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Closing the umbrella: a dark future for umbrella clauses?

Thu, 2017-10-12 20:00

Raul Pereira de Souza Fleury

In December 2015, I published an article examining whether there was a trend towards the elimination of umbrella clauses from investment agreements, be they bilateral, multilateral, or model investment treaties. By that time, model bilateral investment treaties (BITs) from the United States, France, Canada, Colombia, and the Southern African Development Community (SADC) and many prominent multilateral investment agreements, including the NAFTA and the ASEAN-Australia-New Zealand FTA, did not contain umbrella clauses. The position against umbrella clauses was clear.

Furthermore, the much anticipated Trans-Pacific Partnership (TPP) and EU-Canada Comprehensive Economic and Trade Agreement (CETA) showed signs that they would not contain umbrella clauses, as well as other important jurisdictions in updating their model BITs, such as India and Norway.


The landscape today

According to the United Nations Conference on Trade and Development (UNCTAD), 52 new investment agreements have been signed since December 2015. In addition, the model BITs from Norway and India were approved. Thus, we have 54 new instruments relating to investment protection. Of these 54 instruments, only two (3.7%) contain an umbrella clause, namely, the Austria-Kyrgyzstan BIT and the Japan-Iran BIT.

While it is not known whether there are more investment agreements that have not yet become public, the trend seems clear and it can be explained by the comments made in 2007 to the draft Norwegian model BIT: “[t]he point of departure for the work on a new model agreement has been that the Arbitration Tribunal shall only be able to consider alleged breaches of the standards in the interstate investment agreement.” This comment reflects the main concern with umbrella clauses:  the difficulty to determine whether or not they can work as a “bridge” to bring claims arising from contractual relations into the sphere of investment treaty protection.  This concern is shown in the variety of forms and scenarios in which the application of umbrella clauses is an issue:

  • The difference between contract claims and treaty claims;
  • The requirement of exercising sovereign authority (puissance publique) which has the effect of breaching a contract;
  • Whether the umbrella clause supersedes a forum selection clause contained in a public contract;
  • Whether shareholders and parent companies that did not sign the public contract can benefit from the umbrella clause;
  • Whether sub-state entities that signed the public contract are covered by an umbrella clause.


The issue of inconsistency

Each of these issues has been addressed by arbitral tribunals, which have provided different answers. Take for example the landmark SGS cases against Pakistan (ARB/01/13), the Philippines (ARB/02/6), and Paraguay (ARB/07/29). Each of these cases dealt with almost identically worded umbrella clauses; however each tribunal interpreted the umbrella clause in a different way. In SGS v. Pakistan, the tribunal held that “in the face of a valid forum selection clause,” there was no need to elevate claims grounded in a contract to treaty claims. Just a year later, the tribunal in SGS v. Philippines held that an umbrella clause “provide[s] assurances to foreign investors with regard to the performance of obligations assumed by the host State under its own law with regard to specific investments”; however, it decided to stay the arbitral proceedings in order to wait for the Philippine courts to decide the amount of money the government owed SGS. Finally, the tribunal in SGS v. Paraguay adopted a different and broader interpretation, holding that the ordinary meaning of the word commitment in the umbrella clause clearly encompassed contractual obligations, and that the clause “provide[d] no basis for excluding contracts from the scope of ‘commitments’ covered in the [umbrella clause].”

What is even more worrisome is that the set of facts in each of the SGS cases was basically the same: the breach of a service contract for pre-shipment inspection. And over the years different tribunals have followed not one of the interpretations given by the SGS cases, but all three of them, as some examples summarized in the following chart:

SGS v. Pakistan Interpretation SGS v. Philippines Interpretation SGS v. Paraguay Interpretation – Toto Construzioni v. Lebanon

– Salini v. Jordan

– El Paso v. Argentina

– Siemens v. Argentina

– Joy Mining v. Egypt – BIVAC v. Paraguay

– Bosh v. Ukraine – Eureko v. Poland

– Noble Ventures v. Romania

– Burlington v. Ecuador

– Duke Energy v. Ecuador

The other issues cited above also had different interpretations, adding more fuel to the debate of whether an umbrella clause encompasses contractual claims and, if so, under what circumstances. Unfortunately, a consensus has not been reached, and this is showing in treaty practice. While tribunals do struggle in finding the correct interpretation of other treaty standards like fair and equitable treatment, full protection and security, and expropriation, these standards establish clear obligations for states.  In contrast, the main purpose of an umbrella clause is more ambiguous:  to bring under the “umbrella” of the treaty obligations of the state that arose out of a different instrument, i.e., a contract.

The generic language of umbrella clauses has contributed to intense debates since the first SGS case and continues to do so. Yet, treaty practice shows a trend towards the elimination of the umbrella clause from investment agreements. Notwithstanding this perceived new trend, umbrella clauses are still present in new treaties. In this sense, it is worth mentioning the wording of the one contained in the Austria-Kyrgyzstan BIT, which clarifies that “the breach of a contract between the investor and the host State will amount to a violation of this treaty.” That wording would provide more certainty in adjudicating future cases under this particular BIT; however, it might be too late for others.

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Ecuador’s Ordeal: Is International Jurisdiction a Journey with No Return? (Part I)

Wed, 2017-10-11 20:05

Enrique Jaramillo

“BITs and arbitration centers, such as ICSID, are an expression of an unjust moral order”, said Ecuador’s former President, Rafael Correa, back in 2014. Such animadversion led the country to denounce all its bilateral investment treaties (BITs) earlier this year. The Latin American nation’s feud with BITs and the International Centre for Settlement of Investment Disputes (ICSID), however, can be traced back far before that.

It is the purpose of this two-part post to assess the situation of investors in Ecuador vis-á-vis the country’s efforts to elude the substantive and procedural protections afforded by investor-state dispute settlement (ISDS).

This first part begins with a review of the law governing entering and denouncing the ICSID Convention (the “Convention”), as well as of an important debate on the effects of withdrawing from it. Then, it goes on to revise Ecuador’s concrete steps to distance itself from ISDS; from the first BITs terminated back in 2008 to the last note verbale denouncing Ecuador’s final BIT in 2017.

The second part, to be posted in a subsequent publication, will refer to investors’ alternatives after the termination of the BITs, what might be Ecuador’s last standing BIT, and the urgent need to provide investment protections in the face of the current situation of the country’s petroleum sector.


ICSID Convention: You Can Check Out Anytime You Like, But Can You Ever Leave?

This section refers to the legal steps that a nation has to take in order to, first, subject itself to international tribunals and, second, to withdraw from such jurisdiction.

It is no secret that consent is the sine qua non requirement of arbitration. Namely, both parties must consent to submit their disputes to an arbitration tribunal. A state can provide such consent in several ways: by treaty, by law, or by contract. Investors, on the other hand, can also give their consent in a number of fashions, e.g., by initiating arbitration. This is what Jan Paulsson calls “arbitration without privity”, and it consists of investors bringing claims against states that have previously consented to arbitration by means of, for example, a BIT.

As to ICSID arbitration, there are additional requirements that must be met before a dispute can be decided by a tribunal. Only one relevant to this discussion: the dispute must involve a member of the Convention.

Whereas the requirements to submit to ICSID jurisdiction are clear, the law on how to withdraw from it is far from settled. Under Article 71 of the Convention, any contracting state can denounce the Convention by submitting a written notice. This denunciation takes effect 6 months from the receipt of the notice. Article 72 states, however, that the notice of denunciation does not affect the rights and obligations of contracting states arising from consent to ICSID jurisdiction given before such notice.

The meaning of Article 72 has divided scholars in two groups: the “bilateralists”, and the “unilateralists”. The former believe that ICSID jurisdiction requires consent by both parties, whereas the latter argue that Article 72 refers only to consent given by contracting states.

