’t Mot., p. 9. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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What’s in a Name Change? For Investment Claims Under the New USMCA Instead of NAFTA, (Nearly) Everything.

Fri, 2018-10-05 00:10

Robert Landicho and Andrea Cohen

Young ITA

President Trump’s October 1, 2018 announcement that the United States, Canada, and Mexico have reached an agreement to replace the 1994 North American Free Trade Agreement (NAFTA) marks a veritable sea change in investor-state dispute settlement in the region. Previous and prospective users of NAFTA’s dispute resolution procedures will immediately note that this new free-trade agreement departs substantively and significantly from the NAFTA’s investment chapter—which has been on the books since 1994. More than just a change in name, the new United States-Mexico-Canada Agreement (USMCA), is an identity change.

This brief note discusses preliminary impressions from the released text of the USMCA and addresses only the investor-state arbitration provisions in USMCA, Chapter 14, that purport to replace Chapter 11 of the NAFTA. It begins with a discussion of the implications for those with cases already before NAFTA tribunals, then moves to the relevant considerations for investors in Canada and Mexico, and then presents some key definitional changes in the new text. The note concludes with some initial takeaways and a watchlist for readers while the USMCA Parties await U.S. Congressional approval. This note is far from comprehensive – no doubt, the applicability, interpretation, and application of the USMCA’s provisions will be the subject of increased discussion and scrutiny in the coming months.

Part I

For now, the USMCA is not yet the law of the land in the United States – as with any U.S. treaty, it must first be approved by Congress. Nonetheless, there are (at least) three key takeaways at this initial stage:

1. Under this proposed USMCA text, current NAFTA litigants need not fear that the USMCA will disrupt ongoing NAFTA arbitrations (i.e., the shift to the USMCA will have no effect on the fourteen cases that have already been filed under Chapter 11 of the NAFTA).

2. Although the NAFTA has not yet been terminated, the USMCA provides that, once terminated, investors may nevertheless file NAFTA claims within three years, provided the investments were validly made in accordance with Chapter 11 of the NAFTA already (or are made during the short remaining interval while NAFTA is still in force).

3. The USMCA would completely eliminate future investor-state arbitration between U.S. and Canadian parties under the USMCA. Moreover, the USMCA would limit the type of disputes that may be brought by investors of investments made between the United States and Mexico, and would force investors to file claims in national courts first, and then wait 30 months before initiating arbitration (unless the investor has a contract with the government relating to an “covered sector” expressly specified in the USMCA).

Thus, investors with existing investments covered by the NAFTA who wish to bring arbitration against Canada pursuant to Chapter 11 of NAFTA would need to do so within three years of the NAFTA’s termination if the USMCA is approved by Congress and the NAFTA is terminated, or otherwise risk losing their ability to file investor-state arbitration under the new USMCA altogether. Investors with qualified investments in Mexico may still have the option to bring an investor-state arbitration under the USMCA after filing a claim in national courts and waiting the requisite 30 months after initiating that lawsuit, but would do well to confirm whether their potential investment claims are part of a covered sector under the USMCA (thereby enabling them to take advantage of the full remedies available under the USMCA), or if they will be limited in the types of claims they can file.

No change for current litigants of NAFTA claims, but claims for investments established or acquired while NAFTA is in force must be brought within three years of NAFTA’s termination.

For those parties with arbitrations that have already been filed under Chapter 11 of the NAFTA, the current text of the USMCA would allow these NAFTA arbitrations to proceed uninhibited. Moreover, Annex 14-C of the USMCA, pertaining to “Legacy Investment Claims and Pending Claims,” directly addresses whether (and in which circumstances) prospective claims might be “grandfathered” into the NAFTA’s existing investment protection regime.

A “legacy investment” is defined in Article 6(a) of Annex 14-C as “an investment of an investor of another Party in the territory of the Party established or acquired between January 1, 1994, and the date of termination of NAFTA 1994, and in existence on the date of entry of force of this agreement.” Accordingly, an investment must have been “established or acquired” when the NAFTA is still in force, and remain “in existence” on the date of the USMCA’s entry into force.

As users of investment arbitration are no doubt familiar, a State must express its consent to arbitrate investment claims against an investor from another State. In the context of the “legacy investments” discussed above, the new USMCA makes clear that an investor cannot wait to file its NAFTA claims ad infinitum. Rather, each State Party’s consent to arbitrate in accordance with Section B of Chapter 11 of the NAFTA expires “three years after the termination of NAFTA 1994,” under Article 3 of Annex 14-C.1) Notably, under Article 2 of Annex 14-C, the consent and submission to arbitration must “satisfy the requirements” of Chapter II of the ICSID Convention. jQuery("#footnote_plugin_tooltip_6314_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Chapter 14 also provides that “an arbitration initiated pursuant to the submission of a claim under Section B of NAFTA 1994 while NAFTA 1994 is in force may proceed to its conclusion […] the tribunal’s jurisdiction with respect to such a claim is not affected by the termination of NAFTA 1994.” Thus, Annex 14-C clarifies that the USMCA creates no jurisdictional impediment to the completion of already-filed NAFTA claims.

No investment claims for future U.S. investors in Canada (or vice-versa) after the NAFTA’s Termination.

The USMCA’s current text eliminates the possibility of future investor-state arbitration between U.S. and Canadian parties under the USMCA for investments made after the termination of the NAFTA.2) Although investor-state arbitration is dead between the U.S. and Canada, state-to-state arbitration between the two very much survives. Canada won its fight over NAFTA Chapter 19, paying for it in dairy concessions, and there will be no change to those provisions. This means that Canada may continue to bring suit before a special panel over alleged unfair trade practices by the U.S. and Mexico, including anti-dumping and countervailing duties. jQuery("#footnote_plugin_tooltip_6314_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is unequivocal in the text of Article 14.2 of the USMCA, which limits the scope of investor-state arbitration to Legacy Investment Claims and Pending Claims, Mexico-U.S. Investment Disputes, and Mexico-U.S. Investment Disputes Related to Government Contracts only:

For greater certainty, an investor may only submit a claim to arbitration under this Chapter as provided under Annex 14-C (Legacy Investment Claims and Pending Claims), Annex 14-D (Mexico-United States Investment Disputes), or Annex 14-E (Mexico-United States Investment Disputes Related to Covered Government Contracts).

Investors wishing to arbitrate claims will be forced to arbitrate in a forum other than a NAFTA investment tribunal (likely pursuant to a contract or other applicable instrument containing a valid arbitration clause), or be forced to bring claims in local courts if a domestic remedy is available.

The USMCA imposes limits on investment arbitration for U.S. investors in Mexico (or vice-versa).

Although not as clear-cut as the prohibition on claims of U.S. investors against Canada (or vice-versa), the new USMCA provisions would substantially limit the availability of investor-state dispute settlement for claims pertaining to investments made by U.S. investors in Mexico (and vice-versa).

Investor-state arbitration for U.S.-Mexico investment claims survives under Annex 14-D, but only as to claims of direct expropriation,3) Direct expropriation under Annex 14-B, Clause 2 occurs when “an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.” jQuery("#footnote_plugin_tooltip_6314_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); claims for violations of national treatment,4) USMCA Article 14.4.1 defines national treatment as “treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” jQuery("#footnote_plugin_tooltip_6314_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or for violations of the most-favored-nation (MFN) provision of the USMCA5) Under the USMCA Article 14.5.1, most-favored-nation claims arise when a state’s treatment of an investor is “less favorable than the treatment it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” Readers of the new USMCA will be particularly careful to read footnote 22 in Chapter 14, which provides that “the ‘treatment’ referred to in Article 14.5 (Most-Favored-Nation Treatment) excludes provisions in other international trade or investment agreements that establish international dispute resolution procedures or impose substantive obligations; rather, ‘treatment’ only includes measures adopted or maintained by the other Annex Party, which may include measures adopted or maintained pursuant to or consistent with substantive obligations in other international trade or investment agreements.” (emphases added) Like other provisions in Chapter 14 of the USMCA, the language of this provision may depart substantially from the definitions used in other investment agreements. jQuery("#footnote_plugin_tooltip_6314_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (except for any MFN or national treatment claims “with respect to the establishment or acquisition of an investment,” which are expressly excluded).

An exception to the above limitation is found in Annex 14-E of Chapter 14, entitled “Mexico-United States Investment Disputes Related to Covered Government Contracts.” As the title of the annex suggests, Annex 14-E does not apply unless the claimant is “a party to a covered government contract”6) Article 6 of Annex 14-E defines “covered government contract” as “a written agreement between a national authority of an Annex Party and a covered investment or investor of the other Annex Party, on which the covered investment or investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor in a covered sector.” jQuery("#footnote_plugin_tooltip_6314_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); that grants rights in a “covered sector” expressly named in Article 6 of Annex 14-E, in which case a claimant may rely on other benefits in the treaty, including the possibility of bringing claims for violations of the minimum standard of treatment afforded under customary international law,7) The USMCA defines the minimum standards of treatment due to investors “in accordance with customary international law, including fair and equitable treatment and full protection and security.” (Article 14.6.1). It adds that “(a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b) “full protection and security” requires each Party to provide the level of police protection required under customary international law.” (Article 14.6.2(a),(b)) jQuery("#footnote_plugin_tooltip_6314_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); claims of indirect expropriation,8) Indirect expropriation refers to a situation “in which an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.” (Annex 14-B, Clause 3) jQuery("#footnote_plugin_tooltip_6314_8").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or claims with respect to the establishment of acquisition of an investment. The five “covered sectors” are:

(i) activities with respect to oil and natural gas that a national authority of an Annex Party controls, such as exploration, extraction, refining, transportation, distribution, or sale;
(ii) the supply of power generation services to the public on behalf of an Annex Party;
(iii) the supply of telecommunications services to the public on behalf of an Annex Party;
(iv) the supply of transportation services to the public on behalf of an Annex Party; or
(v) the ownership or management of infrastructure, such as roads, railways, bridges, canals, or dams, that are not for the exclusive or predominant use and benefit of the government of an Annex Party.9) See Article 6 of Annex 14-E (emphases added). It should be noted that the preservation of investor-state arbitration in these key sectors is likely due to successful lobbying by American industry groups during negotiations.

jQuery("#footnote_plugin_tooltip_6314_9").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The USMCA also adopts fundamental procedural changes for all remaining US/Mexico claims submitted to arbitration, even those in the covered sectors. Prospective claimants and their counsel will need to carefully plan a litigation strategy to comply with preconditions to arbitration under Annex 14-D.

1.
Prior to initiating investor-state arbitration under the USMCA, under Article 5 of Annex 14-D, U.S. and Mexican claimants must file suit in national courts. The dispute may proceed to arbitration only after “30 months have elapsed from the date the proceeding [in national courts] was initiated,” or after a final decision has been rendered in the national court of last resort (e.g., in the case of the United States, the U.S. Supreme Court). Recourse to national courts is not required where it would be “obviously futile or manifestly ineffective” – but it remains to be seen how national courts (or USMCA tribunals) will interpret this provision.

2. Appendix 3 of the USMCA also provides that U.S. investors “may not submit to arbitration a claim that Mexico has breached an obligation under this Chapter[…] if the investor or the enterprise, respectively, has alleged that breach of an obligation under this Chapter in proceedings before a court or administrative tribunal of Mexico.” Investors will likely question how Appendix 3 will be interpreted in light of Article 5 of Annex 14-D.

3. Moreover, arbitration under the USMCA must be filed within four years (i.e. 48 months) of the alleged breach by the claimant under Article 5 of Annex 14-D. As a practical matter therefore, assuming that a final decision in the national court of last resort has not been rendered prior to the 30 month waiting period, and assuming that the investor had filed suit in national court immediately after “the claimant first acquired, or should have first acquired, knowledge of the breach alleged … and knowledge that the claimant … or enterprise … has incurred loss or damage,” parties will have only 18 months (at most) to file their claims – roughly half of the time previously permitted under Chapter 11 of the NAFTA.

4. Importantly, where the claimant is party to a “covered government contract” under Annex 14-E, i.e., investors contracting with a government to provide services in one of the five “covered sectors,” the national courts requirement is waived10) See Footnote 31 to USMCA Chapter 14: “For greater certainty, Article 5.1(a)-(c) of Annex 14-D do not apply to claims under paragraph 2 [of Annex 14-E].” jQuery("#footnote_plugin_tooltip_6314_10").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and claimant may file anytime within a 3-year window. This means that – under the current USMCA text – those contracting with the government with respect to oil and gas activities, power generation, telecommunications, transportation, and infrastructure may not need to file in national courts first.

Regarding arbitrators, the USMCA explicitly adopts the IBA Guidelines on Conflicts of Interest in International Arbitration, including the guidelines on direct and indirect conflicts of interest, and any supplemental guidelines, in Article 6.5 of Annex 14-D. It also imposes a so-called “two-hats” bar, prohibiting arbitrators from “acting as counsel or as party appointed expert or witness in any pending arbitration under the annexes to this Chapter.”

Canada-Mexico investment arbitration might survive elsewhere, but not under the USMCA

Because no consent for investment arbitration has been included in the USMCA for investments between Canada and Mexico, investors seeking to bring investment claims are likely to rely on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) rather than the USMCA. The CPTPP, to which both Canada and Mexico are signatories, offers many of the same protections accorded to investors under both the NAFTA and the USMCA.11) Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Article 9: Investment jQuery("#footnote_plugin_tooltip_6314_11").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Mexico has already ratified the CPTPP and Canada has pledged to do so.12) “Canada Move Closer to CPTPP Ratification, Malaysia Calls for Trade Deal Review”, International Centre for Trade and Sustainable Development (Jun. 28, 2018) jQuery("#footnote_plugin_tooltip_6314_12").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The CPTPP will enter into force after 6 of the 11 signatory countries complete their ratification processes.

Part II

The USMCA uses lessons learned from NAFTA to clarify legal terms and amend arbitral procedure

Incorporating lessons from past NAFTA arbitrations, the USMCA Parties took steps to clarify certain key terms (including the standards of investment protection) throughout the agreement, often in footnotes, which may prove relevant in the USMCA’s interpretation. Some important changes are noted below:

1. Under the national treatment and most-favored-nation provisions of the USMCA, tribunals would be required to determine whether treatment is accorded in “like circumstances” based on a totality-of-the-circumstances test: “For greater certainty, whether treatment is accorded in “like circumstances” under this Article depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.”

2. The USMCA offers more guidance on the definition of an “investment,” stating that “investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.”

