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Opinion 1/20 and the Conclusion of the Modernisation Negotiations of the Energy Charter Treaty – Hitting the Home Stretch?

7 hours 9 min ago

Amidst the still ongoing negotiations on the modernisation of the Energy Charter Treaty (ECT), which were concluded with an agreement in principle yesterday (24 June 2022), the Court of Justice of European Union (CJEU) delivered its ruling on Belgium’s request for an opinion on the compatibility of intra-EU investor-state arbitration under a modernised text of the ECT with EU law on 16 June 2022. The CJEU found that it ‘does not have sufficient information on the actual content of the envisaged agreement and that, therefore, the present request for an Opinion, on account of its premature nature, must be regarded as inadmissible.’ (Opinion 1/20, para. 48).

Against this backdrop, this blogpost briefly addresses the reasoning of the CJEU in Opinion 1/20 and outlines the most contentious topics in the past few ECT modernisation negotiation rounds prior to the agreement in principle adopted yesterday. Given the confidentiality of the modernisation negotiations, the ‘actual content of the envisaged agreement’ remained unknown until the press release on the agreement in principle, but some major fault lines and points where consensus emerged in the modernisation negotiation could already be identified on the basis of press releases of the ECT secretariat.

 

Opinion 1/20 and Intra-EU Arbitration Under the ECT

Following the CJEU’s judgment in Achmea finding the Dutch-Slovak BIT incompatible with the autonomy of EU law, disagreements persisted among EU member states whether the Achmea reasoning applied to the plurilateral ECT as well since the EU itself is party to the ECT and non-EU members are also parties to the ECT. The EU proposal for modernizing the ECT, which was published in May 2020, did not address intra-EU investor-state arbitration. In December 2020 Belgium submitted a request for an opinion pursuant to Article 218(11) TFEU, which permits an EU member state and EU institutions to ‘obtain the opinion of the Court of Justice as to whether an agreement envisaged is compatible with the Treaties.’ The Belgian request sought clarification on whether intra-EU arbitration under a modernised ECT was compatible with EU law. However, at that point in time only the comprehensive EU proposal for amending the ECT existed. Eventually, in September 2021, the CJEU held in an obiter dictum in Komstroy that intra-EU arbitration under the current version of the ECT was not permitted by EU law (see analysis here). In light of this finding, Belgium was asked whether it wanted to withdraw its request, but Belgium declined (Opinion 1/20, paras. 17-18).

On 16 June 2022, the Fourth Chamber of the CJEU found the Belgian request to be inadmissible. It held that it did not have sufficient information on the actual content of that agreement and could not conclude that the provision providing for investor state arbitration under the ECT, i.e. Article 26,  ‘will not be subject to amendments at the end of those negotiations’ (Opinion 1/20 para. 43). The Court emphasized that the situation had changed since the request was submitted in December 2020. At that point in time negotiations on the modernisation of the ECT had only just started a few months ago –in July 2020– and the Komstroy judgment had not been delivered (Opinion 1/20 para. 44). Accordingly, it was still possible that intra-EU arbitration had already been addressed or would be addressed (Opinion 1/20 para. 44). In addition, the negotiations on the definitions of investor and investments under the ECT were on the table and could indirectly affect the scope of investor-state arbitration (Opinion 1/20 para. 44). Thus, the CJEU regarded the request as premature and inadmissible (Opinion 1/20 para. 46). However, the CJEU also reaffirmed its Komstroy Judgment pointing out that intra-EU arbitration under the existing ECT was not applicable because it contravened EU law (Opinion 1/20 para 47).

Overall, this ruling provides little additional guidance on intra-EU investment arbitration as it treated the request as inadmissible and simply re-affirmed what was already known: intra-EU arbitration under the ECT is contrary to EU law. While investment tribunals have generally not dismissed jurisdiction on the basis of an intra-EU objection even after Komstroy (see e.g. Mathias Kruck v. Spain), the tribunal in Green Power v. Spain for the first time declared that it has no jurisdiction. In light of Achmea and Komstroy, ‘Spain’s offer to arbitrate under the ECT is not applicable in intra-EU relations’ (Green Power v. Spain, para. 445) (a post on this development is soon to be published on the Blog). Given the unfinished negotiations at that point in time, the CJEU’s decision to treat the request as inadmissible was certainly the most prudent approach.

 

The State of the Modernisation Negotiations Prior to the Agreement in Principle

In order to modernise the ECT, the modernisation group, which was established by the Energy Charter Conference, i.e. all contracting parties to the ECT, in November 2019, held fifteen formal negotiation rounds between July 2020 and June 2022 discussing a wide array of procedural and substantive issues. The last negotiation round was initially scheduled for 8-10 June 2022, but was subsequently extended for one day (14 June 2022). Not all outstanding issues could be settled in the last round, thus informal discussions continued ahead of an in-person meeting of the modernisation group on 23 June 2022 (fifteenth negotiation round), which prepared the ad hoc meeting of the Energy Charter Conference for the agreement in principle on 24 June 2022.

 

Contested Topics in the Last Negotiation Rounds

The most contested topics plagued the modernisation group up until the very last negotiation round on 23 June 2022. This blogpost outlines some of these controversial topics and how the negotiations proceeded in the last few negotiation rounds.

According to a leaked document from the EU’s Trade Policy Committee, the ‘most controversial issue given the EU’s demand to exclude fossil fuels from the treaty’ was the ‘Definition of “economic activity in the energy sector”’. The EU proposed a redefinition of ‘economic activity in the energy sector’ by gradually phasing out investment protection for fossil fuel based energy production within ten years after the amendment of the ECT takes effect or by 2040 the latest (for an analysis see here). This topic had been intensively discussed since the fourth negotiation round (2-5 March 2021). In the fifth negotiation round (1-4 June 2021) delegations stressed the importance of taking into account the individual climate goals and energy security goals as well as their specific energy mixes when it comes to re-defining ‘economic activity in the energy sector’. In the sixth negotiation round  (6-9 July 2021), these discussions continued and the ECT secretariat presented some options to implement flexibility for each contracting state. The ECT secretariat was then tasked with further developing the options for flexibility and the principle of flexibility guided these discussions ever since. In the fourteenth negotiation round (8-10 and 14 June 2022) ‘proposals of individual Contracting Parties were considered in combination with rules on reciprocity among Contracting Parties as well as transition periods.’ The agreement in principle incorporates a flexibility mechanism, which permits the Contracting Parties –on the basis of a decision by the Energy Charter Conference– to exclude fossil fuel based investments in their territories from the scope of protection of the ECT. In addition, a review mechanism has been added, which allows the Contracting Parties to review the flexibility mechanism and the list of energy materials and products that are protected by the ECT.

Another controversial topic was ‘Sustainable development and corporate social responsibility’. The EU proposed the inclusion of references to international instruments on sustainable development and responsible business conduct as well was the Paris Agreement and an obligation to conduct environmental impact assessments. Moreover, it advocated for a state-to-state dispute settlement mechanism with respect to these provisions. Already in the sixth negotiation round  (6-9 July 2021) compromise drafts on these provisions were discussed and since the eleventh negotiation round (1-4 March 2022) particular attention was paid to the proposed dispute settlement mechanism. While there seem to have been considerable disagreements on these provisions (see progress report 2021), some agreement was reached in the fourteenth negotiation round, including on the dispute settlement mechanism. According to the agreement in principle, provisions were introduced that reaffirm exiting obligations under various multilateral treaties, including the Paris Agreement. The dispute settlement mechanism with respect to these new provisions on ‘Sustainable development and corporate social responsibility’ appears to be limited to a conciliation procedure rather than an arbitration mechanism as foreseen by the EU proposal.

In addition, there was consensus in the modernisation group on e.g. Fair and Equitable Treatment (FET). Here, the EU favoured a closed list of measures, which constituted a breach of FET, whereas other states favoured an open list (see here). Apparently, such a closed list is now part of the agreement.

Moreover, in the fourteenth negotiation round, a major success for transparency was achieved by reaching consensus to have the UNCITRAL Rules on Transparency in Treaty-based Investor-State arbitration applied to investment disputes under the ECT. This is particularly significant given the lack of support for the ‘Mauritius Convention on Transparency’, which also requires states to apply the aforementioned UNCITRAL Transparency Rules in investor-state disputes, but has only been ratified by nine states thus far.

Finally, an agreement was reached to exclude intra-EU arbitration from the ECT in the thirteenth negotiation round (16-20 May 2022). The agreement in principle indicates that a provision has been added clarifying that investor-state dispute settlement does not apply between contracting parties which are members of a Regional Economic Integration Organisation (REIO). The only REIO that is party to the ECT, is the EU. Thus intra-EU arbitration will be excluded, which satisfies the criteria established by the CJEU in Komstroy and reaffirmed in Opinion 1/20 and the modernised draft of the ECT will be compatible with EU law insofar as it concerns intra-EU arbitration.

Various other important aspects have been covered in the modernisation negotiations and are covered in the ECT’s public communication on the agreement in principle. The full text of the agreement in principle is not publicly available yet.

 

Outlook

With the CJEU having stayed on the sideline in the final phase of the modernisation negotiations, the negotiations concluded on 24 June with the agreement in principle, but the future of the modernised text of the ECT still remains uncertain. The draft text should now be communicated to the contracting parties by 22 August 2022 for adoption by the Energy Charter Conference on 22 November 2022. The modernised ECT will only enter into force 90 days after ratification of three-fourths of the contracting parties. An entry into force of the modernised ECT may face serious political obstacles, in particular in the European Parliament and some EU member states, which may still opt for withdrawal instead of amending the ECT.

 

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Never-ending Achmea Saga: A New Episode from Lithuanian Courts Confirms That Intra-EU BITs Are Really Over

Fri, 2022-06-24 01:00

A recent decision of the Lithuanian Supreme Court (Civil case No. e3K-3-121-916/2022, 18 January 2022, hereinafter the “LSC judgement”) adds another episode to the long saga of implementing the Achmea  decision. The Lithuanian decision once again confirms the end of the BITs era in Europe and turns to national courts as well as to the classic conflict of laws rules. It also falls in line with a number of other decisions of the EU member states’ courts.

 

The Background to the National Proceedings

On 10 February 2016, Veolia Environnement S.A., Veolia Energie International S.A., UAB Vilniaus energija, UAB Litesko (together – “Veolia”) initiated an ICSID investment arbitration case against the Republic of Lithuania regarding the alleged breach of the 1992 Bilateral Investment Treaty (BIT) between France and Lithuania .

The Republic of Lithuania submitted a counterclaim in the abovementioned investment arbitration case on 17 September 2017. After the Court of Justice of the EU’s (“CJEU”) decision in Achmea, the Republic of Lithuania concluded that the ICSID tribunal lacked jurisdiction, withdrew its counterclaim, and submitted it to the national courts as a separate claim.

On 6 August 2020, the court of first instance refused to register this new claim. The Appellate court overturned the decision and decided to remand the case for further proceedings on 9 March 2021. Veolia challenged the decision of the Appellate court inter alia on several principal grounds:

First, the agreement to arbitrate the investment dispute was concluded on 10 February 2016, when Veolia accepted the offer expressed in the BIT and submitted the claim to the ICSID. Therefore, Achmea cannot affect the validity of the concluded arbitration agreement.

Second, referring the question of the registration of the claim to the national court infringes the competence-competence power of the tribunal to decide on its own jurisdiction.

Third, the implications of Achmea decision are overextended to different proceedings that should be protected by Article 53 – 54 of the ICSID Convention, Article 54 of the Vienna Convention on the Law of Treaties, Articles 15-16 of the BIT and Article 351 of the Treaty on the Functioning of the European Union.

 

The Supreme Court’s Decision

In a decision dated 18 January 2022, the Lithuanian Supreme Court restated the reasoning of Achmea, Komstroy (C-741/19) and PL Holdings (C-109/20) and concluded that the jurisprudence of the CJEU is consistently developed toward the prohibition of intra-EU investment arbitrations (LSC judgement, para 42). The Lithuanian Supreme Court underscored that (i) ICSID is not a court of an EU member state; (ii) ICSID awards are not under the control of the EU courts; (iii) ratio decidendi of the Achmea decision should be applicable in the case at hand (LSC judgement, para 43).

Therefore, the Lithuanian Supreme Court was checking the jurisdiction of the national court at the moment of the registration of the claim through a two-prong test.

First, the Court assessed factors relevant for the registration of the new claim in a national court, i.e. the legal effect and temporal validity of the Achmea decision and the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union of 29 May 2020.

The Lithuanian Supreme Court in its reasoning referred to the practice of the CJEU that the interpretation which the CJEU gives to a rule clarifies and defines the meaning and scope of that rule as it must be, or ought to have been, understood and applied from the time of its entry into force (C-24/86 Blaizot and Others, C-402/03 Skov and Bilka, C-92/11 RWE Vertrieb) (LSC judgement, para 45). This inevitably affects the legal relationships arising before the interpretation, unless this effect is restricted by the judgment itself, which was lacking in the Achmea decision (LSC judgement, para 47).

As a consequence of the CJEU practice and the interpretation of the Achmea decision, since 1 May 2004, when Lithuania joined the EU, Lithuanian BITs with other EU member states did not contain a valid offer to arbitrate disputes and it could not have been accepted by an investor – investment arbitration could not proceed in the absence of the agreement to arbitrate (LSC judgement, para 50).

The entry into force of the Agreement for the Termination of Bilateral Investment Treaties between the EU member states did not affect these conclusions, because the invalidity of investment arbitration was caused by the Achmea decision, not the agreement to terminate BITs (LSC judgement, para 50).

Hence, the Court held that the prohibition of investment arbitration between EU member states existed at the moment of the registration of the claim. The bilateral investment treaty between Lithuania and France cannot be applicable when it contradicts the EU law, thus there was no valid arbitration agreement, which could prevent the registration of the claim at the national court (LSC judgement, para 51).

 

The Future of this Case and Investment Arbitration in Europe

This decision of the Lithuanian Supreme Court became a Pyrrhic victory for the claimant because upon return of the case to the first instance court, the latter refused to accept the claim, arguing that it lacked jurisdiction as the respondent companies are domiciled in France. The basis for refusal looks doubtful because two co-respondents are companies registered in Lithuania, the business activities were conducted in Lithuania for a number of years and contractual obligations were performed in Lithuania. Therefore, it is highly likely that we will observe the second round of legal procedures up to the Lithuanian Supreme Court on the most basic question: whether to register the initial counterclaim as a new case or not.

When reflecting on the foreseeable future of investment arbitration in Europe, we cannot ignore the critics of Achmea, Komstroy and PL Holdings line of reasoning, who argue that the CJEU got it all wrong by pitting EU law against international investment law. The substantive critique often is based on the premise that national courts are not equipped, nor suitable, to hear investment disputes and that the EU law is too weak and inadequate to protect the interests of investors in comparison to the BITs and ISDS.

However, it may be that the ISDS in Europe has become a victim of its own success. Investment arbitration was brilliant at isolating private business complaints from competing societal concerns and so successful at getting the monetary remedies for any interference with private rights. International environmental issues, human rights, health and safety concerns and even proper functioning of the market were left lightyears behind the development of international investment law in terms of accessibility of legal remedies and efficiency.

Probably for some, it comes as a surprise that EU law, in general, refused to play the role of a weakling when confronting ISDS, which is quasi-private, despite having the initial authorization in BITs. Probably international investment law met its equal in the CJEU which jealously guards its own powers, the effectiveness of EU law and the delicate balance of societal interests within the EU.

Both EU law and international investment law are relatively young, as both emerged after WWII. Both are the product of international treaties and compete for superiority against each other. EU law is holistic in the sense that it regulates a wide variety of subject areas and consequently protects a variety of interests, unlike international investment law, which concerns only investments. EU law mimics national law and has an institutional advantage over international investment law because the CJEU can ensure continuity for law development. Meanwhile, ISDS is still mostly ad hoc with limited jurisprudence constante.

The Multilateral Investment Court proposed and advocated by the EU could be a solution in the current situation. With proper procedural and institutional safeguards maybe the CJEU could accept requests from the Multilateral Investment Court for preliminary reference rulings eliminating the very reason behind the Achmea decision.

 

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The Contents of Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, Volume 88, Issue 1 (January 2022)

Thu, 2022-06-23 01:00

The 31st of January 2022 marked twenty-five years from the day the Arbitration Act 1996 was brought into force. Inspired by the UNCITRAL Model Law but, at the same time distinctly English, the Act has rightly been hailed as an ‘exemplary piece of legislation’.1) Merkin and Flannery on the Arbitration Act 1996 (6th Edition Informa Law Routledge). jQuery('#footnote_plugin_tooltip_41992_9_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41992_9_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It is a comprehensive, coherent and progressive Act which made it harder for a party to challenge an arbitration award before English courts and accorded parties greater freedom to conduct their arbitration and agree on the procedure that should be followed.

To appreciate the Act’s contribution to the development of English arbitration law, the Act should be seen as part of an uninterrupted series of pro-arbitration legislation that goes back to the seventeenth century and the introduction of the 1698 Arbitration Act, one of the first arbitration statutes in the world. The 1698 Act is often referred to as the Locke Act, because it was singlehandedly drafted by John Locke, who was commissions by the Board of Trade to ‘draw up a scheme of some method of determining differences between merchants by referees, that might be decisive without appeal’.

Locke, who was familiar with arbitration, understood that merchants would be willing to use arbitration only if an effective legal mechanism was introduced to ensure that arbitration agreements and awards were complied with and enforced. His draft was adopted by the Board, which submitted it to the Privy Council in January 1697, noting that statutory law was necessary to address the ‘great obstruction in trade arising from the tedious determination of controversies between merchants and traders concerning matters of accompt or trade in our ordinary methods’. The Board urged the Council to adopt the draft on the grounds of the ‘very great advantage to the Trade of this Kingdom’. The bill was finally enacted with minor amendments in May 1698.

The Locke Act expressly introduced a policy favouring arbitration by stating that a legal mechanism for the protection of arbitration agreements was necessary ‘for promoting Trade and rendering the Awards of Arbitrators the more effectual in all Cases’. Locke’s vision and the pro-arbitration policy, embedded in the 1698 Arbitration Act, was then treasured and further developed in all subsequent arbitration acts. The 1889 Act, for example, enshrined the rule of irrevocability for arbitration agreements and offered statutory protection to arbitration agreements for both existing and future disputes. Subsequently, the Arbitration Act 1950 accorded arbitrators the power to grant interim relief, while the Arbitration Act 1979 accorded parties the significant power to take their arbitration disputes out of the purview of judicial review for errors of law. Importantly, the Act abolished the power of the courts, which they had since the 1854 Act, to order arbitrators to refer (‘state’) a question of English law arising in the course of an arbitration or an award in the form of a special case for the decision of the High Court.

Starting with the Locke Act and currently with the 1996 Act, English law has in the last three centuries given effect to a clear policy favouring arbitration as a means of promoting business. It is a remarkable legal tradition that has proved to be the catalyst for London’s reputation as one of the most important arbitration places worldwide and has inspired pro-arbitration legislations in other parts of the world.

We are happy to report that the latest issue of Arbitration is now available and includes the following:

 

ARTICLES

Ben Waters, Alternative Dispute Resolution and Civil Justice: A Relationship Resolved?

At a time when there was a perceived civil justice crisis, The Modern Law Review of May 1993 published an article written by Simon Roberts in which he reasserted the importance of party control over dispute processes and their professional management, and between negotiated outcomes and imposed decisions. The article presented here revisits Roberts’s view that the strained relationship between civil justice and alternative dispute resolution (ADR) (particularly mediation) could be mitigated by introducing three models designed to encourage extrajudicial dispute resolution. The author reassesses the relationship between ADR and civil justice, and the extent to which Roberts’s models have been incorporated is evaluated. To understand how civil justice reform in England and Wales has and will affect the way in which those who use the civil justice system engage with it, this article provides an analysis of the developing relationship between ADR and the civil justice system and suggests its future direction.

 

Peter E. O’Malley, A New ‘UNCITRAL Model Law on International Commercial Adjudication’: How Beneficial Could It Really Be?

The United Nations Commission on International Trade Law (UNCITRAL) has promoted Alternative Dispute Resolution (ADR) as an alternative to litigation, being the traditional method of resolving disputes. ADR has been primarily facilitated by UNCITRAL through two Model Laws, namely the UNCITRAL Model Law on International Commercial Arbitration (1985) and the UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation (2018). The Commission has discussed, and continues to discuss, the development of an additional UNCITRAL Model Law on International Commercial Adjudication, primarily for the international construction industry. This article seeks to discuss and consider what real benefit the introduction of a new UNCITRAL Model Law for International Commercial Adjudication could provide.

 

Andrea Colorio, Investor-State Arbitration, Human Rights, and Consumer Protection: China’s New Challenges in an Era of Globalization

This paper explores the interconnections among Investor-State arbitration, Human Rights, and Consumer Protection in modern-day China. In particular, the author analyses the relationship between open arbitration in Bilateral Investment Treaties and the development of the ecological reforms launched in order to reach what has been called an ‘ecological civiliszation’, specifically with respect to the still controversial ‘right to water’. It is shown that within the framework of the construction of a consumer policy that might guarantee the safeguarding of environmental protection and consumer rights and, at the same time, the promotion of investment policies, the correct balance between public and private interests will be a crucial issue for China in the coming years.

 

Yuan Wang, Extraterritorial Arbitration in China’s Pilot Free Trade Zones and Beyond

Since the end of 2019, the Pilot Free Trade Zones (PFTZs) established around China have adopted an aggressive approach to make reforms in extraterritorial arbitration as well as other international arbitration rules. An arbitration agreement with designation of an institution outside the Chinese Mainland between foreign-invested corporations, which used to be invalid according to Chinese Arbitration Law, became valid for the first time in the Shanghai PFTZ. As other modifications are emerging ever-evident for Chinese courts, arbitration institutions follow an international track to open the arbitration service market and keep pace with mainstream practices.

 

Hamid Reza Younesi, The Adequacy of Remedies in International Investment Law: Should the Legal Framework Be Revisited for a Proper Remedy?

This article aims to examine the subject of remedies in international investment law under two competing theories of contracting which encompass different implications for contractual relationships. It first assesses the available remedies in existing international investment law and then looks at the approach taken by relational contract theory. The article addresses the inadequacy of the remedies suggested by the classical model (existing and dominant law) in maintaining equilibrium and restoring contractual balance in international investment contracts. In light of these analyses, the article attempts to determine and develop the features and availability of remedies suggested by the relational model in international investment agreements. It underlines that the suggested remedy according to relational theory would serve the joint purpose and interests of contracting parties.

 

Divyansh Sharma, The Move Towards Multi-Party Interim Appeal Arbitration: How Efficacious?

The Appellate Body (AB) of the World Trade Organisation (WTO) is in a period of severe crisis. Though generally composed of seven members, the forum’s composition has now dropped below three, the minimum number required to hear any new appeal. At its root, this deadlock arises out of the United States’ veto against any further appointments to the AB. However, it is important to understand the potential fallout likely to occur when approaching solution-oriented discussions from this perspective. This article hypothesizes that the crisis is not limited merely to AB members’ appointment but originates from a threat to core WTO tenets of mutual trust and multilateralism. In this context, it argues that the Multi-Party Interim Appeal (MPIA) Arbitration Procedure is a mere ‘band-aid’ solution that promotes complacence within Member States and distracts attention from the structural WTO transformations necessary to escape from the current impasse. Further, the article finds that the legal and practical feasibility of the procedure is suspect, and thus there is an urgent need to explore alternative means to restore a functioning multilateral trade disputes mechanism.

