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The Contents of b-Arbitra, Issue 2018-1

Tue, 2018-09-25 17:33

Annet van Hooft and Jean-François Tossens

We are pleased to present you with this new issue of b-Arbitra, which is once more filled with thought provoking articles and new developments. This issue is published as part of our cooperation with Wolters Kluwer. As announced, our journal is now also accessible in digital form on Jura in Belgium and in the Kluwer Law Arbitration database.

In this issue you will find Marie Stoyanov, Werner Eyskens, Valentin Bourgeois and Michaël Fernandez-Bertier’s in-depth review of the impact that the presence, or absence, of criminal proceedings or complaints may have on the treatment of corruption allegations in investor-state arbitrations. They also look at how the arbitral proceedings and criminal proceedings may interfere with one another.

We then have Michael Neumeier and Miroslav Georgiev’s article exploring whether mass claims in arbitration in Europe, and in particular in Germany, could one day become a reality. They look into existing impediments and options to give form to such proceedings, against the background of U.S. and Australian law.

With respect to recent case law, we are very pleased to offer you two annotations by Alexander Hansebout regarding two Yukos decisions. The first annotation (concerning Civ. Bruxelles, 9 December 2016, published in b-Arbitra 2017/2) focusses on the existing confusion regarding the exequatur procedure that applies in Belgium to awards rendered in the Netherlands and provides an overview of the various existing exequatur regimes in Belgium. The second annotation concerns the seizure of assets (Civ. Bruxelles, 8 June 2017, published in b-Arbitra 2017/2), the intervention of the Belgian state and the relevance of current status of the title that the seizures were based on.

We then include the CJEU’s decision in the Achmea matter and AG Wathelet’s opinion. A comment on this opinion and the Court’s decision will be published in a future issue of our journal.

We also publish, without annotation, two decisions of the Court of First Instance of Brussels regarding third party opposition to arbitral awards. They are related to the decision of the Constitutional Court of 16 February 2017 No. 21/2017 (published with annotation by Olivier Caprasse and Maxime Malherbe in b-Arbitra 2017/2). The first judgment Civ. Bruxelles (Fr.), of 29 January 2016 concerns the proceeding up to the posing of the preliminary question to the Constitutional Court. The second judgment Civ. Bruxelles (Fr.), of 12 April 2018 concerns the Court’s decision to annul two ICC awards on the basis of third party opposition, after having obtained a confirmative answer from the Belgian Constitutional Court that the Belgian Code of Civil Procedure’s limitation of the availability of third party opposition to judgments from state courts only, violated the Constitution.

We have several book reviews, notably of Philippe De Bournonville’s (posthumous) title “L’arbitrage, tiré a part du Répertoire notarial” by Caroline Verbruggen, and of Sigvard Jarvin and Corinne Nguyen’s “Compendium of International Commercial Arbitration Forms,” by Herman Verbist. We conclude with a book review by Jean François Tossens of Jacques Herbot’s “ Contracts in the People’s Republic of China.”

We hope you enjoy this issue and always welcome further views, exchanges and suggestions from our readers.

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The Material Scope of the 1958 New York Convention: Russian Courts Make It Broader

Tue, 2018-09-25 03:00

Mikhail Samoylov

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) has its own scope – it states that it “shall apply to the recognition and enforcement of arbitral awards”. Only decisions made by arbitrators are to be considered “awards” within the meaning of the New York Convention1)UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016) para 22. jQuery("#footnote_plugin_tooltip_2360_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2360_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, rather than decisions handed down by judges. As one prominent academic notes: “[t]here is no universal international treaty governing the recognition and enforcement of foreign court judgments.”2)Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Fifth Edition) (Kluwer Law International 2016) p. 129 jQuery("#footnote_plugin_tooltip_2360_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2360_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Despite that, Russian courts are invoking the New York Convention in the exequatur proceedings of foreign court judgements.

This blog post will first briefly reveal the results from the research conducted by the author on the issue (I). The next part of this contribution then discusses some possible reasons why Russian courts apply the New York Convention erroneously (II), and some consequences of such practices (III). The author summarizes conclusions in a final part (IV).

I. A Case Study of Erroneous Practice

Research carried out by the author shows that in at least 81 cases, which were considered in recent years, Russian courts invoked the New York Convention in the exequatur proceedings of foreign court judgements.

The table below reveals (i) the countries where foreign court judgements were rendered (the nationality of a foreign court judgement); and (ii) the number of exequatur proceedings in Russian courts in which the New York Convention was applied to such judgements:

N The nationality of a foreign court judgement The number of exequatur proceedings in Russia 1. Belarus 6 2. Cyprus 3 3. China (Hong Kong) 1 4. Finland 2 5. France 2 6. Georgia 1 7. Italy 2 8. Japan 2 9. Kazakhstan 29 10. Kyrgyzstan 2 11. Lithuania 4 12. Moldova 4 13. Mongolia 1 14. Netherlands 1 15. Poland 1 16. Ukraine 17 17. United Kingdom of Great Britain and Northern 2

Moreover, Russian courts apply the New York Convention even in cases where a foreign judgement was rendered in a State (a territory) that is not a party to the New York Convention. For instance, in case No А41-55167/16, the New York Convention was invoked for the recognition and enforcement of the Nampkhosky court on sea matters of the Democratic People’s Republic of Korea in Russia.

II. Prerequisites for Erroneous Practice

There might be several possible explanations for such erroneous practice. First, there is a dual meaning of the word “arbitrage” in the Russian language. The word “arbitrazh” in Russian comes from “arbitrage” in French. While in French, “arbitrage” is an alternative method of dispute settlement (“[r]èglement d’un différend ou sentence arbitrale rendu par une ou plusieurs personnes, auxquelles les parties ont décidé, d’un commun accord, de s’en remettre.” 3)Le Nouveau Petit Robert. Dictionnaire alphabétique et analogique de la langue française ; texte remanié et amplifié sous la direction de Josette Rey-Debove et Alain Rey (Dictionnaires Le Robert, Paris 2009), p. 129 jQuery("#footnote_plugin_tooltip_2360_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2360_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });), in the terms of Russian law and the language, the word has a dual meaning, and it means :

(i) dispute resolution by a state court – an arbitrazh court;

(ii) dispute resolution by arbitral tribunals.

This dual meaning confuses Russian courts and foreign courts. For example, a Sweden court in the exequatur proceedings, confused by a translation of “an arbitrazh court” from Russian to Swedish, applied Sections 54-55 of the Swedish Arbitration Act (which correspond to Article V of the New York Convention) and declared the ruling of a Russian arbitrazh court enforceable.4) Eric Johnson, ‘The “Award” Not Recognized – and Rightfully So’ (10 April 2017). jQuery("#footnote_plugin_tooltip_2360_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2360_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, the Swedish Supreme Court corrected the lower court, clarified that in the case at hand, the enforcement was sought for a court ruling, rather than for an arbitral award (Swedish Supreme Court decision on 30 March 2017, Case No. Ö 5209-13).

Further misunderstanding can be possibly caused by the wording of Russian procedural law. Article 241 (1) of the Arbitrazh Procedure Code of the Russian Federation reads as follow:

foreign courts judgements <…>, and awards of arbitral tribunals and international commercial arbitration courts are recognized and enforced in the Russian Federation by arbitrazh courts, if the recognition and enforcement of such decisions are stipulated in an international treaty of the Russian Federation and in federal law.” (emphasis added).

In 1996, the Supreme Arbitrazh Court of the Russian Federation clarified that the New York Convention deals only with arbitral awards, whereas the recognition and enforcement of foreign court judgements are governed either by an international treaty to which Russia is a party to, or by Russian law. The notion of “a foreign court judgement” is not equal to the notion of “an arbitral award”.

Article 241 (1) of the Arbitrazh Procedure Code of the Russian Federation, which became law in 2002, rests upon the mentioned rationale. One would say that the same approach should have been true regarding its application by Russian courts. Notwithstanding the clarification of the highest court, Russian courts often consider the notions “a foreign court judgement” and “an arbitral award” as the synonyms of a common notion – a court judgement. For example, in case No А40-187536/2015 the Arbitrazh court of the city of Moscow threated a LCIA award as a foreign court judgement. Opposite, in case No A53-11372/2017, the Arbitrazh court of the Rostov region treated a foreign court judgement as an arbitral award, and stated:

Grounds for refusing the recognition and enforcement of a decision of the Economical court of the Kharkov region [Ukraine] <…> providing for Article V of the [New York] Convention are not established <…> the petition [for the enforcement] shall be satisfied.”

Finally, recognizing that Russia may not have an international treaty on the recognition and enforcement of court judgements with a country where a court judgment was rendered, Russian courts often use the New York Convention instead of such an international treaty, or use the New York Convention simultaneously with an international treaty (see, e.g., the decision of the Arbitrazh court of the Pskov region dated 16 February 2017 in case No A52-2950/2016).

III. The Consequences of Erroneous Application

The erroneous application of the New York Convention in the exequatur proceedings of foreign court judgements may, and, in fact, leads to the adverse effects to judgment creditors. At the outset, in 23 of 81 examined cases, Russian courts refused the recognition and enforcement of foreign court judgements and based its conclusions on the provisions of the New York Convention. Articles V(1)(b) and V(2)(b) of the New York Convention were the article most frequently applied by Russian courts in those cases.

(a) Proper Notice

Article V(1)(b) of the New York Convention requires that the party against whom the award is invoked was properly notified of the appointment of the arbitrator and of the arbitral proceedings. Although Russian procedural law contains similar provisions regarding foreign court judgements, Russian courts apply Article V(1)(b) of the New York Convention instead of a relevant provision of a procedural law. For example, in case No А47-2947/2010, the Arbitrazh court of the Orenburg region refused the enforcement and recognition of a Kazakhstan court judgement having established that the judgement debtor was not properly notified of a court proceeding in Kazakhstan.

(b) Public Policy

The public policy defence is one of the most often invoked by the parties against whom arbitral awards, or foreign courts decisions, are invoked.

Russian procedural law entitles Russian courts to refuse the enforcement of a foreign court judgement if the enforcement of such judgement would violate of the Russian public policy (Article 244 (1)(7) the Arbitrazh Procedure Code the Russian Federation). Hence, recourse to the New York Convention is not needed. Nevertheless, Russian courts invoke Article V(2)(b) of the New York Convention, instead of a relevant provision of the Arbitrazh Procedure Code of the Russian Federation. One among numerous examples of such application is the following statement given by the Arbitrazh court of the city of Moscow in the case No А40-29792/15:

“[t]he court considers that consideration on the territory of the Republic of Moldova of a dispute that falls under the exclusive competence of a Russian arbitrazh court, violates sovereignty of the Russian Federation, Article V(2)(b) of the New York Convention, <…>, therefore the recognition and enforcement of such decision should be rejected due to violation of the public order of the Russian Federation.

IV. Conclusion

The application of the New York Convention to foreign court judgments is undoubtedly an erroneous practice of Russian courts, and such practice should be discontinued by the Russian Supreme Court. Until that moment, the following guidance may be useful for a party seeking enforcement of a foreign court judgment in Russia:

  1. All procedural requests submitting to Russian courts shall be drafted clearly, stressing that enforcement of the foreign court judgment is the aim of exequatur, rather than enforcement of an arbitral award;
  2. The party shall keep in mind that Russian courts can invoke Article V (1) of the New York Convention by its own discretion. For example, in case No А51-14965/2016, the Arbitrazh court of the Primorsky Krai faced with the recognition and enforcement of a court judgement rendered by a Hong Kong court. Despite the fact that a judgement debtor had no objections to the enforcement of the judgement, the court, guided by Article V(1)(b) of the New York Convention, examined whether the judgement debtor was properly notified of a court proceeding at the Hong Kong court;
  3. Legal arguments showing to a court that the New York Convention is not applicable in the exequatur proceedings shall be put into the case at an early stage of the proceedings. A reference to the Russian Supreme Arbitrazh Court letter of 1996 is a useful argument.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Egorov Puginsky Afanasiev & Partners, its affiliates, or its employees.

References   [ + ]

1. ↑ UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016) para 22. 2. ↑ Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Fifth Edition) (Kluwer Law International 2016) p. 129 3. ↑ Le Nouveau Petit Robert. Dictionnaire alphabétique et analogique de la langue française ; texte remanié et amplifié sous la direction de Josette Rey-Debove et Alain Rey (Dictionnaires Le Robert, Paris 2009), p. 129 4. ↑ Eric Johnson, ‘The “Award” Not Recognized – and Rightfully So’ (10 April 2017). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Snapshot on Litigation Finance in Latin America

Sun, 2018-09-23 17:23

Zachary Krug and Helena Eatock

Litigation finance continues expand rapidly on a global basis, including in Latin America. The region’s code-based civil systems generally permit litigation funding and the continued growth in arbitration make it an attractive market for funding. Brazil, as the region’s largest economy and with a well-developed and sophisticated legal system is leading the way.  Moreover, local practitioners emphasize that third party funding is not only growing, but that it may be developing in a uniquely Latin American way.

Growing Demand for Funding

Practitioners familiar with the legal market report a growing interest in funding.  Erika Levin, a partner at a law firm with deep ties to the region notes that “parties in Latin America have been warming up to the idea of litigation finance over the last few years.” Likewise, Marcela Kohlbach de Faria and Marianna Marra, lawyers at Brazil’s leading litigation funder, report that interest has “been growing rapidly,” which has been driven by the “well-known advantages of litigation funding, such as access to justice and better control of companies’ allocation of costs.”

They report that the bulk of inquiries come from civil engineering and construction matters.  That is largely “due to the high costs regarding expert determinations and the (usually long) hearings of expert witnesses.”  However, inquiries come from all sectors—from mergers and acquisitions to intellectual property matters—reflecting an increasing demand throughout the legal sector.

An Uptick in Funded Matters

Now, it appears that that interest is beginning to translate into an uptick in actually funded matters—at least for certain types of disputes.

Interestingly, there is an important distinction between arbitration and litigation. Thus far, the demand for funding of arbitration has far outpaced the demand for funding in litigation. Kohlbach de Faria and Marra believe that is not surprising given the relatively low costs of litigation compared to arbitration: “Since tribunal costs are not high, so, compared to arbitration, in most cases the amount of money that must be spent to litigate in the Brazilian judiciary does not justify a funding contract.”

Thus, unlike common law jurisdictions, where the high costs of litigation are one of the main drivers of funding, in Brazil at least for now, funding is primarily being requested for arbitration matters.

While specific details remain elusive and the overall number remains small relative to other jurisdictions with a longer experience using funding, anecdotally, there appears to be a steady uptick in the number of arbitrations involving third party funding.  For example, in November 2017, Brazilian law firm Atelier Jurídico conducted a survey of Brazilian arbitration institutions on their practices with regard to third party funding.  Interestingly, the survey reports at least four cases involving third party funding, whereas there were none in the prior year.

Notably, because disclosure of funding is not generally required, this may well underreport the number of arbitrations that are third party funded.  To be sure, the numbers remain relatively small, but the trend seems evident.

Disclosure of Funding

Disclosure of funding is, of course, a topic of continued debate globally.  As funding remains new, there are few, if any, rules around funding, let alone disclosure. However, in Brazil, the CAM-CCBC (Brazil Canada Chamber of Commerce), a leading arbitral centre, issued guidelines in July 2016 recommending the disclosure of funding so that any potential conflicts can be considered.

Interestingly, since CAM-CCBC publication of its funding guidelines, other Latin American arbitral institutions have followed with similar rules or recommendations. Perhaps this suggests that concerns over potential conflicts (the main issue generally driving disclosure) are overblown, or simply a cautious approach as the centres evaluate whether the actual number of funded cases warrants promulgations of new rules.

In any event, Kohlbach de Faria and Marra note that the bulk of funding inquiries they receive for arbitration dispute involve arbitration clauses referring to Cam-CCBC (40%), followed by the ICC (16.8%).  Thus, as funding grows, the CAM-CCBC’s disclosure recommendation will have an impact even if it is not followed by other centres.

Lex Mercatoria of Latin American Funding

From the Calvo doctrine to today, Latin America often goes its own way and litigation funding may be no different.

Kohlbach de Faria and Marra emphasize that this lack of specific rules and regulations should not be seen as a sign of funding’s uncertain footing in the region. Indeed, quite the contrary:  “In Latin America, for instance, there are only a few guidelines over TPF and the institute lacks governmental regulation, but those who think such fact implements an obstacle for litigation funding may be mistaken.”  Rather, they note that “the Latin American regional market, in the absence of regulation, tends to stipulate its own application methods and limitations – a kind of lex mercatoria – whereas legislation in a market that is still blossoming could undermine its development.”

Time for a Brazilian ALF?

Nevertheless, some practitioners predict that with the growth of funding, some type of regulatory body will eventually be desirable.  For example, Carlo Verona, a partner at Demerest focused on international arbitration and cross-border litigation, argues that “self-regulation is key” because a robust “litigation funding market cannot operate without trust, transparency and suitability.”  Verona notes that the UK’s Association of Litigation Funders provides a potential model: “ALF’s Code of Conduct, set of procedural rules and stellar list of funder members is perfect adequate to the expanding Brazilian market, currently boosted by the wide spread use of arbitration for complex disputes and recent amendments regarding enforcement of judgments and awards in the Code of Civil Procedure.”

Looking to the Future

Looking ahead, litigation funding will no doubt continue to grow, particularly in arbitration, as practitioners and claimants become more familiar with its substantial advantages in offsetting risk and leveling the playing field in contentious disputes.  Of course, regional economic and political uncertainty may also play a role in the growth of funding.

For example, Brazil’s economic slump and the lingering impacts of the Lava Jatorevelations likely portend a number of disputes that will eventually find their way into arbitration. Indeed, Kohlbach de Faria and Marra note that Lava Jatohas had “enormous impacts” and “its unfolding affected the vast bulk of Brazilian construction and engineering companies.” Thus, funding may be particularly attractive now, “especially in the current scenario of economic crisis and difficulties in various branches of Latin America economy, such as the construction field.”

Hermes Marangos, a partner at a disputes-centred law firm in London with a cross-border practice that frequently involves Latin American matters, reflects that “the effect of new regulations to speed up justice, provide opportunities for claims by shareholders, investors in infrastructure, suppliers and consultants and many others who suffered losses in Brazil.” But Marangos notes that because many of the current disputes “involve sensitive claims for the local market and raise potential conflicts,” which provides an “opportunity for local teams which are not conflicted as well as international experts and funders come together to pursue these claims.”

Finally, “while the majority of financing has occurred with respect to arbitrations in Brazil and Mexico,” Erika Levin predicts “a continued rise in its use throughout the region with respect to arbitrations as well as litigations.”

However funding grows in Latin America, it will be particularly interesting to see how it develops differently from the common law jurisdictions where it is more deeply established

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Confidentiality in International Commercial Arbitration: Truth or Fiction?

Sat, 2018-09-22 17:05

Marlon Meza-Salas

Confidentiality is usually mentioned among the advantages of international commercial arbitration (ICA). The thought that confidentiality is an innate attribute, seems to be an attractiveness considered to choose ICA to settle disputes. For a long time, it did not seem to be questioned that the private nature of the arbitration process also forced the parties to maintain confidentiality. However, since certain judgments were issued in some countries from the mid-1980s that held: (i) that confidentiality was not an essential attribute of arbitration (Esso and others v. Plowman (1995) 128 A.L.R. 391 —High Court of Australia), (ii) that there was no general principle of confidentiality (U.S. v. Panhandle et al. (1988) 118 F.R.D. 346 (D. Del) —in United States), or (iii) an implied duty of confidentiality in ICA (Bulbank v. A.I. Trade Finance (2000) The Supreme Court of Sweden, case T1881-99), it was evidenced that the belief about confidentiality in ICA was not universal.

When reviewing the comparative law, it is noted that there is no uniform approach on the subject but instead significant differences, since many national legislations do not regulate confidentiality at all, other countries mention it in a very general way, and exceptionally some statutes contain broader regulations. Diversity is so great that even where it is recognized, there are huge differences about its content and scope.

So, it is not surprising that many commentators reject the existence of an implied confidentiality duty in ICA. The truth is that confidentiality in ICA can be misleading, to the point that it has been said it is a “myth” (See J.C. Fernández Rozas, Trayectoria y contornos del mito de la confidencialidad en el arbitraje comercial, 2(2) Arbitraje – Revista de Arbitraje Comercial y de Inversiones 335, 335-378 (2009).

Confidentiality in National Legislations

Confidentiality in ICA is not protected in most countries, which may be due to the fact that the UNCITRAL Model Law on ICA followed in whole or in part by many countries, contains no provision in this regard. In contrast, the laws of New Zealand, Peru, Scotland and Australia have meticulous regulations on confidentiality.

