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2021 in Review: Key Investment-Arbitration Developments in Europe

3 hours 12 min ago

Looking back on 2021, one realizes that for those interested in the intersection between EU law and investment arbitration, it was a busy year. As part of our customary “year-in-review” series, this post offers a brief overview of the key investment arbitration-related developments in Europe and their coverage on the Blog. I have grouped these developments in two parts. First, the post focuses on the key judicial developments, notably judgements rendered by the Court of Justice of the EU (CJEU or the Court) and by EU domestic courts. Second, the post highlights the policy initiatives taken by the European Commission at both intra- and extra-EU levels.

 

Investment Arbitration-related Judicial Developments: Highlights from the Case Law of the CJEU and the EU Domestic Courts

Since the CJEU rendered its landmark judgment in Achmea (see coverage on the Blog here), all eyes were on the potential reach of the ruling to intra-EU disputes under the ECT. The debates have been intense and everyone anticipated that the authoritative answer would come, eventually, from Luxembourg. This abstract anticipation for an answer was concretized in March 2021, when a preliminary ruling raising precisely the issue of intra-EU applicability of the ECT was sent to the Court (C-155/21, Athena Investments e.a., pending). However, the answer came perhaps sooner than expected in a different preliminary reference case. It was in Moldova v Komstroy (formerly known as Energoalians) (C-741/19) that the Court chose to examine the intra-EU applicability of Article 26(2)(c) of the ECT and the compatibility of the investor-State dispute settlement (ISDS) mechanism provided therein with EU law. In the Blog, several posts covered the various phases and angles of the Komstroy saga.

One of the first developments we covered was the confirmation of the Komstroy arbitral award in the United States. About the same time as one of our contributors was wondering what could happen after the CJEU’s ruling, the Opinion of Advocate General Szpunar was delivered. The Opinion inspired mixed critiques. Several contributors questioned the competence of the Court to examine the intra-EU applicability of the ECT in the context of this particular preliminary reference request that was limited to the notion of investment under Article 16(1) of the ECT. Such doubts on the competence of the Court were cast irrespectively of the authors’ views on the controversial issue of intra-EU applicability of the ECT or the substantive issue of the definition of investment.

Indicatively, some contributors argued in favour of the transposability of Achmea to intra-EU ECT Arbitration but also underlined the Court’s lack of competence to rule on this matter in Komstroy. Others emphasized that the facts of this case were “completely unconnected with EU law” and the “CJEU superimposed itself on the ECT”. Another commentator looked at the negotiating history of the ECT underlining the lack of a disconnection clause in the ECT despite the EU’s original demand for one.

The Court rendered its judgment in September 2021. It ruled that Article 26(2)(c) ECT must be interpreted as inapplicable to intra-EU disputes, and that the acquisition of a claim arising from an electricity supply contract does not constitute an ‘investment’ within the meaning of Articles 1(6) and Article 26(1) of the ECT. As two of our contributors noted, this was a restrictive interpretation of the notion of protected investment.

About a month after the Court rendered its judgment in Komstroy, its ruling in another much-awaited case, Case C-109/20 (PL Holdings), came out. In PL Holdings, the Court found that an EU Member State is precluded from replacing an arbitration clause, included in an intra-EU international agreement, by concluding an ad hoc arbitration agreement in order to make it possible to pursue arbitration proceedings based on that clause. A different approach would circumvent that EU Member State’s obligations under the EU Treaties as interpreted in Achmea (para 65 of the Court’s judgement in PL Holdings).

Looking forward, it is certain that discussions on the implications of the CJEU judgements in both PL Holdings and Komstroy will continue into 2022. In addition, there are several other developments that are to be expected. For example, the modernization process of the ECT is ongoing, and Belgium’s request for an Opinion from the CJEU on the intra-European application of the arbitration provisions of the future modernised Energy Charter Treaty is still pending.

2021 (like almost every year since 2014) was also marked by another episode of the Micula saga. The CJEU has pending (C-638/19) before it  the European Commission’s request to annul the General Court’s judgement, which was rendered in 2018 and annulled the European Commission’s 2015-decision (see also here). In July 2021, AG Spuznar’s Opinion in C-638/19 was published. AG Spuznar opined that the General Court’s judgment under appeal should be set aside. We are all waiting for the CJEU’s ruling in Micula (expected in January 2022) with great interest.

Time will show how much room for intra-EU ECT cases or non-treaty-based investment arbitration cases is left in the EU (to quote another contributor and her comment on AG Kokott’s Opinion in PL Holdings). A determining factor will naturally be the stance of enforcement courts inside and outside of the EU. In that regard, two developments that we covered are worthy to mention. In May 2021, as two of our contributors reported, the Dutch Ministry of Economic Affairs and Climate initiated “anti-arbitration” proceedings before the German courts to “avert” two ECT-based ICSID arbitrations brought against it by two German energy companies in light of the Achmea ruling. In November 2021, the German Supreme Court (Bundesgerichtshof – the referring court in Achmea) rejected an appeal against the Higher Regional Court Frankfurt upholding essentially an action brought by Croatia pursuant Article 1032(2) of the German Code of Civil Procedure and declaring the arbitral proceedings inadmissible (stay tuned for a post authored by Hanno Wehland, soon to be published on the Blog).

 

Policy Developments

At the intra-EU level, in light of the above developments on the judicial front, the pressing question is what the future holds for intra-EU investment protection. In addition to a communication published shortly after Achmea, the Commission intends to take action to safeguard cross-border investment within the EU. To this effect, in 2020 it launched a public consultation  inviting  stakeholders  to  “express  their  views  on  the  identification  of  issues  related  to investment protection and facilitation cross border within the European Union and on the best  way  to  improve  the  intra-EU  investment  environment”. The Commission did not adopt a proposal for a regulation in the fourth quarter of 2021, as was its original expectation. We therefore eagerly await this development in 2022.

At the extra-EU level, the EU has emerged as a significant actor in the investment field. Notably, the idea to establish a Multilateral Investment Court (MIC) (see also coverage on the Blog here) to replace traditional ad hoc ISDS (in the form of investor-State arbitration) was introduced by the EU. The EU managed to introduce this idea in the context of bilateral negotiations with its various trade partners. Subsequently, it became part of the global reform agenda and keeps being discussed under the auspices of UNCITRAL Working Group III.

The EU is “committed to open trading relations” with China. The EU and China reached an agreement in principle on investment in December 2020 (the EU-China Comprehensive Agreement on Investment (CAI)). Nevertheless, in May 2021, the European Parliament decided to suspend CAI, in list of the tensions in the political relationship of the two parties. Our contributors examined the key investment protection provisions of the agreement and its potential impact on future investment claims. Notably, China’s position on the establishment of a permanent court does not seem to fully align with the position of the EU.

Looking forward to 2022, we could predict with relative certainty that, if 2021 kept us all busy, 2022 will not disappoint us, either. So, stay tuned for further coverage of developments concerning the relationship between ISDS and EU law on this Blog!

 

This piece was prepared by the author in her capacity as an Assistant Editor of the Kluwer Arbitration Blog. Linking to Blog’s coverage is not an endorsement of the views expressed in the respective posts. The author expresses her views in a purely personal capacity.

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COP26 Created New Carbon Market Rules: How Will Arbitration Respond?

Sun, 2022-01-23 00:10

As the climate crisis has intensified, much has been said about the roles that arbitration can play in the collective global response – including during the recent BVI Arbitration Week, which coincided with the Glasgow climate conference. Arbitration has been utilised as a tool for resolving disputes as market mechanisms have developed to deliver greenhouse gas emission reductions. At COP26, governments adopted long-awaited rules for carbon market cooperation under the Paris Agreement’s Article 6.2 and Article 6.4. This post discusses the significance of these rules, what they mean for carbon disputes and how arbitration can contribute to the resolution of such disputes.

 

Carbon Markets Rising

Carbon markets exist to incentivise emission reductions at the least cost. By purchasing a carbon credit, a government or company can offset a proportion of its emissions, i.e., count the actual emission reductions underlying the credit against its own emission reduction commitments. Carbon markets can also create incentives for investment and technology transfer in climate-vulnerable countries.

By setting quantified emission targets for developed Parties, the Kyoto Protocol was a major spur for the development of carbon markets . This treaty sets out three ‘flexibility’ mechanisms:

Following Kyoto’s adoption, domestic carbon pricing was introduced in various jurisdictions, with the EU’s Emissions Trading System being the largest example.

Today, carbon markets have largely outgrown the Kyoto mechanisms. For instance, carbon pricing continued to expand during the past year, with the proportion of global emissions covered by carbon pricing up from 15% in 2020 to 25.1%.

 

Arbitrating Carbon Market Disputes

Carbon market transactions are effected through forward contracts for the production and delivery of credits (emission reduction purchase agreements) and spot and derivatives contracts for secondary trading. While some carbon contracts provide for court jurisdiction, many provide for arbitration. Examples include the International Emissions Trading Association’s emissions trading master agreement for the EU ETS (providing for the PCA Secretary-General as the appointing authority, with the option to choose among the ICC Rules, UNCITRAL Rules or PCA environmental rules), the World Bank’s Forest Carbon Partnership Facility general conditions for emissions reduction payment agreements (PCA Secretary-General as appointing authority; UNCITRAL rules; London as arbitral seat) and Norway’s template agreement for purchase of CDM credits (LCIA rules; London as arbitral seat).

Arbitration is also provided for in the processes of carbon crediting standards bodies, such as Verra and the Gold Standard Foundation (which the World Bank reports were collectively responsible for half the credits issued through crediting mechanisms in 2020). Verra’s template agreement provides for disputes with validation/verification bodies (which assess projects under Verra’s standard) to be settled through arbitration in London under ICC rules. The Gold Standard has developed bespoke rules, based on the PCA environmental rules, for arbitrating disputes concerning project registration and credit issuance and labelling.

Carbon disputes often turn on issues common to other contractual disputes: commodity non-delivery, breach of covenants or warranties, failure to fulfil conditions precedent, disputes over title or security, etc. Distinctive elements include the nature of the commodity, the carbon crediting project cycle, and the application of international climate standards. The project cycle itself can also generate disputes, e.g., concerning project registration or credit issuance.

For instance, in an SCC arbitration a Danish firm successfully claimed damages from its Russian counterparty regarding a JI project. The Danish company had reduced emissions from the Russian state-owned entity’s gas pipelines, but the Russian entity had failed to get the relevant projects registered in Russia, thereby blocking the issuance of the JI emission reduction units due under the contract.

Carbon disputes are not limited to carbon contracts themselves but extend to the full gamut of disputes concerning the underlying infrastructure projects undertaken to generate emission reductions, potentially resulting in commercial or investment arbitration proceedings. Interstate arbitration has also been chosen for dispute settlement concerning international emissions trading cooperation.

 

The Paris Agreement and COP26 Outcomes

Article 6 of the Paris Agreement introduced ‘cooperative approaches’ involving internationally transferred mitigation outcomes (ITMOs) (Article 6.2) and a ‘mechanism’ to contribute to emissions mitigation and sustainable development (Article 6.4), as well as non-market approaches (Article 6.8).

According to the rules agreed in Glasgow, the Article 6.2 and 6.4 modalities differ from their Kyoto predecessors. The guidance on Article 6.2 provides for the participation of all Paris Agreement Parties in cooperative approaches, not just developed Parties as in Kyoto emissions trading (pilot projects are quite diverse).

The transferrable carbon units, ITMOs, can be measured either in tonnes of CO2 equivalent (as with the Kyoto units) or in other metrics consistent with participating Parties’ Nationally Determined Contributions (NDCs). ITMOs can be transferred not just as credit against a receiving Party’s NDC target but also for ‘international mitigation purposes’ (currently, the international aviation carbon mechanism) and ‘other purposes’ (voluntary carbon markets).

The Article 6.4 mechanism rules build on the CDM model with important differences. All Paris Agreement Parties can participate in the A6.4 mechanism both as host States or as investors/purchasers of credits, unlike JI (limited to developed Parties) and the CDM (limited to developing Party host states and developed Parties as purchasers of credits). As with A6.2 cooperation, A6.4 emission reductions can be credited to NDCs, international purposes and voluntary markets.

The Article 6 rules should reinforce the existing trend toward more widespread and credible carbon markets. Indeed, over 70% of Parties reportedly intend to use at least one Article 6 approach, with A6.2 cooperation the most popular.

 

What Does this Mean for Arbitration?

COP26 will also affect the nature of future carbon market disputes. For instance, significant growth in market activity through the creation and trade in ITMOs (including the subcategory of A6.4 emission reductions) can be expected to eventually result in more disputes. Institutions that provide for arbitration in agreements with counterparties (such as the Asian Development Bank) have already indicated plans to participate in this market. Also, the entry of new market participants and the unfamiliarity and complexity of new modalities compared to previous carbon credits – e.g., allowing for the diversity of NDCs (from which ‘mitigation outcomes’ are derived), mitigation metrics and activity methodologies – may generate disputes, at least during the early years of implementation.

Carbon contracts will need to be updated to reflect the new rules (e.g., concerning human rights and environmental and social safeguards), thereby affecting the respective obligations of parties. A new generation of carbon contracts (mitigation outcome purchase agreements, or MOPAs) are being developed for this purpose. Some market standards bodies have already indicated intent to update their frameworks for consistency with the COP26 outcomes.

Governments are likely to introduce or amend legislation to structure their interaction with the Article 6 processes (e.g., as A6.4 activity hosts). These changed legal frameworks, differing from country to country, will apply to relevant disputes alongside pertinent international rules.

It is also possible that arbitration will be directly incorporated into Article 6 governance. The A6.4 rules provide that “[s]takeholders, activity participants and participating Parties may appeal decisions of the Supervisory Body or request that a grievance be addressed by an independent grievance process”. This language indicates that two distinct processes – an appeal process and a grievance process – must be made available. For the appeal process, it is conceivable that arbitration would be utilised, perhaps if mediation is unsuccessful (as carbon contracts often provide). One model might be the Gold Standard Rules mentioned above, which provide for appeals from the kinds of decisions that the Supervisory Body will also be taking (at least concerning registration of activities and issuance of units).

In the A6.4 decision, Parties tasked the Supervisory Bodies to develop provisions for matters including the appeals and grievance processes. There is no existing UN climate appellate process that could be readily applied to the A6.4 mechanism. It is also worth noting that Parties never agreed a process for appeals against CDM Executive Board decisions, despite the issue being on the agenda since 2010.

With the Paris rules adopted at last, arbitral institutions and associations now have opportunities to prepare for arbitration to play an effective role in their implementation. These opportunities include:

Observing and contributing to UN processes mandated in Glasgow for putting the new rules into practice, for instance for the A6.4 Supervisory Body to develop provisions for appeals and grievance processes. The Supervisory Body begins meeting in 2022. Since the pandemic started, most meetings of UN climate bodies have been held virtually and open to observers. Arbitral institutions and practitioners have been present at several recent COPs. Their advocacy has not resulted – and, in my view, will not result – in adoption by Parties of an arbitration Annex for the Climate Convention (mandated in 1992 to be adopted “as soon as practicable”). However, Article 6 is a more discrete matter, and the timely adoption of dispute settlement arrangements might reasonably be expected.

Engaging with carbon market standards bodies, as well as sovereigns and institutions nominated by them to participate in the ITMO marketplace, regarding further development of template and bespoke contract provisions and the potential utility of arbitration.

Building capacity and awareness among arbitration practitioners regarding dispute settlement in this specialised but growing market. This includes developing familiarity with the unique regulatory context for carbon credits that includes the Paris Agreement, Article 6 rules, CDM rules, etc, plus the project cycle, actors involved and common structure of carbon agreements.

Institutions exploring a larger role in carbon market disputes might also consider measures such as the adoption of specialised rules tailored to this market, the establishment of a panel of arbitrators with relevant expertise and the creation of a list of technical experts.

 

This post is written in a personal capacity.

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Russian Sanctions Law Bares Its Teeth: The Russian Supreme Court Allows Sanctioned Russian Parties To Walk Away From Arbitration Agreements

Sat, 2022-01-22 00:54

As previously reported, in mid-2020, changes were enacted to the Russian Arbitrazh (Commercial) Procedure Code (“APC”) to establish the exclusive jurisdiction of Russian Arbitrazh courts over cases where a Russian party is subject to sanctions or where the dispute has arisen out of sanctions. This triggered concerns that sanctioned Russian parties would be able to easily avoid arbitration clauses they had entered into. As discussed in an earlier blog post, the way in which the relevant provisions of the APC were drafted gave rise to two possible interpretations: (1) whether any sanctioned Russian party can avail itself of these provisions, or (2) whether they only apply when sanctions effectively prevent the sanctioned party from participating in a foreign-seated arbitration. In May 2021, the arbitration community breathed a sigh of relief when the Russian Supreme Court embraced the latter, more restrictive approach. However, on 9 December 2021, the Judicial Panel on Economic Disputes of the Russian Supreme Court overturned the earlier Supreme Court decision and adopted an expansive approach to the interpretation of these provisions, thus allowing any sanctioned Russian party to walk away from contractually agreed arbitration and to obtain an anti-suit injunction against such arbitration from Russian courts.

 

The June 2020 Changes to the APC

On 18 June 2020, changes to the APC were enacted allowing sanctioned Russian parties to bring a claim at their place of residence or incorporation, provided that the same dispute had not already been brought before a foreign court or before an arbitral tribunal seated outside of Russia (Article 248.1(3) of the APC). Sanctioned Russian parties were also given the right to apply for an anti-suit injunction in relation to such proceedings in foreign courts or arbitrations (Articles 248.1(3) and 248.2 of the APC). Article 248.1(4) of the APC states that the provisions of this article “also apply” when the arbitration agreement is “incapable of being performed” due to the application of sanctions to one of the parties.

 

Earlier Decisions in the Uraltransmash Case

The interpretation of these provisions has been recently tested in the Uraltransmash case. Uraltransmash, a Russian company, entered into a contract for the purchase of tramway cars with PESA Bydgoszcz (“PESA”), a Polish company, which contained an SCC arbitration clause. Uraltransmash’s parent entity subsequently became subject to EU sanctions. In May 2019, PESA commenced arbitration against Uraltransmash, in which the latter participated. Uraltransmash subsequently applied to the Russian courts seeking an anti-arbitration injunction against PESA, arguing that the fact that Uraltransmash was subject to EU sanctions was in itself sufficient to grant the injunction under Articles 248.1(3) and 248.2 of the APC.

Several levels of Russian courts (including the Supreme Court, which in May 2021 refused to hear an appeal of the decisions of lower courts – denying certiorari, to adopt US legal terminology) disagreed with the expansive interpretation put forward by Uraltransmash, finding that these provisions should be interpreted together with Article 248.1(4) of the APC, and that thus an anti-suit injunction may only be granted when sanctions render the arbitration agreement incapable of being performed.

 

Reversal of the Supreme Court’s Position

Uraltransmash filed a complaint on the Supreme Court certiorari denial to its Deputy Supreme Justice (as is possible to do under Russian law). On 21 September 2021, the Deputy Supreme Justice of the Supreme Court overturned the certiorari denial and directed the matter to be heard by the Supreme Court’s Judicial Panel on Economic Disputes.

On 9 December 2021, the Supreme Court overturned the decisions of the lower courts in Uraltransmash. It endorsed an expansive interpretation of Article 248.1(4) of the APC, noting that ipso facto the application of sanctions against a Russian party already creates obstacles to its access to justice. In the Supreme Court’s view, there was thus no need to present evidence of any practical difficulties preventing a sanctioned party from participating in an arbitration seated outside of Russia; the sanctioned party can simply unilaterally opt for the jurisdiction of Russian courts.

The Supreme Court cited the explanatory note to the APC amendments, which suggested that the legislative intention was to protect the interests of Russian parties subject to foreign sanctions, because such sanctions de facto deprive them of the opportunity to defend their rights before foreign fora. It concluded that the legislative intention was to establish that the mere fact of the imposition of sanctions against a party was sufficient to conclude that its access to justice was impeded.

The Supreme Court went on to suggest that the imposition of sanctions against Russian parties affects their rights, at least “reputationally”, and thus a priori puts them in an unequal position to other parties to an arbitration. In the view of the Supreme Court, this justifies doubts as to the impartiality of a foreign arbitration and as to whether a sanctioned Russian party can get a fair trial in such circumstances.

In reaching this conclusion, the Supreme Court ignored amicus curiae submissions from the Vienna International Arbitration Centre and the Russian Arbitration Association advocating a more restrictive approach to the interpretation of Article 248.1(4) of the APC and explaining the absence of any legal restrictions on arbitrations with sanctioned parties in a number of popular seats of arbitration.

Despite these pronouncements, the Supreme Court refused to grant Uraltransmash an anti-suit injunction against PESA, because the arbitration between Uraltransmash and PESA had already concluded, an award having been rendered in May 2021.

 

Reactions and Implications

The latest Supreme Court decision in Uraltransmash has been met with concern by commentators. It is problematic on a number of levels. While not a binding precedent, the decision is likely to be highly persuasive to lower-level Russian courts in the future. It will mean that any sanctioned Russian party, regardless of any practical impact or lack thereof on its ability to participate in an arbitration, will be able to walk away from contractually agreed arbitration clauses and enjoin its counterparties from pursuing arbitration in accordance with such clauses.

Uraltransmash creates substantial uncertainty for parties dealing with all Russian counterparties, since it cannot be excluded that, after an arbitration agreement is entered into, the Russian party may become subject to sanctions (as indeed happened in the Uraltransmash case). Further, it gives Russian parties the option to selectively enforce or disregard arbitration clauses, depending on their interests in each particular case.

