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Should I Arbitrate My Patent Dispute?

Kluwer Arbitration Blog - Tue, 2022-11-29 00:51

As noted in GAR’s Guide to IP Arbitration, “one of the noticeable trends in international arbitration in the past several years has been the growing use of arbitration to resolve IP-related disputes.”  The World Intellectual Property Organization (“WIPO”) Arbitration and Mediation Center reports that its filings (arbitration, mediation and expert determination) increased by over 15% from 2018 to 2019, held steady in 2020, and increased 44% from 2020 to 2021.

Despite the arbitration of patent disputes not being a new or novel concept, wide-spread use of arbitration for the resolution of patent disputes remains elusive. But why? In large part it appears that questions arise as to the arbitrability of patent disputes, the arbitral process, and the benefits available from selecting arbitration over litigation.

 

Are patent infringement and invalidity arbitrable?

The arbitrability of substantive patent disputes (i.e., disputes involving questions of patent validity and infringement as opposed to contractual questions involving, for example patent licensing) is increasingly recognized by national legislatures and courts.  Indeed, WIPO Arbitration and Mediation Center asserts that “it is now broadly accepted that disputes relating to IP rights are arbitrable.”

The United States has a relatively long track record with patent arbitration.  In 1982, Congress amended Title 35 of the United States Code (i.e., the U.S. patent statute) to include Section 294, which is directed to voluntary arbitration and provides a broad scope of arbitrability.

More recently, leading arbitration-friendly jurisdictions have amended their legislations to expressly provide for arbitration of substantive patent disputes. In 2017, Hong Kong amended its Arbitration Ordinance (Cap. 609; Part 11A) to, among other things, clarify that all disputes over intellectual property rights (“IPRs”) can be resolved by arbitration. In 2019, Singapore followed suit, amending its International Arbitration Act (Arts. 26B and 26G) to expressly provide for the arbitration of IP disputes including patent invalidity.1)See also, the website of the Intellectual Property Office of Singapore (“IPOS”) jQuery('#footnote_plugin_tooltip_43465_3_1').tooltip({ tip: '#footnote_plugin_tooltip_text_43465_3_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); While Japan does not have a specific civil code provision concerning the arbitrability of patent disputes, the Japan Patent Office (“JPO”) has a portal to facilitate arbitration of substantive patent disputes.

On May 5, 2021, the District Court of Munich recognized the arbitrability of patent validity under both German and Swiss law. Relying on Section 1030 of the German Code of Civil Procedure, which provides that any pecuniary claim is arbitrable, the court found that German ordre public did not preclude the arbitrability of patent rights. Further, in analyzing Swiss law, the court found that Swiss public policy did not preclude the arbitrability of disputes relating to the rights of European patent application.

With increasing statutory and judicial acceptance of the arbitrability of patent rights/disputes and the express recognition that such disputes do not violate public policy, the concern that an award may be refused recognition under Articles V(2)(b) of the New York Convention is obviated in at least in those countries.  For example, in the United States, the Court of Appeals for the Federal Circuit has rejected arguments that an arbitral award addressing patent invalidity issues should be refused recognition under Article V(2)(b) of the New York Convention. In doing so, the Federal Circuit explained that US courts construe the public policy exception of the New York Convention narrowly, applying it “only where enforcement would violate the forum state’s most basic notions of morality and justice.” In fact, the Korean Supreme Court, has also rejected a party’s argument that the arbitral award addressing patent rights should be aside for violating public policy as defined in Art. V(2)(b) of the New York Convention. This despite that fact that the case involved the use of a patent right, which, under Korean law, could not be created by an agreement between private parties because such a patent right is created and recognized for public interest within the framework of patent law. The Korean Supreme Court, similarly explained the narrow application of this ground. That said, care should always be taken to consider in which countries enforcement is likely to ensure those countries recognize the arbitrability of the validity and infringement of patents rights.

 

Resolution of Multi-jurisdictional Patent Disputes in a Single Proceeding

While arbitrating patent disputes provides all the benefits of arbitration in general (e.g., ability to select a technically and legally qualified arbitrator, neutrality, confidentiality, efficiency, lower cost of arbitrating IP disputes), there is another  aspect of arbitration that makes it particularly attractive for patent disputes: the ability to resolve global disputes in a single proceeding.

Patent disputes frequently implicate patents in multiple jurisdictions, each of which requires litigation in the respective national courts.  Arbitration, in contrast, allows parties to resolve the full scope of their dispute in a single proceeding, with one set of attorneys, and under an agreed upon legal regimen, thereby reducing costs and the time to resolution, while eliminating the risk of conflicting decisions.

The UK Court of Appeal recently acknowledged this benefit of arbitrating transnational patent disputes in Nokia Technologies OY v Oneplus Technology (Shenzhen) Co Ltd, [2022] EWCA Civ 947 (11 July 2022).  This case involved a complex jurisdictional dispute over Nokia’s assertion of its Standard Essential Patents (SEPs).

Industry standards (e.g., USB, LTE, Wi-Fi) exist so that different manufacturers can produce compatible equipment. As the court explained, a patent is said to be “standard-essential” if implementation of the standard would necessarily involve infringement of the patent in the absence of a license.  Industry members that are involved in the establishment of the standard are required grant licenses of their SEPs on fair, reasonable and non-discriminatory (FRAND) terms. This ensures patentees are not disadvantaged by cooperating with the establishment of the standards – allowing patentees to be rewarded for their inventions – while guaranteeing access to those standard essential inventions at a fair rate.

As the UK Court of Appeal explained, when disputes arise as to SEPs and FRAND licenses, the parties typically turn to the national courts. However, because patents are territorially limited, a patentee must enforce its patent(s) in each jurisdiction where the accused infringer exploits the patented invention. Not only is this burdensome for the patentee, but it is incredibly inefficient and costly for both parties and creates the inherent risk of inconsistent decisions.

Arbitration provides a facile mechanism for global resolution of such disputes.  As Lord Justice Arnold aptly put it, “[t]he only sure way to avoid these problems is to use a supranational dispute resolution procedure, and the only supranational procedure currently available is arbitration.”

 

Arbitration Can Avoid Bifurcation of Infringement and Invalidity Determinations

Patent disputes can be further complicated when the dispute arises in a country (e.g., Japan, Germany, China, Korea) in which infringement is bifurcated from the invalidation proceedings.  In Japan, for example, infringement is resolved in national courts, whereas invalidity proceedings are conducted in the JPO.  In Germany, these issues are resolved in two separate courts.  Arbitration, however, allows parties to avoid the bifurcation dilemma, allowing for the resolution of all patent issues in a single proceeding.2)Patent invalidity is not arbitrable subject matter in Korea and China. jQuery('#footnote_plugin_tooltip_43465_3_2').tooltip({ tip: '#footnote_plugin_tooltip_text_43465_3_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Caution Against Patent/IP Carve-Outs in Arbitration Agreements

Even parties that choose arbitration as the dispute resolution mechanism for their contractual disputes, often choose to exclude patent and other IP disputes from the arbitration agreement (“carve-out”).  The Second Circuit’s recent decision in Lavvan, Inc., v. Amyris, Inc., No. 21-1819, 2022 WL 4241192 (2d Cir. Sep. 15, 2022) demonstrates the negative aspects of such carve-outs.

In Lavvan, the court of appeals reviewed the lower court’s denial of the defendant’s motion to compel arbitration.  The arbitration agreement in question provided for arbitration of “[a]ll disputes that cannot be resolved by the management of both Parties,” but contained a carve-out of all disputes arising “with respect to the scope, ownership, validity, enforceability, revocation or infringement of any Intellectual Property”. Thus, the plaintiff commenced ICC arbitration of its contractual claims and, simultaneously, pursued litigation of its trade secret misappropriation and patent infringement claims in federal court. In its motion to dismiss, the defendant argued that because all the claims arose from a common factual matrix, and it was at least ambiguous whether the claims fell within the carve-out, any ambiguity should be resolved in favor of arbitration.

The Second Circuit rejected the defendant’s argument, holding that the claims asserted in the complaint were “clearly disputes of the sort exempted from arbitration” and thus not arbitrable. Additionally, the court noted that “the fact that these intellectual property claims are intertwined with the contractual issues currently being arbitrated provides no basis on which to require claims exempted from arbitration to be subject to it.”

Thus, even where contractual and intellectual property claims are intertwined, they must be pursued in two separate and parallel proceedings when the parties include a carve-out regardless of the increased costs, decreased efficiencies and the inherent risk of inconsistent rulings.   Given the inherent benefits of arbitration (i.e., ability to select a technically and legally qualified arbitrators, neutrality, increased confidentiality, lower cost, etc.), parties should avoid such carve-outs unless strong overriding reasons exist.

Additionally, while some IP owners may be hesitant to arbitrate their IP disputes because of the lack of appellate review, such hesitancy should be tempered. For a patent owner, if an asserted patent is invalidated in a national court, the patent claims at issue are invalidated erga omnesi.e. towards everyone.  Hence, it cannot be asserted against any party.  However, because arbitral awards are binding only on the parties to the arbitration and can be subject to strict confidentiality, arbitral invalidation of the patent may not affect the enforceability of the patent against other possible infringers. Thus, agreeing to arbitrate such disputes can provide a lower risk avenue of enforcement than litigation.

 

Conclusion

It is broadly accepted that patent disputes are arbitrable. While litigation is often perceived as providing certain benefits in patent disputes (e.g., greater discovery, appellate review), any perceived benefits are offset by the substantial expense and inability to achieve a global resolution in a single proceeding.  By contrast, arbitration can accomplish the same goals, while providing the added benefits of global dispute resolution in a single neutral proceeding, by qualified arbitrators, at lower cost and with increased confidentiality. As more parties and counsel understand and appreciate the benefits of arbitrating patent disputes, it can be expected that patent arbitrations will not remain elusive for long.

References[+]

References ↑1 See also, the website of the Intellectual Property Office of Singapore (“IPOS”) ↑2 Patent invalidity is not arbitrable subject matter in Korea and China. function footnote_expand_reference_container_43465_3() { jQuery('#footnote_references_container_43465_3').show(); jQuery('#footnote_reference_container_collapse_button_43465_3').text('−'); } function footnote_collapse_reference_container_43465_3() { jQuery('#footnote_references_container_43465_3').hide(); jQuery('#footnote_reference_container_collapse_button_43465_3').text('+'); } function footnote_expand_collapse_reference_container_43465_3() { if (jQuery('#footnote_references_container_43465_3').is(':hidden')) { footnote_expand_reference_container_43465_3(); } else { footnote_collapse_reference_container_43465_3(); } } function footnote_moveToReference_43465_3(p_str_TargetID) { footnote_expand_reference_container_43465_3(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_43465_3(p_str_TargetID) { footnote_expand_reference_container_43465_3(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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The Art of Advocacy: Storytelling from Socrates’ Athens

Kluwer Arbitration Blog - Mon, 2022-11-28 00:39

The trial of Socrates

In 399 BC, the philosopher Socrates was tried on the charges of asebeia, or impiety, and of corrupting the youth of Athens. The trial is famous for, inter alia, Socrates’ elenchus, or cross-examination, of his accuser, Meletus. While Socrates’ cross-examination was doubtless an impressive sight, he ultimately failed to successfully advocate for his own life. Convicted and condemned to death by a jury of 501 citizens, the wisdom of Socrates failed to live up to the task required, that of Socrates’ acquittal. For further reading see Plato’s The Apology of Socrates, or, e.g., the Encyclopaedia Britannica.

 

No corrupt youth to see here

Over 2,400 years later and another international arbitration moot season is now upon us. This blog post summarizes some important advice and insights into dealing with oral and written advocacy, including cross-examination.

In preparing this post, the authors, being one current and one former moot court participant (the Cross-Examination and Willem C. Vis International Commercial Arbitration moots, respectively), have drawn inspiration from the recent ICDR Y&I Skills Training Workshop on Written and Oral Advocacy in Investment Arbitration (“Workshop”) held in July 2022 in Athens, the Hellenic Republic, as part of a Summer Law School in Investment Arbitration organized by the European Law Students’ Association.

The Workshop was led by renowned lawyers and arbitration practitioners Rebecca James (Linklaters), Barton Legum (Honlet Legum Arbitration), Alexander G. Leventhal (Quinn Emanuel), Marc Krestin (PGMBM) and Marily Paralika (Fieldfisher), each of whom offered incisive tips that are valuable to many new and aspiring students and practitioners as they hone their skills for use in moot court competitions and beyond.

 

Coordinated advocacy

First, coordinate your team. A well-coordinated team is the foundation of any successful case. It is seldom you will be working completely alone, and it is important to understand each other’s strengths and weaknesses and to take advantage of these.

Relatedly, consider the division of work early and to start writing as soon as possible. The writing of submissions or sections thereof should be kept as consistent and equal as possible between the drafters. In this regard and depending on the team dynamic, it is often helpful to brainstorm together. Things move faster and two heads are generally better than one.

Where the individual components of the submission continue to be written separately, it is advisable to merge the individual parts first as soon as possible and then to coordinate the styles.

In the authors’ experience, the team’s more junior associates generally build the basic framework of the submission, while the more experienced team members then finesse the fine points. Ask questions of your peers, seniors, partners and coaches. There are no silly questions. In general, the goal should be to draft logically with simplicity and precision. Developing a solid legal and evidentiary basis is very important.

 

Mind the gap: effective signposting

Second, it may be trite, but it is very effective to put up “signposts”. These include key words to hold on to, but also stylistic devices that weave a golden thread through the submissions, oral or written.

Lead your submissions with the strongest arguments. There is no time for a warm-up act. End your arguments on a high, there may well be no encore. In real life there may be a post-hearing brief, alas not so for Socrates. Ordered signposts will help you here in terms of structure and ordering.

The authors are aware of the conundrum as to what extent an advocate should take into account the preferences of an arbitral tribunal with regard to the presentation or the order of their submissions. In principle, it is possible to take such preferences into account, but it is not necessarily conducive to good advocacy. What should be uncontroversial is the view that it is essential for an advocate to truly understand their case and to give the arbitral tribunal the impression that it is being presented with serious and important issues to decide. For Socrates’ Ancient Athenian jury, this question should have been made especially clear.

 

Goodies versus baddies: persuasion through storytelling

Third, the Workshop panelists stressed the importance of the advocate persuading the arbitral tribunal to view the facts as they see them and not as opposing counsel sees them. To do this, the best advocates present their case in the form of a story. In particular, the arbitral tribunal should be made to feel as if they are directly involved, acting as the “avenger” in righting a wrong. To achieve this, the advocate must ensure the arbitral tribunal also becomes part of the story.

To this end, it can be useful, nay important to cast one’s client in the role of the victim as much as possible. But how can the advocate portray their client in a way that makes them appear as the victim? The authors concede that this question cannot be answered in a one-size-fits all manner. As the lawyerly adage goes, “it depends”. It depends both on the individual circumstances of a dispute and, in the case of investment arbitration, on the nature of the investment. The most important thing for the advocate here is to be able to explain, for example, why the client’s expectations were not met, or why their story is the more credible one.

 

“Know thyself”

Fourth, it should be emphasized that the narrative or “story” of the case becomes clearer towards the “pointed end” of the proceedings. Presenting this story persuasively is ultimately the advocate’s main job. Therefore, and this is considered particularly important, an advocate must also focus on themself. There can be tragic consequences if an advocate forgets their “personality”, i.e., who they are and what their particular style and preferences are.

 

Oral testimony: what is it good for?

Fifth, what is oral testimony and is it truly needed? While the art of advocacy appears firmly established as a cornerstone of every jurisdiction, the value of oral testimony and the concept of cross-examination remain alien to many. At the Workshop, the scenario of the client who insists on testifying to have their “day in court” arose. Unsurprisingly, this is only necessary or helpful in rare cases. For the authors of this post, the strong emotional attachment of such a witness to the dispute contradicts Aristotle’s notion that the “law is reason free from passion” and can jeopardize both the advocate’s credibility and persuasiveness. Indeed, one of the Workshop panelists referred to a case they worked on in which the witness being cross-examined admitted to committing criminal offences, which led to his subsequent prosecution. Such testimony should therefore be discouraged.

It should also be recalled that, for the layperson, the task of testifying can be very difficult and stressful. A good advocate will ensure their witness has had every opportunity to be well-prepared for the examination, cross-examination, and reexamination, if applicable.

Successful cross-examination demands control, responsiveness, and adaptability. When cross-examining, avoid questions to which you do not know the answer.

 

Tips for hearing preparation

Sixth, how to prepare for the hearing. The Workshop panelists provided some useful practical tips as guidance. Outside the competition requirements that might guide moot court advocacy, the advocate’s opening statement should not take longer than 90 minutes and this is generally not the opportunity for detailed discussion of damages calculations.

Moreover, it is of crucial importance that the advocate presents themself as well as possible during the submissions. In the Zoomiverse, basic tips include keeping the speaker’s microphone facing the right direction and the optimal distance from the speaker’s mouth, if such technology is available. The advocate should speak slowly and with a varied intonation to engage the arbitral tribunal. The advocate’s focus should stay on the arbitral tribunal in order to respond to any reactions.