3. In determining whether an “indirect expropriation” occurred within the meaning of Article 14.8.1 (as defined in Annex 14-B), the USMCA expressly states that this “requires a case-by-case, fact-based inquiry.” (It should be recalled that, under the current USMCA text, only claimants with a “covered government contract” in one of five “covered sectors” may file a claim for breach of the USMCA, Article 14.8.1, for an indirect expropriation).

a. Annex 14-B instructs tribunals to consider “the economic impact of the government action” (though economic impact alone is not determinative), “the character of the government action, including its object, context, and intent,” and “the extent to which the government action interferes with distinct, reasonable investment-backed expectations.”

b. Regarding “reasonable, investment-backed expectations,” it offers the following factors as guidance: “whether the government provided the investor with binding written assurances and the nature and extent of governmental regulation or the potential for government regulation in the relevant sector.”

4.
In contrast to the USMCA’s above definition of “indirect expropriation,” the USMCA specifically rejects that the “minimum standard of treatment under customary international law” should be defined by reference to an investor’s legitimate, investment-backed expectations. Specifically, Article 14.6(4) provides that “[f]or greater certainty, the mere fact that a Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result.” This departs from investment tribunals’ interpretation of the fair and equitable treatment standard under other investment treaties, or (some argue) the minimum standard of treatment under customary international law.

Codifying the interpretation from the NAFTA’s Free Trade Commission’s trilateral “Notes of Interpretation of Certain Chapter 11 Provisions” from 2001,13) NAFTA Free Trade Commission, “Notes of Interpretation of Certain Chapter 11 Provisions” (2001) (1. “Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.”) jQuery("#footnote_plugin_tooltip_6314_13").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Article 14.6(2) of the USMCA specifies that the term “minimum standard of treatment” is the customary international law standard, stating “[f]or greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment”14) Article 14.6(2)(a) defines “fair and equitable treatment” as “includ[ing] the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.” jQuery("#footnote_plugin_tooltip_6314_14").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and “full protection and security”15) Article 14.6(2)(b) defines “full protection and security” as “requi[ring] each Party to provide the level of police protection required under customary international law.” jQuery("#footnote_plugin_tooltip_6314_15").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights.”

Things to watch

As current and prospective investors await congressional approval for the USMCA and the termination of the NAFTA, it might be asked: what happens next? The USMCA has created uncertainty for North American investors, which is likely to affect future foreign investment flows and raise new legal issues. Prudent investors and practitioners will watch for the following developments in the coming months:

Will NAFTA officially be terminated, and if so, when? What date will the USMCA come into force?

What are the likely issues that will emerge during the congressional approval process? How will industries respond to these changes, and what effect will their voices have on the USMCA’s approval? Will there be any proposed changes to the text of Chapter 14 of the USMCA?

Will the CPTPP be ratified before the NAFTA’s termination, and will it really offer Canadian and Mexican investors an effective avenue for future investor-state arbitration?

Finally, in light of well-known developments in Europe pertaining to investor-state arbitration,16) See, e.g., Laurens Ankersmit, “Achmea: the Beginning of the End for INVESTOR-STATE ARBITRATION in and with Europe?”, Investment Treaty News, International Institute for Sustainable Development (Apr. 24, 2018). jQuery("#footnote_plugin_tooltip_6314_16").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_16", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); is the USMCA part of a global trend away from investor-state arbitration?

Given this uncertainty, current and prospective investors may consider whether certain investments may be structured (or restructured) through effective nationality planning. Investors should consult qualified counsel to discuss investment-protection alternatives to the new USMCA, including analysis of investment treaties between USMCA Parties and other States. These other investment treaties may contain more favorable standards of investment protection (or more advantageous procedural provisions) than those in the proposed USMCA text.

References   [ + ]

1. ↑ Notably, under Article 2 of Annex 14-C, the consent and submission to arbitration must “satisfy the requirements” of Chapter II of the ICSID Convention. 2. ↑ Although investor-state arbitration is dead between the U.S. and Canada, state-to-state arbitration between the two very much survives. Canada won its fight over NAFTA Chapter 19, paying for it in dairy concessions, and there will be no change to those provisions. This means that Canada may continue to bring suit before a special panel over alleged unfair trade practices by the U.S. and Mexico, including anti-dumping and countervailing duties. 3. ↑ Direct expropriation under Annex 14-B, Clause 2 occurs when “an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.” 4. ↑ USMCA Article 14.4.1 defines national treatment as “treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” 5. ↑ Under the USMCA Article 14.5.1, most-favored-nation claims arise when a state’s treatment of an investor is “less favorable than the treatment it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” Readers of the new USMCA will be particularly careful to read footnote 22 in Chapter 14, which provides that “the ‘treatment’ referred to in Article 14.5 (Most-Favored-Nation Treatment) excludes provisions in other international trade or investment agreements that establish international dispute resolution procedures or impose substantive obligations; rather, ‘treatment’ only includes measures adopted or maintained by the other Annex Party, which may include measures adopted or maintained pursuant to or consistent with substantive obligations in other international trade or investment agreements.” (emphases added) Like other provisions in Chapter 14 of the USMCA, the language of this provision may depart substantially from the definitions used in other investment agreements. 6. ↑ Article 6 of Annex 14-E defines “covered government contract” as “a written agreement between a national authority of an Annex Party and a covered investment or investor of the other Annex Party, on which the covered investment or investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor in a covered sector.” 7. ↑ The USMCA defines the minimum standards of treatment due to investors “in accordance with customary international law, including fair and equitable treatment and full protection and security.” (Article 14.6.1). It adds that “(a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b) “full protection and security” requires each Party to provide the level of police protection required under customary international law.” (Article 14.6.2(a),(b)) 8. ↑ Indirect expropriation refers to a situation “in which an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.” (Annex 14-B, Clause 3) 9. ↑ See Article 6 of Annex 14-E (emphases added). It should be noted that the preservation of investor-state arbitration in these key sectors is likely due to successful lobbying by American industry groups during negotiations.

10. ↑ See Footnote 31 to USMCA Chapter 14: “For greater certainty, Article 5.1(a)-(c) of Annex 14-D do not apply to claims under paragraph 2 [of Annex 14-E].” 11. ↑ Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Article 9: Investment 12. ↑ “Canada Move Closer to CPTPP Ratification, Malaysia Calls for Trade Deal Review”, International Centre for Trade and Sustainable Development (Jun. 28, 2018) 13. ↑ NAFTA Free Trade Commission, “Notes of Interpretation of Certain Chapter 11 Provisions” (2001) (1. “Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.”) 14. ↑ Article 14.6(2)(a) defines “fair and equitable treatment” as “includ[ing] the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.” 15. ↑ Article 14.6(2)(b) defines “full protection and security” as “requi[ring] each Party to provide the level of police protection required under customary international law.” 16. ↑ See, e.g., Laurens Ankersmit, “Achmea: the Beginning of the End for INVESTOR-STATE ARBITRATION in and with Europe?”, Investment Treaty News, International Institute for Sustainable Development (Apr. 24, 2018). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Contents of Asian International Arbitration Journal, Volume 14, Issue 1, 2018

Thu, 2018-10-04 02:32

Lawrence Boo and Gary Born

Kluwer Law International and the Singapore International Arbitration Centre (SIAC) are pleased to announce their new partnership in publishing the latest edition of the Asian International Arbitration Journal (AIAJ). In this 2018 publication, Mr Gary Born, President of the SIAC Court of Arbitration, joins Professor Lawrence Boo as a General Co-Editor of the AIAJ.

The AIAJ seeks to be a thought leader on issues in international commercial arbitration in the Asia-Pacific region. Published twice yearly since 2005, this cutting edge, practical publication will provide insights into latest institutional developments and regulatory changes, as well as updates on recent case law, legislative enactments and arbitral awards in Asia.

The contents of the latest issue of the journal is now available and includes the following contributions:

 

V. K. Rajah, The Case For Singapore To Take The Lead In International Arbitration Ethics

There has in recent times been much hand wringing within the international arbitral community about the difficulties of reaching a consensus on ethical standards. This paper presents a simple thesis: it is in Singapore’s enlightened self-interest to set the highest pragmatic standards for its professionals regardless of where they operate and to ensure that all matters seated here are ethically policed by common standards. While Singapore should continue to steadfastly contribute to international thought leadership in this area, it cannot afford to adopt ‘wait-andsee’ approach for the rules to be imposed internationally. First, being ethics agnostic is not the Singapore way. Second, instead of harming its competitive edge, stricter ethical standards will pay dividends both professionally and commercially. To this end, greater weight should be given to the business and financial community in assessing both the desirability and urgency for reform. Third, Singapore should not be ethically disingenuous by upholding one standard of ethics before the courts and another lower standard before arbitral tribunals. Axiomatically, it is in Singapore’s self-interest to take the lead. The jurisdictions that best address the very patent desire by users for enforceable ethical standards will over time benefit enormously as first movers.

 

Gracious Timothy Dunna, Supreme Court In Centrotrade 2016: Too Quick To Nod At The Validity Of The Two-Tier Arbitration Clause?

In a decade’s time since the Supreme Court’s ruling in Centrotrade in 2006, a plethora of questions opened relating to two-tier arbitrations: What is the nature of the awards in the first and second instances; where is the appellate tribunal seated; what may be the grounds of appeal; and what authority is exercised by appellate tribunals? In 2016, nevertheless, the Supreme Court reflected upon several of these questions, and answered them using certain fundamental principles of arbitration. This piece tries to holistically understand appellate arbitrations and its entailments, and provides an alternative view as to why the Supreme Court erred in enforcing the appellate arbitration clause in Centrotrade.

 

Sai Anukaran, ‘Scope Of Arbitrability Of Disputes’ From The Indian Perspective

Arbitration essentially involves ouster of jurisdiction of civil courts by mutual consent of the parties in lieu of jurisdiction conferred upon a specific set of persons known as arbitrators to adjudicate the dispute. International Arbitral Standards require the states to keep their National Arbitral Legislation open-ended without limiting the scope of arbitrability of disputes, providing grounds only for setting aside of arbitral awards in violation of the Public Policy of the country. Thus, the interpretation of ‘Scope of arbitrability’ is left to the determination of the courts. The instant article explores the meaning of term ‘arbitrability of disputes’ and discusses the ‘Scope of arbitrability of disputes’ in Indian Perspective. The article critically analyses the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., wherein the Supreme court for the first time evolved test of arbitrability of disputes and further enumerated an illustrative list of disputes, which are incapable of being decided by arbitration. The article then maps the evolution of tests of arbitrability by various courts based on the Judgement of the Supreme Court and critically analyses them.

 

Mohamed H. Negm and Huthaifa Bustanji, Particularity Of Arbitration In International Intellectual Property disputes: Fitting Square Peg Into Round Hole

With the world more and more dependent upon technology of all types, the continued and growing importance of intellectual property cannot be understated. There has been, and will continue to be, an accompanying explosion in the number and complexity of transactions in which intellectual property is a critical, if not the critical, element. Many of these transactions cross national boundaries; as do the disputes which inevitably arise from them. This article will serve as a handy reference and guide for navigating through the complex maze of intellectual property and arbitration. The main characteristics of intellectual property disputes and the results offered by domestic litigation and arbitration are scrutinized in this article. It starts by exploring how and why arbitration can provide a better way to resolve these disputes. It then deals with the issue of arbitrability of intellectual property disputes with special emphasis placed on public policy rationales. Finally, the questions of the applicable law and limitations to party autonomy are adequately addressed.

 

Elizabeth Wu and Lawrence Boo, Of Moving Frontiers And Notes Verbales: Ascertaining The Intentions Of State Parties In Bits

The 1969 Vienna Convention on the Law of Treaties (the VCLT) provides an interpretive framework to ascertain State parties’ respective treaty obligations. In bilateral investment treaties (BITs), State parties mutually undertake to protect investments made by the nationals of the other contracting State. In its decision in Sanum Investments Ltd v. Government of the Lao People’s Democratic Republic [2016] SGCA 57, the Singapore Court of Appeal held that a Macanese investor was a protected national under a BIT between the Lao People’s Democratic Republic (Laos) and the People’s Republic of China (China). This ruling was made against the views of Laos and China, expressed through an exchange of Notes Verbales after the dispute arose, that the BIT did not cover Macau. This article examines the Court’s use of an evidentiary ‘critical date rule’ to exclude the consideration of these Notes Verbales. It questions whether the Court’s approach coheres with the principles of treaty interpretation encapsulated in the VCLT.

 

Contributions to the AIAJ should be submitted by softcopy, in a word document, to [email protected]. The editorial guidelines for the AIAJ may be found at the following link.

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Delhi High Court Rejects Arguments against Enforcement Based on CIETAC Split

Tue, 2018-10-02 20:00

Li Haifeng

Background on CIETAC Split

Up until May 1, 2012 CIETAC had a branch in Shanghai named CIETAC Shanghai Sub-commission (the “Old Sub-commission”). This Old Sub-commission used the same CIETAC arbitration rules but was administered by a secretariat semi-independent of that of the head office of CIETAC in Beijing.

On May 1, 2012 CIETAC launched its 2012 edition of arbitration rules. Some disagreements arose between the Old Sub-commission and the head office of CIETAC, which triggered the Old Sub-commission declaring independence from CIETAC.

On April 11, 2013 the Old Sub-commission renamed itself as Shanghai International Arbitration Center (“SHIAC”) (the “Re-naming”). CIETAC then established a new CIETAC Shanghai Sub-commission (the “New Sub-commission”) shortly after the Re-naming. 1) See e.g. Justin D’ Agostino, Kluwer Arbitration Blog, 2 May 2014, The Aftermath of the CIETAC Split: Two years on, lower courts take clashing views on arbitration agreements and awards– but higher courts strive for consistency. jQuery("#footnote_plugin_tooltip_8170_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8170_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

To clarify uncertainties surrounding the competence of CIETAC and SHIAC over cases with an underlying clause providing for arbitration by CIETAC Shanghai Sub-commission, the Supreme People’s Court of China (the “SPC”) issued a circular in June 2015 (the “SPC Interpretation”). Article 1 states that disputes in connection with contracts signed before the Re-naming carrying an arbitration clause providing arbitration by CIETAC Shanghai Sub-commission shall be administered by SHIAC. It also provides in article 3 that no party shall be upheld in its application for the set-aside or non-enforcement of an award on the ground of no competence if either CIETAC or SHIAC had accepted the case which it should not have as per the SPC Interpretation prior to the issuance date thereof.

Delhi Court’s Decision on Enforcement

As reported in Global Arbitration Review, a Chinese solar power company, LDK Solar Hi-Tech (“LDK”), attempted to enforce a CIETAC award against an Indian counterpart, Hindustan Clean Energy (“Hindustan”), in India. 2) https://globalarbitrationreview.com/article/1171818/chinese-company-enforces-award-in-delhi-despite-arguments-based-on-cietac-split jQuery("#footnote_plugin_tooltip_8170_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8170_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The underlying arbitration clause carried in a guarantee agreement entered into between LDK, as the beneficiary, and Hindustan, as the guarantor, provides that “any and call claims, disputes, controversies or differences arising between the Parties out of or in connection with this Bond shall be submitted for arbitration before China International Economic and Trade Arbitration Commission (CIETAC) in Shanghai by three arbitrators appointed in accordance with the corresponding rules of arbitration…

LDK brought arbitration before New Sub-commission in October 2013 and the award was made in February 2015.

