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Hong Kong Arbitration Week Recap: Is Arbitration Sustainable?

Wed, 2019-10-23 19:01

Felicia Cheng and Dominique Yong

Introduction

The fourth annual Harbour Lecture took place on 21 October 2019, with hundreds of attendees packed into the Eaton Club, Hong Kong to hear a thought-provoking lecture delivered by Sophie Lamb QC, global co-chair of the international arbitration practice at Latham & Watkins.

The theme of this year’s lecture was whether arbitration is sustainable. The premise was the necessary and unavoidable disruption (a ‘great transition’ of sorts) that will affect not only the arbitration industry, but life and business more broadly. Ms Lamb used the UN’s Sustainable Development Goals (“SDGs”) as a loose framework to take the audience through a wide array of topics and ideas, from crowd-funded robot arbitrators to climate change, rapid urbanisation, and a growing ‘silver economy’.

 

Climate change and business

As mentioned in the lecture, it is no surprise that environmental, social and governmental (“ESG”) issues have made it to the top of the corporate agenda since the World Economic Forum has identified extreme weather and climate change policy failures as among the gravest threats to the global economy.

Undoubtedly, the effects of the climate crisis and strain on resources, including loss of biodiversity, will impact business and relationships. Examples given in the lecture include shifts in the ‘users’ of international arbitration such as energy companies; necessary updates in the law to deal with arguably increasing foreseeability of ‘extreme’ events; and the need for financing from private sources, noting already the innovation of ‘green bonds’ as a collective response.

Moving on to the role of company directors, Ms Lamb shared that there have been calls (including from Lord Sales, Justice of the UK Supreme Court) for company law to require directors to have regard to climate change effects and adopt climate risk management as part of their fiduciary duties. On this point, she expected that this may involve greater reliance on soft laws and best practice, the importance of which has become generally-accepted over recent decades. On the latter, it was said that a balance must be struck between letting companies pursue commercial objectives and also allocating responsibility for the consequences if companies fail to account for ESG factors in their decision making.

On investment law, the view was that changes to the ESG context may necessitate shifts in the concepts of ‘investors’ and ‘investments’. Ms Lamb explained that the investment arbitration sector faces numerous challenges including the need to counter the public perceptions that ‘justice is being privatised’, that investment arbitration is to blame for regulatory chill, and a general sentiment of anti-globalisation as well as opposition to trade deals. In addition, it was said that the status of intra-EU investment law remains in a state of flux with the consequences of the Achmea decision still transpiring.

 

Diversity and equality

As presented at the lecture, diversity and equality are specifically identified as SDGs, and have been in the spotlight in the arbitration sector for some time, especially given the historical lack of both in the industry demographics. Ms Lamb mentioned it is undeniable that gender equality and diversity are vital for the health, sustainability and legitimacy of arbitration, particularly in light of the increasing diversity in users of arbitration.

Statistics have been brought forward at the lecture in relation to gender equality. Whilst LCIA figures show that women represented 43% of all arbitrators selected by the LCIA Court in 2018, this can be compared with a figure of 23% of appointments overall, suggesting that parties and counsel may lag behind the LCIA in pursuing equality. ICC figures in 2018 are lower, with 27.6% of appointments made by the ICC Court and 18.4% overall being of women. She remarked that there is clearly still some way to go to achieve equality.

It was also mentioned that another challenge to diversity and equality lies in the difficulty of procuring one’s first appointment as arbitrator. In particular, the market tendency to carry out extensive due diligence on prospective arbitrators and the emphasis on past experience means that the pool of candidates will be limited instead of expanded. This is exacerbated by the IBA Guidelines on Conflicts of Interest in International Arbitration, which Ms Lamb considered do not reflect the realities of modern law firms and require urgent attention to address, for example, ways that firms can manage potential conflicts by implementing information barriers and protocols.

The suggestion was that these structural barriers could be ameliorated by, for example, allowing junior arbitrators to shadow experienced arbitrators on a disclosed basis in order to gain practical experience and increase prospects of future appointments; a concept that was enthusiastically received by the audience.

 

Technology and data protection

Technology in the arbitration sector has had a slow start, with most arbitration hearings still relying on voluminous hard copy bundles. As commented by Ms Lamb, although technology has been used to assist with research, document review, discovery, bundles and translation, it is typically limited to fairly pedestrian tasks.

Ms Lamb viewed that there is a clear opportunity to adopt much more sophisticated uses of technology, and this has already been done in certain sub-sectors. It was mentioned that business such as eBay already use artificial intelligence for dispute resolution, which involves using an algorithm to generate a suggested settlement figure and allows the business to process an extremely high volume of disputes. It was said this type of technology use is particularly suitable for low value and/or routine disputes. Further, various US government entities also have online dispute resolution platforms for tax and traffic matters.

As further suggested, other potential uses of technology could include using Blockchain to authenticate evidence, algorithms to process high volumes of data, and to calculate pricing or quantum in gas and construction disputes. Ms Lamb considered that technology may also assist in mitigating the environmental impacts of modern international arbitration, which involves copious amounts of travel, for example by opting for virtual hearing rooms.

 

Concluding thoughts

In addition to the broad categories of disruption and progress mentioned above, Ms Lamb commented that there exist other challenges to the future of arbitration such as the emergence of regional international commercial courts (particularly in financial centres), as well as the rise of mediation including the Singapore Convention on Mediation and increasing tendency of parties to opt for a commercially pragmatic rather than legal solution.

Further, Ms Lamb mentioned that as climate change related disputes increase, particularly energy, construction and land use disputes, this will affect various aspects of the arbitration industry. The view was that arbitration is uniquely placed to adapt to these effects, including allowing the choice and application of specified governing laws including climate change instruments, and the choice and appointment of arbitrators and experts with climate change and scientific expertise.

In addition, Ms Lamb remarked that the arbitration industry must persist and do more to achieve gender equality and diversity, which should be viewed as vital to the health and sustainability of the industry. The opinion was that practical measures such as allowing juniors to shadow arbitrators and updating the IBA Guidelines on Conflicts of Interest in International Arbitration would be moves in the right direction.

Ms Lamb also said that the use of technology must be embraced and not feared. That said, opportunities to embrace technological advancement must be accompanied by measures to manage associated and new risks. She considered that data protection and cybersecurity risk management programmes should be implemented such as for contractual protection, staff training, and policies for detection and analysis, breach management and containment, as well as PR and dispute resolution strategy.

 

More coverage from Hong Kong Arbitration Week is available here.

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Hong Kong Arbitration Week Recap: The Future of Arbitration in Hong Kong

Tue, 2019-10-22 19:00

Joyce Leung, Joanne Lau and Nicole Tsui

As Hong Kong Arbitration Week 2019 hits the midway point, we asked three next-generation arbitration practitioners: how do you see the future of arbitration in Hong Kong?

These are their answers:


Joyce Leung:
As a construction lawyer, I am seeing an increase in arbitrations arising from the construction sector in light of the completion of a number of major infrastructure projects in Hong Kong. Apart from local projects, disputes have also arisen on projects under the Belt and Road initiative. Coupled with the developments in the Greater Bay Area, there are significant opportunities for Hong Kong as an arbitration forum going forward.

There are speculations that the proposed security of payment legislation, which introduces statutory adjudication as a dispute resolution mechanism to increase cash flow in the construction industry, would significantly reduce the amount of arbitrations in Hong Kong as overseas experience suggests that parties tend to accept the adjudicator’s decision as final.  My view is that whilst this may be true for smaller disputes, parties would probably still refer disputes which are more complex or of higher value to arbitration.

There have been a number of welcoming developments this year which will help boost Hong Kong’s attractiveness and competitiveness as a seat for arbitration. The third party funding provisions of the Arbitration Ordinance (Cap. 609) came into full operation on 1 February 2019, giving parties comfort that third party funding of arbitration in Hong Kong is not prohibited by the common law doctrines of maintenance and champerty. Further, by virtue of a unique arrangement between the Mainland and Hong Kong which came into effect on 1 October 2019, the Mainland courts may order interim measures in support of institutional arbitrations seated in Hong Kong. There is currently no such arrangement for arbitrations seated in other foreign jurisdictions, giving Hong Kong a further competitive edge.

Despite the dark times that Hong Kong has been experiencing in the past months, I think the future of arbitration in Hong Kong remains bright.

 

Joanne Lau: I have every confidence in the future of arbitration in Hong Kong even though it is not without its challenges.

The biggest challenge that Hong Kong faces is perhaps one of perception. Given the complicated socio-political environment, it is important that Hong Kong is able to defend itself against any perception that it is no longer a safe and reputable jurisdiction for conducting arbitration.

Taking a fact-based approach, I do not consider the future of arbitration in Hong Kong to have been undermined. The HKIAC remains very well-regarded with increasing caseload and constant self-improvements, such as the 2018 revision to the HKIAC Rules. Arbitration-related judgments have shown that the Hong Kong courts remain neutral and pro-arbitration. The legal infrastructure is sound. Changes have been introduced to the Model Law-based Arbitration Ordinance over the years in response to evolving demands, including with respect to emergency arbitration and third party funding. There is also a vibrant community of arbitration practitioners, with a number of high profile events being held in Hong Kong, including the Hong Kong Arbitration Week now in its eighth year, the ISDS Reform Conference earlier this year and the ICCA Congress coming up in 2022. A significant recent development is the Mutual Arrangement on Interim Measures which Joyce mentioned.

Hong Kong’s unique position lies in the fact that it is part of China but that it nevertheless differs from China in various ways, most significantly by its separate legal and judicial system. The future of arbitration in Hong Kong will depend on how well Hong Kong is able to capitalise on its special relationship with Mainland China whilst ensuring that the distinctiveness of Hong Kong as a leading international arbitration venue in its own right is also maintained and conveyed.

 

Nicole Tsui: I see a bright future for Hong Kong as a seat of arbitration. The arbitration market is busy and the number of disputes arbitrated in Hong Kong has remained at a consistently high level for the last five years. Due to foreign exchange and other regulatory restrictions in Mainland China, Hong Kong remains China’s bridge to the world and has always been the go-to seat for PRC-related disputes that are eligible for arbitration offshore. Hong Kong is seeing an increasing number of disputes involving Mainland Chinese entities being referred to arbitration. I believe that this upward trend will continue as Chinese outbound investment activity increases.

In addition, I expect that we will see an increase in the number of PRC-related disputes arbitrated in Hong Kong for two further reasons:

  • First, the PRC Supreme People’s Court has incrementally liberalized the types of disputes that are eligible for arbitration outside Mainland China, including some between wholly foreign-owned enterprises registered in Chinese FTZs. Hong Kong is a natural offshore seat for these disputes.
  • Second, there is the arrangement between Hong Kong and Mainland China on interim measures referred to by my co-contributors.

For these reasons, and because of the unique benefits that Hong Kong offers (including our multi-lingual legal profession, highly independent judiciary, and geographical proximity to Mainland China), I expect that Hong Kong will maintain and consolidate its position as one of the world’s leading arbitral seats in the future.

 

More coverage from Hong Kong Arbitration Week is available here.

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Hong Kong Arbitration Week Recap: Has the Proliferation of Institutional Rules Caused International Arbitration to Lose Its Way?

Mon, 2019-10-21 19:01

Sian Knight and Ben Bury

Introduction

Even a cursory analysis of the history of the procedural rules of leading arbitral institutions demonstrates that procedural rules are increasing in number and becoming ever more comprehensive in their scope. Institutional rules now cover, largely without exception, joinder, consolidation, emergency arbitrator provisions, and expedited procedures. And adding to this, as institutions seeking to adapt to global developments, such as the growth of Belt and Road Initiative (BRI) disputes, the pressure for more rules seems inescapable.

Has this increasing breadth of rules created a bewildering morass? Or is it the reality that arbitration institutions are required to expand their procedural tools in order to effectively manage increasingly complex disputes, including those involving multiple parties and arbitration agreements.

On Monday, October 21, Holman Fenwick Willan LLP hosted a panel event on the topic of proliferation of institutional rules as an affiliated event of Hong Kong Arbitration Week 2019 (Chatham House Rules invoked).

This blog post provides an overview of the main themes addressed in the wide-ranging discussion.

 

The interplay and choice between institutional rules in contrast to ad hoc rules

The panel discussion raised the point that institutional rules exist to provide structure and form to arbitrations, and can be thought of as readily understandable means of setting out the rules of the ‘arbitration’ game.

In practical terms, arbitral rules provide institutions with the means to offer a raft of valuable services, ranging from appointment of arbitrators to consolidation of arbitrations. In that sense, choosing administered arbitration subject to institutional rules can operate as a comprehensive and structured alternative to the skeletal procedural provisions generally found in local arbitration laws.

It was discussed that having said that, where appropriate, parties may prefer “ad hoc” arbitrations subject to local legislation over administered arbitrations. However, Ad hoc arbitration is not devoid of structure. It instead takes its form according to the law of the seat, and it is certainly open to parties to agree to a set of rules to supplement underlying legislation, such as the use of LMAA rules in such context. With an experienced arbitral tribunal, ad hoc arbitration can be a genuine and viable alternative to institutional arbitration.

 

The role of institutional rules in the parties’ choice of institution

Further in the discussion, the point was made that regardless of preferences, the decision between ad hoc or administered arbitration should be carefully considered. In the same vein, parties opting for administered arbitration should spend time selecting the right rules, i.e., ones that are fit for purpose in the context of a specific reference, since the rules provide essential procedural framework for an arbitration and will have a significant impact on the conduct of proceedings.

That said, there is not always the luxury of time or influence of a party over which rules to choose in the arbitration agreement when a commercial deal is cut. Arbitration agreements are often “11th hour” clauses in contracts, meaning that they are drafted at the last minute without sufficient regard to their wording.

On this point, the panel explained that, in practical terms and to the extent parties consider the drafting of their arbitration clauses, that parties are more likely to pay attention to the seat of the arbitration rather than which institutional rules to apply. Further, if an institution is deliberately chosen, it is often on the basis of its experience with institutions in terms of their administration of comparable disputes. This is reflected in the results of the Queen Mary University of London 2018 International Arbitration Survey, which confirms that the HKIAC, SIAC, ICC, LCIA and SCC are still the most preferred institutions based on ‘general reputation and recognition‘.

 

The process and development of current institutional rules

Against this background, one may wonder why arbitral institutions seek to create new rules to adapt to change.

The panel discussed that there is no doubt that they do. By way of example, the HKIAC 2018 Administered Arbitration Rules undoubtedly put in comprehensive work in revising its Rules. New provisions have been introduced to recognise the pressure points in existing rules, and to seek input and consensus from the breadth of the interested arbitration community before embarking on change, which is a process not undertaken lightly.

