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ICCA Sydney: New Voices

Wed, 2018-04-18 18:31

Jonathan Mackojc

Young ICCA

The afternoon session of the second day of the ICCA Sydney 2018 Conference on “New Voices” was moderated by Monty Taylor and had the insightful contributions of Jawad Ahmad, Lucas Bastin, Samantha Lord Hill and Solomon Ebere.

Monty Taylor opened the session by noting that not only was this a new initiative for ICCA, but that panellists were selected following a public call for paper abstracts and a rigorous selection process.

Arbitration in conflict and post-conflict zones

Samantha Lord Hill immediately set the scene for a topic that is often overlooked, but highly relevant considering recent geopolitical tensions and conflicts. Samantha Lord Hill noted that there have been over 20 armed conflicts in recent years, many giving rise to lucrative investment opportunities for foreign investors, and noted the World Bank’s commitment of over US$4 billion to restore Iraq. Samantha Lord Hill cautioned legal professionals that timely advice regarding project opportunities for interested investors is not enough; such advice must outline potential disputes and provide guidance on relevant risk assessment and management within these regions of instability. Delegates were provided with an overview of three key risks:

1. A poorly drafted dispute resolution clause – a clause must be correct from the start, with an appropriately selected institution and seat. A fundamental risk is where an institution ceases to operate, or where local judges and lawyers flee the area due to fear of persecution. To avoid this, the designated seat must always be outside the conflict zone.

2. Party non-participation – where the respondent is unable to, or chooses not to, participate in the arbitration. This is less of a concern if it occurs at the beginning of proceedings, but difficult to manage later in the process. Although the tribunal has inherent power to continue with the arbitration, it is important that the non-participating party is still given the opportunity to re-engage, by continuing to copy them into communications. Such an approach will reduce the risk of a challenge or a refusal to enforce the award.

3. Lack of documentary evidence – evidence is often seized or destroyed and access to project areas is limited or restricted. Risks involve parties being unable to produce sufficient supporting documents to prove their own case, or an inability to comply with disclosure obligations. The solution is to ensure that a proper document management process exists, and to store documents outside of the jurisdiction facing conflict.

Fresh approaches to briefing damages in investment arbitration

Jawad Ahmad commenced with an interesting observation – we are preoccupied with issues relating to investment arbitration, such as legitimacy concerns and areas of reform, to the extent that we often forget what it is all about – money. It was also stressed that despite the importance of compensation, lawyers and academics regard quantum as the ‘poor cousin’, when compared to merits or claims.

Jawad Ahmad briefly discussed two significant points:
date of breach affects the availability of the contributory fault analysis or the mitigation analysis as defences pleaded by the respondent; and
depending on which analysis is used, economic consequences will be vast.

Contributory fault and mitigation analyses both focus on the investor’s conduct but have different economic consequences. Contributory fault discounts are expressed in the form of percentages ranging from 25 % to 50 % of the total value of damages available to the investor. Mitigation analysis, however, produces discounts that are ‘hard numbers’ of a financial gain acquired—or not acquired—with respect to an identified activity. There is thus less discretion involved in the mitigation analysis.

Contributory fault analysis takes place prior to the date of the breach. Mitigation analysis, however, is carried out after the date of the breach. The date of breach is not, however, always clear. It will depend upon the primary obligation at issue and the factual circumstances of the case. For example, in ‘creeping’ expropriation cases any series of measures could be conceivably the date of the breach. Therefore, if the date of breach is undetermined then investor’s conduct could be analyzed through the lens of either contributory fault or mitigation.

Jawad’s presentation highlighted the importance of determining the date of breach at an early stage of one’s case as it affects both liability and quantum.


Emergence of sovereign wealth funds as active players

Solomon Ebere presented his topic in three key parts – a background on sovereign wealth funds (SWFs), references to several cases involving SWFs, and technical issues in the context of investment treaty arbitration.

Solomon Ebere indicated that SWFs are regulated according to the Santiago Principles – a framework of generally accepted principles and practices that relate to governance and accountability. It was noted that SWFs have, in recent years, attracted significant criticism whereby it is argued that they operate as investment vehicles fostering geopolitical, rather than commercial, interests. Solomon Ebere noted that SWFs can broadly be categorised according to three waves:

1. born in the 1970s, in the Gulf countries;
2. the China and Russia phase; and
3. more recently, born in emerging markets.

As SWFs are significant investors, they are a natural candidate for new commercial and investment arbitrations. Most cases involving SWFs are largely related to the 2008 Financial Crisis, or from high-level corruption scandals. Technical issues that were discussed involved jurisdiction, whether the definition of ‘investor’ includes an SWF and whether their actions may be regarded as an ‘investment’, under BITs and the ICSID convention.

In response to a question from the panel, Solomon Ebere noted that in many BITs, the definition of ‘investor’ encompasses SWFs, but others still require clarification. Amendments to investment agreements will likely occur once countries notice more claims coming from SWFs.

Inter-generational blame and praise in investment arbitration

Lucas Bastin surveyed a group of emerging arbitration practitioners under the age of 40, predominantly practising in investor state dispute settlement (ISDS). These interviews generated a report card on perceptions of experienced practitioners.

A recurring issue, which forced Lucas Bastin to revise the scope of his paper, was the concern that ISDS allowed for personal preferences and biases to permeate the practice, which ultimately affect the decision. Those in a position of influence were seen to be caught up in ‘decision-making individuality’, which questions the legitimacy of ISDS. A key concern was that not only does this diminish integrity and impartiality among legal practitioners, but that one must create a brand in order to be recognised and selected as an arbitrator.

In response to a question regarding solutions, Lucas Bastin noted that one (more extreme) response suggested that an overall cap be placed on the number of ISDS appointments.

Lucas Bastin acknowledged that previous generations have worked tirelessly to build and develop ISDS, and the speed of development has not been mirrored in other international legal practices. The emerging generation means no disrespect, but asks that we regulate the role of the individual in ISDS.

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ICCA Sydney: Building Better Arbitration Proceedings – Efficiency and the Lessons to be Learned from Other Dispute Resolution Frameworks

Wed, 2018-04-18 02:41

Nasreen Jahan

Young ICCA

The 10th panel session of the ICCA Sydney Congress 2018 with The Honourable P A Bergin, Singapore International Commercial Court; Dr. Shen Hongyu, Supreme People’s Court (China); Flip Petillion, Petillion (Belgium); and Henri C. Alvarez, Vancouver Arbitration Chambers (Canada) and moderated by Stephen L. Drymer, Woods LLP (Canada), continued this year’s theme of evolution and adaptation in commercial arbitration, centring its discussion on features of other dispute resolution mechanisms that may be transposed into the realm of commercial arbitration in order to enhance the cost effectiveness and speedy resolution of arbitral disputes. Each panellist explored their own experiences with different forms of dispute resolution in order to evaluate the efficiency of commercial arbitration, highlighting, in the process, what they have seen to be problematic tendencies in the commercial arbitration sphere. While much of this comparative exercise involved weighing commercial arbitration against the Australian court system, speakers Hongyu Shen and Henri Alvarez added colour to the discussion by exploring favourable aspects of the Chinese courts and sports arbitrations, respectively.

The Hon. Patricia Bergin commenced the session by castigating “doomsayers” who claim that commercial parties now hold a level of disdain for the courts and their adversarial nature. Patricia Bergin submitted that there is no evidence of such disdain, despite the fact that commercial parties are now often seen to favour arbitration over other forms of dispute resolution. In fact, it was noted by the entire panel that present-day arbitrations have proven to be rather protracted and laborious in practise, falling well short of the promised efficiency which often attracts parties to arbitration in the first place.

Both Patricia Bergin and Hongyu Shen suggested that aspects of traditional litigation can prove useful in enhancing the efficiency of arbitral proceedings. For example, Practice Note SC Eq 11 of the Equity Division of the NSW Supreme Court (including the Commercial List but excluding the Commercial Arbitration List), now provides:

“Disclosure
4 The Court will not make an order for disclosure of documents (disclosure) until the parties to the proceedings have served their evidence, unless there are exceptional circumstances necessitating disclosure.
5 There will be no order for disclosure in any proceedings in the Equity Division unless it is necessary for the resolution of the real issues in dispute in the proceedings.”

Reference to “evidence” in this practice note means all evidence- claim, reply and all supporting evidence- and restricts the court to ordering discovery only after parties’ reply submissions have been delivered. The audience heard that this guideline should be applied more commonly in arbitral proceedings. The discussion period offered robust agreement on this point from speakers, moderator and audience members alike, with many pointing out that until each party’s reply to the other’s claims is examined, the true issues of the case cannot be properly evaluated. This means that when document discovery is allowed to occur immediately after filing of the initial claims, unnecessary (and unnecessarily broad) requests are made and the discovery process can take several months to exhaust. Patricia Bergin noted that the average legal cost that parties incur during discovery alone in large commercial arbitrations averages 2 million dollars. Problematically, the IBA Rules regarding document discovery (see Article 3) permit parties to submit to the Arbitral Tribunal and the other parties a Request to Produce, within any time ordered by the Tribunal, so long as the request is “relevant to the case and material to its outcome”. Arguably, this poses a much lesser threshold than the NSW Supreme Court guideline and allows tribunals to more readily order discovery immediately after the submission of initial claims and before replies.

A point was made that in the age of technology, inefficiencies such as this are all the more objectionable- the very function of advents such as e-discovery tools is to accelerate the process of discovery and yet, it is perhaps the introduction of these tools that has allowed the process to remain laborious as they enable parties to drown each other in Redfern Schedule requests and production of documents- most of which ultimately do not go to the crux of the issues in dispute. Panellists observed that rare are the cases where a “smoking gun” is discovered in an opposing party’s document production. Rather, most disputes centre on presenting and defending one’s own arguments. Given this tendency in arbitral disputes, it is time that discovery takes its place as a supporting, rather than central process in arbitration in order to accelerate final resolution of disputes.

This point was reiterated by Henri Alvarez, who stated that a common cause of frustration amongst arbitrators is that whilst they attempt to push parties along, parties themselves favour a luxuriously paced process. While it has been suggested that the memorial system in arbitral proceedings overcomes the prohibitive cost and time impact that is seen in traditional litigation, Patricia Bergin disagrees. Members of the panel commented that memorials of claim in arbitral proceedings have not served their promised purpose of condensing the parties’ claims, with memorials often extending to hundreds of pages long. Accordingly, it was suggested that page limits for memorials and witness statements should be imposed more frequently by tribunals to compel parties to distil their submission to the very nucleus of their claims, again going some way towards accelerating the proceedings and arriving more efficiently at a final award.

Henri Alvarez also delivered novel insights and comparisons from the field of sports arbitration as against commercial arbitration. Where sports arbitrations are mandated by sporting contracts between athletes and sporting institutions, they are hallmark examples of extreme efficiency of the arbitration process. As an example, tribunals acting on FIFA arbitrations are held to tight time frames for the delivery of each party’s evidence and tribunals are compelled to deliver awards within 48 hours of the hearing. Another aspect that is lacking in the commercial arbitration world is that with consistency in sporting arbitral awards which stems from a reliance on authoritative precedents.

As a counter-point to the entire discussion, it was noted that context is key to the success of any system and that no one mechanism can be transferred to another area without posing unique issues, even when certain adaptations are made. That is, there exists no universal system capable of meeting all needs in all areas. This is especially true of commercial arbitration as it is the one binding mechanism of alternative dispute resolution that often canvasses extremely complex legal issues and subject matters. The consensual nature of arbitration perhaps plays to its favour in this regard, as procedures can be tweaked to suit the particular needs of the parties to a particular dispute.

The closing remarks of the panel served as a poignant reminder to practitioners in the field; it is the parties themselves who bear the responsibility of ensuring that the unique benefits of arbitration are reaped; it is the parties themselves who are responsible for ensuring arbitration lives up to its promise of being a cost and time effective alternative dispute resolution mechanism, perhaps by borrowing from the beneficial aspects of court and sporting arbitral proceedings as presented by the panel.

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ICCA Sydney: Hot Topics

Wed, 2018-04-18 00:41

Brecht Valcke

Young ICCA

In a much-anticipated session at ICCA Sydney Conference 2018 moderated by Mark Kantor, the panel: Joongi Kim, Yonsei Law School (Republic of Korea); Judith Levine, Permanent Court of Arbitration (Australia, Ireland); Natalie L. Reid, Debevoise & Plimpton LLP (Jamaica), tackled the following four “hot topics” in international arbitration:

1. illegally obtained evidence;
2. the One Belt, One Road initiative;
3. parallel proceedings; and
4. harassment & sexual misconduct.

1. Illegally obtained evidence

Whether evidence that was illegally obtained will be thrown out of the tribunal largely depends on who obtained the evidence.

If the party, or its counsel, had a hand in obtaining evidence in a less than kosher way, that evidence will be considered inadmissible on the basis that the party bringing the evidence does not have “clean hands”.

A party who relies on illegally obtained evidence “found” in the public domain (e.g. through Wikileaks), may find the evidence admissible. One of the considerations to allow the evidence is whether the party against whom the evidence is brought, objects to its admission. In cases were no objection was made, generally, the evidence was admitted. In cases where the party did object, the tribunal weighed the interest to find the truth against the risk of allowing the evidence would cause damage to the objecting party.

Another consideration is the interest for the tribunal to know relevant information that is already in the public domain. Sometimes, an independent advisor will assess the evidence and report back to the tribunal in an attempt to protect the tribunal from being influenced by any privileged information the tribunal would not have known, but for the leaked evidence.

The panel pointed out that the IBA Guidelines on Party Representation in International Arbitration (2013) and Article 9(2) and 9(3) of the IBA Rules on the Taking of Evidence in International Arbitration (2010) are of limited help. These soft-laws address the issue of inadmissibility of false evidence but is silent on the question of illegally obtained evidence, which may not necessarily be false evidence.

So what can be done? The tribunal has the power to rule on the admissibility of the evidence. As mentioned above, whether this type of evidence will be admissible generally depends on considerations of involvement of the party, or its counsel, and the egregiousness nature of how the evidence was obtained.

The panel concluded this topic by posing the question who should sanction the party who obtained evidence illegally? Is the function of a tribunal to be a watchdog, limited to assessing admissibility of such evidence; or act as a bloodhound, sanctioning the party or counsel? Is it more appropriate for the court of the seat to address this issue; or is it the bar association or law society to which the counsel is admitted?

2. One Belt, One Road initiative (OBOR)

China’s monster construction project of constructing a maritime silk road (One Belt) and a land based silk road (One Road) will connect China with 71 countries and its markets, with a potential of more countries to follow. Of those 71 countries, 55 also have BITs, but many of them are challenging jurisdictions.

A recent development in China is the creation of “OBOR-courts”. A court in Xi’an will hear disputes on the Road initiative; a court in Shenzhen will hear disputes on the Belt initiative; where a court in Beijing will operate as a “headquarter”.

Other developments triggered by the OBOR initiative are CIETAC’s recently published investment arbitration rules, and the creation of an e-OBOR initiative in Hong Kong.

With over a trillion dollars in projects, it is surprising that no investment has been made to date in the OBOR initiative by the Asian Infrastructure and Investment Bank (AIIB).

Where there are construction projects, disputes usually follow. With 71 jurisdictions involved, of which many States are not near at arms length with China, parties in dispute will very likely seek a neutral forum to bring the dispute; international arbitration is an attractive option.

The panel drew attention to China’s multi-tier dispute resolution clause of going through stages of negotiation and mediation before arbitrating. Clauses like this, if carefully drafted and applied, have the potential of preserving long time commercial relationships. However, the potential delay in finalising a dispute, especially when delaying a contraction project, may very well kill the project or bankrupt the construction company.

