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Assignment Without Privity: Disposal of Investment Claims

Sun, 2020-04-05 02:00

This post examines the admissibility of investment claim assignments based on the notion of Investor-State arbitration where there is no contractual relationship between the disputing parties. To do so, it draws on Jan Paulsson’s famous article titled Arbitration Without Privity.

 

Contract Assignments, Assignment of Claim and Arbitration Agreements

The assignment of international contracts is a widespread business practice. By virtue of an assignment, the “assignor” transfers the international contract’s legal and beneficial rights to the “assignee”, who steps into the assignor’s shoes. Whenever such international contracts contain an arbitration agreement, the widespread view is that the arbitration agreement automatically travels together with the assigned contractual receivables. Such view is upheld in many different jurisdictions, such Switzerland, Spain, France, the UK, and Germany. The assignment allows for a substitution of the old creditor (assignor) with a new creditor (assignee) vis-à-vis the original debtor with respect to the same credit, whose underlying binding relationship remains unchanged (e.g. Spanish Supreme Court, 26 September 2002, STS 6222/2002). Accordingly, the new creditor enjoys the same rights as the old one, including ancillary rights, which may consist of the right to arbitrate in case of default by the debtor of its obligations under the contract. Conversely, the debtor may raise the same objections against the assignee as it could have done against the assignor.

It is generally possible to assign an international contract unless the contract expressly states otherwise or was entered into because of the unique characteristics of either of the contracting parties (intuitu personae). Other than these two limitations, a debtor cannot oppose the assignment of the contract.

Furthermore, a party to a contract may assign a claim in a more straightforward manner by voluntarily transferring to the assignee the cause of action for breach of contract and the legal remedies to enforce a right against the other party to the contract, where there has already allegedly been a default on that party’s contractual obligations. In this instance, as well, the assignee may avail itself of the same dispute resolution mechanism that was available to the assignor, including arbitration, if that was the case.

In most jurisdictions, it is also valid to assign a damages claim concerning prospective receivables originating from a future cause of action. The likelihood that the future claim materialises is not a factor in ascertaining the validity of the assignment, provided that the cause of action is or can be determined (by way of illustration, see Italian Supreme Court ruling No. 31896/2018). Besides being possible to assign a future cause of action, a fortiori, it is also possible to assign an existing cause of action intended to take place in the future, or the proceeds of a cause of action (Re Oasis Merchandising Services Ltd (In liquidation); Ward v Aitken and others [1995] 2 BCLC 493).

 

Timing and Forms of Assignments

A claim may be assigned either before or after proceedings have been commenced. If an arbitral award has been rendered, the award may also be assigned and the assignee may seek to enforce it. The assignment of international arbitral awards, including awards issued against States, is not unusual. Energoinvest, for example, assigned to FG Hemisphere its interests in two Awards against the Democratic Republic of Congo.

Assignments may be structured in different ways. For example, an assignment may consist in a complete sale of the claim or in a mere assignment for purposes of collection (where the assignor holds an equitable interest in the claim assigned and the assignee is entitled to collect from the debtor, who discharges itself by making payment to the assignee). An assignment might otherwise be made through a third-party-funding agreement, where a full transfer of the risk of the proceedings to the assignee/funder takes place and the assignor and the assignee split the damages collected according to an agreed percentage. Third-party funding agreements are often regarded as a form of claim assignment. The Spanish construction company Abengoa, for example, agreed to partially monetize an arbitration to fund it by assigning a participation in the credit rights that could arise from the arbitration in exchange for a price of € 75 million (see, further Anna Schmallegger’s thesis on the “Commodification of claims”). The selection of one assignment structure over another is a question of claim management and expediency rather than a legal issue and may be influenced by the models commonly adopted in a given jurisdiction/s.

 

Investment Claim Based on International Treaties

International treaties also may create compulsory arbitration without privity. An aggrieved foreign national does not need to point to any contract to which it is a party to have the possibility of a direct action against the host State by means of an international arbitration. In these cases, the cause of action arises out of a given breach of a treaty-based obligation by the host State. Such a breach constitutes the violation of the primary obligation (stipulated in the provisions of the international instrument) and effectively gives rise to a secondary obligation (the obligation of reparation). The aggrieved party is entitled to dispose of such right to claim since the moment the claim arises, which is when the alleged breach of the primary obligation occurred. The aggrieved party can dispose of such right simply by deciding either to file an arbitration or not. The way the arbitration is filed – either directly or through a form of assignment – falls within the discretion of the aggrieved party, who may assign such arbitral claim to another party. Indeed, investment treaties make it possible for the aggrieved party to file an arbitration against a host State without any underlying contract. This is because the international treaty effectively serves as an instrument binding the host State to arbitration. The aggrieved party may equally seek to transfer a claim arising under such an instrument, much like an assignor may transfer a contract containing an arbitration clause or an arbitral claim to an assignee.

This is in practice what happens with political risk insurers (such as Overseas Private Investment Corporation, OPIC, now renamed U.S. International Development Finance Corporation, DFC) who subrogate to the right to claim of the foreign investors upon the payment of the insurance policy. Most bilateral investment treaties (BITs) expressly allow for such assignments, and no BIT expressly forbids them. A foreign investor may therefore freely dispose of investment claims originating from a breach of a BIT. To forbid these assignments would be to read into these BITs a prohibition that is simply not there. The procedural rules usually applicable to investment arbitrations – such the ICSID Convention and ICSID Arbitration Rules, the UNCITRAL Arbitration Rules 1976, 2010, and 2013 – similarly do not prohibit the assignment of arbitral claims. To treat the silence of these procedural frameworks as a prohibition on arbitral claims assignment would be contrary to the purpose of BITs and the ethos of ICSID and UNCITRAL (which are aimed at promoting international investment and trade). The UNCITRAL has even drafted a Convention on the Assignment of Receivables in International Trade, confirming the admissibility of such transactions in order to promote the availability of capital and credit on the basis of receivables at more affordable rates, and in turn to facilitate the development of trade finance and international trade. In the context of an investment arbitration, where a foreign investor may have had all of its assets expropriated by the host State, and as a consequence entered into bankruptcy proceedings, the assignment of its investment claim may be the only way the claim can be actually pursued. As a result of the unlawful expropriation, the investor may lack the required financial resources to pursue its claim (similarly, to what happens in insolvency procedures, where the insolvency office-holder decides to assign a claim because it has insufficient funds to pursue it on behalf of the estate).

Investors may encounter difficulties if they assign their arbitral claims to assignees incorporated in a third country that has a BIT in force with the host State with the purpose of gaining an otherwise nonexistent jurisdiction (e.g. Mihaly International Corporation v Sri Lanka, ICSID Case No ARB/00/2, Award, 15 March 2002). The country where the assignee is incorporated is of no relevance for the purpose of establishing (or losing) jurisdiction under an investment arbitration, as the claim originates and crystallizes at the time of the host State’s violation.

 

Case Law

Few cases have considered the assignment of investment claims. So far, no investment tribunal has ruled that an assignment is invalid per se. The most vocal case on this topic is Daimler Financial Services AG v The Argentine Republic, ICSID Case No ARB/05/1, Award, 22 August 2012). In that case, the tribunal found that the assignment of claims is compatible with investment arbitration, based on the separability between ICSID claims and their underlying investments. The tribunal went on to note that assignments share the same goals as the ISDS system, as they encourage cross-border foreign investments and reduce their political risk, and greatly facilitate and speed up the productive re-employment of assets in other ventures (see, further Nelson Goh The Assignment of Investment Treaty Claims: Mapping the Principles; Markus Burgstaller, Agnieszka Zarowna, “Effects of Disposal of Investments on Claims in Investment Arbitration”).

 

Conclusion

In summary, the permissibility of assigning arbitral claims under investment treaties can be analysed using a three-step analysis: (1) arbitral claims can be assigned (either by virtue of assigning a contract containing an arbitration agreement or through direct assignment of the claim itself); (2) a foreign investor has a direct arbitral claim against a host-State based upon the host-State’s alleged breach of one of its international obligations (an investment claim, regardless of any prior legal relationship with the host-State); (3) therefore, the investor may freely assign its investment claim without privity.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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If You Want to Know the Value of Two Weeks, Ask the Middle East Vis Pre-Moot Community

Sun, 2020-04-05 01:00

The Middle East Vis Pre-Moot Program (the “Program”), scheduled in Bahrain from 10 to 14 March 2020, was prepared and excited to welcome over 200 students, faculty, and lawyers to celebrate the Program’s 10th anniversary.

However, on 25 February, amid the unfortunate COVID-19 global pandemic, Bahrain took precautionary measures to prevent the spread of the COVID-19 virus, which included shutting down educational facilities and suspending flights from neighboring countries. As a result, the Program’s organizers (BCDR, CILE, and CLDP) had no choice but to cancel the in-person event.

The cancellation was devastating for the participants, because the Middle East Pre-Moot has grown to be more than a just a preparatory competition for the Vis Moot in Vienna and Hong Kong. The Program provides participating students oral advocacy training, much needed access to resources otherwise unavailable to them, and the opportunity to network with scholars, practitioners, and other students.

As the Program was only two weeks away, the organizers had to decide: cancel the Program altogether and go home, or go virtual?

For the students, who had worked tirelessly over the last half-year, cancelling the Program and throwing in the towel would have perhaps been the final nail in the coffin: uncertainty was looming around the in-person Vienna and Hong Kong Vis Moots, and students were exasperated. Yet, they were obsessed with solving the legal questions and possible solutions to this year’s Vis Moot problem, including the patent litigation between Mr. Burdin and Prof. John and its impact on the procedural and ethical questions before the tribunal.

For the organizers, cancelling the event would have meant having to live with the disappointment of knowing that the COVID-19 virus, which has already had such a devastating impact on so many aspects of “normal life”, would in yet another way stand in the way of bringing value to the lives of the students, pioneering their careers, and cause a ripple effect throughout the region.

The organizers searched for a way to turn this perceived loss into an opportunity for growth and betterment: victory may be snatched from the hands of defeat! It only took a 30-second phone call to unanimously decide to go home and go virtual!

We thought it would be easy. However, with only 15 days to prepare, it was as hard as understanding turbines!

As mandatory curfews were imposed in certain countries, schedules had to be constantly amended and communicated to participants to accommodate teams; thus, we had to ensure that a smooth communication process with teams was well thought out. The scheduling also had to accommodate for literally all time-zones, from the US’s west coast, passing through Bahrain, all the way to Wuhan, China. A customized electronic grading form and submission tool had to be developed to instantly calculate scores. We also had to find ways to record the availability of arbitrators. Finally, but obviously most importantly, the right online mooting tool had to be identified and tested to ensure the Program’s smooth running.

The success of this first-ever virtual Program hinged upon three essential pillars. First, ensuring adequate academic resources to support the virtual activities planned. Second, confirming a large pool of practitioners willing to volunteer their time to serve as educational advisors to teams, and as arbitrators for the scheduled competition. Third, and naturally the most important, gaining the trust and interest of teams to participate in this unique digital experiment.

Luckily for us, we underestimated the immense spirit of the teams and the Program itself. It is real, and infinite!

In an extraordinary showcase of unity, resilience, and determination, undoubtedly animated by the spirit of the pre-moot, the Program ultimately had more participants than even initially anticipated! Students from as many as 28 teams and 17 countries, and more than 150 advisors, faculty, and arbitrators made a hobby out of “Zooming” from 10 to 14 March, seamlessly overcoming the COVID-19 outbreak and marking the 10th anniversary of the Program a resounding success!

The Program organizers made available to students pre-recorded training videos accessible to them at their convenience, and from the comfort of their beds (if they so wished), but only if they were resilient enough, as the videos were protected with a telling password: ResilientMootie2020. Students also had two days of live training sessions with Pre-Moot advisors. The training materials covered useful tips for the “mooties” and relevant topics related to both oral presentation and substance. The Program’s most-committed friend, Michael Patchett-Joyce, provided an overview of the moot problem; CISG household-names such as Professor Ronald A. Brand and Professor Harry Flechtner of CILE provided invaluable guidance to the students on matters related to the CISG and arbitration law; the Vis Moot’s very own Professor Stefan Kröll shared a real-life approach to the moot problem; and Professor Zlatan Meškić discussed the procedural issues identified in the moot problem. Vis Advisors shared with the students their recommendations on argument development, efficient use of legal authorities in pleadings, maintaining advocacy skills on a virtual platform, avoiding common mistakes and pitfalls, answering arbitrators’ questions, crafting an effective rebuttal, and other key aspects of a successful oral pleading at the Vis Moot.

Thereafter, the students engaged in general round pleadings with arbitrators from around the world, and eight teams competed in elimination rounds to determine who would prevail. The cherry on top of it all? A final round judged by a top-tier panel: Professor Ingeborg Schwenzer as the Presiding Arbitrator, joined by the LCIA’s former Director-General Adrian Winstanley OBE and Professor Stefan Kröll.

Ultimately, Sri Lanka’s superb Royal Institute of Colombo was victorious against the US’s University of Pittsburgh. The traveling Albert H. Kritzer trophy, which is awarded every year to the winning team of the Program, did not have to travel mid-way across the globe because, conveniently, the trophy could pass to the Royal Institute of Colombo from fellow Sri Lankan university, the University of Colombo, who had won the Ninth Pre-Moot the previous year. The program concluded with a virtual “Gala,” celebrating the Program’s top awardees and recognizing individual and team achievements in written and oral advocacy.

This said, perhaps the greatest achievement of the Program was giving the students a taste of Billboard’s longest top-selling album, the universally-acclaimed CISG song. Professor Flechtner also shared a new hit song “The Bridge,” a musical masterpiece which he wrote and recorded with the assistance of CLDP’s Mais Abousy and her daughter Meena Al Khadiri. The song was specifically adapted to the Program’s focus from Iraq’s Elham El Madfai’s ‘Khattar Ana el Farah’ to honor the efforts of Professor Brand whose contribution to the inception and success of the Program is perhaps the single most clear embodiment of the spirit of the Vis Moot.

Obviously, it would have been impossible to deliver this online Program without the unwavering support, of our colleagues at BCDR, CILE and CLDP, and without our networks of scholars, law schools, students, alumni, and practitioners who volunteered their time for the success of this Program, and to whom we owe many thanks!

The Program aims to raise standards of oral and written advocacy, and, more generally, contribute to the study and practice of international commercial law and arbitration in the wider Middle East region. While launched in 2011 with just four teams, we are proud that it has since graduated more than 650 students from faculties in Afghanistan, Bahrain, Bosnia and Herzegovina, Egypt, Iran, Iraq, Jordan, Kosovo, Kuwait, Lebanon, Maldives, Myanmar, Qatar, Saudi Arabia, Sri Lanka, Tunisia, the UAE, and the USA.

Not coincidentally, the Albert H. Kritzer trophy is inscribed with the 13th verse of Chapter 49 of the Holy Quran which captures the spirit of the Program: “People, We have created you all male and female and have made you nations and tribes so that you would recognize each other.”

While this event surely pushed us to our limits, it was worth it, not only for the organizers, but also for the students.

Some say if you want to know the value of one hour, ask the lovers waiting to meet. When the Middle East Pre-Moot was all set and done, we learned that if you want to know the value of two weeks, ask the Middle East Pre-Moot community!

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The Armesto Schedule: a Step Further to a More Efficient Document Production

Sat, 2020-04-04 03:00

Many will shy away from this article on account of its mere title. This is understandable considering that document production tends to be seen as a nightmarish phase in arbitration for junior, senior lawyers and arbitrators alike. This is because, if not handled properly, document production can turn into a very costly and time-consuming exercise.

In an attempt to render document production more efficient and fair for the parties, international arbitrator Juan Fernández-Armesto and his team at Armesto & Asociados have designed a tool which consists in a collaborative table that systematizes the standards of the IBA Rules on the Taking of Evidence in International Arbitration (“IBA Rules”) and a procedural order that provides, from the outset, clear criteria and instructions on document production.

* * *

Document production is one of the most controversial procedural issues in international arbitration; it is the apotheosis of the clash between Common law and Civil law: the gathering and marshalling of evidence vary widely between these two legal traditions. Common law favours a broad discovery phase in pursuit of the “truth”, and no party can withhold any information or document which may be relevant to establish such truth. Whereas Civil law adopts a limited approach to document production, where a party can only ask for documents if it knows they exist and are necessary to prove its case; it is for the claimant to prove the facts with whichever evidence it controls and the defendant has no duty to reveal all their documents.

At the intersection between these two traditions, international arbitration had to find a third way: the IBA Rules which represent the arbitral community’s attempt to find a middle-ground. This set of rules is intended to provide an efficient, economical and fair process for the taking of evidence, particularly between parties belonging to different legal backgrounds.

Yet, the standards defined by the IBA Rules are fairly broad and leave room for interpretation when it comes to the production of documents. What does a “narrow and specific category of documents” mean? Or what kind of document can be considered “relevant and material for the case”? The fluid character of these concepts can lead to a complex arbitration phase, moreover, when lawyers from different cultures come together. This translates into lengthy, costly and ultimately inefficient document production procedures.

In nearly 90% of the international arbitrations at Armesto & Asociados, be it under ICC, ICSID or UNCITRAL Rules, the parties request a document production phase. In order to simplify and limit this procedure, we have designed the “Armesto Schedule”. Our team has been using it for four years now, but it remains a work in progress, constantly subject to improvements and modifications based on our experiences, with the aim of making document production a slightly more friendly exercise for all those involved.

 

  1. What is the Armesto Schedule?

Inspired by the classic Redfern Schedule, the Armesto Schedule is a user-friendly collaborative table in which the requesting party describes the requested document, the requested party agrees or objects to this request and the tribunal decides on the admissibility of such request.

Based on the above description, one may wonder whether there is any difference between the so-called Redfern Schedule and the proposed Armesto Schedule. Below, we outline the two main distinctions.

 

A. Format-wise

The Armesto Schedule is a vertical table, instead of a horizontal one, with three columns and several rows (also referred to as “Document Production Schedule”) (see, Annex I). Each page corresponds to a single document request. The pink areas are for the requesting party to complete, while the blue ones belong to the requested party. The white areas are left to the arbitral tribunal.

Each of the parties files its own Document Production Schedule requesting a number of documents or categories of documents.

 

B. Requirements & Objections

The Armesto Schedule integrates the standards of the IBA Rules under three requirements (R1 to R3) and six objections (O1 to O6). The requesting party must demonstrate that each of the requested documents or categories of documents meets the following three requirements, set out in Art. 3.3 of the IBA Rules:

  • R1: The requesting party must identify a document or a narrow and specific category of documents.1)Based on Art. 3.3(a)(i) and (ii) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • R2: The requesting party must prove that the document is relevant and material to the case.2)Based on Arts. 3.3(b) and 9.2(a) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • R3: The requesting party must demonstrate that the document is not in its possession, custody or control.3)Based on Art. 3.3(c)(i) and (ii) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

These requirements have to be met cumulatively. If a single one is not satisfied, the tribunal will automatically dismiss the request.

After filling in the three requirements, the requesting party sends the Schedule to the requested party, without copying the arbitral tribunal. The requested party has the opportunity (i) to deliver the documents voluntarily, (ii) to challenge any or all of the three requirements and/or (iii) to raise one or more of the following six objections:4)Based on Art. 3.5 IBA Rules. jQuery("#footnote_plugin_tooltip_8239_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

  • O1: The document is subject to legal or settlement privilege.5)Based on Art. 9.2(b) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • O2: Production would be unreasonably burdensome.6)Based on Art. 9.2(c) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • O3: The document has been lost, destroyed or does not exist.7)Based on Art. 9.2(d) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • O4: The document is subject to technical or commercial confidentiality.8)Based on Art. 9.2(e) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_8").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • O5: The document has special political or institutional sensitivity.9)Based on Art. 9.2(f) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_9").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • O6: Production would affect the fairness or equality of the procedure.10)Based on Art. 9.2(g) IBA Rules. jQuery("#footnote_plugin_tooltip_8239_10").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Thereafter, the requested party returns the Schedule to the requesting party, without copying the arbitral tribunal. If any objections have been raised, the requesting party is entitled to reply to them, but must refrain from making any further submission regarding the three requirements.

