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HKIAC, Russian Center Ink Deal To Promote Int'l Arbitration - Law360

Google International ADR News - Wed, 2018-03-07 16:24

HKIAC, Russian Center Ink Deal To Promote Int'l Arbitration
Law360
“The experience and practices of HKIAC are highly regarded in the international arbitration community and the Arbitration Center at the Institute of Modern Arbitration is looking forward to partnering with HKIAC and contributing to promoting ...

Top 5 Reasons For Life Sciences Companies To Use International Arbitration For Intellectual Property Disputes - JD Supra (press release)

Google International ADR News - Wed, 2018-03-07 13:24

JD Supra (press release)

Top 5 Reasons For Life Sciences Companies To Use International Arbitration For Intellectual Property Disputes
JD Supra (press release)
Arbitration continues gaining popularity for resolution of cross-border disputes. A 2013 PricewaterhouseCoopers survey shows that 52% of the respondents preferred international arbitration to court litigation and mediation. Over the past 10 years, the ...

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7th Pay Commission: Hike in dearness allowance for govt employees gets Cabinet nod - Hindustan Times

Google International ADR News - Wed, 2018-03-07 12:10

Hindustan Times

7th Pay Commission: Hike in dearness allowance for govt employees gets Cabinet nod
Hindustan Times
The cabinet approved amendment bills to modify the Arbitration and Conciliation Act, 1996 and the Commercial Courts Act 2015 with the intention of promoting India as an international hub for alternative dispute resolution and boosting the country's ...
7th Pay Commission - India.comIndia.com
Cabinet News - Latest cabinet News, Information & Updates - Energy News -ET EnergyWorldET EnergyWorld

all 70 news articles »

Sereno's 'illegal' appointee resigns - The Manila Times

Google International ADR News - Wed, 2018-03-07 11:34

Sereno's 'illegal' appointee resigns
The Manila Times
It appearing that it is not widely known that the position of PMCO Chief of Office has the rank of Associate Justice of the Court of Appeals and one of the qualifications required is extensive experience in alternative dispute resolution, the filling ...

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Cabinet approves Arbitration and Conciliation (Amendment) Bill - United News of India

Google International ADR News - Wed, 2018-03-07 09:45

The Hindu

Cabinet approves Arbitration and Conciliation (Amendment) Bill
United News of India
Cabinet approves Arbitration and Conciliation (Amendment) Bill. New Delhi, Mar 7 (UNI) The Union Cabinet chaired by Prime Minister Narendra Modi on Wednesday approved the Arbitration and Conciliation (Amendment) Bill, 2018 for introduction in ...
Cabinet clears bill for institutional arbitration of disputesBusiness Standard

all 4 news articles »

Zondo appoints officials to lead enquiry into state capture - Mail & Guardian

Google International ADR News - Wed, 2018-03-07 07:57

Mail & Guardian

Zondo appoints officials to lead enquiry into state capture
Mail & Guardian
Pretorius was a panel member of the Singapore international mediation centre from 2014 and a member of the SA law commission working group on arbitration and alternative dispute resolution. Legal team. Terence Mncedisi Nombembe. Nombembe was the chief ...

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

Kluwer Arbitration Blog - Wed, 2018-03-07 07:24

Clément Fouchard and Marc Krestin

Linklaters

Introduction

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

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

Background of the case

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

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

AG Wathelet’s opinion

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

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

The CJEU judgment

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

The primacy of EU law

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

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

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

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

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

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

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

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

Commentary

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

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

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

References   [ + ]

1. ↑ The opinion has been extensively commented on in previously published posts on this blog (published here, here and here). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Sale of ABA Books — Only March 13-14

ADR Prof Blog - Tue, 2018-03-06 13:03
Here’s an announcement from the Francine Bennett at the ABA Section of Dispute Resolution about a sale on books – only next Tuesday and Wednesday, March 13-14. All Dispute Resolution titles published before 2016 will be discounted 50% for online purchases at www.shopABA.org. Customers must use code ‘Super18’ to apply discount.  Click here to view … Continue reading Sale of ABA Books — Only March 13-14 →

Recent Developments In India-Related International Arbitration - Lexology

Google International ADR News - Tue, 2018-03-06 11:54

Recent Developments In India-Related International Arbitration
Lexology
On Friday, 5 January 2018, the Indian Law Ministry published a Bill titled the New Delhi International Arbitration Centre Bill, 2018 (the “Bill”) for the establishment and incorporation of the New Delhi International Arbitration Centre (“NDIAC”). The ...

