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Israeli Arbitration Law in Knots? Foreign Service of Process for ‘Made in Israel’ Awards

Fri, 2018-02-09 02:00

Hadas Peled and Yedidiya (Didi) Melchior

On 31 December 2017, Israel’s Supreme Court published an important precedential decision concerning enforcement procedures of ‘made in Israel’ commercial arbitral awards. In Request for Appeal 1739/17, Michael Flacks v. Stephan Bisk (in Hebrew), the Israeli Supreme Court denied a motion for service of process abroad in a petition to confirm an arbitration award issued in Israel. The court held that Israeli courts should generally not exercise “long arm” jurisdiction on a foreign party just because the arbitration was seated in Israel.

In this post, we will first present the material facts of the case and explain in a nutshell the legal basis for the decision: the Israeli Arbitration Law 5728-1968 (“Arbitration Law“) and the relevant provisions of the Civil Procedure Regulations 5744-1984 [consolidated version] (“Civil Procedure Regulations“). Then, we turn to discuss the majority opinion as well as the dissenting opinion in reference to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (“New York Convention“) and the UNCITRAL Model law on International Commercial Arbitration 1985: with amendments as adopted in 2006 ((“Model Law“). We conclude with the problematic result that this precedent generates.

The Material Facts of the Case

The parties, Bisk – an Israeli resident and a US citizen, and Flacks – British citizens and US residents, entered into a commercial agreement, according to which Bisk paid a sum of 300,000 USD to Flacks, designated for a property investment in Germany. The agreement included an arbitration clause, providing for arbitration of disputes in Beit Din in Israel (Beit Din is an institutional arbitration court based on Jewish law). When the debt matured and Flacks did not return the principal nor the premium, Bisk initiated arbitration proceedings in Israel. Flacks argued that the arbitration agreement was not valid since the parties reached subsequent agreements that effectively cancelled the arbitration clause. The arbitration panel ultimately appointed dismissed Flacks’ jurisdictional objections arguments and ruled in favor of Bisk in two subsequent arbitration awards: one concerning the principal sum and the latter concerning the premium.

Pursuant to the Arbitration Law, Bisk then applied to the Israeli court for confirmation of the arbitration award. Since Flacks does not reside in Israel, Bisk submitted a motion for service of process abroad. Both the registrar at the District Court, and on appeal, the judge, granted permission for service of process abroad. However, on a request for appeal to Israel’s Supreme Court a majority ruling overturned this decision and denied the motion for service of process abroad.

The Legal Basis for the Decision

As background for presenting the reasoning for this decision, it is important to understand the Arbitration Law and the Civil Procedure Regulations that apply to service of process abroad. Under the Arbitration Law, an arbitration award does not require judicial confirmation. However, according to Article 23 of the Arbitration Law, if a party wishes to enforce the award via the Enforcement and Collection Authority (the judicial branch that administers collection of debts and obligations) it must apply for judicial of the award (“Confirmation Proceedings“). The Confirmation Proceedings requires notice to be given to both parties’ (not an ex-parte proceeding). Essentially, if the respondent is a foreign party, service of process abroad must first be undertaken.

The rules that generally apply to permitting service of process abroad to a foreign party are rooted in the Civil Procedure Regulations and extensive case law. These rules require three cumulative conditions: (a) the cause of action is listed in the closed list of causes in regulation 500 of the Civil Procedure Regulations (“Regulation 500“); (b) there is a good and substantiated cause of action against the respondent; and (c) Israel is a convenient forum.

The majority reasoning – a narrow interpretation of Regulation 500

The causes of action listed in Regulation 500 all demonstrate either a personal connection of the respondent, or a subject-matter connection of the case, to the State of Israel. Courts have consistently held that international comity considerations lead to a narrow interpretation of Regulation 500.

In Flacks, the District Court approved the service of process abroad based on subsection (4) of Regulation 500, which permits extension of jurisdiction in disputes relating to contracts that were either made in Israel or are subject to the laws of Israel. The district court held that the arbitration agreement, that was part of the commercial agreement between the parties, and which designated Israel as the seat of the arbitration, suffices for such purpose.

In accepting the appeal, the Supreme Court held that an action to confirm the arbitration award is distinct from the action based on the agreement between the parties. At the post-award stage, Confirmation Proceedings are no longer an action based on the arbitration agreement, but rather stem for the arbitration award. Accordingly, Subsection 500(4), based on a contractual claim, cannot create the basis for summoning a foreign respondent. The majority verdict summarized that the mere fact that a court is asked to confirm a ‘made in Israel’ arbitration award, is not sufficient for creating personal jurisdiction over the foreign respondent, since award confirmation is not a contractual cause of action.

The Dissenting Opinion and New York Convention

Subsection (8) of Regulation 500 allows overseas summons for enforcement of ‘foreign arbitral awards as defined in the Arbitration Law’ while Confirmation Proceedings (even of foreign awards) are not explicitly listed. The dissenting opinion suggested filling this legal lacuna by assuming that the Israeli legislator did not want to treat Israeli arbitration awards as inferior to foreign awards, and construing Subsection (8) to include Confirmation Proceedings. The majority opinion however expressly dismissed such an expansive construction of Regulation 500, considering international comity.

In this context it is important to note the different scope of application of the New York Convention, the Model Law and the Arbitration Law. Article 1 of the Arbitration Law distinguishes between ‘foreign and ‘domestic’ awards, defining a foreign arbitral award as an award ‘made outside Israel’. The scope of application of the New York Convention covers, according to Article 1 of the Convention, both awards made outside the State where the recognition and enforcement are being sought, and awards not considered domestic. The Arbitration Law does not recognize any award made in Israel as not being domestic, regardless of the parties or circumstances involved, so the second option under the New York convention is not reflected in local law.

Interestingly, the Model Law specifically clarifies (e.g. in Articles 1(2) and 35) that recognition proceedings can be made irrespective of the country in which the award was made if the award is not considered domestic. Thus, in the event that the arbitration involves international elements, such as the case was in Flacks, according to the model law this may fall under the definition of international arbitration. Since the Arbitration Law, which predates the Model Law, and the Civil Procedure Regulations, distinguish, for the purpose of service of process, between foreign and domestic awards, the outcome in Flacks is different than the outcome that would have been reached had the Model Law and appropriate regulations been adopted by the Israeli legislator.

Israeli Supreme Court Ties the Arbitration Law Up in Knots

Despite the undesirable result and troubling outcome expressly noted by the Supreme Court, Flacks set a precedent that Israeli courts will not extend their jurisdiction to foreign parties merely because the arbitral award is made in Israel. At the same time, Israeli courts will extend jurisdiction to foreign parties in enforcement procedures of awards not made in Israel and that are subject to the New York Convention. Consequently, arbitral awards rendered in Israel cannot be confirmed by an Israeli court and enforced in Israel if the foreign party objects to jurisdiction and there are no other causes of action that allow the service of the process abroad. This problem may be solved by initiating enforcement and recognition procedures in the foreign jurisdiction pursuant to New York Convention, as suggested by the Supreme Court itself. Since, as the majority opinion noted, this problematic outcome can only be fully resolved by a future amendment to the Civil Procedure Regulations, parties choosing arbitration in Israel are advised to note this procedural hurdle and act according to it when drafting arbitration clauses.

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Federal Court Enforces Arbitration Clause in Maritime Insurance Policy, Rejecting Reverse Preemption Claim

Wed, 2018-02-07 20:15

Jason P. Minkin and Jonathan A. Cipriani

The U.S. Court of Appeals for the Ninth Circuit has enforced an arbitration clause in a maritime insurance policy, finding the policy subject to the Federal Arbitration Act, and not “reverse preempted” by the McCarran-Ferguson Act.  In so holding, the court determined that the policy’s choice-of-law clause and arbitration provision controlled over somewhat different language in the application for the policy, because the latter did not qualify as a “contract.”  Galilea, LLC v. AGCS Marine Insurance Co., 2018 WL 414108 (9th Cir. Jan. 16, 2018).

Two Montana residents, the Kittlers, established a Nevada LLC (Galilea), through which they purchased a yacht.  Galilea submitted an insurance application for the yacht that contained arbitration and choice-of-law terms.  The arbitration provision provided for AAA arbitration to take place in New York.  The choice-of-law provision stated that the “relationship” and the “Agreement” would be governed by New York law.  The insurance policy that eventually issued also contained choice-of-law and arbitration provisions, but with slightly different terms.  Specifically, while the policy also called for AAA arbitration to take place in New York, the choice-of-law provision selected U.S. federal maritime law, with New York law to fill any gaps where maritime law did not provide any relevant precedent.  Further, the policy provided that the scope of arbitrable disputes was “any and all disputes arising under this policy,” rather than “any dispute arising out of or relating to the relationship [between the Kittlers and the insurance underwriters],” as stated in the application.

A month after the insurance policy issued, the Kittlers’ yacht ran ashore.  The underwriters declined to cover the resulting insurance claim, on the basis that the yacht had traveled south of the navigation limit in both the application and the policy.  The underwriters commenced arbitration proceedings in New York, and Galilea filed objections and counterclaims.  Galilea also filed a separate action in Montana federal district court, as well as a motion to stay the New York arbitration proceedings.  The underwriters filed their own petition to compel arbitration in the U.S. District Court for the Southern District of New York.

The Montana federal district court issued two orders, providing that the arbitration provision in the application was irrelevant because it was not included in the underwriters’ arbitration demand; the insurance policy was governed by federal maritime law; the Federal Arbitration Act (FAA) applied to the policy and required that the court enforce the policy’s arbitration provisions; questions relating to enforceability and arbitrability were to be determined by the court, not an arbitrator; and the policy’s arbitration clause did not extend to ten of Galilea’s twelve claims.  Accordingly, the district court compelled arbitration as to two of Galilea’s claims, but denied it as to the rest.

On appeal, the Ninth Circuit affirmed in part and reversed in part.  The court generally found that the arbitration clause in the policy (not the one in the application) controlled, and was subject to federal law—both maritime law and the FAA.  However, the court also found that the parties had agreed that questions of arbitrability would be decided by an arbitration panel and not by a court.  Accordingly, the Ninth Circuit instructed the district court to grant the underwriters’ motion to compel in its entirety, not just as to two of the claims.

With respect to which law controlled, the court found that the relevant document was the insurance policy itself, and not the application, because the application was not a contract.  Noting that the FAA only applies where there exists an agreement to arbitrate, the court made a threshold determination as to whether there was such an agreement.  The insurance application was not an agreement, the court held, because it contained no evidence of mutual assent to a contract or to arbitration.  Under New York law—which the application called for in its choice-of-law provision—the application would only be deemed a part of the insurance contract if attached to the policy at the time of delivery.  Because it was not, the application was not a contractual agreement under New York law, and federal law of arbitrability could not apply to the arbitration agreement it contained.

In contrast, however, the court determined that the insurance policy was in fact a contract subject to the FAA.  The court noted that “[p]olicies that insure maritime interests against maritime risks are contracts subject to admiralty jurisdiction and to federal maritime law,” citing the U.S. Supreme Court’s decision in Wilburn Boat Co. v. Fireman’s Fund Insurance Co., 348 U.S. 310 (1955).  The FAA specifically applies to “maritime transactions,” see 9 U.S.C. § 2, thus requiring arbitration of the insurance dispute here.  Galilea argued, however, that under federal maritime law, the FAA did not apply to the policy, because Montana public policy disfavoring arbitration “reverse preempted” the FAA pursuant to the McCarran-Ferguson Act.

The Ninth Circuit rejected Galilea’s reverse preemption argument.  As explained by the court, the McCarran-Ferguson Act, 15 U.S.C. § 1101 et seq., allows state law to “trump” otherwise applicable federal if the state law regulates the business of insurance; the conflicting federal law does not; and the federal law would “invalidate, impair, or supersede” state insurance law.  Galilea cited Montana’s Uniform Arbitration Act, which bars enforcement of arbitration provisions in insurance policies, in support of its argument that Montana law reverse preempted the FAA under McCarran-Ferguson.  The Ninth Circuit disagreed.  Under Wilburn Boat, the court reasoned, a maritime insurance policy falls within federal admiralty jurisdiction and is governed by federal admiralty law (including the dictates of the FAA) in the first instance.  State law, in contrast, is only relevant to maritime insurance contracts in the absence of a controlling federal rule.  Because federal law is “primary” over state law with respect to maritime insurance contracts, the FAA’s requirement of arbitration does not “invalidate, impair, or supersede” state law, particularly given the “interstitial, contingent” nature of state law in setting of a maritime insurance dispute.  The same result would hold if a conflict-of-law analysis were done, since Montana law had virtually no relevance to this dispute (other than that the Kittlers happened to reside there), and since landlocked Montana has relatively little interest in maritime insurance disputes.

The Ninth Circuit also rejected Galilea’s secondary argument that the policy’s choice-of-law provision was unenforceable under M/S Bremen v. Zapata Off-Shore Co., (The Bremen), 401 U.S. 1 (1972).  The Bremen holds that forum selection clauses are presumptively unenforceable under federal maritime law, where they “would contravene a strong public policy of the forum in which the suit is brought.”  The court noted, however, that the dispute at issue was about a choice-of-law provision, not a forum selection clause.  Further, the court observed that The Bremen dealt with conflicts between U.S. law and the law of other nations, which were subject to international comity.  In contrast, this dispute involved “an unequal, hierarchical relationship between federal maritime law and state law.”  Accordingly, there was no basis for Montana law to supplant federal maritime law, including the FAA.

Finally, the court determined that the parties had agreed to reserve the issue of arbitrability for an arbitrator by incorporating AAA rules into the insurance contract.  The court noted that arbitrability is an “arcane” issue, and that the general presumption is against having it decided by an arbitration panel absent “clear and unmistakable evidence” that the parties wished to do so.  Ninth Circuit precedent holds, however, that a contract between sophisticated parties that incorporates AAA rules qualifies as such evidence.  AAA Commercial Arbitration Rule 7 specifically provides that “the arbitrator shall have power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”  The court concluded that the parties to the dispute—insurance companies, and two individuals, one of whom owned and operated a financial services company, who had formed an LLC to control a yacht worth more than a million dollars—were indisputably “sophisticated” and capable of agreeing to AAA rules.

Despite dealing with some complex arbitration law issues, Galilea applies two straightforward principles.  First, the Ninth Circuit views insurance contracts for vessels to be maritime in nature, and thus governed by federal maritime law, including the FAA.  Second, “sophisticated” parties can contract around the presumption against “arbitration of arbitrability” by agreeing to arbitration under AAA rules.  As was the case in Galilea, when a maritime insurance policy is at issue, a state law disfavoring arbitration will not limit the FAA’s broad reach.

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Arbitrability of Shareholder Disputes in Germany

Wed, 2018-02-07 01:26

Tilmann Hertel and Alessandro Covi

Herbert Smith Freehills



Germany is considered as one of the most arbitration friendly jurisdictions in Europe if not world-wide, not least because the 1998 arbitration law is almost a verbatim translation of the UNCITRAL Model law. This arbitration-friendliness always encompassed also corporate disputes, safe for one minor, but important exception: arbitrations concerning the validity of shareholder resolutions. After many heated debates among scholars and courts, the German Federal Supreme Court (“BGH“) has by now handed down three seminal decisions on this topic. These decisions show the gradual acceptance of arbitrability of shareholder disputes by the German judiciary, and will be briefly described.


On the back of this case law, foreign investors that purchase shares in a German company can be confident that possible disputes among shareholders in the target company can be comprehensively submitted to arbitration. This requires, however, that the arbitration agreement satisfies the criteria developed by the BGH. These drafting practicalities will therefore be addressed at the end.




On 29 March 1996, the BGH handed down its first ruling on the arbitrability of shareholder disputes (“Arbitrability I”).1) German Federal Supreme Court, decision, case no. II ZR 124/95 dated 29 March 1996. jQuery("#footnote_plugin_tooltip_6693_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6693_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The BGH essentially denied that these disputes were amenable to arbitration.


In that case, the minority shareholder of a German limited liability company (“GmbH“) sued the company before local courts challenging the validity of a shareholder resolution. The company objected to the court’s jurisdiction on the ground that the articles of association of the company contained an arbitration clause which explicitly encompassed shareholder resolutions. The minority shareholder persuaded the local court that it had jurisdiction over the dispute. On appeal, the company prevailed with its assertion that state courts did not have jurisdiction over a shareholder claim in view of the arbitration clause. The BGH vacated the appellate court’s decisions finding that shareholder disputes were not arbitrable under German law.