When LDK applied for enforcement of the award in the Delhi High Court, Hindustan tried to resist the enforcement raising the following arguments:

1) That the New Sub-commission had no jurisdiction as the arbitration agreement referred disputes to the Old Sub-commission, now renamed as SHIAC. For this argument Hindustan relied on article 1 of the SPC Interpretation.

2) That CIETAC breached principles of natural justice when it appointed a substitute arbitrator to replace the original chair within 2 days.

All the arguments were rejected by Judge Navin Chawla.

Comments

In my view, Judge Navin Chawla made a judicious judgment.

It is important to note the distinction between providing for arbitration before CIETAC Shanghai Sub-commission on the one hand, and arbitration before “CIETAC in Shanghai” as is in the present case, on the other. The former provision refers to a specific institution by the name of CIETAC Shanghai Sub-commission whereas the latter commonly interpreted as “CIETAC” being the name of the institution whereas “Shanghai” the place of arbitration.

According to the 2005 edition of CIETAC Arbitration Rules, the claimant could choose either CIETAC the head office or CIETAC Shanghai Sub-commission to administer its arbitration if there is no such selection in the arbitration clause. Although in practice cases with a contractual provision for arbitration before CIETAC in Shanghai were usually handled by the Old Sub-commission, CIETAC reserved the right to decide otherwise. So provision for arbitration before CIETAC in Shanghai is not 100% equivalent of arbitration before CIETAC Shanghai Sub-commission.

Art. 1 of the SPC Interpretation obviously refers to an express reference to CIETAC Shanghai Sub-commission by name rather than Shanghai by place because the very object of the circular was to eradicate ambiguity and uncertainty.

Alternatively even if the reference to arbitration before CIETAC in Shanghai could be treated as 100% equivalent of CIETAC Shanghai Sub-commission, article 3 of the SPC Interpretation would have deprived Hindustan of any right to challenge the award on the ground of no competence in China. Since China is the place of arbitration, it’s only normal for the Indian court to give overriding weight to the positions of PRC laws and courts, particularly the SPC.

Chawla J’s rejection of the natural justice point was predicated on the fact that Hindustan had made no effort to achieve agreement with LDK on the choice of presiding arbitrator when it had the opportunity to do so at the start of the case. It’s true that as per the 2005 CIETAC Arbitration Rules, the same procedure should have been followed to appoint a replacement arbitrator as that for the one being replaced. In other words, to replace the presiding arbitrator, the parties should have been given 15 days to agree on a candidate. However, when a party had not exercised that right when it had an opportunity to do so in the first place, it’s hardly arguable that its legitimate interests would be compromised in any consequential way if it was not given a second opportunity. Therefore, Chawla J was only right in commenting that Hindustan was “merely trying to take advantage of an inconsequential issue to challenge the arbitral award”, and that “there is no such thing as mere technical infringement of natural justice.”

Had the presiding arbitrator been appointed without giving the parties an opportunity to agree on a candidate in the first place, would the judge have viewed it as inconsequential and rejected Hindustan’s invocation of natural justice? I think it would probably not be so. Hence the crux of the judgment is that Hindustan had waived or been slack in exercising its right to propose a presiding arbitrator candidate in the first place.

The decision of the Delhi court to enforce the award is a welcome pro-arbitration gesture of Indian courts that they would not refuse enforcement of arbitral awards merely based on some non-material technical irregularities.

 

References   [ + ]

1. ↑ See e.g. Justin D’ Agostino, Kluwer Arbitration Blog, 2 May 2014, The Aftermath of the CIETAC Split: Two years on, lower courts take clashing views on arbitration agreements and awards– but higher courts strive for consistency. 2. ↑ https://globalarbitrationreview.com/article/1171818/chinese-company-enforces-award-in-delhi-despite-arguments-based-on-cietac-split function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Kluwer Mediation Blog – August & September Digest

Tue, 2018-10-02 02:22

Anna Howard

In every negotiation the most important work is done by those in the shadows.” Ian Wishart, as quoted by Bill Marsh in “Personal Connections.”

August and September offered a particularly varied and vibrant selection of posts on the Kluwer Mediation Blog. The topics addressed, to name just a few, include: developments in the creation of the Japan International Mediation Centre – Kyoto; the introduction of mandatory mediation in Romania; developments in Vietnam’s legal and institutional framework for commercial mediation; the potential which lies in establishing strong connections across conflicts; the mediation of art disputes; the timely and provocative idea of an Interdependence Day and an International Declaration of Interdependence; and the impact of artificial intelligence on alternative dispute resolution. A brief summary of each of the posts on the Kluwer Mediation Blog in August and September can be found below. Have a look – there is something for everyone…

In “What might artificial intelligence mean for alternative dispute resolution”, James South and Andy Rogers of CEDR explore a number of questions regarding the impact of artificial intelligence on ADR including: What is AI likely to do in a setting which has been so focussed on combining subtle concepts such as legal rights and a sense of fairness (adjudication) or human interaction and coaching (mediation)? And where do these developments leave us and what will their impact be?

In “Guerilla Gardening – and a plea for a universal declaration of interdependence”, John Sturrock offers the timely and thought-provoking idea of an Interdependence Day and an International Declaration of Interdependence. Drawing on the work of Yuval Noah Harari, Bobby Duffy and Martin Nowak, John identifies a bold antidote to the isolation, silos and alienation too frequently seen in current times.

In “Nourishment for the spirit: the 20th Tulane-Humboldt summer school on Alternative Dispute Resolution”, Greg Bond shares the reflections of some of the students of the 2018 Tulane-Humboldt summer school. This year marked the 20th anniversary of this summer school which has trained over 2000 students from 87 countries on principled negotiation and mediation.

In “Using a speaking stick in mediation”, Alan Limbury explains how he uses an aboriginal speaking stick in his mediations, and to great effect. Alan also shares the five functions of the speaking stick as identified by Alain Roy, a renowned French mediator, which capture why the beautiful speaking stick can be so efficient in mediations.

In “The art of mediation and mediation of art disputes”, Rafal Morek identifies the particular nature of art disputes and explains why mediation is suited for such disputes. Rafal also lists some art disputes for which mediation has been successful and describes numerous initiatives by international organisations to promote the use of mediation for art disputes.

In “Feel the earth move – shifts in the international dispute landscape”, Eunice Chua provides a comprehensive summary of a panel discussion at the recent 2018 UNCITRAL Emergence Conference which shared the title of this post. In particular, Eunice
explores the two key themes which emerged from the panel discussion: first, the idea of a growing dispute resolution ecosystem; and secondly, a changing culture.

In “Mediation in the theatre: no thanks”, Greg Bond describes a workshop he gave on mediation based on the plays and stories of German Romantic writer Heinrich von Kleist which are full of compelling conflict. Greg explains how he presented interests-based negotiation and then asked participants to be mediators for Kleist’s obsessive characters. Greg also considers how the endings of other well-known literary works might have differed had there been some decent mediation.

In “Evaluation or guidance? What do small claimants want from mediators?”, Charlie Irvine considers the perspective of those who use mediation in small claims where most have no legal representation. Charlie shares the claimants’ views about what mediators do to assist and then contrasts this with the mediators’ perspective on what might have been useful for the claimants. Charlie explains how the evaluative/facilitative debate inhibits practitioners from doing what may seem helpful and suggests changes to address this conundrum.

In “Vietnam series: four key features of the commercial mediation framework”, Nadja Alexander offers an overview of the main features of Vietnam’s legal and institutional framework for commercial mediation. By way of very brief overview, the four key features relate to mediator qualifications and requirements for foreign mediators, institutional mediation rules and enforceability of mediated settlement agreements.

In “What have the robots ever done for us?”, Charlie Woods draws on a speech given by Adair Turner earlier this year on “Capitalism in the age of robots: work, income and wealth in the 21st-century” in which Turner argues that the rapid and unstoppable development of automation – which will play out over the next fifty to a hundred years – will have very profound implications for how we live and work. Charlie considers the implications of this development for the skills of mediators and, importantly, the contribution which such skills can make in these changing times.

In “Personal connections”, Bill Marsh describes the connection between two officials, Olly Robbins (representing the UK) and Sabine Wayward (representing the EU), who have been instrumental in keeping the Brexit talks alive during difficult periods. Bill uses this example to explore the importance of personal connections in mediation and the value of direct engagement between the parties. Bill prompts us as mediators to reflect on how we might better enable parties to create connections across the divide.

In “Total recall”, Geoff Sharp shares his theory that memory is predominantly visual and that it is greatly enhanced by visual thinking. Given that our ability as mediators to take in information, store it, and recall it is crucial to our work, Geoff offers some novel techniques on how to enhance this ability.

In “Stone soup – linking mediation theory and practice”, Rick Weiler acknowledges the gap between mediation theory and practice, and describes the Stone Soup Dispute Resolution Knowledge Project at the University of Missouri which is designed to lessen that gap through the collaboration between faculty, students, scholars, practitioners, educational institutions and professional associations. Rick provides a captivating summary of the Stone Soup fable upon which the project is based and shares how this fable’s message has influenced his teaching.

In “Mandatory pre-institution commercial mediation in India: premature step in the right direction?“, Juhi Gupta explains the key features of Section 12A of India’s Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Bill which provides for mandatory pre-institution mediation for commercial disputes. Juhi also considers the further changes which may be needed in order for there to be a greater uptake of commercial mediation in India.

In “Corporate culture and business mediation”, Paul Eric Mason draws on a number of examples from various cultures to explain how business and corporate culture can affect mediation.

In “Why don’t we mediate the “big” disputes?”, Rick Weiler uses Robert A. Baruch Bush’s seminal article “What do we need a mediator for? Mediator’s value-added for negotiation?” in arguing for a greater use of mediation in large disputes involving many parties.

In “Online Dispute Resolution in Brazil: a major opportunity for stakeholders”, Andrea Maia and Daniel Becker identify key developments in Online Dispute Resolution across the globe and then turn their focus to Brazil. They explore the opportunity for further use of ODR in Brazil and consider the resistance in Brazil to an increased used of ODR.

In “Seeing is interpreting – we are all blind in different ways”, Ting-kwok IU explores the ways in which our perspective might give us only a limited view. Ting-kwok uses the Kanizsa Triangle to illustrate that what we see may be an interpretation of what we think we have seen rather than what we have actually seen. Ting-kwok then describes the unique contribution which those who are visually impaired may be able to bring to mediation.

In “Mandatory ‘mediation attempt’“, Constantin-Adi Gavrila explains recent legislative developments in Romania regarding mandatory information sessions on mediation and how such developments have been received.

In “Getting into gear: the Japan International Mediation Centre – Kyoto”, James Claxton and Luke Nottage provide a detailed overview of key developments in the creation of the Japan International Mediation Centre – Kyoto, including the preparation of procedural rules and the compilation of a panel of mediators. James and Luke also share proposals to improve international arbitration services in Japan which, if realised, may present opportunities for symbiosis with the Japan International Mediation Centre – Kyoto.

In “What happens in mediation stays in mediation: new standards of informed consent to mediation in California”, Rafal Morek provides a detailed overview of recent changes to California’s confidentiality mediation regulations which bring about a robust and absolute approach to confidentiality in mediation.

In “Ethics in mediation: Caesar’s wife must be above suspicion”, Martin Svatos shares a recent experience in a mediation to explore the issues of impartiality, neutrality and independence in mediation and urges mediators to take the issue of conflict of interest very seriously.

In “Reconnecting with the power of symbolism”, Rosemary Howell shares a compelling example of her students’ creativity in depicting a symbolic environment of collaboration and co-operation. Rosemary acknowledges how her students’ work has reignited her enthusiasm as a mediator and facilitator to be more creative in developing ways to use the power of symbolism to encourage collaboration and harness creativity.

In “Politics and posturing: anchoring versus creative options”, Greg Bond uses a recent case from German politics to illustrate the claim for mediation as a decision-making tool. Greg uses this example to show that politics needs less posturing and more collaborative decision-making, even across political differences, and that the tools of mediation can help to achieve this.

In “Civility may not be enough – but it’s a good start”, drawing on the work of Mark Kingwell and Amartya Sen, Ian Macduff describes how civility is the oil that makes the dialogues of difference – and hence of justice, resolution, participation – possible. Ian identifies the important nuance that civility and dialogue are not joined in a linear fashion but rather feed on each other, each making the other possible – even if, as Ian says, in a muddling sort of a way.

In “Letting go”, John Sturrock describes recent experiences of “letting go” and considers, more broadly, whether mediators need to let go of ego. In so doing, John notes that the whole point of being a mediator is that we fade away when the job is done and that all that should really matter to us as mediators is the sense of personal gratitude for having an opportunity to contribute to others’ needs, to the best of our ability.

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FIFA Ban on Third-Party Ownership: A Pyrrhic Victory for FIFA in Front of the Swiss Federal Supreme Court?

Sun, 2018-09-30 23:41

Simon Bianchi

Young ICCA

Over the last few years, third-party ownership of soccer players (“TPO”) has become controversial. TPO is a mechanism through which a soccer club assigns a player’s economic rights, including the right to benefit from transfer fees every time the player is transferred to another club, to third-party investors in return for a financial counterpart. Considering that TPO threatens the integrity of sporting competitions, the Fédération Internationale de Football Association (“FIFA”) eventually banned TPO in 2015. On 20 February 2018, the Swiss Federal Supreme Court rendered decision 4A_260/2017 addressing two important legal issues in this context: (i) the legality of the prohibition of TPO and (ii) the independence of the Court of Arbitration for Sport (the “CAS”) towards FIFA. In this decision, the Supreme Court rejected an appeal from the Belgian club RFC Seraing against a CAS award confirming the validity under European and Swiss law of Articles 18bis and 18ter of the FIFA Regulations on the Status and Transfer of Players (“RSTP”), which prohibit TPO agreements.

Background
The dispute originated from two contracts entered into between RFC Seraing and Doyen Sports Investments Limited (“Doyen”) in 2015, according to which Doyen acquired ownership of certain soccer players’ economic rights against payment of a fixed fee to RFC Seraing. On 4 September 2015, the FIFA Disciplinary Committee found that RFC Seraing had violated Articles 18bis and 18ter RSTP and sentenced it to (i) a ban on recruitment for four consecutive registration periods and (ii) a fine in the amount of CHF 150,000 (approx. EUR 132,000).

