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What’s New on Canada’s West Coast? VanIAC’s New International Commercial Arbitration Rules of Procedure

Fri, 2022-07-08 01:51

Canada’s west coast has long welcomed arbitration as a means of dispute resolution and provided a venue for arbitrations of all kinds. The Vancouver International Arbitration Centre (VanIAC) – established in 1986 under the name British Columbia International Commercial Arbitration Centre (BCICAC) – has recently made further strides in providing parties with workable and efficient routes for resolving their disputes outside the courts. Its offerings now include a new set of International Commercial Arbitration Rules of Procedure that came into effect on July 1, 2022.

VanIAC had several objectives in updating its previous international rules. First, VanIAC wished to incorporate innovations such as emergency arbitrator procedures (which have proven helpful in other venues as well as under VanIAC’s earlier-updated domestic rules) and take into account changes (postdating the rules’ last amendment, in 2000) to the UNCITRAL Model Law and Canadian arbitration legislation, all while preserving well-tested elements of the international rules’ prior content.

Second, relatedly, VanIAC’s new international rules solidify its appeal as an administering arbitral institution for parties internationally. Those parties will benefit from the new rules’ express provision for virtual hearings as well as from VanIAC’s adoption of best practices competitive with those of leading arbitral institutions around the world.

Third, VanIAC sought to make its international rules suitable not only for parties from different countries but also where an arbitration governed by VanIAC rules is seated elsewhere in Canada than VanIAC’s home province of British Columbia.  Under Rule 1(d) of the new international rules, in a case seated in another Canadian province or territory between parties that have agreed to arbitrate disputes under any VanIAC (or BCICAC) rules, VanIAC’s new international rules, rather than its domestic rules, will apply.

Why is the last point important? In 2020, the province of British Columbia enacted a new domestic Arbitration Act that, in contrast to its relatively skeletal predecessor, included much of the procedural detail that had formerly been found in VanIAC’s domestic rules (the Arbitration Act was previously discussed on this blog here). Accordingly, also in 2020, VanIAC revised its domestic rules to mesh with the new domestic legislation, streamlining those domestic rules to avoid overlap. VanIAC’s more streamlined domestic rules, however, no longer work as well alongside other provincial or territorial legislation that does not include the same content as BC’s new Arbitration Act. VanIAC’s international rules provide the additional detail needed in circumstances not governed by BC’s domestic arbitration statute.

 

Resolving Disputes Expeditiously

Further shaping VanIAC’s new international rules is the principle that disputes should be resolved expeditiously while still ensuring, as reflected in Rule 19, that the parties are treated with equality and each given a reasonable opportunity to present their case. In this regard:

  • Rule 19 also provides that the arbitral tribunal shall endeavour to conduct the proceedings expeditiously and avoid unnecessary delay and expense; the parties too shall endeavour to promote the expeditious conduct of the arbitration and to avoid unnecessary delay and expense. The arbitral tribunal may allocate costs or take any other steps it considers necessary to preserve these objectives.
  • Rule 21 provides that a party may seek leave to bring an application for early disposition of one or more issues of fact or law at any stage in the proceedings.
  • Rule 23 provides that unless otherwise agreed by the parties or directed by the arbitral tribunal, the direct evidence of witnesses shall be provided by way of written witness statements.
  • The new international rules expressly contemplate the prospect of virtual hearings, providing specific details in this regard in Rule 25.
  • Under Rule 35, unless otherwise agreed by the parties or directed by the arbitral tribunal, the arbitral tribunal shall issue an award within 90 days of the latter of the close of the hearing and the last written submissions received by the arbitral tribunal.
  • Beyond the above, VanIAC’s new international rules are supplemented by specific expedited procedures which – subject to other determination by the parties, arbitral tribunal or VanIAC – apply to arbitrations conducted by a sole arbitrator if the parties agree or if no claim (or estimate of the amount claimed) by any one party in a notice to arbitrate or notice of counterclaim exceeds $500,000 CAD exclusive of interest and costs. The expedited procedures set out short timelines, including that all written material must be exchanged no later than 120 days from the appointment of the arbitrator, unless otherwise agreed by the parties or directed by the arbitrator. They also provide that, unless otherwise agreed by the parties or directed by the arbitrator, a final award shall be issued without an oral hearing based on the written material. If an oral hearing is necessary, under the expedited rules it is generally to be no more than one day in length. Unless otherwise agreed by the parties or directed by the arbitrator, the expedited arbitrator shall issue an award within 45 days of the last written material received by that arbitrator, or, where an oral hearing has been ordered, within 45 days of the closure of proceedings.

 

Appointing and Challenging Arbitrators

VanIAC’s new international rules set out the process for appointing – and, where this circumstance arises, challenging – arbitrators (Rules 11 and 13).

Rule 12 confirms that arbitrators acting under VanIAC’s international rules shall be and remain wholly independent and impartial of any party involved in the arbitration. When a person is approached in connection with their possible appointment as an arbitrator, the person must disclose any circumstances likely to give rise to justifiable doubts as to the person’s independence or impartiality.

For the purposes of VanIAC’s new international rules, there are justifiable doubts as to an arbitrator’s independence or impartiality only if there is a real danger of bias on the part of the arbitrator in conducting the arbitration.

 

Interim Measures

VanIAC’s new international rules also address the topic of interim relief. Consistent with the prior rules, Rule 26 makes clear that unless otherwise agreed by the parties in writing, the arbitral tribunal may, at the request of a party, grant any interim measure the tribunal deems appropriate, including security for all or part of the amount in dispute, or the preservation, storage, sale or other disposal of property under the control of any party and relating to the subject matter of the arbitration.

Rule 27 goes on expressly to state that unless prohibited by law or otherwise agreed by the parties in writing, the arbitral tribunal may, at the request of a party, grant an ex parte preliminary order (that is, an order made without notice to the other party) directing a party not to frustrate the purpose of a requested interim measure. A preliminary order shall only be granted in exceptional circumstances where the arbitral tribunal considers that prior disclosure of a request for an interim measure to the party against whom it is directed risks frustrating the interim measure’s purpose.

Ex parte relief requires certain safeguards to be satisfied. Under Rule 27, a party applying for an ex parte preliminary order must disclose to the arbitrator all circumstances that are likely to be relevant to the arbitrator’s determination of whether to grant or maintain the order. Further, at the earliest practicable time, the arbitral tribunal must give a reasonable opportunity to the party against whom a preliminary order is directed to present its case. After the party has had a reasonable opportunity to present its case, the arbitral tribunal may issue an interim measure adopting or modifying the preliminary order.

A preliminary order expires 20 days after the date on which it was issued. The preliminary order itself is binding on the parties but is not an arbitral award and is not subject to enforcement by a court.

VanIAC’s new international rules also address the difficult situation where relief is required before the arbitral tribunal that will ultimately decide the merits of the dispute is constituted. To deal with this circumstance, VanIAC’s new international rules set out certain emergency arbitration procedures (although Rule 32 allows parties to agree in writing to opt out of same).