The BGH’s Arbitrability I decision premised mainly on the fact that an award would necessarily be binding on all shareholders, irrespective of whether they participated in the arbitration or not. In ordinary court proceedings, this erga omnes effect is achieved through Sec. 248 German Stock Corporation Act (AktG). The BGH declined to apply this provision to arbitrations because it regarded it to be inconsistent with the arbitration law in force at that time according to which awards were only binding inter partes. In the BGH’s view, the parties could not extend the reach of awards by agreement for three reasons:

  1. There was risk that disputes concerning the validity of a shareholder resolution are not concentrated in one forum creating the risk of conflicting decisions;
  2. In order to have an erga omnes effect, the decision needed to be completely objective and impartial, and to originate from a strictly formalized and transparent proceeding. The BGH hereby implicitly questioned to what extent arbitration satisfied these standards;
  3. A shareholder who had not participated in the arbitration, but is bound by the decision because of its erga omnes effect, could be deprived of its right to appoint an arbitrator or influence the constitution of the tribunal.


The BGH stressed that it had no lawmaking powers and that, to the extent that arbitration in relation to the validity of shareholder resolutions was deemed to be desirable, the legislator had to provide a legal framework.




In 1998, Germany amended its arbitration law, albeit without introducing a mechanism for disputes in relation to the validity of shareholder resolutions. Nevertheless, on 6 April 2009 the BGH reversed Arbitrability I through another ruling on the matter (“Arbitrability II“).2) German Federal Supreme Court, decision, case no. II ZR 255/08 dated 6 April 2009. jQuery("#footnote_plugin_tooltip_6693_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6693_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });


As in Arbitrability I, the case concerned a dispute between a shareholder of a GmbH and the company. The majority of the shareholders passed a resolution according to which the claimant’s shares were to be redeemed. The companies’ articles of association contained an arbitration agreement that encompassed also disputes regarding the validity of shareholder resolutions. Moreover, the arbitration agreement spelled out that disputes should be tried by a three member tribunal. Further, the arbitration agreement set out that a party consisting of more than one individual or entity would be regarded as one single party and its decisions would be taken by majority vote.


The court of first instance declined jurisdiction in virtue of the arbitration agreement. On appeal, this decision was reversed because the arbitration agreement in question did not ensure that all claims concerning a specific shareholder resolution are concentrated in one forum and that all shareholders could participate in the constitution of the tribunal. Interestingly, the appellate court did not call into question the arbitrability of shareholder resolutions as such.


The BGH concurred with the appellate court that disputes concerning the validity of shareholder resolutions are, in principle, amenable to arbitration. Unlike in Arbitrability I, the BGH found that parties are free to agree on an erga omnes effect and that a specific legislative framework is unnecessary. This requires, however, that the arbitration lives up to the standard that the legislator had set out in Sec. 248 AktG for court decisions with erga omnes effect. Put differently, arbitral proceedings must to be functionally equivalent to court proceedings on the validity of shareholder resolutions. While the arbitration agreement in question did not satisfy this standard, the BGH articulated the criteria that need to be fulfilled:


  1. all shareholders consented to arbitration either through an arbitration clause in the articles of association or by separate agreement;
  2. all stakeholders, i.e., all shareholders, managing directors, and members of the supervisory board, if any, must be notified of the institution of the arbitration and be constantly updated about the arbitration and be granted a fair opportunity to actively participate in the proceedings;
  3. all stakeholder must have an equal opportunity to participate in the constitution of the tribunal;
  4. all disputes regarding a specific shareholder resolution must be concentrated in one single arbitration to exclude conflicting decisions.


Finally, the BGH cautioned that an arbitration agreement that does not satisfy the above criteria is null and void.


Arbitrability III


On 6 April 2017, the BGH pronounced its most recent ruling on this matter (“Arbitrability III“).3) German Federal Supreme Court, resolution, case no. I ZB 23/16 dated 6 April 2017. jQuery("#footnote_plugin_tooltip_6693_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6693_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In Arbitrability III, the BGH did not alter the position under German law in substance, but extended the reach of its jurisprudence.


The facts underlying Arbitrability III are very similar to both previous cases. The major difference is that this decision related to a limited partnership under German law (KG).


Both parties were shareholders of the KG. The claimant was a legal entity, namely a GmbH, whereas the respondent was a natural person. The claimants passed a resolution according to which the respondent was expelled as a shareholder. The 1968 articles of association of the KG contained an arbitration agreement. Moreover, in 1968 the shareholders had entered into a side agreement which also contained an arbitration agreement. In 2013, the shareholder replaced the 1968 articles of association, but the side agreement was left in place. Based on the arbitration clause in the 1968 side agreement, the respondent instituted arbitral proceedings challenging the validity of the shareholder resolution. While the claimant challenged the tribunal’s jurisdiction, an interim award was handed down which confirmed the tribunal’s jurisdiction. The claimant unsuccessfully sought to quash the interim award before local courts. This decision was vacated by the BGH.


The BGH held that Arbitrability II applied, in principle, also in relation to a KG. The ruling stressed the importance of granting all affected parties equal opportunities to influence the constitution of the tribunal, as well as a fair chance to participate in the proceedings from the beginning. The BGH advised, moreover, that these criteria may need to be adjusted if this is warranted by the different legal nature of the KG, but without providing any further guidance.




The above case law shows that the BGH accepts arbitration with regard to the validity of shareholder resolutions. At the same time, the BGH vigorously enforces each shareholder’s right to participate in the arbitration and the constitution of the tribunal.


Foreign investors that wish to avoid litigating shareholder disputes in German courts must bear in mind the Arbitrability II jurisprudence. This does not only relate to GmbHs but also KGs, as Arbitrability III shows. In order to minimize the risks of unenforceable arbitration agreements, the German arbitration Institute (“DIS“) has developed a model arbitration clause and Supplementary Rules for Corporate Law Disputes (“DIS-SRCoLD“), which incorporate the Arbitrability II criteria. Due to their complexity in relation to both the arbitration agreement and the subsequent arbitration proceedings, parties should try to agree on the DIS model arbitration clause and the DIS-SRCoLD to avoid unpleasant surprises once a dispute has arisen.4)For an overview on the DIS-SRCoLD in English see Schmidt-Ahrendts/Covi, Arbitrability of Corporate Law Disputes: A German Perspective, International Commercial Arbitration Review, 2014 No. 1, pages 116 et seq., available on Kluwer Arbitration. jQuery("#footnote_plugin_tooltip_6693_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6693_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

References   [ + ]

1. ↑ German Federal Supreme Court, decision, case no. II ZR 124/95 dated 29 March 1996. 2. ↑ German Federal Supreme Court, decision, case no. II ZR 255/08 dated 6 April 2009. 3. ↑ German Federal Supreme Court, resolution, case no. I ZB 23/16 dated 6 April 2017. 4. ↑ For an overview on the DIS-SRCoLD in English see Schmidt-Ahrendts/Covi, Arbitrability of Corporate Law Disputes: A German Perspective, International Commercial Arbitration Review, 2014 No. 1, pages 116 et seq., available on Kluwer Arbitration. 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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Reconciling the Conciliators: The BANI Split in Indonesia

Tue, 2018-02-06 05:00

Togi Pangaribuan

Increased investment in South East Asia has led to a growth in the supply and demand for dispute resolution services in the region. Indonesia is no exception, with disputes increasingly submitted to the Badan Arbitrase Nasional Indonesia (“BANI”) – the country’s most popular and well recognised arbitration centre.

Recently however, BANI has seemingly split into two entities; the original entity created in 1977 (“BANI Mampang”) and a new entity formed in 2016 that calls itself BANI Pembaharuan (“BANI Sovereign”). These two centres have been battling it out across the Indonesian court system to determine which entity has the legitimacy to call itself “BANI”. Meanwhile, parties have been left not knowing which institution should be administering their disputes. This brings further uncertainty to a jurisdiction which should be embracing arbitration as an essential tool to support the rule of law.

The Arbitral Mitosis

BANI was established in 1977 as an independent body to promote the use of out of court dispute resolution. Its foundation was initiated by the Indonesian Chamber of Commerce and Industry and driven by three renowned Indonesian legal experts: Professor Raden Soebekti, Mr. Haryono Tjitrosoebono, and Professor Priyatna Abdurassyid.

In late 2016, former BANI arbitrator Anita Kolopaking established BANI Sovereign as a successor organisation to BANI, supported by high-profile names in the Indonesian arbitration circle. BANI Mampang immediately denounced BANI Sovereign as illegitimate, claiming that it had conducted an unlawful act by establishing an organization with the same name as BANI Mampang. BANI Sovereign however argued that BANI was set up as a civil partnership as defined under Article 1618 of the Indonesian Civil Code and therefore the founding partners have the right to bequeath the organization to their heirs. BANI Sovereign further argued that as it is supported by the heirs of 2 of BANI’s 3 founders, BANI Sovereign was in fact the rightful heir to BANI and that BANI Mampang’s current officers and management are illegitimate.

BANI Sovereign subsequently obtained legal entity status through a decision of the Ministry of Law and Human Rights (“MOLHR Decision”) and set up offices in South Jakarta – not far away from BANI Mampang’s offices.

These events put BANI Mampang and BANI Sovereign onto a direct collision course. To date, we understand that BANI Mampang and BANI Sovereign are engaged in three ongoing court proceedings and police proceedings, with neither side backing down.

Round One – the South Jakarta District Court

In September 2016, BANI Sovereign submitted a claim to the South Jakarta District. By August 2017, the District Court had ruled in favor of BANI Sovereign. Among other things, the Court decided that although BANI was founded as a non-profit organisation, it had become a for-profit organisation and could therefore be regarded as a civil partnership. As a result, the organisation could and indeed had (indirectly) been bequeathed to the heirs of the founders. The Court also declared that BANI Sovereign’s officers were the rightful officers of BANI and that the current BANI Mampang officers were illegitimate. BANI Mampang’s officers were therefore ordered to hand-over management of BANI to BANI Sovereign. BANI Mampang has appealed this decision and it is currently under review by the Jakarta High Court.

Round Two – the State Administrative Court

In December 2016, BANI Mampang submitted a claim to the State Administrative Court, arguing that the MOLHR Decision that approved the establishment of BANI Sovereign should be revoked. In July 2017 the State Administrative Court found in favour of BANI Mampang and revoked the MOLHR Decision. The official copy of the decision is not yet publicly available, but media statements indicate that BANI Mampang argued that it is the original, internationally known BANI institution, and that BANI Sovereign’s use of the name “BANI” infringes on BANI Mampang’s rights. BANI Sovereign has appealed this decision and through a decision dated 21 November 2017 it won the appeal. The State Administrative High Court considers the nature of the dispute to not be an administrative law dispute but a civil law dispute, therefore the State Administrative High Court does not have jurisdiction over the issue and the State Administrative Court’s decision therefore must be revoked.

Round Threethe Jakarta Commercial Court

In July 2017, BANI Sovereign submitted a claim to the Jakarta Commercial Court, arguing that BANI Mampang’s trademark registration of the brand “BANI” should be revoked. In September 2017, the Jakarta Commercial Court found in favour of BANI Mampang and declared BANI Mampang as the rightful owner of the trademark over the brand “BANI”. On 10 November 2017, BANI Mampang issued a statement saying that this decision has become final and binding, because no appeal was filed by BANI Sovereign, therefore making BANI Mampang the only rightful party to use the name “BANI” and “Badan Arbitrase Nasional Indonesia”.

Round FourPolice Report

Publicly available sources also suggest that a police report was filed by BANI  Mampang against BANI Sovereign for misuse of the BANI trademark. Under Indonesia’s Law No. 20 of 2016 on Trademark and Geographical Indications, using a registered trademark belonging to another is punishable by imprisonment of up to 5 years and/or a fine of up to IDR 2 billion (approximately USD 147,000). However, as of the date of this article, there do not seem to have been any developments on this report and no suspect has been named.

The Way Forward

Although not identical, BANI’s current situation shares similarities with CIETAC’s situation following the 2012 split of its Shanghai and Shenzhen sub-commissions to form the Shanghai International Economic and Trade Arbitration Commission (“SHIAC”) and South China International Economic and Arbitration Commission (“SCIA”). Following the sub-commissions’ departures, the Chinese courts issued conflicting “pro-CIETAC” and “pro-sub commission” decisions, which made it difficult for parties with CIETAC arbitration clauses to know whether their arbitration was being dealt with by the correct institution. Clarity only returned in 2015 when the Supreme People’s Court specified which institutions could administer which cases. The Supreme People’s Court issued a Reply, a judicial interpretation that took effect on 17 July 2015. In the Reply, The Supreme People’s Court established the “Golden Rule”, which set out that for a party considering commencing arbitration proceedings in connection with an arbitration agreement affected by the split, the key date for consideration is when the relevant sub-commission changed its name. Further analysis on this issue is provided by Matthew Townsend in his August 2015 post in the Kluwer Arbitration Blog.

Parties caught in the current crossfire between BANI Mampang and BANI Sovereign face similar problems depending on the nature of the arbitration agreements.

For parties whose arbitration agreements are still being negotiated, there is the (slight) benefit of knowing about the existence of this ongoing dispute. If those parties are obliged to opt for a local arbitration institution, one option is to keep the reference specific by referring to the exact BANI institution that the parties intend to engage. For example, the parties could do this by stating the address of the BANI institution. The risk of this approach is that a future court could find that either BANI Mampang or BANI Sovereign has no legitimacy, leaving parties, which have specified the illegitimate arbitration centre with problems.

However, if parties cannot agree on a specific BANI institution and prefer to safeguard their arbitration agreement from future courts declaring one of the BANIs to be illegitimate, another option would be to keep the reference vague by simply referring to “BANI” arbitration, and then going to either BANI Mampang or BANI Sovereign when the dispute arises. The risk of this approach is that when the dispute arises, the parties could continue to disagree on which BANI should administer the dispute. The parties could separately decide to proceed before their preferred BANI, leading to concurrent proceedings and potentially contradictory awards.

For parties already subject to “BANI” arbitration clauses drafted before the establishment of BANI Sovereign, there are also no easy answers.  Arguably as a matter of Indonesian contract law, the parties can only be said to have considered arbitrating before BANI Mampang, given that BANI Sovereign did not exist at the time of their contract. However, this argument requires one to temporarily put aside BANI Sovereign’s argument that it is the successor of BANI, and therefore the entity that should inherit all arbitration agreements that simply provide for “BANI” arbitrations. Again, there are no easy answers.

In any case, given the increasing investment in South East Asia through China’s One Belt One Road Initiative and the increase of cases being examined by BANI Mampang, alternative dispute resolution methods, especially arbitration should thrive in Indonesia. Clarifying this matter should therefore be a priority for the Indonesian government and relevant stakeholders. Even though there are rumours that the Indonesian Chamber of Commerce and Industryis trying to settle the fight between BANI Mampang and BANI Sovereign, the fight is nowhere close to the final bell.

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Japanese Supreme Court’s First Decision On Arbitrator’s Non-disclosure

Mon, 2018-02-05 07:00

Yoko Maeda and Jeremy M. Bloomenthal

On December 12, 2017, the Supreme Court of Japan rendered its first decision on the setting aside of an arbitral award based on an arbitrator’s failure to disclose facts allegedly constituting a conflict of interest, reasoning that, in order for the award to be set aside on this ground, it is necessary that the arbitrator was aware of such facts or that such facts could ordinarily have been ascertained if the arbitrator had conducted reasonable research (heisei 28 (kyo) no. 43. Available at here). This post discusses the court’s decision from a practical, theoretical, and comparative perspective.

Factual Background

The underlying arbitration was filed in June 2011 under the Japan Commercial Arbitration Association’s Commercial Arbitration Rules (“JCAA Rules”) and was seated in Osaka, Japan.  Claimants in the arbitration were Japanese and Singaporean companies that manufactured and sold air conditioners and the two Respondents were Texas companies that sold air conditioners.

The chairman of the three-member tribunal (the “Chair”) was a partner in the Singapore office of an international law firm (the “Firm”).  In his Declaration of Impartiality and Independence submitted in September 2011, the Chair declared that he was not aware of any circumstances likely to give rise to justifiable doubts as to his impartiality and independence, but noted that a lawyer of the Firm could in the future advise or represent a party to the arbitration or related companies thereof on a matter unrelated to the arbitration.

