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Disclosure Standards for Adjudicators in Investment Disputes: The Draft Code of Conduct for ISDS Adjudicators Through the Eyes of State Parties

Kluwer Arbitration Blog - Wed, 2022-06-29 01:23

Two years since it was published, the draft of the Code of Conduct for Adjudicators in International Investment Disputes is still subject to discussion and refinement by States and other stakeholders participating in the UNCITRAL Working Group III (WG III). This evolving instrument, developed jointly by the ICSID and UNCITRAL Secretariats, is the first attempt to develop universal rules of conduct for arbitrators, judges and other decision-makers in investment disputes (commonly referred to as “adjudicators”).

Although the Code is still a work in progress, it has recently featured prominently in a disqualification proposal filed in Misen Energy AB (publ) and Misen Enterprises AB v. Ukraine, ICSID Case No. ARB/21/15.1)The analysis in this post does not reflect the author’s opinions on the merits of the disqualification proposal, the decision, or any personal views about the parties and arbitrators involved. jQuery('#footnote_plugin_tooltip_42005_3_1').tooltip({ tip: '#footnote_plugin_tooltip_text_42005_3_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This proposal illustrates how the Code may be interpreted and used by State parties, should it become binding in investment disputes. This post takes a deeper dive into the existing disclosure provisions of the Code, aiming to assess them through the eyes of a Respondent State. The post concludes with some lessons that may be drawn for the Code’s drafters as they continue to shape the contours of a universal standard of disclosure for adjudicators in investment disputes.

 

The Disqualification Proposal in Misen

In Misen, after the Claimant identified its experts, one of the arbitrators disclosed that he had appeared in cases in which the experts were also appointed, both as counsel and arbitrator (the arbitrator initially accepted the appointment without submitting any statement of possible conflicts of interest in the case). Prompted by this disclosure, the State requested an exhaustive list of all of the arbitrator’s past and present appearances in cases involving the relevant experts and other experts from their firm, as well as an explanation of the responsibilities of the arbitrator in relation to the expert testimony in the relevant cases.

The Respondent State subsequently filed a Proposal for Disqualification under Article 57 of the ICSID Convention. It alleged that the arbitrator’s failure to disclose past “professional relationships” with experts appointed by the Claimant, the subsequent “piecemeal disclosures” that were made, and the “withholding of critical information” about the arbitrator’s professional business and other relationships, raised “reasonable doubts as to whether the Arbitrator can be relied upon to exercise independent judgement due to an appearance of a lack of impartiality or bias.”

The State’s arguments in the Proposal were based on the view that arbitrators could be disqualified not only for reasonable doubts of independence or impartiality, but for reasonable doubts as to the completeness of their disclosure. In addition, the State framed the proper disclosure standard as a seemingly unqualified “comprehensive disclosure”, arguing that the Proposal should be upheld because the State could not be confident that unknown facts might exist that would satisfy the objective disqualification test.

In filing this Proposal, the State referenced the draft Code as an indication of the emerging stricter standards of disclosure for ISDS adjudicators. While noting that the Code is still not binding in a “strict legal sense”, the State referred to the “spirit of the draft CoC” as indicative of a benchmark for a standard of disclosure and diligence that is higher than that envisioned by the Code itself (p. 46). In its view, the arbitrator should have taken into account the importance that the parties would ascribe to the prior cases involving the experts, rather than his assessment of the relevance of this fact under the disqualification standard, thus, transposing the vantage point of the parties as to the relevant standard in the disqualification proceedings. In this regard, the Proposal put forth a novel disclosure standard of “full and frank disclosure expected by [the State]”, once again putting the expectations of the parties at the forefront and conflating the disclosure standards with the standard for disqualification.

The Chair of the ICSID Administrative Council rejected the Proposal, citing the high threshold for the disqualification of arbitrators under the ICSID framework. The Chair reaffirmed that, if the undisclosed facts do not themselves raise doubts of a manifest lack of independence and impartiality, the fact of non-disclosure itself cannot serve as a ground for disqualification (p. 128).

While the State’s Proposal was therefore ultimately unsuccessful, it demonstrates how the existing disclosure provisions of the Code may be interpreted, and how such interpretations will fare in disqualification proceedings under the ICSID Rules.

 

Failure to Disclose as a Stand-Alone Ground for Disqualification

The disclosure provision in the current third version of the Code requires adjudicators to disclose any interest, relationship or matter that may, in the eyes of the disputing parties, give rise to doubts as to their independence or impartiality, and to make “reasonable efforts” to become aware of such interest, relationship, or matter. Although Article 10(2) of the Code does refer to the arbitrator’s relationship with experts, it is also clarified that “not all matters listed in article 10(2) must be disclosed in accordance with article 10(1).”

While the scope of the disclosure obligation under the Code has varied over time as a result of ongoing WG III discussions, a breach of the disclosure obligation was never contemplated to constitute a violation of the Code. In fact, the drafters removed “conflicts of interest” from the original title of the disclosure obligation and separated it from the provisions on independence and impartiality. Most recently, they expressly stipulated in Article 10(5) that the failure to disclose cannot be a standalone ground for challenge. The comments received on this proposal emphasized that the standards for challenge are stricter than the standards for disclosure and will be assessed in light of the applicable rules.

This approach accords with the disclosure standard under most applicable procedural rules, which provide for a subjective disclosure test viewed through the lenses of the disputing parties. On the other hand, the grounds for removal and disqualification are assessed from the perspective of an objective third party with knowledge of the relevant facts and circumstances. This so-called subjective/objective dichotomy is well understood in theory, and it is adopted both in cases under the ICSID Arbitration Rules and in the most recent version of the Code. It is also reflected in the explanation of General Standard 3 of the IBA Guidelines. In practice, however, it continues to create disproportionate expectations of disclosure that parties directly link to the grounds for removal, regardless of the absence of supporting facts (as discussed in an earlier post).

 

The Proper Vantage Point for the Assessment of the Grounds for Disqualification

The Misen case highlights the gap between the level of disclosure that States perceive arbitrators to be required to meet, and the standard of disclosure that will warrant disqualification. If the fact of non-disclosure in and of itself is to be treated as a stand-alone ground for challenge, there would be no room for the exercise of good faith discretion in the disclosure process and arbitrators could be burdened with proving the non-existence of non-disclosed facts. Clearly, this gap will have to be remedied in order for the Code to be both functional and to achieve its intended effect of providing a set of binding rules that will be enforceable in practice.

One way to overcome erroneous interpretations of an arbitrator’s disclosure obligations, and close the gap between these opposing expectations, would be for the Code drafters to maintain Article 10(5) and fortify it with a clear delineation as to when, and to what extent, the fact of non-disclosure will be relevant in the context of challenge proceedings under the applicable rules.

An alternative remedy would be to shift to the UNCITRAL approach (reflected in Article 12(1) of the Model Law and Article 11 of the Arbitration Rules) which requires the disclosure of “any circumstances likely to give rise to justifiable doubts as to [his] impartiality or independence.” Interestingly, the first draft of the Code required the disclosure of matters that could “reasonably be considered as affecting the independence or impartiality of adjudicators”, but it was replaced with the subjective standard in subsequent versions.

The qualification of the disclosure standard with “reasonable” or “justifiable” doubts can mitigate the expectations of the parties and reduce the likelihood of unfounded challenges, as indicated by various commentators on the more recent versions of the Code. This formulation can help align the expected scope of disclosure and place it within the framework that would be relevant in a challenge or disqualification proceeding. In any case, the Code will need to define clearly the effects of non-disclosure and its weight in challenge and disqualification proceedings and provide guardrails against the conflation of the two.

 

Conclusions: Lessons for the Drafters of the Code and the Path Forward

The disqualification proposal in this case demonstrates that States are already reading extensive disclosure obligations into the Code, tying them directly to an arbitrator’s independence and impartiality. This reading of the still-evolving instrument indicates that some States have a clear vision of what the disclosure obligations of arbitrators in investment disputes should be, distinct from the more balanced and moderated standards crafted through the multiple rounds of revisions of the Code.

While the Code is intended to be a binding set of rules that will govern the professional ethics and conduct of adjudicators in investment disputes, its enforcement remains tied to the existing mechanisms that exist under the applicable rules. Unless the Code can effectively close the gap between the parties’ expectations and the existing remedies for what they consider to be problematic conduct, its application will lead to untenable challenges and frustrations for parties and arbitrators alike.

The discussion of the Code will likely continue in the forthcoming sessions of the WG III taking place in September 2022 and February 2023. As the final contours of the Code are taking shape, this disqualification proposal provides a rare, preemptive insight into the perception of the parties of the existing disclosure provisions in the Code and the trajectory of its development. It remains to be seen whether, and to what extent, this signal will affect the transformation of the disclosure standard under the Code and whether other States will reach for it in challenge proceedings prior to its finalization.

References[+]

References ↑1 The analysis in this post does not reflect the author’s opinions on the merits of the disqualification proposal, the decision, or any personal views about the parties and arbitrators involved. function footnote_expand_reference_container_42005_3() { jQuery('#footnote_references_container_42005_3').show(); jQuery('#footnote_reference_container_collapse_button_42005_3').text('−'); } function footnote_collapse_reference_container_42005_3() { jQuery('#footnote_references_container_42005_3').hide(); jQuery('#footnote_reference_container_collapse_button_42005_3').text('+'); } function footnote_expand_collapse_reference_container_42005_3() { if (jQuery('#footnote_references_container_42005_3').is(':hidden')) { footnote_expand_reference_container_42005_3(); } else { footnote_collapse_reference_container_42005_3(); } } function footnote_moveToReference_42005_3(p_str_TargetID) { footnote_expand_reference_container_42005_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_42005_3(p_str_TargetID) { footnote_expand_reference_container_42005_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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Not so Fast – English Commercial Court Finds that LCIA Award does not bind Third Parties

International Arbitration Blog - Tue, 2022-06-28 15:40

In PJSC National Bank Trust and another v Boris Mints and others [2022] EWHC 871 (Comm), Foxton J of the English Commercial Court was tasked with deciding whether to allow the Claimant banks to amend their pleadings to include an allegation that findings from an award of the London Court of International Arbitration (the “LCIA”), involving parties allegedly under the control of the Claimants in the arbitration, bound the First, Second and Third Defendants in the Court proceedings (collectively the “Defendants”). Foxton J found that the arbitral award did not bind third parties, though he did not shut the door entirely for a different conclusion to be reached in the future on a different set of facts.

ICC Austria: Emerging Expropriations and Investment Protection in Russia

Kluwer Arbitration Blog - Tue, 2022-06-28 01:00

On May 2, 2021, the ICC Austria organized a seminar on investment protection in Russia in light of its limited-scope investment agreements and the ongoing military crisis. The key speakers were Dr. Herfried Wöss, a partner of Woess & Partners LLC and founder of the Investment Arbitration Forum, and Prof. Dr. Nikos Lavranos, Of Counsel at Woess & Partners LLC and Secretary-General of EFILA. The seminar focused on overcoming limited-scope investment agreements with Russia considering the emerging expropriations in Russia and Ukrainian territory occupied by the former state.

 

1. Investment Arbitration Proceedings Initiated under Limited-Scope BITs are Rarely Successful

Dr. Herfried Wöss started with a short overview of the different phases of investment arbitration regarding jurisdiction, merits, and damages. He then turned to explain the new Russian draft law of April 8, 2022, concerning the external management of companies leaving the Russian market and the Russian retaliation against foreign investors. The speaker explained that this law allows Russian authorities to take control of investments in “unfriendly” countries (EU, US, Canada, among others) and to take over essential industries with more than 100 employees and a US$12 million book value that aim to withdraw from the Russian market. The law is intended to apply retroactively and enter into force on February 24, 2022. This adds to Resolution Nr. 299 of March 6, 2022, regarding eliminating patent protection of patent holders of unfriendly countries alongside other measures.

He took as a starting point the Austria-Russian BIT (1990) (BIT or Treaty), which contains the typical international standards for investment protection such as Fair and Equitable Treatment (FET), Full Protection and Security (FPS), Most Favored Nation (MFN), compensation for direct and indirect expropriation, payment transfer guarantees, as well as State-to-State arbitration and Investor-State arbitration.

The speaker recalled that the contracting parties exchanged letters on the same day of signing the BIT, and they agreed that the text of the treaty did not allow for the importation of more favorable standards through either the MFN Clause of the National Treatment Protection. Moreover, the National Treatment Standard is not even mentioned in the BIT. Unsurprisingly, article 7 of the Austria-Russia BIT limits the scope of Investor-State arbitration to (i) the amount of compensation and (ii) the payment modalities of compensation and payment transfer restrictions. This means that arbitral tribunals do not have jurisdiction to rule on the violation of the investment protection standards contained in the BITs, subject whose jurisdiction is retained in domestic courts.

This limitation is similar to the first-generation Chinese BITs. In this respect, Marc Bungenberg and Manjio Chi, in their chapter on “Chinese Investment Law,” commented:

“By and large the confines of China’s consent to dispute settlement in the first generation of its investment treaties [to determining the amount of compensation due for expropriation and only after exhaustion of local remedies] inexorably reduce the effectiveness of the investor-State dispute settlement mechanism relegating it to a largely symbolic role.”

The German-Russia BIT (1989) contains the same restrictions but was further amended in a 1990 protocol attached to the BIT, to include a provision whereby the contracting parties agree that the investor has a right to compensation in case of a “substantial detriment to business activities of a company affecting its capital investment.” This may have helped Franz J. Sedelmayer win and execute an SCC investment arbitration case in Stockholm under the Germany-Russia BIT in 1998, where the tribunal awarded US$2.35 million plus interest, amounting to US$10 million.

Another keynote speaker, Prof. Dr. Nikos Lavranos, explained that most of the 27 investment arbitrations against Russia were filed and won by the investor under full or broad scope BITs. For instance, Valle Esina v. Russia was filed under the Italy-Russia BIT 1996, and the tribunal awarded the investor US$11.3 million in compensation. This BIT was negotiated during the window of economic liberalism before President Putin came to power in 2000. Similarly, Yukos v. Russia (US$ 50 bn) was arbitrated under ECT, and the Crimea cases – Everest v. Russia (US$150 million), Ukranafta v. Russia (US$44,5 million), and Stabil v. Russia (US$34.5 million) – under the Ukraine-Russia BIT. However, he underlined that full or wide-scope investment agreements with Russia are the exception, and the grand majority are limited-scope investment agreements.

Apart from the Sedelmayer award, few investment arbitrations under the Russia or China-type limited-scope agreements have been successful. A prominent example is the Tza Yap Shum v. Peru under the first-generation China-Peru BIT, where Christian Armando Carbajal, a partner at Woess & Partners LLC, played an important role. The tribunal made a detailed analysis of the wording of the jurisdictional provisions of the BIT and confirmed its jurisdiction in the Decision on Jurisdiction and Competence.

 

2. Solutions to the Dilemma of Limited Scope Russia BITs?

Dr. Herfried Wöss and Prof. Dr. Nikos Lavranos presented the following three different solutions to the dilemma of limited-scope BITs: (a) shift of ownership or control to a jurisdiction with a more favourable BIT, (b) the use of the MFN clause to import more generous BIT-provisions, and (c) State-to-State Investment Arbitration followed by investor-State arbitration.

 

Shift of ownership or control to a more favorable jurisdiction

Concerning the shift of ownership or control to a jurisdiction with a more favorable BIT, Professor Lavranos cited the UK-Russia BIT (1991) and the Norway-Russia BIT as examples of treaties with wider scopes. However, the transfer of control of the investment is likely to be barred by temporary limitations as established in Philipp Morris v. Australia, where the tribunal argued that the claimant’s complaint was an abuse of right since Phillip Morris’ corporate restructuring was undertaken with the sole purpose of gaining protection under the treaty when an investment dispute was foreseeable thus, deeming the claims inadmissible (paras. 585-588). As mentioned above, the Russian law on external control is supposed to enter into force retroactively on February 24, 2022. Therefore, treaty shopping does not seem viable for investors seeking protection.

 

Use of the MFN standard to import more generous BIT-provisions

A good example of using MFN previsions to circumvent narrow wording in investment treaties is the Berschader v. Russian Federation case. Here, the claimant under the Belgium-Russia BIT sought to import more favorable treaty provisions from the Norway-Russia BIT; however, it was not successful. The arbitral tribunal, in this case, stated that “An MFN provision in a BIT will only incorporate by reference an arbitration clause from another BIT where the terms of the original BIT clearly and unambiguously so provide or where it can otherwise be clearly inferred that this was the intention of the Contracting Parties.” (para.155). On the other hand, a wider interpretation of the UK – Russia BIT was made by the tribunal in RosinvesetCo UK v. Russian Federation, which allowed the application of investment protection standards in the Denmark-Russia BIT because the origin treaty (UK-Russia BIT) contained the terms “use” and “enjoyment” in article 3 regarding the treatment of investments (para.130). Therefore, applying the MFN standard to import favorable provisions depends on treaty wording, but certainly, this rule would not apply under the Austria-Russia BIT.

 

State-to-State Investment Arbitration followed by investor-State arbitration.

Regarding the third solution, Dr. Herfried Wöss observed that all of the revised Russian BITs provide for State-to-State investment arbitration applying all international investment standards contained in the respective BITs as analysed in detail in an article by Anthea Roberts and an OECD working paper by David Graukrodger. It is, therefore, possible – according to Dr. Wöss – that States enter into investment arbitration against Russia to obtain a ruling on liability. In the case of the European Union, this could be coordinated through the European Commission in conjunction with the Member States acting under their respective BITs, considering the provisions of the EU-Russia Partnership and Cooperation Agreement.

Once the ruling on liability has been obtained, the individual investors could then file for investor-State arbitrations concerning the amount of compensation for expropriation and transfer provisions. A leading case in this matter is Mexico v. United States in the matter of Cross-Border Trucking Services. Under Chapter 20 of NAFTA, Mexico claimed that the United States had violated its treaty obligations to afford National Treatment and Most-Favoured Nation treatment to Mexican cross-border trucking services. Mexico argued that these breaches derived from the United States’ failure to lift a moratorium on processing applications by Mexican-owned trucking firms. The Chapter 20 panel determined that the moratorium was inconsistent with NAFTA “even if Mexico cannot identify a particular Mexican national or nationals that have been rejected.” (para.182).

After this initial ruling, in 2009, CANACAR (Cámara Nacional del Autotransporte de Carga) brought an UNCITRAL investor-State arbitration under NAFTA Chapter 11 to seek compensation for violation of national treatment, MFN, and the minimum standard of treatment. However, the case was suspended when the US moratorium was lifted.

 

3. Enforcement and the Iran-US Claims Tribunal Model

Concerning the enforcement of individual investor-State arbitral awards against the Russian Federation, Nikos Lavranos referred to the model of the Iran-US Claims Tribunal. First, the Tribunal froze US$14 billion of Iranian deposits in the US as a consequence of the US hostage crisis due to the Iranian revolution in 1979. Then, both Iran and the US agreed that the Algerian central banks would receive US$ 1 billion of Iranian funds frozen in the US to pay out successful arbitral awards, and Iran would be obliged to maintain those funds at a minimum of US$500 million leading to more than 1,000 arbitral awards since 1981.

The keynote speaker suggested that the model of the Iran-US Claims Tribunal could be applied to the foreign exchange reserves of the Russian Federation deposited in the Swiss Central bank. However, the precise mechanism would certainly require further analysis.

In fact, the European Commission President Ursula von der Leyen, while speaking at the World Economic Forum in Davos, said that the EU “should leave no stone unturned” for Ukraine’s reconstruction, “including, if possible, [using] the Russian assets that we have frozen.”

Moreover, EU Commissioner Valdis Dombrovskis announced that the “freeze and seize taskforce”— which was set up in April to coordinate the seizure of €30bn worth of assets belonging to Russian oligarchs — will now investigate if “there is an EU basis for confiscation [of central bank assets] within international criminal law.”