3. Parallel Proceedings

Over the last four years, it has not been uncommon for a party to seek provisional measures to address the issue where one of the parties or witnesses is also involved in domestic criminal proceedings. In assessing this request, the tribunal has to balance the sovereign right or duty of a State to prosecute criminal proceedings with the principle of due process, more specifically the right to access to an international forum and the integrity of arbitral proceeding. In general, tribunals have granted provisional measures where the criminal proceedings negatively impact the integrity of the arbitral proceedings, e.g. where a witness is unable to provide its testimony because he or she is unable to attend the tribunal.

The Permanent Court of Arbitration has a system in place to allow for safe passage of a key witness against whom an INTERPOL or EUROPOL arrest warrant has been issued. The tribunal has also taken the voluntary action to travel to the witness.

An interesting point was raised by the panel discussing the impact the conclusion of the domestic criminal proceeding may have on the arbitral proceedings still on foot. Considering the burden of proof is higher in a criminal proceeding, would a tribunal be tempted to put more weight on relevant factual evidence from the criminal proceedings?

Another intriguing question posed by the panel was what if the tribunal ignores or denies the domestic criminal judgment? Would this open up the arbitral award to scrutiny of not be recognised or enforced under the New York Convention’s public policy ground?

4. Harassment & Sexual Misconduct

Confidentiality and privacy have long been saluted as a major advantage arbitration provides to court proceedings in a commercial dispute.

However, consumer and employment law arbitrations are challenging these very notions of confidentiality and privacy, demanding instead transparency and public accountability.

One of such cases where the demand for transparency and public accountability is especially strong is where an arbitration clause in an employment or other contract is used to hide a case of harassment or sexual misconduct from public scrutiny.

The “hot topics” panel certainly left the attendees with lots of interesting talking points for the gala dinner tonight.

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ICCA Sydney: The Moving Face of Technology

Tue, 2018-04-17 21:17

Geneva Sekula

Young ICCA

Part 1: Technology as Facilitation

“The future is already here; it’s just not evenly distributed.”

Paul Cohen, assisted by Gabrielle Nater-Bass, Hugh Carlson and Rashda Rana SC, opened his session with this quote from Mr William Gibson, and was able to demonstrate it through his discussion of technology as facilitation in arbitration.

Upon entering the conference room, delegates most likely did not anticipate watching clips from Star Trek, watching a witness interview with Darth Vader, or discussing Snapchat filters, but as they were led through various technologies that could be used to assist the development of arbitration they saw all this and more.

The session was structured around three key technologies. The first, augmented reality (AR), was demonstrated to the audience through an app, which delegates were instructed to download at the start of the session. The panel considered the fictional case, Galactic Empire v Death Star Manufacturers, Inc, in which the Empire seeks to sue DSM for negligent manufacture of its Death Star. AR was used to visually demonstrate to the audience the set of physical circumstances required to lead to the destruction of the Death Star, and to help the Tribunal visualise the structure they were being asked to consider.

While this was highly entertaining, it was an important demonstration of the ways that augmented reality can be used within arbitration, for example in the context of a construction dispute where the parties may wish to show the Tribunal the technical side of what is being debated. Ms Gabrielle Nater-Bass cautioned that though the use of AR is appealing, parties must be cautious to ensure that its use does not jeopardise due process and the rights of parties to be heard, to receive equal treatment, and the right to present their own case.

The second technology considered by the panel was that of instant translation. Given the cross-border nature of international arbitration, the value of this technology is immediately apparent. The panel used Microsoft Translate to demonstrate how an app can process this sort of linguistic information almost instantaneously. However, given the complexity of legal language and issues in dispute in arbitral proceedings, this technology is not yet mature enough to be implemented. Issues such as confidentiality would also need to be considered as the technology develops.

Finally, real time analytics and artificial intelligence were considered as a means by which data could be processed and analysed. Self professed Star Trek expert, Mr Cohen explained they had downloaded the full suite of Star Trek episodes, and demonstrated as certain videos were digitally and instantly extracted as evidence of various propositions (for example that Vulcans are incapable of telling a lie).

Part 2: Technology as Disruption

Part 2 of the panel took a different approach as the new panellists turned to consider technology as disruption. Brandon Malone as moderator was joined by Carsten van de Sande, Sophie Nappert and Matthew Kuperholz, for a sub-panel on artificial intelligence (AI).

Sophie Nappert drew attention to the advanced development of AI, and the ways that technological advances have already started to reshape the legal profession. Ms Nappert also asked the delegates to consider where these advances were taking us. For example, if computers are able to deliver perfect legal reasoning, what need would we have for appeal mechanisms or judicial review? However, Ms Nappert highlighted part of what it is to be human is equity, empathy, conceptual thinking, emotional intelligence, fairness and trust; and these are essential ingredients in (human) dispute resolution. It might mean that parties prefer to reign in computers, and allow fairness, common sense, honesty and empathy to come to the fore.

Carsten van de Sande took a different approach, and suggested that AI would replace human arbitrators as fact finders and adjudicators. He suggested that where AI can overcome narrow, purpose specific application, and can replicate a human’s ability to reason, solve problems and innovate, this would lead AI to develop thoughts and ideas. Experts now believe that by 2045 there will be a functioning AI that will be able to reason like a human being. Mr van de Sande rejected the notion that parties want arbitrators to employ empathy and emotional intelligence, rather parties want arbitrators to adjudicate dispassionately. One man’s empathy is another man’s bias.

Mr van de Sande also considered the criticism that AI cannot explain how it arrived at the decision it did. Mr van de Sande noted that this is not so different from a human arbitrator – the process leading to a decision is never fully transparent, parties simply tend to have an inherent confidence in the human arbitrator because we understand better how their mind words.

The second sub-panel dealt with cyber security. Edna Sussman, Alana Maurushat and Hagit Muriel Elul considered challenges in the digital age, particularly how people are the weakest link in tech defence, and introduced the Draft Cybersecurity Protocol for International Arbitration. Ms Maurushat also strongly recommended that organisations adopt cyber-insurance and helpfully advised that having a cybersecurity protocol helps to bring insurance premiums down.

Based on today’s panels it is clear the future is already here, and it will be fascinating to see where these technologies take the arbitration world.

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ICCA Sydney: Building Better Arbitration Proceedings – Practical Suggestions I: Revisiting Conventional Wisdom in the Organization of Arbitral Proceedings

Tue, 2018-04-17 19:43

Jonathan Mackojc

Young ICCA

The morning session at ICCA Sydney Conference 2018 on “Revisiting Conventional Wisdom in the Organization of Arbitral Proceedings” was moderated by Chiann Bao and had the insightful contributions of Funke Adekoya SAN, Dr. Fuyong Chen, Klaus Reichert SC and Prof. Nayla Comair-Obeid.

Chiann Bao insisted that we ought to deal with issues of procedure by firstly examining the existing structure and questioning whether the current system is wise. Chiann Bao broadly suggested that the following three questions must be considered if we are to unpack the notion of ‘conventional wisdom’:

1. What are we actually organising and what are we seeking to achieve?;
2. What influences conventional wisdom?; and
3. Are there any aspects that should be revisited?


What are we actually organising and what are we seeking to achieve?

Klaus Reichert SC asserted that both the tribunal and parties must share a common understanding of the object and purpose of the arbitration, to avoid a costly and unsatisfactory outcome. The key contention was that disputes are not settled by procedures, but rather relief that is granted by the tribunal. It was noted that most experienced arbitrators commence by reading the prayers for relief, and then work their way back to the beginning of the statement of claim or defence. This is particularly important as the tribunal does not (or at least ought not) have full jurisdiction over parties, as it is restricted to jurisdiction over prayers for relief. The absence of a wide-ranging jurisdiction renders statements such as ‘…further or other relief which the tribunal may award’ superfluous and thus meaningless.

Klaus Reichert SC offered a simple yet powerful solution: immediately after the tribunal is constituted, it must inform parties that they ought to carefully consider prayers for relief as any request to widen the scope at a later stage may be denied by the tribunal. Promoting a strong foundation at the outset will almost always guarantee a smooth process.

What influences conventional wisdom?

Chiann Bao referred to John Kenneth Galbraith OC’s thoughts on conventional wisdom as a starting point. Prof. Nayla Comair-Obeid’s interpretation of the term suggests that it represents a set of good practices and principles, passed down from the current generation of arbitration practitioners to the emerging generation. Prof. Nayla Comair-Obeid also noted that international arbitration has developed significantly, yet not solely in response to technological developments. Recent changes can also be attributed to developments in investor-state arbitration which demand constant adaption to a changing environment. Ultimately, as cases are specific in nature, the arbitration community may be permitted to deviate from conventional wisdom.

Funke Adekoya SAN suggested that we go a step further than Galbraith’s definition of conventional wisdom and consider material which is readily available such as the UNCITRAL Notes on Organizing Arbitral Proceedings. It outlines common practice with respect to key procedural issues, and seeks to addresses power imbalances between experienced and inexperienced parties. However, it is important to note that it is merely a guide. Klaus Reichert SC shared this view, and suggested that even if uniform principles exist, people will inevitably interpret them differently. The only safeguard is sufficient dialogue, within the arbitral tribunal and among parties, as to how these principles are to be interpreted.

Dr. Fuyong Chen urged us to revisit conventional wisdom from time-to-time, and according to different perspectives, to ensure that we remain sensitive to certain cultural issues which equally influence the development of international arbitration. In the case of China, these include the restrictions on ad hoc proceedings, the use of Med-Arb, and the importance of witnesses.

Klaus Reichert SC referred back to Galbraith’s definition of conventional wisdom, noting that it suggests it may change at any time. This has recently been observed, particularly where certain (and often new) arbitration stakeholders are on the look out for the next sound bite, tweet, or conference topic. Such an approach disregards fundamental points of organisation and conventional wisdom. Klaus Reichert SC also highlighted that the arbitration community is currently obsessed with the ‘arrogance of internationalism’ – where just because one arbitral institution adopts a certain procedure or initiative, others must follow suit.

Are there any aspects that should be revisited?

The panel’s list included: online arbitral proceedings, word limits for submissions, front-loading the arbitral process, common understanding of definitions relating to evidence, whether cases should be allowed to ‘breathe’, and considering the ‘essential, desirable, superfluous’ award. The panel agreed that the first seemed to be the most relevant at present.

Other Considerations

The panel agreed that the role of the tribunal secretary must be examined further, particularly whether delegating legal research to the secretary suggests misconduct (as it may be considered an element of ‘decision-making’); and
Prof. Nayla Comair-Obeid’s call to action – experienced practitioners must involve emerging practitioners in arbitration prayer meetings and that this is not a choice but rather a duty.

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ICCA Sydney: Arbitration Challenged II – Party Autonomy in Choosing Decision-Makers: Advantages and Drawbacks – Should it be Revisited?

Tue, 2018-04-17 01:09

Jonathan Mackojc

Young ICCA

The afternoon session at ICCA Sydney Conference 2018 on “Party Autonomy in Choosing Decision-Makers” was moderated by Prof. Dr. Gabrielle Kaufmann-Kohler and had the insightful contributions of Alfonso Gómez-Acebo, Audley Sheppard QC, Natalie Y. Morris-Sharma and Ruth Stackpool-Moore.

The session commenced with Prof. Dr. Kaufmann-Kohler underscoring the importance of maintaining party autonomy in international arbitration. Prof. Dr. Kaufmann-Kohler argued that the ability to choose an arbitrator is more than a hallmark of international arbitration; it is the keystone.

Prof. Dr. Kaufmann-Kohler also noted that investment arbitration has recently faced significant scrutiny, forcing the international arbitration community to consider certain reforms to ensure that it continues to be seen as a legitimate form of dispute resolution for investor-state disputes.

Role of party-appointed arbitrator

Alfonso Gómez-Acebo asked whether the expectations of a party-appointed arbitrator are the same as that of a presiding arbitrator. Alfonso Gómez-Acebo also highlighted the existing debate with respect to the unilateral appointment of arbitrators, and whether this tried-and-tested mechanism should remain as a default, or whether it ought to be entirely abolished. Alfonso Gómez-Acebo argued that this necessarily depends on the ‘role’ or ‘job description’ of party-appointed arbitrators. It was noted that there is currently no understanding, or set of written rules, which address what that particular role may be.

Alfonso Gómez-Acebo also noted that it is disconcerting to contemplate that one should presume that a specific role exists, as this in itself brings about confusion regarding independence and impartiality, an imbalance in the arbitral process, and the introduction of bias.

Overall, it was argued that there is a need for clarity regarding the role of party-appointed arbitrators and that there may be value in exploring special roles for certain party-appointed arbitrators, provided that both parties agree to do so. The most important action is to facilitate increased dialogue between parties, to ensure that their views regarding special roles are considered.

Audley Sheppard replied by stating that there should not be a positive obligation on party appointed arbitrators to adhere to specific roles. However, this should not discourage party-appointed arbitrators from better articulating their parties’ case in the event that their arguments have been poorly presented by counsel, or simply to ensure that the other members of the tribunal ‘get it’. It seems natural that a party would expect such support from its appointed arbitrator, and such initiative would not compromise expectations of independence and impartiality. After all, international arbitration is underpinned by the notion that parties strive to select the best arbitrators in the first place.

Quality of institutional appointments

Ruth Stackpool-Moore agreed with Audley Sheppard that an understanding of the role of party-appointed arbitrators is not enough, and proposed that it may be time to submit to a full-scale evolution of the arbitrator appointment process – by firstly assessing the status quo regarding institutional appointment, and then proposing specific improvements to the process.

Ruth Stackpool-Moore noted that there seems to be a general hesitation to accept that institutions play a pivotal role. Statistics from the QM Arbitration Survey, BLP Arbitration Survey and from institutions such as HKIAC, SIAC, LCIA and ICC, cumulatively suggest that institutions do in fact play a significant role in the appointment of arbitrators. Ruth Stackpool-Moore proposed that institutions must immediately address transparency – an exercise that would necessarily involve clear and comprehensive information with respect to the appointment process. This may include details as to who is responsible for such decisions and their experience, how such decision-makers are selected, and even the criteria used to inform the final appointment.

Natalie Y. Morris-Sharma welcomed Ruth Stackpool-Moore’s call to action and contributed the following points:

trust stems from more than the quality of appointments – institutions must have a good reputation;
institutions must strike the right balance regarding the type and extent of transparency; and
institutions must carefully consider the quality of their appointments, and ensure that their criteria are aligned to party criteria– a consultation process would be an ideal solution.

Prof. Dr. Kaufmann-Kohler then remarked – if we are to pursue greater appointment from institutions, what standard are we to adopt?

Reforming ISDS

Natalie Y. Morris-Sharma acknowledged that investor-state dispute settlement is facing a legitimacy crisis, irrespective of whether this is real or imagined. Three possible solutions with respect to the arbitrator appointment process were proposed:

1. ‘Arbitrators ad hoc’ – following the approach of certain courts which have a ‘Judges ad hoc’ system, increasing the tribunal from three to five members. This may assist parties with real or perceived concerns regarding arbitrator bias. This should remain an option rather than an obligation.
2. ‘Circumscribed appointments’ – rely on pre-established lists which would require parties to internally rationalise their appointments, as they would need to balance considerations of both an investor and host state.
3. ‘Agreed appointments’ – parties to agree at an early stage, empowered by an investment treaty. Though difficult, it is viable as long as parties have options and timelines.

Panellists also discussed the possibility of a permanent multilateral investment court, discussing issues such as Groupthink, homogenous decision makers, the role of dissents and other psychological pressures.

Takeaway

The arbitrator selection process is one of the most important aspects of an arbitration proceeding, and a key reason why parties choose arbitration over litigation. All panellists agreed that it now deserves significantly more attention in both commercial and investment arbitration, as it impacts a variety of stakeholders. Active participation in the arbitrator selection process by all concerned parties is imperative; it will ensure that the best possible arbitrators are appointed to meet the specific needs of a case.