Finally, the arbitral tribunal must decide if each of the requirements is met and if any objections have been raised, whether they are applicable. This leads to a final decision by which the tribunal solves whether the document should be produced.

If at the outset of the proceedings the parties choose to have a document production phase, the above rules are discussed and defined in the first procedural order, together with the applicable procedural calendar. If each of the parties needs one week to prepare its requests, one week to submit a response to the counterparty’s schedule and a further week to present a reply, while the tribunal takes a final week to make its decision, the document production phase can be over in a month (without taking into account the deadline for the parties to produce the documents).

 

  1. What are the advantages of the Armesto Schedule?

We submit that the Armesto Schedule has three main advantages: it systematizes the standards, it clearly defines the criteria which will be used by the tribunal when making its decision, and it limits document production.

 

A. Systematization

The Armesto Schedule systematizes the IBA Rules requirements and objections in a user-friendly format, which is visually easy to follow.

The Schedule forces the parties to ensure that their requests meet all the necessary requirements. It further makes it simple for the counterparty to reply to a request, by either saying that one or several of the requirements are not met or by raising an objection.

Finally, it allows the tribunal to visualize the position of the parties on each of the requirements and objections, leading to a more straight-forward solution. If the requesting party fails to meet a single requirement, the request will be automatically dismissed by the arbitral tribunal, without the need to examine whether the remaining requirements are fulfilled. The Schedule also helps the tribunal to identify the objections to a document request.

In sum, the Armesto Schedule organizes the information that is generally condensed under a single row of a normal Redfern Schedule, and this allows the parties and the tribunal to quickly identify the specific issue, whether it is the absence of a requirement (R1 to R3) or the existence of an objection (O1 to O6).

 

B. Definition of criteria

The rules governing the Armesto Schedule are contained in a Procedural Order Model (the “PO”) agreed with the parties which defines, from the outset, the criteria that the tribunal will be applying when taking its decision. This provides the parties with certainty: the parties not only have clear instructions to present their requests but also know what to expect from the tribunal.

The PO defines and sets forth the tribunal’s understanding of each of the requirements and objections. For instance, in the case of requirement R2 (relevance and materiality of documents), the requesting party must prove that the documents are relevant and material to the resolution of the case. In order to facilitate this, the tribunal compels the requesting party to identify the paragraph in the written submissions for which proof by way of document production is required.

The Schedule goes on to establish that the following documents will, as a general rule, be considered relevant and material:

  • Documents referred to in other documents which are already on the file,
  • Documents mentioned in witness statements, legal opinions and/or expert reports,
  • Documents used by experts to prepare their opinions/reports (excluding their working documents, such as drafts and others).

Furthermore, the Schedule provides that it is not for a requesting party to disprove, by way of document requests directed to the counterparty, allegations for which the counterparty bears the burden of proof, since failure to discharge such burden will by itself lead to dismissal. Thus, parties know that production with the purpose of disproving the counterparty’s allegations will only be ordered in exceptional circumstances.

The PO sets out similarly detailed instructions for each remaining requirements and objections.

The definition of criteria gives less room for different interpretations, while ensuring that the parties are on the same page.

 

C. Limitation of Document Production

The final advantage of the Armesto Schedule is that it limits the document production exercise.

First, it curtails so-called “fishing expeditions”. For instance, in the case of requirement R1 (identification of a document or description of a narrow and specific category of documents) the requesting party knows that if it wants to request a category of documents, it must comply with the following additional requirements:

  • Provide a clear and well-defined characterization of the narrow and specific category;
  • Marshal circumstantial evidence of the putative existence of the category;
  • Provide the name of the person, authority or entity which has issued the category of documents;
  • Identify the initial and final date of the period during which the documents belonging to the category were issued (there is a specific row for this in the Armesto Schedule).

The PO goes as far as to give specific examples of what shall not be considered a narrow and defined category of documents. This is crucial to avoid fishing expeditions. In the event that the requesting party still attempts to make one, at least it knows that the tribunal will end up dismissing the request.

Second, all the parties’ allegations must be contained in the Schedule, i.e. no further pleadings are allowed. This avoids endless discussions on the extent of document production.

Third, the parties are requested to adhere to the word limit defined for each cell of the Schedule.

Finally, the PO also gives the parties the possibility to agree on limiting the number of document requests.

In sum, the Armesto Schedule incites the parties to be concise in their document production requests and avoids petty fighting over the extent of voluntary production.

 

  1. What makes the Armesto Schedule unique?

The Armesto Schedule contains two unique features, which are rarely seen in traditional document production procedures: the use of affidavits and the imposition of specific costs for the document production phase. The aim of these two tools is to avoid spurious document production requests.

 

A. Affidavits

Common law discovery is based on the assumption that parties and their counsel will comply truthfully with document production requests by delivering all responsive documents that are in the party’s custody or possession. This is all “fun and games” when the parties and their counsel come from a legal tradition in which this is the norm.

However, in most Civil law countries, parties do not file and protect their documents in expectation of a potential litigation. Similarly, there is no culture of delivering documents that are detrimental to one’s case.

This clash of cultures is particularly poignant in international arbitration where lawyers do not necessarily feel under a deontological duty to comply with their document production obligations. How can we ensure that there is a level playing field in production and that all involved parties are indeed delivering all responsive documents?

The Armesto Schedule has tried to come up with a solution in the form of two affidavits:

  • The first is a declaration by the Chief Legal Officer of the requested party (or similar rank, or in the case of an individual, his/her own declaration) (see, Annex III) that the requested party (i) has not destroyed any document, (ii) has carried out a reasonable search for the Documents, and (iii) has produced all requested documents.
  • The second affidavit is a declaration by the External Legal Counsel of the requested party (if applicable) (see, Annex IV) that he/she (i) has explained to the client the obligation not to destroy any document, (ii) has advised the requested party to carry out a reasonable search and to produce all ordered documents (except those that are subject to a privilege or confidentiality exception).

These affidavits are aimed at making the parties take responsibility for the document production from the outset. There is no point in engaging in such a time and cost-intensive exercise if the parties do not feel compelled to truthfully comply with the tribunal’s decision.

 

B. Allocation of costs

Additionally, the Armesto Schedule makes a specific provision for the allocation of costs derived from the document production phase.

The PO provides that the tribunal will take into consideration the reasonableness of the requests and objections, each party’s willingness to produce the documents under its control and the relative success of each party. It further establishes that the parties shall identify in their statements of costs, the charges incurred in preparing their document production requests and responses, and the costs incurred in the search and delivery of the requested documents.

The purpose of this provision is to dissuade parties from making unfounded document requests or launching fishing expeditions. It also encourages parties to cooperate and deliver documents voluntarily.

 

  1. Final considerations

Many argue against the use of document production, alleging that it is a cost and time-consuming procedure, where effort and costs are not matched by results.11)Notably, the Rules on the Efficient Conduct of Proceedings in International Arbitration (“Prague Rules”) encourage tribunals and parties to avoid any form of document production (Art. 4.2 Prague Rules). jQuery("#footnote_plugin_tooltip_8239_11").tooltip({ tip: "#footnote_plugin_tooltip_text_8239_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is partly based on poor user experience, which frequently is the result of insufficient or improper regulation.

That said, document production is a very useful tool for parties when properly regulated and used: it permits parties to access documents which would otherwise be inaccessible to the requested party who is looking to prove its case.

In order to try to make the document production process more efficient, the Armesto Schedule uses a friendly design, with clearly defined criteria and instructions, which are proposed by the tribunal and agreed by the parties at the outset of the proceedings.

The Schedule is an evolving mechanism that looks to adapt and meet the expectations of parties and arbitral tribunals.

References   [ + ]

1. ↑ Based on Art. 3.3(a)(i) and (ii) IBA Rules. 2. ↑ Based on Arts. 3.3(b) and 9.2(a) IBA Rules. 3. ↑ Based on Art. 3.3(c)(i) and (ii) IBA Rules. 4. ↑ Based on Art. 3.5 IBA Rules. 5. ↑ Based on Art. 9.2(b) IBA Rules. 6. ↑ Based on Art. 9.2(c) IBA Rules. 7. ↑ Based on Art. 9.2(d) IBA Rules. 8. ↑ Based on Art. 9.2(e) IBA Rules. 9. ↑ Based on Art. 9.2(f) IBA Rules. 10. ↑ Based on Art. 9.2(g) IBA Rules. 11. ↑ Notably, the Rules on the Efficient Conduct of Proceedings in International Arbitration (“Prague Rules”) encourage tribunals and parties to avoid any form of document production (Art. 4.2 Prague Rules). 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Could the Strasbourg Court be a Trump Card in the Enforcement of Arbitration Awards in Intra-EU ECT Disputes?

Fri, 2020-04-03 04:00

The aftermath of Achmea

Since the judgment of the Court of Justice of the European Union (CJEU) in Achmea, defending EU Member States and the European Commission have questioned the validity of the application of the investment arbitration clause in the Energy Charter Treaty (ECT) to intra-EU disputes. Although the motions to challenge jurisdiction on the basis of Achmea have proved until now unsuccessful, defending Member States keep on trying to have intra-EU ECT arbitration awards set aside and to oppose enforcement in non-EU States.

Even if it has not ruled yet on the extension of Achmea to ECT arbitration, CJEU, being part of the EU institutional system, is likely to be more willing to arguments on the predominance of EU law over international law. If that were the case, the courts of EU Member States would be bound to follow the CJEU’s position and set aside the awards or oppose their recognition in the EU. Chances for recognition and enforcement outside the EU under the New York Convention would be seriously impaired because the prevailing practice in many States is to deny recognition if the award is set aside in the State of origin, as in Switzerland, or to recognise the annulment decision on the basis of international comity unless it is contrary to fundamental notions of justice, as in the United States or England. However, ICSID arbitration, one of the options afforded in article 26.4 of the ECT, may provide the claimant with other alternatives for enforcement within the EU.

 

The arbitration award as a possession in the case law of the ECtHR

All EU Member States have ratified the European Convention on Human Rights (ECHR), whose article 1 of Protocol 1 requires the protection of property. Several judgments of the European Court of Human Rights in Strasbourg (ECtHR) recognised that an arbitration award is a possession subject to protection under article 1 of Protocol I.

In the case Stran Greek Refineries and Stratis Andreadis, an arbitration award was annulled by the Greek Supreme Court after several ups and downs, including approval of a law that annulled the arbitration agreement and the award, a judgment of the Greek Constitutional Court against such a law and a last-minute change of opinion of the Supreme Court originally opposed to annulment. In order to be protected as a possession, the ECtHR required the claimant to ascertain that the arbitration award had given rise to a debt in its favour that was sufficiently established to be enforceable. The ECtHR considered the award as a possession because it was final and binding in its own words and, according to Greek arbitration law, it was final and enforceable. Even if it could have been repealed, it had already been confirmed in first and second instance. The new legislation enacted by the Government to leave the agreement and award without effect provoked a change of position in the Supreme Court, which was considered an interference by the State in breach of article I of Protocol I.

In the case Regent Company, ECtHR also established that an award of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of Ukraine was a possession. Such award had been declared enforceable by the Ukrainian jurisdiction, but enforcement had been abandoned after the insolvency of the debtor, a Governmental entity. The ECtHR took into account that the arbitration was governed by specific Ukrainian law which treated the award as equivalent to an enforceable court judgment. Furthermore, the claimant, assignee of the award, had been specifically recognised as debtor by the Ukrainian courts in the procedure initiated for the enforcement of the arbitration award.

An award of the Foreign Trade Arbitration Court of the Yugoslav Chamber of Commerce was considered a possession by the ECtHR in the case Kin-Stib and Majkić. The award had been partially enforced and some amounts had been paid by the debtor. However, the repossession of a casino ordered by the award had not been executed despite several orders and fines imposed by the Serbian jurisdiction, which subsequently abandoned full enforcement efforts due to insolvency of the debtor. The Serbian courts had also denied the request of annulment of the award and the reopening of annulment procedures. The ECtHR considered that the claim in the award had been sufficiently be established to be enforceable as the own Serbian jurisdiction had ordered the execution of the award in its entirety, partially enforced the award and taken some measures against the debtor to attempt full enforcement.

In all three cases, through its own legislation on the finality and enforceability of the awards and by judicial measures ordering the enforcement of the award, the State had recognised that the award contained a debt or claim that should be enforced, thus a right or possession that should be protected under article 1 of Protocol 1of the ECHR.

 

An ICSID ECT arbitration award is sufficiently established to be enforceable

In the case of ICSID arbitration, as the annulment procedure is not carried out by a national jurisdiction but undertaken by an ad hoc committee according to article 52 of the ICSID Convention, there cannot be interference by jurisdiction of Member States in the set aside of the arbitration award. Such committee is not bound by Achmea or by the CJEU’s interpretation on the validity of submission to arbitration of intra-EU disputes under article 26 of the ECT. This committee is only bound by applicable international law and may reach a different conclusion on the interaction of ICSID Convention, ECT, the Vienna Convention on the Law of Treaties and EU law.

If the intra-EU ECT award is confirmed by the ad hoc committee, EU Member States and the EU itself, having ratified the ECT, would be bound to ensure the effective enforcement of such ICSID arbitration award. Under article 26.8 of ECT, “The awards of arbitration, […], shall be final and binding upon the parties to the dispute. […] Each Contracting Party shall carry out without delay any such award and shall make provision for the effective enforcement in its Area of such awards”). Moreover, in accordance with article 54.1 of the ICSID Convention, “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State”.

Any ICSID ECT arbitration award, even in disputes between EU Member States, has been recognised by those States as being enforceable, without need of further recognition and being equivalent to a court judgment. Following the criteria established by the ECtHR in the above case law, there seems to be sufficient grounds to consider that ICSID ECT arbitration awards are sufficiently established as enforceable and, therefore, the debt recognised in such awards is a possession that may benefit from the protection of Article 1 of Protocol I of the ECHR.

 

Review of interference with ICSID intra-EU ECT awards by the ECtHR

If, as we contend, ICSID intra-EU ECT arbitration awards are possessions protected by the ECHR, successful claimants in these awards could request enforcement in any EU Member State where assets of the defending Member State may be found. Failure to enforce such award based on Achmea or other arguments of EU law could be considered as an infringement of the human right to property of the claimant, who could file a claim and seek compensation before the ECtHR.

Although is not free of encumbrances, including the requirement to exhaust all domestic remedies or sovereign immunity from execution, the Strasbourg venue could have certain advantages. The ECtHR is likely to be at least more neutral and cautious in the application of EU law over the international obligations voluntarily assumed in the ECT by EU Member States and the EU itself. It would be an opportunity for ECtHR to dispense poetic justice after the CJEU’s opinion against the accession of EU to the European Convention on Human Rights. This option would also be open to enforcement in certain non-EU countries, such as Switzerland or more recently the United Kingdom, that have ratified the ECHR. It would be arguable whether this option would be available in case of opposition by EU Member States to enforcement of ICSID awards in third States that have not ratified the ECHR.

 

Conclusion

These thoughts may be idle talk if the CJEU finally supports the validity of submission to arbitration of intra-EU disputes under article 26.4 of ECT, if ICSID ad hoc committees take a contrary view or if relevant States, such as the United States, Switzerland, the United Kingdom or Australia, recognise and enforce intra-EU ECT arbitration awards. Otherwise, a complaint before the ECtHR under article 1 of Protocol 1 of the ECHR could serve as a last bullet to attempt enforcement of intra-EU ECT awards within the EU. In any case, it seems important that the EU learns that the assumption of international powers over international trade, including investment arbitration, although desirable, comes with the inherent burden of international obligations and liability.

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On Corruption in Investor-State Arbitration: the Case of Odebrecht Against the Peruvian State

Wed, 2020-04-01 23:00

On February 4, 2020, ICSID registered a request for arbitration submitted by the company Odebrecth Latinvest Sarl, a Luxembourg-based subsidiary of the Brazilian company Odebrecht SA, against the Republic of Peru (ICSID Case No. ARB/20/04). This post analyzes the background to this dispute, as well as the possible strategies that the parties could use during the arbitration process to raise and respond to the issues of corruption that have been put into issue by Peru.

 

Background to the Dispute

Odebrecht states – through a letter addressed to the special team of prosecutors – that it demands compensation of more than US $ 1200 million from Peru, arguing that Peru violated its obligations under the Agreement between the Government of the Republic of Peru and the Belgian-Luxembourg Economic Union for the Reciprocal Promotion and Protection of Investments (BIT), in relation to the Concession Contract for the Project ‘Improvement of the Country`s Energy Security and Development of the South Peruvian Pipeline’ (Concession Contract). It also states that it was obliged to submit this request for arbitration since the BIT establishes in article 11(4) a limitation period of three years to file a request for arbitration, which expired in January 2020.

Odebrecht argues, amongst other things, that on January 24, 2017, the state arbitrarily canceled the Concession Contract and adopted other measures related to the project that violate the rights of the Odebrecht subsidiary, such as the enforcement of the corresponding bond letter. It alleges that this occurred without the State indemnifying the company for the investments made, which would amount to more than US$ 1 billion. It also states that its admitted acts of corruption do not relate to the Concession Contract.

Peru has indicated through a press release that the contract was terminated because the consortium failed to obtain the financing and certify the financial closure within the terms established in the Concession Contract, even after two extensions were granted. Likewise, the Lava Jato Case Special Prosecution Group, in its response letter to Odebrecht, has stated that Odebrecht, under the effective collaboration agreement, has accepted that it committed acts of corruption regarding the Concession Contract (as occurred in the cases of the Costa Verde Highway Construction Project, Callao Section; and Lima-Callao Electric Mass Transportation System Project, Line 1, Sections 1 and 2), therefore the arbitration request should not have been filed.

It should be noted that this arbitration is linked to a previous arbitration also related to the Concession Contract and currently in process, raised by the Spanish companies Enagas S.A. and Enagas Internacional S.L.U. against the Peruvian State (ICSID Case No. ARB/18/26), in which compensation of US$ 1980 million is being claimed.

 

Next Steps in the Proceedings and Key Sticking Points

Under Rule 1 of the ICSID Arbitration Rules, the next step is to proceed with the constitution of the Arbitral Tribunal. However, it is likely that the Peruvian State will use the “clean hands doctrine” to allege a lack of jurisdiction (as happened in the case of African Holding Company of America, Inc. and Société Africaine de Construction au Congo SARL v. Democratic Republic of Congo), or the inadmissibility of the claim (as occurred in the case of Azpetrol International Holdings BV, Azpetrol Group BV and Azpetrol Oil Services Group BV v. Republic of Azerbaijan). If this occurs, the Arbitral Tribunal will need to decide whether to consider the jurisdictional/admissibility issues together with the merits, or choose to bifurcate, that is, to consider the jurisdictional issues and the merits separately.

Should Peru make such a submission, it will have to prove that the acts of corruption that it alleges actually took place, which in turn will depend on the standard of proof used by the Arbitral Tribunal. The ICSID Convention and the Arbitration Rules are silent on this matter, on which there is no consensus in Investor-State jurisprudence. Although the standard of proof is commonly high, an Arbitral Tribunal (in Spentex Netherlands, B.V. with the Republic of Uzbekistan) has already adopted a more flexible and holistic approach, coupled with the use of the “connecting the dots” method (as indicated in the case Methanex Corporation with the United States of America):

“Connecting the dots is hardly a unique methodology; but when it is applied, it is critical, first, that all the relevant dots be assembled; and, second, that each be examined, in its own context, for its own significance, before a possible pattern is essayed. Plainly, a self-serving selection of events and a self-serving interpretation of each of those selected, may produce an account approximating verisimilitude, but it will not reflect what actually happened.”

In this way, proof by the Peruvian State of the acts of corruption carried out by Odebrecht in relation to the Concession Contract will be crucial. Proving corruption may therefore not be as easy as the Special Prosecution Group appears to assume it will be, especially as it appears that in the effective collaboration agreement, Odebrecht did not recognize any payment of bribes to public officials regarding said Concession Contract. For this reason, everything will depend upon the standard of proof that the Arbitral Tribunal uses. If it uses a high standard of proof, the proof of alleged corruption in the Concession Contract will be complicated; but if it adopts a more flexible and holistic standard, together with the “connecting the dots” method, it will be easier for Peru to prove the alleged corruption regarding the Concession Contract.