There is nonetheless a point to make on whether institutions are creating new rules to cater for the changing needs of the parties.

Looking ahead to the future development of arbitration practice, we may reasonably expect more attention to be paid to environmental concerns. Many have taken the decision now to commit to the Green Pledge on arbitration. And looking even further ahead, we wonder how long it would take before the traditional physical hearing is defunct and be replaced with a virtual environment. This poses the question – should rules cater for this?

Leaving to one side was an academic discussion of the respective role of arbitration soft law, and the mandatory application of national law, as well as current concerns over the scope of institutional rules which go to the core of the arbitral process. For example, multi-party provisions may have to address concerns over fair treatment of all parties to an arbitration in terms of appointment of arbitrators.

The panel also discussed how the proliferation of rules may impact enforcement as a favourable award is only a good result when it translates into an enforceable award.

 

The role of an arbitrator and the strengths of the arbitral process

The panel concluded the session by discussing the role of an arbitrator. No consideration of institutional rules would be complete without doing so.

The panel expressed the view that although institutional rules may well facilitate the arbitration procedure, they are not the only factor at play. It was noted that the strength of an arbitral process is also heavily influenced by the caliber of the arbitrator pool in the respective seat.

An example would be, where parties have expressly committed to the use of expedited procedures or emergency arbitrator provisions, arbitrators are expected to be able to utilise the applicable provisions fully in order to drive the proceedings forward without delay.

 

More coverage from Hong Kong Arbitration Week is available here.

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Hong Kong Arbitration Week Recap: Private Equity, Financial Services and Insurance Disputes – Don’t Hesitate to Arbitrate!

Mon, 2019-10-21 02:30

Jake Lowther

Introduction

Kicking off Hong Kong Arbitration Week (“HKAW”) 2019 on Sunday was a joint seminar hosted by KCAB INTERNATIONAL and Freshfields Bruckhaus Deringer (“Freshfields”) titled: “Private Equity, Financial Services and Insurance Disputes: Don’t hesitate to arbitrate!” The seminar was an Oxford-style debate of the motion: “this house believes that private equity, financial services and insurance disputes are uniquely unsuited for arbitration.”

The speakers were divided by sector, with Sue Hyun Lim (KCAB INTERNATIONAL), Nick Lingard (Freshfields) and SeungMin Lee (Shin & Kim) in support of the motion and Dana MacGrath (Bentham IMF), Simon Powell (Powell Arbitration) and Yong Wei Chan (Freshfields) opposed. John Choong (Freshfields) acted as moderator.

Before beginning the debate, a poll of the audience revealed only 22% were in favour of the motion that arbitration is unsuitable for private equity, financial services and insurance disputes.

 

Financial services

With a “heavy heart”, Ms Lim began the debate with four key arguments for why financial services disputes are not suited to arbitration.

First, “if it ain’t broke, don’t fix it.” Financial services litigation has a long history that yielded a wealth of expertise and binding precedents. This provided stability and consistency for the parties which are essential conditions for investment. Court litigation minimizes the real risk of anarchic, conflicting decisions.

Second, “why settle for second-best?” Ms Lim wondered why parties would choose arbitration when the courts provide more comprehensive interim relief and comparative ease to join parties and consolidate claims.

Third, “what are you getting yourself into?” Ms Lim pointed to the lack of accountability when it comes to arbitrators. Judgments are publicly available, providing insight into judges’ reasoning. Arbitrators lack the same level of transparency and accountability. It can lead to counsel running “everything but the kitchen sink” arguments at the expense of efficiency of time and cost.

Fourth, “show me the money!” Ms Lim reminded the audience that arbitration is often neither faster nor cheaper than litigation. Financial services stand to lose due to the lack of early dismissal procedures in arbitration. Despite their “broad discretion” arbitrators typically suffer from “due process paranoia” that leads to lengthier proceedings in arbitration, adding to the expense.

In response, an “at ease” Ms MacGrath begged to differ. She conceded that the courts are good, but pointed to the fact that the parties’ choice to arbitrate is not about courts not working, but the parties making a specific choice to arbitrate due to its advantages. In the US, the courts can be much slower and more expensive than arbitration. The lack of finality in court litigation is a distinct disadvantage.

Ms MacGrath stated that the lack of precedents is an unlikely risk and may even be healthy. A better result may be derived from arbitrators deciding on each case according to its merits. Further, confidentiality remains a hallmark of arbitration. In today’s world of “trial by Twitter”, the ability for financial services providers to keep their disputes private is invaluable.

Ms MacGrath pointed to the various institutional rule changes to facilitate joinder and consolidation as evidence of arbitration doing the “best it can”. She stated it is a rare case where there are non-parties that cannot be joined to an arbitration. She also pointed to the increasing accountability of arbitrators amidst the increasing publication of awards. As for delay, Ms MacGrath made the point that all arbitration participants share responsibility, but institutions are increasingly vigilant in enforcing efficiency.

 

Private Equity

Mr Lingard began by sharing insights into the private equity mindset. It is a fast moving business with fundraising, deployment and realization typically taking place in short time frames. Clients expect a high degree of responsiveness and Mr Lingard suggested that an arbitral tribunal is never sufficiently responsive. He referred to an arbitration in which the proceedings closed in June 2018, but the award is still pending.

Mr Lingard acknowledged the expedited procedures offered by many arbitral institutions, but made the point that the relevant monetary thresholds are too low to be of much use in private equity transactions. While arbitration may be all about obtaining monetary relief, the possibility of court-ordered freezing or relief injunctions with teeth is arguably more useful to private equity clients. The stylistic aspects of arbitration and its effect on enforceability will typically generate a “you’re kidding me” from clients.

Mr Lingard also referred to private equity claimants preferring an advantageous exit from investment terms in disputes, such as the ability to force an IPO as opposed to damages. Finally, Mr Lingard questioned the appropriateness of arbitration particularly for non-arbitrable claims in relation to minority shareholder oppression or insolvency.

In response, Mr Powell promised to be the audience’s “guardian angel” following the previous “hogwash”. Private equity moves fast, but arbitration is speedy, efficient and institutional rules provide adequate interim measures to the parties. It is responsive to the needs of the parties. As a result, it is continually improving. While a delay of over a year is unacceptable, he pointed to various rule revisions enshrining tight time frames for awards. Mr Powell also referred to the support from commercial courts for arbitration, excepting the limited non-arbitrable matters. He stated that judges can lack the expertise to decide matters in private equity, especially when compared to party-appointed arbitrators with private equity backgrounds.

 

Insurance

Ms Lee began by discussing the origins of insurance as a means of spreading risk from the individual to the wider community, ensuring a speedier recovery after an unpredictable event. This is a relationship that should be treated different from other contractual relationships. She stated that arbitrators in insurance disputes may have a predisposition towards insurers, who will be more likely to appoint arbitrators in the future. Arbitration’s flexibility has a downside in insurance disputes, where the insurers tend to be able to manipulate the arbitration agreement in their favour, causing delays and limits to remedies.

Ms Lee pointed out that through arbitration, insurers can avoid class actions. Given the multitude of policy holders with similar contracts, the lack of judicial interpretation is a disadvantage to expediency and consistency in decision making and avoids public scrutiny. Ms Lee concluded by stating that arbitration risks the foundations of insurance, where fairness, mutual trust and the promise of compensation after an insurable event should be preserved.

In response, Mr Chan defended the suitability of arbitration by pointing out that partisan arbitrators who favour insurers risk their reputations and future appointments, particularly in the face of increasingly tight institutional rules. By contrast, the tenure of judges limits accountability, because judges generally have their positions till retirement. Further, the resources of an insurer can have a similar impact in litigation, where delay and other strategies can limit a policyholder’s relief. But unsatisfied customers can always switch insurers.

As for limited legal development, this is not a problem for liability insurance, where bypassing the courts has little negative effect on the public interest. Mr Chan referred to the use of the “Bermuda Form” in response to asbestos litigation, applying New York law to the contract and English law to the arbitration agreement. This avoided the problem of jury-awarded damages that was pricing insurers out of the market, leading to under-insurance. Here, arbitration came to the rescue. However an audience member made the point that a lot of Bermuda Form arbitration is spent on contractual interpretation, all of which remains confidential and cannot assist future parties. This led to a wider audience-led discussion on the importance of increasing the anonymizing and publication of arbitral awards where possible.

 

Comments

After an entertaining and engaging debate, the audience had the opportunity to vote once more. It is perhaps unsurprising that the results of the second vote revealed that the number of audience members who agreed with the motion nearly doubled to 42%.

Those who spoke in support of the motion made frequent reference to broader public policy questions, the lack of precedent, biased arbitrators, Warren Buffet and even the protection of the rule of law. Such arguments can easily tug at the heartstrings and their broad, nebulous nature makes them harder to rebut.

Yet the result arguably suggests that arbitration is no less suited to such financial services, private equity or insurance disputes than other mechanisms of dispute resolution, but there are expectations that arbitration must continue to take advantage of opportunities to improve, particularly in respect to efficiency, cost and transparency. As is so often the case, it is not so much whether arbitration is or is not suited to such disputes, but rather “it depends” and should be assessed on a case by case basis.

 

More coverage from Hong Kong Arbitration Week is available here.

More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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UNCITRAL and Investment Arbitration Reform: A Little More Action

Mon, 2019-10-21 02:00

Malcolm Langford

UNCITRAL’s Working Group III on investor-state dispute settlement (ISDS) assembled in Vienna last week to consider a raft of reforms concerning investment arbitration. The fifth session in this process, governments surprised many by finalising quickly a medium-term work plan and commencing deliberations with a pragmatism that has proved often elusive. To be sure, not all states are enamoured with the agenda. Some prefer the current system, others wish its abandonment. However, the working group can boast now that it is able to advance sensitive negotiations with a certain degree of concreteness and consensus. This blog post sums up the legal and policy developments of the week and ends with a reflection on the politics.

 

1. A medium-term plan

The session kicked off on Monday with a discussion of how to sequence the consideration of the five initial reform topics identified in the New York session in April 2019. These themes ranged from a code of conduct and third-party funding to adjudicator appointment, shareholder claims and an advisory centre. By early Tuesday morning, the Chair had secured consensus on a medium-term work plan. Although, it was achieved despite creative attempts to slow the process down, including a proposal for a verbatim reading of all 23 written state submissions.

The medium-term plan foresaw a staggered discussion. Firstly, three topics were slated for immediate discussion: the establishment of an Advisory Centre on International Investment Law; a code of conduct for arbitrators and judges, and third-party funding. The choice of the advisory centre appeared unusual given its late entry into the reform agenda. Nonetheless, it proved a suitable curtain opener given the support for the proposal in the room. Secondly, a set of mostly structural topics were scheduled for the January 2020 session in Vienna. These are the appellate mechanism, a standing multilateral investment court, and the selection and appointment of arbitrators and judges. Thirdly, a grab bag of other issues was pencilled in for the New York session (30 March to 3 April 2020). This includes reflective loss for shareholder claims but also counter-claims, dispute prevention and the overall reform instrument/s.

 

2. Advisory Centre on International Law

After achieving consensus on the work plan, discussion on an advisory centre commenced immediately. State after state took to the floor to announce support, highlighting the paradox that ISDS cases are often more factually complex and lengthier than WTO cases, but only the latter has an advisory centre. Moreover, developing countries consistently lose ISDS cases more often than developed countries and empirical research suggests that one cause is the lack of quality legal assistance.

However, states were divided on the design of a new centre, especially questions such as: Who would benefit? What services would be provided? And how would it be set up? There was a clear consensus that the prime beneficiaries should be low-income countries. However, some states and observers proposed that the centre help also small and medium enterprises (SMEs) and middle income states under certain conditions (e.g., through limited or partly remunerated support). The likely extent of resources for the centre hung heavily over the discussion of what services would be provided. States agreed on the importance of pre-dispute technical assistance and capacity building, while some were adamant that the centre should also provide representation. The advisory centre was envisaged as an intergovernmental body but with sufficient independence to ensure legitimacy, and  could be funded through contributions by members states and user fees where appropriate. The UNCITRAL Secretariat was asked to begin preparatory work on a full proposal.

 

3. Code of Conduct

The discussions on the code of conduct attracted an equally strong degree of consensus with an emphasis on establishing a ‘binding code’. This implied a focus on developing rules rather than guidelines, and precipitated a certain degree of concreteness in some proposals. However, states were partly divided in how they envisaged the code’s architecture. Some championed a single rulebook for all arbitrators and eventual judges in ISDS. Others contended that structural reforms such as a court or appellate review would solve some or many of the current problems with arbitrator conduct, necessitating a less demanding or different code. For example, a standing judiciary and rigorous pre-appointment procedures could solve independence-based concerns with double hatting and impartiality concerns with issue conflicts. States were also unclear on who would be covered, with proposals for a separate code of conduct for counsel. To complicate matters further, ICSID is further ahead in developing a declaration of ethics, and the eventual product is likely to be influenced significantly by their deliberations and vice-versa.

States were largely in agreement on what themes should appear in a code of conduct. This included a relatively high degree on consensus on the need for detailed disclosure requirements by arbitrators as well as concrete rules to ensure efficiency. Some states mooted a limitation on the number of cases. However, there was a clear divide on other aspects. The most notable concerned ‘double hatting’, whereby arbitrators act as counsel in other ISDS cases. Some delegates expressed support for a complete ban on arbitrators acting as counsel, such as can be found in the code for the Court of Arbitration for Sport (S19). Others thought it should extend to all other ISDS roles, such as expert witness and advisors (with Chile pointing to its 2017 FTA with Argentina). Yet, others called for transitional rules such as a transition period or a ceiling on the number of cases. This could allow more young, female and non-Western nationals to transition more easily from counsel work into arbitral work.

Significant time was also devoted to enforcement mechanisms. Some states emphasised the importance of reputational sanctions, such as transparent and public listings of non-compliance. Others pointed to the need for material incentives, such as loss of fees. The UNCITRAL Secretariat will now proceed to develop a proposal in collaboration with ICSID.

 

4. Third-party funding

 The final topic for reform was third-party funding. The mere definition of the phenomenon bedevilled the earlier discussion in New York, and this partly continued in Vienna. Did third-party funding include contingency fee arrangements for law firms? Did it cover non-profit forms of support, including to states? There were three camps. Firstly, states concerned mostly with the potential for conflict of interest with arbitrators defined third-party funding narrowly and advocated light-touch regulation. Secondly, states worried about perverse incentives – such as unwillingness to settle – defined it more broadly and advocated stronger regulation. Finally, those that viewed third-party funding as a generator of frivolous claims and inconsistent with the raison d’etre of investment treaties (promotion of investment) were more inclined to adopt a wide definition and call for prohibition.