An advocate should also be cautious of excessive hand gesturing. To what extent is the use of a script or outline more appropriate? Again, it depends on the advocate’s preferences. Both options have advantages and disadvantages, but both should be used as a prompt rather than something to rely on throughout the submissions.

A top tip from the Workshop is that advocates should prepare for their hearings by, for example, recording themselves in videos and then watching them in order to refine their presentations and arguments. In the event that the advocate receives a question from the arbitral tribunal during the hearing to which they do not have an appropriate answer in the heat of the moment, it is not a problem and may be advisable to give the answer later in the hearing or, if necessary, to have it answered by another member of the team.

 

“We cannot live better than in seeking to become better”

Among the most valuable tips for advocates that the authors have learned from the Workshop and beyond thus include the importance of a coordinated team, storytelling, a good knowledge of self, an orderly consideration of the broader context of the client and their case, the need for clear communication, and of course, sufficient preparation. We would like to think that perhaps even Socrates himself might have found a small piece of wisdom or two.

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Expeditious Dispensation of Justice: ADR The Way Forward? – Perspectives from Pakistan

Kluwer Arbitration Blog - Sun, 2022-11-27 00:54

International Conference: Expeditious Dispensation of Justice – ADR The Way Forward” was held on 1 and 2 September, 2022 at Serena Hotel, Islamabad, Pakistan and in the Islamabad High Court respectively. The conference was dedicated to exploring the ways in which alternative dispute resolution (ADR) and arbitration can support the progressive development of the legal system in Pakistan. With a huge backlog of cases hindering the expeditious dispensation of justice in Pakistan at all fora, the need for mechanisms that run parallel to traditional litigation is felt at an unprecedentedly unanimous level among the local legal fraternity.

The conference was organized by International Center for Appropriate Dispute Resolution and Prevention (ICADRP) and celebrated ICADRP’s formal launch. The conference was held in collaboration with Samdani & Qureshi, a law firm based in Islamabad, Safer Communities Foundation, an organization working on improving the justice system in Pakistan, Weinstein International Foundation, a US-based organization that focuses on mediation, and the Islamabad High Court Bar Association. This post presents highlights drawn from the two-day conference that are of interest to international audiences.

 

The Need for Greater ADR and Arbitration Tools to Expedite the Progressive Development of Pakistan’s Justice System

Dilating on the impacts of the Pakistani courts’ backlog of cases, a primary challenge is the slower dispensation of justice in these cases, which is problematic for litigants, courts, and lawyers alike; with the litigants suffering in misery owing to the delays, the lawyers overworked with never-ending cases, and the courts overburdened with a case load beyond their capacity to discharge. These concerns and challenges are also highlighted in a press release issued by the Law and Justice Commission of Pakistan on 24 November 2022.

Many countries around the world have adopted various modes of ADR and arbitration to facilitate a more expedient justice system and to ease the workload. ICADRP is one such organization playing its part in facilitating court-annexed ADR by providing various ADR services to litigants interested in the same in Pakistan and providing cost effective solutions for international users. Dr. Shoaib Suddle, Chief Executive Officer of Safer Communities Foundation in particular stressed the need for a fast and expeditious justice system for maintaining rule of law, and cited the example of Japan, wherein ADR is often used to facilitate justice in the criminal context – a model that could be applied to Pakistan. This example demonstrates how ADR can help remove some burden from the national courts while facilitating justice.

Judge Charles N. Brower, a former judge of the International Court of Justice and the Iran-US Claims Tribunal, who is also the Patron-in-Chief of ICADRP, further explained how ADR and arbitration are efficient, efficacious and expeditious and that many countries are turning to ADR and arbitration to avoid the delays in the traditional justice system. Giving the example of Turkey where mediation centers have been set up annexed to private law firms, he explained stressed that Pakistan too can benefit by setting by ADR centers, which could be court-annexed or set up privately, which will help alleviate the burdens felt by national courts.

Howard A. Herman of JAMS further affirmed that ADR and arbitration has been effectively used by American courts and others around the world. He specified that aside from arbitration, other ADR mechanisms can be usefully employed, including mediations, conciliations and negotiations. Such tools can support the avoidance and prevention of disputes before they escalate to an adversarial point, where there can no longer be reconciliation.

 

Challenges in Implementation of Effective ADR Solutions

The Honorable Mr. Justice Miangul Hassan Aurangzeb of the Islamabad High Court emphasized the necessity of lawyers being at the forefront of leading the initiative for supporting ADR and arbitration in Pakistan. In his view, the lack of support from the legal fraternity is a major hindrance to the widespread use of ADR and arbitration in Pakistan. He gave special focus to the model followed in Turkey. A useful feature employed in Turkey in support of ADR is that law firms have developed dedicated rooms within their office premises in which to conduct mediations. He proposed that this small feature could usefully be employed in Pakistan.

On this subject, the need for extensive trainings of mediators and arbitrators in Pakistan was emphasized, especially keeping in mind local socio-cultural dimensions. Some lawyers are fearful or apprehensive because, in their view, encouraging ADR and arbitration would reduce business opportunities. This notion is misplaced; widespread support for and use of ADR and arbitration would not only alleviate the backlog presently facing the courts but also, as ADR and arbitration gain traction, would create new and different opportunities, including for lawyers to maintain specialized practices in this field. For example, rather than allowing a matter to sit before the courts for three years before resolution, a few weeks could be spent in mediation to achieve expeditious resolution of the dispute.

Justice Aurangzeb also identified the challenges for ADR and arbitration as reflected in Pakistan’s legal system itself. The Arbitration Act 1940 (“1940 Act”), as applicable in Pakistan, is an archaic law that requires modification, if not complete revision. As it stands, the 1940 Act requires significant court intervention, which results in arbitration processes becoming as cumbersome as litigation itself. For example, litigants who have opted for arbitration may find themselves approaching the court for administrative and procedural requests that perhaps could be avoided, such as for the appointment of arbitrators, injunctive orders, and claims of misconduct against the arbitrators. This results in formal or informal long periods of inactivity in or stays of the arbitrations. Therefore, even though the 1940 Act, the Section 89-A of the Civil Procedure Code 1908, and various other family and personal laws in Pakistan provide for out of court settlement mechanisms, these are not effectively implemented due to cumbersome procedures, lack of awareness, the scattered nature of the laws (which are not compiled comprehensively in one place) and interference by the court when it should refrain from doing so. Justice Aurangzeb referred to the Arbitration and Conciliation Act 1996, as adopted in India, as an example for Pakistan as well as the UNCITRAL Model Law on International Commercial Arbitration which could be used by Pakistan to develop a more modernized law to replace the 1940 Act.

The Honorable Mr. Justice Sardar Ejaz Ishaq Khan of the Islamabad High Court further discussed the judges’ perspective on the various challenges that hinder the adopting of ADR mechanisms in Pakistan. He narrowed them to seven specific “fallacies” and proposed solutions to the same:

  1. The one-size-fits-all fallacy, that the same ecosystem is sufficient for all kinds of ADR, without differentiating between the different modes of ADR and the methods of their enforcement, such as using mediation and arbitration interchangeably, whereas they are not.
  2. The patriarchal fallacy, that the government must be the all-encompassing regulator of ADR systems.
  3. The statutory fallacy, focusing on varying contradictions and absurdities present in the law that hinder the enforcement of ADR.
  4. The silos fallacy, that ADR and arbitration can effectively be implemented without permanent partners.
  5. The costs fallacy, that ADR and arbitration increase the overall cost for dispensation of justice.
  6. The arbitration law reform fallacy, that the status of the arbitration law in Pakistan is solely responsible for the challenges associated with implementation and use of ADR and arbitration.
  7. The panacea fallacy, that that ADR is the panacea to all our ails, whereas effective rule of law and dispensation of justice needs to be considered at all stages, namely, including the prevention, management, resolution, and enforcement of dispute resolution processes. ADR is a toolkit that needs to be used to manage conflicts at various stages, and there is rising global usage of these tools. However, these tools are admittedly in short supply in Pakistan.

Despite the proven utility of ADR and arbitration in other countries in strengthening the judicial system, it has been largely ignored in Pakistan owing to several challenges, and there needs to be reform at every level, be it judicial, legal or coming from litigants and lawyers themselves.

 

Role of the Courts in Facilitating ADR and Arbitration

The Honorable Chief Justice of the Islamabad High Court, Mr. CJ Athar Minallah, who also presided the event as Chief Guest, emphasized that the backlog of cases and the overburdened courts in Pakistan required greater understanding and use of ADR and arbitration. He emphasized that this intervention must be supported by the Pakistani judiciary, The Islamabad High Court, he assured, would further this initiative towards encouraging and facilitating ADR.

Dr. Nudrat Piracha, Chief Executive Officer of ICADRP, also pointed out that the unnecessary cases pending in courts come from the parties’ understanding that litigation is the only way forward for the resolution of disputes. Court-annexed ADR, she said, is a winning formula that would help take the burden off of the local courts while creating great access to justice. She talked about mediation, conciliation, arbitration and negotiations as the varying methods of ADR. The system currently suffers from various challenges, including lack of: capacity of stakeholders, centralized efforts, and trained mediators, conciliators and arbitrators. There is need for training, system design, government and other institutional support, building appropriate legal and social structure, social support, setting up online dispute resolution systems and public-private partnerships along the models implemented in recent years in Turkey, Italy and some African states.

 

Investment Arbitrations and Pakistan

Meg Kinnear, the Secretary-General of the International Center for Settlement of Investment Disputes (ICSID), speaking on international arbitrations and investor -state dispute settlement, pointed out the problems associated with approaching domestic courts for the resolution of investor-state disputes. She recalled that the first international investment agreement in history was signed between Pakistan and Germany in 1959 and entered into force in 1962. Despite this early interest, expertise and specialization in the area remains lacking within the country. Furthermore, domestic ownership of foreign arbitral awards and agreements remains a challenge for Pakistan.

 

Concluding Remarks

The conference featured many more international and domestic speakers, including those who drew upon innovative technologies and other models to explain how ADR and arbitration can be effectively introduced in Pakistan to facilitate greater access to justice and the progressive development of law within the country. The conference ended on the note that the ICADRP, under the able leadership of Dr Nudrat Piracha, will accelerate its efforts to propagate the importance of ADR in Pakistan in order to facilitate expeditious dispensation of justice in Pakistan, and will further look into online dispute resolution (ODR) as a way forward for efficacious and expeditious settlement of disputes outside of the court rooms. It was further resolved that the Islamabad High Court and the Islamabad High Court Bar Association would both take the initiative of supporting ICADRP and would further facilitate the adoption and use of ADR and arbitration in Pakistan.

 

Recordings of the program’s sessions are available online here.

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How States Comply with Investment Treaty Arbitration Awards: Insights from a 2022 Report on Compliance

Kluwer Arbitration Blog - Sat, 2022-11-26 01:07

Amidst the turmoil surrounding the Energy Charter Treaty (ECT) and the announced withdrawal by Poland, Spain, the Netherlands, France, Slovenia and Luxembourg, the very first edition of the Report on compliance with investment treaty awards by States has been published by the present author.

Whereas the discussion usually focuses on whether international investment agreements (IIAs) and the investor-State dispute settlement mechanism (ISDS) contained in them are pro-investor biased and thus should be reformed or even completely removed as has been the case within the EU, the question to what extent States actually comply with their international obligations and pay awards rendered against them is hardly discussed.

The inspiration for writing this Study, coupled with the wider aim of tracking the compliance level of States on a systematic and regular basis, comes from a highly interesting article written two years ago by the late Emmanuel Gaillard and Ilija Mitrev Penushliski entitled “State Compliance with Investment Awards”.

The research for this Report has been performed in the first half of this year and is based on publicly available sources (free sources as well as behind paywalls). The research compiled the known investment treaty arbitration disputes regarding the top twenty countries which have faced most of such disputes. Subsequently, the research collected available information regarding the outcome of the disputes, and in all cases of adverse awards against States, tried to find information regarding whether or not the States have complied with those awards by paying the amount of compensation. A State is classified as non-compliant whenever it refuses to pay the award by trying to annul or set aside the award either at the international law level (i.e., through ICSID Annulment) or at the national law level by initiating setting aside procedures before domestic courts.

The Report reveals the following notable outcomes.

 

Key Trends in State Compliance with Investor-State Treaty Arbitration Awards

First, the Report underscores the high number of EU member states, in particular Spain, Czech Republic, Poland, Romania, Hungary, Croatia, Slovakia, Italy, Bulgaria, Germany, and the Netherlands, which have faced multiple ECT disputes in the past years.

Second, the International Law Compliance Index, which has been created on the basis of this Report and aims to rank the States according to their non-compliance level, reveals that Spain has been facing more than 50 intra-EU ECT claims resulting in damages claims totalling more than US$ 9.5 billion so far.

Indeed, adverse ECT awards continue to be rendered against Spain, such as in the Eurus Energy v. Spain case (ICSID Case No. ARB/16/4), award issued on 14 November 2022), Cavalum v. Spain case (ICSID Case No. ARB/15/34, award issued on 29 September 2022) and the Mathias Kruck and others v. Spain case (ICSID Case No. ARB/15/23, award issued on 14 September 2022). Also, on 10 June 2022, the ICSID ad hoc Annulment Committee upheld the adverse ECT award in the RREEF Infrastructure v. Spain case (ICSID Case No. ARB/13/30).

More importantly, the Report confirms the fact that Spain ranks second in the world (behind Venezuela and before Russia) the country which most frequently refuses to pay the awards rendered against it, with an outstanding amount of at least US$ 700 million.

Third,  this Study highlights the fact that the overwhelming majority of intra-EU ECT disputes in fact concern renewable energy sources, in particular, the retroactive withdrawal of guaranteed feed-in-tariffs for solar and wind farms.

Fourth, whereas, in contrast to the often-repeated narrative that the ECT mainly protects unclean energy producers, the Study also shows that only a handful of ECT disputes relate to fossil fuel or nuclear energy, which, moreover, are far more often settled than renewable energy cases. Reference can be made to the Vattenfall v. Germany case, which Germany settled for EUR 1.5 billion as opposed to the claimed EUR 4.7 billion.

Similarly, the RWE and UNIPER v. the Netherlands cases, which relate to the phase-out of recently constructed coal-fired power plants have become effectively halted for different reasons. UNIPER had to withdraw its claim as part of the rescue package, which ultimately resulted in the nationalization of UNIPER. The RWE case has been thrown out by a German court following a successful injunction by the Netherlands arguing that the dispute is “inadmissible” because it must be considered to be incompatible with the CJEU’s Komstroy and Achmea jurisprudence. Although, this judgment can be appealed before the German Supreme Court, it seems unlikely that it will rule differently.

 

Annual Compliance Report and Index

In sum, this Study provides a fact-based analysis highlighting that most ECT disputes actually concern measures related to renewable energy, rather than fossil fuel, and that several EU member states, in particular, Spain, belong to the most non-compliant States.

Given the dynamic developments in international investment law, in particular fuelled by the behaviour of the EU and the actions taken by the EU member states in terms of preventing the recognition and enforcement of intra-EU BITs and intra-EU ECT awards as per the Termination Agreement for intra-EU BITs, the similar proposed inter-se agreement regarding the ECT and the CJEU’s Micula judgment, this Compliance Report and the Index will be updated and incrementally expanded by including more countries on an annual basis.

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Arbitrating Small Value Claims in Investment Arbitration

Kluwer Arbitration Blog - Sat, 2022-11-26 00:40

The International Bar Association (“IBA”) Subcommittee on Investment Treaty Arbitration has recently finalized its report titled “Arbitrating Small Value Claims in Investment Arbitration” co-signed by the current co-chairs (Caline Mouawad, Maxi Scherer) and former co-chairs (Noiana Marigo, Patrick Pearsall) (“Report”). The Report was also presented at the 2022 Annual Meeting of the IBA that recently took place in Miami.

The Report explores small value claims in investment arbitrations, where the identifiable amount claimed is no greater than US$50m or €50m. Such claims have come to represent a significant percentage of investment arbitrations across different arbitral institutions, industry sectors and geographic regions. Given their significance, small value claims also present a unique conundrum for the arbitration community: on the one hand, the relatively modest sum at stake calls for a manageable and cost-effective approach so as not to deter parties from bringing such claims and impede the parties’ right to have access to justice; on the other, small value claims do not necessarily mean that they are simpler or less complex than large value claims, that may involve high representation fees if not managed right. With these key considerations in mind, the Report examines the available procedural tools to minimize costs in such cases while ensuring that parties achieve swift and fair resolution of their disputes.

The Report approaches the issue of small value claims mainly from three angles: (1) the Report examines the available empirical data from major arbitral institutions, reinforcing the view that small value claims are statistically prevalent in international investment arbitration; (2) the Report explores the special procedures that are already available in international investment agreements (“IIAs”) and arbitral rules to manage costs in small value claims; and (3) the Report proposes procedural measures that can be adopted at different stages of the proceedings to achieve an efficient resolution of small value disputes. This blog post highlights the Report’s key findings on each of these issues in turn.