Despite the limitations of many BITs concluded by Russia, we have highlighted several options that should be pursued. Most importantly, they need to be complemented by the creation of an international claims’ tribunal that would be able to effectively administer the claims by companies and individuals who are affected by the Russian war against Ukraine.

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ICC YAF Warsaw Recap: Position Yourself to be “Lucky”!

Kluwer Arbitration Blog - Mon, 2022-06-27 01:21

After a two-year hiatus, the ICC Young Arbitrators Forum (ICC YAF) was back with a fully in-person program in Warsaw. This unique conference included an interview with Claudia Salomon, President of the ICC International Court of Arbitration, followed by a lively panel discussion on “champagne clauses and what comes next”. The event coincided with the end of the 2022 Dispute Resolution in M&A Transactions Conference in Warsaw.

Attendees of ICC YAF were welcomed by Beata Gessel-Kalinowska vel Kalisz (GESSEL), also  known as “the Vivienne Westwood of international arbitration”, followed by opening remarks from Alicja Zielińska-Eisen (Queritius & Humboldt University of Berlin), the ICC YAF Representative for Europe and the driving spirit of the event. Ms Zielińska-Eisen emphasised the ICC YAF’s role as the global voice of the younger generation and its focus on creating opportunities and promoting diversity and inclusion. Ms Salomon, as one of the founders of the network, strongly encouraged all attendees to join ICC YAF.

This blog post highlights key advice from Ms Salomon on establishing a career in arbitration and takeaways from the panel on negotiating and interpreting dispute resolution clauses.

 

Interview with Claudia Salomon: Establishing an Arbitration Career

Joanna Kisielińska-Garncarek (GESSEL) began her interview of Ms Salomon with questions about her arbitration journey. Ms Salomon, who had never envisaged a career in the field, recalled hearing in 1998 in Phoenix, Arizona, that international arbitration was the “way of the future” given the increase in international disputes. Sure enough, only a few years later Ms Salomon found herself in Prague working on the seminal Saluka v. Czech Republic case.

Ms Salomon had three pieces of advice for younger practitioners. First, position yourself to be “lucky”, i.e., try to be seen as the “fire jumper”, willing to do what it takes and able to handle what may come. Second, take care of yourself and be sure to prioritise things like exercise. Third, be curious, ask questions and try to establish how, e.g., a narrow research task fits into the broader picture and the client’s strategy.

For practitioners seeking their first appointment as arbitrator, Ms Salomon noted that most first-time appointments are made by arbitral institutions. ICC appoints approximately 25% of all arbitrators in ICC arbitrations and among the things it looks for is strong commercial experience. The key is to specialise enough to ensure people think of you when compiling a shortlist of names. Visibility through publishing articles and organizing events such as ICC YAF, is also key.

Turning to the subject of diversity, Ms Salomon paid tribute to her predecessor Alexis Mourre for achieving full gender parity on the ICC Court in 2018. She stressed that diversity is critical for legitimacy and that businesses have the right to expect that diversity in arbitration reflects themselves, which extends to cultural, geographic and disability inclusion. Ms Salomon pointed to the creation of the ICC’s LGBTQIA+ Network and Disability and Inclusion Task Force as examples of the ICC doing its part to ensure everyone feels “seen and welcome.”

The interview concluded with Ms Salomon’s vision for ICC as it looks to its centenary celebrations in 2023. For Ms Salomon, the ICC’s vision is to be a one-stop-shop for the dispute resolution and prevention needs of business in all forms, from SMEs to global giants. This can be achieved through innovation, providing access to a suite of services, and really getting to grips with what businesses want and the tools they need. There is significant competition among a growing number of competent arbitral institutions, which Ms Salomon welcomes as it drives everyone to be better. For Ms Salomon, the key is to determine what leads businesses to choose arbitration, to analyse why they would insist on an ICC clause and to ultimately ensure that ICC is the arbitral institution that parties trust.

 

Dispute Resolution Clauses: Perspectives from the M&A Lawyer, the In-House Counsel, and the Arbitration Practitioner

The panel discussion was moderated by Natalia Jodłowska (Webuild). The panel’s focus was on the practicalities of negotiating dispute resolution clauses. The panellists took the attendees to the “backstage” of an M&A transaction, to offer perspectives of a transactional lawyer, dispute resolution counsel, and in-house lawyer to this topic. The panellists were Bronte Hannah (CMS Hasche Sigle), Tomasz Maślak (WKB), and Judyta Sawicka (Globalworth Poland).

At first, Ms Jodlowska invited participants to consider the validity of some interesting “pathological clauses” referenced in Gary Born’s International Commercial Arbitration to illustrate the practical problems that may occur. Although all presented clauses were ultimately held to be valid, Ms Jodłowska asked the panel’s transactional lawyer, Mr Maślak, for an explanation as to why clauses with controversial wording find their way into transactional documents. According to Mr Maślak, these might have been examples of “copy/pasting” extracts from previous agreements, including from preliminary documents such as Term Sheets. In his view pathological clauses are not common in practice as the arbitration lawyers will typically be involved in the drafting of arbitration agreements. However, Ms Hannah, as dispute resolution counsel, emphasised that she sees such clauses “all the time”, including phrases that do not make sense or incorporations by reference, which lead to the “juiciest” of cases. We must acknowledge that this is unfortunately also the observation of the authors of this blog post.

Providing the in-house counsel perspective, Ms Sawicka confirmed that arbitration was the preferred dispute resolution mechanism, especially in the case of complex transactions spanning multiple agreements. However, for more simple contracts the first choice is typically litigation because it should take less time to obtain an enforceable decision. She further noted that arbitration’s reputation as “more expensive” is no longer true; costs are more foreseeable, and the proceeding is generally quicker and more efficient.

For Mr Maślak, where there is an international aspect to a transaction, arbitration is the default. However, it is important to inform the client of the relevant factors, including costs and efficiency. Given his experience, it is generally only in the more complex transactions that he would request the assistance of his dispute resolution colleagues. Ms Hannah noted that dispute resolution counsel can assist more broadly in relation to “the fun stage” of transactions as they have knowledge of the issues that can arise after closing a deal, e.g., enforceability, workability, and time limitations.

In terms of choosing dispute resolution counsel, Ms Sawicka confirmed that “price is a factor”, including e.g., hourly rates and pricing structures and that it can be helpful to work with the transactional lawyer’s dispute resolution colleagues. However, experience is the number one factor, which may be demonstrated e.g. by a lawyer’s international rankings. Personal recommendations from other arbitration practitioners are also highly appreciated and valued. The same applies for arbitrator appointments, with youth not necessarily an excluding factor, particularly on tribunals of three arbitrators.

With a view to business, the parties prefer amicable solutions (effective negotiations). In this sense pursuing litigation is a “last resort” as referral of the dispute to an expert or arbitrator involves a greater “loss of control” for the party and it is important to speak to counsel early to set the matter in context, determine a strategy and ideally pursue settlement or a resolution of the matter. In Ms Sawicka’s experience, all disputes that had so far arisen were able to be resolved before escalating into more formal processes. She further confirmed that in most matters, the calm negotiators win over the “fighters” and that the lawyer should generally not be adding to the conflict but working towards its resolution, particularly in cases where preserving the long-term relationships between the parties is a priority.

Following the discussion, the attendees asked questions ranging from the use of mediation, expert determination, and multi-tier dispute resolution clauses, to diversity and inclusion when considering external counsel and arbitrator appointments, to seeing dispute resolution clauses as a window for settlement and an opportunity for litigation funding.

 

Takeaways: Consider Context and Clear Communication Channels

In summary, this ICC YAF provided numerous useful insights concerning the different stages in the life cycle of a dispute resolution clause. Key takeaways for the authors include the clear preference for the use of arbitration in international transactions, the importance of taking into account the broader context in respect to the client and the dispute, the need to establish clear channels of communication between the stakeholders and participants, and good project management. Although nothing new (see e.g. discussion on this blog here), the emphasis on gaining practical experience and engineering opportunities through hard work and visibility remains invaluable for young and aspiring practitioners seeking their first appointment as arbitrator.

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Wolters Kluwer Announces a Suite of Enhancements for Kluwer Arbitration Practice Plus

Kluwer Arbitration Blog - Sun, 2022-06-26 01:15

New features for the Profile Navigator, Relationship Indicator, and expanded Awards search capabilities will equip arbitration practitioners with faster and on-target research and actionable insights

Wolters Kluwer Legal & Regulatory U.S. announced new enhancements to several tools within Kluwer Arbitration Practice Plus (KAPP). These additions will expand KAPP’s capabilities to guide practitioners in finding the most suitable arbitrator or expert witness and evaluating their relationships for potential conflicts of interest as well as easily finding relevant awards to support their case.

KAPP is a practical extension to Kluwer Arbitration, the world’s leading research solution for international arbitration. The Profile Navigator tool within the platform, which helps to verify the initial selection of a potential arbitrator by using data driven information, has been expanded to include expert witness and counsel profiles as well. Wolters Kluwer has also added the option to select an arbitrator, expert witness, or counsel based on specific criteria, making the selection process more inclusive by expanding the pool of usual suspects and helping to achieve a better balance regarding experience and geographical representation.

Wolters Kluwer has also made updates to the Relationship Indicator tool, which provides a comprehensive review of current and previous relationships of arbitrators, expert witnesses or other stakeholders involved in the case for potential conflicts of interest. With this latest enhancement, users can explore relationships of law firms, states, and commercial parties, so the assessment does not have to start with an individual. The enhancement provides more flexibility for exploring these relationships, as well as a broader range of results.

Users can now search more easily through Kluwer Arbitration’s rich set of 6000+ commercial and investment awards, thanks to filters that Wolters Kluwer has added to the capability. The new filters assist the user to find awards based on required criteria, such as economic sector, applicable law, seat of arbitration, and more in order to receive targeted results relevant to the case.

“These additions within KAPP offer a broader range of data-driven resources for arbitration practitioners,” said David Bartolone, Vice President and General Manager for the International Group within Wolters Kluwer Legal & Regulatory U.S. “With these enhanced features, we are providing our customers with more powerful research capabilities to streamline the arbitrator selection process and increase their chances of success.”

To learn more, visit:  https://www.wolterskluwer.com/en/solutions/kluwerarbitration/practiceplus

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Opinion 1/20 and the Conclusion of the Modernisation Negotiations of the Energy Charter Treaty – Hitting the Home Stretch?

Kluwer Arbitration Blog - Sat, 2022-06-25 01:34

Amidst the still ongoing negotiations on the modernisation of the Energy Charter Treaty (ECT), which were concluded with an agreement in principle yesterday (24 June 2022), the Court of Justice of European Union (CJEU) delivered its ruling on Belgium’s request for an opinion on the compatibility of intra-EU investor-state arbitration under a modernised text of the ECT with EU law on 16 June 2022. The CJEU found that it ‘does not have sufficient information on the actual content of the envisaged agreement and that, therefore, the present request for an Opinion, on account of its premature nature, must be regarded as inadmissible.’ (Opinion 1/20, para. 48).

Against this backdrop, this blogpost briefly addresses the reasoning of the CJEU in Opinion 1/20 and outlines the most contentious topics in the past few ECT modernisation negotiation rounds prior to the agreement in principle adopted yesterday. Given the confidentiality of the modernisation negotiations, the ‘actual content of the envisaged agreement’ remained unknown until the press release on the agreement in principle, but some major fault lines and points where consensus emerged in the modernisation negotiation could already be identified on the basis of press releases of the ECT secretariat.

 

Opinion 1/20 and Intra-EU Arbitration Under the ECT

Following the CJEU’s judgment in Achmea finding the Dutch-Slovak BIT incompatible with the autonomy of EU law, disagreements persisted among EU member states whether the Achmea reasoning applied to the plurilateral ECT as well since the EU itself is party to the ECT and non-EU members are also parties to the ECT. The EU proposal for modernizing the ECT, which was published in May 2020, did not address intra-EU investor-state arbitration. In December 2020 Belgium submitted a request for an opinion pursuant to Article 218(11) TFEU, which permits an EU member state and EU institutions to ‘obtain the opinion of the Court of Justice as to whether an agreement envisaged is compatible with the Treaties.’ The Belgian request sought clarification on whether intra-EU arbitration under a modernised ECT was compatible with EU law. However, at that point in time only the comprehensive EU proposal for amending the ECT existed. Eventually, in September 2021, the CJEU held in an obiter dictum in Komstroy that intra-EU arbitration under the current version of the ECT was not permitted by EU law (see analysis here). In light of this finding, Belgium was asked whether it wanted to withdraw its request, but Belgium declined (Opinion 1/20, paras. 17-18).

On 16 June 2022, the Fourth Chamber of the CJEU found the Belgian request to be inadmissible. It held that it did not have sufficient information on the actual content of that agreement and could not conclude that the provision providing for investor state arbitration under the ECT, i.e. Article 26,  ‘will not be subject to amendments at the end of those negotiations’ (Opinion 1/20 para. 43). The Court emphasized that the situation had changed since the request was submitted in December 2020. At that point in time negotiations on the modernisation of the ECT had only just started a few months ago –in July 2020– and the Komstroy judgment had not been delivered (Opinion 1/20 para. 44). Accordingly, it was still possible that intra-EU arbitration had already been addressed or would be addressed (Opinion 1/20 para. 44). In addition, the negotiations on the definitions of investor and investments under the ECT were on the table and could indirectly affect the scope of investor-state arbitration (Opinion 1/20 para. 44). Thus, the CJEU regarded the request as premature and inadmissible (Opinion 1/20 para. 46). However, the CJEU also reaffirmed its Komstroy Judgment pointing out that intra-EU arbitration under the existing ECT was not applicable because it contravened EU law (Opinion 1/20 para 47).

Overall, this ruling provides little additional guidance on intra-EU investment arbitration as it treated the request as inadmissible and simply re-affirmed what was already known: intra-EU arbitration under the ECT is contrary to EU law. While investment tribunals have generally not dismissed jurisdiction on the basis of an intra-EU objection even after Komstroy (see e.g. Mathias Kruck v. Spain), the tribunal in Green Power v. Spain for the first time declared that it has no jurisdiction. In light of Achmea and Komstroy, ‘Spain’s offer to arbitrate under the ECT is not applicable in intra-EU relations’ (Green Power v. Spain, para. 445) (a post on this development is soon to be published on the Blog). Given the unfinished negotiations at that point in time, the CJEU’s decision to treat the request as inadmissible was certainly the most prudent approach.

 

The State of the Modernisation Negotiations Prior to the Agreement in Principle

In order to modernise the ECT, the modernisation group, which was established by the Energy Charter Conference, i.e. all contracting parties to the ECT, in November 2019, held fifteen formal negotiation rounds between July 2020 and June 2022 discussing a wide array of procedural and substantive issues. The last negotiation round was initially scheduled for 8-10 June 2022, but was subsequently extended for one day (14 June 2022). Not all outstanding issues could be settled in the last round, thus informal discussions continued ahead of an in-person meeting of the modernisation group on 23 June 2022 (fifteenth negotiation round), which prepared the ad hoc meeting of the Energy Charter Conference for the agreement in principle on 24 June 2022.

 

Contested Topics in the Last Negotiation Rounds

The most contested topics plagued the modernisation group up until the very last negotiation round on 23 June 2022. This blogpost outlines some of these controversial topics and how the negotiations proceeded in the last few negotiation rounds.

According to a leaked document from the EU’s Trade Policy Committee, the ‘most controversial issue given the EU’s demand to exclude fossil fuels from the treaty’ was the ‘Definition of “economic activity in the energy sector”’. The EU proposed a redefinition of ‘economic activity in the energy sector’ by gradually phasing out investment protection for fossil fuel based energy production within ten years after the amendment of the ECT takes effect or by 2040 the latest (for an analysis see here). This topic had been intensively discussed since the fourth negotiation round (2-5 March 2021). In the fifth negotiation round (1-4 June 2021) delegations stressed the importance of taking into account the individual climate goals and energy security goals as well as their specific energy mixes when it comes to re-defining ‘economic activity in the energy sector’. In the sixth negotiation round  (6-9 July 2021), these discussions continued and the ECT secretariat presented some options to implement flexibility for each contracting state. The ECT secretariat was then tasked with further developing the options for flexibility and the principle of flexibility guided these discussions ever since. In the fourteenth negotiation round (8-10 and 14 June 2022) ‘proposals of individual Contracting Parties were considered in combination with rules on reciprocity among Contracting Parties as well as transition periods.’ The agreement in principle incorporates a flexibility mechanism, which permits the Contracting Parties –on the basis of a decision by the Energy Charter Conference– to exclude fossil fuel based investments in their territories from the scope of protection of the ECT. In addition, a review mechanism has been added, which allows the Contracting Parties to review the flexibility mechanism and the list of energy materials and products that are protected by the ECT.

Another controversial topic was ‘Sustainable development and corporate social responsibility’. The EU proposed the inclusion of references to international instruments on sustainable development and responsible business conduct as well was the Paris Agreement and an obligation to conduct environmental impact assessments. Moreover, it advocated for a state-to-state dispute settlement mechanism with respect to these provisions. Already in the sixth negotiation round  (6-9 July 2021) compromise drafts on these provisions were discussed and since the eleventh negotiation round (1-4 March 2022) particular attention was paid to the proposed dispute settlement mechanism. While there seem to have been considerable disagreements on these provisions (see progress report 2021), some agreement was reached in the fourteenth negotiation round, including on the dispute settlement mechanism. According to the agreement in principle, provisions were introduced that reaffirm exiting obligations under various multilateral treaties, including the Paris Agreement. The dispute settlement mechanism with respect to these new provisions on ‘Sustainable development and corporate social responsibility’ appears to be limited to a conciliation procedure rather than an arbitration mechanism as foreseen by the EU proposal.

In addition, there was consensus in the modernisation group on e.g. Fair and Equitable Treatment (FET). Here, the EU favoured a closed list of measures, which constituted a breach of FET, whereas other states favoured an open list (see here). Apparently, such a closed list is now part of the agreement.

Moreover, in the fourteenth negotiation round, a major success for transparency was achieved by reaching consensus to have the UNCITRAL Rules on Transparency in Treaty-based Investor-State arbitration applied to investment disputes under the ECT. This is particularly significant given the lack of support for the ‘Mauritius Convention on Transparency’, which also requires states to apply the aforementioned UNCITRAL Transparency Rules in investor-state disputes, but has only been ratified by nine states thus far.

Finally, an agreement was reached to exclude intra-EU arbitration from the ECT in the thirteenth negotiation round (16-20 May 2022). The agreement in principle indicates that a provision has been added clarifying that investor-state dispute settlement does not apply between contracting parties which are members of a Regional Economic Integration Organisation (REIO). The only REIO that is party to the ECT, is the EU. Thus intra-EU arbitration will be excluded, which satisfies the criteria established by the CJEU in Komstroy and reaffirmed in Opinion 1/20 and the modernised draft of the ECT will be compatible with EU law insofar as it concerns intra-EU arbitration.

Various other important aspects have been covered in the modernisation negotiations and are covered in the ECT’s public communication on the agreement in principle. The full text of the agreement in principle is not publicly available yet.

 

Outlook

With the CJEU having stayed on the sideline in the final phase of the modernisation negotiations, the negotiations concluded on 24 June with the agreement in principle, but the future of the modernised text of the ECT still remains uncertain. The draft text should now be communicated to the contracting parties by 22 August 2022 for adoption by the Energy Charter Conference on 22 November 2022. The modernised ECT will only enter into force 90 days after ratification of three-fourths of the contracting parties. An entry into force of the modernised ECT may face serious political obstacles, in particular in the European Parliament and some EU member states, which may still opt for withdrawal instead of amending the ECT.