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ICCA Sydney: Arbitration Challenged I – Reforming Commercial Arbitration in Response to Legitimacy Concerns

Tue, 2018-04-17 00:51

Geneva Sekula

Young ICCA

What if Facebook, as a result of its recent negative publicity, had the opportunity to file a request for arbitration against Cambridge Analytica? A key principle of international commercial arbitration is its maintenance of confidentiality, but would the public interest in such an arbitration justify greater transparency?

The afternoon panel of the first day of the ICCA Sydney Congress 2018 grappled with questions such as these in its examination of how international commercial arbitration is positioned to respond to growing challenges and concerns related to its legitimacy. Various criticisms include that arbitrations take too long, that they are too costly, that they are secretive, that there is no accountability etc. But how can the arbitration community respond?

Mr Dietmar W Prager’s opening remarks and Mr Andrés Jana’s presentation shone a spotlight on the tension that exists between public and private interests within an arbitration. A cornerstone of the concept of international commercial arbitration is party autonomy and party freedom in dictating the terms of their own dispute resolution.

However, there are strong public interest factors which emerge in arbitration proceedings, which Mr Jana characterised as stemming from two arenas:
The specific arena: the involvement of states and state entities necessarily brings into question issues of public interest. In 2017, 15.4% of ICC arbitrations involved a state party or state entity.
A more general arena: the large scale social significance of arbitration continues to grow, attracting more public scrutiny and focus.

There is a natural tension which exists between the promotion of public and private interests, and Mr Jana noted that adopting a framework which considers both is a good way to start to find a solution to enhance perceptions of legitimacy. Considering both interests is more likely to produce a favourable result.

However, of particular interest were the comments made by Ms Noradèle Radjai. Her presentation focused on a specific manifestation of the tension between public and private interests, through an examination of the criticism that the growth of international arbitration is hindering the development of the common law. Her thesis grew from the position that indeed, cases that might have otherwise contributed to the development of the common law are being arbitrated, thereby not forming part of case law. English and US law are the most common choices of law for international commercial arbitrations, and therefore these systems of law are particularly affected by this issue.

There are necessary issues of legitimacy to confront in this arena. From a global perspective, if a third of jurisdictions (i.e. common law jurisdictions) are limited in their development of precedential law then this is not a legitimate outcome. Ms Radjai noted however that this issue also impacts civil law jurisdictions, which though do not adopt binding precedent, use case law as influential precedent. Regardless of whether one takes a narrow view (i.e the interest of a party, or the arbitration community) or the wider global view, there are legitimacy issues that need to be confronted.

So what is the solution for the arbitration community? Any solution must be careful not to override the autonomy of the parties in choosing arbitration as their forum for dispute resolution. Ms Radjai suggested that one possible way to mitigate this issue is through a more systematic publication of arbitral decisions. Wider publication would enable parties to refer to more decisions, and also allow courts to allocate appropriate weight to certain decisions. Ms Radjai recommended that these awards could carry the same weight as other non-precedential material, such as academic materials and judicial decisions from other jurisdictions.

In the discussion that followed her presentation, Ms Radjai also suggested that to balance confidentiality concerns, publication bodies could anonymise the names of the parties, implement a cooling off period or 2 or 3 years before publication, and publish the reasoning with limited reference to the facts, in an effort to protect and preserve confidentiality.

Unsurprisingly, the panel were unable to resolve all the legitimacy concerns facing international commercial arbitration in their allotted 90-minute time slot, however the panellists provided insightful and engaging responses to current problems facing the arbitration community, and made some compelling suggestions for the arbitration world to consider moving forward.

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ICCA Sydney: Law-Making in International Arbitration – What Legitimacy Challenges Lie Ahead?

Mon, 2018-04-16 21:40

Mitchell Dearness

Young ICCA

The theme of this year’s ICCA Congress is ‘Evolution and Adaptation: The Future of International Arbitration.’ Central to this theme was the topic of the First Plenary Session -‘Law-Making in International Arbitration: What Legitimacy Challenges Lie Ahead?’ The timing of such a discussion is apt given the Court of Justice of the European Union’s decision in Slovak Republic v. Achmea BV (Achmea). Stephan Schill (University of Amsterdam) moderated the discussion. The panel comprised of Sundaresh Menon (Singapore Supreme Court), Alexis Mourre (ICC International Court of Arbitration), Lucy Reed (National University of Singapore) and Thomas Schultz (King’s College London).

Thomas Schultz considered the concept of ‘legitimacy’ in this international arbitration context, noting that it ought to be viewed from the perspective of key actors (such as arbitrators and arbitration institutions) who have the ability to influence law-making.

Lucy Reed examined the role of the arbitrator and the extent to which it involves legitimate ‘law-making.’ Professor Reed noted the distinction between the role played by an arbitrator in general commercial arbitrations, in certain specialised arbitral tribunals (such as the Court of Arbitration for Sport and the Iran-US Claims Tribunal) and finally in the context of investor-state arbitrations. The legitimacy of arbitrator law-making in this final scenario (arbitrators determining investor-state arbitrations) is particularly topical in the current climate given decisions such as Achmea and the negotiation and signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Alexis Mourre focussed on the role played by arbitral institutions and bodies in rule-making, in particular with regard to ‘arbitration procedure.’ Arbitration cannot exist in a vacuum and the contribution made by these institutions and bodies is fundamental. One only needs to consider widely adopted instruments such as the IBA Rules on the Taking of Evidence in International Arbitration and the IBA Guidelines on Conflicts of Interests in International Arbitration. Legitimacy can be established in this context by ‘cross-fertilisation’ within the arbitration community and the existence of a ‘decentralised and horizontal rule-making process.’

Finally, Chief Justice Sundaresh Menon considered the ‘law-making’ role played by other public actors, in particular domestic legislatures, domestic courts and international organisations. In a climate where a less interventionist approach by these bodies can be called for the important and essential role played by them can be overlooked. Chief Justice Menon refers to the ‘high watermark’ being the development of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Model Law on International Commercial Arbitration.

Note: The ICCA Sydney conference papers prepared by the panelists will be published in the ICCA Congress Series No. 20. This Post is intended to provide only an overview of a detailed discussion of a complex topic.

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ICCA Sydney: Arbitration Challenged II: The Realities of Arbitration Economics: Who Gets to Play, and What are the Implications

Mon, 2018-04-16 21:15

Brecht Valcke

Young ICCA

The panel on Arbitration Challenged II: The Realities of Arbitration Economics: Who Gets to Play, and What are the Implications, at ICCA Sydney 2018 Conference, was moderated by Susan Franck, American University, Washington College of Law (United States) and had contributions from Mohamed Abdel Wahab, Zulficar & Partners Law Firm (Egypt); John Beechey, BeechyArbitration Ltd (UK); Kate Brown de Vejar, Curtis, Mallett-Prevost, Colt & Mosle, S.C. (Australia); Victoria Shannon Sahani, Arizona State University, and Sandra Day O’Connor College of Law (United States).

One of the key criticisms of the international arbitrations system is the high costs. Surprisingly however, stakeholders have generally not questioned costs to be high in international arbitration in deciding to proceed to arbitration or not. However, there is considerable uncertainty as to the law applicable to the question of costs (some States apply party-party costs, some apply a “loser pays” approach) as well as recoverability of costs (some States do not accept recoverability and the laws are not consistent between States).

More and more, third party funders are being used in international arbitrations and it is questioned what impact this may have on the concept of access to justice.

Third party funding may increase the access to justice by allowing parties who would not otherwise have been able to fund a dispute to bring a claim.

However, third party funders generally will not agree to fund parties that are unlikely to win, or pursue non-damages claims, or the respondent State in investment arbitrations. This is so because generally, third party funders are looking for a return on their investment. This approach arguably denies access to justice for the parties third party funders refuse to fund.

Other concerns raised by the panel were the allocation of costs (party-party or “loser pays”) and security of costs. Considering third party funders are not a party to the arbitration agreement, a concern is that third party funders are beyond the reach of the tribunal in imposing an order for costs or for security for costs, where third party funders gain a benefit when costs are awarded in favour of the party they funded.

The panel further discussed the fact that third party funding is currently not regulated or supervised. Because third party funding comes into play at the beginning of a dispute, it is a highly speculative business. The panel argued that third party funders may adapt a ‘portfolio’ funding approach where it invests in many high risk, high rewards disputes which may increase the number of unmeritorious claims to be brought. Potentially, third party funders may also have an interest in funding such claims that are about changing rules in favour of third party funders.

Whether or not third party funding fosters or hinders access to justice, the concept of third party funding is generally accepted throughout the common law (except for Ireland) and civil law jurisdictions. Most tribunals and legislations impose an obligation to disclose where third party funders are involved in a dispute.

As the use of third party funding in disputes will continue to grow, it remains to be seen whether it will be sufficient to rely on self-regulation and code of conduct rules or whether third party funding will need to be independently regulated and supervised.

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ICCA Sydney: Arbitration Challenged Part I: Reforming Substantive Obligations in Investment Treaties and Conditions of Access to Investment Arbitration

Mon, 2018-04-16 20:44

Brecht Valcke

Young ICCA

The panel on Arbitration Challenged Part I: Reforming Substantive Obligations in Investment Treaties and Conditions of Access to Investment Arbitration, at ICCA Sydney 2018 Conference, was moderated by Meg Kinnear, Secretary General of the International Centre for Settlement of Investment Disputes (Canada) and had contributions from speakers Christophe Bondy, Cooley LLP (Canada); Max Bonnell, White & Case (Australia); Mélida Hodgson, Foley Hoag LLP New York (United States); Won Kidane, Seattle University School of Law (United States); and Whenhua Shan, Xi’an Jiaotong University (China).

The panel discussed whether specific substantive obligations in investment treaties need reform or at least could be benefited from an evolution. This question springs from some of the criticisms that are expressed about investment treaties, such as:

– interpretation of investment treaties are too expansive and too pro-State;
– a lack of consistency in jurisprudence; or
– poor drafting of 1st and 2nd generation investment treaties.

The substantive obligations addressed by the panel included: the definition of investment, the fair & equitable treatment standard (FET), the concept of expropriation, the most favoured nation clause (MFN), and investment treaties imposing obligations on the investor.

Investments

As a part of assessing whether tribunals have jurisdiction a ‘double-door’ approach is taken in assessing the definition of “investment”. First, whether the definition of “investment” under the investment treaty under which the dispute is brought applies; secondly, whether the definition of “investment” under the investment arbitration rules applies.

“Investment” in investment treaties is usually based on an asset approach. Most tribunals apply the Salini-test, however, not in a consistent fashion.

The interpretation of “investment” should be based on the ordinary meaning of the word and in general includes the characteristics of an input of capital, the assumption of a profit or gain, and the adoption of risk.

Fair & Equitable Treatment (FET)

FET in investment treaties is the idea of a minimum standard of treatment of investors, disciplined by State practice. The panel identified a conflict between the standard as considered:

– by the States when drafting investment treaties, being a minimum standard based on such customary international law notions as the denial of justice,
– where the jurisprudence has linked FET to concepts such as legitimate expectations, reasonableness or proportionality. This has triggered State practices to react to the tribunal decisions on FET.

Some possible reactions identified by the panel include:

1. terminating investment treaties;
2. eliminating the reference to FET in investment treaties but including a reference to minimum standard concepts such as reasonableness or proportionality;
3. redrafting investment treaties so that FET is defined as a minimum standard treatment;
4. defining FET and restricting the tribunals right to interpret the concept; or t
5. maintaining the existing notion of FET under the motivation that a new concept of FET may bring with it unknown problems of its own.

Expropriation

The concept of expropriation evolved from direct expropriation to also include indirect expropriation (e.g. contractual rights). Over the years, a wider interpretation developed of what constitutes expropriation, triggering questions of whether refusing to grant an environmental permit could be construed as expropriation. Nowadays, more and more exceptions are accepted for the States to regulate such areas as health (pharmaceuticals, vaccines, medical devices), public health or regulating tobacco. The panel questioned whether extremely low or extremely high damages awarded in a dispute between State and investor could be considered an expropriation.

Most Favoured Nation (MFN)

Remarkably, States infrequently turn their mind to the concept of MFN when drafting investment treaties and its application by tribunals is seldom challenged.

However, the concept that an investor can rely on any substantive protection offered by the State in any of its other third party investment treaties exposes the State to potential obligations it may never intended to undertake when it negotiated the investment treaty under which the State is now sued.

Some States, such as India, therefore have excluded MFN clauses or international arbitration clauses from their more recent treaties. Newer treaties such as CETA and JEPA also limit the application of MFN.

The argument against the application of MFN is that a State cannot be drawn into an arbitration it did not consent to, where it nonetheless common for tribunals to rely on MFN to allow arbitration to go ahead.

It is therefore crucial that States address the application or exclusion of MFN in their treaty negotiations expressly. More and more States exchange position papers expressing the State’s view on whether MFN should or should not apply.

Treaty obligations on investors

Recently, investment treaties may also impose obligations on the investor (e.g. in the areas of environmental protection, labour laws and anti-bribery).

The panel questioned whether imposing obligations on investors under investment treaties erodes the protection of the investor, which is the main reason investment treaties came into existence, i.e. to replace “gunboat” diplomacy.

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Belt and Road: Supporting the Resolution of Disputes

Mon, 2018-04-16 08:05

Mingchao Fan, Briana Young and Anita Phillips

On 5 March 2018, the ICC Court announced the establishment of a commission to address dispute resolution in relation to China’s Belt and Road Initiative. The commission will drive the development of ICC’s existing dispute resolution procedures and infrastructure to support Belt and Road disputes.

The Belt and Road

The Belt and Road is China’s ambitious infrastructure project spanning more than 70 countries, with an increasing number of non-Chinese investors, contractors and developers – including sovereign states – involved. The project aims to build connectivity and cooperation between China across the land-based Silk Road Economic Belt and the 21st Century Maritime Silk Road. It spans large parts of Asia, the Middle East, Africa and Europe.

A construction and infrastructure initiative on this scale will inevitably generate disputes. With an estimated US$900bn in projects planned or already underway, the project gives rise to a multitude of actual and potential commercial disputes to consider. In response to this, Alexis Mourre, President of the ICC Court, announced the establishment of the commission during the ICC Court’s working session last fall.

It is a competitive field, with numerous existing institutions vying for a share of the Belt and Road disputes market, and new courts and institutions being established specifically for the purpose. It seems clear that parties who adopt the right dispute resolution model in their contracts today will be in a better position to resolve disputes as and when they may arise.

Make-up of the Commission

Justin D’Agostino, Global Head of Disputes at Herbert Smith Freehills and Hong Kong’s alternate member of the ICC Court, has been appointed commission chair. Dr Mingchao Fan, ICC Director for North Asia, will act as secretary. Other commission members are drawn from a range of sectors, representing jurisdictions including the PRC, Hong Kong and Singapore. A broader advisory board, representing other countries along the Belt and Road, is being considered.

ICC recognises the importance of engaging key stakeholders within both corporates and governments all along the Belt and Road, to ensure that it is offering the best possible service to parties on all sides.

Although the ICC Belt and Road Commission’s main objective is to raise awareness of the ICC as a “go-to” institution for disputes arising out of China’s Belt and Road Initiative, the commission has additional relevant aims:

leveraging ICC’s unparalleled international coverage with secretariats and/or national committees in over 100 jurisdictions to attract Belt and Road disputes;
engaging with corporates, state-owned enterprises and governments across all Belt and Road territories; and
highlighting Belt and Road dispute resolution at a series of events throughout the region, with the aim of promoting ICC’s capabilities widely. Events are planned in locations as diverse as China, Paris, Kazakhstan, Kyrgyzstan, Nigeria, Southeast Asia, Japan and Hong Kong, with more to come.

In the Commission’s view, the combination of the ICC’s tried-and-tested, multi-process services, its unrivalled geographical footprint, and its established credibility and independence, place it in a strong position to resolve Belt and Road disputes.