 

Deyan Draguiev, Liability for Non-compliance with a Dispute Resolution Agreement

The use of dispute resolution with a forum selection clause is widespread and continues to grow so that it is now commonplace to have such a clause inserted in an agreement with an international element. One of the salient issues related to such clauses or agreements is what the consequences are if a party avoids compliance. This article aims to provide an anatomy of this matter: first, how a dispute resolution agreement should be perceived, and what obligations it creates for each of the parties (herein termed performance obligations); and second, a taxonomy of the types of liability that may flow from such a breach, both financial (e.g., damages, costs allocation) and non-financial. The article analyses and draws examples from a variety of both common law and civil law jurisdictions to provide a comprehensive mapping of the topic.

 

Aditi Tripathi & Vaibhav Vidhyansh, The Quest for an Appropriate Dispute Resolution Method in the Oil and Gas Sector in India

As a core sector, the oil and gas industry plays a significant role in shaping the Indian economy. Companies are given license to undertake exploration activities under different forms of granting instruments such as Concessions, Production Sharing Contracts [‘PSC’], and Revenue Sharing Contracts [‘RSC’]. The government initially adopted a relatively complex granting instrument (PSC) for engaging private players in exploration activities. Experience has shown that due to their complex structure, PSCs are prone to giving rise to a wide array of disputes. Twenty-two out of the 310 PSCs entered into by the government of India have been referred to arbitration and, should the trends hold, many more will be referred in the future. Although the government has switched from the PSC model to the RSC model, the nature of disputes remains essentially the same under both instruments. In this article, after discussing the nature of disputes that arise in the oil and gas industry, the regulatory framework in the sector, and aspects such as the volume of investment and the long-term engagement between the parties, the authors put forth a case for replacing arbitration with a non-confrontational mode of dispute resolution (i.e., mediation), so as to preserve the business relationship between the parties after disputes while avoiding the plethora of pitfalls surrounding arbitration.

 

CASE NOTES

Dr Sam Luttrell & Larissa Welmans, Jumping the Gun: Federal Court of Australia Declines Enforcement of Qatari Award on the Basis of Defective Constitution of Court- Appointed Arbitral Tribunal

In a recent decision, the Full Court of the Federal Court of Australia has confirmed the commitment of Australian courts to the primacy of party agreement in the enforcement of foreign arbitral awards. The court refused enforcement in Australia because the award was issued by a Qatari-seated arbitral tribunal that was not constituted in accordance with the parties’ agreement. The court’s decision engages with issues of comity because the arbitral tribunal had been appointed by a court of the seat in Qatar. The decision also clarifies the nature of the burden of proving grounds for non-enforcement of arbitral awards under Australia’s international arbitration legislation. In addition, in finding that the jurisdictional nature of the defective tribunal appointment precluded the exercise of any residual discretion to enforce, the decision elucidates the nature of Australian courts’ discretion to order enforcement of a foreign arbitral award notwithstanding a ground for non-enforcement being established.

 

Alexandre Rivière, Acceptance of DCF in Expropriation Claims

Under international investment law, and as specified in most investment treaties, States should compensate investors who suffered from a direct or indirect expropriation. Most investment treaties explicitly indicate that the compensation should correspond to the fair market value (‘FMV’) of the expropriated investment immediately before the expropriation became known. The choice of the appropriate valuation approach to calculate the FMV of the investment is left to the appreciation of the parties, and ultimately is for the tribunal to determine. One recurring issue in investment treaty cases concerns the choice of the applicable valuation approach for assessing FMV, and in particular whether a discounted cash flow (‘DCF’) analysis is appropriate based on the case facts.

 

Daze C. Nga & Peace O. Adeleye, The English Supreme Court’s Decision in Halliburton V. Chubb: An Examination of the Issues Arising from Arbitrators’ Acceptance of Multiple Appointments in Related Arbitrations and Arbitrator’s Duty to Disclose

Independence, impartiality, and the existence of an environment devoid of bias are key elements that define the integrity of any dispute resolution process. The absence of these key elements in any dispute resolution process cast doubt on due process notwithstanding the formality adopted in such process. Like every dispute resolution process, it is an ideal and a requirement in the arbitral process for every arbitrator to be impartial and independent. Arbitrators are obliged to disclose circumstances that may cast doubt on their impartiality upon acceptance of the arbitration and during the arbitration. This requirement is explicitly contained in most institutional arbitration rules and in most country’s arbitration rules. The requirement for arbitrators to disclose circumstances that may give rise to their partiality is opaque and uncertain. In the case of Halliburton v. Chubb, the English Supreme Court pronounced on the impact of the acceptance of multiple appointments by arbitrators in arbitration with the related subject matter and on the corresponding duty of an arbitrator to disclose. This article analyses the arbitrator’s duty of independence and impartiality considering the decision rendered in Halliburton v. Chubb and critically examines the arbitrator’s acceptance of multiple appointments with a related subject matter or common party, the appearance of bias, unconscious bias, and the duty of disclosure.

 

BOOK REVIEW

Gordon Blanke, Roman Khodykin and Carol Mulcahy, A Guide to the IBA Rules on the Taking of Evidence in International Arbitration (2019) (2019)

References[+]

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Arbitration in Egypt: A Practitioner\'s Guide
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The EU Termination Agreement and Sunset Clauses: No ‘Survivors’ on the (Intra-EU) Battlefield?

Wed, 2022-06-22 01:51

‘Sunset’ (or ‘survival’) clauses extend the effects of the relevant investment treaty after its termination. They provide that the protection afforded by the treaty is maintained for a further period of time after termination to investments made during the lifetime of the treaty. As such, sunset clauses have an ‘entrenchment effect’ limiting the ability of States to immediately walk away from their existing treaty obligations. In the aftermath of Achmea, this entrenchment effect clashed with the resolute intention of (most) European Union (EU) Member States to comply with the CJEU’s ruling and bar intra-EU investment arbitration (see coverage here). Most notably, this intention was pursued through the adoption of the Termination Agreement, a multilateral treaty signed on 5 May 2020 by 23 EU Member States to terminate their BITs (see coverage here).

The Termination Agreement deals with sunset clauses in two ways. First, Article 2 seeks to terminate all sunset clauses of the intra-EU BITs still in force, viz. the bilateral investment treaties (BITs) that are terminated pursuant to the agreement, providing that ‘[f]or greater certainty, Sunset Clauses […] are terminated […] and shall not produce legal effects’. Second, Article 3 purports to terminate the sunset clauses (possibly still in force) of previously terminated intra-EU BITs.

Will these provisions have the intended effect of barring intra-EU investor-state arbitration?

 

Article 2: Simultaneous Termination of BITs and Their Sunset Clauses

It is debated whether sunset clauses are triggered, and thus operate, only when a BIT is unilaterally terminated or also in case of mutual termination by both parties to a BIT, such as envisaged by the Termination Agreement. Most sunset clauses appear to limit their applicability to unilateral termination, by referring to termination caused by the notice of termination provided by one contracting party to the other (e.g. Latvia-Sweden BIT). Hence, a mutual termination would not be covered by the sunset clause, which would effectively be displaced by such termination.

However, it is unclear how sunset clauses should be interpreted when such language (limiting the applicability of the sunset clause to unilateral termination) is missing. For example, an arbitral tribunal has recently held that a sunset clause providing that the BIT shall continue to apply for a certain period in case of ‘termination’ of the agreement, without further qualification, would operate even in case of the mutual termination of the BIT, viz. termination by agreement of both contracting parties (Bahgat v. Egypt, para 313). In this scenario, the agreed termination of intra-EU BITs pursuant to the Termination Agreement would not, in itself, have sufficed to displace (at least some) sunset clauses. This seems to be the reason why, to avoid any arguments in this regard, Article 2 of the Termination Agreement specifically provides that  ‘for greater certainty’ sunset clauses  ‘shall not produce legal effects’ and ‘are terminated’.

This, however, raises a further question: Is such consensual ‘termination’ of sunset clauses permissible? Or are States somehow prevented from removing sunset clauses in this way? Here again there is room for debate.

The view supporting the power of States to remove sunset clauses is based on the general principle underlying the Vienna Convention on the Law of Treaties (VCLT) that States are the ‘masters of their treaties’ (Article 54(b)). Despite the sunset clause, States should therefore be free to immediately and completely terminate a treaty, if they so agree. This view finds some support in recent practice (e.g. UP v. Hungary, para 265).

On the other hand, the possibility of extinguishing sunset clauses appears to be at odds with the very purpose of these clauses, viz. to protect investors’ expectations against a sudden termination of the investment treaty. Such sudden removal can also be problematic from a rule of law and human rights perspective.

Perhaps for this reason the Czech Republic followed a two-step approach and removed the sunset clause just before terminating its BIT with several EU Member States before Achmea, although one may wonder whether there is in fact any material difference between this and the simultaneous termination provided for in the Termination Agreement.

 

Article 3: Terminating Active Sunset Clauses of Prior Terminated BITs

Similar issues arise under Article 3 of the Termination Agreement, seeking to extinguish sunset clauses contained in BITs that had been terminated before the agreement. The key feature of these clauses is that they were already operating at the time of the Termination Agreement. What is the impact of the Termination Agreement in this scenario? Arguably, a distinction should be made between cases where the investor relies on the sunset clause and starts the arbitration, or otherwise accepts the offer to arbitrate contained in the relevant BIT, before the entry into force of the Termination Agreement, and cases where the investor seeks to do so after the entry into force of the Termination Agreement.

In the former cases, it may be argued that, once accepted by the investor, the offer to arbitrate made by the State with the investment treaty becomes irrevocable. It is commonly accepted that this principle of irrevocable ‘perfected consent’ is codified in Article 25 of the ICSID Convention and may constitute a general principle of international law. Arguably, under this principle the subsequent termination of the sunset clause may not retroactively deprive an arbitral tribunal of its jurisdiction to hear the claim brought by the investor. This is in line with the position taken by arbitral tribunals after Achmea, the 2019 Declarations of the EU Member States and the Komstroy ruling. The enforcement in the EU of awards reflecting this view remains nonetheless problematic.

The answer may not be the same if the investor seeks to rely on the sunset clause after the Termination Agreement because the principle of perfected consent would not apply in this scenario. An argument may nonetheless be based on Article 70(1)(b) VLCT, which provides that the termination of a treaty ‘does not affect any right or legal situation of the parties created through the execution of the treaty prior to its termination’. It has been suggested that this rule may apply to sunset clauses and invalidate their retroactive termination. The argument has not yet been tested in practice, and some questions arise as to whether and how it may be addressed by tribunals. First, this is part of the default rule on termination set out by Article 70 VCLT, and States are free to modify this default rule pursuant to the first part of the provision (‘[u]nless the treaty otherwise provides or the parties otherwise agree’). Second, Article 70(1)(b) VLCT refers to the rights ‘of the parties’, which are understood as the States parties to the treaty, not individuals or companies. The position of individuals and companies is governed by a different provision, Article 43 VCLT, which stipulates that, after termination, a treaty ceases to regulate the legal situation of individuals and companies previously affected by such treaty. Furthermore, that Article 70(1)(b) VLCT relates to States and not private parties is made clear also by the ILC Commentary, which states that the provision ‘is not in any way concerned with the question of the “vested interests” of individuals’.

Given these issues, investors may seek to bypass the VCLT and invoke the doctrine of ‘vested’ (or ‘acquired’) rights under customary international law. However, this would seem to be a novel application of the principle since, under the traditional view, the principle of acquired rights has a narrow scope and no application to treaty termination. In any case, both under the VCLT and customary international law, the matter whether investors may have vested rights under sunset clauses despite the Termination Agreement may ultimately revolve around the vexed question of whether investors hold rights created by investment treaties directly, or they exercise rights belonging to their home States.

 

Conclusion  

The Termination Agreement raises several issues concerning termination of sunset clauses. These are mostly unexplored issues that arbitral tribunals might soon have to address. First, there is the issue of whether the consensual termination of an investment treaty triggers the application of the sunset clause. The Termination Agreement appears to assume that it does not but also contains provisions aimed at removing the effects that sunset clauses may potentially have. Second, there is the issue of whether contracting States, as masters of the treaty, can immediately eliminate the effects of a treaty despite the sunset clause included in it. This issue is particularly relevant when the clauses that States wish to neutralise already started to operate, and in particular where the investors relied on them before such neutralisation. Here, the post-Achmea arbitral practice may be instructive, in particular regarding the inclination of tribunals to uphold their jurisdiction to hear intra-EU investment claims despite the attacks from the EU side. Will these be the last ‘survivors’ on the (intra-EU) battlefield?

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The Contents of Journal of International Arbitration, Volume 39, Issue 3 (June 2022) – Special Issue on Empirical Work in Commercial Arbitration

Tue, 2022-06-21 01:52

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

 

Roger P. Alford, Crina Baltag, Matthew E.K. Hall and Monique Sasson, Empirical Analysis of National Courts Vacatur and Enforcement of International Commercial Arbitration Awards

The empirical research in this article relies on a data set including all national court decisions on recognition, enforcement and setting aside (vacatur) of international commercial arbitration awards available in the Kluwer database that were rendered from 1 January 2010 to 1 June 2020.Within the time parameters of this study, there were 504 vacatur actions and 553 offensive recognition and enforcement actions. Those decisions were rendered by national courts in 74 different jurisdictions. The research coded every argument raised by defendants challenging the recognition and enforcement of awards based on grounds set forth in Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as well as every argument raised by claimants to challenge awards based on the grounds set forth in Article 34 of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. In addition to these grounds, several others, outside the two instruments mentioned above, have been identified in the data set. The results of the research are presented in the article below. An overarching conclusion would be that courts overwhelmingly enforce foreign arbitration awards, in 73% of the cases in the data set, without significant variations between courts in various jurisdictions, and, respectively, overwhelmingly refuse to vacate arbitral awards, with courts vacating in only 23% of cases, again without significant variations between courts in various jurisdictions.

 

Maxi Scherer and Ole Jensen, Empirical Research on the Alleged Invalidity of Arbitration Agreements: Success Rates and Applicable Law in Setting Aside and Enforcement Proceedings

This article is based on a data set of over 1,000 judicial decisions in setting aside, recognition and enforcement proceedings. Although sometimes cited as one of the most common grounds for setting aside an award or refusing its recognition and enforcement, the invalidity of the arbitration agreement was raised in less than one-fifth of those decisions. It was confirmed in under one-third of those cases. This article examines which arguments for invalidity were more successful than others and how courts have determined the law applicable to the (in)validity of the arbitration agreement. Notably, less than half of the courts in this data set have engaged in a meaningful conflict of laws analysis. Where they have done so, there does not appear to be a consensus on how the law applicable to the arbitration agreement should be determined and what significance a choice of law clause in the main contract has in this regard.

 

Loukas Mistelis and Giammarco Rao, The Judicial Solution to the Arbitrator’s Dilemma: Does the ‘Extension’ of the Arbitration Agreement to Non-Signatories Threaten the Enforcement of the Award?

This article contributes to the debate on non-signatories by relying on the Kluwer Research project. In particular, through the raw data underlying the Kluwer Research, we have identified cases at the enforcement stage, in which courts had to decide whether, despite the apparent lack of consent, non-signatories were correctly brought into arbitration proceedings. In our view, the analysis of those courts’ decisions is perhaps a reminder that when considering non-signatory issues, the relevant facts of the case are always what matters the most. Non-signatories’ involvement in the relationship underlying the dispute is essential, absent a clear expression of it in the contract. We believe that the results show the judicial solution to the arbitrator’s dilemma, that is, the due consideration of the circumstances of any case, disregarding the rigid application of any theories.

 

Laurence Shore, Vittoria De Benedetti and Mario de Nitto Personè, A Pathology (Yet) to Be Cured?

Fifty years ago, Frédéric Eisemann coined the expression ‘pathological clause’ to refer to arbitration clauses that substantially deviate from the essential requirements of a model clause. However, arbitration practitioners have not yet learned their lesson; the matter of pathology is far from being outdated. Arbitration clauses may be pathological if they do not provide for mandatory referrals to arbitration proceedings, or do not meet certain other requirements to provide for a workable arbitration procedure, or contain a reference to non-existing arbitral institutions and/or arbitral rules, or provide for a proceeding administered by an arbitral institution pursuant to different institutional rules. In most instances, the competent supervisory court (or the arbitral tribunal or institution dealing with a defective clause) seeks to cure these pathologies. Arbitral tribunals and national courts generally try to ascertain whether the parties’ real intention is to arbitrate, and, if that to arbitrate is apparent, to give effect to and enforce an otherwise invalid arbitration clause. In any case, parties should not blindly rely on tribunals’ and courts’ tendency to uphold such clauses; the only safe approach is to avoid pathology.

 

Cecilia Carrara, Conflicts of Interests

The Kluwer Research comprises over 1,000 cases in the period 2010-2020. These cases do not include challenges in particular, but include vacatur and enforcement actions. Out of a total of 504 vacatur cases, in approximately eighty cases arguments related to the composition of the arbitral authority have been made. As regards enforcement, out of a total of 589 enforcement actions, in sixty-one cases these arguments have been made.

The effectiveness of arbitrators’ impartiality and independence is ensured by an ex ante positive obligation of transparency, i.e., the duty to disclose any circumstances that may give rise to independence and impartiality, and an ex post sanctioning mechanism, which enables the parties to challenge an arbitrator who doesn’t comply with those requirements. Disclosure allows parties to verify the arbitrators’ compliance with the requirements of independence and impartiality. The challenge, however, remains the necessary procedure to establish the lack of such requirements. In most countries, the test of the arbitrators’ impartiality and independence is based on the criterion of justifiable doubts.

Raising arguments related to conflicts of interest after the award is rendered, either in vacatur or enforcement actions, is only successful in order to block the enforcement/vacating the award in very few instances. Thus, parties should timely raise all of their objections at an early stage, rather than after the award is rendered.

 

Crina Baltag, Article V(1)(e) of the New York Convention: To Enforce or Not to Enforce Set Aside Arbitral Awards?

The recognition and enforcement of arbitral awards which are set aside at the seat continues to be a ‘hot’ topic, triggered by the increasing number of cases in which the prevailing party in the arbitration attempts to enforce such award in various jurisdictions where the assets of the award debtor are located. Such jurisdictions may have different approaches to the application of Article V(1)(e) of the New York Convention providing for the possibility that courts refuse recognition and enforcement of arbitral awards already set aside. Kluwer Research confirms, that, first, this ground under Article V(1)(e), while the most successfully argued ground under Article V of the New York Convention, is only upheld in 34% of the cases, and that, second, there are diverse approaches of the national courts in assessing such ground, ranging from deference to the courts of the seat of arbitration, to a truly delocalized, transnational approach to the recognition and enforcement of awards.

 

Monique Sasson, Public Policy in International Commercial Arbitration

This article analyses the decisions on public policy contained in the Kluwer Arbitration database. The database includes more than 1,000 cases. Objections based on public policy have been raised in 44% of recognition and enforcement proceedings and in 38% of setting aside proceedings. The success rate of these objections was low, 19% and 21%, respectively. This article discusses the decisions in which these objections were successful, distinguishing between the three International Law Association categories: (i)‘violation of fundamental principles, procedural public policy, or substantive public policy’; (ii) ‘loi de police’; and (iii) ‘violation of international obligations’ (though there were no successful objections in this category). The article concludes that the Kluwer Research confirms that public policy should only be applied in a limited set of circumstances, though it also features a few exceptions to the narrow construction of the concept of public policy.

 

Elina Mereminskaya, Latin America Isn’t ‘Going South’: A Qualitative Sampling Analysis

This article analyses a qualitative sample of recent judicial decisions from Argentina, Colombia, Costa Rica, Chile, the Dominican Republic, Mexico and Peru. Almost all decisions in the sample show ordinary courts’ deference towards arbitration. As long as the courts operate within the framework established by the UNCITRAL Model Law or the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arbitral awards enjoy a high level of autonomy and protection against unjustified attacks. This allows for conclusion that Latin America isn’t ‘Going South’ on its path into global arbitration realm.

At the same time, in almost all jurisdictions included in the sample, Constitutional courts and Tribunals and constitutional actions for protection of fundamental rights play an extremely – indeed excessively – relevant role. Admittedly, these constitutional actions have been mainly unsuccessful and have not led to amendments of arbitral awards. Nonetheless, its sole availability generates legal uncertainty and undermines the reliability of arbitration as a mechanism of dispute resolution. It seems to be the last hurdle that Latin American countries will have to overcome before they are considered safe and appealing seats for international arbitration.

 

Ioana Knoll-Tudor, Recognition or Enforcement and Annulment of Arbitral Awards in France: An Analysis of the Kluwer Research Results

The results of the Kluwer Research showed that, despite Paris being one of the most popular arbitration seats, French courts were the least likely to recognize and enforce an arbitral award, but also those with the highest number of vacated arbitral awards. The article analyses these results and offers some possible justifications for them.

Concerning the enforcement and recognition procedures, the study only included reasoned decisions. The specificities of the French procedure however result in most of the decisions not being reasoned (the exequatur procedure is an ex parte procedure, only orders refusing the enforcement are reasoned) and the decision of the Court of Appeal dismissing an application to set aside an award (for awards rendered in France) has the effect of automatically enforcing the award. Therefore, analyzing only reasoned decisions is not representative of the French courts’ approach. The article also analyses the grounds invoked by the claimants and their respective success rates, especially in comparison with other jurisdictions.

Concerning the annulment procedures, France ranks as the country with the highest number of vacated awards. Indeed, while reviewing the number of annulment actions initiated in recent years before the Paris Court of Appeal, we concluded that the number of actions has doubled, with around 25% of successful annulment actions.

As to the grounds for annulment relied upon by the claimants and their respective rates of success, the Kluwer Research revealed that the most relied upon grounds in France (authority not in accordance with the law and violation of public policy) were also the most successful ones.

 

Arthur Dong and Alex Yuan, An Empirical Study on Recognition and Enforcement of Foreign, Hong Kong, Macau, and Taiwan Arbitral Awards in Mainland China

In this report we analyzed publicly available cases decided by courts of Mainland China (‘PRC courts’) from 2001 to 2021 in which the court refused or rejected party’s application for recognition and enforcement of foreign (including Hong Kong, Macau, and Taiwan) arbitral awards, totaling thirty-seven cases. Here we provide factual summary for each case and conducted statistics with respect to their arbitration-related characteristics and PRC court’s ground of decision. With this report, one can see that PRC courts are extremely cautious in refusing or rejecting recognition and enforcement of foreign arbitral awards. Lack of valid arbitration agreement, and violation of arbitration agreement/arbitration rules/law of the seat, are the two major causes that led to the PRC Courts’ refusal of recognition and enforcement. However, one should note that non-compliance of national laws in Mainland China may undermine recognition and enforcement of foreign arbitral awards.

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Revisiting ‘Investment’ under Article 25 of the ICSID Convention

Mon, 2022-06-20 01:00

The debate surrounding the meaning and scope of the term ‘investment’ under the ICSID Convention is a product of the larger tussle between capital exporting and capital importing states, which convened at Washington in the search for a mutually beneficial agreement on foreign investments. It has been argued by Prof. Julian Davis Mortenson that ‘investment’ under Article 25 of the ICSID Convention must be interpreted as broadly as possible, in deference to party autonomy. An analysis of the travaux préparatoires leads him to conclude that parties’ consent should be the sole basis for evaluating whether a particular enterprise can be classified as an investment. Prof. Mortenson’s previous posts on this topic on the blog can be found here, here and here. While agreeing with such an approach in principle, this post demonstrates how it is not an effective alternative in practice. Instead, I explore the existence of a reasonable middle ground that allows the intentions of parties to be given effect to, while keeping the core of the Convention intact.

 

Contextualising State Consent

The avowed object of the ICSID Convention is to encourage the flow of private international investment by facilitating the settlement of disputes between investors and host states. The need to maintain a ‘careful balance’ between the interests of investors and the host states is, therefore, stated to be an important task of the Convention’s provisions.