To my knowledge, this will be the first ICSID arbitration in which a State is prosecuting public officials involved in acts of corruption at the same time as the arbitration proceedings in which corruption is alleged. It could also provide an opportunity for the Arbitral Tribunal to address the issue of the responsibility of the Peruvian State for such acts (as happened in the case Spentex Netherlands, B.V. with the Republic of Uzbekistan.1)See Betz, Kathrin “Proving Bribery, Fraud and Money Laundering in International Arbitration. On Applicable Criminal Law and Evidence”, Cambridge University Press, United Kingdom, 2017, pp. 128-136. jQuery("#footnote_plugin_tooltip_9741_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9741_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, even if Peru is successful in resisting the claim on the grounds of corruption, it may face the consequences of its public officials having also participated in those acts. In that event, the Arbitral Tribunal may condemn Peru to bear its own legal expenses, as well as half of the arbitration costs (as happened in the case Metal-Tech Ltd. case with the Republic of Uzbekistan). Further, in the event that it files a counterclaim against Odebrecht, the Arbitral Tribunal may also dismiss that counterclaim for lack of jurisdiction.

This case is therefore worth watching as it develops, to see what path it takes according to the various scenarios. It provides an opportune moment for an Arbitral Tribunal to rule on these issues that are frequently connected to allegations of corruption in investor-state arbitration.

References   [ + ]

1. ↑ See Betz, Kathrin “Proving Bribery, Fraud and Money Laundering in International Arbitration. On Applicable Criminal Law and Evidence”, Cambridge University Press, United Kingdom, 2017, pp. 128-136. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Hidden Impediments Await Foreign Parties Seeking to Enforce Arbitral Awards in Kazakhstan

Wed, 2020-04-01 03:30

The overwhelming weight of opinion among legal practitioners is that enforcement of foreign arbitral awards in Kazakhstan is theoretically possible under the New York Convention (“NY Convention”), albeit problematic in practice due to ambiguity in the Kazakh legislations. Many problems associated with the recognition and enforcement of foreign arbitral awards in Kazakhstan and the application of the NY Convention have already been discussed by Kazakh legal scholars. However, existing research works on such topics are often dated.

This post aims to familiarise foreign parties with up-to-date laws and procedures of the enforcement of arbitral awards in Kazakhstan, and thus identify the most prevalent impediments which await foreign parties seeking enforcement of arbitral awards in Kazakhstan. Three major issues in this regard are discussed: 1) status of the NY Convention in Kazakhstan; 2) inconsistences with the NY Convention; and 3) public policy as a ground to refuse enforcement.

 

Status of the NY Convention in Kazakhstan

Kazakhstan joined the NY Convention by Presidential Decree-No-2485 dated 4 October 1995. In accordance with Article 4(3) of the Kazakh Constitution, international agreements ratified by Kazakhstan should take priority over its domestic laws and should be implemented directly.

Kazakhstan has acceded to but has not ratified the NY Convention. In this regard, there are divergent opinions between Kazakh lawyers about the application of the NY Convention within Kazakhstan’s legislative framework. One school of thought is that the NY Convention only has the status of non-ratified treaties under the Kazakh Constitution and has no priority over municipal law. Due to the lack of ratification, Kazakhstan should execute foreign arbitral awards only on the basis of reciprocity.

The other school of thought is that the Convention arguably still applies through direct implementation as its status is equal to that of the enacting decree. According to Article 1(7) of the ‘On-Legal-Acts’ law, the definition of ‘legislation’ includes all normative legal acts adopted regarding established procedure. Thus, the decree and the NY Convention form a part of the national legislations, which in turn permit the recognition and enforcement of foreign arbitral awards in accordance with Article 501 of the Kazakh Civil Procedure Code (“CPC”).

From an international legal perspective, Kazakhstan is bound to observe its obligations under the NY Convention and cannot plead a conflict with domestic laws to escape from such obligations. The practical effect is that, where an arbitral award has been lawfully rendered in a third country and is thereafter brought in Kazakhstan for enforcement, Kazakh courts cannot refuse enforcement on the basis that the NY Convention contravene domestic laws, for this may entail breach of state as well as contractual responsibility by Kazakhstan. There appear to be no previous cases of refusal to issue a writ of execution in Kazakh courts on the ground of lack of ratification of the NY Convention. Therefore, it can be understood that the Kazakh courts consider the NY Convention to be valid and binding in Kazakhstan.

 

Inconsistencies with the NY Convention

As Kazakhstan is a signatory of the NY Convention, provisions of the CPC and the Law on Arbitration should align with the NY Convention. In this regard, the grounds for refusal of recognition and enforcement of arbitral awards provided in Article V of the NY Convention are listed in Article 255 of the CPC and Article 57 of the Law on Arbitration.

However, there is a difference between the wording in Article V of the NY Convention and Article 255 of the CPC, and that in Article 57 of the Law on Arbitration. This creates ambiguity on the scope of judicial discretion. Under the NY Convention, the enforcing court is not obliged to refuse enforcement even if it is satisfied that the recognition or enforcement of the award would be contrary to the national public policy. This is reflected by the employment of permissive wording of “may” in Article V of the NY Convention. Therefore, national courts have discretion to enforce the award even if a ground for refusal is established. However, provisions of Kazakh law are mandatory and Article 52(2) of the Law on Arbitration obliges the court to reject an application for enforcement in the event of conflict with Kazakh public policy. As such, it is arguable that the grounds for refusal of recognition and enforcement of arbitral awards under national laws are inconsistent with the grounds under the NY Convention.

Further Article 51 of the Law on Arbitration provides an additional ground to revise an arbitral award based on the discovery of new facts. Under Article 51(1), a party is entitled to apply for an award to be reviewed if the Kazakh Constitutional Council finds that the legislation applied by the arbitral tribunal in writing its award is unconstitutional. Article 51(2) provides that an application for revision of an arbitral award under Article 51(1) shall be filed and considered by the arbitral tribunal that rendered the award, within three months from the date of the establishment of facts constituting a ground for revising the award, unless another timeline is established by the rules or agreement of the parties. This provision is problematic because the Kazakh courts appear to have substantial discretion to revise arbitral awards, thereby giving rise to doubts as to whether an arbitral award is indeed final and binding on the parties.

 

Public Policy as a Ground to Refuse Enforcement

The broad and inconsistent interpretation of public policy adopted by the Kazakh courts has caused many problems in practice since the enactment of the Law on Arbitration in 2016.

The principles of public order are accounted for in the general provisions and Section II on ‘Person-and-Citizen’ of the Kazakh Constitution. Further, Article 2(1) of Law on Arbitration defines public policy as the fundamentals of law and order which are enshrined in the legislative acts of Kazakhstan, while Article 1090(2) of Kazakh Civil Code and the Law on Arbitration shed light on the principles of ‘public policy’.

Although the general definition of public policy is provided by Kazakh law, its precise application remains unclear and judges are granted discretion when assessing this ground. In this respect, two observations may be made:

  1. If other grounds for refusal have failed, the party resisting enforcement often misuses the public policy ground; and
  2. Some courts have annulled arbitral awards on public policy ground on the basis of contradiction of the ‘rule of law’, which might not be accurate as reflected in the 2017 ruling of the Supreme Court of Kazakhstan discussed below.

Until the Supreme Court resolved it with its ruling in 2017, the lower courts of Kazakhstan often applied a broad and inconsistent interpretation of public policy.

In one case, a Chinese company entered into a preliminary agreement with a Panamanian company in which Kazakh businessmen were involved, for the purchase of subsoil use rights for two gold mines. In such case, the Specialized Inter-District Economic Court of Almaty city (“SIDEC”) referred to Article 52 of the Law on Arbitration in its decision and found the award violated public order.

On 10 August 2016, the Civil Division of Astana City Court (“Appeal Court”) upheld the decision issued by SIDEC. The Appeal Court considered public policy as the basis of the rule of law embodied in the legislation of Kazakhstan and that the fundamental principle of the entire legal system of Kazakhstan is based on the principle of legality. As such, the Appeal Court appears to have applied the repealed principle of legality under the former arbitration law “On Arbitration Courts” which is arguably incorrect.

However, on 16 May 2017 the Supreme Court of Kazakhstan reversed the lower courts’ rulings because it concluded that the lower courts were guided by an inaccurate interpretation of public policy. The Supreme Court gave the following recommendation to lower courts in the Recommendations of the Round Table on Application of the Law on Arbitration:

“It should be noted that the application of the ground of public policy is possible only in exceptional cases where the enforcement of an arbitral award offends the basis of the public policy of the RoK. In connection with the foregoing, the courts when annulling arbitral awards on such ground, should explain which specific public policy is violated and how.”1)Translation provided by the author. jQuery("#footnote_plugin_tooltip_1569_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1569_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Recommendations

To resolve the legal ambiguities discussed above, it is recommended that: 1) the status of the NY Convention within the Kazakh legal system be clarified; 2) the inconsistences between the NY Convention and Articles 255 and 57 of the CPC and the Law on Arbitration be regularised; 3) legal practices of enforcement and recognition of foreign arbitral awards be standardised; and 4) explanatory notes concerning the public policy ground are formulated for judges.

References   [ + ]

1. ↑ Translation provided by the author. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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A Right Without a Remedy? The Recent US Decision to Not Enforce the Shell/Exxon Award

Tue, 2020-03-31 05:00

On September 4, 2019, Esso, a subsidiary of the Exxon Mobil Corporation, and Shell Nigeria, a subsidiary of the Shell Oil Company (collectively “Esso”), attempted to enforce a $1.799 billion arbitral award in the U.S. District Court for the Southern District of New York after it had been annulled in the courts of Nigeria (Esso Opinion). In the arbitration proceedings, the tribunal had found that Nigeria’s state oil company, Nigerian National Petroleum Corporation (“NNPC”), had breached its oil production contract with Esso and awarded Esso the amount of the lost production. When Esso attempted to enforce the award in Nigeria, the Nigerian courts declined to enforce the award. Although the Nigerian courts recognized the tribunal’s finding that the NNPC had breached its oil production contract, it nevertheless found the calculation of damages to be a non-arbitrable issue, and therefore, unenforceable.

In response to the unfavorable outcome, Esso brought the dispute to the United States District Court for the Southern District of New York claiming that the Nigerian court did not grant it a fair process and did not properly recognize the arbitral tribunal’s award as required under the New York Convention. U.S. courts have long held themselves to be the guardians of due process and procedural protections. They are generally skeptical when a party’s liability is determined but there is no remedy to make the harmed party whole. Indeed, this ancient Roman legal maxim, ubi ius, ibi remedium (where there is a right, there is a remedy), was echoed in one of the United States’ earliest landmark cases. Marbury v. Madison, 5 U.S. 137 (1803) (“The very essence of civil liberty certainly consists in the right of every individual to claim the protection of the laws, whenever he receives an injury.”)

U.S. courts have also repeatedly espoused a pro-arbitration policy. Enforcement of annulled arbitration awards raises familiar topics in U.S. law, such as the opportunity to be heard, procedural fairness, and public policy considerations that arise from the application of foreign laws. Hence, proceedings have been brought before U.S. courts to enforce annulled arbitral awards, and international parties closely watch the results of such complex enforcement actions.

Despite the above, the U.S. District Court for the Southern District of New York declined to enforce the award. This decision seems to be at odds with Pemex, a previous U.S. Second Circuit Court of Appeals case in 2016, (discussed in detail below).

 

The Precedent: The Pemex Case

In Corporación Mexicana de Mantenimiento Integral v. Pemex Exploración y Producción, the Second Circuit enforced an award that a court in Mexico had annulled (Pemex Opinion). In annulling the award, the court in Mexico relied on a 2007 law that was passed by Mexico’s legislature while the arbitration proceedings were still ongoing. The new law vested the authority for hearing claims raising issues related to public contracts exclusively in the Mexican Tax and Administrative Court. Mexico’s legislature also made disputes like the one in Pemex non-arbitrable tax issues. Pemex had argued before the arbitral tribunal that the claims raised had turned into a non-arbitrable dispute. However, the arbitral tribunal rejected the argument and issued a final award in favor of Corporación Mexicana de Mantenimiento Integral (“Commisa”) in 2009, finding there was a breach of contract. Pemex sought to set aside the award by submitting that the new law made the dispute non-arbitrable. Mexico’s Eleventh Collegiate Court for the First Circuit annulled the award in 2011.

Commisa turned to the U.S. courts for the enforcement of the annulled award. After the Mexican court annulled the award, the Southern District of New York decided to enforce the arbitral award, and on appeal, the U.S. Second Circuit Court of Appeals found that the annulment was a procedural violation, depriving Commisa of predictability and fair process. Under the New York Convention, enforcement may be refused if the award was set aside by the courts of the seat. Nevertheless, the Second Circuit held it would be against public policy to deprive the parties of a forum to fairly hear the case and, as a result, the court granted enforcement.

 

Abandonment or Not: What Happened in Esso?

The Esso case also involved a production agreement with a state oil company. Esso claimed that NNPC had extracted more oil than their contract had allowed and therefore breached the agreement. In the arbitration, Esso alleged the NNPC engaged in the overlifting, which was purely a contractual issue. The NNPC conversely argued that the differentiation in revenue was remitted to the Nigerian tax authority and their refusal to submit the tax documents prepared by Esso made it a tax issue at its core. For some time prior to the arbitration commencing, tax issues have been held to be non-arbitrable under Nigerian law, which was the law governing the agreement. The arbitral tribunal found that the matter was contractual, however, confirming its jurisdiction to hear the matter, which resulted in a $1.799 billion award for Esso.

In proceedings both before and after the award, Nigerian trial-level courts found the underlying dispute was a tax issue and therefore non-arbitrable. The Nigerian Court of Appeals affirmed that finding. Yet, the Court of Appeals also found that the issues of liability and the related assessment of damages were contractual in nature. These issues should have been separated from the tax issue at the trial level. The Court of Appeals held not only that these were separable issues, but also if the tribunal or the trial courts had properly separated them, they would have found that liability did exist in the amount that Esso had claimed. In other words, the Court of Appeals held that there was a breach of contract, but because the damages were exclusively related to tax, an arbitral tribunal could not legally provide the remedy.

With this unfavorable outcome, Esso sought to enforce the arbitral award in the U.S. courts, emphasizing the dissonance between finding a breach of contract while denying damages due to non-arbitrability. Yet despite this troubling position, the U.S. court declined to enforce the award and thus to provide a route to damages for Esso. So what has changed? Observers of U.S. courts might be wondering whether this is a step backward in enforcing arbitral awards, siding more with the traditional litigation systems.

The court emphasized that Esso had a right to pursue the enforcement of the annulled award. Procedurally, the court held that it had jurisdiction to hear the case and had the power to enforce an annulled arbitral award. However, the New York court felt that the Nigerian courts—the chosen forum of the seat interpreting their own law—provided an adequate opportunity to be heard. Esso did have a remedy; one available through Nigerian law and through the Nigerian tax tribunals. The Nigerian decisions adhered to existing law known to the parties during the drafting of their agreement and at the commencement of arbitration.

This predictability of process distinguished Esso from Pemex: In Pemex, the retroactive law interfered with the parties’ chosen process. Here, the annulment was based on existing and well-known law in the chosen forum. Although the New York Convention permits enforcement of annulled awards, this did not warrant it. The court’s focus was on the opportunity to be heard within the confines of the forum and legal regime that the parties themselves chose.

 

Enforcement of Annulled Awards Moving Forward

The takeaway is that U.S. courts remain open to enforcement of annulled awards and to providing a forum to parties that have otherwise been deprived of a place to fairly enforce their award. This does not depart from the doctrine of pro-enforcement, but it adds nuance. Courts will continue to avoid the substantive issues, while focusing more so on weighing the procedure for fairness.

Questions remain such as whether procedure can affect the substance so much that it transcends a mere opportunity to be heard leading to the unfairness of the outcome being reviewed even if the process was predictable. That said, practitioners bringing annulled awards before U.S. courts should be comforted that the opportunity to enforce annulled awards remains, however, they should focus their petitions on the procedural nuances.

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A Right Without a Remedy? The Recent US Decision To Not Enforce the Shell/Exxon Award

Tue, 2020-03-31 02:00

On September 4, 2019, a subsidiary of the Shell Oil Company, Esso, attempted to enforce a $1.799 billion arbitral award in the U.S. District Court for the Southern District of New York after it had been annulled in the courts of Nigeria (Esso Opinion). In the arbitration proceedings, the tribunal had found that Nigeria’s state oil company, Nigerian National Petroleum Corporation (“NNPC”), had breached its oil production contract with Esso and awarded Esso the amount of the lost production. When Esso attempted to enforce the award in Nigeria, the Nigerian courts declined to enforce the award. Although the Nigerian courts recognized the tribunal’s finding that the NNPC had breached its oil production contract, it nevertheless found the calculation of damages to be a non-arbitrable issue, and therefore, unenforceable.

In response to the unfavorable outcome, Esso brought the dispute to the United States District Court for the Southern District of New York claiming that the Nigerian court did not grant it a fair process and did not properly recognize the arbitral tribunal’s award as required under the New York Convention. U.S. courts have long held themselves to be the guardians of due process and procedural protections. They are generally skeptical when a party’s liability is determined but there is no remedy to make the harmed party whole. Indeed, this ancient Roman legal maxim, ubi ius, ibi remedium (where there is a right, there is a remedy), was echoed in one of the United States’ earliest landmark cases, Marbury v. Madison, 5 U.S. 137 (1803) (“The very essence of civil liberty certainly consists in the right of every individual to claim the protection of the laws, whenever he receives an injury.”)

U.S. courts have also repeatedly espoused a pro-arbitration policy. Enforcement of annulled arbitration awards raises familiar topics in U.S. law, such as the opportunity to be heard, procedural fairness, and public policy considerations that arise from the application of foreign laws. Hence, proceedings have been brought before U.S. courts to enforce annulled arbitral awards, and international parties closely watch the results of such complex enforcement actions.

Despite the above, the U.S. District Court for the Southern District of New York declined to enforce the award. This decision seems to be at odds with Pemex, a previous U.S. Second Circuit Court of Appeals case in 2016, (discussed in detail below).

 

The Precedent: The Pemex Case

In Corporación Mexicana de Mantenimiento Integral v. Pemex Exploración y Producción, the Second Circuit enforced an award that a court in Mexico had annulled (Pemex Opinion). In annulling the award, the court in Mexico relied on a law that was passed by Mexico’s legislature while the arbitration proceedings were still ongoing. The new law vested the authority for hearing claims raising issues related to public contracts exclusively in the Mexican Tax and Administrative Court. Mexico’s legislature also made disputes like the one in Pemex non-arbitrable tax issues. Pemex argued before the arbitral tribunal that the claims raised had turned into a non-arbitrable dispute. However, the arbitral tribunal rejected the argument and issued a final award in favor of Corporación Mexicana de Mantenimiento Integral (“CCMI”), finding there was a breach of contract. Pemex sought to set aside the award by submitting that the new law made the dispute non-arbitrable. The court in Mexico annulled the award.

As a result, CCMI turned to the U.S. courts for the enforcement of the annulled award. After the Southern District of New York decided the matter, on appeal, the Second Circuit found that the annulment was a procedural violation, depriving CCMI of predictability and fair process. Under the New York Convention, enforcement may be refused if the award was set aside by the courts of the seat. Nevertheless, the Second Circuit held it would be against public policy to deprive the parties of a forum to fairly hear the case and, as a result, the court granted enforcement.

 

Abandonment or Not: What Happened in Esso?

The Esso case also involved a production agreement with a state oil company. Esso claimed that NNPC had extracted more oil than their contract had allowed and therefore breached the agreement. In the arbitration, Esso alleged the NNPC engaged in the overlifting, which was purely a contractual issue. The NNPC conversely argued that the differentiation in revenue was remitted to the Nigerian tax authority and their refusal to submit the tax documents prepared by Esso made it a tax issue at its core. For some time prior to the arbitration commencing, tax issues have been held to be non-arbitrable under Nigerian law, which was the law governing the agreement. The arbitral tribunal found that the matter was contractual, however, confirming its jurisdiction to hear the matter, which resulted in a $1.799 billion award for Esso.