While not binding on arbitral tribunals seated outside of Russia, the enforcement of foreign awards against sanctioned parties obtained in breach of a Russian anti-suit injunction is likely to be deemed contrary to public policy by Russian courts. There is also a risk of conflicting foreign awards and Russian court judgments in circumstances where a sanctioned party chooses to remove proceedings to a Russian court, but the foreign arbitration proceeds regardless; again, such conflicting foreign awards are likely to be unenforceable in Russia.

These risks may be partially mitigated by opting for a seat of arbitration in a jurisdiction seen as less likely to impose sanctions against Russian parties (such as Singapore or Hong Kong), or by opting for arbitration with a seat in Russia. The latter option may not be acceptable to all foreign counterparties as it would expose the arbitration to the supervisory jurisdiction of Russian courts.

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Is Italy on the Right Track to Become a Truly Attractive Seat for International Arbitrations?

Fri, 2022-01-21 00:00

As part of the complex set of reforms that Italy presented to the EU institutions to access the Next Generation EU program, the Italian Parliament recently approved Law No. 206/2021 (“Law 206”). Among other things, Law 206: (i) establishes “principles and directions” aimed at enhancing the “efficiency of civil proceedings and amending the rules concerning” arbitration and other methods for the alternative resolution of disputes in Italy; and (ii) delegates the Italian Government to implement these “principles and directions” in ensuing decrees.  Law 206 was published in the Italian official bulletin on December 9, 2021 and entered into force on December 24, 2021.

The “principles and directions” set forth in Law 206 impact on the Italian arbitration statute in various respects, the most noteworthy of which are: (A) the requirements of impartiality and independence of the arbitrators; (B) the recognition and enforcement of foreign awards; (C) the power of arbitral tribunals to issue interim measures; and (D) the possibility for the parties to choose the law applicable to the dispute.

 

A. Impartiality and Independence of Arbitrators

Article 1(15)(a) of Law 206 introduces the duty for arbitrators to issue at the time of appointment a statement disclosing all “relevant factual circumstances” that may affect their “impartiality and independence.” If arbitrators do not do so, their appointment will be invalid.  Moreover, if the arbitrator fails to disclose circumstances that are grounds for disqualification under Article 815 the Italian Code of Civil Procedure (“ICCP”), the arbitrator will be removed from office.

This change aligns Italy to the standards expected from a modern and efficient international arbitration seat.  The early disclosure of circumstances that may affect a potential arbitrator’s impartiality or independence is indeed a well-established practice in international arbitration as well as a requirement in virtually all institutional arbitration rules and in the national arbitration statutes of arbitration-friendly jurisdictions (e.g. Article 1456(2) of the French Code of Civil Procedure; Article 12(1) of the UNCITRAL Model Law).

Regarding the content of disclosure, Law 206 does not provide any particular details.  The ensuing governmental decrees (or, if they are silent on this point, the courts and arbitral tribunals dealing with this issue) will, therefore, set out what an arbitrator must disclose in practice.  While no predictions can be made, it is reasonable to expect that the Government will look at the well-established international practice and, therefore, consider that the early duty of disclosure should not be limited to the circumstances that would lead to the arbitrator’s disqualification under the Italian lex arbitri, but should instead also include further circumstances (e.g., those listed in the red and orange lists of the IBA Guidelines on Conflicts of Interest).

 

B. The Recognition and Enforcement of Foreign Awards in Italy

Pursuant to the current Article 839 of the ICCP, the President of the competent Court of Appeals, if requested to recognize a foreign award in Italy, must in ex parte proceedings:

(i)        assess whether the dispute that is the subject matter of the relevant award is arbitrable under Italian law and whether the award contains findings that are contrary to public policy; and

(ii)       based on the foregoing assessment, issue a decree recognizing or refusing to recognize the “effectiveness” of the award in Italy.  The Presidential decree can then be opposed in fully-fledged adversarial proceedings (“Opposition Proceedings”).

Italian courts and scholars have long debated the practical effects of a Presidential decree recognizing the “effectiveness” of a foreign award in Italy (“Recognition Decree”).  In particular, they have debated as to whether:

  • the award becomes enforceable only if the Recognition Decree is confirmed in the Opposition Proceedings (as many scholars and major Italian courts have indicated).1)See e.g., Court of Appeals of Milan (Italy), October 7, 2019; M. Rubino-Sammartano, Il Diritto dell’Arbitrato (CEDAM 2010). jQuery('#footnote_plugin_tooltip_40098_12_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40098_12_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });
  • the Recognition Decree renders the award immediately enforceable and, therefore, usable as a basis for attaching the assets of the award debtor (as others believe).2)See e.g., Court of Appeals of Catanzaro (Italy), March 25, 1996; La China, L’arbitrato. Il sistema e l’esperienza (Giuffrè 2004). jQuery('#footnote_plugin_tooltip_40098_12_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40098_12_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Article 1(15)(b) of Law 206 puts an end to the debate, requiring the Government to “explicitly” provide in its implementing decrees that the Recognition Decree is enforceable.  Although aimed at providing clarity, this change appears to be inconsistent with the practice of many major Italian courts (such as the Milan Court of Appeals).

 

C. Interim Measures

The most noteworthy change introduced by Law 206 is contained in Article 1(15)(c) (see also detailed discussion here), requiring the Government to provide in its implementing decrees that, if the parties have so agreed in the arbitration agreement, arbitrators can issue interim measures (a power that Article 818 of the ICCP presently excludes).

This is a long overdue reform, which has the potential to finally bring Italy up to the level of the most arbitration-friendly jurisdictions in the world.  The impossibility to obtain interim measures from arbitrators has often been indicated as one of the main factors preventing Italy from becoming a truly attractive seat for international arbitrations.

 

D. The Parties’ Choice of the Applicable Law

Article 1(15)(d) of Law 206 requires the Government to provide in its implementing decrees the “power” for the parties to Italy-seated arbitrations “to choose the law applicable to their dispute.”

At first reading this provision may seem of little consequence as it is undeniable that parties to an Italy-based arbitration already enjoy the possibility to choose the law applicable to their dispute. However, the foregoing provision may open the door to the possibility for the parties to an Italy-based arbitration to choose a set of rules other than national laws (e.g., the a-national lex mercatoria) to resolve their dispute.  This may be the case if the Government in its implementing decrees (or the courts and arbitrators afterwards) interpret the expression “law applicable” broadly, thereby empowering the parties to choose any “rules” they wish to apply to their dispute. This was indeed the case under former Article 834 of the ICCP, which was repealed through the 2006 Italian arbitration reform.

 

Conclusion

The principles set out in Law 206 for reforming the Italian arbitration statute certainly have the potential to improve the attractiveness of Italy as a seat of international arbitrations.  In particular, the provision vesting arbitrators with the power to issue interim measures seems to have finally taken Italy out of the back burner on which the jurisdictions hostile to arbitration are usually relegated.  For a full assessment of the actual reach of the reform, however, it is necessary to wait for the governmental decrees.  Only those decrees will tell if Italy is finally on the right track to become a truly attractive seat for international arbitration.

References[+]

References ↑1 See e.g., Court of Appeals of Milan (Italy), October 7, 2019; M. Rubino-Sammartano, Il Diritto dell’Arbitrato (CEDAM 2010). ↑2 See e.g., Court of Appeals of Catanzaro (Italy), March 25, 1996; La China, L’arbitrato. Il sistema e l’esperienza (Giuffrè 2004). function footnote_expand_reference_container_40098_12() { jQuery('#footnote_references_container_40098_12').show(); jQuery('#footnote_reference_container_collapse_button_40098_12').text('−'); } function footnote_collapse_reference_container_40098_12() { jQuery('#footnote_references_container_40098_12').hide(); jQuery('#footnote_reference_container_collapse_button_40098_12').text('+'); } function footnote_expand_collapse_reference_container_40098_12() { if (jQuery('#footnote_references_container_40098_12').is(':hidden')) { footnote_expand_reference_container_40098_12(); } else { footnote_collapse_reference_container_40098_12(); } } function footnote_moveToReference_40098_12(p_str_TargetID) { footnote_expand_reference_container_40098_12(); 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_40098_12(p_str_TargetID) { footnote_expand_reference_container_40098_12(); 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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2021 Year in Review: Key Developments in East and Central Asia

Thu, 2022-01-20 00:00

In 2021, East and Central Asia witnessed some noteworthy developments in domestic legislation, jurisprudence, and efforts to enhance the standing of arbitral institutions and seats in the region. There have also been developments in trade/investment agreements and investor-State claims in the region. In this post, our East and Central Asian editorial team reviews this progress over the past year.

 

The PRC: Legislative Amendment, Jurisprudence, and Interim Measures

The 2021 coverage by our contributors continued to observe noteworthy steps towards reforming the arbitration framework in the PRC.

In July 2021, the PRC Ministry of Justice released the Draft Amendment to the Arbitration Law (“Draft Amendment”), the first substantial amendment to the existing PRC Arbitration Law in more than two decades. The Draft Amendment includes several breakthroughs. First, while the PRC only permitted institutional arbitration domestically under the existing law, a proposed provision would permit the conduct of ad hoc arbitration in domestic arbitration with foreign elements. Second, the Draft Amendment adopts a more liberal approach to determining validity of an arbitration agreement by removing the statutory requirement for an arbitration agreement to designate an arbitration commission. Third, the Draft Amendment has introduced other revisions to, inter alia, allow foreign arbitral institutions to establish operations in Mainland China and conduct foreign-related arbitration business, recognize the concept of place of arbitration, recognize competence-competence of arbitral tribunals, and permit arbitral tribunals to order interim measures.

On jurisprudence, one contributor observed that PRC courts have generally continued to uphold the validity of arbitration agreements and recognize broad discretion for arbitral tribunals to determine their own jurisdiction, including in two recent judgments.

The past year has also seen occasions to explore emerging PRC jurisprudence. Our contributors observed that PRC courts demonstrated “a predilection for respecting arbitral jurisdiction and upholding awards” when assessing multi-tiered dispute resolution clauses in domestic annulment decisions. However, the Supreme People’s Court of China approved a judgment setting aside an arbitral award involving the return of cryptocurrency on the ground that it was contrary to public interest, namely the “financial market order” and “stability in the Chinese mainland society.”

Our contributor reflected on the groundbreaking Mainland China-Hong Kong Interim Measures Arrangement, which was signed in April 2019, and noted that it has become the bridge for seeking interim measures between the two jurisdictions with disparate legal approaches to granting interim measures. As of November 18, 2021, 56 successful applications had been made. As observed by our contributor, we can expect to see more applications for interim measures in support of Hong Kong-seated arbitration in Mainland Chinese courts.

 

Other Developments in Arbitration Acts and Domestic Legal Regimes

A number of other notable developments in legislation and legal regimes arose in the East and Central Asian jurisdictions, including the following:

  • Hong Kong saw enhanced prospects for a reform permitting outcome-related fee structures (“ORFSs”) for arbitrations and arbitration-related court proceedings, as the Arbitration Sub-committee of the Law Reform Commission of Hong Kong published a Consultation Paper in favor of ORFSs toward the end of 2020. The Consultation Paper indicated that such reform would help safeguard Hong Kong’s standing as “one of the world’s leading arbitral seats.”
  • Macau presented an additional advantage for choosing arbitration to resolve disputes in Macau through its amendments to the Stamp Duty Law, which entered into force in March 2021. It offers tax reduction in Stamp Duty for certain documents with an arbitration clause specifying that a dispute will be resolved through an arbitral institution in Macau.
  • In late 2020, the South Korean government proposed a bill that would permit class action lawsuits in any area of law. The enactment of the bill could in turn open up discussion on permitting class action arbitrations in Korea.
  • In August 2021, Uzbekistan’s new Law on International Commercial Arbitration (the “ICA Law”) entered into force. The ICA Law is based on the UNCITRAL Model Law. Our contributor discussed how the ICA Law is a significant development for establishing Uzbekistan as a reliable seat for dispute resolution in Central Asia and beyond. Uzbekistan’s existing domestic arbitration law will continue to apply to domestic arbitrations in the jurisdiction.
  • The Japanese Ministry of Justice has been working on amending the Japanese Arbitration Act to bring it in line with the latest UNCITRAL Model Law. Our contributor observed that this would be an opportunity to clarify the status of third party funding, which Japan currently seems to tacitly, but not explicitly, permit.
  • A dedicated task force of the Chinese Arbitration Association, Taipei, has made progress on its Draft Amendment to Taiwan’s Arbitration Law. The goal of these amendments is to adopt the UNCITRAL Model Law with modifications specific to Taiwan, with the ultimate goal of becoming a Model Law jurisdiction.

 

Developments in Arbitration Institutions and Seats

The 2021 International Arbitration Survey underscored the rise in seats and arbitration centers in Asia. SIAC, HKIAC, and, for the first time, CIETAC were ranked among the top five most-preferred arbitral institutions. HKIAC’s Secretary-General, Ms. Sarah Grimmer, spoke to our Blog about how the HKIAC is staying ahead of legislative developments in the region, and promoting its capabilities in jurisdictions in East and Central Asia where arbitration is not as popular as in Hong Kong.

There were also developments in other institutions. The JCAA’s revised arbitral rules, which included changes to expand the applicability of expedited arbitration procedures, came into force in July 2021. Our contributors also compared the guidelines and protocols on virtual hearings issued by the ICC, HKIAC, and KCAB, one year after their release.

In the field of maritime arbitration, our Blog contributors analyzed how the Asia-Pacific Maritime Arbitration Center (“APMAC”) and its parent organization KCAB could amend the APMAC rules and beyond to achieve global prominence. The Hong Kong Maritime Arbitration Group swiftly adopted new Terms and Small Claims Procedure, substantially based on the London Maritime Arbitrators Association’s 2021 Terms and Small Claims Procedure.

Singapore, Hong Kong, Beijing, and Shanghai were ranked among the top 10 most-preferred arbitral seats, with those in Mainland China being nominated by more survey respondents than before. Given the extensive investment flows from the PRC into various countries in Africa in particular, our Blog contributor analyzed potential benefits for choosing to seat the disputes in a location in Africa. The Blog also reviewed the Japanese government’s recent efforts to promote international arbitration and Japan’s strength as an arbitral seat and location.

 

Trade/Investment Agreements

2021 also saw developments in trade or investment treaties in East and Central Asia, and a glimpse of some States’ cautious attitude toward ISDS. In December 2020, the PRC and the EU agreed in principle to the EU-China Comprehensive Agreement on Investment. In January 2021, the Japan-United Kingdom Comprehensive Economic Partnership Agreement came into force. Our contributors analyzed (here and here) these agreements’ lack of clear articulation of certain investment protection standards and investor-State dispute resolution mechanisms. In 2021, both the U.K. and the PRC announced a bid to accede to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. While this agreement includes an ISDS mechanism, as our Blog contributor highlights, several signatories have already signed side letters to exclude its application.

There were also notable ISDS disputes featuring investors or States from the regions, including a notice of arbitration submitted to Sweden by a PRC party, the first ICSID arbitration against Malta (by a PRC party), and the first investment treaty claim against Japan (by a Hong Kong party). The Hong Kong-Japan BIT was invoked in the last case, and our Blog also considered trends in investment agreements signed by Hong Kong.

 

The 10th Anniversary of Hong Kong Arbitration Week

Our live coverage of Hong Kong Arbitration Week continued for the fourth year. We launched this year’s coverage with a conversation with Secretary-General Sarah Grimmer of HKIAC, followed by reportage of events covering the Hong Kong-PRC Interim Measures Arrangements, two years on; virtual hearing from a Korean perspective; overcoming limitations on arbitral tribunals’ powers in tackling cases involving fraud; as well as governmental policies and potential future disputes related to the renewables sector.

 

As always, we are grateful to our contributors for their continuous dedication to generating thoughtful and diverse coverage of the region. We eagerly anticipate the promising developments in arbitration to come in the next year and look forward to continuing our Blog’s wide-ranging coverage of East and Central Asia.

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2021 in Review: Continued Movement at the Intersection of International Arbitration and Human Rights

Wed, 2022-01-19 00:00

This is the third consecutive year that we, either together or separately, have reported on trends at the intersection of human rights and international arbitration from the prior year (see prior Blog coverage here and here). As we emphasized last year, the effects of the COVID-19 pandemic on this intersection are likely to remain a dominant theme in the years ahead, particularly in the context of State regulatory measures to protect the health, safety, and welfare of their citizens.

Looking back on 2021, we identify four trend areas: 1) drafting of new IIAs; 2) updates to the binding treaty on business and human rights; 3) key investment arbitration cases; and 4) ISDS reform efforts. Overall, across these four foci, 2021 was a continuation of the directional trends from prior years. We conclude with thoughts on what this could mean for the years ahead.

 

Limited Information on IIA Drafting Trends in 2021

As of January 2022, UNCTAD reports that 9 new IIAs were signed in 2021, none of which are yet in force. Of these 9 new IIAs, the text of 3 are publicly available. It should be mentioned that only 1 of 3 new and publicly available IIAs, the Georgia–Japan BIT, is an investment treaty. The other 2 IIAs are both trade-focused interim agreements between the UK and Ghana and the UK and Cameroon, neither of which include investment chapters. As such, analysis is limited at this time; however, the other 6 IIAs are all investment treaties and, once publicly released, should provide a fuller picture of emerging trends over the year vis-à-vis the inclusion of human rights clauses in IIAs.

The Georgia­–Japan BIT follows similar trends from prior years. For example, its preamble recognizes the importance of achieving shared investment goals without relaxing, inter alia, health-related measures. Article 11(4) excepts “legitimate public welfare objectives, such as health . . . .” from the definition of expropriation. Notably, paragraph (5) excepts compulsory licenses via the TRIPS Agreement, which has of course received attention during the pandemic. Article 15(1) seeks to preserve regulatory autonomy for, inter alia, health-related measures. Finally, Article 20 reflects prototypical language for a non-lowering of standards provision.

Acknowledging the limited availability of sources at this time, it must still be queried whether and when IIA drafting trends may bend towards more direct and robust inclusion of human rights considerations. While there have been a couple notable inclusions of gender-related norms in recent IIAs, such as the 2020 Fiji–US TIFA, drafting trends have otherwise remained constant. Direct mention of specific human rights instruments, not to say anything of specific norms, remain relatively rare. Rarer still are robust operative provisions addressing corporate social responsibility that establish any obligations, not to say anything of direct obligations, for multi-national enterprises.

 

Developments in the Binding Treaty on Business and Human Rights 

Since 2014, efforts have been underway to develop a legally binding instrument to the activities of transnational corporations (TNCs) and other business enterprises (OBEs) regulate under international human rights law (altogether “BHR Treaty”). These developments have been discussed elsewhere by one of us. Following release of the Zero Draft of the BHR Treaty in 2018, the Revised Draft in 2019, and the Second Revised Draft in 2020, a Third Revised Draft was released in August 2021.

The Third Revised Draft makes only minor modifications to the Second Revised Draft. While the BHR Treaty continues to move towards closer alignment with the UN Guiding Principles on Business and Human Rights (UNGPs), notable gaps persist. For example, as has been an issue since the early drafting discussions, the Third Revised Draft still does not clearly establish binding obligations for TNCs/OBEs. Although the Third Revised Draft expanded the scope of the instrument (Article 3) relative to earlier drafts, its scope remains tethered to human rights obligations binding on States only. In contrast, the UNGPs obligate businesses to respect all internationally recognized human rights.

Nonetheless, the Third Revised Draft marks an important step in the iterative process underway since 2014 towards defining the applicability and scope of human rights obligations on businesses on the international legal plane. The UN open-ended intergovernmental working group (IGWG) held discussions on the Third Revised Draft in late October 2021. Among other topics, the IGWG discussed the scope of the instrument, technical points on which rights to include (e.g., right to a clean, healthy, and sustainable environment) and the definition of ‘business activities’, whether and how to strengthen provisions on remedies and liability, and the need for political will to significantly advance the instrument moving forward.

 

Key Cases at the Intersection of Human Rights and Investment Arbitration

The tribunal’s decision in Eco Oro v. Colombia on September 9, 2021, has attracted considerable attention.  The investor had entered into a mining concession in 2007 that overlapped with a vulnerable wetland, described in the award as “environmental jewels”, that also provided “water to around 2.5 million people in 68 surrounding municipalities.”  There were a series of actions by Colombian authorities that prohibited mining activities in the Páramo region, resulting in the arbitration pursuant to the Canada–Colombia FTA.

A majority of the Tribunal found that Colombia had violated the minimum standard of treatment.   Of particular significance is the “General Exceptions” clause under Article 2201(3) which, inter alia, excepts measures

“necessary . . . (a) To protect human, animal or plant life or health, which the Parties understand to include environmental measures necessary to protect human, animal or plant life and health; [. . . ](c) For the conservation of living or non-living exhaustible natural resources.”

Both Colombia and Canada (through a non-disputing party submission; see prior Blog coverage here) argued that if a general exception (including environmental measures) applied, “there can be no violation of the FTA and thus no state liability and, consequently, payment of compensation would not be required.”  The tribunal, however, did not accept the interpretation and concluded that while a state may adopt or enforce environmental measures “without finding itself in breach of the FTA,” this “does not prevent an investment claiming under the [Investment Chapter] that such a measure entitles it to the payment of compensation.”  In other words, even if a State is not liable under an FTA, they can still be liable for compensation.

Many have criticized the finding of the tribunal (e.g., here and here). The decision highlights the tension between human rights law and international investment law that has been the subject of a prior post here.  It remains to be seen how future tribunals will grapple with this issue. General exceptions provisions are generally viewed as supporting regulatory autonomy; however, if liability is bifurcated from such provisions, as in Eco Oro, States will need to carefully consider the introduction of new measures and, where applicable, their disputes strategy.

 

Developments at the Institutional Level

On November 12, 2021, ICSID released its sixth and final Working Paper on proposed amendments to the procedural rules to resolve investment disputes.  Even though the proposals do not touch upon the substance of investment agreements, there are several innovations that would support human rights norms.