Sector expertise

On average, construction and engineering disputes account for close to a quarter of all ICC arbitration cases, while the finance and insurance sector accounts for approximately 20%. As the world’s leading arbitral institution, ICC is adept at handling complex multiparty cases as well as high-value, complex multi-party and multi-contract disputes (approximately half of all cases filed involve three or more parties). The introduction in 2017 of an expedited procedure also enables lower-value cases to be handled with greater time- and cost-efficiency.

Mediation matters too

There is no ‘one-size-fits-all’ method of resolving Belt and Road disputes. But there is a concerted effort, led and supported by the Chinese government, to encourage mediation clauses in Belt and Road agreements, with provision for arbitration if mediation fails. ICC is a world-leading arbitration and mediation provider, with tried and tested mechanisms and a strong pool of arbitrators and mediators. It is therefore well placed to provide appropriate, effective dispute resolution services to parties all along the New Silk Road. ICC’s stated objective is to ensure that where disputes arise, they are resolved efficiently and with minimal damage to the parties’ commercial relationships.

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Interview with Meg Kinnear, Secretary General of the International Centre for Settlement of Investment Disputes

Sat, 2018-04-14 23:41

Crina Baltag (Acting Editor)

In the midst of challenges to the very legitimacy of Investor-State Dispute Settlement (ISDS), the International Centre for Settlement of Investment Disputes (ICSID) celebrated its 50th anniversary and embarked on the fourth ICSID Rules amendment process in ICSID history. The previous amendment processes brought notable additions to the ICSID Rules, such as enhanced transparency in the arbitral process (including publication of at least excerpts of the ICSID awards), and the development of an amicus curiae provision (used in over forty ICSID cases since 2006).

Kluwer Arbitration Blog invited Meg Kinnear, the Secretary-General of ICSID, to discuss these proposed changes to the ICSID Rules, the first 50 years of existence of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention) and of ICSID, as well as the challenges ISDS is currently facing.

1. Meg Kinnear, welcome to Kluwer Arbitration Blog. It is an honour to have you as our guest before the start of the ICCA Conference in Sydney. ICSID and the ICSID Convention celebrated the first 50 years with an impressive caseload, exceeding 650 cases registered under the ICSID Convention and Additional Facility Rules. How were the first 50 years?

Thank you for the opportunity. I am tremendously proud of the role that ICSID has played in the field of investment law over the last fifty years.1)See also Building International Investment Law: The First 50 Years of ICSID by Meg Kinnear, Geraldine Fischer, Jara Minguez Almeida, Luisa Fernanda Torres, Mairée Uran Bidegain (Wolters Kluwer/ICSID) jQuery("#footnote_plugin_tooltip_6125_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6125_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Let me offer a few reflections. One is the ongoing relevance of ICSID’s original mandate. As you know, ICSID is housed in the World Bank where a core priority is mobilizing private finance for development. How to unlock finance by putting in place the right economic and policy drivers for investment—this is the conversation that surrounds us. Against this backdrop, the preamble to the ICSID Convention is remarkably prescient. Its emphasis on international cooperation, and the specific role that foreign investment plays in economic development, could well have been written today.

I also think that the drafters of the ICSID Convention, Regulations and Rules were admirably forward-thinking in the design of the institution. The notion of a self-contained regime that serves to depoliticize international investment disputes—these are qualities that have firmly established ICSID as the preeminent forum for investment dispute settlement. And it is because of this solid foundation that ICSID jurisprudence has made such a wide and deep imprint on international investment law over time.

Finally, it has been a personal privilege to witness the development of the ICSID secretariat. Today we are about 70 individuals from 35 countries, fluent in some 20 different languages, and amongst the most talented people I know.

2. Besides the case administration, the ICSID Secretariat is also involved in other activities, such as the appointing authority function of the Secretary General, training courses etc. How busy is the ICSID Secretariat?

The short answer is ‘very’. We have seen a growing demand for our capacity building services, particularly amongst first-time and developing country participants in ICSID cases. Our ICSID 101 training course, which offers member States a deep dive into ICSID arbitration practice, has been delivered in 40 countries so far. The process of amending the regulations and rules has also been time intensive. We have consulted widely, and will continue to do so over the next year. Our goal is to ensure that all interested stakeholders have an opportunity to provide input and respond to proposed amendments. And our website has also developed over the years into a tremendous research and learning tool, and we continue to build and refine it.

I am also pleased that ICSID has been named the registry in recent EU trade and investment treaties, and designated as the appointing authority in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Both are a significant recognition of ICSID’s leading role in investment arbitration.

3. The current debate revolves around the legitimacy of ISDS, the proposal for a new multilateral investment court, accompanied by renegotiations of free trade agreements etc. How are all these reflected on ICSID?

Clearly international investment agreements have evolved significantly over the last couple decades. There is, however, a lag between innovations in treaties and ISDS case law. UNCTAD pointed out recently that virtually all ISDS cases to date have concerned treaties drafted before 2010. In other words, ICSID tribunals have not yet interpreted the latest generation of investment agreements.

In terms of discussions on ISDS specifically, such as a multilateral investment court, our philosophy is to contribute where we can and in ways that are appropriate. A key objective is ensuring that discussions are grounded in the facts. Given that the majority of investment disputes are settled at ICSID, we have a special responsibility to make information on ISDS trends, and on how the system operates in practice, available in ways that are useful and timely.

At the end of the day, policy decisions on the form of ISDS are for States to make. Our role is to administer these cases, and we strive to do that at the highest professional standard. This ultimately is the responsibility we have to our 153-member States and the investors which elect to bring cases to ICSID, and it doesn’t change even as ISDS evolves.

4. Is the amendment process of the ICSID Rules a response to this apparent ISDS crisis?

I would say firstly that the rhetoric of crisis, backlash, etc. does everyone a disservice in many ways. I value the fact that international investment law broadly, and dispute settlement specifically, is a dynamic field. I don’t agree with every policy or approach, but change that is brought about by a competitive exchange of ideas is ultimately a good thing. The real crisis would be if investment dispute settlement ossified and was incapable of change.

Second, my sense, and this comes from speaking daily with our clients, is that the ICSID rules are performing well. There is always room for improvement—which is why we initiated the amendment process—but we are starting from a solid foundation. You may recall that we made some important amendments to the rules in 2006, including strengthened disclosure requirements for arbitrators, expanded transparency provisions, and procedural rules designed to reduce the time and cost of proceedings. The amendment process today continues this tradition of carefully considered change based on a lot of hands-on experience, a solid empirical foundation, and broad consultation.

5. What is the current stage of the amendment process?

I would say that we are a good half-way to the finish line, but let me explain. In terms of scope, I should emphasize that we are focused on amendments to the ICSID Convention Regulations and Rules—but not the Convention itself. Changes to the Convention require endorsement from all member States, whereas changes to the rules can be amended with a two-thirds majority. We currently have 153 members, so that means at least 102 votes of support. Changes to the Convention are part of the overall vision, but do not fall within the scope of the current process.

In 2016 we made three requests to ICSID member States. One, that they suggest topics to be considered for amendment. Two, that they nominate a focal point: someone with knowledge and responsibility for the portfolio and who could contribute substantively and authoritatively on behalf of her government. Third, we undertook a survey of member States on compliance with awards of costs, at the request of Panama. Last year, we also reached out to the broader public for input. To date we have received over twenty written submissions from law firms, NGOs and individuals—all of which are published on our website.

In parallel, we established a rigorous internal process. Working groups of ICSID counsel were tasked with studying specific rules: their history, how they have been applied in practice, and the comments we received on them from States and the public. In a series of weekly meetings, these groups presented their findings and subjected them to often intense debate amongst their ICSID colleagues.

This process of external consultation and internal deliberation feeds into a working paper, to be released in August of this year, that suggests textual changes to the rules and regulations. We will meet with member States in late September to discuss the proposed amendments, and then embark on a round of meetings at a country and regional level, and with ISDS practitioners and the public, to gather further input.

At the end of 2018 we will take stock. I imagine that some amendments will be easily agreed, others will need further discussion, and others may need to be shelved for another day. Ultimately, a package of amendments will go to the ICSID Administrative Council for a vote.

6. What are the potential areas for amendment? Is the creation of an appellate body still a topic to be considered?

I am glad to discuss what we think will be proposed, but with the caveats that the working paper is not yet final, and, what it will offer are proposals for States and the public to consider and respond to.

That said, a cross-cutting priority is that the rules are simply worded and sequenced in a way that makes them more user friendly. We also want the rules to help reduce the time of ICSID proceedings. So, for example, the working paper recommends that claimants provide more information in their request for arbitration, such as background to the dispute and damages claimed. This would not influence whether a claim is registered, but it would expedite the subsequent proceedings. Also likely is a proposal to allow claimants to ask that their request for arbitration be used as the memorial, which again saves time and might be especially useful in less complex cases.

Once a case is registered, there are other ways in which the rules can quicken the pace of proceedings. For example, by imposing a general obligation on the parties and arbitrators to establish firm time goals for each step in the process. Also recommended is a presumption that all filing is electronic, which not only reduces the time and cost of proceedings, but makes them more environmentally friendly.

I expect that measures to cut down on the time and cost of proceedings—so long as they don’t jeopardize due process—are going to be widely welcomed. Other changes require a more delicate balancing of interests. Transparency and access to case-related documents is one of them. In our view one of most important aspects related to transparency is making decisions and awards public. This fosters consistency and coherence in ISDS caselaw, and public confidence in the system more generally. The working paper therefore proposes mandatory publication of awards (or extracts of awards), decisions and orders, while leaving the release of other case-related materials to the discretion of the parties or the obligations in the relevant treaty.

In answer to the last part of your question, no, the working paper will not propose an appeals facility specifically. Indeed, this was discussed as part of the 2006 amendment process, and ultimately did not muster sufficient support amongst member states. It continues to be discussed at UNCITRAL and UNCTAD, but my sense is that states have still not reached a consensus either way.

However, there are a couple aspects related to appointments to keep in mind. One is that an appeals facility, or other options concerning how or who to appoint, can likely be accommodated by the current rules. In fact, treaties are where—first and foremost—States decide on the primary appointment system. The ICSID rules address appointments in default of a party selection, and so the method selected by the parties is respected.

7. Do you consider that the Administrative Council could play a more active role and issue interpretative resolutions on controversial matters, such as the meaning of the term “investment”, the denunciation of the ICSID Convention, among other matters?

No, this would confuse the function of the Administrative Council. It is a governance, not a legal, body—and we are scrupulous about not mixing the governance function with the legal function of a tribunal. Keep in mind that the States which comprise the Administrative Council are the same States which are respondents or have citizens acting as claimants in cases. The ICSID Convention is careful not to politicize the role of the Administrative Council, mindful of the fact that it would hinder the Council’s ability to perform its governance function and hurt the legitimacy of ICSID cases.

8. Are there certain areas that are in real need of improvement, so that ICSID is able to move forward as successful as now?

The goal of ensuring the rules make ICSID proceedings more efficient in terms of time and money is really in everyone’s interest. That is a lens through which we have viewed all the ICSID rules, and where I am confident that we will see some meaningful improvements.

9. What is the position of the ICSID Secretariat in relation to the non-compliance with arbitral awards rendered under the ICSID Convention based on the allegation that compliance with such arbitral awards are inconsistent with EU law?

The ICSID secretariat needs to be impartial and that means not commenting on legal decisions. We are carefully watching the impact of the decision, and it is being raised by parties in a number of ICSID cases.

10. Third Party Funding is a hot topic in arbitration at this moment and ICSID arbitral tribunals have had the opportunity to express their position on this matter. Should we expect some important amendments of the ICSID Rules to reflect the latest developments on Third Party Funding in investment arbitration cases?

Prohibiting third-party funding is not something we plan to propose. There are a few conceptual and practical reasons behind that decision. First, simply defining third-party funding is difficult. Second, forms of third-party funding are legal in many states, and may be viewed as an access to justice—rather than a conflict of interest—issue. What we do propose is required disclosure by parties of third party funding and by arbitrators of a relationship with a funder to identify, and hopefully avoid, conflicts of interest.

11. The number of challenges of arbitrators sitting on the ICSID panels has increased in recent years, and this is something emphasized by the ICSID Secretariat itself. What are the suggested approaches to this matter envisaged in the new ICSID Rules?

We are working on the exact parameters, but I can say a few things. One suggestion is for a specific timeline for the filing of a proposal for disqualification of an arbitrator. This would replace the current requirement that it be done “promptly”, which is not as precise. Another is that a challenge should not automatically suspend the proceedings. Other proposals that we have received—such as modifying the system of having co-arbitrators decide a challenge unless they are especially divided—may be difficult without changes to the ICSID Convention. And changes to the Convention, as I mentioned, are not a part of this current process. However, I should point out that the Convention constraints do not apply to the Additional Facility rules, so here there will be greater scope for change. Moreover, changes made to the Additional Facility could serve as examples down the road for amendments to the Convention.

12. Is there a need for an ICSID Code of Conduct for Arbitrators and Conciliators?

That is a good question. Currently, the ICSID rules require a declaration that arbitrators meet the qualifications spelled out in the ICSID Convention and a continuing duty to disclose throughout the case. The amended rules could entail a more elaborate declaration. The IBA code of conduct, as well as recent investment treaties that feature more detailed codes of conduct, offer guidance in this area. At the same time, we understand that UNCITRAL is mandated to work on a code of ethics, and ideally that code is as close to universal as possible. We will work with UNCITRAL on the elaboration of a code.

13. What are the issues concerning the ICSID annulment procedure identified so far and which are likely to be addressed in the background paper to be published soon?

The working paper will touch on some technical issues related to annulment; for example, addressing cross application in cases where both parties to an arbitration seek the annulment of an award. But generally, the rules on annulment work well. The debate on annulment is primarily focused on the standard of review, and that is a policy question that falls outside the scope of the ICSID rules amendment. It is certainly a discussion worth having, and could provide an interesting alternative to a full appeals court. But it is not a part of ICSID’s rules amendment process.

14. We are in a boom-and-bust technological period where new tech can either aid ICSID’s operations or expose it to security breaches. There are examples of arbitral institutions being hacked and confidential information being dumped online. How has ICSID responded to these issues?

I am pleased to say that our security systems are first class and benefit from the expertise and technology that exists at the World Bank Group. A dedicated unit, the Office of Information Security, steers the World Bank Group’s cyber security risk management policies and procedures, including those at ICSID. This includes around-the clock security operations in Washington, D.C. and 186 country offices across the world. We have state-of-the-art firewalls, which have been key in preventing any information breach leading to reputational harm. Plus, all ICSID staff are required to take periodic trainings on information security and data protection.

15. Finally, what are you expecting in the next 50 years for ICSID and the ICSID Convention?

Good question! My crystal ball doesn’t extend quite that far in the future, but there are two things I would flag in the shorter term. One, as I mentioned we are not proposing amendments to the ICSID Convention itself. However, we do want to plant that seed now and encourage States and users of ICSID to consider changes that would be beneficial so that it will keep evolving to ensure that we meet our mandate.

Second, our clients will be happy to know that we are moving our Washington D.C. offices in 2019. The new building will have dedicated, state-of-the-art hearing rooms, which we are excited about. We will be sure to invite Kluwer to the house warming.

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References   [ + ]

1. ↑ See also Building International Investment Law: The First 50 Years of ICSID by Meg Kinnear, Geraldine Fischer, Jara Minguez Almeida, Luisa Fernanda Torres, Mairée Uran Bidegain (Wolters Kluwer/ICSID) 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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CJEU Does Not Buy Wathelet’s Opinion in Achmea – What Is Left Unanswered?

Sat, 2018-04-14 03:00

Volodymyr Ponomarov

On March 6, 2018, the Court of Justice of the European Union (“CJEU”) in its 12-page judgment backed the Commission in its grid to finally scrap the intra-EU BITs and defied Advocate General’s attempt to preserve the system.