 

I. PREVALENCE OF SMALL CLAIMS IN INVESTMENT ARBITRATION 

The empirical data obtained from major arbitral investment arbitration institutions demonstrates the prevalence of small value claims in investment arbitration cases in the past decade.

Of the cases administered by ICSID, the PCA, and the SCC between 1 January 2010 and 31 December 2021, approximately 20 percent to 40 percent were small value claims under US$50m or €50m. For ICSID, 108 cases (approximately 27 per cent) involved claims below US$50m. For the PCA, 42 cases (approximately 23 per cent) were small claims. The SCC saw the highest percentage of small claims, with 23 cases (approximately 43 per cent).

There is no one industry sector or region which is more likely to face small value claims. Statistics indicate that small value claims are prevalent in all sectors, including electricity and power, construction, extractive industries, agriculture, finance, and transportation. Respondent states from all geographical regions have seen their fair share of small value claims.

Maybe unsurprisingly, empirical data also confirms that a majority of small value claims are brought by individuals or small and medium-sized enterprises (“SMEs”). Based on the figures provided by ICSID, the PCA, and the SCC, at least half of small value claims were instituted by individuals or SMEs. The only caveat to this view is that there was limited data available on the size of the claimants bringing small value claims.

 

II. SPECIAL PROCEDURES FOR ARBITRATING SMALL VALUE CLAIMS 

Potential claimants considering bringing small value claims can take comfort in the wide range of special procedures already available. In this respect, the Report examines measures in IIAs and arbitral rules that can reduce the time and resources required to arbitrate such claims. While these tools are available for all claims, irrespective of the amount at stake, they are particularly well-suited and (in many instances) essential for small value claims.

Generally speaking, IIAs do not provide for special procedures with regard to small value claims. In recent years, however, a number of IIAs have included provisions concerning claims filed by SMEs or ‘relatively low’ claims for damages. This includes, for example, Comprehensive Economic and Trade Agreement (“CETA”) which encourages the nomination of a sole arbitrator where the investor is a SME or the monetary amount sought against the state is relatively low.  Indeed, Article 8.23(5) of the CETA provides that “[t]he investor may, when submitting its claim, propose that a sole Member of the Tribunal should hear the claim.  The respondent shall give sympethatic consideration to that request, in particular if the investor is small or medium-sized enterprise or the compensation or damages claimed are relatively low.” These IIAs also include procedural measures to accommodate such claims, including through: (a) increased use of videoconferencing (see, e.g., CETA, Article 8.19(3)), (b) consolidation of related claims (see, e.g., Dutch Model BIT, Article 19(7)), (c) tribunal’s discretion not to apply the costs-follow-the-event rule when the unsuccessful party is an SME (see, e.g., Dutch Model BIT, Article 22(5)), (d) supplemental rules to reduce a claimant’s financial burden (see, e.g., EU-Vietnam Investment Protection Agreement, Article 3.53(5)).

In particular, one IIA provides that the disputing parties may consent to the application of an expedited arbitral procedure “when the damages claimed do not exceed CA$10m”. To the extent this IIA applies, the parties typically have the option to: (a) take recourse to mediation, (b) appoint a sole arbitrator, (c) agree on a compressed procedural schedule, (d) agree on a limited document production phase, and (e) agree on streamlined written submissions, among others.

Arbitral rules also provide for expedited rules or fast-track procedures, if agreed between the parties, including the ICSID Expedited Arbitration Rules, or automatic for low-value disputes, such as the UNCITRAL Expedited Arbitration Rules. As the Report explores (pp. 16-24), expedited rules are especially suitable for parties with limited means, which require a quick resolution of their dispute, or for disputes over smaller sums at stake. Typical features of an expedited procedure include: (a) sole arbitrator by default, (b) time limits for filing, (c) limited number of filings, (d) limitation on document production and evidence, (e) documents-only arbitration, (f) time limits to render award, and (g) awards with no reasons or with summary reasons. However, such procedures often allow to revert to non-expedited procedures when necessary.

 

III. ADDITIONAL PROCEDURAL MECHANISMS AVAILABLE FOR ARBITRATING SMALL VALUE CLAIMS

The Report at pp. 25-53 suggests several techniques and procedures which the parties may adopt even when the applicable IIAs or arbitral rules have not set out relevant special procedures. These measures may be adopted at various stages of the arbitration:

  1. At the pre-arbitration phase, parties may increase cost-efficiency through calibrating their choice of arbitral rules, the arbitral institution, the seat, counsels, and arbitrators. Parties are also encouraged to engage in pre-arbitration settlement negotiations or mediations to either avoid the arbitration altogether or streamline the process and narrow down the disputed issues.
  2. At the arbitration phase, parties may, among others, (a) negotiate their Procedural Order No.1 from model agreements, (b) empower the tribunal to adopt cost-saving procedural measures, (c) agree on costs budgets, (d) limit written submissions, (e) agree to manage witness and expert evidence in a cost-efficient manner, (f) limit third-party intervention and amicus curiae, and (g) limit the scope of the document production phase. Parties also may opt for documents-only arbitration and remove the need for hearings altogether or propose to adopt remote hearings with technology-powered transcription services and limited post-hearing phase.
  3. At the post-arbitration stage, parties may restrain the ability to apply for annulments, reduce the length of such proceedings, or altogether waive the right to dispute the awards.

These procedural mechanisms and strategies available to the parties for consideration are summarized in a checklist annexed to the Report.

 

Conclusion

The rise of small value claims in investment arbitration presents a new opportunity to explore cost-saving mechanisms that can be more broadly adopted in investment arbitration to promote a more efficient and cost-effective process overall. The Report contains an invaluable toolkit for disputing parties in investment arbitration to consider when designing an efficient process to resolve their differences.

 

 

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Mexico’s New Energy Sovereignty Puts the USMCA Dispute Resolution Mechanisms to a Test

Kluwer Arbitration Blog - Fri, 2022-11-25 00:30

A North American energy trade war may be on the horizon. President Andres Manuel Lopez Obrador (AMLO) is backstepping the opening of Mexican energy markets by halting the issuance of permits, providing competitive advantages to state-owned enterprises, and attacking independent regulators.

The re-centralization of the energy sector is being done in the name of Mexico’s “energy sovereignty.” Naturally, foreign companies that invested in Mexico after the passing of the 2013 comprehensive energy reform are alleging unfair and discriminatory treatment.

Mexico’s North American partners have not remained quiet. In July 2022, the Canadian and U.S. governments officially began consultation procedures over AMLO’s energy policies but after seventy-five days failed to settle the dispute with Mexico. The exhaustion of the consultation period triggers the first step in the state-to-state dispute resolution mechanism  set up in Chapter 31 of the United States Mexico Canada Agreement (USMCA). The results of these procedures could lead to the establishment of a panel and, if Mexico loses the case, the suspension of trade benefits.

According to some estimates, the dispute could cost Mexico $30 billion in retaliatory tariffs on Mexican goods imposed by the U.S. and Canada. The active engagement of the governments marks the first time that foreign powers retaliate against Mexico’s energy policies since 1938, when Mexico expropriated foreign oil and gas companies. It also marks the beginning of a regional trade conflict–in the midst of a global pandemic, the Russian-Ukraine conflict, unsettled energy markets, and global inflation that has reached its highest levels since the 1970s.

This post will discuss how the concept of energy sovereignty impacts the USMCA energy disputes and the way in which the state-to-state proceedings can affect investors’ rights.

 

‘Energy sovereignty’

As discussed in an extensive paper on the topic of the author of this post, the term energy sovereignty has different meanings depending on the international actor. Energy sovereignty represents not only the eagerness of the state to secure the flow of energy products and the resiliency of the electrical grid -energy security-, but also the right of the state to determine the origin, quality, methods of control and efficiency of those resources. As such, the exercise of energy sovereignty has different strategies depending on the overall priorities of the state in question. Some might employ government-centered approaches where the use of state enterprises and the protection of key industries, such as oil and gas, is a priority to maintain the stability of the state. Others, might rely on market-oriented approaches where access to foreign resources and the global flow of clean energy products is the best way to exercise their energy sovereignty. Both of these visions collide in international trade and investment agreements and it is up to dispute resolution bodies to balance them out.

In the context of Mexico, it is noteworthy that the companies affected have not yet filed investment claims against the regulatory changes introduced by the AMLO administration. The Mexican judiciary, so far, issued injunctions against the implementation of the legislative changes, but the discriminatory treatment against the companies remains. Moreover, under the USMCA Chapter 14 Annex E companies in the energy sector do not need to exhaust domestic remedies or spend time in Mexican courts in order to file an arbitral claim. As of the writing of this post, the AMLO administration had three notices of dispute and three active cases in the energy sector. None of these cases involve actions taken by the government under the new energy policies but rather involve discriminatory or unlawful actions taken by the state-owned enterprises and Ministries against private companies under the 2013 energy legislation. For example, in terms of notices of dispute, Talos Energy filed a notice of intent under the USMCA agreement for actions taken by the Ministry of Energy after the company failed to reach a unitization agreement with Pemex; and Gulf Investments & Services Ltd. filed a notice involving an impounded vessel by Mexican authorities as part of a criminal investigation against Oceanografia for its contractual relationship with Pemex; Monterra Energy also notified the Mexican government of the emergence of a dispute involving the seizure of its Tuxpan terminal by the National Guard in 2021 after a controversial inspection by the Energy Regulatory Commission (CRE) and the Safety and Environmental Energy Agency (ASEA).

On the side of active cases, Finley, MWS and Prize initiated an ICSID arbitration under the USMCA against Mexico for a breach of contract by PEMEX on three oilfield service contracts; Terrance Highlands filed an investment claim under the UK-Mexico Bilateral Investment Treaty for the undue care of its impounded vessels in the criminal investigation against Pemex’s contractor Oceanografia; Shanara Maritime International and Marifield Ltd, also filed an investment claim under the Mexico-Panama BIT for their impounded vessels in the Oceanografia criminal investigation; finally,  Servicios Petroleros Oro Negro filed an investment case under NAFTA’s legacy provisions for Pemex’s alleged breach of contracts involving offshore drilling platforms.

Hence, it will be in the state-to-state panels where the new Mexican energy sovereignty approach will be tested.

 

Potential impact of consultation procedure on ISDS

The triggering of the state-to-state dispute resolution mechanisms raises an interesting question on how the precedent set by the panels could impact future investment claims. Ultimately, this is one of the first cases in which the home states spoused investors’ claims as part of the state-to-state dispute resolution proceedings. In that sense, it is worth pointing out that the investment allegations under Chapter 14 of the U.S. and Canada consultation request only included breaches of the national treatment standard. Hence, investors could still bring claims under the fair and equitable treatment or indirect expropriation, as long as their investments are considered covered government contracts under Annex E of Chapter 14.

Notwithstanding this fact, the state-to-state panels will be analyzing the same policies that the Mexican government enacted and that affect foreign investment in the energy sector. Therefore, it is hard to imagine future investment tribunals ignoring the state-to-state panels’ interpretation. In the same vein, through their briefs, Canada, Mexico and the U.S. could agree on specific interpretations of the agreement that could potentially be considered as a subsequent practice by ISDS tribunals. It is worth remembering that in the context of NAFTA, the interpretation of the Free Trade Commission after the Pope and Talbot decision and the parallel litigation of cases in the WTO involving the sugar industry in Mexico, had an impact in the interpretations of subsequent arbitral tribunals.  Finally, Mexico could also reach an agreement to compensate the U.S. and Canada for its actions. In contrast, the treaty is silent regarding the duty of the filing states to compensate their investors using the damages paid by Mexico.

 

Conclusion

Overall, the storm is still forming and the Mexican government does not seem to back away from its efforts to advance its “energy sovereignty” policies. Even in light of the consultations and the threats of ISDS claims, the Mexican President is benefiting from a hostile geopolitical atmosphere. The lingering effects of a global pandemic, the war in Ukraine, the energy crisis in Europe, and the fears that Mexico will stop cooperating with U.S. officials in security and immigration issues before the midterm elections gives policy space for Mexico to double down on its effort to change its domestic energy market. The costs of retaliation are too high, and the USCMA seems insufficient to tame the temptation of forcing investors to adapt to Mexico’s new energy sovereignty.

 

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The Contents of the Yearbook Commercial Arbitration, Volume XLVII (2022)

Kluwer Arbitration Blog - Thu, 2022-11-24 00:55

Subscribers to KluwerArbitration enjoy access to the ICCA Yearbook Commercial Arbitration.

A new upload of materials from the 2022 volume of the Yearbook Commercial Arbitration is now available on the KluwerArbitration database. It contains six unpublished awards rendered under the auspices of the International Chamber of Commerce.

The arbitrators dealt with a broad range of issues, including the arbitrability of employment disputes, the interpretation of arbitration clauses, and the application of the CISG and Rome I and II Regulations. The public policy exception in the 1958 New York Convention was discussed in two awards that I would like to highlight and commend for reading.

In one case concerning the termination of a distribution agreement in Greece, the arbitral tribunal noted that it was compelled to issue an enforceable award, and that a violation of public policy – in the narrow sense of a violation of the forum state’s fundamental notions of morality and justice – was among the grounds for refusal of enforcement under the New York Convention. However, the tribunal noted that in the present case there was no authority that provisions of Greek law that provided certain protections to distributors – such as a longer termination notice and payment of compensation in case the terminating party had exploited a situation of economic dependence – were a fundamental principle of Greek public policy.

In another case, the sole arbitrator dismissed the respondent’s argument that the arbitration agreement between the parties was invalid as a matter of mandatory UAE law because the UAE Commercial Agency Law provided for the exclusive jurisdiction of the UAE courts over disputes between an agent and a principal. The arbitrator explained that, while the ICC Rules provided that arbitrators had to make every effort to ensure that the award was enforceable at law, and Art. V(2)(b) of the New York Convention provided that enforcement of an arbitral award could be refused on public policy grounds, these provisions did not import into each and every arbitration all public policy provisions of the different countries in which an award might be presented for enforcement. In the same award, the arbitrator also held that the deadline for objections to arbitral jurisdiction was determined by the law of the seat – in that case German law. The earlier date set by the ICC Secretariat for the parties to make known any jurisdictional objections was merely an administrative deadline.

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Applicable Tests For Arbitrator Bias: Recent Practice In Select Common Law Jurisdictions

Kluwer Arbitration Blog - Thu, 2022-11-24 00:15

Over the last few years, arbitrator independence and impartiality have been under heightened scrutiny by courts and tribunals. This is not unexpected. The importance of the rule against bias is best explained by Lord Denning’s dictum in Metropolitan Properties Co (FGC) Ltd v Lannon [1969] 1 QB 577 where he held that “[j]ustice must be rooted in confidence: and confidence is destroyed when right-minded people go away thinking: ‘The judge was biased.’

Arbitrator bias may be “actual” or “apparent”. Whilst the position on actual bias is clear i.e., it is a factual question, the test for apparent bias may not be quite so straightforward in all cases. Most common law jurisdictions rely on one of the two tests for apparent bias in international arbitration:

  1. the less stringent “reasonable apprehension of bias” test, which poses the question as to “whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased” (originally laid down in Porter v Magill [2002] 1 All ER 465 at 507); or
  2. the stricter “real danger of bias” test, where the question is whether “having regard to those circumstances, [the court considers] there [to be] a real danger of bias on the part of the relevant member of the tribunal in question, in the sense that he might unfairly regard (or have unfairly regarded) with favour, or disfavour, the case of a party to the issue under consideration by him” (originally laid down in R v Gough [1993] AC 646 at 670).

There are two immediately visible differences between these two tests. The first lies in the perspective of the observer of bias. While for the reasonable apprehension test relies on the concept of the vantage point of “a fair-minded and informed observer”, in case of the real danger test, the court is the observer. The second difference lies in the degree of proof required to establish bias: the reasonable apprehension test merely requires there to be a “real possibility” of bias i.e. a lower threshold, whereas the real danger test requires a “reasonable likelihood” of bias.

Unsurprisingly, the traditional competition between the two tests originated in the English common law as applied to the rule of bias to administrative and judicial decision makers. In the arbitration context, the UK Supreme Court confirmed that reasonable apprehension test applies to apparent bias in Halliburton v Chubb [2020] UKSC 48 (see previous posts on this case here and here).

This post traces recent applications of the apparent bias test across select common law jurisdictions of Australia, Canada and India. We analyse the formulation of the apparent bias tests and recent legislative and judicial responses to the issue of arbitrator bias in these jurisdictions.

 

Australia

In the recent decision of Hancock v Hancock Prospecting Pty Ltd [2022] NSWSC 724, the New South Wales Supreme Court considered a challenge to an arbitrator appointment under the Commercial Arbitration Act 2012 (WA) (the “CAA”).

The circumstances in the challenge centred around the arbitrator’s relationship with his spouse. The arbitrator’s spouse was employed in the past by the law firm representing the defendant. During the spouse’s employment at the law firm, she attended certain meetings between the parties and the arbitrator had been briefed by his spouse in a related procedural matter in the arbitration. On this basis the plaintiff alleged that justifiable doubts exist as to the arbitrator’s independence and impartiality.