In proceedings both before and after the award, Nigerian trial-level courts found the underlying dispute was a tax issue and therefore non-arbitrable. The Nigerian Court of Appeals affirmed that finding. Yet, the Court of Appeals also found that the issues of liability and the related assessment of damages were contractual in nature. These issues should have been separated from the tax issue at the trial level. The Court of Appeals held not only that these were separable issues, but also if the tribunal or the trial courts had properly separated them, they would have found that liability did exist in the amount that Esso had claimed. In other words, the Court of Appeals held that there was a breach of contract, but because the damages were exclusively related to tax, an arbitral tribunal could not legally provide the remedy.

With this unfavorable outcome, Esso sought to enforce the arbitral award in the U.S. courts, emphasizing the dissonance between finding a breach of contract while denying damages due to non-arbitrability. Yet despite this troubling position, the U.S. court declined to enforce the award and thus to provide a route to damages for Esso. So what has changed? Observers of U.S. courts might be wondering whether this is a step backward in enforcing arbitral awards, siding more with the traditional litigation systems.

The court emphasized that Esso had a right to pursue the enforcement of the annulled award. Procedurally, the court held that it had jurisdiction to hear the case and had the power to enforce an annulled arbitral award. However, the New York court felt that the Nigerian courts—the chosen forum of the seat interpreting their own law—provided an adequate opportunity to be heard. Esso did have a remedy; one available through Nigerian law and through the Nigerian tax tribunals. The Nigerian decisions adhered to existing law known to the parties during the drafting of their agreement and at the commencement of arbitration.

This predictability of process distinguished Esso from Pemex: In Pemex, the retroactive law interfered with the parties’ chosen process. Here, the annulment was based on existing and well-known law in the chosen forum. Although the New York Convention permits enforcement of annulled awards, this did not warrant it. The court’s focus was on the opportunity to be heard within the confines of the forum and legal regime that the parties themselves chose.

 

Enforcement of Annulled Awards Moving Forward

The takeaway is that U.S. courts remain open to enforcement of annulled awards and to providing a forum to parties that have otherwise been deprived of a place to fairly enforce their award. This does not depart from the doctrine of pro-enforcement, but it adds nuance. Courts will continue to avoid the substantive issues, while focusing more so on weighing the procedure for fairness.

Questions remain such as whether procedure can affect the substance so much that it transcends a mere opportunity to be heard leading to the unfairness of the outcome being reviewed even if the process was predictable. That said, practitioners bringing annulled awards before U.S. courts should be comforted that the opportunity to enforce annulled awards remains, however, they should focus their petitions on the procedural nuances.

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From Zero to One: How the Vis Moot is Shaping Arbitration in Afghanistan

Mon, 2020-03-30 19:00

Afghanistan, in January 2007, enacted its Commercial Arbitration Law to facilitate prompt, fair and neutral resolution of commercial and economic disputes through arbitration. However, despite enactment of the Law, Afghan courts exhibited reluctance to defer to dispute resolution clauses in contracts which directed parties to arbitration. Consequently, till 2013, arbitration was neither considered a viable option to resolve disputes nor was there any progress in arbitral jurisprudence. This lack of development can probably be attributed to the then prevailing armed conflict and volatile political situation. However, after 2014, some focus returned to arbitration. Although slowly, discourse on arbitration, over the past six years, has grown so much that the arbitration circuit’s chatter is now audible even outside Afghanistan. Interestingly, this current renaissance has its roots in the 11th Willem C. Vis East International Commercial Arbitration Moot (Vis East).

In 2014, Commercial Law Development Program (CLDP), a division of the U.S. Department of Commerce, sponsored Kabul University’s all-women team to participate in the 11th Vis East. This marked the first time that any team from Afghanistan participated in the Vis East. The competition influenced the participants so much that they decided to pass on the baton and along with CLDP’s support conducted, in 2015, the 1st Afghan Vis Pre-Moot at the US Embassy in Kabul. That year, CLDP supported three teams (consisting of twenty students) that participated in the Afghan Pre-Moot by taking them to the 5th Vis Middle East Pre-Moot in Jordan and the 12th Vis East in Hong Kong. These initiatives fairly piqued the country’s younger generation’s interest in arbitration but the turning point was the release of the documentary titled ‘Afghan Dreams’ which showcased how the 2014 all-female team of four had overcome cultural and systemic challenges to compete in one of the world’s most prestigious moot court competitions.

This set the stage for establishment of the Afghanistan Vis Alumni Network (AVAN). AVAN was established as a voluntary group for the purpose of better preparing students for the competition through trainings and shoulders the mantle of conducting the Afghan Pre-Moot annually. CLDP continues to sponsor teams to the Middle East Pre-Moot and Vis East, but the Afghan Pre-Moot serves as the battleground where teams have to fight for the top spot. In its 6th year, the latest edition of the competition witnessed participation of eleven teams from across Afghanistan. The contributions of AVAN and CLDP have been such that at least three Afghan teams have participated in Vis East every year since the 12th edition in 2015. In fact, the American University of Afghanistan even broke into the elimination rounds of the 13th edition and were semi-finalists in the Pan Asia Division.

Simultaneously, other developments, separate from field of academics, have been critical in bringing focus on the practice of arbitration. In June 2015, Afghanistan Chamber of Commerce and Industries (ACCI) and Afghanistan Investment Climate Facility Organization (AICFO) set up Afghanistan Center for Commercial Dispute Resolution (ACDR), the country’s first arbitral institute. ACDR’s portfolio of services, besides administering arbitrations, includes issuing certifications for arbitrators, conducting international and domestic trainings for Afghan lawyers, judges and Ministry of Justice employees, and providing technical assistance in reviewing the arbitration law in force. In July 2018, ACDR signed a memorandum of understanding (MoU) with AVAN to use their resources to improve future use of ADR, specially arbitration. In August 2019, ACDR successfully issued its first arbitral award.1)As on March 2020, ACDR has issued 4 arbitral awards. jQuery("#footnote_plugin_tooltip_4034_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4034_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); On the other hand, in February 2017, Afghanistan International Chamber of Commerce (ICC-Afg) officially launched its operations in Afghanistan. In 2018, ICC-Afg established an Arbitration & ADR Commission which annually conducts the ICC Young Arbitrators Forum (YAF) conference.2)The 3rd ICC YAF Conference on Arbitration in Afghanistan was held in May 2019. jQuery("#footnote_plugin_tooltip_4034_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4034_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In August 2019, ICC-Afg and AVAN signed a MoU under which ICC-Afg will host trainings and provide internship opportunities to Vis Moot participants.

It is pertinent to highlight that ACDR’s incumbent Executive Director, ICC-Afg’s incumbent Head of Dispute Resolution & Policy and a considerable number of members on ICC-Afg’s Arbitration & ADR Commission, are former Vis East participants. This not only evidences the Moot’s contribution to the arbitration eco-system in Afghanistan but also provides context to why two competing institutions, ACDR and ICC-Afg, are, at least so far, cooperating with each other to overcome obstacles and improve national arbitration practice.

The combined efforts of AVAN, ACDR and ICC-Afg have over the past couple of years led to the following:

  • Presidential assent for bringing into effect the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards;3)Presidential Decree No. 31 dated 1398/11/23 (Hijri Calendar). jQuery("#footnote_plugin_tooltip_4034_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4034_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Proposal to the Ministry of Justice to amend the 2007 Commercial Arbitration Law;
  • Proposal to the Ministry of Commerce and Industry to lay down guidelines regulating enforcement of arbitral awards;
  • Addition of arbitration and mediation modules in Afghanistan Independent Bar Association’s 6-month legal course;4)Pursuing which is a mandatory prerequisite for obtaining a Bar license. jQuery("#footnote_plugin_tooltip_4034_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4034_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Lobbying for amendment of Article 27 of the Law on the Manner of Acquisition of Rights5)The Law on the Manner of Acquisition of Rights, Gazette Number 1309, 2018. jQuery("#footnote_plugin_tooltip_4034_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4034_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); to include arbitral awards in the list of documents so that the General Directorate of Rights can enforce an arbitral award as if it were a court order;
  • Plans to establish a task force which will identify barriers to arbitration and develop an operative framework to eliminate them; and
  • Proposal to create a single-stop section for arbitration related affairs in local commercial courts.

Afghanistan has, over the past decade, gone through a transitional period in the field of arbitration i.e. from a barely active to an active stage. This initiative that kickstarted by virtue of Vis East was taken forward by AVAN, ACDR and ICC-Afg. Although the initial headway has been substantial, continued efforts would be required to move towards a comprehensive arbitral regime. This would necessitate not only seasoned national experts but also increased interest of business houses in arbitration and, most importantly, governmental support. Going ahead, the question that arises is not whether the new arbitration brigade has the potential to bring about meaningful change in the arbitration landscape, rather is, whether it will get support from the government in the aftermath of the US-Taliban peace deal.

References   [ + ]

1. ↑ As on March 2020, ACDR has issued 4 arbitral awards. 2. ↑ The 3rd ICC YAF Conference on Arbitration in Afghanistan was held in May 2019. 3. ↑ Presidential Decree No. 31 dated 1398/11/23 (Hijri Calendar). 4. ↑ Pursuing which is a mandatory prerequisite for obtaining a Bar license. 5. ↑ The Law on the Manner of Acquisition of Rights, Gazette Number 1309, 2018. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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COVID-19 and Investment Treaty Claims

Mon, 2020-03-30 01:30

At the time of writing, the number of confirmed cases of COVID-19 passed 600,000, across more than 200 countries and territories. The World Health Organization (the WHO) declared a Public Health Emergency of International Concern on 30 January 2020, i.e. an ‘extraordinary event’ which is ‘serious, unusual or unexpected’ carries trans-national implications, and may require immediate international action. On 11 March 2020, the WHO declared it a pandemic.

Measures have been announced by many States – on a daily basis – to attempt to contain and mitigate the spread of the disease, and many have declared states of emergency under their domestic laws. The measures mostly involve social distancing, including quarantines, isolation and travel restrictions. These measures have significant human costs, but they are also having a wider impact on economic interests. Europe, Italy, France and Spain, among others, have imposed nationwide lockdowns, and the UK has also imposed significant restrictions on movement. Businesses are closing across a range of sectors, and more are expected over the coming months.

Looking forward, further measures are likely to be imposed, and sooner rather than later. Economic measures are already being announced which are likely to have a significant impact on banks, such as mortgage suspensions. As economies slow and jobs are lost, energy companies may be asked to discount consumer prices or to suspend charges altogether. Businesses, including those run by foreign investors, may be forced to cease trading and operating, their supplies may be requisitioned, or they could be nationalized.

In these circumstances, States and foreign investors will be considering their positions under applicable investment treaties: will States be insulated for measures taken in response to the emergency presented by COVID-19, or will investors be indemnified for the substantial losses they will likely suffer?

If a COVID-19 measure is challenged by a foreign investor, there will be a threshold issue as to whether the measure is potentially in breach of the substantive provisions of an investment treaty. There may be strong grounds for a State to contend that the measure adopted is not a breach of fair and equitable treatment, or does not amount to indirect expropriation. Provided that it can be established that the measure is incompatible with the relevant obligation, a further question that arises is whether the State has a valid defence to a claim. States can defend against treaty claims by:

  1. treaty exceptions; or
  2. defences under customary international law.1)On the application of these under public international law, see also F Paddeu and F Jephcott, “COVID-19 and Defences in the Law of State Responsibility Parts I and II”, EJIL Talk, 17 March 2020. jQuery("#footnote_plugin_tooltip_1541_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1541_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Treaty exceptions

These are expressly set out in the BIT. If the exception applies, the treaty does not apply to the disputed measure. All will depend on the particular treaty.

In early treaties, specific exceptions were rare, although some included exceptions for measures “necessary for the maintenance of public order”. One could see an argument to bring some measures taken to combat COVID-19 within the scope of measures for “public order”, although ultimately it would depend on the particular circumstances.

Very few BITs contain general exceptions, or incorporate the general exceptions as set out in the GATT and GATS trade agreements. The general exceptions usually provide that the treaty will not prevent a party from adopting or enforcing measures to protect human life or health, provided that the measures are not arbitrary or discriminatory. Where possible, States are likely to seek to rely on these general exceptions provisions in relation to measures taken in response to COVID-19.

More recent investment treaties have stronger specific exceptions, which explicitly exempt non-discriminatory regulatory measures for lawful public welfare objectives, including public health, from indirect expropriation obligations. For example, the Canada-EU Trade Agreement (CETA) specifies that non-discriminatory regulatory measures designed and applied to protect legitimate public welfare objectives, including public health, do not constitute indirect expropriations, except in “rare circumstances”. Those may protect States against indirect expropriation claims, but may not assist in relation to breaches of other provisions of investment treaties.

Some treaties do go further. For example, the recent China-Australia Free Trade Agreement provides that non-discriminatory measures for “legitimate public welfare objectives of public health … shall not be the subject of a claim” by an investor. Provisions such as these are likely to insulate COVID-19 measures from investment treaty claims.

 

Customary international law defences

Customary international law defences are not set out in the treaty, but have been codified in the ILC Articles on State Responsibility (termed “circumstances precluding wrongfulness”). The treaty continues to apply, but States will be exonerated from any claims for breach for as long as the facts giving rise to the defence continue to exist.

There are six circumstances precluding wrongfulness that are recognized under customary international law: of these, three are potentially relevant to COVID-19 measures:

  • force majeure;
  • distress; and
  • necessity.

Necessity figured prominently in the treaty-based cases brought in the aftermath of the Argentine financial crisis, but the other two defences have not featured prominently in investment treaty cases.

 

Force majeure

A successful claim of force majeure must fulfil five conditions:

  1. there must be an unforeseen event or an irresistible force;
  2. the event or force must be beyond the control of the State;
  3. the event must make it ‘materially’ impossible to perform an obligation;
  4. the State must not have contributed to the situation; and
  5. the State must not have assumed the risk of the situation occurring.

The plea of force majeure is a strict one, and States have rarely been successful when invoking it. The outbreak of COVID-19 potentially amounts to an unforeseen event or an irresistible force triggering a situation of force majeure, but States are likely to have some difficulty demonstrating material impossibility of performance (3). This will depend on the specific obligation at issue, and the particular circumstances at play, but in most cases, States are likely to have a choice (even if a difficult one) in respect of compliance.

 

Necessity

To successfully plead the defence of necessity, a State must fulfil four requirements:

  1. a grave and imminent peril;
  2. that threatens an essential interest;
  3. the State’s act must not seriously impair another essential interest;
  4. the State’s act was the ‘only way’ to safeguard the interest from that peril.

In addition, the plea is excluded if:

  1. the obligation in question excludes reliance on necessity; and
  2. the State contributed to the situation of necessity.

On the basis of publicly available information, it seems arguable that the outbreak and spread of COVID-19 meets the requirement of grave and imminent peril (1). It is an unfolding event which poses an imminent threat of a grave harm to the world’s population.

It also appears arguable that it threatens an essential interest (2) of the State, or of the international community as a whole. The well-being of a States’ population and the continued functioning of its public services have been accepted as constituting ‘essential interests’ in investment treaty arbitration (see National Grid v Argentina, §245).

The measure must not seriously impair an essential interest (3) of another State or of the international community as a whole. Investment tribunals have readily accepted that a State’s interest in the well-being of its population outweighs the interests of investor home States (or those of investors themselves). The balance must be considered in the particular circumstances, but it is likely to be arguable, in certain cases, that COVID-19 measures do not seriously impair essential interests of investors.

The measure must be the ‘only way’ (4) to protect the essential interest from the impending harm at the time. If there are other (lawful) ways to address the threat, even if these are more costly or inconvenient, the plea will fail. This sets a high threshold. Whether it is met will ultimately turn on an assessment of the measures adopted, by reference to the information available at the time, and taking account of the whole package of measures, as well as alternative measures which could have the same effect, even if they are more costly.

Whether necessity is precluded by the substantive obligation (5) turns on the obligation in question. Investment treaty obligations are unlikely to preclude reliance on necessity.

There is considerable uncertainty as to the scope of the requirement of non-contribution (6). Some tribunals have approached the requirement as a purely causal one such that ‘well-intended but ill-conceived policies’ are sufficient to exclude reliance on the plea (Impregilo v Argentina, §356). Others have interpreted it more narrowly, as requiring some degree of fault (Urbaser v Argentina, §711). Depending on how broadly this is interpreted, it might be argued that States’ under-funding or under-resourcing of health care systems is a substantial contributing factor, potentially precluding reliance on necessity.

On the basis of the information available at the present time, it might be difficult for States to rely on necessity in respect of measures taken to combat COVID-19. The plea has been interpreted in very restrictive terms by tribunals and it could be difficult for States to establish all of the requisite elements.

 

Distress

To successfully plead the defence of distress, the State must show:

  1. threat to life;
  2. a special relationship between the author of the act, whether this is a State organ or an individual whose acts are attributable to the State, and the persons in question;
  3. that there was no other reasonable way to deal with the threat;
  4. that it did not contribute to the situation; and
  5. that the measures were proportionate.

The element of threat to life (1) is likely to be made out, on the basis of the existing threat posed by COVID-19 to the lives of individuals within the State’s jurisdiction. As to the requisite “special relationship” (2), a tribunal could consider that an important aspect of the ‘special relationship’ between the organ imposing a measure and the individuals whose lives are under threat is control: is the fate of those individuals under the control of the relevant organ? In circumstances where only the central government has the authority to put in place measures of containment or mitigation in these types of emergencies, it appears arguable that there is a special relationship: to some extent, the fate of the population is within the control of the central authorities.

Whether the other requirements are likely to be met will depend on the particular measure adopted, its impact, and the particular circumstances. The requirement of “reasonableness” (3) is a lower standard than for the plea of necessity which requires that the measures be the ‘only way’ to deal with the emergency. This requires a case by case assessment, in an appropriate context, including the whole package of measures adopted. The non-contribution requirement (4) is also a lower standard than for necessity: good faith policies that contributed to the crisis do not exclude reliance on the plea. Finally, the measures must be proportionate (5), comparing the measure against the interest protected. This is likely to require an assessment of the impact of the measure on the investor, compared to the impact on the population overall in the event that the measure was not adopted.

 

The Kluwer Arbitration Blog is closely following the impact of COVID-19 on the international arbitration community, both practically and substantively. We wish our global readers continued health and success during this difficult time. All relevant coverage can be found here

References   [ + ]

1. ↑ On the application of these under public international law, see also F Paddeu and F Jephcott, “COVID-19 and Defences in the Law of State Responsibility Parts I and II”, EJIL Talk, 17 March 2020. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The Contents of Journal of International Arbitration, Volume 37, Issue 2

Sun, 2020-03-29 02:00

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

 

Sundaresh Menon, Technology and the Changing Face of Justice

The problem of unequal access to justice, also known as the justice gap, has been worsened by rising levels of inequality over the past half-century. The denial of due compensation and the inability to enforce rights in turn perpetuates and widens the wealth gap, initiating an ever-deepening spiral of inequality that threatens social cohesion and erodes public confidence in the courts. By empowering individuals, organizations and governments, technology and peaceable methods of dispute settlement have the potential to close each dimension of the justice gap and address the large volume of unmet justice needs that do not surface before the justice system. These unmet needs are generally straightforward but require urgent resolution, and therefore require quick and affordable solutions that focus on amicable settlement. In thinking about how we can redesign our justice system to promote solutions of this nature, we need a broader vision of justice: one that seeks to produce just outcomes through practical and proportionate means, and that aspires not merely towards keeping the peace but also building lasting peace. In this manner, our justice system will better promote effective equal access to justice, restore and strengthen communities that are riven by conflict, and help to tilt an unequal society closer towards equilibrium.