On 9 March 2016, RFC Seraing brought the case before the CAS arguing that the decision of the FIFA Disciplinary Committee was to be rescinded as Articles 18bis and 18ter RSTP were in breach of (i) the free movement of persons, services and capital enshrined in the Treaty on the Functioning of the European Union (“TFEU”), (ii) European and Swiss competition laws, and (iii) RFC Seraing’s right to respect for private and family life under the European Convention on Human Rights (“ECHR”). Furthermore, RFC Seraing submitted that, in a previous case leading to the decision 4A_116/2016, the Swiss Federal Supreme Court following the CAS had already recognized the legality of TPO agreements.

In its final award dated 9 March 2017, the CAS rejected all legal arguments raised by RFC Seraing. In a nutshell, the CAS found the following:

(i) Even though Articles 18bis and 18ter RSTP restricted the free movement of persons, services and capital, these restrictions pursued legitimate objectives, such as preserving the regularity of sporting competitions and ensuring the independence and autonomy of soccer clubs and players. Furthermore, the possible anti-competitive effects of such restrictions were inherent to the pursuit of these objectives and proportionate to their achievement, especially since other financing schemes remained available to soccer clubs.
(ii) With regard to European competition law, it had already been recognized by the European Commission that FIFA constituted an association of undertakings within the meaning of Article 101 TFEU. However, Articles 18bis and 18ter RSTP did not have as their object the prevention, restriction or distortion of competition, but rather the regulation of the transfer market for soccer players in order to reach the above-mentioned legitimate objectives. In addition, RFC Seraing did not produce any documents evidencing the anti-competitive effects of these Articles. These considerations applied mutatis mutandis for Swiss competition law.
(iii) As to Article 8 ECHR, RFC Seraing did not demonstrate how it would apply and in which way Articles 18bis and 18ter RSTP would violate such provision.
(iv) Regarding the previous decision 4A_116/2016, the dispute did neither concern the conformity of TPO agreements with Articles 18bis and 18ter RSTP, nor deal with the legality of these Articles in light of the above-mentioned statutory provisions. Since the ratio decidendi of this decision did not concern the subject-matter of the present case, it did not bind the CAS in any respect.

Therefore, the CAS concluded that Articles 18bis and 18ter RSTP were valid under European and Swiss law and that the TPO agreements entered into between RFC Seraing and Doyen constituted a breach of these Articles. However, in light of the proportionality principle, the CAS reduced the ban on recruitment to three consecutive registration periods since the infringements occurred during the transitional period of the RSTP in its new version.

The Swiss Federal Supreme Court Decision
On 15 May 2017, RFC Seraing lodged an appeal to the Supreme Court against the CAS award and raised three legal arguments. First, the award was rendered by an arbitral tribunal which had been improperly constituted under Article 190(2)(a) of the Private International Law Act (“PILA”), in particular the CAS did not qualify as a proper arbitral tribunal because it lacked structural and economic independence from FIFA. Second, the arbitral award rendered by the CAS was incompatible with substantive public policy (Article 190(2)(e) PILA). Third, its right to be heard had been violated by the CAS (Article 190(2)(d) PILA).

The Supreme Court rejected RFC Seraing’s appeal and upheld the CAS award. In its judgment, the Supreme Court recalled the Lazutina decision, which recognized the CAS independence towards the International Olympic Committee, and affirmed that there is no prima facie justification to depart from this jurisprudence. Furthermore, since the Lazutina decision, the CAS had implemented numerous measures to reinforce its structural independence vis-à-vis sports federations. Concerning the economic dependence, FIFA financial participation to the CAS general expenses represented less than 10 % of the CAS total budget. That said, the Supreme Court also referred to the decision rendered in the Pechstein case by the German Federal Court of Justice which, after an extensive review of the CAS functioning, considered that it constituted a proper, independent and impartial arbitral tribunal. In conclusion, the Supreme Court did not find any valid legal ground to overturn its previous jurisprudence and confirmed that the independence of the CAS from FIFA was sufficient to consider the former as an independent and impartial arbitral tribunal.

Concerning the alleged breach of substantive public policy, the Supreme Court reiterated that competition law provisions, whether Swiss or European, do not form part of substantive public policy within the meaning of Article 190(2)(e) PILA as already decided in the Tensacciai case. Therefore, despite the fact that a Swiss arbitral tribunal shall consider Swiss and European competition laws when rendering an award, the Supreme Court would not review how the arbitral tribunal applied these competition law provisions in appeal proceedings.

Furthermore, the Supreme Court rejected RFC Seraing’s submission that TPO agreements were already declared lawful in the decision 4A_116/2016. Indeed, this decision concerned TPO agreements entered into prior to the ban adopted by FIFA, so that the CAS and the Supreme Court only reviewed whether such agreements were contrary to mandatory provisions of European and Swiss law. More specifically, the CAS and the Supreme Court noted in their respective decision that issues related to the financing of professional soccer clubs, such as the legality of TPO, had to be regulated by the relevant sports authorities. Therefore, these previous decisions did neither prevent FIFA from banning TPO, nor address the validity of such prohibition under European and Swiss law.

Finally, RFC Seraing’s contention that the prohibition of TPO violates Article 27(2) of the Swiss Civil Code, as it constitutes an excessive contractual restriction to its economic freedom, was dismissed since RFC Seraing remained free to resort to alternative financing mechanisms.

As to the alleged violation of RFC Seraing’s right to be heard, the Supreme Court found that RFC Seraing shall be precluded from raising such argument since it did not react immediately during the arbitral proceedings.

The Legality of TPO Remains Uncertain

While this decision of the Supreme Court adds to the already existing decisions about the independence of the CAS so that this issue can almost be considered as finally settled, the legality of the prohibition of TPO under European law remains far from being definitively confirmed. Indeed, the Brussels Court of Appeal, seized by RFC Seraing in parallel to the proceedings in front of the Swiss Supreme Court, rendered a partial decision on 29 August 2018 affirming that the obligation for soccer clubs to submit to the jurisdiction of the CAS was null and void as the corresponding arbitration clause was overly broad and not limited to a defined legal relationship (Article II of the New York Convention). Now that the objection to jurisdiction raised by FIFA has been rejected, the Belgian court is expected to address whether the prohibition of TPO is lawful under European law. To add complexity to this issue, the FIFA Disciplinary Committee issued a press release on 26 June 2018 indicating that players were not to be considered as “third party” under Article 18ter RSTP, which could trigger the return of TPO in another form. The TPO saga is just beginning and the Swiss Supreme Court decision might turn out to be a Pyrrhic victory for FIFA.

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State Courts and BIT Arbitrations: Cautious Optimism in the Vodafone v. India Saga?

Sun, 2018-09-30 21:51

Aman Deep Borthakur

Young ICCA

A key issue that has assumed importance in BIT arbitrations today is the role of state courts vis-à-vis investment tribunals. Two aspects of this issue become particularly relevant when courts are faced with claims of vexatious BIT arbitrations: (i) the law applicable in the court’s supervisory capacity, and (ii) the extent to which courts can intervene in such arbitrations. On 7 May 2018, the Delhi High Court addressed these issues from the Indian perspective in Vodafone’s long-running retrospective taxation dispute with the Indian authorities. Its judgement is significant for the 20 plus investment disputes India is currently embroiled in.

Factual Background

On 17 April 2014, the Dutch company, Vodafone International Holdings B.V., initiated an arbitration under the Netherlands-India Bilateral Investment Promotion and Protection Agreement (BIPA), now terminated, disputing its tax liability under Indian statute. Several years later, on 24 January, 2017, Vodafone UK initiated an arbitration under the UK-India BIPA. The Indian government approached the Delhi High Court seeking an anti-arbitration injunction since both arbitrations were related to the same question. The Court dismissed the Indian government’s plea (CS(OS) 383/2017 & I.A.No.9460/2017).

The Ruling of the Delhi High Court

The Court adopted a pro-arbitration outlook while declining to issue the anti-arbitration injunction. It held that the UK-India tribunal was the appropriate authority to decide on the question of abuse of process caused by a multiplicity of proceedings under different BITs. Three related questions were adjudicated upon by the Court: (1) the jurisdiction of state courts to deal with BIT arbitrations, (2) the law applicable to such arbitrations, and (3) multiplicity of BIT proceedings.

Firstly, as regards the jurisdiction of national courts in investment arbitrations, the Court recognised that a signatory to the ICSID Convention would agree to completely negate the jurisdiction of national courts as made clear by Article 26 of the Convention. Countries such as India which are not signatories to the Convention are therefore not bound by this requirement. Hence, a national court in an ICSID non-signatory state such as India has the power to intervene in a BIT arbitration to decide jurisdictional questions if the subject matter of the dispute was in that country. In other words, there is no threshold bar to the jurisdiction of state courts in BIT arbitrations. However, due to the kompetenz-kompetenz principle, courts should exercise this power only in exceptional circumstances such as when no alternative efficacious remedy is possible.

Secondly, on the nature of an investor state arbitration, the Court drew a distinction between an international commercial arbitration and an investor state arbitration. It overruled India’s first investment arbitration court case (Board of Trustees of the Port of Calcutta v. Louis Dreyfus, decided by the Calcutta High Court), holding that commercial arbitrations are born out of the consent of private parties, while the latter is based on state guarantees arising out of treaties. Consequently, a BIT arbitration would not be subject to domestic arbitration statutes but to international law.

The third issue which the Court ruled on was the initiation of separate arbitration proceedings under a different treaty by an entity in the same vertical structure, in this case the U.K. based parent company. It observed that since such multiple proceedings would not per se be vexatious or oppressive, this was not an extraordinary circumstance warranting the court’s intervention. Therefore, this question was ultimately left to the India-UK tribunal.

Analysis

The judgement in Vodafone is certainly a step forward in making India a more preferred seat for investment arbitrations. The court rightly recognised the competence of the UK-BIPA tribunal in being better placed to rule on its own jurisdiction.

However, a number of crucial issues merit clarification and improvement. For instance, the judgement does not define the extent to which international law would be applicable to a BIT arbitration, given specific choice of law clauses now common in a number of BITs. It also implicitly indicates a differential standard of scrutiny for intervention by a state court (whether the proceeding is abusive per se) as opposed to a tribunal. This requires clarity on what constitutes this prima facie standard of abuse of process on which the state court itself could intervene.

Furthermore, the Delhi High Court relied on international investment law cases instead of relying on the domestic Arbitration and Conciliation Act of India. This approach takes the distinction between investment and commercial arbitration too far by completely precluding the application of the Act. This is so because solely for the purpose of supervisory jurisdiction of a state court, an investment arbitration should not be treated differently from a foreign seated commercial arbitration. There is a need to draw a distinction between the substance of a country’s treaty obligations and the procedural aspects of a BIT arbitration. A state court should not intervene in questions such as whether an entity qualifies as an ‘investor’ under a treaty. These are matters that should be left entirely to the domain of a tribunal. However, the characteristic of a BIT proceeding as an arbitration should allow a state court to consider questions such as the granting of provisional measures, assisting in the taking of evidence or injunct vexatious BIT proceedings, as in this case. Adopting an entirely deferential stance towards international investment tribunals (especially problematic when the country in question is not a signatory to the ICSID Convention) would render courts unable to aid parties during BIT proceedings.

Therefore, while the substance of a BIT dispute may be governed by both public and private international law, procedurally it must be looked at from the lens of domestic law of the state court as if it were a commercial arbitration. As a consequence, Part II and Sections 9, 27 and 37 of Part I of the Arbitration Act (provisions applicable to foreign seated commercial arbitrations) would apply even to an investment arbitration with a foreign seat or no designated seat as in this case. Similar powers can be invoked under the statutes of other jurisdictions, most notably Sections 12A and 44 of the Singapore and UK arbitration legislations respectively. Furthermore, if the Act were to not be applicable, several practical issues would arise when invoking the supervisory jurisdiction of a state court. For instance, there would be no statutory scheme for the granting of interim measures by a court or execution of an investment award.

Courts have routinely applied domestic statutes while deciding on the recognition and/or enforcement of investment treaty awards. In both Sanum Investments v. Laos (PCA Case No. 2013-13) and Ecuador v. Occidental Exploration Company (LCIA Case No. UN3467), courts in Singapore and the U.K. respectively determined whether to set aside BIT awards based on provisions in their domestic arbitration statutes.

Lastly, while the court recognises the power of Indian courts to restrain/annul vexatious BIT arbitrations, it refuses to exercise its inherent power in this case on the ground that since Vodafone had offered to consolidate proceedings, there is no question of a double remedy (a view also taken by the CME v. Czech Republic Tribunal). However, there are other reasons apart from multiple awards as to why such arbitrations initiated by companies in the same vertical structure on the same facts are vexatious. The host state is put under a more onerous obligation of defending all of these arbitrations simultaneously while the investor need succeed in just one. However, as the Delhi High Court concurs, the abovementioned tactic is not per se unlawful and has been used in a number of arbitrations such as OI European Group BV v. Bolivarian Republic of Venezuela (ICSID Case No ARB/11/25). It is yet to be seen if Indian courts remain similarly cautious when called upon to exercise their powers to restrain such claims.

Takeaways

This decision has important consequences for the 51 countries India has BITs with at present. It firmly establishes that there is no threshold bar to the jurisdiction of Indian courts to issue anti-arbitration injunctions in investment arbitrations. The wide jurisdiction granted by Section 9 of India’s Civil Procedure Code and recognised by the court can potentially lead to greater court scrutiny of investment awards.

The Delhi High Court’s position on international law being applicable highlights another aspect of non-ICSID investment arbitrations. Article 42 of the Washington Convention provides for parties to agree on the applicable law failing which the law of the host state (including Conflict of Laws Principles) and international law become applicable. Since India is not an ICSID signatory, the BIT provisions must be relied upon. Most Indian BITs, including the UK-India BIPA, contain a clause to the effect that the dispute is to be decided in accordance with the provisions of the BIT. The judgement gives an indication that the interpretation of BIT provisions or any investor-state contracts which contain similar arbitration clauses will now take place in accordance with international principles and will not be subject to the same kind of grounds for annulment as in domestic law.

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China’s International Commercial Court: A Strong Competitor to Arbitration?

Sat, 2018-09-29 20:00

Li Huanzhi

In June 2018, China launched its first and second International Commercial Courts (the “CICC”). The advent of them represents a prolonged attempt of China to upgrade its judicial system by transplanting the advanced international practices to, according to the Supreme Court of China (the “SPC”), “provide services and protection for the “Belt-and-Road” construction (the “BAR”)”.