In making its decision, the court relied on the text of section 12 of the CAA which provides that the “justifiable doubts” standard will only be reached if there is a real danger of bias. The court reiterated the policy reasons for the adoption of this stricter standard  – and found support for its conclusions in a consultation report that preceded the enactment of the CAA  – to discourage the procedural tactic of arbitrator challenges by parties and to promote Australia as a hub for international arbitration.

With clear legislative backing for the application of the stricter standard, the court dismissed the challenge on the basis that a case of “real danger of bias” was not made out by the plaintiff. According to the court, the test is whether there is an “objective likelihood of there being a real risk that someone in the position of the arbitrator would not be able to bring an impartial mind to (all of) the questions to be determined.” The court deemed the passage of time of 20 years between the circumstances allegedly giving rise to the bias and the current case as a relevant factor in dismissing the challenge. It held that the “test should not be understood as requiring an investigation into the particular attitudes or propensities of the arbitrator under challenge”.

Whilst the Hancock decision was under the Western Australia arbitration legislation, the same position applies to Australia-seated international arbitrations (Sino Dragon) and other domestic arbitrations (Gascor v Ellicott [1997] VR 332). In an application to set aside an arbitral award under the International Arbitration Act 1974, the Federal Court of Australia held in Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2016] FCA 1131 that the higher “real danger of bias” test applies to an international commercial arbitration. It expressly rejected the contention that the common law test of “reasonable apprehension of bias” was part of Australia’s public policy.

 

Canada

For domestic arbitration in Canada, the less stringent “reasonable apprehension” test generally applies at common law, which was recently confirmed by the Supreme Court of Canada’s decision in Yukon Francophone School Board, Education Area #23 v. Yukon (Attorney General) [2015] 2 SCR 282. One of the first elucidations of this principle came about in Justice de Grandpre’s dissenting opinion in Committee for Justice & Liberty v Canada (National Energy Board) [1978] 1 SCR 369. According to Justice de Grandpre, there was “no real difference” between the expressions “reasonable apprehension of bias”, “reasonable suspicion of bias” and “real likelihood of bias”.

When it comes to the applicable test for arbitrator bias, the situation differs across the Canadian provinces. The Ontario Arbitration Act expressly mentions the “reasonable apprehension” test for challenging an arbitrator (Section 13(1)1.). The test was most recently applied in Dufferin v. Morrison Hershfield, 2022 ONSC 3485, where the applicant alleged bias on the basis that the arbitrator had pre-judged the issues, and their conduct in the proceeding was akin to being an advocate for the other side. The court acknowledged that while the arbitrator may have been interventionist, it could not conclude that such behaviour would give rise to a reasonable apprehension of bias. Instead, the arbitrator was found to be “a deeply invested, engaged [a]rbitrator that worked tirelessly for the parties in furtherance of his mandate, which was to determine the truth of the issues before him”.

Notably, the British Columbia Arbitration Act has recently gone the opposite way. In 2018, it expressly established the “real danger” test (Section 17). Effects of the shift are yet to be confirmed in practice, but some practitioners contend that the amendment will make it harder for applicants to successfully challenge arbitrators in British Columbia-seated proceedings. Finally, the same “real danger” test applies in the case of international arbitration (Section 12 of the British Columbia International Commercial Arbitration Act).

 

India

In India, the relevant test for arbitrator impartiality is whether there is a reasonable apprehension of bias from the viewpoint of the concerned party rather than that of the arbitrator (Murlidhar Roongta v S Jagannath Tibrewala 2005 57 SCL 128 Bom and Ranjit Thakur v Union of India AIR 1987 SC 2386). This alters the common law test from the point of view of a fair-minded and informed observer to that of the party. However, the test is still an objective one.

India’s response to the issue of arbitrator independence and impartiality has been unconventional. Inspired by the IBA Guidelines on Conflicts of Interest in International Arbitration, the 2015 amendments to the Arbitration and Conciliation Act 1996 (the “ACA”) included an extensive list of circumstances that may give rise to justifiable doubts as to an arbitrator’s impartiality in the Fifth and Seventh Schedules.

The Seventh Schedule to the ACA introduces certain grounds mirroring the Red List of the IBA Guidelines which de jure renders an arbitrator ineligible for appointment. This blanket ineligibility approach has been criticized for not considering the particular circumstances of each case such as the proximity to the dispute, any economic interest and the arbitrator’s relative position to the party. The Indian Supreme Court, in a recent decision of HRD Corporation v GAIL (India) Limited, (2018) 12 SCC 471, provided parties with an interlocutory remedy to approach courts directly to decide the ineligibility of an arbitrator appointment under the Seventh Schedule. It is not inconceivable that this mechanism might be used by parties as a procedural tactic to delay the arbitral process.

***

As countries continue to upgrade their international arbitration legislations to bring them in line with international practice, recent jurisprudence on the rule against bias in the arbitration context may inform potential legislative reform efforts.

The opinions expressed in this blog post are those of the authors alone and do not reflect the opinions or views of Boies Schiller Flexner or its clients.

 

 

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Highlights from CanArb Week 2022: The 2022 ICC Canada Conference – The New World

Kluwer Arbitration Blog - Wed, 2022-11-23 00:39

On the third and final day of CanArb Week 2022, the ICC Canada Arbitration Committee held its annual conference titled The New World. The conference sessions were bookended by opening and closing remarks by Professor Janet Walker (Chair, ICC Canada, Atkin Chambers, Full Professor, Osgoode Hall Law School) and Myriam Seers (Vice-Chair, ICC Canada, Partner, Savoie Laporte). The forward-looking discussions gathered Canadians and other international arbitration practitioners from around the world, including in-house counsel and leading international arbitrators, to share practical insights on key issues in international arbitration. The conference program examined the future of the international dispute resolution community, in particular in light of recent legal and institutional developments.

 

Including the world: achieving equity, diversity and inclusiveness

The first panel discussion was moderated by Dr. Todd Weiler (Independent Arbitrator), and featured Dr. Ayodele Akenroye (FCIArb, Independent Arbitrator), the Hon. Clément Gascon, (Former Justice of the Supreme Court of Canada, Arbitrator, Woods LLP), Dana MacGrath (Independent Arbitrator), and Nancy Thevenin (General Counsel, USCIB). The panelists shared their perspectives and personal experiences with the challenges of and solutions to increase the representation of diverse arbitrators and lawyers, from gender and ethnic diversity to “invisible” disabilities such as attention deficit hyperactivity disorder (ADHD).

The panelists agreed on the need to expand the pipeline of students and lawyers interested in arbitration, increase interest and awareness, create new pathways with scholarships and internships, hire diverse students, and create opportunities for lawyers to move up the ranks within the field. The panel observed that efforts towards diversity need to be intentional, and praised the work of several organizations and initiatives supporting diversity, including ArbitralWomen, the Equal Representation in Arbitration (ERA) Pledge, and Racial Equality for Arbitration Lawyers (REAL). It was also noted that these issues are not new to the world of adjudication. Highlighting the approach that the Federal judiciary has used in Canada to increase diversity on the bench, it was observed that institutions in charge of appointments intentionally took a more active role in promoting diversity. Finally, all of the stakeholders who are part of the system must realize the importance of bringing diversity to the forefront, the “hidden” factor, as we all work toward inclusiveness.

 

Four simultaneous roundtable discussions

The second conference session offered the participants a choice of four roundtable discussions held simultaneously in different rooms of the McGill Faculty Club, which were then summarized by the facilitators in a plenary session.

The first roundtable, which discussed the topic of “modern” investment treaties, was facilitated by Pierre Bienvenu, Ad. E. (Senior Counsel, IMK s.e.n.c.r.l./LLP, Independent Arbitrator, Arbitration Place) and Alexandra Dosman (Counsel, Trade Law Bureau, Government of Canada). The discussion focused on the main changes introduced in Canada’s new 2021 model Foreign Investment Promotion and Protection Agreement (FIPA), the release of which was previously discussed in detail on the Blog. There was also a lively discussion on the introduction of provisions to promote mediation, expedited proceedings, the code of conduct for arbitrators, and the broad prohibition on double hatting.

The second roundtable, which examined the use of technology in international arbitrations, was led by Stephanie Cohen (Independent Arbitrator) and Michael Kotrly (Barrister, One Essex Court). The participants discussed the practical aspects of technology in arbitration, including whether familiarity with technology should be a factor in appointing an arbitrator, and how practitioners can incorporate technology into their practice. The discussion relied on the ICC report on leveraging technology, which was praised as a useful resource for counsel and tribunals.

The third roundtable, on efficiency in international arbitration, was moderated by David Roney (Partner, Sidley Austin LLP) and Ema Vidak Gojković (Independent Counsel & Arbitrator). The participants first discussed whether efficiency is always desirable, and noted that tribunals should engage in a dialogue with the parties in this regard. The discussion then turned to whether efficiency can look differently at various stages of an arbitration. Finally, it was suggested that some practices which used to be seen as inefficient, such as case management conferences throughout an arbitration when they were held in person, can be efficient today with the use of technology.

The fourth roundtable, facilitated by Philippe Boisvert (Counsel, Borden Ladner Gervais LLP) and Annie Lespérance (Omni Bridgeway), was particularly popular and discussed the strengths of Montreal as a seat of arbitration. In particular, Montreal was praised as a fantastic seat given its bilingualism, dual legal culture, and the large number of bilingual arbitrators with common law and civil law experience. As a result of the discussion, a number of participants agreed to create a steering committee whose purpose will be to further the place of Montreal on the Canadian and global arbitration stage.

 

Keynote speech

Meg Kinnear (Secretary-General, ICSID) delivered the keynote speech. Her insightful comments focused on the key changes in the 2022 ICSID rules, which were five years in the making.  The reform, which represents the most extensive rule-revision process in the centre’s history, includes new standalone mediation rules and expanded access to the Additional Facility rules, which can now be used when neither party is affiliated with ICSID – effectively creating a new regime for disputes administered by ICSID, new provisions aimed at reducing time and cost, and provisions on transparency and conflict of interest, in particular in relation to third party funding. The new rules, it is hoped, will provide practitioners guidance on contested issues in international arbitrations and increase the legitimacy of investor-state arbitration by enhancing transparency, and expanding ICSID’ dispute resolution offering.

 

Modified Tylney session

This modified Tylney session, a format in which participants are invited to submit questions and observations in advance, was moderated by Robert Deane (Partner, Borden Ladner Gervais LLP) with panelists Prof. Fabien Gélinas (Full Professor, Sir William C. Macdonald Chair, McGill University) and Erin Miller Rankin (Partner, Freshfields Bruckhaus Deringer). Under this modified Tylney, they shared their views on the future of arbitration and addressed questions from the audience, including many which had not been submitted in advance.

The panelists and audience first discussed the future of witnesses in arbitration, and shared a common concern for the importance of allowing a party to tell its story and the importance of stories in changing the mind of the arbitral tribunal, while noting the downsides of the heavy influence of lawyers on witness statements. The discussion then turned to the future of costs in arbitration and focused on whether more reasoning is needed as the amount of costs awarded increases. For example, a losing party may wish for more transparency and standardization of the reasons for cost awards. However, it was suggested that there are good reasons for the discretionary nature of cost decisions and that we should approach standardization cautiously, given that costs determinations are highly factual. Finally, participants engaged with the panelists on whether arbitration is part of a public civil justice system or whether it stands apart from civil justice system, echoing the remarks of the Hon. Louise Arbour at the 2022 ICCA conference.

 

Special guest speaker

Michael McIlwrath (MDisputes; Chair, ICC Governing Body for Dispute Resolution Services; Chair, Corporate Counsel Committee of Campaign for Greener Arbitrations) gave a brief overview of the important role of the Governing Body in overseeing ICC Arbitration and ADR, and an introduction to the Campaign for Greener Arbitrations and its Corporate Counsel Committee, including practical techniques to conduct arbitrations cost-efficiently and effectively with a reduced environmental impact.

 

Debate on sanctions

The last session consisted of a debate on whether financial, trade and political sanctions must be adhered to by arbitral institutions and tribunals, and whether such adherence negatively impacts their neutrality, independence, and impartiality. The debate between Joseph Chedrawe (Vice-Chair, Disputes, Europe, Middle East, and Africa, Covington & Burling LLP) and Jessica Crow (Independent Arbitrator, Arbitra International) was moderated by Colin Trehearne (Counsel, Mori Hamada & Matsumoto).

By way of introduction, it was noted by the moderator that sanctions take a variety of forms, including trade sanctions (e.g., service embargoes), financial sanctions (e.g., asset freezes), and immigration sanctions (e.g., travel bans). It was reported that the General Counsel of the ICC stated that one third of ICC arbitrations over the last two years have involved sanctions in some way. The impact on arbitral institutions includes additional compliance verifications to identify the ultimate beneficial owner of a party, and forcing institutions to consider the need to seek licenses from regulators.

The debaters raised many reasons for their assigned positions, skillfully navigating developments by institutions, practical realities, and legal impacts. The well-researched and articulated presentation added a lively closing to the day’s discussions.

 

Conclusion

The ICC Canada Arbitration Committee conference was a resounding success, not only for its enlightening and interactive discussions, but also for the palpable enthusiasm shared by the participants in meeting the Canadian arbitration community  again in person. With the program integrating many opportunities for interaction, participants were able, thanks to the masterful guidance of the panelists and facilitators, to delve into issues and connect on ideas, best practices, challenges and how to proceed into the future.

 

Follow along and see Kluwer Arbitration Blog’s prior coverage of CanArb Week here.

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Highlights from CanArb Week 2022: Review of Cross-Canada Jurisprudential Trends and Curiosities

Kluwer Arbitration Blog - Tue, 2022-11-22 00:38

The third edition of CanArb Week took place in Montréal from October 19 to 21, 2022. Speakers from all walks of arbitration life (academics, arbitrators, counsel, experts, leaders of arbitral institutions, and third party funders), as well as justices of the Supreme Court of Canada, gathered in the “Paris of North America”, to the delight of all participants in person and online. More than ten organizations partook in the event, including the Young Canadian Arbitration Practitioners (“YCAP”) and the Institut de médiation et d’arbitrage du Québec (“IMAQ”).

YCAP’s bilingual panel was organized in collaboration with IMAQ and was moderated by Lisa C. Munro (partner, Lerners LLP). True to the session’s title, “Arbitration case-law from sea to sea: quoi de neuf?”, panelists Eric Bédard (partner, Woods LLP), Laura Cundari (partner, Blake, Cassels & Graydon LLP) and Marie-Claude Martel (partner, Forseti) discussed three recurring themes identified in jurisprudence over the last two years: (1) the impact of resignations and bias allegations on arbitral proceedings; (2) decisions concerning jurisdiction and stay of proceedings; (3) non-signatories to arbitration agreements.

 

Resignations and bias allegations: How have they affected arbitral proceedings?

Recent years have seen a spike in arbitrator challenges (meritorious or not), prompting courts across the globe to revisit or elaborate upon applicable tests and standards of independence and impartiality. Eric Bédard addressed a few cases in which Canadian courts faced similar issues, such as Dufferin v. Morrison Hershfield and Aquanta Group Inc. v. Lightbox Enterprises Ltd.. Though the Ontario Superior Court of Justice in both referred to the “reasonable apprehension of bias” test, the outcomes were largely a result of the Court’s perception of fairness. The challenge in Dufferin was triggered by the arbitrator’s proactiveness during the hearing which, according to the applicants, “crossed from adjudication to advocacy”. The Court disagreed, treating the arbitrator’s preparedness and interventions as evidence of him being “truly a subject matter expert who seeks to find the truth”. Apart from the fact that his right to interject with questions was built into the procedural order, the arbitrator’s various inquiries did not give rise to a reasonable apprehension of bias as he always ensured that counsel had the opportunity to ask any questions that arose from his own line of inquiry. Since both parties had a fulsome hearing and were granted an opportunity to explain their evidence, the Court dismissed the application for the arbitrator’s removal.

Similar considerations of fairness led the Court to a different conclusion in Aquanta Group Inc. v. Lightbox Enterprises Ltd. where the applicant sought to appoint an arbitrator who had previously ruled in its favour in a different contract dispute involving the same parties. The other side protested arguing, inter alia, that the arbitrator had made findings against its key witnesses in the context of the earlier arbitration, and that the prior award was the subject of a set aside application. The applicant, however, submitted that the arbitrator was uniquely placed to rule on the parties’ new dispute, including on the applicant’s argument that some of the issues were res judicata, because he could rely on his personal notes from the previous proceeding (an official transcript not having been made). This is precisely why the Court ordered the parties to approach other candidates. Apart from the nearly sacrosanct principle of deliberative secrecy, which would be violated if the arbitrator were to use his notes in the new arbitration, the Court underscored the “commitment to limiting the decision-maker’s reference to the open and transparent evidentiary record [which] is fundamental to due process,” and preventing “decision-makers from having to spend more time testifying about their decisions than making them”.