In February 2013, another lawyer joined the San Francisco office of the Firm.  That lawyer was representing a sister company (the “Affiliate”, under 100% common ownership by the parent) of one of the Claimants in a class action before the U.S. District Court for the District of California and continued to do so during the arbitration (the “Facts”).  The Chair did not disclose the Facts during the arbitration proceeding.

Set-aside Proceedings

After the tribunal rendered an award in August 2014 in favor of Claimants, the Respondents applied to the Osaka District Court (the “ODC”) to have the award set aside under Article 44 of the Japanese Arbitration Act of 2003, on the basis that the composition of the arbitral tribunal or the arbitration procedure was not in accordance with Japanese laws and regulations (Art. 44, para. 1, item (vi)), and the content of the award was contrary to Japanese public policy (Art. 44, para. 1, item (viii)).

Respondents argued, inter alia, that the Chair had breached his obligation, under Article 18 para. 4 of the Arbitration Act, to “disclose … all facts that would be likely to give rise to doubts as to his/her impartiality or independence.

Dismissing the set-aside application, the ODC held that although the Facts might generally qualify as circumstances likely to give rise to justifiable doubts as to the arbitrator’s impartiality and independence, the Facts did not reach this level under the particular circumstances of the case.

On appeal, the Osaka High Court (the “OHC”) set aside the award.  The OHC held that an arbitrator’s obligations include the duty to conduct research to uncover any potential sources of conflicts that the arbitrator can find without substantial effort, and that the Facts could have been ascertained without exceptional difficulty through a conflict-check procedure within the Firm.

Reversing the OHC’s decision, the Supreme Court held that, in order to find a breach of an arbitrator’s duty to disclose facts that would likely give rise to doubts as to his/her impartiality or independence, it is necessary that the arbitrator either was aware of such facts or could have discovered such facts by making a reasonable search before the completion of the arbitration proceeding.

The Supreme Court found it unclear from the record whether the Chair had been aware of the Facts.  It further found that it was unclear whether the Chair could have discovered the Facts by making a reasonable search before the completion of the arbitration proceeding, as it was unclear whether the Firm was aware of such facts, and unclear what methods the Firm used to check for conflicts.

The Supreme Court then concluded that the OHC’s decision was erroneous because it had concluded that the Chair was in breach of his disclosure obligation without determining the relevant issues above.


The OHC and the Supreme Court accepted the same general premise that an arbitrator is obliged to disclose facts like those at issue in this case.

From a practical standpoint, however, the OHC’s decision has been criticized by practitioners as ignoring the real world of international law practice.  Specifically, the conflict check described by the OHC is considered too burdensome because it would apparently require the arbitrators and the parties to continuously monitor all relationships between the arbitrator’s law firm and the parties’ affiliates, regardless of the affiliate’s degree of closeness to the party.

The Supreme Court’s decision, to its credit, takes into account the complex reality of practice in an international law firm setting, requiring that courts, first, determine how the arbitrator’s firm actually conducted conflict checks and whether the facts were, in some sense, known to the firm and, second, determine whether the arbitrator could have found the facts through reasonable research.

From a theoretical standpoint, the Japanese courts have not yet discussed the profound and frequently arising question of whether an arbitrator’s apparent unawareness of his or her law firm’s representation of an affiliate of a party, might preclude a finding of a lack of independence and impartiality that would warrant setting aside.  Recent decisions in Switzerland and England offer an interesting comparison.

In a decision dated September 7, 2016 (4A_386/2015) (English translation here), the Swiss Federal Supreme Court analyzed a case involving an arbitrator at a Swiss law firm who failed to disclose that lawyers at a German law firm (operating in an alliance with the Swiss law firm) represented a sister company of one of the parties in the arbitration.  The Court noted that there was no evidence that the arbitrator was aware of the representation, and thus “he would have had no reason to show favor in the arbitration to the party affiliated to the [sister company].”  Ultimately, the Court found there was no ground for setting aside because the arbitrator’s purported “law firm” was actually just a network of independent law firms that did not share fees.  Thus, referencing the IBA Guidelines, only Article 4.2.1 (Green List) could legitimately be invoked, which was not a ground to challenge the arbitrator or the award.

Similarly, in a decision dated March 2, 2016 (W Limited v. M SDN BHD, [2016] EWHC 422 (Comm), available here), the English High Court declined to set aside an award under similar circumstances.  In that case, after a sole arbitrator had submitted a statement of independence and accepted his appointment, an existing client of the arbitrator’s law firm became a sister company of a party in the arbitration, as the client was acquired by the party’s parent company.  Although the arbitrator had conducted a conflict check and made disclosures twice – first in his initial statement of independence and again later during the arbitration, the second conflict check failed to identify the fact that the firm’s client had become affiliated with one of the parties.  The arbitrator rendered awards in the arbitration, which were later challenged.  While the court stated that the facts fell under Article 1.4 (Non-Waivable Red List) of the IBA Guidelines, it held that, since the arbitrator lacked knowledge of the fact, had made repeated disclosures, and would have disclosed the fact had he been aware of it, there was no doubt as to the arbitrator’s independence and impartiality.  The court found that “the arbitrator could not have been biased by reason of the firm’s work for the client.  That work was not in his mind at all; had it been he would have disclosed it.”

In the case at hand, currently on remand to the OHC, it will be interesting to see whether the OHC takes into account the Chair’s apparent lack of awareness concerning the Facts, which both the Swiss and English court decisions above considered to be a relevant factor.

Furthermore, neither the Supreme Court nor the OHC discussed when or how the Respondents first became aware of the Facts; nor did they take positions on whether or how such timing might affect the conclusion, both of which can be critical issues.  Similarly, the Supreme Court and the OHC did not discuss the significance of the amount of fees that the Firm received from the Affiliate, the relationship between the Claimant and the Affiliate, and the relationship between the Chair and the Firm, all of which could affect the court’s conclusion if the IBA Guidelines on Conflicts of Interest in International Arbitration were to apply.

Therefore, it also deserves continued attention whether the OHC or other Japanese courts will take these factors into consideration to see how close the Japanese courts’ position is to those of national courts in other countries.

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The Intra EU-BITs in the Opinion of AG Wathelet between Light and Shadow

Sun, 2018-02-04 02:12

Anna de Luca


The present analysis critically focuses on some aspects of the Opinion on the intra-EU BITs issued by AG Wathelet in the Achmea case (Case C-284/16) in September 2017. The Opinion has been extensively commented on in previously published posts on this blog. As such posts have noted, the AG’s position that intra-EU BITs are compatible with EU law certainly represents the most remarkable aspect of the Opinion for the arbitration community. This position, extensively analysed by the preceding posts and not further discussed here, clashes with the long-standing claim of the EU Commission on intra EU-BITs’ incompatibility with EU law, submitted to investment tribunals in its several amici curiae briefs as of 2006. The EU Commission’s claim, being weak from a public international law perspective, has been rather unsuccessful before investment tribunals until now.


The AG’s view, endorsing some of the supportive arguments on intra-EU compatibility already made by intra-EU BIT-based tribunals,1)Among these arguments are those that i) intra-EU BITs and EU law do not regulate the same subject-matter (Opinion, para. 173 ff.); ii) EU law does not grant to investors and their investments the same level of protection granted to them by BITs, or even a comparable level of protection (Opinion, para. 199 ff.); and iii) BITs standards and EU law are complementary rather than incompatible (Opinion, para. 210). jQuery("#footnote_plugin_tooltip_2038_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2038_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); represents a positive note, coming from European circles, which sharply contrasts with the ‘incompatibility narrative’ dominant so far.


That notwithstanding the Opinion also presents perplexing aspects, possibly affecting its overall coherence. These aspects, which will be specifically investigated in the present post, are the AG’s qualification of investment tribunals as MSs’ courts pursuant to Article 267 TFEU and his ‘no-discrimination’ conclusion.



Are investment arbitral tribunals under intra-EU BITs court or tribunals within the meaning of Article 267 TFEU?


According to the AG intra-EU BIT-based tribunal would be courts or tribunals common to two MSs, thus permitted to request the Court to give a preliminary ruling. Investment tribunals would therefore meet the requirements established by the Court of Justice in its case-law to determine whether a certain Member State’s ‘body making a reference is a “court or tribunal” within the meaning of Article 267 TFEU’, namely, they a) are established by law; b) have a permanent nature; and c) their jurisdiction is compulsory. (See, inter alia, Case C-377/13, Ascendi Beiras Litoral e Alta, para. 23)


To use the words of the AG, ‘it cannot be disputed that an arbitral tribunal constituted…in accordance with Article 8 of the BIT is established by law’ (Opinion, para. 96). This would be the case because said arbitral tribunal ‘…derives its jurisdiction not only from an international treaty but also from the Netherlands and Czechoslovakian statutes ratifying the BIT by virtue of which the BIT became part of the legal orders of those Member States.’ (Opinion, para. 96) Given that investment tribunals’ jurisdiction would be established by law, and Contracting Parties’ public authorities are obviously involved in the choice of arbitration (Opinion, para. 96), investment arbitral tribunals would also be permanent (Opinion, para. 103 ff.) and their jurisdiction compulsory (Opinion, para. 110 ff.).


In the first place, the AG’ position contradicts the well-established consensual nature of BIT-based arbitration, as is also acknowledged in a contradictory manner in the Opinion at para. 204.


In the second place, the ‘establishment by law’ argument is misleading. It confuses the conclusion of a treaty and its binding effects upon the Contracting Parties at the international level with treaty domestic implementation. ‘Ratification’, i.e., ‘the international act…whereby a State establishes on the international plane its consent to be bound by a treaty’2)Article 2 Vienna Convention on the law of treaties (VCLT). jQuery("#footnote_plugin_tooltip_2038_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2038_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); should be distinguished from a domestic implementing act. The latter is an internal statute or order incorporating the treaty into the domestic legal system, and turning it into domestic law applicable before domestic judges. Consequently, on the one hand, even unincorporated treaties, when duly agreed upon by a certain Contracting State (through ratification), binds it internationally; on the other, an implementing statute has a specific ‘domestic’ significance, which is inconsistently denied by the AG in respect of BITs (Opinion, para. 265), but is of little ‘international’ import, expect for State responsibility purposes.


In the third place, the public authorities’ involvement argument is an element less decisive than the AG seems to believe. Public authorities’ involvement is not a peculiarity of investment arbitration. Such involvement is present and often required by law when parastatal entities consent to international commercial arbitration as means of resolution of contractual disputes with private counterparties.


Finally, to further support his view, the AG relies on two cases in which the Court of Justice gave two Portuguese arbitral tribunals the status of courts of that Member State, and uses the Benelux Court and European Patent Court as points of comparison. The afore-mentioned reliance and comparison are both misplaced.


In the case Ascendi Beiras Litoral e Alta (Case C-377/13) the Court qualifies the Portuguese ‘Tribunal Arbitral Tributario’ as a tribunal of that Member State, given that its general jurisdiction on taxation and customs matters stems directly from provisions of law. To quote the Court itself its jurisdiction ‘…is not, as a result, subject to the prior expression of the parties’ will to submit their dispute to arbitration.’ (para. 29) Additionally, the “Tribunal Arbitral Tributario” is included in the list of national courts in Article 209 of the Portuguese Constitution and, as a whole, is permanent in nature being it institutionalized and a stable element of Portugal’s legal system. Arbitrators are appointed by the Etichs Board of the Centre for Administrative Arbitration, and selected from a panel formed in advance by the Centre itself; its decisions are qualified by law as judgments, and the applicable (substantive and procedural) law is Portuguese law. Similarly, in the second case, Merck Canada v. Accord Healthcare Ltd and others (Case C-555/13), the CJEU attributes the very same status to another Portuguese arbitral tribunal tellingly called ‘Tribunal Arbitral necessário’ vested by law with a general and compulsory jurisdiction on disputes concerning industrial property rights related to medicines (para. 19 ff.). Such Tribunal’s decisions may be subject to appeal before the competent Court of Appeal. Like the ‘Tribunal Arbitral Tributario’, the ‘Tribunal Arbitral necessário’ is mentioned in the list of national courts of Article 209 the Portuguese Constitution, and Portuguese law governs both the procedure and merits.


Since the two Portuguese arbitral tribunals are clearly domestic administrative law arbitrations, the AG’s analogies between the latters and international investment arbitration are more than perplexing. Similarly, his comparison between investment arbitral tribunals and the Benelux Court, the main judicial body of the Benelux Union, is inapposite. (Opinion, paras. 128-130) The Benelux Court is a creature quite different from arbitral tribunals since it is made up of judges belonging to the Supreme Courts of the three States Parties. Moreover, it has jurisdiction to give preliminary rulings on the interpretation of Benelux law upon referral of the domestic judges thereof, as opposed to the arbitral jurisdiction to decide actual cases on the basis of public international law.


Finally, even admitting AG’s qualification of investment tribunals as courts under Art. 267 TFEU such tribunals still remain based on international treaties, which neither provide for the preliminary reference procedure nor explicitly establish that the preliminary rulings of the CJEU are binding on the referring tribunal, as apposed to what is explicitly provided for in the Agreement on a Unified Patent Court (Article 21). Even in case of a referral by an investment tribunal the CJEU would not be in the position to accept its request for preliminary rulings. Pursuant to its consistent case law in case of referral by an international tribunal established by a non-European treaty, same treaty shall explicitly provide that its preliminary rulings are binding thereon (see, inter alia, Opinion 1/91, point 61, opinion 1/92, points 32-33; and 1/00, points 33).


Are intra-EU BITs really not discriminatory against the investors of third MSs?


It is the firm view of the AG that the TFEU does not contain a most favoured nation (MFN) clause. As a consequence, there is no discrimination where a Member State does not afford the nationals of another Member State the treatment which it affords, by convention, to the nationals of a third Member State. The Court’s case-law on Article 18 TFEU would confirm the above (Opinion, para. 72). Since the fact that the reciprocal rights and obligations created by the BIT apply only to investors from one of the two Contracting Member States is a consequence inherent in its bilateral nature, ‘a non-Netherlands investor is not in the same situation as a Netherlands investor so far as an investment made in Slovakia is concerned.’  (Opinion, para. 75)


Nevertheless, pursuant to the CJEU’s case-law discrimination problems might arise in respect of those intra-EU agreements granting reciprocal benefits only to the nationals of the Contracting Parties, excluding nationals of other MBs. Intra-EU bilateral treaties, albeit not per se discriminatory, may have a discriminatory effect from an European perspective. In this respect it is sufficient to mention the Matteucci case (Case 235/87), where the CJEU states that the application of EU law (and of the principle of equal treatment) cannot be precluded on the ground that it would affect the implementation of an agreement (in the case a cultural cooperation agreement outside the scope of application of EU law) between two MSs. As a result, when intra EU bilateral treaties have a discriminatory effect grounded on nationality, the concerned MSs might be obliged to remove it.


Final remarks


The AG’s opinion on intra-EU BITs compatibility, albeit not original, is a welcome dissenting voice. However, the other aspects here commented are so unconvincing from a strictly legal point of view as to risk weakening the ‘compatibility’ conclusions. Besides disregarding the consensual nature of investment arbitration and its public international law nature, the Article 267 TFEU based arguments are also not well founded in EU law, and partially contradictory with the compatibility arguments. Similarly, the conclusion that intra-EU BITs are not discriminatory is not undisputed, if one looks at the CJEU’s case-law. For the afore-mentioned reasons the AG conclusions can hardly represent the last word on the matters. Moreover, as the post by Buczkowska and others aptly observe, the AG’s opinion rests on policy arguments rather than on strictly legal arguments, and advances an intermediate policy approach towards intra-EU investment treaty arbitration (the recognition of its consistency with EU law against its subordination to EU law and the CJEU’s jurisdiction). By adopting a prospective approach, thus entering into the on-going policy discussion on the future of intra-EU BITs, the Opinion appears, however, to be of less help to the CJEU from a judicial perspective than one may expect.

References   [ + ]

1. ↑ Among these arguments are those that i) intra-EU BITs and EU law do not regulate the same subject-matter (Opinion, para. 173 ff.); ii) EU law does not grant to investors and their investments the same level of protection granted to them by BITs, or even a comparable level of protection (Opinion, para. 199 ff.); and iii) BITs standards and EU law are complementary rather than incompatible (Opinion, para. 210). 2. ↑ Article 2 Vienna Convention on the law of treaties (VCLT). 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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Empirical Research on Legal Reasoning in Commercial Disputes – Then and Now

Sat, 2018-02-03 02:40

S.I. Strong

Critics of international arbitration often express concerns about the quality of legal reasoning in arbitration, even though conventional wisdom within the international community suggests that international arbitral awards reflect relatively robust reasoning that is often on a par with that of decisions rendered by commercial courts.  Why the discrepancy?