The situation varies among the countries usually chosen as ICA seats. For instance, although there is no statutory regulation on confidentiality for ICA in Great Britain, there is an important development in case law to protect confidentiality. In the United States, the Federal Arbitration Act and the Uniform Arbitration Act adopted as a model by most States, do not impose confidentiality requirements. In France, a legal amendment of 2011 established the duty of confidentiality for domestic arbitration, but not for ICA unless the parties have agreed to it.

Confidentiality in Arbitration Rules

Many arbitration institutions regulate confidentiality, but mainly as a duty of the arbitrators and the staff of each center. Some rules are more detailed or there are Codes of Ethics for arbitrators, but they do not always establish a duty of confidentiality for the parties. This is the case with the ICC Rules, whose article 6 of Appendix I, and article 1 of Appendix II, only impose duties on arbitrators and the staff of the International Court of Arbitration, but not on the parties, although article 22.3 authorizes the Arbitral Tribunal to make orders concerning confidentiality upon the request of any party. Similarly, article 37.1 of the ICDR rules of the AAA only imposes duties of confidentiality on arbitrators and Administrator and article 37.2 establishes that the tribunal may make orders concerning confidentiality; in addition, there is a Code of Ethics with provisions on confidentiality for arbitrators that applies to both domestic AAA arbitrations and international ICDR arbitrations.

In contrast, article 30 of the LCIA Rules regulates the duty of confidentiality in a well-defined manner. The UNCITRAL Arbitration Rules do not mention the subject, although article 34.5 seems to recognize an implicit confidentiality of the award by requiring the consent of both parties so that it may be made public.

Personal and Material Scope of Confidentiality

The discussion is not limited to whether or not there is a duty of confidentiality, because even where the duty is recognized, its content and scope vary. Thus, among the people who could possibly be subject to a confidentiality duty, we find the arbitrators, the staff of the arbitration institutions, secretaries, witnesses, experts, court reporters, translators, interpreters or other people involved in the arbitration, the parties and their representatives and advisors.

The material scope could cover from the fact of the very existence of the arbitration, to the pleadings and memorials of the parties, the documents produced or other evidence such as witness statements or experts reports, the award and other arbitration decisions, as well as information contained in such filings.

The information contained in the arbitration filings can be critical, since it can be, for example, sensitive commercial information such as profit margins, production costs, pricing policies, know-how or trade secrets, the disclosure of which could harm one or both parties involved in an ICA. It could also expose the financial situation of a company or the existence of a defective product, situations that could compromise the image of a company in front of the public and favor competitors.

Absolute Confidentiality Does Not Exist: The Exceptions

A request for annulment, or the request for recognition and enforcement of an award issued in an ICA, are legal actions processed in courts, and in such cases the confidentiality —if any— has to yield, and the award and all information contained therein become public. Something similar happens if judicial assistance is required to request or enforce interim injunctions in an ICA. These situations are called natural exceptions to confidentiality.

Also, one or both parties may be legally bound to disclose information related to the arbitration, for example, at the request of some regulatory authority (in banking, securities, or insurance matters), or by a tax, criminal or judicial authority. In these cases, we are before exceptions to confidentiality due the public interest that are imposed over the private interest of the parties, although they could be interested in keeping the arbitration away from the public sphere.

There are other circumstances that do not fit with the inevitable situations described above, but some legislations, arbitration rules, or case law in some countries, have also admitted as exceptions to the duty of confidentiality. This is the case, for example, when disclosing the existence of arbitration is reasonably necessary to protect the legitimate interests of one of the parties vis-à-vis third parties, or to protect or enforce a right against a third party acting as a plaintiff or defendant, which has been qualified as a matter of procedural public order. It has also been considered that there is no violation of the duty of confidentiality if certain information related to the arbitration is communicated but there is a legitimate reason to do so. Likewise, the right of certain interested third parties to know the existence and outcome of the arbitration has been recognized, such as a parent company, shareholders of a company, corporate auditors, an insurance company, and even an interested party in acquiring a company that requires a due diligence.

Among interested third parties against whom a party may have a legitimate need to disclose the existence of an arbitration, an ICC publication mentions the case of a sub-contractor, who would be entitled to know the terms and circumstances of an arbitral dispute between the main contractor and the owner of the works (See Craig, Park & Paulsson, International Chamber of Commerce Arbitration 312 (Oxford/ICC, 3rd.ed., 2000). A fortiori —we add—, the owner of the works would have the right to know about an arbitral dispute between his contractor and a sub-contractor. In these cases, the exception seems to be justified in the fact that they are linked contracts that, although they are independent contracts themselves, are closely connected by sharing some degree of identity in the object or cause (See J.O.Rodner, Los Contratos Enlazados – El Subcontrato 35 (Academia de Ciencias Políticas y Sociales, 2nd.ed., 2013).

Hence, unless explicitly forbidden by the applicable legislation or arbitration rules, or by agreement among the parties, the parties may disclose details of their own arbitration, including to interested third parties, if there are legitimate reasons to justify that they are acting in good faith.

Conclusions and Recommendations

In matters of confidentiality, the only thing that tends to be recognized almost unanimously in national legislations or in the arbitration rules regarding ICA, is the duty of confidentiality of the arbitrators in the performance of their tasks, but not of the parties or other people involved in the arbitration proceedings. That is why arbitrators in ICA usually promote the inclusion of an express agreement about confidentiality among the parties when establishing the bases of the arbitration procedure, commonly called Terms of Reference.

The diversity is so great that even in cases where the applicable rules recognize the duty of confidentiality, bounded people and the protected contents also vary, which indicates that there is no presumption of confidentiality in ICA or at least there is no general principle on the matter.

That is why those interested in protecting their ICA disputes from public dissemination or in avoiding potentially unfavorable or harmful publicity, should verify the applicable law regarding confidentiality, since depending on the circumstances of each case and the agreement entered into by the parties, it could be the law applicable to the arbitration agreement, the law of the contract, or the law of the seat of arbitration. In any case it is still advisable to include express provisions in the arbitration agreement that deal with confidentiality.

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Arbitration Reform in Ukraine in Action: First Results

Sat, 2018-09-22 03:00

Kateryna Shokalo

On 15 December 2017, the renewed Supreme Court was launched in Ukraine, which triggered the entry into force of the new amendments of, inter alia, Civil and Commercial Procedure Codes. Within this broader judicial reform, a number of long-awaited changes in legal framework for international commercial arbitration have been brought forward, including the following:

  • reducing the number of court instances in arbitration-related matters from four to two, by courts of appeal acting now as the first instance courts;
  • stipulating the principle of interpretation in favorem validitatis;
  • empowering the courts to support arbitration through granting the interim measures, preservation and taking of evidence; and
  • introducing simplified procedure of voluntary compliance with arbitral awards.

To analyse the efficiency of application of the new rules, this post is overview of the court practice from the past nine months and it will highlight the most noteworthy cases.

The Enforcement of Arbitration Agreements

Ukrainian courts have been renowned for their strict formalism. For instance, from time to time, the courts refused to enforce arbitration agreements due to the non-essential discrepancies in the name of arbitral institution. This issue had become the central one in Vilnohirske sklo LLC v Expobank CZ a.s. case, which was recently considered by the Supreme Court.

The claimant, Ukrainian entity, filed a claim to a Ukrainian commercial court over the invalidity of the mortgage agreement executed in English and Ukrainian. According to the English version of this mortgage agreement, the disputes shall be decided by the “Arbitration Tribunal of the Chamber of Commerce of the Czech Republic and the Agrarian Chamber of the Czech Republic”. Meanwhile, the official name of the institution reads as “the Arbitration Court attached to the Czech Chamber of Commerce and the Agricultural Chamber of the Czech Republic”. Vilnohirske sklo claimed that the discrepancies between the official name of arbitral institution and the one stated in the arbitration agreement are so significant that make the arbitration agreement not capable of being performed.

The first instance court disagreed, referring the parties to arbitration. The court of appeal, however, upheld the claimant’s position and sent the case back to the first instance court for consideration on merits. Expobank CZ a.s. challenged this ruling to the Supreme Court, which ultimately enforced the arbitration agreement.

The Supreme Court found that notwithstanding the existing discrepancies the parties intention to resolve the disputes under the rules of particular arbitral institution is evident. Article 22 (3) of the amended Commercial Procedure Code stipulates that any defects in the arbitration agreement and/or doubts as to its validity, operability and capability of being performed should be interpreted by the court in favour of its validity, operability and capability of being performed.  Meanwhile, the court primarily derived in favorem presumption from Ukraine’s obligation to recognise arbitration agreements under Article 2 of the New York Convention and stated that it is also provided in the Article 22 (3) of the Commercial Procedure Code.

Interim Measures

Before 15 December 2017 it was practically impossible to obtain interim measures and any other support of arbitral proceedings from Ukrainian courts. The arbitration reform filled the legislative gap for arbitration proceedings seated both in Ukraine and abroad.

On 9 February 2018, SoftCommodities Trading Company SA filed an application to Odesa region Court of Appeal, acting as the first instance court, for interim measures in support of arbitration initiated under the GAFTA Arbitration Rules against Elan Soft LLP. The dispute arose out of the supply contract for supply of 20 000 tons of Ukrainian wheat by several lots. SoftCommodities claimed that the parties agreed for the supply of the lot in the amount of 2500 tons, of which Elan Soft delivered 1000 tons. The other 1500 tons should have been stored in the warehouse of Ukrainian company – Davos Firm LLC. SoftCommodities, however, figured out that only 1290 tons are available in the warehouse and, therefore, initiated the arbitration claiming damages. Arguing that Elan Soft has been trying to move all wheat remaining in the warehouse out to avoid the enforcement of future arbitral award, the SoftCommodities asked the Ukrainian court for (i) freezing 1290 tons of Ukrainian wheat stored by Davos Firm LLC, and (ii) prohibiting Davos Firm LLC and Maritime Trade Port Ust-Dunaisk, the port at the location of the warehouse, to move 1290 tons of Ukrainian wheat out of the warehouse.

Under the general rule, the court seized with the application for an interim measure should consider the case ex parte within two days, while it may order the claimant to appear before the court in certain cases or consider the application inter partes in exceptional circumstances. The court decided to hear this case with the participation of all parties, including Davos Firm LLC and Maritime Trade Port Ust-Dunaisk. The court reasoned that the additional evidence as to the amount of wheat stored in the warehouse in February 2018 and its price should be lodged and analysed as well as certain issues regarding counter-security should be decided.

On 22 February 2018, the court upheld the application in full. Regrettably, the court did not provide sound reasoning to offer a clear guidance for future applications. Furthermore, the court secured the possible damages of Elan Soft by the guarantee of another Ukrainian company in the amount equivalent to the price of 1290 tons of Ukrainian wheat. The court decided that the counter-security is obligatory in this case since SoftCommodities is neither registered, nor has its assets in Ukraine sufficient for compensation of possible damages.

Elan Soft applied to Odesa region Court of Appeal for cancellation of the interim measures, however, unsuccessfully. In the meantime, Elan Soft challenged the ruling on granting the interim measures to the Supreme Сourt. It remains to be seen whether the Supreme Court will uphold this ruling and/or clarify the test for granting the interim measures in support of arbitration.

Voluntary Compliance with an Arbitral Award

Due to foreign currency regulations, debtors encountered practical difficulties in voluntary compliance with arbitral awards. The debtor should furnish the servicing bank with the execution writ, which may be obtained as a result of recognition and enforcement proceedings. The arbitral reform resolved this problem introducing expedited procedure of recognition and voluntary compliance with the arbitral awards. The court shall consider the respective application without the participation of the parties and analyse merely the arbitrability of disputes and public policy issues.

On 4 May 2018, PJSC Centrenergo applied to Kyiv city Court of Appeal, acting as the first instance court, for recognition and voluntary compliance with the LCIA award. In this case, the tribunal dismissed the claims of Centrenergo and in a separate award ordered to repay to Mercuria Energytrading S.A. the arbitration and legal costs. On 21 May 2018, Kyiv city Court of Appeal recognised the LCIA award on costs allowing voluntary compliance therewith.

Conclusions

To streamline Ukrainian court practice in arbitration-related matters with the best international standards all participants should contribute to this process. On the one hand, the above illustrated court practice provides some reasons to hope about the tendency for efficient application of thoroughly drafted new provisions. Meanwhile, we should not undermine the significance of the fresh approach to the interpretation of old (in effect) rules. On the other hand, to build a robust and arbitration-friendly court system, the author calls Ukrainian arbitration practitioners to engage into meaningful arguments, e.g. not the ones that a negligible discrepancy in the name of institution makes the arbitration agreement incapable of being performed.

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Can Directors Rely on their Companies’ Arbitration Agreements?

Fri, 2018-09-21 00:00

Ramandeep Kaur

YSIAC

Joint venture agreements increasingly provide for arbitration, allowing the JV partners to resolve matters privately.  Where a director of a JV company (or JV partners) is sued in his capacity as a director in relation to matters arising out of the joint venture agreement, can he also rely on the arbitration agreement in the joint venture agreement?  Or, must he be left to contend with the public scrutiny of litigation?

Unsurprisingly for a legal problem, the answer is “it depends”.  It depends, according to the Singapore High Court in A co and others v D and another [2018] SGHCR 9, on objective intentions of signatories to the arbitration agreement.  As a general proposition, this is uncontroversial.  Its application however is instructive, indeed cautionary, for directors wishing to avoid litigation, who might otherwise be lulled into an assurance of confidentiality based on arbitration agreements signed by their companies.

The Court clarified that just because a director may be acting in his capacity as a director cannot justify his reliance on his company’s arbitration agreement, even if it is broadly drafted (as most arbitration agreements now are).  Something more is required.  Seemingly, a lot more is required – nothing short of an express statement covering claims against a director might suffice.

Facts

Company A was incorporated pursuant to a joint venture between companies F and G.  The relationship between parties to the joint venture was governed by an investment agreement concluded between, among others, companies A, F and G (“IA”).

The incorporated JV, Company A, was the holding company of Companies B and C, and B in turn was the parent company of Company H.  D was the executive chairman and CEO of Company G, and his son, E, was the managing director of Company C.  D and E were also directors of Company A.

Various persons and entities connected with the IA were embroiled in a string of acrimonious proceedings, which included 4 litigations and 1 arbitration.  The latest salvo in this series was a Court action by Company F against D and E.  In this suit, Company F, acting on behalf of Companies A, H and C (“Companies”), alleged that D and E were in breach of their fiduciary duties to the Companies.

D and E applied to stay the suit in favour of arbitration under section 6 of Singapore’s International Arbitration Act (“IAA”), on the basis that the arbitration agreement in the IA applied to them, even though they had not signed it.  They emphasised the breadth of the arbitration agreement, which applied to “any dispute, controversy or conflict arising out of or in connection with” the IA.  This, they argued, on a “holistic” reading of the IA, included claims brought by “Group Companies” (as defined in the IA, to include the Companies) against “Affiliates” (which included D and E).

Alternatively, relying on the “agency principle” from American jurisprudence, they contended that they could compel the Companies to arbitrate simply because the Companies’ claims concerned D and E’s conduct as directors of companies which were governed by the IA.

The Decision

The High Court declined the stay application.  There appears to have been no serious argument on whether the subject matter of the suit was indeed connected with the IA.  The issue was instead framed as whether D and E were parties to the arbitration agreement, which they had not signed.

Objectively, the arbitration agreement did not apply to D and E

Importantly, the Court held that the mere wording of the arbitration agreement, wide though it was, was insufficient to imply that it covered the Companies’ claims against D and E.  It was significant to the Court that the arbitration agreement had on a separate occasion been expressly incorporated into a deed (which was unrelated to this dispute).  This, the Court held, demonstrated that if parties intended to arbitrate disputes between the Companies and D and E, they could similarly have made an express provision to that end.

The Court concluded that nothing in the IA demonstrated the necessary objective intention to arbitrate the Companies’ claims against D and E, and in the absence of any other supporting circumstances or parties’ conduct, such intention simply was not there.  A clause in the IA, which provided that claims by Company A against D and E (as “Affiliates”) shall be prosecuted on behalf of Company A by directors of company F was found to be irrelevant, as it dealt only with who has the authority to prosecute, not with the mode of the dispute resolution.

Directors cannot rely on “agency principle” to compel arbitration

D and E also argued that they could compel the Companies to arbitrate simply because their allegations concerned D and E’s conduct as directors of companies which were governed by the IA.  This was based on the “agency principle” espoused in a 2011 American decision, Kiskadee Communications v Philip Father 2011 US Dist Lexis 34974 (N. Cal. 2011), which allows an agent to benefit from an arbitration agreement if claims against him (i) concern acts done in his capacity as an agent, and (ii) arise out of or relate to the contract containing the arbitration agreement.

The Court declined to import this “novel” point to Singapore law for a number of reasons, of which the most compelling appears to be the criticism of the “agency principle” (even within American jurisprudence) for its potential to offend parties’ objective intentions, i.e. by allowing an “agent” to invoke an arbitration agreement when objectively, parties may not have intended such an outcome.

Company F’s submissions about the differences between the tests for stay under American and Singapore legislation also found favour with the Court in reaching this conclusion.  The Court accepted that section 3 of the Federal Arbitration Act did not require the party seeking the stay to be a party to the arbitration agreement; all that was required was “an issue referable to arbitration under an agreement in writing for such arbitration”.  On the other hand, section 6 of Singapore’s IAA only allows a party to the arbitration agreement to make an application for stay.

This difference however, appears more apparent than real.  Singapore’s IAA does not define “party”, and where an “agent” seeks to rely on an arbitration agreement, his party status is the very question that needs to be decided.  Further, section 9 of Singapore’s Contract (Rights of Third Parties) Act allows third-party beneficiaries of arbitration agreements to invoke them in prescribed circumstances, thus expressly allowing non-parties to rely on them.  On the other hand, it is highly doubtful whether the American Federal Arbitration Act allows anyone other than a party to (or a third-party beneficiary of) an arbitration agreement to stay court proceedings in favour of arbitration.  It requires an issue referable to arbitration “under an agreement”, and an agreement can only be invoked by those who agree to it or are otherwise intended to be its beneficiaries.

Third party rights under Contract (Rights of Third Parties) Act (“CRTPA”)

Although D and E did not seek to rely on the CRTPA, the Court affirmed the theoretical possibility of a non-signatory invoking an arbitration agreement in his capacity as an intended third-party beneficiary of the arbitration agreement, provided:

  1. the arbitration agreement purports to confer a benefit on him, such that the benefit is intended (not merely incidental); and
  2. parties intended to entitle him to enforce the arbitration agreement.

Comment

The key take-away for directors (or other corporate officers and agents) wishing to rely on arbitration agreements signed by their companies is to say so in writing.  Otherwise, they face the uphill task of convincing the court that the signatory companies also objectively intended to make the directors parties to the companies’ arbitration agreement.

This is not easy, and as A v D demonstrates, arguments based on the interpretation of the underlying contract and the scope of disputes it envisages will likely not pass muster.  The CRTPA will also be of little, if any, assistance to a director in this predicament, as it too requires demonstration of parties’ intention to benefit a third party, and to allow him to enforce the arbitration agreement.  The safest course is to spell out the parties and the disputes that the arbitration agreement is to cover.

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Supreme Court of India ‘Rules Out’ the Rulebook in Favor of Substantive Rights

Thu, 2018-09-20 23:00

Siddharth Ratho and Tanisha Khanna

YSIAC

A mandatory legal provision is one that a party has no choice but to obey, whereas a directory provision is one which the party is encouraged to obey. In other words, a mandatory provision must be observed, disobedience of which would lead to a nullification of the legal act, whereas a directory provision is optional.

In the case of State of Bihar & Ors. v Bihar Rajya Bhumi Vijas Bank Samiti1) Civil Appeal No. 7314 of 2018 jQuery("#footnote_plugin_tooltip_2424_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2424_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the Supreme Court of India (“SC”) has had occasion to decide whether Section 34(5)2) Section 34 (5) of the Arbitration Act (inserted vide Section 18 of the Arbitration and Conciliation (Amendment) Act, 2015) states as follows: An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement. jQuery("#footnote_plugin_tooltip_2424_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2424_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of the Indian Arbitration and Conciliation Act, 1996 (“Act”), is a mandatory or directory provision of law. In doing so, it had to play referee to two competing considerations – discouraging unscrupulous defendants by upholding strict rules of procedure, versus preventing procedural provisions of law from defeating substantive rights. The SC eventually ruled in favor of the latter.