This debate matters because states consent to such jurisdiction, predominantly, through BITs. Therefore, from a unilateralist point of view, if such BIT predates a state’s denunciation, that state is subject to ICSID jurisdiction for as long as that BIT is in force. This effect is exacerbated by the fact that BITs usually contain survival clauses-applicable in cases of unilateral termination-that lengthen the life of a treaty’s provisions for several years in order to protect existing investments. Consequently, under this interpretation, a state can be subject to the Convention for many years after its denunciation. From a bilateral point of view, on the other hand, a denouncing state is subject to ICSID jurisdiction only if investors consent to it by starting arbitration before the state’s denunciation.

The bilateralist view predominates among academics. This, however, is far from meaning that ICSID tribunals favor the scholars’ view. On the contrary, the only tribunal that has directly ruled on the matter, in Venoklim Holding B.V. v. Bolivarian Republic of Venezuela, stated that Article 72 of the Convention refers only to consent given by the state, not by investors.

Nonetheless, it is worth to mention that the Venoklim claim was brought within six months from Venezuela’s notice of denunciation, i.e., before the denunciation became effective under Article 71 of the Convention. This is relevant because some bilateralist scholars-as well as some ICSID cases, e.g., Blue Bank International & Trust (Barbados) Ltd. v. Bolivarian Republic of Venezuela-support the position that a denouncing state, which previously consented to arbitration, is still subject to ICSID jurisdiction as long as the claimant initiates the proceeding within such six months. Although no tribunal has decided on the validity of claims brought after this period, there are a number of pending cases that will help to settle the debate. This author is aware of at least one case decided earlier this year, i.e. Valores Mundiales, S.L. and Consorcio Andino S.L. v. Bolivarian Republic of Venezuela, where the tribunal might have ruled on the issue. Much to my disappointment, however, the award is not publicly available yet.


Has Ecuador Been Tilting at Windmills?

Ecuador’s effort to withdraw from ISDS is comprised of four different steps. All such steps, however, have been either ineffective, at worst, or uncertain, at best.

The first two steps took place in 2008. In January of that year, Ecuador denounced over a third of its BITs. This round of denunciation, however, was less than meaningful because, on one hand, such BITs had no real impact on the economy and, on the other hand, the nation was still a contracting state of the ICSID Convention. Thus, investors from countries whose BITs Ecuador had not yet denounced, were still able to have their claims decided by ICSID tribunals.

The second step took place in October 2008, when a new Constitution came into force. A provision of this new Magna Carta prohibits the Government from submitting disputes to the jurisdiction of international arbitration tribunals, unless such disputes are submitted to Latin American tribunals, whose jurisdiction stems from instruments among Latin American parties. However, because under the Vienna Convention on the Law of Treaties (“VCLT”) a state cannot use local law to justify breaching an international treaty, the 2008 Constitution had no effect. From an international perspective, it affected neither existing nor future proceedings against Ecuador. At national level, conversely, such provision afforded the arguments to denounce a second set of BITs a few years later.

The third step took place in 2009. Back then, Ecuador already faced claims for almost 13 billion dollars, and it decided to denounce the ICSID Convention altogether. Although this was the first meaningful step toward escaping from the grip of international tribunals, it was also insufficient. Granted, being a member state is an essential requirement to ICSID jurisdiction, but international arbitration is not only possible under ICSID. Most BITs also provide for arbitration in other centers and under different rules, such as UNCITRAL, or the Additional Facility (AF) rules. This alternative has, actually, enabled several post-denunciation claims against the other ICSID-denouncing countries, i.e., Venezuela and Bolivia.

The last, most decisive step against ISDS took place earlier this year. On 16 May, then-President Correa issued a number of Executive Decrees ordering the termination of all of Ecuador’s BITs. A few days later, the notes verbales formally denouncing such treaties were submitted to the corresponding embassies. However, the BITs contain several provisions extending their life after their termination, i.e., survival clauses, termination windows, and notice periods similar to that established in Article 71 of the ICSID Convention.

For illustrative purposes, the following chart provides the reader information on Ecuador’s most relevant BITs, and the effect of the abovementioned provisions, extending the validity of the treaties into the future.

Notice Period Survival Clause Termination Window Note Verbale notified on BIT valid until USA 1 year 10 years N/A 18 May 2017 18 May 2028 Canada 1 year 15 years N/A 19 May 2017 19 May 2033 The Netherlands N/A 15 years Notification must be submitted before 1 January 2021. 5 June 2017 1 July 2036 France 1 year 15 years N/A 22 May 2017 22 May 2033 U.K. 1 year 15 years N/A 18 May 2017 18 May 2033 China 1 year 10 years N/A 19 May 2017 19 May 2028


To the extent these BITs provide for arbitration under rules other than ICSID, Ecuador is bound to it until the expiration of the relevant treaty. As far as ICSID is concerned, on the other hand, the nation’s position is less clear. From a bilateralist perspective, Ecuador is not bound to ICSID jurisdiction as to any claim submitted after its withdrawal from the Convention in 2009. Under a unilateralist perspective, on the contrary, the country is subject to it until the last treaty expires in the year 2036.

Please continue to Part II of this post.

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Keep Calm and Arbitrate? The Impact of Political Events on International Arbitration

Tue, 2017-10-10 18:34

Joe Liu


Recent political developments have resulted in considerable geopolitical uncertainty and presented challenges to the international order. With the UK’s vote to exit the European Union, the election of Donald Trump as US president, the Western sanctions against Russia, and the rising North Korea nuclear tensions, 2017 ushers in a turbulent time where commercial parties’ usual approach to dispute resolution is under challenge. This article examines the likely impact of recent political changes on international arbitration.

Brexit is imminent. With the approval of the UK Parliament, Theresa May has triggered the Article 50 exit clause of the Treaty of Lisbon that gives the UK and the EU until the end of March 2019 to reach a withdrawal agreement. While exit negotiations are ongoing, there are doubts over London’s future as an international arbitration centre. The concerns arise primarily from the socio-economic consequences of Brexit, which might include the possible departure of financial institutions, increased immigration barriers for foreign talent, and the city’s potential loss of its preeminence as a global financial centre. Despite these concerns, London’s arbitration framework will not be affected by Brexit. The UK remains a party to the New York Convention and the ICSID Convention. The 1996 English Arbitration Act will remain in force and the body of English case law that enunciates the English courts’ strong support for arbitration will continue to apply. Some commentators have even argued that London could benefit from Brexit, because the city might be perceived as a more neutral seat and the English courts would no longer be restrained by the European Court of Justice’s ruling in West Tankers from issuing anti-suit injunctions to prevent parties from commencing court proceedings within the EU in breach of arbitration agreements.

The rise in nationalism not only pushed the UK out of the EU but also pushed Donald Trump into the White House. The Trump administration has revived the protectionist rhetoric that has caused the US’s withdrawal from the TTP, a suspension of the TTIP negotiations, and a renegotiation of NAFTA which Trump described as “the worst trade deal ever”. While these actions may call into question the US’s legal framework for trade and investment, they have a limited impact on the arbitration system in the country. The US Supreme Court’s stance on arbitration is also unlikely to be affected by Trump’s appointment of Justice Neil Gorsuch to replace the late Antonin Scalia. In fact, the Court’s 5-4 conservative majority has been the backbone for most of its pro-arbitration rulings in the past years. However, in June, the Court temporarily lifted part of the suspensions that lower courts had put on Trump’s travel ban targeting visa applicants from six Muslim-majority countries. The Court granted an exception for people from the affected countries with “a credible claim of a bona fide relationship with a person or entity in the United States” to enter the country, without clearly defining “bona fide relationship”. Until the Court reviews the matter in October, arbitrators, counsel, witnesses and experts from the affected countries may face difficulty or protracted procedures of obtaining visas to attend arbitration hearings in the US.