The purpose of this note is to concisely analyze this far-reaching judgment of the CJEU against the major precepts of the advisory opinion of Advocate General Wathelet (“AG”), previously discussed in several posts, and to determine what was, nonetheless, left unattended by the Court, and what may ensue in the aftermath.

General Observations

The CJEU held that the substantive provisions of the EU law preclude the ISDS mechanism of Article 8 of the Netherlands-Slovakia BIT and hence render any award stemming from the intra-EU BIT unenforceable in the Member States.

Key points worth noting before proceeding to the substance of the judgment:

  • The CJEU employed the reverse order of the questions discussed by the AG in his opinion, effectively bypassing the third and, arguably, the most important question on discrimination under Article 18 TFEU pushed by the EU Commission.
  • The CJEU conflated the first and the second questions and simultaneously considered whether the BIT in question conformed to Articles 267 and 344 TFEU.
  • The CJEU did not entertain the request from the Czech, Hungarian, and Polish governments to fend off the AG’s opinion on the matter.

The crux of the CJEU’s reasoning consisted in a fundamental premise that an international agreement, i.e. the Netherlands-Slovakia BIT, cannot affect the allocation of powers fixed by the EU law. The CJEU further underlined that the Member States are to ensure the uniform application of the EU law in their territories. And the only way to ensure such uniformity and consistency is through a common judicial system of the European Union consisting of the national courts, tribunals, and the CJEU.

Given that the CJEU effectively avoided addressing the third question on whether the Netherlands-Slovakia BIT discriminate against other Member States, this note will follow the pattern set out by the CJEU, in particular addressing three pivotal issues of the Court’s reasoning below.

I. Does the Achmea dispute concern the interpretation of the EU law?

In 2017, the AG opined that, although Article 8(6) of the Netherlands-Slovakia BIT subjects investment-state disputes to “the law in force of [the Netherlands or Slovakia]” and “other relevant Agreements between [them]” (i.e., the EU Treaties), the dispute does not implicate the interpretation and application of the EU law per se. According to the AG, the Achmea Tribunal was called upon to rule on the breaches of the BIT in question, and the latter’s provisions do not necessarily overlap with the EU law. For instance, the most-favored nation clause of Article 3(2), the umbrella clause of Article 3(5), the sunset clause of Article 13(3), and finally, the ISDS mechanism of Article 8 of the BIT have no equivalents in the EU law and the Treaties. Therefore, the Achmea Tribunal faced little risk of engrossing in the application and interpretation of the EU law, according to the AG.

In its recent judgment the CJEU decisively renounced the AG’s proposition by pointing out that, to consider the potential infringements of the Netherlands-Slovakia BIT, the Achmea Tribunal could not but apply the EU law, specifically the provisions on the freedom of establishment and free movement of capital. This finding led the CJEU to the question of whether the Achmea Tribunal had the power to apply the EU law in principle.

II. Can the Achmea Tribunal be considered “any court or tribunal” within the confinements of Article 267 TFEU and thus apply the EU law in the first place?

Given the CJEU’s position that Achmea Tribunal was essentially engaged in application and interpretation of the EU law, the question now lingers whether it had the right to do so. In other words, whether it constituted “[a] court or tribunal of a Member State” within the confinements of Article 267 TFEU.

The AG offered a number of criteria for the CJEU to determine that the Achmea Tribunal was indeed “[a] court or tribunal” under Article 267 TFEU and thus could legitimately apply the EU law. He surmised, in particular, that the Achmea Tribunal was “established by law” – the standard which was elaborated in Ascendi Beiras Litoral e Alta, Auto Estradas das Beiras Litoral e Alta (C-377/13, EU:C:2014:1754), where arbitration of tax disputes was found sanctioned by a Portuguese law. In addition, the AG attempted to draw the analogy with the Benelux Court of Justice discussed in Parfums Christian Dior (C-337/95, EU:C:1997:517), recognizing that the latter, even though not a court or tribunal of a Member State, “should . . . be able to submit questions to [the CJEU], in the same way as court of any of those Member States.”

The CJEU dismissed the AG’s reasoning. First, it emphasized that tribunals arbitrating tax disputes in Portugal derive their power from the state’s constitution. On the contrary, the ISDS mechanism of Article 8 of the Netherlands-Slovakia BIT does not form “part of the judicial system” of the contracting states, but is rather of “a precisely exceptional nature”. Second, the Achmea Tribunal did not have “any . . . links with the judicial systems” of Slovakia and the Netherlands, as compared to the Benelux Court of Justice, whose principal task is to ensure cooperation and uniform application of law within the three Benelux states.

Consequently, the CJEU held that, as a matter of the EU law, the Achmea Tribunal cannot be considered “[a] court or tribunal of a Member State” and hence it was not authorized to apply and interpret the EU law in the first place. The CJEU never addressed other criteria advanced in the AG’s opinion, such as the permanent nature of the Achmea Tribunal, its compulsory jurisdiction, exclusion of aequo et bono in decision making, and the Tribunal’s impartiality.

III. Does a limited judicial review of arbitral awards in the context of investment arbitration constitute a remedy for “effective legal protection” as required by Article 19 TEU?

According to the AG, the awards rendered under the BITs are similar to arbitral awards of the commercial arbitration. As such, these awards cannot avoid judicial review and/or be enforced without the assistance of a Member State. Further, neither the Commission nor the Member States ever sought to debate the incompatibility of arbitral awards with the EU law in the context of commercial arbitration.

In the AG’s opinion, the CJEU judgments in Eco Swiss (C-126/97, EU:C:1999:269), Genentech (C-567/14, EU:C:2016:526), and Gazprom (C-536/13, EU:C:2015:316) involving set aside of arbitral awards of commercial arbitration prove that the Member States are able to safeguard the uniform application and interpretation of the EU law “whether in a competition matter or in other areas of [law]” (i.e., in international arbitration). In addition, the AG weighted in that domestic courts are well equipped with the mechanisms of Article V of the New York Convention to protect the European public policy in the context of both commercial and investment setting.

The CJEU once again resolutely disagreed with the AG. It noted that the award rendered by the Achmea Tribunal is final by its nature, which in turn leaves little room for the judicial review by German courts under Paragraph 1059(2) of the German Code of the Civil Procedure [Judgment para. 53].

The CJEU accentuated on the crucial discrepancy between the investment and commercial arbitrations, noting that the former “originate[s] in the freely expressed wishes of the [private] parties”. On the contrary, according to the CJEU, the BIT arbitration is conceived as an attempt of the Member States to remove from the jurisdiction of domestic courts and thus from the remedies for “effective legal protection” fixed by Article 19(1) TEU. In other words, the ISDS mechanism of Article 8 of the BIT falls foul with the states’ obligations arising from Article 19(1) TEU to provide sufficient remedies in the fields covered by the EU law.

What the CJEU did not say?

  • Whether the ISDS in the intra-EU BITs constitutes discrimination under Article 18 TFEU?

The CJEU left open a pivotal question of the alleged discriminatory nature of the BIT’s ISDS provision, strongly pushed by the Commission. The AG noted that the reciprocal nature of the rights and obligations of the parties is “a consequence inherent in the bilateral nature of the BITs” and hence does not amount to discrimination within the meaning of Article 18 TFEU.

  • Whether intra-EU BITs are similar to intra-EU treaties on the avoidance of double taxation (DTA)?

The AG stressed on the similarities between BITs and DTAs, namely that they are aimed at the same economic activities, which was not addressed by the CJEU.

  • What will happen to the ISDS mechanism of the Energy Charter Treaty in the wake of the CJEU’s decision, given that all Member States and the EU itself are the parties to the ECT?

The AG noted in his opinion earlier last year, that if any EU institution or any Member State had “the slightest suspicion” that the ISDS mechanism set forth in Article 26 of the ECT might be incompatible with the EU law, they would have sought an opinion from the CJEU. Nonetheless, it remains unclear what will happen to it, since the CJEU did not address the issue in the recent judgment.

____________________________

*Other recent posts on the Achmea judgment can be accessed here and here, as well as at the following link.

 

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How to Disqualify and/or Remove Arbitrators Under Ethiopian Arbitration Law: Is Ethiopian Law on the Right Track?

Thu, 2018-04-12 21:12

Michael Teshome

If you are a counsel in an ongoing arbitration, you have two obligations: 1) navigate your ways through provisions of the applicable law so that you can litigate as a professional; 2) satisfy your client with your service and make sure that all his questions are answered properly.
Especially, if an arbitrator (whether or not chosen by you) is not discharging his or her duty on time, if you suspect there exists a relationship with the other party, does not understand the case properly, fails to communicate meetings which are crucial to the parties, delegate his or her duty to another person, you might wonder what to do in that regard before things get worse, or before an award is rendered.
It is impossible to think of arbitration without arbitrators. After all, parties choose arbitration to save time, maintain confidentiality and use the advantage of choosing their own arbitrators and seat. In other words, parties choose arbitration because they feel like they can be well represented and ultimately get a fair award. Had it not been for procedural flexibility and specificities, it would have been impossible to speak about arbitration.
Until a final award is given, arbitrators are expected to act independently and impartially. You expect them to act professionally to the best of their abilities as their conduct maintains the integrity of arbitration.
This short blog post attempts to discuss ways in which an arbitrator can be disqualified and removed in accordance with the Civil Code of Ethiopia. An award rendered by an arbitrator who is partial will not be enforced both under the New York Convention and Ethiopian arbitration law. In fact, article 351/d/i-iii/ of the Ethiopian Civil Procedure Code stipulate that it will be reviewed by appeal.
Disqualification of an Arbitrator: Article 3340 of the Civil Code and Its Vagueness?
Who can submit an application to disqualify an arbitrator? What are the grounds that must be considered? A party, whose interest is compromised, due to an arbitrator’s behavior, can submit an application to “disqualify” an arbitrator.
The application can be submitted either to the court having jurisdiction or to the arbitral tribunal. As a corollary, if the application to disqualify an arbitrator gains acceptance, he or she will be disqualified.
According to the 1960 Civil Code, an arbitrator can be disqualified based on these grounds:
• Age,
• Criminal conviction,
• Unsound mind,
• Illness,
• Absence, or
• Any other reason which bars him from discharging his or her duty within a reasonable time.
However, a party may seek disqualification of the arbitrator appointed by him “…only for a reason arising subsequently to such appointment, or for one of which he can show that he had knowledge only after the appointment”, according to article 3341 of the Civil Code.
The general rule that is used to disqualify an arbitrator is found under article 3340/2/ of the Civil Code: “…any circumstances casting doubt upon his impartiality or independence.” This rule corresponds with article 10 of the UNCITRAL model law which says: “an arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence or if he does not possess qualifications agreed to by the parties…”
Yet, the Ethiopian Civil Code fails to define this phrase: “any circumstance casting doubt upon his impartiality or independence.” This might leave much room for parties to submit an application to disqualify an arbitrator; and case law has a lot to show.
The procedure prescribed by the law to disqualify an arbitrator is:
– An application to disqualify an arbitrator should be made to the arbitration tribunal by a party before an award is rendered and as soon as the party knew of the grounds for disqualification;
– If the application is dismissed, then the party can lodge an appeal within 10 days.
Let us take cases as examples…
In a case between Harar Trading (claimant) and Gelateli Hanki Co. (respondent), which was ad-hoc arbitration, published on Arbitral Awards Volume 2, page 191, the respondent’s attorney submitted an application to the sole arbitrator asking for his disqualification citing the following reasons:
“…While the sole arbitrator was a judge at the Federal High Court, he abused me; I had submitted an application requesting disciplinary measures to be taken against him and an action was taken accordingly. Thus, it is difficult for me to believe that he will render an impartial award…”
In deciding on the application for removal, the sole arbitrator said that
“…Even though the respondent’s lawyer mentioned the file in which he claims that there was abuse, as I am not certain about the final decision, I cannot accept or refuse to be disqualified based on mere speculation… he may have approached my bench while I was a judge; He may have discontent as a result of my decision. Nonetheless, I believe that all of the judgments I gave were according to the law. Even if he claims that there was a disciplinary action, the action was not properly stipulated… further, we do not have intimate relationship, we do not know each other that much… therefore, claims he brought against me were unsubstantiated and have no legal basis.”
A party cannot simply apply to disqualify an arbitrator just because he is unhappy. The claim must be founded upon legally acceptable instances. If arbitration allows parties’ emotion to be involved, it will be difficult to maintain its autonomy and will make people consider it as a child’s play. But what does recent Ethiopian case law show?
The Federal Supreme Court Cassation Division Case Number 135094 (Volume 21) decided that “…as per article 3340/2/ of the Civil Code to disqualify an arbitrator it is not necessary to prove that a close connection between an arbitrator and a party. It is enough if there are any circumstances casting doubt upon his impartiality or independence… In the case at hand, the second respondent, which is apparently the arbitrator, was made a party to the suit by Federal First Instance Court; he continued to be joined as a respondent both at the Federal High Court and Cassation Decisions… this means he was litigating to be made an arbitrator… and this creates doubts on his impartiality…”
The Cassation basically stated that if the arbitrator argues against a party who requests him to be disqualified, he or she must be disqualified, because as per article 3340/2/ of the Civil Code such a scenario will give rise to circumstances casting doubt on the arbitrator’s impartiality. Is this the right way to go?
Removal of an Arbitrator under the Civil Code of Ethiopia
Disqualification of an arbitrator is a wider concept than removal. The Civil Code only gives one article to removal and seems to leave the rest under the umbrella of disqualification. It is unclear why the legislature chose to deal with removal and disqualification in this way. Even if we say their effect is the same, there lies no reason as to why the legislature needed to differentiate between disqualification and removal.
According to Article 3343, after accepting his or her appointment, if an arbitrator unduly delays the discharge of his duties the authority agreed upon by the parties, or in the absence of such agreement, the court, can remove him from his position.
A reasonable question would be what the difference between article is 3343 and 3340/1/. According to article 3340/1/, an arbitrator can be disqualified “… for any other reason unable to discharge his function properly or within a reasonable time.” Thus, one may ask the relevance of article 3343 which says that an arbitrator can be removed if he delays the discharge of his duties.
In fact, there is no difference between the two articles. In fact, the criterion in article 3340/1/ can be broadly interpreted to mean the condition laid down in article 3343.
Conclusion and Recommendation
The Ethiopian arbitration law needs to be amended when it comes to disqualification and removal of arbitrators – it can learn a lot from the IBA Guidelines on Conflict of Interests in International Arbitration. The grounds laid down under article 3340 and 3343 seem to be redundant, and no clear interpretation of the law in relation to article 3343 has been given by the Federal Supreme Court Cassation division.
Especially, the interpretation given by the Cassation bench is so wide that an arbitrator who argues against a party who brought a claim for his or her disqualification has to be disqualified. This has a lot of practical ramification.

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Appellate Court Limits “Procedural Loophole” to Enforce Foreign Arbitral Awards in New York Absent Jurisdiction over the Award Debtor or Its Property

Thu, 2018-04-12 02:15

Andreas Frischknecht

The recent decision by an intermediate New York appellate court in AlbaniaBEG Ambient Sh.p.k. v. Enel S.p.A.1)A.D.3d, No. 152679/14, 2018 WL 755355 (N.Y. App. Div. 1st Dep’t Feb. 8, 2018). jQuery("#footnote_plugin_tooltip_7437_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7437_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); has sharply curtailed “a procedural loophole in Chapter 2 of the Federal Arbitration Act”2)Commissions Imp. Exp. S.A. v. Republic of Congo, 916 F. Supp. 2d 48, 49 (D.D.C. 2013), rev’d and remanded sub nom. Commissions Imp. Exp. S.A. v. Republic of the Congo, 757 F.3d 321 (D.C. Cir. 2014). jQuery("#footnote_plugin_tooltip_7437_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7437_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); that some creditors have used to obtain indirect recognition of foreign arbitral awards in New York without having to establish personal jurisdiction over the debtor, or the presence of property belonging to the debtor, in New York.