Under Rule 29, where a party applies in accordance with Rules 26 and 27 for an interim measure or preliminary order prior to the constitution of the ultimate arbitral tribunal, VanIAC shall appoint an emergency arbitrator within two days of its receipt of the application. The emergency arbitrator shall establish a procedure within three days of appointment and, under Rule 31, issue any interim measure or preliminary order within 15 days of appointment.

The emergency arbitrator may issue an interim measure or preliminary order after the ultimate arbitral tribunal has been constituted but shall not have any further powers. (Under Rule 29(d), unless otherwise agreed by the parties, an emergency arbitrator appointed under the new international rules cannot be appointed as part of the arbitral tribunal in the same arbitration.)

 

Looking Forward

As mentioned by VanIAC’s managing director, VanIAC looks forward to providing expert and trusted dispute resolution services by implementing the new international rules. It welcomes questions from anyone considering adoption of those rules as well as feedback from those who use them.

 

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What are the Limits of the Fiona Trust Doctrine? A Review of Recent Cases on Inconsistent Dispute Resolution Clauses

Thu, 2022-07-07 01:09

It is critical to invest time to ensure that there are no inconsistencies between multiple dispute resolution/jurisdiction clauses within a particular contractual relationship (whether within a single contract or across multiple related contracts). Such inconsistencies inevitably lead to disputes over how the parties should resolve their disputes – a potentially costly sideshow to the resolution of the real dispute between the parties.

In the seminal case of Fiona Trust & Holding Corp v Privalov [2007] 2 Lloyd’s Rep 267, the UK House of Lords (as it then was) introduced what is often referred to as the “presumption in favour of one-stop adjudication”. The Fiona Trust doctrine presumes that “rational businessmen” are likely to have intended that any disputes arising between them will be decided by the same court or tribunal, unless they use clear language indicating otherwise.

There have been several recent decisions around the world exploring the limits of the doctrine. These cases suggest that, where there are conflicting arbitration and court jurisdiction clauses, in the absence of clear language indicating the parties’ intention to resolve certain aspects of a dispute in one forum as opposed to another, the Fiona Trust doctrine will be applied to reconcile both clauses such that they continue to remain valid and operative. These decisions have given effect to both clauses by finding as a matter of construction that the parties intended all disputes to be resolved through arbitration with the court providing supervisory jurisdiction, given the other way round would mean that the arbitration clause would become inoperative.

 

Melford Capital Partners (Holdings) LLP l v Wingfield Digby [2021] EWHC 872 (Ch)

In Melford Capital, there was a breakdown of a business relationship between partners to Melford Capital, and there were two conflicting dispute resolution clauses contained in a limited liability partnership agreement. One was an exclusive jurisdiction clause in favour of the English courts and the other was an arbitration clause, which did not specifically designate a seat of arbitration.

The Court interpreted the exclusive English jurisdiction clause as providing for the supervisory jurisdiction of the English courts in support of arbitration, and therefore concluded that it was possible to read the clauses in harmony rather than in conflict with each other.  A similar approach had been taken in other cases prior to Fiona Trust, in particular Paul Smith Ltd v H&S International Holding Inc [1991] 2 Lloyd’s Rep 127.

This arguably went one step further than the House of Lords did in Fiona Trust, given the jurisdiction clause was not expressed to be exclusive in Fiona Trust, and the court and arbitration clauses referred to each other in Fiona Trust.  In contrast, in Melford Capital there were two arguably completely contradictory clauses, each of which would work independently of the other. The judge considered that the question was whether to determine that the arbitration clause was completely inoperable such that it was “eviscerated”, or instead to make the two clauses work together.

 

Surrey County Council v Suez Recycling and Recovery Surrey [2021] EWHC 2015 (TCC)

This case concerned a waste disposal project agreement together with three successive agreements, all of which were described as variations to that first agreement. The four contracts each contained various iterations of the same arbitration clause and an exclusive jurisdiction clause in favour of the English courts. The third deed of variation, by which the parties agreed to implement an “EcoPark”, contained a new additional exclusive jurisdiction clause in favour of the English courts.

The Claimant, Surrey County Council, commenced court proceedings against Suez relating to delay in the construction and commissioning of the EcoPark. Suez disputed the court’s jurisdiction and brought an application for a stay under section 9 of the English Arbitration Act. Suez argued that the development of the EcoPark fell to arbitration in accordance with the original waste disposal agreement, whereas Surrey argued that disputes concerning the EcoPark should be ring-fenced and heard by the English court.

Referring back to Fiona Trust, the judge held that the arbitration clause should be construed broadly to encompass disputes concerning the EcoPark, as there was no reason why the parties would have chosen a different forum for one category of dispute without any clear language to indicate that. The judge found that the reference to arbitration and courts in the same contract was a reference to the supervisory jurisdiction of the English courts in support of arbitration, in line with Melford Capital.

As for the new jurisdiction clause in the third deed of variation, rather than finding that the existence of the arbitration clause and court jurisdiction clause created a conflict, the judge found that the “varied clauses” would fall to arbitration, but that the rest (e.g. the standard boilerplate clauses) would fall to the court. The judge accepted that the jurisdiction clause would therefore be of limited applicability.

The Melford Capital and Surrey County Council judgments could arguably be characterised as an expansion of the Fiona Trust doctrine from “presumption in favour of one-stop adjudication” to “presumption in favour of arbitration”. However, despite the approach taken in the above cases, there have also been several cases in England, Singapore and Hong Kong where the courts have found that the parties’ intention was not to submit all disputes to arbitration.

 

Albion Energy v Energy Investments Global [2020] EWHC 301 (Comm)

This case involved a sale and purchase agreement (SPA) containing a court jurisdiction clause, and an escrow agreement containing an arbitration clause. The court considered that there would be good reasons why parties would choose different dispute resolution provisions for principal and security agreements forming part of the same transaction. Therefore, the court found that the arbitration agreement in the escrow agreement did not supersede the court jurisdiction clause in the SPA.

 

Silverlink Resorts Limited v MS First Capital Insurance Limited [2020] SGHC 251

Silverlink involved an insurance policy which contained an arbitration clause with respect to “any dispute arising out of or in connection with this Policy” and a jurisdiction clause conferring jurisdiction to the Singapore courts with respect to “any dispute… regarding the interpretation or the application of this Policy”. Further, a renewal certificate included a choice of law jurisdiction provision which also conferred jurisdiction to the Singapore courts “in the event of any dispute over interpretation of this Policy”.

The claimant commenced court proceedings when its claim under the insurance policy was rejected. The defendant applied to the Singapore courts to stay the proceedings in favour of arbitration pursuant to section 6 of the International Arbitration Act of Singapore. As part of its reasoning in rejecting the stay application and determining that the arbitration clause did not apply to the dispute before it, the Singapore High Court ruled that the jurisdiction clause was intended to carve out disputes regarding interpretation and application of the policy from the arbitration clause, such that the two clauses were not inconsistent. Further, the court found that the renewal policy confirmed the parties’ intention to resolve disputes falling within the jurisdiction clause through the courts rather than arbitration.