Trump’s Muslim travel ban is not the only measure that risks straining the US’s relationships with foreign powers. The sanctions imposed on Russia over its military actions in Crimea in 2014 and its alleged interference in the 2016 US presidential election pushed US-Russia relations towards a new post-Cold War low. The sanctions over Crimea were subsequently followed and repeatedly extended by the EU and a number of other Western states. One consequence of the sanctions is that Russian businesses are now revisiting their options to arbitrate disputes and some are looking to arbitrate in Asian jurisdictions with no sanctions against Russia. A survey published by the Russian Arbitration Association in 2016 indicates that, while the traditional European arbitral seats remain the most preferred venues for Russia-related disputes, Russian users increasingly view Asian arbitration centres, such as Hong Kong and Singapore, as viable alternatives.

The latest set of sanctions passed by the US Congress target not only Russia but also North Korea. Amid Pyongyang’s continued missile tests and the US and South Korea’s latest joint military exercises, tensions on the Korean Peninsula have been escalating at an unprecedented pace. While the present situation has no direct impact on the legal and arbitration system of the affected jurisdictions, the ongoing threat of insecurity and instability posed by these developments may undermine the incentives of international parties and arbitrators to travel to the region for arbitration.

Political events generally have little impact on how international arbitration operates. Parties remain entitled to appoint arbitrators of their choice who will decide on disputes in a neutral venue and whose awards are enforceable worldwide. However, political instability may sometimes create a perception of legal uncertainty, which may impair businesses’ confidence in arbitrating in the affected jurisdiction. Such perception can be alleviated by a clear demonstration of the rule of law and judicial independence. Hong Kong is a good example.

The rule of law is well entrenched in the Hong Kong society and the independence of the Hong Kong courts is constitutionally guaranteed by the Basic Law. Despite recent political events in the territory, Hong Kong’s arbitration regime remains strong and stable and the courts continue to exercise judicial powers independently, free from interference. The Hong Kong courts have no hesitation in ruling against state-owned enterprises incorporated in or outside Hong Kong. In a recent case, the city’s specialist arbitration judge decided to enforce a US$5 million award against China Coal, rejecting the Chinese state-owned enterprise’s plea of crown immunity.

Judges in Hong Kong have also spoken out. Following the “Occupy Central” protest and the Chinese government’s release of a white paper on the “one country, two systems” policy in 2014, Lord Neuberger, former president of the UK Supreme Court and a judge of Hong Kong’s Court of Final Appeal, said that he detected “no undermining of judicial independence” in Hong Kong.

Some commentators have voiced concerns over possible changes to the “one country, two systems” principle after 2047, which may impact parties’ choice of Hong Kong as an arbitral seat for long-term contracts. In fact, top leaders of the Chinese government have repeatedly confirmed that the “one country, two systems” principle is “firm” and “unswerving” and it “would not sway or change”. During a 2016 visit to Hong Kong, Zhang Dejiang, chair of the Standing Committee of the Chinese National People’s Congress made the following comment:

“The remarks that the mainland government intends to ‘mainlandise’ Hong Kong and even turn ‘one country, two systems’ into ‘one country, one system’ are completely groundless. The majority of Hong Kong compatriots hope that ‘one country, two systems’ can continue as it is, and this is in the best interest of the nation. The central government will continue to steadfastly implement the system, and the Hong Kong community can rest assured of that.”

Commercial parties will continue to trade, invest and do business regardless of any political developments. International arbitration is a dispute resolution mechanism that is not subject to political interferences and remains the preferred mechanism to resolve cross-border commercial disputes. For these reasons, even though we are living at a highly politicized time, the impact of political events on international arbitration should not be overstated. Parties to international commercial disputes should keep calm and arbitrate.

The opinions expressed are those of the author and do not necessarily reflect the views of the HKIAC.

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Review of new Rules of the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry

Tue, 2017-10-10 00:34

Daria Zhdan-Pushkina

In January 2017, the new Rules of the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry were adopted (“MAC Rules”). The Rules implement new regulations which comply with the latest tendencies in arbitration.

MAC was established in 1930 in Soviet Russia and since then it administered about 4,500 disputes. In 2016 – 2017, the participants to the disputes came not only from Russia, but also from various other countries, including Poland, Malta, the United Arab Emirates, Turkmenistan, the Seychelles, the Marshall Islands. The majority of the claims arise from marine insurance. Nevertheless, claims in the fields of transportation, chartering, repair of ships, towing, salvage of ships and cargo are considered regularly.

This article touches upon the most significant changes in the procedure for considering disputes under the MAC Rules.

The requirements for the statements of claim and defense and for the amount of claim

The statement of claim should now include more information, in particular, contacts details of the parties for urgent communication (phone, email addresses). The time allowed for rectifying any defects in the statement of claim was reduced from 30 to 15 days from the receipt of the invitation from the Executive Secretary of MAC to rectify the defects. If these are not eliminated, the arbitral proceedings may continue until an arbitral award or a ruling to terminate the arbitral proceeding is delivered. The rules previously stated that a claim was considered not filed or remained without motion if a party failed to rectify the defects.

The requirements for the content and structure of the statement of defense were also amended. In addition, the Rules now provide a new detailed procedure for submitting counterclaims and set-offs. In particular they establish time limits for submission of the counterclaim and set-off, and the consequences of an unjustified delay in submitting them.

The MAC Rules now provide a procedure for determining the amount of claim. This innovation simplifies the calculation of fees, set at 3% of the claimed amount.

Multiple claims and parties and engagement of third parties

The MAC Rules set out the procedure for multiple parties and multiple claims. It is now possible to consolidate proceedings if they are covered by the same arbitration agreement or by several compatible arbitration agreements referring the claims to MAC, and are connected from the view point of substantive law, that is by their merits. This can be done, as a rule, if all parties agree to such consolidation. In certain cases, the decision on consolidation may be made by the MAC Presidium.

The Rules now establish more comprehensive regulation on the involvement of third parties in arbitral proceedings. A third party making no claims against the parties to the arbitral proceedings may be involved or joined in the arbitral proceedings provided that there is an arbitration agreement covering parties to the proceedings and the third party, or all parties to the proceedings and the third party agree to such effect.

Composition of the arbitral tribunal

According to the MAC historical tradition, the arbitral tribunal shall, as a rule, consist of two arbitrators. One innovation is that if the amount of claim does not exceed USD 15,000, such a claim is normally considered by a single arbitrator.

One new body within the MAC structure is the Appointing Committee, which has a significant role in forming and altering the composition of the arbitral tribunal. In particular, the Appointing Committee appoints the arbitrator where a party failed to select one. Also, the Appointing Committee may decide on challenges of arbitrators. If the challenge was filed after the set deadline, the Committee may still grant it provided that there is a reasonable explanation for the late filing and having regard to the nature of reasons for challenge. Also, the Appointing Committee has the right, on its own initiative, to decide on the termination of the arbitrator’s powers, for example, if the arbitrator is in fact unable to participate in the consideration of a dispute and in other cases.

It should be noted that, as previously regulated, the parties are free to choose an arbitrator also outside the list of recommended MAC arbitrators.

Language of the arbitral proceedings and representation of the parties

In the MAC Rules, provisions on the language of arbitration are now collected into a separate article. The parties may agree on a language or languages of the arbitral proceedings. Arbitral proceedings in a case shall be conducted in the Russian language, unless the parties agree otherwise. Written documents shall be submitted in the original language. MAC may request the parties to provide the translation of the documents.