Prof. Mortenson notes that it is this balancing act that resulted in the term ‘investment’ deliberately being left undefined. Such a ‘compromise’, first proposed by the United Kingdom, is espoused as a consent-based approach to jurisdiction, which offers sufficient flexibility to contracting parties to delimit the scope of covered investments. States are free to have their own definitions of what constitutes an ‘investment’ either through subsequent Bilateral Investment Treaties (BITs) or as unilateral notifications to the ICSID Secretariat (referred to as ‘opt-outs’). However, it is important to keep in mind that this was not an intentional choice, but one made out of compulsion. It is only because contracting states were unable to reach a consensus that the term was left open-ended. Moreover, whether or not such a choice has, in fact, ensured flexibility and encouraged state autonomy is questionable. For instance, only a handful of states have employed notifications under Article 25(4) to exclude certain classes of disputes from ICSID jurisdiction, and even such notifications have been held to be merely informational and not binding qualifications on state consent. Further, limiting the scope of states’ consent through arbitration agreements in BITs or specific contracts has also not been widely embraced insofar as most BITs continue to incorporate an expansive asset-based definition of investments, with reference to ICSID arbitration for the purposes of dispute settlement.

Indeed, if one were to agree that the compromise formula based on party autonomy truly gives effect to the consent of all states, state practice would lead to the inevitable inference that host states have come to accept the all-encompassing definition of ‘investment’. However, that is understandably not the case. Moreover, the expression of consent requires a positive act. Merely because states have not chosen to limit their consent to a specific class of investments through such opt-out mechanisms can not, by itself, be taken to imply an acceptance of the default standard without limitations. Such an approach must also be considered in light of prevailing geopolitics, acknowledging that some states possess greater bargaining powers than others.

 

Requirement of an Outer-Limit

Article 25 of the ICSID Convention explicitly limits jurisdiction ratione materiae to ‘any legal dispute arising directly out of an investment’. The deferential approach espoused by Prof. Mortenson requires that the determination of jurisdiction be solely based on parties’ conception of what constitutes investment, as found in BITs or other instruments of consent, subject only to the exclusion of ‘facially absurd’ non-economic claims. In other words, the term ‘investment’ under Article 25 is seen as non-justiciable and lacking a real limiting effect.

On the other hand, while acknowledging that consent is a jurisdictional prerequisite for bringing claims under the ICSID Convention, the Report of the Executive Directors states that ‘consent alone will not suffice to bring a dispute within its jurisdiction.’ In other words, mere consent cannot confer jurisdiction where none otherwise exists. A similar inference that parties’ agreement does not trump all other requirements can also arguably be drawn from Rule 41 of the ICSID Arbitration Rules, which empowers a tribunal to consider questions of jurisdiction ‘on its own initiative’. Interestingly, at the negotiations for drafting the ICSID Convention, there was a proposal to do away with the term ‘investment’ under Article 25 entirely. The same was however rejected, evidencing that the term has a meaning and effect which cannot be sidestepped by the mere consent of parties.

Accordingly, it has been suggested that the very act of consenting to ICSID arbitrations should be taken to reflect state parties’ intention to ‘overlay the requirements of the ICSID Convention over the broad BIT definition of investment’. Moreover, if consent alone was the jurisdictional requirement, then given the relative certainty of enforcement, all private contracts entered into by states with foreign parties would adopt ICSID arbitrations, effectively rendering all other arbitral mechanisms redundant.

As noted by Prof. Schreuer, the suggestion that the term ‘investment’ under Article 25 extends to all plausible economic activity as consented to under the BITs is also at odds with the well-accepted idea that purely commercial transactions do not fall within the scope of investment disputes. The very fact that there exists a threshold beyond which an activity or enterprise will not be characterised as an investment, points to an effective outer-limit implicit in the understanding of the term itself. It is for the same reason that in 1999, the Secretary-General of ICSID refused to register an arbitration case on the ground that the transaction therein was not capable of being classified as an investment.

 

Scope of the Article 25 Prerequisite

If the view of absolute deference to party autonomy is an extreme standpoint, the restrictive four-prong test expounded in Salini v. Morocco represents the other extreme. It effectively converts typical descriptive characteristics of investments into rigid, legally binding pre-requisites necessary to establish jurisdiction. Instead of qualifying outer-limits on arbitral jurisdiction in investment disputes, the Salini test postulates an independent and exhaustive appraisal of the term ‘investment’, requiring strict objective compliance. In doing so, it pays scant regard to parties’ agreements defining investments, by reason of which it has become a particularly divisive ruling.

Despite the acceptance of the Salini jurisprudence in subsequent decisions, some arbitral tribunals have differed and adopted approaches, which, if taken together, may be able to harmonise party autonomy with the scope of the ICSID Convention. For instance, it has been held that a prior agreement of parties with respect to what constitutes an investment creates a strong presumption in favour of jurisdiction under Article 25 as well. It has also been recognised in various rulings that a jurisdictional requirement cannot be imposed in terms of a strict, objective test, the yardsticks of which must only be seen as mere examples illustrative of typical investments, and nothing more. At the same time, the requirement to keep manifestly non-investment disputes out of the purview of ICSID arbitrations has also been acknowledged, in which case the flexible application of objective criteria in the context of particular facts and circumstances may be useful.

The underlying symbiotic relationship between the ICSID Convention and BIT provisions is central to the reconciliation of two distinct approaches arguing for the primacy of one instrument over the other. It has been proposed that the term ‘investment’ must be defined ‘in the context of shared systemic objectives underlying the mechanism of investment protection’. In this regard, what Prof. Emmanuel Gaillard has referred to as the ‘intuitive school of thought’ provides an insightful basis for a resolution. It places emphasis on identifying, rather than defining, characteristics of investments by means of guiding factors, with significant room for subjective discretion. Such an approach allows a case-by-case evaluation of investments based on criteria not limited to the four prongs of Salini. By not insisting on their cumulative compliance, but on an inclusive appraisal of all facts and circumstances, it may potentially lead to a decision that is flexible, less restrictive and perhaps more in line with parties’ intentions as well.

 

Conclusion

The clash of the deferential and restrictive approaches is a quintessential embodiment of some of the central issues in the practice of international law, viz. state consent and the exclusion of stare decisis. It is evident, however, that state parties share conflicting, but complementary interests in giving effect to the provisions of the ICSID Convention. An approach allowing an initial presumption in favour of party autonomy, subject to a flexible inquiry based on the ordinary meaning of the term ‘investment’, seems to be well suited to reasonably balance competing interests. The resulting degree of uniformity in decision making may allow for greater certainty in parties’ expectations, leading to better outcomes in line with the stated objects of the ICSID Convention itself.

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Public Policy: Is This Catch-All Provision Relevant to the Legitimacy of International Commercial Arbitration?

Sat, 2022-06-18 01:24

One of the articles authored by Dr Monique Sasson and featured in the Journal of International Arbitration Special Issue on Empirical Work in Commercial Arbitration, edited by Dr Monique Sasson, Dr Crina Baltag, Roger P. Alford, Matthew E.K. Hall, under the general editorship of Prof. Dr Maxi Scherer, discussed the public policy in the light of the outcomes of the empirical research.

The empirical research of national court judgements (concerning both vacatur and enforcement of international commercial awards) available in the Kluwer Arbitration Database (the “Database”) revealed that objections based on public policy have been raised in 44% of enforcement proceedings and in 38% of setting-aside proceedings.  The success rates of these objections were only 19% and 21%, respectively; however, the number of times in which the public policy objections have been upheld cannot be dismissed as insignificant.

The analysis of national court judgments indicates that the public policy is usually accepted in a limited set of narrow circumstances, though at times certain courts will accord a broad scope to public policy.

The article first examines the concept and definition of public policy, then lists some examples of actions that have been considered a violation of public policy and concludes with a brief analysis of the “maximalist” versus “minimalist” approaches, to application of the public policy exception to enforcement of awards.

 

The Concept and the Definition of Public Policy

The concept of public policy is widely invoked: Article V(2)(b) of the New York Convention provides that recognition and enforcement of an award “may also be refused” if “recognition and enforcement of the award would be contrary to public policy”. Setting aside provisions in many national arbitration acts also refer to public policy.  However, there is no autonomous definition of public policy. Authors, arbitrators and judges have often referred to an autonomous international standard. One of the definitions most frequently invoked identifies “the most basic notions of morality and justice” as constituting public policy.

This narrow interpretation of public policy is necessary to prevent the public policy exception from becoming “a channel to review the award on the merits”. Thus, the invocation of a violation of public policy should not be a mechanism to allow a substantive review of the award, but only a limited review to determine whether the enforcement or the confirmation of the award would seriously infringe fundamental principles. This application of public policy seeks to balance the interest in maintaining autonomy and efficiency of arbitration and, on the other hand, to safeguard fundamental principles of justice.

The International Law Association (“ILA”) adopted a resolution in April 2002 on the interpretation of public policy, stating that

[t]he expression “international public policy” is used in these Recommendations to designate the body of principles and rules recognised by a State, which, by their nature, may bar the recognition or enforcement of an arbitral award rendered in the context of international commercial arbitration when recognition or enforcement of said award would entail their violation on account either of the procedure pursuant to which it was rendered (procedural international public policy) or of its contents (substantive international public policy).

This resolution also highlighted the importance of finality in international commercial arbitration and, at the same time, the need to protect the most basic principles of a State’s system of justice.

 

Examples of Violations of Public Policy

The Database contains several judgements upholding a public policy objection.  These cases included violations of substantive public policy and procedural public policy.

Examples of the first category were: i) violation of national sovereignty (the award directed the respondent to return an area of its national waters for three years to the opposing party); ii) duress (one of the parties was led to understand that he would be kept in prison if he did not sign the arbitration clause), iii) fraud and corruption (there were two conflicting judgements: a) a French court judgment holding that the court had the power to investigate whether the award was tainted by corruption and finding that the court was not bound by the findings of the arbitral tribunal; b) and a English case holding that since the arbitral tribunal had jurisdiction to determine the issue of illegality, there was a very limited scope for an English court to re-examine the issue of illegality); and iv) penalty (disproportionately high penalty) or damages (extremely high interest rate).

Some examples of the second category were: i) breach of due process for lack of impartiality; ii) failure to adequately motivate the award; iii) de facto exclusion of one arbitrator from the tribunal’s deliberations.

 

Is the Determination by the Arbitral Tribunal binding on the Courts: the Maximalist and the Minimalist Approaches

It remains an open question whether courts should be bound by an arbitral tribunal’s determination of the issue of fundamental principles.  The maximalist approach gives more latitude to the courts, while the minimalist approach suggests that the courts are bound by the determination of the public policy issue reached by the arbitral tribunal.

The maximalist approach by retaining the court’s power to decide the issues concerning public policy, implies that the court will investigate the public policy grounds and will decide whether there has been a violation of fundamental principles even if the arbitral tribunal has ruled on the same issue.  This approach has been criticized because it may constitute an attempt to revisit the arbitral tribunal’s decision-making, thereby jeopardizing the fundamental principle of finality of arbitration.

The minimalist approach considers that the courts are bound by the determination made by the arbitral tribunal.  Critics of this approach have highlighted that by delegating the decision on the issue of public policy to an arbitral tribunal’s evaluation, the State’s control over principles that are the foundation of its justice system is diminished.

 

Conclusions

The court decisions in the Database show that the public policy objection is commonly raised; it is a sort of “catch-all” objection. The judgments in which this objection have been upheld are typically very detailed and concerned extreme patterns of behavior not often confronted in practice. However, there are some judgments where the courts channeled through public policy a revised determination of the merits of the underlying dispute; this is, of course, a development that carries dangers for international arbitration.

A court’s consideration of public policy objection should seek a balance: (i) the autonomy of arbitration; and (ii) the State’s right to preserve its legal system’s fundamental principles. Achieving this balance will enhance the legitimacy of arbitration as a means to resolve disputes in conformity with the State’s most important rules.

A court’s ‘second look’ at issues of fraud, corruption, sham agreements, and breach of due process is aimed to protect fundamental principles of justice. However, a court’s evaluation of the contents of the applicable law, or the arbitral tribunal’s evidentiary assessment, or the formal requirements of an award, undermines public confidence in arbitration as a final and binding dispute resolution method.

 

 

Note: This post refers to an article published in JOIA Special Issue, Volume 39 no 3, pp 411-432. The sources of the references in this post may be found in the footnotes in the JOIA article.

 

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Building the Case for Family Business Arbitration in the GCC Region

Fri, 2022-06-17 00:11

Family businesses – commercial entities in which multiple generations of a family wield influence over decision-making – are one of the oldest and most prevalent forms of association across the world, ranging from convenience stores to multinational corporations like Walmart, Samsung and Porsche. In 2020, Boston Consulting Group described family businesses as “contributing between 25% and 49% of GDP in countries as diverse as India and Germany and employing millions of people”. In the six Gulf Co-operation Council (GCC) countries, where family-owned businesses are heavily concentrated, they contribute about 60% of GDP, employ more than 80% of the workforce, and in the UAE and Saudi Arabia, make up around 90% of the private sector. The GCC thus has one of the highest concentrations of family businesses anywhere in the world. As a result, the resolution of family business disputes (FBD) is an important issue that merits a bespoke dispute resolution approach.

An FBD may arise between two or more family members over the ownership and/or management of the business. Because the disputants have personal relationships, an FBD is not strictly a commercial dispute between arm’s length participants. For instance, a founding parent may apply their discretion throughout their lifetime to divide profits between family members like siblings, children, in-laws and grandchildren. Upon death or retirement, a dispute may arise when the person or process that apportions profits does so in a different way. Alternatively, members of a family conglomerate may wish to “cash out” by selling their stake in the business, prompted by death, retirement, emigration, or a desire to redeploy that capital elsewhere. Disputes may arise over the identification of assets properly forming part of the overall business, the business valuation and the exit process.  An FBD is a commercial dispute not a dispute involving ‘pure’ family law (whether public or private), nor a conflict about personal property or statutory inheritance rights, all of which fall within the mandatory jurisdiction of the civil ‘personal status’ courts found across the GCC.

The flexibility, privacy and confidentiality of process, and relative ease of cross-border enforcement when compared to litigation make arbitration a particularly useful forum for FBD resolution. Yet given the prevalence of arbitration in the region, it is odd that no arbitration institution in the GCC has specific rules for FBD. This is all the more surprising when the speed of change to the regional arbitration offering is considered. The recent abolition of the DIFC-LCIA Arbitration Centre by Dubai Decree 34 of 2021, the move of all future DIFC-LCIA arbitrations to the supervision of the Dubai International Arbitration Centre (DIAC), and the publication of DIAC’s new 2022 rules, are examples of how quickly the provision for and operation of arbitration can change.

There is a further lack of public and government interest in FBD resolution. A report by the Family Business Council – Gulf (FBCG) in 2019 identified that “no specific reports on dispute resolution solutions for GCC family businesses” had previously been produced. This blog post sets out some of the issues that drafters of arbitration rules and laws should think about when considering future amendments, to cater better for family businesses and their disputes.

 

Stepped dispute resolution: mandatory mediation or conciliation before commencing arbitration

Arbitration can be costly and unnecessarily deplete the family assets. As an adversarial dispute resolution process, it can formalise and ratchet up the levels of animosity between family members in dispute. There may therefore be space for an alternative dispute resolution mechanism like negotiation or mediation to take place before the arbitration process is started, even if no express agreement has been reached between the parties. A 2021 report by the English Civil Justice Council found that compulsory ADR before litigation was both legal under English law (in that parties could be compelled to go through it) and desirable in certain circumstances (paragraph 7, page 4). Indeed, this approach is already used in certain family law proceedings in England. As the English Civil Justice Council notes, financial dispute resolution is a court-assisted negotiation process in family cases, where the parties appear before a judge in a without prejudice meeting/hearing, intended to facilitate settlement between parties and “reduce the tension that inevitably arises in family disputes”.

A ‘stepped’ dispute resolution process may oblige disputing parties to mediate or negotiate in good faith for a period of time before arbitration can commence. Family business mediation can be surprisingly effective, with settlement agreements resulting from mediations binding and potentially enforceable across borders thanks in part to the 2019 United Nations Convention on International Settlement Agreements Resulting from Mediation (the Singapore Mediation Convention), which has been signed by 55 states (as of June 2022). In March 2022, the UAE announced that it intended to be the 56th state to sign.

 

Greater powers to consolidate or join disputes in the same dispute resolution process

As noted above, there is an array of potential triggers for a family business dispute, such as over business succession or when a prominent family member dies, retires or otherwise wishes to exit the business. To be clear, the issues considered in this blog post are distinct from inheritance or personal property matters and the focus is exclusively on the FBDs that may arise when considering business succession. This said, these personal matters may introduce an added a layer of animosity or complexity to what are otherwise business matters.

Disputes can also arise over management and control rights, the valuation of a family member’s stake in the business, poor business performance, or a distribution of family wealth including assets and dividends that is perceived as unfair. Changing family dynamics can cause disputes, as personal animosities arise, minor disagreements turn into bigger ones and other family members are drawn in, with a detrimental effect on the enterprise’s management and operation. Because family disputes can arise in different ways, the administration of justice would tip towards consolidating family disputes into one proceeding. One way to do this is to bind all potential parties in a single document like a family constitution or a shareholder agreement with an arbitration clause. A dispute in respect of that agreement could act as an anchor for an arbitration, whereby the parties agree after the tribunal has formed to bring other matters before it. It may be possible – and desirable – to go further, however. Somewhat surprisingly, given the business and emotional value in a family business that may be lost in a dispute, surveys have consistently shown that many family businesses do not have sufficient documentation in place to manage conflict.

The FBCG report (above) sets out data that paint a poor picture: in 2019, less than one third of large family businesses in the GCC had effective policies and practices in place to govern the family business, and in 2015, only 57 percent of surveyed entities in the Middle East used shareholders’ agreements, and around a third used other forms of conflict resolution mechanism, entry-and-exit provisions and/or family councils.

As a result, arbitration institutions could consider wider powers to join or consolidate disputes, even if not on foot or outside the scope of the arbitration agreement, if the other disputes are closely connected to the anchor arbitration.

 

Compile, curate and publish a roster of appropriate arbitrators

An arbitrator in an FBD may have a greater jurisdiction than a court to consider matters in dispute so that a fair decision can be reached across the business and not just on one issue in isolation. Families may also wish to consider agreeing an arbitrator in advance or at least a mechanism for appointing a suitable candidate. Commercial arbitrators are often well-identified in industry guides and peer publications, but experienced private client arbitrators may not be so easy to find from public sources. Many family business arbitrators are appointed through informal connections, such as recommendations from friends.

Some arbitral institutions may be able to recommend an arbitrator on their roster who has particular knowledge and experience of family arbitrations, where family and personal relationships are mixed up with more conventional legal issues and may need to be addressed at the same time and with sensitivity. However, at present, as the FBCG report above notes, the main arbitral institutions do not publish lists of arbitrators with specific family business experience. In the UAE, Dubai Law No.9 of 2020 on Family Ownership has prompted the formation of a special judicial committee formed, in the words of one commentator, out of “professionals with the relevant legal, financial, and—most importantly—family business expertise. The ultimate objective is to provide family firms with the confidentiality, speed and expertise they need to settle their disputes if they arise”. This committee could provide a list of potential arbitrators, meaning that families and their advisors can more easily find an appropriate arbitrator, either before or after a dispute crystallises.

 

Costs capping

Two of the advances in the new 2022 DIAC Rules were the introduction of an obligation requiring parties to disclose the existence of third-party funding arrangements, and the express confirmation that legal fees and disbursements can be recovered inter partes (Articles 22.1 and 36.1 respectively).

With many FBDs less like commercial and more like family litigation in their dynamics, it is fair to suppose that more pressure should be put on parties not to incur unnecessary costs given their reflection in the overall depletion of the family’s assets and the potential risks posed to the family’s underlying businesses.

One approach would be to have mandatory costs budgeting where the tribunal approves limits on legal costs, which cap both expenditure and recovery. Another would be to fix recoverable hourly and disbursement rates.  But granting tribunals powers to limit costs would be a logical extension that all but the wealthiest of parties would surely welcome.

 

The future

The ideas in this blog post may hopefully be a spur to future amendments to institutional rules and arbitration laws to make further accommodation for FBDs, given their economic importance and use of arbitration. This would be particularly welcome in the GCC where family businesses dominate and will likely do so for foreseeable future.

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A Record-Breaking Year in M&A: The Consequences for Damages in Post-M&A Dispute Resolution in Arbitration

Thu, 2022-06-16 00:10

2021 was a record-breaking year for mergers and acquisitions (M&A). The total global deal value amounted to USD 5.9 trillion, an increase of 64% compared to 2020 and the highest ever recorded, driven by high valuations and fuelled by access to cheap financing. The market was strong across corporate and financial buyers. The year saw many auction processes, bidding wars, aborted deals and the increasing importance of special purpose acquisition companies (SPACs), which reportedly accounted for about 10% of global M&A volumes. While the M&A market declined in the first half of 2022, in part because of renewed disruptions caused by the COVID‑19 pandemic as well as the shocks to markets caused by the war in Ukraine, the recent surge in deal volumes, combined with exceptionally high valuations in 2021, have already led to a wave of post-deal disputes.

Most of these disputes are resolved in arbitration: according to one recent estimate, more than 75% of Sale and Purchase Agreements (SPAs) have arbitration clauses, a particularly high percentage among commercial disputes.1)Elsing/Pickrahn/Pörnbacher/Wagner, M&A-Streitigkeiten vor DIS-Schiedsgerichten (C.H. Beck, 2022) jQuery('#footnote_plugin_tooltip_41884_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Statistics published by arbitration institutions show, further, that shareholder, share purchase, or joint venture agreements represent a significant fraction of their overall caseload. For example, these types of agreements represented 14% of the cases administered by the LCIA in 2021.

This is against a background of steady, long-term growth in arbitration more generally. Using reported figures from international arbitration institutions, FTI Consulting recently estimated that international arbitration filings worldwide grew steadily at more than 3% a year from 2010 to 2019, and increased 9.9% in 2020. Thus a record year for M&A, already driving related disputes, met with an acceleration in the rise in popularity of arbitration, placing M&A disputes among the most relevant types of disputes in arbitrations in this period.

Following on from a post last year that discussed the types of M&A dispute that have emerged from the COVID‑19 pandemic, this post examines the impact of the recent exceptionally high valuations on damages quantification when M&A transactions end in disputes.

To be clear, a period of high valuations does not necessarily mean that markets, or individual acquisition targets, are overvalued. However, it does mean an increased scope for disappointment by parties in M&A transactions. Buyers are often left disappointed when the acquisition target falls short of the expected returns that were priced into the bid. Similarly, sellers can be disappointed in cases where a significant shortfall against expectations means lower earn-out payments. Disappointment breeds disputes.

 

Identifying the Correct Counterfactual in Post‑M&A Disputes

Post-M&A disputes arise from different types of (alleged) breaches of contractual or non-contractual obligations. Each of these breaches can result in the affected party seeking remedy through the arbitration process. The different types of breaches, in turn, can be associated with different counterfactuals, and therefore approaches to the measurement of damages. The differences start to matter more if price is different from value, as this can make the identification of the correct counterfactual more important.

The first example is a claim for warranty breach, where the price paid is often rebuttably presumed to be the same as the value as warranted.2)Adam Kramer, The Law of Contract Damages, 2nd ed. (Hart Publishing, 2017), 227. jQuery('#footnote_plugin_tooltip_41884_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); These claims often compare what was promised to what was delivered, or the deductions in the purchase price that would be needed to cure the broken warranty.

A second example is a claim in tort, such as a fraudulent misrepresentation. Damages for tort claims are sometimes calculated as the difference between the true value of an asset and the price paid.3)For example, Glossop Cartons and Print Limited v Contact (Print & Packaging) Limited [2021] EWCA Civ 639. jQuery('#footnote_plugin_tooltip_41884_27_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_27_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  This can be a different comparison of actual and counterfactual from that in contractual claims, and the mechanics of the damages quantification suggests that the difference matters more as price and value differ.

