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Proposed Amendments to the PRC Arbitration Law: A Panacea?

Thu, 2021-09-09 01:30

Efforts are underway in China to reform the Arbitration Law of the PRC (“PRC Arbitration Law”), a statute that was promulgated in 1994 (effective in 1995) and that remains substantially unchanged to this day.1)The authors wish to thank Arnold & Porter Shanghai office interns Lyuzhi Wang and Steven Peng for their assistance in the preparation of this article. jQuery('#footnote_plugin_tooltip_38621_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38621_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); While numerous judicial initiatives have long sought to address the expansion and complication of China’s arbitration market witnessed in the last two decades, until recently, little legislative change has been introduced.

Following a classified consultation process with selected Chinese arbitration experts, on 30 July 2021 the Ministry of Justice of the PRC published a draft of the amended PRC Arbitration Law (“Draft Amended Law”) for broader public consultation. The Draft reflects the most recent, most comprehensive, and most systematic attempt by China to address the ever-growing gap between modern arbitration practice in China and the antiquated PRC Arbitration Law. A modern national arbitration law consistent with international practices is a fundamental prerequisite for consideration as a safe seat of arbitration. Thus, enactment of the reforms contemplated by the Draft Amended Law is one of the most important steps China can take to advance the development of its key cities and free trade zones as true centers of international arbitration.

The Draft Amended Law proposes extensive revisions aimed at bringing Chinese arbitration practice in line with international norms and standards. Most notably, the Draft Amended Law introduces the following proposed changes, which promise to have a major impact on the practice of international arbitration in China:

  • Allowing foreign arbitration institutions to establish their operations in Mainland China and “conduct foreign-related arbitration business” (Article 12);
  • Recognizing the concept of “place of arbitration” (Articles 27 and 91);
  • Recognizing that an arbitral tribunal has the power to independently rule on its own jurisdiction (competence-competence), including “any objections with respect to the existence or validity of the arbitration agreement” (Article 28);
  • Permitting an arbitral tribunal to order interim measures (Article 43); and
  • Allowing ad hoc arbitration in “foreign-related” commercial disputes (Article 91).

In this post, we analyze the proposed reform of the existing system that in effect requires all arbitration in China to be administered by Chinese arbitral institutions.

 

Reforms to the Chinese-Institution-Monopolized System

One of the most criticized features of the existing PRC Arbitration Law relates to its establishment of a framework under which (i) only arbitrations administered by Chinese arbitration institutions are expressly permitted in China, and (ii) the nationality of an arbitral award is determined according to the “domicile” (i.e., place) of the arbitration institution administering the arbitration (known as the “institution standard,” in contrast to the internationally-recognized “seat standard”). Such a framework not only deviates from the practice in most arbitration-friendly jurisdictions, but also creates tension with other sources of arbitration guidance in China—including judicial practice and institutional rules—sometimes catching even seasoned practitioners by surprise.

The Draft Amended Law addresses these problems by, among other reforms, eliminating the monopoly of Chinese arbitration institutions and adopting the “seat standard.” As we discuss below, some of these reforms apply only with respect to those disputes that are categorized under Chinese law as “foreign-related,” thus creating a national arbitration law framework that is bifurcated between purely domestic and foreign-related disputes. Specifically, Article 12 of the Draft Amended Law provides that foreign arbitration institutions will be permitted to administer foreign-related arbitrations in China. Article 91 provides that “parties to a commercial dispute involving foreign-related elements may agree on arbitration by an arbitration institution or directly by an ad hoc tribunal,” thus introducing for the first time the concept of ad hoc arbitration in China. Article 27 adopts the concept of the place (seat) of arbitration and provides that the arbitral award shall be deemed to have been made at the place of arbitration. Article 91 further provides that for foreign-related arbitrations, in the absence of party choice, the arbitral seat shall be decided by the arbitral tribunal “in light of the circumstances of the case.” Article 28, meanwhile, newly adopts the competence-competence principle.

These amendments were not proposed in a vacuum. Many of the proposed reforms seek to codify various positive changes made by courts or pilot programs in recent years. For example, the proposed permission for foreign arbitration institutions to administer foreign-related arbitrations in China under Article 12 of the Draft Amended Law is an expansion of the 2019 and 2020 PRC State Council pilot measures, which opened up the arbitration market in China’s Pilot Free Trade Zones to reputable foreign arbitration institutions on a trial basis. Similarly, the adoption of the “seat standard” under Articles 27 and 91 of the Draft Amended Law follows recent decisions by Chinese courts categorizing arbitral awards rendered in Mainland China as “Chinese” awards notwithstanding that the arbitrations were administered by a foreign arbitration institution (see previous post, discussing Brentwood v. Guangdong Fa’anlong and Deasung (Guangzhou) Gases Co., Ltd. v. Praxair (China) Investment Co., Ltd.).

These and other proposed amendments will bring the legal regime for foreign-related arbitrations conducted in Mainland China substantially in line with the Model Law.

 

Potential Uncertainties

However, the proposed regime also appears to give rise to new uncertainties and potential problems.

First, the Draft Amended Law would create a regime that is bifurcated between purely domestic and foreign-related arbitrations but that lacks a clear demarcation of the boundary between these two categories. For example, Article 91 of the Draft Amended Law permits ad hoc arbitration and empowers the arbitral tribunal to determine the seat of arbitration in the absence of party choice, but Article 91 applies only to “foreign-related” arbitrations (see Article 88 of the Draft Amended Law, providing that “arbitrations with foreign-related elements are subject to the provisions of this Chapter”). As for purely domestic arbitrations, the Draft Amended Law appears to keep the existing system monopolized by Chinese institutions intact—i.e., ad hoc arbitration and foreign-administered arbitration remain unavailable, and the “institution standard” applies in circumstances where the parties have not reached a clear agreement on the place of arbitration (see Article 27, providing that in the absence of party choice, the seat of arbitration shall be the place of the arbitration institution). Thus, under the Draft Amended Law, purely domestic arbitrations are excluded from certain beneficial reforms.

Putting aside the merits of creating such a bifurcated system, a problem arises because the Draft Amended Law does not provide any guidance on what constitutes a “foreign-related” arbitration. As discussed in a previous post, the differing and constantly-evolving treatment of “foreign-related” arbitrations under Chinese law often causes confusion and controversy as to whether the “foreign-related” requirement is satisfied. If the contracting party is a company registered outside of Mainland China, this requirement will be satisfied. The outcome of the “foreign-related” test is less certain, however, if the dispute is between a Chinese incorporated subsidiary of a multinational and a Chinese party (including another local subsidiary of a multinational). What this means, in practice, is that at the time of contracting, the parties may not know for sure whether their relationship ultimately will be deemed foreign-related or domestic. Parties in that situation would not know whether they are permitted to select ad hoc arbitration for resolution of their disputes, whether their choice of a foreign arbitration institution to administer their disputes would be respected, or how the seat of arbitration would be determined in the absence of clear party choice. Such parties would be at risk of entering into an arbitration agreement in reliance on Article 91 (if enacted in its present form) only to later find that their agreement (and any resulting award) is unenforceable because the relationship between them is deemed domestic rather than foreign-related.

Second, the proposed system for ad hoc arbitration (limited to foreign-related disputes) calls for further scrutiny. For instance, Article 93 of the Draft Amended Law requires every ad hoc arbitral tribunal to submit a copy of its award to the Intermediate People’s Court of the seat of arbitration. This would seem to mean that such an award would need to be provided to the PRC courts even absent the parties’ consent to such disclosure. Mandatory reporting of this nature is in tension with the expectation of many parties that the arbitral award will not be disclosed to third parties without their consent (except in cases of necessity, such as in an application to set aside or confirm the award). It is possible that the reporting requirement could deter some parties from choosing ad hoc arbitration in China. Also, while Article 92 of the Draft Amended Law states that the parties may agree to entrust—or, failing such agreement, an appropriate court may designate—an arbitration institution to “assist in constituting the tribunal,” the Draft Amended Law lacks clarity on default procedures for appointment of arbitrators in the absence of party agreement. This is in contrast to the clearer and more fulsome default procedures provided in other arbitration-friendly jurisdictions (see, e.g., Hong Kong Arbitration (Appointment of Arbitrators and Mediators and Decision on Number of Arbitrators) Rules (Cap.609C)).

Finally, foreign arbitration institutions administering arbitrations in China may face practical difficulties in implementing their fee schedules under the Draft Amended Law. Pursuant to Article 96 of the Draft Amended Law, arbitral fee schedules shall be jointly determined by the price department and the judicial administrative department of the PRC State Council. Article 96 does not recognize fee schedules determined otherwise. Notably, the existing version of the arbitral fee schedules issued by the PRC State Council sets forth an extremely low fee standard that is incompatible with foreign arbitration institutions’ practice and—contrary to international practice—does not distinguish arbitrator compensation from institutional administrative fees. To avoid confusion, these and other technical issues will need to be sorted out either in the process of enactment of the amended PRC Arbitration Law or through implementing rules and regulations thereafter.

 

Conclusion

The reputation and standing of a place as a center of international arbitration is a function of an entire ecosystem of pro-arbitration laws, policies, infrastructure, and talent. Enactment of the Draft Amended Law is a necessary but incomplete step toward the development of such an ecosystem in Mainland China. The Draft Amended Law makes major strides toward eliminating idiosyncrasies and anachronisms of the existing Law that are standing in the way of Mainland China’s development as a center of international arbitration. Simultaneously, the Draft Amended Law risks creating some new uncertainties and exacerbating certain existing uncertainties, such as the unclear boundary between purely domestic and foreign-related arbitrations. Hopefully, some or all of the outstanding issues will be resolved in the process of finalizing the draft amendments following the public comment period.2)The authors have submitted relevant comments. jQuery('#footnote_plugin_tooltip_38621_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38621_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Inevitably, however, some uncertainties and problems will remain for resolution through further implementation measures and judicial guidance.

References[+]

References ↑1 The authors wish to thank Arnold & Porter Shanghai office interns Lyuzhi Wang and Steven Peng for their assistance in the preparation of this article. ↑2 The authors have submitted relevant comments. function footnote_expand_reference_container_38621_30() { jQuery('#footnote_references_container_38621_30').show(); jQuery('#footnote_reference_container_collapse_button_38621_30').text('−'); } function footnote_collapse_reference_container_38621_30() { jQuery('#footnote_references_container_38621_30').hide(); jQuery('#footnote_reference_container_collapse_button_38621_30').text('+'); } function footnote_expand_collapse_reference_container_38621_30() { if (jQuery('#footnote_references_container_38621_30').is(':hidden')) { footnote_expand_reference_container_38621_30(); } else { footnote_collapse_reference_container_38621_30(); } } function footnote_moveToReference_38621_30(p_str_TargetID) { footnote_expand_reference_container_38621_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38621_30(p_str_TargetID) { footnote_expand_reference_container_38621_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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2020 Statistics of Polish Post-Award Case Law: Is Poland Arbitration-Friendly?

Wed, 2021-09-08 01:00

Arbitration has been well-established in Poland already before and throughout the 1920s. It has, however, experienced a downturn between 1945 and 1989 due to the distrust of the Polish state. The winds had changed in the 1990s when arbitration started to flourish again.

Since then, the Polish parliament introduced several reforms previously discussed on this blog, e.g.:

This blog post looks at how the law operates and analyzes the statistics of post-award cases decided by Polish courts in 2020 to determine whether Poland is an arbitration-friendly jurisdiction.

 

Empirical Survey of 2020 Polish Post-Award Case Law

Polish “law in books” does not differ from lex arbitri of leading arbitration-friendly jurisdictions. We have, however, asked ourselves what the state of the “law in action” is.

While there is some anecdotal evidence on the state of arbitration in Poland, it is not sufficient to draw definitive conclusions. Therefore, to answer our question, we have decided to conduct an empirical survey of 2020 post-award case law originating from 11 Polish Courts of Appeal, i.e. the courts that have jurisdiction at the post-award stage.

 

Statistics

Following our survey, we have been able to put together the following statistics, i.e. the “hard facts”:

1. New cases

In 2020, parties initiated 299 cases related to the post-award stage. In particular, 35 motions were filed to set aside an arbitral award, 232 motions to enforce or to recognize a domestic arbitral award, and 32 applications to enforce or to recognize a foreign arbitral award.

2. Court decisions

Polish Courts of Appeal issued 283 decisions in 2020 in post-award cases. Out of this number, 70 decisions related to formal issues, e.g., in cases where proceedings were withdrawn. We have therefore excluded these from consideration.

In 2020, the courts ruled on 31 setting-aside applications (approximately 15% of all rendered non-formal decisions), 170 applications for recognition or enforcement of domestic awards, and 12 applications for recognition or enforcement of foreign awards (approximately 85% of non-formal decisions).1)We have assumed these numbers to be correct. However, the courts have informed us that they have recorded a slightly higher volume of decisions in their statistics: 37 setting-aside decisions (compared to the 31 we received), 206 domestic recognition or enforcement decisions (compared to the 170 we received), 22 foreign recognition or enforcement decisions (compared to the 12 we received). The discrepancy may be due to the fact that courts have discontinued a number of cases due to formal reasons, e.g., where a party has withdrawn the application or failed to produce the necessary documents. If the courts have issued more decisions than we received, we believe our 80% sample remains sufficient, i.e. 213 decisions considered of the 265 decisions recorded in court statistics. jQuery('#footnote_plugin_tooltip_38627_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38627_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Out of the 213 decisions, only in 19 cases (approximately 9%) awards were set aside or refused recognition or enforcement. Successful parties, therefore, defended 194, i.e. more than 91% of awards before Polish courts.

Out of the 31 setting-aside proceedings, awards were set aside only in 6 cases, i.e. the courts refused to set aside awards in approximately 81% of cases.

Out of the 170 recognition or enforcement proceedings for domestic awards, 158 (approximately 93%) were successful.

Out of the 12 recognition or enforcement proceedings for foreign awards, 11 (approximately 93%) applications were granted, and only one was refused.

The Warsaw Court of Appeal heard 30% of all cases considered by Polish courts at the post-award stage and took the longest to conclude a case.

 

Conclusions and Further Thoughts

First, the fact that there were relatively few setting-aside applications (15% of all post-award cases) is, in our view, due to two reasons. Polish law provides for a narrow standard of review for arbitral awards. The grounds for recourse are limited and based mainly on the UNCITRAL Model Law. Furthermore, the court fee for recognition or enforcement is relatively low (PLN 300 or EUR 65). Conversely, the court fee for a motion to set aside an arbitral award depends on the amount in dispute (5% with a cap of PLN 200,000 or EUR 44,000). The fact that a party needs to pay a significant court fee and usually has a relatively low chance of success may discourage it from filing the motion to set aside an arbitral award.

In turn, the number of successful setting-aside motions (6 out of 31, or 19%) may indicate that where a party decides to file the motion, it appears to have a good reason to do so. The rate of success in setting-aside proceedings is also almost three times higher than the rate of successful defense against an application to recognize or enforce an award (approximately 7%).

Second, awards survived in more than 90% of post-award cases considered by Polish courts. In our view, this is good news for the parties. In most jurisdictions, there are instances where arbitral awards fall at the post-award stage, and there are bound to be some of such cases in Poland as well. In particular, it is great to see that courts enforced or recognized 11 foreign arbitral awards and refused recognition or enforcement only once. This is important as in proceedings for recognition or enforcement of a foreign award the courts typically perform a more detailed review than in recognition or enforcement of a domestic award. In the former case, the review is based on Article V of the New York Convention. In turn, in the latter case, i.e. for domestic awards, the court can refuse enforcement or recognition only for three reasons (non-arbitrability, violation of public policy, and violation of consumer rights). The limited standard of review stems from the fact that setting-aside proceedings, providing a standard of review based on Article 34 of the UNCITRAL Model Law, are the main forum for more precise control of a domestic award under Polish law.

Third, the information that courts provided within our survey was not specific as to the length of proceedings. However, judging by the file reference number, we deduced that ⅔ of cases for recognition or enforcement started and ended in 2020, and ⅓ started in 2019 and ended in 2020. These numbers improve when the caseload of the Warsaw Court of Appeal – which is overloaded by the number of cases on its docket – is excluded from the statistics. Out of the setting-aside proceedings that ended in 2020, 30% started in 2018, 52% in 2019, and 20% in 2020 (the numbers would be 0%, 62%, and 38%, respectively if the statistics from the Warsaw Court of Appeal are excluded). These numbers show that courts consider cases for recognition or enforcement relatively fast.

Fourth, Anna Tujakowska recently presented her study on institutional arbitration in Poland. The research shows that parties initiated approximately 200 cases before Polish arbitral institutions in 2019 and 300 in 2020 (a rise of 36%). There is a similar 33% rise between the number of post-award cases that ended in Poland in 2020 (201 decisions referring to domestic awards out of 213) and the number of cases at the post-award stage that started in Poland in 2020 (267 proceedings referring to domestic awards out of 299). Continuous statistical analysis in the coming years will verify whether there is a correlation between the rise of arbitral and post-award proceedings.

Finally, only six court decisions out of 283 that we obtained referred explicitly to ad hoc arbitration. More cases could potentially relate to ad hoc proceedings, but court decisions are frequently redacted in a way that did not allow us to draw definitive conclusions on this point. However, the information we did see suggests that the vast majority of the arbitral awards subject to setting aside and recognition or enforcement proceedings in Poland appear to have been rendered in proceedings administered by Polish arbitral institutions. The presence of Polish parties before foreign institutions is also significant and often rising. In 2020 Poland ranked second in the CEE region on the number of LCIA cases and third in ICC cases. Therefore, Polish parties seem to prefer institutional arbitration over ad hoc proceedings.

Of course, measuring arbitration-friendliness based on statistics has its limitations. For instance, several cases in which the Warsaw Court for Appeal refused to enforce domestic awards relate to proceedings between the same parties. Thus, more than one award could pertain to one dispute and be potentially tainted with the same irregularity. Also, the reasons for the defectiveness of an award are rarely obvious. Conversely, there might be dozens of simple cases that increase the numbers in the statistics. However, it is a fact that only a few percent of arbitral awards fall at the post-award stage in Poland. This is a sign that Poland indeed is an arbitration-friendly jurisdiction, at least considering the numbers. We will continue our research in the future and try to establish yearly patterns.