Provisions on representation of the parties are now more detailed. A party should ensure compliance by its representative with the Rules. Authorizing a representative to act on its behalf, the party thereby confirms the agreement of its representative to comply with the Rules and other MAC regulations. The responsibility of representatives for improper conduct and non-compliance with the MAC Regulations is now stipulated.

Preparation of the case, supplementing claims and other submissions, hearings

The new MAC Rules have more details on the measures which may be taken by arbitrators to prepare for a case. These may include setting a schedule of proceedings, establishing a range of issues to be considered, and holding organizational meetings, including video-conferencing.

The new MAC Rules govern the procedure for supplementing claims and other submissions, aimed at accelerating the arbitration proceedings. Thus, the arbitral tribunal has now the right to set a deadline for submission of written statements and evidence by the parties, and not to allow amendments or supplements to the claims or explanations thereof having regard to any delay they may cause.

It is now possible to hear the parties, witnesses and experts via video-conferencing.

Proceedings in the case on the basis of written materials and expedited arbitration

The arbitral tribunal now has the right to conduct proceedings based on written materials, without the agreement of the parties, if neither of the parties requests an oral hearing.

In response to current trends in the development of the arbitral procedure, the MAC Rules also establish an expedited arbitration procedure. According to this procedure, unless otherwise provided, claims of up to USD 15,000 are considered by a single arbitrator. Such cases are heard based on written materials only and without an oral hearing, within a period not exceeding 120 days.


In accordance with the new MAC Rules, the confidentiality requirements are extended not only to MAC and its staff, and arbitrators, but also to the parties, their representatives and other persons involved in arbitration.

Other comments

As a rule, the new version of the MAC Rules applies to arbitration proceedings commenced after the Rules have entered into force.

Thus, the MAC Rules have become more detailed, and some provisions are completely new. In our opinion, according to the new Rules, the procedure for considering a dispute is now more predictable and clearer.

The recommended arbitration clause for contractual disputes reads as follows:

“Any dispute which may arise out of or in connection with the present contract shall be settled at the Maritime Arbitration Commission at the Chamber of Commerce and Industry of the Russian Federation in accordance with its rules”.

Also, the Regulations on organizational principles of activity of MAC at the CCI of Russia and the Rules for the provision of certain functions for administering ad hoc arbitration came into force this year.

In accordance with the Rules for the provision of certain functions for administering ad hoc arbitration, MAC may provide assistance to the arbitral tribunal related to the case, such as sending notifications to the parties on the date of hearing and providing premises for hearings at the request of the parties or arbitrators.

I wish to thank Dmitry Davydenko, the Executive Secretary of Maritime Arbitration Commission at the Russian CCI, for his helpful comments with regard to the review of the MAC Rules.

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English Court Denies Application to Enforce Russian Arbitral Award Set Aside by Russian Courts

Mon, 2017-10-09 02:03

Jonathan Kelly, Adam Grant and Marina Zarubin

A recent decision by the English Court shows once again the very high bar that a claimant must reach to enforce an award that had been set aside by the court at the seat of jurisdiction. The judgment handed down in Maximov v OJSC Novolipetsky Metallurgichesky Kombinat [2017] EWHC 1911 (Comm) on 27 July 2017 denied an application to enforce an award issued by the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation (“ICAC”).

The arbitration award had been set aside by a decision of the Moscow Arbitrazh Court, which was then upheld by the Federal Arbitrazh Court of Moscow District and the Supreme Arbitrazh Court of the Russian Federation.

Despite some trenchant criticism of the Russian courts’ reasoning, the judge found that the set aside decision was not so “extreme and perverse” that it could only have been reached as a result of actual bias.

The Maximov Case

The application arose from an arbitration between claimant Nikolay Maximov, a Russian businessman, and the defendant company, majority owned and controlled by Russian businessman Vladimir Lisin. The dispute centered around the calculation of the purchase price under a share purchase agreement by which the defendant agreed to acquire the claimant’s 50% plus one share stake in OJSC Maxi-Group, a Russian metallurgical business. The ICAC arbitrators rendered an award of 8.9 billion rubles in favour of the claimant.

The defendant successfully applied to the Moscow Arbitrazh Court to have the award set aside. Following the set aside decision by the Moscow Arbitrazh Court, the claimant failed to overturn the decision on appeal to the higher Russian courts. The claimant then sought to enforce the arbitral award in multiple other jurisdictions in Europe, including France, the Netherlands, and England.

In the English court, Burton J held that the applicable test was whether the Russian courts’ decisions were so extreme and incorrect that the Russian courts could not have been acting in good faith. Burton J determined that apparent bias would not be sufficient and actual bias must be shown, although if direct evidence of bias or corruption were lacking, actual bias could be inferred from the surrounding circumstances. The judge’s reasoning therefore centered around an analysis of the Russian court decisions setting aside the arbitral award.

The Moscow Arbitrazh Court based its set aside decision on three grounds:

  1. that two arbitrators failed to disclose their links to expert witnesses put forward by the claimant in the arbitration (the “Non-Disclosure Ground”);
  2. that the award was in conflict with Russian public policy (the “Public Policy Ground”); and
  3. that the dispute was a corporate dispute and was therefore not arbitrable (the “Non-Arbitrability Ground”).

Burton J severely criticised all three grounds for the set aside decision, referring to the decision on the Non-Disclosure Ground as an “unsupportable conclusion”, the decision on the Public Policy Ground as “hopeless” and the decision on the Non-Arbitrability Ground as “adventurous” but “arguable”. The judge also expressed concern that the Public Policy Ground and the Non-Arbitrability Ground were “unfairly” not raised or argued before the first instance Russian court and were only referenced in the Russian judge’s subsequent written reasons.

Burton J appeared to agree with the claimant’s case, but ultimately said that he was more persuaded by counsel for the defendant who argued that the Russian Court’s reasoning can be explained other than by bias against the claimant. In a finding that appeared to be at odds with his assessment of the defendant’s case, Burton J concluded that the decisions were not “so extreme and perverse that they [could] only be ascribed to bias against the claimant”.

The judge found it significant that the Russian first instance judgment was public, and was not regarded as an outlier, since it was regularly followed by later judges. Burton J held that the Russian courts’ criticism of the arbitrators appeared to be rooted in the general negative treatment of arbitration by Russian courts in general and did not constitute cogent evidence of bias. The judge also noted that the Moscow Arbitrazh Court rejected allegations of fraud as a basis for setting aside the award, which it might have accepted if the court was determined to find against the claimant.

English Court Treatment of Arbitral Awards Set Aside at the Seat

The English High Court’s decision in Maximov followed the English law approach that decisions setting aside arbitral awards should be treated according to the ordinary principles for recognition of foreign judgments (see, e.g., Dallah Estate and Tourism Holding Co v Ministry of Religious Affairs of Government of Pakistan [2011] 1 AC 763, 798). A party will, therefore, generally be able to rely on a foreign decision setting aside an award unless that decision is found to be contrary to basic principles of honesty, natural justice and domestic concepts of public policy.

Burton J also stressed that the English court should not simply accept that a foreign court had set aside an arbitral award where there was at least an arguable case that the award had been set aside in breach of natural justice.

This echoed the court’s reasoning in Yukos Capital SARL v OJSC Rosneft Oil Company [2014] EWHC 2188 (Comm). In that case, the English High Court considered whether an arbitral award could in principle be enforced despite the set aside decision of the Moscow Arbitrazh Court, which was upheld on appeal. The defendant in that case pleaded the principle of ex nihilo nil fit (or ‘nothing comes of nothing’), the legal theory that if an arbitral award is set aside in the seat of the arbitration, it ceases to exist in a legal sense. The High Court held that there is no principle of ex nihilo nil fit in English law precluding the enforcement of arbitral awards set aside at the seat. Instead, the court must consider whether an award can be given effect notwithstanding a set aside decision, and that it is not bound to recognise a decision contrary to the principles of honesty, natural justice, and public policy.