 

H v G [2022] HKCFI 1327

Most recently in H v G, the Hong Kong Court of First Instance set aside an arbitral tribunal’s determination that it had jurisdiction over claims under a warranty where an associated building contract between the developer and contractor contained an arbitration clause, but the warranty itself between the two parties and a subcontractor submitted disputes to the non-exclusive jurisdiction of the courts of Hong Kong. The Hong Kong court found that the Fiona Trust doctrine was not applicable, as on the facts of the case, the parties had clearly intended to carve out disputes under the warranty from the arbitration agreement in the building contract and this displaced the Fiona Trust presumption.

 

Comments and take away

In circumstances where there are conflicting arbitration and court jurisdiction clauses (whether exclusive or not) and in the absence of other indications one way or another, it would appear that the only way in which such conflicting clauses can co-exist is for the court jurisdiction clause to be construed as confirming the supervisory jurisdiction of the court in support of arbitration.

Therefore, arguably the approaches taken in Melford Capital and Surrey County Council remain true to the original Fiona Trust doctrine – a presumption that disputes should be resolved in the same forum, and not necessarily demonstrative of a presumption in favour of arbitration, which would be an expansion of the Fiona Trust doctrine. That said, these cases demonstrate that the courts are willing to stretch the Fiona Trust doctrine to apply even where two conflicting clauses exist independently of one another.

The other cases discussed above demonstrate that the courts and tribunals may not always give preference to an arbitration clause for disputes arising in connection with a particular contractual relationship. Much will depend on the specific circumstances and the wording found in the inconsistent clauses, and what they indicate as to the parties’ intentions. An argument could be made that these cases lower the bar for what constitutes sufficiently clear language for the Fiona Trust doctrine not to apply.

The key takeaway from these cases is that arbitration clauses and jurisdiction clauses must be adequately reviewed to avoid inconsistencies (especially in multi-contract transactions). Where the intention is to carve out certain disputes for one forum as opposed to the other, such division and intention should be made clear using express drafting to avoid any unintended outcomes and wasteful disputes over the appropriate forum.

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Disputes between Deep Seabed Miners and their Sponsoring State: The Role of International Law

Wed, 2022-07-06 01:00

Various Pacific Island states have become involved in deep seabed mining (“DSM”) in order to reap the allegedly significant benefits to be obtained from extractive activities in the international seabed (“the Area”). According to the government of Nauru, such gains include “employment; training; capacity building; technology transfer; foreign investment; increased tax revenue; and national self-determination”. Realistically, for many of these states a key mode of participating in deep seabed mining is to attract foreign investment by partnering with private sector enterprises. Such partnership has occurred through the sponsorship granted by a state to a local subsidiary incorporated by a foreign investor. However, concerns over DSM’s environmental impact may lead states to backtrack on their support.

On 14 April 2022, Tuvalu announced that it was rescinding its sponsorship of Circular Metals Ltd. (which was alleged to be a subsidiary of the Canadian the Metals Company) for the exploration of polymetallic nodules in the Area. State sponsorship is required to obtain an exploration contract from the International Seabed Authority (“ISA”). Tuvalu’s Foreign Minister stated that sponsorship had been reversed after “concerns by the government as well as within particularly the foreign ministry”. He also explained that “the part that we can play is to ensure that we set very high standards or the environmental issues that are involved in requirements, which could then hopefully discourage companies from pursuing it, because it’ll be very costly.”

Hence, the question arises as to whether a sponsoring state could face any legal consequences from such change of policy. Starting off by briefly articulating the role of sponsoring states under international law, this post will discuss the possible legal claims that may arise from deep seabed mining statutes and sponsorship agreements.

What is the Role of Sponsoring States?

Under Part XI of the UN Convention on the Law of the Sea (“UNCLOS”), a corporation wishing to extract metals from the international seabed may do so only based on a contract concluded with the ISA. However, no private corporation may apply for the right to explore or exploit resources in the Area until it is sponsored by a state party to UNCLOS. Sponsoring states have the duty of ensuring that the contractor complies with the terms of its contract with the ISA. This duty of due diligence may require to unilaterally modify state laws “as measures considered sufficiently diligent at a certain moment may become not diligent enough in light, for instance, of new scientific or technological knowledge” (para 117).

UNCLOS and associated instruments do not specify particular consequences for the termination or the variation of sponsorship, except that “termination of sponsorship shall take effect six months after the date of receipt of the notification [done by the state] by the Secretary-General” and that in such event the contractor shall obtain another sponsor within those six months (ISA polymetallic nodules regulations, regulation 29). Neither UNCLOS nor the ISA regulations appear to qualify the state’s power to end or modify its sponsorship if it deems it desirable. But this does not mean that everything goes. According to the Seabed Disputes Chamber’s 2011 Advisory Opinion “reasonableness and non-arbitrariness must remain the hallmarks of any action taken by the sponsoring state” (para 230).

More precise language on the termination, suspension, or variation of sponsorship could be found in the national legal instruments relating to activities in the Area. Under national laws, the legal document embodying this partnership is the “certificate of sponsorship” (see sections 88 – 90). A certificate of sponsorship may be complemented by an investment contract – or sponsorship agreement – setting additional legal and financial conditions (see here, at section 92). In addition, UNCLOS requires sponsoring states to adopt general laws to regulate activities in the Area (see here, at para 233). In this regard, both DSM laws and sponsorship agreements restrict the state’s discretion to unilaterally variate, suspend or terminate a sponsorship agreement. In doing so, they often confer a crucial role to international law.

Possible Legal Claims Arising from Deep Seabed Mining Statutes

Legislation developed by five Pacific island states, namely, Fiji, Kiribati, Nauru, Tonga and Tuvalu, contain numerous provisions protecting the stability of the legal relationship between the state and the sponsored entity. For instance, section 97 of Tuvalu’s Seabed Minerals Act 2014 states:

“The Authority may vary, suspend or revoke any Sponsorship Certificate— where the variation or revocation is in the reasonable opinion of the Authority necessary to: (i) prevent serious risk to—(a) the safety, health or welfare of any persons; or (b) the Marine Environment; or (ii) avoid a conflict with any obligation of Tuvalu arising out of any international agreement or instrument in force for Tuvalu…” [emphasis added]

Similar language is present inter alia in section 39 of Nauru’s International Seabed Minerals Act 2015 and in section 88 of Tonga’s Seabed Minerals Act 2014.

Moreover, section 94 of Tuvalu’s law binds state authorities “to not impose unnecessary, disproportionate, or duplicate regulatory burden on Sponsored Parties.” Obligations of proportionality are also evoked in section 13, which mentions “the principles under which regulatory activities should be proportionate, accountable, consistent, transparent and targeted only at cases in which action is needed” [emphasis added]. Importantly, identical language is present in the other legislations across the Pacific region (for instance, see Nauru’s law at sections 10(d) and 30(d).