Consequently, prior notice to an adversary is not mandatory for filing an application to set aside an arbitration award. In reaching its conclusion, the SC elucidated important principles governing the distinction between mandatory and directory provisions of procedural law.

Precedential Back Drop

In this case, the SC was tasked with finally resolving two contrary streams of precedent. One line of rulings, helmed by New India Assurance Co. Ltd. v Hilli Multipurpose Cold Storage Pvt. Ltd. (2015) 16 SCC 20, held that procedural provisions of law (in this case the time limit prescribed for filing a written statement under the Consumer Protection Act, 1986 (“CPA”)) were mandatory in nature. The SC in New India Assurance was guided by observations in Dr. J.J. Merchant & Ors. v Shrinath Chaturvedi (2002) 6 SCC 635 to the effect that the prescribed time limit for filing of a written statement under the Code of Civil Procedure, 1908 (“CPC”) was ‘required to be adhered to.’

Eventually, the SC upheld its previous rulings in Topline Shoes v Corporation Bank, (2002) 6 SCC 33 Salem Advocate Bar Association v Union of India (2005) 6 SCC 344, State v N.S. Gnaneswaran (2013) 3 SCC 594 and Kailash v Nankhu & Ors (2005) 4 SCC 480, where similar procedural provisions prescribing time-lines were considered directory in nature.

Facts and Arguments

The newly introduced Section 34(5) of the Act provides that applications to set aside arbitral awards “shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.” Section 34(6) further provides that such an application is to be disposed of expeditiously and in any event within one year from the date on which such notice is served upon the other party.

The appellants in this case (“Appellants”) had filed an application for setting aside an arbitral award under Section 34 of the Act (“Application”) before the High Court of Patna (“Patna HC”) without issuing prior notice to the respondents (“Respondents”). The Respondents challenged the maintainability of the Application on the ground that no prior notice had been issued to them. The Appellants countered this by stating that the requirement to provide notice under Section 34 (5) of the Act was only directory in nature.

The two arguments came to a head before a single judge of the Patna HC, who relied upon the SC ruling in Kailash to hold that the requirement to issue notice under Section 34(5) of the Act was only directory in nature. However, a division bench of the Patna HC struck down the single judge’s order, opining that the obligatory language in which the provision was couched, and the object of the section, indicated that the provision was mandatory in nature.

Accordingly, the Appellants appealed the decision of the Patna HC division bench before the SC.

Game, Set, Match: SC upholds appeal, ruling that prior notice is not mandatory

On appeal, the SC initially observed that the language of Section 34(5), namely the words ‘shall’, ‘only after’ and ‘prior notice’ supported the Respondents’ argument that the provision was mandatory in nature. The SC also took note of the 246th Indian Law Commission Report (“Law Commission Report”) which documented that the object of Section 34(5) and 34(6) was that an application under Section 34 be disposed of expeditiously within a period of one year from the date of service of the notice.

However, the SC ultimately served three decisive strikes against the Respondents’ arguments.

  • Strike 1: No consequence under the Act for non-service of notice

Relying upon a plethora of judgments, the SC held that the Section 34(5) of the Act was directory in nature because no consequences was provided for its contravention.  The SC also drew a parallel with Section 29A of the Act which prescribes the time limit within which an arbitration award is required to be made and also provides that if the same is not met, the mandate of the arbitrator stands terminated. This stands in stark contrast to Sections 34(5) and 34(6) which did not prescribe a consequence if an application under Section 34 was not decided within the prescribed time limit.

  • Strike 2: Object of Section 34 was to advance justice, not defeat it

The SC held that procedural provisions of law, such as Sections 34(5) and 34(6), ought not be construed in a manner that justice itself was trampled upon. The Law Commission Report indicated that the object behind them was to dispose of applications under Section 34 expeditiously. However, as had been observed in Kailash, the intent behind such provisions was to ‘expedite the hearing and not scuttle the same.’ The SC emphasized the time-honored principle that ‘all rules of procedure were the handmaids of justice’. It noted that ‘if, in advancing the cause of justice, it is made clear that such provisions should be construed as directory, then so be it.

Apart from alluding to the ratio in Kailash to this effect, the SC also noted similar observations in Topline Shoes wherein it was held that a similar provision under the CPA did not create any substantive rights in favor of the complainant that bars a respondent from advancing his defense.

Relying upon the principles propounded in these previous judgments, the SC held that to construe the requirement of ‘prior notice’ in Section 34 as mandatory in nature would defeat the advancement of justice.

  • Strike 3: New India Assurance judgment liable to be set aside

The SC was conscious of the contrary finding of the SC in New India Assurance wherein it was held that the time period for filing a written statement under the CPA was mandatory. In doing so, the SC in New India Assurance relied upon observations in JJ Merchant wherein it was observed that a speedy trial in summary proceedings did not necessarily indicate that justice had not been administered.

In New India Assurance, the SC had reasoned that the remarks in JJ Merchant would prevail, as JJ Merchant was decided prior to Kailash.

The SC in the present case, however, noted that the judgement in New India Assurance had completely overlooked a crucial paragraph in Kailash which underscored both that (i) the observations in JJ Merchant were obiter; and (ii) Topline Shoes had not been cited before the court in JJ Merchant, and that therefore the critical ratio on the consequence of no penalty being provided had not been considered in JJ Merchant.

Additionally, the reasoning in Kailash had been successively upheld by a three–judge bench in Salem Bar Association. In light of this, the SC reasoned that the reliance on the observations in JJ Merchant in New India Assurance was misplaced, and that it was principles propounded in Kailash that held the field.

What this means for procedural provisions of Indian law

This judgment clarifies that before construing a particular provision to be mandatory or merely directory in nature, one has to assess whether there are any penal consequences provided for the same, and whether or not adhering to such a procedural requirement would in any manner take away a vested right of a party and in effect scuttle the administration of justice. This would certainly affect the applicability of the various new provisions introduced across various statutes in India, such as provisions imposing strict time lines for the resolution of disputes, whether through arbitration, litigation, or corporate insolvency.

Some of these statutory time-lines are arguably unreasonable given the judicial backlog, pendency of cases and lack of judges in India. What this judgment re-affirms is that while adhering to procedure is important, administration of justice remains paramount.

References   [ + ]

1. ↑ Civil Appeal No. 7314 of 2018 2. ↑ Section 34 (5) of the Arbitration Act (inserted vide Section 18 of the Arbitration and Conciliation (Amendment) Act, 2015) states as follows: An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Australia’s (In)Capacity in International Commercial Arbitration

Thu, 2018-09-20 01:49

Luke Nottage and Nobumichi Teramura

With some fanfare, on the sidelines of the ICCA Congress hosted in Sydney over 15-18 April, the Australian Trade and Investment Commission (Austrade) unveiled a glossy brochure entitled “Australia’s Capability in International Commercial Arbitration”. This blog posting explains its key contents, identifying both convincing and unconvincing aspects. Our later blog posting will compare Japan as another Asia-Pacific jurisdiction that is also still struggling to attract many international commercial arbitration (ICA) cases.

Australia’s ICA Capacity

The Austrade brochure’s Introduction first summarises the general advantages of ICA: flexibility of process, final and binding outcomes, global enforceability under the New York Convention, neutrality of forum, a process “private and confidential by agreement”, and “time and cost efficiency”. The ensuing Industry Overview then argues for Australia as a compelling “neutral forum for ICA between trading partners in the Asia-Pacific region” as “the ICA landscape has evolved considerably” over the last 5-10 years, through:

  • legislative reforms (including the 2006 revisions to the UNCITRAL Model Law, enacted in 2010 for international arbitration);
  • a supportive and independent judiciary (reiterating elsewhere that the World Bank in 2018 ranked “Australia’s judicial processes as the world’s best”: p3);
  • expert arbitrators and more ICA specialisation among law firms (including a growing number of global firm offices) and barristers;
  • new arbitration centres and support facilities; and
  • “increased education and skills training offerings, from university level through to arbitrator training” (p5).

Regarding further reasons as to “why arbitrate in Australia?”, a summary diagram adds “proximity to Asia and time zone advantages” as well as “stable political environment and resilient economy”.

The last point may surprise readers even vaguely familiar with Australia’s convoluted and unstable federal politics over the last decade (and indeed last month, resulting in another change of Prime Minister). Such political uncertainty might even be linked to Australia’s piecemeal approach to amending ICA legislation evident since 2015. Readers may also wonder about the added complexity of State and Territory politics, which makes it harder and slower to implement uniform legislation nation-wide (such as Commercial Arbitration Acts now also based largely on the revised Model Law for domestic arbitrations, enacted over 2010-2017).

Yet it is true Australia’s institutions for passing, implementing and interpreting legislation are basically sound. The Austrade brochure, under the next heading of “An esteemed judicial system and modern legislative framework” (p7), adds that “Australia ranks 13th out of 180 countries on Transparency International’s corruption perception index” and more generally that “Australia is ranked 15th out of 190 economies for ease of doing business” (p10 instead states that it is ranked “14th”).

The brochure also remarks that “7 Australian universities are among the world’s Top 50 for law” (p7) – at least on the QS rankings. Later, under the heading “World-class expertise, lawyers and infrastructure” (p8), it includes (Professor) Jeffrey Waincymer as one of Australia’s “leading international arbitrators” (along with six lawyers and one former judge). Under “Building capacity through quality education and training”, the brochure notes that “many leading Australian universities offer ICA courses as part of their undergraduate or post-graduate legal degrees” (p11).  Many readers may also be aware of the strong involvement and achievements of Australian law students in the Vis Moot and other more recent competitions developing and displaying ICA-related knowledge and skills.

Australia’s ICA Incapacity

Ironically, however, mooting experience may encourage some students later as lawyers to attempt overly ambitious or innovative arguments in ICA-related court proceedings in Australia. This could explain why case disposition times have not changed before and after the 2010 amendments even in the Federal Court, arguably generating the most consistently pro-arbitration judgments over the last decade (spurring on most State and Territory courts). However, a more direct cause is probably the lack of an indemnity cost principle (as in Hong Kong) for failed challenges regarding ICA agreements and awards, despite several calls for reform. Generally, delays and costs remain major disincentives to choosing and especially later pursuing ICA. This may be particularly true for a country like Australia following the adversarial common law tradition, and with a growing population of lawyers.

A related challenge, not well addressed in the Austrade brochure, is Australia’s geographical inconvenience. Why should Asian parties come to Australia’s main cities for ICA when very popular regional venues like Singapore and Hong Kong are so much closer, as well as having all the advantages listed by Austrade? Matters could be resolved instead say in Darwin, but that northerly Australian city lacks ICA-experienced local counsel, facilities and (if matters end up in court) judges. An alternative would be to promote ICA for where the geography of Australia’s larger cities becomes an advantage, for example transactions between South America and Asia (including China’s new Belt and Road Initiative). Further niche marketing should focus on areas like the resources sector, where Australia has special expertise and the amounts in dispute are often large so travel time and expense is not such an issue. (It is therefore unfortunate that the brochure does not mention the Perth Centre for Energy and Resources Arbitration.) Another way to combat ‘the tyranny of distance’ would be to focus more on e-arbitrations and/or expedited proceedings (without hearings), especially for smaller-value disputes.

A further challenge for seating ICA in Australia is the Australian Consumer Law. It sets mandatory rules not only for transactions involving individual “consumers” in the narrower sense used abroad, but also (indeed increasingly) for business-to-business transactions. Yet there is little legislative and even case law guidance as to their scope regarding forum selection, governing law and award enforcement. Statutory reform has fallen between the cracks (namely the Treasury with consumer law regulators, and the federal Attorney General’s Department) and remains unlikely.

A final disincentive for legal advisors considering Australia as a seat for ICA may be the country’s ambivalence about Investor-State Dispute Settlement (ISDS) since 2011. It may be seen as reflecting or potentially reviving ambivalence about arbitration generally, even though the Chief Justice of the Federal Court emphasised for the ICCA Congress audience that ICA and ISDS arbitration have some significant differences.

Conclusion

Where does this leave Australia overall? The proof should be in the pudding. As another positive change over the last 5-10 years, Austrade asserts an “increased case load and use of Australian seats for ICA” (p5). No sources are given and no statistics are published by ACICA (Australia’s main ICA institution). However, a Board member’s publication in 2015 suggested that on average ACICA had attracted 8 cases per annum since the 2010 amendments. This is indeed an increase over 1-4 over 2008-9, but it is still a very small caseload. The same is true for Australia-seated ICC arbitrations: only one filed on average over 2005-9, but almost four annually since 2010. The four ICC arbitrations filed in 2017 compare with 38 in Singapore, 18 in Hong Kong, six in Korea and four in Japan.

It is also interesting to compare this Austrade brochure with another (and related website, archived here) published in 2003 with support from six major Australian law firms, promoting the “Sydney Arbitral Advantage” and replete with gorgeous photos. As well as listing similar advantages such as a supportive legislative framework for ICA, it contrasted Sydney’s mild sunny weather compared to other traditional and regional arbitral venues, and competitive hotel room rates. It also mentioned (tongue-in-cheek!) the exciting restaurant options available after “a hard day of arbitration”, and even the comparatively low price of a dozen oysters (pp12-13 of the PDF here).

The more conventional recent Austrade brochure remains another useful effort to put Australia on the map for ICA, perhaps especially for businesspeople or in-house counsel. But like most marketing initiatives, the brochure (over-)emphasises the positives. Acknowledging negatives such as geographical inconvenience could help suggest (partial) counter-measures or niche markets. A more distinctive and realistic assessment may also be more effective in persuading legal specialists, or those already familiar with Australia, to give it a go.

 

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Why arbitrate at the Astana International Financial Centre?

Wed, 2018-09-19 01:23

Philip Kim

Herbert Smith Freehills

A focus on the AIFC Arbitration and Mediation Rules 2018 and improvement to enforcement of arbitral awards in Kazakhstan

Introduction to the AIFC

The Astana International Financial Centre (AIFC) is a financial hub in Kazakhstan that came into operation this year. The purpose of the AIFC is to establish itself as a key centre for financial services in Central Asia, with a view to diversifying the Kazakh economy and provide a platform to achieve Kazakhstan’s aim of becoming one of the top 30 developed countries by 2050.1) “100 Concrete Steps”, News Release, Embassy of Kazakhstan in the UK. See also here. jQuery("#footnote_plugin_tooltip_6510_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6510_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  The AIFC also seeks to capitalise on the Belt and Road initiative and support the finance needs of the Kazakh economy, which is undergoing significant change, as a result of the continued privatisation of State assets in Kazakhstan.

In a previous blog post, I reported on the establishment of the AIFC, its legal framework and its dispute resolution bodies. In short, the AIFC is like a “country within a country”, which has an independent judiciary separate from the Kazakh courts, the AIFC Court, which consists of distinguished common law judges and applies English law to disputes that come before it. In addition to the AIFC Court, the AIFC has an international arbitration centre, the procedural rules of which will be considered in this blog post.

AIFC Rules

Leading arbitral institutions, particularly in recent years, have strived to enhance the user experience, by making real efforts to distinguish themselves from each other, through constant innovations in their procedural rules, which have resulted in tangible improvements, such as the strengthening of ethics in the practice of international arbitration, increased awareness of the need for and encouragement of better cost and time efficiency,2) Many leading arbitral institutions publish comparative studies in relation to costs incurred in institutionally administered arbitrations. jQuery("#footnote_plugin_tooltip_6510_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6510_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and the establishment of emergency arbitrator procedures.

The International Arbitration Centre of the AIFC is no exception to this trend. Despite being a young arbitral institution, which began operations this year, it has announced state-of-the-art rules for its administered arbitrations (Rules), which came into force on 1 January 2018.

 Key features of the Rules

The Rules are broadly similar in content and structure to those of the leading arbitral institutions such as the rules of the LCIA and the HKIAC, in that they contain the standard elements that would be expected in procedural rules, such as procedures to be followed for the commencement of arbitration and the appointment of arbitrators, as well as procedures for seeking interim or emergency relief and procedures by which proceedings can be consolidated and additional parties joined to arbitral proceedings. However, there are some notable provisions in the Rules, as follows.

  • Overriding Objective – Article 2 states that the purpose of the overriding objective of the Rules is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense. It is interesting to see the use of terminology perhaps more familiar to those users of the Civil Procedure Rules in the English Courts. It is also worth noting that the language of Article 2 draws from section 33 of the English Arbitration Act 1996, which differs slightly in that it expressly imposes a general duty to the tribunal. It will be interesting to see whether Article 2 will have any utility, and if it is relied on, how it will be interpreted, as such a statement is capable of varied interpretation by tribunals. Although Article 2 of the Rules appears, on its wording, to be less stringent than the “duty” imposed under section 33 of the English Arbitration Act, it is unlikely to make any difference in practice because the overriding objective in Article 2 is clearly well intended and reflects a standard that should be maintained in arbitral practice.
  • Joinder and Consolidation – Article 6 contains provisions on joinder and consolidation, which makes the Rules suitable for disputes involving multiple contracts. Articles 6.8 and 6.9 are specifically aimed at arbitrations involving multiple contracts. However, Articles 6.8 and 6.9 do not make clear whether arbitrations involving multiple contracts should be commenced in: (i) a single Request for Arbitration or (ii) in separate Requests of Arbitration and later consolidated.3) In comparison, see Rule 6 of the SIAC Rules 2016, which is more detailed. jQuery("#footnote_plugin_tooltip_6510_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6510_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Independence of Arbitrators – Article 9 requires arbitrators to be independent and impartial. There is also a requirement for prompt disclosure, throughout the life of an arbitration, of any circumstances giving rise to justifiable doubts as to an arbitrator’s independence or impartiality. The Rules do not prescribe or give guidance on these circumstances. The author has experience of cases where the parties challenged the appointment of an arbitrator on the basis of potential conflicts of their affiliated firms, rather than conflicts individual to the arbitrator. Whilst the IBA Guidelines on Conflicts of Interest in International Arbitration have become accepted good practice in the field of international arbitration, it would be interesting to see if the Centre provides more guidance how this Article may be applied, like the ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration,(paragraphs 15 to 26) and the KCAB which provides guidance on this topic in its ethics for arbitrators.
  • Amended and Supplemented Statement of Case – Article 13.8 permits a party to submit an amended or supplemented Statement of Case, so long as the party’s amended case falls within the relevant arbitration agreement and before the closure of proceedings. The Rules give the tribunal the power to refuse to accept an amendment or supplement to a Statement of Case if it would be contrary to the overriding objective. Although the overriding objective is broad in scope, it arguably restricts the tribunal’s case management powers, so far as Statements of Case are concerned. This provision contrasts with equivalent provisions in other institution’s rules; for example, under Article 22 of LCIA International Arbitration Rules (2014), any amendment or supplement to a Statement of Case is subject to an application being made to the tribunal, which is given broad discretion on whether to grant that request, taking into account any duty similar to the overriding objective under the law of the seat.
  • Representatives – Article 17 permits any authorized person, not just legal practitioners, to represent a party. In this regard, there is no harmonization in the rules of the leading arbitral institutions. For example, Rule 23 of the SIAC International Arbitration Rules (2016) is similar and permits non-lawyers to represent parties but the LCIA International Arbitration Rules (2014), by default, in Article 18, requires legal representatives. Practically speaking, it is likely that most parties in international arbitration under the Rules will choose to be represented by lawyers.
  • Tribunal appointed Experts – Article 21 permits the Tribunal to appoint experts to provide an opinion to the tribunal on any expert issue. Similar provisions are found in the rules of leading arbitral institutions, notable Article 26 of the SIAC International Arbitration Rules (2016) and Article 21 of the LCIA International Arbitration Rules (2014). However, Article 21 does not make clear how the fees and expenses of such expert would be paid. In practice, this is likely to be decided by the direction of the tribunal, exercising its broad case management powers, and agreement is likely to be reached during party consultation, but the lack of an express provision addressing that issue may prolong the party consultation and require the tribunal to give more detailed reasons for deciding how costs should be paid in the interim.
  • Sanctions for Default and Waiver – Article 22 grants the tribunal the power to draw appropriate inferences in circumstances where a party fails to comply with the Rules or any procedural order. The Rules could have gone further by giving the tribunal more wide ranging powers to encourage parties’ compliance with the Rules and procedural directions.4) See LCIA International Arbitration Rules (2014), Article 18.6. jQuery("#footnote_plugin_tooltip_6510_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6510_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Early Determination – Article 25 provides that a party may apply to the tribunal for the early determination of an issue of fact or law by an abbreviated procedure. This is available where: (i) the claim or defence has no real prospect of success; or (ii) the claim or defence is manifestly outside the jurisdiction of the tribunal. This addresses a common concern of lack of speed in international arbitration. This is similar to Rule 29 of the SIAC International Arbitration Rules (2016). However, there are two notable differences. Firstly, Article 25 of the Rules does not require the tribunal to issue a reasoned order or award within 60 days of the application, which is the position under the SIAC Rules (Article 29.4). Instead, Article 25 confers more flexibility and permits the tribunal to fix the expedited procedure in the form it deems appropriate, with no express time limit for a decision under this procedure. Secondly, the wording of Article 25 arguably suggests that it is a summary judgment procedure, as a claim or defence can be dismissed if there is “no real prospect of success“. On the other hand, Rule 29 of SIAC Arbitration Rules (2016) imposes a higher standard by allowing early dismissal, where a claim or defence is “manifestly without legal merit” or “manifestly outside the jurisdiction of the tribunal“. It will be interesting to see how Article 25 is used and interpreted.
  • Release and Replace of Arbitrators – Article 11 provides that an arbitrator is released from the terms of his or her appointment and ceases to be a member of the tribunal when he or she delivers a notice of resignation to the Registrar. The arbitrator does not have to wait for confirmation by the Centre and the wording suggests that the resignation will be effective immediately,5) In contrast, see Article 10.1 of the LCIA International Arbitration Rules (2014). jQuery("#footnote_plugin_tooltip_6510_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6510_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and there are no provisions on whether and how much the released arbitrator would be paid.6) In contrast, see Article 10.6 of the LCIA International Arbitration Rules (2014). jQuery("#footnote_plugin_tooltip_6510_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6510_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is worth noting that Article 11.1(4) provides an additional ground for releasing an arbitrator – if the arbitrator is unable or fails to perform his or her functions as an arbitrator. It is not made express who will make this determination – the Centre and/or the other members of the tribunal (if there is more than one arbitrator). A similar provision exists under the SIAC International Rules (2016), Rule 17.3, which makes clear that the procedure for challenge and replacement of an arbitrator applies. In practice, although it remains to be seen whether it will actually be the case, it is likely that the challenge procedure under Article 10 would be followed where the ground for releasing an arbitrator is on the basis of failure to perform his or her functions.