 

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Never-ending Achmea Saga: A New Episode from Lithuanian Courts Confirms That Intra-EU BITs Are Really Over

Kluwer Arbitration Blog - Fri, 2022-06-24 01:00

A recent decision of the Lithuanian Supreme Court (Civil case No. e3K-3-121-916/2022, 18 January 2022, hereinafter the “LSC judgement”) adds another episode to the long saga of implementing the Achmea  decision. The Lithuanian decision once again confirms the end of the BITs era in Europe and turns to national courts as well as to the classic conflict of laws rules. It also falls in line with a number of other decisions of the EU member states’ courts.

 

The Background to the National Proceedings

On 10 February 2016, Veolia Environnement S.A., Veolia Energie International S.A., UAB Vilniaus energija, UAB Litesko (together – “Veolia”) initiated an ICSID investment arbitration case against the Republic of Lithuania regarding the alleged breach of the 1992 Bilateral Investment Treaty (BIT) between France and Lithuania .

The Republic of Lithuania submitted a counterclaim in the abovementioned investment arbitration case on 17 September 2017. After the Court of Justice of the EU’s (“CJEU”) decision in Achmea, the Republic of Lithuania concluded that the ICSID tribunal lacked jurisdiction, withdrew its counterclaim, and submitted it to the national courts as a separate claim.

On 6 August 2020, the court of first instance refused to register this new claim. The Appellate court overturned the decision and decided to remand the case for further proceedings on 9 March 2021. Veolia challenged the decision of the Appellate court inter alia on several principal grounds:

First, the agreement to arbitrate the investment dispute was concluded on 10 February 2016, when Veolia accepted the offer expressed in the BIT and submitted the claim to the ICSID. Therefore, Achmea cannot affect the validity of the concluded arbitration agreement.

Second, referring the question of the registration of the claim to the national court infringes the competence-competence power of the tribunal to decide on its own jurisdiction.

Third, the implications of Achmea decision are overextended to different proceedings that should be protected by Article 53 – 54 of the ICSID Convention, Article 54 of the Vienna Convention on the Law of Treaties, Articles 15-16 of the BIT and Article 351 of the Treaty on the Functioning of the European Union.

 

The Supreme Court’s Decision

In a decision dated 18 January 2022, the Lithuanian Supreme Court restated the reasoning of Achmea, Komstroy (C-741/19) and PL Holdings (C-109/20) and concluded that the jurisprudence of the CJEU is consistently developed toward the prohibition of intra-EU investment arbitrations (LSC judgement, para 42). The Lithuanian Supreme Court underscored that (i) ICSID is not a court of an EU member state; (ii) ICSID awards are not under the control of the EU courts; (iii) ratio decidendi of the Achmea decision should be applicable in the case at hand (LSC judgement, para 43).

Therefore, the Lithuanian Supreme Court was checking the jurisdiction of the national court at the moment of the registration of the claim through a two-prong test.

First, the Court assessed factors relevant for the registration of the new claim in a national court, i.e. the legal effect and temporal validity of the Achmea decision and the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union of 29 May 2020.

The Lithuanian Supreme Court in its reasoning referred to the practice of the CJEU that the interpretation which the CJEU gives to a rule clarifies and defines the meaning and scope of that rule as it must be, or ought to have been, understood and applied from the time of its entry into force (C-24/86 Blaizot and Others, C-402/03 Skov and Bilka, C-92/11 RWE Vertrieb) (LSC judgement, para 45). This inevitably affects the legal relationships arising before the interpretation, unless this effect is restricted by the judgment itself, which was lacking in the Achmea decision (LSC judgement, para 47).

As a consequence of the CJEU practice and the interpretation of the Achmea decision, since 1 May 2004, when Lithuania joined the EU, Lithuanian BITs with other EU member states did not contain a valid offer to arbitrate disputes and it could not have been accepted by an investor – investment arbitration could not proceed in the absence of the agreement to arbitrate (LSC judgement, para 50).

The entry into force of the Agreement for the Termination of Bilateral Investment Treaties between the EU member states did not affect these conclusions, because the invalidity of investment arbitration was caused by the Achmea decision, not the agreement to terminate BITs (LSC judgement, para 50).

Hence, the Court held that the prohibition of investment arbitration between EU member states existed at the moment of the registration of the claim. The bilateral investment treaty between Lithuania and France cannot be applicable when it contradicts the EU law, thus there was no valid arbitration agreement, which could prevent the registration of the claim at the national court (LSC judgement, para 51).

 

The Future of this Case and Investment Arbitration in Europe

This decision of the Lithuanian Supreme Court became a Pyrrhic victory for the claimant because upon return of the case to the first instance court, the latter refused to accept the claim, arguing that it lacked jurisdiction as the respondent companies are domiciled in France. The basis for refusal looks doubtful because two co-respondents are companies registered in Lithuania, the business activities were conducted in Lithuania for a number of years and contractual obligations were performed in Lithuania. Therefore, it is highly likely that we will observe the second round of legal procedures up to the Lithuanian Supreme Court on the most basic question: whether to register the initial counterclaim as a new case or not.

When reflecting on the foreseeable future of investment arbitration in Europe, we cannot ignore the critics of Achmea, Komstroy and PL Holdings line of reasoning, who argue that the CJEU got it all wrong by pitting EU law against international investment law. The substantive critique often is based on the premise that national courts are not equipped, nor suitable, to hear investment disputes and that the EU law is too weak and inadequate to protect the interests of investors in comparison to the BITs and ISDS.

However, it may be that the ISDS in Europe has become a victim of its own success. Investment arbitration was brilliant at isolating private business complaints from competing societal concerns and so successful at getting the monetary remedies for any interference with private rights. International environmental issues, human rights, health and safety concerns and even proper functioning of the market were left lightyears behind the development of international investment law in terms of accessibility of legal remedies and efficiency.

Probably for some, it comes as a surprise that EU law, in general, refused to play the role of a weakling when confronting ISDS, which is quasi-private, despite having the initial authorization in BITs. Probably international investment law met its equal in the CJEU which jealously guards its own powers, the effectiveness of EU law and the delicate balance of societal interests within the EU.

Both EU law and international investment law are relatively young, as both emerged after WWII. Both are the product of international treaties and compete for superiority against each other. EU law is holistic in the sense that it regulates a wide variety of subject areas and consequently protects a variety of interests, unlike international investment law, which concerns only investments. EU law mimics national law and has an institutional advantage over international investment law because the CJEU can ensure continuity for law development. Meanwhile, ISDS is still mostly ad hoc with limited jurisprudence constante.

The Multilateral Investment Court proposed and advocated by the EU could be a solution in the current situation. With proper procedural and institutional safeguards maybe the CJEU could accept requests from the Multilateral Investment Court for preliminary reference rulings eliminating the very reason behind the Achmea decision.

 

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The Contents of Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, Volume 88, Issue 1 (January 2022)

Kluwer Arbitration Blog - Thu, 2022-06-23 01:00

The 31st of January 2022 marked twenty-five years from the day the Arbitration Act 1996 was brought into force. Inspired by the UNCITRAL Model Law but, at the same time distinctly English, the Act has rightly been hailed as an ‘exemplary piece of legislation’.1) Merkin and Flannery on the Arbitration Act 1996 (6th Edition Informa Law Routledge). jQuery('#footnote_plugin_tooltip_41992_21_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41992_21_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It is a comprehensive, coherent and progressive Act which made it harder for a party to challenge an arbitration award before English courts and accorded parties greater freedom to conduct their arbitration and agree on the procedure that should be followed.

To appreciate the Act’s contribution to the development of English arbitration law, the Act should be seen as part of an uninterrupted series of pro-arbitration legislation that goes back to the seventeenth century and the introduction of the 1698 Arbitration Act, one of the first arbitration statutes in the world. The 1698 Act is often referred to as the Locke Act, because it was singlehandedly drafted by John Locke, who was commissions by the Board of Trade to ‘draw up a scheme of some method of determining differences between merchants by referees, that might be decisive without appeal’.

Locke, who was familiar with arbitration, understood that merchants would be willing to use arbitration only if an effective legal mechanism was introduced to ensure that arbitration agreements and awards were complied with and enforced. His draft was adopted by the Board, which submitted it to the Privy Council in January 1697, noting that statutory law was necessary to address the ‘great obstruction in trade arising from the tedious determination of controversies between merchants and traders concerning matters of accompt or trade in our ordinary methods’. The Board urged the Council to adopt the draft on the grounds of the ‘very great advantage to the Trade of this Kingdom’. The bill was finally enacted with minor amendments in May 1698.

The Locke Act expressly introduced a policy favouring arbitration by stating that a legal mechanism for the protection of arbitration agreements was necessary ‘for promoting Trade and rendering the Awards of Arbitrators the more effectual in all Cases’. Locke’s vision and the pro-arbitration policy, embedded in the 1698 Arbitration Act, was then treasured and further developed in all subsequent arbitration acts. The 1889 Act, for example, enshrined the rule of irrevocability for arbitration agreements and offered statutory protection to arbitration agreements for both existing and future disputes. Subsequently, the Arbitration Act 1950 accorded arbitrators the power to grant interim relief, while the Arbitration Act 1979 accorded parties the significant power to take their arbitration disputes out of the purview of judicial review for errors of law. Importantly, the Act abolished the power of the courts, which they had since the 1854 Act, to order arbitrators to refer (‘state’) a question of English law arising in the course of an arbitration or an award in the form of a special case for the decision of the High Court.

Starting with the Locke Act and currently with the 1996 Act, English law has in the last three centuries given effect to a clear policy favouring arbitration as a means of promoting business. It is a remarkable legal tradition that has proved to be the catalyst for London’s reputation as one of the most important arbitration places worldwide and has inspired pro-arbitration legislations in other parts of the world.

We are happy to report that the latest issue of Arbitration is now available and includes the following:

 

ARTICLES

Ben Waters, Alternative Dispute Resolution and Civil Justice: A Relationship Resolved?

At a time when there was a perceived civil justice crisis, The Modern Law Review of May 1993 published an article written by Simon Roberts in which he reasserted the importance of party control over dispute processes and their professional management, and between negotiated outcomes and imposed decisions. The article presented here revisits Roberts’s view that the strained relationship between civil justice and alternative dispute resolution (ADR) (particularly mediation) could be mitigated by introducing three models designed to encourage extrajudicial dispute resolution. The author reassesses the relationship between ADR and civil justice, and the extent to which Roberts’s models have been incorporated is evaluated. To understand how civil justice reform in England and Wales has and will affect the way in which those who use the civil justice system engage with it, this article provides an analysis of the developing relationship between ADR and the civil justice system and suggests its future direction.

 

Peter E. O’Malley, A New ‘UNCITRAL Model Law on International Commercial Adjudication’: How Beneficial Could It Really Be?

The United Nations Commission on International Trade Law (UNCITRAL) has promoted Alternative Dispute Resolution (ADR) as an alternative to litigation, being the traditional method of resolving disputes. ADR has been primarily facilitated by UNCITRAL through two Model Laws, namely the UNCITRAL Model Law on International Commercial Arbitration (1985) and the UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation (2018). The Commission has discussed, and continues to discuss, the development of an additional UNCITRAL Model Law on International Commercial Adjudication, primarily for the international construction industry. This article seeks to discuss and consider what real benefit the introduction of a new UNCITRAL Model Law for International Commercial Adjudication could provide.

 

Andrea Colorio, Investor-State Arbitration, Human Rights, and Consumer Protection: China’s New Challenges in an Era of Globalization

This paper explores the interconnections among Investor-State arbitration, Human Rights, and Consumer Protection in modern-day China. In particular, the author analyses the relationship between open arbitration in Bilateral Investment Treaties and the development of the ecological reforms launched in order to reach what has been called an ‘ecological civiliszation’, specifically with respect to the still controversial ‘right to water’. It is shown that within the framework of the construction of a consumer policy that might guarantee the safeguarding of environmental protection and consumer rights and, at the same time, the promotion of investment policies, the correct balance between public and private interests will be a crucial issue for China in the coming years.

 

Yuan Wang, Extraterritorial Arbitration in China’s Pilot Free Trade Zones and Beyond

Since the end of 2019, the Pilot Free Trade Zones (PFTZs) established around China have adopted an aggressive approach to make reforms in extraterritorial arbitration as well as other international arbitration rules. An arbitration agreement with designation of an institution outside the Chinese Mainland between foreign-invested corporations, which used to be invalid according to Chinese Arbitration Law, became valid for the first time in the Shanghai PFTZ. As other modifications are emerging ever-evident for Chinese courts, arbitration institutions follow an international track to open the arbitration service market and keep pace with mainstream practices.

 

Hamid Reza Younesi, The Adequacy of Remedies in International Investment Law: Should the Legal Framework Be Revisited for a Proper Remedy?

This article aims to examine the subject of remedies in international investment law under two competing theories of contracting which encompass different implications for contractual relationships. It first assesses the available remedies in existing international investment law and then looks at the approach taken by relational contract theory. The article addresses the inadequacy of the remedies suggested by the classical model (existing and dominant law) in maintaining equilibrium and restoring contractual balance in international investment contracts. In light of these analyses, the article attempts to determine and develop the features and availability of remedies suggested by the relational model in international investment agreements. It underlines that the suggested remedy according to relational theory would serve the joint purpose and interests of contracting parties.

 

Divyansh Sharma, The Move Towards Multi-Party Interim Appeal Arbitration: How Efficacious?

The Appellate Body (AB) of the World Trade Organisation (WTO) is in a period of severe crisis. Though generally composed of seven members, the forum’s composition has now dropped below three, the minimum number required to hear any new appeal. At its root, this deadlock arises out of the United States’ veto against any further appointments to the AB. However, it is important to understand the potential fallout likely to occur when approaching solution-oriented discussions from this perspective. This article hypothesizes that the crisis is not limited merely to AB members’ appointment but originates from a threat to core WTO tenets of mutual trust and multilateralism. In this context, it argues that the Multi-Party Interim Appeal (MPIA) Arbitration Procedure is a mere ‘band-aid’ solution that promotes complacence within Member States and distracts attention from the structural WTO transformations necessary to escape from the current impasse. Further, the article finds that the legal and practical feasibility of the procedure is suspect, and thus there is an urgent need to explore alternative means to restore a functioning multilateral trade disputes mechanism.

 

Deyan Draguiev, Liability for Non-compliance with a Dispute Resolution Agreement

The use of dispute resolution with a forum selection clause is widespread and continues to grow so that it is now commonplace to have such a clause inserted in an agreement with an international element. One of the salient issues related to such clauses or agreements is what the consequences are if a party avoids compliance. This article aims to provide an anatomy of this matter: first, how a dispute resolution agreement should be perceived, and what obligations it creates for each of the parties (herein termed performance obligations); and second, a taxonomy of the types of liability that may flow from such a breach, both financial (e.g., damages, costs allocation) and non-financial. The article analyses and draws examples from a variety of both common law and civil law jurisdictions to provide a comprehensive mapping of the topic.

 

Aditi Tripathi & Vaibhav Vidhyansh, The Quest for an Appropriate Dispute Resolution Method in the Oil and Gas Sector in India

As a core sector, the oil and gas industry plays a significant role in shaping the Indian economy. Companies are given license to undertake exploration activities under different forms of granting instruments such as Concessions, Production Sharing Contracts [‘PSC’], and Revenue Sharing Contracts [‘RSC’]. The government initially adopted a relatively complex granting instrument (PSC) for engaging private players in exploration activities. Experience has shown that due to their complex structure, PSCs are prone to giving rise to a wide array of disputes. Twenty-two out of the 310 PSCs entered into by the government of India have been referred to arbitration and, should the trends hold, many more will be referred in the future. Although the government has switched from the PSC model to the RSC model, the nature of disputes remains essentially the same under both instruments. In this article, after discussing the nature of disputes that arise in the oil and gas industry, the regulatory framework in the sector, and aspects such as the volume of investment and the long-term engagement between the parties, the authors put forth a case for replacing arbitration with a non-confrontational mode of dispute resolution (i.e., mediation), so as to preserve the business relationship between the parties after disputes while avoiding the plethora of pitfalls surrounding arbitration.

 

CASE NOTES

Dr Sam Luttrell & Larissa Welmans, Jumping the Gun: Federal Court of Australia Declines Enforcement of Qatari Award on the Basis of Defective Constitution of Court- Appointed Arbitral Tribunal

In a recent decision, the Full Court of the Federal Court of Australia has confirmed the commitment of Australian courts to the primacy of party agreement in the enforcement of foreign arbitral awards. The court refused enforcement in Australia because the award was issued by a Qatari-seated arbitral tribunal that was not constituted in accordance with the parties’ agreement. The court’s decision engages with issues of comity because the arbitral tribunal had been appointed by a court of the seat in Qatar. The decision also clarifies the nature of the burden of proving grounds for non-enforcement of arbitral awards under Australia’s international arbitration legislation. In addition, in finding that the jurisdictional nature of the defective tribunal appointment precluded the exercise of any residual discretion to enforce, the decision elucidates the nature of Australian courts’ discretion to order enforcement of a foreign arbitral award notwithstanding a ground for non-enforcement being established.

 

Alexandre Rivière, Acceptance of DCF in Expropriation Claims

Under international investment law, and as specified in most investment treaties, States should compensate investors who suffered from a direct or indirect expropriation. Most investment treaties explicitly indicate that the compensation should correspond to the fair market value (‘FMV’) of the expropriated investment immediately before the expropriation became known. The choice of the appropriate valuation approach to calculate the FMV of the investment is left to the appreciation of the parties, and ultimately is for the tribunal to determine. One recurring issue in investment treaty cases concerns the choice of the applicable valuation approach for assessing FMV, and in particular whether a discounted cash flow (‘DCF’) analysis is appropriate based on the case facts.

 

Daze C. Nga & Peace O. Adeleye, The English Supreme Court’s Decision in Halliburton V. Chubb: An Examination of the Issues Arising from Arbitrators’ Acceptance of Multiple Appointments in Related Arbitrations and Arbitrator’s Duty to Disclose

Independence, impartiality, and the existence of an environment devoid of bias are key elements that define the integrity of any dispute resolution process. The absence of these key elements in any dispute resolution process cast doubt on due process notwithstanding the formality adopted in such process. Like every dispute resolution process, it is an ideal and a requirement in the arbitral process for every arbitrator to be impartial and independent. Arbitrators are obliged to disclose circumstances that may cast doubt on their impartiality upon acceptance of the arbitration and during the arbitration. This requirement is explicitly contained in most institutional arbitration rules and in most country’s arbitration rules. The requirement for arbitrators to disclose circumstances that may give rise to their partiality is opaque and uncertain. In the case of Halliburton v. Chubb, the English Supreme Court pronounced on the impact of the acceptance of multiple appointments by arbitrators in arbitration with the related subject matter and on the corresponding duty of an arbitrator to disclose. This article analyses the arbitrator’s duty of independence and impartiality considering the decision rendered in Halliburton v. Chubb and critically examines the arbitrator’s acceptance of multiple appointments with a related subject matter or common party, the appearance of bias, unconscious bias, and the duty of disclosure.