The result was a series of reform proposals scattered along a spectrum. Some called for ‘prohibition’ with exceptions for impecunious claimants that lacked access to justice. Access to third-party funding would be conditional though on claims not being frivolous and speculative and funders not possessing a portfolio targeted at particular states. The majority of states favoured ‘regulation’, citing contractual liberty and access to justice, especially for SMEs. The key for these states was disclosure. However, there was disagreement over the necessary breadth of disclosure, especially the terms of the funding agreement.

Appropriate and proportionate sanctions were advocated. Some states pushed for strong material penalties such as payment of legal costs and annulment of cases, while some observers and states noted the unintended consequences of draconian rules, such as pushing the practice further underground. Indeed, the lack of transparency around contemporary third-party funding also led the Chair to call for all actors to share more data with the Secretariat or the ISDS Academic Forum on the frequency of use, the amount of funding, the reasons for funding, and how often it benefits SMEs. The Secretariat was asked to work with a broad and flexible definition of third-funding funding, develop a suite of options for regulation and control, and consider a separate code of conduct for funders.

 

5. Damages and Multilateral Convention Procedural Reform

 The substantive discussions closed on Thursday with a brief consideration of two additional issues. The first was damages. States such as Nigeria and Pakistan noted their experience in facing multi-billion dollar ISDS awards and questioned the consistency and justification for different valuations methods. The issue will be returned to in April 2020 and there is high likelihood that the working group consider procedural reforms to ensure, at least, greater consistency in damages calculation. Likewise, there was a brief discussion of an eventual single instrument, a so-called Multilateral Convention on Procedural Reform, which will be discussed in forthcoming EJIL:Talk! blogs by Anthea Roberts and Taylor St. John. The idea is that states could opt into certain reforms but not be required to swallow the whole package. Significant time will be devoted to this eventual reform structure in April 2020.

 

6. Plenary politics

Turning to the politics, previous WGIII sessions have been dominated by a mix of confrontation with cooperation. Last week proved more conciliatory. Only a handful of states sought to put spokes in the wheels of progress and the discourse of both states and observers was more moderate, with fewer charged, direct and open attacks. The reason is most likely the focus on concrete topics, as dissent was channelled into substance rather than form. It may have also been the assemblage of personalities that were present this time. Yet, whether this bonhomie survives the more contentious topic of a multilateral investment court in January remains to be seen. Moreover, some of the nit-picking on the adoption of the medium-term plan and sessional report spells some danger for a speedy review of draft treaty text.

There were two other political developments of note. First, continuing a trend, states from the Global South became significantly more active. They made longer and considered interventions on virtually every topic under consideration. Sometimes they mobilised in coalitions – e.g. when eight African states joined a common procedural statement with the European Union – but mostly articulated their own independent positions on a range of topics. The result is the emergence of subtle majority coalitions on distinct issues that partly complicates attempts at broad categorisations. Moreover, states such as Brazil and South Africa, which seek a more paradigmatic move away from ISDS, engaged more fully in various incrementalist and systemic reform discussions this session as they bide their time to speak to their own proposals such as dispute prevention in April 2020.

Second, the voice of investors and practitioners was more strongly heard in the room compared to the last few sessions. A range of associations representing companies and counsel made submissions. Although these groups varied considerably in their emphasis. The Practitioner’s Forum and ITA offered support to the advisory centre; others offered rigorous defences of third-party funding on the basis it provided access to justice; and others cautioned on moving too quickly to ban double hatting given the potential side effects on diversity. One group EFILA organised a side event primarily devoted to highlighting the dangers of a multilateral investment court and the virtues of the current system.

However, other long-standing observers moved to place more focus on provision of research and written submissions. The ISDS Academic Forum launched seven papers on the WGIII topics, the university centre CCSI and civil society organisations IIED and IISD made four joint written submissions, and the Permanent Court of Arbitration secretariat sought to provide statistics on the murky topic of third-party financing. Pluricourts provided statistics on the topics at hand and was asked to follow up with statistical analysis on new topics.

 

7. Conclusion

Channelling Elvis Presley, the UNCITRAL WGIII rapporteur at the close of the previous New York session noted the importance of ‘a little less conversation, a little more action’. The WGIII session last week represented a clear maturing of the ISDS reform process. States were able to identify both areas of agreement and disagreement such that the Secretariat could begin to draft reform options and even treaty text. While states have only been hastening slowly until now, they displayed for a few days at least a potential to engage in a little more action.

 

Malcolm Langford, Professor of Law, Unviersity of Oslo. He attends UNCITRAL Working Group III as Chair of the ISDS Academic Forum and a representative of Pluricourts, University of Oslo. He writes here in his independent academic capacity.

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Interviews with Our Editors: In Conversation with Joe Liu of Hong Kong International Arbitration Centre

Sat, 2019-10-19 18:00

Benson Lim (Associate Editor) and Kiran Nasir Gore (Associate Editor)

Joe is the longest-serving counsel in HKIAC, having been at HKIAC since January 2014. He holds LLMs from New York University and London School of Economics and Political Science. His previous stints included private practice as well as that in SIAC. In January 2019, he was appointed as the Deputy Secretary-General of HKIAC.

Our Blog is providing live coverage of HK Arbitration Week for the second year running. It is therefore apt that we kick off our coverage with our interview with Joe on the same day that HK Arbitration Week 2019 kicks off for its 8th edition.

 

  1. Tell us about how you started in arbitration. What advice do you have for young practitioners seeking to chart a path in arbitration?

I started my career at the Singapore International Arbitration Centre (“SIAC”) where I administered cases under the SIAC Rules or UNCITRAL Rules. I then did a legal internship at the Permanent Court of Arbitration and later worked as part of the Global Arbitration Group at Allen & Overy in Hong Kong. I joined HKIAC in January 2014.

There are many ways of planning a career in arbitration. Interning or working in a junior role at an international arbitral institution or within the arbitration group of a reputable law firm, or working as tribunal secretary to an experienced arbitrator, are all good ways to get into the arbitration circle. I would encourage young practitioners to gain experience in arbitral institutions, private practice and as tribunal secretary if possible, as they all offer different and valuable perspectives and help young practitioners better understand the practice of arbitration. Making yourself known and recognised in the market is also critical. To achieve that, young practitioners should actively participate in networking events, publish articles and prepare themselves well for every public speaking opportunity.

 

  1. In 2018, HKIAC handled 265 new arbitrations where more than 70% of the cases had at least one party not from Hong Kong. The total amount in dispute was USD6.7 billion. In your view, how would you describe HKIAC’s global standing amongst other arbitration institutions?

HKIAC is a leading arbitral institution with its unique strength and focus. Based on the Queen Mary and White & Case survey, HKIAC has been voted among the top four arbitral institutions in the world since 2015. I think there is no question about HKIAC’s global reputation and its experience in dealing with international commercial disputes. HKIAC has a multi-national and multi-lingual secretariat, guided by strong governing bodies, to handle a large amount of international arbitrations with a proven record of enforcement.

Compared with other international arbitral institutions, HKIAC has unrivalled experience in disputes involving mainland Chinese parties. It is the institution of choice where a mainland Chinese party and a non-mainland Chinese party are looking for alternatives to their home turfs. The Hong Kong-Mainland China arrangement on court-ordered interim measures in aid of arbitral proceedings (the “Arrangement”) further strengthens HKIAC (and Hong Kong)’s position to handle arbitrations between these parties.

HKIAC is also rapidly gaining traction in Russia due to its recent status as a permanent arbitral institution in Russia. HKIAC is the first non-Russian arbitral institution to acquire such a status and is now able to administer a range of Russian-related disputes under Russian law which cannot be submitted to institutions without the status.

 

  1. What do you think will be the key challenges to HKIAC in the next 5 years? What is HKIAC doing to be future-proof?

Each institution has its own challenges. I think one challenge for HKIAC is to address untrue perceptions. One of them concerns the neutrality of HKIAC in disputes between Chinese and non-Chinese parties. Having worked at HKIAC for over five years, I can confirm that HKIAC has acted impartially and independently in all cases and there have been no instances in which HKIAC’s operations are subject to external interferences. I think another challenge is the perception of HKIAC being merely a Hong Kong arbitral institution. In my view, HKIAC is more than a Hong Kong institution. It is well-placed to handle disputes anywhere in the world with or without connections with Hong Kong or China.

HKIAC has an extensive outreach programme to raise awareness of, among other things, who we are and what we do. I believe dialogue and information are effective means to tackle untrue perceptions. For those who continue to hold these perceptions, I hope they are willing to have a direct dialogue with us or try to use HKIAC’s services and let the experience speak for itself.

 

  1. This year, Hong Kong has seen protests which were initially against the extradition bill evolve quickly into protests arising out of broader political sentiments from its people. A newspaper editorial described Hong Kong’s current situation as Hong Kong being once “again at a crossroads”. With that backdrop, do you see arbitration in HK at the crossroads? Do you think there are broader challenges to the future of arbitration in HK?

Hong Kong has faced other challenges in the past. However, the city showed extraordinary resilience to overcome those challenges and remains as a global financial centre and a regional legal hub. Hong Kong has recently climbed into the top three in World Economic Forum’s competitiveness rankings and its judicial independence continues to be ranked among top ten in the world.

Hong Kong has a strong legal system and it remains so despite political developments. This is also true in respect of arbitration in Hong Kong. Protests do not affect Hong Kong’s arbitration framework or judicial support for arbitration, or the way how arbitral proceedings are conducted in Hong Kong. I believe every challenge is an opportunity for Hong Kong to demonstrate itself as a tried and tested venue for resolving disputes.

Looking ahead, I think there are more opportunities than challenges for Hong Kong arbitration. For example, the Arrangement provides a strong incentive for businesses to choose Hong Kong as the seat of arbitration for disputes involving mainland Chinese parties. I anticipate more initiatives to be introduced to make Hong Kong a more attractive place to arbitrate in the coming years.

 

  1. ICC’s Alexis Mourre suggested an international accreditation procedure for arbitral institutions at the Atlanta International Arbitration Society’s Hendrix Lecture. In his view “flawed institutions” will taint the legitimacy of the arbitration institution system as a whole. What do you personally think of his suggestion?

If “an international accreditation procedure for arbitral institutions” refers to “institutional self-regulation through a common framework such as IFCAI” mentioned in Mr. Mourre’s speech, I think it is a well-intended suggestion but may face several issues of implementation like those associated with other proposals of creating a global standard by a soft law making body.

The first difficulty is how to define the “common framework”. Every jurisdiction has its own framework on the establishment and functions of an arbitral institution. Such a framework may differ significantly from one jurisdiction to another and the differences may be well justified given the legal and cultural environment of each jurisdiction. Therefore, defining a common framework that is acceptable to most, if not all, jurisdictions may be a challenge.

The second difficulty is what happens if the common framework is not complied with. If there is no meaningful means to enforce a common standard at international and national levels, it would have limited effect on the issue of “flawed” institutions.

 

  1. Do you think HKIAC’s Panel of Arbitrators will one day include an AI arbitrator?

I am open to consider all possible means to enhance efficiency and cost-effectiveness of international arbitration including the use of technology.

With respect to the use of artificial intelligence (“AI”), I have some scepticism towards the idea of replacing human arbitrators with AI but I find it easier to accept that it may be useful for AI to undertake certain work on behalf of an arbitral tribunal, acting effectively as tribunal secretary.

If one day AI proves to be a feasible and reliable tool to facilitate the conduct of an arbitration, I do not think it would be a bad idea to allow AI to be made available on a panel or otherwise as an option for parties to agree upon to undertake appropriate tasks as tribunal secretary or even arbitrator.

 

  1. Finally, it feels from our introduction like you have been with HKIAC for a lifetime! Tell us your most surreal experience ever at HKIAC or describe the most intriguing person you met whilst at HKIAC.

My most surreal experience at HKIAC is to see people using the rules and services I helped develop.

More coverage from Hong Kong Arbitration Week is available here.

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

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The Consequences of the Non-Disclosure of Conflict of Interest on the Enforceability of Awards: The German Stance

Sat, 2019-10-19 01:00

Viktoria Schneider and Nils Schmidt-Ahrendts

Arbitrators and tribunal-appointed experts are at all times obliged to disclose any and all circumstances that might give rise to doubts as to their impartiality and independence. This is one of the most fundamental duties to safeguard the legitimacy of arbitration. Yet, what are the consequences if they fail to do so?

This question has kept two German courts, the Higher Regional Court Karlsruhe (‘OLG Karlsruhe’) and the German Federal Court of Justice (‘BGH’), busy for six years, but now the question appears to be appropriately solved – better late than never!

 

Background

The DIS arbitration, which triggered the above-mentioned court proceedings, started as early as 2010 and it involved two parties that were in dispute as to the root cause of the defects of their jointly manufactured products.

In 2011, the DIS tribunal, with the consent of the parties, appointed a publicly certified expert to examine this issue. In 2013, based on the expert’s report, the DIS tribunal issued its award in which it held that the defects were 100% caused by one of the parties.

Still, in 2013, the defeated party requested the annulment of the award before the OLG Karlsruhe. Among others, it argued that the expert on whose report the arbitral tribunal had based its decision had failed to disclose that his direct superior at the expert company had previously been working for more than 20 years for the other party and only recently started to work for the expert company. Moreover, it claimed that it had discovered this former working relationship only after the award had been rendered. The winning party, in turn, opposed the request for annulment by applying for a declaration of enforceability instead.

What followed were joint annulment/enforcement proceedings that ultimately produced not one, but four German court decisions, two by the OLG Karlsruhe and two by the BGH, on the key legal question: What are the consequences for the enforceability of the award if an arbitrator or tribunal-appointed expert fails to disclose circumstances which may call into question their independence or impartiality?

 

OLG Karlsruhe: Annulment Only in Exceptional Circumstances1)OLG Karlsruhe, Decision of 18 December 2015, 10 Sch 12/13. jQuery("#footnote_plugin_tooltip_4878_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In December 2015, after two years of proceedings, the OLG Karlsruhe decided the issue for the first time – it declared the award enforceable and rejected the request for annulment.

In line with a judgement of the BGH from 19992)Bundesgerichtshof, Judgement of 04 March 1999, III ZR 72/98. jQuery("#footnote_plugin_tooltip_4878_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the OLG Karlsruhe argued that, in light of the res judicata nature of an award, any failure to disclose that becomes known only after the award is issued, warrants its annulment only in very exceptional circumstances, i.e. in a case of obvious and severe bias. The OLG Karlsruhe held that this was not the case here, as only the superior and not the expert himself had worked for a party and the superior’s involvement in the expert report was unclear.