Сounsel for the defendant in Maximov also pleaded the principle of ex nihilo nil fit. Burton J said he did not have to decide “this interesting point” but made obiter remarks echoing Yukos Capital SARL v OJSC Rosneft Oil Company. The ex nihilo nil fit principle has yet to be considered on appeal by higher courts.


The Maximov judgment shows that a claimant must surmount a very high bar to enforce an arbitral award that has been set aside by a court at the seat of the arbitration. Absent cogent evidence that the set aside decision offends basic principles of honesty and domestic public policy, the arbitral award may be doomed at the enforcement stage before English courts.

Parties should be aware of the English courts’ reluctance to enforce arbitral awards in these cases. When drafting arbitration agreements, parties should think carefully whether or not the enforcement of any future award will be required against assets in England and, if so, consider choosing this jurisdiction as a seat. After an award has already been set aside by a court at the seat, a claimant should carefully consider what evidence is available to him to claim that the decision to set aside the award is contrary to basic principles of justice. If cogent evidence is not available, a claimant may wish to abandon attempts to enforce it in England.

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Could Some European Countries Initiate A State-To-State Investment Arbitration Against Switzerland For Abruptly De-Pegging The Swiss Franc From The Euro?

Sun, 2017-10-08 00:18

Danilo Ruggero Di Bella

In the 2000s, mortgages in Swiss Franc (CHF) were very popular among consumers in Central, Eastern and Southeastern Europe for the acquisition of both private and commercial properties, as the CHF was a stable and reliable currency and offered lower interest rates than loans in Euro or in local currencies. When on 15 January 2015 the Swiss National Bank (SNB) suddenly decided to de-peg the CHF from the Euro, the move took by surprise the world central banking system, a market where slow and predictable decisions are of the essence. As a result of the de-pegging, the CHF drastically surged and considerably appreciated against the Euro and all the region’s currencies, making the CHF mortgages far more expensive to repay for hundreds of thousands of Central, Eastern and Southeastern European borrowers with incomes in local currency (in some cases, the principal sum as well as the monthly repayments owed doubled or even tripled up), thus throwing countries like Romania, Poland, Croatia, Montenegro, Serbia, and Bosnia-Herzegovina into a financial turmoil. Borrowers in these countries – struggling to repay the CHF mortgages – began pressuring their respective governments to artificially fix those loans at a lower exchange-rate.

Consequently, many of these countries implemented or consider implementing a forced conversion of the CHF loans into loans denominated either into national currency or in Euro, at historical exchange rates (meaning prior to 15 January 2015), to allow population to repay the installments of those loans. Namely, Croatia and Montenegro passed a law to this effect. Whereas Poland and Romania – that at first wanted to adopt a forced conversion bill from CHF to zlotys and lei at the expense of the banks – got cold feet fearing the reaction of German, Austrian and Italian banks.

Indeed, should any of these States enact a law forcing the conversion of housing loans made in CHF into the local currency or Euro at the currency fluctuation on the day these loans were disbursed, banks will suffer capital losses amounting to billions of Euros. That is why the drafting of these loan conversion acts is shaking the financial sector and investment arbitrations are looming against these States either to repeal or to compensate for these regulatory measures, being the first of these arbitrations already launched against Croatia and Montenegro. Arguably, foreign banks invoking bilateral investment treaties may well claim the breach of the FET standard, because of the retroactive effect of these measures converting the CHF loans at the exchange-rate they were originated at the expenses of the lenders, thus threatening the principle of legal certainty and, accordingly, impairing investors’ legitimate expectations.

Luckily enough, these counties might turn the tables on Switzerland by resorting to the same instrument wherefrom the problems seem to come, in other words, by commencing one or multiple State-to-State investment arbitrations. Before exploring this exciting avenue, it is necessary first to understand what a currency peg is and the implications of its snap termination.

A currency peg takes place when a government fixes its currency’s value to that of another country. By pegging the exchange-rate between countries, such monetary policy serves the purpose of creating a stable trading environment, which allows for accurate long-term predictability for business planning, especially in the import-export sector (whose operators will be able to know beforehand exactly what exchange-rate to expect, accordingly reducing uncertainties inherent to international transactions). A government achieves a currency peg by committing its central bank to either buy or sell its own currency on the open market to maintain the fixed exchange-rate, which has been previously set. The SNB introduced the exchange-rate peg in 2011 holding the CHF at 1.20 to the Euro, by promising to buy unlimited quantities of foreign currencies, thus forcing down its value to foster exports.

To any investment arbitration practitioner, the elements surrounding the pegging of a currency to another – i.e. the creation of stable trading conditions built upon the commitments of a state’s organ to ensure a predictable climate favorable to the operation of enterprises and to the flow of capitals and goods – should already ring a bell as they depict the recurring backdrop of a FET violation, where such elements stop being upheld by the State in question. Elements and evidence in support of a FET violation in this case are:

the breach of specific representations made on 18 December 2014 by the president of the SNB, Thomas Jordan, who reaffirmed SNB’s commitment to the minimum exchange-rate of CHF 1.20 per Euro by continuing to enforce it with the utmost determination (just for breaking his promise the month after, on 15 January 2015);

the breach of another (more specific) rule of international law that comes into play through Art. 31.2.c of the VCLT, videlicet Art. IV of the Articles of Agreement of the International Monetary Fund that imposes upon the Contracting Parties (like Switzerland) the obligations to promote economic stability through a monetary system that does not produce erratic disruptions (like the one at end), and to notify the Fund promptly of any changes in its exchange-rate policy.1)In this regard, see also the Decision No. 5712-(78/41) of the IMF of 23 March 1978 concerning art. IV of the IMF Agreement and emphasizing the importance of a prior notification to the Fund of all changes in the peg. Please see Erik Denters and Annamaria Viterbo (2015), International Monetary Fund (IMF), Second Edition, Wolters Kluwer jQuery("#footnote_plugin_tooltip_4690_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4690_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });;

an interview of the Managing-Director of the IMF – that may well serve as a witness/expert deposition as to the breach of the IMF Articles – where Ms. Lagarde states that she had not been notified about the CHF/Euro de-pegging ahead of time, which she found “a bit surprising” (by using a euphemism).

a study of 2009 conducted under the auspices of the SNB on the CHF lending across Europe, proving that the SNB was aware of the widespread use of the CHF loans all over Europe, so it could not be unaware of the dire spill-over effects of an offhand revaluation.

As to the attribution of the wrongful conduct, attribution under art. 4 of the Articles on State Responsibility of the SNB’s action to the Swiss State should be no problem as the Swiss Constitution devotes article 99 to the SNB itself, making it arguably a full-fledged State organ.

Romania, Poland, Croatia, Montenegro, Serbia, and Bosnia-Herzegovina have all concluded a BIT with Switzerland providing for an FET provision and a dispute settlement provision between the Contracting Parties to the treaty regarding its interpretation and (more importantly for our purposes) its application. Such a State-to-State dispute settlement provision, whose scope covers the application of the BIT itself, means that it will encompass divergences concerning the compliance of the actions or measures taken by the Contracting Parties with the terms and purposes of the BIT.2)UNCTAD, 2003, Dispute settlement: State–state, 14. jQuery("#footnote_plugin_tooltip_4690_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4690_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Hence, each one of these States may effectively invoke the international responsibility of Switzerland by giving notice to the Swiss government of its arbitration claim, wherein it alleges that Switzerland violated, under the applicable BIT, the obligation to afford FET with respect to the Claimant-State and its actual and potential investors by abruptly de-pegging the CHF from the Euro and, accordingly, thwarting friendly-investments constant conditions. To be clear, what constitutes a FET violation is not having de-pegged the CHF, but how such action was taken, videlicet without any prior notice to the Fund and, if this wasn’t enough, by issuing a misleading statement – just few weeks before the de-pegging occurred – where the SNB assured that it would have kept the CHF pegged to the Euro at 1.20. The failure to notify in time the Fund about the de-pegging, prevented other central banks’ governors from taking the necessary steps to avoid or mitigate the damages. Each Claimant-State may also be free to enact a forced conversion law whereby it converts the CHF-denominated loans into local currency and labels such act as a countermeasure against the internationally wrongful act committed by Switzerland to shield itself from international liabilities and the threat of foreign banks.