 

References[+]

References ↑1 We have assumed these numbers to be correct. However, the courts have informed us that they have recorded a slightly higher volume of decisions in their statistics: 37 setting-aside decisions (compared to the 31 we received), 206 domestic recognition or enforcement decisions (compared to the 170 we received), 22 foreign recognition or enforcement decisions (compared to the 12 we received). The discrepancy may be due to the fact that courts have discontinued a number of cases due to formal reasons, e.g., where a party has withdrawn the application or failed to produce the necessary documents. If the courts have issued more decisions than we received, we believe our 80% sample remains sufficient, i.e. 213 decisions considered of the 265 decisions recorded in court statistics. function footnote_expand_reference_container_38627_30() { jQuery('#footnote_references_container_38627_30').show(); jQuery('#footnote_reference_container_collapse_button_38627_30').text('−'); } function footnote_collapse_reference_container_38627_30() { jQuery('#footnote_references_container_38627_30').hide(); jQuery('#footnote_reference_container_collapse_button_38627_30').text('+'); } function footnote_expand_collapse_reference_container_38627_30() { if (jQuery('#footnote_references_container_38627_30').is(':hidden')) { footnote_expand_reference_container_38627_30(); } else { footnote_collapse_reference_container_38627_30(); } } function footnote_moveToReference_38627_30(p_str_TargetID) { footnote_expand_reference_container_38627_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38627_30(p_str_TargetID) { footnote_expand_reference_container_38627_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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CJEU Ruling in Moldova v. Komstroy: the End of Intra-EU Investment Arbitration Under the Energy Charter Treaty (and a Restrictive Interpretation of the Notion of Protected Investment)

Tue, 2021-09-07 01:00

The Court of Justice of the European Union (CJEU) ruled that the Investor-State Dispute Settlement mechanism provided for by the Energy Charter Treaty (ECT) (Article 26(2)c) is not applicable to intra-EU disputes (C-741/19). In the same decision, it also decided that the acquisition of a claim arising from an electricity supply contract does not constitute an ‘investment’ under Articles 1(6) and 26(1) ECT.

Just three and a half years after the Achmea decision, the CJEU continues to reshape the intra-EU investment dispute settlement landscape. In a much awaited decision, it ruled, in the Republic of Moldova v. Komstroy case, that ECT based intra-EU arbitrations are contrary to EU law.

The background of the case is well known. At its origin were several questions referred to the CJEU by the Paris Court of Appeal regarding the notion of ‘investment’ under the ECT, which arose in setting aside proceedings of a Paris-seated UNCITRAL award rendered in 2013.

Since the arbitration proceedings, the debate focused on whether the tribunal had ratione materiae jurisdiction over the claimant’s contractual rights, and more specifically whether the acquisition of a claim arising out of an electricity supply contract constitutes an ‘investment’ under the ECT. The discussion continued before the French Courts with Moldova challenging the award. In the latest instance, the Paris Court of Appeal (to which the case had been remanded after the Cour de cassation overturned its first decision) referred the question of the interpretation of the term “investment” under the ECT to the CJEU.

At the hearing, the European Commission and several EU Member States ‘hijacked’ the debate and introduced the question of the validity of intra-EU ECT arbitration, even though the dispute at issue involved a non-EU investor and a non-EU Member State. In March 2021, Advocate General Szpunar opined not only on the interpretation of the notion of ‘investment’ under the ECT, but also on the validity of intra-EU ECT arbitration.

 

Solution and reasoning

The CJEU’s jurisdiction was debatable (and disputed by the claimant and several Member States). The CJEU nevertheless upheld jurisdiction on the basis of Article 267 TFEU (see para. 22) and the fact that the questions referred to it concerned the notion of investment (see para. 25), with investments falling under EU’s competence (see para. 26). The CJEU noted that it does not, in principle, have jurisdiction to interpret an international agreement regarding its application to disputes not covered by EU law. Yet, it upheld jurisdiction, on account of (i) the interest of the EU in the uniform interpretation of the disputed provisions, and (ii) the fact that the arbitration’s seat was Paris, France: this called for the application of EU law by the French courts, and the ensuing obligation to ensure compliance with EU law in accordance with Article 19 TEU (see para. 34).

As regards the merits of the dispute, the CJEU first had to justify ruling on the question of validity of the ECT arbitration clause in intra-EU disputes. It noted that answering the question referred to it required clarifying which disputes may be brought to arbitration pursuant to Article 26(2)(c) ECT (see para. 40). Then, all the while admitting that the dispute at issue was an extra-EU dispute, the CJEU simply stated (i) that this does not preclude its jurisdiction and (ii) that it cannot be inferred that Article 26(2)(c) ECT also applies to intra-EU disputes (see para. 41).

Thereafter, the CJEU followed dutifully its reasoning in Achmea, recalling the autonomy of the EU legal system and the necessity to preserve it, notably by putting in place a judicial system to ensure consistency and uniformity in the interpretation of EU law. Then, it examined whether the conditions set in Achmea for arbitration to be valid are fulfilled. In the case of Article 26 ECT, the CJEU noted that:

  • Arbitral tribunals constituted under Article 26(6) ECT are required to interpret, and even apply, EU law;
  • Such tribunals are not located within the judicial system of the EU, and cannot be regarded as a court or tribunal of a Member State within the meaning of Article 267 TFEU, and
  • Awards rendered pursuant to Article 26 ECT are not subject to review by a court of a Member State capable of ensuring full compliance with EU law and guaranteeing that questions of EU law can, if necessary, be submitted to the CJEU for a preliminary ruling.

Turning then to the initial question of the Parisian Court, the CJEU held “that the acquisition […] of a claim arising from a contract for the supply of electricity, which is not connected with an investment, […] does not constitute an ‘investment’ within the meaning of [Articles 1(6) and 26(1) ECT].”

The CJEU’s analysis focused on two questions relating to the definition of ‘investment’ in Article 1(6) ECT:

  • Does the contract involve an ‘investment’ as defined at the first subparagraph of Article 1(6) ECT, as: (i) “every kind of asset, owned or controlled directly or indirectly by an investor” (ii) including one of the elements listed in paragraphs a-f of that provision?
  • In the affirmative, is the contract associated with an economic activity in the energy sector as per subparagraph 3 of the provision?

The CJEU answered the first question by the negative: although the first condition (an “investor”) is fulfilled, the asset at issue does not constitute an investment listed at Article 1(6)(a-f), as:

  • The acquisition of a claim arising out of a simple contract for the sale of electricity cannot, in itself, be regarded as aiming at undertaking an economic activity in the energy sector as per Article 1(6)(f) ECT; and
  • The claim does not arise from a contract connected with an investment under Article 1(6)(c) ECT as the contractual relationship concerned only the supply of electricity, e. a commercial transaction which cannot, in itself, constitute an investment, and this irrespective of whether an economic contribution is necessary for a given transaction to constitute an investment.

 

Analysis

The ruling first raises a question of legitimacy. Was the CJEU competent to rule on the validity of ECT arbitration in intra-EU disputes? The case at hand was arguably not the best to extend the Achmea solution to ECT arbitration: (i) this was not the question referred to the CJEU, (ii) the dispute was not intra-EU and EU law was not directly applicable, and (iii) no EU public policy concerns were flagged.

Unlike the Achmea ruling, Komstroy v. Moldova hardly comes as a surprise. AG Szpunar’s opinion had paved the way for it. More generally, the entire EU and EU Member States’ agenda (the plurilateral treaty for the termination of all intra-EU BITs, the EU’s proposal in the ECT modernisation process, advocating for a future multilateral investment court applicable to disputes under the ECT) announced it.

However, like the Achmea ruling, Komstroy v. Moldova will most likely generate an intense debate in the EU and arbitration circles. Without being exhaustive, preliminary takeaways include:

  • The addition to the Achmea reasoning of a reference to a European “constitutional framework that is unique to it” (see para. 44) – thus reinforcing the CJEU’s position of a European legal order justifying the existence of a uniform European international investment law within the Member States;
  • The CJEU upholding jurisdiction, on the basis notably of the need for a uniform interpretation of the concept of investment under the ECT – which appears to reinforce the message of a unified European international investment law that will not suffer any exception within the EU;
  • The question of how arbitral tribunals will react immediately comes to mind. Even after the Achmea decision, a number of tribunals refused to decline jurisdiction although the claims were based on intra-EU BITs. Given the similarities in the CJEU’s reasoning, one could expect tribunals constituted in intra-EU ECT arbitrations to react in the same way;
  • Achmea led parties in intra-EU arbitrations to post-award judicial races and conflicting decisions, as investors attempted to enforce awards in arbitration-friendly non-EU jurisdictions, while EU States challenged them. It is likely that the same battles will occur in relation to intra-EU ECT arbitrations, thus creating legal uncertainty that might only be resolved with the establishment of the future EU investment court;
  • Regarding the narrower question of the notion of ‘investment’ under Article 1(6) ECT, the CJEU considers that the types of assets amounting to an investment set forth in Article 1(6) constitute an exhaustive, rather than indicative, list ( 80 et seq). This finding is contrary to many previous decisions of investment tribunals. Interestingly, the CJEU does not rely on the absence of contribution of capital or resources to the host state to deny the characterisation of ‘investment’, although this was called for by the Paris Court’s question (i.e., whether a claim arising from a sale contract which did not involve any contribution on the part of the investor in the host state can constitute an “investment”).
  • The CJEU’s special care to explain the “clear distinction” made in the ECT between the concept of ‘investment’ (Part III ECT – protected by arbitration under Article 26 ECT), and that of ‘trade’ (Part II ECT – which does not fall in the ambit of that provision), (see para. 69) appears as a testament to the restrictive approach to the definition of investment and augurs difficult discussions between the EU and the other ECT Contracting Parties over the ECT reform.
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Psychology in Oral Advocacy: Using Science to Persuade International Tribunals

Mon, 2021-09-06 01:52

On June 22, 2021, the Dispute Resolution Interest Group (“DRIG”) of the American Society of International Law hosted the webinar “Psychology in Oral Advocacy:  Using Science to Persuade International Tribunals.”  The event featured Doak Bishop, Ula Cartwright-Finch, Jennifer K. Robbennolt and Sabina Sacco, and was moderated by DRIG co-chairs Simon Batifort and Rémy Gerbay.  This post summarizes the webinar’s key takeaways.

Traditional legal education revolves around teaching sound legal reasoning, good research, and writing skills.  When studying court decisions or arbitral awards in law school and professional courses, the psychology of decision-makers is largely ignored on the assumption that legal decisions are driven primarily by rational, conscious considerations. However, behavioural research and neuroscience teach us that this assumption is largely incorrect.

 

How the human brain operates:  Relying on insights from the field of cognitive psychology, Ula Cartwright-Finch explained that human decisions are not based only on rational factors.  Humans have two ways―or systems―of thinking.  System 1 is fast, intuitive, automatic and allows us to make quick decisions.  System 2, on the other hand, takes effort.  It is slow, deliberate and logical.  Humans operate on System 1 most of the time.  But problems can arise if we allow System 1 to make decisions for which we should actually use System 2.

The decisions of professionally trained legal decision-makers can also be influenced by irrational or irrelevant factors.  An analysis of sentencing decisions made by juvenile court judges in a U.S. state over a 16-year period found that, when a prominent local college football team lost unexpectedly, judges gave harsher sentences throughout the following week.  The effect was larger for sentencing judges who studied at the team’s university.

Although emotions or cognitive biases may influence decision-making in certain situations, there are other unconscious influences that are more consistent and constant in a person’s mind.  In the case of international arbitration, each arbitrator has his/her own personal sense of fairness and may have a strong desire to be seen as competent and ethical.  The fact that they are party-appointed and desire to be appointed in the future can also have an impact.  There are also specific techniques that advocates can employ to influence arbitrators’ thinking.  For example, ‘priming’ consists of exposing a person to one stimulus (such as a word), which can influence how that person responds to a subsequent stimulus (such as another word).  Another example is metaphors.  Neuroscientific studies show that metaphors engage the human brain in a fundamental way.  When people hear a metaphor, it connects them to a basic physical experience.  As such, metaphors engage more of the human brain as compared to more literal description of facts.

 

Cognitive biases in legal decision-making:  Jennifer K. Robbennolt explained that cognitive biases (a kind of heuristic) are ways in which humans simplify or take shortcuts in making daily decisions.  They operate in the realm of System 1 thinking.  As shortcuts that help process information and make decisions quickly, they make it very efficient for humans to navigate the world.  However, difficulties arise when decision-makers use these shortcuts to make more complex judgments.

One of the relevant biases is ‘anchoring’.  When people make judgments, they often unconsciously begin the judgment process at some initial value, and then make adjustments away from that value.  This helps the brain quickly get to a useful answer.  But sometimes the human brain anchors automatically and unconsciously on irrelevant values, and those end up influencing final judgments.  A second example is ‘framing’, i.e. how decision-making is influenced by the way a problem is presented.  A third example is ‘hindsight bias’.  In the legal environment, decision-makers assess situations and behaviour with the benefit of hindsight, although it is typically appropriate to judge the behaviour of the actor from his/her position at the time he/she engaged in that behaviour.  This bias makes it difficult for people to take a forward-looking perspective, because once we become aware of the result, we tend to reinterpret all other known factors about the event in light of that outcome.  We not only start to think that the outcome was inevitable, but also that it would have appeared inevitable to others.  A fourth example is ‘confirmation bias’―the tendency for people to process information in a way that confirms their current preconceptions, attitudes, beliefs, and even moods.  People pay closer attention to and better remember information that is consistent with their preferences and hopes.  By contrast, people tend to avoid, discount, and forget information that challenges those beliefs and preferences.  When information is ambiguous, we interpret it in ways that concur with our preconceptions, attitudes and hopes.

 

Advocacy strategies based on psychology:  Doak Bishop explained that one of the most important psychological strategies for advocacy involves framing the argument.  Studies have shown that two different ways of framing any issue can lead people to reach dramatically different results.  One aspect of framing is linguistic—it involves using specific words to call to mind certain word associations, which in turn can influence what, and how, the decision-maker thinks.  Another aspect is subject-matter framing―placing the case into the frame of a specific law or moral framework which evokes different associations from the brain and thus can be more or less persuasive to the audience.  Bishop concluded that an advocate should consciously seize the opportunity to frame the case in a persuasive way at an early stage of the proceeding and should not necessarily accept the way the opposing party frames the case.

Moving on to ‘self-persuasion’, Doak Bishop explained that communication experts referred to that principle as the “holy grail of persuasion research” because it overcomes the key obstacle to persuasion, which is resistance to the message.  This occurs when the audience starts to develop in their own minds counter-arguments to the message.  One way to reduce resistance to the message is by weaving the facts of the case into a story.  Stories do not create as much resistance because they do not explicitly contain a message that the audience is being asked to accept.  Another way to reduce resistance is to break up the argument by posing questions to the tribunal from time to time.  Questions do not evoke the same mental response of critical analysis as factual assertions.  Instead, they invite a different way of thinking:  an open-minded, interactive attitude of searching for the right answer, instead of simply accepting a predetermined one.

 

Impact of advocacy strategies on tribunals:  According to Sabina Sacco, research suggests that System 1 has a greater impact on decision-making than arbitrators or judges realize. Some of the factors that may make certain arbitrators or judges prone to intuitive decision-making are lack of awareness of how the brain works, excessive self-confidence, and lack of time.

In Sacco’s view, decision-makers are particularly affected by framing bias, confirmation bias and anchoring.  The brain tends to focus on: 1) information called to its attention by salient external stimuli (bottom-up attention), and 2) information that the brain deliberatively chooses to focus on (top-down attention). The way parties present or “frame” their case is thus likely to influence what information the arbitrators or judges focus on.  With respect to confirmation bias, research suggests that arbitrators and judges tend to focus on evidence and arguments that confirm their initial position and disregard the evidence that opposes it.  The question is whether the story told by a party and the evidence on record will have sufficient impact on a decision-maker to override his or her original intuitive conclusions.  As to anchoring, research shows that even exposure to an irrelevant value may have an impact on the decision.  That said, Sacco  warned that advocacy strategies can sometimes backfire.  Overstatement and exaggeration rarely help a party’s case.  Framing and anchoring should be based on the facts and supported by the evidence.

Sacco suggested several strategies to address the impact of these biases. The first step is to raise awareness among arbitrators and judges as to their existence.  Another is to establish rigorous processes for decision-making that force arbitrators and judges to reach deliberate rather than intuitive conclusions. Yet another is to appoint a tribunal secretary, who could assist time-crunched arbitrators with administrative tasks and liberate more time for deliberative thinking.  Finally, by referring to these biases in their submissions, counsel may assist in defusing automatic reactions and prompt the tribunal to think deliberately.

 

Factoring in notions of fairness and equity in oral advocacy:  Bishop referred to the “fairness instinct” in pointing out that arbitrators generally decide cases in a way that vindicates not only the law but also their own sense of fairness about how the parties treat each other.  Advocates should therefore focus on the equities of the case―the facts that show whether the parties treated each other fairly―because that can be the strongest weapon an advocate has to persuade an arbitrator.  The objective is to appeal to the arbitrators’ own sense of fairness about the case, in addition to putting the case into the relevant legal framework.

 

Final tips on advocacy strategies:  Cartwright-Finch argued that since a massive amount of our brain is devoted to visual processing, the use of images is of utmost importance.  She referred to the case OAOTafnet” v. Ukraine in which, at the hearing, claimant’s counsel relied on CCTV footage showing men taking over premises of the company in which the investor had invested.  The footage clearly had an impact on the tribunal because it was referred to at length in the award.  Cartwright-Finch concluded that the use of story-telling to complement the evidence is key to winning a case. Robbennolt also explained psychological research showing that the easier it is to process a message, the more memorable and persuasive it is.  It is important to make the message simple, use unambiguous fonts and graphics, and avoid jargon and big words.  This helps with persuasion because messages are perceived as more intelligent and persuasive when they are easy to process.

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Under What Circumstances Will the English Courts Determine a Preliminary Point of Jurisdiction?

Sat, 2021-09-04 01:16

In Armada Ship Management (S) Pte Ltd v Schiste Oil and Gas Nigeria Ltd [2021] EWHC 1094 (Comm), the High Court considered the interplay between sections 32 and 72 of the Arbitration Act 1996 (the Act) and provided a rare indication of how the courts will consider section 32 applications, identifying when section 32 will be engaged and the circumstances in which an application is likely to succeed.

The court recognised section 72 as a vital protection for a party that does not take part in arbitral proceedings, and held that a section 32 application to determine a preliminary point of jurisdiction could not be granted where section 72 was engaged.

 

Factual Background

In August 2016, the parties entered into a contract (the Charterparty), pursuant to which the Claimant (Armada) time chartered a vessel to the Defendant (Schiste) for an initial period of two months. The Charterparty was in a standard form of time charterparties, the BIMCO Supplytime 2005 form, which allowed the parties to amend or opt out of terms they did not consider applicable to their agreement.