 

BGH: Overturning Former Jurisprudence3)Bundesgerichtshof, Decision of 02 May 2017, I ZB 1/16. jQuery("#footnote_plugin_tooltip_4878_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In May 2017, after reviewing the OLG Karlruhe’s decision, the BGH set it aside and remitted the case to the OLG Karlsruhe.

The BGH expressly relinquished its case law from 1999 on which the OLG Karlsruhe had relied. It held that any failure to disclose, regardless when it becomes known, means that the arbitration has not been conducted in accordance with the German lex arbitri and, thus, warrants annulment if it affected the award. According to the BGH, such effect is deemed to exist if the non-disclosed circumstances would have been sufficient to successfully challenge the arbitrator or expert during the arbitration, which is the case if those circumstances give rise to justifiable doubts as to their impartiality and independence. The res judicata principle does not justify retaining the previous threshold of ‘obvious and severe’ bias because an award will only become res judicata once declared enforceable.

However, based on the (undisputed) facts available to the BGH, it could not decide whether there had even been a failure to disclose, let alone one with the required effect on the award. Thus, it remitted the case to the OLG Karlsruhe requesting it to reopen the case in order to establish these, in the BGH’s view, material facts and render a new decision.

 

OLG Karlsruhe: Annulment Only in Case of Justifiable Doubts4)OLG Karlsruhe, Decision of 01 June 2018, 10 Sch 12/13. jQuery("#footnote_plugin_tooltip_4878_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As requested by the BGH, the OLG Karlsruhe reopened the case. By examining the expert and his superior as witnesses, it established that there actually had been a failure to disclose. When rendering his report, the expert had been aware of his supervisor’s previous work position. However, during the 20 years in which the superior had worked for one of the parties, he had not been involved with the product in dispute. Further, in line with the expert company’s internal rules, the superior had not influenced the expert’s substantive findings in any way, but had for organizational reasons merely signed the letter by which the report was transmitted to the arbitral tribunal and the parties. On this basis, the OLG Karlsruhe held that neither the mere failure to disclose nor the non-disclosed facts give rise to justifiable doubts as to the expert’s impartiality and independence or otherwise justify annulment. Thus, it again declared the award enforceable.

 

BGH: A Differentiated Approach5)Bundesgerichtshof, Decision of 31 January 2019, I ZB 46/18. jQuery("#footnote_plugin_tooltip_4878_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

After yet another legal review, the BGH upheld the OLG Karlsruhe’s decision and, thus, declared the award enforceable for good.

In its decision, the BGH clarified under which circumstances the failure to disclose warrants the annulment of an award.

First, a mere failure to disclose, i.e. irrespective of the non-disclosed facts, only justifies an annulment if already such failure in itself shows the arbitrator’s or tribunal-appointed expert’s bias. In the BGH’s view, this is only conceivable in case of intentional concealment.

Second, in the absence of such intention, enforceability or annulment depends on an ex post analysis by the competent state court as to whether the arbitral tribunal would have decided that the non-disclosed facts give rise to justifiable doubts, if they had been duly disclosed already during the arbitration proceedings. In other words, in the BGH’s view, the standard to assess the enforceability or annulment of an award is, when dealing with a failure of disclosure, the same as the standard to challenge an arbitrator or expert during the arbitral proceedings.

This assessment is to be conducted from a ‘subjective-objective perspective’. Though the court must adopt the subjective perspective of the challenging party, it must thereby assume that, when confronted with the non-disclosed fact, this party would objectively appreciate all relevant facts in order to decide whether justifiable doubts exist. All relevant facts are not only the unduly concealed facts, i.e. the facts which the arbitrator or expert should, but did not disclose. Rather due regard has to be paid to all connected circumstances, i.e., circumstances that the parties and/or the challenged arbitrator/expert would have reasonably disclosed during the ‘challenge procedure’.

Thus, the BGH approved that the OLG Karlsruhe had examined the expert and his superior as witnesses.

 

Concluding Remarks

The fact that it took the claimant six years to enforce an award that had been issued after three years of arbitration, shows that the German ‘two-instance’ enforceability/annulment regime is not ideal and potentially in need for reform (although the present case is certainly an extreme scenario). Yet, more importantly, the two BGH decisions provide important guidance on the handling of non-disclosure cases.

On the one hand, annulment may well be a consequence of a failure of disclosure. Hence, any arbitrator and expert are well-advised to disclose rather too much than too little.

On the other hand, annulment is not an inevitability. Only in the extreme case of intentional non-disclosure, the non-disclosure in itself warrants annulment. In all other cases, the competent state courts are requested to do precisely what, in the BGH’s view, any arbitral tribunal or arbitral institution is required to do when deciding on challenges. Faced with the disclosure of a fact potentially impairing an arbitrator’s/experts’ independence and impartiality, they must establish, if required by taking evidence, all circumstances connected to the non-disclosed fact and submit them to careful appreciation from the perspective of a reasonably thinking challenging party.

Both BGH decisions are well in line with the IBA Guidelines on Conflict of Interest (2014), which also require a reasonable balance between the parties’ right to comprehensive disclosure and the defence of formalistic challenges. Hence, any party choosing Germany as the place of arbitration can be assured that – although it sometimes may take a while – it is still in the BGH’s truly ‘safe hands’.

References   [ + ]

1. ↑ OLG Karlsruhe, Decision of 18 December 2015, 10 Sch 12/13. 2. ↑ Bundesgerichtshof, Judgement of 04 March 1999, III ZR 72/98. 3. ↑ Bundesgerichtshof, Decision of 02 May 2017, I ZB 1/16. 4. ↑ OLG Karlsruhe, Decision of 01 June 2018, 10 Sch 12/13. 5. ↑ Bundesgerichtshof, Decision of 31 January 2019, I ZB 46/18. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Navigating Through Stormy Seas: The UK Supreme Court Hears the Micula Case

Fri, 2019-10-18 01:01

Ivaylo Dimitrov

Introduction

With less than a month to go before the latest EU-UK divorce date, the UK Supreme Court resumed its hearing in Micula et al. v Romania 2018/0177, relating to the enforcement of the widely discussed ICSID award against Romania. With the UK grappling with its future relationship with the EU, it is interesting timing for the UK’s highest court to consider the legal and policy intricacies arising from the intersection between the country’s domestic legal order and its EU and other treaty obligations. While separated by arguments and perspectives, the Micula brothers, Romania, and the EU have combined to serve up a host of delicate questions for the court to navigate.

 

The Micula Saga

Much has been written on the Micula saga, on this Blog particularly (see here). In a nutshell, after 8 years of ICSID arbitration proceedings in case ARB/05/20, brothers Viorel and Ioan Micula (the “Miculas”) obtained a EUR 330 million (post-interest) award against Romania, which they have been trying to enforce ever since. The enforcement entered into a new stage when, in 2015, the European Commission (“Commission”) determined that by paying the award Romania would breach EU rules on State aid (“Commission Decision”), effectively barring the State from honouring its obligations under the award. The Commission Decision also required Romania to recover any amounts already paid under the award, with interest, and found Miculas – together with the other claimant companies – jointly liable to repay the State aid any of them had received. Notwithstanding that decision, the Swedish investors continued to seek enforcement of the award in a number of jurisdictions, including the United States, Sweden, and the UK.

 

Recent Background Developments

The enforcement saga has been particularly active recently, with key events occurring in 2019. An outline of these developments helps to put the UK proceedings in context.

Firstly, in January 2019, the investors’ homeland court in Sweden – the Nacka District Court – declined to enforce the award. The Swedish court decided against allowing enforcement against Romania, ruling that this would sidestep the Commission Decision and so violate the principle of sincere cooperation. The Commission filed a brief urging the court to refuse enforcement.

Secondly, in June 2019, the EU General Court quashed the Commission Decision. The EU General Court found that the relevant facts predate Romania’s accession to the EU and that the Commission lacked competence to apply its Article 108 TFEU powers retroactively in this way. Further, the EU General Court found that the Commission‘s decision to classify the award of compensation as an advantage and aid within the meaning of Article 107 TFEU was unlawful as the facts underlying the award had occurred prior to EU law‘s entry into force in Romania.

Finally, in September 2019, the US District Court for the District of Columbia granted a petition to confirm the award in the US. Despite the Commission’s amicus curiae brief relying inter alia on the Achmea judgment to argue that the Miculas’ petition should be denied, the DC court declined to refuse confirmation. Romania instantly appealed the District Court’s decision before the US Court of Appeals for the DC Circuit.

 

Overview of the UK Proceedings

The UK enforcement proceedings started in the autumn of 2014 when the investors obtained a Registration Order. Under Section 2 of the UK Arbitration (International Investment Disputes) Act 1966, for the purposes of execution, a registered ICSID award has the same force and effect as a judgment of the High Court of England and Wales.

Following the Commission Decision, Romania filed a set aside application with the Commercial Court (a sub-division of the High Court). As an alternative to the set aside request, the State also asked the court to vary or stay the registration. In September 2016, the Miculas cross-applied for security. On 20 January 2017, the Commercial Court dismissed the set aside application but granted a stay of enforcement pending the outcome of the EU General Court proceedings for the annulment of the Commission Decision. The investors’ cross-application for security was dismissed.

On 27 July 2018, the UK Court of Appeal dismissed the Miculas’ appeal against the Commercial Court judgment in relation to the stay. However, the court granted the requested security and ordered Romania to provide GBP 150 million as a condition of the stay. The three Court of Appeal justices had different views on the interplay of: the enforcement regime under the ICSID Convention; the UK’s obligations under EU law; and the UK courts’ powers under the 1966 Act. However, while their reasoning differed slightly, the justices formed a 2 on 1 majority on the ruling that it is within the powers of the domestic court to temporarily stay the execution of the award pending the outcome of the proceedings in the EU General Court and that this is consistent with the ICSID Convention’s object and purpose.

Following the decision of the EU General Court in June 2019, Phillips J of the High Court issued a further order extending the stay pending the CJEU determination and ordering Romania to provide GBP 150 million security by 17 October 2019.

The UK Supreme Court hearing started on 18 June 2019 and continued for three days on 7-9 October 2019.

 

Issues Before the Supreme Court

There are two main issues before the UK Supreme Court: first, whether the High Court has the power to stay the enforcement of an ICSID award; and, second, where an ICSID award against an EU Member State has been stayed pending proceedings before the EU courts, whether the duty of sincere cooperation precludes an English court from ordering the State to provide security.

 

Parties’ Submissions

The Miculas

Counsel for the Miculas built their case on the fact that the ICSID Convention allegedly offers a self-contained system of review to the exclusion of any other remedies, and that the Micula award has already survived ICSID annulment proceedings.

Consequently, according to the Miculas, the ordered stay is against the object and purpose of the ICSID Convention as the Convention precludes further challenges and stays of enforcement.

The Miculas further argued that:

  1. The stay granted by the Court of Appeal is not a temporary stay of execution, as argued by Romania, but a stay of enforcement, which the court did not have the right to make under domestic law.
  2. There is no conflict between the UK’s duties under EU law and the enforcement of the award. Whether or not the ICSID Convention imposes obligations toward third countries is not a question of EU law. Even if there is a conflict, this is a matter of domestic law – it cannot be implied that the duty of sincere cooperation requires the English courts to wait for the CJEU’s ruling, especially since the obligations under the ICSID Convention are owed not only to Sweden as the investors’ host State, but towards all Contracting Parties.
  3. The Commission Decision has been annulled and the Commission has not sought interim measures staying the decision of the EU General Court. Therefore, there is no EU law duty that should be taken into account by the English court.

Romania

Romania, on the other hand, argued that the stay is essentially a temporary case management measure pending the final determination of the EU proceedings by the CJEU. Romania’s intention is to deal carefully and reasonably with that temporary measure.

Furthermore, Romania submitted that many other EU Member States have halted the enforcement of the award, including, of course, Sweden, which is the investors’ home country. If the UK court now decides otherwise, this would deprive the decisions of the other Member States courts of practical value. This, according to Romania, would not be sincere cooperation, but quite the opposite.

Regarding the annulment of the Commission Decision by the EU General Court, Romania’s case is that nothing has changed materially. The EU General Court’s conclusion that EU law does not apply has an interim character and there is a realistic possibility of its reversal in the second instance proceedings. Therefore, the risk of conflict between the UK’s obligations under EU law and the ICSID Convention still remains and requires the continuation of the stay until a final determination by the CJEU.

The Commission

The Commission’s intervention supported Romania’s case and concentrated mainly on the EU General Court judgment. The Commission argued that, regardless of the annulment of the Commission Decision, the UK’s obligations under EU law, and the duty of sincere cooperation specifically, are ongoing.

Counsel for the Commission also argued that, according to the EU General Court’s judgment and contrary to the Miculas’ submissions, the Commission has competence over Romania’s post-accession conduct. The judgment could even be considered an invitation to for the Commission to reassess the matter. Further, the Commission has good prospects to win the appeal reaffirming the legal force of its Decision.

 

Concluding Remarks

While acknowledging that its ruling is long-anticipated, the Supreme Court noted it could not guarantee a judgment before 31 October 2019. This raises the intriguing prospect of a Supreme Court ruling on the scope and substance of the UK’s EU law obligations at a point in time where such obligations have been ended as a result of a “no deal” Brexit.

Nevertheless, as well as this interesting timing, the legal and political ramifications of the Supreme Court’s decision are significant beyond even the wide margins of the Miculas’ dispute with Romania. The Court will have to carefully weigh a number of variables and possible consequences. It remains to be seen whether the UK Supreme Court’s decision in the Micula case would be a harbinger of how the post-Brexit dialogue between UK and EU courts will shape.

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The case for an Advisory Centre on International Investment Law

Thu, 2019-10-17 05:00

Karl Sauvant

In his post of 30 August 2019, Pablo Pérez-Salido discussed the proposal at UNCITRAL’s Working Group III for the establishment of an Advisory Centre on International Investment Law (ACIIL). This post seeks to make a case for such an Advisory Centre.1)This post is based on Karl P. Sauvant, “An Advisory Centre on International Investment Law: Key Features”, prepared for the Academic Forum on ISDS and available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3450919#. jQuery("#footnote_plugin_tooltip_4606_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4606_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It complements the excellent Secretariat document on the same subject, which is the basis of the discussions in the Working Group III that began on 15 October 2019. More specifically, the present post makes three points on this subject, relating to the need for such a Centre; the scope of its work; and the way forward.

 

The need for an ACIIL

We know that the number of ISDS cases is now over 1,000, and we also know that the potential for many more cases is very high, among other things because the number of international investors is very high (well over 100,000), the number of foreign affiliates is very high (well over 1 million) and many of the 3,000-plus IIAs contain ISDS provisions.

At the same time, we know furthermore that there are many under-resourced developing countries that neither have the human resources to defend themselves adequately in international investment disputes, nor do they have the funds to hire international law firms to do so.