Proportionality is a principle of public law in many countries and is also applied in the practice of international tribunals. International legal norms of proportionality are very much relevant to legislation which requires state action to be “consistent with existing requirements imposed by the UN Convention on the Law of the Sea, the Rules of the ISA and other applicable standards of international law” (see Tuvalu’s law, section 94 or Nauru’s law, section 30(d)). Law of the sea tribunals have affirmed that the exercise of state power is limited by criteria of reasonableness, proportionality and necessity. Thus, the tribunal in Duzgit Integrity (Malta v. Sao Tomé and Principe) argued that:

“The exercise of enforcement powers by a (coastal) State in situations where the State derives these powers from provisions of the Convention is also governed by certain rules and principles of general international law, in particular the principle of reasonableness. This principle encompasses the principles of necessity and proportionality” (para 209)

Also investment tribunals have affirmed that “there needs to be an appropriate correlation between the state’s public policy objective and the measure adopted to achieve it” (AES v. Hungary, para 10.3.9). Accordingly, state authorities must be able to point to a legitimate objective and there must be some “evidential basis for a measure, if it is not to be considered as arbitrary or disproportionate” (see Harrison, at p. 498). In Crystallex v. Venezuela, for example, the denial of a mining permit was held to violate international law because it was based upon reasons that had not been raised before by the state, whilst ignoring the scientific evidence that had been submitted by the mining company (see paras 591 – 597). Additionally, in Infinito Gold v. Costa Rica, the tribunal held a mining ban to be disproportionate because it retroactively prohibited a gold mining project which national courts had considered to be environmentally sound (para 561 – 563).

Possible Legal Claims Arising from Sponsorship Agreements

Sponsorship agreements seek to preserve the economic bargain struck between the parties. One example is the 5 June 2017 Sponsorship Agreement between Nauru Ocean Resources Inc. (a subsidiary of the Metals Company) and the Republic of Nauru. Clause 10 of this contract sets out a detailed investment protection regime for the private party. Thus, “any Nauruan laws and regulations brought into effect after the commencement date will not interfere with or diminish NORI’s rights… except to the extent the Republic has an obligation at international law to enact such laws in order to fulfil [its] sponsorship obligations”. Even in that case, the parties are obliged to preserve NORI’s level of financial burden as to contract’s date of execution.

In addition, clause 10 refers to several rules of international investment law. Pursuant to its fifth paragraph:

“In enacting and implementing Nauruan Laws and regulations the Republic shall at all times accord NORI fair and equitable treatment and will provide a stable and predictable legal framework and make decisions consistently and transparently and in accordance with the legitimate expectations of NORI and the NORI Group.” [emphasis added].

Such language is equivalent to the fair and equitable treatment (or FET) clauses contained in many investment treaties. Section 10 of the contract also refers to Nauru’s duty not to expropriate NORI’s assets. Finally, this sponsorship agreement selects arbitration in accordance with the UNCITRAL Arbitration Rules for the settlement of disputes.

An arbitral tribunal may turn to international law to interpret the equivalent language contained in the NORI sponsorship agreement, as has already happened in the context of investment arbitration. In Lahoud v. DRC, the tribunal interpreted a FET clause within a national legislation “in light of the principles drawn by the international jurisprudence on this subject, including the awards and decisions of ICSID tribunals” (para 438). Similarly, in Caratube v. Kazakhstan the investment contract at issue referred to Kazakhstan’s former investment law (which in turn prohibited uncompensated expropriation). It was held that substantive protections provided under that law entered the contractual relationship between the claimant and Kazakhstan “in the capacity of supplementary contractual provisions” (para 295). As the parties had not presented any evidence relating to expropriation under Kazakhstani law, the tribunal applied rules of international law relating to expropriation.

Overall, this analysis demonstrates that there are risks for sponsoring states which alter, too abruptly, their policies on DSM. Based on DSM laws or contracts, investor claims against sponsoring states are possible. In this regard, both sponsorship agreements and DSM statutes have important linkages with international law.

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Russia’s Narrow Arbitration Clauses – Can Foreign Investors Bring BIT-Claims For Expropriation Under MFN Clauses?

Tue, 2022-07-05 01:00

Following the Russian military invasion of Ukraine, dozens of states imposed sanctions against Russia. In response, Russia imposed or threatened to impose severe countermeasures on foreign investments associated with such “unfriendly states”. In this regard, several news outlets reported that Russia is in the process of implementing legislation that will interfere with foreign investments in Russia, and might potentially even lead to investors being expropriated. Russia concluded more than 60 bilateral investment treaties (BITs) that should – in theory – protect foreign investors from expropriation without adequate and timely compensation by allowing investors to bring claims in investor-state arbitration (ISDS). However, the road to investor-state arbitration is more cumbersome for some investors than for others. This post analyses BITs concluded by Russia containing narrow dispute resolution clauses that limit the scope of disputes to the amount of compensation for expropriation. The post also discusses the utility of most-favoured-nation (MFN) clauses as a tool to bypass these narrow dispute resolution mechanisms.

 

Dilemma of Narrow Dispute Resolution Clauses

Several BITs concluded by the former USSR and Russia contain dispute resolution clauses that limit the jurisdiction of arbitral tribunals inter alia in expropriation cases to disputes relating “to the amount of compensation or the method of its payment” (see, e.g. Germany-Russia BIT, Austria-Russia BIT) or “concerning the procedure and the amount of compensation” (e.g. Switzerland-Russia BIT). Arguably, the wording of these BITs – if interpreted narrowly – excludes arbitration of disputes about whether an expropriation has actually occurred, resulting in tribunals declining jurisdiction if they have to decide on this matter as a preliminary issue prior to ruling on the amount of compensation.

Such narrow dispute resolution clauses may have made sense in the past, where states directly expropriated foreign investors and disputes only concerned the amount of compensation. Today, however, states rarely expropriate investors directly, but rather carry out regulatory indirect expropriations through forced sales, excessive taxation, deprivation of profits, and interference with management, among others (see, e.g. Tecmed v. Mexico, paras 114 et seqq). In this regard, it is arguable that the countermeasures imposed by Russia against “unfriendly investors” could likely manifest as creeping, rather than direct, expropriations.

When filing claims under narrow scope BITs, investors have frequently argued that if arbitral tribunals have jurisdiction to determine the amount of compensation for expropriation, the jurisdiction clause in such BIT must be interpreted broadly to allow the arbitral tribunal to also rule on whether the state measure is to be qualified as an expropriation (direct or indirect).

Accordingly, some tribunals have ruled that clauses containing wording such as “[a]ny dispute […] relating to the amount or method of payment of the compensation due are sufficiently broad as to allow tribunals to determine whether an expropriation had taken place in the first place. For instance, in Renta 4 S.V.S.A., the tribunal found that any case in which expropriation is disputed by the state constitutes a dispute on whether compensation is “due” (para 28); therefore, the tribunal asserted jurisdiction to hear the entirety of the case. Similarly, in Tza Yap Shum v. Republic of Peru, the tribunal found that a “dispute involving the amount of compensation for expropriation” not only includes the mere determination of the amount but also, other issues inherent to an expropriation, including the question on whether the property had been in fact expropriated (para 188). Furthermore, in Sedelmayer v. Russia, the tribunal asserted jurisdiction under the narrow scope of the Germany-Russia BIT, and ruled on whether Russia’s presidential decree constituted an act of direct expropriation, finding that, in fact, it did (pp 73, 83 et seq).

On the other hand, contrary to the rulings cited above, the Berschader tribunal rejected jurisdiction based on the narrow arbitration clause contained in the Belgium/Luxemburg-Russia BIT. The tribunal held that a comparative analysis of other BITs concluded by the Soviet Union showed a deliberate intention to limit the scope of arbitration to disputes concerning the amount or method of valuation of compensation for expropriation (para 155). This conclusion, however, is not compelling. The tribunal in Renta 4 S.V.S.A., for instance, expressly dismissed this argument (paras 47 et seqq).