Why would the Parties choose to arbitrate under these AIFC Rules?

There is one noteworthy feature of the Rules, which make them a particularly attractive choice for commercial parties that desire a swift resolution of disputes and parties with interests in Kazakhstan.

Enforceability of orders and arbitral awards made easier in Kazakhstan

Under Article 24.4, a party may, with the permission of the tribunal, request from the AIFC Court of First Instance (an independent court within the AIFC, which consists of distinguished common law judges) an order enforcing the Tribunal’s order for interim relief or an Award. This is particularly useful where the enforcement action needs to be carried out in Kazakhstan. AIFC Court decisions are to be enforced in Kazakhstan like decisions of the national courts of Kazakhstan.  Whilst Kazakhstan is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) and the European Convention on International Commercial Arbitration (1961), neither Conventions have been ratified,7) Kazakhstan has acceded to the New York Convention jQuery("#footnote_plugin_tooltip_6510_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6510_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); which has resulted in some views that foreign arbitral awards are only enforceable in Kazakhstan on a reciprocal basis. This risk is not present where enforcement is made through the AIFC Court. It is also worth noting that the AIFC shall recognise an award issued in an arbitration under the Rules, even in circumstances where the seat is not the AIFC; in other words, a London seated arbitration under the Rules would still be enforceable through the AFIC Court.8) Regulation 45(1) of the AIFC Arbitration Regulations 2017 which states that: “An arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the AIFC…“ jQuery("#footnote_plugin_tooltip_6510_8").tooltip({ tip: "#footnote_plugin_tooltip_text_6510_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Concluding remarks

As explained above, there are parts of the Rules which could benefit from further innovation and clarity. However, there is no doubt that these Rules, in their current form, reflect many of the more recent developments in other institutional arbitration rules. It is particularly worth noting that these Rules make it easier for awards to be enforced in Kazakhstan, the largest economy in Central Asia, with vast natural resources and growing international trade. For this reason alone, the Rules have already positioned itself to resolve disputes relating to this significant and dynamic economy. Together with the AIFC Court, it will be interesting to see how the Centre develops over time and the role it plays in resolving disputes in the CIS.

 

References   [ + ]

1. ↑ “100 Concrete Steps”, News Release, Embassy of Kazakhstan in the UK. See also here. 2. ↑ Many leading arbitral institutions publish comparative studies in relation to costs incurred in institutionally administered arbitrations. 3. ↑ In comparison, see Rule 6 of the SIAC Rules 2016, which is more detailed. 4. ↑ See LCIA International Arbitration Rules (2014), Article 18.6. 5. ↑ In contrast, see Article 10.1 of the LCIA International Arbitration Rules (2014). 6. ↑ In contrast, see Article 10.6 of the LCIA International Arbitration Rules (2014). 7. ↑ Kazakhstan has acceded to the New York Convention 8. ↑ Regulation 45(1) of the AIFC Arbitration Regulations 2017 which states that: “An arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the AIFC…“ function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Towards an Exceptio Fundati? Assessing a (Potentially) Emerging Exception for Third Party Funding in Investment Treaty Decisions on Security for Costs in the Wake of Armas v. Venezuela

Mon, 2018-09-17 17:30

Alexander G. Leventhal

“The problem with money,” wrote the American poet and philosopher Ralph Waldo Emerson, “is that it costs too much.” This may soon ring all too true for some investment treaty arbitration claimants and the third parties that seek to fund their claims.

Recent developments suggest that there may be support – albeit embryonic – for an exception to traditional standards for ordering security for costs where a claimant-investor in an investment treaty arbitration receives third party funding. This touches upon an issue for which investment treaty arbitration has struggled to find a condign response. A respondent-State may face a claim from an impecunious, yet well-funded, claimant against whom it will be unable to enforce an award on costs. Although that claimant will have ample funds for the arbitration, the source of those funds, the third party funder, lies beyond the jurisdiction of the arbitral tribunal. Existing standards for provisional measures or security for costs may not address the unique nature of third party funding in investment treaty arbitration. At the same time, however, care must be taken not to stifle potentially meritorious claims for which no alternative forum exists.

In a recent decision in the case of Manuel García Armas and others v. Venezuela (PCA Case No. 2016-08, Procedural Order No. 9, 20 June 2018 (the “Decision”)), a tribunal ordered claimants to provide security for costs in an investment treaty arbitration for only the second known time. While this alone would merit some interest, two aspects of this decision are worthy of particular reflection.

First, after the claimants disclosed the existence of a third party agreement, the tribunal ordered the claimants to produce that agreement, invoking a duty to protect the integrity of the proceedings (see Decision, ¶2).

Second, having established that the agreement did not provide that the funder would cover an award for costs, the tribunal ordered the claimants to prove that they could cover such an award (Decision, ¶242). In so doing, it effectively reversed the burden of proof, which would usually lie with the moving party, and placed the onus on the non-moving parties to demonstrate their solvency. While the tribunal shied from declaring that the existence of third party funding automatically reversed the burden of proof, it found – quite creatively – on the basis of the “procedural principal that obliges the parties to cooperate in good faith with the Tribunal” and the shifting of the burden of proof, that “the burden should lie on the party that is in the best conditions to produce the evidence” (Decision, ¶246).1)Translation from the original Spanish is the author’s. jQuery("#footnote_plugin_tooltip_5680_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5680_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Be that as it may, the decision suggests no basis for the shifting of the burden of proof other than the third party funding agreement and, in particular, the fact that the agreement did not cover a costs award.

The Armas tribunal ultimately concluded that the claimants had not met the burden, brushing aside a number of concerns raised by the claimants, including:

  • the State’s role in contributing to the claimants’ insolvency, an argument whose assessment, according to the tribunal, would prejudge the merits, (Decision, ¶214);
  • the concern that providing information on the claimants’ assets could lead to reprisals from the respondent-State (Decision, ¶219); and
  • the concern that the decision would stifle an otherwise meritorious claim, a worry that, the tribunal found, lacked merit because the claimants themselves had alleged that they were solvent and thus could meet an award on costs (although the tribunal itself found such solvency had not been demonstrated) (Decision, ¶232) and because, the tribunal concluded, the “denial of justice” would in fact be greater for the respondent-State if it could not collect an award for costs (Decision, ¶235).

The grounds for this decision are unique, but its result is not entirely so. In RSM Prod. Corp. v. Santa Lucia (ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs, 13 August 2014 (“RSM Decision”)), an investment treaty tribunal ordered security for costs – and even later discontinued proceedings when the claimant failed to comply with that order. The tribunal, however, did not base its decision solely on the fact that the claimant was funded by a third party. Instead, it found that the claimant’s conduct in those and other proceedings – its refusal to pay its share of the provision on costs and its failure to satisfy a prior award on costs – created a “material risk” that an award on costs would not be met (Id., ¶81), a risk that was “supported” by the fact that the claimant was funded by a third party (RSM Decision, ¶83).

A dissenting opinion by one arbitrator, Gavin Griffith QC, went even further. Alluding to the fact that a respondent-State may face an impecunious, yet well-funded, claimant, Mr Griffith suggested that the existence of a funding agreement alone should constitute exceptional circumstances justifying an order for security for costs (RSM Decision., Dissenting Opinion, ¶11).

Mr Griffith puts his finger on a delicate issue. In commercial arbitration, a moving party has the ability to know the financial state of its counterparty when entering into the arbitration agreement. A party, therefore, should not be able to stifle a meritorious claim if it cannot prove some change in the counterparty’s circumstances. Some commercial tribunals have found that the third party agreement itself constitutes a change in circumstances that merits a security for costs order (Procedural Order – Security for Costs August 3, 2012, 2 Cahiers de l’arbitrage 399 (2013)) This inquiry, however, is more challenging in investment treaty arbitration where the respondent-State does not choose its arbitral counterparty in the same way. The respondent-State’s offer to arbitrate is an open one and the State is forced to take its claimant as it lies, usually without the ability to bring a counterclaim. When the arbitration agreement is concluded, the funding agreement will generally already exist .

Likewise, where a tribunal applies a standard for provisional measures, rather than one specific to security for costs, a State’s request may not always meet the requirements of such test. Where the award is years in the future, the potential for irreparable harm may not satisfy the condition of urgency necessary for a provisional measures order (see e.g. Burimi S.r.l. and Eagle Games Sh.a. v. Albania, ICSID Case No. ARB/11/18, Procedural Order No. 2, 3 May 2012, ¶40).

But does this justify a shift in the onus probandi that could stifle a potentially meritorious claims? As the tribunal in the Pey Casado v. Chile case noted, the respondent-State could easily have included in its offer to arbitrate – i.e. in the relevant provisions of the applicable treaty – an appropriate way to deal with the issue (ICSID Case No. ARB/98/2, Décision sur les Mesures Conservatoires sollicitées par les Parties, 25 September 2001, ¶85). The same can be said of the rules governing procedure. In another dissenting opinion in the RSM case, Judge Edward Nottingham warned of the “mischief which can follow if individual tribunals adjudicating particular cases latch on to broad language in the governing documents as a warrant to address matters which, if they were matters of general concern, could and should be addressed by the ICSID Administrative Council after input and consultation with all interested parties” (RSM Decision, Dissenting Opinion, ¶17).

In this sense, the Armas Decision is timely because it was rendered only months before the Proposals for Amendment of the ICSID Rules.

These Proposals would expressly grant ICSID tribunals the power to order security for costs – separately from provisional measures. That an ICSID tribunal already has the power to do so is not in dispute. However, an independent provision could ultimately result in an autonomous standard that would allow tribunals to take into account a party’s ability to comply with an adverse decision on costs – potentially, in the same way that the Armas tribunal did.

In addition, the Proposals require parties to disclose the source of any third party funding, which could invite the tribunal to order production of the underlying agreement itself – as in the Armas case.

These Proposals, if adopted, could lead to special treatment for funded claimant-investors in security for costs decisions. Some tribunals may even be tempted to follow the lead of the Armas tribunal and shift the burden of proof onto the funded party, requiring it to demonstrate its solvency where a third party funding agreement exists and/or does not cover an award on costs.

The Armas Decision – along with the ICSID Proposals – invites us to ponder whether the future holds an emerging exceptio fundati – an exception to the traditional security for costs standard. One that would even shift the burden of proof in the presence of a third party funding agreement onto the funded party and require it to show that it can meet an award for costs. Such an exception is no trifle. It could effectively allow an investment treaty tribunal to put a halt to a claim where neither the party to the dispute nor the funder are prepared to satisfy an order for security for costs. This would be revolutionary. It would require funders to rethink their cost assumptions in investment treaty cases and could make it harder for some claimants to obtain funding.

While we may not yet be there, the Armas Decision brings us closer to Emerson’s reality.

The views expressed in this blog post are those of the author alone and do not reflect the opinions of Quinn Emanuel.

References   [ + ]

1. ↑ Translation from the original Spanish is the author’s. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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A Candid(e) View on English Case Law in Times of Brexit

Sun, 2018-09-16 17:53

Daniel Levy

In one of Voltaire’s most famous tales, two characters continuously dispute their visions of the world, and whilst Pangloss is always looking for a cause for all small events fitting into a broader system, Candide, optimistic, prefers to look at how he himself can change the world not by pursuing its meaning, but with his everyday actions. That is why, at the very end, after Pangloss spends quite some time explaining his theories about the world, Candide just replies with his famous quote: “Excellently observed,”… “but let us cultivate our garden.”

Voltaire offers a good metaphor as to how those involved with international arbitration view their world and the cases before them. Sometimes, judges and arbitrators can be more Pangloss, trying to make their decisions fit a theoretical perspective on international arbitration and sometimes more Candide, concerned with the immediate and pragmatic challenge of a dispute and not the concatenation of all events in “the best of all worlds”.

Of course, as Candide as they can be, it is unreasonable to expect judges and arbitrators to operate in a vacuum. They are well aware of the extraordinary historical moments affecting our society and Brexit – and the attractiveness of London as a seat for international arbitration – is certainly not an exception. Curiously, a line of recent decisions handed down by the High Court and Court of Appeal in these last couple of months reveals a very interesting balance between Pangloss and Candide in favour of international arbitration.

Starting chronologically, Halliburton ([2018] EWCA Civ 817), in April 2018, shows the application of pro-international standards of disclosure to be provided by arbitrators aimed at protecting an award under an objective approach to the duty to disclose. Indeed, a certain pragmatism, particularly attractive in international arbitration, is put forward as the Court of Appeal contends that non-disclosure of a potential issue conflict in a case of overlapping appointments is not, per se, a ground for justifiable doubt as to an arbitrator’s impartiality. Instead, not only must specific circumstances be present to challenge the impartiality and independence of the arbitrator, but the duty to disclose must be determined by the arbitrator on the basis of present facts and knowledge, and not with the benefit of hindsight.

This pragmatic and contextual view of English courts, looking at each concrete situation without the concern of deductively applying general standards, is allied to the commercial and business-oriented focus of English judges in international arbitration cases, as we can see in Dreymoor ([2018] EWHC 909 (Comm)).

In Dreymoor the High Court demonstrated this perspective in relation to the extension of an arbitration clause in a group of contracts. In his decision, which considered a group of contracts which contained both ICC and LCIA clauses, expressing that the arbitration shall be seated in London, Butcher J. looked at the centre of gravity of the group of contracts and discussed how reasonable business-orientated people negotiating these commercial agreements would have decided to protect the arbitration in a sensible way: the commercial approach is balanced with flexibility and efficiency.

This is illustrated further in the Perkins decision ([2018] EWHC 1500) (Comm), handed down in June 2018 where Bryan J. construed the meaning of an obscure arbitration clause – providing for arbitration only if there was “no reciprocal enforcement procedures” between the UK and the country of the Distributor Agreement (Lebanon) – in accordance with the principles identified by Lord Hoffmann in the Fiona Trust case, ascertaining the “rational commercial purpose” or “reasonable commercial expectation” of “rational businessmen” (quoted by Bryan J at §82). It means that the interpretation of the clause must result in giving the “certainty, speed and simplicity” (at §105), three international arbitration cornerstones. In Perkins, the outcome was that the English Commercial Court granted an anti-suit injunction in respect of the Lebanese proceedings commenced by the Distributor in support of English arbitration.

Less than one month after Dreymoor, Raga ([2018] EWHC 1008 (Comm)), in May 2018, revealed another very strong pro-arbitration stance in a challenge under s.68 of the Arbitration Act 1996 (“the 1996 Act”) (serious irregularity). As the ground for serious irregularity in this LCIA case was an alleged breach of the Tribunal’s general duty under s.33 of the 1996 Act by the arbitrators’ failure to stay the arbitration until the outcome of parallel Ukrainian court procedures, this decision also represents an interesting indication as to how the English courts could react to foreign jurisdictions during Brexit. The Court made eight observations in respect of challenges to awards based on an alleged breach of a tribunal’s general duty under s. 33 of the 1996 Act, including the fact that the tribunal’s conduct must be assessed as at the time of the award and not with reference to what transpired subsequently. The case also serves as a useful reinforcement of the high threshold imposed by the English court under s.68 of the 1996 Act, protecting awards from frivolous challenges.

One day after Raga, the English court faced another very important issue of international arbitrations. In Atlas Power ([2018] EWHC 1052 (Comm)), the High Court considered an anti-suit injunction to restrain one party from challenging a partial final London-seated award before the courts of Pakistan on the grounds that the Pakistani courts had jurisdiction over the arbitration.

Although the English court was faced with a very obscure dispute resolution clause, Atlas Power shows how English courts are still firmly wedded to the fact that a choice of London as the seat of the arbitration necessarily meant that the parties intended that proceedings on the award should be only those permitted by English law, following the reasoning in C v D ([2008] 1 Lloyd’s Rep. 239). Even if the laws of Pakistan expressly governed the contracts in dispute, the High Court was keen to  distinguish the curial law from the governing law, as the former is the only one applicable to the supporting procedures of an international arbitration.

It could be argued that Atlas Power is the only decision in the series of decisions discussed recently before the English courts that reinforces the supervisory power of English courts for international arbitrations seated in London, as opposed to any other choice of law; however, if it is considered from an optimistic (rectius, Candide) perspective, it is also the decision that not only follows a quite coherent jurisprudence, but also allows international arbitrators in London to apply any foreign law to the dispute without the risk of having any of the parties trying to create a fictitious link between that same law and its respective jurisdiction.

A further injunction request was also at the centre in the case of Sana Hassib Sabbagh ([2018] EWHC 1330 (Comm)), but this time requiring the respondent not to commence an arbitration in Lebanon. If Atlas Power shows how English courts react to foreign challenges of a London-based arbitration, in this case we can see how the English courts react to an English challenge of a foreign arbitration. Although the High Court was satisfied with the claimant’s argument as to it not being bound by the articles of association containing the arbitration clause and being discussed in the Lebanese procedure, interestingly this case also shows how cautious and mindful the High Court is in granting the requested anti-arbitration injunction.

Robin Knowles J. reinforced that anti-arbitration injunctions should only be granted under exceptional circumstances and where the seat of the arbitration offers appropriate supervisory jurisdiction. The English court must be comfortable in its role of protecting parties from foreign arbitration procedures that they are not bound by and, more importantly, comfortable in doing this under foreign law: “What matters is not which court decided them but that they are correct conclusions of Lebanese law” (at 31). This is reassuring for party autonomy in the choice of applicable law.

The ease of the English courts in dealing with complex international disputes is reinforced in Nori Holdings ([2018] EWHC 1343 (Comm)) when the High Court ruled on a further case concerning anti-suit injunctions and restraining court proceedings in both Russia and Cyprus. If Raga and Atlas Power show us the reasoning of the courts concerning foreign jurisdictions, Nori Holding goes a step further as it considers a foreign EU jurisdiction and the Recast Regulation. In anticipation of Brexit, this is thought provoking.

It is interesting to note that the High Court remains very cautious to avoid disrespecting other jurisdictions and sticking to the West Tankers jurisprudence (ECJ Case C-185/07 [2009] AC 1138). What is more revealing still is that the High Court could have used the Gazprom (ECJ Case C-536/13) and Advocate General Wathelet’s opinion – and in light of  Brexit  – as a safety valve to start questioning the Recast Regulation. Nevertheless, Males J., even acknowledging that possibility, preferred to give full meaning to West Tankers (which remains “good law”) and to the Brussels Regulation. The anti-suit injunction restraining the Cypriot court proceedings was then dismissed with the anti-suit restraining the Russian proceeding being granted.