A third type of claim relates to the culpa in contrahendo doctrine, which is often associated with yet another measure of damages. Culpa in contrahendo plays a role in many M&A disputes in civil law jurisdictions. These claims often relate to alleged misrepresentations during the contract negotiations. Culpa in contrahendo claims can lead to damages awards for the ‘negative interest’, often calculated as the difference between the price actually paid and the price a purchaser would have paid in a hypothetical scenario in which all information had been disclosed truthfully.

Seller-friendly markets, in which multiple bidders compete for a limited number of quality targets, can mean tightly managed auction processes and more often ‘light’ approaches to the buy-side due diligence. Both factors can make it easier for sellers to be less than forthcoming with information, and it is easy to see how this could lead to an increase in claims for misrepresentation and in fact this is a feature of many of the current generation of M&A disputes.

 

When Does it Matter if Price and Value Differ?

If the price paid for a target is assumed to be equal to its value, then the comparison of actual and counterfactual positions results gives the same absolute difference in each of the three examples (although in culpa in contrahendo claims, the two scenarios are reversed, often leading to confusion about the counterfactual). Even if the difference is the same, however, this does not necessarily mean that damages are the same, for a number of reasons: warranty claims are often subject to contractual limitations that may not apply to fraud or culpa in contrahendo claims4)For example, OLG Munich, 03.12.2020 – 23 U 5742/19. jQuery('#footnote_plugin_tooltip_41884_27_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_27_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });; differences in valuation dates may lead to substantially different damages amounts; and a culpa in contrahendo claim may include elements of lost profits that are sometimes contractually excluded from warranty breach claims.5)Wächter, M&A Litigation, 3rd ed. (RWS Verlag Kommunikationsforum GmbH, 2017), 551. jQuery('#footnote_plugin_tooltip_41884_27_5').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_27_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Why Might Price and Value Differ?

Price and value need not always be the same, and there can be situations in which a buyer pays more, or less, than an asset’s value. In that case, the identification of the correct counterfactual starts to matter.

Why do value and price differ in some instances, and perhaps more so in periods of high valuations? In other words, why is someone willing to pay more or accept less than an asset is worth? This is a complex question for which we can look to agency theory and behavioural economics for explanations.

Agency theory in economics suggests that the separation of ownership (the shareholders) and control (management) of a firm can result in a strategic misalignment, or conflict, of interests. For example, it has been observed that managers have incentives to cause their firms to grow beyond the optimal size.6)Michael C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review 76 (2), 71–92.  jQuery('#footnote_plugin_tooltip_41884_27_6').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_27_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This can lead them to pursue M&A transactions that do not deliver the value that the acquirer paid for. Thus a firm can overpay, even when management (the agent) acts rationally, but self-interestedly, leading to management ultimately acting against the interests of the shareholders.

Behavioural economics, on the other hand, suggests the same outcome (overpaying) can occur as a result of nonrational, or boundedly rational, behaviour when a party agrees a price that is not justifiable by reasonable assumptions. Behavioural economists have examined the conditions in which such outcomes occur. These include behavioural biases such as overconfidence, or the competitive motive to ‘win’ rather than to seek one’s own gain.7)Max H. Bazerman and Don A. Moore, Judgment in Managerial Decision Making, 8th ed. (Wiley, 2013), 123 – 131. Even in instances where it can be shown, however, that prices cannot be justified by reasonable assumptions — for example, when observing two prices that are each based on a set of assumptions where movements in the prices and assumptions produce a contradiction — it can be difficult to identify which of the two prices is irrational. jQuery('#footnote_plugin_tooltip_41884_27_7').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_27_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); For example, consider  a scenario in which a bidder who – in the event it loses in an auction process – would fail to acquire a technology essential to maintaining its competitive position; the bidder faces a trade-off between accepting the loss in competitive position or winning the auction and overpaying, and from there the bidding process may spiral into an outcome that is not justifiable with rational assumptions.8)See Bazerman and Moore, 130–31. jQuery('#footnote_plugin_tooltip_41884_27_8').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_27_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); A seller-friendly market appears more likely to breed such conditions than a buyer-friendly market.

 

Conclusion

There was a ‘white hot’ M&A market in 2021, with strong sellers running tightly managed auction processes and with novel structures. Such a market can create an environment in which buyers come under significant pressures, commitments can escalate more easily, and there can be cases where price exceed value.

If things go wrong after an M&A deal, claims are likely to be made through the arbitration process: a high proportion of post-M&A disputes are resolved through arbitration, and arbitration worldwide is growing steadily.

Depending on the alleged breach being remedied, this can have important consequences for the identification of the correct counterfactual in subsequent disputes and the valuation of damages in post-M&A arbitrations.

 

The views expressed herein are those of the authors and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals

 

 

References[+]

References ↑1 Elsing/Pickrahn/Pörnbacher/Wagner, M&A-Streitigkeiten vor DIS-Schiedsgerichten (C.H. Beck, 2022) ↑2 Adam Kramer, The Law of Contract Damages, 2nd ed. (Hart Publishing, 2017), 227. ↑3 For example, Glossop Cartons and Print Limited v Contact (Print & Packaging) Limited [2021] EWCA Civ 639. ↑4 For example, OLG Munich, 03.12.2020 – 23 U 5742/19. ↑5 Wächter, M&A Litigation, 3rd ed. (RWS Verlag Kommunikationsforum GmbH, 2017), 551. ↑6 Michael C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review 76 (2), 71–92.  ↑7 Max H. Bazerman and Don A. Moore, Judgment in Managerial Decision Making, 8th ed. (Wiley, 2013), 123 – 131. Even in instances where it can be shown, however, that prices cannot be justified by reasonable assumptions — for example, when observing two prices that are each based on a set of assumptions where movements in the prices and assumptions produce a contradiction — it can be difficult to identify which of the two prices is irrational. ↑8 See Bazerman and Moore, 130–31. function footnote_expand_reference_container_41884_27() { jQuery('#footnote_references_container_41884_27').show(); jQuery('#footnote_reference_container_collapse_button_41884_27').text('−'); } function footnote_collapse_reference_container_41884_27() { jQuery('#footnote_references_container_41884_27').hide(); jQuery('#footnote_reference_container_collapse_button_41884_27').text('+'); } function footnote_expand_collapse_reference_container_41884_27() { if (jQuery('#footnote_references_container_41884_27').is(':hidden')) { footnote_expand_reference_container_41884_27(); } else { footnote_collapse_reference_container_41884_27(); } } function footnote_moveToReference_41884_27(p_str_TargetID) { footnote_expand_reference_container_41884_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_41884_27(p_str_TargetID) { footnote_expand_reference_container_41884_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Interviews with Our Editors: Nicole Smith, Vice-President of AMINZ

Wed, 2022-06-15 01:53

Nicole Smith is the Vice-President of the Arbitrators’ and Mediators’ Institute of New Zealand (AMINZ), the leading membership organisation for dispute resolution specialists in New Zealand. In addition to her work with AMINZ, Nicole is also a barrister at Mauao Legal Chambers specialising in commercial litigation and arbitration. Dual qualified in New Zealand and England & Wales, Nicole has previously worked in the litigation group of a top-tier New Zealand firm, and in the international arbitration group of Clifford Chance in London.

Welcome Nicole, thank you for joining us today!

 

  1. To start, could you briefly introduce yourself, AMINZ and your role at AMINZ?

I am a specialist in all aspects of domestic and international arbitration, with a particular interest in construction, property, natural resources, and energy disputes. I sit as an arbitrator in New Zealand and internationally. I am based in Tauranga (by the beach on New Zealand’s east coast) and I also provide English law advice as a partner in Keystone Law (a new model law firm with the firm’s management based in London and partners working remotely from around the world).

AMINZ provides training and credentialling for its members, advocates for improvements to legislation and regulation around dispute resolution, and acts as the default appointing authority under the New Zealand Arbitration Act. AMINZ is also the only independent organisation that has reciprocal rights of membership (for Fellows and Associates) with the Chartered Institute of Arbitrators.

I am the Vice-President on our 7-member Council. All members of Council are volunteers and assist in setting the strategic direction of AMINZ and helping the AMINZ management to achieve its many and varied tasks.

 

  1. You have been involved with the AMINZ Council since 2017; how has the arbitration landscape changed in New Zealand in that time? Has AMINZ seen any trends develop in its users, or the disputes that have been referred to it, in reflection of that changing landscape?

One of the key changes in the arbitration landscape in New Zealand (and elsewhere) is that arbitration is extending beyond its traditional fields of construction and property disputes. AMINZ members are now dealing with arbitrations that cover a broad range of subjects, including shareholder disputes, facilities management, trusts and family property.

Arbitration is also being used to resolve inter and intra-iwi Māori disputes (Māori are the first peoples of New Zealand), many of which arise out of settlements with the government over Treaty of Waitangi claims (being the Treaty signed between the British Crown and Māori chiefs in 1840, at a time of expanding European settlement in New Zealand).

One of the other key changes is the appointment of AMINZ (by the Minister of Justice) as the default appointing authority for arbitrators under the Arbitration Act. This has removed the need for costly and time-consuming applications to the courts where the parties have an agreement that provides for arbitration, but the agreement does not make it clear how the arbitrator is to be appointed.

The other change is that parties and arbitrators are now very comfortable with online and hybrid case management conferences and hearings. This is saving on time and travel and makes it easier to line up schedules. We are also now very familiar with saying (or hearing) “I think you are on mute”.

 

  1. Part of your role on the AMINZ Council concerns reviewing the AMINZ arbitration rules. Could you comment on the specific benefits of conducting an arbitration under the AMINZ rules, and having a New Zealand seat generally?

The Arbitration Act is a modern statute, incorporating the UNCITRAL Model Law, and New Zealand could be described as a “Model Law plus” jurisdiction. It was one of the first countries to incorporate the 2006 amendments to the Model Law (dealing with interim measures and preliminary orders) into its national legislation. Further, the Arbitration Act also has a comprehensive set of provisions dealing with the privacy and confidentiality of arbitral proceedings and documents produced in arbitral proceedings.

As the Arbitration Act incorporates the Model Law, it is possible (in most circumstances) to conduct efficient and effective arbitral proceedings in New Zealand, relying solely on the provisions of the Act.

Where parties wish to have more certainty as to the likely structure of their arbitral proceedings, they may wish to adopt the AMINZ Arbitral Rules. A new set of arbitration rules was issued by AMINZ on 1 January 2022. The Rules adopt an “institution light” approach.

If the parties need assistance with appointing the tribunal or to deal with challenges to the tribunal, they can look to AMINZ. The Rules also provide for a number of matters that are not dealt with in the Act, including the appointment of emergency arbitrators, expedited proceedings, summary dismissal of unmeritorious claims and consolidation (in international proceedings). They also include a protocol to be applied where a tribunal secretary is appointed.

The Rules are ideal for disputes where the tribunal and parties are comfortable with the administration of their own proceedings, including processes for the payment of the tribunal and the exchange of documents. However, where parties consider that they need additional administrative support, the New Zealand International Arbitration Centre is willing to administer arbitrations conducted under the Rules.

 

  1. What, in your opinion, are two areas of challenge, and two areas of opportunity for international arbitration in New Zealand in the post-COVID era?

Starting first with the areas of opportunity: I consider that, particularly for lower value international disputes, institutions, arbitrators and parties are now more comfortable with conducting such proceedings online. That means that New Zealand can overcome the “tyranny of distance”, and being a 24-hour flight from European centers is not an issue.

I also consider that New Zealand has maintained its reputation as a stable environment, politically and socially, with an independent and well-functioning judiciary. When parties are entering into contractual relationships, they seek certainty over uncertainty wherever possible. Therefore, they are likely to avoid choosing a seat of arbitration that has been (or is) going through a period of political or social upheaval. I consider that New Zealand’s ongoing stability makes it an attractive seat for its Asia-Pacific neighbours.

An area of challenge (for parties and arbitrators based in New Zealand) is that we tend to get the “short end of the stick” when timetabling online meetings and proceedings. It is fortunate that we have great cafes to help us get through the day after a 3am procedural hearing.

Another challenge is that for several years New Zealand’s “bright young things” deferred their overseas adventures and we have had the luxury of retaining all that education and enthusiasm in New Zealand firms and institutions. With borders opening, it is only natural that they will go to seek opportunities offshore. Our role and responsibility is to wish them well and to use our networks to ensure that the New Zealand diaspora continues to punch above its weight at the highest levels in international arbitration.

 

  1. We understand that AMINZ has recently undertaken its inaugural survey of arbitration in New Zealand, can you give us a preview of two or three of the key insights to be taken from that survey?

The survey was undertaken by AMINZ (led by Royden Hindle and Dr Anna Kirk) in association with the New Zealand Dispute Resolution Centre. The data that has been gathered is still being analysed. However, some preliminary results shared at the AMINZ Arbitration Day on 16 February 2022 indicate that over 110 New Zealand based arbitrators were appointed to sit in arbitrations in the years 2019 and 2020, with approximately 15% being international arbitrations. As there is no central registry for arbitration appointments, it is possible that this understates the number of appointments that were made.

While the majority of appointments relate to the more traditional areas of building and construction, and lease disputes, there were a large number of general company and commercial disputes dealt with by arbitration, and a range of natural resources and issues involving Māori assets.

The results also indicate that there is still a long way to go on achieving gender equity in arbitral appointments, with only 20% of the appointees being women.

 

  1. AMINZ has also recently launched scholarship programmes focusing on mediation and arbitration, aimed at encouraging diversity and leadership in the New Zealand dispute resolution sector. What are the key benefits you see as arising from the scholarships, and what words of wisdom can you offer to aspiring arbitration practitioners?

The establishment of the AMINZ scholarships has brought about more awareness of the dispute resolution sector in general, especially in the younger generation of practitioners. It has allowed those starting out in their careers to consider furthering their knowledge and experience in ADR.

The Scholarship programme has also provided opportunity for senior practitioners to meet with our scholars at various education and event opportunities, to mentor them, and to allow them to observe mediations and arbitrations.

In New Zealand, I recommend joining AMINZ (of course), and utilising the resources it offers, such as attending local dispute resolution breakfast sessions, webinars and the annual AMINZ conference. Write and publish articles on your areas of interest (AMINZ is always happy to publish articles in its newsletters) and join the Young Arbitration Practitioner Group.  I would also recommend getting involved in mooting opportunities either as coach or participant (depending on whether you are still at university). The international moots are a great way to meet practitioners from all over the world.

 

  1. Part of AMINZ’s unique offering is its comprehensive education and training programmes, how important is education and personal development for the Institute, and what other initiatives does AMINZ undertake to promote the use of arbitration?

A rolling calendar of education topics play a key role in the Institute’s ongoing commitment to diversity and inclusion. We strive to have ample and accessible opportunity for learning and personal development so that anyone who is looking to build upon their knowledge and enhance their skillsets and experience has the opportunity to do so. This is reflected in the range of topics and levels of learning offered throughout the year – be it complimentary webinars with experts, through to the Arbitration Skills Intensive workshops. or the rigorous Fellowship programme.

The move to combining both in-person and virtual programmes has meant greater accessibility overall. It’s meant those who otherwise would have missed a learning opportunity have been able to participate and engage with fellow practitioners through online education. An example being Arbitration Day, which was held as a hybrid event with practitioners logging in nation-wide to hear and learn from leading practitioners both from New Zealand and internationally.

In terms of knowledge-sharing, members are encouraged to share their publications, research, or insights through presentations at networking meetings and seminars, AMINZ’s digital channels, and groups such as the Young Arbitration Practitioner Group. This helps provide a collegial environment, and the opportunity to continuously learn and engage on the latest arbitration topics and up-to-date thinking.

The Institute is also developing a Mentoring Programme designed to provide support and encouragement to young practitioners, from those who have been in the same position – albeit a few decades prior! The Programme’s development is already receiving positive feedback, and will be come into its own in the latter half of 2022, and 2023.

AMINZ is also involved in developing policy and commenting on new legislation that includes provision for dispute resolution. Our goal is to continue encouraging organisations, institutions, and central government to adopt and promote arbitration in contracts, regulation, and legislation.

 

Thank you for your time, Nicole. We wish you and the AMINZ team all the very best!

This interview is part of Kluwer Arbitration Blog’s “Interviews with Our Editors” series. Past interviews are available here.

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“I Can See Clearly Now the Rain Is Gone…” U.S. Supreme Court Definitively Holds that Section 1782 Does Not Permit Discovery Assistance from U.S. Courts for Private Foreign or International Arbitrations

Tue, 2022-06-14 01:28

On June 13, 2022, the U.S. Supreme Court issued its unanimous opinion resolving a U.S. Circuit Court split over a hotly debated issue, namely whether 28 U.S.C. § 1782 applies to private foreign or international arbitrations. In ZF Automotive US, Inc. v. Luxshare, Ltd., 596 U.S. ___ (2022), the Supreme Court was required to decide whether private adjudicatory bodies constitute “foreign or international tribunals” under Section 1782 and concluded they do not. A prior post discussed the oral argument and concluded that there were few clues as to how the Court may rule. Yesterday, the Court held that Section 1782 only reaches “governmental or intergovernmental adjudicative bodies” and that neither of the arbitral tribunals at issue in the consolidated cases before the Court “fits that bill.” Justice Barrett delivered the unanimous opinion for the Court.

28 U.S.C. § 1782 is the U.S. federal statutory provision that permits district courts to order testimony or the production of evidence “for use in a proceeding in a foreign or international tribunal.” Both cases before the Court involved a party seeking discovery in the United States for use in arbitration proceedings abroad. However, the nature of the foreign arbitration proceedings in the two cases differed, which set the stage for the Court to speak more definitively on its interpretation of “foreign or international tribunals” in the opinion.

 

The two underlying arbitrations at issue

One case concerned a private commercial DIS arbitration seated in Munich between a U.S. based automotive parts manufacturer (and subsidiary of a German corporation) and a Hong Kong based company regarding a sale of goods transaction. In anticipation of commencing the arbitration, a discovery application under Section 1782 was filed in the Eastern District of Michigan. The resisting party argued that a DIS arbitration was not a “foreign or international tribunal” under Section 1782. However, Sixth Circuit precedent foreclosed that argument (the Sixth Circuit’s decision is available here). The U.S. Supreme Court granted a stay and certiorari to resolve a split among the Circuit Courts over whether private arbitral tribunals fell within the phrase “foreign or international tribunal” in Section 1782.

The second case concerned an ad hoc UNCITRAL arbitration initiated under a bilateral investment treaty (BIT) between Lithuania and Russia. A discovery application was filed under Section 1782 in the U.S. District Court of the Southern District of New York seeking information from third parties. The application was resisted on the ground that an ad hoc arbitration tribunal was not a “foreign or international tribunal” under Section 1782 but rather a private adjudicative body. The district court rejected that argument and the Second Circuit affirmed. The Second Circuit previously had held that a private arbitral tribunal does not constitute a “foreign or international tribunal” under Section 1782. However, it found that the ad hoc UNCITRAL arbitration under the BIT between Lithuania and Russia did not possess “the functional attributes most commonly associated with private arbitration.” 5 F.4th 216, 225 (2021). Accordingly, the Second Circuit concluded that the ad hoc UNCITRAL arbitral tribunal initiated under the BIT constituted a “foreign or international tribunal” under Section 1782 rather than private arbitration proceeding. 5 F.4th 216, 228 (2021).

 

The Court’s Analysis

The Court approached its analysis in two steps. First, it considered whether the phrase “foreign or international tribunal” in Section 1782 included private adjudicatory bodies, on the one hand, or rather only governmental or intergovernmental bodies, on the other hand. If the Court were to determine that Section 1782 only applies to the latter, it then would need to determine whether either of the arbitral tribunals at issue constituted governmental or intergovernmental bodies.

The Court began its analysis focusing on the definition of “tribunal” in the context of the statutory phrase in which it appears, concluding that in light of the modifiers of “foreign or international,” the term “tribunal” in Section 1782 “is best understood as an adjudicative body that exercises governmental authority,” citing a prior Supreme Court case for the proposition that words together may assume a more particular meaning than those words in isolation.

The Court went on to explain that in isolation, the word “foreign” could mean something belonging to another nation or country, which would support interpreting “foreign tribunal” as a governmental body. On the other hand, the word “foreign” could “more generally mean ‘from’ another country, which would sweep in private adjudicative bodies too.” The Court concluded that the first meaning “is the better fit.” The Court opined that the word “foreign” takes on a more governmental meaning when modified with potential governmental or sovereign connotations. The term “tribunal” is “a word with potential governmental or sovereign connotations, so ‘foreign tribunal’ more naturally refers to a tribunal belonging to a foreign nation than to a tribunal that is simply located in a foreign nation.” The Court continued, “for a tribunal to belong to a foreign nation, the tribunal must possess sovereign authority conferred by that nation.” The Court noted that its reading of “foreign tribunal” was “reinforced by the statutory defaults for discovery procedure.” The statute “presumes that a ‘foreign tribunal’ follows ‘the practice and procedure of the foreign country.” The Court further explained, “[t]hat the default discovery procedures for a ‘foreign tribunal’ are governmental suggests that the body is governmental too.”

Turning next to the term “international tribunal,” the Court noted that “international” can mean either involving or of two or more “nations”, on the one hand, or “nationalities” on the other hand. The Court concluded that nations as opposed to nationalities was the more applicable definition of “international” in Section 1782, reasoning that “it would be strange for the availability of discovery to turn on the national origin of the adjudicators.” The Court concluded that for purposes of Section 1782, a tribunal is “international” when it involved or is of two or more nations and “those nations have imbued the tribunal with official power to adjudicate disputes.” The Court explained: “So understood, ‘foreign tribunal’ and ‘international tribunal’ complement one another: the former is a tribunal imbued with governmental authority by one nation, and the latter is a tribunal imbued with governmental authority by multiple nations.”

The Court noted that “Section 1782’s focus on governmental and intergovernmental tribunals is confirmed by both the statute’s history and a comparison to the federal Arbitration Act (FAA), 9 U.S.C. § 7 et seq.” The Court explained that “in light of the statutory history,” the amendment of Section 1782 in 1964 “did not signal an expansion from public to private bodies, but rather an expansion of the types of public bodies covered.” In the Court’s view, Congress had broadened “the range of governmental and intergovernmental bodies included” in Section 1782, thereby increasing the assistance and cooperation rendered by the United States to those foreign nations, noting that the purpose of Section 1782 is comity – promoting respect for foreign governments and encouraging reciprocal assistance. The Court noted that it was difficult to see how enlisting district courts to help private bodies, adjudicating purely private disputes abroad, would serve that end.

The Court observed that extending Section 1782 “to include private bodies would also be in significant tension with the FAA, which governs domestic arbitration, because §1782 permits much broader discovery than the FAA allows.” Interpreting Section 1782 to reach private arbitration “would therefore create a notable mismatch between foreign and domestic arbitration” and that it is hard to identify a rationale for providing broader court-assisted discovery to parties in foreign seated private arbitrations than in domestic arbitrations.

In concluding its statutory analysis, the Court stated: “we hold that § 1782 requires a ‘foreign or international tribunal’ to be governmental or intergovernmental. Thus, a ‘foreign tribunal’ is one that exercises governmental authority conferred by a single nation, and an ‘international tribunal’ is one that exercises governmental authority conferred by two or more nations. Private adjudicatory bodies do not fall within § 1782.”

Applying this statutory analysis, the Court concluded that neither the DIS arbitration nor the ad hoc UNCITRAL arbitration at issue in the cases before it fell within Section 1782.

The DIS arbitration was plainly a private arbitration under the auspices of a private arbitral institution pursuant to private arbitration rules. “No government is involved in creating the DIS panel or prescribing its procedures. The adjudicative body therefore does not qualify as a governmental body.” The fact that the arbitration was subject to the arbitration law and courts of the country in which it was seated did not alter the analysis: “private entities do not become governmental because laws govern them and courts enforce their contracts – that would erase any distinction between private and governmental adjudicative bodies.”