Allegations of bias, however, are not the only reason why an arbitrator’s mandate may end (or not begin in the first place). Though arbitrators generally have the right to resign, the effects of such resignations on the arbitral process have stirred up debate. Whereas in SZ v. JZ, the arbitrator’s resignation terminated the arbitration, in Kubecka v. Novakovic, it did not. Because the parties in SZ had arguably agreed to arbitration only with the said arbitrator, his resignation due to potential scheduling conflicts led the Alberta Court of Queen’s Bench to find the arbitration terminated. Conversely, the Ontario Superior Court of Justice in Kubecka found no such indication and held “it would be surprising if the mere resignation of an arbitrator […] would trigger the end of the arbitral process and a return to the court’s jurisdiction.” The outcomes in both cases largely turned on the interpretation of the arbitration agreement, but also on particularities of the Arbitration Acts of Alberta and Ontario. While the panelist would not suggest addressing arbitrator resignations in the arbitration agreement itself, it may be prudent to do so in the first procedural order.

 

Issues arising on review of jurisdictional decisions and stay applications: A can of worms that will (not) be closed by new legislation?

Laura Cundari considered the Luxtona case wherein Ontario justices struggled to determine what the evidentiary record before a court reviewing tribunal’s jurisdictional decisions rendered “as a preliminary question” ought to be. As previously discussed on this blog, some allowed parties to file new evidence as of right (justifying such an approach through a correctness / de novo standard of review), whereas others imposed strict conditions for the admission of “fresh evidence”. The decision issued in 2021 by the Divisional Court (a branch of the Ontario Superior Court of Justice) confirmed the standard of review as being de novo, meaning that the reviewing court was not restricted to the evidentiary record that was available to the arbitral tribunal. Though we have probably not heard the last of this case, it has already affected a number of domestic matters, in an outside of Ontario. Hornepayne First Nation v. Ontario First Nations (2008) Ltd., Optiva Inc. v. TbaytelIris Technologies Inc. v. Rogers Communications Canada Inc., and Ong v. Fedoruk – all confirmed that “decide the matter” from Article 16(3) of the UNCITRAL Model Law presupposes a hearing de novo without deference to the arbitral tribunal’s decision. Some of these cases also emphasized the absence of appeals from courts’ judgments reviewing tribunals’ jurisdictional decisions. Though consistent with the Model Law, the panelist wondered how justified such an approach was, considering that appeals are possible when jurisdictional matters are resolved at a later stage.

Since members of the Toronto Commercial Arbitration Society Arbitration Act Reform Committee (“AARC”) were in the audience, they were asked to comment on whether these issues could be addressed through legislative reform. Indeed, in 2021 AARC released a draft commercial arbitration act which, if enacted in Ontario, would apply to both domestic and international arbitrations, thereby replacing the current dual statutory regime. While acknowledging all the dilemmas Article 16(3) has prompted, AARC’s co-chair J. Brian Casey noted that the draft maintained Model Law’s language. Any errors made in the law’s application thus far would, therefore, have to be rectified by courts.

The panelist also touched upon the recent Ontario Court of Appeal judgment in Mundo Media which concerned an application to stay judicial proceedings launched by a receiver in favour of an arbitration in New York.  The Court of Appeal upheld the Superior Court’s refusal to refer the parties to arbitration, thereby confirming that the arbitration agreement had been rendered inoperative by the “single proceeding model” – a judicial construct used to group all claims against a debtor into a single forum so as to facilitate negotiation with creditors. That, coupled with the broad discretion that courts exercise in bankruptcy matters, enabled bankruptcy courts to preclude the operation of arbitration legislation. The panelist noted that the Supreme Court of Canada would probably provide further clarifications on the interplay between arbitration and insolvency in Peace River Hydro Partners et al. v. Petrowest Corporation et al. (the judgment has since been released).

 

Non-signatories to arbitration agreements: To bind or not to bind?

Marie-Claude Martel primarily focused on the position of non-signatories in Quebec, which has been largely influenced by a recent resurgence in the application of the 1996 Court of Appeal judgment in Décarel inc. v. Concordia Project Management Ltd. In this decision the Court held that the defendant’s shareholders and directors were bound to the arbitration agreement because holding otherwise would be tantamount to “nonsense based on blind technicality and knowing ignorance of the particular circumstances of the case”. Building on that, the Superior Court in Newtech Waste Solutions inc. v. Asselin recently allowed a “reverse” veil piercing, when it bound a non-signatory corporation to an arbitration agreement entered into by its shareholder and director. Though non-signatories are usually expected to oppose arbitration, in Tessier v. 2428-8516 Québec inc. and 10053686 Canada inc. v. Tang non-signatories were the ones to seek referral to arbitration. Binding non-signatories, however, remains an exception rather than the rule.

The panelist highlighted that the courts often referred to the close links between the non-signatories and the persons (whether individuals or corporations) involved in the dispute to justify imposing arbitration on non-signatories but noted that considerations for proportionality and the avoidance of multiple proceedings seemed to have also played into the decisions. Suggesting that this recent line of cases may have connections with the fact that parties to an arbitration can no longer opt out of the application of the principle of proportionality in Québec, the panelist asked whether we would see a continuation of the trend in months to come.

***

In canvassing recent trends, the panelists’ presentations highlighted the peculiar nature of the Canadian legal system which, on the one hand, features the co-existence of common law and civil law, and, on the other, is affected by the distribution of legislative powers among the federal and provincial governments, as evidenced in Mundo Media where federal insolvency rules trumped provincial arbitration rules.

 

*  The views expressed herein are those of the author and do not necessarily reflect the views of Woods LLP or its partners.

Follow along and see Kluwer Arbitration Blog’s prior coverage of CanArbWeek here.

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War & Peace: Enforcement of International Arbitral Awards in Canada in an Age of Monetary Sanctions

International Arbitration Blog - Mon, 2022-11-21 10:32

The Alberta Court of King’s Bench recently provided guidance on the practical application of the economic sanctions imposed by the Special Economic Measures (Russia) Regulations (the “Russia Sanctions”).

The Contents of the Yearbook Commercial Arbitration, Volume XLVII (2022)

Kluwer Arbitration Blog - Mon, 2022-11-21 00:54

Subscribers to KluwerArbitration enjoy access to the ICCA Yearbook Commercial Arbitration.

A new upload of materials from the 2022 volume of the Yearbook Commercial Arbitration is now available in the KluwerArbitration database. The materials include ten unpublished awards rendered under the auspices of the Arbitration Institute of the Stockholm Chamber of Commerce between March 2019 and February 2022. Four of those arbitrations were conducted under the SCC Rules for Expedited Arbitrations.

The arbitrators dealt with a variety of issues, including disputes concerning works to reduce the water inflow into a tunnel; compensation for extra construction work; payment of fees under a licensing agreement; the repayment of a loan pursuant to a loan agreement; a non-compete clause; and sale and purchase agreements for chemical products and for shares in a company.

Three awards are of particular interest. First, an arbitral tribunal held that the closing conditions for the agreement to sell and purchase the shares in a company were not met, because not all asbestos found in the property owned by the company had been removed, but had only been encapsulated.

Second, a sole arbitrator found on the facts of the case that the estimate in the parties’ agreement for the costs of the development of an IT system was not a price cap. This did not mean, however, that the developer could perform any work and be entitled to compensation – rather, it was for the developer to show that the time for which it claimed compensation was reasonable. This burden of proof was met in the case because the final costs did not exceed the estimate by more than 15 percent, the range of error in respect of estimates established in the governing Swedish law.

Finally, another sole arbitrator held, under English law, that the claimant had complied with the condition precedent that an attempt be made to settle a dispute through negotiation before commencing SCC arbitration, by sending a notice of dispute to the respondents and inviting them to reply. The arbitrator found that claimant was not required to go beyond that and did not have to propose a specific date, place, and format for negotiations, or chase respondents for a response.

These materials will also be made available on the ICCA Focus on Sweden section on the KluwerArbitration site. The Focus on Sweden is an initiative collecting all materials published in ICCA’s Yearbook Commercial Arbitration and International Handbook on Commercial Arbitration highlighting Sweden as an important arbitration jurisdiction.

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Modernising The Arbitration Act 1996: A Critique of the Law Commission’s Proposed Reforms

Kluwer Arbitration Blog - Mon, 2022-11-21 00:26

The Arbitration Act 1996 (the “Act“), the principal legislation governing arbitration in England, Wales and Northern Ireland, came into force 25 years ago. This landmark Act has enabled London to become a top arbitral seat and England and Wales is now home to at least 5,000 arbitrations every year. On 22 September 2022, to mark this anniversary, the Law Commission reviewed the Act and published a Consultation Paper on possible reforms (the “Paper“), seeking input from stakeholders by 15 December 2022.

The objectives of the reform process are to modernise the law and ensure it remains “state of the art” for domestic arbitrations and continues to support England and Wales as the global first choice for international commercial arbitrations.

This post reviews six important topics relevant to the review namely: non-discrimination, arbitrators’ duties, summary disposal, emergency arbitration, section 44 and section 67.  All quotes are from the Paper.

 

Non-discrimination in Arbitrators’ Appointments

The Law Commission considers that the Act should prohibit discrimination in arbitrator appointments, acknowledging that, currently, nothing prevents an arbitration clause providing for “commercial men” as arbitrators from being struck down.   It proposes that the Act should:

  • prohibit arbitral appointments on the basis of an arbitrator’s protected characteristic(s) (namely: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex, and sexual orientation); and
  • render unenforceable arbitration agreements requiring an arbitrator to have a protected characteristic(s), unless in the context of the arbitration in hand it is a proportionate means of achieving a legitimate aim.

The rationale for this proposal is sound, especially when we are far from gender parity amongst arbitrators, and preventing discrimination in arbitration is paramount.  However, for the below reasons, the current proposal may not be the best way to achieve this end:

  • international arbitration practitioners will need to familiarise themselves with the Equality Act 2010 – a complex English Act – and its related jurisprudence because the terms in bold above are borrowed from it rather than being defined in a standalone way for the purposes of the Act;
  • protected characteristics” form a closed list, there being no catch-all provision to take account of future developments;
  • the “proportionate means” test will be developed by the English courts on a case-by-case basis, which could cause potential concern for foreign parties who may feel that the English court is not best-placed to consider their local cultural/religious considerations for arbitrator selection;
  • the requirements may be employed as a guerrilla tactic (e.g., to significantly stall proceedings; for example, a respondent could engage an arbitrator whose maternity leave is imminent, knowing the claimant cannot challenge the appointment because “pregnancy and maternity” are protected characteristics); and
  • awards may still face enforcement barriers under the New York Convention on the basis that the tribunal was not composed in accordance with the parties’ agreement (e.g., an all-woman tribunal appointed under a clause providing for “commercial men“).

The key is to introduce a user-friendly test which (i) would be workable for the international business community and (ii) avoids being mired in complex local legislation.  Save for one stakeholder, who expressed an opinion earlier in the reform process, we are not aware of other stakeholders expressing any concerns with the current proposal. To date, most stakeholders have either (i) not publicly critiqued the current proposal or (ii) endorsed it or the rationale underpinning it.

 

Arbitrators’ Duty of Disclosure

The Paper proposes codifying an arbitrator’s continuing duty of disclosure – outlined in Halliburton v Chubb – but is against introducing a new statutory duty of independence, asserting that an arbitrator’s connection to the parties doesn’t really matter and is often inevitable; rather, its effect on impartiality, and the openness about such connections, is what counts. This seems a reasonable approach and is an important change which modernises legislation in line with soft law.

The Paper asks whether the Act should specify the state of knowledge required of an arbitrator’s duty of disclosure duty and, if so, if it should be based on the arbitrator’s actual knowledge or an objective standard (what he/she ought to know after making reasonable enquiries).  Given the current uncertainty in English jurisprudence about the state of knowledge required, the Act should clarify this expressly.  An objective standard may be best as international arbitrators are already familiar with this under the widely-consulted IBA Guidelines on Conflicts of Interest (General Standard 7(d)).

 

Summary Disposal

The Paper proposes an express summary disposal procedure that uses the English courts’ threshold, namely the claim/defence has “no real prospect of success” and there is “no other compelling reason” for it to continue to full hearing.  This is a rare but welcome proposal, not commonly found in foreign arbitration legislation, which seeks to promote cost and time efficiency and to reassure arbitrators, and foreign enforcing courts, that summary disposals may be appropriate and proper in the right circumstances (thereby combatting due process paranoia). This proposal could be particularly appealing to financial institutions enforcing payment obligations so may be attractive to speed up arbitrations.

The Act could adopt the “manifestly without merit” test outlined in many institutional rules, which may be better known by international arbitrators, but there is no settled jurisprudence on its meaning. Conversely, the meaning of the proposed threshold is clearly articulated in English case law, so this is likely to be the better option for legal certainty. The threshold set by English law is also high which should appease any concerns that foreign parties may have about this new procedure.  

The Paper proposes that:

  • the summary procedure can only be invoked by party application (not unilaterally by an arbitrator); and
  • the tribunal must consult with the parties on the form of the procedure.

Users should welcome these proposals, designed at protecting party autonomy and procedural due process whilst allowing flexibility.  However, the Act should also incorporate a reasonable time limit for arbitrators to make their determination in order to protect against delay.

 

Emergency Arbitration and Section 44 (Court Powers Supporting Arbitral Proceedings)

Emergency arbitration is a new phenomenon which post-dates the Act.  The Paper provisionally concludes that the provisions which apply to arbitrators should not apply to an emergency arbitrator (“EA“) because many of them would be inappropriate in such context. Moreover, an EA regime should not be administered by the courts but by arbitral institutions, which are best-placed to administer such proceedings under their rules.

Adopting this proposal would mean that ad hoc arbitrations cannot, in future, benefit from an EA regime, something now well-engrained in modern arbitrations. This is significant because many traditional sectors, such as construction and commodities, as well as more recently established ones, such as FinTech, favour ad hoc arbitration as an efficient option for resolving disputes. Consideration should therefore be given to ensuring that the Act provides an EA regime which could apply to ad hoc arbitrations and to institutional arbitrations where no EA mechanism is otherwise available.

The Paper addresses non-compliance with EA orders and proposes either:

  • permitting an EA to issue a peremptory order, backed up by a court order, if ignored; or
  • bringing EAs into the remit of section 44 and allowing EAs to give permission for section 44(4) applications so that the court can grant interim relief relating to the EA order.

While (ii) is simpler, (i) maintains the primacy of the arbitral regime and is what practitioners are accustomed to under sections 41 and 42.

The Paper discusses what it describes as the widespread, but “incorrect”, perception that following the decision in Gerald Metals, section 44(5) of the Act precludes recourse to court where emergency arbitration is possible. Consequently, it suggests repealing section 44(5). Given the controversy generated by Gerald Metals, repealing section 44(5) would simplify things and would clarify that the Court can assist in the EA context within the confines of sections 44(3) and 44(4).

To address the “vexed question” of whether an order under section 44 can be made against someone who is not a party to the arbitration proceedings/agreement (“third party“), the Paper asks whether s44 should be amended “to confirm that its orders can be made against a third party“. Third party orders are possible for most, but not all, matters listed in section 44(2) – it depends on the applicable domestic law rules, which are imported into that section.  For this reason, it may be confusing to adopt the proposed blanket confirmation; it would likely be clearer to maintain the current status quo, especially in light of the evolving law concerning the matters listed in section 44(2).

 

Section 67 Challenges (Challenging Award Based on Tribunal’s Lack of Jurisdiction)

Currently, section 67 challenges may proceed by way of a re-hearing, with the inevitable duplication of cost and time (since the tribunal’s ruling is given no weight) but with the advantage of the court having the final say.

The Paper proposes that a section 67 challenge should instead take the form of an appeal (review of the award) in circumstances where:

  • a party has participated in the arbitration and objected to the tribunal’s jurisdiction; and
  • the tribunal has ruled on jurisdiction in an award.

This seems sensible in order to prevent (i) the “heads I win, tails it does not count” mentality (ii) the tribunal’s jurisdictional hearing being a “dress rehearsal” and (iii) duplication.

Currently, a party may also ask the court to determine a point of jurisdiction under section 32, which is possible either before or after a tribunal has ruled on its jurisdiction. It makes sense for the proposed ‘appeal, not rehearing’ reform to apply equally to section 32 where the tribunal has ruled on jurisdiction. However, serious consideration should be given to whether it should apply in the following scenarios: (i) section 32 applicants who do not possess a tribunal ruling on jurisdiction and (ii) non-participating parties in an arbitration who may seek a jurisdictional determination or apply under section 67 (see section 72), since there will be no award to review or “second bite of the cherry“, respectively.

 

Conclusion

The Act would benefit from modernisation but the objective should be to maintain the simplicity of its 1996 counterpart and to avoid complexity. Many, but not all, of the current proposals achieve this objective.