Mutual respect and comity are at the centre of this judgment and, more importantly, do not seem to depend on the sole wording of the Recast Regulation or of the ECJ case law. In a scenario where the EU agreements and the ECJ jurisdiction are questioned, it is very positive that their philosophy can be applied as rule of law.

This seems to be the exact sense of Vijay ([2018] EWHC 1539 (Comm)), decided on 20 June 2018. After an ICC sole arbitrator rendered an award in Paris ordering damages against the respondent for its failures in executing a construction contract, both the claimant and respondent started a series of actions either to enforce the award in Seychelles, where the respondents’ assets were, or to challenge it, respectively. It is important to note that different provisional and interim attachment measures were requested in Seychelles by the claimant, with the undertaking given being ultimately lifted in favour of the respondent.

In parallel, the claimant also requested the enforcement of the award in the UK, and a worldwide freezing order against the defendant. Although the enforcement procedure is still to be decided by the English courts later in 2018, the Mareva injunction was dismissed by Butcher J. The grounds for the decision seem to illustrate the concern of the High Court not only to identify which is the closest jurisdiction to support an international arbitration, but, more importantly, not to contradict its decision. Butcher J. saw a very limited link between the arbitration and the UK, as both parties were Seychelloises, their contract related to the construction of a hotel in Seychelles and was governed by Seychellois law. Paris was the seat of the arbitration and the assets of the respondent in the UK are minor compared to the assets in Seychelles.

Along with the protection of the most appropriate enforcement jurisdiction, the High Court, inter alia, also considered that any worldwide freezing order would be contrary to the decisions already rendered by the Seychellois courts, inconsistent and “disarharmonious” (at 43(4)). The pursuit of “harmony” and the respect of the primary jurisdiction concerned with the enforcement of the international award show how the English courts are attentive to offer an equally harmonious arbitration seat for its cases.

In conclusion, could we say that these eight decisions supporting the international arbitration regime in a little more than two months are a coincidence? Or are they just the result of a very long tradition of international arbitration case law evolving into a very supportive jurisdiction? In one way or another, this very business-oriented, pragmatic, international and harmonious perspective in all eight cases in only two months are too much opposite to the recent political movements to be just thrown together as insignificant as a whole. Like Voltaire’s Candide, I would prefer to see London as a beautiful garden for international arbitration and decisions that have been cultivating it for the best of all possible worlds.

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Third Party Funding in Sweden – Uncovering Uncharted Territory

Sun, 2018-09-16 03:19

Johan Sidklev, Carl Persson and Bruno Gustafsson

Introduction

Despite a rapid emergence at a global stage, third-party funding (TPF) appears yet as unfamiliar to businesses in the Nordic region. According to a survey included in the 2018 edition of the Roschier Disputes Index, merely 5 per cent of the Nordic companies have used TPF for financing litigation or enforcement proceedings. Arguably, these results mirror that the occurrences of TPF in Sweden have so far been limited to international arbitrations seated in Sweden, i.e. there is no internal market for TPF. Nonetheless, respondents of the survey who had used TPF described positive experiences, which indicates that an increasing number of businesses in the Nordic region will eventually embrace that resorting to TPF for financing arbitration costs is not only possible but may also be viable and beneficial. Concurrently, the already considerable amount of funded arbitrations seated in Sweden will likely increase and attract greater interest going forward.

Alongside the utilities of TPF are several important legal issues. In April this year, the ICCA-Queen Mary Task Force published its Report for public discussion on some of the most pressing of such inquiries, several of which remain yet to be examined from a Swedish viewpoint. As of today, there are no laws or mandatory rules in Sweden regulating TPF and, given the absence of a domestic market, it is unlikely that legislature will be introduced in the near future. Nonetheless, the particular features of Swedish law may have inferences on TPF in international arbitrations seated in Sweden as well as on the prospective emergence of a domestic funding market. This will be dealt with further below.

Restrictions on Risk Arrangements

In Sweden, the structuring of the funding agreement (i.e. the contractual arrangement stipulating the terms behind the funding) is not subject to any common practice. However, the Swedish Bar Association’s Code of Professional Conduct (CPC) governs the financial interests of Swedish lawyers. Save upon a set of exceptional grounds, the CPC prohibits lawyers from executing “risk agreements”, under which the reimbursement constitutes a percentage of the amount recovered by the client. As TPF will likely remain unregulated, the Bar Association’s stringent rules on risk agreements likely do not reflect an impending Swedish approach imposing comparable restrictions towards funding agreements. However, funders, who engage Swedish counsel, must do so accepting that Swedish lawyers utilize traditional fee models. This, in turn, might carry implications to the construction and terms behind the funding arrangement, as some funders are inclined to demand the funded party’s legal counsel to part risk through the use of outcome-based fee arrangements.1)See Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International; 2016) p. 33-34. jQuery("#footnote_plugin_tooltip_6489_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6489_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Disclosure

The well-articulated issues of disclosure in relation to TPF are strongly linked to the fundamental requirement for an impartial and independent tribunal. The prevailing controversy relates to how the arbitral tribunal can ensure its independence if not informed of the existence of TPF. Currently, neither Swedish arbitration legislation nor any arbitration rules impose any apparent obligation for parties to disclose funding sua sponte.

The Queen Mary Task Force Report expresses a stricter view on disclosure obligations than tribunals have tended to do in practice. Among other things, the report suggests that parties “should, on their own initiative, disclose the existence of a third-party funding arrangement and the identity of the funder to the arbitrators”.2)See Report for public discussion of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, Apr. 2018. The ICCA Reports No. 4. At p. 81. jQuery("#footnote_plugin_tooltip_6489_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6489_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The IBA Guidelines on Conflicts of Interest expresses an analogous approach. The explanatory section re General Standard 6 (b) states that “[t]hird-party funders and insurers in relation to the dispute may have a direct economic interest in the award, and as such may be considered to be the equivalent of a party”, in effect suggesting that the same disclosure requirements that apply to the parties may be imposed towards funders.

It remains to be seen how courts and tribunals in Sweden will handle the correlation between disclosure and TPF. Previously, transnational soft law sources, such as the IBA Guidelines, have influenced the Swedish Supreme Court’s interpretation of the provisions relating to conflicts of interest in the Swedish Arbitration Act on several occasions (See, e.g., NJA 2007 p. 841 & NJA 2010 p. 317). If applied in a TPF context, this tendency may predict a shifting towards a stricter view on disclosure duties, at least with respect to the existence of funding and the identity of the funder.

Costs

In the Swedish context, case-law has developed regarding investors attempting to attribute the risk for adverse costs liability to shell companies acquired for the sole purpose of pursuing legal claims. In several cases, the Swedish Supreme court has deemed the shareholders of such “claims vehicles” personally liable for adverse costs (See, e.g., NJA 2014 p. 877 and on NJA 2006 p. 420). This veil-piercing doctrine entails that personal liability may step in where the third-party investor has acted as the effective beneficiary in the dispute and where the claim has been transferred to a company in poor financial condition. Furthermore, the cases suggest that personal liability requires that the purpose behind using the claims vehicle is to indemnify the investors in case of an adverse judgment so as to limit the adverse financial consequences of a negative outcome in the dispute. Through this development, the Swedish Supreme Court has sought to prevent arrangements whereby a creditor transfers a claim to a financially weak party in order to discharge the liability for legal fees and litigation costs in the event of an unsuccessful outcome while simultaneously retaining the financial interest linked to a successful outcome.3) Johan Sidklev & Carl Persson “Chapter 5 – Sweden” in Third Party Litigation Law Review, 1st ed. (2017) p. 146. jQuery("#footnote_plugin_tooltip_6489_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6489_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In relation to TPF, a discussed issue relates to the notion that funders, in general, do not cover adverse costs. It is debatable whether the view of the Swedish Supreme Court on costs allocation may be applied also to third-party funding in the context of arbitration. If so, does this mean that a third party funder may be ordered to pay adverse costs, for instance through tribunal-ordered costs orders directed towards the funder? We believe that the answer is no, as third-party funding generally does not involve any transfer of claims, i.e. funders do not become formal parties to the arbitrations in which they are invested.

Another measure that could mitigate the risks associated with financially weak parties who opted for the external funding of arbitration claims is security for costs. However, the use of security for costs in arbitrations involving TPF has triggered a heated debate after the tribunal in RSM v. Saint Lucia, in a fairly controversial manner, ordered security for costs against the funded claimant. Subsequent to RSM v. Saint Lucia, assessments of tribunals provide a multi-faceted view on how to evaluate the relation between impecuniousness and the existence of funding on the one hand, and the general standards for granting security for costs on the other.4)See e.g. EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14. South American Silver Limited v. Bolivia, UNCITRAL, PCA Case No. 2013-15, Procedural Order No. 10 (Jan. 11, 2016), and Caso CPA No. 2016-08 Manuel Garcia Armas v. Venezuela (Procedural Order dated June 20, 2018). jQuery("#footnote_plugin_tooltip_6489_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6489_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As per the latest revision in 2017, the SCC Arbitration Rules contain a provision (article 38) specifically on security for costs. By providing detailed and explicit requisites, including an elucidation that security for costs should be granted only under “exceptional circumstances”, article 38 provides some clarity with respect to the general conditions for granting security for costs. However, as a corollary to the lack of consistency demonstrated in international practice, it is fair to say that a prediction of how tribunals seated in Sweden will apply these conditions with respect to the involvement of a third party funder, is clouded by uncertainty.

The ICCA Queen Mary Task Force report has attempted to mitigate these uncertainties by providing recommendations as to the appropriate standards for assessing security for costs in relation to TPF. From this time and on, it will be interesting to observe what impact these directions will have on how tribunals choose to apply article 38 of the SCC Rules in funded arbitrations brought by impecunious parties.

Looking Forward

The Swedish legal community has previously viewed third-party funding with a fair amount of disinclination. However, during the course of the past year, we have witnessed the development of a more optimistic attitude among practitioners and business representatives alike. It appears indisputable that this emerging trend ventures a perspicuous future for TPF in the Nordic region, and Sweden in particular. Nonetheless, the above-discussed issues constitute merely a selection out of multiple procedural queries relating to TPF and its impact on arbitration. In order to secure a well-operating market, these issues ought to be analyzed more scrupulously and simultaneously interconnected with the characteristics of Swedish arbitration law.

References   [ + ]

1. ↑ See Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International; 2016) p. 33-34. 2. ↑ See Report for public discussion of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, Apr. 2018. The ICCA Reports No. 4. At p. 81. 3. ↑ Johan Sidklev & Carl Persson “Chapter 5 – Sweden” in Third Party Litigation Law Review, 1st ed. (2017) p. 146. 4. ↑ See e.g. EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14. South American Silver Limited v. Bolivia, UNCITRAL, PCA Case No. 2013-15, Procedural Order No. 10 (Jan. 11, 2016), and Caso CPA No. 2016-08 Manuel Garcia Armas v. Venezuela (Procedural Order dated June 20, 2018). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Generating Needed Information about Arbitrators, One Arbitration at a Time

Sat, 2018-09-15 01:28

Catherine A. Rogers and José María de la Jara

One of the most critical moments in any international arbitration is the appointment of arbitrators. As Rusty Park has explained, “just as ‘location, location, location’ comprise the three key elements in sustainable real estate value, so it has been observed that ‘arbitrator, arbitrator, arbitrator’ endure as the most critical factor in the integrity of any arbitration.”

 

Despite the vital importance of selecting the right arbitrator, there is a shocking paucity of information on the most relevant issues about arbitrators’ decisional history and their case management skills and predilections.

 

The disclosure of such information is generally treated as confidential and proprietary. Even now in 2018, it is generally assumed that the only way parties can obtain information about arbitrator decision-making is through confidential, off-the-record, person-to-person exchanges by their lawyers. Put more simply, arbitrator selection relies on 19th Century technology.

 

This method produces several negative consequences. First, the lack of information about arbitrators distorts the market for international arbitrators and makes it more difficult for diverse arbitrators to establish their reputations and, consequently, increase their likelihood of appointments. Particularly as we see some of the greatest case growth in regions like Latin America, Africa and the Middle East/North Africa, there is a clarion call for more arbitrators from these regions.

 

Second, lack of information about arbitrators undermines the predictability and efficacy of arbitrator appointments for the parties. No other aspect of corporate decision-making relies on such a collection of informal impressions and industry gossip instead of concrete data, research, and analysis. Why make an exception in such a critical context as the appointment of the person who will decide the dispute?

 

These shortcomings in arbitrator selection are often treated as inevitable and inescapable because it is thought that the arbitration system is private and arbitral awards are generally confidential.  In other words, the assumption in international arbitration has been that you could have either information about arbitrators or confidentiality, but not both.

 

Arbitrator Intelligence (AI) has hacked this seeming impasse. Through our AI Questionnaire (AIQ), we are using more modern technology to collect information about arbitrators while maintaining confidentiality of arbitral proceedings and outcomes.  The AIQ collects key information about arbitrations, but does not retrieve information that would reveal the identity of the parties. We also ensure the anonymity of the contributor of the AIQ, but we verify the authenticity and experience of contributors through a separate registration process.  Data analytics based on this information will soon be available in our forthcoming Arbitrator Intelligence Reports, to be distributed by Kluwer.

 

While it remains to be seen what this information hack will mean to international arbitration, there are many reasons to believe it will produce important changes.

 

First, information alone can be an important, market-based tool against corruption.  In other contexts, certainly information and transparency has been demonstrated as an effective means of both deterring corruption and increasing the possibility that corrupt practices will be exposed. For example, Brunetti and Weder1) Brunetti, Aymo & Weder, Beatrice. “A free press is bad news for corruption,” Journal of Public Economics, Elsevier, vol. 87(7-8), 2003, pages 1801-1824. jQuery("#footnote_plugin_tooltip_9574_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9574_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); investigated the relationship between freedom of press and corruption in 68 countries. Based on their research, they predict that if Nigeria had the same level of freedom of information as Norway, its level of corruption would drop precipitously.

 

Second, information can break the diversity paradox.  Most arbitration practitioners say they are supportive of increasing diversity among arbitrators, but do not themselves appoint diverse arbitrators.  One important reason is that they do not have sufficient information about newer and more diverse arbitrators.  As a Bryan Cave Leighton Paisner survey demonstrated, 92% of respondents wanted more information about newer and more diverse arbitrators.

 

Third, information will make arbitrator selection for parties and arbitral institutions more efficacious and the market for arbitrators more functional. More information would necessarily allow parties to make more informed choices as among established arbitrators, and open up opportunities for young arbitrators, more women and people from regions outside North America and Europe.

 

In these respects, Peru represents a particularly important example. To create a functional alternative to the often-corrupt Peruvian courts, a (relatively) new Peruvian law requires that all disputes arising under State contracts be submitted to arbitration.2) Article 45.1, Legislative Decree N° 1341 amending the Law N° 30225 of state contracts: “Disputes arising between the parties regarding the execution, interpretation, resolution, non-existence, ineffectiveness or invalidity of the contract are resolved, through conciliation or institutional arbitration, according to the agreement of the parties. The regulation defines the exceptional cases for recourse to Ad Hoc arbitration. Disputes over the nullity of the contract can only be submitted to arbitration”. jQuery("#footnote_plugin_tooltip_9574_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9574_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Another recent Peruvian law expressly permits the appointment of foreign arbitrators in domestic arbitration.3) Article 1, Legislative Decree N° 1231 amending article 20 of the Legislative Decree N° 1071 regulating arbitration: “The natural person who is in full exercise of their civil rights may be an arbitrator, provided that they have no incompatibility to act as an arbitrator and have not received a final criminal conviction for an intentional crime. Unless otherwise agreed by the parties, the nationality of a person will not be an obstacle to acting as arbitrator”. jQuery("#footnote_plugin_tooltip_9574_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9574_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Together, these reforms are important innovations based on the promise that a well-functioning arbitration market could provide a much-needed form of reliable dispute resolution.  These reforms have also, not surprisingly, led to a virtual explosion in the number of arbitrations.4) Contraloría General de la República. “El Arbitraje en las Contrataciones Públicas durante el periodo 2003 – 2013”, page 123: “In relation to the average annual growth rate of the arbitration awards, we have that for the period 2003-2008 this was 3%; while for the period 2009-2013 it was 25%”. jQuery("#footnote_plugin_tooltip_9574_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9574_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

In light of its regional importance, AI, in collaboration with the Bullard Falla Ezcurra+ law firm and the Lima Chamber of Commerce Arbitration Center, organized a “Flash Campaign” in July to collect AIQs on Peruvian arbitrators. The campaign involved recruiting mostly young practitioners interested in doing something concrete to promote diversity and reduce corruption.

 

In the brief two weeks of the Campaign, Arbitrator Intelligence received over 30 AIQs, 28 of which were seated in Lima, Peru. Because most AIQs involved 3-person tribunals, responses provided information about 60 instances of arbitrator conduct and decision-making in different sectors (construction, energy, insurance, among others). These AIQ responses included arbitrations administered by different institutions (Lima´s Chamber of Commerce, AMCHAM, Ad-hoc, CIAC, among others).

 

The AIQs asks a range of questions, from dates and dollar amounts, to arbitrators’ interpretive methodology, their responses to requests for documents or interim relief, and the quality of questions during hearings. The AIQs do NOT ask for the names of the parties or the law firms, or the identity of the person completing the AIQ. In this way, through the Flash Campaign, we collected a lot of information about arbitrators, but maintained the confidentiality of the arbitrations.

 

The Flash Campaign also demonstrated the critical importance of engaging young arbitration practitioners. Over 23 young Peruvian practitioners participated in the Flash Campaign, inspired both by the potential to do their part to increase diversity and reduce corruption. They were also incentivized by some tantalizing prizes. Sandro Espinoza won 1st place and a plane ticket to the United States for Penn State International Arbitration Day, which will focus on Latin America.  Meanwhile, Mayra Bryce and Carla de los Santos tied for 2nd Place, and were awarded signed copies of Gary Born’s treatise, International Arbitration: Law and Practice and Catherine Rogers’ Ethics in International Arbitration.

 

AI is taking this information gathered from the Peru Flash Campaign to develop a AI Reports, which will analyze the information collected about an arbitrator.  As with the AIQ, in the process of developing the prototype AI Report, we will be seeking input from selected experts as well as the general public.

 

In the meantime, you can also get directly involved in efforts to hack the information gap. Arbitrator Intelligence, together with the Bullard law firm, will soon be seeking to replicate the success of the Peru Flash Campaign in various regions.

 

Starting with Latin America, AI is in the process of recruiting AI Ambassadors for on Brazil, Colombia, Argentina, Chile, Mexico, Costa Rica, Guatemala, Panama, Ecuador and Peru. These AI Ambassadors will reaching out to lawyers, law firms, arbitration centers, young international arbitration groups, and parties to participate in the new AIQ Campaign in Latin America. In comparison to the Peru Flash Campaign, in the new LatAm AIQ Campaign, the number of participants will be bigger, the time longer, the prizes better, and the number of AIQs collected much higher.

 

Stay tuned, because we will soon have a call for Ambassadors in the MENA region.

 

AIQ responses collected during these AIQ Campaigns will help shine a bright light on arbitrations in these regions, on the institutions that administer them, and the arbitrators who decide them, all while maintaining the confidentiality of those same arbitrations.

 

If you are in Latin America, you can apply now to be an AI Ambassador, and a call for Ambassadors in MENA will be coming soon.

 

If you are not in these regions, you can still help us bridge the information gap in international arbitration. Just take a few minutes to fill out an AIQ at the end of your next arbitration!

 

The authors would like to thank Rodrigo Vega and Thalia Villegas, interns at Bullard Falla Ezcurra +, for their assistance. Their enthusiasm and feedback were critical for the preparation of this article.

References   [ + ]

1. ↑ Brunetti, Aymo & Weder, Beatrice. “A free press is bad news for corruption,” Journal of Public Economics, Elsevier, vol. 87(7-8), 2003, pages 1801-1824. 2. ↑ Article 45.1, Legislative Decree N° 1341 amending the Law N° 30225 of state contracts: “Disputes arising between the parties regarding the execution, interpretation, resolution, non-existence, ineffectiveness or invalidity of the contract are resolved, through conciliation or institutional arbitration, according to the agreement of the parties. The regulation defines the exceptional cases for recourse to Ad Hoc arbitration. Disputes over the nullity of the contract can only be submitted to arbitration”. 3. ↑ Article 1, Legislative Decree N° 1231 amending article 20 of the Legislative Decree N° 1071 regulating arbitration: “The natural person who is in full exercise of their civil rights may be an arbitrator, provided that they have no incompatibility to act as an arbitrator and have not received a final criminal conviction for an intentional crime. Unless otherwise agreed by the parties, the nationality of a person will not be an obstacle to acting as arbitrator”. 4. ↑ Contraloría General de la República. “El Arbitraje en las Contrataciones Públicas durante el periodo 2003 – 2013”, page 123: “In relation to the average annual growth rate of the arbitration awards, we have that for the period 2003-2008 this was 3%; while for the period 2009-2013 it was 25%”. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Slovak Republic v. Achmea: A Disproportionate Judgment?