After several extensions of the Charterparty, a dispute arose concerning alleged unpaid invoices due from the Defendant to the Claimant under the Charterparty and the Claimant commenced arbitration proceedings in London in accordance with the provisions of the Charterparty.

The parties had amended Clause 34 of the Charterparty to provide for the appointment of a sole arbitrator, rather than three arbitrators. However, the parties’ amendments meant that it was unclear on the face of the Clause how the sole arbitrator was to be appointed, because (i) the appointment process outlined in the Clause conflicted with the Terms of the London Maritime Arbitration Association (LMAA), which were said to apply to the appointment process; and (ii) the parties inserted a reference to the UNCITRAL Arbitration Rules, which provide for a different appointment mechanism to the LMAA Terms.

The Defendant failed to engage substantively with the Claimant’s Reference to Arbitration and subsequent correspondence. In August 2020, after the Claimant’s proposed sole arbitrator expressed reservations about his jurisdiction, the Claimant applied to the President of the LMAA for the appointment of a sole arbitrator pursuant to section 11 of the LMAA Terms. Having not received a Defence or further correspondence from the Defendant in accordance with the instructions of the sole arbitrator appointed by the President of the LMAA, the Claimant sought the sole arbitrator’s permission to make an application under section 32 of the Act seeking the court’s determination of a preliminary point of jurisdiction.

 

Competing provisions of the Act?

Under section 32 of the Act, the courts may determine a question as to the substantive jurisdiction of an arbitral tribunal, either where an application is made by agreement of all the parties to the arbitration or with permission of the tribunal. In the latter case, applications are subject to the following conditions being satisfied:

  • that the determination of the question is likely to produce substantial savings in costs;
  • that the application was made without delay; and
  • that there is good reason why the matter should be decided by the court.

In accordance with the scheme of the Act (and the expectations of the Departmental Advisory Committee on Arbitration), section 32 applications are relatively rare in practice, because questions of jurisdiction are resolved primarily before the tribunal itself (in accordance with section 30 of the Act).

Section 72 of the Act reserves certain substantive rights of parties to arbitral proceedings who take no part in those proceedings, namely the (i) ability to question the validity of an arbitration agreement, the proper constitution of the tribunal, and what matters have been submitted to arbitration under the arbitration agreement; and (ii) right to challenge an award on the grounds of lack of substantive jurisdiction or serious irregularity in accordance with sections 67 and 68 of the Act, respectively.

 

Judgment

In his decision, Cockerill J first considered the “threshold question” of the interrelationship between sections 32 and 72 of the Act. Cockerill J held that in circumstances where section 72 of the Act is engaged, the granting of an order under section 32 of the Act runs the risk of “denuding s 72 of the important protection which lies at its heart.” In explanation, he observed that, “[u]nder section 32 a party may lose a right to object to jurisdiction if it takes part in the determination but, if it does not, it is not being heard on jurisdiction in relation to a determination which prima facie binds it.” Cockerill J considered that, “in the light of section 72”, that would “put [] the non-participant in an unacceptable position.

Given the Defendant’s non-participation in proceedings and the engagement of section 72 of the Act, the court therefore considered it inappropriate to grant the application.

Despite concluding that section 32 was not engaged, the Court went on to consider the circumstances in which such an application would be successful. In its “non-binding indication” the court outlined a two-stage process for determining section 32 applications:

  • the court has to be satisfied that the section 32 conditions are met”; and
  • the Court has to be satisfied that the declarations sought concern questions of “substantive jurisdiction” and that the position in that respect is as the Claimant contends it to be”.

On the facts, having the court determine the preliminary question of jurisdiction was likely to produce substantial cost savings, the application was made without undue delay, and there was clearly a good reason that the court should give a declaration – to determine the proper construction of Clause 34 of the Charterparty and thus the correct method for appointment of the sole arbitrator. The court was therefore satisfied that the section 32 conditions would have been met. Further, the declaration sought was one of “substantive jurisdiction” within the meaning of the Act. Had the Defendant taken part in the proceedings and section 72 not been engaged, the application would have been successful.

 

Comment

The court’s “non-binding indication” in Armada provides a rare glimpse of how the courts will consider the merits of applications made under section 32 of the Act. In addition, the decision is noteworthy for the court’s confirmation that a party does not need to confirm its intention not to participate in arbitral proceedings for section 72 of the Act to be engaged.

In this regard, while a party has the right to challenge the decision of an arbitral tribunal under section 72 of the Act, section 72 does not afford a party the right to challenge an order of the court. A section 32 order would therefore appear to bar a subsequent section 72 application to set aside or vary that order. Further, any subsequent declaration sought by a party under section 72 against a determination of a tribunal would run the risk of being in conflict with, or subject to an estoppel by, an earlier order of a court granted under section 32.

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Hungary: Steps Towards Differentiating Between Domestic and International Procedural Public Policy

Fri, 2021-09-03 01:53

Drawing a well-defined line of demarcation between domestic and international public policy when enforcing foreign arbitral awards sends a clear pro-arbitration message from national courts in any jurisdiction. Does Hungarian case law come close to this level of sophistication? This post analyses this question in the context of procedural public policy, and it does so based on two recent appellate court decisions rendered in the context of enforcement of arbitral awards in accordance with the New York Convention.

 

Public Policy Explained

The concept of public policy, or ordre public, has often been criticized for its vagueness, and as an often-cited, almost two centuries old English judgment puts it pertinently, public policy “is a very unruly horse and when once you get astride it you never know where it will carry you”.1) Richardson v. Mellish (1824) jQuery('#footnote_plugin_tooltip_38597_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38597_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Yet the principle that public policy violation can be a ground to refuse the recognition and enforcement of a foreign arbitral award is a cornerstone of international arbitration, and it had been already codified by Article 1 (2) (e) of the Geneva Convention  1927.

Serving as a safety net in the contemporary legal framework of international arbitration to protect national values and interests, the public policy exception was maintained and confirmed by both Article V (2) b) of the New York Convention and Article 36 (1) b) ii) of the UNCITRAL Model Law.

While legal theory differentiates between domestic public policy, embodying the fundamental values and mandatory rules of a given jurisdiction, and international public policy, encompassing those rules that are applied by domestic courts in cross-border cases, the dividing line between these dimensions is often missing or is blurred in court practice.

For instance, under Hungarian case law, the distinction between domestic and international public policy remains blurred, despite the fact that the country has been the signatory of the New York Convention from the very beginning, and has been a Model Law jurisdiction since 1994.

In relation to substantive public policy, the Hungarian case law is scarce, but at least two Supreme Court judgments (cases Nos BH.2003.127. and BH 2007.130, respectively) have already shed some light on the line of demarcation between domestic and international public policy. For example, based on these decisions, it can be argued that the unusually high attorney’s fees can be a ground for setting aside domestic awards, but they cannot serve as a ground to refuse the recognition of foreign arbitral awards for violation of public policy.

However, up until now, case law has been silent on similar questions dealing with procedural public policy. But based on two recent appellate court decisions, both rendered in New York Convention cases dealing with enforcement of arbitral awards, Hungarian courts seem to be making the first steps towards the distinction between domestic and international dimensions of procedural public policy.

 

Decision of the Budapest Regional Court of Appeal

The first case, No ÍH2019.94, involves the recognition and enforcement of a foreign arbitral award rendered in the institutional setting under the auspices of the International Centre for Dispute Resolution (“ICDR”). The case involved a legal dispute arising in relation to a franchise agreement.

The losing party resisted the enforcement in Hungary inter alia on the ground that they did not have knowledge about the arbitral proceedings, and therefore they could not submit their defence during the proceedings. In their opinion, the enforcement of an award that was rendered in such arbitral proceedings is not reconcilable with the principle of due process as enshrined in Articles XXIV and XXVIIII of the Hungarian Fundamental law. Consequently, the recognition of such an award would violate the Hungarian public policy.

The first instance court established that the documents in the arbitral proceedings have been duly delivered to the representative of the losing party at the front desk of a restaurant, and these facts have been confirmed by the documents of the arbitral proceedings and by the arbitral award itself.

Based on the above factual background, the first instance court concluded that neither procedural irregularities set forth in Article 5 (1) b) nor the violation of public policy in Article 5 (2) b) of the New York Convention could be successfully invoked by the losing party, and therefore the enforcement was be granted.

The Budapest Regional Court of Appeal upheld the first instance decision, but it decided to slightly modify the justification. When it comes to the public policy exception, the second instance court recalled that this ground of refusal can be established only in exceptional cases when the rules that are violated form directly the basis of the social and economic order.

For this reason, the second instance court firmly rejected to examine the issue of delivery of documents and its alleged consequences on the procedural rights of the losing party under the lens of public policy set forth in Article 5 (2) b), and thus limited the examination of the losing party’s allegation of the potential violation of the due process principle set forth in Article 5 (1) b) of the New York Convention.

This line of demarcation, as drawn by the Budapest Regional Court of Appeal, indicates an approach according to which only flagrant violations of basic principles of domestic law can lead to the scrutiny of the international arbitral award based on public policy, while common procedural irregularities do not attain this threshold.

 

Decision of the Szeged Court of Appeal

In the second case, published under No. ÍH2021.22, the winning party sought the recognition of an award rendered by a tribunal of the Commercial Arbitration Court of the Ukrainian Chamber of Commerce and Industry.

The losing party invoked the public policy exception both on substantive and on procedural grounds.

In the framework of the procedural defence, the point of the losing party was that the arbitral award allegedly had not been served upon him. Therefore, in addition to the infringement of the Ukrainian procedural provisions, they were unable to pursue further domestic remedies available against the award. This, in their opinion, violates the Hungarian public policy.

The Szeged Court of Appeal held that the absence of the service of the arbitral award upon the losing party, in and of itself, does not automatically entail the loss of remedies against the arbitral award in the country of origin. Therefore, the violation of public policy cannot be established on this ground.

It is notable that in the framework of procedural public policy, the Szeged Court of Appeal referred to a Hungarian Supreme Court judgment, No. BH 2012.98., which had been rendered under similar factual circumstances, but in an enforcement procedure of a court judgment governed by the Brussels I Recast Regulation (“Brussels I”).

In that case, the party resisting enforcement of the court judgment alleged the violation of public policy under Article 45 (1) of Brussels I, relying on the supposed absence of the service of the Finnish state court decision. The Hungarian court, after setting a deadline for them to file for remedy in front of the Finnish courts, finally allowed the enforcement of the foreign judgment because the party resisting enforcement failed to demonstrate that they actually pursued the said remedy.

 

Hungarian Courts Live Up to the Standard

While in domestic cases the Hungarian courts show a tendency to set aside arbitral awards on purely procedural grounds, as in cases Nos BH2016. 122. and EH 2010.2150, the decisions rendered in the two above-mentioned international cases indicate a more restrained attitude.

According to this latter approach, the party resisting the enforcement of a foreign court judgment or arbitral award must show serious procedural irregularity and the real effects of the alleged procedural breach on the merits of the case, in the absence of which the violation of procedural public policy cannot be invoked with success to refuse recognition and enforcement.

To this end, the two Hungarian appellate courts showed that they interpret Article V (2) b) of the New York Convention narrowly when it comes to the public policy exception on procedural grounds.

In addition, by applying the same procedural public policy test under two different supranational legal sources, the two above-mentioned court decisions show that the Hungarian higher courts have started to adopt a unified approach of this concept in international cases.

The sophisticated distinction made between domestic and international public policy is an important sign of the pro-arbitration approach of these appellate courts in the field of recognition and enforcement of foreign arbitral awards, and the author of this article hopes that Hungarian courts will follow this path in the future.

References[+]

References ↑1 Richardson v. Mellish (1824) function footnote_expand_reference_container_38597_30() { jQuery('#footnote_references_container_38597_30').show(); jQuery('#footnote_reference_container_collapse_button_38597_30').text('−'); } function footnote_collapse_reference_container_38597_30() { jQuery('#footnote_references_container_38597_30').hide(); jQuery('#footnote_reference_container_collapse_button_38597_30').text('+'); } function footnote_expand_collapse_reference_container_38597_30() { if (jQuery('#footnote_references_container_38597_30').is(':hidden')) { footnote_expand_reference_container_38597_30(); } else { footnote_collapse_reference_container_38597_30(); } } function footnote_moveToReference_38597_30(p_str_TargetID) { footnote_expand_reference_container_38597_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38597_30(p_str_TargetID) { footnote_expand_reference_container_38597_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Making the Most of Diversity: In favour of Arbitral Liberalism

Thu, 2021-09-02 01:17

The current quest for greater diversity in the world of arbitration has focused heavily on the proportion of women as well as different ethnic and cultural groups on arbitral tribunals, boards and committees of arbitral institutions, and, to a lesser extent, acting as lead counsel. Most recently, there have been timely demands to recognize and accommodate the needs of practitioners with disabilities. In contrast, less attention has been paid to whether the arbitral community has a sufficiently open culture of debate and discussion to welcome and absorb new voices and ideas. The ends of pluralism are not served by tweaking the demographic mix of practitioners yet expecting newcomers simply to submit to the prevailing rules and practices. All legal and academic communities benefit from a range of different opinions. The need for upholding that diversity is all the greater where the members of those communities are themselves diverse and likely to hold divergent views. In this post, we make a plea for a liberal culture that, in the best liberal traditions of free speech, encourages an open mind and open debate, where an argument is judged on its merits and not on who made it.

The theory and practice of international arbitration derive from the New York Convention, domestic legislation, the jurisprudence of courts and academic commentary as well as the demands and experience of practitioners and other users and stakeholders. In itself it is no bad thing that a measure of consensus has emerged. It would be disastrous if the courts of each state adopted radically different standards of public policy in applying the New York Convention. Nor would it benefit anyone if arbitral procedure differed materially according to the whims and prejudices of the arbitrator. Predictability is important in the law. By this token, any newcomer must expect to accustom himself with arbitral theory and practice. There is no need to reinvent the wheel. Nor should you presume to change something that you have not first understood.

And yet, however much certain bodies impose institutional rules or soft law instruments on it, arbitration belongs to no one, but is rather held in common by many. This was true in a bygone age when it was supposedly the preserve of retired English judges and French professors, and it is especially true today. The past decades have seen the rise of regional hubs, notably in East Asia, as well as the creation of new institutions and the rise of a new generation of practitioners in Asia, Eastern Europe, Latin America, the Middle East and Africa. Arbitration is polycentric. No single institution, law firm, group of law firms, or professional body can speak for arbitration as a whole. Nor is there a de facto single set of rules.

Respect is essential to any civilized debate. Good court etiquette can serve as a guide to arbitration etiquette and more generally to the etiquette of arbitral debate. It is customary in Korea and to a lesser extent in England for counsel and parties to bow to the judge. Although they may not be happy with the decision, they do so out of respect for the institution of the court. This is not to say that the practice should be copied in arbitration, but if you have no respect for arbitration, you should probably not be advocating your client’s case in that forum. Similarly, good etiquette requires advocates to treat their opponents with courtesy however harshly they argue on matters of substance. You may abhor the argument but should not abhor the person who makes it. These values apply as much outside the hearing room as inside it. You should not be intimidated by arbitral conventions and those advocating them, but nor should you dismiss them casually.

An open mind is essential. The fact that practitioners did something in a particular way yesterday does not mean that they should do it that way today, still less that they should do it again tomorrow. Arbitration should not be a stagnant practice but should accommodate what users want, need and even enjoy. Tradition, convention or “good practice” can be excuses for intellectual laziness and imposing the preferences of leading players over what users actually need. No one legal culture has a claim to unquestioned superiority over another. To a degree practice reflects this in combining some common law elements, such as extensive document production and witness examination, with a more civil law culture of written submissions.

Still, mainstream practice has recently come in for criticism for being supposedly in the thrall of a common law culture and a “big law” approach, involving protracted proceedings, excessive and onerous document production, relentless procedural applications, and merely disruptive arbitrator challenges pour encourager les autres. Those approaches will not do for every case and every party. Document production remains a particularly thorny subject among many civil law practitioners.

Success may have its roots in unexpected places. Apart from largely mythical English insurance lawyers who are proverbially under the spell of the English Civil Procedure Rules, most arbitration practitioners try to break with rather than adapt domestic court practice. Yet, the Gangnam Principles do just that. The name is a gentle nod towards the popular song “Gangnam Style” by K-Pop artist Psy. As the now unfortunate phrase would have it, the song achieved global viral success a few years ago, having been less than successful upon its release in Korea. In the video, the dapper, if mildly corpulent, artist leaps maniacally from side to side, balancing on alternate legs and brandishing an imaginary lasso, all to pounding electronic music. The macaronic Korean-English lyrics give a satirical take on life in Gangnam, an affluent district of Seoul.

It remains to be seen if the Gangnam Principles will prove a similarly popular Korean cultural export. Psy’s hit inspired admiring imitations all over the world, even at MIT in Boston. Like the Prague Rules and institutional proposals for active case management, they offer techniques to manage delay and expense by tribunal interaction with the parties. The techniques draw on Korea’s civil law culture and include shorter, frequent hearings in place of the more usual single, climactic evidentiary hearing. Each shorter hearing gives the arbitral tribunal the opportunity to work with the parties on whittling down the relevant and contentious issues. Other measures include witness conferencing for fact as well as expert witnesses and streamlined document production. The Gangnam Principles are an example of a possible solution from an unexpected source to a problem that affects users the world over.

Good ideas benefit everyone. The challenge is to ensure that they are given a fair opportunity to succeed. The arbitral community is more diverse than it has ever been, but it will not reap the benefits, unless it is open to fresh thinking. No one who has a serious suggestion for improving the procedure should be turned away. This depends on free and open debate in which everyone both is and feels able to participate. No practitioner should claim superiority based on personal fame or legal heritage. However, maximum inclusivity in debates does not necessarily lead to a single universal solution. On occasion, people must agree to differ. There is no harm in this. In some cases, parties will prefer a heavyweight “big law” approach to a more conciliatory one. As stated at the outset, arbitration has no single centre, either legal or professional, and accordingly no single set of rules. A pluralism of approach is the predictable and welcome outcome. Arbitration is, after all, also known for its flexibility.

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The Wait is Over: Ecuador Enacts Regulations to its Arbitration and Mediation Law

Wed, 2021-09-01 01:18

Ecuador´s Arbitration and Mediation Law (“AML”) was enacted in 1997 and amended in 2015. However, the AML did not count with regulations until August 2021. Given that some provisions contained in the AML are vague, arbitrators, counsel and judges interpreted them in different ways, many of them in contradiction with the very nature of the arbitral process. On August 18, 2021, President Guillermo Lasso issued Executive Decree Nº 165 containing the regulations to the AML (the “Regulations”). The Regulations clarify important aspects for the practice of arbitration in Ecuador, such as the process for enforcing international arbitral awards, requirements for arbitration with public entities, and the process for annulment actions. This post explores the novel aspects brought by the Regulations regarding arbitration.