Given the inconsistent case law and the (slightly) different wordings of BITs, it is not entirely clear whether an investor can successfully bring a BIT claim to determine whether an expropriation has occurred without having to overcome – in some cases – significant hurdles. In the present case, it is yet to be seen how investment tribunals will interpret jurisdiction clauses to allow investors to bring investment disputes related to sanctions impacting “unfriendly investors”.

 

MFN Clauses as a Possible Solution?

To lower these jurisdictional hurdles, it might be worth looking at MFN clauses included in almost all BITs signed by Russia (see, e.g., Germany-Russia BIT; Austria-Russia BIT.)1) However, see the exchange of diplomatic notes between Russia and Austria of February 8, 1990, in which Russia and Austria derogated from MFN. jQuery('#footnote_plugin_tooltip_42014_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_42014_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In general, MFN clauses extend the benefits granted to investors of third states to nationals of the contracting state by requiring the state to afford “treatment that is no less favourable”. While it is widely recognised that “treatment” encompasses substantive treaty obligations (e.g. FET, FPS, expropriation), it is less clear whether it also includes procedural issues, particularly the scope of arbitrable matters imported from other BITs. The latter question is especially important bearing in mind that several Russia BITs provide for narrow dispute resolution clauses on the one hand – see, e.g., article 10(2) of the Germany-Russia BIT, article 7(1)-(2) of the Austria-Russia BIT and article 8(2)(a) Switzerland-Russia BIT) – but broad clauses on the other hand (see e.g., article 8(1)-(2) Sweden-Russia BIT, article 8(1)-(2) Denmark-Russia BIT).

In RosInvestCo UK v. Russia, the tribunal heard treaty claims under the narrow UK-Russia BIT that limits jurisdiction regarding expropriation to “the amount or payment of compensation” and “concerning any other matter consequential upon an act of expropriation”. By operation of the MFN clause contained in this BIT, the RosInvestCo tribunal asserted jurisdiction for the preliminary question of whether an expropriation had occurred in the first place, basing its jurisdiction on the broad dispute resolution clause in the Denmark-Russia BIT (paras 135 et seqq).

Applying a similar rationale, the tribunal in Le Chèque Déjeuner v. Hungary also found that the MFN clause in article 4(1) of the France-Hungary BIT could be used to extend a more favourable treatment by importing a more favourable arbitration clause from another BIT (paras 216 et seqq).

In the same vein, the Maffezini tribunal reached a similar conclusion by “replacing” the procedural waiting period provided in the applicable Argentina-Spain BIT by importing a more favourable Spanish BIT provision which did not require a waiting period (para 64).

Consequently, the 2015 ILC report determined that a majority of arbitral tribunals found MFN clauses that refer e.g. to “all treatment” or “all matters”, or clauses that qualify treatment with words such as “use”, “management”, “maintenance”, “enjoyment”, “disposal” or “utilization” to be broad enough to include dispute settlement provisions (paras 197-198).

However, this is far from being set in stone. For instance, in the Austrian Airlines and Plama cases the tribunals did not allow the investors to rely on an MFN clause to import more favourable arbitration clauses. In Austrian Airlines the tribunal rejected jurisdiction asserting that the MFN clause did not invalidate the restrictive dispute settlement mechanism established in the BIT (paras 135 et seqq). Similarly, in Plama, the tribunal found that investors could not – by operation of the MFN clause –  replace a specific agreement on dispute resolution by a different dispute resolution mechanism, unless the contracting states had expressly agreed to do so, in contradiction to the narrow dispute resolution clause (paras 209, 212). In its reasoning, the Plama tribunal also found that the MFN clause does not extend to dispute resolution because the arbitration clause is separable and autonomous from the main treaty or contract granting the tribunal jurisdiction. The tribunal noted the distinction between importing substantive and jurisdictional clauses and stated that “This matter can also be viewed as forming part of the nowadays generally accepted principle of separability (autonomy) of the arbitration clause. Dispute resolution provisions constitute an agreement on their own […]” (para 212). However, this reasoning is rather questionable since the distinction between substantive treaty obligations and dispute settlement clauses does not alone justify refusing the extension of jurisdiction based on the MFN clause. Despite the autonomy of the dispute resolution clause, dispute resolution mechanisms are still part of an international treaty and states should not refuse to comply with MFN obligations arguing that the dispute resolution clause in the more favourable BIT is separable from the rest of the treaty. Consequently, the scope of the particular MFN clause will be determined under articles 31 and 32 Vienna Convention on the Law of Treaties (VCLT).

 

Outlook

In the past, investors successfully filed BIT claims in treaty arbitration even in cases where narrow arbitration clauses applied either based on the wording of the dispute resolution clause itself or by relying on MFN clauses. However, case law is far from uniform and whether an investment tribunal will assume jurisdiction in case any dispute is filed for Russia’s “unfriendly investors” expropriations, highly depends on the wording of the applicable BIT.

Therefore, it is by no means impossible that an investor who is affected by the current and expected Russian countermeasures can successfully bring a BIT-claim for expropriation, even if confronted with a narrow dispute resolution clause.

 

 

 

 

References[+]

References ↑1 However, see the exchange of diplomatic notes between Russia and Austria of February 8, 1990, in which Russia and Austria derogated from MFN. function footnote_expand_reference_container_42014_30() { jQuery('#footnote_references_container_42014_30').show(); jQuery('#footnote_reference_container_collapse_button_42014_30').text('−'); } function footnote_collapse_reference_container_42014_30() { jQuery('#footnote_references_container_42014_30').hide(); jQuery('#footnote_reference_container_collapse_button_42014_30').text('+'); } function footnote_expand_collapse_reference_container_42014_30() { if (jQuery('#footnote_references_container_42014_30').is(':hidden')) { footnote_expand_reference_container_42014_30(); } else { footnote_collapse_reference_container_42014_30(); } } function footnote_moveToReference_42014_30(p_str_TargetID) { footnote_expand_reference_container_42014_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_42014_30(p_str_TargetID) { footnote_expand_reference_container_42014_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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From a Backlash Against Investment Arbitration to a Backlash by Investment Arbitrators?

Mon, 2022-07-04 01:21

States have spent the last decade and a half rebalancing the design of their international investment agreements (IIAs). In their new-generation IIAs, states have clarified core protective standards, omitted controversial clauses, and inserted new carve-outs and general exceptions. These reformed treaties, it was hoped, would provide investment tribunals with “new analytical devices for adjudicating disputes involving competing policy objectives” and alleviate concerns over the undue restraints earlier IIAs had placed on states’ right to regulate.

These new-generation IIAs are now beginning to be litigated and the first series of awards under them suggests that the hopes they raised have been disappointed. Instead, new treaties have produced old outcomes.