The ad hoc arbitration panel constituted pursuant to the BIT between Lithuania and Russia “presents a harder question” but results in the same answer. The Court reasoned that “neither Lithuania’s presence nor the treaty’s existence is dispositive, because Russian and Lithuania are free to structure investor-state dispute resolution as they see fit. What matters is the substance of their agreement,” namely whether the two nations intended to confer governmental authority on an ad hoc arbitral panel formed pursuant to the treaty, noting that as a general matter, a treaty is a contract between two nations.

While the BIT at issue permits an investor to choose one of four forums to resolve disputes, including a national court, the inclusion of national courts on the list of possible elective forums reflects the intent of the treaty parties to give investors the choice of where to bring their disputes.

The Court observed that the “ad hoc panel … ‘is materially indistinguishable in form and function’ from the DIS panel resolving the dispute” in the other case, quoting the Brief for George A. Bermann et al. as Amici Curiae at 19. The Court went on to explain that “[i]n a private arbitration, the panel derives its authority from the parties’ consent to arbitrate. The ad hoc panel in this case derives its authority in essentially the same way.” The Court reasoned “a body does not possess governmental authority just because nations agree in a treaty to submit to arbitration before it. The relevant question is whether the nations intended that the ad hoc panel exercise governmental authority. And here, all indications are that they did not.”

The Court concluded that only a governmental or intergovernmental adjudicative body constitutes a “foreign or international tribunal” under Section 1782 and that such bodies are “those that exercise governmental authority conferred by one nation or multiple nations.” Applying that statutory interpretation, the Court concluded that neither the DIS private commercial arbitration not the ad hoc arbitration pursuant to the BIT qualified.

The Supreme Court’s decision resolves a long-standing Circuit Court split on whether private foreign or international arbitrations fall within Section 1782. In the past decade, a myriad of appellate court cases on Section 1782 have been issued with differing results and, in some cases, internally inconsistent or incomprehensible reasoning. By contrast, the Supreme Court’s decision in ZF Automotive US, Inc. v. Luxshare, Ltd. is straight-forward and clear. It outlines a coherent rationale for its statutory interpretation grounded in first principles. It then applies its statutory interpretation to the two separate arbitrations at issue in a cogent way that further illustrates the meaning of its interpretation of the phrase “foreign or international tribunal” in Section 1782.

At last, the Supreme Court finally has empowered courts to see clearly how to interpret and apply the phrase “foreign or international tribunal” in Section 1782. This decision will be welcomed by many in the international arbitration field. Whether or not you agree with the Supreme Court’s statutory interpretation or wish the Court to have reached a different result, clarity was sorely needed after more than a decade of confusion.

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How Should the United States Supreme Court Have Decided in the Controversy over 28 U.S.C. § 1782(a)?

Tue, 2022-06-14 00:47

The Kluwer Arbitration Blog previously published an excellent summary by Jonathan Tompkins of the oral arguments held before the United States Supreme Court on March 23, 2022 on the future scope and application of 28 U.S.C. §1782, a federal statute that allows foreign or international tribunals and their litigants to ask the relevant district court to order witnesses who reside or can be found in its territory to give testimony or produce documents located there). It involves the consolidated cases of ZF Automotive US, Inc. v. LuxShare Ltd. and AlixPartners, LLP v. The Fund for Protection of Investor Rights in Foreign States.

Yesterday, the US Supreme Court issued a unanimous opinion (available here, authored by Justice Barrett) in the above-mentioned cases, holding that neither the DIS tribunal in ZF Automotive, nor the ad hoc BIT tribunal under the UNCITRAL arbitration rules in AlixPartners falls within the scope of §1782. To quote from Justice Barrett’s opinion:

“The current statute, 28 U.S.C. §1782, permits district courts to order testimony or the production of evidence ‘for use in a proceeding in a foreign or international tribunal.’ These consolidated cases require us to decide whether private adjudicatory bodies count as ‘foreign or international tribunals.’ They do not. The statute reaches only governmental or intergovernmental adjudicative bodies, and neither of the arbitral panels involved in these cases fits that bill.” Slip Op. at 1.

  1. The Opinion of the Supreme Court

The issue before the Supreme Court is whether the term “foreign or international tribunals” includes arbitral tribunals. As Tompkins correctly concluded in his prior post, the oral arguments gave no reliable indication as to how the Supreme Court would decide. But now we know.

The Court based its decision mostly on an analysis of the words, first taken separately, then the combination of “foreign tribunal” and “international tribunal”. The Court observed that the word “tribunal” expanded the 1958 wording “any court in a foreign country” to the 1964 version of a “foreign or international tribunal”. “[T]hat shift created ‘the possibility of U.S. judicial assistance in connection with administrative and quasi-judicial proceedings abroad.’” citing Intel, 542 U.S., at 258. The Court goes on to say:

“So a §1782 ‘tribunal’ need not be a formal ‘court,’ and the broad meaning of ‘tribunal’ does not itself exclude private adjudicatory bodies. If we had nothing but this single word to go on, there would be a good case for including private arbitral panels.” Slip Op. at 6.

The Court then looks at the “context,” because “tribunal” does not stand alone as it is part of the phrase “foreign or international tribunal”. Attached to these “modifiers”, the word is “best understood as an adjudicative body that exercises governmental authority.” Slip Op. at 7. Taking each of “foreign tribunal” and “international tribunal” in turn, the Court ventures that in either case Congress could have used it both in a governmental context or more generally. It concludes, without any further, deeper inquiry, that “‘foreign tribunal’ more naturally refers to a tribunal belonging to a foreign nation than to a tribunal that is simply located in a foreign nation.” Ibid. The Court finds that this reading of “foreign tribunal” is reinforced by the statutory defaults for discovery procedure, as §1782 permits the district court to “prescribe the practice and procedure, which may be in whole or in part the practice and procedure of the foreign country or the international tribunal, for taking the testimony or statement or producing the document or other thing.” (emphasis by the Court).

Where this author would find the reference to the practice and procedure of the international tribunal to include a reference to the evidentiary rules adopted by an international arbitral tribunal, the Court finds that “that would be an odd assumption to make about a private adjudicatory body, which is typically the creature of an agreement between private parties who prescribe their own rules.” Slip Op. at 8.

Similarly, in its analysis, the Court observes that the interpretation of “international tribunal” could go either way, “either (1) involving or of two or more “nations,” or (2) involving or of two or more “nationalities.” It finds that the “latter definition is unlikely in this context because “an adjudicative body would be ‘international’ if it had adjudicators of different nationalities––and it would be strange for the availability of discovery to turn on the national origin of the adjudicators.” Ibid.

Huh? Does the Court not know what the world of arbitration ordinarily calls an international arbitral tribunal? As in “a tribunal involved in arbitrating an international dispute”?1)In a simple google search, I found this definition: “The international arbitration tribunal is the independent and non-governmental panel of independent and impartial experts most often composed of three members nominated by the Parties (or appointed by the international arbitration institution, or more rarely by a national court) on the basis of their legal and practical expertise and knowledge, to render a final and binding award.” available here jQuery('#footnote_plugin_tooltip_41936_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

“So understood,” the Court concludes, “‘foreign tribunal’ and ‘international tribunal’ complement one another; the former is a tribunal imbued with governmental authority by one nation, and the latter is a tribunal imbued with governmental authority by multiple nations.” It finds that this interpretation is confirmed by both the statute’s history and a comparison to §7 of the Federal Arbitration Act.

As to the history, the Court emphasizes that pursuant to the Act of Sept. 2, 1958, the Commission on International Rules of Judicial Procedure was charged “with improving the process of judicial assistance, specifying that the ‘assistance and cooperation’ was ‘between the United States and foreign countries’ and that the rendering of assistance to foreign courts and quasi-judicial agencies’ should be improved.” Slip Op. at 10 (emphasis by the Court).

This author wonders since when arbitral tribunals are no longer held to be “quasi-judicial agencies.” The Court demonstrates how little it understands about the breadth and depth of international commercial arbitration, when it wonders “[w]hy would Congress lend the resources of district courts to aid purely private bodies adjudicating purely private disputes abroad?” Slip Op. at 10. Obviously, it is unfamiliar with the fact that (1) most international disputes are purely private, and (2)  the vast majority of international disputes do not end up before courts or governmental quasi-judicial agencies, but before international arbitration tribunals. It shows no understanding of the implications of the New York Convention, which now includes 170 states.

Lastly, the Court also repeats the often heard complaint that §1782 would give more extensive rights to discovery than §7 FAA does domestically. The answer to that point is simple: the Commission was not charged with amending the Federal Arbitration Act. It was charged exclusively with broadening the availability of discovery internationally, even if the suggestion was made at the time for Congress to amend §7 FAA.

So why is it that the Supreme Court decided as it did? Were the arguments made on behalf of the petitioners not strong enough? Was it simply following the wishes of the Justice Department?

It is true that the arguments were deficient in showing the Supreme Court that the Second Circuit decision discussed here was built on quicksand. Neither written nor oral arguments argued why the issue was wrongly decided when the Second Circuit Court of Appeals (as the first court of appeals) was asked to rule on the question.

The circuits were split as to whether such assistance may be given to private foreign or international tribunals or only to tribunals that are “state-sponsored.” Holding that § 1782 permits discovery assistance to private arbitrations were the 4th, 6th and likely the 11th circuit: Servotronics, Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020); Abdul Latif Jameel Transp. Co. v. Fedex Corp., 939 F.3d 710 (6th Cir. 2019); and Consorcio Ecuatoriano de Telecomunicaciones S.A. v. JAS Forwarding (USA), Inc., 685 F.3d 987, 993–98 (11th Cir. 2012), later withdrawn in Consorcio Ecuatoriano de Telecomunicaciones S.A. v. JAS Forwarding (USA) Inc., 747 F.3d 1262, 1270 n.4 (11th Cir. 2014) (“leav[ing] the resolution of the matter for another day”).

Holding that § 1782 does not permit discovery assistance to private arbitrations were the 7th, 5th and 2nd circuit: Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. 2020); Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880 (5th Cir. 1999), confirmed in El Paso Corp. v. La Comision Ejecutiva Hidroelectrica Del Rio Lempa, 341 F. App’x 31, 33-34 (5th Cir. 2009); and Nat’l Broadcasting Co. v. Bear Stearns, 165 F.3d 184 (2d Cir. 1999) (hereinafter “NBC”), confirmed in In re: Application and Petition of Hanwei Guo, 965 F.3d 96 (2d Cir. 2020).

The remainder of this post provides a summary of my personal conclusions following a more detailed analysis of the issue, more specifically of where the Second Circuit Court of Appeals went wrong in its 1999 case involving a §  1782 application, Nat’l Broadcasting Co. v. Bear Stearns Co., 165 F.3d 184 (2d Cir. 1999) (“NBC”).

NBC involved a dispute between a Mexican television company, TV Azteca S.A. de C.V (“Azteca”) and National Broadcasting Company and NBC Germany (“NBC”), in which NBC filed an ex parte § 1782 application to obtain testimony from six investment banking firms, including Bear Stearns Co., in anticipation of an ICC arbitration to be brought by Azteca in Mexico. When five of the six forms objected by filing a motion to quash, the district court (by Judge Robert W. Sweet) granted the motion and quashed the subpoenas originally authorized by Judge Deborah A. Batts. NBC appealed to the Second Circuit, which affirmed Judge Sweet’s ruling holding that the term “foreign or international tribunals” in 28 U.S.C. § 1782 does not “apply to proceedings before private arbitral panels”.

When Judge Sweet’s decision in NBC had come to the attention of Professor Hans Smit, the principal draftsman of § 1782 as amended by Public Law 88-619, 78 Stat. 995 (1964), he wrote an article in which he went into greater detail about how and why § 1782 applies to foreign and international tribunals. Hans Smit, American Assistance to Litigation in Foreign and International Tribunals: Section 1782 of the U.S.C. Revisited, 25 Syracuse J. Int’l L. & Comm. 1 (1998).

Shortly after the adoption of the 1964 Act, he wrote a lengthy commentary about the entire overhaul of 28 U.S.C.: International Litigation under the United States Code, 65 Colum. L. Rev. 1015 (1965). The 1965 article was cited approvingly by Justice Ginsburg in Intel Corp. v. Advanced Micro Devices, 542 U. S. 241 (2004), the only other time that the Supreme Court had the opportunity to interpret § 1782 (but involving a different though related issue).

Rather than relying on Professor Smit’s 1965 and 1998 articles, the NBC court ignored the 1965 article and did away with the 1998 article in a footnote. Instead, the court seemingly found support in  Professor Smit’s 1962 article, Assistance Rendered by the United States in Proceedings Before International Tribunals, 62 Colum. L. Rev. 1264 (1962).

The court’s footnote read in pertinent part:

“It is perhaps enough to say … that Professor Smit’s recent article does not purport to rely upon any special knowledge concerning legislative intent, and we find its reasoning unpersuasive. By contrast, statements in the 1962 article, which was specifically relied upon in the House and Senate reports, are probative of Congress’s contemporaneous interpretation of the statutory language.”2)165 F.3d 184, 190 (2d Cir. 1999). jQuery('#footnote_plugin_tooltip_41936_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

  1. NBC’s textual analysis

The NBC court’s textual analysis of § 1782 was nothing less than convoluted, as it wrote:

“In support of its position, NBC cites numerous references to private arbitration panels as ‘tribunals’ or ‘arbitral tribunals’ in court cases, international treaties, congressional statements, academic writings, and even the Commentaries of Blackstone and Story. This authority amply demonstrates that the term ‘foreign or international tribunals’ does not unambiguously exclude private arbitration panels. On the other hand, the fact that the term ‘foreign or international tribunals’ is broad enough to include both state-sponsored and private tribunals fails to mandate a conclusion that the term, as used in § 1782, does include both. . . In our view, the term ”foreign or international tribunal’ is sufficiently ambiguous that it does not necessarily include or exclude the arbitral panel at issue here. Accordingly, we look to legislative history and purpose to determine the meaning of the term in the statute.”3)Ibid. (emphasis added) jQuery('#footnote_plugin_tooltip_41936_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Judge Cabranes had to get to the conclusion that the term “foreign or international tribunal” is “sufficiently ambiguous” by first fabricating a triple negative with respect to the word “tribunal”: “does (1) not (2) unambiguously (3) exclude” private arbitration panels.4)As the amicus brief of Federal Arbitration Inc. in support of ZF Automotive points out, “courts should not presume that the language of a statute is ambiguous. See United States v. LaBonte, 520 U.S. 751, 757 (1997) (“We do not start from the premise that [the statutory] language is imprecise. Instead, we assume that in drafting legislation, Congress said what it meant.”). Similarly, courts may not impose their own limitations upon a plain and unambiguous statute or resort to legislative history to upend its commonsense construction.” [citing cases]. Brief of Federal Arbitration, Inc. (FEDARB) as Amicus Curiae in support of Petitioner, at 7. (last visited February 21, 2022) jQuery('#footnote_plugin_tooltip_41936_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); And then, in order to justify this tortuous conclusion, Judge Cabranes had to rely on a misinterpretation of Robinson v. Shell Oil Co., a 1997 Supreme Court case5)Robinson v. Shell Oil Co., 519 U.S. 337, 339 (1997). jQuery('#footnote_plugin_tooltip_41936_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });, which held that the term “employees” in some provisions of Title VII was broad enough to include “former” employees, whereas in other sections the term had to mean just “current” employees, and that therefore the use of the term in the section relevant in that case was ambiguous.6)Robinson v. Shell Oil Co. involved a Title VII action by Mr. Robinson, an African-American person who had been fired by Shell. Mr. Robinson filed a charge with the EEOC, alleging that Shell had discharged him because of his race. While that charge was pending, Mr. Robinson applied for a job with another company. That company contacted Shell, as Mr. Robinson’s former employer, for an employment reference. Shell allegedly gave him a negative reference in retaliation for his having filed the EEOC charge. Section 704(a) of Title VII of the Civil Rights Act of 1964 makes it unlawful “for an employer to discriminate against any of his employees or applicants for employment” who have either availed themselves of Title VII’s protections or assisted others in so doing. The issue was whether the term “employees” as used in §704(a) includes former employees, such that Robinson could bring suit against his former employer for post-employment actions allegedly taken in retaliation for his having filed a charge with the EEOC. The Court found that in several sections of Title VII the term “employee” necessarily meant to include former employees whereas in other sections it necessarily meant current employees. jQuery('#footnote_plugin_tooltip_41936_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

In his 2006 opinion in In re Roz Trading Ltd., Judge William S Duffey, Jr., a federal district court judge in Georgia, summarized well the erroneous reasoning by the NBC court in a footnote:

“The Second Circuit started with the premise that the term ‘tribunal’ is ambiguous. In essence, the Second Circuit reasoned that even though the common usage and widely accepted definition of ‘tribunal’ include private arbitral bodies, it was free to impose its own limitations on the statute. This is precisely the type of conduct that courts engaged in statutory construction are directed to avoid. [United States v.] Turkette, 452 U.S. 576, 580, 587 (1981). Even if the Second Circuit found ‘contrary indications’ , 469 F. Supp. 2d 1221, 1227, n.4 (N.D. Ga. 2006) (other citation omitted).

  1. NBC’s reliance on 22 U.S.C. §§ 270-270(g) and the 1958 version of § 1782

The Second Circuit court relied on Professor Smit’s 1962 article where it described the proposed deletion of 22 U.S.C. §§ 270 – 270(g) in light of the 1958 version of § 1782. The court cited a passage in which Professor Smit “asserted” that “an international tribunal [as described in Section 270] owes both its existence and its powers to an international agreement.”

Even in that effort, however, the court got it wrong, as it not only failed to note that Professor Smit clearly referred to the 1958 version of § 17827)In fact, Prof. Smit quotes in this connection in a footnote the text of the 1958 version of §1782: “The deposition of any witness within the United States to be used in any judicial proceeding in any court in a foreign country with which the United States is at peace may be taken before a person authorized to administer oaths designated by the district court of any district where the witness resides or may be found. The practice and procedure in taking such depositions shall conform generally to the practice and procedure for taking depositions to be used in courts of the United States.” 62 Colum. L. Rev. at 1267, n. 18. jQuery('#footnote_plugin_tooltip_41936_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); rather than the then not yet existing 1964 version, but the court also took this passage completely out of context: Professor Smit was discussing “international tribunals” in connection with the history of Section 270 in the 1930s.8)The language quoted by the NBC court is followed by this sentence: “The correctness of this view was sustained by the United States–German Mixed Claims Commission when the American agent tried to invoke the 1930 act.” 62 Colum. L. Rev. at 1267. From the context I surmise that the word “owes” in the sentence quoted by the NBC court has a typo and that it should read “owed” instead. jQuery('#footnote_plugin_tooltip_41936_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

  1. The 1964 Act and Professor Smit’s 1965 Commentary

The amendments to Title 28 of the U.S. Code were signed into law by President Johnson on October 3, 1964, “to improve judicial procedures for serving documents, obtaining evidence, and proving documents in litigation with international aspects.”9)For a full report on the activities of the Commission on International Rules of Judicial Procedure, including the text and explanatory notes of all the reform measures developed by the Commission and the Project on International Procedure of the Columbia University School of Law (the “Project”), see Fourth Annual Report of the Commission on International Rules of Judicial Procedure, H.R. Doc. No. 88, 88th Cong., 1st Sess. (1963). The explanatory notes are reprinted almost verbatim in S. REP. No. 1580, 88th Cong., 2d Sess. (1964) [herein  the “Senate Report”]. Professor Smit was the Director of the Project and the Reporter for the Commission. jQuery('#footnote_plugin_tooltip_41936_30_9').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The intent of the 1964 Act was to liberalize all domestic procedures in aid of foreign procedures. In fact, the reforms were premised on the hope that their principle of liberality in rendering aid to foreign courts and litigants will find widespread acceptance abroad. The 1964 Act as drafted by the Project on International Procedure at Columbia Law School was adopted by Congress without encountering any objection.

As a former research associate and assistant of the late Professor Hans Smit, who (as noted above) was the principal drafter of the 1964 amendments to 28 U.S.C., I have some knowledge as to how he wrote in general, and specifically how § 1782(a) was intended to function – alongside the other changes that the 1964 Act brought to 28 U.S.C.

For one, Professor Smit believed in brevity and conciseness, by using only necessary words while omitting all words that are superfluous. As he noted in a footnote to his lengthy 1965 article, “[t]he term ‘tribunal’ was chosen deliberately as being both neutral and encompassing. Any person or body exercising adjudicatory power is included.” 65 Colum. L. Rev. at 1021, n. 36.

In the body of the article, on the same page, he emphasized explicitly the breadth of the term “tribunal”:

“The term tribunal encompasses all bodies that have adjudicatory power, and is intended to include not only civil, criminal, and administrative courts (whether sitting as a panel or composed of a single judge), but also arbitral tribunals or single arbitrators.” 65 Colum. L. Rev. at 1021.

Although this explanation of the word “tribunal” was used in connection with the meaning and breadth of §1781, the same meaning was to be attributed to “tribunal” in all other sections of Title 28. Thus, for example, Professor Smit refers in footnote 71 to his writings on § 1782 to the same broad concept:

“71. The term “tribunal” embraces all bodies exercising adjudicatory powers, and includes investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts. See SENATE REPORT 7-8. On the use of the term tribunal in other sections of the Act, see notes 36-38, 53 supra and accompanying text.” 65 Colum. L. Rev. at 1026.

  1. Section 1782 Today

Reliance on Professor Smit’s explanations of § 1782, whether in his 1965 article or any of his later articles, is not really necessary: as even the Supreme Court found in the present case, the word “tribunal”, whether 100 or 60 years ago, or at present, has always included arbitral tribunals.

In 1923, the Protocol on Arbitration Clauses (the so-called Geneva Protocol of 1923) distinguished arbitral tribunals and judicial tribunals. In 1964, (as Professor George Bermann explained in his amicus brief in the Servotronics case) the Supreme Court found that in submitting a labor dispute to private arbitration rather than the National Labor Relations Board, the union was “resort[ing] to a tribunal other than the Board.” Carey v. Westinghouse Elec. Corp., 375 U.S. 261, 272 (1964). Today, the increased use of international commercial arbitration makes that the use of the word “tribunal” as referring to an arbitral tribunal is ubiquitous.

As for the applicability of § 1782 to investment arbitration, it clearly makes no difference whether the tribunal deals with commercial or investment arbitration. The artificial structure built by the Second Circuit’s opinion in the AlixPartners case (also written by Chief Judge Cabranes) has no foundation in the text, structure or history of the statute.

As noted previously, Professor Smit wrote in 1965, “the term ‘tribunal’ was chosen deliberately as being both neutral and encompassing.” In my opinion, that includes both tribunals created by pursuant to an international treaty, such as the Court of Justice of the European Union (CJEU), and arbitral tribunals in international arbitration.

 

  1. The District Court’s Discretionary Authority

The Supreme Court in Intel pointed out that § 1782 authorizes, but does not require, discovery assistance, and it developed certain factors that a district court ought to take into account as guidelines when it exercises its discretion. This is especially relevant with respect to discovery assistance as it applies to foreign or international arbitration. For example, as the district court may not know what rules of evidence the tribunal will apply, it may well decide to deny discovery assistance to an “interested person” if sought before the arbitral tribunal has been constituted.

Since the §1782 application in ZF Automotive (one of the cases presently before the U.S. Supreme Court for decision) relates to a discovery request prior to the commencement of the arbitration proceeding, the Supreme Court ought to remand the case to the district court so that it can decide whether to continue to grant the discovery request or to further limit it or deny it – at least until such time as a complaint in arbitration has been filed and an arbitral tribunal has been formed.

The above ideas are elaborated in a more in-depth article I hope to publish in the forthcoming issue of the American Review of International Arbitration.