Fri, 2018-09-14 03:38

John P Gaffney

Introduction

The judgment of the Court of Justice of the European Union (CJEU) in Case C-284/16, Slovak Republic v. Achmea B.V. (Achmea) has attracted much comment in many fora, including the Kluwer Arbitration Blog (See e.g., articles authored by Florian Stefan, Clement Fouchard and Marc Krestin, and Vivek Kapoor). This is not surprising. The CJEU held that the arbitration clause contained in Article 8 of the 1991 Netherlands-Slovakia BIT (BIT) is incompatible with EU law, a holding that has significant consequences for intra-EU investment arbitration.

Criticism of the Achmea judgment may have been dismissed by some as the griping of a self-interested international arbitral community (See e.g., Peter Nikitin, “The CJEU’s Achmea Judgment: Getting Through the Five Stages of Grief”, (2018)), but in this article I question whether it constitutes a violation of EU law, on the basis that it violates the principle of proportionality set forth in the Treaty on European Union, and whether its validity may thus be called into question by EU Member State courts.

The Principle of Proportionality and the Conferral of Competence and under EU Law

Article 1 of Protocol (No 2) to the Treaty on the Functioning of the European Union (TFEU)) on the application of the principles of subsidiarity and proportionality provides:

“Each institution shall ensure constant respect for the principles of subsidiarity and proportionality, as laid down in Article 5 of the Treaty on European Union.”

Articles 5(1) and 5(2) of the Treaty on European Union (TEU) provide:

“1. The limits of Union competences are governed by the principle of conferral. The use of Union competences is governed by the principles of subsidiarity and proportionality.

2. Under the principle of conferral, the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein. Competences not conferred upon the Union in the Treaties remain with the Member States.”

While Article 5(4) of the TEU provides:

“4. Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties.”

The EU’s Summaries of EU legislation explains that “…the principle of proportionality regulates the exercise of powers by the [EU]. It seeks to set actions taken by EU institutions within specified bounds…the action of the EU must be limited to what is necessary to achieve the objectives of the Treaties. In other words, the content and form of the action must be in keeping with the aim pursued.”

Thus, the principle of proportionality ought to regulate the exercise of judicial powers by the CJEU.

Applying the Principle of Proportionality to the Achmea Judgment

 If the CJEU is required to “ensure constant respect” for the principle of proportionality in the performance of its judicial functions, the question arises whether its judgment in Achmea could be considered to have violated that principle.

The CJEU held that a arbitral tribunal established under Article 8 of the BIT is not part of the judicial system of the EU and since it is provided for by an agreement concluded by Member States (and not by the EU) it is such as to call into question not only the principle of mutual trust between the Member States but also the preservation of the particular nature of the law established by the Treaties ensured by the preliminary ruling mechanism provided for in Article 267 TFEU. In the CJEU’s view, it is not therefore compatible with the principle of sincere cooperation, thus having an adverse effect on the autonomy of EU law (CJEU judgment).

The CJEU judgment sharply contrasts with the carefully reasoned Opinion of Advocate General Wathelet, in which he proposed that the BIT’s arbitration clause is compatible with the preliminary ruling mechanism (and neither constituted discrimination on grounds of nationality nor undermine either the allocation of powers fixed by the Treaties or the autonomy of the EU legal system) (Opinion of Advocate General Wathelet).

In the context of this article, the AG’s observations on the alleged systemic risk of intra-EU BITs to the uniformity and effectiveness of EU law are notable:

“44. I would add that the systemic risk which, according to the Commission, intra-EU BITs represent to the uniformity and effectiveness of EU law is greatly exaggerated. UNCTAD’s statistics show that out of 62 intra-EU arbitral proceedings which, over a period of several decades, have been closed, the investors have been successful in only 10 cases, representing 16.1% of those 62 cases, a rate significantly below the 26.9% of ‘victories’ for investors at the global level.

45. The arbitral tribunals have to a large extent allowed the Commission to intervene in arbitrations and to my knowledge in none of those 10 cases was the arbitral tribunal required to review the validity of acts of the Union or the compatibility of acts of the Member States with EU law. In their written observations, several Member States and the Commission have mentioned only a single example, namely the arbitration Ioan Micula and Others v Romania (ICSID Case No ARB/05/20), which resulted in an arbitral award that was allegedly incompatible with EU law. Even though that example is in my view not relevant in the present case, the fact that there is only a single example reinforces my opinion that the fear expressed by certain Member States and the Commission of a systemic risk created by intra-EU BITs is greatly exaggerated.” (Footnotes omitted)

Advocate General Wathelet arguably would appear to have been mindful that the CJEU’s judgement ought not to “exceed what is necessary to achieve the objectives of the Treaties”. In other words, the CJEU’s judgment ought to be that necessary for achieving the desired objectives and proportionate to any adverse consequences. He demonstrated, among other things, how arbitral tribunals established under Article 8 of the BIT could be considered as part of the judicial system of the EU – an outcome that was arguably the least invasive of the freedom of action of both EU Member States and intra-EU investors, as well as providing for appropriate judicial dialogue – but one that the CJEU ignored.

Could the Achmea judgment thus be considered disproportionate in circumstances where:

  • the alleged systemic risk posed by intra-EU investment arbitration to the uniformity and effectiveness of EU law appears to be very low,
  • Advocate General Wathelet demonstrated an effective and reasonable alternative to the CJEU’s holding that arbitration under such BITs has an adverse effect on the autonomy of EU law, and
  • it has dramatically damaging consequences for intra-EU investment arbitration?

Potential Consequences for Intra-EU Arbitration if the Achmea Judgment is Disproportionate

The CJEU judgment cannot be set aside, since it is not subject to judicial review by a higher court. However, it might be ignored.

It is possible that a Member State court – faced with a challenge to an intra-EU investment arbitration award – could decline to give effect to the Achmea judgment where it held that the CJEU exceeded the competence conferred on it by the EU Treaties in the exercise of its judicial functions in that case.

As noted, earlier, Article 5(2) of the TEU provides:

“…the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein. Competences not conferred upon the Union in the Treaties remain with the Member States.”

In other words, it is possible that a Member State court could hold that the Achmea judgment was ultra vires the competence(s) conferred on it by the Member States. The chances of that occurring, however, would appear to be low.  As one commentator has observed:

“Declaring an act to be ultra vires always implies a defect in the act. It would also imply a reproach to the European level and especially to the ECJ. Moreover, the reproach of an ultra vires-act would also concern the validity and/or application of European law in all other Member States, as an act cannot be ultra vires only in the bipolar relationship between one Member State and the EU. This is hence a frontal attack on (European) judge-made European law.”1) F. Mayer, “The European Constitution and the Courts Adjudicating European constitutional law in a multilevel system”, Jean Monnet Working Paper 9/03. jQuery("#footnote_plugin_tooltip_4600_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4600_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Nonetheless, in a decision of 5 July 1967, the German Constitutional Tribunal (BVerfG):

“emphasised a central role for the “act of assent“ to the founding treaties…Later commentators likened this central role to that of a bridge between EC law and national law, in that – in the German view – the act of assent functions as the decisive ‘order to give legal effect’ (Rechtsanwendungsbefehl) to European law. […] The BVerfG hinted, though, at constitutional limitations on the transfer of public authority rights (Übertragung von Hoheitsrechten) to the EC in the context of the German constitution’s guarantee of fundamental rights.” (Ibid.)

And in a judgment concerning an alleged discriminatory pension scheme in the Czech Republic, the Czech Constitutional Court (CCC) held that in its judgment in Case C-399/09 Landtová the CJEU acted ultra vires and subsequently gave Czech national law precedence over EU law, albeit in a heavily criticized judgment.2)See, e.g., Jan Komarek: Playing With Matches: The Czech Constitutional Court’s Ultra Vires Revolution. jQuery("#footnote_plugin_tooltip_4600_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4600_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is notable that in its judgment, the CCC referred to the BVerfG’s earlier judgment to support its ruling.

Conclusion

Hence, there remains the possibility – admittedly remote – of a Member State court finding that the CJEU acted ultra vires in violating the principle of proportionality in its Achmea judgment and thus giving precedence to national law in the enforcement of intra-EU arbitral awards over the CJEU’s judgment. Given the stakes, and with so many extant intra-EU investment arbitrations in play, one cannot rule out the possibility of this scenario presenting itself sooner rather than later.

 

 

References   [ + ]

1. ↑ F. Mayer, “The European Constitution and the Courts Adjudicating European constitutional law in a multilevel system”, Jean Monnet Working Paper 9/03. 2. ↑ See, e.g., Jan Komarek: Playing With Matches: The Czech Constitutional Court’s Ultra Vires Revolution. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Cooperation and Facilitation Investment Agreements in Brazil: The Path for Host State Development

Thu, 2018-09-13 01:09

Natali Cinelli Moreira

Brazil has recently executed two new Cooperation and Facilitation Investment Agreements (“CFIAs”) with the Federal Democratic Republic of Ethiopia on April 11, 2018; and with the Republic of Suriname on May 2, 2018. These are, respectively, the 7th and the 8th CFIAs that Brazil has executed since 2015 (the former ones were executed with Chile, Colombia, Malawi, Mexico, Angola and Mozambique). Following this same protection model, Brazil has also entered into two treaties with investment provisions: the Economic and Trade Expansion Agreement with Peru and the Intra-Mercosur Investment Facilitation Protocol. So far, the CFIA executed with Angola is the only one in force.
 
CFIAs are the model investment agreement proposed by Brazil to regulate the relationship between foreign investors and host countries. Focusing on cooperation and facilitation of investment flows, the CFIAs do not resemble traditional bilateral investment treaties (“BITs”). CFIAs regulate direct investment flows from the investor of a party into the territory of the other party; however, differently from BITs, they seek a greater balance between investment protection and host state’s development agenda. To accomplish it, CFIAs bring new wording to old traditional clauses inserted into BITs (such as National Treatment, Most-favored-nation Treatment, and Expropriation), introduce new safeguard clauses to regulate investments and investors’ behavior (as corporate social responsibility clauses and provisions to protect the environment, labor affairs and public health), as well as rely on a dispute resolution mechanism far from investor-state arbitration model widely included in BITs. The CFIAs executed with Ethiopia and Suriname have followed this same path.
 
When addressing National Treatment and Most-favored-nation Treatment, the referred CFIAs expressly state that “treatment accorded in like circumstances” shall be interpreted according to the totality of circumstances, including – and, therefore, excepting – whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives (articles 5.2 and 6.3 of the Ethiopian CFIA; articles 5.4 and 6.4 of the Surinamese CFIA). As to Expropriation, both CFIAs also explicitly acknowledge that only direct expropriation – where an investment is nationalized or otherwise directly expropriated through formal transfer of title or ownership rights – is under protection, excluding the well-known creeping expropriation so dreaded by host countries when adopting public policies to protect the environment, public health and other areas of public concern (article 7.5 of both Ethiopian CFIA and Surinamese CFIA).
 
Besides this new face to old clauses, CFIAs also contain dispositions which historically have been alien to investment treaties. Both Ethiopian and Surinamese CFIAs include articles on corporate social responsibility (article 14 and 15, respectively), stating that investors and their investment shall strive to achieve the highest possible level of contribution to the sustainable development of the host state and the local community, by means of a high degree of socially responsible practices on a voluntary basis. This approach is in line with modern investment agreements, which have included more socially responsible clauses – as can be noted, for example, from the investment chapter included in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership; although this trend is recent, it has gained considerable relevance in the last years. The CFIAs also include articles which overtly acknowledge that host county is free to adopt, maintain and enforce any measure deemed appropriate to ensure the foreign investment is carried out according to national labor, environmental and health legislation (article 16 of the Ethiopian CFIA; article 17 of the Surinamese CFIA).
 
The aforementioned clauses evidence that the CFIAs executed with Ethiopia and Suriname follow the previous ones negotiated by Brazil within the last three years, consolidating a new model to regulate foreign investment. Investor protection is still a major concern in this Brazilian model; creating and maintaining favorable conditions for investments is an express objective included in the preamble, and several clauses intended to protecting investments are also part of the agreements (such as Compensation for Losses, Transparency, Transfers, among others). However, it comes accompanied by provisions intended to protect and, indeed, to promote the host country’s development agenda.
 
This is even more evident when the dispute resolution mechanism is taken into account. The agreements executed with Ethiopia and Suriname address foreign investment-related claims as previous CFIAs: there is an initial dispute prevention phase, and, if no agreement is reached, the aggrieved party may initiate a state-to-state arbitration. Both choices may be seen as positive steps towards host state’s development.
 
A high emphasis is placed in the amicable settlement of disputes. Two institutional arrangements created in the context of CFIAs – the Joint Committee and the Focal Point (or, Ombudsman) – are intended to address any issues or differences concerning investments in order to avoid litigation (articles 17 and 18 of the Ethiopian CFIA; articles 18 and 19 of the Surinamese CFIA). In case the dispute is not avoided, a settlement phase is initiated. The parties shall engage into negotiation proceedings and, by the end of a 60-day deadline, the Joint Committee shall issue a report with its recommendation; the parties, then, may decide whether to adopt it or not (article 23 of the Ethiopian CFIA; article 24 of the Surinamese CFIA). If no agreement is reached and the parties decide not to follow the Joint Committee’s report, then arbitration state-to-state may be initiated (article 24 of the Ethiopian CFIA; article 25 of the Surinamese CFIA).
 
The settlement approach, followed by this type of arbitration, may be seen as favorable to host state protection. No litigation is initiated unless several steps are taken in order to avoid the dispute itself. Both parties are invited to discuss their arguments and reach a settlement, while a preliminary report on the case, with the conclusions of the Joint Committee on their claims, is issued and made available. The fact both parties may discuss their arguments and even be provided with a first analysis of the case may avoid a lengthy and costly litigation, leading to an amicable settlement.
 
Even if this is not the case, and parties decide to proceed with litigation, it will not constitute an investor-state arbitration; this system has long been criticized as biased towards the investor’s protection, with little regard to host states’ interests. State-to-state arbitration, as proposed in the CFIAs, may be an alternative to reach a greater balance between investor and host state. The aggrieved investor shall persuade its home state that a damage was caused to the investment, so it may initiate an arbitration against the host state. It would be expected that only robust claims would proceed under this situation, avoiding adventurous litigators.
 
Brazil seems to be promoting the model agreement it has launched a few years ago, which is focused in finding a greater balance between investment protection and the development agenda of the host state. From new wording to old clauses, to the inclusion of provisions which were alien to traditional investment agreements, including new dispute resolution mechanisms, the fact is that CFIAs have come to provide a new meaning to the relationship between foreign direct investment and host state development. Nonetheless, we still have to wait whether these agreements will result in concrete facts.

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New Signs of Good Prospects for International Arbitration in Argentina?

Tue, 2018-09-11 17:30

Noiana Marigo, María Julia Milesi and Ezequiel Vetulli

On 4 July 2018, the Argentine National Congress passed a new arbitration act modernizing the framework for the conduct of international commercial arbitrations in Argentina (the Arbitration Act or the Act), based on the UNCITRAL Model Law and its 2006 amendments (the Model Law). The development comes in response to calls from the arbitral community in Argentina, which have been ongoing for some time, to rehaul the country’s arbitration legislation, particularly following problematic amendments introduced in 2015. The approval of the new Act mirroring the Model Law represents a solid step towards enhancing the status of international arbitration in Argentina.

The Model Law is considered to embody the most widely accepted and highly regarded rules of arbitration practice and principles; its adoption by 80 countries attests to its reputation. Even countries not officially listed as “Model Law” jurisdictions follow its main principles, thereby further ensuring the uniformity and predictability of arbitral practice worldwide.

In November 2016, the Argentine Ministry of Justice presented to Congress a draft bill on international arbitration (the Bill) prepared by a working group composed of lawyers, arbitrators, academics, and public authorities (including the Treasury Attorney General’s Office). The Bill had its genesis in a project to enhance the judicial system so as to achieve quicker, more independent, and more secure resolution of disputes. The Bill acknowledged the importance of arbitration as a flexible, fast and reliable dispute resolution method. In September 2017, the Senate approved the Bill, and on 4 July 2018 it was finally passed into law by the House of Representatives. Once promulgated by the executive power, the Act will enter into full force and effect. The legislative decision to foster international arbitration forms part of a broader policy to reform Argentina’s political and economic framework, aimed at improving legal certainty as to attract foreign investors, in line with the recent policies of President Macri. The promotion of international arbitration as a means of dispute resolution can also be seen in other recent legislation, including the Public-Private Partnership Act, which expressly refers to international arbitration as a means of resolving disputes involving state parties.

The previous arbitration framework in Argentina

Historically, arbitration in Argentina has been regulated by the procedural codes of each jurisdiction, i.e. each province or the federal territory. While each code dealt with the procedural aspects of arbitration in a different way, there were no substantial differences between them. The Argentine courts applied the provisions of these procedural codes to both domestic and international arbitrations, as the rules provided no distinction between the two.

In 2015 Argentina introduced a new Civil and Commercial Code, which included a specific chapter on domestic arbitration. This Code, which applied in all provinces and federal territories, recognized the Model Law as one of its main sources (along with the French arbitration law and the Quebec Civil Code). Its enactment meant great improvements in the arbitration framework in Argentina, as it incorporated the principles of separability and kompetenz-kompetenz (articles 1653 and 1654), which were not previously formally codified, and that of favor arbitrandum for the interpretation of arbitration agreements (article 1656).

The provisions on arbitration contained in the procedural codes of each province, however, also remained in force. The Civil and Commercial Code did not clarify the scope of its application either, so both instruments governed domestic and international arbitration in Argentina.

The new Arbitration Act has sought to clarify this issue, specifying that it, exclusively, will govern international commercial arbitration (along with the relevant international treaties). The Act thus consolidates all relevant domestic rules for international commercial arbitration into a single instrument. The Act further provides that an arbitration will be “international” if: (i) at the time of the conclusion of the arbitration agreement the parties had their places of business in different states, or (ii) their places of business are different from either the seat of the arbitration, any place where substantial obligations are to be performed, or the place of the closest connection to the dispute. The procedural codes and the Civil and Commercial Code will continue to apply, but only to domestic arbitrations. As a consequence, the realms of international and domestic arbitration will now have different regulatory instruments.

The new rules for international commercial arbitration pursuant to the Act

Unlike other countries that have adopted the Model Law whilst making significant alterations to its text, Argentina has decided to adopt the model text almost in its entirety with few modifications. As such, Argentina’s new Arbitration Act offers cutting edge solutions with regard to some issues, but takes a more conservative approach regarding other novel practices.

In the definition of “arbitration agreement,” for instance, the Arbitration Act adopts option I of article 7 of the Model Law, which contains the requirement that an arbitration agreement shall be in writing. Congress indicated in the Act that the circumstances mentioned in article II(2) of the New York Convention under which an arbitration agreement is deemed to be “in writing” (arbitration clause, or arbitration agreement signed by the parties or contained in an exchange of letters or telegrams), shall be interpreted as non-exhaustive, as recommended in 2006 by UNCITRAL. However, the Act takes a conservative approach by declining to adopt the possibility that an arbitration agreement may be considered to be in writing “whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means” (article 7.3 of the Model Law).

The Arbitration Act also excludes the qualification of arbitration as “international” when the parties expressly agree that the subject matter of the arbitration agreement relates to more than one country (article 1.3.c Model Law).

Another deviation from the text of the Model Law relates to the law applicable to the merits where the parties are silent on the issue. Instead of taking the Model Law approach, which provides that the arbitral tribunal shall apply the law determined by the conflict-of-laws rules, the Arbitration Act creates a shortcut by stating that the tribunal shall simply apply the “rules of law” that it considers appropriate.