International commercial courts are certainly no novelty to the international dispute resolution (“DR”) community. Numerous ones have emerged during the past decade with the goal of enhancing the attractiveness of their host countries in the purview of the intense competition on international DR market as one of their main pursuits. However, such aim was rarely mentioned when establishing the CICC. The idea of building a mechanism and corresponding institution for solving disputes in servicing the BAR was first put forward in January 2018 by a CPC Central Committee Opinion. This Opinion set the tone for the CICC by emphasizing its ability to serve, instead of its attractiveness for international parties. The corresponding purpose is stipulated in the Recital of the Provisions of the Supreme People’s Court on Several Issues Regarding the Establishment of the International Commercial Court (the “Provisions”), which can be summarized as, firstly, to better manage international commercial cases, secondly, to create a better judicial environment for transnational players, and lastly, to facilitate the BAR construction. Although an avenue through which parties can voluntarily submit their disputes to the CICC is created, and some of the reforms made by the Provisions are indeed unprecedented, the CICC’s attraction for international cases may remain limited. I explain in this post why the CICC might only be a good “starting point” for China in the cause of being recognized as an attractive place for BAR disputes and could not, for the time being, replace international arbitration as the mainstream avenue.

1. Difficulties posed by the CICC’s jurisdictional approach

According to article 2(1) of the Provisions, parties can submit the first instance international commercial cases with actual connection with China and with an amount in dispute of at least 300 million RMB to the CICC by a jurisdiction agreement. Obviously, such approach leaves limited room for consensual jurisdiction and in practice, poses several difficulties for lawyers intending to select the CICC as the DR forum.

The first difficulty would be how to draft an effective DR clause to select the CICC. There is not always a positive correlation between the total value of a contract and the amount in dispute arising out of such contact. In other words, one cannot predict the “size” of the dispute when drafting a DR clause. Selecting the CICC in a jurisdiction agreement would produce too much uncertainty regardless of the “size” of the contract.

A “safe” way to select the CICC would be to adopt a “non-exclusive” choice of court clause stipulating that disputes over 300 million RMB will be submitted to the CICC and other disputes would be submitted to an arbitral tribunal or other Chinese courts. Nevertheless, the amount in dispute is not always fixed during a proceeding, as Mr. Wei Sun pointed out in his earlier post on this Blog. Cases where the amount in dispute exceed 300 million RMB after the acceptance of other courts either by the change of the claims by the claimant or filing counter-claims by the defendant, might have trouble reaching the CICC. Moreover, one cannot assume that cases with smaller amount in dispute are necessarily easier. Last, it is the truism that the Higher Court or the SPC could transfer tricky cases with the amount in dispute less than 300 million RMB to the CICC if they agree or decide to. Nevertheless, party autonomy would be completely deprived. Setting this quantifiable threshold might lessen the CICC’s workload at the first appearance, but the practical difficulties posed by this may result in parties not selecting the CICC at all.

It is also noted that only cases with actual connection with China can be submitted to the CICC. Here the stubborn Chinese judicial tradition, i.e., Article 34 of the Civil Procedure Law, comes into play. Article 34 enumerates several locations which parties can choose via a written jurisdictional agreement to enable the court of such locations exercising jurisdiction over their disputes. It specifically emphasizes that for a consensual venue to be valid, such venue must have actual connection with the dispute. Thus, the CICC would be difficult to satisfy the demands of parties seeking a neutral forum for BAR disputes.

Taking the other four types of jurisdiction of the CICC into consideration (i. cases transferred from the first instance Higher Court; ii. cases with significant nationwide impact; iii. cases involving application for preservation measure in arbitration and setting aside or enforcement of international commercial arbitration awards; and iv. cases designated by the SPC when it deems appropriate), essentially, they operate only as an internal allocation of jurisdiction inside of the Chinese court system. In other words, with the restriction on the consensual jurisdiction, the CICC might only facilitate the resolution of cases which are already under the Chinese jurisdiction. Moreover, in terms of the CICC’s judicial assistance for the enforcement of preservation measures and awards of international arbitration, parties would, in a way, be encouraged to use arbitration proceedings for BAR disputes.

There are significant differences between the CICC and other international commercial courts. The Singapore International Commercial Court (the “SICC”) requires only a written jurisdiction agreement for an action to be heard by it even where the dispute has no actual connection with Singapore. Similar approach is adopted by the Dubai International Financial Centre Courts (the “DIFCC”). As for the CICC, one may argue that the arrangement with regard to consensual jurisdiction would only enable international parties willing to bring cases to Chinese courts to have their disputes resolved by a more professional bench, instead of vying for jurisdiction with international institutions.

2. Difficulties posed by the Chinese upper laws

Building an international commercial court is never an isolated event. In the absence of a full-scale revision of the current laws, setting some special procedures for the CICC would not be able to eliminate parties’ concerns towards the Chinese judicial system.

A fully-internationalized commercial court requires the participation of reputable foreign judges and highly-professional international lawyers. However, according to Article 9 of the Chinese Judges Law, foreign experts are prohibited from sitting as judges on the CICC, because a judge must possess Chinese nationality. And only Chinese-admitted lawyers can act as legal representatives according to the Chinese Civil Procedure Law, even when the applicable law is foreign law. With its limited room for institutional innovation, the CICC created an internal International Commercial Expert Committee. Parties can use this Committee as the mediator after a case is accepted by the CICC. This approach does, somehow, inexplicably remove the meditation function from the collegial panel, while improving the enforceability of the mediation agreement by allowing the CICC to issue a conciliation statement or a judgment based on the mediation agreement upon parties’ request. The practical value of this Committee remains to be seen. However, it is obvious that this limited approach can by no means possess the same attractiveness compares to other courts with benches comprising leading international experts and flexible rules of representation for foreign lawyers, such as the SICC and the DIFCC, not to mention, to the international arbitration.

Moreover, the Chinese Civil Procedure Law does not provide any compulsive requirement for evidence disclosure before the start of hearings. The possibility of facing surprising evidence might be one of the biggest obstacles preventing a lawyer with common law background from trusting the Chinese judicial proceedings. The Provisions could have learnt from the SICC practices and opened a small window by allowing parties to exclude the application of the Chinese evidential rules and thereby grant more autonomy for parties to manage the proceeding. Regrettably, this issue remains unsolved.

In light of the preceding discussions, foreign lawyers’ reluctance in selecting Chinese courts as DR forum and their “medieval” impression of the Chinese judicial system can hardly be converted by the establishment of the CICC. Despite that, the CICC did achieve what it set out to achieve by helping transfer international commercial cases to the hands of a more professional and internationalized bench and creating a much more flexible and efficient procedure for those cases. The CICC may not be able to compete with international arbitration at this moment, but who is to say it will not be a good starting point?

 

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Turkey’s Court of Cassation Refuses to Enforce an Arbitration Clause in English Based on a Turkish Language Requirement

Sat, 2018-09-29 01:08

Courtney Kirkman Gucuk and Can Talaz

In a recent decision, Turkey’s Court of Cassation refused to enforce an arbitration clause in an English language contract between a Turkish party and a foreign party based on Turkey’s national language requirement for commercial enterprises, the Code on the Mandatory Usage of the Turkish Language in Commercial Enterprises No. 805 (“Law No. 805”).

The Contract

The contract at issue is a Licensing and Distribution Contract (“Contract”) between a Swiss company that produces and sells health products (“Swiss Co.”), as licensor, and a Turkish company that handles the import, export, marketing, and sales of health products (“Turkish Co.”), as licensee. The parties signed the Contract in English, without a Turkish counterpart. The Contract is governed by Swiss law and includes an arbitration clause.

The Turkish Court Proceedings

Swiss Co. filed for a declaratory judgment against Turkish Co. in the Turkish court of first instance, the 12thCivil Commercial Court of Ankara (“Commercial Court”). Swiss Co. asked the Commercial Court to declare that Swiss Co. had rightfully terminated the Contract based on Turkish Co.’s non-performance of its contractual obligations. Turkish Co. objected to the request of the Commercial Court to hear the merits of the case because of the existence of an arbitration clause. This argument was accepted by the Commercial Court.

Swiss Co. appealed the Commercial Court’s decision. The Court of Cassation overruled the Commercial Court’s decision on the grounds that the Commercial Court had failed to take into account in its decision Law No. 805 and the obligation of Turkish parties to draft contracts in the Turkish language, and it remanded the case to the Commercial Court.

On remand, the Commercial Court accepted the Court of Cassation’s reasoning and denied Turkish Co.’s objection to its jurisdiction to hear the substantive case based on the arbitration clause. The Commercial Court noted that while the contract is valid, the arbitration clause could not be invoked by Turkish Co. Accordingly, the Commercial Court made a substantive ruling on the merits and decided that Swiss Co. had rightfully terminated the Contract.

Turkish Co. appealed the Commercial Court’s decision, and argued that Law No. 805 did not apply to commercial contracts, but only to commercial books and records. The Court of Cassation rejected Turkish Co.’s argument and upheld the Commercial Court’s decision. It found that based on Article 4 of Law No. 805, Turkish Co. could not invoke the arbitration clause because it was in English. The Court of Cassation upheld the Commercial Court’s decision that Swiss Co. rightfully terminated the Contract.

Turkish Co. has appealed the Court of Cassation’s decision and asked for a correction of the judgment (karar düzeltme) and the case is currently pending before the 11thCivil Law Chamber of the Court of Cassation.

Law No. 805

Law No. 805 is relatively short, comprised of only nine articles. It was adopted in 1926, shortly after Turkey became a Republic in 1923, when Turkey was actively promoting the use of the Turkish language as state policy.

The most important provisions of Law No. 805 are as follows:

Article 1: “All types of Turkish companies and enterprises shall use the Turkish language in all kinds of transactions, contracts, communication and bookkeeping in Turkey.”

Article 2: “For foreign companies and enterprises, this obligation applies to all kinds of transactions and communications with Turkish companies and persons, and whenever foreign companies are obliged to disclose documents and company books to government bodies or officials.” Unlike Article 1, Article 2 does not include the word “contracts”.

Article 3: “Even though the companies referred in Article 2 can use a secondary foreign language in their transactions, the Turkish copy shall prevail, and the binding signatures shall be put on the Turkish copy of such documents. In case the signatures are on the foreign language copy of the contract despite this prohibition, the Turkish text shall be acknowledged.”

Article 4: “Documents and papers that are drafted after this Law becomes effective and are in violation of the above articles will not be taken into consideration for the benefit of the companies and enterprises.”

Article 7: “Any person that acts in contradiction with the provisions of this Law shall be imposed with a judicial fine that is not less than one hundred days.”

Jurisprudence  

Although Turkish parties and foreign parties routinely enter into contracts only in English, to our knowledge this decision is one of less than a dozen cases in which the Turkish courts have applied Law No. 805. The Court of Cassation selectively applied Law No. 805 to deny enforcement of the arbitration clause by Turkish Co., but enforced the rest of the Contract (also in English) on behalf of Swiss Co. Unfortunately, the Court of Cassation did not give a detailed analysis in its decision.

A look back at the few decisions in which Law No. 805 has been applied by the Turkish courts does not provide much guidance.

  • 1977: The court enforced a clause which was written in the English language and contained in a Turkish contract, finding that the clause was customarily in English.
  • 1979: The court refused to enforce a due date clause which was in English and contained in a bank security letter in Turkish given to a government office.
  • 1986: The court dismissed the argument that a foreign company doing business in Turkey should execute a contract in Turkish.
  • 2006: In a dispute between a Turkish bank customer and a Turkish branch of a foreign bank, the court of appeals found that the lower court should have considered Law No. 805.
  • 2009: In the same dispute, on remand the lower court decided that the Turkish branch of a foreign bank could not rely on a contract that was not in Turkish.
  • 2012: The Court of Cassation directed the lower court to consider, because both parties to the contract were Turkish, whether Law No. 805 applied to the dispute, and if so, to decide whether the arbitration-related clauses of the contract would benefit the defendant.
  • 2014: In a dispute between a foreign pharmaceutical company and a Turkish distributor, the court dismissed the case because it found the arbitration clause was invalid in the contract as it was drafted in English.
  • 2015: In a dispute between two Turkish companies related to a sales agreement in English, the Court of Cassation remanded the case because the lower court did not consider Law No. 805. On a second appeal, the Court of Cassation remanded again, finding that the dispute should not be resolved based on the contract but on general Turkish laws.

Analysis

While the Court of Cassation’s recent decision sheds some light on the interpretation of Law No. 805, it also leaves some questions. Significantly, the Court of Cassation’s application of Law No. 805 to the Contract resulted in the enforcement of the Contract except for the arbitration clause. Because the Court of Cassation (and the Commercial Court in the earlier decisions) did not explain its reasoning in detail, we cannot be sure of the entire legal basis for the denial of Turkish Co.’s invocation of the Contract’s arbitration clause.

The Court of Cassation may have differentiated between the parties, as Law No. 805 imposes slightly different obligations on Turkish and foreign parties. In fact, it reasoned, applying Article 4, that the arbitration clause could not be taken into account for the benefit of Turkish Co. That is, Turkish Co. failed to comply with Law No. 805 in making the arbitration agreement and cannot invoke arbitration as a defense in seeking termination of the Turkish court litigation against it. The Court of Cassation also may have reasoned that the arbitration clause was rendered inapplicable for both parties because an arbitration clause that could be invoked by only one party (here, Swiss Co., as a result of Article 4 operating to preclude Turkish Co. from invoking the arbitration clause) would be invalid under Turkish law. The Court of Cassation has a very high standard for assessing the validity of arbitration agreements, which must establish explicitly, exclusively, with certainty, and without any doubt the parties’ agreement to arbitration. Here the Court of Cassation may have decided that an arbitration clause in violation of Law No. 805 is not exclusive, if not valid.

Going Forward

We await the final decision of the Court of Cassation, which could clarify the scope of application of Law No. 805. Until then, foreign and Turkish parties doing business together in Turkey should be cautious and may wish to execute their arbitration agreements as separate contracts in English and Turkish versions. For existing contracts including arbitration clauses between foreign parties and Turkish parties that have been executed in only English, if the parties agree, a Turkish version of at least the arbitration clause can always be executed to avoid possible future complications.

The case reference is: X v. Y, Court of Cassation, 11th Civil Law Chamber, File No. 2016/5836, K. 2017/4720, dated 26/09/2017.

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CIETAC’s Fresh Footprint in North America: Drawing on Experiences of its Hong Kong Counterpart

Thu, 2018-09-27 20:00

Brad Wang and Gloria Ho

The Inauguration
On 2 July 2018, CIETAC established its second arbitration centre outside mainland China – the North America Arbitration Center in Vancouver, Canada. Co-organised by CIETAC and the Vancouver Economic Commission, the inauguration ceremony was graced by the presence of the Honourable Bruce Ralston, Minister of Jobs, Trade and Technology of the Government of British Columbia; the Honourable George Chow, Minister of State for Trade of the Government of British Columbia; Mr. Kong Weiwei, Deputy Consul General of the Consulate-General of the PRC in Vancouver; and close to 200 dignitaries from government departments, trade and commerce federations and the legal profession.