For example, the amended rules require, inter alia, greater transparency in the conduct and outcome of proceedings by permitting submissions of non-disputing parties (Rule 67), participation of non-disputing treaty parties (Rule 68), publications of orders and decisions (Rule 63), and publication of documents filed in the proceeding (Rule 64). Such efforts will promote human rights values by allowing greater scrutiny into and consideration of multiple voices in the dispute resolution process, as well as broadly support due process and access to justice.

Similarly, on September 22, 2021, ICSID and UNCITRAL issued an updated third version on the Code of Conduct for Adjudicators in International Investment Disputes.  The latest version emphasizes the goals of “independence” and “impartiality” for adjudicators (Article 3), while presenting three options to prevent the “double hatting” problem: (i) full prohibition, (ii) modified prohibition, or (iii) full disclosure with an option to challenge (Article 4).  Article 10 emphasizes greater transparency through “disclosure obligations” in relation to “any interest, relationship or matter that may, in the eyes of the disputing parties, give rise to doubts as to their independence or impartiality.”  Such efforts again seek to promote human rights goals of transparency and greater access to information.

 

Looking Ahead 

Overall, 2021 was a continuation of the directional trends from prior years. This is perhaps unsurprising. It is likely too soon to observe, in concrete ways, the effects of the pandemic across these four foci, not least because the pandemic is still ongoing. Indeed, the wheels of international law, as a general matter, turn slowly.

Looking ahead, it is interesting to reflect on the convergence of these four foci. Notably, they are comprehensive, as they encompass concrete changes to both the procedural and substantive dimensions of the intersection of human rights and international arbitration. For the BHR Treaty, in particular, the potential future establishment of new norms—whether direct and binding, or otherwise—would have ripple effects across IIA drafting trends and disputes.

This year, we are hopeful—on a personal note—to see the pandemic subside, as well as continued attention on the intersection of human rights and international arbitration, so as to harmonize efforts towards share sustainable investment and development goals.

 

The views expressed herein are the authors’ personal views, and do not necessarily reflect the views of the authors’ affiliated institutions or clients.

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A Look at California’s International Arbitration Future

Tue, 2022-01-18 00:59

“If they can’t do it in California, it can’t be done anywhere.”  – Novelist Taylor Caldwell

 

From its sunlit beaches to its fog-spangled hills, California hosts the world’s fifth largest economy, boasting among its accomplishments Hollywood entertainment, Silicon Valley technology, and Central Valley agricultural produce. In addition to its strong trade ties within the Americas and with Asia, California is home to the largest shipping ports in the Americas, and Los Angeles is the busiest port in the Western Hemisphere. And with a focus more on Asia than Europe and a commitment to due process, diversity, and leadership in industry, trade, and innovation, California is uniquely positioned as a gateway for trade and growth throughout the Pacific region.

California, being California, is ever in search of the next new “it.” California’s $3.1 trillion economy, fine weather, good wine, and multi-cultural embrace make it a welcoming destination for new opportunities. From the looks of it, international arbitration is poised to be California’s next starring role.

An UNCITRAL Model Law Jurisdiction that Protects Parties

Many attribute California’s delay in becoming a leading international arbitration seat to legislative or judicial hostility. But the fact is that California adheres to a nationwide policy favoring commercial arbitration. California’s main problem is that it has been misunderstood.

So let’s talk about the misperceptions. When it comes to commercial arbitration, particularly international arbitration, California has impeccable credentials. California is an UNCITRAL Model Law jurisdiction. In fact, it is one of just a handful of US states that have adopted the Model Law. Moreover, California has a strong record for supporting international arbitration and enforcing international agreements and awards.

Like the rest of the US, California leans toward some degree of US-style discovery in arbitration, but there are many well-trained international counsel and arbitrators in California who appreciate and respect customary limits of information exchange in international arbitration, such as those articulated in the IBA Rules on the Taking of Evidence in International Arbitration. Reliance disclosures and limited and narrow document requests are the norm when sophisticated international counsel and arbitrators are engaged.

Some complain that California law imposes a heavy burden for ethical disclosures. That view is also misplaced in international arbitration because the statutory provisions requiring fuller disclosures apply only to domestic arbitration. California’s International Arbitration and Conciliation Act (CIACA), §1297.11 et seq, which applies to international arbitrations seated in California, expressly supersedes these provisions, and requires the same level of disclosure as the ABA Code of Ethics for Arbitrators in Commercial Disputes and institutional rules, as in New York and other states. Regardless, it is true that international arbitrators serving in California have a heightened awareness of disclosure responsibilities. That is a good thing for parties and the integrity of international arbitration.

Finally, many have pointed to the 1998 California Supreme Court’s Birbrower decision, 17 Cal. App. 4th 119 (Cal. 1998) to challenge California’s support for international arbitration (for example, this post from 2017). That domestic case addressed whether an out-of-state law firm could perform legal services in California. California’s legislature promptly implemented a  registration process for non-California lawyers in domestic cases in 1999 and, to resolve any uncertainty, passed legislation in 2018 expressly permitting non-California lawyers to appear in international arbitrations in California without any registration or local counsel requirements (for more, see here). Birbrower is now a closed chapter.

Looking to the Atlantic and the Pacific

From 1985 until shortly before 2000, San Francisco was the home of the AAA-Asia/Pacific Center for the Resolution of International Business Disputes. Its mission was to promote California (and Hawaii) as international arbitral seats. What has really held back California for so many years since then has not been hostility to arbitration; rather, it is a lack of an organized and ongoing effort.

For the most part, California did little while other jurisdictions acted. International arbitration in California has had limited collective leadership, only remote institutional support, and no engagement with state and local governments. Initiatives to establish a California Arbitration Center were short-lived and more recent efforts failed to build consensus. Practitioners in California are now looking to what other jurisdictions have done right and how California can advance further.

New York provides a useful case study. In 1996, the American Arbitration Association (“AAA”) created its new international division, the International Centre for Dispute Resolution (ICDR), and based it in New York. The focus by AAA on New York, and the more recent collaborative initiative by major law firms there to establish the New York International Arbitration Center provided the catalyst needed to shift some of the focus on international arbitration from Europe to New York. It was that initiative that allowed New York, in just recent decades, to become a major arbitral seat.

Other jurisdictions have followed parallel trajectories. In the late 1980’s and early 1990’s, jurisdictions in Asia, particularly Hong Kong and Singapore, took steps to meet the growing need for international business dispute resolution there. Those initiatives led to the rise of the Hong Kong International Arbitration Centre in Hong Kong and the Singapore International Arbitration Centre in Singapore, jurisdictions that now rank among the top five global arbitration seats. New arbitral institutions continue to sprout and prosper in Asia.

The delay in developing California as an international arbitration seat has left a void that reaches beyond California itself. For many, New York is too far away from Asia, in both distance and focus, to support international arbitration between North America and Asia. The result is that international arbitration is inconvenient for US companies doing business in Asia, and Asia-based companies have little incentive to use the US as a seat.

California is now moving forward. Rather than competing with other jurisdictions, California is looking to collaborate and offer itself as a welcoming hearing locale for arbitral institutions around the world. As detailed below, recent initiatives are promising.

Eureka! California, the Golden State

Just a few months ago, California international practitioners formed California Arbitration (“CalArb”), an organization to serve as “the voice of [the] California international arbitration and ADR community.” This rapidly growing group has brought together professionals from across the state and internationally to collaborate with California businesses, their corporate counsel, law firms, ADR providers, and universities to support international arbitration and mediation in California. CalArb’s broader mission is to provide resources to businesses and legal practitioners around the globe to guide them on international dispute resolution in California.

CalArb has joined with the California Lawyers Association to spearhead the first annual California International Arbitration Week, which is set to take place on March 14 – 18, 2022. California International Arbitration Week will be a hybrid, virtual and in-person conference, and presenting organizations will include: AAA-ICDR, Asian International Arbitration Centre, Arbitral Women, Chartered Institute of Arbitrators, CPR Institute for Conflict Prevention and Resolution, Hong Kong International Arbitration Centre, International Chamber of Commerce Court of Arbitration, JAMS International, Korean Commercial Arbitration Board, London Court of International Arbitration, Silicon Valley Arbitration & Mediation Center, Shenzhen Court of International Arbitration, Singapore International Arbitration Centre, Straus Institute / Pepperdine University, and the University of Southern California.

These and other California initiatives are bringing interested practitioners around the world together to celebrate the opportunities California offers.

The Strategy Forward: The US Gateway to the Pacific

In working with practitioners around the world, California practitioners are developing focused plans to move forward. There are six concrete steps required and CalArb is taking the lead:

One, Engaging the International Community: CalArb plans to engage the entire international arbitration community in a coordinated, constructive manner to demonstrate how California adds to the international equation.

California provides opportunity as both a seat for arbitrations and a hearing locale for arbitrations seated in Asia, New York, and elsewhere in the Americas. To strengthen opportunities for international arbitration on the Pacific coast, CalArb plans to collaborate with other institutions in the Americas, including NYIAC, the Vancouver International Arbitration Centre, and providers in Latin America.

As well, CalArb will be engaging new and diverse practitioners around the globe who can benefit from and contribute to the opportunities California offers.

Two, Engaging Law Firms in California: CalArb will be working to develop sustaining relationships with US and international law firms in California, including law firms that are not yet fully engaged in the international arbitration field. There are many highly capable lawyers in California who can add value to international arbitration. Many already have international backgrounds, unique industry focused practices and serve an array of international clients.

Three, Providing Education: CalArb plans to implement regular, ongoing educational programming on international arbitration and engage in focused initiatives to bring practitioners into the fold. This effort further includes supporting California law schools in teaching international arbitration.

Four, Working with Corporations: CalArb plans to enlist broad corporate support for international arbitration in California. 55 of the Fortune 500 companies are based in California, including the likes of Apple, Google, Chevron, Wells Fargo, Intel, Walt Disney Company, Netflix, Salesforce, Visa, PayPal, and Uber Technologies. California businesses need to understand the benefits of arbitration, particularly when the alternative is a foreign court. This requires active leadership from companies that are already active users of international arbitration.

Five, Enlisting Government Support: CalArb will be examining opportunities for government support and engagement. Unlike some jurisdictions that have received heavy government support for developing arbitration, California has yet to engage state and local governments in any meaningful way. Other leading jurisdictions have turned to government support for international hearing centers to accommodate international arbitration proceedings. Those facilities serve as a focal point for in-person and hybrid arbitrations and contribute greatly to the economics in their locales. California may soon be doing the same in one or more locations.

As well, CalArb is planning for ongoing outreach to the California legislature and judiciary so that they properly appreciate the value of international arbitration, and so that the topic is not lost in the national debate over employee and consumer arbitration (for more on those topics, see here). This includes responding directly to questions raised as to the statutory requirements for foreign counsel as well as continuing to update California’s international arbitration law. Already, leading practitioners and academics in the state are working on a California Lawyers Association project to modernize California’s UNCITRAL Model Law statute to include the latest amendments and new innovations.

Six, Collaborating with Institutions: California will be looking to find its institutional footing. All of the leading arbitral seats are closely aligned with one or more arbitral institutions that call their cities home. Although AAA-ICDR has a presence in California, none of the leading international arbitral institutions are based in California. US domestic provider JAMS, based in Southern California, has been devoting significant resources to develop international credentials by adding international arbitrators to its ranks, investing in international marketing, and building out international arbitration centers in California. Several Asia-based institutions have also been actively exploring the US market through California. It is inevitable that AAA-ICDR will increase its focus on California as the opportunity develops. Whether AAA-ICDR, JAMS, or some other existing or to be established institution fills the void remains to be seen. But in the meantime, California international practitioners will be actively encouraging institutions to make measurable, on the ground commitments to California.

California is already the US’s gateway to Asia and the Pacific Rim and is thus uniquely positioned to serve as the base for Pacific Rim-focused arbitration in the Americas. It has the resources in technology to offer unique, practical and useful solutions to parties. And that is precisely where the opportunity lies – for California to innovate what comes next in international arbitration. Because with innovation, California is at its best.

 

Gary Benton, C.Arb., is a US, UK and International Arbitrator, the founder and Chairman of the Silicon Valley Arbitration and Mediation Center (SVAMC) and the founder of California Arbitration (CalArb.org), both educational foundations based in Palo Alto, California.

Giorgio Sassine is an Associate of Musick, Peeler & Garrett LLP and is based in Los Angeles, California. He is also an Assistant Editor for California and the United States for the Kluwer Arbitration Blog, coaches the University of San Diego School of Law’s Willem C. Vis team, and is a founding member of California Arbitration.

This article represents the views of the authors and not necessarily those of the referenced entities.

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2021 in Review: Commercial Arbitration Highlights in LatAm

Mon, 2022-01-17 00:00

In 2021, Latin American countries continued to struggle with the adverse effects of the COVID-19 pandemic.  Accordingly, legislative and jurisprudential developments on arbitration-related issues were also affected given that the governments were focused on reactivating local economies, vaccinating their citizens, and launching tax and labor reforms.  In addition, presidential elections also marked political shifts for countries such as Ecuador, Peru, and Chile, thereby moving the focus on the new administrations’ new policies.

Notwithstanding this, the private sector was still eager to promote the use of arbitration in the region.  In fact, several arbitral institutions in the region launched new arbitration rules to ‘catch up’ with international arbitration rules and reflect the use of technologies in arbitration proceedings amidst the ‘new normal’.

Below, we will discuss the most relevant developments in the region.

 

Proactiveness from local arbitral institutions

In June 2021, the Arbitration Center of the American-Peruvian Chamber of Commerce (AMCHAM Peru) published new Arbitration Rules, which entered in force in July 2021, replacing the 2013 Arbitration Rules.  The rules incorporate provisions on the scrutiny of awards, multiparty and multiple-contract arbitrations, publication of awards, and the composition of arbitral tribunals.  Likewise, the Arbitration Center of the American-Ecuadorian Chamber of Commerce (AMCHAM Ecuador) also launched new Arbitration Rules in July 2021, which replaced its 2010 Arbitration Rules. Among other changes, the new rules (i) include the possibility to consolidate two or more arbitrations under certain circumstances; (ii) set forth a procedure to appoint arbitrators absent an agreement between the parties; (iii) amend the procedure to challenge arbitrators providing for a ten-day term to challenge any arbitrator following the notification of the acceptance of the appointment; (iv) provide for the possibility to resort to the IBA Guidelines on Conflicts of Interest in International Arbitration and the IBA Rules on the Taking of Evidence in International Arbitration when appropriate; (iv) include the possibility to conduct the arbitration proceedings virtually; and (v) set forth the possibility to appoint an emergency arbitrator.

In addition, as Renata Steiner and Carlos Selias reported, in November 2021, the Center for Studies and Research in Arbitration from the University of São Paulo published a report on challenges to arbitrators in domestic proceedings in Brazil. The initiative analyzed data from ten challenges in arbitral proceedings that the Câmara de Mediação e Arbitragem Empresarial – Brasil (CAMARB) administered, and has provided the Brazilian arbitral community with transparency on the standards applicable to arbitrator challenges in the country.

Paraguay and Uruguay similarly experienced developments in arbitration rules.  On November 12, 2021, the Paraguayan Arbitration and Mediation Center (CAMP) issued new Arbitration Rules which now incorporate emergency arbitration proceedings, rules for expedited procedures, and procedures for multi-party and multi-contract arbitrations.  Likewise, the Center of Conciliation and Arbitration of the Stock Market of Uruguay issued new Arbitration Rules, focusing on new procedural issues very much in line with modern arbitration rules and displacing the old rules contained in the Uruguayan Procedural Code.  The rules now address (i) the issuance of Terms of Reference, the conduct of a case management hearing, and the issuance of a procedural calendar; (ii) the possibility to request interim measures before local courts, the arbitral tribunal, and an emergency arbitrator; (iii) submitting written witness statements and expert reports; and (iv) expedited procedure applicable to matters up to US$ 200,000, and other matters where the parties opt in.

 

Brazil: surprisingly active despite being one of the countries most impacted by the COVID-19 pandemic

In 2021, Brazil reported the highest number of legislative and judicial developments, confirming that it is a hot spot for arbitration disputes in the region.  Our interview with Eleonora Coelho, President of the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC), revealed how Brazil is an attractive forum for Portuguese language arbitration disputes and how the Center has successfully increased the numbers of domestic and international disputes it administers in the last thirty years.

Unlike the rest of the region, Brazil did face a series of legislative and jurisprudential developments, which were reported in 2021:

  • On January 23, 2021, the New Brazilian Insolvency Act entered into force, which for the first time, regulated the interaction between insolvency and arbitration. As Andre Luis Monteiro discussed here, the act adopts an arbitration-friendly approach clarifying that the commencement of a judicial reorganization proceeding or the issuance of a winding-up order (i) does not permit the trustee/liquidator to discharge the arbitration agreement, or prevent arbitrations from starting or continuing; and (ii) does not negate the arbitrability of claims made against the insolvent party.
  • Thiago Marinho Nunes reported on a controversial decision dated March 2, 2021 from the Appellate Court of São Paulo, which found that Article 189(IV) of the Brazilian Civil Procedure Code, which provides for the confidentiality of court documents relating to arbitration proceedings, was unconstitutional. Although the decision may still be reversed in the future, its holding affects one of the essential features of commercial arbitration, i.e. confidentiality.
  • In a case introduced by Maúra Guerra Polidoro earlier this year, the courts considered a party’s request for a supplemental arbitral award, on the basis that a prior arbitral award was issued infra petita. The case arose from a request for emergency relief that a party filed to suspend ongoing arbitral proceedings before CAM-CCBC, until the First Corporate and Arbitration Conflicts Court decided if the supplemental award was necessary. While the first instance court rejected the petition, the appeals court granted it. The case is awaiting a final decision from Brazil’s Superior Court of Justice.
  • On July 30, 2021, the 2nd Civil Court of the District of São Paulo hearing an annulment petition issued an interim decision partially staying enforcement of an ICC partial award on the basis of a conflict of interest allegation against Mr. Anderson Schreiber.1)The annulment action is under court secrecy, hence the decision is not publicly available. jQuery('#footnote_plugin_tooltip_39486_24_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39486_24_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The annulment action followed an arbitral award rendered in February 2021 in favor of CA Investments SA, a subsidiary of Paper Excellence B.V., in a dispute over the sale of pulp producing company Eldorado Celulose Paper, against respondent J&F Investimentos.  The respondent sought the annulment of the partial award alleging that claimant’s appointed arbitrator, Mr. Schreiber, failed to disclose the fact that his previous law firm shared the same office space with claimant’s former counsel.  Brazilian courts have yet to finally decide on the annulment. The outcome will certainly represent an important development for discussions over arbitrators’ disclosure duties in the country, which we look forward to reporting on in 2022.

 

Ecuador’s pro-arbitration wave: But is the Lasso Administration trying too hard?

The current regime of President Lasso has made a clear statement that it is willing to showcase Ecuador as a reliable jurisdiction for foreign investment.  The first step taken this year was the country’s re-accession to the ICSID Convention.  This initiative was followed by the enactment of Regulations to the 1997 Arbitration and Mediation Law, which as Andrés Larrea reported, seek to limit judicial intervention, reinforce party autonomy, and promote Ecuador as a seat for international arbitration.

In addition, Hugo García and Bernarda Muriel reported that on November 23, 2021, in an effort to audit and reduce the costs the Ecuadorian government has spent in defending international lawsuits, the Office of the Attorney General launched the “Institutional Strengthening of the Attorney General’s Office Project”, an institutional framework for handling disputes brought against the state and state entities.

Despite the new administration’s clear-cut efforts to turn away from the country’s anti-arbitration policy of the last decade, Ecuador still faces challenges given that President Lasso does not have control over other institutions such the National Assembly.  In addition, the government’s pro-investment policy was recently questioned given the Constitutional Court’s recent ruling on the Los Cedros case, where environmental permits granted to Canadian mining company Cornerstone were revoked based on environmental protection concerns.

 

Colombia: Council of State equates arbitrators to judges 

In a decision from October 11, 2021, the Council of State of Colombia (the “Council”) declared that arbitrators are state agents and the Judiciary may be held liable for jurisdictional errors incurred in arbitral awards. The decision arises from a claim filed against the Judiciary for damages arising from a jurisdictional error that a three-member tribunal allegedly committed. The first instance court dismissed the claim on the grounds that the Judiciary could not be held liable for any error attributable to arbitrators who are not state officers and could not be equated to judges. Although the Council upheld the lower court’s decision, it did so on different grounds. The Council confirmed the dismissal of the claim because it found no evidence of the existence of a jurisdictional error but it repudiated the lower court’s reasoning. It held that arbitrators are agents of the state, and that the Judicial Branch is formally and materially accountable for the damages caused by jurisdictional errors contained in arbitral awards. In particular, the Council held that arbitrators may be equated to judicial agents for the purposes of liability for damages and that the Judiciary was entitled to seek reimbursement from them where it is held liable for errors committed in the course of arbitral adjudication.

 

Argentina: a positive note on the enforcement of foreign arbitral awards

During New York Arbitration Week, María Inés Corrá reported on a favorable decision from Argentina’s Supreme Court, which rejected a lower court’s unorthodox application of the grounds to deny the recognition and enforcement of foreign arbitral awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NY Convention”).

Milantic Trans S.A. (“Milantic”) (a Panamanian company) obtained a favorable award against Astillero Río Santiago (a public entity owned by the Province of Buenos Aires, “Astillero”) in an arbitration seated in London. Milantic requested enforcement of the award before Buenos Aires courts and Astillero opposed the petition arguing that the construction contract containing the arbitration clause was invalid because it lacked the legislative authorization required from the government of Buenos Aires. The first instance court dismissed Astillero’s objection and granted the enforcement. Astillero then filed an appeal only against the court’s award of costs. Absent Astillero’s appeal of the court granting the enforcement, the decision became final. The Court of Appeals, however, reversed the first instance decision sua sponte, based on the absence of a valid arbitration clause duly approved by law. The court based its ruling on Article V(2) of the NY Convention, which grants courts the power to review ex officio violations of international public order. The decision was upheld by the Supreme Court of Buenos Aires.