 

BOOK REVIEW

Gordon Blanke, Roman Khodykin and Carol Mulcahy, A Guide to the IBA Rules on the Taking of Evidence in International Arbitration (2019) (2019)

References[+]

References ↑1 Merkin and Flannery on the Arbitration Act 1996 (6th Edition Informa Law Routledge). function footnote_expand_reference_container_41992_21() { jQuery('#footnote_references_container_41992_21').show(); jQuery('#footnote_reference_container_collapse_button_41992_21').text('−'); } function footnote_collapse_reference_container_41992_21() { jQuery('#footnote_references_container_41992_21').hide(); jQuery('#footnote_reference_container_collapse_button_41992_21').text('+'); } function footnote_expand_collapse_reference_container_41992_21() { if (jQuery('#footnote_references_container_41992_21').is(':hidden')) { footnote_expand_reference_container_41992_21(); } else { footnote_collapse_reference_container_41992_21(); } } function footnote_moveToReference_41992_21(p_str_TargetID) { footnote_expand_reference_container_41992_21(); 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_41992_21(p_str_TargetID) { footnote_expand_reference_container_41992_21(); 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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A Heartwarming TV Series

ADR Prof Blog - Wed, 2022-06-22 20:42
I just watched the incredibly heartwarming Netflix TV series, Heartstopper.  It focuses on the relationship between two teenaged high school students in England who are grappling with their sexuality.  Charlie is a nerdy guy who had come out as gay and Nick is the star of the rugby team who comes to realize that he … Continue reading A Heartwarming TV Series →

The EU Termination Agreement and Sunset Clauses: No ‘Survivors’ on the (Intra-EU) Battlefield?

Kluwer Arbitration Blog - Wed, 2022-06-22 01:51

‘Sunset’ (or ‘survival’) clauses extend the effects of the relevant investment treaty after its termination. They provide that the protection afforded by the treaty is maintained for a further period of time after termination to investments made during the lifetime of the treaty. As such, sunset clauses have an ‘entrenchment effect’ limiting the ability of States to immediately walk away from their existing treaty obligations. In the aftermath of Achmea, this entrenchment effect clashed with the resolute intention of (most) European Union (EU) Member States to comply with the CJEU’s ruling and bar intra-EU investment arbitration (see coverage here). Most notably, this intention was pursued through the adoption of the Termination Agreement, a multilateral treaty signed on 5 May 2020 by 23 EU Member States to terminate their BITs (see coverage here).

The Termination Agreement deals with sunset clauses in two ways. First, Article 2 seeks to terminate all sunset clauses of the intra-EU BITs still in force, viz. the bilateral investment treaties (BITs) that are terminated pursuant to the agreement, providing that ‘[f]or greater certainty, Sunset Clauses […] are terminated […] and shall not produce legal effects’. Second, Article 3 purports to terminate the sunset clauses (possibly still in force) of previously terminated intra-EU BITs.

Will these provisions have the intended effect of barring intra-EU investor-state arbitration?

 

Article 2: Simultaneous Termination of BITs and Their Sunset Clauses

It is debated whether sunset clauses are triggered, and thus operate, only when a BIT is unilaterally terminated or also in case of mutual termination by both parties to a BIT, such as envisaged by the Termination Agreement. Most sunset clauses appear to limit their applicability to unilateral termination, by referring to termination caused by the notice of termination provided by one contracting party to the other (e.g. Latvia-Sweden BIT). Hence, a mutual termination would not be covered by the sunset clause, which would effectively be displaced by such termination.

However, it is unclear how sunset clauses should be interpreted when such language (limiting the applicability of the sunset clause to unilateral termination) is missing. For example, an arbitral tribunal has recently held that a sunset clause providing that the BIT shall continue to apply for a certain period in case of ‘termination’ of the agreement, without further qualification, would operate even in case of the mutual termination of the BIT, viz. termination by agreement of both contracting parties (Bahgat v. Egypt, para 313). In this scenario, the agreed termination of intra-EU BITs pursuant to the Termination Agreement would not, in itself, have sufficed to displace (at least some) sunset clauses. This seems to be the reason why, to avoid any arguments in this regard, Article 2 of the Termination Agreement specifically provides that  ‘for greater certainty’ sunset clauses  ‘shall not produce legal effects’ and ‘are terminated’.

This, however, raises a further question: Is such consensual ‘termination’ of sunset clauses permissible? Or are States somehow prevented from removing sunset clauses in this way? Here again there is room for debate.

The view supporting the power of States to remove sunset clauses is based on the general principle underlying the Vienna Convention on the Law of Treaties (VCLT) that States are the ‘masters of their treaties’ (Article 54(b)). Despite the sunset clause, States should therefore be free to immediately and completely terminate a treaty, if they so agree. This view finds some support in recent practice (e.g. UP v. Hungary, para 265).

On the other hand, the possibility of extinguishing sunset clauses appears to be at odds with the very purpose of these clauses, viz. to protect investors’ expectations against a sudden termination of the investment treaty. Such sudden removal can also be problematic from a rule of law and human rights perspective.

Perhaps for this reason the Czech Republic followed a two-step approach and removed the sunset clause just before terminating its BIT with several EU Member States before Achmea, although one may wonder whether there is in fact any material difference between this and the simultaneous termination provided for in the Termination Agreement.

 

Article 3: Terminating Active Sunset Clauses of Prior Terminated BITs

Similar issues arise under Article 3 of the Termination Agreement, seeking to extinguish sunset clauses contained in BITs that had been terminated before the agreement. The key feature of these clauses is that they were already operating at the time of the Termination Agreement. What is the impact of the Termination Agreement in this scenario? Arguably, a distinction should be made between cases where the investor relies on the sunset clause and starts the arbitration, or otherwise accepts the offer to arbitrate contained in the relevant BIT, before the entry into force of the Termination Agreement, and cases where the investor seeks to do so after the entry into force of the Termination Agreement.

In the former cases, it may be argued that, once accepted by the investor, the offer to arbitrate made by the State with the investment treaty becomes irrevocable. It is commonly accepted that this principle of irrevocable ‘perfected consent’ is codified in Article 25 of the ICSID Convention and may constitute a general principle of international law. Arguably, under this principle the subsequent termination of the sunset clause may not retroactively deprive an arbitral tribunal of its jurisdiction to hear the claim brought by the investor. This is in line with the position taken by arbitral tribunals after Achmea, the 2019 Declarations of the EU Member States and the Komstroy ruling. The enforcement in the EU of awards reflecting this view remains nonetheless problematic.

The answer may not be the same if the investor seeks to rely on the sunset clause after the Termination Agreement because the principle of perfected consent would not apply in this scenario. An argument may nonetheless be based on Article 70(1)(b) VLCT, which provides that the termination of a treaty ‘does not affect any right or legal situation of the parties created through the execution of the treaty prior to its termination’. It has been suggested that this rule may apply to sunset clauses and invalidate their retroactive termination. The argument has not yet been tested in practice, and some questions arise as to whether and how it may be addressed by tribunals. First, this is part of the default rule on termination set out by Article 70 VCLT, and States are free to modify this default rule pursuant to the first part of the provision (‘[u]nless the treaty otherwise provides or the parties otherwise agree’). Second, Article 70(1)(b) VLCT refers to the rights ‘of the parties’, which are understood as the States parties to the treaty, not individuals or companies. The position of individuals and companies is governed by a different provision, Article 43 VCLT, which stipulates that, after termination, a treaty ceases to regulate the legal situation of individuals and companies previously affected by such treaty. Furthermore, that Article 70(1)(b) VLCT relates to States and not private parties is made clear also by the ILC Commentary, which states that the provision ‘is not in any way concerned with the question of the “vested interests” of individuals’.

Given these issues, investors may seek to bypass the VCLT and invoke the doctrine of ‘vested’ (or ‘acquired’) rights under customary international law. However, this would seem to be a novel application of the principle since, under the traditional view, the principle of acquired rights has a narrow scope and no application to treaty termination. In any case, both under the VCLT and customary international law, the matter whether investors may have vested rights under sunset clauses despite the Termination Agreement may ultimately revolve around the vexed question of whether investors hold rights created by investment treaties directly, or they exercise rights belonging to their home States.

 

Conclusion  

The Termination Agreement raises several issues concerning termination of sunset clauses. These are mostly unexplored issues that arbitral tribunals might soon have to address. First, there is the issue of whether the consensual termination of an investment treaty triggers the application of the sunset clause. The Termination Agreement appears to assume that it does not but also contains provisions aimed at removing the effects that sunset clauses may potentially have. Second, there is the issue of whether contracting States, as masters of the treaty, can immediately eliminate the effects of a treaty despite the sunset clause included in it. This issue is particularly relevant when the clauses that States wish to neutralise already started to operate, and in particular where the investors relied on them before such neutralisation. Here, the post-Achmea arbitral practice may be instructive, in particular regarding the inclination of tribunals to uphold their jurisdiction to hear intra-EU investment claims despite the attacks from the EU side. Will these be the last ‘survivors’ on the (intra-EU) battlefield?

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A Mea Culpa in Miami

Well, somebody in Arbitration World has to write about a subject other than Section 1782, so here we go…. The US 11th Circuit Court of Appeals, after nearly 25 years of living on the dark side of international arbitration, seems prepared to confess its sins and seek redemption. It appears poised to recognize that the New York Convention provides the limited grounds for a US court to refuse recognition and enforcement of an international arbitration award made at a US arbitral seat, but that US domestic arbitration law (especially Chapter 1 of the Federal Arbitration Act) supplies the grounds for...
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The post A Mea Culpa in Miami appeared first on Marc J. Goldstein - Arbitration & Mediation.

The Contents of Journal of International Arbitration, Volume 39, Issue 3 (June 2022) – Special Issue on Empirical Work in Commercial Arbitration

Kluwer Arbitration Blog - Tue, 2022-06-21 01:52

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

 

Roger P. Alford, Crina Baltag, Matthew E.K. Hall and Monique Sasson, Empirical Analysis of National Courts Vacatur and Enforcement of International Commercial Arbitration Awards

The empirical research in this article relies on a data set including all national court decisions on recognition, enforcement and setting aside (vacatur) of international commercial arbitration awards available in the Kluwer database that were rendered from 1 January 2010 to 1 June 2020.Within the time parameters of this study, there were 504 vacatur actions and 553 offensive recognition and enforcement actions. Those decisions were rendered by national courts in 74 different jurisdictions. The research coded every argument raised by defendants challenging the recognition and enforcement of awards based on grounds set forth in Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as well as every argument raised by claimants to challenge awards based on the grounds set forth in Article 34 of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. In addition to these grounds, several others, outside the two instruments mentioned above, have been identified in the data set. The results of the research are presented in the article below. An overarching conclusion would be that courts overwhelmingly enforce foreign arbitration awards, in 73% of the cases in the data set, without significant variations between courts in various jurisdictions, and, respectively, overwhelmingly refuse to vacate arbitral awards, with courts vacating in only 23% of cases, again without significant variations between courts in various jurisdictions.

 

Maxi Scherer and Ole Jensen, Empirical Research on the Alleged Invalidity of Arbitration Agreements: Success Rates and Applicable Law in Setting Aside and Enforcement Proceedings

This article is based on a data set of over 1,000 judicial decisions in setting aside, recognition and enforcement proceedings. Although sometimes cited as one of the most common grounds for setting aside an award or refusing its recognition and enforcement, the invalidity of the arbitration agreement was raised in less than one-fifth of those decisions. It was confirmed in under one-third of those cases. This article examines which arguments for invalidity were more successful than others and how courts have determined the law applicable to the (in)validity of the arbitration agreement. Notably, less than half of the courts in this data set have engaged in a meaningful conflict of laws analysis. Where they have done so, there does not appear to be a consensus on how the law applicable to the arbitration agreement should be determined and what significance a choice of law clause in the main contract has in this regard.

 

Loukas Mistelis and Giammarco Rao, The Judicial Solution to the Arbitrator’s Dilemma: Does the ‘Extension’ of the Arbitration Agreement to Non-Signatories Threaten the Enforcement of the Award?

This article contributes to the debate on non-signatories by relying on the Kluwer Research project. In particular, through the raw data underlying the Kluwer Research, we have identified cases at the enforcement stage, in which courts had to decide whether, despite the apparent lack of consent, non-signatories were correctly brought into arbitration proceedings. In our view, the analysis of those courts’ decisions is perhaps a reminder that when considering non-signatory issues, the relevant facts of the case are always what matters the most. Non-signatories’ involvement in the relationship underlying the dispute is essential, absent a clear expression of it in the contract. We believe that the results show the judicial solution to the arbitrator’s dilemma, that is, the due consideration of the circumstances of any case, disregarding the rigid application of any theories.

 

Laurence Shore, Vittoria De Benedetti and Mario de Nitto Personè, A Pathology (Yet) to Be Cured?

Fifty years ago, Frédéric Eisemann coined the expression ‘pathological clause’ to refer to arbitration clauses that substantially deviate from the essential requirements of a model clause. However, arbitration practitioners have not yet learned their lesson; the matter of pathology is far from being outdated. Arbitration clauses may be pathological if they do not provide for mandatory referrals to arbitration proceedings, or do not meet certain other requirements to provide for a workable arbitration procedure, or contain a reference to non-existing arbitral institutions and/or arbitral rules, or provide for a proceeding administered by an arbitral institution pursuant to different institutional rules. In most instances, the competent supervisory court (or the arbitral tribunal or institution dealing with a defective clause) seeks to cure these pathologies. Arbitral tribunals and national courts generally try to ascertain whether the parties’ real intention is to arbitrate, and, if that to arbitrate is apparent, to give effect to and enforce an otherwise invalid arbitration clause. In any case, parties should not blindly rely on tribunals’ and courts’ tendency to uphold such clauses; the only safe approach is to avoid pathology.

 

Cecilia Carrara, Conflicts of Interests

The Kluwer Research comprises over 1,000 cases in the period 2010-2020. These cases do not include challenges in particular, but include vacatur and enforcement actions. Out of a total of 504 vacatur cases, in approximately eighty cases arguments related to the composition of the arbitral authority have been made. As regards enforcement, out of a total of 589 enforcement actions, in sixty-one cases these arguments have been made.

The effectiveness of arbitrators’ impartiality and independence is ensured by an ex ante positive obligation of transparency, i.e., the duty to disclose any circumstances that may give rise to independence and impartiality, and an ex post sanctioning mechanism, which enables the parties to challenge an arbitrator who doesn’t comply with those requirements. Disclosure allows parties to verify the arbitrators’ compliance with the requirements of independence and impartiality. The challenge, however, remains the necessary procedure to establish the lack of such requirements. In most countries, the test of the arbitrators’ impartiality and independence is based on the criterion of justifiable doubts.

Raising arguments related to conflicts of interest after the award is rendered, either in vacatur or enforcement actions, is only successful in order to block the enforcement/vacating the award in very few instances. Thus, parties should timely raise all of their objections at an early stage, rather than after the award is rendered.

 

Crina Baltag, Article V(1)(e) of the New York Convention: To Enforce or Not to Enforce Set Aside Arbitral Awards?

The recognition and enforcement of arbitral awards which are set aside at the seat continues to be a ‘hot’ topic, triggered by the increasing number of cases in which the prevailing party in the arbitration attempts to enforce such award in various jurisdictions where the assets of the award debtor are located. Such jurisdictions may have different approaches to the application of Article V(1)(e) of the New York Convention providing for the possibility that courts refuse recognition and enforcement of arbitral awards already set aside. Kluwer Research confirms, that, first, this ground under Article V(1)(e), while the most successfully argued ground under Article V of the New York Convention, is only upheld in 34% of the cases, and that, second, there are diverse approaches of the national courts in assessing such ground, ranging from deference to the courts of the seat of arbitration, to a truly delocalized, transnational approach to the recognition and enforcement of awards.

 

Monique Sasson, Public Policy in International Commercial Arbitration

This article analyses the decisions on public policy contained in the Kluwer Arbitration database. The database includes more than 1,000 cases. Objections based on public policy have been raised in 44% of recognition and enforcement proceedings and in 38% of setting aside proceedings. The success rate of these objections was low, 19% and 21%, respectively. This article discusses the decisions in which these objections were successful, distinguishing between the three International Law Association categories: (i)‘violation of fundamental principles, procedural public policy, or substantive public policy’; (ii) ‘loi de police’; and (iii) ‘violation of international obligations’ (though there were no successful objections in this category). The article concludes that the Kluwer Research confirms that public policy should only be applied in a limited set of circumstances, though it also features a few exceptions to the narrow construction of the concept of public policy.

 

Elina Mereminskaya, Latin America Isn’t ‘Going South’: A Qualitative Sampling Analysis

This article analyses a qualitative sample of recent judicial decisions from Argentina, Colombia, Costa Rica, Chile, the Dominican Republic, Mexico and Peru. Almost all decisions in the sample show ordinary courts’ deference towards arbitration. As long as the courts operate within the framework established by the UNCITRAL Model Law or the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arbitral awards enjoy a high level of autonomy and protection against unjustified attacks. This allows for conclusion that Latin America isn’t ‘Going South’ on its path into global arbitration realm.

At the same time, in almost all jurisdictions included in the sample, Constitutional courts and Tribunals and constitutional actions for protection of fundamental rights play an extremely – indeed excessively – relevant role. Admittedly, these constitutional actions have been mainly unsuccessful and have not led to amendments of arbitral awards. Nonetheless, its sole availability generates legal uncertainty and undermines the reliability of arbitration as a mechanism of dispute resolution. It seems to be the last hurdle that Latin American countries will have to overcome before they are considered safe and appealing seats for international arbitration.

 

Ioana Knoll-Tudor, Recognition or Enforcement and Annulment of Arbitral Awards in France: An Analysis of the Kluwer Research Results

The results of the Kluwer Research showed that, despite Paris being one of the most popular arbitration seats, French courts were the least likely to recognize and enforce an arbitral award, but also those with the highest number of vacated arbitral awards. The article analyses these results and offers some possible justifications for them.

Concerning the enforcement and recognition procedures, the study only included reasoned decisions. The specificities of the French procedure however result in most of the decisions not being reasoned (the exequatur procedure is an ex parte procedure, only orders refusing the enforcement are reasoned) and the decision of the Court of Appeal dismissing an application to set aside an award (for awards rendered in France) has the effect of automatically enforcing the award. Therefore, analyzing only reasoned decisions is not representative of the French courts’ approach. The article also analyses the grounds invoked by the claimants and their respective success rates, especially in comparison with other jurisdictions.

Concerning the annulment procedures, France ranks as the country with the highest number of vacated awards. Indeed, while reviewing the number of annulment actions initiated in recent years before the Paris Court of Appeal, we concluded that the number of actions has doubled, with around 25% of successful annulment actions.

As to the grounds for annulment relied upon by the claimants and their respective rates of success, the Kluwer Research revealed that the most relied upon grounds in France (authority not in accordance with the law and violation of public policy) were also the most successful ones.

 

Arthur Dong and Alex Yuan, An Empirical Study on Recognition and Enforcement of Foreign, Hong Kong, Macau, and Taiwan Arbitral Awards in Mainland China

In this report we analyzed publicly available cases decided by courts of Mainland China (‘PRC courts’) from 2001 to 2021 in which the court refused or rejected party’s application for recognition and enforcement of foreign (including Hong Kong, Macau, and Taiwan) arbitral awards, totaling thirty-seven cases. Here we provide factual summary for each case and conducted statistics with respect to their arbitration-related characteristics and PRC court’s ground of decision. With this report, one can see that PRC courts are extremely cautious in refusing or rejecting recognition and enforcement of foreign arbitral awards. Lack of valid arbitration agreement, and violation of arbitration agreement/arbitration rules/law of the seat, are the two major causes that led to the PRC Courts’ refusal of recognition and enforcement. However, one should note that non-compliance of national laws in Mainland China may undermine recognition and enforcement of foreign arbitral awards.

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Revisiting ‘Investment’ under Article 25 of the ICSID Convention

Kluwer Arbitration Blog - Mon, 2022-06-20 01:00

The debate surrounding the meaning and scope of the term ‘investment’ under the ICSID Convention is a product of the larger tussle between capital exporting and capital importing states, which convened at Washington in the search for a mutually beneficial agreement on foreign investments. It has been argued by Prof. Julian Davis Mortenson that ‘investment’ under Article 25 of the ICSID Convention must be interpreted as broadly as possible, in deference to party autonomy. An analysis of the travaux préparatoires leads him to conclude that parties’ consent should be the sole basis for evaluating whether a particular enterprise can be classified as an investment. Prof. Mortenson’s previous posts on this topic on the blog can be found here, here and here. While agreeing with such an approach in principle, this post demonstrates how it is not an effective alternative in practice. Instead, I explore the existence of a reasonable middle ground that allows the intentions of parties to be given effect to, while keeping the core of the Convention intact.