Last year’s Eco Oro v. Colombia award marked the preliminary climax of this worrying trend. In a majority opinion, the tribunal, having found that Colombia’s partial withdrawal of a mining concession vis-à-vis a Canadian mining company fell below the minimum standard of treatment enshrined in Article 805 of the Canada-Colombia FTA, had to make sense of that treaty’s novel general public policy exception in Article 2201(3). Colombia had asserted that this clause would justify a possible violation of the FTA given that its measures were necessary to preserve the Páramo de Santurbán wetland conservation area and that no compensation would therefore be due. Controversially, the tribunal majority construed the treaty’s public policy carve-out as a “permission” rather than an exception. It found that even if its conditions were met, the clause could not justify a prior violation and compensation must be paid. The tribunal thereby not only departed starkly from jurisprudence in neighboring trade law dealing with almost identical exception language. It also, in the words of one commentator, declared general policy exceptions – one of the hallmarks of most reformed IIAs – “to be effectively irrelevant in investment arbitration.”

The Eco Oro decision is not the only recent award that dulls the effect of new-generation IIAs. As I discuss in my book, Investment Arbitration and State-Driven Reform: New Treaties Old Outcomes, across the board, recent investment tribunals have rolled back state-driven treaty design change. Controversial clauses phased out in recent treaties are brought back via most-favored nation treatment. Existing customary international law flexibilities are summoned to displace more for-reaching exceptions. More precise language in core protective standards is circumvented by applying old precent rather than state-of-the-art clarifications. In short, new-generation IIAs are read like old-generation IIAs.

If much of the state-driven IIA reform of the past decade was prompted by a “backlash against investment arbitration”, then the dialectics of investment law have entered a new phase. This new era is marked by a “backlash by investment arbitrators” as tribunals roll back state-driven change through controversial interpretations in distinct disputes.

 

Contracting states vs tribunals: Who decides how treaty gaps should be filled?

Part of what we are seeing is a competition over norm-development. For decades, it was up to investment tribunals to make sense of the vague and open-textured language of first-generation investment treaties. As tribunals seized this “quasi-legislative power”, they became the chief engine for investment law’s normative development. Understandably, tribunals grew used to this extensive gap-filling authority.

However, with the advent of a new generation of IIAs, contracting states have taken it upon themselves to fill the gaps that earlier treaties left open. Sometimes, they have contracted on prior arbitral interpretations. More often, though, contracting states have purposefully departed from judicial precedent, corrected perceived arbitral misinterpretations and inserted new clauses or omitted old ones. These treaty design innovations have placed states and tribunals at loggerheads. States are pushing for change while tribunals are pushing for continuity. With gap-filling strategies thus diverging, the question of who decides comes to the fore. Who has the ultimate authority to decide how to fill normative gaps in investment arbitration and to shape the normative trajectory of IIAs?

While legal dogma may provide clear-cut answers to this question, on the ground, the jury is still out. Judged by the recent wave of decisions under new-generation IIAs, investment tribunals have shown little willingness to defer to the choices and changes made by states. In the above discussed Eco Oro award, for example, the tribunal openly disagreed with the concordant submissions of the contracting state parties, Canada and Colombia, on the interpretation of the general public policy exception. As tribunals eschew deference in the face of state-driven change and continue to stick to their own gap-filling preferences, their views clash with the position taken by contracting states in new-generation IIAs.

What yields? José Alvarez asked over a decade ago that “if … international investment law is driven by the jurisprudence produced by investment arbitrators, does that jurisprudence provide a firewall to protect foreign investors against [treaty] trends in favor of ‘re-balancing’?”  The preliminary answer to his question seems: yes. Reformed treaties have produced interpretations that mirror those of unreformed treaties. Tribunals, not states, have had the last word on gap-filling.

That is a problem, however, because it calls into question the effectiveness of state-driven IIA reform. For a long time, new IIAs with their clarifications and exceptions were the poster child that decision-makers pointed to when questioned about concerns over investment arbitration. The sense was, “we know there is a problem of imbalanced old treaties but look to these new agreements: we are fixing it!” This promise and expectation of change makes it so devastating that new treaties continue to produce old interpretive outcomes. Far from alleviating legitimacy concerns around IIAs, new treaties and their lacking impact are poised to exacerbate them.

 

Where next: Procedure or Substance?

If we accept that treaty design reform has, up to now, been more failure than success, then what can and what should states do to effectively realize the much-needed rebalancing of the IIA regime?

Some states seek fortune in procedural change. Changing the arbitrators, they reason, is the way to break through the arbitral firewall. A standing multilateral court with adjudicators trained in public international law may indeed change the dynamics between lawmakers and judicial gapfillers and produce more interpretive deference to contracting states in adjudication. However, despite its promise, it is bound to fail in remedying the underlying substantive problem that ultimately causes new treaties to be interpreted like old ones.

The investment regime’s normative center of gravity still lies with old, outdated, and unreformed treaties. The vast majority of investment arbitration claims are filed under them. Today’s negotiators, litigators, and arbitrators have been socialized through these early treaties and the case law rendered thereunder. Via precedent, arguments on custom, and MFN, these old IIAs still affect every new investment dispute including under new generation treaties. In short, it takes more than procedural reform to escape the gravitational pull of these old-generation IIA and to achieve the interpretive reset that states have begun to aim for in their new-generation treaties.

What is ultimately needed is a bulk reform of IIAs in substance and procedure. Instead of old, outdated, and unreformed treaties, recent, modern and reformed IIAs should be the collective reference point. And rather than reading new treaties like old ones, old treaties should be read in light of new ones. The neighboring tax regime demonstrates how an ambitious updating of an entire treaty regime can work. Thousands of bilateral tax treaties are routinely interpreted in light of current best practices. Where interpretation was deemed insufficient, a multilateral reform convention, the 2018 Multilateral Instrument, updated and upgraded old tax treaties based on state-of-the-art clauses.

Change and state-driven reform is possible also in the investment law context. But it takes more than new treaties or new adjudication to achieve it.

 

The views outlined in this post draw on Wolfgang Alschner, Investment Arbitration and State-Driven Reform: New Treaties, Old Outcomes. Oxford, New York: Oxford University Press, 2022.

 

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In Recap: ICC Asia-Pacific Conference on International Arbitration 2022 (Part 2)

Fri, 2022-07-01 01:00

Though the world is in a constant state of flux, the last few years have been particularly taxing on the global economy. As the world emerges from a pandemic, it has lurched into a state of geopolitical tension arguably not seen since the end of the Cold War. The 7th ICC Asia-Pacific Conference on International Arbitration, held in Singapore on 22 June 2022, sought to address the challenges currently facing the pharmaceutical/biotechnology industry and the logistics/shipping industry.

After commenting that declarations that Asia is the future miss sight of the reality that Asia is actually the present and then announcing the new branded ICC Belt and Road Commission, the President of the ICC International Court Arbitration, Ms Claudia Salomon moderated an insightful fireside chat with Mr Stephan Jansma, CFO of Trafigura Asia Pacific, a global commodity trading enterprise, and Mr Bani M. Mulia, CEO of PT Samudera, an Indonesia-based shipping company. The discussed current state of the global supply chain.