The case ultimately reached the Federal Supreme Court, which reversed the decision on the grounds that the power to consider ex officio the grounds for refusing recognition and enforcement of awards under the New York Convention cannot be exercised in violation of other essential principles such as res judicata, which are also part of international public order.  This decision is clearly a good precedent for the country’s practice on the enforcement of foreign arbitral awards.

 

Conclusion

2021 promised to be different from 2020, but in reality, not many things changed.  With Latin American governments’ ongoing focus on fighting the economic crisis the COVID-19 pandemic caused, and political changes in the region, arbitration-related developments fell short (when compared to prior years).  However, this situation seems to have given arbitral institutions the opportunity to update their arbitration rules to meet internationally accepted practices.

References[+]

References ↑1 The annulment action is under court secrecy, hence the decision is not publicly available. function footnote_expand_reference_container_39486_24() { jQuery('#footnote_references_container_39486_24').show(); jQuery('#footnote_reference_container_collapse_button_39486_24').text('−'); } function footnote_collapse_reference_container_39486_24() { jQuery('#footnote_references_container_39486_24').hide(); jQuery('#footnote_reference_container_collapse_button_39486_24').text('+'); } function footnote_expand_collapse_reference_container_39486_24() { if (jQuery('#footnote_references_container_39486_24').is(':hidden')) { footnote_expand_reference_container_39486_24(); } else { footnote_collapse_reference_container_39486_24(); } } function footnote_moveToReference_39486_24(p_str_TargetID) { footnote_expand_reference_container_39486_24(); 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_39486_24(p_str_TargetID) { footnote_expand_reference_container_39486_24(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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The New York Convention in the United Arab Emirates: Fifteen Years On

Sat, 2022-01-15 00:53

The United Arab Emirates (“UAE”) adhered to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention (“New York Convention”) in 2006. Joining the New York Convention was done through Federal Decree No. 43 of  2006. This post examines how the New York Convention has been implemented by the Dubai courts fifteen years on.

 

Refusal to Recognize the Foreign Award

In Dubai Court of Cassation No. 403/2020 (Civil), the Dubai Court of Cassation (“Court”) refused the enforcement of an award issued in China on the grounds of public policy. The Court explained that the New York Convention has become part of the country’s legislation and that foreign arbitral awards should be enforced unless one of five instances set out in Article V of the New York Convention is triggered.1)Article V contains the grounds for which the recognition and enforcement of the award may be refused. jQuery('#footnote_plugin_tooltip_39963_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39963_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  One such ground is where the award violates the public policy of that country. The Court then cited Article III of the New York Convention which provides for enforcement in line “with the rules of procedure of the territory where the award is relied upon”. In this regard, the Court found that “the rules of procedure” refers to any law which governs proceedings and is not limited to the Federal Civil Procedures Law. It was the Court’s view that the Federal Arbitration Law No. 6 of 2018 (“Arbitration Law”) is a procedural law given that  it contains the procedural rules of arbitration and is therefore part of “the rules of procedure” envisaged in Article III of the New York Convention. Article 41.3 of the Arbitration Law stipulates that the arbitrators shall sign the award. The Court was of the opinion that signing an award means signing both the dispositive and the reasoning sections of the award. If the signature has not been placed in both of the sections of the award, the award is deemed to be invalid and this invalidity is one of the reasons to refuse the recognition and enforcement of the award as part of UAE’s public policy. The award in this case contained the signature of the arbitrator on the last page only and not on any parts of the reasoning or the dispositive sections of the award and as such, the Court concluded that the award could not be enforced. The requirement to sign the reasoning and the dispositive has been consistently applied by Dubai courts.

As previously discussed on the Blog here and here, the UAE courts have a rather conservative approach on the issue of a representative’s authority to conclude an arbitration agreement. For example, in Dubai Court of Cassation No. 400/2014 (Commercial), the Court refused the enforcement of an award that was rendered in London on the basis that the signatory of the arbitration agreement was not authorized to agree to arbitration. The Court held that the New York Convention should apply to the recognition and enforcement of the award and found that the award debtor provided evidence demonstrating the lack of capacity of the signatory. Accordingly, the Court relied on Article V(1)(a) of the New York Convention to refuse its recognition and enforcement.

 

Recognition of a Foreign Award

In Dubai Court of Cassation No. 5/2020 (Commercial), the Court reversed the decision of the lower court which had refused enforcement on the basis that the award had not become final in the country of the seat of the arbitration.  The lower court had relied on Article 85.2(d) of the Implementing Regulations of the Civil Procedures Law (“Implementing Regulations”), which requires finality of the judgment in order to enforce a foreign judgment, in its decision refusing enforcement of the award. In particular, the lower court reached this conclusion on the basis of a certificate issued from the Court of Appeal in Beirut demonstrating that the case is still being heard. The lower court concluded that the award is being appealed. The Court clarified that this was an error as the award is not subject to appeal. It appears that the award debtor had filed an action for annulment. One can conclude from the reasoning of the Court that ratification and enforcement would not have been granted If the award was subject to appeal. This is in line with Article V.1(e), which states as one of the grounds for refusing ratification and enforcement, the instance where “The award has not yet become binding on the parties.” When the case was heard before the Court, the award debtor argued that the award was not enforced in the country of the seat, in Lebanon. The Court explained that enforcement in the country of the seat was not a prerequisite and only one of the five instances set out in Article V of the New York Convention can prevent enforcement. The Court explained that the provisions of the international treaties concluded by the UAE take precedence over local legislation. As such, the lower court should have decided the application to enforce the award in line with the New York Convention and not the Implementing Regulations.

In Dubai Court of Cassation No. 693/2015 (Commercial), the award debtor had argued that the arbitration agreement was signed by a person who was not authorized to sign the contract, that the award debtor was not given proper notice of the arbitral proceedings and was unable to present its case. The award debtor argued that the arbitral tribunal had served notice of the proceedings on a commercial agent who was not related to the award debtor and that the latter is an Emirati company, which should be served as per the convention on judicial cooperation concluded between the UK and the UAE. Accordingly, the award debtor argued that the award should not be recognized and enforced on the basis of Articles V.1(a) and (b) of the New York Convention. The Court found that there was no evidence on the incapacity of the signatory under the laws of the award debtor and that it was clear that the debtor had participated in the proceedings. Accordingly, the Court ordered the enforcement of the award under the New York Convention.

In Dubai Court of Cassation No. 384/2016 (Commercial), the Court ordered enforcement of the award in a case that was extensively reported and criticized in the arbitration community (See prior discussion on the Blog here). This case related to an ICC award, which the lower courts refused to recognize on the basis that the UAE and the country of the seat of the arbitration, the United Kingdom, should be members of the New York Convention and that there was no evidence in the casefile that the United Kingdom was a member of the New York Convention. The decision was subsequently reversed by the Court as the Court explained that the United Kingdom had become a member of the New York Convention on 24 September 1975.  It is noteworthy in this decision that the Court highlighted the importance of respecting the international conventions entered into by the UAE with respect to the enforcement of foreign court judgments and arbitral awards amongst which the New York Convention. In this context, the Court reiterated the requirement that a country member to the New York Convention should not impose more burdensome requirements on the enforcement of foreign awards.

In Dubai Court of Cassation No. 132/2012 (Commercial), the award creditor had filed an application for the recognition and enforcement of two awards issued in London while the award debtor filed for the nullification of the awards on multiple grounds such as the incapacity of the signatory of the arbitration agreement, irregularities in the formation of the arbitral tribunal, etc. The Court granted the enforcement  of both the awards dismissing the objections raised by the award debtor. The Court explained that as the UAE was a signatory of the New York Convention, ratification of foreign awards should be in line with the New York Convention. As such, a court may only refuse the recognition of an award if one of the grounds set out in Article V are met and the award debtor in this case had not been able to demonstrate any of the grounds contained in Article V. The Court further explained that there is an assumption that the requirements of arbitral proceedings have been observed and whoever alleges the contrary should provide evidence of such allegations. The Court then dealt with the challenges raised by the respondent and found that these allegations were not proven.

In Dubai Court of Cassation No. 434/2013 (Commercial), the Court rejected the various objections raised by the award debtor and enforced the award issued in Germany on the basis that  foreign awards should be enforced in line with the New York Convention, which the UAE was a member of, and that the enforcement of an award could only be rejected if one of the instances set out in Article V has been met. The decision is discussed in more detail in a prior post. It is worth noting here that the Court mentioned that the award is issued in Germany, which is a country member to the New York Convention and that as such, the requirements of implementing the New York Convention have been met. This indicates that the Court considers it a requirement that the country of the seat be a member of the New York Convention.

 

Final Remarks

It is clear from the reviewed decisions that the courts have a very clear understanding of the application of the New York Convention and that they are consistently implementing its provisions. There seems to be only one issue that the courts are unclear on; It appears from the decisions rendered in Dubai Court of Cassation No. 384/2016 (Commercial) and Dubai Court of Cassation No. 434/2013 (Commercial) that the courts require that the country of the seat be a member of the New York Convention in order to grant ratification and enforcement of the foreign arbitral award. However, the UAE has not entered such a reservation and therefore such a requirement does not apply. Having said that, 169 countries are currently member to the New York Convention. Therefore, the chances of there being an award issued from a country that is not a member and consequently refusing ratification are very low.

It is commendable how strictly the Dubai courts are applying the New York Convention and how errors of lower courts are being rectified at the Cassation level. It is also noteworthy that the courts generally presume that the arbitral proceedings have been conducted correctly unless a party can prove otherwise and they implement Article V in the narrowest way possible. All of this is praiseworthy and demonstrates that the UAE has taken steps in the right direction.

References[+]

References ↑1 Article V contains the grounds for which the recognition and enforcement of the award may be refused. function footnote_expand_reference_container_39963_27() { jQuery('#footnote_references_container_39963_27').show(); jQuery('#footnote_reference_container_collapse_button_39963_27').text('−'); } function footnote_collapse_reference_container_39963_27() { jQuery('#footnote_references_container_39963_27').hide(); jQuery('#footnote_reference_container_collapse_button_39963_27').text('+'); } function footnote_expand_collapse_reference_container_39963_27() { if (jQuery('#footnote_references_container_39963_27').is(':hidden')) { footnote_expand_reference_container_39963_27(); } else { footnote_collapse_reference_container_39963_27(); } } function footnote_moveToReference_39963_27(p_str_TargetID) { footnote_expand_reference_container_39963_27(); 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_39963_27(p_str_TargetID) { footnote_expand_reference_container_39963_27(); 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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2021 in Review: Australia, New Zealand and the Pacific Islands

Fri, 2022-01-14 00:00

Last year saw positive movements in Australia, New Zealand and the Pacific Islands to better promote the use of arbitration in the region. Arbitral institution rules were modernised and domestic legal frameworks were introduced all to stimulate arbitration activity. The year also saw a sharp focus on the benefits of empirical studies to understand how arbitration is being used, recent trends, and where improvements can be made.

This post highlights some of the key arbitration-related developments in 2021.

 

Australia

 

Australian Arbitration Report

In March 2021, the findings of Australia’s first empirical study on the use of commercial arbitration were released in the Australian Arbitration Report (Report). The Report outlines the results of a survey of 111 respondents covering 223 unique domestic and international arbitrations involving Australian parties, projects, or expertise between 2016 and 2019.

Some of the key insights of the Report include:

  • The highest number of reported domestic and international arbitration cases was in the construction, engineering and infrastructure industries, accounting for almost 50% of all reported arbitrations.
  • The ICC, SIAC, and UNCITRAL arbitration rules were the most frequently used for international arbitrations, with almost three times as many reported international cases under the UNCITRAL rules as under the Australia Centre for International Commercial Arbitration (ACICA) rules. The most common arbitration rules used for domestic arbitrations were those of the Resolution Institute, ACICA, and UNCITRAL.
  • Singapore was the most frequently recommended and included arbitration seat for international arbitration contract clauses, followed by London and Hong Kong.
  • There remains significant room for improvement in achieving gender diversity in arbitrator appointments and in unlocking greater efficiency in arbitral proceedings.

The Report provides valuable insights on the nature and extent of arbitration activity across Australia. Importantly, it also lays the foundation for more detailed research to come – setting a benchmark that future trends and developments in arbitration activity in Australia can now be measured against.

 

ACICA’s new Arbitration Rules

Along with the appointment of a new President in 2021, ACICA had a busy year releasing an updated version of its Arbitration Rules and Expedited Arbitration Rules in 2021. The rules apply to arbitrations commenced from 1 April 2021.

The rules have been updated since their previous iteration in 2016 to reflect best practice in international arbitration and to reduce costs and delays. Among others, the key changes include:

  • Introducing an express provision for the commencement of a single arbitration dealing with claims under multiple contracts.
  • Requiring tribunals to raise with the parties the possibility of using mediation or other alternative dispute resolution mechanisms.
  • Requiring the disclosure of third-party funding agreements.

The new rules are a welcome change to enhance the arbitration experience for all users, a core focus of the institution.

 

News Media and Digital Platforms Mandatory Bargaining Code

In March 2021, the Australian Parliament introduced a world-first News Media and Digital Platforms Mandatory Bargaining Code (Code).

The Code seeks to support the sustainability of the Australian news media sector by addressing bargaining power imbalances between Australian news businesses and digital platforms (such as Facebook and Google) in the payment for news content shared online. The Code only applies to digital platforms explicitly designated by the Australian Government.

One of the main elements of the Code is the use of compulsory arbitration to resolve disputes, after a failed mediation. Where the parties cannot agree on the remuneration to be paid for news content to be shared on the digital platform, the Code requires the parties to engage in the novel system of “final offer arbitration” (otherwise known as “baseball arbitration”). This system allows each party to submit their final offer to an arbitral tribunal which then determines the remuneration amount.

Despite dismissing strong initial opposition to the Code, the Australian Government has not yet designated any digital platforms to participate in the Code. It remains unclear why this is the case. However, commercial content agreements are reported to have been concluded by Facebook and Google with Australian news businesses outside of the Code.

A review of the Code is expected in early 2022.

 

 Australian case law developments

Last year saw important case law developments at Australia’s intermediate appellate court level for both investor-state and international commercial arbitrations.

In February 2021, the Full Court of the Federal Court of Australia published its decision in Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2021] FCAFC 3. The Court upheld an appeal against a decision to recognise and enforce two awards of ICSID against a foreign State under Australia’s International Arbitration Act 1974 (Cth) (IAA). The Court’s decision provides useful clarity on the distinction between the ‘recognition’ of an arbitral award, and its ‘enforcement’ and ‘execution’, and why that distinction matters in response to claims of foreign state immunity from ICSID awards in Australia.  A detailed summary of the decision is available here.

In June 2021, the decision of Hub Street Equipment Pty Ltd v Energy City Qatar Holding Company [2021] FCAFC 110 was handed down by the Full Court of the Federal Court of Australia. The Court considered an appeal against a decision to enforce an arbitral award under Australia’s IAA that was brought primarily on the basis that the constitution of the tribunal was improper. The Court provided useful guidance on a range of matters, including re-iterating the applicable standard of proof for a party seeking to oppose the enforcement of a foreign award under section 8(5) and (7) of the IAA. The Court also considered the bounds of judicial discretion to enforce an arbitral award, where a ground to refuse enforcement is established under section 8(5) of the IAA.

 

New Zealand

In New Zealand, foundations were laid in 2021 for several important arbitration-related developments to come in 2022.

 

Statutory class action and litigation funding regimes

In 2019, New Zealand’s Te Aka Matua o te Ture | Law Commission began its review into whether, and to what extent, class action and litigation funding should be explicitly regulated in New Zealand. The Law Commission released an Issues Paper in December 2020 outlining its “preliminary view” that litigation funding and a statutory class action regime were both desirable. It requested public feedback over the first quarter of 2021 on this view, and the scope and design of any regulation.

The Law Commission is currently reviewing the submissions received and is preparing a final report, which is expected to be released in the first half of 2022.

Arbitration was not expressly cited in the terms of reference of the review. However, it is referenced throughout the Issues Paper, particularly in comparative analysis of class action and third-party funding regulations in jurisdictions such as Singapore, Hong Kong and the United Kingdom.

This year should reveal whether (and, if so, how) any regulatory responses proposed by the Law Commission will specifically address international and domestic arbitration in New Zealand.

 

New Zealand Arbitration Survey

The New Zealand Dispute Resolution Centre is currently analysing the results of a 2021 survey about the practice of arbitration in New Zealand.

The New Zealand Arbitration Survey asked arbitrators to respond to a series of questions about their demographics, background and experience, and the number and kind of arbitrations undertaken in New Zealand in the 2019 to 2020 period.

The responses will feed into a report detailing the findings of the survey – although an expected release date is not yet known.  

 

The Pacific Islands

Over the past five years, the South Pacific has seen ongoing efforts to promote arbitration reforms to spur economic growth and development and encourage a more investor-friendly climate.

There are currently six Pacific Island States that have acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’). Three of those States acceded to the Convention in the past three years – Papua New Guinea (2019), Palau (2020) and Tonga (2020).

In Tonga, 2021 saw the commencement of a domestic legislative framework based on the UNCITRAL Model Law, albeit with some key differences that contributors to this blog have highlighted. These reforms follow similar efforts by Fiji in the enactment of its International Arbitration Act 2017, and by Papua New Guinea with its draft Arbitration Bill 2019 (which has not yet passed its National Parliament).

Back in November 2016, the Asian Development Bank outlined its regional technical assistance support to promote international arbitration reform in the South Pacific. Among other initiatives, this led to the Third South Pacific International Arbitration Conference held in Sydney, Australia in March 2021 – which was described as the “culminating event” of the regional technical assistance. The conference explored the topic of de-risking investment in the South Pacific through a world-class international arbitration disputes regime.

The above arbitration reform efforts and developments also run parallel to broader trade and investment initiatives to strengthen economic development in the region. In December 2020, the Pacific Agreement on Closer Economic Relations Plus (‘PACER Plus’) entered into force – a multilateral trade and development agreement involving Australia, New Zealand, and six Pacific Island States (Samoa, Kiribati, Tonga, Solomon Islands, Niue and Cook Islands). Three additional States (Nauru, Tuvalu and Vanuatu) have signed but have yet to ratify the agreement. All Pacific Islands Forum members (18 in total) have been encouraged to join.

In short, momentum is building in the South Pacific to establish and modernise the practice of arbitration. It will be exciting to watch this region over the years to come as it actively pursues the economic benefits and investor confidence to be gained from arbitration reform.

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Regime Interaction in Investment Arbitration: EU Law; From Peaceful Co-Existence to Permanent Conflict.

Thu, 2022-01-13 00:30

Once upon a time, not so long ago, the two legal orders of on the one hand, international investment law (i.e., International Investment Agreements (IIAs) and investor-State arbitration provisions (ISDS)), and on the other hand, EU law, were peacefully co-existing next to each other with only occasional contact.

Indeed, it was the time when the EU Member States were responsible for the conclusion of roughly half of the 3,000+ IIAs worldwide. It was also the time when the EU and its Member States unconditionally signed up to the Energy Charter Treaty (ECT) and its ISDS provisions. It was also the time when the EU was actively encouraging its candidate members to sign IIAs in order to provide additional legal stability and thereby attracting desperately needed foreign investments before acceding to the EU.

So, while the number of concluded IIAs steadily continued and as a consequence, also the number of ISDS disputes to more than 1,100 according to the UNCTAD investment policy hub, significant changes took place within the EU legal order, which rather abruptly ended the harmonious time by ushering in the current status of permanent conflict between those two legal orders.

 

The Journey of Creating and Escalating a Conflict that did not Exist Before

The first signs of a potential conflict between these two legal orders emerged in the Eastern Sugar case decided in 2007. In that case, the Czech Republic had raised several EU law objections against the jurisdiction of the arbitral tribunal, which, however, were all rejected.

It was the 2018 Achmea judgment by the Court of Justice of the EU (CJEU), which provided the justification of the EU Member States to sign the Termination Agreement in 2020  aimed at terminating almost all intra-EU BITs. It should be noted that not all 27 EU Member States have signed the Termination Agreement.

In parallel, the European Commission continued to escalate the conflict by intervening in practically all intra-EU disputes (both based on intra-EU BITs and the ECT) as amicus curiae before arbitral tribunals as well as before domestic courts. However, so far, the European Commission has not been successful in convincing arbitral tribunals of its position that EU law prevents them from exercising their jurisdiction.

In contrast, domestic courts of EU Member States are applying the Achmea judgment, as the Frankfurt Court and the German Federal Supreme Court have done in the Austria’s Raiffeisen Bank v. Croatia case.

Moreover, in an unprecedented act, the European Commission prohibited Romania to fulfil its international obligations by paying out the Micula award because that would supposedly constitute new, illegal state-aid. The Micula brothers have successfully brought an action against the European Commission before the General Court of Justice of the EU. However, the European Commission has appealed, which means a final decision is still pending. Meanwhile, Advocate General Szpunar has opined that the General Court’s judgment should be set aside.

Most recently, the European Commission has launched infringement proceedings against several EU Member States (Austria, Sweden, Belgium, Luxembourg, Portugal, Romania and Italy) for their failure to terminate their intra-EU BITs.

 

The Spill-Over Effect onto the ECT

Whereas until the CJEU’s Komstroy judgment one could confidently argue that the impact and fallout of the Achmea judgment and the post Achmea actions taken by the EU Member States remained limited to intra-EU BIT situations, it has now been confirmed by the Komstroy judgment that the fallout of Achmea equally applies to ECT disputes having a connection in the EU.