 

Contextualising State Consent

The avowed object of the ICSID Convention is to encourage the flow of private international investment by facilitating the settlement of disputes between investors and host states. The need to maintain a ‘careful balance’ between the interests of investors and the host states is, therefore, stated to be an important task of the Convention’s provisions.

Prof. Mortenson notes that it is this balancing act that resulted in the term ‘investment’ deliberately being left undefined. Such a ‘compromise’, first proposed by the United Kingdom, is espoused as a consent-based approach to jurisdiction, which offers sufficient flexibility to contracting parties to delimit the scope of covered investments. States are free to have their own definitions of what constitutes an ‘investment’ either through subsequent Bilateral Investment Treaties (BITs) or as unilateral notifications to the ICSID Secretariat (referred to as ‘opt-outs’). However, it is important to keep in mind that this was not an intentional choice, but one made out of compulsion. It is only because contracting states were unable to reach a consensus that the term was left open-ended. Moreover, whether or not such a choice has, in fact, ensured flexibility and encouraged state autonomy is questionable. For instance, only a handful of states have employed notifications under Article 25(4) to exclude certain classes of disputes from ICSID jurisdiction, and even such notifications have been held to be merely informational and not binding qualifications on state consent. Further, limiting the scope of states’ consent through arbitration agreements in BITs or specific contracts has also not been widely embraced insofar as most BITs continue to incorporate an expansive asset-based definition of investments, with reference to ICSID arbitration for the purposes of dispute settlement.

Indeed, if one were to agree that the compromise formula based on party autonomy truly gives effect to the consent of all states, state practice would lead to the inevitable inference that host states have come to accept the all-encompassing definition of ‘investment’. However, that is understandably not the case. Moreover, the expression of consent requires a positive act. Merely because states have not chosen to limit their consent to a specific class of investments through such opt-out mechanisms can not, by itself, be taken to imply an acceptance of the default standard without limitations. Such an approach must also be considered in light of prevailing geopolitics, acknowledging that some states possess greater bargaining powers than others.

 

Requirement of an Outer-Limit

Article 25 of the ICSID Convention explicitly limits jurisdiction ratione materiae to ‘any legal dispute arising directly out of an investment’. The deferential approach espoused by Prof. Mortenson requires that the determination of jurisdiction be solely based on parties’ conception of what constitutes investment, as found in BITs or other instruments of consent, subject only to the exclusion of ‘facially absurd’ non-economic claims. In other words, the term ‘investment’ under Article 25 is seen as non-justiciable and lacking a real limiting effect.

On the other hand, while acknowledging that consent is a jurisdictional prerequisite for bringing claims under the ICSID Convention, the Report of the Executive Directors states that ‘consent alone will not suffice to bring a dispute within its jurisdiction.’ In other words, mere consent cannot confer jurisdiction where none otherwise exists. A similar inference that parties’ agreement does not trump all other requirements can also arguably be drawn from Rule 41 of the ICSID Arbitration Rules, which empowers a tribunal to consider questions of jurisdiction ‘on its own initiative’. Interestingly, at the negotiations for drafting the ICSID Convention, there was a proposal to do away with the term ‘investment’ under Article 25 entirely. The same was however rejected, evidencing that the term has a meaning and effect which cannot be sidestepped by the mere consent of parties.

Accordingly, it has been suggested that the very act of consenting to ICSID arbitrations should be taken to reflect state parties’ intention to ‘overlay the requirements of the ICSID Convention over the broad BIT definition of investment’. Moreover, if consent alone was the jurisdictional requirement, then given the relative certainty of enforcement, all private contracts entered into by states with foreign parties would adopt ICSID arbitrations, effectively rendering all other arbitral mechanisms redundant.

As noted by Prof. Schreuer, the suggestion that the term ‘investment’ under Article 25 extends to all plausible economic activity as consented to under the BITs is also at odds with the well-accepted idea that purely commercial transactions do not fall within the scope of investment disputes. The very fact that there exists a threshold beyond which an activity or enterprise will not be characterised as an investment, points to an effective outer-limit implicit in the understanding of the term itself. It is for the same reason that in 1999, the Secretary-General of ICSID refused to register an arbitration case on the ground that the transaction therein was not capable of being classified as an investment.

 

Scope of the Article 25 Prerequisite

If the view of absolute deference to party autonomy is an extreme standpoint, the restrictive four-prong test expounded in Salini v. Morocco represents the other extreme. It effectively converts typical descriptive characteristics of investments into rigid, legally binding pre-requisites necessary to establish jurisdiction. Instead of qualifying outer-limits on arbitral jurisdiction in investment disputes, the Salini test postulates an independent and exhaustive appraisal of the term ‘investment’, requiring strict objective compliance. In doing so, it pays scant regard to parties’ agreements defining investments, by reason of which it has become a particularly divisive ruling.

Despite the acceptance of the Salini jurisprudence in subsequent decisions, some arbitral tribunals have differed and adopted approaches, which, if taken together, may be able to harmonise party autonomy with the scope of the ICSID Convention. For instance, it has been held that a prior agreement of parties with respect to what constitutes an investment creates a strong presumption in favour of jurisdiction under Article 25 as well. It has also been recognised in various rulings that a jurisdictional requirement cannot be imposed in terms of a strict, objective test, the yardsticks of which must only be seen as mere examples illustrative of typical investments, and nothing more. At the same time, the requirement to keep manifestly non-investment disputes out of the purview of ICSID arbitrations has also been acknowledged, in which case the flexible application of objective criteria in the context of particular facts and circumstances may be useful.

The underlying symbiotic relationship between the ICSID Convention and BIT provisions is central to the reconciliation of two distinct approaches arguing for the primacy of one instrument over the other. It has been proposed that the term ‘investment’ must be defined ‘in the context of shared systemic objectives underlying the mechanism of investment protection’. In this regard, what Prof. Emmanuel Gaillard has referred to as the ‘intuitive school of thought’ provides an insightful basis for a resolution. It places emphasis on identifying, rather than defining, characteristics of investments by means of guiding factors, with significant room for subjective discretion. Such an approach allows a case-by-case evaluation of investments based on criteria not limited to the four prongs of Salini. By not insisting on their cumulative compliance, but on an inclusive appraisal of all facts and circumstances, it may potentially lead to a decision that is flexible, less restrictive and perhaps more in line with parties’ intentions as well.

 

Conclusion

The clash of the deferential and restrictive approaches is a quintessential embodiment of some of the central issues in the practice of international law, viz. state consent and the exclusion of stare decisis. It is evident, however, that state parties share conflicting, but complementary interests in giving effect to the provisions of the ICSID Convention. An approach allowing an initial presumption in favour of party autonomy, subject to a flexible inquiry based on the ordinary meaning of the term ‘investment’, seems to be well suited to reasonably balance competing interests. The resulting degree of uniformity in decision making may allow for greater certainty in parties’ expectations, leading to better outcomes in line with the stated objects of the ICSID Convention itself.

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Public Policy: Is This Catch-All Provision Relevant to the Legitimacy of International Commercial Arbitration?

Kluwer Arbitration Blog - Sat, 2022-06-18 01:24

One of the articles authored by Dr Monique Sasson and featured in the Journal of International Arbitration Special Issue on Empirical Work in Commercial Arbitration, edited by Dr Monique Sasson, Dr Crina Baltag, Roger P. Alford, Matthew E.K. Hall, under the general editorship of Prof. Dr Maxi Scherer, discussed the public policy in the light of the outcomes of the empirical research.

The empirical research of national court judgements (concerning both vacatur and enforcement of international commercial awards) available in the Kluwer Arbitration Database (the “Database”) revealed that objections based on public policy have been raised in 44% of enforcement proceedings and in 38% of setting-aside proceedings.  The success rates of these objections were only 19% and 21%, respectively; however, the number of times in which the public policy objections have been upheld cannot be dismissed as insignificant.

The analysis of national court judgments indicates that the public policy is usually accepted in a limited set of narrow circumstances, though at times certain courts will accord a broad scope to public policy.

The article first examines the concept and definition of public policy, then lists some examples of actions that have been considered a violation of public policy and concludes with a brief analysis of the “maximalist” versus “minimalist” approaches, to application of the public policy exception to enforcement of awards.

 

The Concept and the Definition of Public Policy

The concept of public policy is widely invoked: Article V(2)(b) of the New York Convention provides that recognition and enforcement of an award “may also be refused” if “recognition and enforcement of the award would be contrary to public policy”. Setting aside provisions in many national arbitration acts also refer to public policy.  However, there is no autonomous definition of public policy. Authors, arbitrators and judges have often referred to an autonomous international standard. One of the definitions most frequently invoked identifies “the most basic notions of morality and justice” as constituting public policy.

This narrow interpretation of public policy is necessary to prevent the public policy exception from becoming “a channel to review the award on the merits”. Thus, the invocation of a violation of public policy should not be a mechanism to allow a substantive review of the award, but only a limited review to determine whether the enforcement or the confirmation of the award would seriously infringe fundamental principles. This application of public policy seeks to balance the interest in maintaining autonomy and efficiency of arbitration and, on the other hand, to safeguard fundamental principles of justice.

The International Law Association (“ILA”) adopted a resolution in April 2002 on the interpretation of public policy, stating that

[t]he expression “international public policy” is used in these Recommendations to designate the body of principles and rules recognised by a State, which, by their nature, may bar the recognition or enforcement of an arbitral award rendered in the context of international commercial arbitration when recognition or enforcement of said award would entail their violation on account either of the procedure pursuant to which it was rendered (procedural international public policy) or of its contents (substantive international public policy).

This resolution also highlighted the importance of finality in international commercial arbitration and, at the same time, the need to protect the most basic principles of a State’s system of justice.

 

Examples of Violations of Public Policy

The Database contains several judgements upholding a public policy objection.  These cases included violations of substantive public policy and procedural public policy.

Examples of the first category were: i) violation of national sovereignty (the award directed the respondent to return an area of its national waters for three years to the opposing party); ii) duress (one of the parties was led to understand that he would be kept in prison if he did not sign the arbitration clause), iii) fraud and corruption (there were two conflicting judgements: a) a French court judgment holding that the court had the power to investigate whether the award was tainted by corruption and finding that the court was not bound by the findings of the arbitral tribunal; b) and a English case holding that since the arbitral tribunal had jurisdiction to determine the issue of illegality, there was a very limited scope for an English court to re-examine the issue of illegality); and iv) penalty (disproportionately high penalty) or damages (extremely high interest rate).

Some examples of the second category were: i) breach of due process for lack of impartiality; ii) failure to adequately motivate the award; iii) de facto exclusion of one arbitrator from the tribunal’s deliberations.

 

Is the Determination by the Arbitral Tribunal binding on the Courts: the Maximalist and the Minimalist Approaches

It remains an open question whether courts should be bound by an arbitral tribunal’s determination of the issue of fundamental principles.  The maximalist approach gives more latitude to the courts, while the minimalist approach suggests that the courts are bound by the determination of the public policy issue reached by the arbitral tribunal.

The maximalist approach by retaining the court’s power to decide the issues concerning public policy, implies that the court will investigate the public policy grounds and will decide whether there has been a violation of fundamental principles even if the arbitral tribunal has ruled on the same issue.  This approach has been criticized because it may constitute an attempt to revisit the arbitral tribunal’s decision-making, thereby jeopardizing the fundamental principle of finality of arbitration.

The minimalist approach considers that the courts are bound by the determination made by the arbitral tribunal.  Critics of this approach have highlighted that by delegating the decision on the issue of public policy to an arbitral tribunal’s evaluation, the State’s control over principles that are the foundation of its justice system is diminished.

 

Conclusions

The court decisions in the Database show that the public policy objection is commonly raised; it is a sort of “catch-all” objection. The judgments in which this objection have been upheld are typically very detailed and concerned extreme patterns of behavior not often confronted in practice. However, there are some judgments where the courts channeled through public policy a revised determination of the merits of the underlying dispute; this is, of course, a development that carries dangers for international arbitration.

A court’s consideration of public policy objection should seek a balance: (i) the autonomy of arbitration; and (ii) the State’s right to preserve its legal system’s fundamental principles. Achieving this balance will enhance the legitimacy of arbitration as a means to resolve disputes in conformity with the State’s most important rules.

A court’s ‘second look’ at issues of fraud, corruption, sham agreements, and breach of due process is aimed to protect fundamental principles of justice. However, a court’s evaluation of the contents of the applicable law, or the arbitral tribunal’s evidentiary assessment, or the formal requirements of an award, undermines public confidence in arbitration as a final and binding dispute resolution method.

 

 

Note: This post refers to an article published in JOIA Special Issue, Volume 39 no 3, pp 411-432. The sources of the references in this post may be found in the footnotes in the JOIA article.

 

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Building the Case for Family Business Arbitration in the GCC Region

Kluwer Arbitration Blog - Fri, 2022-06-17 00:11

Family businesses – commercial entities in which multiple generations of a family wield influence over decision-making – are one of the oldest and most prevalent forms of association across the world, ranging from convenience stores to multinational corporations like Walmart, Samsung and Porsche. In 2020, Boston Consulting Group described family businesses as “contributing between 25% and 49% of GDP in countries as diverse as India and Germany and employing millions of people”. In the six Gulf Co-operation Council (GCC) countries, where family-owned businesses are heavily concentrated, they contribute about 60% of GDP, employ more than 80% of the workforce, and in the UAE and Saudi Arabia, make up around 90% of the private sector. The GCC thus has one of the highest concentrations of family businesses anywhere in the world. As a result, the resolution of family business disputes (FBD) is an important issue that merits a bespoke dispute resolution approach.

An FBD may arise between two or more family members over the ownership and/or management of the business. Because the disputants have personal relationships, an FBD is not strictly a commercial dispute between arm’s length participants. For instance, a founding parent may apply their discretion throughout their lifetime to divide profits between family members like siblings, children, in-laws and grandchildren. Upon death or retirement, a dispute may arise when the person or process that apportions profits does so in a different way. Alternatively, members of a family conglomerate may wish to “cash out” by selling their stake in the business, prompted by death, retirement, emigration, or a desire to redeploy that capital elsewhere. Disputes may arise over the identification of assets properly forming part of the overall business, the business valuation and the exit process.  An FBD is a commercial dispute not a dispute involving ‘pure’ family law (whether public or private), nor a conflict about personal property or statutory inheritance rights, all of which fall within the mandatory jurisdiction of the civil ‘personal status’ courts found across the GCC.

The flexibility, privacy and confidentiality of process, and relative ease of cross-border enforcement when compared to litigation make arbitration a particularly useful forum for FBD resolution. Yet given the prevalence of arbitration in the region, it is odd that no arbitration institution in the GCC has specific rules for FBD. This is all the more surprising when the speed of change to the regional arbitration offering is considered. The recent abolition of the DIFC-LCIA Arbitration Centre by Dubai Decree 34 of 2021, the move of all future DIFC-LCIA arbitrations to the supervision of the Dubai International Arbitration Centre (DIAC), and the publication of DIAC’s new 2022 rules, are examples of how quickly the provision for and operation of arbitration can change.

There is a further lack of public and government interest in FBD resolution. A report by the Family Business Council – Gulf (FBCG) in 2019 identified that “no specific reports on dispute resolution solutions for GCC family businesses” had previously been produced. This blog post sets out some of the issues that drafters of arbitration rules and laws should think about when considering future amendments, to cater better for family businesses and their disputes.

 

Stepped dispute resolution: mandatory mediation or conciliation before commencing arbitration

Arbitration can be costly and unnecessarily deplete the family assets. As an adversarial dispute resolution process, it can formalise and ratchet up the levels of animosity between family members in dispute. There may therefore be space for an alternative dispute resolution mechanism like negotiation or mediation to take place before the arbitration process is started, even if no express agreement has been reached between the parties. A 2021 report by the English Civil Justice Council found that compulsory ADR before litigation was both legal under English law (in that parties could be compelled to go through it) and desirable in certain circumstances (paragraph 7, page 4). Indeed, this approach is already used in certain family law proceedings in England. As the English Civil Justice Council notes, financial dispute resolution is a court-assisted negotiation process in family cases, where the parties appear before a judge in a without prejudice meeting/hearing, intended to facilitate settlement between parties and “reduce the tension that inevitably arises in family disputes”.

A ‘stepped’ dispute resolution process may oblige disputing parties to mediate or negotiate in good faith for a period of time before arbitration can commence. Family business mediation can be surprisingly effective, with settlement agreements resulting from mediations binding and potentially enforceable across borders thanks in part to the 2019 United Nations Convention on International Settlement Agreements Resulting from Mediation (the Singapore Mediation Convention), which has been signed by 55 states (as of June 2022). In March 2022, the UAE announced that it intended to be the 56th state to sign.

 

Greater powers to consolidate or join disputes in the same dispute resolution process

As noted above, there is an array of potential triggers for a family business dispute, such as over business succession or when a prominent family member dies, retires or otherwise wishes to exit the business. To be clear, the issues considered in this blog post are distinct from inheritance or personal property matters and the focus is exclusively on the FBDs that may arise when considering business succession. This said, these personal matters may introduce an added a layer of animosity or complexity to what are otherwise business matters.

Disputes can also arise over management and control rights, the valuation of a family member’s stake in the business, poor business performance, or a distribution of family wealth including assets and dividends that is perceived as unfair. Changing family dynamics can cause disputes, as personal animosities arise, minor disagreements turn into bigger ones and other family members are drawn in, with a detrimental effect on the enterprise’s management and operation. Because family disputes can arise in different ways, the administration of justice would tip towards consolidating family disputes into one proceeding. One way to do this is to bind all potential parties in a single document like a family constitution or a shareholder agreement with an arbitration clause. A dispute in respect of that agreement could act as an anchor for an arbitration, whereby the parties agree after the tribunal has formed to bring other matters before it. It may be possible – and desirable – to go further, however. Somewhat surprisingly, given the business and emotional value in a family business that may be lost in a dispute, surveys have consistently shown that many family businesses do not have sufficient documentation in place to manage conflict.

The FBCG report (above) sets out data that paint a poor picture: in 2019, less than one third of large family businesses in the GCC had effective policies and practices in place to govern the family business, and in 2015, only 57 percent of surveyed entities in the Middle East used shareholders’ agreements, and around a third used other forms of conflict resolution mechanism, entry-and-exit provisions and/or family councils.

As a result, arbitration institutions could consider wider powers to join or consolidate disputes, even if not on foot or outside the scope of the arbitration agreement, if the other disputes are closely connected to the anchor arbitration.

 

Compile, curate and publish a roster of appropriate arbitrators

An arbitrator in an FBD may have a greater jurisdiction than a court to consider matters in dispute so that a fair decision can be reached across the business and not just on one issue in isolation. Families may also wish to consider agreeing an arbitrator in advance or at least a mechanism for appointing a suitable candidate. Commercial arbitrators are often well-identified in industry guides and peer publications, but experienced private client arbitrators may not be so easy to find from public sources. Many family business arbitrators are appointed through informal connections, such as recommendations from friends.