The Regulations will officially enter into force in the upcoming days once published on Ecuador’s Official Registry.

 

Arbitration involving the State and State entities

According to article 190 of the Constitution, public entities require the Attorney General of the State to approve any arbitration agreement the entity might include in a contract. In 2014, the Attorney General of the State issued an internal resolution clarifying that his prior approval is mandatory  if a public entity wants to enter into an agreement for submitting disputes to international arbitration, or if a public entity wants to submit its dispute to arbitration once the dispute has already begun. However, it was not clear if a public entity required the prior approval issued by the Attorney General of the State before the conflict had arisen.

In addition, in case No. 17711-2016-0049 the National Court of Justice confirmed the setting aside of an award holding that in public contract matters the prior approval issued by the Attorney General of the State is always mandatory and impacts the validity of the arbitration agreement. In this regard, the Regulations now clarify that there are three ways in which public entities can submit their disputes to arbitration: first, by entering into an arbitration agreement before the dispute arises; second, by entering into an arbitration agreement once the dispute has arisen; and third, when the law of an international treaty so provides. Only in the second way and for international arbitration agreements the Attorney General of the State´s approval is required.

In terms of arbitrability of disputes involving State entities, the Regulations clarify that in matters of public contracts, arbitrators shall have the power to decide on the facts, acts or administrative actions that are related to the controversy, including administrative acts for termination, unilateral termination of contracts (caducidad), or the imposition of penalties. Another aspect of great relevance is that when an arbitration agreement has not been included in a contract entered with a public entity, the contractor may request the contracting party to agree to arbitrate. If the contracting party (public entity) remains silent for the next thirty days after such request has been made, then it will understood that it has agreed to arbitrate the dispute. This provision is likely to face some controversy, mostly because arbitration is a creature of consent, and this involves this idea of the existence of a “tacit consent.”

 

International arbitration and enforcement of international awards

Regarding international arbitration, the Regulations clarify that public entities may enter into international arbitration agreements as long as they have the Attorney General of the State´s approval. The Regulations establish that in order to obtain said approval, the Attorney General of the State shall review whether the arbitration agreement is valid in accordance with the law of the seat.  Parties are free to agree on the seat of the arbitration.

With regards to the enforcement of international arbitral awards, the Regulations clarify that they will be enforced in the same way as domestic awards and no particular formalities will be required. Domestic awards are enforced before the lower civil court from the domicile of the respondent/losing party or the place where they have assets capable of being seized. This provision is in harmony with Article III of the New York Convention and confirms that the “exequatur” process is no longer needed. In addition, judges will reject and sanction any attempt by a party looking to obstruct the enforcement process. The party against whom the award is being enforced may only challenge the enforcement process if they prove that the award has been suspended or set aside by a competent authority.

 

Annulment actions

The Regulations clarify that during the annulment action against an award, judges shall observe the principle of minimal judicial intervention. The Regulations confirm that annulment actions may not be used as a mechanism to delay the enforcement of an award and in case a party tries to do that, they will be sanctioned.  During the annulment proceedings, the President of the Provincial Court shall determine (i) whether the party who is seeking the annulment has claimed in a timely manner before the tribunal the occurrence of the event which supposedly caused the nullity, (ii) if the cause for annulment causes an irreparable damage to the party, and (iii) if the annulment ground could have been raised or corrected during the arbitration proceedings and the party now complaining failed to do so. The Regulations state that in case of doubt, the President of the Provincial Court shall opt for refusing the annulment of the award.

In terms of the procedure, once the annulment petition has been filed, the tribunal shall keep a certified copy of the arbitration record (hard copy or electronic) at the arbitration center and then send the original file to the corresponding Provincial Court. From the date of the receipt of the file, the President of the Provincial Court will have five days to review if the annulment petition complies with all legal requirements and then, he will have thirty additional days to reach a decision. Parties may submit written pleadings during this time and will also have time to present their arguments orally before the Court. In the author´s view, these provisions are important because they finally clarify procedural aspects regarding annulment actions.

 

Precautionary measures

The Regulations establish that the tribunal or an emergency arbitrator (the AML does not make any reference to emergency arbitrators) shall issue precautionary measures in order to: (i) maintain the status quo until the dispute has been finally resolved; (ii) prevent the continuation of any current damage or an imminent one; (iii) preserves assets in dispute; (iv) preserve evidence; (v) ensure that the parties will comply in the future with the obligations that are being disputed.; (vi) preserve the tribunal’s jurisdiction. In the author´s view, it is positive that the Regulations established the general requirements for granting precautionary measures because this was vaguely addressed in the AML. The arbitrators may revoke, modify or suspend the measures either at a party’s request or sua sponte.

 

Scope of the Arbitration Agreement, Confidentiality, Party Autonomy and Arbitrator´s Duties

The Regulations establishes that the arbitration agreement may cover those parties whose consent is implied according to the principle of good faith, or from their substantial role in the participation, negotiation, execution, performance or termination of the contract, or exercised rights or acquired benefits from it (e.g. successors). This provision may open the door for extending arbitration agreements to non-signatories or third parties using theories such as the group of companies, estoppel, alter-ego or piercing of the corporate veil, which was a controversial issue and on-going topic for discussion among the local arbitral community.

In terms of confidentiality the regulation brings important aspects such as the possibility for parties to request either arbitration centers or Provincial Courts during annulment actions, to take specific measures in order to protect their identity and preserve the confidentiality of the arbitration.

The Regulations also guarantee party autonomy and allow parties to agree to any institutional rules or agree on their own procedural rules if interested in a more flexible process. It also guarantees that local courts will not interfere in the administration and autonomy of arbitration centers, which is positive given that in the past the Judiciary has tried to interfere in the conduct of arbitration centers.

Finally, the Regulations establish that once an arbitrator has been appointed and accepted said appointment, he or she has a duty to comply with their legal obligations, including personal liability for damages caused by fraud or gross negligence. The arbitral institution, their director and employees face the same responsibility.

 

Conclusion

In the author´s view, the new Regulations to the AML will bring many positive changes for the practice of arbitration in Ecuador because it limits judicial intervention, promotes international arbitration, reinforces party autonomy, and sends a positive message to the country and to the whole world that Ecuador is an arbitration-friendly jurisdiction.

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Consequences of Recognizing Environmental Protection as an Emerging Erga Omnes Obligation in the ISDS Context

Tue, 2021-08-31 01:12

ISDS has faced harsh criticism from environmental groups as being inimical to the protection of the environment. This post argues that environmental protection is an emerging jus cogens norm, and thus, an arising erga omnes obligation, which investment tribunals must recognize as such. Additionally, it explores the legal consequences of applying this public international law concept in the context of ISDS.

 

Jus Cogens Norms, Erga Omnes Obligations and Environmental Protection

Jus cogens (or peremptory) norms and erga omnes obligations are highly interrelated yet different concepts. One way to think about jus cogens is as a “super customary international law”(CIL). In this regard, Article 53 of the VCLT, jus cogens is a norm recognized by the international community from which no derogation is permitted, and which can be modified only by a subsequent norm of general international law with the same character. Thus, jus cogens norms protect fundamental values of the international community, are hierarchically superior to other rules of international law and are universally applicable. By contrast, the term “erga omnes obligation” was crafted by the ICJ in the Barcelona Traction case, and which determines that given the importance of certain rights involved, states have specifically determined obligations towards the international community as a whole (non-reciprocal).

The ICJ clarified the relationship between jus cogens and erga omnes obligations in the Chagos Case in 2015. In this regard, as Tladi highlights, the Court noted that (1) jus cogens norms produce erga omnes obligations; however, (2) in few cases, erga omnes obligations arise from non-peremptory norms (customary international law, para.63). The Court also noted that the right of self-determination – the right analyzed therein – was initially a customary international law principle, which then crystalized as a jus cogens norm.

While the ICJ has not yet acknowledged environmental protection as a jus cogens norm, it did recognize the importance of environmental protection in the Gabcikovo-Nagymaros case. The Court noted that environmental protection is an essential interest of the state in the sense of article 64 of the VCLT (emerging jus cogens). Accordingly, as an emerging jus cogens norm and a clear customary international law principle – evidenced in a wide variety of state practices and binding opinio iuris acts, such as the Rio Declaration, the Paris Agreeement, and the UNFCC – environmental protection becomes an emerging erga omnes obligation that investment tribunal ought to recognize.

 

The Legal Consequences of Recognizing Environmental Protection as an Emerging Erga Omnes Obligation in Investment Arbitration

The legal effects of environmental protection as an erga omnes obligation in the ISDS context is an unexplored territory. Moreover, even in public international law, the effects of erga omnes are still unclear and ambivalent (see arts. 42, 28 of the ILC Draft Articles on State Responsibility). Yet, as outlined by Professor Tanaka, the logical consequences of erga omnes obligations are:

  • The obligation not to recognize illegal situations.
  • Third-party countermeasures, and
  • The standing of not directly injured States in response to a breach of obligations erga omnes.

While these legal effects can only be extended to states for responsibility for internationally wrongful acts, it is necessary to recognize similar legal effects to parties in ISDS.

In the ISDS system, one party to the dispute- the claimant- will be a private party whose legal status differs substantially from states’. For this reason, the consequences of erga omnes obligations proposed by Tanaka are not extensible to commercial parties. In the paragraphs below, this post suggests different but analogous legal effects of recognizing environmental protection as an erga omnes obligations in the ISDS system. First, tribunals should recognize environmental protection as an exculpatory justification for states against claims of breach of treaties and hold states liable if they do not comply with this obligation. Second, due to the erga omnes nature of environmental protection, directly injured and not directly injured actors should also have the standing to intervene in response to a breach of these obligations.

 

Environmental Protection as an Exculpatory Justification for States and as an Additional Source of State Liability

If investment tribunals recognized the erga omnes obligation of states to protect the environment, states would be compelled not to recognize situations that infringe environmental protection laws. Thus, any action to deter environmental damage would be adequately justified and not infringing on investment treaties. In turn, States could be liable for the breach of these obligations. This line of thought has not been adopted yet in ISDS; however, substantial advances have been made in the past decade.

As an erga omnes obligation, any measure by states that furthers environmental protection that is applied in a non-discriminatory manner should serve as an exculpatory justification to exempt states from liability. Accordingly, several treaties have inserted language that allows them to regulate environmental matters. For instance, the Netherlands Model BIT reaffirms the investors’ duty to comply with domestic laws, including environmental regulations. Similarly, the 2021 Singapore-Indonesia BIT includes a carve-out provision in Article 11 that reaffirms the state’s right to regulate to achieve environmental protection without this constituting a treaty breach, including the modification of laws that might adversely affect an investor. Likewise, Article 13 of the Nigeria – Morocco BIT allows host states to regulate and enforce environmental laws without this constituting a treaty breach. Finally, articles 400 and 401 of the TCA Agreement contain strong declarations of the parties to target climate change and recognize the prevalence of international climate protection as an erga omnes obligation.

There are a few examples of tribunals nearly acknowledging environmental protection as an erga omnes obligation in case law. For instance, as a source of state liability, in Peter A. Allard v. Barbados, the claimant sued the state of Barbados due to its failure to comply with environmental laws and climate change obligations. While the claimant was unsuccessful, the Tribunal acknowledged that a host State’s international obligations might be relevant in applying environmental standards to particular circumstances.

Similarly, as an exculpatory justification, in a pending case, Gabriel Resources v. Romania, one of the critical discussions of the case is whether the protected investment falls within the carve-out provision of Article XVII(2) of the Romania- Canada BIT, which affords the host state a wide margin to enforce environmental measures. If the investment falls within the carve-out clause and the measure is applied in a non-discriminatory manner, there would be no breach of Romania’s obligations under the BIT. This deferential treatment of the state would be the first-time environmental concerns take precedence over the investor interests and would serve as an implicit recognition of the erga omnes obligation of states to protect the environment.

 

Mandatory Third-Party Intervention of Directly Affected Groups and Not Directly Affected Groups in Response to a Breach of Erga Omnes Obligations.

There have been several criticisms around the ineptitude of ISDS to include the voices of those who have been directly affected by environmental damage. Furthermore, as evidenced in Chevron, States do not have standing to raise claims regarding investor misconduct or violation of third-party rights. For this reason, affected parties must directly intervene in ISDS. These concerns are being addressed in the ISDS reform process at the UNCITRAL Working Group III as well as in EU Law trade agreements.

According to UNCITRAL, at first, amicus curiae submission seemed a viable solution for the inclusion of interested third parties in ISDS. However, since Methanex, tribunals have highlighted the limited scope of amicus curiae. Moreover, as evidenced in United Parcel Service of America, amicus curiae submissions remain at the entire discretion of the tribunal, yet this is not a right of affected parties, hence, not granting affected parties meaningful participation. The proposed solution by the group has been to give parties intervention, joinder, interpleader and dismissal rights, very similar to the ones in the US Federal Rules of Civil Procedure.

For its part, EU law has addressed the participation of affected parties differently. Chapter 7 of the TCA, is entirely devoted to environmental matters and one of the critical advances is the participation of civil society in environmental disputes. The treaty provides for domestic advisory groups (DAGs) that monitor compliance and implementation and advise on civil society matters, such as environmental protection (arts. 12 and 13). Additionally, chapter 9, on dispute resolution, provides for extensive consultation to DAGs when panels of experts and arbitration solve environmental disputes.

Finally, regarding the participation of not directly affected parties, derived from the emerging erga omnes obligation to protect the environment, not only directly affected parties are interested in the protection of the environment but also the international community as a whole. For this reason, NGOs, international organizations, scholars, and different civil society groups must also be allowed to participate in ISDS proceedings. In this case, despite the criticism to amicus curiae submissions, they seem accurate to give a voice to not directly affected parties.

 

Conclusion

There is still much to be discussed on the erga omnes obligation of states to protect the environment. While the consequences explored in this post are limited to the ISDS context, they are not unique; several other implications can be drawn from this concept. As in Urbaser, a question that remains unexplored is whether Tribunals can hold private actors directly accountable for violating erga omnes obligations in ISDS (para. 1212). Although the rules of state responsibility do not apply to former, as the term “erga omnes” suggests, these obligations are non-reciprocal, and they are owed by everyone – even corporations – to the international community as a whole.

 

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Open Positions: Kluwer Arbitration Blog and ITA Arbitration Report

Mon, 2021-08-30 01:05

The Editorial Board of the ITA Arbitration Report announces the opening of two positions of Assistant Editors. The Assistant Editors report directly to the co-managing editors, Dr Monique Sasson and Dr Crina Baltag. The Assistant Editors are expected to assist the co-managing editors in their tasks and to summarize relevant arbitral awards as per the ITA Arbitration Report format. The positions provide an opportunity to work with a dynamic and dedicated team, expand the arbitration knowledge and liaise with various stakeholders. The Assistant Editors will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email, before 5 September 2021, to Dr Crina Baltag, [email protected]. We will only reach out to shortlisted candidates for an interview.

 

The Editorial Board of Kluwer Arbitration Blog announces the opening of the Assistant Editor to the Editor of Kluwer Arbitration Blog position. The Assistant Editor reports directly to the Editor and is expected to assist the Editor in her tasks, mainly in monitoring the publications of the Blog. The Assistant Editor will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email, before 5 September 2021, to Dr Crina Baltag, [email protected]. We will only reach out to shortlisted candidates for an interview.

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Challenges to the Jurisdiction of the QFC Court in Qatar

Sat, 2021-08-28 01:00

Similar to other countries in the region, Qatar’s primary legal system is civil law based. In 2005, the Qatar Financial Centre (“QFC”), an offshore jurisdiction, was established in Qatar by virtue of Law No. 7 of 2005 as amended by Law No. 2 of 2009 (“QFC Law”). This post sheds light on the jurisdiction of the QFC Court, with particular emphasis on its relationship to the local Qatari courts, and explores the implications of the QFC Court’s decisions, including the recent case of C v D, where a Note on Ruling was issued confirming the QFC Court’s jurisdiction in a Qatar seated arbitration

 

The QFC

The QFC is home to more than 1300 companies that are currently registered there. The QFC Law provides the basic structure of the QFC and establishes the QFC Authority, the QFC Regulatory Authority and the Qatar International Court and Dispute Resolution (“QICDRC”). In turn, the QICDRC consists of the Civil and Commercial Court of the QFC (“QFC Court”) and the QFC Regulatory Tribunal. The rulings of the QFC Court are issued in the name of His Highness the Emir of Qatar and are regularly published in English and Arabic on the QICDRC’s website as well as on LexisNexis.

The jurisdiction of the QFC Court is stipulated in article 8(3)(c) of the QFC Law as well as under article 9.1.4 of the QFC Court Regulations and Procedural Rules (“Rules”). These provisions provide that the QFC Court has jurisdiction over civil and commercial disputes in four distinct scenarios: (i) transactions, contracts, arrangements or incidences taking place in or between entities established in the QFC; (ii) matters between the QFC authorities or instructions and entities established therein; (iii) matters between entities established in the QFC and contractors therewith and employees thereof, unless the parties agree otherwise; and (iv) transactions, contracts or arrangements taking place between entities established within the QFC and residents of Qatar, or entities established in Qatar but outside the QFC, unless the parties agree otherwise.

From January 2020 to June 2021, jurisdiction challenges were raised in 10 cases before the QFC Court, which were addressed by way of preliminary judgments which it considered would “most expeditiously and effectively be addressed by consideration of the documents filed by the parties, without the need for an oral hearing.” 1)Ahmed Mohammed Youssef Hassan v Arab Jordan Investment Bank (Qatar) LLC [2021] QIC (F) 7, para 4. jQuery('#footnote_plugin_tooltip_38529_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38529_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The QFC Court rendered its decisions in 9 of these cases while in the tenth case of C v D, it released a note on its ruling. The unsatisfied respondents brought their cases before the appellate division of the QFC Court in two of these cases.

 

Local Qatari Courts vis-à-vis QFC Court

The jurisdiction of the QFC Court is not based on the parties’ agreement or preference. It is stipulated in the QFC Law and the Rules. In Ahmed Mohammed Youssef Hassan v Arab Jordan Investment Bank (Qatar) LLC, the claimant sought an order from the QFC Court to recover documentation held by the respondent, a QFC entity, which was ordered to be provided to the claimant by the local Qatar Court of Appeal. While the QFC Court dismissed the case for lack of jurisdiction, it offered some interesting observation on the relationship between the local Qatari courts and the QFC Court.