In turn, a few elements have been added to the original text of the Model Law, as follows:

  1. In the definition of the term “commercial,” instead of including footnote 2 of the Model Law (which recommends a wide interpretation of such term), article 6 of the Arbitration Act states that the term “commercial” refers to any contractual or non-contractual relationship predominantly governed by Argentinian private law. Article 6 also explains that the interpretation should be wide and, in case of doubt as to the nature of a relationship, there should be a presumption in favour of its commercial nature. While this provision may have been intended to foster arbitration, it probably went too far, as it may now encompass situations that are governed by private law but can hardly be considered “commercial” in nature.
  2. In the constitution of the arbitral tribunal, the Act states that an arbitration agreement whereby either party is granted an advantage over the other in the appointment of arbitrators shall be null and void. This provision is unusual, and represents a departure from the Model Law, which provides that any advantage in the appointment of arbitrators is governed by a general rule on equal treatment of the parties (see, for example, article 18 of the Model Law).
  3. While the Model Law provides general rules for challenging arbitrators, article 28 of the Act includes additional (non-exhaustive) grounds for challenge. It refers, for example, to the participation of an arbitrator (or members of his/her law firm or equivalent organization) in another arbitration (or judicial procedure) as: (i) counsel of one of the parties, regardless of the subject matter of the dispute, or (ii) counsel of a third party in a case with the same subject matter, and provides that either situation will constitute grounds for challenge, irrespective of any evidence to the contrary about the arbitrator’s independence and impartiality. This provision might therefore pave the way for frivolous challenges and generate delays.

The rules governing domestic arbitration pursuant to the existing instruments

Although Argentina’s new Arbitration Act establishes a new framework for international commercial arbitration, it leaves the existing procedural codes and the Civil and Commercial Code to govern domestic arbitration. The procedural codes are quite outdated, and, as noted above, the chapter on arbitration contained in the Civil and Commercial Code contains several technical flaws. For instance, one of the most problematic provisions relates to the challenge of awards (the last paragraph of article 1656). This provision (i) establishes an annulment recourse without indicating the applicable grounds, and also (ii) refers to a non-waivable “judicial challenge” against any final award “contrary to the legal system”, virtually creating a system of appeal for arbitral awards.

In an effort to address these issues, Congress is in the process of analyzing a draft bill which proposes several amendments to the Civil and Commercial Code, including on the vital issues of arbitrability and challenges to arbitral awards.

On arbitrability, the bill proposes to eliminate the Code’s limitation on the arbitrability of disputes involving public policy (article 1649). It also proposes to replace the Code’s blacklist of non-arbitrable matters with a general rule confirming the arbitrability of all disputes involving freely transferable rights (article 1651).

With regard to challenges of arbitral awards, the bill proposes to remove the last paragraph of article 1656 providing for the judicial challenge of awards “contrary to the legal system” mentioned above and an existing ground to challenge interim measures on the basis that they violate constitutional rights or are “unreasonable” (article 1655).

Such changes will hopefully provide the much-needed certainty required to achieve consistency of the arbitration framework at the domestic level as well.

Conclusions

In sum, Argentina’s decision to pass the new Arbitration Act is a positive step towards the promotion of the country as an arbitration-friendly jurisdiction. The Act now establishes a clear distinction between the rules applicable to domestic versus international arbitration, and a modern body of rules for the latter. There remain some aspects that could be improved in the legal framework applicable to domestic arbitration, but the reforms proposed in the current bill being considered by Congress appear promising in this regard.

The ultimate success of the Arbitration Act will be measured by its application in the domestic courts. It remains to be seen whether the Argentine courts will respect the new dividing line between the instruments governing international and domestic arbitration and apply the provisions of the Act to the exclusion of the old procedural codes. While many courts have been contributing to the creation of a solid body of pro-arbitration case law even prior to the introduction of the new Act, a limited few still show some reservations towards its use.

By passing its new Act, Argentina follows in the legislative footsteps of several of its Latin American neighbours. In the last decades, almost all countries in the region have modernized their arbitration legislation. Like Argentina, most of them have followed the Model Law, with some also incorporating the 2006 amendments. Most of them, like Argentina, have also consolidated their international arbitration laws into  a single standalone act, with the exception of Mexico, where arbitration is still governed by the commercial code. Uruguay, for instance, passed its new and long awaited arbitration legislation on 3 July 2018 (almost simultaneously with Argentina), replacing its old procedural code-based rules with a new framework based on the 1985 Model Law with some 2006 amendments. In view of these developments, the future of arbitration in Argentina and in Latin America seems bright.

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Madrid High Court of Justice and the Setting Aside of Arbitral Awards

Tue, 2018-09-11 02:00

Alessandro Spinillo

Part I

In a judgment dated 5 April 2018 (Case nº 6/2017), the Madrid High Court of Justice (“TSJM”), the competent court to hear applications to set aside an award when the seat of the arbitration is Madrid, set aside an arbitration award on public policy grounds after finding that the tribunal “[…] unjustifiably omitted to assess evidence that was relevant for the resolution of the case”.

In recent years, Spain has experienced an impressive increase of arbitration cases. The TSJM has handled an unusual number of applications to set aside arbitration awards based on a wide array of grounds and has granted a significant part of these applications. Many in the Spanish and international arbitration community have raised concerns that the TSJM is too easily prone to review the merits of awards. Statistics show a rather high rate of successful applications for setting aside (26.6 %) (here). The matter, however, seems too nuanced and complex to sum up, and definitive conclusions cannot be hastily made on the sole basis of statistics.

This post is divided into two parts. The first part will discuss the facts of the above case, the arbitration proceedings and the TSJM’s judgment dated 5 April 2018. Thereafter, the second part will illustrate some thoughts and views about the particular stage of development of arbitration in Spain and the TSJM’s trend to review the merits of awards.

 

The facts of the case and the arbitration

The case involved a turnkey contract for a wind farm project between owner, Engasa Eólica (“Engasa”), and contractor, Vestas Eólica (“Vestas”). The core issue in dispute was whether or not the parties agreed upon a valid and enforceable limitation of liability provision with respect to the civil construction works required for the project.

Some years after the wind farm had become operational, Engasa claimed that Vestas was responsible for certain defective construction works under the turnkey contract. Engasa took the matter to arbitration and sought that Vestas be ordered to repair the defective construction works (specific performance) or, alternatively, to pay damages. Vestas denied the claim by invoking the limitation of liability provision. Vestas maintained that the parties concluded a valid limitation of liability provision by way of an exchange of emails between them during the negotiations leading to the signature of the turnkey contract. Engasa disagreed and argued that it never consented to any such limitation of liability.

The tribunal concurred with Vestas. In taking the decision, the tribunal relied on the contents of that set of emails as well as corroborating witness testimony. It was satisfied that the parties only signed the turnkey contract to meet a requirement of the financing banks. The tribunal assumed that the banks were not prepared to finance the project unless Vestas (given its good track record in the energy renewable sector) accepted to act as contractor under a standard turnkey contract −also referred to as an Engineering, Procurement and Construction (EPC) contract.

Regardless of the turnkey contract the parties had signed, the tribunal found that their mutual intention was, in fact, that Engasa would select and pay another engineering company, Isolux, for the whole of the project’s civil construction works whilst Vestas would supply, start up, and maintain the turbines and related equipment. In other words, from a common law contract terminology perspective, it could be said that the tribunal found that the consideration stated in the turnkey contract did not reflect the true intention of the parties and therefore did not bind them.

The tribunal was satisfied that Engasa, in that set of emails, agreed to waive any claim against Vestas that would be outside the said scope of supplies, start up and maintenance undertakings. It would have made little commercial sense for Vestas to accept to remain liable for Isolux’s potential non-performance or negligence under the circumstances. The tribunal also considered that Engasa decided to pay Isolux directly for the advance of the construction works.

The tribunal concluded that Vestas and Engasa had agreed upon a valid and enforceable limitation of liability provision that excluded Vestas’ liability for the defective construction works carried out by Isolux.

 

Dissenting arbitrator

The tribunal was composed of three arbitrators, and one of them issued a dissenting opinion holding that Vestas and Engasa entered into nothing but a true standard turnkey contract, and therefore Vestas, as contractor, was globally liable for all the construction works and supplies related to the project. According to the dissenting arbitrator, Vestas could have claimed recovery from subcontractors for the faulty performance of the latter, including, of course, from Isolux.

The dissenting arbitrator relied on an additional set of emails submitted to the tribunal that the majority did not consider at all. It appears, however, that the dissenting arbitrator did not give any weight to the circumstance that Engasa selected and paid Isolux directly for the whole of the project’s civil construction works, a circumstance which would be incompatible with the predicate that Vestas and Engasa had entered into a standard turnkey contract.

 

Engasa approached the TSJM to set aside the award

Engasa moved to the TSMJ seeking that the award be set aside on public policy grounds under Article 41 (1) (f) of the Spanish Arbitration Law (SAL). The grounds for setting aside in the SAL are exhaustive, reflecting the UNCITRAL Model Law standards. Engasa put forward, inter alia, the argument that the majority voting “[…] irrationally assessed the evidence and the applicable law […]”. It contended that the flawed assessment of the evidence by the tribunal led to an “irrational outcome in the award”.

The TSJM used the public policy argument as a door to open a review of the merits of the award and finally set it aside. The TSJM effectively undertook a de novo review of the issues in dispute and held that the arbitral tribunal “unjustifiably omitted to assess evidence that was relevant for the resolution of the case”.

The TSJM underscored that the dissenting arbitrator relied upon another set of emails and documents submitted to the tribunal that the majority vote did not consider at all in the award and held “[…] those means of evidence […] relied upon by the dissident opinion required a proper analysis, even if it were to explain why they did not undermine the arguments put forward by the two arbitrators of the majority. The absolute silence about those means of evidence, without any explanation or justification, causes an appearance of arbitrariness in the arbitral tribunal […]”. The TSJM cited one of its own precedents in support of its conclusions: “[…] under certain circumstances, the assessment of the evidence −as put forward in the reasonings− may infringe due process and therefore infringe public policy” [ROJ:STSJ M 11066/2017-ECLI:ES:TSJM:2017:11066].

 

Assessment

The TSJM’s reasoning and conclusions are unfortunate and depart from mainstream arbitration rules and practice.

Article 25 SAL (based on Article 19 Model Law) provides that evidential questions of admissibility, relevance and materiality are clearly within the sole sphere of the arbitral tribunal. The assessment of evidence is a matter for the tribunal, not for the court.

The arbitral tribunal’s duty is to decide the issues put before it, and to provide reasons in the award. This duty does not require the tribunal to refer to all the evidence submitted. The TSJM cannot determine −as it did in this case− what evidence is relevant for the case, unduly interfering with the tribunal’s decision on the merits.

It appears that the members of the arbitral tribunal simply disagreed on the merits of the dispute and the set of documents they relied upon to support their respective findings. The dissenting opinion, as one may observe from the TSJM’s ruling, does not at all suggest any appearance of arbitrariness or procedural unfairness or unequal treatment to the parties throughout the proceedings, let alone any impropriety during the tribunal’s deliberations leading to the final award. The dissenting opinion, therefore, cannot form the basis for challenging the award.

One cannot appreciate any infringement to public policy as provided for in Article 41 (1) (f) SAL as to justify the TSJM’s decision for vacating the award. The TSJM’s decision is final and subject to no appeal or recourse in accordance with Article 42 (2) SAL.

By accepting arbitration, the parties undertake to carry out the award without delay and waive the right to an appeal on the merits, meaning the award was only subject to a very narrow scope of judicial review. If anything, the TSJM’s ruling is likely to encourage attempts to mount appeals on the merits disguised under Article 41 (1) (f) challenges.

Having discussed the TSJM’s reasonings in setting aside the award made in the Engasa vs. Vestas arbitration, Part II, as noted earlier, will raise some thoughts and views on the particular stage of development of arbitration in Spain and the TSJM’s trend to review the merits of awards.

 

Part II

In Part I, the TSJM’s reasoning in setting aside the award made in the Engasa vs. Vestas arbitration was discussed in detail.Now the discussions will focus on the particular stage of development of arbitration in Spain and the TSJM’s trend to review the merits of awards.

 

An unprecedented growth of arbitration in Spain  

The SAL, modelled on the UNICTRAL Model Law, was passed in 2003 and amended in 2011. The new law triggered an unprecedented growth in the number of arbitrations with a seat in Spain (here). Madrid and Barcelona (and likely in that order) are by far the most frequently chosen venues for arbitration in Spain. There has been a significant volume of new entrants at all levels of an emerging (and profitable) niche of the legal market (here). The new entrants naturally have different levels of arbitration expertise. In addition, only in 2011 was the TSJM vested with the authority to hear applications to set aside awards after a major reassignment of judicial functions related to arbitration brought about by said amendment to the SAL. Previously that authority resided in the first instance civil courts of Madrid. According to the preamble of the 2011 amendment, the legislator conferred jurisdiction on the TSJM (and the respective High Court in each Autonomous Community of Spain), to hear applications to set aside, for the sake of “uniformity”.

As discussed, the TSJM granted a rather high number of applications to set aside awards, but actually many of them resulted from lethally-flawed arbitration proceedings with manifest breaches of due process (here here here), lack of transparency (actual or perceived) and conflict of interests of local arbitral institutions (Case nº 120/2013 and here here), as well as dubious arbitrability of the subject matter of the dispute (here).

In other cases, the TSJM vacated pro-bank awards, resulting from disputes related to the sale of complex financial products to consumers, for infringements of Spanish and EU economic public policy (Cases nº 20/2014 and 59/2014). Although these decisions raised controversy, the TSJM ultimately followed the principle laid down by the ECJ in the well-known Ecco Swiss case. Arbitration cannot be used to circumvent mandatory rules of public policy.

The TSJM, however, sometimes confuses its role by handling applications to set aside arbitration awards as if they were appeals on the merits. In those cases, in effect, the TSJM appears to function as an appeal court reviewing a first-instance court judgment. The TSJM is a collegiate court composed of three judges, one of whom issued a dissident vote with a strong warning in this respect (Case nº 59/2014):

“[…] it is necessary to define the powers of this Chamber when entertaining an action for annulment of an arbitral award so as not to confuse them with those of a Court of Appeal”.

For example, as discussed in Part I, the TSJM vacated the arbitral award made in Engesa vs. Vestas after reviewing de novo the issues discussed in the arbitration and concluding that the tribunal’s assessment of evidence involved an “appearance of arbitrariness in the arbitral tribunal”. After a thorough analysis of the TSJM’s judgment, one can only observe that the tribunal rendered a perfectly reasoned award based on documentary evidence (primarily a set of emails exchanged between the parties) which appeared to be corroborated by witness testimony. The TSJM had been unfair to hold that the tribunal acted with arbitrariness.

In another recent case, the TSJM was called upon to set aside an arbitration award made by an ICC tribunal on grounds of an alleged breach of due process (here). In this case, the tribunal refused to grant a party’s request for disclosure of documents that were in the possession of the other party. The tribunal had skillfully narrowed the issues in dispute and decided that the requested documents were not material to the resolution of the case. The tribunal’s decision disallowing disclosure was reasonable and predictable under ICC Rules and practice. The TSJM, however, gave no deference to it and reviewed de novo the issues discussed in the arbitration to finally conclude that the requested documents would not have changed the outcome of the arbitration. Although the award was not set aside, the standard of review used by the TSJM was again intrusive. There had been no violation of due process, let alone a manifest or egregious one.

In some advanced jurisdictions, for example, Hong Kong, the threshold to be met to set aside an award for want of due process is very high, requiring that “[…] the conduct of the Tribunal must be sufficiently serious to offend our most basic notions of morality and justice” (here).

One cannot definitively say that the TSJM has adopted an anti-arbitration stance although its tendency to use public policy arguments as a door to review the merits of awards may cause disruption to the development of Madrid as an emerging arbitration center.

A considerable number of Spanish multinational corporations −in sectors such as infrastructure, construction, telecommunications, finance, oil and energy− have become world leading players and gained leverage to include ICC (and others) arbitration clauses, providing for arbitration with seat in Madrid, into their international business transactions. There has been a proliferation of arbitration clauses of this sort. Parties from Latin America, Eastern Europe and North America are known to come to Spain to arbitrate their disputes with Spanish counterparts.

Madrid has a unique opportunity to start to build its own tradition of arbitration. To this end, however, it is crucial that the TSJM’s standard for reviewing awards be brought in line with international best practice. Arbitration users are understandably risk-averse and may not take too long to choose other safer seats for their arbitrations, within or outside of Spain.

 

 

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Interim Measures by Chilean Courts in Aid of Foreign Arbitration

Sun, 2018-09-09 17:13

Orlando Palominos and Catharina Müller

Throughout the years, Chilean courts and legislation have fostered a pro-arbitration and a pro-enforcement environment, favoring arbitration and recognizing the benefits that are generally attached to it. In such regard, the Civil Procedure Code, the Code on the Organization of Tribunals, the New York Convention on the Recognition and Enforcement of Arbitral Awards and Law No. 19,971 on International Commercial Arbitration (also known as “LACI”), encompass a clear commitment towards arbitration, particularly in connection with the finality of arbitral awards and the enforcement of foreign awards.

However, in light of recent judgments, this pro-arbitration bias seems to suffer when it comes to the request of interim measures, before national courts, in aid of foreign arbitrations. Indeed, some Chilean courts have refused to grant them in aid of an international arbitration seated in a country other than Chile and involving parties not domiciled in Chile. Is such approach consistent with Chilean law? It does not seem so.

I. Interim Measures by Chilean Courts: A Confusing Signal

Following the UNCITRAL Model Law on international arbitration, LACI meant a major improvement and modernization of Chilean legislation in this regard. As per interim measures, Article 9 LACI provides that “It shall not be deemed incompatible with the arbitration agreement for a party to request, before arbitration proceedings or during their process, from a court an interim measure nor for a court to grant such a measure.”

The provision does not distinguish on the seat of the arbitration nor the nationality or domicile of the parties thus, apparently, providing for full assistance from national courts on the issuance of interim measures, be it before or after the commencement of the arbitration. Is that so?

In GCZ Ingenieros S.A.C y Otra v. Latin America Power Perú S.A.C y Otras, a civil court of Santiago casts doubts on such a straight interpretation and rejected a request for interim relief in aid of a foreign arbitration. To do so, the court argued that Chilean law did not allow such a resolution because the arbitration proceeding was seated in another country and that the respondent parties were not domiciled in Chile. To support its reasoning, the court referred to Articles 1 and 107 et seq. of the Chilean Code on Organization of Tribunals and Articles 279 et seq. of the Chilean Civil Procedure Code that, purportedly, would provide for a territorial scope of Chilean law on arbitration.

However, such arguments and provisions are not convincing and pose a contradiction with the wording of Article 9 LACI, its legislative history and its purpose.

First, since the wording of Article 9 does not distinguish between arbitrations based in Chile or abroad, the interpreter or the court cannot make such a distinction in order to restrict the scope of the rule. Moreover, Article 1.2 LACI recognizes that Article 9 LACI is applicable if the seat of the arbitration is located outside the Chilean territory.1)BLACKABY, Nigel/PARTASIDES QC, Constantine/REDFERN, Alan/HUNTER, Martin (2015): Redfern and Hunter on International Arbitration, Student Version (Oxford, Oxford University Press, Sixth Edition), p. 429, para. 7.24. jQuery("#footnote_plugin_tooltip_2625_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2625_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, article 9 LACI is a clear exception to the principle of territoriality.

Furthermore, LACI was enacted to fill a legal vacuum and provide a special and autonomous set of rules, procedurally and substantially, for the international commercial arbitration.2) Message of the President of the Republic of Chile in History of the Law No. 19,971, Library of the National Congress, 2004, p. 7. jQuery("#footnote_plugin_tooltip_2625_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2625_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, it is improper to resort to general rules (such as the Civil Procedure Code and the Code on Organization of Tribunals) to reject interim measures in aid of foreign arbitral proceedings. Such rules remain applicable to local arbitration proceedings due to the dualistic nature of the Chilean arbitration system: on the one hand, domestic arbitration governed by general rules and, on the other hand, international commercial arbitration governed by LACI.

This approach is consistent with the adoption of the UNCITRAL Model Law and its aim at creating legal certainty, avoid the risk of the local law and to follow the general international consensus in this field. In this regard, the commentary and explanatory note by UNCITRAL on this Model Law confirms that interim measures by local courts do not depend on the place of arbitration.

Moreover, the judgement may present an additional risk if read along with certain decisions of Chilean courts in connection with interim measures granted abroad. In particular, the criterion of Chilean higher courts, as shown in Western Technology Servis Internacional Inc. v. Caucho Industriales S.A., is to reject the exequatur of interim measures granted abroad regarding assets located in Chile. Such approach, and the uniform decisions of Chilean courts in connection with the exclusive application of Chilean law over assets located in Chile, may leave claimants without proper legal protection and, on the other hand, may convey a message to defendants that Chile offers a sort of “safe haven” regarding the request and enforcement of interim measures. This would be an even bigger issue before the constitution of the arbitral tribunal or in the case of measures affecting a third party.