I am deliberately referring to cases “having a connection in the EU” since Komstroy did not involve an EU investor nor an EU Member State. Also, no EU law question was at issue. The only connecting factor was the fact that Paris was the seat of arbitration. Consequently, Komstroy is not an intra-EU ECT dispute, and therefore it cannot be equalized with Achmea, despite the fact that this is what the CJEU did.  Instead, Komstroy was an extra-EU ECT dispute, and the Komstroy judgment of the CJEU has effectively extra-territorial impact onto the rights and obligations of non-EU ECT Contracting Parties, and by extension, their investors.

Obviously, the CJEU is not competent to diminish the rights and obligations of non-EU ECT Contracting Parties and/or their investors. Therefore, the Komstroy judgment is an example of an extraterritorial overreach of the CJEU’s powers.

In any event, the message of the CJEU is clear: ISDS arbitration based on the ECT is banned within the EU – irrespective of whether it concerns intra-EU disputes or not.

This sweeping approach is unsurprisingly congruent with the Political Declaration that was signed by the majority of the EU Member States in 2019, which also extended the Achmea judgment to ECT disputes (see Points 1 and 9). However, the Political Declaration was a legally non-binding statement, whereas the legally binding Termination Agreement signed in 2020 explicitly states in the Preamble that it does not apply to the ECT. 1)CONSIDERING that this Agreement addresses intra-EU bilateral investment treaties; it does not cover intra-EU proceedings on the basis of Article 26 of the Energy Charter Treaty. The European Union and its Member States will deal with this matter at a later stage; […] Available at:https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22020A0529(01)&from=EN jQuery('#footnote_plugin_tooltip_38720_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38720_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This is because currently the ECT is being renegotiated, so the EU Member States decided not to deal with the ECT in the Termination Agreement itself.

Hence, the Komstroy judgment even overreached the intentions of the EU Member States, if one agrees with this author, that Komstroy was in fact an extra-EU ECT dispute.

 

The Autonomy, Uniformity and Supremacy of EU Law are Alien Principles to Public International Law

After having described on a very high level the journey of the creation and escalation of the conflict between international investment law and EU law, it is equally important to take a step back and identify the root cause of this dilemma.

Essentially, it all boils down to the protection of the principles of autonomy, consistency, uniformity, full application and supremacy of EU law, and by extension, the ultimate interpretative authority of the CJEU as the highest court of the continent – at all times and in all cases. The CJEU referred to these principles in Achmea, Komstroy and PL Holdings as the main reasons for banning ISDS.

This is not the first time that the CJEU considered it necessary to rely on the most fundamental principles of EU law in order to protect its final authority against public international law influences. Indeed, a decade earlier in the seminal Kadi case concerning the alleged supremacy of UN Security Council Resolutions based on Article 103 of the UN Charter, the CJEU clearly stated that the autonomy and supremacy of the EU legal order cannot be affected by any international treaty. In fact, the CJEU has displayed a similar attitude towards the European Court of Human Rights (ECHR) and the WTO Appellate Body.

Coming back to investment law, the question that needs to be asked is: Can an international arbitral tribunal that is deciding a specific case be able to endanger the autonomy, consistency, uniformity, full application or supremacy of the EU legal order to any discernible level? A legal order developed over the past 50 years with such a solid constitutional foundation and a supreme court that is more powerful than any other (international or constitutional) court in the world. Could the Achmea or Komstroy arbitral tribunals seriously have been ever in a position to be the slightest threat to these fundamental principles of EU law?

Even if, for the sake of argument, we would assume that this would have been theoretically possible, Advocate General Wathelet proposed in his Opinion in Achmea the simple solution for avoiding this permanent conflict: namely, to allow or even require arbitral tribunals to request preliminary rulings from the CJEU in case EU law issues are at stake.

In fact, this is precisely the solution that the Andean Community Court of Justice, the equivalent of the CJEU, adopted. Accordingly, this conflict between EU law and international investment law could have easily been avoided.

The simple point is that all these EU law principles work very well internally but are alien at the public international law level where all international treaties are treated equally (with the exception of Article 103 UN Charter). In other words, the horizontal nature of public international law simply clashes with the vertical, supremacy, and autonomy-loaded, EU legal order.

 

The Frantic Search for Alternatives

Obviously, the CJEU, the European Commission and the Member States will not change their quest to significantly modify or even completely eradicate ISDS arbitration. That quest is already ongoing at the UNCITRAL Working Group III on ISDS reforms with the proposal of replacing ISDS with a permanent multilateral investment court (MIC).

As Gary Born warned years ago, winter has come for investors and the arbitration community. At the same time, the Rule of Law level is backsliding – not only in Europe. Thus, investors remain in need of investment protection and effective dispute settlement tools.

 

So, What are the Alternatives?

First, the main advice is to stay out of the EU – for both – structuring investments and using European IIAs. Instead, commercial arbitration could theoretically provide an alternative for some investors and for certain investments based on contracts with State entities.  However, the PL Holdings judgment may have already crushed any such hopes in this regard.

Second, the seat of arbitration should preferably be outside of the EU to avoid the interference of the CJEU and the European Commission.

Third, and for the same reasons, enforcement and recognition of awards should be sought outside the EU.

Thus, while the EU is rapidly becoming an arbitration-hostile jurisdiction, other more arbitration-friendly jurisdictions such as the UK, Switzerland, Singapore, and the US are increasingly benefitting from these developments.

Nonetheless, despite these potential alternatives, the fact remains that those may only be available for a select group of large investors, while for the vast majority of the investors, investment protection and access to arbitration have been effectively and permanently curtailed by the very same EU, which –ironically – as per Article 21 (1) of the TEU:

[…]seeks to advance in the wider world: democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity, and respect for the principles of the United Nations Charter and international law.

 

 

To read our coverage of regime interaction in investment arbitration, click here.

 

References[+]

References ↑1 CONSIDERING that this Agreement addresses intra-EU bilateral investment treaties; it does not cover intra-EU proceedings on the basis of Article 26 of the Energy Charter Treaty. The European Union and its Member States will deal with this matter at a later stage; […] Available at:https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22020A0529(01)&from=EN function footnote_expand_reference_container_38720_30() { jQuery('#footnote_references_container_38720_30').show(); jQuery('#footnote_reference_container_collapse_button_38720_30').text('−'); } function footnote_collapse_reference_container_38720_30() { jQuery('#footnote_references_container_38720_30').hide(); jQuery('#footnote_reference_container_collapse_button_38720_30').text('+'); } function footnote_expand_collapse_reference_container_38720_30() { if (jQuery('#footnote_references_container_38720_30').is(':hidden')) { footnote_expand_reference_container_38720_30(); } else { footnote_collapse_reference_container_38720_30(); } } function footnote_moveToReference_38720_30(p_str_TargetID) { footnote_expand_reference_container_38720_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_38720_30(p_str_TargetID) { footnote_expand_reference_container_38720_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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Regime Interaction in Investment Arbitration: Looking Forward, Looking Back on the Vienna Convention on the Law of Treaties as a Disciplining Force in International Investment Disputes

Thu, 2022-01-13 00:00

In 2011, in an article titled ‘W(h)ither Fragmentation? On the Literature and Sociology of International Investment Law’, Professor Stephan Schill reflected on the prior decade of scholarly and practical developments in international investment law (IIL). He referred to the boom in specialised scholarship and the more than 400 investor-State disputes then in existence as reasons to reflect on the status of the field.

Today, a further decade later and at the dawn of a new year, his words and efforts seem even more poignant. The quantity and quality of IIL scholarship has continued to dramatically grow, which is unsurprising with more than 1,100 investor-State disputes now recorded by UNCTAD – a figure that is current as of December 2020 and reflects that more than half of the recorded disputes came into existence after Schill’s article was published.

Each newly registered dispute presents a fresh opportunity to question whether the investor-State dispute settlement (ISDS) system remains fit for purpose – as both a system and a mechanism. Indeed, as presaged in a post by Maria José Alarcon and Sebastian King last week, the field is at a crossroads. Many of its criticisms are actively under debate at ICSID as part of its Rule Amendment Project. A parallel and broader initiative for modernisation and reform continues through UNCITRAL Working Group III, where the discussion has now turned to establishment of a standing first instance and appellate multilateral investment court, with full-time judges, as a solution to the risk of fragmentation of the discipline.

A common impetus for these efforts is the concern articulated by the International Law Commission of the United Nationals (ILC) in its 2006 report, ‘Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law’ (ILC 2006 Report). In his 2011 article, Schill examined the ILC 2006 Report and focused on fragmentation within IIL, a phenomenon that is not monolithic. There is fragmentation that arises out of regime interaction, where each of the various public international law disciplines (such as trade law, human rights law, and law of the sea) progresses, grows, and dovetails with one another. There is also fragmentation that emerges from the interaction of the multitude of instruments, approaches, and piecemeal decisions within each of these defined disciplines. The ILC 2006 Report sought to examine both categories of ‘conflict’ to present avenues for harmonisation and systemic integration.

While these forward-looking efforts are crucial to maintenance of a transnationalist approach to the international legal order, it is also worthwhile to reflect on the existing public international law toolkit. Accordingly, this post shines the spotlight on the Vienna Convention on the Law of Treaties (VCLT) as a disciplining force in ISDS. It argues that the VCLT, as demonstrated through the path to its preparation, and its text, evidences that the ILC foresaw the risk of fragmentation and the VCLT’s rules of interpretation, in particular Articles 31 and 32, provide an effective means for harmonisation and systemic integration in IIL.

 

The Post-World War II International Legal Order: The Winding Road To the VCLT

Following World War II, the international community crafted a new worldview. Driven by a philosophy of transnationalism, States designed a modern framework for international relations.1) See generally Barry E. Carter, Making Progress in International Institutions and Law, in PROGRESS IN INTERNATIONAL LAW 51–68 (Russell A. Miller & Rebecca M. Bratspies ed., 2008). jQuery('#footnote_plugin_tooltip_38716_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38716_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); They collectively agreed to no longer tolerate unilateral tactics and instead adopted transnational rules, derived from multilateral and bilateral agreements, systems of global trade, established international norms, and decisions by international tribunals.2) See generally Myres S. McDougal & Florentino P. Feliciano, International Coercion and World Public Order: The General Principles of the Law of War, 67 YALE L.J. 771 (1958). See also Thomas G. Weiss, The United Nations: Before, During and After 1945, 91 INT’L AFF. 1221, 1226–29 (2015). jQuery('#footnote_plugin_tooltip_38716_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38716_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Key institutions emerging from this new legal order included the United Nations, the World Trade Organisation, and various international courts and tribunals. Decades later, this transnational system is the backbone of our international law toolkit. It informs approaches to international affairs, human rights, foreign policy, business transactions, and related disputes. ISDS mechanisms, embodied in more than 3,300 independent bilateral and multilateral investment agreements (collectively, international investment agreements, IIAs), form a part of this transnationalist system.

As discussed in a prior post co-authored with Dr Esmé Shirlow, at its first session in 1949 the ILC identified the law of treaties as a high priority topic. At that time, the customary international law rules relevant to the negotiation, validity, and interpretation of treaties had grown to become a fairly comprehensive body of rules and it seemed opportune to codify these rules. The ILC appointed four successive Special Rapporteurs for the topic and kept the topic of the law of treaties on its agenda from 1949 through to 1966. In its sessions, the ILC considered the Special Rapporteurs’ research and work product, information provided by governments, and documents prepared by the United Nations Secretariat.

It was only under Sir Humphrey Waldock’s leadership that it was determined that the best way forward would involve draft articles capable of serving as a basis for an international convention. His six reports enabled the Commission in 1966 to submit a final draft to the UN General Assembly and to recommend that the Assembly convene an international conference to conclude a convention on the subject. The Vienna Conference on the Law of Treaties was thus held from 26 March to 24 May 1968 and 9 April to 22 May 1969. As a result, the VCLT  was adopted and opened for signature on May 23, 1969, and entered into force on January 27, 1980.

 

The VCLT’s Universal Rules of Interpretation

In the intervening decades, the VCLT has become universally regarded as one of the most important instruments of treaty law. It has been ratified by 116 States and even some non-ratifying States (such as the United States) recognise parts of the VCLT as a restatement of customary international law. Along these lines, the VCLT offers solutions to modern concerns over the fragmentation. With respect to interpretation, Article 31 sets out the so-called ‘general rule of interpretation’, while Article 32 provides for ‘supplementary means of interpretation’ and allows reference to an IIA’s travaux préparatoires and the ‘circumstances of its conclusion’.

In the ILC 2006 Report, the VCLT, and in particular its interpretive rules, are presented as a centralised tool for legal interpretation, legal reasoning, and systemic relationships. In the face of regime interaction and ‘conflict’, these tools provide a common baseline:

‘articles 31 and 32 of the VCLT are always applicable unless specifically set aside by other principles of interpretation. This has been affirmed by practically all existing international law-applying bodies’. (2006 ILC Report, pp. 92-93)

Indeed, VCLT Articles 31 and 32 are commonly employed as core interpretive tools in ISDS cases. For example, in HOCHTIEF Aktiengesellschaft v. Argentine Republic, the arbitral tribunal matter-of-factly noted that interpretation of the applicable treaty ‘must be conducted in accordance with the law of treaties … and in particular in Articles 31-33 of the VCLT, which are familiar to all involved in investment arbitration’ (Decision on Jurisdiction, 24 October 2011, para. 26). Similarly, Professor Brigitte Stern noted in her dissenting opinion in Yukos Capital v. Russia that ‘[t]he rules of interpretation of an international treaty are well known and embodied in Article 31 of the VCLT’ (Dissenting Opinion of Professor Brigitte Stern, 18 January 2017, para. 14).

Yet, this baseline does not automatically result in uniform understanding or application of the VCLT’s interpretive rules. For example, in Eskosol v. Italy, the arbitral tribunal explained that ‘VCLT Article 31(3)(a) is not […] a trump card to allow States to offer new interpretations of old treaty language, simply to override unpopular treaty interpretations based on the plain meaning of the terms actually used’. (Decision on Italy’s Request for Immediate Termination, 7 May 2019, para. 223) Meanwhile, Judge Charles Brower has advocated in various settings, including in his dissenting opinions, for a hierarchical approach to employing the VCLT’s Articles 31 and 32. Thus, even with common interpretive tools, the risk of fragmentation remains. Some of these challenges and opportunities were explored in a previous series on the Blog. A post by Dr Esmé Shirlow and Professor Michael Waibel focused on the practical difficulties associated with ascertaining the existence of travaux préparatoires and regulating its production in arbitral proceedings per VCLT Article 32. Similarly, a post by Dr Julian Wyatt explored how investment tribunals have used the principle of contemporaneity in treaty interpretation. Of special relevance to concerns about fragmentation, he highlighted how the same principles of treaty interpretation might be used by different international courts and tribunals in quite distinct ways.

 

W(h)ither Harmonisation and Systemic Integration?

Despite these tensions, as reflected in its 2006 Report, the ILC remains resolute that the VCLT and its interpretive tools are the north star to address fragmentation and conflict in public international law:

‘most of the VCLT – at least its customary law parts – including above all articles 31 and 32 – automatically, and without incorporation, is a part of the regime: indeed, it is only by virtue of the VCLT that the regime may be identified as such and delimited against the rest of international law’. (2006 ILC Report, p. 94)

It is therefore not surprising that a solution for harmonisation and systemic integration can also be found within the VCLT. Article 31(3)(c), in particular, provides that a further interpretive vehicle is to draw upon ‘any relevant rules of international law applicable in the relations between the parties’. As such, Article 31(3)(c) offers an opportunity to reconcile the various interpretive techniques explored in the 2006 ILC Report (eg lex specialis; lex posterior; or lex superior). Application of each – and whether it is the correct mode for a particular circumstance – is dependent on what is considered ‘relevant’ to that specific circumstance.

In the ISDS context, this means that the question is not whether a specific rule, custom, or terms of an IIA would ever be irrelevant, but rather ‘whether a rule’s speciality or generality should be decisive, or whether priority should be given to the earlier or to the later rule depended on such aspects as the will of the parties, the nature of the instruments and their object and purpose as well as what would be a reasonable way to apply them with minimal disturbance to the operation of the legal system’ (2006 ILC Report, p. 207). As such, harmonisation can be achieved without rendering any instrument of public international law irrelevant. To the contrary, the ‘norm that will be set aside will remain as it were “in the background”, continuing to influence the interpretation and application of the norm to which priority has been given’. (Id.) This is an especially useful framework for concerns arising from regime interaction.

Even more, this approach has special relevance to the ISDS regime. The latest debates on fragmentation arise out of the now more than 1,100 investment disputes in existence and different approaches to and interpretations applied where the same or similar IIAs and/or the same or similar facts are issue. Indeed, stakeholders’ interest in the establishment of a multilateral investment court, appellate mechanism, and a standing roster of full-time arbitrators is primarily driven by demands for coherence and harmonisation. While such innovations may be fruitful for the goals of legitimacy and transparency, it is important to bear in mind that even that body would draw upon the existing public international law toolkit. As discussed by Dr Mary Mitsi in a prior post, ISDS tribunals must always engage in the interpretive process, which involves first identifying norms and then applying them. This is the case no matter how those tribunals are constituted, even if comprised of full-time judges under the umbrella of a permanent multilateral investment court. This concern was also expressed by Professor José E Alvarez in a keynote address at the International Trade Administration’s (ITA’s) March 2021 virtual conference.

 

Concluding Remarks

While there are no easy solutions to the challenge of regime interaction and fragmentation in public international law, the optimistic view is that this challenge exists primarily because the transnationalist approach to the international legal order has been successful. Continued growth, especially within the ISDS regime – which includes a multitude of instruments, stakeholders, and decisions – is a signal that the system continues to react to the needs of the global community in an effort to serve those needs in a seemingly effective manner. Within this context, as advocated by the ILC and numerous ISDS tribunals, the VCLT’s interpretive tools, especially its Article 31(3)(c), remain instructive and offer a solution to the ‘systemic’ objective, allowing decisionmakers to downplay ‘conflict’ and read relevant materials holistically to achieve harmonisation and systemic integration.

 

The importance of the VCLT to international arbitration is the focus of the forthcoming book The Vienna Convention on the Law of Treaties in International Arbitration: History, Evolution, and Future, Dr Esmé Shirlow and Kiran Nasir Gore (eds) (Kluwer, 2022).

To read our coverage of regime interaction in investment arbitration, click here.

References[+]

References ↑1 See generally Barry E. Carter, Making Progress in International Institutions and Law, in PROGRESS IN INTERNATIONAL LAW 51–68 (Russell A. Miller & Rebecca M. Bratspies ed., 2008). ↑2 See generally Myres S. McDougal & Florentino P. Feliciano, International Coercion and World Public Order: The General Principles of the Law of War, 67 YALE L.J. 771 (1958). See also Thomas G. Weiss, The United Nations: Before, During and After 1945, 91 INT’L AFF. 1221, 1226–29 (2015). function footnote_expand_reference_container_38716_27() { jQuery('#footnote_references_container_38716_27').show(); jQuery('#footnote_reference_container_collapse_button_38716_27').text('−'); } function footnote_collapse_reference_container_38716_27() { jQuery('#footnote_references_container_38716_27').hide(); jQuery('#footnote_reference_container_collapse_button_38716_27').text('+'); } function footnote_expand_collapse_reference_container_38716_27() { if (jQuery('#footnote_references_container_38716_27').is(':hidden')) { footnote_expand_reference_container_38716_27(); } else { footnote_collapse_reference_container_38716_27(); } } function footnote_moveToReference_38716_27(p_str_TargetID) { footnote_expand_reference_container_38716_27(); 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_38716_27(p_str_TargetID) { footnote_expand_reference_container_38716_27(); 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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Regime Interaction in Investment Arbitration: Crowded Streets; Are Human Rights Law and International Investment Law Good Neighbors?

Wed, 2022-01-12 00:30

Globalization has diversified the actors, institutions, norms, and instruments on the international legal stage. With diversification comes increased specialization and, in turn, organization around so-called regimes. The notion that international legal regimes can exist autonomously has long been refuted; indeed, each regime draws from general international law to some degree. If regimes are not autonomous, then how do they interact?

Here, we briefly consider the interaction between two such regimes, international investment law (“IIL”) and international human rights law (“IHRL”). We argue that ‘interaction’ should be conceived broadly, which contrasts with the prevailing view of interaction as synonymous with conflict.

In this post, we provide a four-part model for defining the interactions between IIL and IHRL. First, IIL and IHRL interact at a foundational level with regard to what each regime seeks to protect—foreign investors under IIL and individuals under IHRL. Second, they interact in the context of investment treaties and, narrowly, the drafting of preambular text and operative provisions. Third, they interact—and perhaps conflict—at various stages in international disputes. Fourth, and finally, they increasingly interact in procedural contexts, such as ISDS reform efforts.

 

1) Interactions in Relation to Fundamental Protections

IIL is defined by a system of protections for investors in their bilateral business relationships with foreign governments. Investors may be individuals but, given the quantum of investment in typical foreign direct investment projects, they are more likely to be legal entities, such as corporations, established under the auspices of the corporate legal structure of a foreign jurisdiction. In contrast, IHRL is defined by a system of protections for individuals—more specifically, the various legally prescribed rights that attach to all human persons on the international plane.

As such, IIL and IHRL establish fundamentally different protections. Even where an investor under IIL is an individual, the protections that attach are specific to that individual qua investor, not as a human person in the sense of fundamental rights under IHRL. Many foreign direct investment projects directly or indirectly impact human rights, yet individuals qua human persons have no recourse under IIL through which to seek remedies. Correspondingly, an investor has no recourse under IHRL by which to seek remedies because human rights do not attach to investors.

Nonetheless, IIL and IHRL do overlap to a degree regarding certain human rights. For example, the right to property is foundational to both IIL and IHRL. Similarly, the right to due process plays an integral procedural role in dispute resolution and is protected under both regimes. This is of course only a small subset of the numerous rights under IHRL, but it does evidence an integral interaction.