 

Moritz Keller & Eric Leikin, A Taxing Endeavour: Addressing the Tax Consequences of Investment Arbitration Awards

The authors proceed from the theoretical rule that where a claimant establishes that the value of its award will be taxed in excess of what its profits would have been taxed absent the respondent state’s breach, it may be entitled to a ‘tax remedy’ in order to prevent under-compensation. They then analyse tribunal practice, with some interesting (and surprising) results. First, despite the taxation of awards often amounting to tens of millions of dollars, tribunals have devoted very little attention to this issue. Second, tribunals have tended to make a distinction between those potential award tax burdens imposed by the respondent state and those imposed by a third state. Whilst requests for tax remedies regarding tax liabilities to third states have been refused in all publicly available decisions, some tribunals have been sympathetic to requests for tax remedies regarding tax liabilities to the respondent state; although importantly, such awarded remedies have been non-monetary in nature. Finally, looking forward, the authors propose that tax remedies be categorized as ‘future losses’, a well-established concept. Mindful of the hurdles such arguments would need to overcome, including the requirements of reasonable certainty and proximate causation, the authors point to existing law and practice to provide a corresponding legal framework, in the hope of moving towards consistent and objective future practice on this point.

 

Yasin Alperen Karaşahin, Contractual Time Limits to Commence Arbitration

Arbitration and multi-tier dispute resolution clauses may contain a time limit to commence arbitration. The expiry of such a time limit could have different legal results. First, it could make the arbitration clause ineffective. Second, it could extinguish the claim or prevent its enforcement through legal proceedings. In the latter case, the contract provision about the time limit would have to be examined with regard to its compliance with mandatory provisions of the law applicable to limitation periods. Even the determination of the law applicable to limitation periods causes considerable difficulty. It is another difficult issue to determine which provisions of the law applicable to limitation periods are mandatory and, if so, whether the contract provision complies with the limits of the law. Once it is established that the contract provision is valid, the acts necessary to prevent the expiry of the time limit would have to be examined.

 

Eloïse Glucksmann & Rüdiger Morbach, Hot-Button Issues in International Arbitration: A Survey Among Arbitrators

International Arbitration has been in the focus of public attention following the fierce debate on the Transatlantic Trade and Investment Partnership (TTIP) and the Comprehensive Economic and Trade Agreement (CETA). A broad public has questioned whether arbitral tribunals should be entrusted with issues of public interest. Some of these issues are particularly controversial. These ‘hot-button’ issues include international sanctions, corruption, money laundering and, to a somewhat lesser extent, antitrust law. The authors wanted to know how arbitrators deal with these issues, should they come up in an arbitration. They set up a survey in the form of a short online questionnaire and invited more than 2,500 arbitrators, listed as members of different European arbitral institutions, to participate. The participants were asked whether they have already encountered hot-button issues in an arbitration, whether they felt prepared to deal with them and whether they have been approached by parties who wanted a hot-button issue to be disregarded in the arbitration. Further questions addressed possible proactive measures to prevent public policy violations, such as a cooperation with public authorities and state courts. The authors compare the results of their survey with recent developments in International Arbitration.

 

Oluwafikunayo D. Taiwo, The Restrictive Approach to Legal Representation in Arbitration Proceedings and Its Unintended Consequences in Nigeria

The issue of legal representation in arbitration proceedings accounts for one of the sub-factors of ‘formal legal structure’ and ‘national arbitration law’ that disputing parties consider before choosing a seat of arbitration. Indeed, the ability of disputing parties in arbitration to freely select their desired representatives is embedded in the foundational principle of party autonomy. In Nigeria, a literal interpretation of the national arbitration rules prevents parties from selecting persons not admitted to the Nigerian bar as their representatives in arbitration proceedings. This article examines the impact of this restrictive approach on the attractiveness of Nigeria as a seat of arbitration. The article identifies scope for reform in the law and makes suggestions to create a more liberal legislative and judicial framework in order to promote Nigeria as a preferred seat for arbitration.

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UNCITRAL Working Group III: Counterclaims in ISDS – Challenges and Prospects in Light of the UNCITRAL Reform Process

Sat, 2020-03-28 02:00

A cursory reading of the mandate of Working Group III reveals that the discussion at UNCITRAL of ISDS (Investor-State Dispute Settlement) reform focuses only on procedural aspects of dispute settlement under investment treaties and excludes any substantive aspects. However, the topic of respondent states’ counterclaims, albeit procedural in itself, is so inextricably intertwined with substantive aspects that it has also been excluded in principle from the ISDS reform mandate. This notwithstanding (and not without some ambiguities) the UNCITRAL Working Group III has indicated that it “would not foreclose consideration of the possibility that a state might bring a counterclaim where there was a legal basis (or an underlying provision) for so doing.”

 

Asymmetries in Investment Law

Investment agreements (IIAs) are formulated to provide protection to investors, and thus mainly impose international obligations on Contracting States towards investors. As such, generally speaking of course, they do not impose direct obligations upon investors. IIAs are therefore characterized by an inherent asymmetry, although this asymmetry is a feature the investment regime shares with many other international forums open to international claims by individuals (such as, for instance, the European Court of Human Rights). The “inherently asymmetrical character” of investment treaties has made counterclaims in ISDS problematic.

Rebalancing this asymmetry by allowing states to file counterclaims, when possible (and provided the ISDS clause at stake so permits), would allow investment tribunals to take a holistic judicial approach in analysing investment disputes. This would allow them to adjudicate (alongside alleged breaches by a host state of its international obligations under IIAs) the consequences of investors’ non-compliance with domestic provisions of paramount importance, including those implementing internationally accepted core obligations related to human rights (such as, for instance, those related to environment protection). This would, in turn, promote “procedural efficiency, fairness, and the rule of law”, as indeed highlighted by several UNCITRAL delegates.

It is in this perspective that states’ right to file counterclaims (and investment arbitral practice thereon) deserves closer scrutiny.

 

Restrictive Approaches to Counterclaims in Existing Investor-State Arbitration Decisions

Tribunals to date have either opined that the consent under the relevant BIT did not include in principle claims by the host state against the investor, even where the relevant BIT contains an umbrella clause, or held that the counterclaim made did not directly arise out of the subject-matter of the dispute under the treaty, thus not meeting the necessary requirement of close connection with the primary treaty-based claim of the investor.

According to the dominant approach in arbitration case-law, respondent states’ counterclaims in the form of reactive claims grounded on a different legal basis than the IIA itself (thus legally unrelated to the investors’ claims based on the breaches of IIA provisions) are in principle either outside the treaty-based jurisdiction of the investment tribunal or inadmissible. This is the case even when such counterclaims are factually connected to the investor’s claim. This holds true unless a specific agreement between the disputing parties extending arbitral jurisdiction to the Respondent’s counterclaims and identifying its domestic law as applicable law is present.

Such a restrictive approach to counterclaims appears to be influenced by the arbitration practice concerning investment contracts. In these cases, respondent states have filed counterclaims based on the violation of domestic law provisions of general application (such as, for instance, tax laws and regulations) in response to investor claims based on an investment contract. In many of these cases, tribunals have held that such counterclaims are in principle either outside the scope of parties’ consent to arbitration or not sufficiently connected (both legally and factually) with the original contractual claim of the investor. Nevertheless, the investment contract framework differs in many respects from the investment treaty one. One of the most prominent differences is related to the applicable rules of interpretation. This casts doubt on whether investment contract arbitration practice related to counterclaims is of great relevance to investment treaty cases.

It might instead be possible that a respondent state’s counterclaim that relies on the same factual matrix of the original treaty claim of the investor, but grounded on a different legal basis than the IIA itself, can be considered as both within the scope of the tribunal’s jurisdiction and admissible, even if no mention of the possibility for the respondent state to file counterclaims is made in the IIA. This would be the case where the ISDS clause of the relevant IIA covers “any” or “all disputes between a Contracting State and an investor of the other Contracting State” concerning a protected investment. Such a counterclaim would be especially likely to be within jurisdiction if the IIA contains a broad definition of covered investment, for example by referring to licenses and concessions conferred by law or under contract. This approach seems to be supported by the widely internationally and domestically accepted concept of counterclaims. Such practice includes set-off claims, and claims of a respondent party, which are responsive to the claims of the claimant even when legally grounded on a different instrument, provided that they are closely factually connected therewith. After all, the right to counterclaim is a core element of a defendant’s right to claim on an equal footing to the original claimant as a general principle of law. Given this, any restrictive interpretation of ISDS clauses that is not explicitly justified by the wording of the treaty would unjustly limit the right of defence of respondent states. Given the status of this general principle of law related to a defendant’s right to counter-claim, the question is why a respondent state should not be able a priori to file a counterclaim against a claimant investor based on the violation by the latter of domestic legal obligations of fundamental importance with which should have been complied with in its business activities in the host state. This is especially so when the ISDS clause is so broadly worded as to encompass any dispute between the investor and the host state on the investment.

 

New Approaches to Counterclaims in Recent Arbitration Decisions?

The dominant approach described above does not facilitate such counterclaims by respondent states. It has been suggested that the recent trend in arbitration practice on counterclaims, represented by the cases Urbaser and Aven, might be less restrictive. However, these cases do not represent particularly promising developments in light of the objective of balancing IIAs’ asymmetry by way of counterclaims. In these cases, the discussion focussed on the wording of ISDS clauses that are neutral as to the identity of the claimant or respondent, thus allowing in the abstract either the investor or the host State to submit a dispute in connection with the investment to arbitration. These neutrally drafted clauses were interpreted by the Urbaser and Aven tribunals so as to allow arbitral jurisdiction over respondent states’ counterclaims.

However, despite judging the states’ counterclaims as admissible in principle, both tribunals dismissed them on the merits. At the jurisdictional level, to support the counterclaim’s admissibility, it was accepted that “it can no longer be admitted that companies operating internationally are immune from becoming subjects of international law”, including HRs obligations. However, this very same argument was among the factors causing the dismissal of the counterclaims on the merits. In fact, the nature of HRs obligations as state obligations makes it impossible for them to merely shift from states to corporations. Furthermore, HRs obligations related to individuals’ fundamental social, economic, and cultural rights are positive obligations which require states to actively and effectively act, but, within their sovereign discretion and, in most cases, their limited financial resources. The point made here is well illustrated by the Urbaser case where, although declaring Argentina’s counterclaim related to the human right to water as admissible, the Tribunal could not but conclude that:

“…the enforcement of the human right to water represents an obligation to perform. Such obligation is imposed upon States. It cannot be imposed on any company knowledgeable in the field of provision of water or sanitation services. In order to have such an obligation to perform applicable to a particular investor, a contract or similar legal relationship of civil and commercial law is required.”

Respondent states’ right to file counterclaims has therefore proved to be rather inoperative and ineffective in investment arbitration practice until now, even when based on the characterization of investors as subject of international law and thus holders of HRs obligations. In this respect, the observation by Professor Higgins in the late 70s that the traditional debate on natural and legal persons (corporations included) as subject or object of international law “is not particularly helpful, either intellectually or operationally” still retains its validity. Given current trends in investment case-law, the possibility for a state to effectively counterclaim in investment arbitration is contingent upon the presence of specific underlying provisions explicitly permitting it to do so.

 

Should UNCITRAL Working Group III Give Greater Attention to Counterclaims as a Reform Option?

In conclusion, states’ counterclaims against investors in investment disputes can be an effective means of promoting procedural efficiency, fairness, and the international rule of law. These objectives will only be realised if they are supported by explicit policy changes in investment treaty law that operate at not just a procedural but also a substantive level. Such innovation should establish an international jurisdiction not just limited to hearing investors’ claims against Contracting States for breach of their international treaty obligations, but open to adjudication of investment disputes understood in a broad sense so as to include at least violations of human-rights legislation by investors in carrying out their business activities. In other terms, reforms should go beyond the provision of an investor’s general duty to respect the law of the host state, and the putative inadmissibility of its ISDS claims where it fails to do so.

In this respect, the inclusion of specific treaty provisions imposing positive obligations upon investors to respect a host state’s legislation – including legislation implementing internationally accepted core obligations related to human rights (such as, for instance, those related to environment protection, or labour rights) – should be considered by Contracting Parties to IIAs.1)For instance, such innovation is under discussion among Italian competent authorities within the currently pending process of reviewing the Italian BIT model. jQuery("#footnote_plugin_tooltip_3375_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3375_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Such provisions would raise these obligations from the plane of domestic law (and domestic judges’ jurisdiction) to treaty obligations enforceable against investors in ISDS, thus giving respondent states the capacity to file, in such proceedings, counterclaims possessing a tangible legal basis.

Such provisions may, however, present downsides. First of all, the possibility for a respondent state to file a counterclaim will inevitably impact its capacity to advance such claim before other possibly competent fora, including its own judiciary. Since respondent states’ counterclaims are generally governed by domestic law provisions and fall under the competence of the host state’s judiciary, their admissibility and adjudication in ISDS raise sensitive policy issues related to the correct interpretation and application of applicable domestic law, and may risk depriving domestic judiciaries of their natural and general competence. Secondly, the provisions referred to here seems at odds with the most recent approaches in investment treaty drafting, which have delinked Contracting Parties’ international commitments from their domestic legal systems. This is the case with European agreements, where such ‘delinking’ is required pursuant to the case-law of the Court of Justice of the EU in order to safeguard the autonomy of the European legal system (its judiciary included) from interferences by external judicial mechanisms. As a consequence, such ‘delinking’ seems to be, at the moment, a non-negotiable element in European investment relations with third countries. New generation IIAs are thus moving in the opposite direction than the innovation mentioned here: they limit the scope of application of ISDS to just investment disputes based on alleged breaches by Contracting Parties of their international treaty obligations, and make investors’ illegalities relevant to the capacity of investors to submit treaty claims.

Notwithstanding the aforementioned downsides, providing greater scope for counterclaims in ISDS might allow tribunals to take a more holistic approach to investment disputes. This can promote international justice at large, thus curing the widely perceived legitimacy crisis of ISDS.

In light of the above analysis it still remains the case that states’ counterclaims in ISDS pose fundamental issues of substantive law. These issues (together with the implied downsides mentioned above) have potential to become much more contentious than those, strictly procedural, already discussed by UNCITRAL Working Group III. However, the Working Group cannot avoid finally discussing them at its next sessions, where the focus should be on (feasible) reform options, as pointed out by the Secretariat in its note of January 2020 on multiple proceedings and counterclaims. This in turn raises the basic issue of whether Working Group III “…should not address the topic, as its work was to focus on the procedural aspects of ISDS dispute settlement rather than on the substantive provisions in investment treaties”.

Addressing states’ right to counterclaim in ISDS has, certainly, the potential of contributing to a better integration between foreign investment and HRs. Considering counterclaims as a general means of adjudicating human rights-related obligations of investors is, however, too simplistic, as the above analysis of the Urbaser and Aven cases clearly shows. Furthermore, the interplay between investment and human rights goes well beyond the field of foreign investment protection, and also involves purely domestic investors and investments, calling into question effective compliance by states with their HRs obligations in regulating business activities in general. Given this, it is therefore unclear what the rationale behind expanding the framework for respondent states’ counterclaims in ISDS to allow submission of claims by third parties against (presumably just foreign) investors would be. In fact, ISDS is established by interstate agreements for the settlement of investment disputes between the investors of a Contracting State and the other Contracting State. It is alike unclear what the legal basis for such third parties’ claims would be exactly. Moreover, “to regulate, in international human rights law, the activities of transnational corporations and other business enterprises” is now the objective pursued by a UN treaty project. Said UN treaty project, albeit in its initial stage, holds much promise for ensuring HRs protection against corporate abuses. UNCITRAL Working Group III, albeit taking such UN treaty project in due consideration, should avoid unnecessary overlaps therewith, and be reminded of the Italian old maxim according to which “who wants everything, loses everything.”

 

To see our full series of posts on the UNCITRAL WG III reform process, click here.

References   [ + ]

1. ↑ For instance, such innovation is under discussion among Italian competent authorities within the currently pending process of reviewing the Italian BIT model. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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UNCITRAL Working Group III: Security for Costs – An Inefficient Mechanism to Avert Frivolous Claims in ISDS

Fri, 2020-03-27 02:00

Ahead of the thirty-ninth session of UNCITRAL Working Group III (Investor-State Dispute Settlement Reform), the General Assembly Secretariat issued a note on issues to be considered on the topic of security for costs and frivolous claims. Averting frivolous claims has been a recurring topic in the ISDS debate over the past years, not least in the UNCITRAL reform work. The existing concerns are prompted by the fact that States involved in ISDS have testified to frivolous actions from investors being a relatively common occurrence. In addition, States have often found it difficult to obtain reimbursement for their legal fees in case of a successful outcome of the case.

These testimonies are demonstrative of an apparent desire of states involved in ISDS to increase the available remedies against investor-induced frivolous measures. Security for costs has, in many instances, including in the UNCITRAL reform process, been discussed as a mechanism that can be used for the purpose of reducing the risks associated with frivolous claims. However, ISDS practice shows that arbitral tribunals (both under the auspices of the UNCITRAL and ICSID framework) have thus far applied a high standard for granting security for costs. Against this background, one topic for the (now deferred) thirty-ninth session will be “to consider whether work should aim at providing a more predictable framework for security for costs and in that context, […] the conditions to be satisfied in order for the parties to request, and for the tribunal to order, security for costs.”

While the issue of frivolous actions by investors and limited costs recovery for the states is by now a well-known concern, any reform of the standards for ordering security for costs must carefully address the conflict between the interest of adequate costs recovery for States, and policy considerations relating to the interest of not stifling legitimate claims brought by underfinanced investors. Added to this, any prima facie assessment of the frivolousness of a claim exposes arbitral tribunals to the risk of allegations that they have prejudged the case. The restrictive approach taken by arbitral tribunals in deciding applications for security for costs appears to arise out of legitimate policy considerations, and gives rise to the question of whether security for costs – even if subject to loosened standards – can work as an efficient mechanism for averting frivolous claims.

 

Legitimate interests explain the restrictive approach taken by ISDS tribunals with respect to security for costs in practice

So far, UNCITRAL practice (and ISDS practice at large) has shown that arbitral tribunals in investor-state arbitration have subjected security for costs orders to a high standard.

For example, in Guarachi v. Bolivia, the respondent relied upon the existence of third-party funding on the investor’s side as well as evidence that the investor had no real assets in support of a request for security for costs. The arbitral tribunal rejected the reasons invoked by Bolivia as insufficient for demonstrating that the investor would be unable to cover an adverse costs award. The tribunal underlined that an “order for posting of security for costs remains a very rare and exceptional measure”.

Similarly, in SAS v. Bolivia, the investor was a Bermuda shell company with no assets or economic activity. Bolivia filed a request for security for costs in the amount of USD 2.5 million. The arbitral tribunal rejected the request and noted, amongst other things, that:

“In relation to the necessity and the urgency of the measure, investment arbitration tribunals considering requests for security for costs have emphasized that they may only exercise this power where there are extreme and exceptional circumstances that prove a high real economic risk for the respondent and/or that there is bad faith on the part from whom the security for costs is requested.”1)Para. 59. jQuery("#footnote_plugin_tooltip_1219_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1219_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The tribunal further reasoned that: “[i]n sum, the general position of investment tribunals in cases deciding on security for costs is that the lack of assets, the impossibility to show available economic resources, or the existence of economic risk or difficulties that affect the finances of a company are not per se reasons or justifications sufficient to warrant security for costs.” The restrictive view is further elucidated by the fact that there are few ISDS cases in which security for costs has in fact been granted.2)In this context, it should, however, be noted that despite the many instances where arbitral tribunals have entertained a very restrictive approach, there are also recent examples of ISDS tribunals engaging in slightly less strict approach. One such example is Caso CPA No. 2016-08 Manuel Garcia Armas v. Venezuela, Procedural Order No. 9 (20 Jun. 2018). In this case, the arbitral tribunal found that the investor in general had indicated that it possessed a limited ability to cover adverse costs (merely five out of nine claimants had demonstrated any proof of solvency). The arbitral tribunal concluded that this, in combination with the fact that it had been shown that the investor’s third-party funder had not committed to cover adverse costs, was sufficient to order security for costs in the amount of USD 1.5 million. jQuery("#footnote_plugin_tooltip_1219_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1219_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

It is conceivable that a loosening of the standards for ordering security for costs under the UNCITRAL framework may increase the inclination of arbitrators to grant security for costs. However, any reform must factor in the legitimate reasons that lay at the foundation of the restrictive approach demonstrated in international practice thus far.