Hence, establishing an Advisory Centre on International Investment Law would be very desirable. It could be an independent international institution tasked with assisting under-resourced developing countries in defending themselves adequately in international investment disputes. The Advisory Centre on WTO law could serve as a precedent and model.

Establishing such a Centre would level the playing field and provide de facto access to justice to under-resourced developing countries. It would also strengthen the legitimacy of the international investment regime. (Establishing an Advisory Centre is independent from other needed reforms of the international investment regime.)

 

The scope of work of an ACIIL

The core competency of an Advisory Centre should be to represent, together with lawyers from the respondent States, under-resourced developing country respondents in international investment disputes and the immediate preparation of such disputes. There are three reasons for this focus:

  • First, while technical assistance is required across a wide range of issues related to the international investment regime, such assistance is available in a number of areas from both international organizations and other institutions. An example concerns trainings about issues that are addressed in international investment agreements. It would indeed be desirable to avoid duplicating the work of other organizations.
  • Second, there is currently no institution that provides assistance in the representation of respondents in international investment disputes—under-resourced developing countries are left entirely on their own if and when they face disputes. In other words, there is a real gap in the international investment regime that needs to be filled.
  • The third reason for which the core competency of an Advisory Centre should be to help developing countries to defend themselves adequately in international investment disputes is that—as is well-known—conducting such disputes is already very costly. Adding additional responsibilities to the mandate of a Centre might risk to overload the Centre’s mandate and, therefore, might risk making the establishment of the ACIIL so expensive that the funds cannot be raised to bring it into existence. (Of course, nothing would prevent States from widening the mandate of the Centre once it is up and running, in the light of experience gained.)

 

The way forward

Maybe the deliberations of Working Group III could benefit from an informal inter-sessional meeting that examines the many technical issues related to the establishment of an Advisory Centre. It could be helped in this work by the detailed scoping study being finalized by the CCSI for the government of the Netherlands. Perhaps such an event could be organized by interested countries and be held in a developing county. The outcome of such a meeting could then help the Working Group to arrive at a considered understanding of the issues involved.

Beyond that, and as a preparatory step, the UNCITRAL Secretariat—or the Academic Forum—could perhaps organize a webinar for interested government representatives to kick off the technical discussions.

In summary, I think there is a distinct need for establishing an ACIIL; it should have a clear focus on helping under-resourced developing countries in defending themselves adequately in international investment disputes; and it would be desirable if UNCITRAL’s Working Group III began as soon as possible the examination of the technical issues involved.

Establishing an Advisory Centre would close a real gap in the international investment regime; it would level the playing field for under-resourced developing countries, thus providing them with de facto access to justice; and it would strengthen the legitimacy of the international investment regime.

References   [ + ]

1. ↑ This post is based on Karl P. Sauvant, “An Advisory Centre on International Investment Law: Key Features”, prepared for the Academic Forum on ISDS and available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3450919#. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Arbitrators’ Conflict of Interest: An Egyptian Perspective

Thu, 2019-10-17 03:00

Ibrahim Shehata

Introduction

An ongoing discussion in the world of international arbitration concerns the conflict of interest of arbitrators and how such issue should be addressed. In this regard, the Egyptian Court of Cassation has very recently enriched this discussion by evincing its perspective on this matter, particularly, with respect to the standard of impartiality and independence of arbitrators, and the parameters of the duty of disclosure of arbitrators.

 

Egyptian Courts’ Perspective on Arbitrators’ Conflict of Interest 

To deliver the full picture regarding this discussion in Egypt, we have to begin with the Cairo Court of Appeal’s1)Cairo Appeal Challenge No. 29/ Judicial Year No. 131, Hearing Dated 4 August 2014. jQuery("#footnote_plugin_tooltip_1213_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1213_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); – quite interesting – judgment in a different case. In 1998, the challenged arbitrator was a member of an arbitral tribunal. However, the arbitral tribunal in this case did not issue an award. This was because the competent court2)The competent court means the court referred to under article (9) of the Egyptian Arbitration Law, which would be either (a) Cairo Court of Appeal in case of International Arbitration; or (b) Territorially competent Court of Appeal in case of Domestic Arbitration. jQuery("#footnote_plugin_tooltip_1213_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1213_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); had issued a judicial order terminating such arbitral proceedings for exceeding the time limit for rendering arbitral awards under the Egyptian Arbitration Law. This order was based upon article 45 (2) of the Egyptian Arbitration Law which empowers the competent court to issue a judicial order either: (i) extending the period of time for rendering the arbitral award, or (ii) terminating the arbitral proceedings. All this in case the arbitral tribunal has failed to issue its arbitral award within the time limit prescribed under article 45 (1) of the Egyptian Arbitration Law (i.e., 12 months plus a further extension of 6 months).3)It should be noted that this time limit for rendering arbitral awards does not apply where the parties have agreed otherwise (i.e., chose the rules of an arbitral institution). jQuery("#footnote_plugin_tooltip_1213_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1213_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

More than a decade later, in 2013, the challenged arbitrator became, yet again, a member of another arbitral tribunal that was constituted to review the same dispute between the same parties. This time around, the arbitral tribunal was able to render its award which has prompted the challenging party to file an annulment action before the Cairo Court of Appeal. The challenging party has based its action for annulment on the ground that the arbitrator in question lacked the requisite impartiality and independence under the Egyptian Arbitration Law. The Cairo Court of Appeal, however, refused to annul the arbitral award. The Court made it clear that the duty of disclosure is only required when the arguably suspicious facts are not known to the challenging party. In this regard, the Court held that the fact the two arbitrations were between the same parties and were concerning the same dispute – undoubtedly – evidence the presumed knowledge of the challenging party of such facts and, therefore, the challenged arbitrator was not under any obligation to re-disclose these facts when he accepted the mission for the second arbitration. The Court added that the challenging party, in this case, has waived its right by failing to raise any challenges against the arbitrator in question within the time limit prescribed under the law.4)Supra note 1. jQuery("#footnote_plugin_tooltip_1213_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1213_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Four years later, in July 2018, a contrasting fact pattern was presented to the Cairo Court of Appeal.5)Cairo Appeal Challenge No. 65/ Judicial Year 134, Hearing Dated 22 July 2018. jQuery("#footnote_plugin_tooltip_1213_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1213_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This time around, it was not known to the challenging party before the issuance of the arbitral award that the challenged arbitrator has acted previously as a legal counsel to the other party. The case recitals show that the challenged arbitrator also did not disclose such facts when he officially accepted his arbitration appointment. Yet, the Cairo Court of Appeal decided to reject this ground of annulment on the basis that such facts were presumably known to the challenging party before the issuance of the arbitral award. Therefore, according to the court, failing to object to such appointment before the issuance of the arbitral award has constituted a waiver of this right. In other words, the Cairo Court of Appeal has shifted the burden of proof to the challenging party, whereby the latter is the party under an obligation to prove that he did not know such suspicious facts before the lapse of the time limit prescribed under CRCICA rules for challenging arbitrators.

The Cairo Appeal judgment was further challenged before the Court of Cassation. Consequently, the Cassation Court decided to overrule the Court of Appeal judgment.6)Court of Cassation Challenge No. 18116/ Judicial Year No. 88, Hearing Dated 11 June 2019. jQuery("#footnote_plugin_tooltip_1213_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1213_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Cassation Court began, first, by elaborating the standard of impartiality and independence of arbitrators by stating that:

The arbitrator’s independence and impartiality means that the arbitrator has no implicit, material, or moral relation to any of the parties in a way that affects such impartiality and constitutes a flagrant & imminent threat real danger of bias, or raise justifiable doubts“.

Then, the Cassation Court made it crystal clear that the presumption of knowledge of the challenging party is only created when the challenged arbitrator discloses the relevant suspicious facts at the time of officially accepting his arbitration appointment; not the other way around. Accordingly, if the challenged arbitrator fails to prove that the challenging party already knows these suspicious facts, then it cannot be said that the challenging party has waived its right concerning this ground.

In light of the above, there are three (3) key takeaways, as follows:

  • The Egyptian Court of Cassation has aligned its views with international arbitration best practices when it defined the standard of arbitrators’ independence and impartiality as the one constituting “a real danger of bias”, or raising “justifiable doubts”.
  • The Egyptian Court of Cassation has deemed that the presumption of knowledge of the challenging party of any arguably suspicious facts arises only when the arbitrator in question discloses such facts at the time of accepting his appointment.
  • Egyptian Courts might rely on supporting facts other than the disclosure statement by the arbitrator in question to deduce whether the challenging party was aware of the relevant suspicious facts before the issuance of the arbitral award.

 

Conclusion

It is evident that the Egyptian Courts’ position is very much in line with best international practices when it comes to the issue of arbitrators’ conflict of interest. In the meanwhile, the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration are increasingly used by the parties as well as arbitral institutions in Egypt. However, the author and another notable jurist7)Mohamed Abdel-Raouf, WORLD ARBITRATION REPORTER 2nd Edition (2019), page 26. jQuery("#footnote_plugin_tooltip_1213_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1213_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); were not able to locate any Egyptian courts’ judgments featuring or referring to these guidelines.

The fact that the IBA guidelines are available in Arabic language could be a stepping stone towards promoting their utilization in Egypt and other Arab jurisdictions. However, translation does not always suffice. The IBA has to act more proactively towards endorsing these guidelines through organizing multiple events and roundtables with Egyptian and Arab Judges in that respect. This would immensely support the incorporation of these guidelines in the Egyptian and Arab arbitration landscape.

References   [ + ]

1. ↑ Cairo Appeal Challenge No. 29/ Judicial Year No. 131, Hearing Dated 4 August 2014. 2. ↑ The competent court means the court referred to under article (9) of the Egyptian Arbitration Law, which would be either (a) Cairo Court of Appeal in case of International Arbitration; or (b) Territorially competent Court of Appeal in case of Domestic Arbitration. 3. ↑ It should be noted that this time limit for rendering arbitral awards does not apply where the parties have agreed otherwise (i.e., chose the rules of an arbitral institution). 4. ↑ Supra note 1. 5. ↑ Cairo Appeal Challenge No. 65/ Judicial Year 134, Hearing Dated 22 July 2018. 6. ↑ Court of Cassation Challenge No. 18116/ Judicial Year No. 88, Hearing Dated 11 June 2019. 7. ↑ Mohamed Abdel-Raouf, WORLD ARBITRATION REPORTER 2nd Edition (2019), page 26. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Contents of the Brazilian Arbitration Journal, Volume XVI, Issue 63 (September 2019)

Tue, 2019-10-15 21:00

João Bosco Lee

In this edition of Brazilian Journal of Arbitration, the National Doctrine section presents Gustavo Scheffer da Silveira‘s considerations about the sentencing nature of the arbitrators’ decision on their own jurisdiction, as well as the legal regime to which the arbitral award is submitted. Also, Maria Beatriz Grella Vieira proposes some reflections on the objective arbitrability of disputes involving corporate resolutions composed by the vote of a public entity in its capacity of controlling shareholder of a mixed private-public ownership company. Lastly, Antonio Pedro Garcia de Souza and Raphael Rodrigues da Cunha Figueiredo examine the peculiarities surrounding the figure of the emergency arbitrator and the practical circumstances that make him or her a better alternative to the judiciary (or not).

In the International Doctrine section, Gabriele Ruscalla analyses the evolution of applicability concerning conciliation and mediation in disputes between States and investors.

In the National Judicial Case Law section, André Marini takes note of the decision of the New York State Supreme Court’s appeal division on the application and scope of the controversial doctrine of the manifest disregard of the law and its relation to the review of the merits of arbitral awards.

André Rodrigues Junqueira contributes to the Arbitral Awards section by commenting on the arbitration award of the well-known Libra Case, which dealt with claims subject to port sector regulation and the legal regime applicable to legal entities governed by public law.

Turning to the General Information section, Gabriela Barcellos Scalco reports the launch of the Brazilian Arbitration Committee (CBAr) library in the city of Porto Alegre; Egon Bockmann Moreira and Elisa Schmidlin Cruz present notes regarding Ordinance AGU No. 320/2019 and Decree SP No. 64.356 / 2019, regarding public-private arbitration; and Ricardo Dalmaso Marques analyzes Resolution No. 35/2019 of the Arbitration and Mediation Center of the Brazil-Canada Chamber of Commerce (CAM / CCBC) on the transparency of the data of the arbitrators acting in their proceedings.

Rodrigo Octávio Broglia Mendes presents the classic doctoral thesis of Professor Luiz Gastão Paes de Barros Leães, ‘Essay on Commercial Arbitration’, as the Arbitration Classic of this edition.

Finally, the present edition presents reviews by João Ilhão Moreira, of ‘Key Duties of International Investment Arbitrators: A Transnational Study of Legal and Ethical Dilemmas’ by Kathia Fach Gomez, and by Fábio M.R. Cavalcante of ‘Tribunal Secretaries in International Arbitration’ by J. Ole Jensen.

Have a good arbitral reading!

João Bosco Lee, Director

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An Overview of Chile’s International Investment Agreement Program

Mon, 2019-07-08 03:08

Charles ('Chip') B. Rosenberg and Eduardo Bruera

Chile is one of the most dynamic states in Latin America.  The World Bank has observed that “Chile has been one of Latin America’s fastest-growing economies in recent decades”.  And foreign direct investment has increased significantly in recent years.  As investment interest in Chile grows, it is important for both investors and international law practitioners to understand Chile’s international investment agreement (“IIA”) program, particularly as it has evolved in recent years.

Notably, on February 5, 2019, the Amending Agreements to the Canada-Chile Free Trade Agreement (“CCFTA”) entered into force, updating several key provisions of the CCFTA, including in its investment chapter.  For example, the amended CCFTA now contains a dedicated article on corporate social responsibility (“CSR”) that reaffirms the parties’ commitment to globally endorsed CSR standards.  It also includes procedural enhancements to the investor-state dispute settlement mechanism with respect to a host of modern considerations, including preliminary objections, awarding of costs, ethical considerations, third-partying funding, and transparency.

The amendment of the CCFTA was in line with Chile’s IIA program in recent years.  Historically, Chile’s IIA program centered on bilateral investment treaties (“BITs”).  Between 1991 and 2000, Chile signed more than 50 BITs with states such as Bolivia, France, Germany, Malaysia, Spain, the UK, and Venezuela.  However, since 2000, Chile has signed only a handful of BITs, opting instead to concentrate on comprehensive FTAs with investment chapters.  In fact, Chile has signed at least 10 FTAs with investment chapters since 2000 with states such as Argentina, Colombia, Korea, and the United States, as well as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) with Australia, Brunei, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

The differences between Chile’s BITs and FTAs are important and worth considering.  The investment chapters in Chile’s FTAs are much more detailed than Chile’s BITs.  There also are several substantive differences that become apparent when evaluating Chile’s BIT and FTA regimes holistically.