 

2) Investment Treaties

As we have detailed elsewhere, IIL and IHRL can and do interact in the context of investment treaty drafting across both preambular text and operative provisions. Regarding preambular text, references to human rights are increasingly common, such as affirming the parties’ “commitment to the respect for human rights”. In contrast with this broad, open-textured language, some investment treaties directly reference specific instruments in the preamble, such as to affirm the parties’ commitment to the principles in the Universal Declaration of Human Rights. While the practical effect of such references is debatable, articles 31 and 32 of the Vienna Convention on the Law of the Treaties (VCLT) indicate that preambular text may at the very least inform the interpretation of operative provisions.

Regarding operative provisions, interactions become rather more complex. Interactions may occur in the context of investor responsibilities, such as striving to conduct business in accordance with the OECD Guidelines. They may further occur in the context of general exceptions, such as carving out measures taken for the maintenance of “public order” or to protect human life or health. They may further still occur in the context of provisions seeking to preserve regulatory autonomy, where such provisions have the effect or maintaining regulatory “space” for domestic policymaking in service of fulfilling State obligations regarding human rights.

 

3) International Investment Disputes

IIL and IHRL can and do interact in the context of disputes. This occurs at all stages in the proceedings, as well as in the context of third-party participation. This graphic illustrates these complexities, which are in turn discussed below.

 

a) Jurisdiction

Where human rights considerations may be at play in a dispute, the first question that a tribunal must resolve is whether it has jurisdiction to even consider such issues. As highlighted by the tribunal in Strabag v. Poland, the burden to establish a tribunal’s jurisdiction – while ultimately subject to a tribunal’s own satisfaction – will fall on the party alleging a breach of human rights by its counterparty.

The wording of the dispute resolution clause will determine whether human rights norms are within the scope of a tribunal’s jurisdiction and, relatedly, whether they may permit counterclaims based on human rights. As affirmed by the Tribunal in Gavazzi v. Romania, a narrowly worded dispute resolution clause will not permit consideration of human rights issues.

Investment tribunals do not have the mandate to determine human rights claims as independent claims. In Biloune v. Ghana, for example, the tribunal ruled that the parties agreed to “arbitrate only disputes in respect of’ the foreign investment” and, therefore, “lacks jurisdiction to address, as an independent cause of action, a claim of violation of human rights.”

 

b) Applicable Law

Interactions in the context of the applicable law become even more complex. The applicable law will determine which human rights a tribunal may consider. As emphasized by the tribunal in Siemens v. Argentina, a tribunal is not obligated to examine human rights, even if it can do so, if it does not view human rights as directly impacting the core issues of the dispute.

If a tribunal decides to examine human rights, it has discretion to decide which human rights norms, obligations, or instruments apply and what weight is to be ascribed to them, perhaps most notably illustrated by the tribunal in Urbaser v. Argentina. As illustrated by confusion over the deliberative weight given to such matters by the tribunal in Yukos v. Russia, even if a tribunal introduces human rights norms, obligations, or instruments, it is not always fully clear what role they play in the final decision.

 

c) Merits and Damages

Certain human rights norms might also be implicated indirectly during the merits and damages phases, even if a tribunal may not expressly refer to it as a human rights norm.

During the merits phase, tribunals commonly rely on interpretative techniques, such as Article 31(3)(c) of the VCLT, which permits a tribunal to consider “any relevant rules of international law” (often referred to as “systemic integration”). As in Urbaser v. Argentina, this may permit consideration of human rights norms, obligations, or instruments. The exact scope of such an interpretative process is subject to a tribunal’s discretion. Furthermore, certain human rights norms like the right to property, right to a fair trial, and due process considerations may be considered by tribunals more readily as being directly relevant to a tribunal’s mandate under investment agreements, as underlined by the annulment committee in Tulip v. Turkey.

During the damages phase, investor conduct might also be a basis for a tribunal to reduce damages awarded through the doctrine of “contributory fault”, as discussed in a partial dissenting opinion in Bear Creek v. Peru. This may be significant where the conduct implicates human rights obligations like the right to water.

 

d) Third-Party Participation 

The role of third parties, such as indigenous communities affected by investment projects, has been contentious. Traditionally, such third parties could not participate in an investor-state arbitration.  This has now changed with the acceptance by many investment tribunals of amicus curiae submissions.

While tribunals have accepted amicus curiae submissions, this is ultimately subject to a tribunal’s discretion and subsequent reliance by the tribunal on such submissions is not fully certain. Tribunals also greatly limit the role of amicus not permitting attendance to the hearing or accessing files of the case, as in Philip Morris v. Uruguay. While amicus submissions do permit greater access, the interaction between human rights and investment arbitration is probably mixed.

 

4) Procedural Issues in the Reform Process

As we have written earlier, there have been three notable ISDS reform efforts: (i) UNCITRAL Working Group III, (ii) the amendment to ICSID Rules, and (iii) the European proposal of a multilateral investment court. All these reform efforts are focused on the procedural issues, such as reducing costs and time of arbitration, increasing transparency, and allowing greater amici participation.

While these efforts will not address contentious substantive issues in investment disputes, such as the right to water or the right to health, they will promote certain human rights considerations. For example, by focusing on procedural improvements to ISDS, such efforts advance fundamental IHRL protections within the IIL regime beyond the right to property, such as the right to trial, access to justice, and due process. While only relative to a narrow subset of procedural rights, such efforts further reflect an incorporation of IHRL into IIL.

 

Conclusions

We have argued that regime interaction, especially between IIL and IHRL, is complex and stretches beyond a narrow view of interaction as only occurring in the context of disputes. A broader view, as we have delineated, surfaces the connective tissue between the two regimes and provides a rubric for assessing the perceived tensions between them. If regime interaction is a fundamental reality of the increasing diversification of international law—and we would argue that it is—it is necessary to define the contours of these interactions, so as to consider how best to generate alignment on the international legal plane between the actors, institutions, norms, and instruments of each regime.

That said, interactions between IIL and IHRL have been strained. If interactions are to become more commonplace, we would argue that efforts should be devoted to identifying shared goals regarding investment treaty drafting, as well as more robust involvement of human rights experts in relevant investment disputes. Because both regimes draw from general international law, the foundation no doubt exists for pursuing more harmonious interactions.

 

The views expressed herein are the authors’ personal views, and do not necessarily reflect the views of the authors’ affiliated institutions or clients.

 

To read our coverage of regime interaction in investment arbitration, click here.

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Regime Interaction in Investment Arbitration: Climate Law, International Investment Law and Arbitration

Wed, 2022-01-12 00:00

Nearly 30 years have passed since world leaders signed the UN Framework Convention on Climate Change (“UNFCCC”), agreeing to combat “dangerous human interference with the climate system.” For many of those years, nobody seemed to take that commitment very seriously. But things look different now: climate law has hit its stride.

At COP26 in November 2021, world leaders signed the Glasgow Climate Pact, which aims to reduce unabated coal usage and fossil subsidies, and finalized the “rulebook” that operationalizes the 2015 Paris Agreement. Also in Glasgow, private-sector finance pledged billions of dollars toward climate change mitigation and adaptation. Meanwhile, regulators worldwide work around the clock to translate lofty Net Zero goals into concrete policy at the national level, and the EU is legislating at breakneck speed to become the first climate-neutral continent.

It is a new reality out there. In the words of US climate envoy John Kerry, the world has embarked on the “biggest economic transformation since the industrial revolution.”

International investment law, however, seems at odds with these developments. Not only are international investment agreements (“IIAs”) still largely silent on climate issues, but the very regulations that are necessary to meet climate law obligations may trigger liability under investor-protection provisions. Various processes to update the investment law framework is underway, but progress is slow and hampered by politics. Therefore, as this short overview will explain, it will be necessary for arbitration practitioners to consider the interaction between the current IIA regime and the climate law regime, and to interpret states’ obligations to protect investors in harmony with obligations to reduce carbon emissions.

 

Climate Law in a Nutshell

At the center of the international legal framework of climate change is the 2015 Paris Agreement. It has been ratified by 191 states and the European Union, which signals a near-universal global consensus on its main goal: to limit global average temperature rise to well below 2°C (preferably 1.5°C) above pre-industrial levels. As the Paris Agreement requires, most state parties have set ambitious emissions-reduction targets – known as Nationally Determined Contributions (“NDCs”) – typically aimed at cutting emissions significantly by 2030 and achieving Net Zero carbon emissions by mid-century.

Before Paris, there was the 1997 Kyoto Protocol – the first treaty to stipulate that big emitters should take the lead in slowing climate change by reducing greenhouse gas emissions. The 2012 Doha Amendment extended Kyoto, but ratification took so long that it rendered the treaty obsolete. The Paris Agreement has now largely superseded these previous commitments and mechanisms.

Around the world, governments have taken legislative action to implement their commitments under the Paris Agreement. In Europe, climate action is at the heart of the European Green Deal – a package of policy measures that aim to transform the European economy and decouple growth from resource use. The European Climate Law was passed in June 2021 and enshrines into law the goal of Net Zero by 2050. Another recent development was the European Commission’s adoption of “Fit for 55,” a series of legislative proposals setting out how the EU intends to cut carbon emissions by 55% by 2030.

Globally, there has been a veritable explosion of climate-related laws and policies, putting pressure on corporations and other actors to take concrete steps to reduce carbon emissions and invest in measures to adapt to the effects of climate change. A parallel development can be seen in the rise in climate litigation in national courts. Most such court cases have demanded government action on climate change. Recently, however, several cases have also been filed against corporations.

So, that is climate law in a nutshell. Let us juxtapose it with international investment law and investor-state arbitration.

 

The Clash between Climate Law and Investment Law

In simple terms, the clash is obvious: Legislative and regulatory measures necessary to meet obligations under climate law are likely to trigger liability claims under international investment law. States have two main tools – a carrot and a stick – to accomplish reductions in greenhouse gas emissions. Both are accompanied by risks under investment law.

  • The carrot involves incentivizing investments in low-carbon technologies. This creates new regulatory frameworks upon which foreign investors may base legitimate expectations of stability and profit, which (as we know from the Spanish saga) may lead to investor claims in the event of future amendments.
  • The stick involves regulating emissions and phasing out fossil fuels. This changes the existing legal framework and regulatory environment for foreign investors and affects the value of foreign investments, which may lead to claims of indirect expropriation or breach of the fair and equitable treatment (“FET”) standard.

Nowhere is the fault line between climate law and investment protection clearer than in the energy sector, which accounts for two-thirds of all greenhouse gas emissions. To meet their emissions targets, most countries will need to significantly alter their energy mix and limit the extraction, transportation and combustion of fossil fuels. The Glasgow Climate Pact explicitly requires countries to reduce fossil subsidies and “phase down” unabated coal (changed from “phase out” as a last-minute semantic compromise forced by coal-reliant China and India). Such measures will turn many fossil investments into stranded assets, which may lead investors to seek compensation under applicable investment treaties.

The most important treaty in the energy sector is the multilateral Energy Charter Treaty (“ECT”), which, despite years of “modernization” negotiations, still protects all investments regardless of climate impact. As will be shown in a forthcoming report, none of the 70+ awards rendered under the ECT has considered the host state’s climate law obligations, weighed the investor protections against the state’s right to regulate for emissions reduction, or in any other way analyzed the interaction between these two legal regimes.

ECT tribunals have, of course, considered the host state’s right to regulate in other contexts – confirming, for example, that states may exercise this right as long as it does not affect “the fundamental stability in the essential characteristics of the legal regime relied upon by the investors in making long-term investments” (Antin v. Spain). They have also analyzed the interaction between the ECT and other legal regimes – ruling, for example, that in the event of an inconsistency between the ECT and EU law, the ECT will prevail (based on Article 16 ECT). It remains to be seen how tribunals will apply these standards in cases challenging state regulations to phase out fossil fuels; the first so-called “phase-out cases” were filed by foreign investors against the Netherlands in 2021.

There are two principal ways to reconcile the apparent conflict between international investment law and climate law: (1) by reforming IIAs to integrate climate principles or hierarchy clauses stipulating which obligations take priority, and (2) by reinterpreting current treaty provisions through general conflict norms, such as the principle of systemic integration. The former option involves lengthy political negotiations, whereas the latter requires only invocation by arbitral tribunals.

 

Reforming IIAs to Resolve the Conflict with Climate Law

Reform of the framework of international investment law and treaty arbitration is underway – not least in UNCITRAL’s Working Group III, the ECT modernization process, and the revision of the ICSID arbitration rules – but progress is limited and slow, and the integration of climate principles is not necessarily a main focus.

Some countries have developed model BITs that include climate and sustainable development provisions. These treaties typically alter the traditional IIA structure, in which states have obligations but no rights, and investors have rights but no obligations. The Dutch model BIT, for example, requires investors to comply with domestic laws and to conduct environmental impact assessments. And the Pan-African Investment Code, a template treaty developed by the African Union, omits the FET standard and allows states to submit counterclaims in arbitral proceedings.

Some observers may insist that amending IIAs to align with climate law will reduce investment protection and impede the flow of FDI; others may contend that IIAs never really served to incite FDI in the first place. Either way, the investment law regime is not inherently incompatible with climate law, and there are many good ideas on how to reconcile the two through treaty revision. But the process to renegotiate IIAs is slow – and there are 3000 of them. Moreover, in the case of multilateral treaties like the ECT, the unanimity needed for amendments may be entirely unattainable. Therefore, it is necessary to consider how to reconcile current IIAs with climate law through general treaty-conflict norms, such as the principle of systemic integration.

 

Working With What We’ve Got – Reinterpreting Current IIAs

The principle of systemic integration embodies a normative preference for a coherent international legal system. It is codified in Article 31(3)(c) of the Vienna Convention, which requires tribunals to take into account “any relevant rules of international law applicable in the relations between the parties” when interpreting treaties. Some IIAs include similar provisions. For instance, Article 26(6) of the ECT provides that tribunals “shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.” This now includes the Paris Agreement, the Glasgow Climate Pact, and EU climate law. It may also soon include environmental law principles: Just as past claims have been dismissed based on the principle of good faith, future claims might be dismissed based on the polluter-pays principle.

Although tribunals already have the mandate to do so, systemic integration has rarely been invoked in investment arbitration. More often, tribunals rely on the lex specialis doctrine to hold that the IIA, as a specialized legal instrument, prevails over more general rules and principles of international law. This could be because investment law, while part of public international law, belongs to international economic law and is implemented primarily by commercial lawyers who may be unaware of (or disinclined to consider) public interests or the broader public international law perspective.

Arbitral tribunals are not bound by precedent. This means that prior interpretations of investor protection provisions are not set in stone – even seemingly entrenched standards can be reinterpreted in alignment with climate law. For example, a 2019 ICC Report on resolving climate-related disputes through arbitration emphasized that arbitrators can consider climate law when interpreting the FET standard. Accordingly, a tribunal might reject the argument that an investor in a coal-fired power plant had legitimate expectations of regulatory stability, if at the time when the investment was made, the Paris Agreement made it foreseeable that the host state would soon regulate to phase out coal.

Ultimately, successfully integrating investment law and climate law will depend on the lawyers and arbitrators working the system. As John Kerry recently put it, all lawyers are climate lawyers now. This includes, of course, investment arbitration practitioners.

 

In Sum

With the signing of the Paris Agreement in 2015, climate law reached a tipping point. Since then, countries have been legislating and regulating to reduce emissions, and private actors have pledged to invest billions in climate change mitigation and adaptation. In its current iteration, international investment law is not fully aligned with this new reality. But if adequately renegotiated and revised, IIAs can support global climate goals and give effect to the Paris Agreement. That process, however, might take a while. In the meantime, arbitration practitioners can use the principle of systemic integration to reinterpret current IIAs in coherence with climate law.

 

 

To read our coverage of regime interaction in investment arbitration, click here.

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Regime Interaction in Investment Arbitration: Counterclaims

Tue, 2022-01-11 00:30

This post deals with the conceptual underpinnings and theoretical justification for the practice of counterclaims in investment arbitration. First, it is important to delineate this post from an analysis of counterclaims case-law in investment arbitration, as ample accounts of the counterclaim debate in practice can be found here, here, and here.  Equally, this post does not deal with regime interaction as such. For a fuller account of regime interaction in investment arbitration, see for example here and here.

To understand the conceptual underpinning of counterclaims and the theoretical justification for allowing such practice, one must not look only at the practice and evolution of international investment law (“IIL”) and investment arbitration, but also to conflicting interests as manifested in other regimes of public international law (“PIL”) and the practice of other international courts and tribunals. International investment agreements (“IIAs”) are formulated with the exclusive intention to provide protection to investors and to facilitate and promote foreign investments. As such, these instruments impose one-way obligations on states towards investors. Thus, it is important that the discussion on enforcing investor obligations through, for example, counterclaims, starts from the right end, i.e., with a discussion of PIL per se, in the light of the asymmetrical nature of IIL, and the adjudicatory mission of enforcing a holistic and all-encompassing (“thick”) global rule of international law in mind.

Put simply, it is impossible to understand the adjudicatory mission of investment arbitration without understanding PIL more broadly. Those who try otherwise, fail. The time is ripe for investment arbitrators to shift their focus from the norm-hierarchical viewpoint and instead approve the interaction of other equally specialized regimes in their decision-making process. Meanwhile, the arbitral procedure should seek ways to optimize the procedure’s efficiency without undercutting the fundamental elements of international arbitration.

This inevitable need for a perspective shift culminates in a reform debate, generally, and more specifically in a discussion of reinterpreting current IIAs and arbitration rules, on the one hand, and the long-term mission of redrafting IIAs and investment arbitration rules to align with “conflicting” regimes, on the other hand. As was explained in the Introduction to the IISD Model International Agreement on Investment for Sustainable Development in 2005:

“[T]he model for IIAs developed 50 years ago no longer meets the needs of the global economy in the 21st century. … We believe the time is ripe to propose a new model for IIAs, a new direction that is consistent with the goals and requirements of sustainable development and the global economy of the 21st century.” (p. 11)

All in all, it is evident that some reform is necessary. This is especially prevalent in light of the current backlash against IIL and investment arbitration. Such reform is welcomed and should be aligned with constitutional values of democracy, the rule of law, and fundamental liberal values (e.g., human rights and environmental law). There are many ways of reforming IIL and investment arbitration without undercutting its fundamental elements and therefore its adjudicatory mission of enforcing a liberal and pragmatic global rule of law, for example, by: (a) redrafting IIAs, (b) adopting and redrafting investment arbitration rules, and (c) broadening host states’ defences where IIL clashes with other regimes of PIL.

This post deals with one out of a handful of possible and sensible reforms, namely, the heightened standing and increased currency of counterclaims in investment arbitration. The ongoing dialogue on regime interaction further entrenches the enhanced role of counterclaims.

 

Counterclaims in Investment Arbitration

Filing a counterclaim can serve both as an independent claim for liability and damages, as well as a tool (incidentally) focused on the dismissal or set-off of the investor’s legal action. A counterclaim can be explained as a fundamental element of the respondent state’s right to present its case on an equal footing with the investor. It is, therefore, to be treated as a general principle of law that rests on reasons of fairness. Moreover, counterclaims can be said to promote procedural economy and consistency in decision-making, contributing to a better administration of justice by creating reciprocal obligations for parties. For example, judicial economy would be preserved and the procedural integrity, too, when the procedure deals with all connected claims collectively. In so doing, counterclaims could potentially facilitate the enforcement of a thick global rule of law.

As has been mentioned on this blog, there are several bases upon which an investment tribunal might find that it has jurisdiction over a counterclaim; for example, it can find jurisdiction on the basis of: (1) an IIA explicitly, (2) an IIA implicitly, or (3) on agreed-upon arbitration rules, (4) consent.

For example, the ICSID Convention expressly maintains the right to file a counterclaim. Article 46 of the ICSID Convention reads as follows:

 Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.

Treating a state claim as “incidental” or “additional” to, or as “arising directly out of” the subject-matter and yet “within the scope of consent” is a cumbersome threshold to square with regime interaction, unless some proactive decision-making is conducted and rooted in a broader understanding of PIL. It is this threshold that has allowed investment tribunals to treat counterclaims conservatively.

The jurisdictional hurdle is followed by the question of the source of an investor’s alleged obligation. Such an obligation can arise from either a domestic law or an international law. But should an investment tribunal allow for counterclaims pursuant to both types of alleged obligations? The most controversial types of counterclaims include where (a) the state is seeking to enforce the rights of third parties, (b) the counterclaims are based on domestic law obligations, and (c) the states could instead request commercial arbitration or litigation pursuant to an investor-state contract.

 

The Standing and Currency of Counterclaims in the Current and Future Web of IIAs

Today, there are approximately 3,000 IIAs in force, for which the majority fails to provide guidance as to how issues of, for example, human rights and environmental protection should be exhaustively addressed in the context of investment promotion and protection. IIAs are frequently narrowly defined and limited in their IIL scope, focusing on attracting, promoting, and finally protecting FDI and thereby enforcing only state obligations. This can be redressed by harmonizing otherwise conflicting regimes through systemic interpretation. This technique – embedded in Article 31(3)(c) Vienna Convention on the Law of Treaties (“VCLT”) – allows for the interpretation of international rules holistically.

The emphasis on and importance of counterclaims is indeed an expression of regime interaction. If regime interaction is properly facilitated through either the redrafting of IIAs, arbitration rules, or systemic interpretation, investment tribunals would be empowered to enforce investor obligations by allowing for counterclaims on legal bases outside IIL.