Some arbitral institutions may be able to recommend an arbitrator on their roster who has particular knowledge and experience of family arbitrations, where family and personal relationships are mixed up with more conventional legal issues and may need to be addressed at the same time and with sensitivity. However, at present, as the FBCG report above notes, the main arbitral institutions do not publish lists of arbitrators with specific family business experience. In the UAE, Dubai Law No.9 of 2020 on Family Ownership has prompted the formation of a special judicial committee formed, in the words of one commentator, out of “professionals with the relevant legal, financial, and—most importantly—family business expertise. The ultimate objective is to provide family firms with the confidentiality, speed and expertise they need to settle their disputes if they arise”. This committee could provide a list of potential arbitrators, meaning that families and their advisors can more easily find an appropriate arbitrator, either before or after a dispute crystallises.

 

Costs capping

Two of the advances in the new 2022 DIAC Rules were the introduction of an obligation requiring parties to disclose the existence of third-party funding arrangements, and the express confirmation that legal fees and disbursements can be recovered inter partes (Articles 22.1 and 36.1 respectively).

With many FBDs less like commercial and more like family litigation in their dynamics, it is fair to suppose that more pressure should be put on parties not to incur unnecessary costs given their reflection in the overall depletion of the family’s assets and the potential risks posed to the family’s underlying businesses.

One approach would be to have mandatory costs budgeting where the tribunal approves limits on legal costs, which cap both expenditure and recovery. Another would be to fix recoverable hourly and disbursement rates.  But granting tribunals powers to limit costs would be a logical extension that all but the wealthiest of parties would surely welcome.

 

The future

The ideas in this blog post may hopefully be a spur to future amendments to institutional rules and arbitration laws to make further accommodation for FBDs, given their economic importance and use of arbitration. This would be particularly welcome in the GCC where family businesses dominate and will likely do so for foreseeable future.

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A Record-Breaking Year in M&A: The Consequences for Damages in Post-M&A Dispute Resolution in Arbitration

Kluwer Arbitration Blog - Thu, 2022-06-16 00:10

2021 was a record-breaking year for mergers and acquisitions (M&A). The total global deal value amounted to USD 5.9 trillion, an increase of 64% compared to 2020 and the highest ever recorded, driven by high valuations and fuelled by access to cheap financing. The market was strong across corporate and financial buyers. The year saw many auction processes, bidding wars, aborted deals and the increasing importance of special purpose acquisition companies (SPACs), which reportedly accounted for about 10% of global M&A volumes. While the M&A market declined in the first half of 2022, in part because of renewed disruptions caused by the COVID‑19 pandemic as well as the shocks to markets caused by the war in Ukraine, the recent surge in deal volumes, combined with exceptionally high valuations in 2021, have already led to a wave of post-deal disputes.

Most of these disputes are resolved in arbitration: according to one recent estimate, more than 75% of Sale and Purchase Agreements (SPAs) have arbitration clauses, a particularly high percentage among commercial disputes.1)Elsing/Pickrahn/Pörnbacher/Wagner, M&A-Streitigkeiten vor DIS-Schiedsgerichten (C.H. Beck, 2022) jQuery('#footnote_plugin_tooltip_41884_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Statistics published by arbitration institutions show, further, that shareholder, share purchase, or joint venture agreements represent a significant fraction of their overall caseload. For example, these types of agreements represented 14% of the cases administered by the LCIA in 2021.

This is against a background of steady, long-term growth in arbitration more generally. Using reported figures from international arbitration institutions, FTI Consulting recently estimated that international arbitration filings worldwide grew steadily at more than 3% a year from 2010 to 2019, and increased 9.9% in 2020. Thus a record year for M&A, already driving related disputes, met with an acceleration in the rise in popularity of arbitration, placing M&A disputes among the most relevant types of disputes in arbitrations in this period.

Following on from a post last year that discussed the types of M&A dispute that have emerged from the COVID‑19 pandemic, this post examines the impact of the recent exceptionally high valuations on damages quantification when M&A transactions end in disputes.

To be clear, a period of high valuations does not necessarily mean that markets, or individual acquisition targets, are overvalued. However, it does mean an increased scope for disappointment by parties in M&A transactions. Buyers are often left disappointed when the acquisition target falls short of the expected returns that were priced into the bid. Similarly, sellers can be disappointed in cases where a significant shortfall against expectations means lower earn-out payments. Disappointment breeds disputes.

 

Identifying the Correct Counterfactual in Post‑M&A Disputes

Post-M&A disputes arise from different types of (alleged) breaches of contractual or non-contractual obligations. Each of these breaches can result in the affected party seeking remedy through the arbitration process. The different types of breaches, in turn, can be associated with different counterfactuals, and therefore approaches to the measurement of damages. The differences start to matter more if price is different from value, as this can make the identification of the correct counterfactual more important.

The first example is a claim for warranty breach, where the price paid is often rebuttably presumed to be the same as the value as warranted.2)Adam Kramer, The Law of Contract Damages, 2nd ed. (Hart Publishing, 2017), 227. jQuery('#footnote_plugin_tooltip_41884_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); These claims often compare what was promised to what was delivered, or the deductions in the purchase price that would be needed to cure the broken warranty.

A second example is a claim in tort, such as a fraudulent misrepresentation. Damages for tort claims are sometimes calculated as the difference between the true value of an asset and the price paid.3)For example, Glossop Cartons and Print Limited v Contact (Print & Packaging) Limited [2021] EWCA Civ 639. jQuery('#footnote_plugin_tooltip_41884_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  This can be a different comparison of actual and counterfactual from that in contractual claims, and the mechanics of the damages quantification suggests that the difference matters more as price and value differ.

A third type of claim relates to the culpa in contrahendo doctrine, which is often associated with yet another measure of damages. Culpa in contrahendo plays a role in many M&A disputes in civil law jurisdictions. These claims often relate to alleged misrepresentations during the contract negotiations. Culpa in contrahendo claims can lead to damages awards for the ‘negative interest’, often calculated as the difference between the price actually paid and the price a purchaser would have paid in a hypothetical scenario in which all information had been disclosed truthfully.

Seller-friendly markets, in which multiple bidders compete for a limited number of quality targets, can mean tightly managed auction processes and more often ‘light’ approaches to the buy-side due diligence. Both factors can make it easier for sellers to be less than forthcoming with information, and it is easy to see how this could lead to an increase in claims for misrepresentation and in fact this is a feature of many of the current generation of M&A disputes.

 

When Does it Matter if Price and Value Differ?

If the price paid for a target is assumed to be equal to its value, then the comparison of actual and counterfactual positions results gives the same absolute difference in each of the three examples (although in culpa in contrahendo claims, the two scenarios are reversed, often leading to confusion about the counterfactual). Even if the difference is the same, however, this does not necessarily mean that damages are the same, for a number of reasons: warranty claims are often subject to contractual limitations that may not apply to fraud or culpa in contrahendo claims4)For example, OLG Munich, 03.12.2020 – 23 U 5742/19. jQuery('#footnote_plugin_tooltip_41884_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });; differences in valuation dates may lead to substantially different damages amounts; and a culpa in contrahendo claim may include elements of lost profits that are sometimes contractually excluded from warranty breach claims.5)Wächter, M&A Litigation, 3rd ed. (RWS Verlag Kommunikationsforum GmbH, 2017), 551. jQuery('#footnote_plugin_tooltip_41884_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Why Might Price and Value Differ?

Price and value need not always be the same, and there can be situations in which a buyer pays more, or less, than an asset’s value. In that case, the identification of the correct counterfactual starts to matter.

Why do value and price differ in some instances, and perhaps more so in periods of high valuations? In other words, why is someone willing to pay more or accept less than an asset is worth? This is a complex question for which we can look to agency theory and behavioural economics for explanations.

Agency theory in economics suggests that the separation of ownership (the shareholders) and control (management) of a firm can result in a strategic misalignment, or conflict, of interests. For example, it has been observed that managers have incentives to cause their firms to grow beyond the optimal size.6)Michael C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review 76 (2), 71–92.  jQuery('#footnote_plugin_tooltip_41884_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This can lead them to pursue M&A transactions that do not deliver the value that the acquirer paid for. Thus a firm can overpay, even when management (the agent) acts rationally, but self-interestedly, leading to management ultimately acting against the interests of the shareholders.

Behavioural economics, on the other hand, suggests the same outcome (overpaying) can occur as a result of nonrational, or boundedly rational, behaviour when a party agrees a price that is not justifiable by reasonable assumptions. Behavioural economists have examined the conditions in which such outcomes occur. These include behavioural biases such as overconfidence, or the competitive motive to ‘win’ rather than to seek one’s own gain.7)Max H. Bazerman and Don A. Moore, Judgment in Managerial Decision Making, 8th ed. (Wiley, 2013), 123 – 131. Even in instances where it can be shown, however, that prices cannot be justified by reasonable assumptions — for example, when observing two prices that are each based on a set of assumptions where movements in the prices and assumptions produce a contradiction — it can be difficult to identify which of the two prices is irrational. jQuery('#footnote_plugin_tooltip_41884_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); For example, consider  a scenario in which a bidder who – in the event it loses in an auction process – would fail to acquire a technology essential to maintaining its competitive position; the bidder faces a trade-off between accepting the loss in competitive position or winning the auction and overpaying, and from there the bidding process may spiral into an outcome that is not justifiable with rational assumptions.8)See Bazerman and Moore, 130–31. jQuery('#footnote_plugin_tooltip_41884_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_41884_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); A seller-friendly market appears more likely to breed such conditions than a buyer-friendly market.

 

Conclusion

There was a ‘white hot’ M&A market in 2021, with strong sellers running tightly managed auction processes and with novel structures. Such a market can create an environment in which buyers come under significant pressures, commitments can escalate more easily, and there can be cases where price exceed value.

If things go wrong after an M&A deal, claims are likely to be made through the arbitration process: a high proportion of post-M&A disputes are resolved through arbitration, and arbitration worldwide is growing steadily.

Depending on the alleged breach being remedied, this can have important consequences for the identification of the correct counterfactual in subsequent disputes and the valuation of damages in post-M&A arbitrations.

 

The views expressed herein are those of the authors and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals

 

 

References[+]

References ↑1 Elsing/Pickrahn/Pörnbacher/Wagner, M&A-Streitigkeiten vor DIS-Schiedsgerichten (C.H. Beck, 2022) ↑2 Adam Kramer, The Law of Contract Damages, 2nd ed. (Hart Publishing, 2017), 227. ↑3 For example, Glossop Cartons and Print Limited v Contact (Print & Packaging) Limited [2021] EWCA Civ 639. ↑4 For example, OLG Munich, 03.12.2020 – 23 U 5742/19. ↑5 Wächter, M&A Litigation, 3rd ed. (RWS Verlag Kommunikationsforum GmbH, 2017), 551. ↑6 Michael C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review 76 (2), 71–92.  ↑7 Max H. Bazerman and Don A. Moore, Judgment in Managerial Decision Making, 8th ed. (Wiley, 2013), 123 – 131. Even in instances where it can be shown, however, that prices cannot be justified by reasonable assumptions — for example, when observing two prices that are each based on a set of assumptions where movements in the prices and assumptions produce a contradiction — it can be difficult to identify which of the two prices is irrational. ↑8 See Bazerman and Moore, 130–31. function footnote_expand_reference_container_41884_30() { jQuery('#footnote_references_container_41884_30').show(); jQuery('#footnote_reference_container_collapse_button_41884_30').text('−'); } function footnote_collapse_reference_container_41884_30() { jQuery('#footnote_references_container_41884_30').hide(); jQuery('#footnote_reference_container_collapse_button_41884_30').text('+'); } function footnote_expand_collapse_reference_container_41884_30() { if (jQuery('#footnote_references_container_41884_30').is(':hidden')) { footnote_expand_reference_container_41884_30(); } else { footnote_collapse_reference_container_41884_30(); } } function footnote_moveToReference_41884_30(p_str_TargetID) { footnote_expand_reference_container_41884_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_41884_30(p_str_TargetID) { footnote_expand_reference_container_41884_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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Interviews with Our Editors: Nicole Smith, Vice-President of AMINZ

Kluwer Arbitration Blog - Wed, 2022-06-15 01:53

Nicole Smith is the Vice-President of the Arbitrators’ and Mediators’ Institute of New Zealand (AMINZ), the leading membership organisation for dispute resolution specialists in New Zealand. In addition to her work with AMINZ, Nicole is also a barrister at Mauao Legal Chambers specialising in commercial litigation and arbitration. Dual qualified in New Zealand and England & Wales, Nicole has previously worked in the litigation group of a top-tier New Zealand firm, and in the international arbitration group of Clifford Chance in London.

Welcome Nicole, thank you for joining us today!

 

  1. To start, could you briefly introduce yourself, AMINZ and your role at AMINZ?

I am a specialist in all aspects of domestic and international arbitration, with a particular interest in construction, property, natural resources, and energy disputes. I sit as an arbitrator in New Zealand and internationally. I am based in Tauranga (by the beach on New Zealand’s east coast) and I also provide English law advice as a partner in Keystone Law (a new model law firm with the firm’s management based in London and partners working remotely from around the world).

AMINZ provides training and credentialling for its members, advocates for improvements to legislation and regulation around dispute resolution, and acts as the default appointing authority under the New Zealand Arbitration Act. AMINZ is also the only independent organisation that has reciprocal rights of membership (for Fellows and Associates) with the Chartered Institute of Arbitrators.

I am the Vice-President on our 7-member Council. All members of Council are volunteers and assist in setting the strategic direction of AMINZ and helping the AMINZ management to achieve its many and varied tasks.

 

  1. You have been involved with the AMINZ Council since 2017; how has the arbitration landscape changed in New Zealand in that time? Has AMINZ seen any trends develop in its users, or the disputes that have been referred to it, in reflection of that changing landscape?

One of the key changes in the arbitration landscape in New Zealand (and elsewhere) is that arbitration is extending beyond its traditional fields of construction and property disputes. AMINZ members are now dealing with arbitrations that cover a broad range of subjects, including shareholder disputes, facilities management, trusts and family property.

Arbitration is also being used to resolve inter and intra-iwi Māori disputes (Māori are the first peoples of New Zealand), many of which arise out of settlements with the government over Treaty of Waitangi claims (being the Treaty signed between the British Crown and Māori chiefs in 1840, at a time of expanding European settlement in New Zealand).

One of the other key changes is the appointment of AMINZ (by the Minister of Justice) as the default appointing authority for arbitrators under the Arbitration Act. This has removed the need for costly and time-consuming applications to the courts where the parties have an agreement that provides for arbitration, but the agreement does not make it clear how the arbitrator is to be appointed.

The other change is that parties and arbitrators are now very comfortable with online and hybrid case management conferences and hearings. This is saving on time and travel and makes it easier to line up schedules. We are also now very familiar with saying (or hearing) “I think you are on mute”.

 

  1. Part of your role on the AMINZ Council concerns reviewing the AMINZ arbitration rules. Could you comment on the specific benefits of conducting an arbitration under the AMINZ rules, and having a New Zealand seat generally?

The Arbitration Act is a modern statute, incorporating the UNCITRAL Model Law, and New Zealand could be described as a “Model Law plus” jurisdiction. It was one of the first countries to incorporate the 2006 amendments to the Model Law (dealing with interim measures and preliminary orders) into its national legislation. Further, the Arbitration Act also has a comprehensive set of provisions dealing with the privacy and confidentiality of arbitral proceedings and documents produced in arbitral proceedings.

As the Arbitration Act incorporates the Model Law, it is possible (in most circumstances) to conduct efficient and effective arbitral proceedings in New Zealand, relying solely on the provisions of the Act.

Where parties wish to have more certainty as to the likely structure of their arbitral proceedings, they may wish to adopt the AMINZ Arbitral Rules. A new set of arbitration rules was issued by AMINZ on 1 January 2022. The Rules adopt an “institution light” approach.

If the parties need assistance with appointing the tribunal or to deal with challenges to the tribunal, they can look to AMINZ. The Rules also provide for a number of matters that are not dealt with in the Act, including the appointment of emergency arbitrators, expedited proceedings, summary dismissal of unmeritorious claims and consolidation (in international proceedings). They also include a protocol to be applied where a tribunal secretary is appointed.

The Rules are ideal for disputes where the tribunal and parties are comfortable with the administration of their own proceedings, including processes for the payment of the tribunal and the exchange of documents. However, where parties consider that they need additional administrative support, the New Zealand International Arbitration Centre is willing to administer arbitrations conducted under the Rules.

 

  1. What, in your opinion, are two areas of challenge, and two areas of opportunity for international arbitration in New Zealand in the post-COVID era?

Starting first with the areas of opportunity: I consider that, particularly for lower value international disputes, institutions, arbitrators and parties are now more comfortable with conducting such proceedings online. That means that New Zealand can overcome the “tyranny of distance”, and being a 24-hour flight from European centers is not an issue.

I also consider that New Zealand has maintained its reputation as a stable environment, politically and socially, with an independent and well-functioning judiciary. When parties are entering into contractual relationships, they seek certainty over uncertainty wherever possible. Therefore, they are likely to avoid choosing a seat of arbitration that has been (or is) going through a period of political or social upheaval. I consider that New Zealand’s ongoing stability makes it an attractive seat for its Asia-Pacific neighbours.

An area of challenge (for parties and arbitrators based in New Zealand) is that we tend to get the “short end of the stick” when timetabling online meetings and proceedings. It is fortunate that we have great cafes to help us get through the day after a 3am procedural hearing.

Another challenge is that for several years New Zealand’s “bright young things” deferred their overseas adventures and we have had the luxury of retaining all that education and enthusiasm in New Zealand firms and institutions. With borders opening, it is only natural that they will go to seek opportunities offshore. Our role and responsibility is to wish them well and to use our networks to ensure that the New Zealand diaspora continues to punch above its weight at the highest levels in international arbitration.

 

  1. We understand that AMINZ has recently undertaken its inaugural survey of arbitration in New Zealand, can you give us a preview of two or three of the key insights to be taken from that survey?

The survey was undertaken by AMINZ (led by Royden Hindle and Dr Anna Kirk) in association with the New Zealand Dispute Resolution Centre. The data that has been gathered is still being analysed. However, some preliminary results shared at the AMINZ Arbitration Day on 16 February 2022 indicate that over 110 New Zealand based arbitrators were appointed to sit in arbitrations in the years 2019 and 2020, with approximately 15% being international arbitrations. As there is no central registry for arbitration appointments, it is possible that this understates the number of appointments that were made.

While the majority of appointments relate to the more traditional areas of building and construction, and lease disputes, there were a large number of general company and commercial disputes dealt with by arbitration, and a range of natural resources and issues involving Māori assets.

The results also indicate that there is still a long way to go on achieving gender equity in arbitral appointments, with only 20% of the appointees being women.

 

  1. AMINZ has also recently launched scholarship programmes focusing on mediation and arbitration, aimed at encouraging diversity and leadership in the New Zealand dispute resolution sector. What are the key benefits you see as arising from the scholarships, and what words of wisdom can you offer to aspiring arbitration practitioners?

The establishment of the AMINZ scholarships has brought about more awareness of the dispute resolution sector in general, especially in the younger generation of practitioners. It has allowed those starting out in their careers to consider furthering their knowledge and experience in ADR.

The Scholarship programme has also provided opportunity for senior practitioners to meet with our scholars at various education and event opportunities, to mentor them, and to allow them to observe mediations and arbitrations.

In New Zealand, I recommend joining AMINZ (of course), and utilising the resources it offers, such as attending local dispute resolution breakfast sessions, webinars and the annual AMINZ conference. Write and publish articles on your areas of interest (AMINZ is always happy to publish articles in its newsletters) and join the Young Arbitration Practitioner Group.  I would also recommend getting involved in mooting opportunities either as coach or participant (depending on whether you are still at university). The international moots are a great way to meet practitioners from all over the world.

 

  1. Part of AMINZ’s unique offering is its comprehensive education and training programmes, how important is education and personal development for the Institute, and what other initiatives does AMINZ undertake to promote the use of arbitration?