Dual Nationals:  The vast majority of Chile’s BITs protect dual nationals.  However, a notable exception is the Germany BIT, which provides in its Protocol that the treaty “shall not apply to investors who are nationals of both Contracting Parties”.  Another exception is the Switzerland BIT, which provides that the treaty “shall not apply to investments of natural persons who are nationals of both Contracting Parties unless such persons have at the time of the investment and ever since been domiciled outside the territory of the Contracting Party in which the investment was made”.  The France BIT also contains a unique provision in its Protocol which specifies that the treaty “shall not apply to investments made by natural persons who are nationals of one of the Contracting Parties and who, at the date of investment in the . . . other Contracting Party, have their domicile in the territory of that other Contracting Party for more than five years, unless the necessary funds for the investment come from abroad”.

Several of Chile’s FTAs protect dual nationals but only if the investor satisfies the dominant and effective nationality test.  For example, the U.S. FTA provides that a “a dual national shall be deemed to be exclusively a national of the state of his/her dominant and effective nationality”.

Fair and Equitable Treatment:  Nearly all of Chile’s BITs contain fair and equitable treatment (“FET”) protections unqualified by the minimum standard of treatment under customary international law.  For example, the Croatia BIT provides that “[e]ach Contracting Party shall extend fair and equitable treatment to investments made by investors of the other Contracting Party on its territory”.  However, there are a few notable exceptions.  For example, the Uruguay BIT provides that “[e]ach Party shall accord covered investments treatment in accordance with customary international law, including fair and equitable treatment”.

By contrast, nearly all of Chile’s FTAs expressly limit the FET standard to the customary international law standard.  For example, the U.S. FTA provides that “[e]ach Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment”.  The U.S. FTA specifies that “[f]or greater certainty . . . the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments” and that FET does “not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights”.

Umbrella Clause:  Chile generally has included umbrella clauses only in its BITs with European states.  For example, the Greece BIT provides: “Each Contracting Party shall observe any other obligation it may have entered into with regard to investments of investors of the other Contracting Party”.

None of Chile’s FTAs contain umbrella clauses, reflecting a broader trend in investment treaty practice.

Most Favored Nation (“MFN”) Clause:  The vast majority of Chile’s BITs include an MFN clause but do not specify whether the clause applies to the dispute settlement provisions in the treaty.  That said, there are two notable exceptions.  The Uruguay BIT provides that “[f]or greater certainty, the Parties agree that [the MFN clause] is not applicable to procedural or jurisdictional matters”.  Conversely, the UK BIT provides that “[f]or the avoidance of doubt it is confirmed that the [MFN] treatment . . . shall apply to the provisions of Articles 1 to 10 of this agreement”.

Several of Chile’s FTAs expressly provide that the MFN clause does not apply to dispute settlement.  For example, the Argentina FTA provides that “[f]or greater certainty, the [MFN] treatment . . . is not applicable to procedural or jurisdictional matters”.

Statute of Limitations:  Chile’s BITs rarely contain a statute of limitations.  The notable exception is the Uruguay BIT, which provides that “[n]o claim may be submitted to arbitration . . . if more than three (3) years have elapsed from the date on which the claimant had or should have been aware of the alleged violation . . . and known that the claimant . . . suffered losses or damages”.

In contrast, all of Chile’s FTAs contain a statute of limitations.  The most common term is 3 years.  The only exceptions are the Colombia FTA (39 months) and the CPTPP (3 years and 6 months).

*          *          *

Investors and international law practitioners involved with Chile related investments should understand Chile’s IIA program.  While it is foremost critical to assess and apply the language of the specific BIT or FTA at issue, understanding Chile’s IIA practice – and in particular whether Chile deviated from its IIA practice – can be an important supplementary means of interpretation to ascertain the meaning of the BIT or FTA.

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Can You Enforce an Agreement Involving Bribery? From World Duty Free v. Kenya to Vantage Deep Water Co. v. Petrobras Am., Inc.

Sat, 2019-07-06 19:17

Diogo Pereira

Discussions of corruption carry strong moral sentiments.  After all, the abuse of public office for private gain erodes people’s trust in government and institutions, makes public policies less effective and fair, and siphons taxpayers’ money away from schools, roads, and hospitals. More generally, broad-based corruption weakens the foundations of a healthy economy, degrades social norms, and undermines civic virtues.  Unsurprisingly, it is easy to provoke outrage with a nuanced or concise discussion of this issue.

 

Illegality and Corruption in Commercial and Investment Arbitration: A One-Sided Proposition?

In the context of international commercial arbitration, illegality and corruption can serve as a basis to deny jurisdiction or admissibility of a dispute, can be dispositive of claims on the merits, and can serve as a basis to deny enforcement. Arbitral practice is well developed on issues relating to illegality of underlying contracts with notable commercial cases like Fiona Trust & Holding Corp v. Privalov, which provide rich discussions of foundational arbitral principles such as kompetenz kompetenz, and severability, which are necessary for a tribunal to even entertain allegations of illegality and corruption. See Fiona Trust & Holding Corp v. Privalov, [2007] UKHL 40. Similarly, cases such as Soleimany v. Soleimany provide for the unenforceability of an arbitral award based upon a contract that was illegal in the jurisdiction of enforcement. See Soleimany v. Soleimany [1999] Q.B. 785, 798.

In investment arbitration, the number of cases involving allegations of corruption is increasing.  One of the most notable examples, which reads like a Hollywood script, is the case of World Duty Free v. Kenya. In that case, the claimant’s only witness, Mr Nassir Ibrahim Ali of Dubai, testified to the following facts relating to how the concession contract had originally been procured:

 “protocol in Kenya required that I should in addition make a “personal donation” to President Moi. … X advised me that the appropriate donation … was US$2 million. I was further advised by him that the donation should be in cash. … I brought [part of the cash in Kenyan shillings] to my meeting with President Moi in a brown briefcase. When we entered the room where the President received us, [I] put the briefcase by the wall and left it there. After the meeting [I] collected the briefcase from where [I] had left it. On the departing journey I looked in the briefcase and saw that the money had been replaced by fresh corn”.

This case was disposed of on the merits in favor of Kenya under the skilled representation of Jan Paulsson and Constantine Partasides. The tribunal noted that, due to the bribery, the respondent Kenya:

“was legally entitled to avoid and did avoid legally … the Agreement  … [and] [t]he Respondent, Kenya, did not lose its right to avoid the said contract by affirmation or otherwise … under these applicable laws;” (emphasis added)

This award, while widely commended, has not been without criticism and has raised valid concerns. While anti-corruption norms are important, legitimate concerns about fairness arise if tribunals privilege anti-corruption laws over all other normative considerations. After all, the payment of a bribe is not a unilateral act and always implicates at least two guilty parties.  Notwithstanding its pari delicto nature, it is also concerning to notice that it is usually the host states or government entities that allege corruption as a defense against allegations of their own later misconduct.1)It is important to note here that government officials who accept bribes do not necessarily do so in their official capacity and as a result their conduct is often not attributable to the State. jQuery("#footnote_plugin_tooltip_1192_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1192_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The availability of a remedy to the host state only where both are involved in the illegitimate conduct can be seen as unfair and can also create a moral hazard.  After all, a cynical State could conclude that it should encourage an act of corruption at the inception of an investment to inoculate themselves against future investor claims.

 

Vantage Deep Water Co. v. Petrobras Am., Inc.

On 17 May 2019, in Vantage Deep Water Co. v. Petrobras Am., Inc., the U.S. District Court for the Southern District of Texas (the “Court”) denied Petrobras’ effort to vacate an arbitration award obtained by Vantage Deepwater Drilling on the basis that the underlying contract was procured through bribery.

By way of background, petitioners (“Vantage”) and respondents (“Petrobras”) entered into an eight-year Agreement for the Provision of Drilling Services (“DSA”), for which performance of offshore drilling services commenced on 2 December 2012. On 27 October 2014, Vantage and Petrobras executed the Third Novation and Amendment Agreement to the DSA (“Third Novation”) which provided that all disputes were to be resolved before the International Centre for Dispute Resolution (“ICDR”) of the American Arbitration Association (“AAA”). See Vantage Deepwater Company et al v. Petrobras Americas Inc. et al, Civ. Action No. 4:18-CV-02246.

Petrobras’ premature termination of the DSA on 31 August 2015 led Vantage to commence the arbitration proceeding. During the arbitration, Petrobras argued “that the DSA was void or unenforceable for allegedly being procured through bribery”. Notwithstanding, the majority found Petrobras liable to Vantage for US$615.62 million. On 8 July 2018, Vantage petitioned the Court to confirm the final award under U.S.C. §§ 301-307. Subsequently, Petrobras filed a response opposing confirmation of the final award, arguing that it should be set-aside under two provisions of Article V of the Inter-American Convention on International Commercial Arbitration of 30 January 1975 (the “Inter-American Convention”).

Petrobras argued that Article V(2)(b)2)Article V(2)(b) allows a signatory country to refuse enforcement of an award if such enforcement would conflict with public policy. jQuery("#footnote_plugin_tooltip_1192_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1192_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of the Inter-American Convention provides such ground to refuse enforcement because it would violate public policy to require a party to pay for damages resulting from a contract that was invalidly obtained by bribery. However, the Court noted that defenses to enforcement of the Inter-American Convention are construed narrowly and there is an “empathetic federal policy” in favor arbitral dispute resolution. Although Petrobras argued that confirming the award involving a contract procured through bribery would violate the public policy of the United States, that was not the case. The Court stated a public policy defense is only applied where enforcement would violate the forum state’s most basic notions of morality and justice. The Court here took the view that public policy did not refer to any international notion but rather should be examined with respect to Texas law. In this case, Petrobras conducted a bribery audit two months before executing the Third Novation. This, the Court explained, is evidence that Petrobras continued with recognizing the agreement with the knowledge of the bribery allegations, and thus, ratified the agreement under Texas law. Therefore, the question before the Court was whether enforcing a contract alleged to have been procured through bribery—and subsequently ratified by the non-bribing party—would violate public policy.

The Court cited further case law and explained that public policy does not favor allowing a party engaged in fraud to attempt to use fraud as a defense to a valid arbitration in favor of its alleged co-conspirator. Thus, enforcement of the final award did not violate public policy where the parties who were alleged to have mutually engaged in some misconduct during the formation of a contract, particularly when that contract was later ratified. As a result, the Court granted Vantage’s petition to confirm the arbitral award.

 

The Competing Roles of International Arbitrators

In its treatment of allegations of bribery and illegality, the District Court’s opinion in Vantage Deep Water Co. is consistent with the decisions of previous commercial and investment tribunals at both the merits and enforcement stages. Notably the tribunal in World Duty Free specifically noted that there was no subsequent affirmation of the contract in question that would have compromised the state party from avoiding the contract. Nevertheless, this case is notable in that it squarely acknowledges that a state actor or state-owned entity should not use their own misconduct as a defense, particularly when they later ratified that conduct.

The intersection of anti-corruption norms and international arbitration raises important theoretical questions about arbitration and exposes inherent tensions. Arbitration arises out of an agreement between parties, but at the same time, arbitrators must consider issues that could impact the wider public. Questions of corruption in particular straddle the line between civil and criminal law and raise questions of public interest that extend beyond the limits of party autonomy. This intersection exposes the reality that arbitration lies at the center of divergent claims of authority and arbitrators must delicately balance competing functions. As repugnant as bribery is, a finding of bribery is not necessarily dispositive of a case. International tribunals must consider various important public and private legal principles in reaching their decisions. Future cases will continue to grapple with the contours of these principles as they are fundamental and of recurring importance.

The views in this post represent the view of the author only and do not represent the view of De Almeida Pereira.  This post was prepared with the invaluable support of Wilson Carneiro, Summer Associate at De Almeida Pereira in Washington DC.

References   [ + ]

1. ↑ It is important to note here that government officials who accept bribes do not necessarily do so in their official capacity and as a result their conduct is often not attributable to the State. 2. ↑ Article V(2)(b) allows a signatory country to refuse enforcement of an award if such enforcement would conflict with public policy. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Ssangyong v. NHAI: Supreme Court of India Fixing Some Troubles, and Creating Some?

Sat, 2019-07-06 00:00

Shivansh Jolly and Sarthak Malhotra

The decision of the Supreme Court of India (“SC”) in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) (“Ssansyong”), has led to three notable developments: (1) it clarifies the scope of the “public policy” ground for setting aside an award as amended by the Arbitration and Conciliation (Amendment) Act 2015 (“2015 Act”), (2) affirms the  prospective applicability of the 2015 Act and (3) adopts a peculiar approach towards recognition of minority decisions.

Facts

The dispute arose out of a contract between the parties for construction of a four-lane bypass on a National Highway in the State of Madhya Pradesh. The appellant, Ssangyong Engineering, was to be compensated under the contract for inflation in prices of components to be used in construction of the highway. The agreed method of compensation for inflated prices was the Wholesale Price Index (“WPI”) following 1993 – 1994 as the base year. However, National Highways Authority of India (“NHAI”) subsequently issued a circular revising the WPI to follow 2004 – 2005 as the base year for calculating the inflated cost, which was disputed by Ssangyong. The parties referred this dispute to a three member arbitral tribunal. The majority award upheld the revision of WPI as being within the terms of the contract. The minority decision opined otherwise, and held that the revision was de hors the contract. Aggrieved by the majority finding, Ssangyong unsuccessfully challenged the award as being against public policy before Delhi High Court, and consequently sought remedy from the SC in appeal.

Scope of “Public Policy” under Section 34

The public policy ground under Section 34 (2)(b)(ii) (challenge to domestic awards) and Section 48(2)(b) (conditions for enforcement of foreign awards) of the 1996 Act became a cause for concern due to a broad interpretation given to the phrase “fundamental policy of Indian law” by the SC in ONGC Ltd. v. Western Geco International Ltd. (“Western Geco”) – one of the three explanations given to public policy under the aforesaid provisions. This has already been discussed here. The impact of Western Geco, and later Associate Builders v. DDA (“Associate Builders”) following Western Geco, was such that “fundamental policy of Indian law” was left to be exploited for refusing enforcement to foreign awards, and allowing domestic awards to be reviewed on merits. This was changed by the 2015 amendments. The SC in the Ssangyong case held that the broad interpretation given to “fundamental policy” in Western Geco does not find place under Section 34, as amended by the 2015 Act. It relied on the 246th Report of the Law Commission of India which stated that public policy ground cannot have the same scope under Section 34 and Section 48 [para 18]. The Report further stated that even though grounds of court intervention in a domestic award ought to be wider, the same was recognized by introducing “patent illegality” in Section 34(2A) by the 2015 Act without making the same amendment to Section 48. The SC also relied on the Supplementary to the 246th Report which was released in February 2015 as a consequence of the SC’s judgments in Western Geco and Associate Builders [para 20]. The Report stated that the amendments to Section 34 ‘were suggested on the assumption that other terms such as “fundamental policy of Indian law” or conflict with “most basic notions of morality or justice” would not be widely construed.