In the arbitration claim, every Claimant-State should pursue a declaratory relief3)See Nathalie Bernasconi-Osterwalder, State–State Dispute Settlement in Investment Treaties, October-2014, The International Institute for Sustainable Development,7-8. jQuery("#footnote_plugin_tooltip_4690_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4690_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, asking for satisfaction as form of reparation, modeled after Mexico’s claim in the 2000 NAFTA case Mexico v. United States of America, because in that way the Claimant-State would not have to prove that a particular national investor or investment had been affected by the sudden CHF/Euro de-pegging. Instead, it should simply tackle the measure or action adopted by the Respondent-State that it deems in violation of the BIT, i.e. the abrupt CHF/Euro de-pegging itself4)See Mexico v. United States, Final Report of the Panel, February 6, 2001, para. 292 jQuery("#footnote_plugin_tooltip_4690_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4690_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. By doing so, every problem concerning the territoriality requirements of a specific impaired investment would be avoided. Further, the Claimant-State could always reason its position by maintaining that such an abrupt revaluation of the CHF against the Euro, as well as, its currency is harmful for a stable economic environment per se.

Finally, it would be a unique opportunity for the whole system of investment arbitrations because it would be probably the first time that an investment arbitration be deployed to justify a regulatory measure adopted by several States (the forced loans conversion act), rather than undermining States’ regulatory powers. In this way, some of the harsh criticisms regarding the legitimacy of investment arbitrations could be softened.

The views expressed in this article are those of the author and DO represent those of the law firm Bottega DI BELLA.

References   [ + ]

1. ↑ In this regard, see also the Decision No. 5712-(78/41) of the IMF of 23 March 1978 concerning art. IV of the IMF Agreement and emphasizing the importance of a prior notification to the Fund of all changes in the peg. Please see Erik Denters and Annamaria Viterbo (2015), International Monetary Fund (IMF), Second Edition, Wolters Kluwer 2. ↑ UNCTAD, 2003, Dispute settlement: State–state, 14. 3. ↑ See Nathalie Bernasconi-Osterwalder, State–State Dispute Settlement in Investment Treaties, October-2014, The International Institute for Sustainable Development,7-8. 4. ↑ See Mexico v. United States, Final Report of the Panel, February 6, 2001, para. 292 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: Arbitrators as Lawmakers
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Digesting the AG Wathelet Opinion in Case C-284/16 Slowakische Republik v Achmea BV. Is it A Trap?

Sat, 2017-10-07 05:24

Ivaylo Dimitrov

I. Introduction

On 19 September 2017 the Advocate General (AG) to the Court of Justice to the European Union (CJEU) Melchior Wathelet delivered his long-awaited Opinion in Case C-284/16 Slowakische Republik v Achmea BV. As already explained in another post, Bundesgerichtshof (“German Federal Court of Justice”) requested a preliminary ruling from the CJEU on the compatibility of certain provisions of the 1991 BIT between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic (“BIT”) with EU law. The case before the German Federal Court of Justice arose out of the efforts of Slovak Republic to set aside the Frankfurt-seated UNCITRAL Award in Achmea B.V. v. The Slovak Republic, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko B.V. v. The Slovak Republic). In his shockingly firm Opinion, the AG concluded that the BIT, and specifically its dispute resolution mechanism, are not incompatible with the EU law and do not run afoul of Articles 344, 267, and 18 Treaty of Functioning of the European Union (“TFEU”). As acknowledged in the Opinion, the outcome of the case is of “fundamental” importance” and outreaches the particularities of the dispute at hand given the (i) uncertain future of the numerous intra-EU BITs, (ii) volume and importance of the current intra-EU investor-state disputes, and (iii) complicated political implications of the ongoing clash over the future of investment disputes in general and the European participation therein. Indeed, the position of the AG appears to be in a stark contrast to the view of the European Commission (EC) and its notorious efforts to dissolve the intra-EU ISDS. What is more, the Opinion was issued shortly after:

II. Positives of the Opinion

The AG Opinion is extremely interesting and gives the international community of lawyers and practitioners food for thought. Further, many of the conclusions of the AG deserve support:

1. No discrimination

The AG concludes that the BIT (Art. 8) is sound with the prohibition on the discrimination under Art. 18(1) TFEU by way of comparison with bilateral double taxation conventions. According to the CJEU case law (C-376/03), the latter are not discriminatory whereas the benefits which they grant are “an integral part thereof and contribute to the overall balance”. On the basis of this, the AG concluded that Art. 18(1) TFEU does not contain an MFN clause and does not prevent Member States from affording treatment to nationals of another Member State which is not afforded to national of a third Member State. Art. 18(1) TFEU provides equal treatment compared to nationals of the respective Member State (national treatment) (AG Opinion, para. 67-75). Apart from clarifying the scope and the meaning of Art. 18 TFEU, these arguments of the AG recognise the lex specialis character of reciprocal rights and obligations established by bilateral intra-EU treaties whereas those rights and obligations lay at the core of the treaty regime.

2. No violation of Art. 344 TFEU

The AG’s primary argument with regard to the question whether disputes referred to in Art. 8 of the BIT do not violate Art. 344 TFEU (monopoly of dispute settlement) as such disputes do not even come under Art. 344 TFEU since they do not represent disputes between Member States or between Member-States and the Union. Referring to Opinion 2/13 CJEU (Accession of the Union to the ECHR), the AG determined that disputes involving individuals are outside of the scope of the provision (AG Opinion, paras. 146-153).

Alternatively, even if Art. 344 TFEU applies, the investor-State disputes do not concern the interpretation or application of the EU Treaties. First, the jurisdiction of the arbitral tribunal is confined to rulings on breaches of BIT, and, second, the BIT legal rules are not the same as those of the EU Treaties. The AG makes the important finding that the scope of the BIT is wider than the EU treaties the BIT contains rules which have no equivalent in EU law and are not incompatible with it.

III. Is it A Trap? The international nature of the arbitral tribunals

Notwithstanding the positive sides of the Opinion, it should be accepted with some caution. Its careful reading reveals some arguments which are troublesome and inconsistent. In answering the second question of the preliminary request, namely whether Art. 267 TFEU (the preliminary reference procedure) precludes the application of the ISDS provision of the BIT, the AG makes the conclusion that the arbitral tribunal is common to the Member States parties to the BIT and is permitted to request preliminary rulings. Applying the CJEU case law test, the tribunals are considered courts under Art. 267 TFEU. The AG goes even further by determining that they are “…required — and if they failed to do so their awards would be null and void on the ground that they would be contrary to public policy — to respect the principles set out by the Court … including, in particular, the primacy of EU law over the laws of the Member States and over every international commitment given between Member States…” (Emphasis added). (AG Opinion, para. 134).

1. Possible political goals

If adopted, such opinion would possibly lead, as observed by Nikos Lavranos, to an “Europeanisation” of investment-State arbitration and would be integrated by the EU, which would be a diplomatic way to achieve the EC goals. This goal might be reaffirmed if one considers other passages from the Opinion. In arguing that the BIT does not undermine the allocation of powers within the EU and the autonomy of the EU legal system, the AG concludes that the awards made by the arbitral tribunals cannot avoid review by national courts and, if required, requesting preliminary rulings from the CJEU. Realizing that this principle applies only to UNCITRAL arbitrations conducted on the territory of a Member State, the AG merely points out that in the Achmea case Art. 8 of the BIT does not refer to ICSID.