A rolling calendar of education topics play a key role in the Institute’s ongoing commitment to diversity and inclusion. We strive to have ample and accessible opportunity for learning and personal development so that anyone who is looking to build upon their knowledge and enhance their skillsets and experience has the opportunity to do so. This is reflected in the range of topics and levels of learning offered throughout the year – be it complimentary webinars with experts, through to the Arbitration Skills Intensive workshops. or the rigorous Fellowship programme.

The move to combining both in-person and virtual programmes has meant greater accessibility overall. It’s meant those who otherwise would have missed a learning opportunity have been able to participate and engage with fellow practitioners through online education. An example being Arbitration Day, which was held as a hybrid event with practitioners logging in nation-wide to hear and learn from leading practitioners both from New Zealand and internationally.

In terms of knowledge-sharing, members are encouraged to share their publications, research, or insights through presentations at networking meetings and seminars, AMINZ’s digital channels, and groups such as the Young Arbitration Practitioner Group. This helps provide a collegial environment, and the opportunity to continuously learn and engage on the latest arbitration topics and up-to-date thinking.

The Institute is also developing a Mentoring Programme designed to provide support and encouragement to young practitioners, from those who have been in the same position – albeit a few decades prior! The Programme’s development is already receiving positive feedback, and will be come into its own in the latter half of 2022, and 2023.

AMINZ is also involved in developing policy and commenting on new legislation that includes provision for dispute resolution. Our goal is to continue encouraging organisations, institutions, and central government to adopt and promote arbitration in contracts, regulation, and legislation.

 

Thank you for your time, Nicole. We wish you and the AMINZ team all the very best!

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

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Gay Couples Can Teach Straight People a Thing or Two About Arguing

ADR Prof Blog - Tue, 2022-06-14 08:19
That’s the title of an article in the New York Times. It reports that “[s]ame-sex couples, on average, resolve conflict more constructively than different-sex couples, and with less animosity, studies have shown.” It cites researchers suggesting ideas that our field generally recommends including: Using humor to defuse anger Staying calm Being mindful of the other’s … Continue reading Gay Couples Can Teach Straight People a Thing or Two About Arguing →

“I Can See Clearly Now the Rain Is Gone…” U.S. Supreme Court Definitively Holds that Section 1782 Does Not Permit Discovery Assistance from U.S. Courts for Private Foreign or International Arbitrations

Kluwer Arbitration Blog - Tue, 2022-06-14 01:28

On June 13, 2022, the U.S. Supreme Court issued its unanimous opinion resolving a U.S. Circuit Court split over a hotly debated issue, namely whether 28 U.S.C. § 1782 applies to private foreign or international arbitrations. In ZF Automotive US, Inc. v. Luxshare, Ltd., 596 U.S. ___ (2022), the Supreme Court was required to decide whether private adjudicatory bodies constitute “foreign or international tribunals” under Section 1782 and concluded they do not. A prior post discussed the oral argument and concluded that there were few clues as to how the Court may rule. Yesterday, the Court held that Section 1782 only reaches “governmental or intergovernmental adjudicative bodies” and that neither of the arbitral tribunals at issue in the consolidated cases before the Court “fits that bill.” Justice Barrett delivered the unanimous opinion for the Court.

28 U.S.C. § 1782 is the U.S. federal statutory provision that permits district courts to order testimony or the production of evidence “for use in a proceeding in a foreign or international tribunal.” Both cases before the Court involved a party seeking discovery in the United States for use in arbitration proceedings abroad. However, the nature of the foreign arbitration proceedings in the two cases differed, which set the stage for the Court to speak more definitively on its interpretation of “foreign or international tribunals” in the opinion.

 

The two underlying arbitrations at issue

One case concerned a private commercial DIS arbitration seated in Munich between a U.S. based automotive parts manufacturer (and subsidiary of a German corporation) and a Hong Kong based company regarding a sale of goods transaction. In anticipation of commencing the arbitration, a discovery application under Section 1782 was filed in the Eastern District of Michigan. The resisting party argued that a DIS arbitration was not a “foreign or international tribunal” under Section 1782. However, Sixth Circuit precedent foreclosed that argument (the Sixth Circuit’s decision is available here). The U.S. Supreme Court granted a stay and certiorari to resolve a split among the Circuit Courts over whether private arbitral tribunals fell within the phrase “foreign or international tribunal” in Section 1782.

The second case concerned an ad hoc UNCITRAL arbitration initiated under a bilateral investment treaty (BIT) between Lithuania and Russia. A discovery application was filed under Section 1782 in the U.S. District Court of the Southern District of New York seeking information from third parties. The application was resisted on the ground that an ad hoc arbitration tribunal was not a “foreign or international tribunal” under Section 1782 but rather a private adjudicative body. The district court rejected that argument and the Second Circuit affirmed. The Second Circuit previously had held that a private arbitral tribunal does not constitute a “foreign or international tribunal” under Section 1782. However, it found that the ad hoc UNCITRAL arbitration under the BIT between Lithuania and Russia did not possess “the functional attributes most commonly associated with private arbitration.” 5 F.4th 216, 225 (2021). Accordingly, the Second Circuit concluded that the ad hoc UNCITRAL arbitral tribunal initiated under the BIT constituted a “foreign or international tribunal” under Section 1782 rather than private arbitration proceeding. 5 F.4th 216, 228 (2021).

 

The Court’s Analysis

The Court approached its analysis in two steps. First, it considered whether the phrase “foreign or international tribunal” in Section 1782 included private adjudicatory bodies, on the one hand, or rather only governmental or intergovernmental bodies, on the other hand. If the Court were to determine that Section 1782 only applies to the latter, it then would need to determine whether either of the arbitral tribunals at issue constituted governmental or intergovernmental bodies.

The Court began its analysis focusing on the definition of “tribunal” in the context of the statutory phrase in which it appears, concluding that in light of the modifiers of “foreign or international,” the term “tribunal” in Section 1782 “is best understood as an adjudicative body that exercises governmental authority,” citing a prior Supreme Court case for the proposition that words together may assume a more particular meaning than those words in isolation.

The Court went on to explain that in isolation, the word “foreign” could mean something belonging to another nation or country, which would support interpreting “foreign tribunal” as a governmental body. On the other hand, the word “foreign” could “more generally mean ‘from’ another country, which would sweep in private adjudicative bodies too.” The Court concluded that the first meaning “is the better fit.” The Court opined that the word “foreign” takes on a more governmental meaning when modified with potential governmental or sovereign connotations. The term “tribunal” is “a word with potential governmental or sovereign connotations, so ‘foreign tribunal’ more naturally refers to a tribunal belonging to a foreign nation than to a tribunal that is simply located in a foreign nation.” The Court continued, “for a tribunal to belong to a foreign nation, the tribunal must possess sovereign authority conferred by that nation.” The Court noted that its reading of “foreign tribunal” was “reinforced by the statutory defaults for discovery procedure.” The statute “presumes that a ‘foreign tribunal’ follows ‘the practice and procedure of the foreign country.” The Court further explained, “[t]hat the default discovery procedures for a ‘foreign tribunal’ are governmental suggests that the body is governmental too.”

Turning next to the term “international tribunal,” the Court noted that “international” can mean either involving or of two or more “nations”, on the one hand, or “nationalities” on the other hand. The Court concluded that nations as opposed to nationalities was the more applicable definition of “international” in Section 1782, reasoning that “it would be strange for the availability of discovery to turn on the national origin of the adjudicators.” The Court concluded that for purposes of Section 1782, a tribunal is “international” when it involved or is of two or more nations and “those nations have imbued the tribunal with official power to adjudicate disputes.” The Court explained: “So understood, ‘foreign tribunal’ and ‘international tribunal’ complement one another: the former is a tribunal imbued with governmental authority by one nation, and the latter is a tribunal imbued with governmental authority by multiple nations.”

The Court noted that “Section 1782’s focus on governmental and intergovernmental tribunals is confirmed by both the statute’s history and a comparison to the federal Arbitration Act (FAA), 9 U.S.C. § 7 et seq.” The Court explained that “in light of the statutory history,” the amendment of Section 1782 in 1964 “did not signal an expansion from public to private bodies, but rather an expansion of the types of public bodies covered.” In the Court’s view, Congress had broadened “the range of governmental and intergovernmental bodies included” in Section 1782, thereby increasing the assistance and cooperation rendered by the United States to those foreign nations, noting that the purpose of Section 1782 is comity – promoting respect for foreign governments and encouraging reciprocal assistance. The Court noted that it was difficult to see how enlisting district courts to help private bodies, adjudicating purely private disputes abroad, would serve that end.

The Court observed that extending Section 1782 “to include private bodies would also be in significant tension with the FAA, which governs domestic arbitration, because §1782 permits much broader discovery than the FAA allows.” Interpreting Section 1782 to reach private arbitration “would therefore create a notable mismatch between foreign and domestic arbitration” and that it is hard to identify a rationale for providing broader court-assisted discovery to parties in foreign seated private arbitrations than in domestic arbitrations.

In concluding its statutory analysis, the Court stated: “we hold that § 1782 requires a ‘foreign or international tribunal’ to be governmental or intergovernmental. Thus, a ‘foreign tribunal’ is one that exercises governmental authority conferred by a single nation, and an ‘international tribunal’ is one that exercises governmental authority conferred by two or more nations. Private adjudicatory bodies do not fall within § 1782.”

Applying this statutory analysis, the Court concluded that neither the DIS arbitration nor the ad hoc UNCITRAL arbitration at issue in the cases before it fell within Section 1782.

The DIS arbitration was plainly a private arbitration under the auspices of a private arbitral institution pursuant to private arbitration rules. “No government is involved in creating the DIS panel or prescribing its procedures. The adjudicative body therefore does not qualify as a governmental body.” The fact that the arbitration was subject to the arbitration law and courts of the country in which it was seated did not alter the analysis: “private entities do not become governmental because laws govern them and courts enforce their contracts – that would erase any distinction between private and governmental adjudicative bodies.”

The ad hoc arbitration panel constituted pursuant to the BIT between Lithuania and Russia “presents a harder question” but results in the same answer. The Court reasoned that “neither Lithuania’s presence nor the treaty’s existence is dispositive, because Russian and Lithuania are free to structure investor-state dispute resolution as they see fit. What matters is the substance of their agreement,” namely whether the two nations intended to confer governmental authority on an ad hoc arbitral panel formed pursuant to the treaty, noting that as a general matter, a treaty is a contract between two nations.

While the BIT at issue permits an investor to choose one of four forums to resolve disputes, including a national court, the inclusion of national courts on the list of possible elective forums reflects the intent of the treaty parties to give investors the choice of where to bring their disputes.

The Court observed that the “ad hoc panel … ‘is materially indistinguishable in form and function’ from the DIS panel resolving the dispute” in the other case, quoting the Brief for George A. Bermann et al. as Amici Curiae at 19. The Court went on to explain that “[i]n a private arbitration, the panel derives its authority from the parties’ consent to arbitrate. The ad hoc panel in this case derives its authority in essentially the same way.” The Court reasoned “a body does not possess governmental authority just because nations agree in a treaty to submit to arbitration before it. The relevant question is whether the nations intended that the ad hoc panel exercise governmental authority. And here, all indications are that they did not.”

The Court concluded that only a governmental or intergovernmental adjudicative body constitutes a “foreign or international tribunal” under Section 1782 and that such bodies are “those that exercise governmental authority conferred by one nation or multiple nations.” Applying that statutory interpretation, the Court concluded that neither the DIS private commercial arbitration not the ad hoc arbitration pursuant to the BIT qualified.

The Supreme Court’s decision resolves a long-standing Circuit Court split on whether private foreign or international arbitrations fall within Section 1782. In the past decade, a myriad of appellate court cases on Section 1782 have been issued with differing results and, in some cases, internally inconsistent or incomprehensible reasoning. By contrast, the Supreme Court’s decision in ZF Automotive US, Inc. v. Luxshare, Ltd. is straight-forward and clear. It outlines a coherent rationale for its statutory interpretation grounded in first principles. It then applies its statutory interpretation to the two separate arbitrations at issue in a cogent way that further illustrates the meaning of its interpretation of the phrase “foreign or international tribunal” in Section 1782.

At last, the Supreme Court finally has empowered courts to see clearly how to interpret and apply the phrase “foreign or international tribunal” in Section 1782. This decision will be welcomed by many in the international arbitration field. Whether or not you agree with the Supreme Court’s statutory interpretation or wish the Court to have reached a different result, clarity was sorely needed after more than a decade of confusion.

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How Should the United States Supreme Court Have Decided in the Controversy over 28 U.S.C. § 1782(a)?

Kluwer Arbitration Blog - Tue, 2022-06-14 00:47

The Kluwer Arbitration Blog previously published an excellent summary by Jonathan Tompkins of the oral arguments held before the United States Supreme Court on March 23, 2022 on the future scope and application of 28 U.S.C. §1782, a federal statute that allows foreign or international tribunals and their litigants to ask the relevant district court to order witnesses who reside or can be found in its territory to give testimony or produce documents located there). It involves the consolidated cases of ZF Automotive US, Inc. v. LuxShare Ltd. and AlixPartners, LLP v. The Fund for Protection of Investor Rights in Foreign States.

Yesterday, the US Supreme Court issued a unanimous opinion (available here, authored by Justice Barrett) in the above-mentioned cases, holding that neither the DIS tribunal in ZF Automotive, nor the ad hoc BIT tribunal under the UNCITRAL arbitration rules in AlixPartners falls within the scope of §1782. To quote from Justice Barrett’s opinion:

“The current statute, 28 U.S.C. §1782, permits district courts to order testimony or the production of evidence ‘for use in a proceeding in a foreign or international tribunal.’ These consolidated cases require us to decide whether private adjudicatory bodies count as ‘foreign or international tribunals.’ They do not. The statute reaches only governmental or intergovernmental adjudicative bodies, and neither of the arbitral panels involved in these cases fits that bill.” Slip Op. at 1.

  1. The Opinion of the Supreme Court

The issue before the Supreme Court is whether the term “foreign or international tribunals” includes arbitral tribunals. As Tompkins correctly concluded in his prior post, the oral arguments gave no reliable indication as to how the Supreme Court would decide. But now we know.

The Court based its decision mostly on an analysis of the words, first taken separately, then the combination of “foreign tribunal” and “international tribunal”. The Court observed that the word “tribunal” expanded the 1958 wording “any court in a foreign country” to the 1964 version of a “foreign or international tribunal”. “[T]hat shift created ‘the possibility of U.S. judicial assistance in connection with administrative and quasi-judicial proceedings abroad.’” citing Intel, 542 U.S., at 258. The Court goes on to say:

“So a §1782 ‘tribunal’ need not be a formal ‘court,’ and the broad meaning of ‘tribunal’ does not itself exclude private adjudicatory bodies. If we had nothing but this single word to go on, there would be a good case for including private arbitral panels.” Slip Op. at 6.

The Court then looks at the “context,” because “tribunal” does not stand alone as it is part of the phrase “foreign or international tribunal”. Attached to these “modifiers”, the word is “best understood as an adjudicative body that exercises governmental authority.” Slip Op. at 7. Taking each of “foreign tribunal” and “international tribunal” in turn, the Court ventures that in either case Congress could have used it both in a governmental context or more generally. It concludes, without any further, deeper inquiry, that “‘foreign tribunal’ more naturally refers to a tribunal belonging to a foreign nation than to a tribunal that is simply located in a foreign nation.” Ibid. The Court finds that this reading of “foreign tribunal” is reinforced by the statutory defaults for discovery procedure, as §1782 permits the district court to “prescribe the practice and procedure, which may be in whole or in part the practice and procedure of the foreign country or the international tribunal, for taking the testimony or statement or producing the document or other thing.” (emphasis by the Court).

Where this author would find the reference to the practice and procedure of the international tribunal to include a reference to the evidentiary rules adopted by an international arbitral tribunal, the Court finds that “that would be an odd assumption to make about a private adjudicatory body, which is typically the creature of an agreement between private parties who prescribe their own rules.” Slip Op. at 8.

Similarly, in its analysis, the Court observes that the interpretation of “international tribunal” could go either way, “either (1) involving or of two or more “nations,” or (2) involving or of two or more “nationalities.” It finds that the “latter definition is unlikely in this context because “an adjudicative body would be ‘international’ if it had adjudicators of different nationalities––and it would be strange for the availability of discovery to turn on the national origin of the adjudicators.” Ibid.

Huh? Does the Court not know what the world of arbitration ordinarily calls an international arbitral tribunal? As in “a tribunal involved in arbitrating an international dispute”?1)In a simple google search, I found this definition: “The international arbitration tribunal is the independent and non-governmental panel of independent and impartial experts most often composed of three members nominated by the Parties (or appointed by the international arbitration institution, or more rarely by a national court) on the basis of their legal and practical expertise and knowledge, to render a final and binding award.” available here jQuery('#footnote_plugin_tooltip_41936_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

“So understood,” the Court concludes, “‘foreign tribunal’ and ‘international tribunal’ complement one another; the former is a tribunal imbued with governmental authority by one nation, and the latter is a tribunal imbued with governmental authority by multiple nations.” It finds that this interpretation is confirmed by both the statute’s history and a comparison to §7 of the Federal Arbitration Act.

As to the history, the Court emphasizes that pursuant to the Act of Sept. 2, 1958, the Commission on International Rules of Judicial Procedure was charged “with improving the process of judicial assistance, specifying that the ‘assistance and cooperation’ was ‘between the United States and foreign countries’ and that the rendering of assistance to foreign courts and quasi-judicial agencies’ should be improved.” Slip Op. at 10 (emphasis by the Court).

This author wonders since when arbitral tribunals are no longer held to be “quasi-judicial agencies.” The Court demonstrates how little it understands about the breadth and depth of international commercial arbitration, when it wonders “[w]hy would Congress lend the resources of district courts to aid purely private bodies adjudicating purely private disputes abroad?” Slip Op. at 10. Obviously, it is unfamiliar with the fact that (1) most international disputes are purely private, and (2)  the vast majority of international disputes do not end up before courts or governmental quasi-judicial agencies, but before international arbitration tribunals. It shows no understanding of the implications of the New York Convention, which now includes 170 states.

Lastly, the Court also repeats the often heard complaint that §1782 would give more extensive rights to discovery than §7 FAA does domestically. The answer to that point is simple: the Commission was not charged with amending the Federal Arbitration Act. It was charged exclusively with broadening the availability of discovery internationally, even if the suggestion was made at the time for Congress to amend §7 FAA.

So why is it that the Supreme Court decided as it did? Were the arguments made on behalf of the petitioners not strong enough? Was it simply following the wishes of the Justice Department?

It is true that the arguments were deficient in showing the Supreme Court that the Second Circuit decision discussed here was built on quicksand. Neither written nor oral arguments argued why the issue was wrongly decided when the Second Circuit Court of Appeals (as the first court of appeals) was asked to rule on the question.

The circuits were split as to whether such assistance may be given to private foreign or international tribunals or only to tribunals that are “state-sponsored.” Holding that § 1782 permits discovery assistance to private arbitrations were the 4th, 6th and likely the 11th circuit: Servotronics, Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020); Abdul Latif Jameel Transp. Co. v. Fedex Corp., 939 F.3d 710 (6th Cir. 2019); and Consorcio Ecuatoriano de Telecomunicaciones S.A. v. JAS Forwarding (USA), Inc., 685 F.3d 987, 993–98 (11th Cir. 2012), later withdrawn in Consorcio Ecuatoriano de Telecomunicaciones S.A. v. JAS Forwarding (USA) Inc., 747 F.3d 1262, 1270 n.4 (11th Cir. 2014) (“leav[ing] the resolution of the matter for another day”).