 

  1. So How Should the Supreme Court Have Decided?

It is clear to me that Justice Barrett’s opinion is not very convincing since its reasoning borders on the unacceptable – and that it is plainly wrong. It surprises me that this is a unanimous decision. It appears that the entire Court may have little understanding of the importance of international commercial arbitration to the United States and the international community and how much § 1782 helps improve international arbitration.

Or, if it does understand that importance, perhaps the Court does not believe the argument made on behalf of Petitioners that recognizing that § 1782 extends to arbitral tribunals will not unduly burden the district courts.

If that was the true reason, the Supreme Court’s decision is most regrettable. It will have given preference to an unfounded fear of overburdening the district courts over the need to serve the international community which more and more makes international or cross-border discovery available in international commercial arbitration.

It may be that a future Congress will have the same enlightened vision as the Congress of 1958 showed by its appointment of, and charge to the Commission on International Rules of Judicial Procedure. If that should happen, as optimists certainly hope, they may decide to amend § 1782 and while they are at it, amend Section 7 of the Federal Arbitration Act.

 

Eric van Ginkel, FCollArb, FCIArb, J.D. (Leiden University 1964), J.D. (Columbia University 1969), LL.M. in Dispute Resolution (Straus Institute for Dispute Resolution, Pepperdine University 2003), is an independent international arbitrator and mediator. He is also an Adjunct Professor at both the Law School of the University of Texas at Austin and the Straus Institute for Dispute Resolution at the Caruso Law School at Pepperdine University. During the calendar year 1966, Mr. van Ginkel was a research associate and assistant to Professors Hans Smit and Richard Pugh for the Project on European Legal Institutions at Columbia Law School.

References[+]

References ↑1 In a simple google search, I found this definition: “The international arbitration tribunal is the independent and non-governmental panel of independent and impartial experts most often composed of three members nominated by the Parties (or appointed by the international arbitration institution, or more rarely by a national court) on the basis of their legal and practical expertise and knowledge, to render a final and binding award.” available here ↑2 165 F.3d 184, 190 (2d Cir. 1999). ↑3 Ibid. (emphasis added) ↑4 As the amicus brief of Federal Arbitration Inc. in support of ZF Automotive points out, “courts should not presume that the language of a statute is ambiguous. See United States v. LaBonte, 520 U.S. 751, 757 (1997) (“We do not start from the premise that [the statutory] language is imprecise. Instead, we assume that in drafting legislation, Congress said what it meant.”). Similarly, courts may not impose their own limitations upon a plain and unambiguous statute or resort to legislative history to upend its commonsense construction.” [citing cases]. Brief of Federal Arbitration, Inc. (FEDARB) as Amicus Curiae in support of Petitioner, at 7. (last visited February 21, 2022) ↑5 Robinson v. Shell Oil Co., 519 U.S. 337, 339 (1997). ↑6 Robinson v. Shell Oil Co. involved a Title VII action by Mr. Robinson, an African-American person who had been fired by Shell. Mr. Robinson filed a charge with the EEOC, alleging that Shell had discharged him because of his race. While that charge was pending, Mr. Robinson applied for a job with another company. That company contacted Shell, as Mr. Robinson’s former employer, for an employment reference. Shell allegedly gave him a negative reference in retaliation for his having filed the EEOC charge. Section 704(a) of Title VII of the Civil Rights Act of 1964 makes it unlawful “for an employer to discriminate against any of his employees or applicants for employment” who have either availed themselves of Title VII’s protections or assisted others in so doing. The issue was whether the term “employees” as used in §704(a) includes former employees, such that Robinson could bring suit against his former employer for post-employment actions allegedly taken in retaliation for his having filed a charge with the EEOC. The Court found that in several sections of Title VII the term “employee” necessarily meant to include former employees whereas in other sections it necessarily meant current employees. ↑7 In fact, Prof. Smit quotes in this connection in a footnote the text of the 1958 version of §1782: “The deposition of any witness within the United States to be used in any judicial proceeding in any court in a foreign country with which the United States is at peace may be taken before a person authorized to administer oaths designated by the district court of any district where the witness resides or may be found. The practice and procedure in taking such depositions shall conform generally to the practice and procedure for taking depositions to be used in courts of the United States.” 62 Colum. L. Rev. at 1267, n. 18. ↑8 The language quoted by the NBC court is followed by this sentence: “The correctness of this view was sustained by the United States–German Mixed Claims Commission when the American agent tried to invoke the 1930 act.” 62 Colum. L. Rev. at 1267. From the context I surmise that the word “owes” in the sentence quoted by the NBC court has a typo and that it should read “owed” instead. ↑9 For a full report on the activities of the Commission on International Rules of Judicial Procedure, including the text and explanatory notes of all the reform measures developed by the Commission and the Project on International Procedure of the Columbia University School of Law (the “Project”), see Fourth Annual Report of the Commission on International Rules of Judicial Procedure, H.R. Doc. No. 88, 88th Cong., 1st Sess. (1963). The explanatory notes are reprinted almost verbatim in S. REP. No. 1580, 88th Cong., 2d Sess. (1964) [herein  the “Senate Report”]. Professor Smit was the Director of the Project and the Reporter for the Commission. function footnote_expand_reference_container_41936_30() { jQuery('#footnote_references_container_41936_30').show(); jQuery('#footnote_reference_container_collapse_button_41936_30').text('−'); } function footnote_collapse_reference_container_41936_30() { jQuery('#footnote_references_container_41936_30').hide(); jQuery('#footnote_reference_container_collapse_button_41936_30').text('+'); } function footnote_expand_collapse_reference_container_41936_30() { if (jQuery('#footnote_references_container_41936_30').is(':hidden')) { footnote_expand_reference_container_41936_30(); } else { footnote_collapse_reference_container_41936_30(); } } function footnote_moveToReference_41936_30(p_str_TargetID) { footnote_expand_reference_container_41936_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_41936_30(p_str_TargetID) { footnote_expand_reference_container_41936_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Empirical Analysis of National Court Judgements in Commercial Arbitration: What Do the Data Tell Us?

Mon, 2022-06-13 06:05

On June 6, 2022, the Journal of International Arbitration Special Issue on Empirical Work in Commercial Arbitration, was released, edited by Dr Monique Sasson, Dr Crina Baltag, Roger P. Alford, Matthew E.K. Hall, under the general editorship of Prof. Dr Maxi Scherer. The Special Issue also includes articles authored by Prof. Loukas Mistelis, Prof. Dr Maxi Scherer, Dr Ole Jensen, Giammarco Rao, Laurence Shore, Vittoria De Benedetti, Mario de Nitto Personè, Cecilia Carrara, Elina Mereminskaya, Ioana Knoll-Tudor, Arthur Dong, and Alex Yuan.

The empirical research featured in this Special Issue is based on the Kluwer Arbitration Database (“Database”) and relies on a data set that includes all national court decisions on recognition, enforcement and setting-aside of international commercial arbitration awards available in the Database and rendered from January 1, 2010, to June 1, 2020. The empirical research comprises 504 vacatur actions and 553 recognition and enforcement actions. National courts in 74 different jurisdictions issued these decisions.

The research coded every argument raised by respondents in opposing the recognition and enforcement of awards under Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as well as every argument raised by respondents in attempting to set-aside awards based on the grounds in Article 34 of the UNCITRAL Model Law on International Commercial Arbitration.  Several other grounds, outside the two instruments mentioned above have been identified in the Database.

This type of empirical research is routinely done in investment arbitration, but it is rarely attempted in commercial arbitration. Understanding success in enforcement and setting-aside proceedings is usually left to reliance on anectodical evidence, which is unsatisfactory. Moreover, it is necessary to consider the data from several jurisdictions to understand the extent to which the general impression that commercial arbitral awards are ultimately upheld by the courts is correct.

The empirical research concerned court judgments involving 104 claimant nationalities (50% of the cases were from 16 nationalities; the US was the largest percentage at 8.8%) and 107 respondent nationalities (50% of the cases were from 14 nationalities; the US was the largest percentage at 9.8%).

The majority of these court judgements arose from administered arbitrations. There were 110 different arbitral institutions (9 institutions administered 48% of the relevant awards) mentioned in the court judgments. The probability of an award being enforced was 78% in all actions filed in proceedings administered by the nine most represented arbitral institutions. In vacatur proceedings, 75% of the applications filed by respondents seeking to set-aside the award were rejected (thus, a 75% success rate in preserving the award).

 

The research first analyzed the general data and then addressed certain specific issues:

(i) Invalidity of Arbitration Agreements and Applicable Law —  Professor Scherer and Dr. Jensen analyzed the challenges to the validity of arbitration agreements, which were at issue in almost one-fifth of the database court decisions.

(ii) Non-Signatories — Professor Mistelis and Dr. Rao addressed the ‘extension’ of the arbitration agreement to non-signatories threatened the enforcement of the award.

(iii) Pathological Clauses — Mr. Shore, Dr. De Benedetti and Dr. De Nitto Persone looked at this jurisdictional objection, which was raised in 21% of the Database enforcement cases and successful only in 23% of the cases.

(iv) Conflicts of Interest — Dr. Carrara considered the issue of conflicts of interest, impartiality and independence of arbitrators.

(v) Enforcement of Annulled Awards — Professor Baltag analyzed the enforcement of awards vacated at the seat.

(vi) Public Policy — Dr. Sasson analyzed the decisions on public policy. Objections based on public policy were raised in 44% of recognition and enforcement proceedings and in 38% of setting aside proceedings. The success rate of these objections was low: 19% and 21%, respectively.

(vii) Annulment, Recognition and Enforcement Proceedings in Latin America — Dr. Mereminskaya addressed the most recent jurisprudential approaches to international arbitration in Latin America, specifically Argentina, Colombia, Costa Rica, Chile, Dominican Republic, Mexico and Peru.

(viii) Annulment, Recognition and Enforcement Proceedings in France — Dr. Knoll-Tudor examined NY Convention and annulment cases in France.

(ix) Recognition and Enforcement Proceedings in China. Dr. Dong and Dr. Yuan analyzed judgements by the Chinese courts.

 

 General Conclusions to be Drawn From the Data  

i) The Low Vacatur Application Success Rate: 23% (19% in the nine largest jurisdictions) without significant variations between courts in various jurisdictions.

ii) The High Enforcement Success Rate: 73% (71% in the nine largest jurisdictions), again without significant variations between courts in various jurisdictions.

 

It is noteworthy that, despite the lack of uniformity in the setting-aside legislative acts across the world, the percentages of confirmations of awards under national arbitration acts, and of recognition and enforcement of foreign awards under the New York Convention are very similar (77% and 73%).  This indicates that the general impression that setting-aside proceedings are parochial and not especially arbitration-friendly, because of a lack of an international convention regulating them, is misguided.

Second, there is no statistically significant evidence that the choice of arbitration institution will measurably affect enforcement outcomes. The ICC represented over 20% of cases in the data set; there was no evidence that this institution fared better than others in terms of enforcement or vacatur action outcomes. This database also highlights the widespread use of arbitration institutions from around the world, from Albania to Zambia.

Third, international commercial arbitration is overwhelmingly a private affair. Government parties features in only 6 % of the cases in the Database. Moreover, regardless of whether or not there was a government party in the arbitration, there is little evidence of a “home field” advantage. That is, there is no direct evidence connecting the nationality of the parties and the outcome of the vacatur or enforcement proceeding.

Fourth, the most common grounds for challenge are not the most successful. Arguments based on public policy or invalid arbitration agreement are most frequently raised by respondent in enforcement proceedings, but are relatively unsuccessful. Similarly,  arguments based on public policy and inability to present one’s case are most frequently raised in the vacatur context, but are relatively unsuccessful (“no notice of arbitrator appointment” was the most successful).

 

 

This empirical analysis is only a starting point. There are many unanswered questions that flow from this study. We have not analyzed, for example, questions such as the cost or duration of arbitration, the composition of tribunals or demographics of arbitrators, the enforcement of arbitration agreements. Further research is needed to answer these and other questions.

Finally, the articles in the Special Issue offer a detailed empirical analysis of national court enforcement of international commercial arbitration awards. But, it is not comprehensive, and many questions require further research. We focused on analysis of cases since January 1, 2010, and coded national court proceedings that were included in the Database. There is an inherent selectivity bias in analyzing these cases, because the reporters and editors chose to include in that database only those cases that are likely to be relevant to the international commercial arbitration community.

There is no other equivalent database relating to international commercial arbitration decisions in national courts. One must therefore draw conclusions and extrapolate from these cases, recognizing the limitations of the database. We hope that the enthusiasm with which practitioners and scholars have embraced legal empiricism in the investment arbitration context will translate to the world of international commercial arbitration

 

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International Law Talk Podcast and Arbitration: What Data Tells You About International Commercial Arbitration?, In Conversation with Monique Sasson

Fri, 2022-06-10 07:59

International Law Talk is a series of podcasts through which Wolters Kluwer provides the latest news and industry insights from thought leaders and experts in the fields of International Arbitration, IP Law, International Tax Law and Competition Law.  Here at Kluwer Arbitration Blog, we highlight the podcasts focused on international arbitration.

 

In this latest episode, Prof. Dr Maxi Scherer, General Editor of the Journal of International Arbitration (JOIA) interviews Dr Monique Sasson, one of the editors of the Journal of International Arbitration Special Issue on Empirical Work in Commercial Arbitration, together with Dr Crina Baltag, Roger P. Alford, Matthew E.K. Hall.  The Special Issue also includes articles authored by Prof. Loukas Mistelis, Prof. Dr Maxi Scherer, Dr Ole Jensen, Giammarco Rao, Laurence Shore, Vittoria De Benedetti, Mario de Nitto Personè, Cecilia Carrara, Elina Mereminskaya, Ioana Knoll-Tudor, Arthur Dong, and Alex Yuan.

 

The podcast discussion considers and explores “What Data Tells You About International Commercial Arbitration?”, namely:

  • First, the reasons why the empirical research study has been commenced, why “data is the new gold”, and research based on data has become a hot topic in recent years.  In addressing these questions, Monique Sasson highlighted that we have seen various empirical research data in investment arbitration, which enable users to predict possible outcomes of certain arguments. At the same time, such tendency is not visible in the commercial arbitration setting, where there is more “anecdotal evidence”, i.e. unverifiable and unquantifiable information, originating from “each other’s stories”.
  • Second, how the empirical research study is structured and what is comprised in the dataset.  The dataset is composed of judicial decisions rendered in setting aside and enforcement actions, more precisely 504 and 553 respectively, covering the time frame of the last ten years (January 2010 – January 2020).  The judgments originated from 74 jurisdictions, with 64% of which reflected the practice of 9 jurisdictions, namely Germany, the United States, Switzerland, Spain, the United Kingdom, the Netherlands, France, Brazil, and the People’s Republic of China.  The majority of these cases concerned arbitral awards in cases administered by institutions – over 100 arbitral institutions -, whereas ad hoc arbitrations constituted a smaller “fraction” of the data.
  • Third, what was done to the dataset and how it was coded.  The grounds for coding the dataset were divided into 19 groups for the setting aside and enforcement data. For the setting aside data, the grounds were based on Article 34 of the UNCITRAL Model Law. While for the enforcement data, the coding was based on Article V of the New York Convention.
  • Fourth, what the general and specific findings of the empirical research study were.  Among other things, some of the general conclusions, which Monique Sasson has noted to be “expected conclusions”, included the finding that the setting aside application success rate is 23%. At the same time, in the enforcement proceedings, such attempts are successful in 73% of cases.
  • Fifth, the findings of the research conducted by Prof. Dr. Maxi Scherer and Dr. Ole Jensen with respect to the grounds for invalidity of the arbitration agreements in 171 decisions.  The named decisions were coded with respect to the grounds for invalidity invoked in the setting aside or enforcement proceedings.  Some of the “surprises” related to the argument on formal invalidity of the arbitration agreement: although it is believed that it is one of the most frequently invoked grounds, the data does not confirm that.  The data showed that this ground was relied upon only in 9.3% of cases.  On the other hand, the two of the most “successful” grounds for the challenge were that (i) the arbitration agreement did not come into existence or was not applicable (36.5% success rate), and that (ii) one of the parties did not sign the arbitration agreement (42% success rate).  Finally, Prof. Scherer highlighted that there is a mismatch between the frequency in which the grounds for challenge are invoked and their success rates.

 

http://arbitrationblog.kluwerarbitration.com/wp-content/uploads/sites/48/2022/06/Trailer.mp4

 

Listen to the discussionWhat Data Tells You About International Commercial Arbitration?, In Conversation with Monique Sasson.

Follow the coverage of the International Law Talk arbitration podcasts on Kluwer Arbitration Blog here.

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The Intersection of International Arbitration and Sustainable Development: Perspectives from Sarajevo

Wed, 2022-06-08 01:41

On 18 March 2022, academics and arbitration practitioners convened in Sarajevo (Bosnia & Herzegovina) for an international conference dedicated to cutting-edge topics related to the intersection of international arbitration and sustainable development. This post outlines some of the highlights of a rich discussion that was part of a broader effort to engage the legal and academic communities in Bosnia and Herzegovina in the international reform processes in this area.

The conference was part of the annual training and a Willem C. Vis Pre-Moot, co-organized by the U.S. Department of Commerce Commercial Law Development Program (CLDP), the Faculty of Law of the University of Zenica, GIZ, Association ARBITRI and the American Chamber of Commerce Bosnia and Herzegovina Sarajevo. A diverse audience of Willem C. Vis Moot teams (from Azerbaijan, Bosnia and Herzegovina, Georgia, Germany, Kosovo and Saudi Arabia), representatives of the business sector and practitioners contributed to the richness of the discussions. Following the welcome address and introduction by CLDP representatives, the U.S. Embassy in Bosnia and Herzegovina and AmCham, the conference unfolded through two keynote speeches, two panels and an interactive presentation.

The two keynote speeches were dedicated to the law applicable to the arbitration agreement, and delivered by Mr. Steven Finizio (Wilmer Hale, London) and Prof. Dr. Helmut Ruessmann (Saarland University). In final session of the conference, Ms. Amanda Lee (Costigan King) and Honorable Virginia M. Covington (District Court Judge, Middle District of Florida) shared tips and best practices for a career in international arbitration. The session was moderated by Ms. Amina Hasanović (University of Zenica, Faculty of Law). The panels of the conference focussed upon the intersection between international arbitration and sustainable development and form the focus of this post.

 

Arbitrating for a Greener Future: How SDG Disputes are Changing the Landscape of International Arbitration

Ms. Nevena Jevremović (University of Aberdeen) opened the discussion by discussing the implications of the Sustainable Development Goals (SDGs) on trade and investment. Although the international arbitration jurisprudence is yet to see the first awards related to SDGs (including climate change), international instruments and procedural reforms are taking place on parallel tracks to prepare for the anticipated increase in caseload in this field. Given the fast pace and ambitious goals of the energy transition and adoption of green policies worldwide, many challenges lie on the horizon for policymakers and arbitration practitioners alike. More broadly, the need for accountability for adverse social, environmental, and human rights impacts of trade and investment is only increasing.

While States have taken steps to address these challenges – from the Paris Agreement to the UN 2030 Agenda to numerous soft law instruments – developing and capital importing countries are struggling to put in place a policy framework compliant with these international obligations while retaining foreign investments. KAB readers will be familiar with the concept of “regulatory chill”, which presents one of the main hindrances for adopting meaningful SDG legislation and measures. States are hesitant to disrupt their foreign investment protection regime for fear of facing lengthy and expensive investment arbitrations. While it is difficult to measure the extent and real effects of “regulatory chill”, it is a growing concern that modern investment protection treaties aim to address by expressly safeguarding the States’ right to regulate in the public interest.

Ms. Jevremović then reflected on SDG interactions and global value chains (GVCs), explained the existing international and national regulatory framework, and laid the groundwork for discussing the implications of SDG considerations for Investor-State Dispute Settlement (ISDS). She concluded with an example of a recent groundbreaking decision of The Hague District Court – Milieudefensie et al. v. Royal Dutch Shell – where the court ruled that the Shell group is responsible for its CO2 emissions and those of its suppliers. The court in that case further held that Shell must cut its CO2 emissions by 45% compared to 2019 levels. In its reasoning, the court heavily relied on scientific research and reporting on the effects of climate change and also various international instruments, primarily the UN Guiding Principles on Business and Human Rights, to interpret and apply the Dutch standard duty of care standard.

The decision is particularly noteworthy for two reasons. First, it embraces a broad, and some may say bold, take on the scope of responsibility carbon majors have in their supply chains for adverse climate change effects. Second, the decision builds on the famous Urgenda decision. On 20 December 2019, the Dutch Supreme Court ruled that the Dutch government has obligations to reduce emissions urgently and significantly in line with its human rights obligations. More specifically, it ordered the Dutch State to reduce greenhouse gas emissions by at least 25% as of late 2020 relative to 1990 levels.

The Dutch experience in Urgenda and with climate change policy more broadly illustrates certain of the concerns associated with regulatory chill noted above. The Dutch Climate Act entered into force on 1 September 2019, setting a framework for the development of policy geared towards a permanent and gradual reduction of greenhouse gas emissions in the Netherlands to a level that will be 95% lower in 2050 than in 1990, to curb global warming and climate change. However, in response to the Climate Act, RWE filed a claim against the Kingdom of Netherlands under the Energy Charter Treaty requesting compensation for banning the use of coal in electricity generation from 2030. One can expect the connecting points between liability for adverse climate change, social, human rights, and environmental impacts, the ISDS system, and climate change litigation to multiply going forward.

Dr. Kabir Duggal (Arnold & Porter) addressed the changing landscape of ISDS and the tension between investors’ rights and States’ rights to regulate in the public interest. He reflected on the high stakes of ISDS proceedings for less developed states and the role of human rights and environmental concerns in ISDS. Turning to the ongoing reform processes in ISDS, Dr. Duggal commented on the focus on procedural reforms in ISDS, particularly the reform options deliberated and developed in the UNCITRAL Working Group III (ISDS Reform). Considering that the mandate of WG III is limited to concerns and reforms associated with dispute resolution (such as the consistency of awards, costs and duration of the proceedings and ethical rules for ISDS adjudicators), the discussion of substantive issues, including SDG concerns, remains off the table of international bodies, at least for the foreseeable future. This isolated process cannot effectively resolve the most problematic issues concerning the States’ ability to regulate in the public interest while maintaining an attractive investment environment. Therefore, there is a risk of the reform process being another missed opportunity to bring about meaningful change in the field.

 

Shifting the Paradigm of Investment Arbitration: State Rights and Investor Obligations

Following the discussion about the changing landscape of global business and trade and ISDS, the second panel turned to explore the evolving positions of States and foreign investors in ISDS. Ms. Fahira Brodlija (GIZ) opened the discussion by highlighting the trajectory of the development of the existing ISDS system. Initially, bilateral investment treaties (BITs) and the ISDS clauses served a dual role: on the one hand, they were a safeguard for foreign investors from developed States venturing into developing States, while developing States used them as a tool to attract foreign investment.  The European Union, which is now the main advocate for the abandonment of ISDS and the establishment of a standing Multilateral Investment Court, once encouraged the conclusion of BITs among its Member States “as a means of establishing a favorable climate for private investment.” She noted the reversal in the attitude of States towards investment arbitration as a feature of their investment protection framework, and the growing tendency of states to safeguard their regulatory space, to the exclusion of direct recourse of foreign investors against States. This opens the door for the paradigm shift in the roles of investors and States in ISDS.

Mr. Arne Fuchs (McDermott Will & Emery) identified several approaches that could be applied to soften the tension between investment treaties and State rights to regulate. States have already started lowering investment protection standards, by exempting certain measures from the scope of investment treaty protection and judicial review. Mr. Fuchs noted that this may raise inconsistencies in practice and that a much better approach would be to change the perspective on the traditional investment protection standards and to engage directly with investors when adopting significant policies of public interest. In addition, Mr. Fuchs reflected on the possibility of using investment treaties to enforce States’ international obligations (e.g., in relation to the environment). As the notions of investment treaties as instruments of investment protection shift to a purpose od investment facilitation, the understanding of investor obligations and the State’s duties to comply with global environmental obligations will likely impact the outcomes of future investment arbitration cases.