I have written elsewhere about how unconscious biases may work against the perception of international arbitration (see “Truth in a Post-Truth Society: How Sticky Defaults, Status Quo Bias and the Sovereign Prerogative Influence the Perceived Legitimacy of International Arbitration”, 2018 University of Illinois Law Review), but other factors may be at play in this case.  In particular, the problem may simply be that very few empirical studies exist regarding legal reasoning in arbitration.


The situation may have been very different if Soia Mentschikoff, the first woman to teach at Harvard Law School (1947) and a former dean of the University of Miami School of Law (1974-82), had been able to complete her ground-breaking empirical work in the area of commercial arbitration.  During the 1950s and 1960s, Mentschikoff conducted empirical studies using hypothetical disputes resolved by arbitrators from a variety of backgrounds.  The goal was to determine whether and to what extent legal reasoning differed according to the arbitrator’s professional experience.   Although Mentschikoff never wrote up her final conclusions, a number of preliminary observations are reflected in “Commercial Arbitration” (1961) 61 Columbia Law Review 846 and “The Significance of Arbitration – A Preliminary Inquiry” (1952) 17 of Law and Contemporary Problems 698.


The University of Chicago has kept Mentschikoff’s working papers and it is possible that an aspiring young researcher could eventually complete Mentschikoff’s work.  However, contemporary scholars are currently developing a number of new studies that appear quite promising.


One major project involves a large-scale, international study conducted by the University of Missouri’s Center for the Study of Dispute Resolution.  The research seeks to improve our understanding of how judges and arbitrators resolve complex commercial disputes in both national and international settings by exploring potential differences between (1) judicial and arbitral decision-making; (2) national and international decision-making; and (3) common law and civil law decision-making.  The study will not only help parties make more informed choices about where and how to resolve their legal disputes, it will also assist judges and arbitrators in carrying out their duties by improving counsel’s understanding about how to best to craft and present legal arguments and submissions.  The study also helps providers of judicial and arbitral education offer educational programming that better meets the needs of judges and arbitrators.


The study includes several different elements, including a series of semi-structured interviews of domestic and international judges and arbitrators; a detailed survey of domestic and international judges and arbitrators; and a coded (qualitative) analysis of judicial decisions and arbitral awards involving domestic and international commercial disputes.  All of the various components focus on legal reasoning, including factual reasoning as it affects legal reasoning, and thereby provide key insights into previously unstudied issues.  The research is funded in part by a grant from the AAA-ICDR Foundation, although neither the Foundation, the AAA nor the ICDR plays any role in the gathering or analysis of the data so as to ensure the objectivity and independence of the study.


The research is currently ongoing, and those with experience serving as judges or arbitrators in national or international commercial disputes are invited to complete an anonymous electronic survey that can be found here: < https://www.surveymonkey.com/r/commercial-dispute-strong >.  The survey should take approximately twenty minutes to complete, and participation is entirely anonymous.  The survey will remain open until 11:59 p.m. Central Daylight Time (CDT) on May 1, 2018.  Only those with experience serving as judges or arbitrators in national or international commercial disputes are eligible to participate, although there are no restrictions relating to nationality or the level of seniority.


As the preceding suggests, empirical research in international arbitration has a bright future, and it will be interesting to see where the field moves next.  Although Soia Mentschikoff is no longer with us, she would doubtless be pleased with current developments relating to legal reasoning in commercial arbitration.

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Is Arbitration Portfolio Financing Going to Grow In 2018?

Fri, 2018-02-02 09:54

Tobey Butcher

The progress in the development, acceptance and understanding of third-party financing of dispute resolution costs by lawyers and clients, will undoubtedly continue in 2018. The model of third-party based financing of arbitration costs will be no exception, it being generally accepted that it is here to stay and that it provides a solution, in particular, to the high cost of arbitration proceedings.

In 2017, Singapore established a framework for third party financing of international arbitrations by yet to be prescribed qualifying third-party funders1)Civil Law (Amendment) Act (Bill No. 38/2016), see https://sso.agc.gov.sg/Bills-Supp/38-2016/Published/20161107?DocDate=20161107&ProvIds= jQuery("#footnote_plugin_tooltip_3627_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3627_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; also, Hong Kong passed legislation making it clear that third party financing of arbitrations is permitted under Hong Kong law2)Arbitration and Mediation Legislation (Third Party Funding)(Amendment) Bill 2016 dated 14 June 2017, see https://www.legco.gov.hk/yr16-17/english/bills/b201612301.pdf jQuery("#footnote_plugin_tooltip_3627_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3627_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. In April 2018, the final report by a Task Force made up by the International Council for Commercial Arbitration and the Queen Mary University of London about third-party funding in international arbitration is due to be published 3) For the draft report see Krestin/Mulder: Third-Party Funding In International Arbitration: To Regulate Or Not To Regulate? http://arbitrationblog.kluwerarbitration.com/2017/12/12/third-party-funding-international-arbitration-regulate-not-regulate/ jQuery("#footnote_plugin_tooltip_3627_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3627_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. The report provides detailed background focusing on the issues dispute cost financing raises in international arbitration and how those issues might be addressed.  Initiatives like this will serve to ensure that the quality and professionalism of those providing third-party finance for dispute resolution costs is kept in focus and further integrate the concept into mainstream arbitral processes.

In addition to the acceptance and understanding of third-party financing by the wider arbitral community that the above developments demonstrate, the third-party finance community itself will continue to provide innovative solutions. Particularly with regard to the adoption of portfolio financing which will further expand in 2018.

Under the portfolio model, finance is provided across multiple arbitrations. If the first award under the arbitrations included in the portfolio does not provide a complete, or any, return to the finance provider, the balance due in relation to that arbitration is included in the return to be paid upon the next successful outcome of an arbitration which it has been agreed between the client and the third-party finance provider should be included in the portfolio. Through this approach, the arbitration finance provider’s return is cross collateralised and relying upon the overall performance of the portfolio, rather than a single arbitration.

A significant advantage of the portfolio model from the client’s perspective is the ability to include a range of cases in the portfolio that would not otherwise qualify for a case by case financing. The finance provider is certainly seeking to include claims likely to provide the agreed return for the portfolio. However, the client may be able to include claims anticipated to achieve outcomes, whether by settlement or award, which on their own would not be sufficient to secure financing on a single case basis. In addition, the client might be able to include in the portfolio arbitrations where it is the respondent and thereby finance defence costs.  So long as across the entire portfolio there is sufficient potential value to generate the required return, the third-party finance provider will be prepared to advance the funds required, enabling the client to pursue, or defend the arbitration and court claims, or even to monetise a potential award or judgment.

Any form of third-party financing of dispute costs benefits clients from an accounting perspective as it removes a present-day cost P&L expense, and a contingent liability for future costs. The legal fee spend is transferred to the finance provider and becomes an off-balance sheet transaction. The portfolio financing model extends the accounting advantages because of the potential ability to include in the portfolio claims that would not otherwise qualify for case by case financing.

Arbitration financing on a case by case basis will continue but will increasingly be supplemented in 2018 by more and more sophisticated arrangements including financing based on a portfolio model. In this way, as the understanding by clients and lawyers of the advantages of third party financing in arbitration develops, the use of it will advance beyond application just as a matter of necessity by entities subject to liquidity or budgetary issues, to use as a tool by corporates as a matter of choice to manage legal budgets.  This will include actively seeking to identify claims that might not otherwise have been pursued, in order to realise the value locked-up in claims which would otherwise be lost with the passage of time.


References   [ + ]

1. ↑ Civil Law (Amendment) Act (Bill No. 38/2016), see https://sso.agc.gov.sg/Bills-Supp/38-2016/Published/20161107?DocDate=20161107&ProvIds= 2. ↑ Arbitration and Mediation Legislation (Third Party Funding)(Amendment) Bill 2016 dated 14 June 2017, see https://www.legco.gov.hk/yr16-17/english/bills/b201612301.pdf 3. ↑ For the draft report see Krestin/Mulder: Third-Party Funding In International Arbitration: To Regulate Or Not To Regulate? http://arbitrationblog.kluwerarbitration.com/2017/12/12/third-party-funding-international-arbitration-regulate-not-regulate/ 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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International Politics vs International Justice: No Room for Investor-State Arbitration?

Thu, 2018-02-01 01:45

Anissa Achaibou


Critics of the current investor-state arbitration regime may yet have their best days ahead of them. In the midst of tarnished FTA negotiations and in times of political uncertainty, they have captured a global audience. Their message is disconcerting: Investor-State Dispute Settlement (ISDS) is a system designed by and for multinational corporations. It allows faceless conglomerates to bypass national courts and thus strips sovereign nations of their policy-making powers and taxpayers of their money.

From a political perspective, ISDS originally emerged from a bilateral bargaining process of post-colonial developing states with capital-exporting developed states. From a legal perspective, ISDS provided a much needed international legal framework that allowed investors to invest in emerging economies while at the same time affording them protection against local political turmoil. The dispute resolution system of the International Centre for the Settlement of Investment Disputes (ICSID) was created to incentivise investors to specifically venture into new territory and to bolster international development by doing so. As some commentators have rightly noted, the link between investment arbitration and international economic development justified the connection between ICSID and the World Bank. Today, ISDS critics perceive this link as a “dangerous liaison”. It supposedly illustrates how big corporations, backed by the international financial system, manipulate public policy and undermine democracy.

So far, the polemics of the anti-ISDS front are hardly convincing. Take, for example, the oft-repeated complaint that the triggering of a treaty clause by a private party deprives states of their sovereignty. It is not only dishonest; it also shows a blatant ignorance of basic principles of public international law. Bilateral Investment Treaties are legal instruments entered into by sovereign nations. That, in itself, is a sovereign act. The triggering of the dispute settlement clause contained in a Bilateral Investment Treaty guarantees compliance of the sovereign nation with the international obligations it assumed under the treaty. In their diatribe against globalisation, the critics of ISDS likewise tend to forget this. For instance, ISDS has proven to be the only efficient mechanism to protect foreign investments in the oil and gas sector against political risks and “economic nationalism”.

Nor is ISDS a privilege exclusive to multinational corporations. It very much benefits small and medium enterprises (SMEs) as well. More often than not, investor-state arbitration constitutes the only forum in which SMEs may effectively seek justice. In the same vein, for economic, political and legal reasons, the number of nationals of capital-exporting states suing other capital-exporting states is rising sharply (e.g. Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No.  ARB/12/12). And the scales of Justice do not always tip exclusively to the detriment of state respondents. Moreover, cost decisions against claimants are an effective tool that is increasingly applied to penalise frivolous claims (e.g. Philip Morris v. Australia, PCA Case No. 2012-12, Final Awards Regarding Costs, 8 March 2017)

To be fair, ISDS is a still-developing and thus perfectible system at the crossroads of international justice and politics. Ultimately, it provides a peaceful dispute settlement forum and prevents economic disagreements from growing into political and diplomatic conflicts. The latest trends show there is a political will to reform the system, pushing for more institutionalisation (e.g. the process of analysis and reform of ISDS initiated within the framework of Working Group III of UNCITRAL; the European Commission’s project of a Multilateral Investment Court). Yet, spreading falsities will not assist in adapting the system such that it will serve its purpose in today’s political environment.


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Paving the Way Forward: the Supreme Court’s Ratification of Grounds for Annulment of Arbitral Awards in Argentina

Tue, 2018-01-30 17:15

Leandro Caputo and Martina Monti

The judicial review of arbitral awards has been a continuous topic of discussion amongst scholars and legislators. Considering the major effects of the seat of the arbitration in annulment proceedings, even when the arbitral award is in principle final and binding, local legislators are faced with the need to balance the aim of assuring the finality of awards with the need for judicial control to guarantee a certain degree of fairness. Verily, excessive judicial review could lead to re-litigation of the case in the domestic forum, which in turn would contravene the very purpose of an arbitration proceeding which seeks finality.

In its most-recent decision, the Argentine Federal Supreme Court (the “Supreme Court”) made its own mark in the debate over judicial control of arbitral awards by crystallizing the development of a long line of case law by ratifying the limited reach of judicial control of annulment proceedings of awards.

In the judgment handed down on 09/05/2017 in the case Ricardo Agustín López [et al.] v. Gemabiotech S.A., the Supreme Court recognized the grounds for annulment contained in sections 760 and 761 of the National Procedural Civil and Commercial Code (the “Procedural Code”). Section 760 states that arbitral awards may be set aside if: (i) there is an essential flaw in the proceedings -which could include the failure to give reasons for the decision, constituting a violation of the due process of law-, (ii) an award is rendered beyond the stipulated term and (iii) an award is rendered on issues not listed to be resolved. On its part, section 761 adds that (iv) an award may be annulled if it contains incompatible and contradictory decisions. In essence, the Procedural Code is the local judges’ primary guidepost in order to decide whether or not to set aside an award.

Ricardo Agustín López [et al.] v. Gemabiotech S.A.: A Brief Overview

The application arose from an arbitration where the plaintiffs requested the payment of the price of shares they had sold to the respondent. The respondent filed a counterclaim, alleging the plaintiffs’ breach of various contractual clauses. Soon thereafter, the plaintiffs sought the suspension of the proceedings -which was later denied by the arbitral tribunal- on the basis of the existence of parallel criminal proceedings instituted by the respondent against the plaintiffs.
An arbitral award was eventually rendered in favor of the respondent, but was later annulled by Chamber F of the National Court of Appeals on Commercial Matters (the “Court of Appeals”), as it considered that the arbitral tribunal should have postponed the issuance of the final award until the decision in the parallel criminal proceedings was resolved.

The annulment decision was elevated to the Supreme Court, whereby the Court of Appeals decision was revoked as the award had been annulled for reasons different than those set forth in the Procedural Code, which contained an exhaustive list of grounds for annulment. In other words, the plaintiff had not alleged that its grievance fell within any of the causes that the law exhaustively enabled for the judicial review of an arbitral award by means of a recourse of annulment. Even more so, the Supreme Court added that the Court of Appeals did not articulate the plaintiff’s grievances upon any of the grounds that would enable the request of nullity, nor therefore, did it examine the extent of its jurisdiction. On the contrary, it entered directly into the treatment of issues relating to the merits of the dispute, according to its own assessment of the claims and defenses wielded by the respondent, as well as the records of the criminal case.

Crystallization of Previous Case Law and Lessons Learnt from the Supreme Court’s Decision

The Supreme Court’s ruling in Ricardo Agustín López [et al.] v. Gemabiotech S.A. strikes a balance between the need for arbitration proceedings to render final decisions and the need for judicial review and supervision. By stating that the judicial review of an arbitral award must be limited to verifying the existence of grounds for annulment expressly stated by the Procedural Code, it not only ratified that the judicial control of awards is limited, but also crystallized the development of Argentine jurisprudence regarding the matter.

In this sense, Argentine precedents have supported a limited judicial review of arbitral awards. For instance, in the July 2013 case Seven Group v. ADT Security Services S.A., Chamber F of the Court of Appeals denied the request for annulment of the award as the plaintiff had essentially presented a full-fledged appeal, not an annulment proceeding. In fact, it stated that: “(…) the judge must limit himself to resolve the existence of expressly indicated grounds for annulment which may affect the validity of the arbitral award”, and even added that those express grounds for annulment were found in sections 760 and 761 of the Procedural Code.

Similarly, on November 2013 in the Aronna v. Petrobras case, Chamber A of the Court of Appeals stated that it did not find any defect in the compromise the parties had agreed upon, but that the plaintiff merely disagreed with the content of the decision. It also highlighted that the challenge of annulment of an arbitral award did not involve a substantive review of the case, but rather the confirmation of certain conditions that are contained in rules of public order that must be respected, that is, those contained in the Procedural Code.

On August 2014, in the case NSB v. A.A., one of the three arbitrators in an ICC arbitration passed away during the issuance of the final award. Consequently, the award was issued by the two remaining arbitrators. As they did not reach a consensus, the dispute was resolved by the vote of the tribunal’s chairman, as stipulated by the ICC Arbitration Rules. In turn, the respondents requested the annulment of the award based on this alleged defect in the proceedings. The Chamber B of the Court of Appeals rejected the petition for annulment by stating that the recourse was not meant to challenge the merits of the case. It went on to add that judges must limit themselves to controlling the fulfillment of the formal conditions that the legislation has considered indispensable for a proper administration of justice.