In the authors’ view, the main explanation for the restrictiveness upheld in international practice is two-fold. First and foremost, it relates to access to justice concerns. Such concerns are triggered by the invasive nature of security for costs as compared to other kinds of provisional relief. Generally, compelling (under the threat of dismissal) a party with limited resources to post security for costs at the outset or during an arbitral proceeding restrains the party’s ability to present its case and may even stifle the party’s substantive claims altogether. Thus, security for costs orders may interfere with a party’s access to justice insofar as the party lacks financial means to comply with the security for costs order and thus is denied the opportunity to be heard.3)Cf. Born G, International commercial arbitration, Second edition (2014), p. 2496. jQuery("#footnote_plugin_tooltip_1219_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1219_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Consequently, from a policy perspective, it is desirable that arbitral tribunals retain their inclination to carefully balance the right of a party to pursue its claim against the right of an opposing party to recover its costs.

Secondly, assessing the merits of the claimant’s claim in investor-state arbitration often involves complex issues of both a jurisdictional and substantive nature. These matters are often difficult (if not impossible) to evaluate in any depth during the early stages of the proceedings. This is illustrated in, among other cases, SAS v. Bolivia where the tribunal concluded that it could not grant security for costs merely on the ground that SAS was used by the “real investor” to bring a claim. Doing so, the tribunal stated, would constitute a prejudgment on a crucial jurisdictional issue, “on which Parties’ submissions are pending”. Arguably, the fear of prejudging crucial issues constitutes a significant contributing factor which explains the hesitance of arbitrators to grant an order for security for costs in general.

 

The reasons for upholding fairly strict standards limits the utility of security for costs as a mechanism for averting frivolous claims and calls for a more holistic approach

It is clear that the occurrence of frivolous actions in investor-state arbitration constitutes a serious concern, particularly in light of the fact that states often times are not in a position to obtain any costs recovery in case of a successful outcome. These concerns arguably justify a loosening of the so far very strict requirements that have generally applied in ISDS practice. Nevertheless, the fact that the restrictive approach adopted by arbitral tribunals stems from legitimate policy considerations sets a limit for how extensive any reform of the applicable standards can be. Moreover, loosening the standards with respect to granting security for costs does not adequately address the second policy concern – that tribunals wish to avoid prejudging the merits of the case in assessing a potentially frivolous claim.

These reasons entail that the situations in which security for costs may be a viable alternative for averting frivolous claims should (and likely will) remain limited to situations where there is a clear case of frivolousness combined with a demonstrable inability to comply with an adverse cost decision. This in turn, gives reason to question security for costs as a sufficiently efficient mechanism for averting frivolous claims. Accordingly, dealing with frivolous action in investor-state arbitration under the UNICTRAL framework arguably requires a more holistic approach.

In this regard, it is interesting to note that the UNCITRAL WG III, following the initiative of the ICSID reform process, is currently considering adoption of an expedited procedure for addressing unmeritorious claims. In essence, introducing such a procedure would aim to enable the dismissal of claims that manifestly lack legal merit at an early stage of the proceedings, before they unnecessarily consume the parties’ resources. In the authors’ view, such an expedited procedure may, if implemented, become a viable alternative (in addition to security for costs) for addressing the issue of frivolous claims. To enable any such procedure to become a useful option, it is key that the employed framework clearly sets out when and under what circumstances the rules may come into play. Moreover, in light of access to justice concerns, it is important that the expedited procedure is designed so that it to requires the State to clearly demonstrate that the claim is frivolous,4)Cf. ICISD Arbitration Rule 41(5), which requires the party requesting for dismissal to specify, “as precisely as possible”, the basis on which the claim is “manifestly without legal merit”. jQuery("#footnote_plugin_tooltip_1219_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1219_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); while still taking due consideration to cost efficiency concerns (limiting, for instance, rounds of written submissions to a minimum). Additionally, the framework should provide for cost allocation mechanisms enabling an adequate risk distribution between the state and the investor, particularly in the event of a decision in favor of the investor.

 

Concluding remarks

The thirty-ninth session of the UNCITRAL Working Group III is likely to have significant impact on the standing of security for costs as a mechanism for addressing frivolous claims brought by investors in UNCITRAL arbitration going forward. While a loosening of the strict standards for granting security for costs so far applied by tribunals in practice may be warranted, legitimate policy considerations sets an outer boundary on how extensive any such revision can be. For this reason, it is desirable that the issue is addressed using a holistic approach, with due regard to the limited utility of security for costs as means for averting frivolous claims in ISDS.

 

To see our full series of posts on the UNCITRAL WG III reform process, click here.

References   [ + ]

1. ↑ Para. 59. 2. ↑ In this context, it should, however, be noted that despite the many instances where arbitral tribunals have entertained a very restrictive approach, there are also recent examples of ISDS tribunals engaging in slightly less strict approach. One such example is Caso CPA No. 2016-08 Manuel Garcia Armas v. Venezuela, Procedural Order No. 9 (20 Jun. 2018). In this case, the arbitral tribunal found that the investor in general had indicated that it possessed a limited ability to cover adverse costs (merely five out of nine claimants had demonstrated any proof of solvency). The arbitral tribunal concluded that this, in combination with the fact that it had been shown that the investor’s third-party funder had not committed to cover adverse costs, was sufficient to order security for costs in the amount of USD 1.5 million. 3. ↑ Cf. Born G, International commercial arbitration, Second edition (2014), p. 2496. 4. ↑ Cf. ICISD Arbitration Rule 41(5), which requires the party requesting for dismissal to specify, “as precisely as possible”, the basis on which the claim is “manifestly without legal merit”. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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UNCITRAL Working Group III: Reforms in the Realm of Investor-State Disputes – UNCITRAL’s Proposals for an Appellate Mechanism and its Impact on Duration and Cost

Thu, 2020-03-26 02:00

One of the topics on the agenda of UNCITRAL Working Group III is the establishment of an Appellate Court system. The system of investor-State dispute resolution therefore now faces the fact that WG III is considering, among other matters, the following:

  • the repeal of local law governing the setting aside of an UNCITRAL award giving full jurisdiction to the Appellate Court;
  • permanent appointment by States of adjudicators for this Appellate Court, abolishing the equality of disputing parties;
  • the automatic adjournment of enforcement of awards pending an appeal;
  • authority of the Appellate Court to review the merits of decisions on appeal, including reconsideration of findings of fact and law;
  • the text of a set of rules of an undefined status applicable to the procedure on appeal, possibly detached from national laws; and
  • provision for losing parties in investor-State dispute settlement across the globe to appeal those decisions, without regard to the bottleneck effect when the Appellate Court’s docket reaches capacity.

This post considers the proposed appellate mechanism, and highlights the key issues it creates for duration, costs, and certainty in investment arbitration.

 

The Proposal for the Creation of an Appellate Mechanism

The system of investor-State dispute settlement (“ISDS”) has been under sustained scrutiny and has received considerable criticism. In the wake of the Achmea decision, some governments have terminated intra-EU BITs; some tribunals have confirmed the holding of Achmea in subsequent awards (the chilling effect); and commentators continued to criticize the methods of international arbitration. The UNCITRAL Working Group III was established in fall 2017:

At its forty-eighth session, in 2015, the Commission noted that the current circumstances in relation to investor-State arbitration posed challenges and proposals for reform had been formulated by a number of organizations. In that context, the Commission was informed that the Secretariat was conducting a study on whether the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (“Mauritius Convention on Transparency” or “Mauritius Convention”) could provide a useful model for possible reforms in the field of investor-State arbitration, in conjunction with interested organizations.

In addressing the criticism of the current system of ISDS, the Working Group has established two pathways: one is the (total or partial) replacement of the system; and the second is incremental reforms within the system. The first pathway proposes two alternatives. One is the Multilateral Investment Court that replaces the system in toto and the other is the Appellate Mechanism that replaces crucial parts of the system such as annulment mechanisms, enforcement and finality of awards. Both are premised on the idea of abandonment of party autonomy; and with that the right of disputing parties to appoint an arbitrator. Instead, permanent judges will be appointed by the Contracting States. One must bear in mind that the one argument in favor of these efforts was to address the concerns about duration and cost in international arbitration and one wonders if this is the way to do it. Replacing ISDS with a system that eliminates party autonomy, will not give investors confidence. Perhaps it is useful to remind the reader of the reason for States to come together some decades ago to create the Washington Convention to conclude bilateral investment agreements:

As such, early in the first Development Decade, which spanned the 1960’s, it became increasingly clear that if the plans established for the growth in the economies of the developing countries were to be realized, it would be necessary to supplement the resources flowing to these countries from bilateral and multilateral governmental sources by additional investments originating in the private sector. To encourage such investments, the competent international organizations considered several schemes designed to remove some of the uncertainties and obstacles that faced investors in any foreign country.

 

The Appellate Mechanism and its negative impact on duration and costs creates uncertainty

The Appellate Mechanism would be a body of permanent adjudicators with jurisdiction to review arbitral awards on their merits. Arguably this would create consistency in the application of certain substantive norms in bilateral investment treaties. UNCITRAL’s Secretariat submitted a note addressing the possible implementation of the Appellate Mechanism or Court (“the AC”). That note aims to outline the key elements of the AC which must give rise to concerns about both the feasibility of the implementation of the AC and the negative effect it would have on duration and the costs of dispute settlement. Consistency in the application of substantive norms in BITs would contribute to confidence in ISDS. However, the reason for the reforms was to address some of the main criticisms on ISDS – duration and costs. An AC, in fact, will increase duration and costs. Both lead to uncertainty, which tends to have a chilling effect on investment and trade. There are three key issues likely to arise in the implementation of the AC.

The Secretariat suggests that a Contracting Party to the investment treaty could use the AC procedure as the opportunity to be heard on treaty interpretation, or could join with other States Party to the treaty to seek rejection of decisions of the AC through joint statements. This is not an official source of treaty interpretation as prescribed by the Vienna Convention on the Law of Treaties (“the VCLT”). It will not be qualified as a source of interpretation under Article 31(1) of the VCLT and it does not seem to be an interpretive declaration either (the latter have not been well developed in international law). The Secretariat has not yet provided the delegations with other examples or case law demonstrating the value of such statements by Contracting Parties as relevant to treaty interpretation at the time of a dispute. It has not reacted to the case of Pope & Talbot Inc. v. Canada in which the tribunal expressed misgivings about such a statement of interpretation, rendered in the middle of the dispute, made by Canada, US and Mexico about a question of law. If due process and fairness are to continue to be pillars of dispute resolution between investors and States, suggestions of such provenance would seem counterproductive. A unilateral interpretation by a Contracting State during a pending procedure would violate the due process rights of the investor and would create an inherent imbalance between the disputing parties.

The Secretariat makes some suggestions as to the law that could be applicable to the AC procedure. It suggests the following possibilities: (i) the law applied before the first-tier tribunal, (ii) a different law if the seat of the appeal is not the same as in the first instance, or (iii) a completely de-nationalized procedure subject only to international law. The idea of de-nationalizing dispute resolution and creating laws entirely detached from their sovereign base has been tried before, unsuccessfully. Any attempt to do this would be unrealistic: would the sixty Member-States to the UNCITRAL Working Group III have to draft an international procedural law to be applied by the permanent adjudicators of the AC? As I note in my book on the New York Convention, the idea was raised at the occasion of the drafting of the 1958 New York Convention:

Nothing has proven to be as divergent as the rules of procedure. Imposing uniform rules would deter many States from signing the Convention. The inclusion of such detailed provisions … would tend to overburden the text, and might provoke objections based on considerations of national law and lead to lengthy discussion.

As to the scope and standard of review, the Secretariat also looks into the subject of appeal on issues of law and fact and proposes that such review would be more consuming as it would require the disputing parties to present their case again. The Secretariat also considers the idea that the AC could provide for a review of issues de novo or whether it should accord some degree of deference to the findings of the first adjudicator. If the main objective of the reforms is to address issues of cost and duration, the idea of a review on issues of law and fact would constitute a second bite of the apple and inevitably increase cost and duration. In addition, this would lead to more uncertainty, which tends to have a chilling effect on cross-border investment. Even if the Working Group agrees to build in limitations on the scope of appellate review, how might this be done without the treaty language leaving the possibility of AC discretion and interpretation for a de facto review of those issues? The Secretariat appears to envisage that the AC will enable a review on the merits, instead of the review limited to matters of due process as currently provided under both the ICSID and UNCITRAL mechanisms. If the permanent adjudicators of the AC are to allow some deference to the members of the first instance tribunal, the drafters of the instrument creating the AC must consider the role of both (i) the ‘first instance’ arbitrators, with the mandate to consider all issues of law and fact and to decide the entire dispute on its merits; and (ii) the permanent members of the AC, and their appropriate (limited) mandate in appeal. This is complex and will most likely be a source of disagreement and ultimately some ambiguity leading to unpredictability. Additional complexities are introduced by the fact that any rules drafted by the Working Group will ultimately be subject to interpretation. Will the Working Group create an interpretative mechanism or will the delegations defer to the VCLT?

 

Final Remarks

In addition to the above, there are many other elements to consider: in relation to the timing, statutes of limitation, and jurisdiction in relation to national courts. If the UNCITRAL Rules are applicable, who will have jurisdiction to decide on a request for the setting aside of the award? The same applies for ICSID annulment committees. The Secretariat raised the idea for the AC to ‘have the ability to annul awards rendered in first instance’. This would mean that all Contracting Parties to the instrument that creates jurisdiction for the AC to set aside awards will have to amend their national provisions on annulment. Tilting at those windmills of sovereignty will be an ambitious undertaking.

Another matter that has been extensively addressed in the 1958 New York Convention and national laws is the possible adjournment of enforcement. This becomes an issue for consideration for the AC as well. It seems the Secretariat is considering such temporary stay. This would open the floodgates to dilatory tactics. Something that has been a basis for criticism of the current system. What would be the point of these ‘reforms’ if it leads to excessive delays?

Finally, the Secretariat has addressed the applicability of the 1958 New York Convention. However, while addressing this quintessential matter, it does not rely on Article I of the New York Convention, which determines the scope of the treaty. The Secretariat finds that the arbitration law of the place of arbitration determines whether a decision constitutes an award. This is not correct: it is the lex fori since the New York Convention is directed to the court of enforcement (of an arbitration agreement under Article II and arbitral award under Article V). Overall, the proposals for an appeal function lead to many issues that have been left unanswered.

Uncertainty has a chilling effect on investment. Therefore, for those countries with an interest in attracting foreign investment, it is important to reconsider these radical proposals, including how they would work in reality and whether it is in effect yet again one of those unrealistic dreams of the Man from La Mancha.

To see our full series of posts on the UNCITRAL WG III reform process, click here.

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UNCITRAL Working Group III: Would an Investment Court De-politicize ISDS?

Wed, 2020-03-25 02:00

Arbitrators under the Crossfire

While investor-state dispute settlement (ISDS) was created with the purported goal of depoliticizing investment disputes, it is currently at the centre of heated political debates. Investment arbitration follows the commercial arbitration paradigm, with disputing parties playing a direct role in the composition of the tribunal. This is perceived as a tool of control over the arbitrators’ interpretative space. Party-appointed arbitrators are frequently portrayed as ‘hired guns’ who replicate the divide between host states and foreign investors.

UNCITRAL’s Working Group III has identified several concerns regarding arbitrators, inter alia the lack of precise definition of the applicable ethical requirements in practice, the existence of potential conflicts of interest, the qualifications required to serve as arbitrator, and the impact of third-party funding on the independence and impartiality of arbitrators. Chief among these concerns is the way the appointment mechanism is structured. The Working Group is currently considering different models for reshaping the way adjudicators are selected, ranging from the creation of a pre-established list to the establishment of a permanent adjudicatory body. Still, UNCITRAL is aware that any reform effort should not promote further (re)politicization of investment disputes.

The proposal that has received the most attention thus far is the creation of a permanent investment court. The investment court model would replace the current regime – where every arbitral panel is purposefully established by the parties after the dispute emerges – with a system where the adjudicatory body is already in place when the proceedings are initiated. The main goal is to ‘break the link’ between the parties and the adjudicators, which seems to be at the root of many of the system’s perceived shortcomings.

 

Potential Risks

One of the major problems with this model is that it turns states into the exclusive gatekeepers of the composition of the adjudicatory body. The new system implies a paradigm shift regarding the selection of adjudicators, moving from a disputing party framework to a treaty or contracting party context. While in the investment court model ‘disputing parties would have no or little influence on the selection and appointment of adjudicators’, UNCITRAL’s Working Group III nevertheless admits that ‘the respondent State might retain a diluted control over the appointment of the judges’.

The new framework would shrink the influence of disputing parties while increasing that of states party to the system. The problem remains nevertheless: appointees may be perceived to represent the specific political views of appointing states. This paves the way for accusations of partiality and favouritism in the composition of the tribunal, potentially (re)politicizing investment disputes. The reality is that it is extremely difficult to dispel the appearance of politicization of the process when states are the only source of appointment.

 

Tools to Mitigate Political Influence

Several tools may be employed to reduce the discretion of states and provide some checks and balances on the qualifications and expertise of appointed adjudicators. Greater transparency and inclusiveness would also help to mitigate possible attempts to instil politics into the appointment process.

Any reform should ensure that the selection and appointment mechanism is more transparent and open. This would help to moderate the choice of individuals for reasons other than merit and therefore increase the legitimacy of the system. Several tools can be used to increase the visibility of the process such as the advertisement of openings, consultation with stakeholders, publication of candidates’ resumes, public hearings, and debates in national parliaments. The process should welcome direct applications by potential candidates, thus extending the selection phase beyond the circle of names already in the mind of government officials.

Another tool that can be built into the selection process – and which also promotes transparency – is the existence of a screening phase. Advisory panels or appointment committees have been employed in different international courts and tribunals to guarantee that candidates fulfil the necessary requirements to perform the job. The existence of a screening mechanism would prompt government officials to put forward better candidates, rendering the selection process more objective while increasing the legitimacy of the system. The thorniest issue seems to be the composition of such a screening body. Kaufmann-Kohler and Potestà underline that the selection of members for this panel will probably raise as many eyebrows as the adjudicators they are going to screen. Again, we enter the discussion about who chooses the decision-makers, and how. In abstract, a screening mechanism could render the selection process more objective and merit-based and therefore less politicized. However, the advantages of such a mechanism should not be overstated. The very creation of this type of mechanism indirectly acknowledges that sometimes states do not appoint the most qualified candidates. The contribution of such mechanisms to depoliticize nomination and appointment processes in other international courts and tribunals is debatable.

A mechanism that has also been featured in the selection process in different international courts and tribunals is a consultation phase. Consultations are a useful tool to enhance acceptance of the system and therefore promote its credibility and legitimacy. The trickiest question is whether the consultation process should also be open to investors. UNCITRAL seems to be open to the possibility of listening to business and industry-affiliated associations. Without returning to the now contested party-appointment system, this would give investors an opportunity to voice their concerns regarding the composition of the adjudicatory body and therefore attenuate the transition from a disputing party system of appointment to a regime where that power rests exclusively with treaty parties. Just because investors are no longer allowed to appoint one arbitrator does not mean that their opinion cannot be heard. Consultation with all interested stakeholders – including investors – on the membership of the investment court may help to reinforce the legitimacy and independence of the new system. By affording investors an opportunity to contribute to the process, it might also help mitigate the perception that the court is unilaterally set up by states, thus reducing potential accusations of politicization.

Another mechanism that should be implemented, as it is typical of permanent courts, is the random assignment of cases. The idea behind this mechanism is that parties will not be able to determine the specific adjudicator who decides a particular dispute. A clear, objective method of case assignment prevents the allocation of cases based on outside influence (including political considerations) and thereby helps to foster individual and institutional independence. This tool helps to weaken the direct connection between appointers and adjudicators in charge of a particular case; however, it does not necessarily dispel the image that the court, as a whole, might be biased as states still have the power to nominate (although in advance of any specific dispute) the adjudicators who will sit on the bench. Just because a panel of arbitrators was not hand-picked for a specific dispute, ex post, that does not mean that the whole court will be perceived as unbiased, ex ante. In this regard we move from the traditional relationship between disputing parties and the arbitral panel to a connection between appointing states and the whole court. A move towards a permanent adjudicatory body entails a greater emphasis on institutional independence.