Another civil court also rejected an interim relief request in Hyundai Engineering & Construction v. Construtora OAS S.A. but on the basis of a very limited reasoning: “the seat in which the request was filed”. Fortunately, the judgment was overruled by the Court of Appeals of Santiago but it did not provide reasons to reach such decision.

II. Foreign Decisions May Shed Some Lights on the Subject

The issue is not new and it has already been addressed by foreign courts that, in general, have favored interim measures in aid of foreign arbitration proceedings under certain circumstances.

In such regard, although the United States’ Federal Arbitration Act does not contain a specific provision on the subject matter, the mere fact that the arbitration is seated abroad was not considered a determinative argument for rejecting an interim measure in its aid by a New York court. Indeed, in Sojitz Corp. v. Prithvi Info. Solutions Ltd., and based on Section 7502(c) of the Civil Practice Law and Rules (as amended on 2005), the court affirmed a decision that granted an interim measure on the basis that the arbitration award would otherwise be rendered ineffectual and that the account seized was a debt owed by a New York domiciliary.

Quite similar to the United States is the situation in the United Kingdom. In such regard, Section 44 (5) of the United Kingdom’s Arbitration Act authorizes interim relief by national courts if the arbitral tribunal is not able to grant them effectively. Pursuant to Section 2 (3), in the case of a foreign arbitration, the national court is allowed to reject interim measures provided that approving them is “inappropriate” considering the foreign seat. Accordingly, local courts have ruled that there must be some kind of connection to the territory of the UK, thus rejecting cases in which there was only a tenuous link to the UK (Econet Wireless Services Ltd v. Vee Networks Ltd [2006] EWHC 1568 (Comm); Company 1 v. Company 2 [2017] EWHC 2319 (QB)).

III. Promoting an International Approach from Chilean Courts towards Interim Measures

As detailed above, the denial of court-ordered interim measures in aid of a foreign arbitration by some Chilean courts, based on the location of the arbitration seat and the defendants’ domicile is inconsistent with the wording, legislative history and purpose of Article 9 LACI. Moreover, such an approach is counterintuitive considering the UNCITRAL Model Law and the international consensus and decisions on the subject.

Accordingly, Chilean courts should develop a proper balance between the autonomy of the arbitral tribunal, the supportive interference of national courts and the need to foster the effectiveness of the arbitral award.

An approach based on the existence of a sufficient connection with Chile would be consistent with LACI, the international consensus and the Chilean court’s cautiousness. Bearing that in mind, and considering that in the Chilean case mentioned above the operation of the respondents which the claimants aimed to inhibit took place in Chile and that a substantial part of the respondents’ obligations was connected with companies whose shares and assets were situated in Chile, it would have been possible to conclude the existence of “sufficient connection”, thus granting the requested

References   [ + ]

1. ↑ BLACKABY, Nigel/PARTASIDES QC, Constantine/REDFERN, Alan/HUNTER, Martin (2015): Redfern and Hunter on International Arbitration, Student Version (Oxford, Oxford University Press, Sixth Edition), p. 429, para. 7.24. 2. ↑ Message of the President of the Republic of Chile in History of the Law No. 19,971, Library of the National Congress, 2004, p. 7. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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First Lusophones’ Arbitration Meeting: Note and Invitation Translating Cultures and Promoting Arbitration

Sun, 2018-09-09 02:02

Eduardo Silva da Silva, Yves Derains and Ana Gerdau de Borja Mercereau

Fernando Pessoa and Machado de Assis.  What do these names have in common other than the fact that they are celebrated Portuguese-speaking writers?  Far away situated because of geography, history, and culture, these two writers have left an important legacy that has brought closer different cultures through their literary work.  In addition to being writers, Pessoa and Machado have also worked as translators.  And, in the translation of a poem, they have met at last.  The poem translated by them is the Portuguese version of a well-known text by Edgar Allan Poe, an American writer, originally published in 1845, entitled The Raven.1) The poem The Raven is one of the most well-known works of Edgar Allan Poe.  The English text has its own musicality and uses many figures of speech, which make translation a real challenge.  The translations of the Brazilian writer Machado and of the Portuguese writer Pessoa have been examined by the Brazilian writer Carlos Heitor Cony, “As traduções de o Corvo”, Jornal Folha de São Paulo, Editoria de Opinião (20 April 1997). jQuery("#footnote_plugin_tooltip_2669_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2669_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This literary encounter of Pessoa and Machado perhaps could illustrate or translate the First Lusophones’ Arbitration Meeting that took place during the Paris Arbitration Week (PAW) in April 2018.

The Portuguese-speaking world, whether it is Portuguese, Brazilian, Angolan or Mozambican, has been inspired by the Roman-Germanic legal tradition.2) See DAVID, René. Os grandes sistemas do Direito contemporâneos (Martins Fontes 2002). jQuery("#footnote_plugin_tooltip_2669_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2669_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  This legal tradition – as rightly puts Professor Miguel Reale – has courageously travelled across the seas.3) REALE, Miguel. Fontes e modelos do Direito (Saraiva 1994). jQuery("#footnote_plugin_tooltip_2669_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2669_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  As far as arbitration is concerned, the relations between Portuguese-speaking countries relate to economic realities.  Despite the different realities of these countries, they shared the same need for arbitration as a means to strengthen their internal market and to engage in foreseeable international commercial transactions.  If in contemporary Portugal international arbitration has also grown in light of the European tradition, in Brazil arbitration was needed as a better-suited solution for commercial disputes.  In turn, Mozambique and Angola as African commercial hubs with an important oil & gas sector have also used international arbitration as a tool to translate different legal systems.

In light of the above perspective, Mr. Yves Derains, who has become fluent in Portuguese on his own merits, opened the First Lusophones’ Arbitration Meeting welcoming the Portuguese-speaking guests at his Paris-based firm on the occasion of the enriching activities promoted by the International Chamber of Commerce (ICC) and by other entities supporting the PAW.  In his opening speech, Mr. Derains presented the three topics for discussion at the meeting to incite the encounter and the debate among participants, including exchanges between the different countries then represented.

The first panel discussed the topic “Institutional Initiatives Aiming at Increasing Publicity and Transparency in Arbitration”, animated by the moderator Mr. Fernando Mantilla-Serrano, Partner of Latham & Watkins, Paris.  Ms. Ana Serra e Moura, Deputy Secretary-General of the ICC International Arbitration Court, presented the topic, with comments by Mr. Felipe Moraes, Secretary-General of Câmara de Mediação e Arbitragem Empresarial do Brasil (CAMARB).  Their presentations considered (a) publicity and transparency in relation to players (constitution of the arbitral tribunal and disclosure obligations of arbitrators), (b) publicity in relation to the proceedings (in relation to amici curiae and to the reasons of the arbitral institution’s decisions), and (c) publicity of awards, including their publication and later enforcement proceedings.

Among other matters, Ms. Ana Serra e Moura from the ICC reported its experience in proceedings with Brazilian, Portuguese and African parties, relevant statistics, and the progress made towards greater transparency with the adoption of measures set forth in the Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration, available on the ICC website.

In turn, Mr. Felipe Moraes from the CAMARB reported on its increasing experience with State entities and on its efforts to promote greater transparency.  He mentioned recent updates in Brazilian law on publicity in arbitration involving State entities, and the experience of CAMARB in this respect.   He also talked about the new CAMARB Arbitration Rules (2017) with provisions on publicity and transparency in cases involving State entities, distinguishing between public and private law State entities.  Articles 12.2 and 12.5 of these Rules state that the CAMARB Secretariat will publish on its website information about CAMARB arbitrations concerning State entities of public law, including the date of the request for arbitration, the names of the parties, and the award.  Pursuant to Article 12.3, the CAMARB will not provide additional information about these arbitrations to third parties, information which may otherwise be provided by the parties themselves according to the law.  Further, Article 12.4 provides that the arbitration hearing will not be opened to the public, unless the parties agree otherwise.

Moreover, Mr. Felipe Moraes mentioned the new legal provisions on transparency in arbitrations involving corporate and capital markets issues, such as the 2017 amendment to Instruction No. 358 of the Brazilian Securities and Exchange Commission (Commissão de Valores Mobiliários or “CVM”) requiring publicly traded companies’ disclosure of the institution of arbitration proceedings that may affect a company’s economic and financial situation.  Finally, he commented on CVM’s recent decisions in this regard.

The second panel discussed the topic “Arbitration with the State and State Entities in Brazil and in Portugal”.  The moderator Dr. Ana Gerdau de Borja Mercereau presented the speakers Mr. Renato Stephan Grion, Partner of the law firm Pinheiro Neto Advogados from São Paulo, and Mr. Filipe Vaz Pinto, Partner of MLGTS from Lisbon.  The arbitration experience with the State and State entities in Portugal and in Brazil is challenging with new developments shared by the speakers and the participants.

Among other matters, Mr. Filipe Vaz Pinto discussed the Portuguese reform of 2018, in light of the adoption of Decree-Law No. 111-B/2017, which, among other provisions, introduced changes to Article 476 of the Code of Public Contracts (on alternative dispute resolution).  The changes came about at a time when the Judiciary in Portugal is facing increasing difficulties to deal effectively with the case load brought before State Administrative Courts, while at the same time arbitration involving State entities is facing growing public criticism, even if sometimes based on wrong perceptions, not actual facts.  This is perhaps what justifies the unease feeling that this reform “gave with one hand what it took away with the other”: while the new rules purport to expand the use of arbitration in disputes involving the State or State entities, including disputes concerning public tenders, they also establish a non-waivable right of appeal in respect of all disputes with an amount exceeding € 500,000.  It remains to be seen how these rules will play out in practice and be perceived by investors.

In turn, Mr. Renato Stephan Grion discussed Brazilian initiatives like the new provisions on arbitration with State entities under the Brazilian Arbitration Law (Law 9,307/1996, Article 1, § 1, and Article 2, § 3, modified by Law No. 13,129/2015), the Federal Decree 8,465/2015 (on port sector arbitration), and the Decree of the State of Rio de Janeiro 46,245/2018  (on arbitration with State entities of the State of Rio de Janeiro).  He also referred to the survey “Arbitration in Regulated Infrastructure Sectors” published in 2017 by the FGV/CERI and The Word Bank, which shows that several Brazilian agencies such as ANP (National Petroleum Agency or Agência Nacional do Petróleo), ANTT (National Land Transport Agency or Agência Nacional dos Transportes Terrestres), ANAC (National Civil Aviation Agency or Agência Nacional de Aviação Civil) and ANATEL (National Telecommunications Agency or Agência Nacional de Telecomunicações) have concluded arbitration agreements.  In relation to the ANP, Mr. Renato Grion referred to Proceedings No. 139,519/RJ (Conflito de Competência), in which the Superior Court of Justice (Superior Tribunal de Justiça or “STJ”), in 2017, referred the ANP to ICC arbitration proceedings instituted by the mixed capital company Petrobras based on an arbitration clause under an oil & gas concession contract concluded with the ANP.  Later, he discussed the implications of the new publicity provision under Article 2, § 3, of Law 9,307/1996, noting that several Brazilian institutions have adjusted their arbitration rules in light of this.

Finally, the third panel considered the topic “Arbitration in the Oil & Gas Sector in Angola and Mozambique”, moderated by Prof. Dr. Eduardo Silva da Silva, Partner of S&R Dispute Resolution Office, from Brazil.  The speakers were Ms. Sofia Martins, Partner of the law firm Miranda Advogados, from Lisbon, and Ms. Filipa Cansado Carvalho, of Counsel of the law firm PLMJ, also from Lisbon.  They discussed the legal and regulatory framework of the oil & gas sector in these countries, the type of disputes and ways to tackle political, economic and social questions related to arbitration in Angola and Mozambique.

Ms. Sofia Martins described in detail the structure of oil & gas operations in both Angola and Mozambique, focusing in particular on the structure of Production Sharing  Agreements, on the standard dispute resolution provisions as well as on mandatory arbitration-related provisions in the laws of both countries.

In turn, Ms. Filipa Cansado Carvalho highlighted some difficulties that might arise within or in connection with arbitration proceedings seated in Angola or Mozambique and shared some war stories. Among other issues, Ms. Cansado Carvalho explained why it is fundamental to involve Portuguese-speaking lawyers at the negotiation stage as well as when a dispute arises.  She also spoke of recent legislation enacted in Angola seeking to prevent non-members of the Angolan Bar Association to act in arbitrations seated in Angola, describing how this has been applied in practice so far and comparing this to the current situation in Mozambique.  Ms. Cansado Carvalho concluded on a positive note stating that, although arbitration and, in particular, oil & gas arbitration involving Angola or Mozambique is not without challenges, with knowledge of what these difficulties are and of how these jurisdictions work it is generally possible to manage them.

The debate about the above-mentioned topics has been enriching and promoted the interaction between the Portuguese-speaking practitioners.  Among the participants were Ms. Ana Paula Montans (Arbitrator, London), Dr. Clávio Valença (Partner, Valença Galíndez, São Paulo), Dr. Daniel de Andrade Levy (Of Counsel, Enyo Law, London), Prof. Dr. Diego Fernández Arroyo (Sciences Po, Paris), Dr. Gustavo Scheffer da Silveira (Counsel, ICC, São Paulo), Prof. Dr. Judith Martins-Costa (Partner, Judith Martins-Costa Advogados, Porto Alegre), Ms. Luiza Saldanha Pena Costa (Associate, Betto Seraglini, Paris), Prof. Dr. Mariana França Gouveia (Partner, PLMJ/Universidade Nova de Lisboa, Lisbon), Dr. Matthieu de Boisséson (Arbitrator, Matthieu de Boisséson, London and Hong Kong), Mr. Miguel de Almada (Partner, MLGTS, Lisbon), Prof. Dr. Nadia de Araujo (Partner, Nadia de Araujo Advogados/PUC-Rio, Rio de Janeiro), Mr. Ricardo Ranzolin (Partner, Silveiro Advogados, Porto Alegre), and Ms. Sofia Ribeiro Mendes (Arbitrator, Lisbon).

As arbitration practitioners and Portuguese speakers, we practice arbitration according to the tones and nuances of our cultures.  Like Fernando Pessoa and Machado de Assis, we live in our own political, economic and social environment.  Acknowledging that arbitration could be designated “lusophone” depends on an increasing effort towards contributing, interacting and understanding: this is our role as “translators” of different legal cultures in arbitration.

We met, in this first edition, in Paris, the city of lights, a place of meaningful encounters.  Just like Pessoa and Machado, we too have become translators.  We have reciprocally translated our own particularities and multiple potentialities.  And this experience like the literary encounter of Pessoa and Machado can inspire and produce new lusophone perspectives in arbitration.  Portugal as an international destination and Brazil as a developing country clearly present opportunities and potentialities. Angola and Mozambique although needing economic and legal infrastructure present important resources for the international trade.  These countries present a whole world to explore and to translate.  May Camões’ language, which brought together in a poem Machado and Pessoa, be used as a tool for this task.  In 2019, we shall continue this fruitful exercise in the Second Edition of the Lusophones’ Arbitration Meeting.

References   [ + ]

1. ↑ The poem The Raven is one of the most well-known works of Edgar Allan Poe.  The English text has its own musicality and uses many figures of speech, which make translation a real challenge.  The translations of the Brazilian writer Machado and of the Portuguese writer Pessoa have been examined by the Brazilian writer Carlos Heitor Cony, “As traduções de o Corvo”, Jornal Folha de São Paulo, Editoria de Opinião (20 April 1997). 2. ↑ See DAVID, René. Os grandes sistemas do Direito contemporâneos (Martins Fontes 2002). 3. ↑ REALE, Miguel. Fontes e modelos do Direito (Saraiva 1994). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Cleansing the (Un)clean: The Ongoing Saga of the Clean Hands Doctrine

Sat, 2018-09-08 05:00

William Kirtley and Thomas Davis

The arbitral tribunal in Glencore Finance (Bermuda) Limited v. Bolivia has recently hinted at its intent to address an old question: What is the doctrine of “clean hands” in investment arbitration?

On 31 January 2018, an arbitral tribunal composed of Professor Ricardo Ramírez Hernández, Professor John Gotanda and Professor Philippe Sands issued a Procedural Order No. 2 on the issue of bifurcation. While the order itself is uncontroversial, the tribunal notes that the standard and scope of clean hands will have to be examined thoroughly. Therefore, the tribunal will have an opportunity to clarify a problem that has frustrated former tribunals and led to divergent decisions.

Bolivia had objected to Glencore’s claims, arguing that the privatization of the assets underlying the investment in question had been illegal under Bolivian law, the acquisition of mining and leasing assets were contrary to the Bolivian Constitution and the circumstances surrounding the privatization of the assets were contrary to transparency and good faith. Based on this, Bolivia claimed that under the “clean hands” principle, the foreign investor could not present claims tainted by illegality which the foreign investor was aware of when it received the assets in question. The Claimant maintained that the investment was made lawfully through a public tender process.

In its Order, which rejected bifurcation, the tribunal referenced Churchill Mining to agree that the clean hands doctrine had found “expression” internationally, but that its “status and exact contours” remain uncertain (para. 46). The tribunal acknowledged its doubts that a “mere assertion of unlawful conduct” would raise the objection above the required threshold (para. 47), but indicated that it would not only have to accept the clean hands principle, but also to lay out its contours. The tribunal also indicated that it would need to look at the merits to address this objection.

There remains significant disagreement about the status of the clean hands doctrine under international law.

Proponents argue that the doctrine exists as a general principle, pointing to international tribunals and a significant number of national legal decisions (e.g., P. Dumberry, “State of Confusion: The Doctrine of “Clean Hands” In Investment Arbitration after the Yukos Award“, 17 Journal of World Investments and Trade (2016), pp. 229-259). Past tribunals have relied on similar good faith principles, international public policy and the duty to honor local laws (e.g., Inceysa Vallisoletana, S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award (2 August 2006), para. 244 (‘[N]o legal system based on rational grounds allows the party that committed a chain of clearly illegal acts to benefit from them.’). According to Dumberry, the legality requirement is itself a manifestation of the clean hands doctrine.

However, to become a general principle of law, a principle must have “a certain level of recognition and consensus” (Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award (18 July 2014), para. 1359.). The ILC Articles on State Responsibility and Diplomatic Protection do not contain any reference to the doctrine of unclean hands. As the Yukos tribunal noted – which itself included a member who had previously dissented in an ICJ case based on a finding of unclean hands (para. 1361) – there is not a single majority decision by an international tribunal which has applied the clean hands doctrine to an investor-State dispute to conclude that it operated as a bar to claims as a principle of international law (para. 1362).

In Fraport II, for instance, the principle did not operate to exclude the investor’s claim, since the relevant treaty contained a legality requirement clause (para. 328). In another case, Al-Warraq v. Indonesia, the tribunal’s finding that claimant’s conduct fell within the scope of the application of the clean hands doctrine and therefore could not benefit from the protection afforded by the OIC Agreement was made, but in obiter dictum (para. 647). Given the lack of relevant case law, it is difficult to determine the doctrine’s status, let alone the standard to be applied.

A 2013 case provides a potential solution. The tribunal in Niko Resources v. Bangladesh (“Niko”) addressed clean hands separately from contentions of bad faith and international public policy (para. 476). It also sidestepped determining the status of unclean hands as a general principle of law by focusing on its content. It found that, at the principle’s core, some form of reciprocity was required, i.e., a nexus between the relief forming the objection and past actions which may be characterized as unclean hands (para. 483). In doing so, it relied on three elements referenced by Judge Hudson’s opinion in Guyana v. Suriname (para. 481):

  1. the breach must concern a continuing violation;
  2. the remedy sought must be ‘protection against the continuance of that violation in the future’, not damages for past violations and
  3. there must be a relationship of reciprocity between the obligations considered

In Niko, as the violation was not continuing, the remedy did not concern protection against a past violation and there was no relationship between the relief being sought and the acts in the past characterized as involving unclean hands, the respondents’ objection based on acts of corruption were dismissed (paras. 483, 485).

The tribunal in Glencore might apply this narrow standard, which would avoid the contentious task of outlining the standard and scope of unclean hands as a general principle of law, while addressing genuine concerns of illegality. This would also allow the tribunal to avoid making a distinction between admissibility and jurisdiction, should Bolivia fail to corroborate its objection.

While some treaties expressly cover only those investments that are made in accordance with host State law, the question of whether there is a general principle of international law which requires “clean hands” is unsettled, at best. In the authors’ opinion, the most that can be said is that rather than forcing the parties to guess at the appropriate standard to apply in cases where the clean hands doctrine is invoked, it is important for the arbitrators in Glencore to provide the parties guidance as early as possible, so that the parties can adapt themselves to those standards, strengthening due process while minimizing tilting at windmills.

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