In particular, the QFC Court noted that where states have separate but parallel jurisdictions, legislation may exist for the parties facing ongoing legal proceedings in one jurisdiction for assistance in legal proceedings pending before the courts in the other jurisdiction. As no such legislation exists in Qatar that provides for the cooperation between the local Qatari courts and the QFC Court, they called for this issue to be considered by the legislative authority of Qatar, and rightfully so. To provide meaningful access to justice and enhance the judicial system in Qatar, the two court systems must cooperate and work in tandem with each other. In the first instance, this could even be achieved by a joint judicial committee consisting of representatives from both the local Qatari courts and the QFC Court. The committee could render binding decisions on matters which require cooperation between the two court systems. The committee could also decide on which court system should have jurisdiction in cases where there are contrary arguments for both.

 

QFC Court has Jurisdiction where Legal Services Provided by QFC Entity

In John and Wiedeman LLC v Integrated Intelligence Services and Trading LLC, the claimant was a QFC-licensed law firm claiming legal fees for services rendered to a non-QFC company. The respondent challenged the jurisdiction of the QFC Court, on the basis of article 10 of the QFC Law, and argued that legal services were not among the activities that business were permitted to operate within the QFC. In its judgment, the QFC Court relied on article 8.3(c/4) of the same law to hold it had jurisdiction over the matter, as the subject matter was a civil dispute arising between an QFC entity and one established elsewhere in Qatar. The legal services provided by the law firm were considered to fall within the permitted business activities to be carried out within the QFC.

In Badri and Salim Elmeouchi LLP v Data Managers International Limited, a claim was brought by a QFC-licensed law firm which operated from its offices located in Lebanon and Qatar, against its Lebanese client, for the recovery of its legal fees. The law firm’s client (respondent in this case) objected to the jurisdiction of the QFC Court on the basis that there was no agreement (on jurisdiction) for the parties to litigate their dispute before the QFC Court. This, the respondent argued, was especially given that the legal services were provided entirely from the law firm’s office in Lebanon. In response, the law firm considered that the QFC Court had jurisdiction over the dispute irrespective of where the parties were domiciled. Agreeing with the law firm, the QFC Court held that it had jurisdiction on the basis that the law firm was licensed and had a presence in the QFC, notwithstanding that it also had an office elsewhere.

If the respondent’s contention in this case was accurate, that the legal and fiduciary services were carried out by the associated Lebanese law firm of the claimant, then this raises a number of interesting points that the QFC Court, unfortunately, did not address. In particular, where the substantial services of a QFC entity is rendered from a foreign jurisdiction, care needs to be taken that any decision issued by the QFC Court is not contradictory to the rules and regulations of the professional legal body in that jurisdiction where the legal services were rendered.

 

QFC Court is a Qatari Court

In Aycan Richards v (1) Nigel Thomas Howard Perera and (2) International Financial Services Qatar LLC, the challenge of the respondents was based on the parties’ dispute resolution clause which provided that “Qatari courts” would have exclusive jurisdiction over the matter. The respondents argued that the reference to “Qatari courts” expressly excluded the QFC Court.

In its judgment, the QFC Court considered that as a matter of general language, it was clearly a Qatari court and relied on Article 3.2 of the Rules for this, which states that “[i]t is recognised that the Court is a court of Qatar”. The QFC Court held that the reference to “Qatari courts” could not only be a reference to the local Qatari courts. It reasoned that even if the reference to the governing law being “laws of the State of Qatar” was to the national laws of Qatar, it still did not follow that the reference to “Qatari courts” meant the local Qatari courts. Based on this and their observation that there was nothing elsewhere that explicitly excluded the jurisdiction of the QFC Court, it held that it had jurisdiction over the matter.

This decision essentially expands the ambit of the QFC Court’s jurisdiction; it envisages that the QFC Court can decide on matters governed by the local Qatari laws. How this could be achieved in practice ought to be explored and decided by way of the joint judicial committee proposed above.

 

QFC Court Has Jurisdiction Over Arbitrations Seated in Qatar

Following the enactment of the Qatar Arbitration Law in 2017, parties in Qatar seated arbitrations were expressly allowed to choose either “[t]he Civil and Commercial Arbitral Disputes Circuit in the Court of Appeals” (i.e., the local Qatari courts) or “[t]he First Instance Circuit of Civil and Commercial Court of the Qatar Financial Centre” (i.e., the QFC Court) as the Competent Court in their arbitration.

In the recent case of C v D, none of the parties were established in the QFC. Their contract provided for arbitration under the LCIA arbitral rules, QICDRC in the QFC as the seat and Qatar as the venue of the arbitration. Upon the application by a party to obtain an interim relief by way of an injunction, the QFC Court stated, in a March 2021 Note on Ruling, that it “was satisfied that it had jurisdiction to deal with the application, in circumstances in which an arbitral tribunal could not yet act, or act effectively”.2)Para 3. jQuery('#footnote_plugin_tooltip_38529_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38529_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In this case, the QFC Court confirmed that it had jurisdiction to act as the supervisory courts in Qatar seated arbitrations where invariably, the Qatar Arbitration Law applies.

C v D reiterates the freedom that parties arbitrating in Qatar have, in selecting either the local Qatari civil jurisdiction courts or the common law based QFC Court to have supervisory jurisdiction over arbitrations seated in Qatar. This is irrespective of whether the parties are established within the QFC.

 

Implication for Non-QFC Parties Going Forward

Based on the above, it appears that the QFC Court has, on the one hand, an absolute or exclusive territorial jurisdiction to hear and determine civil and commercial disputes arising between (i) any entities both established in QFC; and/or (ii) any QFC authority and an entity established in QFC as a default. On the other hand, subject to a contrary agreement between the parties (opt-out), the QFC Court has jurisdiction in disputes which may arise between (iii) any entity established in QFC and a contractor therewith (contract for services with a client) or any employee thereof (contract of labour) and/or (iv) any entity in QFC and a resident in Qatar or a non-QFC entity, whether in or outside Qatar. It is obvious that the QFC Court’s territorial competence was meant to go gradually from absolute to relative and from exclusive jurisdiction to consensual agreement where not both of the parties are QFC registered.

Non-QFC parties, whether established in Qatar or abroad, must exercise particular care when they enter into agreements with QFC-based entities, by using the opt-out mechanism. This is not least because the QFC Law has determined that the QFC Court will ordinarily exercise jurisdiction over contracts that fall within the four exclusive jurisdictional gateways as indicated under article 8.3(c).

Over time, it is hoped that both the court systems in Qatar are linked by way of a seamless mechanism that will allow parties facing litigation in Qatar to avail of the benefits in both the civil law local Qatari courts and common law QFC Court.

 

Dr Minas Khatchadourian provided his contributions to this post before his recent and very sad passing. We join the international arbitration community in mourning this great loss. His invaluable contributions to progress international arbitration in Qatar and the wider region will be fondly remembered.

References[+]

References ↑1 Ahmed Mohammed Youssef Hassan v Arab Jordan Investment Bank (Qatar) LLC [2021] QIC (F) 7, para 4. ↑2 Para 3. function footnote_expand_reference_container_38529_30() { jQuery('#footnote_references_container_38529_30').show(); jQuery('#footnote_reference_container_collapse_button_38529_30').text('−'); } function footnote_collapse_reference_container_38529_30() { jQuery('#footnote_references_container_38529_30').hide(); jQuery('#footnote_reference_container_collapse_button_38529_30').text('+'); } function footnote_expand_collapse_reference_container_38529_30() { if (jQuery('#footnote_references_container_38529_30').is(':hidden')) { footnote_expand_reference_container_38529_30(); } else { footnote_collapse_reference_container_38529_30(); } } function footnote_moveToReference_38529_30(p_str_TargetID) { footnote_expand_reference_container_38529_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38529_30(p_str_TargetID) { footnote_expand_reference_container_38529_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Arbitration Tech Toolbox: Damages Expert Evidence Using Sensitivity Analysis, Scenario Modelling and Data Visualisation

Fri, 2021-08-27 01:00

The views of the party-appointed experts in an arbitration may differ substantially, making it difficult for tribunals to navigate within the multiple areas of disagreement. Even if the disagreed issues can be isolated (e.g. via means of the joint expert report), understanding the sensitivity of the amount claimed to the individual assumptions may not be straightforward, particularly if the calculations are tested or challenged by the tribunal, counsel, or experts during the hearing. This article explores how sensitivity analysis, scenario modelling and data visualisation tools may assist in cutting through the complexities of damages assessment.

 

Sensitivity analysis

Sensitivity analysis allows one to understand how sensitive any given model or calculation (i.e. output) is to a particular sole assumption (i.e. input). For example, in a shareholder dispute over valuation of shares, one can assess the sensitivity of the shareholding value to, say, discount rate, or assumptions as to the pricing of products sold by the business in question.

In the damages evidence context, the purpose of the sensitivity analysis is to understand how (if at all) damages change depending on the issues disagreed by experts. Sensitivity analysis is particularly helpful in matters where experts disagree on multiple issues and the tribunal aims to isolate the issues which affect the claim the most. For example, if the experts’ disagreement on a particular assumption is 20%, but the difference in the respective loss due to this single factor is only 1%, the tribunal might want to focus the cross-examination and/or hot-tubbing of experts on other areas.

So how does one incorporate sensitivity analysis into the damages expert evidence?

Damages calculations performed in Microsoft Excel spreadsheets can be utilised to include sensitivity analysis, which can be attached as working soft copy files to expert reports.

Sensitivity analysis can be incorporated into Excel in various forms. One example is a sensitivity table showing a sensitivity of, say, estimated loss, to two selected inputs, e.g. rate used to discount future cash flows and assumed revenue growth (see Figure 1 below).

Figure 1: Sensitivity data table in Excel

Another way to make the Excel model more flexible is to use drop-down lists for some of the key assumptions or a dashboard of inputs, which could be easily changed by the user of the model. If such inputs are set out in a single sheet in a user-friendly format, that would allow tribunals to understand the impact of changing those assumptions on the loss without getting into complexities of the underlying modelling. An example of such dashboard of assumptions is shown in Figure 2 below.

Figure 2: Dashboard of assumptions in Excel

 

Scenario modelling

Scenario modelling aims to answer the question of “what if?”. In a damages quantification context, modelling various scenarios is helpful in the following circumstances:

  • One has to consider alternative scenarios (i.e. counterfactual scenarios) of what would have happened but for the breach, e.g. in case the counterfactual position is disputed by the parties;
  • The sub-categories of point (1) may include claims for the loss of opportunity, disputes arising out of failed M&A deals or in relation to a launch of a new product;
  • In cases involving natural resource assets, one might consider various production profiles or production start dates of, say, greenfield mines or oil/gas fields, and the respective impact on value of such assets;
  • Assumptions about contingent events (e.g. achievement of profit targets, occurrence of an IPO) may affect the loss in M&A disputes and claims over share options or management incentive shares; and
  • In some cases, different sets of forecasts might be available for the same subject asset, e.g. prepared by management, lender and/or a third-party advisor.

Compared to the sensitivity analysis, modelling scenarios generally involves changing multiple inputs or assumptions at the same time, which makes it a more complex exercise. In certain circumstances, modelling an alternative scenario may require creating a new Excel model with a different structure, as opposed to amending the existing one. Therefore, it is important for the tribunal, counsel, and experts to define various scenarios to be considered in a particular matter as soon as possible, as introducing new scenarios later in the process (e.g. during the hearing) may restrict the experts’ ability to perform the necessary amendments promptly. However, if the set of alternative scenarios is defined early enough in the proceedings, experts can incorporate flexibility into their Excel models to allow switching between scenarios in real-time.

As with sensitivity analysis, one can create a dedicated worksheet in Excel allowing one to switch between various scenarios and also change the individual assumptions outside those scenarios (see Figure 3 for an example).

Figure 3: Scenario selection sheet in Excel

Creating a user-friendly dashboard in Excel would equip the tribunal with a tool to (a) select an appropriate scenario for calculating the loss, based on tribunal’s findings of fact and law; and (b) make changes to the individual inputs and assumptions.

 

Joint expert models for sensitivity/scenario analyses

One way to identify areas of disagreement between experts and potentially narrow the list of those down is for the tribunal to order experts to prepare a joint expert report (or joint statement). This report typically sets out the areas of agreement and disagreement between experts, together with their reasoning for the latter. In many cases, such joint report is used as a starting point for the cross-examination of experts or witness conferencing (also known as hot-tubbing).

Either during the joint expert report stage or based on tribunal’s directions, experts can prepare a joint model incorporating various sensitivity/scenario analyses. Although creating a joint model may be a time-consuming exercise, a joint model:

  • Removes the need for experts to review and comment on another expert’s model if any substantial changes are made to it. In other words, the tribunal, counsel, and experts can focus on a single model as a starting point;
  • Specifies and shows the areas of expert disagreement in a user-friendly way, so that changes to the individual assumptions and/or selection of relevant scenarios can be made; and
  • Can be amended during the hearing in an uncontroversial manner, thus limiting the need for experts to perform further calculations after the hearing.

In our practice, joint expert models can be prepared even in cases where damages experts use different valuation approaches and/or counterfactual scenarios. In such cases, the decision the tribunal may have to make becomes two-tiered. First, the tribunal decides on the appropriate approach/scenario. Second, the tribunal decides on the individual assumptions within the selected approach/scenario.

 

Use of data visualisation tools in damages expert evidence

Whilst Excel is a common tool for damages experts to create their models, there are instances where the data is so complex and voluminous that a more sophisticated data visualisation platform should be used. Data visualisation tools can assist in presenting the data and damages models by consolidating various Excel spreadsheets and calculations into a single platform. These tools:

  • Allow you to pull all the data used in a damages model into a single platform, e.g. by combining multiple spreadsheets;
  • Would have built-in functionality to assist in “cleaning up” for erroneous data, as well as consolidating data in a consistent manner. Further, one can keep track of all modifications made to the original source data; and
  • Incorporate more sophisticated charting and presentation functions compared to Excel, facilitating a more holistic approach to analysing data, model sensitivities and implications of various scenarios on the damages estimate. This functionality is generally easy to navigate, as shown in Figures 5 and 6 below.

Figure 4: Cash flow forecast graph

Figure 5: Analysis of valuation’s sensitivity to revenue and discount rate assumptions

Last, but not least, data visualisation tools allow experts to share their damages models with other people (e.g. opposing party’s expert during the joint expert report preparation stage) and give a certain level of access to either just view the model or modify it with any changes being tracked by the software itself. This is especially important in the current pandemic climate where experts are unable to meet physically to discuss their damages models and potentially arrive at a joint model.

 

Concluding Remarks

Reconciling the evidence of damages experts may be complicated at times, even with the joint expert report in place. The use of sensitivity analysis in the experts’ damages models may bridge the gap and make it possible for tribunals to test those models in a real-time mode (e.g. during the hearing). If the quantum of the loss is also dependent on multiple assumptions of a factual and legal nature, including assumptions as to the counterfactual events, one may find scenario modelling helpful as a tool for the tribunal to explore the impact of any particular scenario on the loss.

Sensitivity analysis and scenario modelling can be performed using the standard Excel spreadsheet functionality (e.g. by creating a user-friendly dedicated summary sheet), making it simple for the tribunal, counsel, and experts to change the individual assumptions and switch between various scenarios.

Although relatively unexplored in arbitration context, specialised data visualisation software may also be a useful tool in preparing and presenting damages expert evidence, particularly in data-heavy matters. This software makes it possible to consolidate all the relevant data into a single platform in a consistent manner and exploit enhanced functionality for charting and presenting of data, including for the purpose of sensitivity and scenario analysis.

 

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The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Further posts on our Arbitration Tech Toolbox series can be found here.
The content of this post is intended for educational and general information. It is not intended for any promotional purposes. Kluwer Arbitration Blog, the Editorial Board, and this post’s author make no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information in this post.

 

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Open Positions: Kluwer Arbitration Blog and ITA Arbitration Report

Thu, 2021-08-26 02:37

The Editorial Board of the ITA Arbitration Report announces the opening of two positions of Assistant Editors. The Assistant Editors report directly to the co-managing editors, Dr Monique Sasson and Dr Crina Baltag. The Assistant Editors are expected to assist the co-managing editors in their tasks and to summarize relevant arbitral awards as per the ITA Arbitration Report format. The positions provide an opportunity to work with a dynamic and dedicated team, expand the arbitration knowledge and liaise with various stakeholders. The Assistant Editors will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email, before 5 September 2021, to Dr Crina Baltag, [email protected]. We will only reach out to shortlisted candidates for an interview.

 

The Editorial Board of Kluwer Arbitration Blog announces the opening of the Assistant Editor to the Editor of Kluwer Arbitration Blog position. The Assistant Editor reports directly to the Editor and is expected to assist the Editor in her tasks, mainly in monitoring the publications of the Blog. The Assistant Editor will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email, before 5 September 2021, to Dr Crina Baltag, [email protected]. We will only reach out to shortlisted candidates for an interview.

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Are we FRAND now?

Thu, 2021-08-26 01:00

Technology is crucial in the contemporary, knowledge-based economy. Over the past decade, technology-related, telecommunications, and now Internet of Things (IoT) disputes have gained momentum. An area of relevance has been ‘Fair, Reasonable and Non-discriminatory’ (FRAND) litigation. It relates to the licensing terms of patents essential to the implementation of a standard. While litigation is an established method to settle FRAND disputes, one may wonder about arbitration. This post aims at providing insight thereof.

 

Setting the Scene

A standard is a document setting out technical specifications, guidelines or rules for common and repeated use in order to ensure quality, safety and interoperability of products. Standards are pivotal in shaping markets and are crucial tools to achieve geopolitical and economic preponderance. In a nutshell, the adoption of standards is a prerogative of standard-setting organizations (SSOs). In the adoption process, SSOs pay attention to possible patents that may be embedded in the standard to be adopted. For this reason, SSOs require their members to declare whether they own any patent that is essential for the implementation of the standard to be adopted and to commit to its licensing according to FRAND terms (licensing declaration). The said patents are commonly referred to as standard-essential patents (SEPs).

Courts in several jurisdictions have dealt with the determination of FRAND licensing terms. A major drawback of multijurisdictional litigation is the peril of contradicting decisions, race to the bottom (eg, litigating in the country where the case law suits the patent owner or the implementer), and time and cost issues. As such, Alternative Dispute Resolution (ADR) mechanisms, and arbitration in particular, have been considered as an option for FRAND disputes. Arbitration for FRAND disputes has attracted interest in the European Union (EU), Japan, and the United States, among other countries.