Background: Different Jurisdictional Rules for Recognition of Foreign Arbitral Awards and Foreign Judgments

In New York, the vast majority of foreign arbitral awards are enforced directly under Chapter 2 of the U.S. Federal Arbitration Act (“FAA”). But unlike in some other jurisdictions, the holder of a foreign award for the payment of money also has the option of first obtaining a foreign court judgment recognizing the award and then seeking recognition of that judgment in New York as a foreign money judgment under Article 53 of the New York Civil Practice Law and Rules (“CPLR”).3)See Seetransport Wiking Trader Schiffahrtsgesellschaft MBH & Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 29 F.3d 79, 81 (2d Cir. 1994) (French judgment conferring exequatur on an arbitral award issued in a Paris-seated ICC arbitration was entitled to recognition under Article 53 of the CPLR as “the functional equivalent of a French judgment awarding the sums specified in the award”); see also Commissions, 757 F.3d at 323 (proceeding to enforce English High Court order recognizing ICC award in Paris-seated arbitration was “a lawful, parallel enforcement scheme” not preempted by the FAA). jQuery("#footnote_plugin_tooltip_7437_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7437_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is known as the “dual enforceability” principle. For a more fulsome discussion of this topic, see Andreas A. Frischknecht, Yasmine Lahlou & Gretta Walters, Enforcement of Foreign Arbitral Awards and Judgments in New York, at 210-12 (Kluwer Law International 2018).

A key reason why some holders of foreign arbitral awards have opted to seek recognition of a foreign judgment recognizing their award (rather than the award itself) in New York stems from the requirement that award creditors must establish jurisdiction over the debtor (known as personal jurisdiction) or the debtor’s property (known as quasi in rem jurisdiction) to obtain recognition of a foreign arbitral award under Chapter 2 of the FAA.4) See AlbaniaBEG, 2018 WL 755355, at *9 (citing Frontera Res. Azerbaijan Corp. v. State Oil Co. of Azerbaijan Republic, 582 F.3d 393, 398 (2d Cir. 2009) & Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co., 284 F.3d 1114, 1118, 1122 (9th Cir.2002)). jQuery("#footnote_plugin_tooltip_7437_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7437_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In contrast, New York courts have held that the creditor may obtain recognition of a foreign money judgment in New York even if the judgment debtor is not subject to personal jurisdiction in New York and has no assets in the state. The rationale for this exception is that proceedings to recognize a foreign judgment are merely “ministerial” where a foreign court with proper jurisdiction over the debtor has already adjudicated the parties’ underlying dispute.5) Abu Dhabi Commercial Bank PJSC v. Saad Trading, Contracting & Fin. Servs. Co., 117 A.D.3d 609, 613 (N.Y. App. Div. 1st Dep’t 2014). jQuery("#footnote_plugin_tooltip_7437_5").tooltip({ tip: "#footnote_plugin_tooltip_text_7437_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

AlbaniaBEG Reduces the Jurisdictional Gap

In AlbaniaBEG, the Appellate Division, First Department sharply limitecthe scope of this exemption from personal or quasi in rem jurisdiction for judgment enforcement proceedings. Going forward, the exemption applies only where the judgment debtor “does not contend that substantive grounds exist to deny recognition to the foreign judgment” under CPLR Article 53. Otherwise, the New York court’s “function ceases to be merely ministerial,” and the judgment creditor must establish either personal or quasi in rem jurisdiction. This newly-formulated rule reduces the jurisdictional discrepancy between proceedings to enforce foreign money judgments under the CPLR and proceedings to enforce foreign arbitral awards under the FAA.

The First Department reversed the trial court’s ruling and granted the Italian defendants’ motion to dismiss the Albanian plaintiff’s action to recognize and enforce an Albanian judgment arising from a dispute over the contemplated construction of a hydroelectric power plant in Albania. After one of the defendants prevailed against the plaintiff’s parent company in an Italian arbitration, the plaintiff commenced proceedings in Albania and obtained a judgment against the defendant in that country. The plaintiff then filed a motion for summary judgment in lieu of a complaint against the Italian counterparty and its parent company seeking enforcement of the Albanian judgment in New York.

The defendants moved to dismiss, asserting that the plaintiff had established neither personal nor quasi in rem jurisdiction because both defendants were “foreign corporations with no known presence in New York,” and the plaintiff neither alleged any dispute-related contacts between the defendants and New York nor identified any property of the defendants within the state. The defendants also planned to assert multiple ground for non-recognition of the Albanian judgment under CPLR Article 53, including that the Albanian proceedings were contrary to the parties’ arbitration agreement, and that Albanian tribunals and procedures are not compatible with due process.

Because the defendants “attacked the Albanian judgment as failing to meet the prerequisites for recognition under article 53” and the plaintiff did not seek jurisdictional discovery, the court granted the defendants’ motion to dismiss and directed entry of judgment in their favor.

The full impact of AlbaniaBEG in practice remains to be seen. In most cases, the creditor will have little incentive to pursue enforcement of a foreign arbitral award in New York unless the debtor is believed to have substantial connections with (and assets in) New York. 6)For a discussion of New York’s significance as a global hub for award enforcement generally, see Andreas A. Frischknecht, Yasmine Lahlou & Gretta Walters, Enforcement of Foreign Arbitral Awards and Judgments in New York, 3-5 (Kluwer Law International 2018). jQuery("#footnote_plugin_tooltip_7437_6").tooltip({ tip: "#footnote_plugin_tooltip_text_7437_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In such cases, the creditor should be able to establish either personal or quasi in rem jurisdiction, such that the debtor can pursue enforcement directly under Chapter 2 of the FAA. Following AlbaniaBEG, however, the holder of a foreign arbitral award desiring to preserve “the opportunity to pursue [further] enforcement steps in futuro”7) Lenchyshyn v. Pelko Elec., Inc., 281 A.D.2d 42, 50 (N.Y. App. Div. 4th Dep’t 2001). jQuery("#footnote_plugin_tooltip_7437_7").tooltip({ tip: "#footnote_plugin_tooltip_text_7437_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); likely can no longer obtain recognition in New York of a foreign judgment recognizing the award if the debtor is not subject to personal jurisdiction in New York, lacks any assets in New York, and contests the enforceability of the foreign judgment on substantive grounds.

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References   [ + ]

1. ↑ A.D.3d, No. 152679/14, 2018 WL 755355 (N.Y. App. Div. 1st Dep’t Feb. 8, 2018). 2. ↑ Commissions Imp. Exp. S.A. v. Republic of Congo, 916 F. Supp. 2d 48, 49 (D.D.C. 2013), rev’d and remanded sub nom. Commissions Imp. Exp. S.A. v. Republic of the Congo, 757 F.3d 321 (D.C. Cir. 2014). 3. ↑ See Seetransport Wiking Trader Schiffahrtsgesellschaft MBH & Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 29 F.3d 79, 81 (2d Cir. 1994) (French judgment conferring exequatur on an arbitral award issued in a Paris-seated ICC arbitration was entitled to recognition under Article 53 of the CPLR as “the functional equivalent of a French judgment awarding the sums specified in the award”); see also Commissions, 757 F.3d at 323 (proceeding to enforce English High Court order recognizing ICC award in Paris-seated arbitration was “a lawful, parallel enforcement scheme” not preempted by the FAA). 4. ↑ See AlbaniaBEG, 2018 WL 755355, at *9 (citing Frontera Res. Azerbaijan Corp. v. State Oil Co. of Azerbaijan Republic, 582 F.3d 393, 398 (2d Cir. 2009) & Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co., 284 F.3d 1114, 1118, 1122 (9th Cir.2002)). 5. ↑ Abu Dhabi Commercial Bank PJSC v. Saad Trading, Contracting & Fin. Servs. Co., 117 A.D.3d 609, 613 (N.Y. App. Div. 1st Dep’t 2014). 6. ↑ For a discussion of New York’s significance as a global hub for award enforcement generally, see Andreas A. Frischknecht, Yasmine Lahlou & Gretta Walters, Enforcement of Foreign Arbitral Awards and Judgments in New York, 3-5 (Kluwer Law International 2018). 7. ↑ Lenchyshyn v. Pelko Elec., Inc., 281 A.D.2d 42, 50 (N.Y. App. Div. 4th Dep’t 2001). 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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In a first, English High Court sets aside Investment Treaty Award against Poland

Wed, 2018-04-11 03:00

Kshama A. Loya and Vyapak Desai

On March 2, 2018, the England & Wales High Court (Court) for the first time set aside an investor-state arbitration award on jurisdiction (Award on Jurisdiction) passed against the Claimant in GPF GP S.a.r.l. v. Republic of Poland[1]. The Court ruled that:

  • A specific event in a series of creeping expropriation did not preclude the tribunal from assuming jurisdiction over other measures in the series;
  • Fair and equitable treatment (FET) claims fell within a dispute resolution clause covering expropriation ‘as well’ as other measures ‘leading to consequences similar to expropriation
  • Effet utile principle assured that effect and meaning be given to every word in a clause

Background

In 2008, the Claimant (a Luxembourg Company) made an investment in White Star Property Group (WSG, a Polish entity) to enable it to acquire shares in 29 Listopada. 29 Listopada held usufructuary rights in a property in Warsaw pursuant to a Perpetual Usufruct Agreement (PUA) for 99 years.

WSG sought recommendations from Warsaw officials on development of property held by 29 Listopada. Based on recommendations and permits granted by Warsaw authorities, the Claimant provided finance to WSG’s acquisition of shares in 29 Listopada.

Subsequently, Warsaw officials reversed their recommendations and permits. After recourse to local remedies, in 2013, the Warsaw Regional Court terminated the PUA. This decision stood confirmed by the Warsaw Court of Appeal in 2014. Appeal against the same was rejected by the Supreme Court.

The Claimant initiated claim under Article 9 of the Treaty between the Government of the People’s Republic of Poland and the Government of the Kingdom of Belgium and the Government of the Grand Duchy of Luxembourg, which became binding on 2 August 1991 (BIT).

Key Issues

The Claimant raised two claims in the arbitration: (a) that the series of measures adopted by Poland culminating into the Warsaw Court of Appeal decision constituted indirect expropriation in the form of creeping expropriation; and (b) the measures adopted by Poland violated the FET standard under the BIT. The Claimant averred that the arbitral tribunal (Tribunal) had jurisdiction over all claims under Article 9.1(b) of the BIT.

Article 9.1(b) covered:

disputes relating to expropriation, nationalization or any other similar measures affecting investments, and notably the transfer of an investment into public property, placing it under public supervision as well as any other deprivation or restriction of property rights by state measures that lead to consequences similar to expropriation.

With respect to (a) above, the Tribunal ruled that it only had jurisdiction to determine whether the Warsaw Court of Appeal decision constituted expropriation; and not whether other measures constituted indirect expropriation. With respect to (b), the Tribunal held that its jurisdiction under Article 9(2) read with Article 9.1(b) was restricted to expropriation and did not cover FET.

The Claimant challenged the Award on Jurisdiction before the Court under Section 67 of the English Arbitration & Conciliation Act, 1996 (“A&C Act”).

Analysis of the Decision

At the outset, the Court ruled that the hearing under Section 67[2] is in the nature of a re-hearing, and that a party can challenge an award of the tribunal as to its substantive jurisdiction.

The Court held that the Tribunal had erred on both aspects on its substantive jurisdiction. With respect to (a), the Court held that under creeping expropriation,[3] each act in the series was essential to determine a claim for creeping expropriation. The identification of a specific event as expropriation did not foreclose consideration of other acts in the series to have an effect similar to expropriation. Therefore, the Tribunal had erred in assuming jurisdiction only on the Warsaw Court of Appeal decision leading to termination of the PUA whilst denying jurisdiction on prior measures alleged to constitute creeping expropriation.

With respect to (b), the Court held that FET claims were covered under Article 9.1(b). The Court segregated Article 9.1(b) into two parts. The first part included ‘disputes relating to expropriation, inter alia placing it under public supervision’ (‘Part 1’). The second part included ‘as well as any other deprivation or restriction of property rights by state measures that lead to consequences similar to expropriation’ (‘Part 2’).

It held that Part 1 considered all measures relating to expropriation. The Court meticulously employed the principles of interpretation under the Vienna Convention on the Law of Treaties (VCLT) and stated that the use of the words ‘as well as’ in Article 9.1(b) formed a different category of disputes – not in continuation but in addition to Part 1. Moreover, the two parts envisaged separate category of disputes. The ordinary meaning of ‘deprivation or restriction’ in Part 2 entailed a lesser threshold of interference than ‘an expropriation’ in Part 1. In addition, the words ‘leads to’ and ‘consequences similar to expropriation’ in Part 2 envisaged something distinct from expropriation.

Additionally, the Court used the ‘effet utile’ principle to give effect and meaning to words in Part 2, as opposed to discarding the same as a ‘mere tautology’ as claimed by the Respondent.

Comment

The Court’s ruling on creeping expropriation is laudable. It assures that once a Tribunal assumes jurisdiction over expropriation claims, it would be inappropriate for the Tribunal to pick and choose select State acts especially in an alleged series, at the preliminary stage and narrow the scope of adjudication. This is a matter best judged by the Tribunal at the merits stage.

However, with respect to coverage of FET, the Court has granted jurisdiction based on interpretation of language of Part 1 and 2. Under prevalent interpretations adopted by tribunals to ‘measures leading to consequences similar to expropriation’, a claim for FET violation is distinct from expropriation. It is seldom considered hand-in-hand with a clause relating to expropriation.

Further, the distinction is based on detailed interpretation of the language of a French version of the BIT – agreed by the parties to be translated in English. It is pertinent to note that two of the Tribunal members are French speakers. It is unclear whether the Court considered this aspect while deciphering the ordinary meaning of words in the translated BIT.

While it is desirable that national courts adopt a slow pace in ‘over-ruling’ decisions of international arbitral tribunals, more particularly in the context of investor-State disputes, the present decision closely scrutinizes the award on jurisdiction on principles of interpretation and recognized concept in international investment treaty law. This power is derived from Section 67 of the A&C Act which offers wide latitude to re-consider facts and arguments placed before the tribunal, as also consider new arguments and evidence. This practice is prevalent in France and Switzerland which permit a wider scope of review to national courts.

The present case is unique in as much as it is the first instance where an English Court has rejected an arbitral award on substantive jurisdiction under an investor-state dispute. It is also a classic example of the interplay or conflict between interpretations adopted by specialized international law tribunals and national courts.

We will wait to see whether leave will be granted to Republic of Poland and if so, whether the decision of the Court would be confirmed, modified or over-ruled by the English Court of Appeal. In the absence of a specific leave to appeal, the case would move to the stage of merits. A deeper conflict may arise then since the Tribunal, having harbored a decision on denying jurisdiction on majority claims, will be compelled to adjudicate upon merits of the claims.

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[1] [2018] EWHC 409 (Comm)

[2] Section 67. Challenging the award: substantive jurisdiction.

(1)A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court—

(a)challenging any award of the arbitral tribunal as to its substantive jurisdiction; or

(b)for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction. A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).

(2)The arbitral tribunal may continue the arbitral proceedings and make a further award while an application to the court under this section is pending in relation to an award as to jurisdiction.

(3)On an application under this section challenging an award of the arbitral tribunal as to its substantive jurisdiction, the court may by order—

(a)confirm the award,

(b)vary the award, or

(c)set aside the award in whole or in part.

(4)The leave of the court is required for any appeal from a decision of the court under this section.

[3] As ‘a series of acts or measures that did not individually constitute expropriation but cumulatively had the effect of expropriation’. The Court also quoted the oft-used lines in this context, stating that ‘the last step in a creeping expropriation that tilts the balance is similar to the straw that breaks the camel’s back’.