Revision Of The DIS Arbitration Rules - Litigation, Mediation ... - Mondaq News Alerts

Google International ADR News - Tue, 2018-03-06 11:52

Revision Of The DIS Arbitration Rules - Litigation, Mediation ...
Mondaq News Alerts
The German Institution of Arbitration (Deutsche Institution für Schiedsgerichtsbarkeit, or "DIS") has revised its Arbitration Rules ("Rules"). The new Rules came into effect on 1 March 2018 and replace the 1998 DIS Rules. The revision introduces major ...

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Turkey: Resolution Of Disputes Through Arbitration In Agreements Concluded Under The Public Procurement ... - Mondaq News Alerts

Google International ADR News - Tue, 2018-03-06 11:52

Turkey: Resolution Of Disputes Through Arbitration In Agreements Concluded Under The Public Procurement ...
Mondaq News Alerts
... as an alternative dispute resolution mechanism. Especially, and subsequent to the establishment of the ISTAC, important steps have been taken to ensure that public authorities and institutions may select this mechanism. A very important example is ...

Wake Up Call: UK Politicians Demand Law Firms Restate Pay Gap Data - Bloomberg Big Law Business

Google International ADR News - Tue, 2018-03-06 07:44

Bloomberg Big Law Business

Wake Up Call: UK Politicians Demand Law Firms Restate Pay Gap Data
Bloomberg Big Law Business
s new chief diversity officer won't start at her new post until July as part of a settlement of a lawsuit by her former employer, International Business Machines Corp., that equated her hiring to the theft of trade secrets. (Bloomberg). • Lawsuits ...

FAI Arbitral Tribunal’s Decision concerning the Disqualification of Counsel in Arbitral Proceedings

Kluwer Arbitration Blog - Tue, 2018-03-06 07:15

Mika Savola

Introduction

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

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

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

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

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

Reasons for the arbitral tribunal’s decision

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

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

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

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

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

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

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

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

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

Decision

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

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ACHMEA

Kluwer Arbitration Blog - Tue, 2018-03-06 06:28

Crina Baltag (Acting Editor)

More from our authors: International Arbitration and the Rule of Law
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4-word-build, A Conflict Resolution Exercise and Teamwork Exercise

Communication and Conflict Blog - Tue, 2018-03-06 05:14
4-word-build - a conflict resolution exercise for gaining a shared understanding of a concept in a group or team. The exercise enables all present to participate in the creation of the shared view.

How To Be Constructively Angry

Communication and Conflict Blog - Mon, 2018-03-05 10:13
This page explores how to be constructively angry in a way that leads to learning and change and not destructively angry through violence, abuse or vandalism.

Reform of state-run companies top priority in new EBRD strategy for Serbia - SeeNews

Google International ADR News - Mon, 2018-03-05 07:23

SeeNews

Reform of state-run companies top priority in new EBRD strategy for Serbia
SeeNews
In late 2014 the EBRD and Serbia launched an initiative to improve the investment climate, encourage the development of the private sector and promote good governance in Serbia. Under the initiative, the bank is supporting regional business registry ...

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Qatar- MoU signed to enhance arbitration environment - MenaFN.com - MENAFN.COM

Google International ADR News - Mon, 2018-03-05 06:36

MENAFN.COM

Qatar- MoU signed to enhance arbitration environment - MenaFN.com
MENAFN.COM
DOHA: Qatar International Court and Dispute Resolution Centre (QICDRC) signed a memorandum of understanding (MoU) with the Foundation of Qatar Sports Arbitration to begin their cooperation in the field of alternative dispute resolution. The memorandum ...

and more »

MoU signed to enhance arbitration environment - The Peninsula Qatar

Google International ADR News - Mon, 2018-03-05 02:24

The Peninsula Qatar

MoU signed to enhance arbitration environment
The Peninsula Qatar
DOHA: Qatar International Court and Dispute Resolution Centre (QICDRC) signed a memorandum of understanding (MoU) with the Foundation of Qatar Sports Arbitration to begin their cooperation in the field of alternative dispute resolution. The memorandum ...

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

Kluwer Arbitration Blog - Mon, 2018-03-05 01:11

Charlie Morgan

Herbert Smith Freehills

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

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

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

Blockchain and smart contracts explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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