Investment arbitration must accommodate the changing times. As much as the imbalance between investors and states constituted the foundation of investment arbitration, the perceived reversed imbalance in the current IIA and investment arbitration landscape is at the heart of today’s backlash and legitimacy crisis. For that reason, the investment arbitration community is currently considering proposals concerning whether investor obligations should be enforced through investment arbitration. However, the current ISDS reform is limited to procedural aspects without addressing core issues of rights and obligations of both investors and states. As such, a holistic consideration of counterclaims as a tool for ensuring a balanced system is somewhat limited. Undoubtedly, counterclaims have the potential to rebalance IIL and the investment arbitration procedure by enforcing investor obligations. The threat of a counterclaim may indeed incentivize investors to operate in a more sustainable manner (a reasonable “counterclaim-chill”), and it may likewise discourage investors from challenging state decision-making aimed at regulating public policy concerns (and thereby avoid the supposed “regulatory-chill”).

All in all, it has rightly been noted that the case-law on counterclaims “clearly points to the poor performance of respondent states’ counterclaims in investor-state dispute settlement (“ISDS”), which were ultimately upheld in just two cases out of 25 investment arbitration cases”. Beyond the case-law, which has been, thus far, rather restrictive, IIAs and investment arbitration procedural rules further, generally speaking, exclude a respondent state’s right to submit a counterclaim under most of the current web of IIAs. Arbitration stemming from investor-state contracts falls within an entirely different discussion, along with counterclaims on behalf of third parties. We are not dealing with those scenarios here.

 

The Continued Adjudicatory Mission of Investment Arbitration through Regime Interaction

IIL is facing both fragmentation from within, as well as being part of a fragmented international law web. Regime interaction is needed to provide for a coherent and effective global rule of law and that investment arbitration is best equipped to enforce such rules. Domestic courts (and court-like institutions) routinely enforcing domestic law cannot, as such, properly handle such matters of global concern.

Thus, arbitral tribunals should not view IIL in isolation but should instead integrate conflicting legal regimes through systemic interpretation. If a proper approach to systemic interpretation were to be employed, both legitimacy and effectiveness of international law and investment arbitration would stand to benefit. Systemic interpretation would help deal with fragmentation by reconciling or integrating otherwise conflicting legal regimes. In this broader quest, arbitral tribunals should allow counterclaims by integrating  other international law regimes, including human rights and environmental law. While it is true that states have found ways to counteract IIA’s general lack of substantive obligations for investors by, for example, asserting that investors have obligations under customary international law or otherwise asserting breaches of domestic law, it is vital that reform of IIL and ISDS takes a comprehensive approach.

Providing a mechanism for respondent states to counterclaim is an important development in investment arbitration and ensures that there is an appropriate balance between states and investors by promoting equality of arms, democracy, liberal values manifested in and protected through public international law, fairness, and finally by facilitating the enforcement of a thick global rule of law.

 

To read our coverage of regime interaction in investment arbitration, click here.

 

 

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Regime Interaction in Investment Arbitration: An Introduction

Mon, 2022-01-10 00:30

Debates about the fragmentation of international law and the sometimes conflicting relationship between a state’s and investor’s obligations under international investment law (“IIL”), on the one hand, and public international law and domestic law, on the other, have gained renewed relevance for investment arbitration. Issues related to the interactions between these regimes have featured in discussions about the proper application of the VCLT to investment treaties and in reform work in, for example, the UNCITRAL Working Group III and the Energy Charter Conference. Yet, despite the extensive discussions and reform work, many questions remain.

In the light of this trend, we are devoting this week on the Kluwer Arbitration Blog to exploring the regime interactions in investment arbitration and the ongoing debate on the fragmentation of international law and conflicts with other regimes of public international law and domestic law. As part of our series, we will hear from expert contributors on the regime interactions between investment arbitration and other functional areas of international law, including treaty interpretation (Kiran Gore), counterclaims (Crina Baltag and Ylli Dautaj), climate law (Anja Ipp), human rights law (Kabir Duggal and Nicholas Diamond), and EU Law (Nikos Lavranos).

 

Introduction

The interactions between IIL and other regimes of international law (such as human rights law, environmental law, and so on) illustrate the so-called normative and institutional fragmentation of international law. Through regime interaction, IIL comes into contact and sometimes conflicts with other regimes of public international law. Meanwhile, IIL as lex specialis under public international law comes in conflict and frequently clashes with domestic law and EU law. These tensions raise nuanced issues of treaty interpretation before investment tribunals. As a result, there is an active and ongoing debate about whether investment arbitration should merely be a venue for enforcing international economic law (“IEL”) or is instead an appropriate venue for addressing and redressing issues centered in other regimes of international and domestic law, including grievances of broader public interest.

 

What should investment arbitrators do when fragmented and specialized regimes conflict? What are the jurisdictional limits of an investment tribunal? What law is directly applicable to an investment treaty dispute, and what law could be indirectly applicable through treaty interpretation? Should investment tribunals enforce only a narrow set of IEL, namely, IIL, or should tribunals consider public international law more broadly (e.g., human rights law, environmental law, labor rights, etc.)? If investment tribunals should indeed interpret and apply public international law broadly, should respondent states be able to invoke such conflicting (or now interacting) regimes as a defense to an alleged breach of an international investment agreement (“IIA”) containing investor and investment protection (e.g., as a “shield” against a fair and equitable treatment or indirect expropriation claim, etc.)? Should the respondent state even be permitted to make a counterclaim based on an investors’ obligations, thereby turning public international law into a “sword” for states too? Should such counterclaims be limited to public international law obligations or include domestic law ones? In a word: should the fragmented, specialized regimes be harmonized and accounted for by investment tribunals to enforce a global rule of law?

 

Answers to these questions are long overdue. In fact, addressing these issues of interaction and overlap between investment arbitration and other areas of international law may become increasingly pressing to respond to contemporary backlash against international investment law and arbitration. Critics claim that investment arbitration is inherently unfair and must be rebalanced, while its proponents claim that investment arbitration increases foreign direct investment (“FDI”) and itself contributes to providing a level playing field between investors and their host states. As a result, or incidentally, the proponents claim, increased economic activity improves the lives of those less fortunate, promoting economic development. Critics add that economic development should be complemented by sustainable development. Both positions are indeed reconcilable and proper approaches to regime interaction could facilitate such non-binary positioning.

 

How can the adjudicatory mission of investment arbitration meet sustainable development challenges? Can IIAs be redrafted to align with broader public international law concerns in mind, e.g., by imposing investor obligations? Should such obligations be enforced through elevating domestic law obligations? Should states be free (or freer) to regulate in areas of public policy concerns without the fear of liability (avoiding the so-called “regulatory-chill”)? What about renewable energy investments that rely on green commitment incentives? What about investments that improve human rights and rely on state undertakings and specific promised incentives? For example, what about a water management investment, funded by the World Bank in an underdeveloped country to facilitate the states’ commitment to honor Goal 6 of the UN Sustainable Development Goals to ensure water and sanitation availability and sustainable management of this resource? What about the fact that, for example, “the OECD estimated that US $6.3 trillion of investment is needed annually until 2030 to meet development goals, increasing to US $6.9 trillion annually to make this investment compatible with the goals of the Paris Agreement, of which only a small proportion will be met by States”?

 

In other words, the protections under IIL protect not only the “evil” tycoons and billionaires but also the well-intended yet profit-driven corporations. Thus, we should look at how to improve investment arbitration by reconciling the benefits of IIL with the constitutionalist values embedded in other liberal regimes of public international law (and possibly as implemented by domestic laws) through regime interaction.

 

In this series, we will hear from highly esteemed authors on regime interaction in investment arbitration, generally, and how it may translate into necessary reform, redress legitimacy concerns, and improve the adjudicatory mission of investment arbitration as a result.

 

Dr. Crina Baltag and Ylli Dautaj will address how regime interaction opens-up the possibility to allow states to counterclaim against an investor for the failure to honor their commitments under, for example, environmental or human rights law. They explain that the increased appreciation of systemic interpretation and integration will lead to a heightened standing and increased currency of counterclaims in investment arbitration. In turn, such a development will help combat the backlash against ISDS by redressing some outstanding legitimacy concerns.

 

Anja Ipp will address the role that ISDS and IIL plays in climate law and consequently climate change. In her post, she explains how investments in the energy sector (renewable as well as fossil fuels) can lead to investor-State arbitration and how such arbitration interacts with the global commitment to combat climate change. She concludes that if “properly negotiated and revised, investment treaties can support global climate goals and give effect to the Paris Agreement” and that until this happens “arbitration practitioners can use the principle of systemic integration to reinterpret current IIAs in coherence with climate law”.

 

Dr. Kabir Duggal and Nicholas Diamond will address the much-debated interaction between ISDS and IIL and human rights. The authors identify the different spheres of interaction between the two regimes and highlight each system’s fundamental purposes and protections to identify how both systems can be harmonized. The authors argue that despite interaction between the two regimes being strained at present, efforts should be devoted to identifying shared goals”. Focusing on express references to human rights in investment treaties, the authors also illuminate the ways in which IHRL may permeate the various aspects of investment disputes (jurisdiction, applicable law, merits and damages, third party participation).

 

Nikos Lavranos will clarify the interaction between ISDS, IIL and EU Law. He explains the previously harmonious coexistence of both regimes to briefly outline how escalating tensions have led to the current ban on ISDS in intra-EU disputes from an EU law perspective. The author examines how various judgments of the CJEU have had a ¨spill- over effect” on the ECT and all disputes connected to the EU. He will further explain how certain principles of EU law are alien and perhaps even contrary to general principles of public international law. His post concludes by proposing possible approaches to harmonizing both regimes.

 

Kiran Gore focuses on the Vienna Convention on the Law of Treaties (“VCLT”) as a disciplining force in international law. Its rules of interpretation, in particular Articles 31 and 32, are commonly cited by investment tribunals as reflecting universal rules of interpretation. She elaborates on the VCLT’s drafting history evidencing that the International Law Commission foresaw that the VCLT would serve as an effective means to create systemic integration. In this light, she explains the role of systemic integration in investment arbitration

 

Our Own Reflection

It seems that ideological underpinnings and extreme positions taint the reform debate and remove it from a place of constructive dialogue. One thing is clear, the lack of agreed directions to the questions underscored above are indeed to be treated with heightened urgency and seriousness. Regime interaction plays a vital and instrumental role in investment arbitration reform. Sensible reform must take shape soon, and concessions between the various poles of the debate are, therefore, indispensable. The global community stands to benefit from an investment arbitration regime that categorically and unequivocally enforces a holistic IIL, which should also include interacting regimes of public international law and possibly domestic law obligations.

 

This series will underscore the continued importance of investment arbitration by informing this Blog’s readers about the regime interaction debate, with the hope that it is them who will then actively get involved in maintaining and re-shaping the institution of investment arbitration for the generations to come. We believe that the regime interaction debate is instrumental for both improving the legitimacy of investment arbitration and for enforcing the rule of law globally.

 

To read our coverage of regime interaction in investment arbitration, click here.

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The Three Steps in Appointing Arbitrators, And Which One is Most Important

Mon, 2022-01-10 00:04

In most cases, arbitrator selection follows a basic 3-step process: (1) Start with a Long List of Potential Arbitrators; (2) Pare it down to a Short List of Suitable Arbitrators; and then (3) Pick The Arbitrator to appoint.

At first, research is very broad. Parties focus on fundamental elements of the case, such as applicable law, seat, industry, and such. Many of these qualities can be found in directories, rosters, or on the CVs of individual arbitrators.

To narrow down the long list, parties seek out every published case, every scholarly article, every treatise authored by the arbitrators on their list. From these publicly available sources, parties seek both to understand arbitrators’ experience and to identify various connections with other parties, arbitrators, or counsel. As databases and directories become more detailed and sophisticated, this process has become much easier.

However, the single most important and difficult decision remains the last step: Which arbitrator do you ultimately pick for the tribunal? Ironically, this last, most important decision is when the most guesswork comes in.

Publicly available awards and academic publications run out of useful information on the most nuanced questions. Meanwhile, personal and professional networks are showing more limitations when researching newer and less well-known arbitrators from outside the traditional hubs. Parties need deeper insights on topics that are not in publicly available sources and outside the ambit of their personal networks.

That is where Arbitrator Intelligence’s innovative new tools come in.

These tools provide essential, unrivaled insights about arbitrators on the most crucial issues. They help take some of the guesswork out of the most important decision about which person on the short list makes it to the arbitral tribunal.

 

Revolutionary New Sources of Information about Arbitrators

Arbitrator Intelligence collects both factual and evaluative feedback about arbitrators from parties and counsel in past cases (contribute your feedback here). This feedback goes well beyond what is available in published awards. Arbitrator Intelligence’s unique feedback extends to cases that remain confidential and provides insights about arbitrators that cannot be gleaned from published awards.

Arbitrator Intelligence recently released a new Arbitrator Perspectives Survey. In the Survey, arbitrators themselves provide details about their approach to issues such as how they improve efficiency, respond to alleged counsel misconduct, manage document production, approach substantive interpretation, and award costs and fees. At a time when pre-appointment interviews are increasing circumscribed, responses to the Survey give parties and counsel valuable answers to key questions that they cannot ask arbitrators directly in an interview.

Arbitrator Intelligence’s Reports and Arbitrator Perspectives Survey ensure that parties and counsel have the information that they need to make informed decisions about which arbitrators to appoint to a tribunal.

Let’s look at a few examples.

 

Efficiency in Proceedings

For virtually all parties, fairness and efficiency are top of mind. But if only a few awards are public, how can you understand an arbitrator’s track record on these issues?

These topics are an important focus of feedback collected by Arbitrator Intelligence. For example, from Arbitrator Intelligence feedback you could learn that an arbitrator sat on a tribunal that “used a chess clock during the hearings to promote fairness and efficiency.” Or you can learn that an arbitrator, when sitting as chair, was described as “efficient and well-organized” and as “in absolute control of the hearings and paying attention, with a likable personality, well-humored and approachable. …[A] very impressive performance.”

If you anticipate requesting or opposing dispositive motions, you might want to know how an arbitrator proceeded when “the Respondent’s defense included a Request for Expeditious Dismissal of Manifestly Unmeritorious Claims,” namely that “[i]n spite of being a provision not commonly applied in proceedings [sic], the Arbitrator was exceptional in acting in accordance with the relevant standards of said concept.”

Another fundamental concern that affects efficiency is whether arbitrators are prepared and familiar with the record. Even a published award can’t tell you much about an arbitrator’s diligence—only feedback can. That is why Arbitrator Intelligence collects information about an arbitrator’s questions during the hearings as indicia of preparedness.

Specific comments can add to general assessments, such as the following comment, which explains that all “panel members, particularly the chair and [one co-arbitrator] clearly demonstrated that they read and synthesized the material submitted and the issues of the case.”

This crucial feedback about efficiency is complemented by perspectives offered by arbitrators themselves through Arbitrator Intelligence’s Arbitrator Perspectives Survey.

For example, arbitrators identify in our Survey their perspectives on the efficacy of:

  • Tribunal efforts to encourage settlement
  • Use of Redfern Schedules
  • Page limits on parties’ submissions
  • “Documents only” arbitration
  • Online hearings even over party objection
  • Broad and/or electronic document production

These topics can be important in picking the right arbitrator from your short list, or in assessing proposed chairpersons. But for the most part, an arbitrator’s approach to these topics cannot be readily assessed from public sources.

 

Responding to Guerilla Tactics

As allegations of so-called guerilla tactics have been on the rise, those who have been (or anticipate being) on the receiving end may want to know arbitrators’ approach to dealing with alleged counsel or party misconduct.

Concerns have been expressed that some arbitrators take a passive approach during arbitral proceedings. This more laissez-faire approach is sometimes presumed to be a way of avoiding time-consuming fact-finding and procedures or potential backlash.

Whatever the explanation, if avoiding potential guerilla tactics is on your list of concerns when picking arbitrators, past awards can’t tell you much about arbitrators’ handling of such matters. Most often, arbitrators’ assessments to such alleged misconduct are behind the shield of tribunal deliberations or clandestinely embedded in the assessment of evidence or allocation of costs and fees.

In sum, most alleged guerilla tactics and arbitrator responses are hidden from view, even in published awards.

Again, that is where Arbitrator Intelligence comes in.

Through the feedback AI collects, you can find out that one arbitrator on your short list was described, while sitting as a sole arbitrator, as having “issued general admonitions to dissuade further instances of allegedly improper conduct and made specific findings regarding the allegedly improper conduct.” That source also added: “During the hearing, the Arbitrator was quick to identify objections and resolve them efficiently and fairly.”

From AI Reports, you can also know that an arbitrator on your shortlist was on a tribunal that “showed great professionalism and courtesy in dealing with unexpected challenges to their own decisions by one of the parties when they walked out of the proceedings, the tribunal showed great professionalism in continuing forward in completing their task of hearing the remainder of the arguments and issuing the award.” Not surprisingly, the person provided this information concluded “I highly recommend the case management skill shown by this panel.”

By contrast, you may also find that an arbitrator you were considering “did not give much attention to the allegations” that the opposing party engaged in “[o]bstructionist, uncooperative behavior, making outrageous allegations.”

Meanwhile, in responding to our Perspectives Survey, arbitrators identify which kinds of behavior they consider cross the line from zealous advocacy to improper misconduct: continuously interrupting opposing counsel or witnesses, unfounded refusal to produce documents, continuously raising untimely new arguments, using unprofessional language, etc.

The Perspectives Survey also invites arbitrators to indicate which, in appropriate circumstances, they regard as appropriate tribunal responses to alleged counsel misconduct: oral admonitions, drawing negative inferences, considering when awarding costs and fees, referring counsel to national bar associations, etc.

 

Substantive Interpretation

Arbitrator Intelligence Reports and its Perspectives Survey also provide innovative new tools to assess arbitrators’ approaches to substantive interpretation.

Historically, legal education and nationality were used as rough proxies for how an arbitrator might approach contract interpretation. But today, those assumptions are not always good predictors—arbitrators from similar backgrounds may use strikingly different approaches. Foreign graduate degrees, working for multi-national firms or foreign clients, or sitting with other tribunal members from other backgrounds may affect an arbitrator’s allegiance to interpretative traditions from their national legal background.

These differences can become quite clear from feedback about specific arbitrations and awards, including those that are not publicly available to compare. For example, Arbitrator Intelligence has feedback about these two cases with similar tribunal compositions and applicable law, but very different approaches to interpretation:

  • In an arbitration governed by Russian law, a tribunal relied on the contract’s “plain meaning and interpretation of INCHOATE terms
  • In an arbitration governed by Ukrainian law, a tribunal applied a “flexible interpretation” and “consider[ed] the award considers previous amendments to the contract

To supplement feedback from individual cases, our Perspectives Survey asks about arbitrators’ approach to interpretation: In interpreting contracts, statutes, and treaties, when do you believe it is appropriate to look outside the “plain meaning” of the relevant language? Please check all that you believe may potentially be applicable, recognizing that specifics will depend on the details of individual cases.

Below are two actual but anonymized arbitrators’ responses from the Perspectives Survey:

Arbitrator A:

Arbitrator B:

If your client’s case relies on a plain meaning interpretation of contract language, other things being equal, you might be more inclined to pick Arbitrator A. On the other hand, if your client’s case relies on a more flexible interpretation that takes considers commercial realities that have changed since signing the contract, you might be more inclined toward Arbitrator B.

Given that only a tiny percentage of arbitral awards become publicly available in any particular year, this kind of indirect assessment can be invaluable in assessing an arbitrator’s approach to interpretation.

*     *     *

To be sure, these tools won’t necessarily tell you how an arbitrator will rule in your particular case. No source can (or should purport to). But these new sources of information can help you make better-informed decisions and reduce inaccurate guesses about which person you should appoint from your shortlist to your tribunal.

As the pool of arbitrators expands both in size and geography, traditional research exclusively through public sources and professional networks is not enough. These limited sources can leave you and your client unaware of crucial insights about an arbitrator’s track record and perspectives.

Arbitrator Intelligence’s innovative new sources provide one-of-a-kind insights that can mean the difference between picking the right arbitrator or the wrong arbitrator, between winning and losing.

 

 

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Air Canada’s Win Against Venezuela: Some Guidance for Future Tribunals?

Sun, 2022-01-09 01:49

Bilateral investment treaties depend upon international arbitration as the mechanism to resolve disputes between sovereign states and investors. Although offering obvious advantages over litigation before national courts, investors are not immune from the risk of proceedings becoming destabilized by external factors. A recent example involved Air Canada, the country’s flag carrier, and the Bolivarian Republic of Venezuela (“Venezuela”). An International Centre for Settlement of Investment Disputes (“ICSID”) Tribunal heard the airline’s claim under the 1996 Canada-Venezuela BIT (“BIT”), and on 13 September 2021 awarded Air Canada repatriation of profits which had been held up by Venezuela.  In resolving the dispute, the Tribunal had to confront external challenges arising from the current political conflict in Venezuela, and the procedural implications of US sanctions.

Numerous problems have affected the South American country in recent years – from hyperinflation and a mass exodus of 5.6 million citizens, to a protracted leadership crisis and punitive US sanctions. A new currency was launched in October 2021 with six fewer zeros as the one-million bolivar note became one new Venezuelan bolivar. Air Canada’s investment treaty claim centred on the bolivar’s exchange rate against the US dollar: in particular, the repatriation of outstanding profits by way of exchange between the two currencies.

Submissions were made during the ICSID proceedings about Venezuela’s political turmoil and the impact of sanctions.  The impact of economic and other sanctions on arbitration proceedings is a topic that is gaining currency amongst practitioners, not least because of the practical difficulties that may arise as a result in the conduct of proceedings. The Tribunal’s findings provide valuable insight for international arbitration practitioners, first, into how potentially destabilising obstacles were navigated in determining the award, and secondly, into the application of the fair and equitable treatment (“FET”) provisions in investment treaties – on which arbitral tribunals have taken different approaches.