Therefore, the SC held that the wide import given to “fundamental policy of Indian law” in Western Geco and Associate Builders is improper, and not in accordance with the intent and purpose of the amended Sections 34 and 48 of the 1996 Act [para 23]. The SC also clarified that the following interpretation be given to the respective species of public policy under Section 34(2)(b)(ii), and to “patent illegality” under Section 34(2A):

  • “fundamental policy of Indian law” – contravention of a law protecting national interest; disregarding orders of superior courts in India; principles of natural justice such as audi alteram partem (in line with Renusagar Power Co. Ltd. v. General Electric Co.) [paras 23 – 25];
  • “most basic notions of morality or justice” – the SC adopted the ratio of Associate Builders wherein it was observed that an award would be against justice and morality when it shocks the conscience of the court; morality, however, would be determined on the basis of “prevailing mores of the day” [para 24];
  • “patent illegality” – illegality which goes to the root of the matter, but excluding erroneous application of law by an arbitral tribunal or re-appreciation of evidence by an appellate court. However, this ground may be invoked if (a) no reasons are given for an award, (b) the view taken by an arbitrator is an impossible view while construing a contract, (c) an arbitrator decides questions beyond a contract or his terms of reference, and (d) if a perverse finding is arrived at based on no evidence, or overlooking vital evidence, or based on documents taken as evidence without notice of the parties [paras 26 – 30].

The SC also affirmed its findings in BCCI v. Kochi Cricket where it held that the 2015 Act amending Section 34 is entirely prospective in nature and shall apply to applications filed on or after 23.10.2015 (date of commencement of the 2015 Act), even if arbitration proceedings were commenced prior to the said date [paras 10 – 12]. This would allow parties to such arbitrations to also benefit from the findings of the SC in Ssangyong, eliminating exploitative use of “public policy” and “patent illegality” to unduly interfere with domestic and foreign awards.

Minority Decisions

The SC in Ssangyong set aside the judgments of the Single Judge and Division Bench of the Delhi High Court. It also exercised its plenary power under Article 142 of the Constitution of India to declare the minority decision as the award between the parties. Article 142 gives the SC power to make such orders which may be necessary for doing “complete justice” in a case. This power has been deliberately left undefined and elastic enough to grant suitable reliefs in a given situation [Delhi Development Authority v. Skipper Construction Company]. However, the prevailing view is that the SC cannot by-pass statutory considerations while exercising its power under Article 142 [Supreme Court Bar Association v. Union of India].

The SC’s approach in Ssangyong raises questions about the overall efficacy of the remedy available to the parties under Section 34 of the 1996 Act.

It is the prevailing position that the Act does not allow Indian courts to modify an award while dealing with a Section 34 application [Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express].1)An appeal against the judgment is currently pending in the Supreme Court. jQuery("#footnote_plugin_tooltip_8496_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8496_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The SC appeared to have endorsed this scheme of the Act when it observed that if the majority award was set aside, the parties would have to re-agitate their claims afresh before a new arbitral tribunal [para 49]. The Court further stated that the delay in resolution of disputes between the parties caused due to the foregoing would be contrary to the objective of 1996 Act, i.e. to promote speedy resolution of disputes. However, the Court overcame the limits prescribed under Section 34 by exercising its plenary power under Article 142 and declared the minority decision as the enforceable award between the parties.

The precedential value of this judgment is limited in light of the previous SC decision of State of Punjab v. Rafiq Masih where it observed that orders under Article 142 do not constitute a binding legal precedent. Nevertheless, it raises an important issue of the power of the Indian courts to effectively deal with an application for setting aside an award. There have been instances in the past where courts have set aside majority awards and upheld the minority decision as the award between the parties. [Modi Entertainment v. Prasar Bharati; ONGC v. Interocean Shipping]. The SC’s approach of invoking its plenary power under Article 142 to declare the minority decision as the award between the parties suggests that the approach adopted by the courts in the past to uphold minority decisions was not proper. It further appears to be against the principles enunciated by it in previous cases that Article 142 cannot lose sight of the provisions of a statute.

As such, the Ssangyong judgment appears to indicate that if a majority award is set aside by a court under Section 34 of the 1996 Act, the minority decision cannot be upheld and the parties shall have to commence arbitral proceedings afresh. On the other hand, the approach of the SC in Ssangyong may lead the parties to agitate the dispute up to the SC in the hope to revive minority decisions through Article 142 of the Constitution of India. It is therefore necessary to bring in suitable clarifications / amendments to the Act to address this uncertainty.

 

The views of the authors expressed above are purely independent, and do not necessarily reflect the views of their organisations

References   [ + ]

1. ↑ An appeal against the judgment is currently pending in the Supreme Court. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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ISDS As a Means of Addressing Challenges for the BRI in Central Asia

Thu, 2019-07-04 18:53

Tiange "Tim" Chen

Background

Since its announcement in 2013, China has invested more than US $120 billion into the target countries along the Belt and Road Initiative (“BRI”) on infrastructure projects ranging from ports and railroads to pipelines. Central Asia will become part of nearly the entire major trade corridor identified under the BRI. Hence the BRI presents a rare opportunity for Central Asian countries to attract foreign investment and to upgrade their Soviet-era infrastructure. Yet, at the Second Belt and Road Forum held in Beijing during the last weekend in April, Chinese President Xi Jinping went to great lengths to reassure foreign leaders, many of them from Central Asia, that the BRI was not a debt-trap amid growing fear of loan defaults in BRI-related projects. Specifically, Xi promised to establish a “debt-sustainability framework” and to encourage compliance with international infrastructure-contracting standards.

These reassurances notwithstanding, the debt fears associated with the BRI are very much alive and are cited by many observers as the primary basis for potential legal disputes arising out of the BRI. Particularly in Central Asia, China’s dominance in inbound FDIs and imports means that a number of Central Asian states bear an unusually high debt burden to Chinese investors.1)The Council on Foreign Relations have published an index on BRI countries’ debt to China. In 2017, debts to China represent 12.1%, 42.3%, 24.0%, 16.9% and 7.1% of GDP for Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, respectively. jQuery("#footnote_plugin_tooltip_2962_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2962_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This post considers challenges and solutions for these tensions and draws from the analysis presented at a panel discussion called “China’s New Route to the Silk Road: Challenges and Opportunities for the Eurasian Region” held in April 2019 in Washington, DC as part of the American Bar Association’s Section of International Law Annual Conference (“ABA Conference”). The panel consisted of Olga Boltenko (Partner, Fangda LLP – Hong Kong), Matthew Erie (Associate Professor, University of Oxford), Dmitry Lysenko (Counsel, Baker McKenzie LLP – Moscow), Richard Hoagland (former U.S. Ambassador), and Madina Tursunova (Partner, Legalmax Law Firm – Tashkent), and was moderated by Diana Tsutieva (Associate, Foley Hoag LLP – Washington, DC).

 

A. Challenges Presented by the BRI in Central Asia

Legal disputes arising in the BRI context present several unique challenges:2)As many of the challenges that BRI poses for the Central Asian countries remain uncertain, some of the panelists have interestingly drew comparisons to the experience of some Southeast Asian countries to provide some insights. For example, Sri Lanka’s handing over of the Hambantota port to a Chinese SOE for failure to pay off its debt and Malaysia’s renegotiation of its East Coast Rail Link suggested that the debt fear would only continue, and that future disputes, especially investor-state ones, would be a very likely outcome. jQuery("#footnote_plugin_tooltip_2962_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2962_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

  • First, the BRI disproportionately involves state-backed players or sovereign governments themselves. At the ABA Conference, Ms. Boltenko observed that BRI projects are predominantly built by Chinese investors, and such projects are disproportionately backed by Chinese state financiers, especially the China Development Bank, the Silk Road Fund and the China EXIM Bank. On the other side, many of the projects are directly backed or guaranteed by the BRI-targeted countries, especially in Central Asia.
  • Second, legal institutions along the BRI routes are still embracing international dispute resolution. It would take time for investors to build confidence in these domestic legal systems. There are also significant challenges created by the different legal systems involved in the cross-border BRI projects. Ms. Tursunova pointed out that the BRI creates significant risks for investors because many of the large projects’ contracts are negotiated and executed separately on a country-by-country basis, meaning that investors sometimes have to fight in different fora with different countries at the same time.
  • Third, the Chinese’s preferred way of friendly consultation, rooted deeply both in culture and in its international legal instruments, remains a barrier for non-Chinese counterparts to bring the Chinese parties before an arbitration panel, rather than a negotiation table. While the Chinese Government has signed dozens of MOUs with BRI countries, these MOUs are not legally binding, and almost none of them introduce any specific or new dispute resolution mechanism. This is not unique for bilateral or multilateral agreements signed between China and Central Asian countries. As pointed out by Mr. Lysenko at the ABA Conference, no agreement within the Eurasian Union framework or any of the economic cooperation agreements between Russia and the Eurasian countries contain any form of binding dispute resolution mechanism.

 

B. Possible Solutions

Faced with these unique challenges, the choice on venues and choice of the appropriate dispute resolution mechanism are critical questions. 

 

  1. Venues for Dispute Resolution

Both China and the Central Asian countries recognize the potential of BRI disputes. China has been establishing ISDS options, including the establishment of a new International Commercial Court and CIETAC’s publication of new investment arbitration rules. At the same time, two newly established arbitration centers are filling in the vacuum in Central Asia, i.e., the Astana International Financial Centre (AIFC) and International Arbitration Centre and the Tashkent International Arbitration Centre (TIAC).

However, as discussed previously on this Blog, while the Chinese and Central Asian governments have high hopes for the value of these new institutions, many traditional challenges associated with these options, including perceived lack of trust, transparency or judicial experience, cannot be effectively addressed any time soon.

As such, it remains unlikely that major players would choose these new institutions over more established arbitration seats, given that the new institutions not only lack experience and expertise, but also could see potential difficulties for parties in enforcing their awards. In my view, the preferred venues would likely continue to be HKIAC and SIAC, where BRI-oriented programs and rules are well-established. Through its BRI Commission the ICC could also see an increased caseload based on disputes coming out of this Central Asian region.

 

  1. Protection through Regional BITs

In addition, BITs are particularly valuable for addressing cross-border disputes. As recognized by some, consistent with the rise of Chinese outbound investment and the development of BRI, Chinese investors may increasingly choose to take advantage of protection measures under international investment treaties for their investments. This trend arguably reassures Chinese investors in using dispute resolution mechanisms in BITs to resolve BRI disputes.

Within the Central Asian region, China has BITs with the following countries:

 

BIT with China Effective date Generation Central Asian countries Kazakhstan Y 1994 2nd Uzbekistan Y 2011 (updated) 3rd Kyrgyzstan Y 1995 2nd Turkmenistan Y 1995 2nd Tajikistan Y 1994 2nd Afghanistan X – – Caspian countries/regional players Russia Y 2009 3rd Turkey Y 1994 2nd Iran Y 2005 3rd Azerbaijan Y 1995 2nd Armenia Y 1995 2nd Georgia Y 1995 2nd Mongolia Y 1993 2nd

 

A key issue with the many BITs that China signed with Central Asian countries is that they are mostly the so-called 2nd generation BITs, those that was negotiated and signed by China and its partners during the 1990s after China accession to ICSID.3)See also Gallagher & Shan, China Investment Treaties: Policies and Practice, Oxford University Press 2009. jQuery("#footnote_plugin_tooltip_2962_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2962_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These 2nd generation BITs provide better protection for investors under the National Treatment standard. While 2nd generation BITs are not as toothless as the 1st generation ones, which usually cover amount-of-compensation disputes arising out of expropriation cases only, the terms of these 2nd generation BITs remain vague and are difficult to interpret. Chinese BITs also did not adopt the U.S. model of using negative lists for BIT negotiations until the late 2000s.

While these Chinese BITs, as do many legal instruments executed by the Chinese government, have their unique “Chinese characteristics”, including the emphasis on consultation and mediation, and many carve-outs for investment protections (especially in the older BITs), they do provide a framework for investors to seek relief from State actors. For example, Huawei’s recent attempt to build a case against the Czech Republic under the China-Czech BIT could be seen as a bellwether on the potential for settling BRI disputes under IIAs.

 

Concluding Thoughts

While Chinese BITs are often textually ambiguous and frequently overlooked, they do provide an available avenue for ISDS under the BRI framework. As debt fear continues and legal uncertainty persists, BIT-based dispute resolution in traditional venues might be one of the more credible choices for ISDS in the region.

References   [ + ]

1. ↑ The Council on Foreign Relations have published an index on BRI countries’ debt to China. In 2017, debts to China represent 12.1%, 42.3%, 24.0%, 16.9% and 7.1% of GDP for Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, respectively. 2. ↑ As many of the challenges that BRI poses for the Central Asian countries remain uncertain, some of the panelists have interestingly drew comparisons to the experience of some Southeast Asian countries to provide some insights. For example, Sri Lanka’s handing over of the Hambantota port to a Chinese SOE for failure to pay off its debt and Malaysia’s renegotiation of its East Coast Rail Link suggested that the debt fear would only continue, and that future disputes, especially investor-state ones, would be a very likely outcome. 3. ↑ See also Gallagher & Shan, China Investment Treaties: Policies and Practice, Oxford University Press 2009. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Take-Aways from the Copenhagen Arbitration Day 2019

Thu, 2019-07-04 03:00

Andrew Poole

 

The Danish Institute of Arbitration (DIA) and ICC Denmark hosted Copenhagen Arbitration Day earlier this year. Discussion took place on a wide range of topics such as the criticism of arbitration, diversity and the Prague Rules.

The day began with three lunchtime seminars. The first took place at the University of Copenhagen, where four speakers focused on investment arbitration in a post-truth world.

Jan Heiner Nedden of Hanefeld Rechtsanwälte noted that the criticism of arbitration, which was centered on issues such as transparency, legitimacy and the alleged favouring of investors, was mainly based on rumours, inaccurate information and tenuous assumptions. He stated that it was up to the arbitration community to change arbitration’s reputation and highlighted that investment, rather than commercial, arbitration bore the brunt of the criticism.