Prof. Catherine Rogers (Arbitrator Intelligence) laid out the prospects of States acting as Claimants, rather than as Respondents as is the norm in ISDS. To illustrate the nature and implications of such actions by States, Prof. Rogers presented some prominent examples from US case law, where States acted as claimants – including an action by 40 US States against tobacco companies in the courts that resulted in a US$365 billion settlement. Prof. Rogers also highlighted the role of contingency fee arrangements in claims brought by States against private companies, as well as the high settlement rate of such cases. Finally, Prof. Rogers commented on the importance of international adjudication in any form and the prospects of increasing rates of State claims and counterclaims as an incentive for settlement.

 

***

 

It is undeniable that the world of international arbitration cannot exist in a vacuum and that it will have to tune into the challenging landscape of ESG regulations and disputes in the near future.   The conference laid the groundwork for future debates in this field among policy makers, practitioners and academics in Bosnia and Herzegovina, many of whom were among the Vis Moot participants who were in attendance. The full recording of the program is available online.

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Arbitration and the Decommissioning of Oil and Gas Assets: An Australian Perspective

Tue, 2022-06-07 05:20

As the oil and gas industry continues to mature, the number of mid-to-late life assets grows. A key challenge for the energy sector is how to effectively manage the decommissioning of these assets, especially those situated offshore. In Australia:

  • decommissioning work is expected to be required for up to 65 offshore platforms by 2026, and
  • the cost of decommissioning over the next 30 years is predicted to be in the order of $60 billion.

The challenge is not one for engineers and operators alone. Decommissioning presents legal issues that implicate oil and gas companies, investors, contractors, and the government. As with the original construction projects, decommissioning is a minefield for disputes; in particular, disputes in relation to the mechanisms used to mitigate the risks associated with the newly implemented trail liability provisions set out below, and the estimation of decommissioning costs, their impact on the value of assets and who will be responsible for those costs. Arbitration remains the preferred method of dispute resolution for these types of energy projects, particularly due to confidentially and ease of enforcement.

Nor is the challenge one for Australia alone. While the current buoyancy of energy commodity prices is likely to push out some decommissioning work, a wave of decommissioning is expected over the next decade, with a significant number of assets around the world reaching the end of their economic life phase.

 

Context

At the macro level, the timing of decommissioning of oil and gas assets depends in large part on government policy as well as the market for energy commodities.

Even as Covid-19 disruption eases globally (with the notable exception of China), the war in Ukraine and redoubled sanctions against Russia, compounded by Russia itself cutting supply of natural gas to a number of European countries, threaten to push prices even higher.

While disruptions in the short to medium term look set to continue, the transition towards renewable energy in the mid to longer term continues to press forward. In Australia, the newly elected Labour-led government has committed to reducing emissions by 43% by 2030 (a more ambitious target than the previous Government’s goal of 26-28%).

Though, for example, hydrocarbon prices are likely to sustain their current highs for the foreseeable future, prolonging decommissioning for some oil and gas fields in the short to medium term, the long-term outlook in the coming years and decades remains unchanged.

 

Decommissioning in Australia

Decommissioning of oil and gas assets is not a simple “pack-up” exercise. It involves a range of activities necessary to safely dispose of the various installations of piping and platforms, and restoration of the site to an “agreed” status (as determined by contract, typically a joint operating agreement, and any legislation). However, decommissioning is more than a technical engineering challenge. Prior to any work being undertaken, pre-abandonment surveys will be carried out, and a decommissioning plan must be prepared for regulatory approval.

Though decommissioning is gathering pace globally, Australia faces a particular challenge in this regard. A Wood Mackenzie study on the subject noted:

“Unlike in the Gulf of Mexico and the North Sea, decommissioning is still in its infancy in Australia, and all involved (i.e., regulators, operators, and the service sector) need to be prepared for the coming wave as assets approach the end of their producing lives.”

 

The legislative landscape

Offshore oil and gas decommissioning is currently regulated by the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth).

Until recently, the registered titleholder was responsible for decommissioning, with no financial assurance required to ensure liquidity to cover associated costs. Things changed following an incident in 2019, when the Northern Oil and Gas Australia group of companies went into liquidation, leaving the Australian government responsible for extensive decommissioning costs in the Timor Sea. A review was established (the Walker Review) to investigate the liquidation, and make recommendations to improve practices, policies and legislation. The key recommendations were adopted in the Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Act 2021 (Cth) (the Act).

One of the key changes introduced by the Act was the “trailing liability” provisions, whereby earlier titleholders would not be absolved of responsibility for remediation and decommissioning. The National Offshore Petroleum Safety and Environmental Management Authority has the power to “call back” not just former titleholders but (1) any person that has significantly benefited from the operations, (2) anyone who was in a position to influence the extent of another person’s compliance with their obligations under the Act, or (3) has acted jointly with a titleholder in their operations. The sweeping provision encompasses employees, advisers, financiers and royalty holders.

The provisions, which came into effect on 2 March 2022, are intended to be used as a “last resort”. Residual issues that could involve calling back a former titleholder include where a previously plugged and abandoned well has a leak or impacts arise from a previously decommissioned activity.

Along with the trail liability provisions, other key changes in the Act add yet further transactional and regulatory complexity.

 

Disputes avoidance – navigating the labyrinth

The trailing liability provisions pose a significant risk factor for investors in oil and gas assets, as well as those wishing to divest. As many of the larger companies look to sell-down their Australian portfolios to smaller, later-life-stage operators, these provisions contribute an added layer of complexity to any transaction.

In other countries where trail liability can be imposed by regulators on a wide range of parties (such as the UK), the response has been to implement decommissioning security agreements (DSAs), whereby buyers and sellers, as well as other joint venture parties, contribute funds (in tiered amounts, according to their stake and involvement) into a trust set aside for decommissioning costs.

Disputes may arise in relation to the mechanisms and structures used to mitigate the risks associated with trail liability. For example, disputes can arise between parties to a DSA, in connection with the estimate of sufficient security to cover the costs of decommissioning, and the respective contributions of different parties to the agreement.

DSAs also rest on intrinsic assumptions as to when decommissioning will occur, which is a key input into the expected net cost of decommissioning and how that should be split over time. Disputes can then ensue when oil or gas prices rise or fall, altering the optimal decommissioning date, and thereby thwarting parties’ expectations as to the extent or duration of their contributions. In the UK, the decision in Apache v Esso provided that a former titleholder would not be liable for decommissioning of wells drilled after the titleholder ceased to be the owner of the relevant oil and gas assets.1) Apache UK Investment Limited v Esso Exploration and Production UK Limited [2021] EWHC 1283 (Comm). jQuery('#footnote_plugin_tooltip_41789_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41789_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); By contrast, the regulatory guidance note in Australia acknowledges that the trail liability provisions do not differentiate between property that was:

  • in the title area at the time that person was involved and
  • brought in subsequent to that person’s involvement“.2) Department of Industry, Science, Energy and Resources, Guideline: Trailing liability for decommissioning of offshore petroleum property (2 March 2022), at 3.9, available here. However, in issuing a remedial direction, the regulator will give consideration to whether a person was responsible for a specific installation or well. jQuery('#footnote_plugin_tooltip_41789_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41789_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Disputes can also arise as to the scope of decommissioning required, the execution, and environmental remediation (which is not always straightforward) and interpretation of the relevant legislation.

The potential for disputes increases with the time taken for approval of decommissioning plans and execution of the works, particularly if any delays accrue (for example, because of weather conditions), or the actual scope of required decommissioning changes (for example, if a site or rig deteriorates and becomes more hazardous to work on).

For older agreements, it is not uncommon for the contract not to include precise mechanisms for dealing with abandonment (which may not have been considered or thought out at the time the contract was signed). This can give rise to issues of unexpected liability, where it must be decided who is to bear the cost of regulatory compliance. Parties in this position should be aware of the applicable regulatory framework and what that may require of them and proactively engage with stakeholders and regulators to front foot and minimise their risk.

Offshore oil and gas facilities are often developed by joint ventures that operate under Joint Operating Agreements (JOAs). JOAs typically include a provision for the creation of a decommissioning fund. The trigger date for decommissioning is usually a point at which the net value of the remaining reserves reaches a percentage of the costs. However, estimating the value of both decommissioning and reserves involves assumptions, which are difficult to make during periods of market volatility and can give rise to disputes when the expectations underlying those assumptions are unfulfilled.

Other issues to keep an eye on include:

  • Records for older assets may not provide a complete picture, particularly where the construction was decades ago, and records were not kept or converted to digital. In such instances, the inherent uncertainties involved in decommissioning are exacerbated by incomplete information.
  • Delay issues can also arise where sub-contractors are mobilised to remote locations but are required to wait on standby due to delays. Where various sub-contractors provide mutually dependent services to a tight schedule, one delay can cause cascading issues for successive decommissioning steps.

To avoid disputes escalating, parties should be mindful of maintaining robust contract management practices, including, on the employer’s part, providing clear instructions, and on the contractor’s part, issuing unambiguous notices of claim, and submitting timely and detailed variation requests where a claim is intended.

References[+]

References ↑1 Apache UK Investment Limited v Esso Exploration and Production UK Limited [2021] EWHC 1283 (Comm). ↑2 Department of Industry, Science, Energy and Resources, Guideline: Trailing liability for decommissioning of offshore petroleum property (2 March 2022), at 3.9, available here. However, in issuing a remedial direction, the regulator will give consideration to whether a person was responsible for a specific installation or well. function footnote_expand_reference_container_41789_30() { jQuery('#footnote_references_container_41789_30').show(); jQuery('#footnote_reference_container_collapse_button_41789_30').text('−'); } function footnote_collapse_reference_container_41789_30() { jQuery('#footnote_references_container_41789_30').hide(); jQuery('#footnote_reference_container_collapse_button_41789_30').text('+'); } function footnote_expand_collapse_reference_container_41789_30() { if (jQuery('#footnote_references_container_41789_30').is(':hidden')) { footnote_expand_reference_container_41789_30(); } else { footnote_collapse_reference_container_41789_30(); } } function footnote_moveToReference_41789_30(p_str_TargetID) { footnote_expand_reference_container_41789_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_41789_30(p_str_TargetID) { footnote_expand_reference_container_41789_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Textual, Contextual, Good Faith, or Common Intent: The Need for a Baseline for Evidentiary and Interpretative Standards in International Arbitration

Mon, 2022-06-06 01:00

Generally, the choice of substantive law applicable to a particular contract will affect the outcome of a case.  It is common, however, for the evidentiary and interpretive rules to also have important implications for a case’s outcome.  Arbitral rules leave such matters to a tribunal’s discretion that can be exercised in different ways.  For instance, suppose that two disputes arise under the terms of a form agreement and that parole evidence points to a particular interpretation of the contract. Let us further suppose that one dispute is heard by an arbitrator in a jurisdiction where parole evidence is admissible as a matter of course, and the other dispute is heard in a jurisdiction where such evidence is generally inadmissible.  The outcome of the arbitrations is likely to diverge even though the arbitrators are interpreting the same agreement.  Regrettably, this is not an isolated example of how the choice of evidentiary and/or interpretative rules can affect the outcome of a given dispute.

We argue that greater uniformity in evidentiary and interpretive rules in international arbitrations would ensure that outcomes turn on the choice of substantive law and—unless the parties prefer otherwise—not, for example, on the vicissitudes of how an arbitrator reads a contract.  To that end, we survey the different approaches to interpreting contracts in California, New York, and a few select civil law jurisdictions.  We then propose some potential reforms to evidentiary and interpretative approaches that will reduce subjectivity in outcomes irrespective of the substantive law that the parties have chosen.

 

Textual v. Contextual Debate in Common Law Countries

Contract interpretation in the U.S. is by no means monolithic.  Indeed, there is significant disagreement amongst U.S. states as to the centrality of contractual text when interpreting the parties’ agreement.

Generally speaking, New York courts, and a majority of other jurisdictions in the United States, focus on the “plain meaning“ of the terms within the “four corners” of a contract: the so-called “textual” approach.  The rule in the U.S. is most clearly stated in Greenfield v. Philles Records, in which New York’s highest state court held as follows:

‘The best evidence of what parties to a written agreement intend is what they say in their writing.’ Thus, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms … Extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous …

In practice, New York courts will consider the words of a contract next to each other and in light of the overall document; the query is not of their literal dictionary definitions strictly devoid of other context.  However, if the contract “on its face is reasonably susceptible of only one meaning,” New York courts cannot alter or read other ideas into it.

In California and a handful of other jurisdictions in the United States, courts preliminarily consider all credible evidence of the parties’ intent in addition to the language of the contract under the so-called “contextual” approach.  The California approach is premised on the notion that we have not yet attained an adequate “degree of verbal precision and stability” in our use of language, and what may appear clear to a judge, based on their read of the text, may not be clear among the parties or be their intended meaning at the time of drafting. California state courts maintain that “rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. Such evidence includes testimony as to the ‘circumstances surrounding the making of the agreement … including the object, nature and subject matter of the writing …’ so that the court can ‘place itself in the same situation in which the parties found themselves at the time of contracting.’”

A majority of U.S. jurisdictions follow New York’s textual approach, though the UCC Sales and Restatement (Second) of Contracts recommend the contextualist approach. Importantly for arbitration, a majority of corporate parties to arbitrations have historically preferred textualist jurisdictions, as seen in choice-of-law provisions that still generally favor New York over California.

Although New York and California were chosen for discussion in this blog post as jurisdictions that best epitomize this split within the common law tradition, such debate between textualism and contextualism also exists in other common law jurisdictions such as the United Kingdom (textualist) and New Zealand (contextualist), among others.

 

Good Faith and Common Intent in Civil Law Countries

In contrast to the U.S. and other common law jurisdictions, civil law jurisdictions are more uniform in their interpretive approach.  At the heart of the civil law tradition are the principles of good faith and common intent.  The idea of good faith is both objective—used to enhance fairness and level the playing field in contractual relations—and subjective—a person acts with the belief that what they are doing is right or lawful.  Common intent simply refers to the natural meaning of words, rather than some inferred meaning.  But whereas the common law focuses mainly on objective intent, using a reasonable-person or reasonable-business (trade usage) standard to determine meaning, civil law approaches tend to focus on a subjective inquiry: the provisions of a contract mean what the parties intended them to mean.  In case of doubt, provisions are generally construed against the author of the clause (see Italian Code Art. 1370, French Code Art. 1190).

For instance, under the French Code, “a contract is to be interpreted according to the common intention of the parties rather than by stopping at the literal meaning of its terms” (Art. 1188), but “clear and unambiguous terms are not subject to interpretation as doing so risks their distortion” (Art. 1192).  While on first brush seemingly contradictory, this approach can be understood as essentially encapsulating the common-law divide, albeit with a more subjective flair: if the words are clear and unambiguous, the inquiry stops there; if they are not, the court turns to other factors (which may be described as contextual by a California court), in order to ascertain the parties’ intent.  Put another way, all courts will first look to the natural or plain meaning of the words in a contract, and then, depending on the legal tradition, turn to a consideration of either objective or subjective factors, and ultimately extend or confine their consideration of the underlying context to varying degrees.

 

Soft Law Instruments May Not Always Provide a Clear Answer

Common law and civil law jurisdictions also diverge in how they may respect evidentiary approaches in contract disputes.  On an international level, proponents of the civil law system have recently developed the Rules on the Efficient Conduct of Proceedings in International Arbitration (“Prague Rules”) as a response to what was seen as the common law assumptions underlying the IBA Rules on the Taking of Evidence in International Arbitration.  Both sets of rules and comparative analysis have been the subject of extensive writing (see here, here, here, and here).  While it is true that both sets of rules, which concern the taking of evidence, have certain fundamental differences based largely on the inherent systemic divergences of the adversarial vs. inquisitorial approaches, as concerns the interpretation of evidence both sets of rules are silent.

As a prior blog post (coauthored by one of the present authors) has pointed out, “both sets encourage tribunals to take initiative in identifying relevant factual or legal issues; exclude witness testimony considered irrelevant to the case; … and draw adverse inferences.”  Yet, identification of relevant issues and powers to admit or exclude certain evidence is where the rules leave off: there is very little direction as to which factors to take into account in the weighing of evidence to identify those relevant issues and make an informed decision.  Indeed, the selection of a substantive law may not always suffice for interpretative matters as these are within a tribunal’s discretion.  Article 9 of the IBA Rules, concerning “Admissibility and Assessment of Evidence,” merely states that an arbitral tribunal shall “determine the admissibility, relevance, materiality and weight of evidence” and then sets forth the grounds for exclusion, privilege, and production.  It is silent as to grounds for assessing the weight of evidence.  The Prague Rules do not even contain this type of provision.  The need for a more uniform, objective approach in interpretative practices is thus clear irrespective of the common law or civil law background of the tribunal or arbitrators.

 

Closing the Gap

As this piece has signaled, there is a lacuna in both the common law and civil law approaches to contract interpretation, especially on evidentiary matters that can lead to multiple, competing interpretations between fora—and sometimes even multiple meanings under the ‘one plain meaning rule.’ While a measure of discretion in arbitration is generally unavoidable, at present, practitioners cannot help but feel that there is a randomness to the manner in which a contract is interpreted, and even the outcome of a case, is dependent on the arbitrator and their background, which may suggest a degree of arbitrariness in the system. The development of a soft law to assist the various courts and arbitrators spanning both common law (including the NY and CA approaches) and civil law to apply a contract would reduce arbitrator discretion and increase objectivity.  While Chapter 4 of the UNIDROIT Principles 2016 and the Vienna Convention on the Law of Treaties provide a good foundation regarding the rules for interpreting instruments at the international level, we believe that a lex specialis that provides guidance as to international evidentiary and interpretive guidelines in international disputes is desirable.  This can be done by arbitral institutions themselves or through international bodies, such as UNIDROIT, tasked with developing international norms.  These could be developed in consultations with all stakeholders which we propose to develop in subsequent posts.

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LIDW 2022: States as First-Class Citizens?

Sun, 2022-06-05 01:40

As part of the 2022 London International Disputes Week, 3 Verulam Buildings, Clifford Chance, Kroll, Mayer Brown, QMUL, Three Crowns and White & Case organized a conference on “States as first-class citizens? Special treatment for states in international disputes”. This post covers both panels of the program.

 

Panel One:  Procedural and Substantive Peculiarities of Arbitration Proceedings with a State Party

The stellar panel was composed of Loukas Mistelis (QMUL, Clyde&Co),  Leilah Bruton (Three Crowns), Jessica Gladstone (Clifford Chance), Rachael O’Grady (Mayer Brown), and Vikki Wall (Kroll).

The panel discussed the procedural and substantive peculiarities of arbitration proceedings with a State party. They considered both investor-State and commercial arbitrations.

Loukas Mistelis opened the discussion with a historical observation. While the 1980s and 1990s saw the rise of non-state actors on the global scene, in the last two decades, States are reassessing and recalibrating their sovereign roles in international economic and investment law. Despite the focus on sovereignty, States themselves have become more complex, expanding their range of activities, including emerging roles in commercial transactions and participating in sovereign wealth funds with admirable investment portfolios. Prof Mistelis observed that States stand generally at the receiving end of investment arbitration, however, in commercial matters they may (and increasingly do) appear as the claimant. Does being a State party to an arbitration proceeding change the procedural dynamics? Does being a State Party to an arbitration proceeding change the behaviour of the tribunal? In other words, are States dealt with as first-class citizens in international arbitration?

To Jessica Gladstone (Clifford Chance), several phenomena come into play when a State is a party to an arbitration:

  1. Even the decision to pursue or defend a claim has its own complexities. Considerations may include “opening the floodgates”, maintaining the confidentiality of elements under dispute, and perhaps preferring the political cover of a judicial order over a political decision when it comes to explaining an outcome to a domestic audience.
  2. Diplomatic considerations may also drive a State’s decision on how to deal with a dispute. Sometimes, a formal dispute process may be preferred to separate out and insulate the wider diplomatic relationship from the dispute.
  3. The State may also need to manage particular public relationship implications with both a domestic and international audience.

In terms of evidence, States often present tribunals with the challenge of dealing with refusal to disclose  government documentation that is classified as secret. In such cases, tribunals must be persuaded of the genuine purpose behind an application to redact or withhold a document.  The IBA Rules on the Taking of Evidence in International Arbitration support this with a specific provision enabling the exclusion of evidence where there are grounds of special political or institutional sensitivity that the Tribunal has determined to be compelling (Art 9.2(f)). Ultimately, the arbitral tribunal must be sensitive to the challenges posed by evidentiary issues in cases involving states, and determine the relevance, materiality and the appropriate weight to be accorded to the evidence in all the circumstances.

Procedural issues may also arise. In general, States may take longer to organize themselves internally, consulting with a wide range of stakeholders from across the government before putting forward their legal or factual case. Similarly, jurisdictional objections arise more frequently in arbitrations with a State party, as the consent to arbitrate of a sovereign is often very specifically drawn. Finally, Jessica Gladstone argued that the potential concurrence of domestic and international proceedings has to be taken into account when arbitrating with a State party. In environmental cases, for instance, domestic proceedings may be preceding or parallel to an investor-state dispute. Questions may arise as to the relevance of and interaction between the parallel proceedings.

Reacting to the comment on public relations, Prof Mistelis recalled that the mere existence of disputes may affect the credit rating of the State. He further asked the panel whether it was true that representing a State these days had better-winning chances.

According to Leilah Bruton, tribunals ensure a fair level-playing field, and State representation benefits from advantages in the procedural phase. The most important privilege is timing. Tribunals are usually sympathetic to the State’s specific circumstances. States may appoint or instruct specialist counsel very late, sometimes when the proceedings have already begun. This may lead to a disruption of the procedural timetable. Issues of instructions may arise too. When a State is a party, an instructing body is constituted within the government to instruct the outside counsel. That body may have a number of stakeholders, from the ministry of justice, ministry of energy, of international affairs, up to the agency that has substantive links with the dispute at stake. This may create extra layers of time in consulting and seeking instructions. The State’s potential inconsistency is another issue The State may change its legal strategy throughout an arbitral proceeding, depending on a counsel adjustment, a policy shift or government change. Finally, State files can be kept by different state authorities. However, in Ms. Bruton’s experience,  tribunals are accommodating and fair.

Bouncing off these potential disruptions, Prof Mistelis asked whether the panellist perceives a level of asymmetry in the arbitral decisions. Whether the equality of arms is maintained or whether they see an asymmetry of weapons. More generally, with the growing attention to the right to regulate, public interest challenges, such as climate change or the redrafting of new-generation BITs, is there a disadvantage in representing a non-state party?

To Ms. Bruton, access to evidence can create an inequality of arms. In particular, documents linked with the exercise of the State’s police powers are difficult to produce. From her experience, tribunals take initiatives to ensure that fairness is ensured. For instance, they may appoint a third-party reviewer to maintain a level playing field. In her view, tribunals are not unfair on the substance; they may be understanding of delays and timing issues that create a slight imbalance. To Rachael O’Grady (Mayer Brown), tribunals generally ensure a standard playing field level. In this sense, she noted that the new ICSID rules allow greater equality of arms, too.

The panel then turned to experts’ appointments. In her capacity as expert in arbitral proceedings, Vikki Wall describes an asymmetry of information when appointed as accountant for the state party. In particular, access to financial information may be limited or inexistent. Often, her first contact with the State is through a specifically appointed counsel. She pointed out that the quantum of damages was a very important issue for claimants, but often left to the last day of a hearing, when asked whether tribunals pay enough attention to expert witnesses on accounting. She also noted that one way of assisting tribunals with engaging with expert evidence is for arbitral tribunals to appoint experts themselves, although seen only 11 times in 130 recent BIT cases where damages were awarded. Further, Prof Mistelis and Ms Wall remarked that a lack of diversity currently existed in the appointment of expert witnesses, but hoped to see improvement.