 

An Opening for FRAND Arbitration

Scholarly debate on FRAND arbitration has focused on how to structure the proceedings to achieve an optimal outcome, for eg discussing ‘mandatory’ and ‘final offer’ arbitration, or suggesting the more progressive option of creating a global tribunal tasked with the setting of FRAND rates. These academic contributions go along with practice-related developments on FRAND arbitration, where a relevant case is the dispute between Samsung and Apple that, in 2014, led to an EU antitrust procedure. The antitrust procedure was closed after the European Commission accepted the binding commitments made by Samsung, including the determination of its SEPs licensing rate by arbitration.

 

FRAND Arbitration Guidelines – Salient Traits

Against this backdrop, in 2017, the World Intellectual Property Organization (WIPO) Arbitration and Mediation Center (the WIPO Center) developed a set of guidelines  – ‘Guidance on WIPO FRAND Alternative Dispute Resolution (ADR)’ (WIPO Guidelines). The Guidelines aim to help parties, counsel and prospective arbitrators to navigate the steps of the FRAND arbitration process. In 2018, the WIPO guidelines were followed by an additional set of guidelines issued by the Munich IP Dispute Resolution Forum – ‘FRAND ADR Case Management Guidelines’ (IPDR Guidelines). While the WIPO guidelines focus closely on the services provided by the WIPO Center, the IPDR guidelines expand on FRAND ADR, and as such may work in synergy with the WIPO guidelines. While both WIPO and IPDR guidelines deal with ADR broadly, including e.g. mediation, in this post I will touch upon the key elements of FRAND Arbitration.

A first important feature is that the WIPO Center, through its good office’s services, may assist the parties to commence proceedings. Referral to arbitration, in fact, may not always be part of a licensing agreement, or included in a SSO IPR policy (this is a very rare instance). As such, resorting to good offices can prove particularly useful if negotiations have reached a stalemate. The Center makes available tailored FRAND model submission agreements, which are based on the WIPO Arbitration (and Expedited Arbitration) Rules and adapted to FRAND disputes.

FRAND disputes are often complex, especially where large SEP portfolios are involved. Hence, both the WIPO and IPDR guidelines focus on the scope of the subject matter referred to arbitration, which can be divided into three sub-items.

  1. The number of patents. Parties should carefully decide which SEPs to submit to arbitration: specific SEPs; a collection of SEPs; an entire portfolio and so forth.
  2. Claims and defences. In view of time and cost-efficiency, parties can limit the claims/defences to be heard by the arbitral tribunal. Examples range from including/excluding a scrutiny of patent essentiality; patent validity; patent infringement; determination of royalties. A caveat applies to patent validity, which is generally seen as a ‘core IPR issue’. Not all jurisdictions allow the arbitrability of patent validity. The reason lies in the fact that a patent is a state-granted monopoly, which validity can only be assessed by state courts or administrative organs. Nevertheless, the approach to arbitrability of patent validity varies depending on the jurisdiction. For example, Belgium, Switzerland, the US, the UK (with inter partes effects), and Singapore generally allow arbitrability of patent validity, whilst Germany and China do not. It is further worth noting that there is no uniform, established, FRAND methodology for royalty rate calculation. As such, the parties may address this issue in the case management conference or may leave the determination to the arbitral tribunal. The WIPO and IPDR guidelines do not endorse any particular methodology, but the IPDR guidelines contain an Annex with an explanation of the methodologies applied in seminal cases across the globe.
  3. Geographical scope. This issue concerns whether the determination of the FRAND licensing terms has, or not, a global reach. The issue has grown in importance, in the aftermath of decisions in the UK and China setting a global licensing rate.

The appointment procedure is another aspect considered in the guidelines. Qualified adjudicators are key to achieving optimal outcome, which means that the arbitration tribunal should possess experience in patent disputes, SEPs licensing and, more generally, pricing. Party appointment, and appointment in default thereof, is governed by the applicable institutional rules. For example, where a party fails to appoint an arbitrator itself, Article 19 of the WIPO Arbitration Rules contemplates the possibility that candidates be proposed to the parties from the WIPO Center list of neutrals for patents in standards.

Schedule of proceedings. A well-planned schedule of the proceedings serves the purpose of providing the parties with a realistic approximation of the duration of the proceedings. In the EU, this acquires additional relevance since the Court of Justice of the EU (CJEU) judgment in Huawei v ZTE, which set some prior procedural steps to follow when injunctive relief is sought under FRAND-committed SEPs. One of these steps is that a third-party (which may include the arbitration tribunal) determines the FRAND licensing conditions ‘without delay’. Hence, dilatory tactics can be addressed by agreeing on a reasonably strict procedural schedule for the conduct of the proceedings. Adding to this, the WIPO FRAND ADR model arbitration agreement sets a detailed procedural schedule for the proceedings.

Applicable law. In FRAND disputes, a party’s freedom to select the applicable law may be limited. For example, the construction of the licensing declaration is likely to be subject to the law of the place of incorporation of the SSO (for eg, France in the case of the European Telecommunications Standards Institute – ETSI). Likewise, ‘core IP issues’, conditions, and validity of a transfer and infringement are subject to the law of the state where the IP right has been granted (lex loci protectionis). On the other hand, contract formation and interpretation, mode of royalty payment, breach of obligations, and consequences of contract invalidity, may be submitted by the parties to a law of their choice.

Confidentiality. A cornerstone of the WIPO Arbitration Rules is that, unless otherwise agreed by the parties or required by law, (i) the existence of the arbitration, (ii) information on disclosures made during the arbitration, and (iii) the arbitral award enjoy high standards of confidentiality.

Nevertheless, standards, if not considered public goods per se, are crucial in the attainment of public goods, such as interoperability of devices. Additionally, access to FRAND licensing terms for standard essential patents may attract competition law-based concerns. As such, FRAND dispute settlement is surrounded by pressing public and industry interest regarding access to royalties’ calculation methodologies adopted by the arbitral tribunal. In this regard, parties may agree to disclose said methodology for calculation, and maintain confidentiality of the remaining part of the proceedings.

In any event, when applying the WIPO Arbitration Rules, an arbitral tribunal can disclose the award to the extent necessary to comply with a legal requirement imposed on a party, in connection with a court action relating to the award, or as otherwise required by the law.

 

Conclusion

Arbitrating technology disputes, such as those relating to the licensing of SEPs, is a matter of growing interest for practitioners and scholars alike. In this post, I provided an overview of the salient traits that need particular attention in planning FRAND arbitration proceedings, also covering the guidelines developed by WIPO and IPDR. These tools reflect an attempt to crystallise practices that may prove effective in FRAND arbitration and should be duly considered by those involved in SEPs-related arbitration.

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The Netherlands Coal Phase-Out and the Resulting (RWE and Uniper) ICSID Arbitrations

Tue, 2021-08-24 01:10

Western European countries have taken divergent approaches to dealing with the consequences of shutting down power plants while transitioning towards cleaner energy sources. On one side, Germany resolved the resulting compensation disputes by making settlement payments to the owners of affected nuclear and coal power plants. In contrast, the Netherlands appears reluctant to similarly compensate affected power plant owners, which resulted in claims. This contribution focusses on the latter; specifically, the Netherlands’ coal phase-out legislation and, in turn, the resulting ICSID arbitrations commenced by RWE and Uniper.

The Paris Agreement on climate change led the Netherlands to adopt the Law Prohibiting the use of Coal with the Production of Electricity in 2019. The law affects the Netherlands’ five coal-fueled power plants by prohibiting them from generating electricity through the use of coal. The prohibition is divided into three categories.

First, as from 1 January 2020, inefficient coal plants (i) with an electrical efficiency rate lower than 44%; (ii) that cannot produce any renewable energy through biomass; and (iii) that don’t produce any renewable heat, are prohibited.

Secondly, as from 1 January 2025, inefficient coal plants (i) with an electrical efficiency rate lower than 44%; (ii) that can produce renewable energy through biomass; and (iii) that can produce renewable heat, will be prohibited.

Thirdly, as from 1 January 2030, all coal plants will be prohibited.

The oldest of the five affect plants is owned by Vattenfall and was commissioned in 1994. The four remaining plants are owned by RWE (who owns one plant required to be shut down by 2025 and one plant required to be shut down by 2030), and Uniper and Onyx (who both own plants required to be shut down by 2030). The three plants required to be shut down in 2030 were commissioned in 2015 and 2016 respectively, after having received the necessary governmental permits and in part built at the specific request of the Netherlands in 2004 to ensure continuity in the power supply during the country’s energy transition. At the time, the Minister of Economic Affairs explained to Parliament that newer more efficient coal plants would be important in the transition towards renewables, in part due to the limited adverse environmental effects that such plants would cause.

With regards to compensation, the Netherlands agreed In 2019 to pay Vattenfall EUR 52.5 million in compensation to close the oldest plant (and therefore, the plant with the shortest remaining lifespan) by 2020. That payment was subject to state-aid investigations, just as payments made by Germany for its coal phase-out. The European Commission finally authorized the payment to Vattenfall as can be read here.

As for the remaining four plants, it is believed that the Netherlands is currently in negotiations with Onyx regarding compensation for one plant, but has refused to compensate RWE and Uniper for the remaining three plants, resulting in various legal proceedings.

RWE commenced ICSID arbitration on 2 February 2021 and Uniper commenced ICSID arbitration on 30 April 2021. Uniper and RWE also commenced court proceedings (presumably one procedure per power plant, as reported to the Netherlands Parliament). In response to the commencement of the ICSID arbitrations, the Netherlands initiated two anti-arbitration injunctions (one against RWE and one against Uniper) before the German courts to block the ICSID arbitrations to proceed. The basis for these injunctions, which can be distilled from correspondence to the Netherlands Parliament, would be that the arbitration agreement in the Energy Charter Treaty cannot be given effect due to the incompatibility of the Energy Charter Treaty with EU law in intra-EU investment protection matters. The German anti-arbitration injunctions are reported separately on Kluwer Arbitration Blog.

Should the German anti-arbitration injunctions be unsuccessful, the central issues in the ICSID arbitrations would include:

  • jurisdictional objections arising out of the alleged incompatibility of the Energy Charter Treaty with EU law in light of the ECJ judgment in the Achmea matter; and
  • a State’s right to regulate to achieve climate change goals.

 

RWE and Uniper’s claims

 RWE and Uniper made their position known in the public consultation process in advance of the law being adopted. They argued that the law would not appropriately take into account the interests of power plant owners as these would not be compensated appropriately for the inability to operate their power plants in an undisturbed manner until the end of their lifespan.

RWE said that the law would cause unequal damages in view of the economic lifespans exceeding 2040 (for the plant required to be shut down by 2025) and 2055 (for the plant required to be shut down by 2030). The latest plant commissioned cost RWE an investment of EUR 3.2 billion. If the plants would be shut down before the end of each plant’s economic lifespan, appropriate compensation would have to be paid as the 2025 and 2030 phase-out deadlines would not be sufficient to recover the investments made. RWE also said that it built one of the plants at the specific request of the Netherlands. While the law would not prohibit another use of the plants from 2025 and 2030, RWE believes that it cannot make the plants profitable using another fuel type.

Uniper also said that it should receive appropriate compensation and that the law provides an imbalance between climate goals and the rights of plant owners. Uniper believes that it had legitimate expectations to rely on the policies of the Netherlands when it took the investment decision (before the Paris Agreement was concluded), especially since the Netherlands repeatedly stressed the importance of coal plants in the energy transition. The coal phase-out was not foreseeable and an appropriate compensation mechanism is missing. See also Uniper’s 16 April 2021 press release.

 

The position of the Netherlands

In the past, the Netherlands said that “the EU must respect international law in the exercise of its power, in particular with respect to the termination and suspension of international treaties”. That statement was made in 2010 when it intervened as an amicus in the Achmea / Slovak Republic arbitration. The Netherlands at the time confirmed that it was working towards “a practical solution that … secures … the protection of investors in the European Union”.

Since 2010 circumstances have changed because of the 2018 ECJ decision in the Achmea matter; and the 2019 joint declaration of more than 20 EU member States (including the Netherlands and Germany) in relation to the consequences of the ECJ decision on intra-EU investment protection instruments.

The government’s position is that it cannot be held to arbitrate intra-EU investment protection disputes. This, it believes, is justifiable as it is established EU law that arbitration clauses in investment protection instruments governing intra-EU investments cannot be given effect. In an explanation to parliament, the Minister of Economy and Climate said that the analysis in relation to intra-EU BIT’s would equally apply to arbitrations based on a multilateral instrument such as the Energy Charter Treaty. No position is taken on the decisions that reject the Achmea-objections, the latest being the 30 July 2021 Infrastructure Services Luxembourg ICSID annulment committee decision that reports 56 tribunal decisions having rejected the Achmea-objections.

The jurisdiction of the ICSID tribunals will be heavily contested, both in and outside of the arbitrations, as evidenced by:

  1. the German anti-arbitration injunctions having been commenced; and
  2. the contents of the minister’s letters to parliament.

The Netherlands shed some light on its merits defences of the claims of RWE and Uniper. Before the ICSID arbitrations commenced, the minister updated parliament in relation to the modernization discussions relating to the Energy Charter Treaty and the importance of the States’ right to regulate, especially in view of inter alia reaching climate goals. The Netherlands seems to invoke the right to regulate as a reason to exculpate itself. In letters to parliament in relation to both the RWE and the Uniper arbitration, it says that in its view, the adopted law takes into account the Netherlands’ international and European law obligations. Plant owners should not have expected that the government would not impose measures to significantly reduce carbon emissions given long term developments. How this can be reconciled with the government’s request to build more efficient coal plants and its repeated emphasis on the importance of more efficient coal plants in the energy transition is unclear.

As the law does not prohibit the plants from being repurposed, they may be able to be used to generate power with alternative fuels or be used for a purpose other than power generation. The coal phase-out would further be appropriately long-term structured to allow power plant owners a (sufficient) return on investment.

 

NGO perspective on the profitability of the power plants

If the ICSID arbitrations proceed into a merits phase, the Netherlands may argue that RWE and Uniper do not suffer (material) damages. Research from the NGO’s IEEFA, Ember and Somo indicates that RWE and Uniper already devaluated their plants years before 2019 when the law on coal prohibition was adopted.

According to the research, the cause of the devaluations did not relate to the State-ordered coal phase-out, but rather is attributable to the uncompetitive economics of the exploitation of coal plants through rising carbon prices and cheaper renewable energy.

While the Netherlands has not yet forwarded these arguments, there is little doubt that it would stay clear from advancing these at the appropriate time.

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Interviews with Our Editors: In Conversation with Eleonora Coelho, President of the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC)

Mon, 2021-08-23 01:52

Welcome to the Kluwer Arbitration Blog, Ms. Coelho!  We are grateful for this opportunity to learn more about the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC), and its administration of complex disputes, as well as about the attractiveness of São Paulo and Rio de Janeiro as seats for international arbitration. 

  1. To start, can you briefly introduce yourself and explain your role at CAM-CCBC?

I am a Brazilian lawyer based in São Paulo, Brazil, who acts as counsel and sits as arbitrator in domestic and international arbitrations. I completed my LLB from the University of São Paulo Law School and my master’s degree in arbitration from the Université Paris II at the turn of the millennium. I have published extensively and have taught on arbitration, and I am currently a visiting professor in the LL.M. on Transnational Arbitration at Sciences Po. Further, I was the vice president of the Brazilian Arbitration Committee (CBAr) and I am the current president of the Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada, CAM-CCBC, the largest and most important centre of arbitration in Brazil.

 

  1. Now that the Brazilian Arbitration Act has been in effect for 25 years, how do you see the role of arbitration institutions, including of CAM-CCBC, in promoting arbitration in Brazil?

To an extent, it is possible to say that the process of consolidation of arbitration in Brazil is intertwined with CAM-CCBC’s growth. CAM-CCBC went from being a two-room-two-case office in the 90s to today’s caseload of 400 arbitrations per year.

As much as CAM-CCBC is based in Brazil and a highly regarded institution by Brazilian practitioners, we do not see ourselves as promoting arbitration specifically in Brazil. Over the last four decades, CAM-CCBC has built a unique experience administering highly complex domestic and international disputes. We have established agreements with more than 20 other institutions worldwide, sent representatives to the most important arbitration events and strove to promote arbitration everywhere, not only in Brazil. For instance, CAM-CCBC is a long-term sponsor of the Willem C. Vis Moot Court Competition and holds every year not just one but two pre-moots in preparation to the main event, one of them in São Paulo and the other in Hamburg. Every year we promote workshops, networking sessions and other events in São Paulo, Lisbon, New York City, Oxford, Vienna, and other venues. Just last year, for instance, we had 25 webinars, several of them in English. We believe that this careful attention to international trends brings Brazilian arbitration closer to international practices, nudging the domestic market towards the right directions ever since the Brazilian Arbitration Act went into force.

CAM-CCBC is the appropriate institution for a range of disputes. There are Portuguese speaking countries in 4 continents who negotiate commercial relations in Portuguese and need an institution with a list of outstanding Portuguese speaking arbitrators. Further, there are contracts concluded between European and Hispanic companies in which they need an institution from a neutral place. There are international agreements with Brazilian state entities in which these entities would not feel comfortable submitting their dispute to a foreign institution, and, at the same time, investors need a sophisticated arbitral organisation to oversee possible disputes.

From my perspective, the role of institutions in Brazil is to respect and understand the domestic practice, but also to push it towards international sophistication.

 

  1. Will the adoption of the new Government Procurement Act (Law n. 14,133/2021) – allowing and encouraging disputes arising from public contracts to be solved through non-judicial methods – affect the number, type or composition of cases the CAM-CCBC administers?

Arbitration with Brazilian public entities is no novelty. Since the beginning of the last decade, and even before that, arbitral proceedings involving government-controlled enterprises are common and increasing in number and size. At CAM-CCBC alone we have administered over 50 cases involving these entities and, as a matter of fact, since 2014 we regulate some aspects of these cases through Administrative Resolutions 09/2014 and later 15/2016. In 2015, Brazil had already gone through a major reform in its Arbitration Act and one of the main changes was to explicitly provide for the lawfulness of arbitrating with state entities. Now, the new Procurement Act goes one step further towards modern public contracts, codifying what practice has already allowed: the state can, and is incentivised, to use non-judicial methods when adequate. We already manage a substantial number of the largest proceedings in which Brazilian state entities are involved and the trend seems to go up for the following years. I can only believe that with the new Public Procurement Act in force, the legal certainty it provides will allow for more public contracts to include CAM-CCBC’s dispute resolution clauses.