Expectations from the Vice-Chairman
Speaking at the ceremony, Vice-Chairman and Secretary-General of CIETAC Mr. Wang Chengjie pointed out that launching the North America Arbitration Center would enable CIETAC to learn from practices of international arbitration so as to enhance the internationalisation of its arbitration services. At the same time, the North America Arbitration Center would serve as a platform for the legal profession in North America to get informed of Chinese arbitrations.

Further, Mr. Wang foresaw that in establishing an overseas branch in North America, CIETAC would bring fair, efficient and convenient arbitration services to Chinese and foreign parties in North America. He indicated that CIETAC would continue its efforts in promoting the use of international arbitration and in making positive contributions to the development of global trade.

The Hong Kong Experience
Handling foreign-related commercial disputes has been CIETAC’s founding mission since it was established in 1956. However, it was only six year ago and after it has already administered approximately 30,000 cases in total, upon the invitation of the Department of Justice of Hong Kong SAR, when CIETAC decided to step outside mainland China and authorise its Hong Kong Arbitration Center to administer cases when a neutral, common law, (and of course a popular) seat of Hong Kong is preferred by parties. CIETAC was both confident and comfortable with choosing Hong Kong as it saw Hong Kong as a frequently chosen seat of arbitration, and Hong Kong party-related cases ranked as 2nd in its case profile at that time.

CIETAC Hong Kong Arbitration Center was not built in a day. We summarised three key breakthroughs which will be of great assistance to the North America Arbitration Center, as explained below:

  • Chapter VI of CIETAC Arbitration Rules 2015 and Its “Bridging” Function

Headquartered and having most cases administered in Beijing, CIETAC adopts arbitration rules which from version to version consistently feature what CIETAC considers to be the best practices of international arbitration to the extent they are practical to be carried out under the procedural laws in mainland China. The establishment of CIETAC Hong Kong Arbitration Center accordingly called for special rules that are more compatible with procedural laws and arbitration practices in Hong Kong.

Chapter VI was introduced in the CIETAC Arbitration Rules 2015 (the “Rules”), which is exclusively applicable to arbitration cases accepted and administered by the CIETAC Hong Kong Arbitration Center. The Chapter provides that cases under CIETAC Hong Kong Arbitration Center (unless parties agree otherwise) shall adopt an open panel of arbitrators and comply with the doctrine of “Kompetenz-kompetenz”; and acknowledges the power of the arbitral tribunal to make interim measures. A transparently-structured fee schedule was also introduced for the cases CIETAC Hong Kong Arbitration Center administers.

  • The Enforcement of Award of CIETAC Hong Kong Arbitration Center

CIETAC Hong Kong Arbitration Center started to administer its cases under the Rules on 1 January 2015. The next milestone event, subsequently, was the enforcement of an Arbitral Award issued by CIETAC Hong Kong Arbitration Center in mainland China, which gave lawyers and parties a glimpse of a typical case under its auspices, from the beginning to the end.

In late 2016, the Nanjing Intermediate People’s Court of Jiangsu Province of China (“the Intermediate People’s Court”) handed down its ruling ((2016) Su Ren Gang 1) to enforce an Arbitral Award issued by CIETAC Hong Kong Arbitration Center. Relying on the Supreme People’s Court’s Arrangement Concerning Mutual Enforcement of Arbitral Awards between Mainland China and Hong Kong 1999, the Intermediate People’s Court found that the CIETAC award was in accordance with procedural laws of Hong Kong, and the enforcement would not contradict the public interest of mainland China.

  • Offshore Court’s Mareva Injunction in Aid of an Ongoing Case Administered by CIETAC Hong Kong Arbitration Center

While most practitioners were discussing Hong Kong court’s supportive stance in its case Chen Hongqing v Mi Jingtian & Others (HCMP 972/2017) when it comes to granting interim relief for international arbitrations (in this case, a CIETAC mainland Chinese arbitration), an unreported case ((2017) Yue 0113 Cai Bao 237) by a local court in Guangzhou, China (“the Court”) in support of an ongoing arbitration at CIETAC Hong Kong Arbitration Center was lesser-known.

In June 2017, the Court accepted a party’s asset preservation application forwarded by CIETAC Hong Kong Arbitration Center to prevent the respondents from disposing of their assets. Primarily relying on Article 28 of Chinese Arbitration Law and upon a financial undertaking provided by a third party, the Court held that the tests for approving of such application were satisfied.

This case illustrates the “brunch” feature of CIETAC Hong Kong Arbitration Center as it carries both the characteristics of a Hong Kong seat and a sub-commission of CIETAC, a Chinese arbitration commission, and may be argued to have provided a new option of seeking interim reliefs in similar arbitrations.

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Advance Waivers of Conflicts of Interest – Changing the Dimensions of Arbitrator Challenges

Wed, 2018-09-26 23:11

Alefiyah M Shipchandler

Arbitrator neutrality remains an imperative prerequisite in international commercial arbitration. After all, the primary advantage of arbitration is that parties have the ability to choose their own decision-makers.  The issue of advance waivers typically arises at the time of appointment, when the arbitrator reserves the right to continue as an arbitrator despite the occurrence of certain potential conflicts, that would normally give rise to justifiable doubts about the arbitrator’s impartiality and independence. Thus, what the parties end up ‘waiving’ is their future right to challenge the arbitrator on the basis of the previously disclosed potential conflict.

However, can such advance waivers of conflicts of interest supersede the mandatory right of challenging an arbitrator? There exists limited guidance in terms of the validity and enforceability of such waivers and its ultimate impact on the right to have an impartial and independent tribunal. Given that there do not exist any formal Rules or Guidelines on the same, this article aims at pointing out certain practices that have begun to gradually emerge amongst arbitral institutions, in their treatment of advance waivers.

Advance Waivers of Potential Conflict of Interests

In recent times, two kinds of advance waivers are generally used by arbitrators in their declarations of independence and impartiality,

  1. Arbitrators may seek an advance waiver by which parties to the dispute ‘waive’ their right to challenge the said arbitrator at a future time, on the basis of certain potential conflicts. For example,

 “… I would however make a reservation that the other partners of my law firm may be free to continue with current or take up new instructions, involving the parties to this dispute or their affiliates.”

  1. Arbitrators may also seek a ‘waiver’ by the parties, by which the arbitrator is no longer bound by his duty to make continuous disclosure of conflicts. For example,

“The parties are requested to accept that current or future member firms of [the prospective arbitrator’s group of firms] are free … to accept instructions from or against any of the parties to this arbitration … without any duty on my part to make any disclosure in connection with any such instructions.”

Interestingly, the IBA Guidelines on Conflicts of Interest, 2014 (“IBA Guidelines“) only recognizes the use of advance waivers. It does not take any conclusive position on their validity, and leaves this question to be determined by “the specific text” of the waiver, the applicable rules and law. Similarly, even the Report of the International Commercial Disputes Committee of the New York City Bar Association simply states that, “the Committee neither endorses nor rejects the use of advance waivers, but rather seeks to encourage further dialogue and consideration of an existing trend”.

Due to a lack of uniformity on the issue, different arbitral institutions seem to follow different procedures when it comes to advance waivers. A question that needs to be answered is whether parties can in exercise of their autonomy, do away with the arbitrators’ continuous duty of disclosure, which under most procedural rules is mandatory. The UNCITRAL Model Law, for example, omits any grounds for parties to contract out of Article 12’s impartiality standards.

In fact, the IBA Guidelines specifically mandate in General Standard 3(b) that, “advance declaration or waiver in relation to possible conflicts of interest arising from facts and circumstances that may arise in the future does not discharge the arbitrator’s ongoing duty of disclosure”. Given the soft law status of the IBA Guidelines it only remains to be seen whether notwithstanding such advance waiver, an arbitrator shall nevertheless be required to disclose conflicts of interest that may arise in the future.

A practice in point, followed by the ICC is rooted in the supervisory role the Secretariat plays in arbitrations administered by it. According to the current practice, the Court is not bound by the arbitrator’s statement relating to future conflicts of interest. This essentially means that the parties are not precluded from challenging an arbitrator. The Court consequently allows challenges against arbitrators notwithstanding advance waivers. Further, the arbitrator’s duty of continuous disclosure is also not discharged.

There is also a growing tendency of arbitral institutions to refuse the appointment of an arbitrator who requires an advance waiver. For example, when an arbitrator is to be proposed by an ICC National Committee pursuant to Article 13(3) of the ICC Rules, the Court ordinarily does not appoint arbitrators who request advance waivers. A similar practice is also followed by the SCC, where the arbitrator requesting a waiver is required to revise his/her declaration before sending it to the parties.

Proposed Practice

In consonance with the IBA Guidelines and the practice of the ICC Secretariat, the validity of an advance waiver may be evaluated on the basis of the following:

  1. Limited scope of the waiver.

An overly broad waiver covering a variety of potential conflicts, is incompatible with the fundamental principle, that parties to an arbitration have a legitimate interest in being fully informed of all circumstances that ensure that an arbitrator is and remains independent and impartial. Therefore, arbitral institutions such as LCIA do not accept waivers that are overly broad.

  1. Informed consent of the parties and constructive knowledge.

For a waiver to be valid, it must be necessary that the parties are aware of the exact nature of the potential conflict and the implications that that waiver could have on proceedings. The validity of waivers must thus be evaluated on the touchstone of ‘you cannot waive what you do not know’.

  1. Continuing obligation of the arbitrator to disclose conflicts.

Waivers by which an arbitrator attempts to do away with his continuing duty of disclosure should not be accepted at all.

  1. Possibility of challenging the arbitrator despite the advance waiver.

In unison with the mandatory right to challenge an arbitrator, parties should be permitted to challenge an arbitrator despite an advance waiver, in exceptional circumstances. Such leave may be given by the supervisory institution or the arbitral tribunal as the case may be.

  1. Effect on the enforcement of the award vis-à-vis the advance waiver.

Since an arbitral award can be set aside by national courts on the grounds of partiality of an arbitrator, the validity of advance waivers may also be determined on the basis of its general treatment in the jurisdictions from which the parties to the dispute belong. For example, according to the dictum of Justice White in Commonwealth Coatings Corp. v. Continental Cas. Co, arbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance. Thus, the United States appears amenable to enforce advance waivers.

Path Ahead

Another question that must also be answered is as to what impact the advance waiver might have on a challenge to the arbitrator. Could an arbitrator rely on the advance waiver as a defence in such case? And to that extent, can the advance waiver be used to draw conclusions on some form of acquiescence or can it be used to increase the objective standard necessary to uphold a challenge against an arbitrator?

Advance waivers thus affect various elements which are at play in commercial arbitration, including party autonomy, standards of impartiality and independence, duty of disclosure and even enforceability.  In light of the uncertainty surrounding them, it is necessary to formulate a set of rules, even if in the form of soft law, to regulate the use and ensure uniformity in the enforcement of advance waivers and address the effect they have on arbitral proceedings.

 

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The Contents of b-Arbitra, Issue 2018-1

Tue, 2018-09-25 16:33

Annet van Hooft and Jean-François Tossens

We are pleased to present you with this new issue of b-Arbitra, which is once more filled with thought provoking articles and new developments. This issue is published as part of our cooperation with Wolters Kluwer. As announced, our journal is now also accessible in digital form on Jura in Belgium and in the Kluwer Law Arbitration database.

In this issue you will find Marie Stoyanov, Werner Eyskens, Valentin Bourgeois and Michaël Fernandez-Bertier’s in-depth review of the impact that the presence, or absence, of criminal proceedings or complaints may have on the treatment of corruption allegations in investor-state arbitrations. They also look at how the arbitral proceedings and criminal proceedings may interfere with one another.

We then have Michael Neumeier and Miroslav Georgiev’s article exploring whether mass claims in arbitration in Europe, and in particular in Germany, could one day become a reality. They look into existing impediments and options to give form to such proceedings, against the background of U.S. and Australian law.

With respect to recent case law, we are very pleased to offer you two annotations by Alexander Hansebout regarding two Yukos decisions. The first annotation (concerning Civ. Bruxelles, 9 December 2016, published in b-Arbitra 2017/2) focusses on the existing confusion regarding the exequatur procedure that applies in Belgium to awards rendered in the Netherlands and provides an overview of the various existing exequatur regimes in Belgium. The second annotation concerns the seizure of assets (Civ. Bruxelles, 8 June 2017, published in b-Arbitra 2017/2), the intervention of the Belgian state and the relevance of current status of the title that the seizures were based on.

We then include the CJEU’s decision in the Achmea matter and AG Wathelet’s opinion. A comment on this opinion and the Court’s decision will be published in a future issue of our journal.

We also publish, without annotation, two decisions of the Court of First Instance of Brussels regarding third party opposition to arbitral awards. They are related to the decision of the Constitutional Court of 16 February 2017 No. 21/2017 (published with annotation by Olivier Caprasse and Maxime Malherbe in b-Arbitra 2017/2). The first judgment Civ. Bruxelles (Fr.), of 29 January 2016 concerns the proceeding up to the posing of the preliminary question to the Constitutional Court. The second judgment Civ. Bruxelles (Fr.), of 12 April 2018 concerns the Court’s decision to annul two ICC awards on the basis of third party opposition, after having obtained a confirmative answer from the Belgian Constitutional Court that the Belgian Code of Civil Procedure’s limitation of the availability of third party opposition to judgments from state courts only, violated the Constitution.

We have several book reviews, notably of Philippe De Bournonville’s (posthumous) title “L’arbitrage, tiré a part du Répertoire notarial” by Caroline Verbruggen, and of Sigvard Jarvin and Corinne Nguyen’s “Compendium of International Commercial Arbitration Forms,” by Herman Verbist. We conclude with a book review by Jean François Tossens of Jacques Herbot’s “ Contracts in the People’s Republic of China.”

We hope you enjoy this issue and always welcome further views, exchanges and suggestions from our readers.

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The Material Scope of the 1958 New York Convention: Russian Courts Make It Broader

Tue, 2018-09-25 02:00

Mikhail Samoylov

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) has its own scope – it states that it “shall apply to the recognition and enforcement of arbitral awards”. Only decisions made by arbitrators are to be considered “awards” within the meaning of the New York Convention1)UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016) para 22. jQuery("#footnote_plugin_tooltip_8658_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8658_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, rather than decisions handed down by judges. As one prominent academic notes: “[t]here is no universal international treaty governing the recognition and enforcement of foreign court judgments.”2)Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Fifth Edition) (Kluwer Law International 2016) p. 129 jQuery("#footnote_plugin_tooltip_8658_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8658_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Despite that, Russian courts are invoking the New York Convention in the exequatur proceedings of foreign court judgements.

This blog post will first briefly reveal the results from the research conducted by the author on the issue (I). The next part of this contribution then discusses some possible reasons why Russian courts apply the New York Convention erroneously (II), and some consequences of such practices (III). The author summarizes conclusions in a final part (IV).