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World Arbitration Update: “Balancing the Protection of Foreign Investors and States Responses in the Post-Pandemic World” – Book Launch Program

Kluwer Arbitration Blog - Sun, 2022-11-20 00:41

The current era of emergencies, which includes climate change, environmental challenges, armed conflicts, and health crises, has a profound impact on foreign direct investment (FDI). A panel held on 27 September 2022 as part of the second edition of the World Arbitration Update (WAU) engaged with the effect of such global emergencies on international investment law (IIL) by focusing on ideas related to “Balancing the Protection of Foreign Investors and States Responses in the Post-Pandemic World”, a book published by Kluwer earlier this year and co-edited by Dr. Yulia Levashova and Dr. Pascale Accaoui Lorfing (also authors of book chapters). The book provides a comprehensive understanding of the impact of Covid-19 crisis on the IIL regime from both a State and an investor perspective. It draws focus to the analysis of investor rights and State defences from a multi-jurisdictional and regional standpoint, including Latin America, India, Korea, the United States and Russia. The book’s detailed examination of the effects of a pandemic on States and investors demonstrates how any crisis can alter the balance between investors’ legal protection under IIAs and the State’s regulatory authority to implement emergency measures.

The panel was moderated by Dr. Alvaro Galindo (Universidad de las Americas; Carmigniani Pérez Abogados) with speakers Ms. Munia El Harti Alonso (Xtrategy LLP), Dr. Pascale Accaoui Lorfing (Research Associate CREDIMI – University of Burgundy), Dr. Yulia Levashova (Nyenrode Business Universiteit), and Dr. Crina Baltag (Stockholm University).

 

Risk Allocation – “Emergency Provisions” in Contracts and IIAs

Ms. El Harti Alonso addressed “emergency provisions,” a concept that encompasses several different kinds of specific clauses that may be found in commercial contracts and international investment agreements (IIAs) (e.g. necessity and armed conflict clauses, as considered by the tribunal in CMS v. Argentina, para 353). She examined such emergency provisions through the lens of risk allocation because, fundamentally, the very existence of emergency provisions is premised on risk allocation (see e.g. Strabag v. Lybia referring to force majeure, para 791). She explained that such provisions are usually drafted by both contracting parties, or/and by the States that are parties to the relevant IIA. She elaborated that, in the FDI context, risk allocation provisions in related commercial contracts may be also invoked in  an investor-State dispute, as the investment tribunal may “identify and give effect to the risk allocation agreed by the parties in each contract” (see e.g. Strabag v. Lybia, para 791). This may include commercial contracts entered by an investor with a State – owned enterprise. With respect to IIAs per se, in Guris v. Lybia the tribunal went further and extended the risk allocation mechanism of the related commercial contract to its analysis of the IIA itself, in particular as to the emergency provision of the BIT such as the war losses clause of the 2004 Syria-Italy BIT (Guris v. Lybia, para 322). Ms. El Harti Alonso pointed out the triangular nature of IIAs, noting that in a Bilateral Investment Treaty (BIT), the host state and home state (rather than the investor) are the sole drafters of the clause. The State, through its role in drafting the clause, can be deemed to concomitantly have “assumed the risk of that situation [of force majeure (FM)] occurring” (Guris v. Syria, para 322, ibid). Such complexity is illuminated through the state’s triple identity, as elaborated by Patrick Pearsall in his article ‘The Role of the State and the ISDS Trinity’ (2018), where he explained that in the IIL regime the host state wears a triple hat as “treaty drafter, protector of investment and respondent.

 

Covid-19 and Fundamental Change Of Circumstances

Art. 62 of the Vienna Convention on the Law of Treaties (VCLT) sheds light on change of circumstances (CoC) in the international treaty regime and, as a general rule, provides that CoC may not be invoked as a ground to terminate or withdraw from treaties unless:

  1. there has been fundamental change of circumstances;
  2. such a change was not foreseen by the parties while concluding the treaties;
  3. previously existed circumstances were the essential basis of consent of the parties to be bound by the treaty; or
  4. the effect of the change is radically to transform the extent of obligations still to be performed under the treaty.

Dr. Galindo explained the legal effects of Art. 62, primarily focusing on the role of travaux préparatoires of the VCLT. He highlighted that CoC and consequences of pacta sunt servanda may apply in certain crisis situations. States may invoke Art. 62 VCLT to withdraw from IIAs upon a fundamental CoC occurring as a result of the crisis. However, it must be noted, the threshold to invoke CoC is high, as demonstrated in the Gabčíkovo-Nagymaros Project ICJ case as the conditions mentioned above must be cumulatively satisfied. With further nuance, Dr. Galindo added that going forward, attention must be paid to the strategy used by tribunals when resolving Art. 62 VCLT in connection to IIAs.

 

The State’s National Security Interest and Force Majeure

In the intricate IIL regime, States’ efforts to maintain national security are in the limelight. To safeguard national security interests, States may recourse to the provisions regulating essential security interest (ESI) or/and to the defence of force majeure (FM). Dr. Accaoui Lorfing’s chapter and presentation examine what constitutes FM, drawing attention to three sources that may provide guidance: (i) FM as defined by customary international law (CIL) as provided in  the ILC’s Draft Article on Responsibility of States for Internationally Wrongful Acts (2001) (ARISWA) Art. 23; (ii) FM as defined by national legislation and soft law; and (iii) FM clauses in contractual practice.

She emphasized the non-mandatory nature of FM clauses in national legislation, recalling that States may draft these clauses to prioritize either restrictive or expansive FM definitions. In terms of the obligation to notify the other party on FM, usually national legislation makes no mention of it, whereas soft law requires it. As such, she advised that these clauses should be drafted with a greater caution to include a list of qualified events as exemplified in the ICC model Clause on FM of 2020. This will assist parties in avoiding the situation in which a tribunal must determine what constitutes an FM situation and whether the FM clause applies in the case at hand.

States take measures for the protection of ESI i.e., national security, environment, climate change and human rights by including essential security exception clauses in IIAs. Dr. Accaoui Lorfing emphasised that ESI exception clauses have been included in an increasing number of the new-generation IIAs. As a result, tribunals will have to take these clauses into account more frequently in the future by carefully analysing their scope and the measures falling under an exception clause precluding liability, particularly in relation to the environment, human rights, and climate change. As the decision in Eco Oro v. Colombia case demonstrates, tribunals do not always give due consideration to the exception provision contained in an applicable IIA (para 829).

 

Legitimate Expectations of an Investor and the Right to Regulate

When States take measures during a crisis situation, such measures may interfere with the legitimate expectations of foreign investors under the fair and equitable treatment (FET) standard. Dr. Levashova addressed the tension of FET in relation to States’ right to regulate (RTR). She drew upon her research to explain that RTR has been recognized by tribunals in the assessment of the legitimate expectations of an investor and comprised of several elements. These are:

  1. States have inherent powers to RTR under customary international law;
  2. States can modify their laws as a part of the RTR; and
  3. the State’s legitimate objective in serving the public interest is among factors that is assessed as part of an overall balancing exercise.

She elucidated that, in recent cases such as Renergy S.à r.l. v. Kingdom of Spain and Sevilla Beheer B.V. and others v. Kingdom of Spain, tribunals have underscored that the assessment of legitimate expectations implies an inherent balancing of a state’s RTR and the investor’s rights. However, the manner in which tribunals perform the balancing exercise varies and there is no particular methodology followed in weighing the investor’s expectation and the State’s regulatory conduct. She pointed out to a lack of clarity regarding the hierarchy and allocation of weight among these factors in a tribunal’s final determination regarding the breach of legitimate expectations. Thereafter, she drew the attention to a State’s legitimate objective in serving the public interest and stated that it is only one among other intermediary factors in tribunals’ assessments. This sometimes might be problematic specifically in cases that involve a strong public interest, as was demonstrated in an assessment of FET standard in Eco Oro v. Colombia case.

While discussing the investor’s expectations of stability that may by a subject to protection, Dr. Levashova underlined that the scope of permitted regulatory changes is subject to ambiguity. She emphasized that FET claims arising out of the instability of a regulatory framework as a result of State measures aimed at dealing with any type of emergency are especially relevant in the context of a health, economic or environmental crisis. Finally, she explained that prevalent number of tribunals underlined that a State has an obligation to ensure a stable economic and legal regime, and that the FET protects only against drastic changes or fundamental changes, while pointing out that this definition that may and is interpreted in different ways does not clarify the scope of permitted regulatory changes.

 

New Horizon – Moving Forward

Considering various emerging crises, it is critical to understand what comes next in the IIL regime. In this regard, Dr. Crina Baltag stressed that the book co-edited by Dr. Levashova and Dr. Accaoui Lorfing addresses the issue of a health crisis in a timely manner given the existing IIL framework and its critics. Dr. Baltag observed that the IIL framework is clearly evolving. As reforms are visible especially in the context of the next-generation of IIAs that include the elaborated RtR provisions, as well as specific exceptions and carve-outs.

In discussing new horizons in the IIL regime, she identified four lessons that can be learned from the pandemic and in the context of ongoing ISDS reform:

  1. Collaboration: During the Covid-19 pandemic, there was clear cooperation between investors and States. Many States implemented the measures in such a way that allowed investors to successfully deal with the impact of these measures on their investments. She stated that, such collaborations are an important takeaway from the pandemic.
  2. Tools vested with investors and State: She addressed the tools available to both States and foreign investors to cope with a health crisis, such as the Covid-19 pandemic. States, in her opinion, should always follow a transparent process when dealing with investors.
  3. Novel elements and changes: She elucidated that Art. 62 VCLT is an unexplored tool in IIL that may become more relevant in the future.
  4. States’ responses: In addressing the States’ responses to a crisis, more attention must be paid to FM clauses in national and soft law, as well as State responsibility in the IIL regime pertaining to preclusions, as reflected in ARISWA Chapter V.

***

In sum, the webinar elucidated the legal nuances of the IIL regime in relation to crisis situations, such the Covid-19 pandemic. The discussions contained a timely analysis of the mechanisms that States can use to deal with an emergency, as well as the legal tools available to foreign investors under contracts and IIAs to protect their investments.

For additional coverage of World Arbitration Update click here.

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Practitioners’ View of the New ICSID Arbitration Rules: A Step in the Right Direction, but Many Unknowns and Risks of Abuse

Kluwer Arbitration Blog - Sun, 2022-11-20 00:37

The British Institute of International and Comparative Law (“BIICL”), and DLA Piper, recently organized an event titled Revised ICSID Arbitration Rules: Key Changes. Following the initial presentation of Martina Polasek (ICSID Secretariat), Prof. Yarik Kryvoi (BIICL), Kate Cervantes-Knox, (DLA Piper), Guglielmo Verdirame KC (Twenty Essex) and Dr. Anthony Sinclair (Quinn Emanuel Urquhart & Sullivan) shared their insights on the new rules.

The amendment of the arbitration rules coincides with the intensified efforts to reform the system of investor-state dispute settlement to make it less expensive, more time efficient and fair for stakeholders. In this blog post, we discuss the major changes the panellists touched upon, such as: greater transparency; enhanced efficiency; the tribunal’s express powers to order security for costs; the regulation of third-party funding; or the opening of ICSID to other international actors, such as Regional Economic Integration Organizations (REIOs) like the European Union.

 

Arbitrators Must Actively Ensure Efficiency, Sometimes Even at the Cost of Flexibility

The 2022 ICSID Rules impose stricter deadlines upon the parties (see Figure 1), obligations on arbitrators to conduct at least one case-management conference, and other specific changes to achieve greater efficiency. These rules also include an express obligation on the parties to ICSID proceedings to act in good faith and to conduct themselves “in an expeditious and cost-effective manner”. Failure to do so may result in the tribunal allocating additional costs.

Critics of ISDS often point to the extensive duration of ICSID proceedings and their costs, which are recognised concerns by the UNCITRAL Working Group III. The 2022 ICSID Rules aim to tackle these concerns.

Figure 1. Timeframes to render an award (new time-limits on top of the figure)

 

These changes, however, may also have potential downsides. For instance, the panellists highlighted the risk that the new rules might force arbitrators “to act with a stick” to ensure procedural efficiency at the behest of flexibility. One panellist mentioned that, realistically speaking, these changes will primarily affect the most in-demand arbitrators, who may for instance, struggle to comply with strict time-limits. According to the newly introduced Rule 12, if the tribunal cannot comply with an applicable time limit, it shall advise the parties of the special circumstances justifying the delay and specifying the date when it anticipates rendering the expected decision.

The rules also introduce the possibility of dismissing claims based on the manifest lack of legal merit (Rule 41), which addresses the concern of frivolous claims brought by an investor to put financial and reputational pressure on the host state.

The new expedited arbitration procedure makes it possible for the parties to obtain an award in a little over a year upon the constitution of the tribunal. The idea is not only to decrease duration, but also to make it easier for small and medium-sized enterprises to start ICSID proceedings. However, as one of the panellists pointed out, parties – especially states – may view the possibility of expedited proceedings with caution. Another panellist noted, that States would unlikely commit to such proceedings without first seeing the claimant’s memorial and probably will not be in a rush to respond and commit to expedited proceedings given the need to find lawyers and go through relevant internal procedures.

 

The Tribunal Can Now Expressly Order Security for Costs

As pointed out by one of the panellists, an express provision on security for costs (Rule 53) brings much-needed clarity on the power of the tribunal to order security for costs, as the old version of the rules were unclear on that.

When faced with a request to order security for costs, the arbitral tribunal will look at the other party’s ability and willingness to comply with an adverse decision, how such a decision affects that party’s ability to further pursue its (counter) claim, and at the conduct of the parties. The rules mandate that the tribunal looks at all the relevant circumstances. As pointed out by one of the panellists, this may also mean considering the existence of a third-party funder.

The general rules on costs have become more detailed in the revised rules. The tribunal can now adopt an interim decision on costs, even on its own initiative. In addition, the new rules provide that the costs following the event should become the default approach of tribunals (Rule 52).

 

Third Party Funding Is Now Expressly Regulated – With a Catch

One of the major changes brought by the new rules concerns the express regulation of third-party funding (“TPF”). Many have called for this before, with the European Parliament recently voicing its concerns.

According to the 2022 Rules, a funded party must disclose in detail information of the funder, such as its name and address, and who controls it (in case of legal persons). While the panellists generally viewed this change as positive, they also expressed some criticism. One panellist pointed out that the broad language used in the Arbitration Rules makes it hard to know exactly when something qualifies as TPF or not. For instance, would a law firm acting on contingency fees qualify as a TPF?

Moreover, as pointed out on this blog before, the obligation to disclose the TPF agreement (when the arbitrators consider this necessary) might adversely affect the litigant’s procedural strategy. For instance, it might make it so that the disclosure of certain arguments and positions of parties become known earlier – or in a skewed manner – than those parties would have wanted. This, in turn, could affect the arbitrator’s view of the case.

 

The New Rules Open the ICSID Framework to More Actors

The amended Additional Facility Rules now permit their use even when neither the state is a party to the ICSID Convention, nor the investor comes from an ICSID contracting state. That means that the ICSID Additional Facility Rules will compete with UNCITRAL rules, which are also not linked to being a party to an international treaty.

Similarly, REIOs (such as the European Union) can now also use the Additional Facility Rules. This could become even more relevant in the future with REIOs concluding more international investment protection agreements and possibly finding themselves as respondents before arbitral tribunals. In the end, the changes are important given that the EU could most probably not have become an ICSID Convention party.

Conclusion

The ICSID Secretariat has concluded the significant task of modernizing its arbitration rules, which, after years of extensive consultations with key stakeholders and preliminary drafts, it shared with the public. These changes will help alleviate some concerns in relation to ISDS.

All the panellists agreed that if the new rules had been adopted earlier, a great number of investment disputes administered under the previous ICSID Arbitration Rules would have been conducted more efficiently. The potential shortcomings of the new rules will become apparent when arbitrators apply them in practice.

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World Arbitration Update: Legal Developments in Sub-Saharan Africa – Africa’s Blooming

Kluwer Arbitration Blog - Sat, 2022-11-19 00:41

The second edition of the World Arbitration Update was held from 26 to 30 September 2022. The panels dedicated to the African region were held on September 28, and one of the panels focused on ‘Legal Developments in Sub-Saharan Africa’. The panel discussions provided an overview of and updates on the practice of arbitration in Sub-Saharan Africa, with a particular emphasis on the prospects for investors and legal practitioners, as well as associated challenges.

The panel was moderated by Ucheora Onwuamaegbu (ArentFox Schiff LLP). After a brief kick-off presentation by Efemena Iluezi-ogbaudu (Linklaters LLP), the topic was further debated by Ana Carolina Dall’Agnol (University of Oxford; Kluwer Arbitration Blog) Abayomi Okubote (Pennsbury Attorneys & Solicitors; Africa Arbitration Academy), Victoria Kigen, (Nairobi Centre for International Arbitration), and Njeri Kariuki (Chartered Institute of Arbitrators, Kenya).