 

  1. The CAM-CCBC arbitration rules are considered to be aligned with most internationally recognized arbitration rules and are one of the most important elements to the Center’s success, what is the main difference or advantage between these rules and rules issued by other institutions? Is there a particular feature of the rules that reflect Brazil’s practice of arbitration, or which are particularly useful for parties arbitrating against public entities in the country?

CAM-CCBC’s rules were issued in 2012 and revised in 2016. Through the accumulated experience of 13 years under the previous Rules and the challenges brought by various cases administered until then, CAM-CCBC 2012 Rules introduced enhancements to the way arbitration is conducted in Latin America. At the time, CAM-CCBC had introduced in Brazil mechanisms that were becoming the standard internationally, such as (i) the prima facie analysis of the dispute before constitution of the tribunal; (ii) provisions for multiparty arbitrations; (iii) different restrictions to the appointment of the chair; and (iv) detailed provisions regarding costs.

Most importantly, CAM-CCBC introduced the Administrative Resolutions framework: these are documents issued by CAM-CCBC’s presidency to update the functioning of the centre and regulate some intraprocedural matters. The innovation of allowing Administrative Resolutions to solve minor issues and gradually update the main Rules has guaranteed that the Centre maintained the same set of Rules in force for nearly ten years. This way of updating our arbitration proceeding allowed us to pioneer major changes without the burden of issuing revised sets of arbitration rules. The Centre has addressed several important issues via Administrative Resolutions, including arbitration with state-owned entities, third party funding, emergency arbitrator proceedings, and expedited arbitration procedure. I believe that through these Administrative Resolutions we have achieved a fine balance between certainty and innovation.

 

  1. Please tell us more about your users and their disputes.
    • What kind of parties do you usually serve, and are there particular industries or types of disputes prevalent among them? What percentage of your arbitrations relate to international disputes?

CAM-CCBC has not one specialisation when it comes to types of parties or disputes. Nevertheless, our 2020 caseload does reveal patterns worth sharing. For instance, currently more than 40% of our cases relate to corporate disputes, many arising out of recent M&As or other corporate operations. Two other substantial sources of disputes are contracts for the sale of goods and infrastructure agreements. When we investigate the business sectors involved, the spread is more diverse. Construction, Electricity, Commerce and Transport represent each roughly 15% of our 2020 cases. Financial services, Agriculture and IT come right after, with approximately 7% each.

Our percentage of international disputes is close to 17%, with the remaining being domestic arbitrations. Among international parties, litigants from the USA, Uruguay, Netherlands and France constitute almost 60% of all international parties at CAM-CCBC’s cases. However, there is a caveat here. For fiscal reasons, most multinational companies that invest in Brazil create a national subsidiary. When an international dispute arises, thus, it is usually carried between these subsidiaries and the Brazilian counterpart. Therefore, we end up categorising it as a domestic dispute. A substantial part of the 83% of cases tagged as domestic is, in fact, international.

 

  • In recent years, the CAM-CCBC has experienced a steep increase of proceedings (over 40% in 2017), what are the reasons for the Center’s success and how did it manage to administer this upsurge of cases?

We like to think that CAM-CCBC’s success is due not only to its rules, but to its very particular manner of managing arbitration. We have state-of-the-art hearing centres and digital infrastructure designed to rival the largest arbitral institutions, while maintaining the type of hands-on case management you would expect from a small hyper-specialised organisation.

Further, we aggregate a large caseload, tailor-made case management and comparatively low fees. These points are essential. Case managers at CAM-CCBC are instructed to closely manage the arbitrations, controlling deadlines, communications, and the proceedings as a whole. Although CAM-CCBC’s case managers are hands-on with their cases, CAM-CCBC’s intervention ends there. The CAM-CCBC does not scrutinise arbitral awards.

 

  1. We understand CAM-CCBC has founded a young arbitration practitioners group called New-Gen. Could you please tell us about this initiative and others CAM-CCBC is taking to promote the study and practice of international arbitration among young practitioners?

NewGen is CAM-CCBC’s group for innovative thinking and creative design of the future of ADR’s. It was created just years ago but it has grown exponentially and now it has more than 400 members throughout the world. The group is organised in a way that members are required to be active, rather than passive, parts of the project. NewGen is constantly calling for papers, investing in the education of its members through specific training, and questioning what the new generations think of our current methods. Recently we offered a mediation training for NewGen members with renowned professionals from Germany and Austria. It is our understanding that the new generation will bring new ideas, solutions, and credibility to arbitration practice. This is why we chose to empower new generations through NewGen. The ball will be in their court soon, best that they are ready when it gets there.

 

  1. The COVID-19 health crisis has caused and is expected to keep causing unprecedented disruptions to several sectors of the economy and business relationships, such as those in the oil and gas sector. How has the pandemic affected the CAM-CCBC, its caseload and how did it face the challenges brought by this crisis?

Throughout the last year, we reinforced our commitment to improving ADR methods, always guided by our duty towards social responsibility and ethical performance. Despite physical distancing, our secretarial staff remained accessible along the year. This is all part of CAM-CCBC’s institutional policy: our greatest responsibility is to deliver the best possible service to the parties, lawyers and arbitrators acting in our proceedings. In fact, in only 48 hours after the pandemic’s breakout, CAM-CCBC organised itself to ensure the remote continuity of more than 300 cases. Administrative Resolution n. 40/2020 provided rules for the remote management of proceedings. We have also put in place a project that was already in progress: the complete migration to electronically conducted arbitrations and mediations, equally efficient and secure. We have also expanded our academic activities virtually, organising 25 webinars, the VII CAM-CCBC Arbitration Congress, in hybrid format, and the III São Paulo Arbitration Week (SPAW), held entirely online.

The impact on our cases was substantial. Without the need to send and receive hard copies, electronic filling made the process faster and also cheaper. From March 2020 to December 2020, a total of 15,498 letters were not sent in hard copies, a decrease of 97% in comparison with 2019. It saved approximately 522,000 Brazilian reais in courier costs and an immeasurable benefit to the environment. One of our studies regarding arbitration proceedings costs during the pandemic revealed a decrease of 93% in spending related to hearings, exchange of hard copies, coffee breaks and others.

The lower expenditure comes with a bonus: higher efficiency. With the full visualization of our services, our Secretariat achieved a whole other level of speed while managing arbitrations, mediations, and dispute boards.

Also, last year CAM-CCBC administered 418 proceedings, our largest caseload in history. I believe that through quick action and sensible measures we have managed to balance all interests involved and do the best we could, given the circumstances.

 

Thank you for the interview – we wish you and CAM-CCBC all the best!

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Delegation of Tasks to Arbitral Secretaries: Striking the Right Balance?

Sun, 2021-08-22 01:31

A recent, still unpublished, judgment of the French-speaking section of the Brussels Court of First Instance (Belgium) (the “Brussels court” or the “court”) provides an excellent opportunity to take stock of recent developments on the much-debated topic of delegation of tasks to arbitral secretaries. Russia famously put the arbitral secretary in the spotlight in the annulment litigation following the Yukos award (see blog posts here and here). While a final decision in that case is still pending before the Dutch Supreme Court, state courts in other jurisdictions have in the meantime also had the opportunity to reflect on the role of arbitral secretaries. In its judgment of 17 June 2021, the Brussels court provides clear guidance on the issue.

 

Allegations of Improper Delegation to the Arbitral Secretary

The court was asked to rule on a petition for annulment of an interim award in an ongoing ICC arbitration. The request was based (inter alia) on allegations of improper delegation by the arbitrators. The tribunal, composed of three arbitrators, had appointed an arbitral secretary in accordance with the procedure prescribed by the ICC’s Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration in the 2019 version (the “ICC’s Note” or the “Note”), available here. The parties had expressly consented to the appointment of the arbitral secretary, an associate at the chairman’s law firm.

After the award was rendered, the defendants raised questions about the role of the arbitral secretary with regard to a particular issue that was decided in favor of the claimant. The defendants queried whether the secretary had authored the chair’s list of questions for the expert witnesses, and which role she had played in drafting the arbitral award. The chairman of the tribunal affirmed that the secretary had prepared his questions. He also acknowledged that she had been present during the deliberations of the tribunal and had assisted in drafting the award, though that he had reviewed every sentence and footnote, and that he had corrected the draft where he thought appropriate based on his judgment and the deliberations with the co-arbitrators.

The defendants concluded that it was in fact the secretary who had decided the issue in question, in violation of the guidelines in the ICC’s Note. To further substantiate their allegation, the defendants asked the arbitral tribunal to produce a detailed break-down of the hours spent by the secretary on the list of questions and on the different sections of the award, as well as a copy of the list of questions and award sections drafted by the secretary. The tribunal dismissed the request.

Shortly thereafter, the defendants filed a petition for annulment of the award before the Brussels court. They argued that the involvement of the secretary surpassed her legal powers, resulting in irregularities in respect of both the composition of the tribunal and the conduct of the arbitral proceedings. Under Belgian law, pursuant to Article 1717, §3, a), v) of the Judicial Code, such irregularities can lead to annulment of an arbitral award.

 

How Far Can an Arbitral Tribunal Go in Delegating Tasks to the Secretary?

To address the issues raised, the court predominantly focused on the ICC’s Note. It first reiterated that a variety of tasks can be assigned to a secretary, including legal research, drafting factual portions of the award, and taking notes of the deliberation (para. 185 of the Note). In the view of the court, this means that a secretary’s work is not limited to purely administrative tasks. It also encompasses intellectual contributions, which could potentially impact the decision-making process of the tribunal. However, the court continued, there must be safeguards in place to prevent undue influence by the secretary. As an example of such safeguards, it referred to para.184 of the ICC’s Note, which prohibits the tribunal from delegating any of its decision-making functions.

The court went on to analyze para. 187 of the ICC’s Note, which states that “a request by an arbitral tribunal to an administrative secretary to prepare written notes or memoranda shall in no circumstances release the arbitral tribunal from its duty personally to review the file and/or to draft any decision of the arbitral tribunal”. In the court’s opinion, para. 187 implicitly authorizes a tribunal to rely on its secretary to draft parts of an arbitral award or even the entire award, as long as the tribunal reviews and corrects the draft according to its own views. If the ICC would have wanted to exclude this possibility, the court ruled, it would not have used the words “and/or” in para. 187.

The court then proceeded to apply these principles to the facts of the case. It noted that the parties had consented to the appointment of the arbitral secretary after review of her curriculum vitae. They had also accepted the applicability of the ICC’s Note. In addition, the secretary had followed specific trainings for arbitral secretaries organized by the ICC, including sessions on “drafting enforceable awards”. She was also of relatively young age, which reduces the risk of undue influence on the tribunal when compared to a more experienced secretary.

First, the court held that asking the secretary to draft a list of questions does not amount to delegation of decision-making in and of itself. In its view, there were no factual elements indicating the contrary, despite an allegation that the president did not seem to know the questions at the hearing. That allegation did not find support in the transcripts and was also contradicted by one of the co-arbitrators as well as the chairman, who confirmed that he had reviewed the questions.

Second, the court did not consider the secretary’s assistance in drafting the award to constitute improper delegation by the tribunal. The chairman as well as the co-arbitrators confirmed that the award was the result of their joint intellectual efforts and that each arbitrator contributed to the award, which they had thoroughly discussed. The secretary had attended the deliberations with the consent of the tribunal but had not taken part in the substantive discussions between the arbitrators. Any drafts provided by the secretary had been reviewed and corrected by the chairman. Given these circumstances, the Brussels court dismissed the allegation of improper delegation by the tribunal.

 

Conclusion: Striking the Right Balance

The judgment of the Brussels Court of First Instance clearly illustrates the need to strike the right balance when it comes to the role of arbitral secretaries. It is in the first place up to the tribunal itself to guard the appropriate balance and to carry out its decision-making tasks with integrity. Nonetheless, the question remains which role the secretary can play. The Brussels court clearly sides with those who consider the arbitral secretary to be more than just an administrative aid. It accepts the possibility of intellectual contributions by the secretary and is even open to the idea of an award that is fully drafted by the secretary, provided that proper checks and balances are in place to ensure that ultimately the arbitral tribunal makes the decisions.

The opinion of Advocate General Vlas in the Yukos case (see blogpost here) goes in the same direction and adopts a similar, pragmatic view when it comes to the role of the arbitral secretary. It remains of course to be seen whether the Dutch Supreme Court will follow suit. In our opinion, (careful) delegation and decision-making can go hand in hand. As Constantine Partasides has pointed out on different occasions, balancing delegation and decision-making is not at all unique to arbitration. Indeed, similar considerations apply for example to Law Clerks assisting the US Supreme Court or Referendaires at the European Court of Justice, without leading to much controversy regarding the decision-making process.

Finally, this case also illustrates the difficulty of balancing transparency to the parties on the one hand with the secrecy of deliberations on the other hand. This is perhaps even the trickiest topic, as parties alleging improper delegation would certainly benefit from further transparency by the tribunal and/or the secretary, which at the same time may endanger the secrecy of deliberations. The Brussels Court of First Instance clearly gave a lot of weight to the statements of the chairman and the co-arbitrators in response to the allegations raised, with very limited other evidence being available. Parties alleging improper delegation therefore seem to face an additional, evidentiary, hurdle.

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Double Hatting, Sports Arbitration and Article 6(1) ECHR: A Recent Decision by the Paris Court of Appeal

Sat, 2021-08-21 01:00

On 8 June 2021, the Paris Court of appeal (CoA) rendered an interesting decision dealing with the issue of so-called “double hatting” in sports arbitration. The issue of double hatting can no longer arise with respect to proceedings before the Lausanne-based Court of Arbitration for Sport (CAS), as Article S18(3) of the Code of Sports-related Arbitration (CAS Code) explicitly provides, since its 2010 edition, that “CAS arbitrators and mediators may not act as counsel or expert for a party before the CAS”. The Paris CoA’s decision is notable as it concerned annulment proceedings brought against an award rendered by the Chambre Arbitrale du Sport of the French National Olympic Committee (CAS-CNOSF), an institution that, like the CAS, requires that arbitrators be appointed from a closed list, but, at the relevant time, did not bar lawyers on that list from acting as party representatives in CAS-CNOSF proceedings.

The dispute at the origin of the challenged award had arisen from a sports agency contract concluded in 2015 between Serge Aurier,1)While the Player’s name is anonymized in the decision, the chronology of events and the indication of the clubs he was employed by allow for his identification. jQuery('#footnote_plugin_tooltip_38432_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38432_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); a professional football player of Ivorian nationality (the Player), then playing in France, and Sports Management International SA (SMI), a Swiss-incorporated company (the Agency contract). The Agency contract provided for the CAS-CNOSF’s jurisdiction to resolve disputes between the parties. In August 2017, when he was with Paris Saint-Germain, the Player terminated the Agency contract, and, shortly thereafter, he signed an employment contract with the English club Tottenham Hotspur FC. In February 2018, SMI filed a request for arbitration with the CAS-CNOSF, seeking the payment of fees under the Agency contract.

A three-member Tribunal was constituted under the CAS-CNOSF Rules then in force. During the arbitration, SMI requested that Mr Aurier’s counsel be precluded from representing him, as she was on the CAS-CNOSF list of arbitrators. That request was rejected.

The CAS-CNOSF Tribunal issued its Award on 21 January 2019, dismissing most of SMI’s claims.

SMI filed an application for the annulment of the Award before the Paris CoA in February 2019, on the ground that the CAS-CNOSF Tribunal’s independence and impartiality and the regularity of its constitution had been compromised by the fact that the Player was represented by a lawyer who was also on the CAS-CNOSF list of arbitrators. SMI relied inter alia on the guarantee of the right to a fair trial under Article 6(1) of the European Convention on Human Rights (ECHR).

Before ruling on the merits of the application, the CoA dealt with two preliminary objections raised by the Player, who challenged both the admissibility of the application and the admissibility of the ground for annulment relied upon by SMI.

 

Admissibility of the Application for Annulment

The Player argued that SMI had incorrectly initiated the proceedings under Article 1492 of the French Code of Civil Procedure (CPC), which governs the annulment of French domestic awards, when in reality the arbitration at hand was international.

As is well known, the distinction between domestic and international arbitration under French law is based solely on an economic criterion, namely whether the “interests of international trade” are implicated in the underlying dispute (Article 1504 CPC). Contrary to the criteria adopted by other dualist laws of arbitration (e.g. Swiss law), the parties’ domiciles or places of incorporation are not relevant in this respect.

In this case, the CoA noted in particular that i) the object of the Agency contract, which was governed by French law and registered with the French Football Federation, was to facilitate the conclusion of employment contracts exclusively with French clubs and in accordance with the French Professional Football League’s requirements; ii) at the time the Agency contract was concluded, the Player was and had been employed by French clubs for several years, and iii) even though SMI had a Swiss bank account, no monetary transfers had been made to that account (§§24-27).

Accordingly, the CoA ruled that the Award had been rendered in a domestic arbitration and dismissed the Player’s objection.

 

Admissibility of the Ground for Annulment Relied Upon by the Applicant

The Player argued, inter alia, that by agreeing to submit the dispute to arbitration, SMI had waived its rights under Article 6(1) ECHR, including the right to have its claims heard by an independent and impartial tribunal (§29).

The CoA dismissed this objection in two paragraphs. First, it affirmed that “[a]lthough the [ECHR] is binding on States and does not directly bind arbitrators, it is for the court hearing the application to set aside an arbitral award to ensure, within the scope of its review, that the award made by the arbitrators does not infringe any of the guarantees protected by Article 6(1) [ECHR] that the parties have not validly waived” (§35, free translation).

Then, it held that “the mere fact of submitting the dispute to an arbitral tribunal as provided in an arbitration clause, and of referring the dispute to the [CAS-CNOSF], cannot be regarded as a waiver of the right to challenge the impartiality or independence of an arbitrator” (§36, free translation).

 

Merits of the Application for Annulment

Turning to the merits, the CoA stated that the question to be addressed was “whether the mere fact that [M.], counsel for one of the parties is on the [CAS-CNOSF] list of arbitrators constitutes a circumstance that is likely to create reasonable doubt in the minds of the parties as to the independence or impartiality of the arbitral tribunal” (§43, free translation).

In answering this question in light of the applicable standards of independence and impartiality (§§44-45), the CoA noted, in characteristically brisk prose, that SMI had agreed to arbitrate under the rules of the CAS-CNOSF, which did not prohibit [M.] from acting as a party representative, which in turn was why the CAS-CNOSF had rejected SMI’s request to forbid [M.] from representing the Player. As an aside, the CoA observed that granting the request would also have affected the Player’s right to choose his lawyer. SMI, the CoA noted, had raised the fact that the Tribunal was composed of three members, as requested by the Player and against its wish for a sole arbitrator, but then failed to put forward any elements supporting the existence of a “dependence relationship” between the members of the Tribunal and [M.], or suggesting that the Tribunal’s ability to decide the case in an impartial manner was affected by the circumstance that [M.] was counsel to one of the parties (§§46-49). The CoA concluded that the latter circumstance alone could not, in and of itself, be deemed to create reasonable doubts as to the impartiality and/or independence of the Tribunal (§50), and thus dismissed the application.