As mentioned, the Supreme Court in Ricardo Agustín López [et al.] v. Gemabiotech S.A. not only reaffirmed that the judicial review of arbitral awards could not delve into the merits of the case, but it went even further and stated that the only possible grounds for annulment were those set out in sections 760 and 761 of the Procedural Code. On our behalf, we fully support the Supreme Court’s decision. Otherwise, the scope of grounds for annulments of arbitral awards could be unduly broad, thus dwindling the attractiveness and advantages of the arbitral system. Therefore, the precedent set by the Supreme Court allows both the plaintiff and the respondent to rest assured that the award, whether favorable to their position or not, will only be annulled on the grounds expressly stated by the law. For this same reason, this decision increases the overall confidence in the institution of arbitration as a means for seeking finality.

Final Considerations

The Supreme Court’s ruling leaves us with high-hopes for the future of arbitration in Argentina. Not only this, but new developments are in the horizon. For instance, a bill was presented in the Argentine Chamber of Deputies on 03/03/2017 in order to partially reform the National Civil and Commercial Code with respect to the rules regulating arbitration that have been criticized by scholars. Even more, there is a draft International Commercial Arbitration Act based on the UNCITRAL Model Law pending approval by the Chamber of Deputies, as it has already been approved by the Senate.

We can reasonably expect that with a consistent line of jurisprudence and internationally-aligned arbitration standards, Argentina will be able to establish itself as a safe haven for arbitration in the near future.

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Amendments to the UAE Advocacy Law: Run into the Sand?

Mon, 2018-01-29 17:06

Gordon Blanke

At the dawn of the New Year, foreign arbitration specialists will welcome some reassurance to the effect that the amendments made to the UAE Advocacy Law, also known as Federal Law No. (23) of 1991 on the Regulation of the Legal Profession, in November 2017 (see Ministerial Resolution No. (972) of 2017 on the Executive Regulations of the Federal Law No. (23) of 1991 on the Regulation of the Legal Profession and its Amendments, in short “MR 972/2017”) do not affect their right to represent clients in arbitrations seated in the Emirate of Dubai. This, no doubt, provides some relief given the importance of Dubai as a seat of arbitration and the keen interest taken by foreign and expat practitioners in advising and representing clients in arbitrations seated there. That said, the representation of clients in arbitrations seated in other Emirates might be affected by the amendments in question. To avoid procedural complications in individual references going forward, it is worthwhile taking a closer look at the positions on legal representation taken by the various Emirati laws and to what extent these might be impacted by the UAE Advocacy Law as amended.

By way of background, Art. 2 of MR 972/2017 provides that only lawyers who are registered on the Roll of Practicing Lawyers in the UAE are permitted to plead before arbitration tribunals. A power of attorney for authorisation to represent may only be issued to any such registered lawyers. The Roll distinguishes between “practicing lawyers admitted before courts of first instance and courts of appeal” and those “admitted before the Federal Supreme Court” (see Art. 4, MR 972/2017). Finally, arbitration tribunals are prohibited from accepting representation for and on behalf of a party by non-registered lawyers (see Art. 2, MR 972/2017: “[…] arbitration tribunals […] may not accept a person to act as a lawyer on behalf of another person unless his name is registered in the Roll of Practicing Lawyers.”). Only governmental bodies appear to be excluded from these new rules (see Art. 3, MR 972/2017) except where they hire outside counsel (see Art. 48, MR 972/2017). The net effect of these provisions is that non-local (non-UAE) lawyers are not allowed to represent any parties in UAE-seated arbitrations nor to plead before UAE-seated tribunals. Violations will be sanctioned with a range of disciplinary penalties, including suspension from practice (see Art. 38, MR 972/2017).

No need to say that taken literally, these amendments have for a consequence that non-UAE lawyers (i.e. all expat and international arbitration specialists offering their services in the UAE) are no longer allowed to represent clients and appear before arbitration tribunals in domestic arbitrations (although it would seem that they are still allowed to sit as arbitrators in such cases, no provisions being made to the contrary in the UAE Advocacy Law as amended). Not only does MR 972/2017 fail to provide for a transition regime that would allow pending arbitrations with non-qualifying counsel to complete on previously acceptable terms, but it also sends a strong arbitration-hostile signal to international arbitration lawyers practising on the ground.

For the avoidance of doubt, it is arguable that free zone arbitration seated in the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) are excluded as the UAE free zones have their own regime of registration of practising lawyers. A solution may therefore be to re-seat pending local arbitrations and move them to a free zone. Irrespective of any temporary solutions that may be on offer, the fact remains that these new advocacy rules throw a spanner into the wheel of arbitration in the UAE.

It is further arguable that these new rules do not bite in the Emirates of Dubai, Abu Dhabi and Ras Al Khaimah given that these do not form part of the federal judicial structure and that instead, each has their own, stand-alone judiciary (with its own rules on the licensing and registration of lawyers): By way of example, all lawyers practising in Dubai (including the DIFC) must register – without discrimination (i.e. whether foreign or local) – with the Dubai Legal Affairs Department (DLAD) (see Dubai Executive Council Decision No. 22/2011 on the Legal Profession and Legal Consultancy in the Emirate of Dubai of 26 June 2011). In this context, it is also instructive to note that the Arbitration Rules of the Dubai International Arbitration Centre (DIAC) allow arbitrating parties free choice of counsel, again irrespective of their national origin – i.e. whether local or international (see Art. 7, DIAC Rules). Importantly, the DIAC Rules have been adopted by Ruler’s decree and therefore have the status of a law (thus producing legal rights and obligations in their own right). It has more recently been confirmed in this context that the amendments introduced by MR 972/2017 do not apply to lawyers – whether domestic or foreign – practising arbitration in Dubai. Pursuant to a circular of Dr. Louay Mohamed Balhol, General Manager of the DLAD, addressed to the local legal profession:

“We inform you that the ‘Resolution of Dubai’s Executive Council No. 22/2011 regarding penalties and fines related to the practice of the legal profession and legal consultancy in the Emirate of Dubai’, which confirms in its Article 2 the competence given to the Legal Affairs Department by virtue of its establishing Law No. 32 of 2008 in the organisation of the legal profession and legal consultation in the Emirate of Dubai, allows legal consultants who are licensed with the Legal Affairs Department to appear and represent clients before arbitration tribunals and administrative bodies in the Emirate of Dubai. […] As regards visiting lawyers, there are no restrictions as to their right to appear and represent their clients before arbitration tribunals in the Emirate of Dubai.”

Equally, the situation in Ras Al Khaimah (RAK) likely remains unaffected: The relevant RAK laws contain no specific restrictions on representation in arbitration (see RAK Law No. 3 of 2012 Concerning Legal Profession). Finally, Abu Dhabi also does not place any limitations on the representation of parties in arbitration through foreign counsel (see Executive Council Chairman Resolution No. 30 of 2006 Concerning Organizing the Licensing of Legal Consulting Activities in Emirate of Abu Dhabi). Like the DIAC Rules, the Arbitration Rules of the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) leave the appointment of counsel to the full discretion of the arbitrating parties (see Art. 3, 2014 ADCCAC Procedural Regulations of Arbitration).

In any event, rumour has it that the impact of the amendments was unintended and that the courts will not implement the new rules on their strict terms. In addition, the local professional forces that are have reportedly raised these concerns with the UAE legislature and are hopeful that necessary revisions will shortly be afoot to rectify what are amendments with severe consequences on the international perception of the UAE as an arbitration-friendly seat. In the interim, challenges of international counsel might impede smooth arbitration proceedings in a number of Emirates: This will, in particular, be the case in Fujairah, Umalquain and Ajman, each of which is entirely dependent for the licensing and registration of lawyers practising there on the UAE federal structure, the legal profession in those three Emirates being governed by the UAE Advocacy Law as amended. That said, few foreign practitioners are active as advising counsel in those Emirates, so that the amendments of the UAE Advocacy law will likely have only limited effect in practice.

In this sense, the recent amendments to the UAE Advocacy Law have not entirely run into the sand and do produce some, albeit limited, impact on arbitration in the UAE. It is to be hoped that these amendments will be reversed without further ado in the early course of the New Year in order to avoid any more incisive inroads into the reputation of the UAE as a regionally leading seat of arbitration.

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“Japan is Back” – for International Dispute Resolution Services?

Mon, 2018-01-29 07:00

Luke Nottage and James Claxton

“Japan is Back”?


Prime Minister Shinzo Abe himself is certainly back – having led the Liberal Democratic Party (LDP) to a fifth consecutive election in October 2017. If Abe remains in power for another three years, he will become the longest serving Japanese prime minister since World War II. Although the electorate probably responded mostly to his government’s hawkish security policy, given the recent sabre-rattling from North Korea, voters also seem to be giving the government the benefit of the doubt on his “Abenomics” economic policy. Introduced after the LDP regained power in 2012, Abenomics involves shooting “three arrows” – for monetary, fiscal and structural reform – to try to jumpstart the Japanese economy out of its lethargic performance since the “bubble economy” burst in 1991.


Against this political backdrop, and Abe’s ambitious announcement in 2013 that “Japan is back” on the world stage, some LDP policy-makers recently have proposed enhancing Japan as regional hub for international dispute resolution services. On 18 May 2017 the Nikkei Asian Review announced: “Japan to Open Center for International Business Arbitration.”


Beyond the JCAA?


However, the wheels of government turn slowly in Japan. The Cabinet Office (naikaku kanbo) has established an inter-departmental committee to investigate options in more detail. One key player remains METI. Its jurisdiction ranges from sectors where Japanese firms have long become globally competitive (such as the automotive and electronics industries) to sectors dominated by small- and medium-sized enterprises (SMEs). The latter have traditionally been more domestically oriented but since the 1990s have increasingly engaged in exports and even investments abroad. METI has long supported the JCAA, notably by providing former senior officials to serve as JCAA President. The latest such “descent from heaven” (amakudari) is Mr Hiromichi Aoki, who had a career primarily in METI and the associated SME Agency.


Unfortunately, the JCAA has largely missed out on the boom in international commercial arbitration across the wider Asian region particularly over the last 10-15 years. Despite good Rules (last updated in late 2015), fee structures and personnel, the JCAA has attracted only 12-27 new case filings annually over 2007-2016. This caseload is very low compared to its counterparts in China, Hong Kong, Singapore and even recently Malaysia (KLRCA) and Korea (the KCAB). The JCAA might gain more critical mass and visibility if it merged with the Tokyo Arbitration Maritime Commission (TOMAC), but that has its own history and shipping comes under the jurisdiction of the Transport Ministry. JCAA also struggles to shake off a reputation abroad as being Japan-focused, partly reflecting the fact that almost all its cases involving at least one Japanese party but also the nature of the appointment of its Presidents.


The result is that the JCAA loses credibility for Japanese SMEs and even large Japanese companies seeking to include it in cross-border contracts as the arbitral venue. More generally, Japan is missing out on the potential to be a neutral and quite geographically-convenient seat in Asia for disputes between for example parties in the Americas and China or along the latter’s “One Belt, One Road” initiative, and between parties in Southeast Asia and North Asia other than Japan. Yet Japan was quick to ratify the New York Convention (in 1961), and has implemented the UNCITRAL Model Law (from 2003) for both international and domestic disputes. Courts have interpreted both instruments in a pro-arbitration spirit, as Nottage outlined with Tatsuya Nakamura in 2013 and with Nobumichi Teramura in their chapter in Anselmo/Gu (eds) The Developing World of Arbitration (Hart, January 2018).


So can Japan make a comeback now in the increasingly competitive world of international dispute resolution services? The opportunity is well worth taking, despite the notorious risk-averseness of Japanese policymakers. And this will probably be Japan’s last chance, especially now that Korea’s Arbitration Industry Promotion Act has come into effect since August 2017. That statute commits the Korean government to planning and funding initiatives beyond its longstanding support for the KCAB.


Adding the TCIDR


The complex institutional history behind JCAA (and TOMAC) suggests that the best option for Japan will be to set up a new umbrella organisation, which could be named the Tokyo Centre for International Dispute Resolution (TCIDR). This would be similar to the Seoul International Dispute Resolution Centre, successfully established in 2013 and seemingly now an inspiration for Japan, but with even stronger international flavour. The President of TCIDR should have excellent English (whether as a native speaker or otherwise), a world-wide reputation and extensive expertise in international dispute resolution (in terms of practice and publications), and marketing acumen (to promote Japan as a venue for international dispute resolution services generally, whether or not involving Japanese parties). The TCIDR could also have a thoroughly international board (closer to the diversity evident within the SIAC Court of Arbitration), as well as including non-Japanese employees and interns.


The TCIDR would promote and offer facilities for international arbitrations that already do (and should increasingly) take place in Japan under ICC, ICDR or other rules, as well as for ad hoc arbitrations. But it can also provide support for other types of cross-border ADR, such as adjudication (expert determination) in construction disputes. The TCIDR could additionally provide a venue for mediation, especially for short sessions in “breakouts” from arbitration proceedings underway in Tokyo. These might be led by mediators appointed separately from the arbitrators, thus offering a different option to the JCAA’s traditional Arb-Med practice. Such mini-mediations might also be conducted off-site, for example in downtown premises of universities (such as Keio Law School) that actively promote practice-oriented teaching and learning in international dispute resolution. This would defray costs to the Japanese government and other sponsors for TCIDR facilities and activities – possibly the Japan Association of Arbitrators (JAA) and Bar Associations. Anyway, commercial property rentals and other operational costs in Tokyo are now very reasonable by regional standards.


Adding the JIMC-Kyoto


The new TCIDR would be complemented by the Japan International Mediation Center-Kyoto (JIMC-Kyoto), which will offer international commercial mediation services beginning already in 2018. The idea for JIMC-Kyoto came from disputes lawyers in Tokyo and Osaka who felt that the peaceful environment in the old capital, with its natural beauty and traditional Japanese architecture, might be conducive to amicable settlements.


JIMC-Kyoto will offer various services including appointing mediators, supporting ad hoc mediations, and administering mediations under rules presently being drafted by the organising committee. Managed by the JAA and Doshisha University, it will maintain a secretariat at Doshisha’s campus in central Kyoto. Doshisha will also offer physical facilities for mediations, including rooms for the parties and mediation rooms with interpretation booths.


JIMC-Kyoto aims to be a truly international institution. While court-annexed mediation and ADR in Japan tends to follow a more evaluative approach (compared for example to Australia), JIMC-Kyoto will not proscribe any particular type of mediation but rather leave it to the mediators and parties to determine the appropriate methodology. For this purpose, the organising committee is compiling a panel of international mediators whose approaches are facilitative, evaluative and or in between. The Singapore International Mediation Center, with its own panel of international mediators, is advising JIMC-Kyoto on the composition of this panel. JIMC-Kyoto and the SIMC have also made plans to collaborate on mediator training, events and promotion. The Centre’s potential is bolstered as UNCITRAL’s Working Group II progresses towards an instrument for the enforcement of international commercial settlement agreements resulting from mediation.


Further Promising Developments


Another key player in successfully promoting both these initiatives to reposition Japan as a regional hub in international dispute resolution services will be the Justice Ministry. Its Litigation Bureau has been expanded in recent years (now called the Shomu-kyoku), partly to respond to more and increasingly complex domestic lawsuits involving the Japanese government, but also by adding an “international litigation” support unit (including several bengoshi lawyers on fixed-term contracts) to assist the Foreign Ministry. One of the unit’s aims is to be better prepared for any investor-state dispute settlement claim that might be brought against Japan, amidst proliferating investment treaties and slowly increasing inbound FDI. Yet it could achieve this partly by becoming more familiar with and supportive of international commercial arbitration and mediation processes.


In addition, the Litigation Bureau as well as other parts of the Justice Ministry involved primarily in law reform projects still rely significantly on elite-track career judges being seconded by the Supreme Court’s General Secretariat. If the Ministry can develop a more active role in promoting international dispute resolution services, this may eventually result in Japanese judges speaking out more publically about the advantages of ADR, including in international forums. So far, this almost never happens. By contrast, judges particularly from common law jurisdictions within the Asia-Pacific region often actively promote their home countries as desirable venues for international dispute resolution services.

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Anticipated revision to Article 257 of the UAE Penal Code

Sun, 2018-01-28 03:01

Sadaff Habib (Assistant Editor for Africa)

Arbitrators have an overarching duty to act fairly and impartially. This is a fundamental aspect of arbitration that arises out of one of the key advantages of the arbitration process, that is, the parties’ abilities to select the tribunal or arbitrator.