From shortages of cream cheese in the United States to beer droughts for Oktoberfest in Germany, the global pandemic has, for many reasons, made a significant impact on the global supply chain. One key reason related to labor issues that have arisen as employees in the logistics space have been unable to report to work and labor shortages continue, despite the continued relaxing of pandemic related restrictions. Mr Mulia explained that while some politicians, like President Biden of the United States, blame recent shipping industry pricing practices for recent inflationary spikes, the current labor shortage is actually responsible for many of the increasingly higher prices we are witnessing. Moreover, the continued lockdowns, closed borders and port limitations in China have served to further disrupt the global economy.

The on-going Russia-Ukraine conflict and the corresponding global sanctions imposed upon Russia further changes the landscape of the global supply chain; especially in energy sectors. The Black Sea is a major water way utilized in the global trading fabric, but, that fabric is now torn, and companies in the supply chain sector are implementing risk management strategies, such as cooperating with the insurance industry for minimizing conflict related risk.

The global move towards a greener economy, is another key reason for the price fluctuations. Environmentally friendly technology may come with a high price tag, but the real affect can be seen through environmentally driven policies limiting the extraction of natural resources, and thus raising prices of said resources as well asany finished manufactured products in the same stream of commerce as those limited resources.

As to future prognostications, Mr Jansma is optimistic in the supply chain’s ability to adjust to become more efficient, but generally pessimistic on the global economy. Conversely, Bani is optimistic in terms of the world’s need for commodities and stated that he prefers to stay positive in the economic trajectory, using a maritime pun to suggest the way forward – the wave may be strong and high, but, we need to ride the wave in order to properly succeed.

The panelists concluded by summarizing supply chain trends to watch for: (1) security, (2) corporate social responsibility, and (3) trade digitalization.

After the fireside chat, the pharma industry panel, moderated by Ms Sae Youn Kim (Attorney at Kim & Chang), was specifically on the role of arbitration and other alternative dispute resolution mechanisms in settling industry specific disputes. Ms Kim was joined by panelists, Mr Alexander G. Fessas (Secretary General of ICC International Court of Arbitration), Mr Alex Parker (Assistant General Counsel of APAC Investigations and Dispute Resolution), Ms Earl Rivera-Dolera (Head of International Arbitration Practice, Frasers Law) and remotely by Mr Yin Ye (CEO of BGI Group).

From a perspective of an entrepreneur and researcher, Mr Ye opened the panel with a presentation on discovery and development of the human genome. He then shifted to a discussion on the importance of the popularization of science, data security and privacy, ethical technology use and affordable and equitable access to new developments. As to dispute resolution, he pointed out that consensus building and cooperation is essential in the biomedical field and that the view from China is that negotiated settlements to disputes would create win-win solutions, while maintaining efficiency and confidentiality. He, however, ended his remote presentation on a humble note, by paraphrasing the Socratic axiom that the more we know the less we know; thus making it clear that none of us may truly know the best way to move forward in regards to this complicated matter.

Mr Parker chimed in by stating that flexible, private and confidential procedures with full legitimacy are welcome by the majority of the dispute resolution community. The panel did, however, stress that the complexity of life science disputes tended to lead to overly detailed party submissions which more often than not serve to extend the timing of the process.

Mr Fessas gave a statistical overview of ICC cases in the life science space, now in top 5 of dispute types that the ICC handles, and stressed that the ICC recently saw a 50% increase in life science disputes, growing form 4% of the ICC docket to 6%. The amount in dispute also went from 500 million (USD) to less than 2 billion (USD) prior to the pandemic, and then shot up to 10 billion (USD) in 2020. The parties to these specific disputes were representative of a wide scope of entities, inclusive of pharmaceutical companies, governments, state-owned enterprises, and academic institutions. The disputes heard were related to all aspects of industry, inclusive of distribution, buyer-seller payments, misrepresentation on invoices, development, branding and marketing. Issues related to IP rights and registration may also allow for the filing of investment treaty-based claims.

Ms Rivera-Dolera noted that as many parties from the economic south were still using pre-pandemic boilerplate, even whilst lockdowns were the norm, this was leading to a spike in disputes.  Customized and flexible contracts were needed in such an uncertain commercial environment. Furthermore, though the pharma industry tends to be highly regulated globally, Asian jurisdictions, such as Vietnam, require stakeholders to comply to particularly strict regulations  inclusive of IP licensing, payment of royalties, distributorship agreements, supply chain issues, sale and purchase contracts, and employment issues related to the poaching of workers and key personnel.

In response to Ms Kim’s query on the advantages of ICC arbitration in resolving pharma disputes, Mr Fessas stressed that parties to a dispute can choose the level of confidentiality, privacy and data protection in which a dispute will move forward. The ICC has already been asked to intervene to assist where parties to a dispute have purportedly strayed from agreed upon privacy provisions. Additionally, parties to ICC disputes tend to take full charge of the arbitrator appointment process and often choose arbitrators with backgrounds in life sciences. The complexity of life science disputes was also raised as possibly leading to longer running tribunal’s time, but, theICC secretaratiat was well situated to assist parties in efficiently making their submissions and moving the process along in a timely manner. ICC scrutiny was also raised as a vital tool, allowing the broad experience of the participants and members of the court to act as a bridge for a fair conclusion.

Despite the clear warmth towards ICC Arbitration at the end of the panel discussion, the panelists were not of the view that arbitration was appropriate in every circumstance. The fact that domestic awards may be automatically enforceable, while international ones likely need to go through New York Convention mechanism, along with client preferences for court litigation in Singapore where a group of interrelated contracts may have separate and different dispute resolution clauses. Ms Rivera-Dolera also raised that interim relief was also an important element, as Vietnam can potentially allow interested banks to block proceedings.

Mr Fessas concluded the session by surprising the audience by reciting the Socratic axiom on the acquisition of knowledgeraised by Ye in the original Greek, and stressing that those ancient words do in fact continue to ring true today. The more we learn about a specicific issue, the less we seem to know, we should keep this idea close to heart as we continue to move down the road of improvement and reform.

The social, econonomic and political shockwaves we have witnessed over the past few years have yielded many commercial disputes, while also raising questions as to the best methods of settling such disputes. Conflicts arising from the industry need effective and prompt dispute settlement mechanisms. Asia being not the future but “the now,” as per the comments of Ms Salomon, is in a position to forge new ground and show the rest of the world how to best handle the recent stresses forced upon the world economy. The current era may not be easy but as heard during the fireside chat, we need to ride the wave in order to succeed.

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In Recap: ICC Asia-Pacific Conference on International Arbitration 2022 (Part I)

Thu, 2022-06-30 01:00

At the recent hybrid 7th ICC Asia-Pacific Conference on International Arbitration (the “Conference”), a palpable sense of happiness and community resonated throughout the day.  Mr Justin D’Agostino (Global CEO, Herbert Smith Freehills, Hong Kong) moderated the first panel discussion in a quick fire manner on recent arbitration developments in the Asia-Pacific region with leading practitioners Mr Sanjeev K. Kapoor (Partner, Khaitan & Co, India and Vice-President, ICC International Court of Arbitration), Ms Edwina Kwan (Partner, King & Wood Mallesons, Australia), Mr Jay Patrick Santiago (Trustee & Senior VP, Philippine Institute of Arbitrators, Philippines) and Ms Helen Shi (Partner, Fangda Law Firm, China and Vice President, ICC International Court of Arbitration).