 

Was the Arbitration Domestic or International?

Although it seems oblivious to the fact that the transfer market for football players of Mr Aurier’s level is intrinsically transnational in nature, the CoA’s decision appears to be in line with the well-established French case law interpreting Article 1504 CPC, seeking as it does to determine whether, in the context of the parties’ relationship, there had been “any cross-border transfer” of goods, persons or money. Be that as it may, had the Court found that the arbitration was international instead of domestic, its ruling on the admissibility of the application would likely have been the same, given that the ground invoked by SMI (irregular constitution of the tribunal) is available for both domestic and international arbitrations. Similarly, if the case had been governed by the Swiss lex arbitri, the Swiss Supreme Court would have deemed the action admissible even if it was based on the wrong (but inconsequential) assumption that the arbitration was domestic and not international (or viceversa), given that the ground invoked is (also) the same under both regimes.2)Gabrielle Kaufmann-Kohler & Antonio Rigozzi, International Arbitration – Law and Practice in Switzerland, OUP, 2015, para. 8.17 (the ground of “irregular constitution of the tribunal” is available under both Article 190(2)(a) PILA and Article 393(a) Swiss (CPC)). jQuery('#footnote_plugin_tooltip_38432_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38432_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

The CoA’s Reasoning on the Applicability of Article 6(1) ECHR

The most interesting part of the decision concerns the other objection to admissibility raised by the Player, namely the argument that, by agreeing to arbitrate, the parties had waived the applicability of Article 6(1) ECHR. As just noted, in rejecting this argument, the CoA affirmed that “it is for the court hearing the application to set aside […] to ensure, within the scope of its review, that the award […] does not infringe any of [Article 6(1) ECHR’s guarantees] that the parties have not validly waived”. On its face, this statement (which is not further developed in the decision) could be taken to mean that compliance with the fundamental guarantees of the ECHR constitutes a separate ground for annulment, independent from the grounds provided by the lex arbitri. If this was indeed what the CoA meant, then the solution is different from the Swiss Supreme Court’s approach, which invariably requires that applicants relying on Article 6(1) ECHR’s guarantees establish in which way an infringement thereof amounts to a violation to one of the (exhaustive) grounds for annulment under Article 190(2) PILA (or Article 393 Swiss CPC for domestic arbitrations).

It is also striking that the CoA did not refer to the ECtHR’s most relevant case law on this specific issue, in particular the Mutu & Pechstein decision (see also here and here). In Mutu/Pechstein, the ECtHR held that in cases like the present one, where the arbitration is not mandatorily provided for by the applicable sports rules, limitations of the guarantees of Article 6(1) ECHR contained in the applicable arbitration rules can be valid if they are “free[ly], lawful[ly] and unequivocal[ly]” agreed to (§ 96). It is submitted that silence on a particular issue in the rules (here the absence of an explicit prohibition of double hatting) is not “unequivocal”, and that the CoA was thus correct in rejecting the Player’s objection to admissibility. Conversely, one could argue that the fact that the CAS-CNOSF Arbitration Rules explicitly set out (in Article 20) that the proceedings are confidential, means that the parties must be deemed to have unequivocally waived their right to a public hearing pursuant to Article 6(1) ECHR.

 

Double Hatting and the Importance of Appearances

As to whether the fact that a party was represented by counsel who happened to be on the closed list of arbitrators is in and of itself a ground to set aside the award for lack of independence and impartiality, the CoA’s approach is sensible. It requires a demonstration that, in the specific circumstances of the case, such double hatting can “create reasonable doubt in the minds of the parties as to the independence or impartiality of the arbitral tribunal”. This cannot be ruled out for instance if being on the list of arbitrators of a particular institution can create a strong sense of community between arbitrators. Notwithstanding the CoA’s decision, it is submitted that the CNOSF was well inspired to amend the CAS-CNOSF Arbitration Rules to expressly prohibit double hatting, as it did in December 2020. This will avoid future challenges and strengthen the perception that CAS-CNOSF’s Tribunals act with independence and impartiality: as was also emphasized by the ECtHR in Mutu/Pechstein, appearances are important when “what is at stake is the confidence which the courts in a democratic society must inspire in the public” (§143).

 

 

References[+]

References ↑1 While the Player’s name is anonymized in the decision, the chronology of events and the indication of the clubs he was employed by allow for his identification. ↑2 Gabrielle Kaufmann-Kohler & Antonio Rigozzi, International Arbitration – Law and Practice in Switzerland, OUP, 2015, para. 8.17 (the ground of “irregular constitution of the tribunal” is available under both Article 190(2)(a) PILA and Article 393(a) Swiss (CPC)). function footnote_expand_reference_container_38432_30() { jQuery('#footnote_references_container_38432_30').show(); jQuery('#footnote_reference_container_collapse_button_38432_30').text('−'); } function footnote_collapse_reference_container_38432_30() { jQuery('#footnote_references_container_38432_30').hide(); jQuery('#footnote_reference_container_collapse_button_38432_30').text('+'); } function footnote_expand_collapse_reference_container_38432_30() { if (jQuery('#footnote_references_container_38432_30').is(':hidden')) { footnote_expand_reference_container_38432_30(); } else { footnote_collapse_reference_container_38432_30(); } } function footnote_moveToReference_38432_30(p_str_TargetID) { footnote_expand_reference_container_38432_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38432_30(p_str_TargetID) { footnote_expand_reference_container_38432_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Interpreting Tanzania’s Arbitration Act, 2020

Fri, 2021-08-20 01:20

This post is in response to the post titled “The First Year of Tanzania’s 2020 Arbitration Act” published on the Kluwer Arbitration Blog on 21 April 2021.

In the above-mentioned post, Katarina Jurisic and Michael Wietzorek analysed the provisions of Tanzania’s Arbitration Act 2020 (‘the Act’) and the effect that the Act would have on the jurisdiction. The well-written article provides a deep analysis of the Act, to which we generally prescribe. However, we disagree with certain views of the authors and, in this post, we provide our reactions to some of them, in particular the following statement:

“In addition to this difference, Section 13(3) of the 2020 Arbitration Act appears to be at odds with Section 12(1) of the 2020 Arbitration Act…”

This post therefore presents further opinions in reaction to that statement.

 

Analysis

In our opinion, while conceding that provisions of the Act are open to interpretation, Section 12(1) and Section 13(3) do not seem to be at odds with each other.

Under Section 6 of the repealed Arbitration Act, any application to stay court proceedings pending arbitration would have to be filed before the Defendant files a written statement of defence (‘WSD) or takes any other steps in the proceedings. If the Defendant were to take steps in the proceedings, such as submitting arguments or defenses, it would amount to foregoing his right to submit the dispute to arbitration. The court would first determine the application for stay before making a decision as to whether the dispute should be referred to arbitration or a WSD should be filed by the Defendant.

Section 6 of the repealed Arbitration Act which provided as follows:

Where a party to a submission to which this Part applies, or a person claiming under him, commences  legal proceedings against any other party to the submission or any person claiming under him in respect of any matter agreed to be referred, a party to the legal proceedings may, at any time after appearance and before filing a written statement or taking any other steps in the proceedings apply to the court to stay the proceedings”. (our emphasis)

Currently, under Section 13(3) of the Act, a party cannot make an application for stay of legal proceedings pending arbitration unless he has first taken appropriate procedural steps to acknowledge the legal proceedings against him, or has taken steps in those proceedings to answer the substantive claim. This includes filing a WSD in response to the claim.

Meanwhile, Section 12(1) of the Act states:

A court, before which an action is brought in a matter which is the subject of an arbitration agreement shall, where a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement of claim on the substance of the dispute, and notwithstanding any judgment, decree or order of the superior court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.” (our emphasis)

Contrary to the inference made in the post by Jurisic and Wietzorek, this provision simply means that a WSD should be filed first before making an application to stay legal proceedings. Further, such application should be filed within the statutory deadline of filing a defence, which is within 21 days from the date of service of summons as per Order VIII Rule (1) of the Civil Procedure Code R.E. 2019.

In our view, there is no confusion created by the inclusion of both Sections 12(1) and 13(3) in the Act. Whereas Section 13(3) imposes conditions for applying for stay of proceedings pending arbitration, Section 12(1) imposes a time limit within which such application can be made.

 

The Spirit behind these Provisions of the Act

The aim behind the two provisions is to facilitate the speedy determination of suits. Previously, under the repealed Arbitration Act, where an application for stay of proceedings was dismissed, hearing of the suit could not immediately proceed because the Defendant would not have yet filed his WSD.

Instead, he would then have applied for leave and extension of time to file the WSD, and this would have resulted in a considerable prolonging to the conclusion of pleadings, therefore causing delay in the hearing of the suit.

The Act remedies these issues by providing that if the application for stay of proceedings is dismissed, there would be no need for an extension of time to file the WSD, since one would have been filed before the application for stay was made.

Among the previous cases which set the framework for an application for stay of legal proceedings was the case of Wembere Hunting Safaris Limited v Registered Trustees of Mbomipa Authorized Association, Commercial Case No. 40 of 2013, High Court of the United Republic of Tanzania, Commercial Division, Dar es Salaam Registry (Unreported) cited as authority in Travelport International Limited v Precise Systems Limited, Misc. Commercial Application No. 359 of 2017, The High Court of the United Republic of Tanzania, Commercial Division, Dar es Salaam Registry (Unreported), where the court stated four conditions for the grant of a stay in legal proceedings pending reference to arbitration, namely:

  • There are legal proceedings commenced by the Respondent and pending in court;
  • There is an arbitration agreement;
  • No WSD has been filed in response to the proceedings commenced or taken other steps in the proceedings; and
  • The petitioner has shown willingness and readiness to do things necessary for the proper conduct of arbitration.

However, the Act now requires the Defendant to acknowledge the proceedings before him, effectively meaning that the third condition is no longer applicable.

The case of Queensway Tanzania (EPZ) Limited v Tanzania Toku Garments Co. Ltd, Misc. Commercial Cause No. 43 of 2020, High Court of the United Republic of Tanzania, Commercial Division, Dar es Salaam Registry, (Unreported) affirmed the position that an application under Section 13(1) of the Act requires the Defendant to first acknowledge the proceedings against him.

We note that under Section 12(1) of the Act a party who wishes to apply for stay of proceedings so as to refer a matter to arbitration must do so not later than the date of submitting his first statement of claim on the substance of the dispute.

We believe the reference to “statement of claim” was unintended and that it was meant to refer to a statement of defence”. The applicant would be a Defendant in the suit and he would be expected to file a WSD, not a statement of claim.

 

Concluding Remarks

Save for the  reference to “statement of claim” which we believe to be unintended and the fact that what amounts to a Respondent acknowledging proceedings against it for purposes of applying for stay is not defined, the provisions of section 12(1) and 13(1) of the Act are clear.  We believe that any confusion arising out of the interpretation of the provision of the Act will be effectively resolved by the courts, and that both investors and practitioners have a reason to smile.

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Filling In The Gaps Left By the US Supreme Court Decision in GE Energy v. Outokumpu: Which Law To Apply?

Thu, 2021-08-19 01:38

The United States Supreme Court’s June 2020 decision in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC (“GE Energy“) made clear that, under U.S. law, a non-signatory to an arbitration agreement may invoke equitable estoppel to compel arbitration under Article II(3) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) (for more on GE Energy, see here). The Supreme Court did not, however, decide what law should be applied to determine whether equitable estoppel is available for arbitration agreements under the New York Convention – i.e., whether this should be determined by reference to federal or state law.

Instead, the Supreme Court remanded that question to the United States Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”). While the Eleventh Circuit has not yet scheduled the remand hearing in GE Energy, the same question has now arisen before other courts – should federal or state law determine the availability of equitable estoppel?

The case for applying federal law
In a recent decision by the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit“), Balkrishna Setty v. Shrinivas Sugandhalaya LLP (“Setty v. Sugandhalaya”), the majority determined that federal law principles apply to determine whether equitable estoppel is available based on the facts of a particular case.

In that case, two brothers, Balkrishna and Nagraj Setty, signed a Partnership Deed in 1999 agreeing to joint ownership of Shrinivas Sugandhalaya, an incense manufacturing company owned by their late father. The Partnership Deed contained an arbitration clause requiring all disputes in respect of the partnership arising between the partners to be settled by arbitration. After a period of joint operation, the brothers separated and began operating their own incense manufacturing firms, though maintaining the same trademark. Balkrishna, formed Shrinivas Sugandhalaya (BNG) LLP (“SS Bangalore“), whereas Nagraj formed Shrinivas Sugandhalaya LLP (“SS Mumbai“).

After a period of operation, the Plaintiffs-Appellees, Balkrishna and SS Bangalore, commenced litigation against SS Mumbai and its U.S. distributor, claiming that SS Mumbai had committed a number of U.S. federal trademark violations, including having fraudulently obtained trademark registrations. The suit was originally brought in the Northern District of Alabama but was transferred to the Western District of Washington to suit the parties’ convenience, pursuant to 28 U.S.C. § 1404(a).

SS Mumbai moved to dismiss or stay the case in favour of arbitration, arguing that the Plaintiffs-Appellees should be equitably estopped from avoiding the arbitration clause contained in the Partnership Deed. Neither SS Bangalore nor SS Mumbai were parties to the Partnership Deed.

The district court for the Western District of Washington denied SS Mumbai’s motion, applying generalized estoppel doctrine from Ninth Circuit jurisprudence. On appeal, while the Ninth Circuit affirmed the district court in finding that SS Mumbai could not assert equitable estoppel, it did so on the grounds that as a non-signatory to the Partnership Deed, SS Mumbai was barred from compelling arbitration under Article II(3) of the New York Convention.

SS Mumbai then sought, and was granted, certiorari by the Supreme Court on the basis of the Supreme Court’s decision in GE Energy, and the Ninth Circuit’s decision was vacated and remanded. On remand, the parties disputed whether the law of India (the choice of law in the Partnership Deed) or federal common law applied to the question of whether a non-signatory can compel arbitration.

The majority held that Indian law did not apply, noting that to resolve a “threshold issue”, the Court should not look to the agreement itself. Additionally, because the Partnership Deed’s arbitration clause applied to disputes “arising between the partners”, it did not apply to third parties such as SS Mumbai.

Instead, the majority held that federal substantive law applies where a case involves the New York Convention and concerns the arbitrability of federal claims by or against non-signatories to an arbitration agreement. This, the majority found, furthered the principle of uniformity in the enforcement of international arbitration agreements, as emphasized by the New York Convention and its implementing legislation, the Federal Arbitration Act (“FAA”).

The case for applying state law
Interestingly, the case for applying state law was made in a strong dissent to the majority opinion of Setty v. Sugandhalaya. Judge Bea, who authored the dissent, argued that state, not federal law should govern equitable estoppel claims to compel arbitration. Her dissent was grounded in jurisprudence from Chapter 1 of the FAA, which addresses domestic arbitration law (noting that Chapter 2 of the FAA addresses international arbitration law, by incorporating the New York Convention). In essence, Judge Bea stated that jurisprudence from the Supreme Court and Ninth Circuit on Chapter 1 of the FAA had firmly established that the state contract law that governs the arbitration agreement governs equitable estoppel claims to compel arbitration. The fact that the arbitration agreement in this case was under the New York Convention (which is implemented in the United States by Chapter 2 of the FAA) did not merit a departure from this position. Rather, Judge Bea argued, it is in the interests of uniformity that settled FAA law apply to agreements governed by the New York Convention.

Judge Bea relied on the Supreme Court’s decision in Arthur Anderson LLP v. Carlisle, 556 U.S. 624 (2009), which held that the FAA did not “alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them)”. (Id. at 630). The Supreme Court held that the application of “traditional principles of state law” is permitted under the FAA to allow a contract to be enforced by or against non-parties through a number of principles, including equitable estoppel (Id. at 631). Judge Bea went on to state that “Since Arthur Andersen, the Ninth Circuit has repeatedly applied state contract law any time a non-signatory has sought to compel arbitration under the FAA.” (Setty v. Sugandhalaya at page 13).

In addition, the Restatement on U.S. Law of International Commercial Arbitration and Investor-State Arbitration (“Restatement”) takes the position that the availability of estoppel is governed by state law (see Comment (c) to §2.3). Though the Restatement is not binding on courts, it has significant persuasive authority such that courts may look to the Restatement to decide which law to apply.

What are the implications of applying federal or state law?
The question of the applicability of federal or state law is not limited to the doctrine of equitable estoppel. In GE Energy, the Supreme Court noted that under the FAA, arbitration agreements can be enforced by non-signatories through “assumption, piercing the corporate veil, alter ego, incorporation by reference, third party beneficiary theories, waiver and estoppel.” (GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637, 1643 (2020)). While the decision in Setty v. Sugandhalaya specifically addressed estoppel, it remains to be seen whether state or federal law will govern these other mechanisms for enforcement of arbitration agreements by non-signatories.

The question of which body of law applies to determine the availability of doctrines like equitable estoppel may have important practical implications. In particular, there may be instances in which the application of federal or state law produces different results when applied to the specific facts of a case. As the case law develops in different courts, parties could take advantage of these inconsistent approaches in determining where to file their claim.

There is therefore high potential for divergence in determining whether a non-signatory can enforce an arbitration agreement. We are likely to see more cases of non-signatories seeking to enforce arbitration agreements concerning the New York Convention in the wake of GE Energy, and it remains to be seen whether federal courts will converge on the methodology for determining the availability of these principles, or whether they will remain divided.

In particular, and as mentioned above, the Supreme Court in GE Energy remanded to the Eleventh Circuit to determine the body of law that governs the enforceability of arbitration clauses under the doctrine of equitable estoppel. It remains to be seen whether the Eleventh Circuit will adopt the same position as the Ninth Circuit in Setty v. Sugandhalaya.

Conclusion
While the US Supreme Court in GE Energy made the important clarification that the New York Convention does not bar non-signatories from asserting equitable estoppel to compel arbitration, gaps remain as to whether state or federal law applies to determine the availability of equitable estoppel on the facts of a particular case. The Ninth Circuit has recently held that federal law applies, albeit with a strong dissent arguing in favor of the application of state law. In light of the important implications arising out of the applicable law, further debate is to be expected.

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