This duty is commonly enshrined in arbitration laws and institution rules. For example, Article 9.1 of the DIAC Arbitration Rules 2007 provides, “All arbitrators conducting arbitration under these Rules shall be and remain impartial and independent of the parties; and shall not act as advocates for any party in the arbitration.” Where doubt exists as to the arbitrator’s ability to act impartially, the relevant rules or arbitration laws usually set out a procedure for parties to challenge the appointment of such an arbitrator. Continuing with DIAC as an example, Articles 13.3 and 13.4 of the DIAC Rules set out a process for parties to challenge the appointment of an arbitrator in circumstances that give rise to justifiable doubts as to the arbitrator’s impartiality and independence.

In October 2016 the UAE legislative took this duty a step further and criminalised an arbitrator’s failure to act objectively. The original wording of Article 257 of the UAE Penal Code imposed criminal sanctions against court appointed experts who acted in a biased and/or prejudicial manner. This provision has been in existence for almost 30 years and has rarely been invoked. The purview of this provision was amended by Federal Decree No.7 of 2016 which extended the provision to impose criminal sanctions against arbitrators and/ or experts selected by parties in case of bias. Such that, an arbitrator and/ or expert found in violation of Article 257 would be subject to imprisonment for a period of between 3 to 15 years.
The amended Article 257 reads as follows:

Any person who, while acting in the capacity of an arbitrator, expert, translator or investigator appointed by an administrative or judicial authority or elected by the parties, issues a decision, gives an opinion, presents a report or a case or establishes a fact in favour or against a person, contrary to the duty of objectivity and integrity, shall be punished by temporary imprisonment. The above individuals shall be prohibited from undertaking the assignments commissioned to them again and the provisions of Article 255 of this Law shall apply to them.”

The above amendment understandably led to considerable concern and criticism within the international arbitration community. Arbitrators began to withdraw and refuse appointments as there was a concern that uncooperative respondents would use the threat of criminal sanctions to disrupt arbitration proceedings. This was particularly true with sole arbitrator appointments where arguably it could be comparatively easier to establish bias than against members of tribunals. It is not uncommon for respondents to bring vexatious claims to the extent of filing civil cases against arbitrators who refuse to resign in the face of challenges. Now with possible criminal sanctions, it is not surprising that many refused to partake in the process. However, in practice, we are yet to see a party file criminal proceedings against an arbitrator and/ or a party appointed expert for failure to act objectively. Nonetheless, and for obvious reasons, the provision remains a cause for concern.

In practice, it is unusual for criminal proceedings to be initiated against an arbitrator for failing to act impartially; criminal sanctions are usually imposed against arbitrators in cases of fraud and/ or bribery. Further in the wider international arbitration community such as in the UK, in the event of justifiable doubt as to an arbitrator’s impartiality a party can make an application to the court under section 24 of the Arbitration Act 1996 to remove an arbitrator.
The present arbitration law of the UAE is captured in Articles 203-218 of the UAE Civil Procedure Code, and does not expressly address the issue of impartiality and fairness. However, Article 207 (4) of the UAE Civil Procedure Code allows parties to challenge appointments for the same reasons that judges may be refused to hear cases. Article 114 of the UAE Civil Procedure Code, sets out circumstances when a judge may be prevented from hearing a case such as for example if the judge is the husband of one of the litigants or a relative or son-in law. By all means Article 114 does not appear to provide an exhaustive list. Therefore, there nonetheless appears to be a void in the existing legislation in this area. It is speculated that the revision to Article 257 was an attempt at closing this void. However, as mentioned above, imposing criminal liability against arbitrators appears more counterintuitive than beneficial. A possible way of closing the gap could be for the issue of impartiality and fairness to be addressed, in harmony with international arbitration best practices, in the much anticipated UAE draft arbitration law.

During the ADGM/ICC conference last year it was suggested that Article 257 may be partially repealed to remove criminal sanctions against arbitrators and/ or experts with such an amendment coming into effect before the end 2017. Thus far nothing further has been said on the subject. Undoubtedly, starting the new year with an amendment to Article 257 will be welcomed by the international arbitration community as many practitioners would be put to ease in accepting arbitrator appointments.

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Rockhopper vs Italy: Weighing Legitimate Expectations Up Against Investor’s Due Diligence in M&A Deals

Fri, 2018-01-26 17:15

Danilo Ruggero Di Bella


Following the denial by Italian authorities to grant Rockhopper Exploration PLC (a UK upstream company; hereafter, RKH) the production concession for an oil and gas field, in May 2017, the company lodged (jointly with its Italian subsidiary, hereafter collectively referred to as the Claimant) a request for arbitration against Italy with the ICSID by relying on the Energy Chart Treaty (ECT).

This post gives a brief overview of the pending case and comment on the balance between investor’s legitimate expectations and due diligence in M&A transactions with the aim to warn the interested M&A practitioner – who spots a target company with a potential investment arbitration claim – about the timing of the purchase completion and its consequences on claimable damages.


In August 2014, the Claimant completed the acquisition of Mediterranean Oil & Gas PLC (a UK upstream company, MOG hereafter) for GBP 29.3 million in a cash and shares deal. MOG had onshore and offshore interests in Italy, Malta, and France. Among its interests in Italy, was the Ombrina Mare, a field located in the central Adriatic Sea whose exploration permit was applied for and obtained in 2005. In 2008, a hydrocarbon deposit was found and the relevant production concession submitted. However, pending the administrative procedure for the granting of the relevant production concession, the Italian Government brought about several reforms in the extraction sector which made unfeasible the exploitation of the Ombrina Mare field, given its proximity to the coastline (4 miles offshore) and to a natural reserve.

Although during the administrative procedure, MOG was given some reassurances that eventually it would have been awarded the necessary authorizations to start with the drilling, eventually, the concession application was denied by the competent Ministry.

Consequently, MOG applied for an administrative review before the Administrative Court, which upheld the Ministry’s refusal to grant the concession, both in first instance and on appeal (on 16 April 2014 and 17 December 2015, respectively).

After the Claimant acquired MOG, it resumed the authorization process despite the many setbacks, hoping for a different outcome. However, when in February 2016 the Ministry of Economic Development denied for the umpteenth time to grant the Production Concession covering the Ombrina Mare field, the Claimant took the decision to file an arbitration request by invoking the breach of the ECT, after securing a third-party funding.

(Most likely) Arbitral Claim: FET violation

Since RKH claimed that Italy breached the ECT, the Claimant is going to maintain that Italy breached Part III of the ECT and, in all likelihood, specifically Article 10(1), which establishes the FET standard under the ECT. As a result of the acquisition, RKH indeed subrogated to MOG in all its legal relations, and accordingly RKH substituted MOG in its rights against the Italian Republic, including its rights under the ECT.

It is sensible to contend that Italy failed to accord the Claimant fair and equitable treatment by failing to protect its legitimate expectations with respect to its asset (the Ombrina Mare field). Among the measures – that violated Article 10(1) of the ECT and are directly attributable to Italy under Article 4 of the ILC Articles on State Responsibility – are the following:

  1. The failure to observe the time-frame to conclude the administrative procedure for the issuance of the Environmental Impact Assessment Decree concerning the Ombrina Mare project (which also may constitute per se an infringement of legitimate expectations and give rise to indemnification under Italian Administrative Law, Articles 1(1), 2-bis(1) of Law No. 241/1990 (Administrative Procedure Act) and Article 97(1) of the Italian Constitution (impartiality and good-government conduct);
  2. The introduction and retroactive application of the Legislative Decree 128/2010 to the Ombrina Mare oilfield, thereby paralysing MOG’s project, an act which is in contrast with the exploration permit B.R269.GC previously granted in 2005;
  3. A Ministerial Note demanding MOG in July 2013 to submit an additional environmental compliance (the so-called AIA, e. integrated environmental authorisation), which is inconsistent with MEPLS’s previous specific representation to MOG  in October 2012, ensuring that the AIA was not necessary, and which is also incompatible with Article 23(4) of the Environmental Code1)Since the 30 days, that the competent authority has to verify the completeness of the documentation, were already elapsed. jQuery("#footnote_plugin_tooltip_7803_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7803_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, and Articles 3, 21-octies(1), 21-nonies(1) of the (Administrative Procedure Act)2)Since every administrative measure must include a statement of reasons, failing which it may be vitiated by excess of power and, therefore, be voidable. jQuery("#footnote_plugin_tooltip_7803_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7803_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

(Most likely) Defence: Lack of Due Diligence and Duty to Mitigate the Damages

An acquisition, just like a merger, is a lengthy process that may stretch over several months or even years, firstly, to allow the parties involved to get to know each other, secondly, to devise the yearned synergy and, thirdly, to come to a deal. During the negotiations, the seller and the buyer have the opportunity to exchange a series of non-binding and binding documents – ranging from the letter of intent (LOI) to the stock or asset purchase agreement (SPA or APA) – which outline parties’ rights and obligations during and after the transaction. Once the non-disclosure agreement (NDA) and the LOI are signed, as a consequence of the caveat emptor principle, the buyer has the duty to conduct a thorough due diligence to know exactly what he/she is getting into, by reviewing and investigating various aspects of the target company. Especially in an oil and gas acquisition, legal and environmental due diligence – covering pending, threatened, or settled litigations and regulatory approvals, such as government-issued permits or concessions – is of the essence.

On this point, Italy could object to the Claimant that it did not carry out an exhaustive due diligence prior to making the investment, as its failed to assess correctly the feasibility of its project on the basis of the circumstances available when it took the decision to invest. Indeed, tribunals have recognized that Claimant’s own conduct in the course of obtaining the investment undermines the chances of a successful FET claim every time a failure to exercise due diligence is shown in the undertaking of a viability study of the project before investing therein. Even if RKH was subrogated to MOG in all its rights by means of its acquisition, the content of these rights is not the same where the core element of the causa petendi is the legitimate expectations the rightsholder might have at the time he/she made the investment (being these moments different in time). Since by the time the Claimant made its investment (by closing the acquisition of MOG in August 2014), the government had already enacted, in June 2010, a decree banning oil concessions near the coasts and an Administrative Court had already intervened in April 2014 by upholding the Government’s refusal to grant MOG the relevant concession (because further environmental assessments were necessary due to the complexity of the project), RKH’s expectations with respect to that oilfield definitely could not have been as high as those of MOG when it first discovered it in 2008.

In this respect, it is reasonable to draw a distinction between the transfer of rights from transfer of legitimate expectations from the selling company to the purchasing company: whereas the former is automatic, the latter is subjected to the circumstances in place and information available by the time the acquisition is executed.

Further, parties in a M&A can avail themselves of different ways to allocate the risks of the transaction, such as conditions precedent, representations and warranties and the pertaining indemnifications and damages, and post-closing price adjustments. Tribunals have also recognized claimant’s duty to mitigate the damages suffered. Italy indeed could contend that it was Claimant’s duty to reduce such damages by relying on the prudent means available in M&A deals. For instance, RKH should have set the grant of the production concession either as a condition precedent to the closing of the acquisition, or ask MOG to make it an item of a specific representation subject to an indemnity in the event of non-attainment thereof, or ask for a price reduction given that RKH was not awarded therewith. Of course, since the details of the acquisition are confidential, in case RKH did address this matter in such a cautious way in the SPA, there might be risk of double recovery.

(Most likely) Outcome: 50% off

In cases where the respondent proved investor’s lack of due diligence or failure to minimize losses, tribunals often made the Solomonic decision of reducing by 50% the amount of damages awarded (e.g. MTD v Chile, Award § 244–246; EDF v. Argentina, Award § 1302-1312), by holding the claimant accountable for half of its own losses and the host State liable for the other half.

The Takeaway

The safest way a claim is transferred intact from an investor to another claimant is throughout a political-risk insurance covering the investment by virtue of the subrogation provision (often found in many BIT-MIT). However, most insurance contracts do not cover FET breaches (hence, they share to some extent the same limit of an acquisition similar to the one discussed above).

Thus, should a purchasing company smell the fumus boni juris of a target company’s claim in an investment arbitration, the best option for the buyer might be to prompt the seller to initiate the arbitration on its own behalf by including in the SPA a condition precedent to that effect and backing up financially the selling company by means of a suitable third-party funding arrangement (since probably the seller will not have the necessary funds or may not be interested to keep on pouring money in a company for sale).

References   [ + ]

1. ↑ Since the 30 days, that the competent authority has to verify the completeness of the documentation, were already elapsed. 2. ↑ Since every administrative measure must include a statement of reasons, failing which it may be vitiated by excess of power and, therefore, be voidable. 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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Speak Louder About Arbitrator Diversity: Reflections From MLK Day

Thu, 2018-01-25 19:54

Christopher Campbell

Please do not stop talking about gender and racial diversity as it pertains to the arbitrator diversity problem.  Of course I know my learned friend penned his proposal (and I think it is a good one) to be a call to action, but I think it is essential to not only continue the conversation regarding arbitrator diversity but to expand that dialogue further.

“If you can’t fly, then run, if you can’t run, then walk, if you can’t walk, then crawl, but by all means, keep moving.” – Dr. Martin Luther King, Jr.

As young African-American practitioner seeking my path to becoming a world-renowned arbitrator (or maybe somewhere just shy of that) these words by the great Dr. Martin Luther King, Jr. resonated in my mind on his birthday (January 15th) as I prepared to celebrate his life and achievements and especially as I contemplated this issue of arbitrator diversity.  I believe there are a handful of additional avenues that should be utilized in order to encourage and expand diversity. They are as follows:

  1. Mentorship. A tradition nearly as old as our profession itself should be used to greater effect.  Sure, there are programs like that offered by Young ICCA, Arbitral Women, and Club de Arbitraje Espanol, which offer mentoring to younger practitioners, but there must be more of an intentional effort.  For you veteran practitioners, arbitrators and institutional staff that value diversity, now reading this article—consider how, if at all, and to what extent you have a relationship with a professional woman or person of color who seeks to be appointed an arbitrator?  I assure you, there are numerous listservs, conferences, and other correspondence of these would-be-arbitrators seeking such a guiding hand forward.  If you’re keen to know where to find such a mentee, he is authoring this piece (shameless plug!). But seriously, that point will be addressed more fully in a subsequent section below.
  2. Sponsorship. As an aspiring arbitrator, I am frustrated by the monetary cost to attend many arbitration events, whether they be skills training, or theme-focused conferences or dialogues–Aside from providing tactical advice, and sage wisdom, is the need for financial support.  Often, there is a desire to attend trainings and other events that would help an aspiring arbitrator develop skills, expand her network, or otherwise uplift said arbitrator, however, the financial burdens of these events sometimes make the experience cost-prohibitive.  Specifically, I am referring to arbitration-centric conferences, trainings and courses.  While I am not suggesting that those looking to be supportive fly mentees around the world and finance all aspects of their attendance at one of these events, I am proposing some additional financial consideration.  What if these events offered discounted rates for diverse arbitrators?  If that is untenable, what if the event allowed attendance on the condition that such diverse arbitrators report on the occurrences at the event or contributed in some other manner?  My point is this—If there isn’t access to the venues where the conversations and empowerment regarding our profession is being had, then inclusion becomes an ever-distant fantasy.
  3. Observers.  It is well understood that arbitral proceedings are typically taken as private and/or confidential.  However, perhaps counsel for the parties, the arbitrators and the institutions could provide for more opportunities for disinterested third parties, under the compulsion of confidentiality, to observe the various phases of resolution of disputes before the tribunal.  Although not the same as an appointment, such experience could help bolster a novice arbitrator’s resume.
  4. Inclusion. I have been attending arbitration related events in various jurisdictions for the past several years.  One disappointing commonality has been the lack of representation and inclusion of diverse speakers, and authors in publications.  Admittedly there have been steadily increasing numbers of female authorities, but as we all recognize, the ranks are dominated by, as rightly described in Mr. Benton’s article, non-diverse representatives. Having recently organized a couple such conferences, I reflect with some recent impressions on how to achieve this objective.  As organizers, we should intentionally seek out qualified diverse speakers and authors.  One way to do this is by inquiring of institutions, arbitrators or practitioners.  If that line of questioning is unsuccessful, then seeking out groups representing this pool of arbitrator professionals is also an alternative.  (eg. Arbitral Women).  Frankly, if we honestly cull our own memories, LinkedIn Pages, peer’s networks, and other personal resources, diverse arbitrators are there, we must include them.  All of that said, I admit, in my own recent event organization and journal preparation, I could have done more to be more intentionally diverse—however, I hope this vantage point spurs others to take different approaches in their next project.
  5. Engagement with minority organizations. At this point you may be asking “But Chris, where do we find these diverse arbitrators to mentor and appoint?”, and I’m glad you’ve asked!  I am certain that I cannot codify the entire list of organizations you should consider, but aside from Arbitral Women as referenced above, you should contemplate:

Final Thoughts:

I know that this conversation, and these recommended actions by myself, Mr. Benton, and the scores of others clamoring for greater arbitrator diversity will be met with push-back.  However, I think we must overcome that resistance.  I am reminded of one final anecdote before I conclude—

In 1972, the National Collegiate Athletic Association (“NCAA”) in the United States implemented Title IX of the Education Amendments Act of 1972, which changed the landscape of college athletics.  In summation, it required, under threat of financial or administrative penalty for non-compliance, that American public universities must maintain equal numbers of athletic scholarships for male and female athletes.  This revolutionary act of leadership enshrined a spot at the athletics table for generations of female athletes at both the collegiate and professional level.  Some critics at the time said that the NCAA should let the schools do what they want and in their own time.   Other opponents, railed against the NCAA’s actions as overreach, and said that it would destroy college athletics.  Nearly 50 years later, we know that was not the case.  However, had it not been for the NCAA, we may have never known the names Brandi Chastain, Dawn Staley, or Pat Summit.  If not for the actions of arbitral institutions, we as practitioners, and calls for change in policy as advocated by Mr. Benton, how many potential arbitrators’ names will remain unknown?  “The time is always right to do what is right.” (MLK, Jr.)