The State of Arbitration in Sub-Saharan Africa: A Market for the Present and the Future

Efemena Iluezi-Ogbaudu based his presentation on two propositions. First, that the international arbitration market in Sub-Saharan Africa is not only a market for the present but also one for the future, given the entry into force of the Agreement establishing the African Continental Free Trade Area (AfCFTA). Second, even without the AfCFTA, positive developments in the domestic legal framework of Sub-Saharan African States make the countries of the region prime destinations for international arbitration.

In support of the first proposition, Iluezi-Ogbaudu highlighted the consistent rise in foreign direct investment (FDI) inflows in Africa. The Continent’s post-pandemic FDI inflows have increased by 130%. He opined that with this investment potential, there will inevitably be more businesses and consequently more arbitrations arising out of business transactions with relation to the Continent. He noted that, historically, this potential is illustrated by commercial and investment landmark arbitration cases like P&ID v Nigeria and World Duty Free Company v Kenya. He also pointed out that increased activity by leading arbitration practices on the Continent shows this potential. Furthermore, with the entry into force of the AfCFTA in January 2021 – albeit with a six month delay due to Covid19 – the future looks bright (developments related to AfCFTA have been discussed on the Blog on several prior occasions). The free trade area aims to primarily liberalize trade over the Continent. Its significance is emphasized by the fact that it establishes the largest free trade area by geographic size and population, making it the second largest in terms of member states, coming just after the World Trade Organization (WTO).

On the second proposition, Iluezi-Ogbaudu mentioned that changes to the domestic framework and private participation in arbitration show that Africa remains a favored destination for investment arbitration, even without the AfCFTA. The key points in this regard are the reforms conducted by many African states to amend and update their international arbitration legal framework as illustrated recently by Tanzania (which might “giv[e] investors reasons to smile”, as commented here), Nigeria and Sierra Leone’s recent arbitration acts (which are further analysed below). Long before such changes, South Africa and the Organization for the Harmonization of African Business Law (OHADA) reformed their arbitration acts. He also highlighted the pro-arbitration stance taken by national courts with specific mention being made of Kenyan and Ghanaian courts.

He concluded by pointing out the rise in ad hoc arbitration and most importantly the activities of African arbitral institutions or even foreign institutions resolving African disputes to promote international arbitration.


Rise of Arbitration in Africa and its Progressive “Africanization”

Ana Carolina Dall’Agnol focused on an analysis of the legal environment for international arbitration and its capacity to support the arbitral process in Sub-Saharan Africa. She stated that African arbitration options continue to rise. Many of these developments could, in the long-term, lead to a progressive “re-localization” or “Africanization” of international arbitration, as stated by Mbengue and Schacherer.1)Makane Moïse Mbengue, Stefanie Schacherer, ‘The ‘Africanization’ of International Investment Law: The Pan-African Investment Code and the Reform of the International Investment Regime’, Journal of World Investment & Trade 18 (2017) 414-448. jQuery('#footnote_plugin_tooltip_43081_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_43081_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Indeed, many African states can be said to have adopted modern arbitration approaches. At least ten African jurisdictions have officially adopted the UNCITRAL Model Law, thirty-six Sub-Saharan states are contracting states to the New York Convention, and forty-two have ratified the ICSID Convention.

As to recent empirical data, numbers corroborate the increase of arbitration in Africa. According to the 2020 SOAS survey, there were ninety-one arbitral institutions in the whole Continent. However, it should be noted that – as pointed out by Ana Carolina Dall’Agnol –, asymmetrically, the number of cases involving African parties is still small and steady. While statistics from institutional reports show that in 2020 cases involving African parties represented 6.8% of ICC’s caseload, 11.7% for the LCIA, and 15% for ICSID, African institutions like the Arbitration Foundation of Southern Africa (AFSA), the Kigali International Arbitration Center (KIAC), and the Nairobi Center for International Arbitration (NCIA) respectively reported an incremental growth in their caseload.

The role of domestic courts in supporting the development of international arbitration was duly mentioned by Dall’Agnol. Three main factors can affect the choice of an African jurisdiction as the seat of an arbitral tribunal. Time and cost as interlocking aspects constitute the first factor. In this regard, Dall’Agnol referred to the Africa Arbitration Academy survey on costs and disputes funding in Africa, which showed that the duration of the process is one of the main factors affecting the costs of litigation.  As was commented in the Blog previously, “there is huge appetite and market opportunity for [third-party funding]”, which might solve the concerns of parties regarding costs. The second factor relates to the expertise and pro-arbitration approach of national judges while dealing with arbitration matters, while the third resides in the issue of making decisions on arbitration-related matters rendered by African courts publicly available.


Legislative Activity: a State Driven Process?

Dr Abayomi Okubote focused on some of the essential features of two recent developments in international arbitration on the Continent, namely the 2022 Nigeria Arbitration and Conciliation Bill and the 2022 Sierra Leone Arbitration Act. As part of the drafting committees of each of these bills, Dr. Abayomi indicated that one of the main and unique features of the Nigerian Bill is the institution of an Award Review Tribunal that is entitled, when opting in, to review awards rendered by an arbitral tribunal.

As for Sierra Leone, two years after its accession to the New York Convention, it passed a bill on 2 August 2022, which has subsequently been enacted on 6 September. The bill reflects the UNCITRAL Model Law and makes provisions for issues such as third party funding, interim relief, confidentiality, recognition, and enforcement of foreign awards. Most importantly, the new Sierra Leone Arbitration Act establishes the first Sierra Centre for International Arbitration with its own rules.

Further, Dr. Okubote elaborated on the AfCFTA and its forthcoming Protocol on investment, focusing on the four objectives set to inform the future text namely: (i) Africanization (requirement to have substantial activities in Africa), (ii) systemic approach to investment (promotion of Africa as a preferred destination for investments), (iii) sustainability (incorporation sustainability criteria), and (iv) codification (instead of harmonization considering the diversity of the Continent).

Ultimately Dr. Okubote was invited to present the Africa Arbitration Academy’s Model BIT (AAA Model BIT). The AAA Model BIT, which was released in July 2022, has as its main objective to promote, encourage investment, and enhance sustainable development in Africa. The AAA Model BIT was elaborated as a comprehensive non-binding document that states may use and adapt to their needs when drafting their specific BITs. The AAA Model BIT incorporates the most innovative practices, such as the protection of traditional knowledge, and the right of indigenous communities to file amicus curiae briefs.

At the backdrop of the AfCFTA and AAA Model BIT being praised as important milestones, Dall’Agnol shed an important nuance on two critical questions: would the AfCFTA be able to support resilient and sustainable investment in the next decades, which will likely be marked by increasing environmental and climate pressure? As to the AAA Model BIT, she focused on the Joint Treaty Management Committee (JTMC) to point out that, as a state-driven process, the operation of the JTMC might leave investors outside of dispute management and resolution. This may either encourage the prevention of investor-state disputes, or on the other hand, lead investors to resort to international commercial arbitration as an alternative. From the perspective of the state-parties to the BIT, the JTMC could also encourage states to engage in joint investment treaty interpretation, as has been suggested by Methymaki and Tzanakopoulos in regard to similar mechanisms set forth in other recent international investment agreements.2)Eleni Methymaki, Antonios Tzanakopoulos, ‘Masters of Puppets? Reassertion of Control Through Joint Investment Treaty Interpretation’ in Andreas Kulick (ed.), States’ Reassertion of Control Over International Investment Agreements and International Investment Treaty Dispute Settlement, Cambridge University Press, 2017, 155-181. jQuery('#footnote_plugin_tooltip_43081_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_43081_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });


Ad hoc
Arbitration Here to Stay

Njeri Kariuki gave an insight into the evolution of ad hoc arbitration in Sub-Saharan Africa. Ad hoc arbitration is in her view a precursor in Sub-Saharan Africa. She built her assertion on the experience of the Kenyan branch of the Chartered Institute of arbitrators, which has become the default appointing authority in many contracts over the years. In the last decade, the growth in such appointments has been phenomenal. The 2020 SOAS Survey reported more than 300 such appointments for Kenya and Nigeria. In the latter, The International Centre for Arbitration and Mediation of Abuja (ICAMA) has been identified as the leading institution in ad hoc arbitrations in Nigeria.

Finally, when asked about the future of ad hoc arbitration in the region, Kariuki believes that despite the rise of arbitral institutions, ad hoc arbitrations will continue to flourish thanks to the confidentiality they offer to parties. However, there is still an important concern regarding corruption, which could eventually lead stakeholders to prefer institutional arbitrations over ad hoc arbitrations.


A Mapping of Institutional Arbitration from a South, West and East Regional Perspective

Pointing out to Africa as a continent composed of multiple regions, Victoria Kigen started with South Africa. She elaborated on the experience of the Arbitration Foundation of South Africa (AFSA) as the leading arbitration center. It has achieved a degree of success and a keen desire to develop further. The center has established a special legal exchange with China, and it launched in this regard the China-Africa Joint Arbitration Center based in South Africa in August 2015  (commented here).

As for West Africa, Kigen focused on Nigeria and Ghana. Regarding Nigeria, she mentioned that, as the home of various arbitral institutions, Nigeria hosts the Lagos Chamber of Commerce International Arbitration Centre (LACIAC), the Regional Centre for International Commercial Arbitration – Lagos (RCICAL), the Maritime Arbitrators Association of Nigeria (MAAN), Lagos Court of Arbitration (LCA). In respect of Ghana, there are two major arbitral institutions: namely the Ghana Arbitration Center (GAC) and the Ghana Association of Certified Mediators and Arbitrators (GHACMA).

In East Africa, Kigen mentioned the Kigali Arbitration Center (KIAC), which provides for domestic and international panels of arbitrators; thus, seeking to attract international renown arbitrators. Kenya is also a leading jurisdiction in the region as evidenced by the amendment of the Arbitration Act in 2009, and the subsequent establishment of the Nairobi Center for International Arbitration (NCIA) by an Act of Parliament in 2013.

Coming to the specific features expected by users of African arbitral institutions, Kigen echoed the 2020 SOAS Survey key findings, and underlined the need for those institutions to provide multilingual staff, adequate power supply, stable internet particularly for virtual hearings, as well as functioning and attractive websites. They should also be independent of governments or any other organizations.


Conclusion

From the discussions, it is evident that arbitration in Africa is blooming at the national, regional, and continental level. Based on new empirical evidence (SOAS and Africa Academy Surveys), past, present, and ongoing projects (the AAA Model BIT and the future AfCTA Investment Protocol), as well as personal experiences of the speakers as drafters of key legislation and representatives of institutions, the panel highlighted the exponential growth of arbitration in Sub-Saharan Africa over the last decades. However, despite the unquestionable rise of arbitration in Sub-Saharan Africa, there are still some issues that need to be tackled for the rise to be qualitative: such as a matching of cases that are still thin versus the number of institutions, costs, corruption for ad hoc adjudication, or a state led process sidelining investors. As conversations such as those held in the panel continue to foster a critical analysis, and a further “Africanization” is settling, those challenges can be overcome by Africa’s ownership of its blooming.

 

For additional coverage of World Arbitration Update click here.

References[+]

References ↑1 Makane Moïse Mbengue, Stefanie Schacherer, ‘The ‘Africanization’ of International Investment Law: The Pan-African Investment Code and the Reform of the International Investment Regime’, Journal of World Investment & Trade 18 (2017) 414-448. ↑2 Eleni Methymaki, Antonios Tzanakopoulos, ‘Masters of Puppets? Reassertion of Control Through Joint Investment Treaty Interpretation’ in Andreas Kulick (ed.), States’ Reassertion of Control Over International Investment Agreements and International Investment Treaty Dispute Settlement, Cambridge University Press, 2017, 155-181. function footnote_expand_reference_container_43081_30() { jQuery('#footnote_references_container_43081_30').show(); jQuery('#footnote_reference_container_collapse_button_43081_30').text('−'); } function footnote_collapse_reference_container_43081_30() { jQuery('#footnote_references_container_43081_30').hide(); jQuery('#footnote_reference_container_collapse_button_43081_30').text('+'); } function footnote_expand_collapse_reference_container_43081_30() { if (jQuery('#footnote_references_container_43081_30').is(':hidden')) { footnote_expand_reference_container_43081_30(); } else { footnote_collapse_reference_container_43081_30(); } } function footnote_moveToReference_43081_30(p_str_TargetID) { footnote_expand_reference_container_43081_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_43081_30(p_str_TargetID) { footnote_expand_reference_container_43081_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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World Arbitration Update: Taking Stock of the ECT Modernization Process – Fit for the 21st Century?

Kluwer Arbitration Blog - Fri, 2022-11-18 20:18

The Second Edition of the World Arbitration Update (WAU) took place from September 26 to September 30, 2022. This post highlights the panel on “Taking Stock of the ECT Modernization Process: Fit for the 21st Century?”. The panel was moderated by WAW Co-founder José Antonio Rivas (Xtrategy LLP/Georgetown Law). He was joined by Daniela-Olivia Ghicajanu (Georgetown University), Lukas Stifter (Chair, Modernisation Group – Energy Charter Treaty), Nikos Lavranos (International Dispute Resolution Arbitrator & Mediator, NL-Investmentconsulting), and Marinn Carlson (Partner and Co-leader of the Trade and Advocacy practice, Sidley Austin).

 

Quo vadis, ECT?

Ms. Ghicajanu opened the discussions by providing a general overview of the Energy Charter Treaty (“ECT”). The ECT is a multilateral trade and investment treaty which has been in force since 1998 and which provides a binding international legal framework for energy cooperation (initially between 54 Contracting Parties, among which the European Union (“EU”) and EURATOM are also included in their own capacities. Ms. Ghicajanu highlighted that, at the moment, the ECT is the most used investment agreement globally with some 150 arbitral proceedings having been initiated under the treaty to date.

Ms. Ghicajanu also walked the audience through the highly discussed ECT modernization process, which, in her opinion, was a necessity due, inter alia, to (i) the inconsistent interpretation and application of the ECT provisions by tribunals, national courts and recently the Court of Justice of the European Union (CJEU) climate change and net zero goals. Furthermore, amendments were needed because the ECT did not include a disconnection clause that expressly excluded the application of the treaty in intra EU disputes. The term disconnection clause is commonly used to refer to a provision in a multilateral treaty allowing “certain parties to the treaty not to apply the treaty in full or in part in their mutual relations, while other parties remain free to invoke the treaty fully in their relations with these parties” (See Report on the Consequences of the so-called “Disconnection Clause” in International Law in General and for Council of Europe Conventions, containing such a Clause, in Particular, at 3). ECT modernization efforts and related topics have been discussed extensively on the Blog previously.

The overview concluded with comments that could be drawn on later in the panel discussion, including  the latest developments in domestic courts regarding the ECT application (See Mainstream Renewable Power and others v. Germany, RWE v. Netherlands, and Uniper v. Netherlands) and the tension between the principles of supremacy and primacy of the EU law and principles of international public law.

 

ECT Modernization Process

While the ECT modernization process discussions started in 2017, the first negotiation only started until 2020. The ECT Reform negotiations ended in June 2022. Mr. Stifter explained that the core of the negotiations for the ECT modernization were focused on the amendments that the ECT needed to align the treaty with the Paris Agreement.

Some of the highly discussed topics during the negotiations were (i) the definition of Economic Activity in the energy sector (See article 1.6 of the ECT) and how that Economic Activity concerns to “Energy Materials and Products”, (ii) the definition of ‘Investor’ and the necessity of including a substantial business requirement, and (iii) the definition of ‘Investment’ and its prospective compliance with the laws of the home state.

Similar to ISDS reform discussions in other fora, transparency, security for costs, third party funding, damages and frivolous claims were the main topics discussed during the negotiations of the ISDS provisions in the ECT. In particular, he noted that the provisions related to frivolous claims and third-party funding obligations were inspired by the ICSID Rules. Furthermore, Mr. Stifter held that the umbrella clause in the ECT will now be limited to concrete breaches and must be exercised through the government authority authorized for such purposes. Lastly, it is noteworthy that the negotiations clarified a long-standing issue regarding which ECT provisions (if any) should not apply among members of the Regional Economic International Organisation (“REIO”) by concluding, inter alia, that article 26 of the amended ECT shall not apply to REIO members.

 

Thought Provoking Questions around the ECT Modernization Process

Mr. Rivas asked Mr. Lavranos about his perspective on the ECT modernization process. Mr. Lavranos noted that in the leaked text of the ECT Working Document there are no transition periods or cut off gates for the application of article 26 of the ECT which leaves the door open to possible retroactivity. Therefore, if article 26 of the ECT, as worded in the ECT Working Document, enters into force, it is worth questioning whether the awards of concluded cases under the current ECT provisions could be fully enforced and recognized in and outside of the EU. Retroactive application of article 26 of the ECT is a latent risk and European Court jurisprudence suggests that a retroactive application is a possibility, as happened in the Achmea ruling, for example.