Another issue addressed was the conflict of state representation when two competing governments claim legitimacy or control over a specific territory – such as in Venezuela or Yemen.

In Ms Bruton’s view, an issue of standing might arise when competing political factions claim to represent the same State. In general, arbitral tribunals have treated this as a procedural issue – they usually maintain the status quo and place the burden of proof on the authority seeking to change the party to the proceeding. For instance, in the case of Yemen, two competing governments coexist. One is internationally recognised; the other is not. One minister of legal affairs intervened in an UNCITRAL case to claim that it had authority, and the tribunal stayed the proceedings. Usually, tribunals afford greater weight to the territorial control in relation to the claim rather than the international recognition of the party to the proceedings. In any event, this raises significant issues that have yet fully known implications.

Last, Rachael O’Grady (Mayer Brown) looked at how in investment disputes, have procedural shields and a sword with counterclaims.

Counterclaims can be defined as positive claims by the State seeking relief from the foreign investor. Counterclaims seem counterintuitive in investment arbitrations since bilateral investment agreements (BITs) are meant to primarily protect investors from State’s measures. Nevertheless, counterclaims are possible under article 46 of the ICSID Convention, which states the following:

“Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.”

Rachael O’Grady elaborated on the three conditions set out by the article:

  1. Both parties must have agreed to allow counterclaims. This is considered an issue of consent. Despite Reisman’s opinion, arbitral tribunals generally have determined the consent by an agreement outside the ICSID convention. Tribunals infer consent from the treaty language underlying the dispute at hand. In particular, they may look for the fact that the treaty covers “all disputes concerning an investment”.
  2. The counterclaim must “arise out of the subject of the dispute”. In other words, the counterclaim must arise out of the main claim. In Saluka v Czech Republic, the tribunal agreed that a counterclaim could be heard but decided that it was not connected sufficiently to the subject of the dispute.
  3. The counterclaim must be within the “within the jurisdiction of the Centre”, meaning it must fall within article 25 of the ICSID convention. In practice, the State and eventually the tribunal must establish a positive obligation on the investor, not the State. In Urbaser v Argentina, the tribunal found that the BIT was broad enough to allow counterclaims. However, it could not pinpoint an international law obligation on the part of the investor. While there is not a general rule that international law obligations only apply to States, in this case, the tribunal could not find an applicable law to the investor’s conduct.

Counterclaims raise interesting questions. What kind of positive obligation may come to be placed on investors? Will the new wave of investment treaties refer to positive international obligations on the investor? Will these obligations be substantial enough to find liability? Other questions of procedural economy and equality of arms may arise in case of parallel proceedings in domestic courts too. Finally, could counterclaims eventually defeat the original purpose of BITs?

 

Panel Two: Whether States have Preferential Treatment before the English Courts in Arbitration-related Cases

The second brilliant panel was composed of  David Goldberg – Moderator, White & Case), Mark Wassouf (3 Verulam Buildings), Zahra Al-Rikabi (Brick Court Chambers), and Cameron Miles (3 Verulam Buildings). This panel revolved around the question of whether States have preferential treatment before the English courts in arbitration-related cases. The panel took opposing views in answering this question, thereby creating an engaging discussion.

Mark Wassouf argued that States do not receive any special treatment before English courts and, in consequence, they do not have a privileged standing. In fact, it was said that States are generally treated as regular commercial parties.

Under English law, the only statutory advantage that States have is the State Immunity Act. Although it gives States immunity from the court’s adjudicative and enforcement jurisdiction, commercial judges in England try to avoid granting the State special treatment in arbitration-related applications. Admittedly, this trend can be seen in the General Dynamics v Libya saga, in which the Court of Appeal found a way around the statutory requirement set forth in Section 12 of the State Immunity Act. However, this judgment was later overturned by the Supreme Court.

Another example of this stance is the case Micula v Romania. Here, the Supreme Court decided whether enforcement proceedings against Romania could continue, even if such enforcement implied that the State would breach its international obligations under EU law. The Supreme Court analysed the issue without paying deference to any of Romania’s international obligations. In short, it was treated like any other commercial party would have been treated. The panellist concluded that counsels representing States before English courts are better off grounding their “arguments in ordinary commercial and legal logic”.

Conversely, Zahra Al-Rikabi considered that States do have, as a matter of fact, some advantages under the State Immunity Act. For instance, unlike commercial parties, States are not precluded from raising objections to the arbitral tribunal’s jurisdiction that were not disputed before. As the court in PAO Tatneft v Ukraine held, there is no foreclosure of the type of arguments that the State may raise as to the applicability of the State Immunity Act, regardless of what might have occurred before the arbitral tribunal.

In general, the panellist discussed that there are several obstacles when claimants face proceedings involving a State. Parties need to tackle this issue both from the adjudicative and enforcement immunity perspective. In particular, claimants must be able to address the court’s jurisdiction and prove why the State cannot benefit from the immunity as established in the State Immunity Act.

Finally, Cameron Miles offered a more pragmatical approach to the treatment of States in English courts. It was discussed that the State Immunity Act is not only driven by customary international law. In fact, considerations of comity are always relevant. Section 15 of the act supports such an argument. For that reason, where the case deals with issues of State immunity, depending on the judge and its background, some outcomes might be preferred over others.

Touching upon the previously mentioned General Dynamics v Libya cases, the panellist suggested that the decisions adopted by the Court of Appeal and the Supreme Court can be explained by taking into account the judges’ backgrounds. Interestingly, it was argued that the Court of Appeal’s judgement gave more weight to the commercial arguments of the case because the panel was composed of two judges that had been members of the Commercial Court and the Chancery Division, respectively. On the other hand, the Supreme Court’s decision to overturn the appeal was taken by a majority composed of former academics, one of them specialising in public international law. Arguably, they were more inclined to give the State special treatment. The panellist concluded that both rulings could be justifiable. The differences between them can be better described as conflicting approaches to the same issue.

The key takeaway of the session is that English courts take State immunity seriously but maintain a fair level-playing field between the parties. Even though the State Immunity Act does raise additional hurdles for claimants, counsel acting for States should not only rely upon State immunity arguments.

 

Conclusion

The first panel showed the many procedural and substantive intricacies that arise when a State is party to an arbitral proceeding – whether commercial or Investor-State. Three main topics are of importance and may raise concerns of fairness: the privileges over the production of (expert) evidence, the issue of standing before arbitral tribunals and the increase of counterclaims.  Bearing in mind that a State must manage public and diplomatic relationships when taking part in arbitration, the panel opined that arbitral tribunals have and should continue to offer a balanced level-playing field to all parties.

The second panel demonstrated that cases involving States before domestic courts can be tricky. States enjoy a differential treatment before courts that is established in law. States’ sovereignty and immunity is to be taken seriously as it poses specific challenges to the jurisdiction and access to evidence. However, to the panel, immunities and privileges must be assessed cautiously, and should be grounded in well-reasoned commercial and legal logic to win over the opinion of domestic courts.

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New ICSID Arbitration Rules: A Further Step in The Regulation of Third-Party Funding

Fri, 2022-06-03 01:06

On March 21, 2022, the Member States of the International Centre for Settlement of Investment Disputes (“ICSID”) approved a comprehensive reform of its rules and regulations, including the rules of procedure for ICSID arbitration proceedings (“New ICSID Rules”). Drafted over a five-year consultation process and six working papers, this profound amendment aims to “modernize, simplify, and streamline the rules” and will enter into force on July 1, 2022. The highlights of the recently approved amendments have recently been covered on the Blog (here).

One of the overarching aims of the New ICSID Rules is to increase transparency in various aspects of ICSID proceedings, thereby aligning the ICSID Rules with a recognizable trend among arbitration rules worldwide. This post focusses on the approach taken under the New ICSID Rules to third-party funding (“TPF”) disclosures, analyzing the scope of the duty to disclose in comparison with other institutional rules, and the underlying policy concerns.

 

TPF and the Duty to Disclose

The TPF phenomenon has been at the center of extensive debates recently. It suffices to note that TPF is a form of non-recourse financing, in which a funder – typically a specialized company with no direct involvement in a dispute – undertakes to bear the costs of a party to an arbitration. In the event that the funded party prevails, the third-party funder receives a profit, typically consisting of a percentage of the award or a multiple of the funds provided, whichever is higher. However, TPF agreements can materialize in different forms, including contingency fee agreements with a party’s legal counsel.

At a first glance, one might think that TPF is a tool primarily directed towards impecunious parties that would otherwise not be able to afford arbitration. However, TPF has also become a viable instrument for financially stable entities that seek funding to facilitate smoother cash-flow management.

The rise of these new actors in arbitration proceedings has provoked various concerns, mainly related to possible conflicts of interests that may arise out of relationships between funders and arbitrators, counsels or parties.

This has spurred some arbitral institutions to develop ways to shed light on the existence of funding agreements, including by granting tribunals the power to order disclosure of TPF arrangements, or by imposing a generalized duty on parties to disclose details as to the existence and nature of their funding agreements. The very first institutional rules addressing TPF were the SIAC and CIETAC investment arbitration rules in 2017 (Articles 24(l) and 27, respectively), followed by the HKIAC arbitration rules in 2018 (Article 44), the BAC investment arbitration rules in 2019 (Article 39), the CAM arbitration rules in 2020 (Article 43), the ICC arbitration rules and the VIAC investment arbitration rules in 2021 (Article 11(7) and Article 13a, respectively). The amendments in the New ICSID Rules build, at least in part, on these precedents.

 

What to Disclose?

The principal divergence that arises from the above institutional rules is the extent to which such disclosure is required; that is, what kind of agreements should be disclosed; and to what extent should those agreements be disclosed?

The new Rule 14(1) of the amended ICSID Arbitration Rules provides:

A party shall file a written notice disclosing the name and address of any non-party from which the party, directly or indirectly, has received funds for the pursuit or defense of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding (“third-party funding”). If the non-party providing funding is a juridical person, the notice shall include the names of the persons and entities that own and control that juridical person.

At the beginning of the arbitration or “immediately” after concluding the funding arrangement, the party is to file such notice (and any updates) with the Secretary-General, who in turn is to transmit it to the parties and any arbitrator proposed for appointment or appointed in the proceeding (Rules 14(2)–(3)).

Rule 14(1) presents a number of noteworthy features not seen elsewhere.

First, while certain rules do not define TPF (e.g., the HKIAC and CAM rules), Rule 14 sets forth a broad definition of TPF, reflecting the wide variety of TPF agreements employed in practice. By doing so, it aims at preventing possible issues of interpretation on what qualifies as TPF and what does not.

Second, Rule 14(1) includes in the TPF definition arrangements with party representatives, such as contingency fee agreements with legal counsel, thereby further extending the scope of the duty to disclose. This is in contrast with, for instance, the VIAC investment arbitration rules (Article 6), in which the definition encompasses only agreements with persons who are not a party nor “party representatives”.

Third, the last sentence of Rule 14(1) requires a party to reveal the names of the entity or individuals ultimately controlling the funder (if the funder is a juridical person). This was introduced in the sixth working paper in order to ensure additional “transparency regarding the identity of the funder” and to “allow the arbitrators to accurately identify any conflict of interest” involving the “ultimate beneficial owner” of the funding entity. This provision, invoked by a number of States and by the European Union, had been initially rejected by the Secretariat (in the fifth working paper) because, among other things, this language risked creating confusion among the interpreters and, in any event, did not respond to concerns actually encountered in practice (accordingly, no other sets of rules feature similar provisions). Criticisms have been risen also by commentators, including because Rule 14(1) oddly requires disclosure of more information from the funder than from the funded party itself, which is not required to reveal its shareholders. On the other hand, one can see that, in circumstances where the funder is a shell company, limiting the duty to disclose details only to the funder might defeat the purpose of disclosure.

Lastly, while many sets of rules (e.g., the HKIAC, ICC and VIAC rules) generically refer to the disclosure of the “identity” of the funder, new Rule 14 specifies that the written notice shall include its “name and address” to avoid any confusions.

 

The Funding Agreement Dilemma

Under the new Rule 14(4): “The Tribunal may order disclosure of further information regarding the funding agreement and the non-party providing funding …”. This open wording appears to be a halfway solution to the heated discussion surrounding the duty to disclose the details of any TPF agreement.

The policy considerations upon which the duty to disclose is premised include the assumption that a funded party is likely to be financially distressed and might thus be unable to comply with an adverse costs award in the event of an unfavourable outcome in the arbitration. All the more so provided that the funder might not have any contractual obligation to cover adverse costs and, in any event, might benefit from termination clauses or other contractual tools to escape responsibility deriving from such an award (the so-called “arbitral hit and run”).

Therefore, disclosure of the funding agreement to allow the assessment of the extent of the funder’s rights and obligations might be sensible to protect the non-funded party, especially when it comes to deciding on an application for security for costs1)Coherently, the new Rule 53 requires tribunals to consider the involvement of a funder when deciding an application for security for costs jQuery('#footnote_plugin_tooltip_41785_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41785_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });.

This appears to be the reason why, for instance, the 2021 UNCITRAL proposals for provisions on TPF in ISDS suggest the systematic disclosure, among other things, of “the funding agreement and the terms thereof”. Arbitral institutions have so far adopted less-onerous approaches to TPF than those advanced by the UNCITRAL2)The UNCITRAL proposals seem overall overly sceptical towards TPF. For instance, among the proposed approaches, there is the generalized prohibition of TPF aimed inter alia at eliminating the risk of an increased number of frivolous claims. However, this issue is at least overstated for the obvious reason that funders have zero interest in funding baseless claims jQuery('#footnote_plugin_tooltip_41785_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41785_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });. For instance, Article 39(2)(d) of the 2019 BAC investment arbitration rules requires parties only to reveal “whether or not the third-party funder has committed to cover adverse costs liability”, as opposed to the entire agreement. Other institutions, such as the ICC and the HKIAC, do not grant tribunals any powers concerning any funding agreement.

Avoiding a general obligation to disclose the funding agreement seems entirely reasonable, primarily because nowadays it is far from certain that a funded party is impecunious since, as mentioned above, TPF is increasingly becoming a cash-flow management tool used also by stable entities. Consequently, always requiring the parties to reveal the confidential and commercially sensible information contained in funding agreements does not appear justified.

In light of the above, the ICSID’s decision to give tribunals a discretional power to require additional information about the funding agreement only when and to the extent necessary (e.g., in circumstances in which the funded party strongly appears to be financially distressed and an application for security for costs is brought) appears appropriate. Nonetheless, how these issues will be addressed will only be revealed through their use in practice and it is easy to foresee the opening of a new battleground around whether, and to what extent, such power ought to be exercized.

 

Conclusion

The new provisions of the ICSID Rules dedicated to TPF can be favorably welcomed, as they address the critical point of conflict of interests with more precision than other sets of rules, while maintaining a balanced and modern approach to the delicate issue of disclosure of the funding agreement.

References[+]

References ↑1 Coherently, the new Rule 53 requires tribunals to consider the involvement of a funder when deciding an application for security for costs ↑2 The UNCITRAL proposals seem overall overly sceptical towards TPF. For instance, among the proposed approaches, there is the generalized prohibition of TPF aimed inter alia at eliminating the risk of an increased number of frivolous claims. However, this issue is at least overstated for the obvious reason that funders have zero interest in funding baseless claims function footnote_expand_reference_container_41785_30() { jQuery('#footnote_references_container_41785_30').show(); jQuery('#footnote_reference_container_collapse_button_41785_30').text('−'); } function footnote_collapse_reference_container_41785_30() { jQuery('#footnote_references_container_41785_30').hide(); jQuery('#footnote_reference_container_collapse_button_41785_30').text('+'); } function footnote_expand_collapse_reference_container_41785_30() { if (jQuery('#footnote_references_container_41785_30').is(':hidden')) { footnote_expand_reference_container_41785_30(); } else { footnote_collapse_reference_container_41785_30(); } } function footnote_moveToReference_41785_30(p_str_TargetID) { footnote_expand_reference_container_41785_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_41785_30(p_str_TargetID) { footnote_expand_reference_container_41785_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Blip on the Radar: An Anomalous Refusal to Enforce on Public Policy Grounds in Korea or a Sign of More to Come?

Thu, 2022-06-02 01:57

Under Article V(2)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (the New York Convention, “NYC”), a court may refuse to recognize or enforce a foreign award if “recognition or enforcement of the award is contrary to the public policy of that country.”

The NYC does not define the term “public policy” and instead permits each state to interpret the rule. Nonetheless, similar to many other jurisdictions (see, e.g., here and here), the courts in the Republic of Korea have traditionally adopted a narrow interpretation of Article V(2)(b), establishing a high threshold for a given circumstance to be deemed contrary to public policy.

In November and December of 2018, the Supreme Court of Korea issued back-to-back decisions in which the public policy argument failed in the first but prevailed in the second. The latter case was notable because it was a rare publicly available Supreme Court judgment to (partially) deny enforcement of a foreign award on grounds of Article V(2)(b). Although these decisions were rendered a few years ago, they may have slipped “under the radar” to some extent. In light of the relative dearth of publicly available case law on public policy challenges in Korean courts, these ones are worth revisiting.

 

Overview of Korean Arbitration Act and “Public Policy”

Korea’s Arbitration Act is based on the UNCITRAL Model Law. However, the Act does not adopt Chapter VIII of the Model Law concerning enforcement and recognition of foreign awards. Instead, Article 39 of the Act states that “recognition and enforcement of foreign arbitral awards subject to the NYC shall be governed by the NYC.”

Consequently, there is no direct statutory guidance on what constitutes “public policy” in the Korean legal regime. There is a comparable legal term “good customs and other social order” (“good customs”) that appears in Article 217(1)(3) of the Civil Procedure Act, Article 10 of the Act on Private International Law, and Article 103 of the Civil Act. The prevailing view is that “good customs” in the meaning of the Civil Procedure Act is most comparable to the “public policy,” since Article 217 governs the enforcement of foreign court judgments.

 

The Norm: Rejection of the Public Policy Argument

In 2016Da18753, decided in November 2018, the Supreme Court affirmed the decision of the Seoul High Court to grant enforcement of a foreign award despite its inconsistencies with domestic law.

The award in dispute was rendered by a tribunal seated in The Netherlands which ordered a South Korean company, Shinhan Apex, to transfer two of its patents to a Dutch company, Euro-Apex B.V.

Importantly, the tribunal ordered an “indirect compulsory performance” (i.e., a monetary enforcement measure) if Shinhan Apex failed to transfer the patents. On its face, this was contrary to Korean law because indirect compulsory performance is not permitted for transfer of patents, according to the Civil Execution Act.

Nonetheless, the Supreme Court held that the award does not contravene Korea’s public order to the extent that enforcement must be denied. It reasoned, inter alia, that indirect compulsory performance does not amount to a major restriction on the freedom of choice, because it merely applies psychological pressure to induce voluntary performance.

This pro-arbitration approach conforms with previous Supreme Court decisions. Starting from 93Da53054 and reiterated in several other cases, the Supreme Court repeatedly noted that “the fact that a foreign law applied to an award contravenes the mandatory provisions under the Korean law does not necessarily become grounds for non-recognition.” Further, in 2001Da20134, the Supreme Court held that the stability of the international trade order must be considered together with the domestic circumstances. This position, in effect, restricts the scope of the denial of enforcement.

 

The Exception: Acceptance of the Public Policy Argument but in Unusual Circumstances that Only Arose After the Award Was Rendered

However, in December 2018, the Supreme Court accepted the public policy argument in another case, 2016Da49931. LSF-KDIC Investment Company Ltd. (“LSF-KDIC”), a company jointly established by Korea Resolution & Collection Co., Ltd. (“KR&C”), requested that KR&C be held liable for 50% of the additional expenses incurred as a result of the sale of real estate, which included corporate taxes of KRW 23.7 billion. An ICC tribunal sided with the LSF-KDIC, which then sought enforcement in Korean courts.

During the enforcement stage, LSF-KDIC prevailed in a separate lawsuit against the local tax authorities. The corporate taxes were slashed to just KRW 370 million. Based on this decision, KR&C argued that, in light of the public policy exception, the award should not be enforced because, under Article 44 of the Civil Execution Act, a debtor may file a “lawsuit of demurrer” to suspend or block the compulsory execution of a binding decision.

Although KR&C’s public policy argument was unsuccessful in the lower courts, the Supreme Court sided with KR&C and remanded the case to the Seoul High Court.

The Supreme Court determined enforcement would constitute a contravention of “public order and good morals,” given the following circumstances:

  1. The tax was significantly reduced.
  2. LSF-KDIC was already dissolved.
  3. Awards are not subject to appeal, so such changes must be taken into consideration during the enforcement stage.

The Court noted that there were circumstances amounting to Article 451(1)(8) of the Civil Procedure Act – the alteration of an administrative disposition (i.e., taxation) by a different judgment or administrative disposition – which is grounds for a retrial.

However, since retrial is not permitted in international arbitration, the Court reasoned that KR&C must be able to raise such an objection during the enforcement stage as a last resort. In this case, it was clearly contrary to the “good morals” of Korea for KR&C to accept the enforcement of the award.

One notable contrast with 2016Da18753 (i.e., the case decided in November 2018) was that unlike in that case, where the Court found the level of contravention of Korea’s public order and good customs to be minor, here, the Court found the magnitude of contravention to be highly significant. This seems to indicate that the Court takes into account the level of practical impact on the parties.

Subsequently, in 2018Na10878, the Seoul High Court partially denied the enforcement of the award by deducting the exempted tax amount. It could be argued that denial of enforcement in this context is akin to correction of an arbitral award based on new circumstances that arose after the rendering of the award, and one might observe that the main reason why a court is forced to make the correction is that the tribunal has become functus officio.

At the same time, the High Court stressed the importance of maintaining a high threshold for the public policy argument:

  1. Arbitration is a form of alternative dispute resolution based on the parties’ consent.
  2. Parties usually have equal standing in arbitration.
  3. If domestic courts around the world attempt to prioritize local interests and deny enforcement of awards in the name of public policy, international trade will become unstable, and the arbitration will lose its effectiveness.
  4. NYC encourages widespread recognition and enforcement of awards.

As such, the High Court reasoned that the “public policy” under NYC is an “international public order.” Accordingly, denial of enforcement requires a violation of the fundamental principles of the domestic legal system which may not be allowed despite the international character of the dispute.

This case illustrates that even when public policy arguments are partially successful, Korean courts are cautious about denying enforcement of a foreign award.

 

Conclusion

Following the Supreme Court’s reasoning in 2016Da49931, there is a possibility that other grounds for retrial under Article 451(1) of the Civil Procedure Act may provide a basis for a demurrer, and consequently, denial of enforcement according to Korean “public policy.”

The following grounds for a retrial under Article 451(1) appear particularly relevant in the context of a potential public policy challenge of a foreign award:

  • “When a party has been led to make a confession, or obstructed in submitting the method of offence and defense to affect the judgment, due to the criminally punishable acts of another person” (Article 451(1)(5));
  • “When a document or any other article used as evidence for the judgment has been forged or fraudulently altered” (Article 451(1)(6));
  • “When the false statements by a witness, an expert witness or an interpreter, or those by a sworn party or legal representative have been adopted as evidence for the judgment” (Article 451(1)(7));
  • “When a judgment is contrary to the final and conclusive judgment which has been previously declared” (Article 451(1)(10));

It is yet to be seen if the “public policy” argument will prevail under grounds for retrial other than Article 451(1)(8). Given the paucity of Supreme Court cases concerning “public policy,” future judgments are necessary to settle this issue.

Nonetheless, those who seek to rely on the “public policy” argument will face an uphill battle. Korean courts maintain a pro-arbitration approach by presenting a narrow definition of “public policy,” looking beyond the domestic legal system and heeding the international trade order.

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