 

The Way Forward

The traditional process of selection and appointment of adjudicators in investment disputes has attracted substantial criticism, potentially leading to growing re-politicization of investment disputes. The truth, however, is that investment dispute settlement can never be fully depoliticized: these disputes are intrinsically political and therefore their settlement always takes place in a politically charged environment. Regardless of the forum chosen, there seems to be an inevitable political element associated with any dispute that involves public policy. In this regard investment arbitration is no different from other types of international adjudication.

While parties’ ability to choose their adjudicators has been described as a ‘keystone’ of arbitration, this feature contributes to a system that is increasingly perceived as politically polarized and unable to offer an exclusively legal, objective adjudicatory process. Still, concerns about the capacity for selection processes to result in the appointment of independent and impartial adjudicators also exist in domestic and even international courts. There is no irrefutable evidence that international judges are more independent and impartial than arbitrators. The selection and appointment of arbitrators raises some problems but the same can be said about other adjudicatory bodies. This is not to say that there are not valuable lessons to learn from the experience of other adjudicatory bodies. Indeed, knowing more about how appointment mechanisms have a bearing on the conduct of international courts and tribunals is a matter of increased scholarly and practical relevance.

The process of selection and appointment of investment adjudicators should be based on the expertise and experience of candidates and not on their political preferences or loyalties. However, because international courts are set up by states and function in a politically charged milieu, political considerations may influence and even lead to outright politicization of the process. This risk is especially high in a system where states (as one class of disputing party) have exclusive control over the screening and appointment of candidates.

A revamped system should incorporate a combination of the tools discussed above to ensure that candidates are above all chosen because of their professional skills and merit. The experience of other international courts and tribunals demonstrates that such measures do not fully eradicate political preferences from the process but at least mitigate their impact by filtering candidates through a stringent set of checks and balances.

 

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UNCITRAL Working Group III: One Step Closer to a Multilateral Investment Court?

Tue, 2020-03-24 02:00

During its last resumed 38th session which took place in Vienna from 20–24 January 2020 the UNCITRAL Working Group III discussed in parallel three reform alternatives, based on the notes prepared by the Secretariat. These alternatives suggested the creation of: (i) a stand-alone review or appellate mechanism; (ii) a standing multilateral investment court (MIC); and/or (iii) changes to the procedures relevant to the selection and appointment of arbitrators and adjudicators. UNCITRAL Working Group III undertook a preliminary consideration of several issues with the goal of clarifying, defining and elaborating these three options (Report, §15). Its demarche continued the desired little more action commenced at its previous session of October 2019. However, instead of asking the delegations to side with a particular reform option, as one might have expected, a more pragmatic approach was undertaken. The agenda was essentially split in three core issues which were holistically addressed: (i) enforcement of the decisions, (ii) financing, and (iii) selection and appointment of adjudicators. No decision on whether to adopt a particular solution was embraced at this stage.

 

The Idea of a Multilateral Investment Court

For the European Union (EU), an important and active player in the reform process, a MIC is the only course of action that can effectively address all the concerns identified in the second stage of work conducted by UNCITRAL Working Group III. In an attempt to materialise its view, in January 2019 the EU formally advanced the idea of a “standing mechanism”. It would have two levels of adjudication, with appeal open only for errors of law (including serious procedural shortcomings) or manifest errors in the appreciation of the facts. Appeal was thus envisaged to exclude the possibility for a de novo review of the facts. The EU proposal also suggested that the standing mechanism have full-time adjudicators who would not conduct any outside activities. These adjudicators would also be subject to qualification requirements comparable to those of other international courts, and would be selected through a non-renewable term of office combined with a transparent appointment process which would ensure independence, impartiality and observances of strict ethical requirements. Transparency of procedures, including access by interested third parties, were also flagged as reform goals. According to the proposal, enforcement of the awards of the standing mechanism would be carried out under a self-contained enforcement regime excluding domestic court review, or, alternatively, under Article 1(2) (“permanent arbitral bodies”) of the New York Convention. Financing would be made through contributions of the contracting States and would be managed through a trust fund. The EU proposal envisaged that the mechanism would be structured as an “opt-in” system, i.e. each State would be free to decide whether to accept the jurisdiction of the MIC, and if so, to which investment treaties it would be applicable. The mechanism would also be used for State-to-State dispute settlement.

As a side note, the EU’s submission is part of its broader agenda to reform the ISDS system, which began in 2015 and gained momentum in March 2018 when the Council published the negotiating directives for the MIC. On the basis of this mandate, the European Commission (EC) is playing on two fronts: (1) it is advocating for the creation of a MIC as part of the discussions initiated in UNCITRAL Working Group III, and (2) it is advancing its Investment Court System (ICS) in the investment agreements it is concluding. This second front exceeds the scope of this post. Nevertheless, it is worth noting the EU’s courageous start in implementing provisions relating to the fundaments of ICSs in several investment and free trade agreements concluded or pending conclusion by the EU with Canada (CETA), Singapore (EUSFTA), Vietnam (EVFTA) and Mexico, which is also on the table in all on-going investment negotiations. As shown in a previous post, the Court of Justice of the European Union (CJEU) confirmed in its Opinion 1/17 of 30 April 2019 the compatibility of an ICS like the one included in CETA with EU’s primary law.1)Consequently, in October 2019, the EC submitted to the Council a proposal for the ICS in CETA which is pending adoption. jQuery("#footnote_plugin_tooltip_6502_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6502_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Apart from greenlighting the implementation of ICSs, the establishment “in the longer term [of a] multilateral investment Tribunal” (§108) was also touched upon by the CJEU, arguably as the ultimate goal.

 

Multilateral Investment Court in 3D: Enforcement of Decisions, Financing and Composition

The MIC was formally on the agenda of UNCITRAL Working Group III for the first time since its inception. It was proposed both as a standalone option and as part of the matters common to an appellate mechanism, with both envisaged as permanent institutions. Mirroring the structure of the agenda of the session, the creation of a MIC was subject to a three-pronged analysis.

First, the topic of enforcement of the decisions rendered by a MIC was addressed from two perspectives. For enforcement in participating States, the Working Group discussed the possibility of creating an internal mechanism in the founding convention (potentially modelled on Article 54 of the ICSID Convention), with further consideration to be given to potential conflicts with existing enforcement regimes and issues of State immunity (Report, §§64-66). Some States also advocated for an enforcement based on the New York convention model (Report, §§67-68).

Issues associated with enforcement in non-participating States appeared more vexing. Article 1(2) of the New York Convention (which refers to awards “made by permanent arbitral bodies”) was advanced as a possibility (Report, §70). Several ideas were put forth in order to mitigate the risk of inconsistent application of this provision by domestic courts, such as relevant wording in the founding convention or the issuance of a specific recommendation on the interpretation of Article 1(2) (Report, §§71-73). Certain States also noted that the risk of non-enforceability could be mitigated by allowing non-participating States to opt into the enforcement mechanism later down the line (Report, §§74-77).

A number of additional questions were left open for the time being. This included the impact of the law applicable at the seat of the permanent body to issues of enforcement; the possibility for participating States to waive the right of review under Article V of the New York Convention; and the role of domestic courts in relation to awards contrary to mandatory rules of law and essential public policies (Report, §80). In light of the numerous outstanding questions, the Secretariat was requested to conduct additional preparatory work and to provide an in-depth analysis of the questions raised during the deliberations, as well as information on provisions in existing international instruments and the potential adaption of such provisions in the context of a permanent body (Report, §81).

Second, in relation to the financing of a MIC, preliminary discussions revolved around matters such as remuneration of the adjudicators, costs related to the administration of the case and administrative support staff, and the overhead costs associated with maintaining the permanent body (Report, §82). The source and allocation of funding was of particular interest, given the need to safeguard the independence of the permanent body and to ensure that there would be no discrimination based on contributions provided by States (Report, §§86-88). The brainstormed solutions included financing by the participating States based on different criteria (e.g., level of economic development, number of claims, voluntary contributions), the implementation of a user-pays system, or a hybrid financing mechanism combining the former two. A number of important questions were also flagged for further consideration, such as: long-term sustainability, transitional financing measures, contingency plans in case of lack of funds, and flexibility in the budget structure to reflect the caseload (Report, §93). Consequently, the Secretariat was requested to continue to analyse this topic, with a focus on hybrid models for financing, assessed contribution schemes for participating States, and potential budgets for a permanent body based on comparable international judicial bodies (Report, §94).

Third, with respect to the selection and appointment of the adjudicators in a MIC, key characteristics were considered to be qualified knowledge (although subject to the risk of reducing the pool of eligible individuals), independence and impartiality, accountability and integrity (Report, §§96-100 and §123). Geographical, gender and linguistic diversity as well as equitable representation of different legal systems and cultures were flagged as essential but only as long as such requirements would not jeopardize the ultimate goal of a fair and efficient resolution of the dispute (Report, §101). The representation of the participating States and the nomination of candidates (by participating States, by an independent entity or by interested individuals) were debated as fundamental points in relation to this topic. Some delegations also argued that the election process (through vote by/consensus of the participating States or selection by a committee) could potentially involve preliminary states, such as (i) a screening stage by neutral independent bodies or (ii) a consultation stage whereby certain stakeholders (e.g., representatives of investors, professional associations in the field of international law and civil society) could take part in (Report, §§114-122). Other tackled aspects were the duration of the terms and possibility of renewal, the allocation of the cases (e.g., by the president or on a random basis) and the criteria to be considered for such allocation (e.g., specificities of the case, diversity, balance of work) (Report, §§123-129). These issues will be considered in more detail in a subsequent post in this series. The Secretariat was requested to prepare options covering the different aspects identified during the deliberations and to suggest ways in which pertinent qualifications and requirements could be incorporated into investment treaties or any other relevant instrument. Thus, it was expressly acknowledged that the “specific features would largely depend on the broader design of how ISDS would be conducted, including whether the ad hoc nature would be preserved or whether a permanent structure would be sought” (Report, §§132-133).

Finally, further exploratory work was deemed necessary for matters such as the location of the MIC, hosting within an existing organisation (possibly within the United Nations) or as a separate body, and its prerogative to handle State-to-State disputes (Report, §130).

 

Conclusion

The latest work of UNCITRAL Working Group III illustrates a change in strategy towards better understanding the benefits and downsides of implementing a MIC, alongside other reform options. What initially looked like delegations anchored in rigid positions now resembles a common engineering exercise in search for a solution that could fly. Albeit a large number of topics remain partially or completely unaddressed at this stage,2)The next session initially planned to take place between 30 March – 3 April 2020 in New York was rescheduled due to the coronavirus outbreak. Its agenda does not include the topic of a MIC per se but that of a potential multilateral instrument on ISDS reform. jQuery("#footnote_plugin_tooltip_6502_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6502_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); these will be subject to further analysis by the Secretariat and the delegations, and the discussions seem to be more structured and solution-oriented than they were previously. The process is slow and one cannot predict when an implementable conclusion will be reached. Nevertheless, it is moving, and the directions of the ultimate reform – be it in favour of a MIC or not – will arguably organically emerge throughout the process embarked on by the UNCITRAL Working Group III.

 

To see our full series of posts on the UNCITRAL WG III reform process, click here.

References   [ + ]

1. ↑ Consequently, in October 2019, the EC submitted to the Council a proposal for the ICS in CETA which is pending adoption. 2. ↑ The next session initially planned to take place between 30 March – 3 April 2020 in New York was rescheduled due to the coronavirus outbreak. Its agenda does not include the topic of a MIC per se but that of a potential multilateral instrument on ISDS reform. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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UNCITRAL Working Group III: An Introduction and Update

Mon, 2020-03-23 02:00

Next week was due to be the 39th session of the United Nations Commission on International Trade Law’s (UNCITRAL) Working Group III, and its sixth session considering the issue of reform to investor-State dispute settlement (‘ISDS’). The session has since been postponed indefinitely, in light of the current global COVID-19 pandemic. In lieu of Working Group III’s meeting in New York, we are running a series of posts this week to discuss some of the key reforms that the Working Group (‘WG’) has under consideration. These are all topics to which the WG will return when its meetings resume. This post provides an introduction to the series. It sets out some background related to the WG process to date, and then introduces the posts you will see throughout this week as part of our series.

 

Working Group III: The Process So Far

In July 2017, the Commission turned the issue of ISDS reform over to WG III. This WG comprises member States, observer States, and observer international and non-governmental organisations. As previously explained, the WG has divided its task into three phrases, as follows: (a) first, identify and consider concerns regarding investor-State dispute settlement; (b) second, consider whether reform was desirable in light of any identified concerns; and (c) third, if the WG were to conclude that reform was desirable, develop any relevant solutions to be recommended to the Commission. The first and second stages have now been completed, with the WG having determined that reform is desirable. Such reform is considered necessary to respond to a range of issues that have been identified and discussed during the WG’s meetings. These include issues associated with the duration and cost of investor-State arbitration proceedings, and related issues such as security for costs; issues of predictability and consistency between arbitral decisions; concerns related to processes for the appointment of arbitrators, including issues associated with their independence, diversity, and qualifications; and problems raised by third-party funding arrangements.

At its sessions in October 2019 and January 2020, the WG discussed a range of possible reform options, including the establishment of an advisory centre, creation of a code of conduct, development of an appellate and/or standing court mechanism, and reforms to address issues of third-party funding. It also agreed on a schedule for the discussion of these – and additional – reform options, agreeing to dedicate its 39th session in 2020 (now postponed) to considering the following areas of reform:

  • dispute prevention and mitigation as well as other means of alternative dispute resolution;
  • treaty interpretation by States parties;
  • security for costs;
  • means to address frivolous claims;
  • multiple proceedings including counterclaims; and
  • reflective loss and shareholder claims (together with the Organisation for Economic Cooperation and Development).

As noted above, this session was due to take place in New York from 30 March to 3 April 2020, but has been indefinitely postponed due to the unfolding COVID-19 situation.

 

A Preview into Our WG III Series

We have invited a group of contributors to explore different aspects of the WG III process over the course of this week. We hope that this series will provide a useful forum – particularly now that the WG’s session is not proceeding as scheduled – for our contributors and readers to engage with the WG reform process, and to debate its merits, scope, and limits.

Our first three posts consider institutional reforms, examining the WG’s development of reforms focussed on the establishment of standing and appellate review mechanisms.

On Tuesday, we will have a post by Andreea Nica that introduces the WG’s discussions concerning the possible establishment of a multilateral investment court. The post examines the background to this proposal, and analyses some of the key issues associated with its implementation including issues of enforcement, financing, and the selection and appointment of adjudicators.

This will be followed on Wednesday by a post by Associate Professor Fernando Dias Simões (The Chinese University of Hong Kong), which examines how institutional modifications interact with issues associated with adjudicator selection and appointment. That post examines the relationship between institutional reforms and concerns about the politicisation of ISDS, and identifies a number of mechanisms that could be incorporated as part of broader institutional reforms to ensure that adjudicators can be chosen due to their professional skills and merit, not their political leanings.

In Thursday’s post, Marike Paulsson (Albright StoneBridge Group) explores whether the creation of an appellate mechanism would respond to concerns about ISDS procedures, or rather create more difficulties. She highlights a number of issues potentially associated with the creation of an appellate mechanism, including issues of cost, duration, and uncertainty.

Our next two posts in the series examine key procedural reforms under development by WG III.

In Friday’s post, Johan Sidklev and Bruno Gustafsson (Roschier Attorneys Ltd) explore the WG’s discussions of security for costs and frivolous claims. The WG intended as part of its 39th session to consider security for costs as a mechanism for averting frivolous claims in ISDS. Friday’s post examines how any reform of the standards for ordering security for costs might address the conflict between the interest of adequate costs recovery for States, and policy considerations relating to, among other things, an investor’s access to justice.

This will be followed by a post on Saturday by Dr. Anna De Luca (Bocconi University) examining the WG’s proposals concerning counterclaims. Her post highlights the implications of this reform option, including for asymmetry in investment arbitration and the UNCITRAL WG III’s analysis of procedural versus substantive reform options.

Our contributors this week offer a diverse set of perspectives on a number of important and emerging issues under consideration by the WG. We hope you enjoy the series!

 

To see our full series of posts on the UNCITRAL WG III reform process, click here.

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The 2020 Vis Moot: Facing Emerging Challenges, While Continuing to Hone Best Practices in Procedure and Ethics

Sun, 2020-03-22 02:03

For decades, like clockwork, the Willem C. Vis International Commercial Arbitration Moot (‘Vis Moot’) and its sister competition, Vis East Moot, have brought together students, academics, practitioners, and arbitrators to consider emerging and important substantive topics in international arbitration and international sales law. Many of us honed our passion for these fields as student participants in the Vis Moot. We enthusiastically return to the Vis Moot each spring, as an opportunity to step back from the rigors of real-world practice and catch up with old friends and colleagues, while supporting students and considering emerging topics through the lens of the current problem.

 

Emerging Challenges

In the Fall, the Vis East Moot saw the decision by many student teams to withdraw in light of ongoing protests stemming from local concern over Hong Kong’s autonomy from mainland China. In addition, recent months of preparation for oral hearings have been overshadowed by the global public health crisis associated with COVID-19. This led to the reluctant, but appropriate and necessary, decision by Vis Moot organizers to first postpone in-person oral hearings in Hong Kong (to an unannounced date), followed by the recent decision to cancel oral hearings in Vienna.

The Vis Moot continues to execute its mission in unexpected ways. Student teams now have an opportunity to engage, in real-time, with the realities of arbitral practice. Most practitioners and arbitrators, after months of preparation, have seen hearings cancelled, either due to settlement or other circumstances requiring their delay. We also are now on the eve of the first Virtual Vis Moot: the organizers of each competition are separately providing students the opportunity to present their oral arguments from “home.” During the current public health crisis, nothing else could feel more modern. Globally, social distancing and remote working are emerging as a new reality. Practitioners face the pressurized challenge to rely on technology to transition their work and collaboration to a virtual setting, including the conduct of court and arbitration hearings. Consistent with the spirit of Lucy Greenwood’s Campaign for Greener Arbitration, there may be a silver lining to this momentary disruption. We have an opportunity to re-evaluate our individual carbon footprints and implement environmentally-friendly best practices. Indeed, each of these challenges and reactions highlights the true resilience and strength of both the Vis Moot community and the global arbitration community.

 

The 2020 Problem

Substantively, the Vis Moot problem always includes important questions – perhaps ones that have been percolating under the radar for some time – concerning arbitral procedure and contractual interpretation. It calls upon students, coaches, practitioners, and academics to consider these questions in detail and over a long period of time to glean collective insights and solutions. Already, in 2020, these goals have been achieved. While we may not all meet in person this year in Danubia (the Vis Moot’s fictional “seat”), the experience of coaching, researching, preparing memoranda, scoring memoranda, and preparing for oral hearings are each exercises that facilitate the Vis Moot’s goals.

With respect to arbitration, this year’s Problem involves two main questions.

First, the validity and enforceability of a unilateral option arbitration clause. This question was thoroughly considered on the Blog in a recent post by Kevin Cheung.

Second, the regulation of party representatives and the appropriate standards to guide whether their conduct is ethical and fair. Specifically, the Problem involves a scenario where one party has engaged an expert witness, one of the world’s few English-speaking experts on the subject. The other party contends that this expert’s selection is merely a tactic to create a conflict of interest with its party-appointed arbitrator and will lead to a (yet to be filed) improper arbitrator challenge and create delay in the resolution of the dispute. Under these circumstances, does the tribunal have the power to exclude the expert witness? The remainder of this post draws upon the Blog’s archives for insights to guide this analysis.

 

The Case for Tribunal Regulation of Counsel Conduct 

In recent years, the tribunal’s power to regulate the conduct of party representatives has attracted significant attention.