Moreover, a valid question for ongoing or future cases is whether investors would have legitimate expectations, from a rule of law perspective, on the recognition and enforcement of awards. If cases are concluded after the ECT amended provisions have entered into force, EU domestic courts might not recognize these awards – even if they are ICSID awards – possibly arguing public order reasons. Nonetheless, Mr. Lavranos noted that ICSID awards, generally speaking, should provide a stronger legal basis for enforcement before domestic courts, at least outside the EU, e.g., in the Micula case, the UK Supreme Court held, inter alia, that “arbitration awards under the ICSID Convention should be enforceable in the courts of all Contracting States and with the same status as a final judgment of the local courts in those States (…)” (at para. 70). However, non ICSID awards might pose a problem, possibly, due to the public order exception under the New York Convention.

 

ECT Going Forward

Ms. Carlson started her intervention by mentioning that the entire ECT modernization process was made in a remarkably short time for a multilateral agreement. She pointed out that the Komstroy case, which is relevant for the ECT modernization process discussion, does not involve an intra-EU ECT dispute, but a dispute involving a non-EU State and a third country investor. Mr. Rivas mentioned that in some cases, such as Komstroy, the Court of Justice of the EU (CJEU) have not relied on the Vienna Convention on the Law of Treaties, but on the EU law supremacy principle over an apparent conflicting international norm.

It is likely that the recognition and enforcement of awards of cases conducted under the current provisions of the ECT would be pushed to the United States, the United Kingdom or any other jurisdiction outside the EU, for instance, Turkey. However, US courts, might be hesitant to apply article 26 of the ECT retroactively. Opposing recognition or enforcement of awards in non-EU domestic courts by retroactively relying on ISDS provisions and EU laws  might be a tall order (See the Micula saga as previously covered on the Blog).

Ms. Carlson questioned whether countries that withdrew the ECT like Italy -that is now under the sunset clause- would get the benefits of all the amendments and improved treaty provisions to the ECT or whether they would have to defend their disputes under the “former” ECT provisions.

 

Closing Remarks

Until today Netherlands, Spain, and Poland have signaled their intent to withdraw from the ECT and, more recently, France, Slovenia, and Germany have also announced that they would withdraw the treaty. Now that the ECT reform has been concluded, its outcome features various aspects such as the increase in the level of investment protection, the seeming end of intra-EU applications under the ECT, as well as the strengthening of environmental and social provisions. However, when assessing the outcome of the amended ECT, the current political landscape in the EU should be taken into consideration.

Commercial arbitration cases in the energy sector are likely to increase, and since the EU is looking to foster the investment in renewable energies, a key question is whether investors are -or not- better off the ECT. Finally, how EU and non-EU domestic courts would reconcile the regional principles of supremacy and autonomy of EU law with the principles of public international law, remains to be seen.

The complete the video of the panel is available here.

For additional coverage of World Arbitration Update click here.

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Amazon Tries to Avoid Class Action in California

ADR Prof Blog - Fri, 2022-11-18 12:12
I spoke with a reporter from Bloomberg BNA yesterday about Jackson v. Amazon.com, Inc. (oral argument 11/17/22). The case raises a number of interesting arbitration issues: whether Amazon’s broad arbitration clause includes a worker’s privacy claim (Amazon was monitoring employee’s discussions on social media), whether a federal court’s decision that an Amazon last-mile driver is … Continue reading Amazon Tries to Avoid Class Action in California →

Expert Roundtable: The Energy Charter Treaty at a Crossroads

Kluwer Arbitration Blog - Fri, 2022-11-18 00:39

The Centre for International Law and Governance, University of Copenhagen, in cooperation with Hasselt University and Seven Summits Arbitration, recently hosted an expert roundtable on “The Energy Charter Treaty (ECT) at a Crossroads”. The discussion, moderated by the three authors of this post, focused on the relationship between investor-state dispute settlement (ISDS), investment protection, modernization of the ECT, and climate change mitigation This post highlights key themes from the discussion, drawing on the insights of the distinguished academics, practitioners, and representatives of the corporate sector who took part, such as Freya Baetens (Oxford University), Anja Ipp (Climate Change Counsel, CCC), Greg Lourie (ICC International Court of Arbitration), Martin Dietrich Brauch (Columbia Center on Sustainable Investment), Giacomo Lorenzo (Deminor) and Tomáš Linhart (Siemens Energy).

 

I. The Modernization Process: Challenges and Achievements

The discussions highlighted the challenges and achievements associated with the ECT modernization process. Speakers emphasized the necessity of reforming the ECT: a treaty that in 1998 sought energy investment liberalization “at all costs”. The discussion engaged closely with the challenges that the ECT poses to climate goals. It was stated that the ECT (i) does not distinguish between high and low emission investments, (ii) has resulted in 150 ISDS cases, including those brought by fossil fuels investors, who were awarded damages for hundreds of millions of dollars, and (iii) leaves decarbonization policies to the will of individual contracting parties (Contracting Parties).

It was stated that to adequately respond to current challenges, the revised text should (i) align the treaty with more recent trends in investment treaty-making—practical examples included the investment chapters of EU’s Free Trade Agreements (FTAs) and the 2019 Netherlands Model BIT—and (ii) cater to international climate goals. The speakers engaged particularly with the revision of the Fair and Equitable Treatment (FET) clause and of the definitions of “investment” and “investor” in the agreement in principle reached by the Contracting Parties on 24 June 2022 (not fully available at the time of the roundtable, but announced through an official press-release). As to substantive reforms, it was suggested (as then reflected in the text rendered public after the roundtable) that a modernized FET clause could take the wording of that in the EU – Canada Comprehensive Economic and Trade Agreement (CETA) on legitimate expectations as a model. It was further noted that arbitrators enjoy broad interpretative powers when treaties are broadly worded, which may shift key decisions on climate mitigation from governments to the discretion of arbitral tribunals. One panelist argued that arbitrators should already be guided by climate considerations when adjudicating ECT disputes through the application of other rules and principles of international law (Article 26(6) ECT).

The focus then shifted to the Contracting Parties’ agreement in principle on the exclusion of the application of Article 26 ECT to members of the same Regional Economic Integration Organization (REIO) in their mutual relations. This raised the issue of the EU’s general objection to any judicial body—other than a European domestic court or the European Court of Justice (ECJ)—interpreting or applying EU law. One panelist referred to the alternative proposal to allow arbitral tribunals to file a request for preliminary ruling under Article 267 TFEU. Another panelist commented that, in light of Achmea, subsequent developments like Komstroy and—for certain practitioners—the Green Power award, were not surprising. Prospects of enforcement had already become narrower. The panelists agreed that the agreement to exclude the application of Article 26 ECT (ISDS clause) between members of the same REIO (such as the EU) should settle the controversial issue of intra-EU investment disputes.

It was observed, however, that the announced modernized ECT arguably missed the opportunity to provide arbitral tribunals with more interpretative guidance, and to distinguish between investments supporting the energy transition and those fostering investment in fossil fuels (which world leaders have pledged to reduce at the COP26 last year). The next topic was the challenges faced by companies in the energy transition and their role in supporting customers in the process. Energy companies seek to replace fossil fuels by greener sources, but the pace of technology advancements, as well as the scarce availability of alternatives to wind and solar power (e.g., hydrogen) and of zero-emissions suppliers, are considerable barriers.

It was expressed that by failing to deal with ISDS, costs allocation, and damages calculation, the ECT contracting parties did not reap the full potential of the modernization. One panelist referred to the Rockhopper v. Italy award to criticize the arbitral tribunal for determining the quantum of damages based on the investor’s loss of profit, regardless of the environmental justification behind the challenged measure. Yet, the multilateral nature of the ECT rendered its revision a matter of compromise. The panel stressed, nevertheless, that the text agreed in principle aligns the ECT with modern (treaty) practice on third-party funding and requires the disputing parties to disclose the existence and identity of a funder to exclude conflicts of interest. It was noted that the funding of intra-EU disputes would arguably already diminish prior to the entering into force of the modernized ECT, given the risks related to jurisdictional objections and narrower prospects of enforcement in and outside the EU after Achmea and Komstroy.

 

II. The Modernization Process: Future Possibilities

The panelists assessed whether some (bolder) alternatives could have been considered, bearing in mind the challenges and need for compromise with which the Contracting Parties were confronted.

The speakers agreed that treaty reforms often have less impact on ISDS decisions than one may expect, due to the broad formulation of investment treaty provisions. One panelist referred to case-law on environmental exceptions (e.g., Eco Oro v. Colombia) and to arbitral tribunals’ “gymnastics” when justifying their dismissal. Reference was made to a recent CCC’s study that stresses, inter alia, the limited role played so far by environmental clauses under the ECT. As a solution, it was suggested that the treaty should include provisions on the States’ right to regulate that are as specific as possible and make compliance with clear obligations for investors a mandatory precondition for treaty protection. The speakers emphasized the general need to carefully balance the rights and obligations of foreign investors and host States, as established in recent treaties, and it was suggested that treaties could include a reference to the Hague Rules on Business and Human Rights Arbitration.

The discussion then turned to the issue of “flexibility” as opposed to a strict carve-out of fossil fuels investments from treaty protection. The panelists questioned whether the negotiators had any leeway to agree on a strict exclusion of protection for fossil fuels investments. One discussant considered “flexibility” a second-best option, and likely the only one politically feasible. Another discussant argued that a strict approach is the only one that should be pursued in the long run, due to the need to abandon fossil fuels to achieve climate neutrality goals. Yet, the same speaker acknowledged the need to address technological and geopolitical barriers.

Lastly, the panelists balanced the pros and cons of a withdrawal from the ECT against the alternative of its modernization. One discussant considered the announced amendments to the ECT to be insufficient—because the “flexibility” mechanism would offer inadequate support to the energy transition—and advocated for withdrawal or termination. Reference was made to the UN Special Rapporteur on Human Rights and Climate Change, who in his report to the United Nations General Assembly of 26 July 2022 recommended to terminate the ECT. By contrast, another discussant argued that to reduce claims from fossil fuels investors modernization is a better solution than withdrawal and referred to the ECT sunset clause. Besides, it was affirmed that the termination of the ECT would deprive renewable energy investors of treaty protection, too.

 

III. Short-Term and Long-Term Perspectives

In light of the challenges, achievements and possible alternatives discussed earlier, the speakers ventured in prognoses regarding the more immediate future, as well as long-term perspectives.

The panel stressed the lack of sense of urgency during the ECT modernization process. Hence, it found that no meaningful developments are likely to occur in the short-term given the lengthy process of ratification, despite the need to expedite the global fight against climate change. Some speakers referred to the initiatives of some EU Member States to withdraw from the treaty.

The panel further considered that, although no publicly-known ISDS cases under the ECT concerned a climate change-related domestic measure so far, disputes like the one raised by RWE against the Netherlands are likely to set the tone of investment disputes on the long-run.

 

IV. Conclusion

The modernized ECT is scheduled to be adopted by the Energy Charter Conference on 22 November 2022. In the meantime, after the expert roundtable, the draft text on which the Contracting Parties tentatively agreed on 24 June 2022 became publicly available. It remains to be seen what the final text will look like and whether it will deliver on the promise of a modernized treaty consistent with the goals of enhanced climate action. Lessons can be learned either way for future treaty-making.

The views of the speakers do not represent those of the institutions to which they are affiliated, nor those of the hosts.

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A New Investment Law in Guatemala: Will it Attract Foreign Investment?

Kluwer Arbitration Blog - Fri, 2022-11-18 00:03

On September 19, 2022, the Guatemalan Congress enacted the Act for Promotion of Investment of Foreign Capital, 46-2022 (Ley de Fomento de Inversión de Capital Extranjero) (the “Act”), which came into force on September 27, 2022.

The Act aims to promote investment projects from foreign capital in Guatemala. The Act gives special treatment to foreign investment by regulating the conditions and authorizations necessary for its implementation. Article 2 establishes that it applies to all investors, individuals, or foreign companies with foreign capital that will make new investments in the country.

 

Is the Act entirely clear?

The Act’s objective is to introduce a special treatment for foreign investment to promote investment projects. The intention of the Guatemalan legislators seemed to be noble and towards creating incentives to attract foreign investment but the Act does not provide a list of the incentives of the special treatment that the foreign investors will receive if they decide to apply for the benefits of the Act.

Once the investor has submitted the request to the Ministry of Economy, the Ministry must determine whether it approves or rejects the project. Such resolution from the Ministry of Economy seems to be the most important document according to the Act since it is in that resolution where the investors can finally find out what special treatments they will be granted.

While it is not entirely clear, it seems that the special treatment consists of tax benefits, given that article 13 of the Act includes reforms to the Income Tax Law (Ley de Actualización Tributaria), indicating that the investors will maintain their status and preserve the rights granted under the resolution of the Ministry of Economy for a time-lapse that cannot exceed for more than 10 years for each investment project.  

Accordingly, it will not be but until the end of the road that investors will have certainty about the benefits they will receive in Guatemala for investing their capital. From the reading of the Act, the investors cannot gain knowledge of whether the benefits will refer to labor, tax, environmental, corporate, or administrative matters. This gives a powerful discretion to the Ministry of Economy and such discretion is not necessarily what an investor is looking for when investing in a foreign country.

Article 15 of the Act establishes that the Executive Branch, through the Ministry of Economy, must issue a regulation (reglamento) within the next 60 days of the entry into force of the Act. This regulation will be an important instrument to understand how the Ministry of Economy and the rest of the agencies will apply the Act. It is possible, although not the correct legal mechanism, that the regulation will establish what the benefits for foreign investors will comprise.

 

Similar legislation in the Latin American region

Panama has enacted the Act of Legal Stability of Investments (Ley de Estabilidad Jurídica de las Inversiones) which registers national and foreign investments equivalent to USD $2,000,000.00 or more. In Panama, the Ministry of Economy is the entity in charge of the registry and guarantees the investor that it will receive legal stability in tax matters, municipal tax, labor law, free transfer of capital, customs, and exports. Such a  guarantee is for a term of 10 years, except for municipal taxes, where a 5-year term applies. In case the conditions vary, the investor may be indemnified.

In Nations Energy, Inc. and others v. the Republic of Panama, ICSID Case No. ARB/’06/19), Panama’s Act of Legal Stability of Investments was discussed. The claims arose out of communications between Panama’s General Revenue Directorate and the Ministry of Economy and Finance where they allegedly refused claimants the transfer of certain fiscal tax credits to third parties.

El Salvador also enacted the Act of Legal Stability of Investments (Ley de Estabilidad Jurídica para las Inversiones) to promote national and foreign investment through a contract of legal stability. El Salvador has signed contracts of legal stability in the energy sector, the first one involved an investment of USD $73,000,000, and the second one an investment of more than USD $13,000,000.  In El Salvador, the contracts of legal stability not only guarantee the stability of the conditions at the time of the contracts and tax regimes but also guarantee migratory conditions to the key persons related to the investment.

 

The Act and its relation with international investment contracts and treaties

In the international context, the regimes of stabilization are best known as stabilization clauses, freezing clauses, or economic equilibrium clauses. These clauses intend to be incorporated either in public contracts, investment contracts, or international investment agreements.

Stabilization clauses have been interpreted by different arbitral tribunals, for example in Duke Energy International Peru Investments No. 1 Ltd. v. Republic of Peru (ICSID Case No. ARB/03/28), the ICSID tribunal determined that the stability foreseen by stabilization clauses goes beyond the mere protection against future changes in laws and also applies to legal interpretations.

In Perenco Ecuador Limited v. Republic of Ecuador (ICSID Case No. ARB/08/6) the tribunal analyzed contracts for two exploratory oil properties that included a tax modification clause requiring the application of a correction factor to absorb any increase or decrease in the tax burden resulting from changes to the tax regime, the creation or elimination of new taxes or their interpretation. While nothing on the contract clauses was clearly designated to protect the contractual bargain, the Tribunal affirmed that they did not constitute stabilization clauses per se, since they did not purport to freeze Ecuadorian law at the time of their signing nor prohibit the State from modifying the tax regime.

From the reading of the legislative history of the Act, it seems that the Guatemalan legislator intended to replicate Panama’s and El Salvador’s model by creating a stabilization regime in Guatemala. Even though it is not expressly stated in the Act, article 13, which reforms the Income Tax Law (Ley de Actualización Tributaria), suggests that there is room for the interpretation of a stabilization clause. Such article provides that the investors will maintain their legal status and will preserve their rights covered by the resolution rendered by the Ministry of Economy, which cannot exceed a period of 10 years for each project.

Therefore, it seems that the Guatemalan legislator intended to insert a type of stabilization clause in an administrative act – the resolution of the Ministry of Economy. But the nature of this act is different from what we have in the international scenario, where stabilization clauses are either part of the contract (as is the case of El Salvador) or as part of a provision in an international investment agreement. Either way, depending on the text of the resolution of the Ministry of Economy, in the future this can lead to some potential issues of interpretation in an international context.

 

Conclusion

Will the Act attract foreign investment to Guatemala? Not yet.

The Act is missing an important component: a list of the benefits that the investors will receive as part of the special treatment when investing their new capital in Guatemala.  It is unclear whether the regulation of the Act will establish these benefits or if it will be left to other governmental authorities to issue further guidance.

Finally, the Act alone will not attract foreign investment to Guatemala. Other relevant factors are important for this to happen, such as absence of corruption, due process, and respect for the rule of law, among others.

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