I. A Case Study of Erroneous Practice

Research carried out by the author shows that in at least 81 cases, which were considered in recent years, Russian courts invoked the New York Convention in the exequatur proceedings of foreign court judgements.

The table below reveals (i) the countries where foreign court judgements were rendered (the nationality of a foreign court judgement); and (ii) the number of exequatur proceedings in Russian courts in which the New York Convention was applied to such judgements:

N The nationality of a foreign court judgement The number of exequatur proceedings in Russia 1. Belarus 6 2. Cyprus 3 3. China (Hong Kong) 1 4. Finland 2 5. France 2 6. Georgia 1 7. Italy 2 8. Japan 2 9. Kazakhstan 29 10. Kyrgyzstan 2 11. Lithuania 4 12. Moldova 4 13. Mongolia 1 14. Netherlands 1 15. Poland 1 16. Ukraine 17 17. United Kingdom of Great Britain and Northern 2

Moreover, Russian courts apply the New York Convention even in cases where a foreign judgement was rendered in a State (a territory) that is not a party to the New York Convention. For instance, in case No А41-55167/16, the New York Convention was invoked for the recognition and enforcement of the Nampkhosky court on sea matters of the Democratic People’s Republic of Korea in Russia.

II. Prerequisites for Erroneous Practice

There might be several possible explanations for such erroneous practice. First, there is a dual meaning of the word “arbitrage” in the Russian language. The word “arbitrazh” in Russian comes from “arbitrage” in French. While in French, “arbitrage” is an alternative method of dispute settlement (“[r]èglement d’un différend ou sentence arbitrale rendu par une ou plusieurs personnes, auxquelles les parties ont décidé, d’un commun accord, de s’en remettre.” 3)Le Nouveau Petit Robert. Dictionnaire alphabétique et analogique de la langue française ; texte remanié et amplifié sous la direction de Josette Rey-Debove et Alain Rey (Dictionnaires Le Robert, Paris 2009), p. 129 jQuery("#footnote_plugin_tooltip_8658_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8658_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });), in the terms of Russian law and the language, the word has a dual meaning, and it means :

(i) dispute resolution by a state court – an arbitrazh court;

(ii) dispute resolution by arbitral tribunals.

This dual meaning confuses Russian courts and foreign courts. For example, a Sweden court in the exequatur proceedings, confused by a translation of “an arbitrazh court” from Russian to Swedish, applied Sections 54-55 of the Swedish Arbitration Act (which correspond to Article V of the New York Convention) and declared the ruling of a Russian arbitrazh court enforceable.4) Eric Johnson, ‘The “Award” Not Recognized – and Rightfully So’ (10 April 2017). jQuery("#footnote_plugin_tooltip_8658_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8658_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, the Swedish Supreme Court corrected the lower court, clarified that in the case at hand, the enforcement was sought for a court ruling, rather than for an arbitral award (Swedish Supreme Court decision on 30 March 2017, Case No. Ö 5209-13).

Further misunderstanding can be possibly caused by the wording of Russian procedural law. Article 241 (1) of the Arbitrazh Procedure Code of the Russian Federation reads as follow:

foreign courts judgements <…>, and awards of arbitral tribunals and international commercial arbitration courts are recognized and enforced in the Russian Federation by arbitrazh courts, if the recognition and enforcement of such decisions are stipulated in an international treaty of the Russian Federation and in federal law.” (emphasis added).

In 1996, the Supreme Arbitrazh Court of the Russian Federation clarified that the New York Convention deals only with arbitral awards, whereas the recognition and enforcement of foreign court judgements are governed either by an international treaty to which Russia is a party to, or by Russian law. The notion of “a foreign court judgement” is not equal to the notion of “an arbitral award”.

Article 241 (1) of the Arbitrazh Procedure Code of the Russian Federation, which became law in 2002, rests upon the mentioned rationale. One would say that the same approach should have been true regarding its application by Russian courts. Notwithstanding the clarification of the highest court, Russian courts often consider the notions “a foreign court judgement” and “an arbitral award” as the synonyms of a common notion – a court judgement. For example, in case No А40-187536/2015 the Arbitrazh court of the city of Moscow threated a LCIA award as a foreign court judgement. Opposite, in case No A53-11372/2017, the Arbitrazh court of the Rostov region treated a foreign court judgement as an arbitral award, and stated:

Grounds for refusing the recognition and enforcement of a decision of the Economical court of the Kharkov region [Ukraine] <…> providing for Article V of the [New York] Convention are not established <…> the petition [for the enforcement] shall be satisfied.”

Finally, recognizing that Russia may not have an international treaty on the recognition and enforcement of court judgements with a country where a court judgment was rendered, Russian courts often use the New York Convention instead of such an international treaty, or use the New York Convention simultaneously with an international treaty (see, e.g., the decision of the Arbitrazh court of the Pskov region dated 16 February 2017 in case No A52-2950/2016).

III. The Consequences of Erroneous Application

The erroneous application of the New York Convention in the exequatur proceedings of foreign court judgements may, and, in fact, leads to the adverse effects to judgment creditors. At the outset, in 23 of 81 examined cases, Russian courts refused the recognition and enforcement of foreign court judgements and based its conclusions on the provisions of the New York Convention. Articles V(1)(b) and V(2)(b) of the New York Convention were the article most frequently applied by Russian courts in those cases.

(a) Proper Notice

Article V(1)(b) of the New York Convention requires that the party against whom the award is invoked was properly notified of the appointment of the arbitrator and of the arbitral proceedings. Although Russian procedural law contains similar provisions regarding foreign court judgements, Russian courts apply Article V(1)(b) of the New York Convention instead of a relevant provision of a procedural law. For example, in case No А47-2947/2010, the Arbitrazh court of the Orenburg region refused the enforcement and recognition of a Kazakhstan court judgement having established that the judgement debtor was not properly notified of a court proceeding in Kazakhstan.

(b) Public Policy

The public policy defence is one of the most often invoked by the parties against whom arbitral awards, or foreign courts decisions, are invoked.

Russian procedural law entitles Russian courts to refuse the enforcement of a foreign court judgement if the enforcement of such judgement would violate of the Russian public policy (Article 244 (1)(7) the Arbitrazh Procedure Code the Russian Federation). Hence, recourse to the New York Convention is not needed. Nevertheless, Russian courts invoke Article V(2)(b) of the New York Convention, instead of a relevant provision of the Arbitrazh Procedure Code of the Russian Federation. One among numerous examples of such application is the following statement given by the Arbitrazh court of the city of Moscow in the case No А40-29792/15:

“[t]he court considers that consideration on the territory of the Republic of Moldova of a dispute that falls under the exclusive competence of a Russian arbitrazh court, violates sovereignty of the Russian Federation, Article V(2)(b) of the New York Convention, <…>, therefore the recognition and enforcement of such decision should be rejected due to violation of the public order of the Russian Federation.

IV. Conclusion

The application of the New York Convention to foreign court judgments is undoubtedly an erroneous practice of Russian courts, and such practice should be discontinued by the Russian Supreme Court. Until that moment, the following guidance may be useful for a party seeking enforcement of a foreign court judgment in Russia:

  1. All procedural requests submitting to Russian courts shall be drafted clearly, stressing that enforcement of the foreign court judgment is the aim of exequatur, rather than enforcement of an arbitral award;
  2. The party shall keep in mind that Russian courts can invoke Article V (1) of the New York Convention by its own discretion. For example, in case No А51-14965/2016, the Arbitrazh court of the Primorsky Krai faced with the recognition and enforcement of a court judgement rendered by a Hong Kong court. Despite the fact that a judgement debtor had no objections to the enforcement of the judgement, the court, guided by Article V(1)(b) of the New York Convention, examined whether the judgement debtor was properly notified of a court proceeding at the Hong Kong court;
  3. Legal arguments showing to a court that the New York Convention is not applicable in the exequatur proceedings shall be put into the case at an early stage of the proceedings. A reference to the Russian Supreme Arbitrazh Court letter of 1996 is a useful argument.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Egorov Puginsky Afanasiev & Partners, its affiliates, or its employees.

References   [ + ]

1. ↑ UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016) para 22. 2. ↑ Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Fifth Edition) (Kluwer Law International 2016) p. 129 3. ↑ Le Nouveau Petit Robert. Dictionnaire alphabétique et analogique de la langue française ; texte remanié et amplifié sous la direction de Josette Rey-Debove et Alain Rey (Dictionnaires Le Robert, Paris 2009), p. 129 4. ↑ Eric Johnson, ‘The “Award” Not Recognized – and Rightfully So’ (10 April 2017). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Snapshot on Litigation Finance in Latin America

Sun, 2018-09-23 16:23

Zachary Krug and Helena Eatock

Litigation finance continues expand rapidly on a global basis, including in Latin America. The region’s code-based civil systems generally permit litigation funding and the continued growth in arbitration make it an attractive market for funding. Brazil, as the region’s largest economy, and with a well-developed and sophisticated legal system, is leading the way.  Moreover, local practitioners emphasize that third party funding is not only growing, but that it may be developing in a uniquely Latin American way.

Growing Demand for Funding

Practitioners familiar with the legal market report a growing interest in funding.  Erika Levin, a partner at a law firm with deep ties to the region notes that “parties in Latin America have been warming up to the idea of litigation finance over the last few years.” Likewise, Marcela Kohlbach de Faria and Marianna Marra, lawyers at Brazil’s leading litigation funder, report that interest has “been growing rapidly,” which has been driven by the “well-known advantages of litigation funding, such as access to justice and better control of companies’ allocation of costs.”

They report that the bulk of inquiries come from civil engineering and construction matters.  That is largely “due to the high costs regarding expert determinations and the (usually long) hearings of expert witnesses.”  However, inquiries come from all sectors—from mergers and acquisitions to intellectual property matters—reflecting an increasing demand throughout the legal sector.

An Uptick in Funded Matters

Now, it appears that that interest is beginning to translate into an uptick in actually funded matters—at least for certain types of disputes.

Interestingly, there is an important distinction between arbitration and litigation. Thus far, the demand for funding of arbitration has far outpaced the demand for funding in litigation. Kohlbach de Faria and Marra believe that is not surprising given the relatively low costs of litigation compared to arbitration: “Since tribunal costs are not high, so, compared to arbitration, in most cases the amount of money that must be spent to litigate in the Brazilian judiciary does not justify a funding contract.”

Thus, unlike common law jurisdictions, where the high costs of litigation are one of the main drivers of funding, in Brazil at least for now, funding is primarily being requested for arbitration matters.

While specific details remain elusive and the overall number remains small relative to other jurisdictions with a longer experience using funding, anecdotally, there appears to be a steady uptick in the number of arbitrations involving third party funding.  For example, in November 2017, Brazilian law firm Atelier Jurídico conducted a survey of Brazilian arbitration institutions on their practices with regard to third party funding.  Interestingly, the survey reports at least four cases involving third party funding, whereas there were none in the prior year.

Notably, because disclosure of funding is not generally required, this may well underreport the number of arbitrations that are third party funded.  To be sure, the numbers remain relatively small, but the trend seems evident.

Disclosure of Funding

Disclosure of funding is, of course, a topic of continued debate globally.  As funding remains new, there are few, if any, rules around funding, let alone disclosure. However, in Brazil, the CAM-CCBC (Brazil Canada Chamber of Commerce), a leading arbitral centre, issued guidelines in July 2016 recommending the disclosure of funding so that any potential conflicts can be considered.

Interestingly, since CAM-CCBC publication of its funding guidelines, other Latin American arbitral institutions have followed with similar rules or recommendations. Perhaps this suggests that concerns over potential conflicts (the main issue generally driving disclosure) are overblown, or simply a cautious approach as the centres evaluate whether the actual number of funded cases warrants promulgations of new rules.

In any event, Kohlbach de Faria and Marra note that the bulk of funding inquiries they receive for arbitration dispute involve arbitration clauses referring to Cam-CCBC (40%), followed by the ICC (16.8%).  Thus, as funding grows, the CAM-CCBC’s disclosure recommendation will have an impact even if it is not followed by other centres.

Lex Mercatoria of Latin American Funding

From the Calvo doctrine to today, Latin America often goes its own way and litigation funding may be no different.

Kohlbach de Faria and Marra emphasize that this lack of specific rules and regulations should not be seen as a sign of funding’s uncertain footing in the region. Indeed, quite the contrary:  “In Latin America, for instance, there are only a few guidelines over TPF and the institute lacks governmental regulation, but those who think such fact implements an obstacle for litigation funding may be mistaken.”  Rather, they note that “the Latin American regional market, in the absence of regulation, tends to stipulate its own application methods and limitations – a kind of lex mercatoria – whereas legislation in a market that is still blossoming could undermine its development.”

Time for a Brazilian ALF?

Nevertheless, some practitioners predict that with the growth of funding, some type of regulatory body will eventually be desirable.  For example, Carlo Verona, a partner at Demarest focused on international arbitration and cross-border litigation, argues that “self-regulation is key” because a robust “litigation funding market cannot operate without trust, transparency and suitability.”  Verona notes that the UK’s Association of Litigation Funders provides a potential model: “ALF’s Code of Conduct, set of procedural rules and stellar list of funder members is perfect adequate to the expanding Brazilian market, currently boosted by the wide spread use of arbitration for complex disputes and recent amendments regarding enforcement of judgments and awards in the Code of Civil Procedure.”

Looking to the Future

Looking ahead, litigation funding will no doubt continue to grow, particularly in arbitration, as practitioners and claimants become more familiar with its substantial advantages in offsetting risk and leveling the playing field in contentious disputes.  Of course, regional economic and political uncertainty may also play a role in the growth of funding.

For example, Brazil’s economic slump and the lingering impacts of the Lava Jato revelations likely portend a number of disputes that will eventually find their way into arbitration. Indeed, Kohlbach de Faria and Marra note that Lava Jato has had “enormous impacts” and “its unfolding affected the vast bulk of Brazilian construction and engineering companies.” Thus, funding may be particularly attractive now, “especially in the current scenario of economic crisis and difficulties in various branches of Latin America economy, such as the construction field.”

Hermes Marangos, a partner at a disputes-centred law firm in London with a cross-border practice that frequently involves Latin American matters, reflects that “the effect of new regulations to speed up justice, provide opportunities for claims by shareholders, investors in infrastructure, suppliers and consultants and many others who suffered losses in Brazil.” But Marangos notes that because many of the current disputes “involve sensitive claims for the local market and raise potential conflicts,” which provides an “opportunity for local teams which are not conflicted as well as international experts and funders come together to pursue these claims.”

Finally, “while the majority of financing has occurred with respect to arbitrations in Brazil and Mexico,” Erika Levin predicts “a continued rise in its use throughout the region with respect to arbitrations as well as litigations.”