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The CJEU’s Achmea Judgment: Getting Through the Five Stages of Grief

Tue, 2018-04-10 03:50

Peter Nikitin

Many arbitration lawyers’ initial reaction to the CJEU’s Achmea judgment resembles the first three of the famous “five stages of grief” (denial, anger, bargaining, depression and acceptance). Some deny Achmea’s relevance under international law, others angrily dismiss it as unreasoned and politically motivated, while many attempts to “bargain” a way out for intra-EU arbitrations under the ECT and/or ICSID given their multilateral and extra-EU character.

In my view, Achmea is entirely consistent with both EU and international law, and applies equally to intra-EU ISDS under BITs, the ECT and ICSID. It may, therefore, be wisest to keep the stage of depression brief and accept the outcome before moving on to greener pastures.

The Autonomy and Primacy of EU Law

To restate several truisms, the TEU and TFEU ( “EU Treaties”) are inter-State agreements that establish an autonomous system of regional international law. The fundamental purpose – indeed, the raison d’être – of this system is to create a common market without internal frontiers. To this end, the CJEU has developed the doctrines of “primacy” and “effectiveness”, under which any domestic legal rule – even one that enjoys constitutional status – that is incompatible with EU law must be immediately disapplied, without awaiting formal revocation [C-6/64, Costa v. ENEL [1964] ECR 585; C-106/77, Simmenthal [1978] ECR 629]. The doctrines of primacy and effectiveness are long-standing and considered by all as an integral part of the EU Treaties.

Inter se agreements of EU Member States are not exempt from primacy and effectiveness, and have always been treated just like domestic law [E.g. C-235/87, Matteucci [1988] ECR 5589, paras 19-22]. This is logical because EU Member States cannot be permitted to deviate from common market rules by treaty any more than they can by domestic legislation. It is also consistent with the international treaty law, which expressly permits States to

(a) disapply provisions of an earlier treaty to the extent they are incompatible with those or a later treaty [VCLT Article 30(2)-(3)],

(b) enter into subsequent agreements concerning the interpretation and application of their previous treaties [VCLT Article 31(3)(a)], and

(c) subject their international agreements to other “rules of international law applicable in the relations between the parties” [VCLT Article 31(3)(c)].

In other words, there is nothing legally wrong with EU Member States agreeing, in the EU Treaties, that those Treaties will automatically prevail over all other inconsistent international agreements between those same Member States. There is no sense in denying the international character of such an agreement or its relevance under international law.

No “Outsourcing”

Like virtually all cross-border economic activity inside the EU, intra-EU investments take place squarely within the scope of the “four freedoms” of the EU’s internal market. Many areas in which investment disputes tend to arise (e.g., energy, environment, state subsidies) are heavily regulated by internal market directives, regulations and/or state aid law. Furthermore, Member State conduct is already subject to binding EU standards of protection of property rights, due process and legal certainty (including legitimate expectations), which are all relevant to the legitimacy of a particular government measure. Much as tribunals may seek to avoid them, questions of EU law therefore inevitably arise – indeed, centrally so – in many intra-EU arbitrations.1)See e.g., Electrabel v. Hungary Decision on Jurisdiction and Liability, paras 6.21-6.22, 6.70, Micula v Romania Award, para 691-707, 741-742, 792-793; Wirtgen v Czech Republic Award, paras 297-299, 337-342, 350; Postova Banka v Greece Award, paras 192-193, 207-208. jQuery("#footnote_plugin_tooltip_7992_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7992_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Given the fundamental importance of EU law primacy and autonomy, the CJEU always firmly opposed Member States’ “outsourcing” to non-EU fora disputes even potentially involving their EU law obligations. This was the case with the EEA Court in Opinion 1/91, inter-State arbitration in the Mox Plant case, the Patent Court in Opinion 1/09, and the European Court of Human Rights in Opinion 2/13. The Achmea judgment refers to this line of case law and is fully consistent with it.

Advocate-General Wathelet proposed treating ISDS tribunals as Member State courts, enabling them to refer EU law issues to the CJEU. That would have been an elegant solution indeed if it were not for one obstacle: convincing ISDS tribunals themselves. How can one be sure that a tribunal seated outside the EU and composed of non-EU lawyers would even recognise an EU law issue, let alone suspend proceedings for a CJEU reference?

It is, of course, correct that commercial arbitration is permitted under EU law, and commercial awards’ compliance with EU law can be verified by EU courts at the post-award stage [See e.g. C-126/97 Eco Swiss [1999] ECR I-3055]. However, parties to a commercial contract are not under a legal duty to ensure the primacy and full effectiveness of EU law in a certain territory. By contrast, Member States conferring jurisdiction on an ISDS tribunal do have that duty, and the remote possibility of post-award control by EU courts where the tribunal may not even be seated in the EU is far from sufficient to secure compliance.

There is thus nothing shocking or “political” about the Achmea judgment. The dismay that ISDS lawyers now express towards the Achmea judgment mirrors similar dismay expressed four years ago by human rights lawyers towards Opinion 2/13. However, like that Opinion, the Achmea judgment is only a restatement of the fundamental constitutional principles that have been at the heart of CJEU’s jurisprudence for many decades.2)See e.g., D. Halberstam, ‘It’s the Autonomy, Stupid!’ A Modest Defense of Opinion 2/13 on EU Accession to the ECHR, and the Way Forward, 16 German Law Journal 105 (2015) jQuery("#footnote_plugin_tooltip_7992_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7992_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Multilateral Agreements

There have been suggestions since the Achmea judgment that it may not apply to ICSID and/or ECT arbitration because those treaties include third countries.

However, the CJEU has always been clear that primacy also covers any intra-EU application of multilateral conventions [See e.g. C-301/08 Bogiatzi [2009] I-10185, paras 3-4, 19.]. This is consistent with TFEU Article 351, which regulates the relationship between EU law and international treaties involving third countries, as well as with VCLT Article 41(1)(b), which permits States to vary multilateral treaties as between some parties, to the extent this does not affect the rights of others.

The language of the Achmea judgment very clearly extends to all provisions “such as” Article 8 of the Czechoslovak-Dutch BIT. That includes the ISDS provisions of the ECT, which is, therefore, extinguished, as between EU Member States, by operation of primacy. Similarly, primacy will “turn off” the ICSID Convention to the extent it applies to intra-EU ISDS awards. Given that such application of primacy does not affect the interests of any non-EU States or their investors, neither the ECT nor ICSID can provide a safe ground on which intra-EU ISDS can continue. The CJEU is quite uncompromising and there is no place for bargaining here.

A Question of Trust

It would be unthinkable for an investor from Berlin (London, Paris) that is denied a planning permission in Munich (Manchester, Marseille) under German (British, French) administrative law to oppose the refusal outside the framework of that law, before a foreign arbitrator unfamiliar with that law, on the vague grounds that the refusal was “unfair” or “inequitable”. The relationship between investors operating within a single national market and the state that regulates that market is normally governed by the administrative law of that state based on the principle of equal justice for all. After all, Texas and California cannot agree on special privileges for each other’s investors independently and outside of US federal law.

Why should things be different within the European single market? The answer often given to justify this anomaly is that the courts of certain recent joiners to the EU are somehow inadequate compared to those of “old” EU Member States. Notably, no evidence of this appears in existing intra-EU awards, virtually none of which concerned any kind of judicial impropriety. However, the assumption that there is a risk of such impropriety does shed light on another ground on which the CJEU decapitated intra-EU ISDS: a breach of the EU principle of “mutual trust”.

After comprehensively reforming their legal system to meet the EU’s stringent accession criteria, the courts of “new” Member States are deemed to meet the standards of justice that all Europeans are entitled to expect. There are no “second-class” Member States in the EU and the principle of mutual trust implies a presumption that a Dutch investor in Slovakia can expect substantially the same quality of justice as it can in its home Member State.

If, as many complain, this is not the case, in reality, that would undoubtedly be a failure of the EU. However, it would be one that must be rectified at Union level, and in a manner that complies with Union law. ISDS lawyers can and should play a role in arriving at a solution, but the first step must surely be to understand and accept the reasons and consequences of the Achmea judgment, not deny, dismiss or try to bargain a way out of them.

Although the author is involved as counsel in investment disputes, the views expressed in this blog entry are the author’s alone and are not to be attributed to any person the author represents or has represented in the past.

References   [ + ]

1. ↑ See e.g., Electrabel v. Hungary Decision on Jurisdiction and Liability, paras 6.21-6.22, 6.70, Micula v Romania Award, para 691-707, 741-742, 792-793; Wirtgen v Czech Republic Award, paras 297-299, 337-342, 350; Postova Banka v Greece Award, paras 192-193, 207-208. 2. ↑ See e.g., D. Halberstam, ‘It’s the Autonomy, Stupid!’ A Modest Defense of Opinion 2/13 on EU Accession to the ECHR, and the Way Forward, 16 German Law Journal 105 (2015) function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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The Swedish Government Revives Efforts to Modernise the Arbitration Act

Mon, 2018-04-09 04:50

Brian Kotick

After almost 20 years, the Swedish Arbitration Act (“SAA” or “Act”) may be getting a well-deserved face lift. In February 2014, the Swedish Government decided to take definitive steps to begin modernising the Act. The purpose of the reform was to bring Swedish arbitration law more in line with certain advancements in arbitration and to address some practical gaps – making it more effective and attractive to users. The Government appointed an investigative committee, composed of established Swedish arbitration practitioners, to conduct an inquiry into the existing Act (“Inquiry”). On 1 April 2015, the committee filed its Inquiry, entitled “Review of the Arbitration Act” (“Översyn av lagen om skiljeförfarande”), which reviewed the existing law, noted certain pitfalls, and suggested new text for potential eventual adoption. However, since the Inquiry, the discussion of reform had gone stale – until now.

The Government recently consulted Swedish universities, organisations and institutions in hopes to redraft the Inquiry into a more focused proposal (“Proposal”). During the re-drafting process, some of the Inquiry’s suggestions were discarded. Among the discarded suggestions were: (i) the suggestion to repeal Section 33 of the Act, i.e. eliminating the differentiation between grounds for invalidity and setting aside an award; and (ii) the suggestion to include an express rule whereby an arbitral tribunal may order security measures via special awards.

On 1 March 2018, the Government sent the Proposal to the Swedish Council on Legislation, entitled “A Modernisation of the Arbitration Act”, aiming for its approval and entry into force on 1 March 2019.

There are a few amendments listed in the Proposal that are worth pointing out:

1. An arbitral tribunal’s decision on jurisdiction can be appealed to the Court of Appeal.

The Problem: In accordance with Section 2 of the SAA, arbitrators may decide on their own jurisdiction. If the arbitration has commenced and the tribunal has rendered a decision on jurisdiction, then the party dissatisfied with that decision may challenge it before the District Courts. However, despite the challenge to the decision, a tribunal may still continue the arbitration and even render an award. Should a party challenge the award on the ground that the tribunal lacked jurisdiction, the venue for such a challenge would be the Svea Court of Appeal. Thus, a situation exists in which the parties are faced with two concurrent court proceedings, in two different courts, hearing the same jurisdictional challenge.

The Proposal:
The law should introduce a rule whereby a challenge a tribunal’s positive decision on jurisdiction during the arbitral proceedings shall be referred to the Svea Court of Appeal. This rule would simultaneously be a bar to challenges in the District Court.

2. In the absence of an agreement between the parties, the arbitral tribunal will designate the applicable substantive law.

The Problem: Currently, there is no provision in the Act that establishes how an arbitral tribunal shall determine the applicable substantive law to the dispute, in the absence of the parties’ agreement. A tribunal can determine the applicable substantive law by referring to the conflict of laws rules or, as the SCC Arbitration Rules suggest, the tribunal can have full discretion to determine the law it deems appropriate.

The Proposal:
Parties are free to agree on the applicable substantive law or a regulatory framework for the dispute. The tribunal must respect the parties’ agreement. However, if the parties have not agreed on the applicable law, then the arbitrators are to decide on the applicable law as they see fit. The tribunal may decide the dispute ex aequo et bono if the parties have expressly authorised it to do so.

3. Several arbitrations may be consolidated under certain circumstances.
The Problem: There is no regulation in the current Act that governs the possibility to consolidate two or more arbitrations. In the preparatory works to the Act, the explanation for omitting such a provision was to avoid a potential conflict with the principle of party autonomy. However, since the Act entered into force, similar provisions on consolidation have been introduced into the Dutch arbitration act and the SCC and the ICC Arbitration Rules.

The Proposal:
The law should introduce the possibility that two or more arbitrations may be consolidated under certain circumstances. The circumstances necessary for consolidation should be: (i) the appointment of same arbitrators in all respective proceedings; (ii) the arbitrators’ decision that consolidation would be beneficial to the arbitrations; and (iii) no objections to consolidation from the parties. The proceedings may be subsequently severed; however, the arbitrators should consider how to memorialize such a division and address the issues of costs.

4. The ground to challenge an award for an excess of mandate should include the requirement that the excess of mandate likely affected the outcome of the dispute.

The Problem: The main principle that arbitration should resolve disputes quickly and effectively should also apply to challenge proceedings. It is, therefore, pivotal that the domestic courts and the parties are not burdened with unnecessary challenges. As the law stands now, there is a risk that a losing party could challenge an award despite the fact that, if successful, there would be no practical difference to the outcome of the dispute.

The Proposal:
A provision should be included in the Act whereby a requirement is imposed on a party challenging an award on the ground of the excess of mandate to prove that that excess affected the outcome of the dispute. This amendment would have a deterrent effect for the parties since they will now be aware that not all excess of mandate will lead to a successful challenge to an award.

Other suggested amendments presented in the Proposal included shortening the time limit to challenge an award to two months and introducing the possibility for a court to hear oral evidence in English without the use of translation services. With such concrete amendments to the Act expected to enter into force next year, it will be interesting to see what proposals survive scrutiny from the Swedish Council on Legislation and in what form.

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The Rule of Law As Created by Arbitrators – An Update on the Discussions At The Recent IBA Arbitration Day in Buenos Aires

Sat, 2018-04-07 20:00

Julián Bordacahar

At a time when Argentina is looking to modernize its arbitration culture and attract foreign investment, the IBA Arbitration Day held in Buenos Aires could not have been more opportune.  Gathering more than 400 arbitration experts from more than 45 countries, the venue and the event proved to be up to the challenge.  While arbitration has been a frequent target of criticism in recent years in Latin America, as highlighted by Eduardo Silva Romero during the conference’s opening, one of this year’s goals was to recognize arbitrators’ many positive contributions to the rule of law. To that end, presentations revolved, inter alia, around the principles of pacta sunt servanda and bona fide and the way in which arbitrators apply the law.  Interestingly in this regard, Prof. Kaufmann-Kohler started by analyzing certain statistical data and concluded that in 90% of cases, parties made a choice of law: they chose national law in 97% and transnational rules in only 3% of them.  Despite this, due to their diverse backgrounds and frequent lack of familiarity with the applicable national law, arbitrators tend to apply transnational rules in conjunction with national law.  Therefore, while applying national law, international arbitrators validate the outcome by reference to rules with wider recognition.  In essence, she concluded, arbitrators transnationalize the law.

This post attempts to report on that debate but also to add to it by taking the analysis a step back and assessing whether and to what extent arbitrators have the power to modify contracts, an issue which becomes particularly relevant in the field of cross-border transactions.  As highlighted by Philippe Pinsolle during the conference, we see more and more complex long-term relational contracts which include arbitration clauses.  Because these contracts are structured to last for many years, sometimes decades, they become more vulnerable to technological, political and/or economic changes which may substantially affect the parties’ rights and even disrupt the contract’s economic equilibrium.  Were that to happen, the possibility to restore that equilibrium through adjudication becomes crucial.  Now the question is: are arbitrators entitled to modify contracts?  The answer is, as almost any other answer to a legal question, “it depends”.  Nonetheless, as the IBA debate clearly showed, there exists a steady trend demonstrating that, whether expressly or impliedly, arbitrators often do so.