It is encouraging and reaffirming to know that this conversation is continuing, and that apparently we are at the time to act.  It is my hope that I am exploring the field as the path continues to clear for more diverse arbitrators.  I equally hope that you, dear reader, if you are unable to appoint, then recommend, if you can’t recommend, then mentor, if you can’t mentor, then seek out those to include, but by all means keep talking – the next generation of clients and arbitrators needs you to.

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Come Arbitrate in Austria under the New VIAC Rules 2018!

Thu, 2018-01-25 03:00

Anne-Karin Grill


Historic grandeur, impressive architecture, outstanding cultural offerings, natural beauty and diversity, good value for money, beauty, safety, timelessness… Austria truly has a lot going for itself. Yet, should this still not be enough to tempt arbitration users and practitioners around the globe, the new Arbitration and Mediation Rules of the Vienna International Arbitral Centre (VIAC) and a legal framework that is markedly pro-arbitration might do the trick!

In force since 1 January 2018, the new VIAC Rules introduced some important new features. The highlights are:

– The new VIAC Rules consist of three equal parts: Arbitration Rules (Part I, Vienna Rules), Mediation Rules (Part II, Vienna Mediation Rules) and Annexes (Part III, Model Clauses, Internal Rules of the VIAC Board, Schedule of Fees, VIAC as Appointing Authority). This new framework confirms the practical relevance of mediation as a dispute resolution tool in international commerce.

– After the successful introduction of some long-awaited legislative changes, the VIAC, which technically constitutes a division within the Austrian Federal Economic Chamber, will henceforth also administer purely domestic arbitration/mediation cases in addition to the international cases that have so far been the exclusive focus of the VIAC’s case load (Article 1 Vienna Rules and Article 1 Vienna Mediation Rules).

– Promoting gender diversity, the new VIAC Rules draw an explicit distinction between the linguistic form chosen in the rules to refer to natural persons (this form shall be understood to apply to all genders) and the linguistic form chosen in arbitration practice (this form shall be gender-specific) (Article 6 Vienna Rules and Article 2 Vienna Mediation Rules).

– As of 2018, all VIAC cases will be administered electronically. The relevant provisions (Statement of Claim, Service, Time Limits and Disposal of File, Arbitral Award, etc.) were amended accordingly (Articles 7, 12 and 36 Vienna Rules and Articles 1 and 3 Vienna Mediation Rules).

– The new VIAC Rules lay down an express obligation for arbitrators, parties and party representatives to conduct the proceedings in an efficient and cost-effective manner. Within the bounds of their respective competences, both the VIAC Secretary General and arbitral tribunals constituted under the new VIAC Rules may take non-compliance into consideration in their decisions on costs (Articles 16 para 6, 28 para 1 and 38 para 2 Vienna Rules).

– Under certain circumstances, respondents may request security for costs (Articles 33 paras 6 and 7 Vienna Rules).

– The VIAC Secretary General now enjoys express authority to increase arbitrators’ fees by up to 40 % depending on the particularities of the case, e.g. in especially complex cases, but also to reduce them where appropriate (Articles 44 paras 7 and 10 Vienna Rules).

– The VIAC’s model arbitration clauses, as well as its model mediation clauses were revised and adapted to suit the new set of rules (Annex 1).

– Finally, the new VIAC Rules feature amended fee schedules (Annex 3). Registration fees and administrative fees for lower amounts in dispute were adjusted and reduced accordingly. At the same time, administrative fees for very high amounts in dispute were raised, but still remain moderate compared to other international arbitration institutions. Registration fees and administrative fees for proceedings in accordance with the Vienna Mediation Rules now match the fee schedules applicable in arbitration cases (Annex 3 in conjunction with Articles 4 and 8 Vienna Rules).

The new VIAC Rules confirm the ambitious course the VIAC has set for itself for the years to come: to consolidate its first-rate standing as one of the leading arbitration centres in Europe and to assist users of international dispute resolution services who appreciate the benefits of Vienna’s unique geographic location and the institution’s excellent reputation that extends to all areas of alternative dispute resolution.

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Finality of Arbitral Awards in Nigeria- Separating Harm from Hubris (Contd.)

Wed, 2018-01-24 03:49

Adebayo Adenipekun

In a previous post, the issue of finality of arbitral awards in Nigeria was discussed and it was concluded that the review of awards is not in itself a vice to arbitration. In this post, I share further observations on the finality debacle with emphasis on the pro-finality judicial policy in Nigeria.

Are our Criticisms Fair?: There is an increasing crop of arbitration practitioners making it to the state and federal benches in Nigeria and taking with them a firm understanding of arbitration law and the limitations of judicial intervention. Courts have generally warmed up to arbitration and the finality of its awards. Thus, the risk of overreach in Nigerian courts has reduced.

Of course, there is the notorious Nigerian case of Taylor Woodrow (Nig.) Ltd. v. Suddeutsehe Etna – Werk GMBH (1993) 4 NWLR (Pt. 286) 127, which has been much vilified for two reasons. Firstly, the decision appeared to expand the grounds for challenge of an award by a wide margin. Secondly, the decision takes cognisance of errors of law and mistakes of fact as grounds to set aside an award – a large leeway for re-litigation. Worse, the decision is that of the Supreme Court in a country where judicial precedent is the law. I too have had bad experiences arising from this decision as I have seen so many challenge applications based on even the most frivolous points and by imaginative legal argumentation, hinged to any of the ten misconduct examples in Taylor Woodrow. To be fair, however, complaints of errors of law are an exception – the Learned Law Lords of the Supreme Court did state the law as is applicable in Nigeria today, that

“‘You have constituted your own tribunal; you are bound by its decision’. The only exceptions to that rule, are, cases where the award is the result of corruption or fraud, and one other, which, though it is to be regretted, is now, I think, firmly established, viz: where the question of law necessarily arises on the face of the award, or upon some paper accompanying and forming part of the award”.

The Learned Justices adopted this exception, as can be seen, with reluctance and it is important to understand that this exception was not a creation of the Nigerian Courts- the Supreme Court had merely followed the English position as in Hodgkinson v. Fernie. That decision may no longer be the law in England as a result of legislation but as the Nigerian Arbitration and Conciliation Act has remained the same since Taylor Woodrow, the position remains.

However, Taylor Woodrow does not appear to me to have materially altered the law since in 2015 the Court of Appeal would still hold that on the question of errors of law, “when parties have referred a question to a judge of their choice…they must be bound by his decision whether the conclusion be right or wrong” (Arbico v. Nigeria Machine Tools). An error of law contemplated by Taylor Woodrow will arise only where the legal question is the main dispute submitted for resolution to the arbitrator. A mistake of fact, on the other hand, was explained to be one that is admitted or clear beyond reasonable doubt. Proof beyond reasonable doubt is the highest standard of proof in Nigeria and to my knowledge, no challenge application on mistake of fact has met that standard yet.

Most gratifying on award finality is the decision of the Nigerian Supreme Court delivered in January 2017 in NITEL v. Okeke [2017] 9 NWLR (Pt. 1571) 439. A complaint of the appellant was that the arbitrator had not considered the evidence the way a judicial panel would have and that the tribunal did not analyse the pleadings as a court would. The Supreme Court rejected this argument and held that “[a] court should not therefore upset the expectation of the parties except for the clearest evidence of wrong doing or manifest illegality on the part of the arbitrator”. The Supreme Court stated expressly that a challenge application is not a merits appeal and deprecated the appellant’s approach of attacking the substance of the award rather than demonstrating the alleged misconduct. Fortunately, the Court considered Taylor Woodrow and was not persuaded that the conduct of the arbitrator in question fit into any of the broad Taylor Woodrow examples of misconduct.

Accordingly, Taylor Woodrow may make for easy criticism but it does not appear that it has significantly altered the law on award finality – an award is still final and binding in Nigeria, whether its conclusion be right or wrong. Of course, the criticism against Taylor Woodrow is not really that it altered the law but that it has led to a deluge of mischievous actions to set awards aside. The problem with this criticism is in its very framing – if an application is mischievous or made with a hidden untoward intent, the state of the law is essentially immaterial and even if the Nigerian law were to be interpreted or amended to reduce the ground of challenge to one stringent ground, mischievous party representatives will still bring applications to set awards aside and tie them to that sole statutory ground. The problem is, therefore, the mischief of the party representatives and not the courts. And if the position in Taylor Woodrow is no longer the law in England because legislation has changed the challenge landscape, then blame should lie at the feet of the Nigerian legislature, not the courts. Certainly, a panacea for the criticisms is perhaps in the clamour for an effective judicial system in Nigeria where challenge applications are heard timeously and effectively as opposed to the current norm where challenge applications even when ultimately refused, stay in courts for long periods, sometimes as long as a decade.

The point is, for arbitrators, the concern ought not to be the litigious nature of party representatives but the judicial policy of Nigeria. The law as it is may disappoint the party-representative and arbitration user who have to contend with (frivolous) set-aside actions after an award, but the disposition of the courts before and after Taylor Woodrow (as well as the pro-arbitration stance of the current Chief Justice who has issued arbitration practice directions to all courts) should encourage the arbitrator.

Post Script: There is some value to award challenge. The truth is that more damage will be done to arbitration if parties leave with an award which they are convinced was tainted by bias, but cannot challenge for fear of appearing litigious – or simply because it is forbidden. Secondly, just as the number of concluded references speaks to the competence of an arbitrator, the number of challenge applications resolved in the arbitrator’s favour speaks to his or her suitability and integrity; thus, it may actually be an additional medal to an arbitrator to have his or her awards and procedural orders subjected to the scrutiny of some authority. Should the award survive, so may the arbitrator – I recently came upon the example of a renowned Kenyan arbitrator who was challenged five times from one reference and is today an example of the arbitrator under fire.

Thirdly, challenge applications, where eventually shown to be meritorious, do the arbitration world a vital favour. In Nigeria, Judges and Justices are subject to the discipline and oversight of the Judicial Council. Before their appointments, they ought to show certain qualifications and pass a test and then immediately upon appointment, are subjected to intensive judicial training. This system of pre-appointment checks is remarkably absent from the arbitrator-appointment process as anyone can be appointed to discharge the quasi-judicial role of an arbitrator, in ad hoc references especially (checks however exist, I am aware, in institutional references in which the institutions or certain officials/organs thereof play roles similar to that of the Judicial Council in litigation). Also, while the Court system is a public system utilising public records available for public scrutiny, an arbitral reference is the business of the parties and with a water-tight confidentiality direction, will remain so for life. Without an employer or Judicial Council to oversee the arbitrator and with the reference being such that the public cannot keep an eye on, all sorts of misdeeds could occur unchecked. Successful award challenges therefore spotlight the worst of arbitrator behaviour. Arbitrators are guided by such decisions in knowing what amounts to acceptable determination, what manner of party indulgence is too much indulgence, what level of procedural equivalence they must afford the parties and what manner of directions to make or decline, going forward.

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FAI Arbitral Tribunal’s Separate Award on the Reimbursement of Advance on Costs

Tue, 2018-01-23 01:59

Mika Savola


Article 48.1 FAI Rules provides that, in any international arbitration, FAI shall fix an advance on costs which the parties must pay in full before the case file is transmitted to the arbitral tribunal. Like under many other institutional arbitration rules, the starting point under the FAI cost regime is that FAI will fix one “global” advance on costs to be paid by the parties in equal shares. Accordingly, the respondent is normally required to contribute to the advance on costs to the same extent as the claimant irrespective of whether it has brought any claims of its own against the claimant. There is, however, a limited exception to this main rule that may apply where the respondent has raised a counterclaim or set-off claim. In such instances, FAI Rules permit FAI to fix separate advances on costs for the claims, counterclaims and set-off claims and order each of the parties to pay the advance on costs corresponding to its claims.

If a party fails to pay its share of the global advance on costs, FAI will give the other party an opportunity to pay the unpaid share on behalf of the defaulting party within a set time limit. If the other party makes such payment, the arbitral tribunal may, at the request of that party, issue a separate award for reimbursement of the payment in accordance with Article 43(a) FAI Rules and Article 2.6 of Appendix II thereof. In the event that any part of the advance on costs remains unpaid, FAI Board is vested with the power to terminate the proceedings.

As a practical matter, it is not unheard of that a respondent who objects to FAI’s jurisdiction, or for some other reason does not want to participate in the arbitral proceedings, refuses to pay its part of the advance on costs as requested by FAI. Occasionally a respondent may choose to do so even though it wishes to bring its own counterclaim in the arbitration and is willing to pay the requisite filing fee for its own claims. In all of these situations, unless FAI has fixed separate advances costs, the claimant has no other alternative but to make the payment on behalf of the defaulting respondent in order to avoid the arbitration being frustrated and to have its claims adjudicated by the arbitral tribunal.

Where the claimant has discharged the full global advance on costs due to the respondent’s failure to pay its part, the claimant may wish to exercise its right of redress through a separate award for reimbursement of the payment in accordance with the above-mentioned Article 43(a) FAI Rules and Article 2.6 of Appendix II. These provisions, which were introduced to the FAI Rules in 2013, are inspired by Article 45(4) of the 2010 SCC Rules (an essentially similar provision is set forth in Article 51(5) of the 2017 SCC Rules). The principal justification for such a remedy is the widespread sentiment within the arbitration community that some form of redress should be available to the claimant in the event that the respondent breaches its contractual commitment by refusing to discharge its share of the advance on costs. While few arbitration rules expressly recognize separate awards to this effect, in practice such awards have been issued, e.g., under the ICC Rules, even in the absence of clear statutory support or any specific provisions in the applicable arbitration rules.

There are many cases concerning the rendering of separate awards for reimbursement of payment of advances on costs under the SCC Rules. In FAI arbitrations, however, the provisions governing separate awards on advances on costs have been invoked rather infrequently. To date, there are only two cases where the claimant requested such an award due to the respondent’s failure to pay its share of the global advance on costs. In both instances, the arbitral tribunal granted the claimant’s request. Below is a comment on the latter one of these cases.

Factual circumstances of the case

A Finnish company (“Claimant”) had concluded a contract with two Eastern European parties (“Respondents”). The contract was governed by Finnish substantive law and the arbitration clause provided that any disputes relating to it shall be decided in FAI arbitration seated in Helsinki. Once a dispute arose between the parties and Claimant commenced FAI arbitration proceedings, all parties expressly agreed that the case shall be referred to an arbitral tribunal consisting of a sole arbitrator. FAI Board then appointed a Danish sole arbitrator in the case and fixed the global advance on costs to be paid in equal shares by Claimant, on one hand, and Respondents, on the other.

Claimant paid its share, but Respondents failed to do so. Upon invitation of FAI Secretariat, Claimant paid Respondents’ share too and the case file was subsequently transmitted to the sole arbitrator. In their Statement of Defence, Respondents raised a counterclaim and paid the requisite filing fee of EUR 3,000. However, they continued to decline to pay their part of the global advance on costs.