Prof. Margaret Moses has previously explained the arbitration community’s concern: arbitration is increasingly global and no longer controlled by an elite and exclusive “club” of parties, counsel, and arbitrators who implicitly understand the appropriate standard of conduct. Thus, with increasing use and diversity among its players, it is important to create explicit (rather than implicit) minimum and equalized standards for conduct. Indeed, Blog contributors have commented that national rules regulating counsel behavior rarely envisage the unique circumstances that counsel are confronted with in international arbitrations. Moreover, the reliance on national frameworks to regulate counsel conduct would probably lead to a fragmented response to transnational problems.

While there is agreement that a basic conceptual framework is needed and codes of conduct would be instructive, there is not agreement on what these codes of conduct should provide. This consensus stems from the understanding that self-regulation alone is not effective. The risk of guerilla tactics is pervasive. However, the existence of this risk does not automatically mean that the tribunal is the appropriate body to promulgate such standards (nor does it necessarily have the “power” to do so).  If the tribunal exercises powers it has not been granted, could its award be vacated on the ground that it exceeded the scope of its power? In this year’s Problem, this is precisely the risk. The International Law Association’s Committee on Commercial Arbitration has considered the issue and offered some useful recommendations by identifying two buckets of powers held by the tribunal: inherent and implied. Exercise of both types of powers can fall within their mandate to adjudicate a dispute.

As noted by Prof. Maxi Scherer, the goal should be to level the playing field among counsel and their clients. Because national rules cannot be relied upon to exclusively regulate counsel behavior in international arbitration, arbitral institutions are uniquely positioned to lead this debate by formulating common standards and rules regulating counsel conduct. Indeed, the London Court of Arbitration (‘LCIA’) was the first arbitral institution to offer guidelines on the conduct of counsel in international arbitrations (for the similar ICC initiative, see here). This year’s Problem specifically invokes the LCIA Rules (2014) as the lens for analysis.

The LCIA Rules (2014) include General Guidelines for the Parties’ Legal Representatives (‘LCIA Guidelines’) as part of its rules (for a general overview on the 2014 LCIA Rules, see here). Interestingly, the LCIA Guidelines are binding upon its users by virtue of Article 18.5, which provides that the participation of legal representatives before LCIA arbitral tribunals is conditioned to the compliance with the LCIA Guidelines. Accordingly, counsel give their consent to the LCIA Guidelines by agreeing to appear by name before the arbitral tribunal.

With respect to the Problem, the LCIA Guidelines provide that:

  • the LCIA Guidelines should not be interpreted so as to undermine a legal representative’s obligation to present the party’s case effectively to the tribunal (Paragraph 1); and
  • legal representatives should not engage in activities intended unfairly to obstruct the arbitration or to jeopardize the finality of any award (Paragraph 2).

As one Blog commentator mentioned, these recommendations are fairly general and high-level. As the application of these guidelines is not straightforward, tribunals should be particularly careful when interpreting Paragraph 2 of the LCIA Guidelines, which refers to obstruction strategies – the so-called guerrilla tactics. Indeed, certain procedural steps might be necessary to represent effectively a party in an arbitration, such as the appointment of a party expert whose linguistic capabilities and expertise make her unique to represent a party’s case in the arbitration – such as that of Respondent in the 2020 Problem. Accordingly, tribunals should strike a fine balance between discouraging and sanctioning those that engage in guerilla tactics, while at the same time not undermining a party’s right to present its case effectively.

In regard to the scope of the tribunal’s power to analyze claims connected to party representatives’ conduct, Article 18.6 grants tribunals significant discretion to decide, upon complaint of one of the parties or upon its own initiative, on whether legal representatives have violated the LCIA Guidelines. Moreover, the provision sets forth sanctions to be applied by tribunals, which include written reprimands or cautions in regard to future conduct in the proceedings, as well as the catch-all remedy of applying “any other measure necessary” for the tribunal to fulfil its general duties. One Blog contributor challenged whether a party-appointed arbitrator would be prepared to impose sanctions on the counsel that appointed her, knowing that such an approach would potentially undermine future appointments – indeed, given the economics, would party-appointed arbitrators be prepared to bite the hand that feeds them?

While analyzing the design of the LCIA Guidelines, a Blog commentator affirmed that the preference for broadly drafted recommendations is somewhat inherent to any attempt to formulate universally acceptable principles for the conduct of the parties’ legal representatives. The same can also be said about non-binding codes of ethical conduct that are relevant to the Problem, such as the 2013 IBA Guidelines on Party Representation in International Arbitration (for other examples of non-binding codes of ethics, see comments on the Prague Rules here and on the Spanish Arbitration Club’s Code of Best Practices in Arbitration here).

 

Discretionary Rules: The 2013 IBA Guidelines on Party Representation in International Arbitration

The 2013 IBA Guidelines on Party Representation in International Arbitration (‘2013 IBA Guidelines’) cover similar aspects to those covered by the LCIA Guidelines and reflect another institutional approach, although not binding upon parties unless expressly agreed by them either before or during the arbitration proceedings (for a general overview of the 2013 IBA Rules, see here).

According to its Preamble, the 2013 IBA Guidelines were not designed with the intention of replacing mandatory rules or agreed-upon arbitral rules, nor of vesting arbitral tribunals with powers reserved to regulatory professional bodies, as a contributor said. Rather, the 2013 IBA Rules consists of a valid initiative to consolidate best practices in international arbitration, which may level the playing the field between legal practitioners coming from different legal traditions, as well as between less and more experienced lawyers.

However, critics affirm that the 2013 IBA Guidelines will likely not offer optimal efficacy in shaping the conduct of party representatives, even if they are to become binding rules through the acceptance, in whole or in part, by the parties. This is so for a number of reasons.

First, the IBA 2013 Guidelines do not provide guidance on all aspects of party representative conduct, leaving out important aspects. Second, as raised by one contributor, the 2013 IBA Rules is concerned with counsel conduct, and not with conduct of the parties themselves, who are those that could consent to the application of the regulation.1)On this point, see Comments to Guidelines 1-3 (“A Party Representative, acting within the authority granted to it, acts on behalf of the Party whom he or she represents. It follows therefore that an obligation or duty bearing on a Party Representative is an obligation or duty of the represented Party, who may ultimately bear the consequences of the misconduct of its Representative.”). jQuery("#footnote_plugin_tooltip_2165_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2165_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In this sense, there is an inconsistency between those that are subject to the regulation and those who could agree to its application, which may deprive counsel from the incentives to act in accordance with the guidelines.Third, and as a consequence, the sanctions provided by the 2013 IBA Rules inherently penalize the end user of the arbitration, not their legal representative, as one contributor suggests. This is the case of adverse costs orders (for an analysis of this matter, see here).2)2013 IBA Rules, Guideline 26(b) and (c). jQuery("#footnote_plugin_tooltip_2165_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2165_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

***

All in all, this year’s Vis Moot participants will have a rich experience – both substantively and procedurally – and we are looking forward to seeing advancement of the debate, and the success of the participants, during the upcoming online pleadings!

References   [ + ]

1. ↑ On this point, see Comments to Guidelines 1-3 (“A Party Representative, acting within the authority granted to it, acts on behalf of the Party whom he or she represents. It follows therefore that an obligation or duty bearing on a Party Representative is an obligation or duty of the represented Party, who may ultimately bear the consequences of the misconduct of its Representative.”). 2. ↑ 2013 IBA Rules, Guideline 26(b) and (c). 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Young Female Practitioners Breaking into the World of International Arbitration

Fri, 2020-03-20 23:21

Late last year, Herbert Smith Freehills Seoul and Kim & Chang held a “Women in Arbitration” Networking-Dinner and panel discussion as part of the Seoul ADR Festival 2019. The dinner aimed to provide an opportunity for female professionals in the Korean arbitration community to network with their industry peers and work to advance their position in arbitration. This post provides the perspectives of the authors based on the panel discussions.

 

A young practitioner’s perspective

Latin America

Increasing legitimacy in international arbitration, as explained by Van Leeuwen in a KluwerBlog in 2019, requires that arbitral decisions are made by a diverse pool of arbitrators, composed not only by gender equality, but also from geographical diversity. The reality is, however, that the field is not yet fully diversified, thus being a young woman from Mexico may present challenges to breaking into the international arbitration community. ArbitralWomen’s data show that, compared to other developed countries such as the United Kingdom, Mexico has few registered female arbitrators. Thus, accessible mentoring programs are not a feasible option for my jurisdiction. As a young Latina woman, the path is still long and tough; both Mexico and South Korea are jurisdictions known for being patriarchal societies. For instance, in the platform ArbitralWomen, there are no South Korean female arbitrators registered. The lack of female role models working in international arbitration from diversified jurisdictions reduces the number of young women willing to work in international arbitration and inhibits the opportunities for women to engage in constructive, supportive networking. Thus, encouraging societal awareness of potential unequal gender treatment at work becomes critical to being able to move forward and progress. For instance, by promoting its highly credentialed female members, ArbitralWomen seeks to equip clients, counsel and other stakeholders in the international arbitration community with access to women for any role needed. Another method discussed by the panel to enhance diversity is to establish targets and quotas. Ms Paula Hodges (Herbert Smith Freehills) explained that Herbert Smith Freehills used to have 20% female partners thereafter aiming for a clear target to achieve 35% female partners by May 2023. A male from the audience asked why the target was 35% and not 50%. Ms Hodges answered that the aim is to set realistic targets in order to advance more effectively. According to the authors, the responsibility to set effective targets has a direct impact on young practitioners and gender perception for future generations. Mr Eun Young Park (Kim & Chang), the male voice on the panel, explained that targets have a more positive response by male colleagues whereas quotas spike criticism and more discussions about the results. Ultimately, it is important to recognize the problem of opportunity and recognition when compared with our male peers from relatively privileged jurisdictions. Thus, we need to reset the balance in the pursuit of legitimacy for international arbitration.

 

Europe

The disparities in the progress towards more gender-equal societies are clearly visible when comparing Sweden, my country of origin, and South Korea, where I currently live. As raised by Ms Sue Hyun Lim (KCAB INTERNATIONAL) during the panel discussion, South Korea has experienced a rapid economic and societal shift in the last few decades, which is reflected in the distinct generational gap. The authors note that in a society where respect for elders is essential, it is important to balance the need to impress the older generation and the desire to have a more progressive working culture and environment. In this regard, the Economist’s glass-ceiling index measures gender equality in the labour market and lists South Korea as the worst environment for women to work in within the OECD, having the largest gender pay gap amongst OECD countries. Given the increased number of highly educated women in law, it is important to secure equal opportunities for male and female practitioners alike. Moreover, the topic of networking was also addressed by the panel, where the general consensus is that women can be excluded from social groups, mainly because men have more time to network and socialize. The same Economist’s glass-ceiling index displays that in 2017 South Korea and Sweden were at opposite sides of the spectrum when it comes to gender equality in the labour market. This is not to say that there isn’t room for improvement in Sweden; parity has not been reached, but there is institutional support which is not yet present in other countries. In some places there is a more urgent need for support groups, where experience sharing, and mentoring can encourage the next generation of women to disrupt the status-quo and confidently reach for their goals. At the event in Seoul, panelist Ms Hodges urged law firms and institutions to encourage diversity, without leaving the burden of fighting unconscious and conscious bias entirely on women. Ms Kim Rooney (International arbitrator) agreed networking events hosted by arbitral institutions are important and people must recognize that gender equality has not been achieved yet. The authors agree that the situation is not improving fast enough, and it is up to the individuals to make a positive impact. In addition to the institutions promoting diversity, there are other initiatives available: for instance, the Equal Representation in Arbitration Pledge (ERA Pledge) launched in 2015, aims to improve the representation of women in arbitration. We cannot content ourselves with hiding behind the optimistic statement of having come a long way, when women are still not given the same opportunities for advancement, face gender discrimination from the seniors in their fields and are expected to fulfil rigid gender roles even after attaining the same education and/or professional experience as their male colleagues. As stated by Noor Kahdim on 26 September 2016 in a KluwerBlog, we should be striving towards a true meritocracy in international arbitration. While there is much work to be done, in the last ten years we have seen remarkable progress and an optimism that diversity can be achieved. Ideally, the same advice should be given to young men and young women entering the field of arbitration, but the reality is that young women still need further guidance to tackle the bias that plagues professional fields. The obstacles are more pronounced in certain cultures compared to others, but women in Europe, Latin America, East Asia and beyond should focus their training, intelligence, character, and values to assert themselves in their professional fields leading by example for the generations of professional men and women to come.

 

Concluding Remarks

As young female practitioners entering the world of arbitration, we are still expected to be pioneers to pave the way for the international arbitration community of the future. The world is changing, and so is the world of arbitration: initiatives such as the event in Seoul and the work that other organizations are doing are crucial in creating a more diverse arbitration community that can attract promising practitioners, female and male alike. As young practitioners, we should enter the world of arbitration determined to make our mark, by supporting each other, seeking out role models and mentors and distinguishing ourselves through hard work and vision. The future of international arbitration lies in the new generation of practitioners: both men and women should look forward to creating a more diverse international arbitration environment.

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India, Brazil Ink Novel Investment Treaty: Is Dispute Prevention the Way Forward?

Fri, 2020-03-20 21:31

On 25 January 2020, India and Brazil signed an Investment Cooperation and Facilitation Treaty, in the presence of the Brazilian president Jair Messias Bolsonaro. Arguably the most prominent of the 3 BITs that India has signed since adopting the model BIT in December 2015. The new treaty articulates several provisions (briefly discussed below) in departure from the model version. The two nations also committed to step-up cooperation in the field of oil and natural gas, cybersecurity, science and technology, health and traditional medicine, etc. This comes in the backdrop of India opening up its market to allow 100% FDI in Coal and Lignite mining as well as in some digital media sectors. India also offered for a 100% acquisition its debt-ridden national carrier Air India at the World Economic Forum at Davos earlier this January.

The treaty incidentally also comes at a time when Venezuela – which holds the maximum oil reserves in the world (roughly 18%) – faces sanctions from the United States thereby hindering commercial dealings by other nations and businesses with the oil dependent Latin American country.

As a backgrounder, for Brazil, this is the 27th BIT it has signed, yet there is only one which has seen light of the day. Surprisingly though, both Brazil and India are not signatories to the ICSID Convention. While Brazil has remained firm in its views that investor-state arbitration limits a state’s rights to regulate benefits to foreign investors, it may perhaps have been on the same footing as India – which has revoked 58 of its BITs in the recent past. India currently has only 14 BITs in force, with 5 in the post-signing incubation phase, including the most recent with Brazil.

 

A departure from the Model BIT

The new Investment Treaty, in terms of disputes and resolution, has departed considerably from the Model BIT of 2015. Her largely protective Model BIT provides for a new Investor State Dispute Settlement mechanism that requires foreign investors to exhaust local remedies for 5 years before going for international arbitration. Perhaps learning its lessons from the White Industries crises where the investor may not have anticipated that enforcing the award would take substantially longer time than procuring one from a tribunal. For the largest democracy in the world – with the fastest growing population – which has its higher judiciary clogged with close to half a million pending cases; it would make sense to prevent being accused for breach of the Fair & Equitable Treatment Standard owing to delayed adjudication. However, the instant treaty between India and Brazil completely shifts the focus from dispute resolution to dispute prevention, with no provision for investor-state arbitration, lest through their country.

 

Here’s a brief look at some of the key provisions

Investment has been defined narrowly to include shares, stocks, licenses, authorizations, loans to enterprises, intellectual property, and movable and immovable property. There is a categorical exclusion of several items like debt securities, portfolio investments, claims to monies arising out of commercial transactions, goodwill.

 Article 4 – Treatment of Investments

The standards of protection are provided for in Article 4, depart from the traditional Fair & Equitable Standard, preclude either nation from taking measures that constitute denial of justice, breach of due process, discrimination and abusive treatment against investments. Though in consonance with the model BIT’s Article 3, there is no most-favored nation (MFN) clause in the treaty.

 Article 10 – Investment Measures and Combating Corruption and Illegality

The Article casts a duty upon both nations to adopt measures and make efforts to prevent and fight corruption, money laundering and terrorism financing with regard to covered matters. Moreover, the treaty takes a step further in precluding any protection to investments made with capital or assets from ‘illicit’ sources. This provision rather cements the debate, at least for the purpose of this treaty, on whether corrupt investments are entitled to protection. The investment, to be recognized as such, has to be in accordance with the provisions of the treaty and in compliance with the laws of the host state, with an onus on the investors to share any information that the host state may desire, including those of corporate history and practices of the investor.

Article 13 – Joint Committee for the Administration of the Treaty

A Joint Committee envisaged under this provision would administer the treaty. The functions and responsibilities include supervising the implementation and execution of the treaty, and also consulting with investors and stakeholders on issues related to the work of the committee. But going beyond, the largely autonomous committee would, inter alia, be empowered to mediate for amicable disputes concerning investments and also, supplement rules for arbitral dispute settlement between the parties.

Article 14 – Ombudsman

Both nations shall designate an ombudsman who shall be responsible to support investors from the other party in its territory, and amongst other responsibilities, shall be tasked to address differences in investment matters with a view to help in prevention of disputes.

Article 18 – Dispute Prevention Procedure

The most striking feature of the treaty translates not to dispute resolution but dispute prevention. Grievance regarding a specific measure adopted by either nation can only be raised by the other nation, not by investors, before the Joint Committee. An investor, though, may raise objections through its representative nation, unless already raised before another dispute settlement forum (not envisaged in the treaty).

Article 19 – Dispute resolution between Parties

The dispute resolution clause does not envisage resolving disputes between investors and parties, but only between parties, i.e., the nations. The choice between an ad hoc Arbitral Tribunal or a permanent arbitration institution rests with the parties, however, there are 2 important conditions:

i. The purpose of the arbitration is to decide on interpretation of this treaty or the observance by a Party of the terms of this Treaty. The Arbitral Tribunal, however, shall be precluded from awarding compensation.

ii. The Tribunal shall be empowered to examine matters related to the following:

a. the objective, definitions, scope and general provisions.

b. treatment of investments, expropriation, compensation for losses attributable to war or other armed conflict, revolution, state of emergency, civil strife, etc., and transfer of funds.

c. treatment of protected information.

d. parties’ right to take prudential measures in relation to protection of investors, maintenance of financial institutions and financial systems.

e. amendments to the treaty, relationship with other treaties, and issues relating to the duration of the instant treaty.

iii. The parties would bear their own costs, although the tribunal may in its discretion direct any party to bear all or a substantial portion of the costs.

The treaty further lays down the criteria for the appointment of arbitrators as well as a code of conduct to be followed by the arbitrators. As it appears, an aggrieved party may ultimately seek refuge under its government to raise issues of treaty violation in arbitration, and vicariously seek enforcement of any arbitral directions regarding observance of treaty provisions.

 

Dispute Prevention

The treaty envisages cooperation, in pursuit of which are incorporated binding general and security exceptions; while giving due regard to each other’s sovereign prerogatives and regulatory powers. The minimization of the potential areas of disputes certainly exhibits promise in avoidance of conflicts that may escalate to the level of formal disputes. The level of governmental intervention in crystallizing those disputes may effectively mean resolution through diplomatic discussions, rather than invoking the provisions of this treaty. The promise to offer ombuds services, to act as a focal point for the other party’s investors, appears ideal. In theory, dispute prevention provisions can promote transparency, better informed investments, cooperation between investors and states, reduce blindsiding measures, save costs, prevent hostilities and eventually promote the objectives of the treaty.

Reportedly, India has been taken to investment arbitration on 24 occasions, and suffice it to say, India is wizening-up with its approach towards investments. India is currently defending 11 investment disputes, unlike its Brazilian counterpart, which has no reported ones. Indian investors on the other hand have notably resorted to Investment Arbitration on only 7 instances, of which just 3 remain pending. Though one of the largest developing economies, and one of the fastest growing, too, India still ranks 63rd on the Ease of doing business index and a startling 163 in resolving contracts. India’s new-found approach, under which any of the 3 new treaties are yet to come in force, is yet to manifest results vis-à-vis dispute resolution. How the new dispute prevention mechanism fares is a question for tomorrow, but it surely would highlight the impact of not resorting to traditional investor-state dispute resolution in an age when investment arbitration is often being questioned.

 

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