2. Legal incorrectness

Some of the proposed views does not stand legal scrutiny from the perspective of public international law.

First and foremost, it is legally incoherent to regard investment arbitral tribunals as courts or tribunals of the Member States. It might be beneficial to consider them as such only for the purposes of Art. 267 TFEU. However, this may not be supported given the independent international status of the investor-State arbitral tribunals. The powers conferred to the arbitral tribunals stem exclusively from the treaty regime established by the parties (See Electrabel S.A. v. The Republic of Hungary, (ICSID Case No. ARB/07/19) Decision on Jurisdiction, Applicable Law and Liability, para. 4.112).

Secondly, if ICSID tribunals are required to make references for preliminary rulings each time they need to apply a question of EU law (See Art. 267 TFEU), they would effectively be placed under the supremacy of the CJEU. Admittedly, abitral tribunals have long accepted unique nature of EU law and that it should be applied both as national law and also as international treaty law. (See Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic (ICSID Case No. ARB/14/3), Award, para. 278). However, conflicts between international legal rules which have the same hierarchical power and regulate the same subject-matter is a complex question and cannot be ab initio resolved in favour of EU law based on the internal supremacy alleged by AG.

3. Inconsistency

Apart from the foregoing, the AG Opinion demonstrates some inherent inconsistencies. Giving a negative answer to the second question, the AG determined that the arbitral tribunals participate in the dialogue between courts and, where necessary, are required to request preliminary ruling. However, in his analysis of the third question, the AG argues that disputes resolved by the arbitral tribunals constituted under the BIT do not concern questions of interpretation or application of EU Treaties and are thus are not incompatible with Art. 344 TFEU. While the AG puts those arguments in further alternative, whether an investor-State dispute concerns interpretation or application of EU law is a matter of fact and cannot be automatically changed dependent on the alternatives construed.

IV. Conclusion

The AG Opinion in Achmea is certainly a breakthrough in the intra-EU ISDS saga. The analysis of the AG has many positive traits and views which should, in the author’s opinion, be adopted by the CJEU in its decision. Still, one should be careful and consider the overall effect of the proposed solutions which promises to be far-reaching.

The author holds a position of Research Assistant at the LCIA. Opinions expressed in this article are the author’s own and do not, in any way, reflect the view of the LCIA.

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Cybersecurity In International Arbitration – A Necessity And An Opportunity For Arbitral Institutions

Fri, 2017-10-06 00:17

Claire Morel de Westgaver

Bryan Cave LLP

Cybersecurity bears particular significance to the realm of international arbitration. In addition to the ambient cybersecurity risks faced by each participant in international arbitral proceedings, the need to share information between the parties, the tribunal and the institution for the resolution of a dispute increases the likelihood that data will be lost or breached. Arbitral institutions may be uniquely positioned to address cybersecurity risks in a consistent and sustainable way. Doing so provides an opportunity for arbitral institutions to advocate for institutional arbitration (as opposed to ad hoc arbitration) and to differentiate themselves from the competition by attracting cybersecurity conscious users through innovation.

Why is international arbitration a target for hackers?

First, as a neutral forum for the resolution of commercial and investment disputes, international arbitration often involves parties that are themselves prominent targets of cybersecurity attacks, e.g. multi-national groups, governments or state entities, public figures and NGOs. Second, although the level and scope of confidentiality is variable, arbitration offers the possibility to resolve disputes behind closed doors. Disputes submitted to international arbitration generally require evidence of facts which are not in the public domain and which may have the potential to influence politics and financial markets. Third, international arbitration involves actors from different jurisdictions that operate from a variety of settings. Parties are typically represented by large and often cross-border teams. In-house lawyers, counsel and arbitrators tend to travel extensively and work from multiple places including hotels, airport lounges or private home offices. These factors enhance the risk of being hacked by electronic means as well as social engineering and theft of physical data.

Analysis of the structure of international arbitration provides insight as to how cybersecurity risks may arise and which of its stakeholders may be best equipped to adequately address these risks.

Law firms

Law firms (including barristers’ chambers) are depositories of their clients’ data and documents. Communications that a law firm has with its clients are generally covered by privilege and/or a duty of confidentiality. With arbitrators often being associated with a law firm, such firms may also be privy to communications between members of a tribunal. The content of deliberations, including draft awards, is particularly prone to cyberattacks because they may contain confidential facts and also information which may give rise to insider trading.

Law firms are a prominent target for hackers. A 200 law firm study released by LogicForce (a cybersecurity consulting firm) found that all of them had been subjected to hacking attempts. In the context of arbitral proceedings in particular, in Libananco v Republic of Turkey (ICSID ARB/06/8), Turkey admitted to have intercepted Libananco’s correspondence with its counsel and third parties, albeit as part of a separate criminal investigation. In spite of their exposure and their resources, law firms are nonetheless not (yet) adequately prepared to cope with these risks. The LogicForce survey revealed that 40% of firms were actually unaware of the hacking attempts until the study was conducted and corresponding investigations made. Further, 95% of firms were not fully compliant with their own data governance and cybersecurity policies and only 23% had an adequate cyber-attack insurance policy in place.

While law firms have control over their communications with clients as well as witnesses and experts, their channels of discourse are relatively limited compared to arbitral institutions. Law firms do not have any control over participants other than by agreeing protocols with the opposition (not always possible or appropriate) or seeking directions from the tribunal.


Unlike judges, arbitrators are private practitioners. Arbitrators may operate in contexts with varying degrees of cybersecurity (e.g., law firms and universities); or they may be independent from any firm or organisation. In the former case, arbitrators are typically subject to data security processes and policies over which they may not have any control and which may not be adapted to their role of arbitrator. In the latter case, arbitrators have a higher level of freedom and flexibility but they may not have any sophisticated IT support.

Under most rules and legal systems, arbitrators and tribunals have the power to make necessary orders for the protection of confidential information and documents. Arguably arbitrators’ wide procedural powers include the ability to make orders for the storage, use and transfer of data generated and produced in a given arbitration. In this regard, recommendations and protocols as to how cybersecurity risks may be tackled by parties and tribunals are a positive development and should be welcomed by the international arbitration community. However, if adopted by a tribunal, such measures would be limited in scope and enforceability. Further, whilst some arbitrators may have a strong grasp of cybersecurity issues, one needs to recognise that as a group arbitrators are not IT experts. As such, relying on them to improve cybersecurity may not be sustainable or in any event sufficient.

Arbitral institutions

As the depository of sensitive data, institutions are highly exposed to cybersecurity risks, including in terms of reputation management and compliance with the rapidly evolving regulations. In July 2015, the website of the Permanent Court of Arbitration in The Hague was hacked during a hearing of a sensitive maritime border dispute between China and the Philippines. The website was implanted with a malicious code that posed a data breach risk to anyone who visited a specific page devoted to the dispute. Despite this modern threat and the risks involved, many arbitration institutions continue to rely upon relatively insecure storage and communication systems. Notably institutional rules tend to be silent on cybersecurity and allow communications and transfer of data between the parties and the tribunal by any electronic means. In addition, many arbitral institutions use unencrypted email and commercially available cloud data repositories.

Yet, the permanent nature of arbitral institutions allows them to regulate by way of revisiting their arbitration rules and policies. Institutions could introduce mandatory filing and communication systems under which data would be transmitted exclusively through an internet-based secured platform, moving away from sharing external drives, hard copies and emails with sensitive attachments. Such platform could include separate areas only accessible to tribunal members for the storage and sharing of draft awards for example, and could be equipped with multi-factor authentication, as well as functions preventing users from editing, printing, downloading or emailing certain classes of documents. Such tools are already available on the market and often used by parties and tribunals, albeit on an ad hoc basis.