Meanwhile, Claimant filed a request for a separate award, asking the sole arbitrator (a) to order Respondents jointly and severally to pay to Claimant “soonest by a date decided by the Arbitrator” EUR 11,000, which amount represented Respondents’ share of the advance on costs fixed by FAI, with interest starting on [date] at the rate provided in Section 4.1 of the Finnish Interest Act (633/1982); and (b) to order, as part of the final award, Respondents to bear the costs for rendering the separate award, including the sole arbitrator’s fees and all costs and fees incurred by Claimant.

Respondents objected to Claimant’s request for a separate award, stating that the issue of advance on costs should be decided only in the final award and that the claim for interest on any amount payable by Respondents as advance on costs should be dismissed as contrary to Article 2.11 of Appendix II FAI Rules. According to said provision, “the amounts paid as advances on costs do not yield interest for the parties or the arbitrators”.

The sole arbitrator decided to issue a separate award and granted Claimant’s request for the reimbursement of the advance on costs as well as the claim for interest. Below is an extract of the reasons for the sole arbitrator’s separate award.

Reasons for the separate award

The parties have agreed in their arbitration clause that any dispute shall be finally settled by arbitration in accordance with the FAI Rules. Pursuant to Article 3.2 FAI Rules, the Rules include Appendices I to III, which form an integral part of the Rules. Article 2.2 of Appendix II imposes an obligation on each party to pay half of the advance on costs fixed by the Institute. Article 2.6 of Appendix II provides that the arbitral tribunal may, at the request of a party, issue a separate award for reimbursement of the payment made on another party’s behalf.

Since the parties have adopted the FAI Rules by reference in the arbitration clause, they have undertaken to comply with the obligation to pay half of the advance on costs. The prevailing doctrine affirms the contractual nature of such provision. The matter in dispute is thus a matter of substance on which the arbitral tribunal may render a decision regarding the reimbursement of the advance on costs paid on behalf of another party, by way of a separate award.

Respondents have not paid their share of the advance on costs as determined by the Institute. Instead, Claimant has made the payment of EUR 11,000 on Respondents’ behalf. Respondents’ failure to pay constitutes a breach of a contractual condition. It lies with Respondents to prove that an exception to reimbursement should apply.

Respondents have not objected, by itself, to the obligation to pay half of the advance on costs, i.e. the principal amount of EUR 11,000. However, Respondents have argued that the issue of advance on costs should be determined only in the final award, which decides the merits of Claimant’s case.

The sole arbitrator considers that the reimbursement of the advance on costs paid by Claimant is a separate matter from the sole arbitrator’s ultimate decision in the final award on the allocation of costs. The FAI Rules provide an explicit legal basis for the sole arbitrator to decide Claimant’s claim for reimbursement by a separate award. The sole arbitrator also finds that Claimant has a legitimate interest that Respondents reimburse Claimant given that Respondents informed the Institute on [date] that they were unable to pay their share of the advance on costs.

In their comments to Claimant’s request for a separate award, Respondents have not repeated the inability to pay as grounds for relieving Respondents from the obligation to pay half of the advance on costs. Moreover, Respondents have continued to involve themselves in this arbitration and raised counterclaims/set-off claims without, however, adhering to the obligation to pay half of the advance on costs as determined by the Institute. The sole arbitrator finds that Respondents have not presented any reasonable cause for their failure to pay. Claimant’s request for a separate award shall therefore be granted insofar as the principal amount of EUR 11,000 is concerned.

Claimant has also claimed interest on the amount payable by Respondents accruing from [date], which is the day Claimant paid Respondents’ share of the advance on costs on their behalf. Respondents have objected to Claimant’s claim for interest by arguing that Article 2.11 of Appendix II FAI Rules excludes interest on advances on costs. Claimant, for its part, has disputed Respondents’ interpretation of said provision. Claimant contends that it regulates the payment of interest on any amounts paid to the Institute, but does not prevent ordering Respondents to pay interest on any amount payable to Claimant.

The sole arbitrator finds that Article 2.11 of Appendix II FAI Rules only addresses the situation where a party has in fact paid its share of the advance on costs to the Institute, in which case the amount paid does not accrue interest for the parties. Therefore, the sole arbitrator agrees with Claimant in that Article 2.11 of Appendix II does not prohibit ordering Respondents to pay interest on their share of the advance on costs to Claimant.

Further, the sole arbitrator finds that the issue of interest is governed by the laws of Finland. Under Finnish law, parties to arbitration are generally entitled to receive interest on defaulted payments.

Following the Institute’s letter of [date], Claimant paid Respondents’ share of the advance on costs. Respondents were aware of their payment obligation when Claimant made the payment on their behalf, but stated that they were unable to pay and ultimately chose not to reimburse Claimant. Claimant had to pay Respondents’ share of the advance on costs to ensure the continuation of the arbitration proceedings.

The sole arbitrator finds that Claimant’s claim for interest on the amount in dispute constitutes an actual damage resulting from Respondents’ breach of their contractual obligation set forth in Article 2.2 of Appendix II FAI Rules. On that basis, Claimant’s claim for interest is justified and interest shall be awarded from the date of Claimant’s payment on behalf of Respondents at the rate provided in Section 4.1 of the Finnish Interest Act.

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Setting Aside Arbitral Awards before Japanese Court: Consolidating Japan’s Position as an Arbitration-Friendly Jurisdiction?

Sun, 2018-01-21 18:57

Koki Yanagisawa and Takiko Kadono

Under the Japanese Arbitration Act, which was established based on the UNCITRAL Model Law on International Commercial Arbitration in 2003, parties may file a petition with a court requesting the court to set aside an arbitral award under certain circumstances. In such petition, parties frequently assert, among others, that “the terms of the arbitral award violated the public policy of Japan” under Article 44-1-8 of the Arbitration Act or that “the composition of the arbitral tribunal or arbitration proceeding violated Japanese laws and regulations” under Article 44-1-6 of the Arbitration Act, as grounds for setting aside the arbitral award.

Recently, the Tokyo High Court referred to the construction of Article 44-1-8 and Article 44-1-6 in a case where Company X (an appellant) filed a petition with a court in Japan, requesting the court to set aside an arbitral award that was rendered in accordance with the rules of the Japan Commercial Arbitration Association (JCAA) (Company X v Company Y, the Tokyo High Court, 2016 (RA) 497, August 19, 2016). In this case, the arbitral tribunal rendered an arbitral award ordering X to pay Company Y (an appellee) a certain amount of money for, among others, compensation for damage arising from X’s breach of its obligations under a distributor agreement between X and Y. X filed the aforementioned petition, asserting that (1) the arbitral tribunal’s construction of the distributor agreement violated the EU competition law and therefore violated the public policy of Japan and (2) the arbitral tribunal’s construction of the burden of proof was not justified under Japanese law, the governing law of the distributor agreement, and therefore the arbitration proceeding violated Japanese law. However, the Tokyo District Court rendered a decision dismissing X’s petition and, in response to the appeal against such decision filed by X, the Tokyo High Court rendered a decision affirming the decision of the Tokyo District Court.

Parties who received an unfavorable arbitral award tend to make an attempt to set aside such award based on the theory of “a breach of public policy” before the Japanese courts. It is also common for such parties to argue that the “arbitration proceeding was in breach of Japanese laws and regulations.” Over the past 15 years since the Arbitration Act came into force, Japanese courts have had opportunities to deal with the issue regarding to what extent the aforementioned grounds should be accepted in determining whether to set aside arbitral awards. Japanese arbitration practitioners have been closely monitoring the court’s construction on this issue since it would indicate to what extent arbitral awards could be set aside by Japanese courts, which would seriously affect the issue as to whether or not Japan is considered as an “arbitration-friendly” jurisdiction in the world.

We envisage that the Tokyo High Court decision reasonably affirmed the district court decision based on a view that not all breaches of a governing law or mandatory laws by an arbitral tribunal constitute “public policy” grounds for the court to set aside an arbitral award under the Arbitration Act. More specifically, the Tokyo High Court took a position that the EU competition law should not constitute the public policy of Japan and the arbitral tribunal’s mere misconstruction of a distributor agreement in violation of mandatory laws would not necessarily constitute a breach of the public policy of Japan under Article 44-1-8 of the Arbitration Act.

Furthermore, we believe it is important for the court to reasonably limit the scope of “issues concerning arbitration proceeding” in order to avoid the situation where parties can readily make an attempt to expand the scope of such issues to make it easier to set aside arbitral awards based on the ground that the arbitration proceeding violated Japanese laws and regulations under Article 44-1-6 of the Arbitration Act. In the present case, while it was discussed by the parties whether or not the construction of the burden of proof is an issue of arbitration proceeding, the Tokyo High Court reasonably concluded that it is a matter of substantive law and therefore the arbitral tribunal’s misconstruction of the burden of proof does not mean that the arbitration proceeding violated Japanese laws.

In Japan, the number of petitions to set aside arbitral awards filed with the court is relatively small and even a single court decision on this issue would significantly affect the construction of the Arbitration Act and arbitration practice in Japan. From that perspective, the Tokyo High Court decision in the present case has made a meaningful contribution in solidifying a reasonable construction of the definition of “public policy” as well as the scope of the “issues concerning arbitration proceeding” in relation to the grounds for setting aside arbitral awards under the Arbitration Act and thereby establishing sophisticated arbitration practice in Japan. We firmly believe that a series of such decisions rendered by Japanese courts will further consolidate Japan’s position as an arbitration-friendly jurisdiction and is expected to attract global business entities to select Japan as the situs of arbitration in arbitration agreements in their international business transactions.

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What is the Future of Intra-EU BITs?

Sun, 2018-01-21 02:08

Lucian Ilie

After the enlargement of the European Union in 2004, many eastern bloc countries acceded to the European Union. BITs entered into between the eastern bloc and the western bloc were transformed into the so-called “Intra-EU BITs”.

The problems of Intra-EU BITs arose when the European Commission started its campaign against Intra-EU BITs, alleging their incompatibility with EU law. Many EU Member States have taken different actions: Czech Republic, Ireland, Italy, and Romania have terminated their Intra-EU BITs unilaterally, while Poland and Denmark have expressed an intention to do the same; other Member States such as Germany, Finland, the Netherlands, Austria and France proposed a system for multilateral termination of Intra-EU BITs.

European Commission’s War against Intra-EU BITs

The European Commission began to take a soft formal stand against Intra-EU BITs as early as 2006 through a note addressed to the Economic and Financial Committee of the Council (“EFC”). In 2009, the EFC stated in its letter to the President of the Council of the European Union that the majority of Member States wished to maintain their Intra-EU BITs since they did not share the European Commission’s view on the incompatibility between these BITs and EU law.

In addition, the European Commission has petitioned investment tribunals, through amicus curiae, for challenging their jurisdiction and the application of Intra-EU BITs. The European Commission has also made submissions before ICSID annulment committees and national courts in enforcement proceedings.

For instance, in Micula v. Romania the ICSID award was only partially enforced because the European Commission issued in 2014 a suspension injunction calling Romania to suspend the remaining payment due under the award. In its decision of March 2015, the European Commission found that the payment of damages under the award was incompatible with EU State aid provisions, and prohibited Romania from making any further payment.

In June 2015, the European Commission took a further step by initiating infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden in order to formally request them to denounce their Intra-EU BITs. These proceedings had little success since Romania was the only country to have formally terminated, though on a unilateral basis, all of its Intra-EU BITs in March 2017.

Intra-EU BITs and EU Law: Are They Really Incompatible?

The core concern of the European Commission is the alleged incompatibility between Intra-EU BITs and EU law. The European Commission has raised many arguments in support of this position but in all occasions arbitral tribunals refused to uphold these arguments.

The first argument is the principle of lex posterior under Article 59 of the Vienna Convention on the Law of Treaties. This principle is often invoked along with Article 351 of the Treaty on the Functioning of the European Union (“TFEU”), which requires the Member States to take actions against incompatibilities between EU law and an earlier treaty. This argument was raised as a defence to bar the tribunals’ jurisdiction. For instance, the arbitral tribunal in Achmea v. Slovakia did not uphold this argument because (i) Intra-EU BITs provided wider investment protections than EU law, (ii) there was no incompatible provision for protecting an investment under Intra-EU BITs and EU law, and (iii) there was no intention on the part of the Member States to derogate from the application of Intra-EU BITs.

The second argument is the principle of supremacy of EU law, which enables EU law to prevail over treaties concluded between EU Member States. For example, the arbitral tribunal in Achmea v. Slovakia pointed out that it had to apply international law since it derived its power from the Intra-EU BIT, and not EU law. It concluded that international law had to be applied as a matter of law, while EU law may be applied as facts, in assessing whether there was a breach of the afforded substantive protection.

The third argument is the availability of equivalent investment protection under EU law. In the view of the arbitral tribunal in Achmea v. Slovakia, investment protections under Intra-EU BITs were neither covered nor applied in the same scope as under EU law. Particularly, EU law did not grant access to investment arbitration or an equivalent provision that would allow a EU investor to bring a claim against a EU Member State.

The fourth argument is the principle of non-discrimination under Article 18 of TFEU, which prohibits any discrimination on grounds of nationality. The arbitral tribunal in Binder v. Czech Republic refused to accept this argument because in the absence of Intra-EU BITs, investors could bring their claims before national courts. In this regard, arbitration was just a form of adjudication that replaced the access to national courts.

The fifth argument is the violation of State aid rules under EU law. Micula v. Romania is a very controversial ICSID case regarding State aid, in which the European Commission persistently contested the tribunal’s jurisdiction and the enforcement of the award. The arbitral tribunal in this case refused to allow the prevailing application of EU law over the BIT, since the investment was made prior to Romania’s accession to the EU, thus being subject only to the Intra-EU BIT. Furthermore, the arbitral tribunal denied that the issue of enforcement was a matter to be resolved before it.

The last argument is the exclusive jurisdiction of the CJEU on interpreting EU law and that an arbitral tribunal is not competent to seek preliminary ruling from the CJEU. Arbitral tribunals denied this argument on the ground that the CJEU had no jurisdiction over investor-State disputes, and there was no prohibition of investor-State arbitration under EU law. The arbitral tribunal in Achmea v. Slovakia added that EU domestic courts were not always required to seek preliminary ruling from the CJEU for every interpretation of EU law.

Problems of Terminating Intra-EU BITs

Termination of Intra-EU BITs may address the European Commission’s main concern for their alleged incompatibility with EU law. However, without an alternative regime to replace these Intra-EU BITs, such termination can bring other problems.

Firstly, the lack of Intra-EU BITs means that EU investors can no longer benefit from the advantages of international investment arbitration for disputes arising out of their investment in a EU Member State. The sole available option would be to have recourse to national courts. However, the lack of procedural protection via arbitration may affect EU investors’ confidence in their investment in EU countries, and may encourage forum shopping for restructuring the investment in a non-EU country that has a favourable BIT with a EU Member State.

Secondly, many Intra-EU BITs stipulate a sunset clause under which a protected investor continues to enjoy substantive and procedural protections under the BIT upon its termination for a specified period of time. In Gavazzi v. Romania, the investor was able to initiate in 2012 arbitration under the terminated Italy-Romania BIT, as the sunset period was not yet expired. Therefore, termination of Intra-EU BITs would not solve the European Commission’s concern in the short-term.

Lastly, EU law has no equivalent substantive protections to Intra-EU BITs since the latter generally provide a broader scope of protections, as pointed out by the CJEU Advocate General Wathelet in the Achmea v. Slovakia preliminary ruling.

Potential Solutions

On a short-term basis, two solutions may be envisaged to tackle the issue of incompatibility between Intra-EU BITs and EU law.

One solution is to consider the proposal made in the non-paper of April 2016 by Austria, France, Finland, Germany and the Netherlands, which requested a multilateral agreement among the EU Member States, in order to replace and supersede pre-existing Intra-EU BITs. On the substantive aspects, the new multilateral agreement would (i) terminate all Intra-EU BITs and their sunset clause, and (ii) provide for common and wide substantive protections to all EU investors. On the procedural aspects, the multilateral agreement would create a single procedure for resolving Intra-EU BIT claims by either (i) conferring jurisdiction to the CJEU over Intra-EU investment disputes, (ii) establishing a Permanent Investment Court, or (iii) providing investor-State arbitration under the auspices of the Permanent Court of Arbitration.

Another solution is to obtain guidance from the CJEU in 2018, on the relationship and the compatibility between Intra-EU BITs and EU law. Since two-investment arbitration cases are pending before the CJEU (Achmea v. Slovakia and Micula v. Romania), these decisions could have a breakthrough implication on Intra-EU BITs.

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