Holding that § 1782 does not permit discovery assistance to private arbitrations were the 7th, 5th and 2nd circuit: Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. 2020); Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880 (5th Cir. 1999), confirmed in El Paso Corp. v. La Comision Ejecutiva Hidroelectrica Del Rio Lempa, 341 F. App’x 31, 33-34 (5th Cir. 2009); and Nat’l Broadcasting Co. v. Bear Stearns, 165 F.3d 184 (2d Cir. 1999) (hereinafter “NBC”), confirmed in In re: Application and Petition of Hanwei Guo, 965 F.3d 96 (2d Cir. 2020).

The remainder of this post provides a summary of my personal conclusions following a more detailed analysis of the issue, more specifically of where the Second Circuit Court of Appeals went wrong in its 1999 case involving a §  1782 application, Nat’l Broadcasting Co. v. Bear Stearns Co., 165 F.3d 184 (2d Cir. 1999) (“NBC”).

NBC involved a dispute between a Mexican television company, TV Azteca S.A. de C.V (“Azteca”) and National Broadcasting Company and NBC Germany (“NBC”), in which NBC filed an ex parte § 1782 application to obtain testimony from six investment banking firms, including Bear Stearns Co., in anticipation of an ICC arbitration to be brought by Azteca in Mexico. When five of the six forms objected by filing a motion to quash, the district court (by Judge Robert W. Sweet) granted the motion and quashed the subpoenas originally authorized by Judge Deborah A. Batts. NBC appealed to the Second Circuit, which affirmed Judge Sweet’s ruling holding that the term “foreign or international tribunals” in 28 U.S.C. § 1782 does not “apply to proceedings before private arbitral panels”.

When Judge Sweet’s decision in NBC had come to the attention of Professor Hans Smit, the principal draftsman of § 1782 as amended by Public Law 88-619, 78 Stat. 995 (1964), he wrote an article in which he went into greater detail about how and why § 1782 applies to foreign and international tribunals. Hans Smit, American Assistance to Litigation in Foreign and International Tribunals: Section 1782 of the U.S.C. Revisited, 25 Syracuse J. Int’l L. & Comm. 1 (1998).

Shortly after the adoption of the 1964 Act, he wrote a lengthy commentary about the entire overhaul of 28 U.S.C.: International Litigation under the United States Code, 65 Colum. L. Rev. 1015 (1965). The 1965 article was cited approvingly by Justice Ginsburg in Intel Corp. v. Advanced Micro Devices, 542 U. S. 241 (2004), the only other time that the Supreme Court had the opportunity to interpret § 1782 (but involving a different though related issue).

Rather than relying on Professor Smit’s 1965 and 1998 articles, the NBC court ignored the 1965 article and did away with the 1998 article in a footnote. Instead, the court seemingly found support in  Professor Smit’s 1962 article, Assistance Rendered by the United States in Proceedings Before International Tribunals, 62 Colum. L. Rev. 1264 (1962).

The court’s footnote read in pertinent part:

“It is perhaps enough to say … that Professor Smit’s recent article does not purport to rely upon any special knowledge concerning legislative intent, and we find its reasoning unpersuasive. By contrast, statements in the 1962 article, which was specifically relied upon in the House and Senate reports, are probative of Congress’s contemporaneous interpretation of the statutory language.”2)165 F.3d 184, 190 (2d Cir. 1999). jQuery('#footnote_plugin_tooltip_41936_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

  1. NBC’s textual analysis

The NBC court’s textual analysis of § 1782 was nothing less than convoluted, as it wrote:

“In support of its position, NBC cites numerous references to private arbitration panels as ‘tribunals’ or ‘arbitral tribunals’ in court cases, international treaties, congressional statements, academic writings, and even the Commentaries of Blackstone and Story. This authority amply demonstrates that the term ‘foreign or international tribunals’ does not unambiguously exclude private arbitration panels. On the other hand, the fact that the term ‘foreign or international tribunals’ is broad enough to include both state-sponsored and private tribunals fails to mandate a conclusion that the term, as used in § 1782, does include both. . . In our view, the term ”foreign or international tribunal’ is sufficiently ambiguous that it does not necessarily include or exclude the arbitral panel at issue here. Accordingly, we look to legislative history and purpose to determine the meaning of the term in the statute.”3)Ibid. (emphasis added) jQuery('#footnote_plugin_tooltip_41936_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Judge Cabranes had to get to the conclusion that the term “foreign or international tribunal” is “sufficiently ambiguous” by first fabricating a triple negative with respect to the word “tribunal”: “does (1) not (2) unambiguously (3) exclude” private arbitration panels.4)As the amicus brief of Federal Arbitration Inc. in support of ZF Automotive points out, “courts should not presume that the language of a statute is ambiguous. See United States v. LaBonte, 520 U.S. 751, 757 (1997) (“We do not start from the premise that [the statutory] language is imprecise. Instead, we assume that in drafting legislation, Congress said what it meant.”). Similarly, courts may not impose their own limitations upon a plain and unambiguous statute or resort to legislative history to upend its commonsense construction.” [citing cases]. Brief of Federal Arbitration, Inc. (FEDARB) as Amicus Curiae in support of Petitioner, at 7. (last visited February 21, 2022) jQuery('#footnote_plugin_tooltip_41936_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); And then, in order to justify this tortuous conclusion, Judge Cabranes had to rely on a misinterpretation of Robinson v. Shell Oil Co., a 1997 Supreme Court case5)Robinson v. Shell Oil Co., 519 U.S. 337, 339 (1997). jQuery('#footnote_plugin_tooltip_41936_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });, which held that the term “employees” in some provisions of Title VII was broad enough to include “former” employees, whereas in other sections the term had to mean just “current” employees, and that therefore the use of the term in the section relevant in that case was ambiguous.6)Robinson v. Shell Oil Co. involved a Title VII action by Mr. Robinson, an African-American person who had been fired by Shell. Mr. Robinson filed a charge with the EEOC, alleging that Shell had discharged him because of his race. While that charge was pending, Mr. Robinson applied for a job with another company. That company contacted Shell, as Mr. Robinson’s former employer, for an employment reference. Shell allegedly gave him a negative reference in retaliation for his having filed the EEOC charge. Section 704(a) of Title VII of the Civil Rights Act of 1964 makes it unlawful “for an employer to discriminate against any of his employees or applicants for employment” who have either availed themselves of Title VII’s protections or assisted others in so doing. The issue was whether the term “employees” as used in §704(a) includes former employees, such that Robinson could bring suit against his former employer for post-employment actions allegedly taken in retaliation for his having filed a charge with the EEOC. The Court found that in several sections of Title VII the term “employee” necessarily meant to include former employees whereas in other sections it necessarily meant current employees. jQuery('#footnote_plugin_tooltip_41936_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

In his 2006 opinion in In re Roz Trading Ltd., Judge William S Duffey, Jr., a federal district court judge in Georgia, summarized well the erroneous reasoning by the NBC court in a footnote:

“The Second Circuit started with the premise that the term ‘tribunal’ is ambiguous. In essence, the Second Circuit reasoned that even though the common usage and widely accepted definition of ‘tribunal’ include private arbitral bodies, it was free to impose its own limitations on the statute. This is precisely the type of conduct that courts engaged in statutory construction are directed to avoid. [United States v.] Turkette, 452 U.S. 576, 580, 587 (1981). Even if the Second Circuit found ‘contrary indications’ , 469 F. Supp. 2d 1221, 1227, n.4 (N.D. Ga. 2006) (other citation omitted).

  1. NBC’s reliance on 22 U.S.C. §§ 270-270(g) and the 1958 version of § 1782

The Second Circuit court relied on Professor Smit’s 1962 article where it described the proposed deletion of 22 U.S.C. §§ 270 – 270(g) in light of the 1958 version of § 1782. The court cited a passage in which Professor Smit “asserted” that “an international tribunal [as described in Section 270] owes both its existence and its powers to an international agreement.”

Even in that effort, however, the court got it wrong, as it not only failed to note that Professor Smit clearly referred to the 1958 version of § 17827)In fact, Prof. Smit quotes in this connection in a footnote the text of the 1958 version of §1782: “The deposition of any witness within the United States to be used in any judicial proceeding in any court in a foreign country with which the United States is at peace may be taken before a person authorized to administer oaths designated by the district court of any district where the witness resides or may be found. The practice and procedure in taking such depositions shall conform generally to the practice and procedure for taking depositions to be used in courts of the United States.” 62 Colum. L. Rev. at 1267, n. 18. jQuery('#footnote_plugin_tooltip_41936_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); rather than the then not yet existing 1964 version, but the court also took this passage completely out of context: Professor Smit was discussing “international tribunals” in connection with the history of Section 270 in the 1930s.8)The language quoted by the NBC court is followed by this sentence: “The correctness of this view was sustained by the United States–German Mixed Claims Commission when the American agent tried to invoke the 1930 act.” 62 Colum. L. Rev. at 1267. From the context I surmise that the word “owes” in the sentence quoted by the NBC court has a typo and that it should read “owed” instead. jQuery('#footnote_plugin_tooltip_41936_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

  1. The 1964 Act and Professor Smit’s 1965 Commentary

The amendments to Title 28 of the U.S. Code were signed into law by President Johnson on October 3, 1964, “to improve judicial procedures for serving documents, obtaining evidence, and proving documents in litigation with international aspects.”9)For a full report on the activities of the Commission on International Rules of Judicial Procedure, including the text and explanatory notes of all the reform measures developed by the Commission and the Project on International Procedure of the Columbia University School of Law (the “Project”), see Fourth Annual Report of the Commission on International Rules of Judicial Procedure, H.R. Doc. No. 88, 88th Cong., 1st Sess. (1963). The explanatory notes are reprinted almost verbatim in S. REP. No. 1580, 88th Cong., 2d Sess. (1964) [herein  the “Senate Report”]. Professor Smit was the Director of the Project and the Reporter for the Commission. jQuery('#footnote_plugin_tooltip_41936_30_9').tooltip({ tip: '#footnote_plugin_tooltip_text_41936_30_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The intent of the 1964 Act was to liberalize all domestic procedures in aid of foreign procedures. In fact, the reforms were premised on the hope that their principle of liberality in rendering aid to foreign courts and litigants will find widespread acceptance abroad. The 1964 Act as drafted by the Project on International Procedure at Columbia Law School was adopted by Congress without encountering any objection.

As a former research associate and assistant of the late Professor Hans Smit, who (as noted above) was the principal drafter of the 1964 amendments to 28 U.S.C., I have some knowledge as to how he wrote in general, and specifically how § 1782(a) was intended to function – alongside the other changes that the 1964 Act brought to 28 U.S.C.

For one, Professor Smit believed in brevity and conciseness, by using only necessary words while omitting all words that are superfluous. As he noted in a footnote to his lengthy 1965 article, “[t]he term ‘tribunal’ was chosen deliberately as being both neutral and encompassing. Any person or body exercising adjudicatory power is included.” 65 Colum. L. Rev. at 1021, n. 36.

In the body of the article, on the same page, he emphasized explicitly the breadth of the term “tribunal”:

“The term tribunal encompasses all bodies that have adjudicatory power, and is intended to include not only civil, criminal, and administrative courts (whether sitting as a panel or composed of a single judge), but also arbitral tribunals or single arbitrators.” 65 Colum. L. Rev. at 1021.

Although this explanation of the word “tribunal” was used in connection with the meaning and breadth of §1781, the same meaning was to be attributed to “tribunal” in all other sections of Title 28. Thus, for example, Professor Smit refers in footnote 71 to his writings on § 1782 to the same broad concept:

“71. The term “tribunal” embraces all bodies exercising adjudicatory powers, and includes investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts. See SENATE REPORT 7-8. On the use of the term tribunal in other sections of the Act, see notes 36-38, 53 supra and accompanying text.” 65 Colum. L. Rev. at 1026.

  1. Section 1782 Today

Reliance on Professor Smit’s explanations of § 1782, whether in his 1965 article or any of his later articles, is not really necessary: as even the Supreme Court found in the present case, the word “tribunal”, whether 100 or 60 years ago, or at present, has always included arbitral tribunals.

In 1923, the Protocol on Arbitration Clauses (the so-called Geneva Protocol of 1923) distinguished arbitral tribunals and judicial tribunals. In 1964, (as Professor George Bermann explained in his amicus brief in the Servotronics case) the Supreme Court found that in submitting a labor dispute to private arbitration rather than the National Labor Relations Board, the union was “resort[ing] to a tribunal other than the Board.” Carey v. Westinghouse Elec. Corp., 375 U.S. 261, 272 (1964). Today, the increased use of international commercial arbitration makes that the use of the word “tribunal” as referring to an arbitral tribunal is ubiquitous.

As for the applicability of § 1782 to investment arbitration, it clearly makes no difference whether the tribunal deals with commercial or investment arbitration. The artificial structure built by the Second Circuit’s opinion in the AlixPartners case (also written by Chief Judge Cabranes) has no foundation in the text, structure or history of the statute.

As noted previously, Professor Smit wrote in 1965, “the term ‘tribunal’ was chosen deliberately as being both neutral and encompassing.” In my opinion, that includes both tribunals created by pursuant to an international treaty, such as the Court of Justice of the European Union (CJEU), and arbitral tribunals in international arbitration.

 

  1. The District Court’s Discretionary Authority

The Supreme Court in Intel pointed out that § 1782 authorizes, but does not require, discovery assistance, and it developed certain factors that a district court ought to take into account as guidelines when it exercises its discretion. This is especially relevant with respect to discovery assistance as it applies to foreign or international arbitration. For example, as the district court may not know what rules of evidence the tribunal will apply, it may well decide to deny discovery assistance to an “interested person” if sought before the arbitral tribunal has been constituted.

Since the §1782 application in ZF Automotive (one of the cases presently before the U.S. Supreme Court for decision) relates to a discovery request prior to the commencement of the arbitration proceeding, the Supreme Court ought to remand the case to the district court so that it can decide whether to continue to grant the discovery request or to further limit it or deny it – at least until such time as a complaint in arbitration has been filed and an arbitral tribunal has been formed.

The above ideas are elaborated in a more in-depth article I hope to publish in the forthcoming issue of the American Review of International Arbitration.

 

  1. So How Should the Supreme Court Have Decided?

It is clear to me that Justice Barrett’s opinion is not very convincing since its reasoning borders on the unacceptable – and that it is plainly wrong. It surprises me that this is a unanimous decision. It appears that the entire Court may have little understanding of the importance of international commercial arbitration to the United States and the international community and how much § 1782 helps improve international arbitration.

Or, if it does understand that importance, perhaps the Court does not believe the argument made on behalf of Petitioners that recognizing that § 1782 extends to arbitral tribunals will not unduly burden the district courts.

If that was the true reason, the Supreme Court’s decision is most regrettable. It will have given preference to an unfounded fear of overburdening the district courts over the need to serve the international community which more and more makes international or cross-border discovery available in international commercial arbitration.

It may be that a future Congress will have the same enlightened vision as the Congress of 1958 showed by its appointment of, and charge to the Commission on International Rules of Judicial Procedure. If that should happen, as optimists certainly hope, they may decide to amend § 1782 and while they are at it, amend Section 7 of the Federal Arbitration Act.

 

Eric van Ginkel, FCollArb, FCIArb, J.D. (Leiden University 1964), J.D. (Columbia University 1969), LL.M. in Dispute Resolution (Straus Institute for Dispute Resolution, Pepperdine University 2003), is an independent international arbitrator and mediator. He is also an Adjunct Professor at both the Law School of the University of Texas at Austin and the Straus Institute for Dispute Resolution at the Caruso Law School at Pepperdine University. During the calendar year 1966, Mr. van Ginkel was a research associate and assistant to Professors Hans Smit and Richard Pugh for the Project on European Legal Institutions at Columbia Law School.

References[+]

References ↑1 In a simple google search, I found this definition: “The international arbitration tribunal is the independent and non-governmental panel of independent and impartial experts most often composed of three members nominated by the Parties (or appointed by the international arbitration institution, or more rarely by a national court) on the basis of their legal and practical expertise and knowledge, to render a final and binding award.” available here ↑2 165 F.3d 184, 190 (2d Cir. 1999). ↑3 Ibid. (emphasis added) ↑4 As the amicus brief of Federal Arbitration Inc. in support of ZF Automotive points out, “courts should not presume that the language of a statute is ambiguous. See United States v. LaBonte, 520 U.S. 751, 757 (1997) (“We do not start from the premise that [the statutory] language is imprecise. Instead, we assume that in drafting legislation, Congress said what it meant.”). Similarly, courts may not impose their own limitations upon a plain and unambiguous statute or resort to legislative history to upend its commonsense construction.” [citing cases]. Brief of Federal Arbitration, Inc. (FEDARB) as Amicus Curiae in support of Petitioner, at 7. (last visited February 21, 2022) ↑5 Robinson v. Shell Oil Co., 519 U.S. 337, 339 (1997). ↑6 Robinson v. Shell Oil Co. involved a Title VII action by Mr. Robinson, an African-American person who had been fired by Shell. Mr. Robinson filed a charge with the EEOC, alleging that Shell had discharged him because of his race. While that charge was pending, Mr. Robinson applied for a job with another company. That company contacted Shell, as Mr. Robinson’s former employer, for an employment reference. Shell allegedly gave him a negative reference in retaliation for his having filed the EEOC charge. Section 704(a) of Title VII of the Civil Rights Act of 1964 makes it unlawful “for an employer to discriminate against any of his employees or applicants for employment” who have either availed themselves of Title VII’s protections or assisted others in so doing. The issue was whether the term “employees” as used in §704(a) includes former employees, such that Robinson could bring suit against his former employer for post-employment actions allegedly taken in retaliation for his having filed a charge with the EEOC. The Court found that in several sections of Title VII the term “employee” necessarily meant to include former employees whereas in other sections it necessarily meant current employees. ↑7 In fact, Prof. Smit quotes in this connection in a footnote the text of the 1958 version of §1782: “The deposition of any witness within the United States to be used in any judicial proceeding in any court in a foreign country with which the United States is at peace may be taken before a person authorized to administer oaths designated by the district court of any district where the witness resides or may be found. The practice and procedure in taking such depositions shall conform generally to the practice and procedure for taking depositions to be used in courts of the United States.” 62 Colum. L. Rev. at 1267, n. 18. ↑8 The language quoted by the NBC court is followed by this sentence: “The correctness of this view was sustained by the United States–German Mixed Claims Commission when the American agent tried to invoke the 1930 act.” 62 Colum. L. Rev. at 1267. From the context I surmise that the word “owes” in the sentence quoted by the NBC court has a typo and that it should read “owed” instead. ↑9 For a full report on the activities of the Commission on International Rules of Judicial Procedure, including the text and explanatory notes of all the reform measures developed by the Commission and the Project on International Procedure of the Columbia University School of Law (the “Project”), see Fourth Annual Report of the Commission on International Rules of Judicial Procedure, H.R. Doc. No. 88, 88th Cong., 1st Sess. (1963). The explanatory notes are reprinted almost verbatim in S. REP. No. 1580, 88th Cong., 2d Sess. (1964) [herein  the “Senate Report”]. Professor Smit was the Director of the Project and the Reporter for the Commission. function footnote_expand_reference_container_41936_30() { jQuery('#footnote_references_container_41936_30').show(); jQuery('#footnote_reference_container_collapse_button_41936_30').text('−'); } function footnote_collapse_reference_container_41936_30() { jQuery('#footnote_references_container_41936_30').hide(); jQuery('#footnote_reference_container_collapse_button_41936_30').text('+'); } function footnote_expand_collapse_reference_container_41936_30() { if (jQuery('#footnote_references_container_41936_30').is(':hidden')) { footnote_expand_reference_container_41936_30(); } else { footnote_collapse_reference_container_41936_30(); } } function footnote_moveToReference_41936_30(p_str_TargetID) { footnote_expand_reference_container_41936_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_41936_30(p_str_TargetID) { footnote_expand_reference_container_41936_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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