 

The Interaction Between Arbitrators’ Powers, Pacta Sunt Servanda And The Bona Fide Principle

It is especially in the context of lex mercatoria that pacta sunts ervanda is considered an essential feature.  However, just as any other legal principle, pacta sunt servanda is not absolute and is therefore subject to certain limits (e.g., rebus sic stantibus).  Some have argued that there has been a change of paradigm in international contract law which proposes that the sacred principle of pacta sunt servanda should not be abused by means of a blind, and sometimes hypocritical, compliance [K. P. Berger, “Power of Arbitrators to Fill Gaps and Revise Contracts to Make Sense”, Arbitration International, Ed. Oxford, 17(1): 1-18, p. 17 (2014)].  Notably, good faith and fair dealing have become the central yardstick for the social control of business behavior and of the fairness of business agreements.  In this regard, it has been noted that the “all or nothing rule” of the sanctity of contracts is being replaced by a more flexible, pragmatic approach seeking to produce results that are in line with commercial common sense, mutual cooperation, flexibility and an intrinsic willingness of the parties to adjust terms which reduces the rigid use of contract law [K. P. Berger, op. cit., p. 16].

It is against this background that the potential clash between the arbitrators’ power to modify contracts and pacta sunt servanda should be assessed.  After explaining how the various elements of the normative framework for interpretation interact with each other, Almeida Prado’s presentation at the IBA tried to convey the idea that, in case of conflict, international arbitrators tend to prioritize the contract’s wording and its nature; particularly given how the nature of the contract affects its interpretation and constitutes a reliable parameter for the interpretation of specific obligations.  Additionally, while he explained that the nature of the contract in itself does not create additional obligations, the contract’s nature coupled with the governing law and/or international usages may do so (bona fide).

In practice, pacta sunt servanda’s effects are further diminished by contractual and/or statutory provisions, such as those pertaining to changed circumstances.  Common examples are hardship, indexation, re-negotiation or price revision clauses.  Their inclusion may indicate that, in certain circumstances, parties are willing to provide arbitrators with the power to adapt their contracts, which they often do.

 

Legal Basis For Arbitrators’ Powers

One has to refer simultaneously to three different legal sources: the arbitration agreement and the underlying contract, the law applicable to the arbitration (lex arbitri) and the law applicable to the substance of the dispute (lex causae) [K. P. Berger, op. cit., p. 7 and 8].  Of course, party autonomy plays a decisive role in this assessment.  In cases where a contractual authorization is given, pacta sunt servanda would not speak against but in favor of arbitrators’ competence [K. P. Berger, op. cit., p. 5].  Conversely, if no express or implied authorization has been given [for example, an ICC tribunal found that an ICC clause contained in a long-term contract containing a number of provisions that required adjustment over the period of the contract, was an implied authorization (ICC Award No. 5754 cited by Craig, Park and Paulsson, International Chamber of Commerce Arbitration, 2nd ed., p. 112 (1990))], then arbitrators must look for legal authority in the applicable rules of law.  And here, the issue gets more complicated because, as stated above, there are several laws which might be relevant.

In relation to different lex arbitris, only a few arbitration laws contain express provisions dealing with arbitrators’ authority to adapt contracts [for example, the 1986 Dutch Arbitrators Act, the 1999 Swedish Arbitration Act, the 1993 Bulgarian Law on International Commercial Arbitration, etc.].  Where arbitration laws remain silent, a useful exercise is to refer to the competence of domestic courts in that particular jurisdiction and assess whether this power is procedurally available [C. H. Brower, “Mind the Gap”, BYU Law Review (2016), p. 18].

It can be argued that arbitrators’ powers to modify contracts should be placed on equal footing with those of State judges (parties should not be worse off in arbitration).  This is known as the principle of synchronized competences [P. Sanders, International Encyclopedia of Comparative Law, Vol. XVI, Ch. 12, p. 70].  However, State judges’ power to modify contracts is far from being internationally established [L. Beisteiner, “Adjusting Contracts in Arbitration?”, available here].  But it has been proposed that, under certain circumstances, arbitrators’ power can be wider than judges’ power.  One of the clearest examples is that, if parties agree, arbitrators are generally allowed to decide cases ex aequo et bono—a power which is generally outside of the scope of the competence of State judges.  If the domestic procedural law does not provide for a rule applicable to judges, then one must resort to the substantive law of that jurisdiction.  Because the assessment of the relevant rules of law is generally done holistically, the case may be that one of the applicable laws may allow the arbitral tribunal to do so while another may not.  Then, whether any of the provisions are mandatory will likely affect the outcome of that clash.

 

Conclusion

In practice, the line between contract interpretation and adaptation is not always clearly distinguishable.  However, even if unconsciously or under the disguise of “contract construction”, the IBA debate revealed a feeling among practitioners that whether expressly or impliedly, or directly or indirectly, arbitrators frequently adapt contracts to meet the needs and intentions of disputing parties, and by doing so, they contribute to the rule of law.  Were the tribunal not to do this, the dispute resolution procedure would not be fully effective.  Our comfort level with arbitrators acting in this manner is reflected in the express hardship or re-negotiation clauses which have become a common feature of modern contracts that establish complex and long-term arrangements.  As a general matter, the prevailing view seemed to be that we should not be too cautious to grant and/or accept that arbitrators have powers to fill gaps and adapt contracts, but we should demand that arbitrators be extremely cautious while making use of them.

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The post The Rule of Law As Created by Arbitrators – An Update on the Discussions At The Recent IBA Arbitration Day in Buenos Aires appeared first on Kluwer Arbitration Blog.

New Vienna Rules: Where do you stand on Security for Costs?

Sat, 2018-04-07 05:54

Lisa Beisteiner

Since their inception in 1975, the Vienna Rules (Rules of Arbitration and Mediation of the Vienna International Arbitral Centre) have undergone a number of major reforms keeping them abreast of the fast-moving tides of legal development in international arbitration. The latest revision of the Rules as from 1 January 2018 (previously covered in this blog) also introduced an explicit regulation of the tribunal’s power to order security for costs. By acknowledging such power, the Vienna Rules take an innovative and truly international stand, however stipulating a strict standard for security for costs orders which must be reserved to exceptional cases.

Clarification: Security for costs in exceptional circumstances

The new rule comes at a time when there is still little consensus1) Whilst some reject the tribunal’s power to order security for costs altogether, other scholars base such orders on the tribunal’s procedural power to conduct the arbitral proceedings within its discretion or – and this is the prevailing opinion – frame them as interim measures. The drafters of the Vienna Rules sided with this last approach. jQuery("#footnote_plugin_tooltip_7436_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7436_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); on the admissibility and preconditions under Austrian law of this legal instrument. Unsurprisingly, the new provisions sparked a lively debate when officially presented to the Austrian arbitration community at the sixth ArbAut Forum on 19 February 2018. Considering the absence of statutory provisions and case law on security for costs in arbitration in Austria and (as it appears) in many other civil law jurisdictions,2) Whereas institutional rules in common law jurisdictions have traditionally included express rules (e.g. LCIA, SIAC, HKIAC), those in civil law jurisdictions were hesitant to address the issue (see, however, Article 38 of the new SCC Rules as of 1 January 2017; whilst the Belgian CEPANI Rules set out that security for costs may be ordered as an interim measure, they stop short of providing further guidance; the new DIS-Rules – as of 1 March 2018 – refrain from expressly regulating security for costs). jQuery("#footnote_plugin_tooltip_7436_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7436_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the new Vienna Rules 2018 bring valuable clarification and legal certainty. The Vienna Rules working group responded to what they felt was a practical need for security for costs orders in exceptional cases, not least in view of the recent rise of third party funding.3) Third party funding, too, was amongst the topics discussed by the Vienna Rules working group but eventually did not make its way into the new Rules. jQuery("#footnote_plugin_tooltip_7436_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7436_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The good news upfront: Parties arbitrating under the Vienna Rules will now spare the time and costs which are often lost in debating the tribunal’s authority to order security for costs. Let’s look at some of the details:

Interim Measure

As from 1 January 2018, Article 33(6) and (7) Vienna Rules authorize tribunals to order security for costs as an interim measure, they read as follows:

(6) The arbitral tribunal may, at the request of the respondent, order the claimant to provide security for costs, if the respondent shows cause that the recoverability of a potential claim for costs is, with a sufficient degree of probability, at risk. When deciding on a request for security for costs, the arbitral tribunal shall give all parties the opportunity to present their views.
(7) If a party fails to comply with an order by the arbitral tribunal for security for costs, the arbitral tribunal may, upon request, suspend in whole or in part, or terminate, the proceedings (Article 34 paragraph 2.4).

Under Article 33(6) Vienna Rules, security for costs orders can be imposed on the claimant (including on the counter-claimant) at the request of respondent (including counter-respondent). The wording of the Vienna Rules excludes – in line with the intention of its drafters – security for costs orders against the respondent. Before deciding on the request for security for costs, the tribunal is required to grant all parties “the opportunity to present their views” (para 6): This general principle that interim relief may not be granted ex-parte (Article 33(1)) thus also extends to security for costs. Also, although not explicitly mentioned in Article 33(6) Vienna Rules, the tribunal first must ascertain its jurisdiction prima-facie based on the information before it. Requests for security for costs will typically be raised at the outset of the arbitration or, subsequently, after respondent becomes aware of circumstances giving rise to an enforceability risk. Whilst Article 33(6) Vienna Rules does not stipulate a strict period for making the request, the tribunal may consider any “delays” in the exercise of its discretion to grant the order.

Substantive requirements

Under Article 33(6) Vienna Rules, the respondent needs to demonstrate that, first, there is a possibility of an adverse costs award, and, second, that the enforceability of this award is at risk. The Vienna Rules do not spell out further requirements. The second prerequisite will be the real test in practice:

Potential costs claim

As envisaged by the working group, the first prerequisite (“potential claim for costs”) will hardly ever present an obstacle in practice. It will operate to exclude security for costs where, based on the parties’ agreement on costs allocation, an adverse costs award is not conceivable in the first place, e.g. where the arbitration clause provides for the “American rule” to govern the costs decision. In most cases, respondent will be able to show that the costs-follow-the-event rule may (amongst other principles) be applied in a prospective costs decision. The reference to a “potential claim for costs” also includes an additional requirement, namely that respondent has a (potential) defence case on the merits at all so that the loser pays rule could be applied in the first place. However, the procedural arguments on security for costs are not the place to engage the tribunal in (and for the tribunal to prejudge) the merits of the case. This requirement will therefore only strike out requests in such exceptionally rare cases where claimant can demonstrate that based on the limited information available on file respondent’s case is manifestly groundless, which would exclude even the remote possibility of a claim for costs.

Recoverability risk

In practice, the parties’ arguments will concentrate on the second requirement stipulated by the Vienna Rules: Respondent must “show cause that the [potential costs claim’s] recoverability is, with a sufficient degree of probability, at risk”, which is the case where claimant will have no funds to pay the costs award and where his assets will not be readily available for an effective enforcement. Such risk may materialize e.g. where claimant takes steps to frustrate a costs award, or where claimant is impecunious (e.g. a special purpose vehicle with no sizeable assets). Amongst other things, as was envisaged by the working group, the involvement of a third party funder may play a role in assessing the recoverability risk, but only if the third party funding indicates the impecuniosity of the party.

The language “show cause” is the English translation of the German “glaubhaft machen” (“show credibly”), which is defined in Austrian civil procedural law as reducing the standard of proof (Section 274 Austrian Code on Civil Procedure) to that of preponderant probability. Thus Article 33(6) three times refers to the probability of the enforcement of a costs award, namely by introducing the standard of preponderant probability as implied in “glaubhaft machen”, by referring to a “sufficient degree of probability” and by the use of the term “risk”, which again connotes a likelihood, namely that of an undesirable event materializing. Tribunals likely will focus on the requirement of “a sufficient degree of probability”, which works to increase the threshold for a security for costs order: Security for costs presupposes a high risk of non-recoverability. Not in every case of a preponderant probability of non-enforceability, but only where such probability is sufficiently high may security for costs be ordered.

Tribunal’s discretion

The Vienna Rules do not set out further express prerequisites. If the tribunal concludes that the requirements of Article 33(6) are met, it “may” grant the order within its discretion. Conversely, respondent has no procedural right to a security for costs order. Tribunals will exercise their discretion diligently and restrictively and limit security for costs orders to exceptional circumstances which manifestly call for such orders. This does not only flow from the current arbitral practice to limit security for costs to “very particular circumstances” (CIArb Guidelines on Applications for Security for Costs, Preamble, item 2) but will typically be corroborated by the reasonable expectations of the parties who agree on the Vienna Rules expecting a civil law style arbitration. Usually, the general rule that claimant needs to substitute respondent’s share on the advance on costs will suffice to deter futile claims.

In this vein, tribunals will typically treat the express substantive requirements for a security for costs order set out in Article 33(6) as a minimum threshold. Whilst a request may pass this – high – minimum threshold, the tribunal may still deem it inappropriate (or: “unfair”) to order security for costs. This may e.g. be the case where based on the information on file security for costs is unaffordable, i.e. where both claimant as well as any third parties holding a material economic interest in the proceedings on claimant’s side (including the main shareholders) are impecunious. In such case, the tribunal may wish to respond to concerns that ordering security for costs would unjustly stifle a genuine claim. Security for costs orders would then likely be restricted to manifestly abusive claims. Typically, this will also follow from an in favorem validitatis interpretation of the underlying arbitration clause: Imposing security for costs where it is unaffordable may – at least under Austrian law – entitle claimant to terminate the arbitration agreement for due cause.

It has also been submitted that if respondent was responsible for claimant’s impecuniosity this should militate against a security for costs order. However, this goes a far way into the merits of the case. Tribunals under the Vienna Rules may therefore be reluctant to open the interlocutory proceedings on security for costs to such arguments. Another factor which is sometimes mentioned as relevant is Respondent’s failure to pay its share on the advance on costs. In the author’s view, however, such failure must not exclude a security for costs order; rather, its legal consequences are spelled out in Article 42 Vienna Rules.

To recap: Whilst a preliminary and prima facie assessment of (certain aspects of) the merits of the case cannot always be avoided (most importantly: no stifling of legitimate claims), under the Vienna Rules there is no room for assessing the prospects of success of the parties’ claims and defences on the merits as a standard step in assessing a security for costs request.

Scope and legal consequence

According to Article 33(7) Vienna Rules, a failure of claimant to comply with a security for costs order entitles the tribunal to (wholly or partially) suspend or even terminate the proceedings (Articles 33(7) and 34 para 2.4 Vienna Rules) upon request of respondent. Again, as for the issuance of the order, the tribunal enjoys discretion as to the suspension or termination of the proceedings where claimant fails to provide security. Tribunals will have due regard to claimant’s right to (effective) access to (arbitral) justice, also considering claimant’s reasons for non-provision of the security.

Overall, under the new Vienna Rules security for costs orders are admissible but will be the exception rather than the rule. Tribunals will be called upon to act diligently and robustly, discouraging belligerent respondents from any attempts to misuse security for costs applications for prolonging proceedings and increasing costs.

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References   [ + ]

1. ↑ Whilst some reject the tribunal’s power to order security for costs altogether, other scholars base such orders on the tribunal’s procedural power to conduct the arbitral proceedings within its discretion or – and this is the prevailing opinion – frame them as interim measures. The drafters of the Vienna Rules sided with this last approach. 2. ↑ Whereas institutional rules in common law jurisdictions have traditionally included express rules (e.g. LCIA, SIAC, HKIAC), those in civil law jurisdictions were hesitant to address the issue (see, however, Article 38 of the new SCC Rules as of 1 January 2017; whilst the Belgian CEPANI Rules set out that security for costs may be ordered as an interim measure, they stop short of providing further guidance; the new DIS-Rules – as of 1 March 2018 – refrain from expressly regulating security for costs). 3. ↑ Third party funding, too, was amongst the topics discussed by the Vienna Rules working group but eventually did not make its way into the new Rules. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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