Institutions may take the view that gaining more control over the flow of data generated and produced as part of arbitral proceedings may result in further risks and liabilities. Yet, given their role in the arbitration process and the liabilities to which they are already exposed, devoting resources to cybersecurity may be seen by institutions as a long term investment, not only in terms of hedging existing risks but also business development. Arbitration users will become increasingly cybersecurity conscious and advanced security may help arbitration institutions to stand out from the increasingly fierce competition.

*The author is grateful to David Zetoony (Bryan Cave partner) for his advice and to Yeon-Ho Son (Bryan Cave trainee-solicitor) for his assistance.

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Let’s talk about arbitration

Thu, 2017-10-05 02:00

Joel Dahlquist Cullborg and Brian Kotick

Information dissemination is the flavor of the decade. Processing information with our busy lives has become harder than ever and companies are hard at work to ensure knowledge reaches as many people around the globe as possible. These efforts are not without their threats. The rise of what might be called the “fake news” movement has placed established news outlets in an existential crisis in which even the basic facts are questioned.

Arbitration, too, has been sucked into the “fake news” whirlpool resulting in critics questioning the value of the field that has existed for centuries. The arbitration community must adapt the means it disseminates its message by breaking down loaded concepts and utilizing technology so as to reach a wider audience.

One means of information dissemination that has not penetrated the field of arbitration is podcasts. We have seen the use of online audio and video recordings of adjacent fields, such as international law. In this regard, the United Nations Audiovisual Library of International Law has been a reputable source of information on cutting-edge issues. But outside of our field, the podcast format has exploded over the last handful of years and has become a major platform for politics, arts, literature, drama, and comedy. Arbitration-specific content has been limited, however.

“The Arbitration Station” is a new, weekly podcast that covers new developments in both commercial and investment treaty arbitration. It is run by young arbitration enthusiasts who believe the best way to understand arbitration is to talk about it in a more informal setting. We hope to provide an alternate outlet for those interested in staying connected and to generate dialogue with the wider audience.

Each episode is about an hour long and usually covers three distinct issues: two substantive issues in arbitration and a third, more light-hearted discussion intended to engage members of the arbitration community.

So far, six episodes have been released:

  1. “The Inaugural” – administrative secretaries, tribunal deliberations and PhD programs;
  2. “The Bourne Arbitration” – third party funding, diversity in arbitration and espionage tactics in arbitration;
  3. “The Machine Arbitrators” – appointing authorities, the EU’s role in investment arbitration and the automation of arbitration;
  4. “The Languages” – res judicata, emergency arbitration and important languages in arbitration;
  5. “The Costs” – costs in international arbitration and proper etiquette at an arbitration conference; and
  6. “The Redfern Schedule” – Place of arbitration, document production and arbitration in pop culture.

The podcast can be accessed via the website, iTunes or Soundcloud.

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Legitimacy and International Arbitration: An Alternate View

Wed, 2017-10-04 00:06

S.I. Strong

Over the last few years, legitimacy has become a hot topic in international arbitration. Although the investment regime has borne the brunt of the attack, commercial proceedings have also suffered from criticism. The range of voices questioning the propriety of arbitration has been at times quite diverse and has included journalists, judges, governments and human rights advocates as well as parties themselves.

To its credit, the arbitral community has not ignored these concerns but has instead responded with a series of public and private reforms. For example, demands for increased transparency have been answered in the investment realm by the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration and the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration and by the Case Law on UNCITRAL Texts (CLOUT) project and ArbitratorIntelligence in the commercial realm.

Practitioners and policymakers are not the only ones interested in the integrity of the arbitral process. Academics have also sought to address concerns about the legitimacy of international arbitration, primarily in the form of an ever-increasing number of empirical studies relating to the nature and quality of arbitral procedures. Although these studies strongly suggest that international arbitration can indeed be considered a legitimate form of dispute resolution, critics of arbitration tend to ignore or downplay this data.

Recent years have seen a rise in the number of people who refuse to recognize the veracity of scientific data, leading to concerns about how policy debates can realistically proceed. The problem in the arbitral realm is to some extent exacerbated by the fact that lawyers are trained to believe that the best form of persuasion is through content-based arguments. This preference for “hard evidence” has led the arbitral community to respond primarily to external criticism by addressing the merits of the dispute. This approach often reflects the underlying belief that erroneous policy positions are generated by an incorrect or incomplete understanding of the relevant facts. However, as discussed in my forthcoming article, empirical research by political scientists Brendan Nyhan and Jason Reifler has shown that pervasive misconceptions about objectively identifiable facts often do not arise as a result of information deficits. Instead, mistaken beliefs are often caused or perpetuated by a variety of other factors.

One of the most important elements of Nyhan and Reifler’s research is the discovery that political misperceptions are significantly affected by people’s preexisting worldviews. In fact, Nyhan and Reifler found that “[d]irectionally motivated reasoning – biases in information processing that occur when one wants to reach a specific conclusion – appears to be the default way in which people process (political) information.”

This conclusion is supported by research conducted by social scientists in other fields. For example, psychologists interested in the decision-making process have found that “cognitive distortions” often arise as a result of implicit or unconscious biases. One of the most well-established phenomena involves the status quo bias, which reflects an emotional preference for the established legal or social norm, regardless of the rationality of that preference. Not only has the status quo bias been empirically proven, it also appears to provide a potential explanation for why critics of international arbitration refuse to recognize the validity of empirical research suggesting that international arbitration is at least as good as (if not better than) international litigation in resolving cross-border commercial and investment disputes.

Adherents of the law and economics movement will recognize that the effect of the status quo bias is in many ways analogous to the effect of legal defaults. Indeed, economists have shown that defaults tend to assert a psychological pull in the direction of the established norm, regardless of the rationality of that particular position. Because litigation operates as the default in dispute resolution, judicial procedures can be considered to reflect the status quo. This suggests that international arbitration will always suffer, at least to some extent, from an unconscious bias in favor of litigation, particularly among those who are unfamiliar with international arbitration.

What does this mean for the arbitral community? First, it suggests the need to educate the legal and policymaking communities about the effect that unconscious biases can have on discussions about the legitimacy of international arbitration. This is not to say that some criticisms of the procedure are not valid, it is simply to recognize that comparisons between litigation and arbitration are affected by certain factors that do not reflect optimum or rational decision-making.

Second, this analysis suggests that it may be necessary or at least useful to “reset” cultural expectations about the status quo by adopting new defaults regarding international dispute resolution. This initiative could be implemented through treaties or legislation that establish arbitration as the legal default in international commercial matters or through judicial rules (such as those establishing a strong version of negative competence-competence) that would create a presumption in favor of arbitration. Various commentators, including Gary Born, Gilles Cuniberti and Jack Graves, have proposed these types of measures, and it may be time to give those proposals some serious thought.

Third, the issues identified in this post suggest a possible need to rethink how the arbitral community communicates with other segments of society. Traditionally, law and policymakers have relied on a point-counterpoint approach to legal debate, but scholars like Nyhan and Reifler have shown that that style of argument can actually exacerbate pervasive political misconceptions. These findings raise significant questions as to what types of communication will actually prove persuasive to those who hold different viewpoints. To answer that question, it may be necessary to consult with experts in communications theory to identify alternative means of discussing the legitimacy of international arbitration, as I argue in my recent article.

This is obviously a very complex subject, and this post has only touched very briefly on a few of the relevant points. However, it is hoped that this discussion has demonstrated how interdisciplinary research can help the arbitral community overcome certain recursive problems in the field.

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