However funding grows in Latin America, it will be particularly interesting to see how it develops differently from the common law jurisdictions where it is more deeply established.

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Confidentiality in International Commercial Arbitration: Truth or Fiction?

Sat, 2018-09-22 16:05

Marlon Meza-Salas

Confidentiality is usually mentioned among the advantages of international commercial arbitration (ICA). The thought that confidentiality is an innate attribute, seems to be an attractiveness considered to choose ICA to settle disputes. For a long time, it did not seem to be questioned that the private nature of the arbitration process also forced the parties to maintain confidentiality. However, since certain judgments were issued in some countries from the mid-1980s that held: (i) that confidentiality was not an essential attribute of arbitration (Esso and others v. Plowman (1995) 128 A.L.R. 391 —High Court of Australia), (ii) that there was no general principle of confidentiality (U.S. v. Panhandle et al. (1988) 118 F.R.D. 346 (D. Del) —in United States), or (iii) an implied duty of confidentiality in ICA (Bulbank v. A.I. Trade Finance (2000) The Supreme Court of Sweden, case T1881-99), it was evidenced that the belief about confidentiality in ICA was not universal.

When reviewing the comparative law, it is noted that there is no uniform approach on the subject but instead significant differences, since many national legislations do not regulate confidentiality at all, other countries mention it in a very general way, and exceptionally some statutes contain broader regulations. Diversity is so great that even where it is recognized, there are huge differences about its content and scope.

So, it is not surprising that many commentators reject the existence of an implied confidentiality duty in ICA. The truth is that confidentiality in ICA can be misleading, to the point that it has been said it is a “myth” (See J.C. Fernández Rozas, Trayectoria y contornos del mito de la confidencialidad en el arbitraje comercial, 2(2) Arbitraje – Revista de Arbitraje Comercial y de Inversiones 335, 335-378 (2009).

Confidentiality in National Legislations

Confidentiality in ICA is not protected in most countries, which may be due to the fact that the UNCITRAL Model Law on ICA followed in whole or in part by many countries, contains no provision in this regard. In contrast, the laws of New Zealand, Peru, Scotland and Australia have meticulous regulations on confidentiality.

The situation varies among the countries usually chosen as ICA seats. For instance, although there is no statutory regulation on confidentiality for ICA in Great Britain, there is an important development in case law to protect confidentiality. In the United States, the Federal Arbitration Act and the Uniform Arbitration Act adopted as a model by most States, do not impose confidentiality requirements. In France, a legal amendment of 2011 established the duty of confidentiality for domestic arbitration, but not for ICA unless the parties have agreed to it.

Confidentiality in Arbitration Rules

Many arbitration institutions regulate confidentiality, but mainly as a duty of the arbitrators and the staff of each center. Some rules are more detailed or there are Codes of Ethics for arbitrators, but they do not always establish a duty of confidentiality for the parties. This is the case with the ICC Rules, whose article 6 of Appendix I, and article 1 of Appendix II, only impose duties on arbitrators and the staff of the International Court of Arbitration, but not on the parties, although article 22.3 authorizes the Arbitral Tribunal to make orders concerning confidentiality upon the request of any party. Similarly, article 37.1 of the ICDR rules of the AAA only imposes duties of confidentiality on arbitrators and Administrator and article 37.2 establishes that the tribunal may make orders concerning confidentiality; in addition, there is a Code of Ethics with provisions on confidentiality for arbitrators that applies to both domestic AAA arbitrations and international ICDR arbitrations.

In contrast, article 30 of the LCIA Rules regulates the duty of confidentiality in a well-defined manner. The UNCITRAL Arbitration Rules do not mention the subject, although article 34.5 seems to recognize an implicit confidentiality of the award by requiring the consent of both parties so that it may be made public.

Personal and Material Scope of Confidentiality

The discussion is not limited to whether or not there is a duty of confidentiality, because even where the duty is recognized, its content and scope vary. Thus, among the people who could possibly be subject to a confidentiality duty, we find the arbitrators, the staff of the arbitration institutions, secretaries, witnesses, experts, court reporters, translators, interpreters or other people involved in the arbitration, the parties and their representatives and advisors.

The material scope could cover from the fact of the very existence of the arbitration, to the pleadings and memorials of the parties, the documents produced or other evidence such as witness statements or experts reports, the award and other arbitration decisions, as well as information contained in such filings.

The information contained in the arbitration filings can be critical, since it can be, for example, sensitive commercial information such as profit margins, production costs, pricing policies, know-how or trade secrets, the disclosure of which could harm one or both parties involved in an ICA. It could also expose the financial situation of a company or the existence of a defective product, situations that could compromise the image of a company in front of the public and favor competitors.

Absolute Confidentiality Does Not Exist: The Exceptions

A request for annulment, or the request for recognition and enforcement of an award issued in an ICA, are legal actions processed in courts, and in such cases the confidentiality —if any— has to yield, and the award and all information contained therein become public. Something similar happens if judicial assistance is required to request or enforce interim injunctions in an ICA. These situations are called natural exceptions to confidentiality.

Also, one or both parties may be legally bound to disclose information related to the arbitration, for example, at the request of some regulatory authority (in banking, securities, or insurance matters), or by a tax, criminal or judicial authority. In these cases, we are before exceptions to confidentiality due the public interest that are imposed over the private interest of the parties, although they could be interested in keeping the arbitration away from the public sphere.

There are other circumstances that do not fit with the inevitable situations described above, but some legislations, arbitration rules, or case law in some countries, have also admitted as exceptions to the duty of confidentiality. This is the case, for example, when disclosing the existence of arbitration is reasonably necessary to protect the legitimate interests of one of the parties vis-à-vis third parties, or to protect or enforce a right against a third party acting as a plaintiff or defendant, which has been qualified as a matter of procedural public order. It has also been considered that there is no violation of the duty of confidentiality if certain information related to the arbitration is communicated but there is a legitimate reason to do so. Likewise, the right of certain interested third parties to know the existence and outcome of the arbitration has been recognized, such as a parent company, shareholders of a company, corporate auditors, an insurance company, and even an interested party in acquiring a company that requires a due diligence.

Among interested third parties against whom a party may have a legitimate need to disclose the existence of an arbitration, an ICC publication mentions the case of a sub-contractor, who would be entitled to know the terms and circumstances of an arbitral dispute between the main contractor and the owner of the works (See Craig, Park & Paulsson, International Chamber of Commerce Arbitration 312 (Oxford/ICC, 3rd.ed., 2000). A fortiori —we add—, the owner of the works would have the right to know about an arbitral dispute between his contractor and a sub-contractor. In these cases, the exception seems to be justified in the fact that they are linked contracts that, although they are independent contracts themselves, are closely connected by sharing some degree of identity in the object or cause (See J.O.Rodner, Los Contratos Enlazados – El Subcontrato 35 (Academia de Ciencias Políticas y Sociales, 2nd.ed., 2013).

Hence, unless explicitly forbidden by the applicable legislation or arbitration rules, or by agreement among the parties, the parties may disclose details of their own arbitration, including to interested third parties, if there are legitimate reasons to justify that they are acting in good faith.

Conclusions and Recommendations

In matters of confidentiality, the only thing that tends to be recognized almost unanimously in national legislations or in the arbitration rules regarding ICA, is the duty of confidentiality of the arbitrators in the performance of their tasks, but not of the parties or other people involved in the arbitration proceedings. That is why arbitrators in ICA usually promote the inclusion of an express agreement about confidentiality among the parties when establishing the bases of the arbitration procedure, commonly called Terms of Reference.

The diversity is so great that even in cases where the applicable rules recognize the duty of confidentiality, bounded people and the protected contents also vary, which indicates that there is no presumption of confidentiality in ICA or at least there is no general principle on the matter.

That is why those interested in protecting their ICA disputes from public dissemination or in avoiding potentially unfavorable or harmful publicity, should verify the applicable law regarding confidentiality, since depending on the circumstances of each case and the agreement entered into by the parties, it could be the law applicable to the arbitration agreement, the law of the contract, or the law of the seat of arbitration. In any case it is still advisable to include express provisions in the arbitration agreement that deal with confidentiality.

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Arbitration Reform in Ukraine in Action: First Results

Sat, 2018-09-22 02:00

Kateryna Shokalo

On 15 December 2017, the renewed Supreme Court was launched in Ukraine, which triggered the entry into force of the new amendments of, inter alia, Civil and Commercial Procedure Codes. Within this broader judicial reform, a number of long-awaited changes in legal framework for international commercial arbitration have been brought forward, including the following:

  • reducing the number of court instances in arbitration-related matters from four to two, by courts of appeal acting now as the first instance courts;
  • stipulating the principle of interpretation in favorem validitatis;
  • empowering the courts to support arbitration through granting the interim measures, preservation and taking of evidence; and
  • introducing simplified procedure of voluntary compliance with arbitral awards.

To analyse the efficiency of application of the new rules, this post is overview of the court practice from the past nine months and it will highlight the most noteworthy cases.

The Enforcement of Arbitration Agreements

Ukrainian courts have been renowned for their strict formalism. For instance, from time to time, the courts refused to enforce arbitration agreements due to the non-essential discrepancies in the name of arbitral institution. This issue had become the central one in Vilnohirske sklo LLC v Expobank CZ a.s. case, which was recently considered by the Supreme Court.

The claimant, Ukrainian entity, filed a claim to a Ukrainian commercial court over the invalidity of the mortgage agreement executed in English and Ukrainian. According to the English version of this mortgage agreement, the disputes shall be decided by the “Arbitration Tribunal of the Chamber of Commerce of the Czech Republic and the Agrarian Chamber of the Czech Republic”. Meanwhile, the official name of the institution reads as “the Arbitration Court attached to the Czech Chamber of Commerce and the Agricultural Chamber of the Czech Republic”. Vilnohirske sklo claimed that the discrepancies between the official name of arbitral institution and the one stated in the arbitration agreement are so significant that make the arbitration agreement not capable of being performed.

The first instance court disagreed, referring the parties to arbitration. The court of appeal, however, upheld the claimant’s position and sent the case back to the first instance court for consideration on merits. Expobank CZ a.s. challenged this ruling to the Supreme Court, which ultimately enforced the arbitration agreement.

The Supreme Court found that notwithstanding the existing discrepancies the parties intention to resolve the disputes under the rules of particular arbitral institution is evident. Article 22 (3) of the amended Commercial Procedure Code stipulates that any defects in the arbitration agreement and/or doubts as to its validity, operability and capability of being performed should be interpreted by the court in favour of its validity, operability and capability of being performed.  Meanwhile, the court primarily derived in favorem presumption from Ukraine’s obligation to recognise arbitration agreements under Article 2 of the New York Convention and stated that it is also provided in the Article 22 (3) of the Commercial Procedure Code.

Interim Measures

Before 15 December 2017 it was practically impossible to obtain interim measures and any other support of arbitral proceedings from Ukrainian courts. The arbitration reform filled the legislative gap for arbitration proceedings seated both in Ukraine and abroad.

On 9 February 2018, SoftCommodities Trading Company SA filed an application to Odesa region Court of Appeal, acting as the first instance court, for interim measures in support of arbitration initiated under the GAFTA Arbitration Rules against Elan Soft LLP. The dispute arose out of the supply contract for supply of 20 000 tons of Ukrainian wheat by several lots. SoftCommodities claimed that the parties agreed for the supply of the lot in the amount of 2500 tons, of which Elan Soft delivered 1000 tons. The other 1500 tons should have been stored in the warehouse of Ukrainian company – Davos Firm LLC. SoftCommodities, however, figured out that only 1290 tons are available in the warehouse and, therefore, initiated the arbitration claiming damages. Arguing that Elan Soft has been trying to move all wheat remaining in the warehouse out to avoid the enforcement of future arbitral award, the SoftCommodities asked the Ukrainian court for (i) freezing 1290 tons of Ukrainian wheat stored by Davos Firm LLC, and (ii) prohibiting Davos Firm LLC and Maritime Trade Port Ust-Dunaisk, the port at the location of the warehouse, to move 1290 tons of Ukrainian wheat out of the warehouse.

Under the general rule, the court seized with the application for an interim measure should consider the case ex parte within two days, while it may order the claimant to appear before the court in certain cases or consider the application inter partes in exceptional circumstances. The court decided to hear this case with the participation of all parties, including Davos Firm LLC and Maritime Trade Port Ust-Dunaisk. The court reasoned that the additional evidence as to the amount of wheat stored in the warehouse in February 2018 and its price should be lodged and analysed as well as certain issues regarding counter-security should be decided.

On 22 February 2018, the court upheld the application in full. Regrettably, the court did not provide sound reasoning to offer a clear guidance for future applications. Furthermore, the court secured the possible damages of Elan Soft by the guarantee of another Ukrainian company in the amount equivalent to the price of 1290 tons of Ukrainian wheat. The court decided that the counter-security is obligatory in this case since SoftCommodities is neither registered, nor has its assets in Ukraine sufficient for compensation of possible damages.

Elan Soft applied to Odesa region Court of Appeal for cancellation of the interim measures, however, unsuccessfully. In the meantime, Elan Soft challenged the ruling on granting the interim measures to the Supreme Сourt. It remains to be seen whether the Supreme Court will uphold this ruling and/or clarify the test for granting the interim measures in support of arbitration.

Voluntary Compliance with an Arbitral Award

Due to foreign currency regulations, debtors encountered practical difficulties in voluntary compliance with arbitral awards. The debtor should furnish the servicing bank with the execution writ, which may be obtained as a result of recognition and enforcement proceedings. The arbitral reform resolved this problem introducing expedited procedure of recognition and voluntary compliance with the arbitral awards. The court shall consider the respective application without the participation of the parties and analyse merely the arbitrability of disputes and public policy issues.

On 4 May 2018, PJSC Centrenergo applied to Kyiv city Court of Appeal, acting as the first instance court, for recognition and voluntary compliance with the LCIA award. In this case, the tribunal dismissed the claims of Centrenergo and in a separate award ordered to repay to Mercuria Energytrading S.A. the arbitration and legal costs. On 21 May 2018, Kyiv city Court of Appeal recognised the LCIA award on costs allowing voluntary compliance therewith.

Conclusions

To streamline Ukrainian court practice in arbitration-related matters with the best international standards all participants should contribute to this process. On the one hand, the above illustrated court practice provides some reasons to hope about the tendency for efficient application of thoroughly drafted new provisions. Meanwhile, we should not undermine the significance of the fresh approach to the interpretation of old (in effect) rules. On the other hand, to build a robust and arbitration-friendly court system, the author calls Ukrainian arbitration practitioners to engage into meaningful arguments, e.g. not the ones that a negligible discrepancy in the name of institution makes the arbitration agreement incapable of being performed.

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