Steffen Hindelang of the University of Southern Denmark supported the position that there was not an overwhelming favouring of investors in investment arbitration by showing that nearly half (47%) of the already concluded intra-EU investment arbitration cases, between 1987 and 31 July 2018, were decided in favour of a state. However, he noted that statistics could be used to argue almost any position on this.

Ole Spiermann of Bruun & Hjejle followed by noting that the statistics overlooked “no clear winner” outcomes such as if an investor were awarded less than anticipated, and so suggested that states may benefit more than what is generally perceived. He also added that the current criticism might be a reaction to the high praise of investment arbitration when it first began.

Joanna Jemielniak of the University of Copenhagen next highlighted the EU’s strong support of its Investment Court System, which is often portrayed as a response to arbitration’s criticism. However, she noted that this new system still relies heavily on existing arbitral rules. She also anticipated the importance of the CJEU opinion on the Investment Court System in the EU-Canada trade agreement, discussed in the Kluwer Arbitration Blog post here.

At the second seminar held at Gorrissen Federspiel, Henriette Gernaa discussed the importance of nationality, forum and legal traditions. She noted that international arbitral procedure could often reflect regional styles and illustrated her case by presenting different configurations regarding seat, arbitrator nationality, party nationality, etc. and queried to what extent the differences could affect factors such as disclosure, experts and tribunal proactivity. She suggested that a single international style could aid predictability for users as well as reduce the likelihood of overly regulated and extensive arbitration clauses, while emphasising that any interplay between international and regional practice should focus on what serves the users best.

The third seminar took place at Kromann Reumert, where the former president of the Danish Supreme Court, Torben Melchior, highlighted the advantages of Danish arbitration including: lower DIA costs, pro-enforcement judgments and Denmark’s top ranking in the World Justice Project’s Rule of Law Index. Frank Bøggild of Kromann Reumert then followed and spoke about the rise of M&A arbitrations owing to issues such as warranty breaches and shareholders’ liability, and the consequent increase in toughened rhetoric, horse-trading of claims and forensic expertise. He advised that topics such as discovery and standard arbitration clauses should be commonly considered when drafting M&A agreements.

After lunch, the day continued at the 17th century Old Stock Exchange. The host speakers, Steffen Pihlblad, Secretary-General of the DIA, and René Offersen of DLA Piper and of the ICC International Court of Arbitration, focused on diversity. Steffen discussed the United Nations Sustainable Development Goal 5 of gender equality, the Arbitration Pledge and that proportionally, the DIA selects more women arbitrators than parties do. René highlighted that the ICC Court has gender parity among its members for the 2018-2021 term, and that its scrutiny process supports the quality of awards, noting that awards should be “self-explanatory and convincing”.

The first keynote speech picked up on regional perspectives, with Peter Rees QC of 39 Essex Chambers providing a commentary on the Prague Rules. He highlighted that the rules state that they supplement the agreed procedure, rather than replace it (see here for a previous Kluwer Arbitration Blog post comparing the Prague Rules with the IBA Rules). However, he also remarked that the rules focused on the tribunal’s proactivity, for instance the tribunal can decide which witnesses to call and how they are examined. Regarding oral evidence in particular, he stated that any decision to limit cross-examination must be taken carefully as a tribunal needs to be sceptical about documents. In support of his case, he provided two engaging examples where witness examination had crucially changed the interpretation of the evidence.

Dan Terkildsen of Lundgrens next moderated a panel of four. Johan Tufte-Kristensen of the University of Copenhagen began by discussing confidentiality; he highlighted that different jurisdictions and institutions can vary in their approaches, and there are different degrees of confidentiality, from privilege to trade secrets to NDAs. He discussed possible solutions ranging from procedural orders to confidentiality agreements to unilateral statements. He also raised the possibility that penalties could be agreed if confidentiality were to be breached.

Anna-Maria Tamminen of Hannes Snellman followed and focused on different considerations for witness evidence. For instance, three issues which can come into play are: 1) how the evidence is gathered (whether from notes, documents or interviews); 2) who gathers the evidence (whether in-house or external counsel, with their own jurisdictions and personal styles); and 3) why the evidence is gathered (to prove facts, help the narrative or assist in understanding technical aspects?). Moreover, regarding how evidence is received, cognitive bias based on whether the claimant or the respondent called the witness could arise. The understanding of the evidence could be affected by issues such as leading or open questions, whether a tribunal tells a witness that it is acceptable to say “I don’t know”, or how counsel responds to a witness’ responses, such as by summarising or just a nod of the head. Lastly, Anna-Maria highlighted how individuals may remember facts differently. She exemplified this by starting her presentation with three reasons why she liked visiting Copenhagen, and ending the presentation by asking the audience members which reasons they had remembered.

Jon Stokholm, Justice of the Danish Supreme Court, focused on witness statements. He discussed the Danish approach of not generally having them, and of rather relying on examination-in-chief and cross-examination so that a judge is able to obtain an immediate impression of the witness. He noted that written statements could be expensive, time-consuming and restrict a witness’ memory, but was also aware that a lack of statements could lead to misunderstanding because of the limited ability to prepare. He recommended that the earlier the terms of evidence were discussed, the better, as there could be different opinions on issues such as whether the parties or the tribunal question the witness, and whether a witness statement is admitted or dismissed if it does not give rise to cross-examination.

Lastly, a technological perspective was voiced by Kasper Mortensen of Kammeradvokaten/Poul Schmith. He highlighted the finding in a 2017 ICC Commission Report on IT in international arbitration, that the absence of negative data suggested that IT use in arbitration was relatively problem-free. Regarding recognised challenges, he provided practical tips such as if a party sends out files in a non-standard format, that party should also provide software so that the recipients can read the files and if there are numerous files, to ensure that there is an appropriate filing system to facilitate identification.

Dr Inka Hanefeld of Hanefeld Rechtsanwälte gave the second keynote speech on inherent powers, which she said could both reinforce and comfort practitioners when in doubt as to what to do. She observed that there was no single accepted approach, as the need and basis of inherent powers can depend on institutional rules and jurisdictions. She also suggested that inherent powers found by tribunals can anticipate institutional rules, such as the power to effect summary proceedings under the ICC rules. She concluded by noting that the scope of inherent powers was uncertain, but she suggested that their understanding could allow for a realisation of arbitration’s full potential and counter due process paranoia (see here and here for previous Kluwer Arbitration Blog posts on inherent powers and due process paranoia, respectively).

At a dinner held at the Royal Danish Library, Georg Lett of DLA Piper ended the day with a speech on arbitrators’ impartiality, which highlighted the influence of culture and legal traditions on arbitration.

 

Concluding Remarks

Denmark bridges the legal traditions of common and civil law systems, such as by emphasising the importance of advocacy on the one hand and by limiting disclosure on the other. The international speakers and audience for the Copenhagen Arbitration Day attested to this mix of traits, and afforded a balanced hub for reflection on different arbitral practices, not least demonstrated by the Prague Rules, seen by some as a civil law response to the IBA rules’ favouring of common law. This neutral position, alongside Danes’ flair for English and the day’s success, herald strong foundations for future developments and discussion. The next edition of the day is scheduled for 2 April 2020.

 

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Gorrissen Federspiel.

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Colombia’s Constitutional Court Conditions Ratification of the Colombia-France BIT to the Interpretation of Several Provisions of the Treaty

Thu, 2019-07-04 01:33

Eduardo Zuleta and María Camila Rincón

In June 2019, Colombia’s Constitutional Court (the “Court”) issued a communication informing its decision on the constitutionality of the BIT between Colombia and France (the “BIT”) signed on July 10, 2014. In an unprecedented decision, the Court adjudged that the BIT is compliant with the Colombian Constitution (the “Constitution”) but conditioned its ratification to the state parties’ issuance of a joint interpretative note of several provisions, including those regarding fair and equitable treatment (“FET”), national treatment, most favored nation (“MFN”), and expropriation.

In the past, the Court subjected the approval of the FTA between Colombia and South Korea to the issuance of a unilateral interpretative declaration to interpret section A(2) of Annex 8C so as to preserve the powers of the Colombian Central Bank. However, this is the first time that the Court conditions the approval of several clauses of the BIT to the adoption of a joint interpretative declaration, or in absence thereof, to a renegotiation of the BIT.

Three out of nine justices of the Court issued dissenting opinions basically considering that the Court exceeded its constitutional powers.

 

The Court’s decision

The Court considered, generally, that the BIT is compliant with the Constitution. Nonetheless, it concluded that certain interpretations of the text of the BIT may be inconsistent with constitutional principles such as the obligation to provide equal treatment to foreign and national investors and their investments, and not to discriminate the former vis-à-vis the latter. In turn, the Court warned that to ratify the BIT, the state parties had to either adopt a joint interpretative declaration or renegotiate the treaty to comply with the decision of the Court.

 

Fair and Equitable Treatment

Article 4 of the BIT provides that:

“Each Contracting Party shall accord fair and equitable treatment in accordance with applicable international law to investors of the other Contracting Party and its investments in its territory. For greater certainty the obligation to accord fair and equitable treatment includes, inter alia:

a) the obligation not to deny justice in civil, criminal or administrative proceedings in accordance with due process;

b) the obligation to act in a transparent, non-arbitrary and discriminatory manner as regards investors from the other contracting Party and its investments”. This treatment is consistent with the principles of foreseeability and legitimate expectations (…)”.

The Court concluded that the language of this clause is vague and undetermined and therefore contradicts constitutional principles of legal certainty and good faith. Hence, this provision must be interpreted by the state parties to clarify whether “international law” refers to customary international law, treaty law, or both, and if it refers to customary international law, to which “instruments” does custom refer to. Moreover, the Court considered that the expression “inter alia” must be interpreted restrictively, in an analogical and not additive sense. Finally, it concluded that the concept of “legitimate expectations” is compliant with the Constitution only to the extent that (a) the expectations arise from specific and repeated acts carried out by the host state to induce an investor to make or maintain investments in its territory; and (b) the expectations are breached as a result of the investment being affected by abrupt and unexpected changes made by public authorities.

 

National treatment and MFN

Akin to other national treatment and MFN clauses included in multiple International Investment Agreements ratified by Colombia, Article 5 of the BIT provides that each contracting party shall grant to the investments of investors of the other contracting party made in its territory, a treatment not less favorable than that accorded, in like circumstances, to investments of its own investors or to investments of investors of another third state. According to Article 5(3) of the BIT, this obligation does not prevent the contracting parties from adopting justified, necessary and proportional measures to guarantee public order in the event of serious threats to fundamental interests of the states.

For the Court, the terms “similar circumstances” and “necessary and proportional” are vague and uncertain. According to the Court, the former must be interpreted in a way that encompasses all relevant circumstances –including differentiated treatment directed to pursue legitimate public policy objectives– and the latter should be interpreted in a way that respects the autonomy of national authorities to guarantee public order and protect legitimate public policy objectives.

Also, the Court concluded that the practice accepted by some international investment tribunals to import through the MFN clause provisions from other treaties ratified by the host state of the investment, threatens the powers of the President of Colombia to direct international relations and negotiate treaties, as embodied in Article 189.2 of the Political Constitution. Consequently, the Court declared the expression “treatment” to be compliant with the Constitution insofar as it is interpreted to preserve the competences of the President.

 

Expropriation

Article 6(2) of the BIT provides for the definition of indirect expropriation. Under this provision, a case-by-case analysis must be performed in order to determine whether a measure or series of measures adopted by one of the contracting parties constitute indirect expropriation, considering, among others, the consequences of the measure in the legitimate expectations of the investor. Furthermore, it provides that measures adopted to safeguard legitimate public policy objectives do not constitute an indirect expropriation insofar as such actions are necessary and proportional.

The Court found that the expressions “legitimate expectations” and “necessary and proportional” pose difficulties due to their vagueness and dissimilar application by international investment tribunals. Accordingly, it concluded that these terms must be interpreted under the same conditions required by the Court as regards Article 4 with respect to the concept of “legitimate expectations”, and Article 5 regarding the expression “necessary and proportional”.

 

Preliminary Comments

Although the full text of the judgment has not been released yet by the Court, the official communication reporting the decision raises several questions and comments. The following is a brief initial reaction to the official summary issued by the Court. But of course, it will be necessary to wait for the full text of the judgment to perform a full evaluation of the Court’s reasoning.

In its analysis of Article 4 of the BIT, the Court emphasized on the need to specify which are the “instruments” comprising customary international law in order to clarify the concept of “international law”. This request is far from clear. The Court seems to assume that customary international law is contained in a set of treaties or international instruments. If this is the case, the task entrusted to the contracting parties by the Court is almost impossible to comply with since there is no set of treaties or instruments that embodies customary international law.

Additionally, the Court does not explain how it comes to what appears to be its own definition of “legitimate expectations”. There is no reference in the Court’s communication to the interpretation of the BIT in the light of the Vienna Convention on the Law of Treaties (VCLT), to which both Colombia and France are parties.

As to the MFN clause contained in article 5 of the BIT, the clarifications requested by the Court seem more as requests for modifications or additions to the BIT than mere interpretative declarations. The Court demands the MFN clause to be interpreted so as to bar the possibility of importing of provisions incorporated in other international investment agreements (IIAs). While, Article 5(4) of the BIT already excludes the application of the MFN clause to import clauses of “definitions” (such as Article 1 of the BIT) or dispute settlement mechanisms incorporated in other IIAs, the BIT does not exclude substantive–or any other–provisions. Thus, the question is whether broadening the scope of limitations to the MFN clause as requested by the Court, would constitute an addition to the BIT rather than an interpretation.

This decision has dramatically changed the Court’s longstanding position regarding IIAs and may have several effects.

First, if the Parties wish to pursue the ratification of the BIT, the representatives of Colombia and France will have to negotiate again either a joint interpretative declaration or the language of the BIT. The question, of course, is whether France will follow the Court’s requests.

Second, the judgment of the Court may become evidence of state practice on how Colombia interprets provisions such as “similar circumstances” or “legitimate expectations”. For better or worse, this may have an impact on on-going and future investment arbitrations against Colombia.

Third, the Court drew a red line for Colombia in the negotiation and ratification of IIA. It is most likely that the Court will not approve similar clauses as the ones incorporated in the BIT without further interpretation. The bottom-line question is whether this judgment opens the door for the Court to impose on Colombia’s executive branch, and particularly on the President as head of the international relationships of Colombia, the Court’s views as to the contents of future IIAs.

 

Conclusion

The official communication suggests that the Court abrogated the competence to redefine the text of certain provisions of the BIT invading the competence granted to the President of Colombia by the Constitution. Furthermore, it seems that most of the interpretations requested by the Court cannot be addressed through a joint interpretative declaration but require an amendment to the treaty and therefore a new negotiation of its terms. The complete decision may, or may not, shed light on the position of the Court and on whether it exceeded its powers.

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