 

The Discussion on Repatriated Profits

The airline had a long history of repatriating profits on its Venezuelan earnings by converting bolivars into US dollars via a Venezuelan State commission. Following a significant devaluation in 2014, the bolivar’s exchange rates were altered by the commission. Air Canada suspended its flights to Venezuela shortly afterwards and later initiated arbitration pursuant to the BIT under the ICSID Additional Facility Arbitration Rules. The airline alleged a breach of the protection relating to the free transfer of funds (Art. VIII, BIT), breach of the fair and equitable treatment standard (Art. II, BIT), and expropriation (Art. VII, BIT).

The Venezuelan commission altered exchange rates which had been previously agreed between Canada and Venezuela. The commission had failed to process several of Air Canada’s pending applications for an Authorization for Foreign Currency Acquisition (AAD) to repatriate profits. The Tribunal found that the commission’s unjustified failure to sufficiently address Air Canada’s AAD requests meant that Air Canada were restricted from its right to freely transfer its investments or earnings under the BIT. The Tribunal therefore awarded Air Canada US$ 20,790,574 for repatriation of revenues, ruling that the airline was entitled to this sum (after set off against money owed to Venezuela as part of the currency exchange) as well as costs and interest. Because there was no finding of expropriation, no additional compensation was awarded.

The Tribunal also awarded damages, finding that Venezuela had breached the protection of the free transfer of funds by failing to process Air Canada’s numerous currency exchange requests and, held that this right was central to the international regime for promotion and protection of investments. Although the Tribunal’s FET discussion was largely obiter, the Tribunal’s approach is worth considering alongside procedural issues relating to political factors and international sanctions, which have become more commonplace in international arbitration. Because there was no finding of expropriation, no additional compensation was awarded.

 

Determination on FET Violations

The parties offered different interpretations of the FET protection under Article II of the BIT. Venezuela argued that the threshold for finding a violation of FET should be assessed in line with customary international law principles, and when considering the reasonableness of state decisions, the Tribunal should take into account public policy reasons. Venezuela thus argued that overall the threshold for violation of the FET standard was high, requiring a more restrictive interpretation. In rejecting it, the Tribunal adopted a purposive approach instead:

“Rather, international law requires this Tribunal to interpret the concept of fair and equitable treatment in a manner consistent with the context of investor-State arbitration and the purpose of the BIT itself: namely investment protection. In this regard, the more liberal approach, which focuses on the broadly consistent elements of “fair and equitable”, is appropriate”.

Recognising that a BIT is designed to provide investment protection, the Tribunal decided that, as an investor, Air Canada should be able to rely on it for relief. Venezuela’s actions were found to be arbitrary, lacking in transparency and, by failing to process the airline’s requests for repatriation, the state did not meet the investor’s legitimate expectations.1) This is another example, if needed, of a Tribunal finding in favour of an investor because of a sovereign state’s failure to comply with previous representations and follow established processes. For example, ESPF Beteiligungs GmbH & others v Italy, involved a claim under the Energy Charter Treaty the state was held to have breached the legitimate expectations of a German investment company through measures that substantially reduced the benefits of a previously established incentive regime in Italy, the Conto Energia Decrees (discussed here). jQuery('#footnote_plugin_tooltip_39961_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39961_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Impact of Venezuela’s Crisis

Unusually, the Tribunal was confronted with issues stemming from Venezuela’s political difficulties, in particular, the legitimacy of President Maduro, which has been disputed since the country’s 2019 elections. The international community is divided. Notably, the USA, Canada, the UK and the European Union, have extended some form of recognition to opposition politician Juan Guaidó. Claiming to be Venezuela’s Attorney General with exclusive responsibility for the country’s legal representation, one of Mr Guaidó’s representatives argued that the ICSID Tribunal should no longer grant standing to Venezuela’s legal counsel on record, who were appointed by the Maduro government.  This issue is considered in a previous post discussing the potential difficulties arbitrators face when deciding who to recognise as Venezuela’s legal representative.

The Tribunal rejected this position, which permitted the proceedings to continue with Venezuela’s existing counsel.2) This approach was consistent with decisions reached by other international tribunals faced with a similar issue. See, for example, Venezuela Holdings, B.V. & others v Venezuela (ICSID Case No. ARB/07/27), Decision, 1 March 2021.  In Global Values v. Venezuela, the Tribunal rejected the request by the Special Attorney appointed by Mr Guaidó to exclude Venezuela’s (Maduro-appointed) Attorney General. The Tribunal held that it had not shown that Mr Guaidó’s Special Attorney had been appointed by a government with authority and control over Venezuela. jQuery('#footnote_plugin_tooltip_39961_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_39961_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Venezuela’s complex political dynamics do, however, have potential implications for future international arbitration proceedings. Venezuela sought to rely on a quantum expert’s report to rebut Air Canada’s quantum expert evidence. However, because of the stringent economic sanctions imposed by the US, the Venezuelan quantum expert could not corroborate the contents of a report or be available for examination at the hearing. Nevertheless, the Tribunal dismissed Air Canada’s attempt to exclude the report and did consider the evidence, albeit giving it less weight. Circumstances could arise in another Tribunal hearing which might think it inappropriate to admit disputed forensic evidence that cannot be fully examined at a hearing

 

Keeping Politics out of the Proceedings

Tribunals routinely have to balance the legislative and policy choices of states with investors’ rights, but should external political factors be permitted to disrupt arbitration of BIT claims?

Notwithstanding Venezuela’s complex political situation, the arbitrators reached a decision consistent with international law principles, focusing their analysis primarily on the BIT provisions. Significantly, they did not order Venezuela to replace its counsel and permitted the country to rely on its quantum expert.  By doing so, the arbitrators prevented sanctions or other political considerations from undermining the proceedings.

 

Conclusion

The Tribunal’s flexibility in this case and its reticence to allow the proceedings to be disrupted should reinforce investors’ confidence in the investor-state dispute settlement process. The case also illustrates how the integrity of an arbitration proceeding can be preserved despite the potentially disruptive effect of sanctions. Tribunals may increasingly be called upon to resolve procedural obstacles created by sanctions, and it remains to be seen whether the system is sufficiently flexible for a similar approach to be followed in future cases.

References[+]

References ↑1 This is another example, if needed, of a Tribunal finding in favour of an investor because of a sovereign state’s failure to comply with previous representations and follow established processes. For example, ESPF Beteiligungs GmbH & others v Italy, involved a claim under the Energy Charter Treaty the state was held to have breached the legitimate expectations of a German investment company through measures that substantially reduced the benefits of a previously established incentive regime in Italy, the Conto Energia Decrees (discussed here). ↑2 This approach was consistent with decisions reached by other international tribunals faced with a similar issue. See, for example, Venezuela Holdings, B.V. & others v Venezuela (ICSID Case No. ARB/07/27), Decision, 1 March 2021.  In Global Values v. Venezuela, the Tribunal rejected the request by the Special Attorney appointed by Mr Guaidó to exclude Venezuela’s (Maduro-appointed) Attorney General. The Tribunal held that it had not shown that Mr Guaidó’s Special Attorney had been appointed by a government with authority and control over Venezuela. function footnote_expand_reference_container_39961_30() { jQuery('#footnote_references_container_39961_30').show(); jQuery('#footnote_reference_container_collapse_button_39961_30').text('−'); } function footnote_collapse_reference_container_39961_30() { jQuery('#footnote_references_container_39961_30').hide(); jQuery('#footnote_reference_container_collapse_button_39961_30').text('+'); } function footnote_expand_collapse_reference_container_39961_30() { if (jQuery('#footnote_references_container_39961_30').is(':hidden')) { footnote_expand_reference_container_39961_30(); } else { footnote_collapse_reference_container_39961_30(); } } function footnote_moveToReference_39961_30(p_str_TargetID) { footnote_expand_reference_container_39961_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_39961_30(p_str_TargetID) { footnote_expand_reference_container_39961_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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Challenging Arbitrators in Brazil: a Practical Guideline from the CEPArb-USP Digest

Sat, 2022-01-08 00:20

The Center for Studies and Research in Arbitration from the University of São Paulo (“CEPArb-USP”) has recently made public the findings of its pioneer empirical research on challenges of arbitrators in domestic proceedings in Brazil. The initiative analyzed data from challenges in proceedings administered by the Câmara de Mediação e Arbitragem Empresarial – Brasil (CAMARB).

The outcome of the working group is documented in the Digest of challenge proceedings in arbitration before the Câmara de Mediação e Arbitragem Empresarial – Brasil (CAMARB) – Portuguese version available here.  The Digest encompasses a chronological analysis of ten institutional arbitrator challenge decisions rendered between 2008 and 2021. A uniform methodology was applied in the analysis of all ten cases: only the final decision was analyzed, in an objective way, meaning that the Digest does not contain the team’s opinions on the related matters. Confidentiality was preserved and no information on the parties or arbitrators involved were disclosed throughout the analytical process.

The initiative is unique in Brazil. As clarified by the advisors of the team of researchers in the forewords of the Digest, it is of foremost importance for the Brazilian arbitral community to know the standards applicable to arbitrator challenges. This community englobes not only arbitration practitioners, but also state courts, which may eventually deal with the issue in set aside proceedings. Foreign parties unfamiliar with Brazilian arbitration rules and law also benefit from the Digest. As a matter of fact, there is a worldwide concern on transparency regarding the outcomes of challenges related decisions. In this context, it is worth recalling previous efforts from the LCIA challenge digest, discussed here and here.

To provide the international arbitral community with a general view of the Digest, below is a sneak peek of the factual grounds for challenge in each of the ten cases. The report contains raw data that may be subject to different kind of analysis.

  • Case 1 (2008): Chairman appointed by co-arbitrators was challenged based on previous academic relationship with one of the party’s counsel. The challenging party invoked the existence of an intimate friendship between them grounded on such previous relationship. The challenge was rejected.
  • Case 2 (2011): All arbitrators were challenged on the grounds of an alleged prejudgment of the case and lack of impartiality after issuing a procedural order rejecting a party’s request for leave to produce certain evidence. Furthermore, one co-arbitrator was challenged based on previous work as supervisor for one of the party’s counsel in an academic endeavor. The challenge was rejected.
  • Case 3 (2015): All members of the tribunal were challenged by both parties after rendering a partial award which allegedly violated due process and the Brazilian law applicable to the dispute. The Board of CAMARB rejected the challenge as it considered that the violation of due process allegation is a valid ground for setting aside the award, but not for challenging an arbitrator.
  • Case 4 (2014): Party-appointed arbitrator was challenged based on the existence of a professional relationship with counsel for the appointing party as well as the fact that a relative of said arbitrator had been a partner of the counsel in a law firm many years before the challenge was made. The challenge was rejected.
  • Case 5 (2014): Party-appointed arbitrator was challenged by the same party who appointed them after disclosing that their law firm represented a company from the same corporate group of that party. The challenge was rejected.
  • Case 6 (2015): Chairman appointed by the co-arbitrators was challenged after disclosing he had previously acted as an arbitrator in a panel presided by one of the parties’ counsel. In that case, the presiding arbitrator was chosen by CAMARB. The challenge was rejected.
  • Case 7 (2016): Sole arbitrator was challenged after disclosing that his former law firm, but not him personally, had acted for one of the parties to the arbitration. The challenge was rejected.
  • Case 8 (2017): Party-appointed arbitrator was challenged on the grounds of an alleged commercial relationship with the law firm representing one of the parties and due to alleged lack of experience in the related matter. The challenge was accepted based on the first issue. The appointed arbitrator had constantly acted as representative in judicial hearings on behalf of the party’s law firm. The decision considered that the relationship with the party’s law firm gave grounds to justifiable doubts regarding the arbitrator’s independence and impartiality. The reasoning expressly referred to the IBA Guidelines on Conflict of Interests.
  • Case 9 (2020): Party-appointed arbitrator was challenged based on their previous employment, in a company that was not a party to the arbitral proceedings. The challenging party alleged that, due to arbitrator’s previous experience, they would be predisposed to accept the arguments of the opposing party on a subsidiary claim which involved interests of this third party. Said employment relationship ended more than 3 years before the appointment, but the same company was, at the time of the challenge, a client of the arbitrator’s current law firm. The challenge was accepted, as it was considered that the current relationship between the company and the arbitrator’s law firm could jeopardize the trust required between the parties and the arbitrator. As for the former employment relationship, the reasoning expressly referred to the possible application by analogy of the three-year period provided for in the IBA Guidelines on Conflict of Interests to discard it as a circumstance from the Orange List.
  • Case 10 (2021): Party-appointed arbitrator was challenged based on an alleged intimate friendship with one of the party’s counsel, their participation in academic events with some of the counsel for the appointing party, a professional relationship with counsel and also previous professional contacts with the party itself. The challenge was accepted. The reasoning was based on that none of these facts alone would suffice to challenge an arbitrator, but their combination led to justifiable doubts as to the arbitrator’s impartiality. Again, the reasoning expressly referred to the IBA Guidelines on Conflict of Interests.

The data indicates that the standard to accept a challenge is very high and suggests two major initial findings.

The first one refers to the fact that all three cases in which a challenge was accepted expressly referred to the IBA Guidelines on Conflict of Interests. That is particularly relevant because, as pointed out in the Digest’s foreword, those Guidelines were not construed bearing in mind the Brazilian domestic arbitration reality but more experienced and consolidated communities such as the US and Europe. Despite that, praxis shows that, in the absence of any other standard, this soft law instrument is commonly invoked and relied upon to rule on arbitrators’ challenges.

The second one is that, in these three cases, the ground for granting the challenge was the existence of a business or professional relationship between the arbitrator (or his law firm) with the counsel for one of the parties (or their law firm). A relation-based allegation was also the most frequent ground for filing a challenge.

 

Conclusion

Noting that different approaches analyzing the data are possible, we can only hope this Digest to be a starting point towards a much-appreciated consolidation of the guidelines applicable to domestic proceedings in Brazil, promoting foreseeability and transparency and, therefore, legal certainty to all its players.

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P.R.I.M.E. Finance Launches Revised Arbitration Rules

Fri, 2022-01-07 00:56

On 15 November 2021, P.R.I.M.E. Finance launched its revised P.R.I.M.E. Finance Arbitration Rules (the Rules). A launch event was held on 6 December at which Georges Affaki, Martin Doe of the Permanent Court of Arbitration (PCA) and Secretary-General of P.R.I.M.E. Finance Kasper Krzeminski gave an overview of the Rules. A recording is available here.  P.R.I.M.E. Finance stands for the “Panel of Recognised International Market Experts in Finance”.

The Rules offer arbitrators and users a comprehensive, clear, and straightforward set of procedural rules specially designed for the arbitration of a broad range of financial and banking disputes. Non-bank parties and financial institutions conducting ordinary business transactions, with no distinctive credit component, can also choose to submit their disputes to P.R.I.M.E. Finance.

The Rules came into effect on 1 January 2022 and can be downloaded here.

 

Introduction to P.R.I.M.E. Finance

P.R.I.M.E. Finance was established in the wake of the 2008 global financial crisis to help resolve disputes concerning complex financial products. From the outset, P.R.I.M.E. Finance recognised the need for a specialised forum to hear such disputes. As a result, the P.R.I.M.E. Finance Arbitration Rules were developed and designed to offer a framework containing features of particular interest to the financial industry.

Concurrently, P.R.I.M.E. Finance has also kept expanding its Panel of Experts. This group of international finance, legal and regulatory experts now numbers close to 250 individuals. This coincides with the needs of financial institutions which have consistently ranked technical expertise in banking and finance of sitting arbitrators as key when considering an alternative dispute resolution mechanism.

In 2015, the PCA joined forces with P.R.I.M.E. Finance. Arbitrations brought under the P.R.I.M.E. Finance Arbitration Rules (and mediations brought under its Mediation Rules) would henceforth be administered by the PCA. The PCA is the world’s oldest arbitral institution, with over a century of experience in administering complex international proceedings. The aim of the co-operation is to combine the PCA’s efficiency in administering arbitral proceedings with the subject-matter expertise of P.R.I.M.E. Finance’s Panel of Experts.

 

Overview of Review Process

The review of the Rules, which were last updated in 2016, began in 2020. The guiding aim was to ensure that the Rules were fit-for-purpose for users, reflected current best practice in arbitration and contained features of particular interest to financial market participants. A two-tier rule structure for the review was established, comprising a Drafting Group and a Consulting Group. The Drafting Group was chaired by Professor Georges Affaki. The Consulting Group was chaired by Carolyn Lamm, Senior Partner and Co-Chair International Disputes Americas, White & Case LLP, and Heikki Cantell, General Counsel of the Nordic Investment Bank.

The following distinguished arbitrators and finance experts all contributed their time and experience: Yas Banifatemi, Chiann Bao, Paula Costa e Silva, Whitney Debevoise, Felix Dasser, Martin Doe, Grant Hanessian, Bernard Hanotiau, Arthur Hartkamp, Ulf Koping-Hoggard, Kasper Krzeminski, George Liakopoulos, Camilla Macpherson, Ali Malek QC, Romina Martinez, Wendy Miles QC, Loukas Mistelis, Philippe Pinsolle, Kathryn Sanger, Hon. Elizabeth Stong, Gaetan Verhoosel and Marcus van Bevern.

A comprehensive draft set of revised Rules was issued for public comment in January 2021. Three virtual public consultations were held, aimed at audiences in Asia, the Americas and EMEA. Comments were received from many leading law firms and practitioners around the world, ensuring the geographical and sectoral representation that is essential to global rule-setting.

 

Key Features of the Revised Rules

  1. The PCA and the P.R.I.M.E. Finance Panel

The PCA plays a greater role throughout the arbitral process than in the previous version of the Rules. It enjoys all the customary prerogatives of an administering institution, with particular discretion in relation to the fixing of time limits. Particular new features of interest include a confirmation procedure, whereby in exceptional situations, the PCA is granted the power to decline the confirmation of arbitrators nominated by the parties or a tribunal president nominated by co-arbitrators, such as when the agreed nominee and/or nomination process creates a risk of unfairness and endangers the enforceability of the award. The PCA will also henceforth undertake a limited review of draft awards.

P.R.I.M.E. Finance’s Panel of arbitrators is to be referenced, when appropriate, for the purpose of nominations or appointments. This recognises that finance disputes are often complex and can benefit from specialised arbitrators. The combination of the PCA’s efficiency in administering arbitral proceedings and the Panel’s subject-matter expertise brings significant advantages for users in the banking and finance sectors.

  1. Transparency

There is a focus on transparency throughout the Rules. By way of example, parties are required to disclose the identity of any third party with a significant interest in the outcome of the dispute. This is a new element to the Rules.

The provisions on amicus curiae have also been updated, with arbitral tribunals sitting under the Rules having the power to invite or grant leave to an industry body to appear before it as amicus curiae and make submissions on relevant issues. This reflects the fact that banking is a highly standardised sector, with syndicated lending generally following the template of bodies such as the Loan Market Association (LMA) or the Loan Syndications and Trading Association (LSTA) and derivatives using the International Swaps and Derivatives Association (ISDA) Master Agreement. Such bodies might well have an interest in making submissions in certain cases.

Finally, the rules on publication of awards have been clarified, with awards to be published in anonymised form (subject to party agreement), to permit the emergence of a body of jurisprudence similar to the case law of courts in major financial centres. This will increase predictability and transparency of the arbitral process and further P.R.I.M.E. Finance’s mission to reduce legal uncertainty and systemic risk, and to foster stability and confidence in, and a more settled and authoritative body of law for, world finance.

  1. Complex arbitrations

Complex financial transactions may involve many parties, sometimes with adverse interests, and multiple contracts. One of the pitfalls in the arbitral process is that expediency often requires that all claimants, on the one hand, and all respondents, on the other, be treated alike regardless of their interests. The previous version of the Rules dealt only in passing with joinder. The new Rules include detailed provisions not only on joinder but also on consolidation, as well as a provision enabling separate arbitrations that are not eligible for consolidation to be coordinated in certain cases.

  1. Emergency and expedited rules

The Rules comprehensively address emergency situations both before and after the tribunal is constituted, with updated provisions on emergency arbitration and  a new provision on interim measures. As to expedited proceedings, the previous version of the Rules simply noted that the parties might agree to shorten any time lines. Now, in response to financial institutions’ requests for efficiency in the rendering of awards, there is a very complete process for expedited proceedings. The new expedited rules will apply automatically to arbitrations with an amount in dispute of EUR 4 million or less, with a sole arbitrator expected to render the final award within 180 days of the constitution of the tribunal.

  1. Efficiency

The Rules introduce a range of new provisions designed to create efficiency. By way of example, tribunals are expected to convene a case management conference with the parties within 30 days of their constitution. The convening of additional procedural conferences is encouraged throughout the proceedings. Tribunals are also given deadlines to ensure the rendering of final awards in a timely fashion. Tribunals with three or more members are required to render the final award within 90 days of the closing of the hearing (or the receipt of the last submissions authorised by the tribunal); for sole arbitrators, the time limit is 60 days. Tribunals are also explicitly empowered to assist the parties in discussing a settlement when appropriate.

One concern raised by financial institutions is the need for tribunals to be decisive in dismissing evidently unmeritorious claims or defences, without having to go through the full procedure on the merits. Early determination is a power expressly conferred upon tribunals in the Rules.

Last but not least, parties can choose whether fees are calculated on a time-based system or in proportion to the value of the dispute. Absent agreement, the Rules default to a time-based fee system.

 

Conclusion

The Rules offer a highly attractive arbitration mechanism to financial institutions, their customers, and counterparties. It is hoped that all finance parties, and those advising them, consider arbitration in accordance with the P.R.I.M.E. Finance Arbitration Rules, and adopt P.R.I.M.E. Finance’s model clause in their contracts accordingly.

 

The author, Camilla Macpherson, is Head of Secretariat of P.R.I.M.E. Finance and a member of the P.R.I.M.E. Finance Arbitration Rules Review Drafting Group. For more information, contact secretary@primefinancedisputes.org.

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