Mr Justin D’Agostino started off by observing that diversity and inclusion are currently the dominant forces in international arbitration and invited the panellists to address the audience on recent domestic court decisions as well as changes to arbitral rules, decisions and laws, together with the impact of these on international arbitration practice today.

With a focus on the users’ demand for transparency, and time and cost efficiencies, Mr Santiago provided an overview of the revisions of the arbitral rules of  various arbitration institutions in the region (namely, the ACICA, AIAC, JCAA and PDRCI) following the release of the 2021 ICC Rules.  He then went on to address a recent Hong Kong Court of Appeal judgment (namely C v. D [2022] HKCA 729), and contrasted it with a recent decision of the Supreme Court of the Philippines (Mabuhay Holdings Corporation v Sembcorp Logistics Limited, G.R. No. 212734), both of which speak to enforcement of an arbitral award vis-à-vis interpretation of arbitration clause.

Ms Shi then highlighted that the numbers of arbitrations administered by various arbitration institutions in China have seen remarkable strides over the last year. Another notable development is China’s extension of mutual assistance regarding interim measures to Hong Kong which has similarly been extended to Macau in 2022.  Given these progresses, she forecasted that the arbitration market in China will continue to experience rapid growth in many years to come.

India, too, has seen tremendous progress over the last year, with the Supreme Court of India moving in tandem with the international arbitration ecosystem. Mr Kapoor particularly highlighted the judgment of PASL Wind Solutions v. GE Power Conversion India, Civil Appeal No. 1647 of 2021 which clarifies that two Indian parties can choose a foreign arbitral seat and that parties to such foreign seated arbitrations will be able to obtain interim relief from the Indian courts.  He also discussed the landmark Amazon.com v. Future Retail Ltd judgment which recognises a key tool in arbitration, namely emergency arbitrations, and allows for the enforcement of emergency arbitration awards in India.

The recent surge of climate change disputes did not go unnoticed by the panellists, and Ms Kwan addressed this phenomenon. Ms Kwan remarked that there was no single cause of action in these climate change-related cases, and that she has seen human rights, constitutional, civil and private law claims.  Looking to the future, she posited that contractual disputes with respect of energy transition in all sectors will increase, and such is one to watch in Asia-Pacific arbitration space given the growing business appetite in energy sectors and the challenges looming over it.

Another important topic that was discussed at the Conference is corruption in international arbitration, which expert moderator Mr Kabir Singh (Partner, Clifford Chance, Singapore) took it upon himself to propel the discussion on this within Asia-Pacific context.  He was joined by eminent panellists: Hon’ble Mr Justice L. Nageswara Rao (Former Judge, Supreme Court of India), Prof Anselmo Reyes (International Judge, Singapore International Commercial Court, Singapore), Ms Sitpah Selvaratnam (Consultant, Tommy Thomas Advocates & Solicitors, Malaysia and Alternate Member, ICC International Court of Arbitration) and Prof Joongi Kim (Professor of Law, Yonsei Law School, Seoul, Alternative Member, ICC International Court of Arbitration and Council Member, ICC Institute of World Business Law).

The panel discussion centred around the definition of corruption in the different countries, the red flags that identify corruption as well as issues arising out of corruption in arbitration in its many forms.

Prof Reyes noted that the definition of corruption varies across jurisdictions and called for these definitions, even those under the OECD Anti-Bribery Convention and the United Nations Convention against Corruption, to be clarified to address where includes situations where there is an intermediary as well as to distinguish between the liability of the briber and the bribee.

Dr Michael Hwang’s analogy comparing the watch dog to a bloodhound was invoked, with Prof Kim commenting that in identifying red flags in corruption matters, the Tribunal should be more like a watch dog for red flags but not like a bloodhound. Similar to Prof Reyes’ view, Prof Kim pointed out the  factors to consider when attempting to identify corruption such as:  distinction between paymaster and recipient as well as characterization and timeline of the alleged corruption.

Justice Rao carefully set out the dilemma faced by an arbitral tribunal when deciding on matters of corruption. On one hand, the arbitrator is bound by party autonomy and can only decide matters referred to the tribunal otherwise the award will be ultra petita.  On the other hand, as a matter of public policy, the arbitrator is duty bound to take note of corruption as and when it comes to notice.

Ms Selvaratnam also expressed her view that when there is allegation of corruption, the arbitrator’s duty goes beyond the parties’ mandate to examine the matter and extends to rendering an enforceable award.  She noted that party autonomy does not limit arbitrators and that the strong will of the world in this regard is demonstrated by the 189 countries which have adopted the United Nations Convention against Corruption.

Conditional fee arrangements (“CFAs”) continue to gain momentum in key arbitration hubs in Asia, with Singapore permitting such arrangements in May 2022 and Hong Kong having released a Bill on it in March 2022, adding to other jurisdictions which allow contingency fees.

The topic of CFAs was ripe for discussion at the and was addressed in the form of a lively debate between Mr Tom Glasgow (Managing Director and Chief Investment Officer (Asia), Omni Bridgeway, Singapore) and Ms Diana Rahman (Head of Legal, Gamuda Land, Malaysia, Arbitrator and Mediator) for the proposition and Ms Smitha Menon (Partner, Smitha Menon LLP, Singapore and Member, ICC International Court of Arbitration) and Mr Chelva R. Rajah SC (Partner, Tan Rajah & Cheah, Singapore) for the opposition.

The jury, consisting of Ms Chiann Bao (Independent Arbitrator, Arbitration Chambers, Singapore and Vice President, ICC International Court of Arbitration), Mr Abhinav Bhushan (Member, International Arbitrator and Chief Executive for Asia, 39 Essex Chambers, Singapore) and Ms Yoko Maeda (Partner, City-Yuwa Partners, Japan and Member, ICC International Court of Arbitration) opened the floor by asking the audience to vote on the motion “This House Believes that the No Win No Fee scheme is a welcome feature in strengthening international ADR practice”.  Ms Bao noted that the majority of the audience at 75% agreed with the motion and invited Ms Rahman to fire away with her arguments.

The thrust of Ms Rahman’s argument for the proposition centred on the advantages that CFAs bring, namely that it promotes access to justice by allowing impecunious clients to proceed with meritorious claims (especially where third party funding is not an option).  This argument was lucidly countered by Mr Rajah for the opposition who counter-argued that matters involving impecunious clients and class actions are not what typically arise in international arbitrations.  He added that while there are small claims which appear before arbitral tribunals, this does not mean the party is impecunious.

Not only were granular details debated, but so was the bird’s eye view of CFAs.  Mr Glasgow took a broader view of the motion in stating that that CFAs allow for an alignment of interests from the users’ perspective.  He added that the lawyers’ and users’ interests are aligned because the lawyer has skin in the game as both parties rise and fall based on the outcome.

Ms Menon for the opposition, differed and questioned whether this is desirable to the legal services industry.  She elucidated that the law firm’s cash flow is not protected from the risk of insolvency as clients are the sole source of revenue and lawyers are the key service providers in the ADR ecosystem, and cannot be made vulnerable.

After the debate, it was clear that the opposition emerged as winners, with the second audience poll registering only 48.64% of the attendees remaining in favour of the motion.  This, as Mr Rajah pointed out, may also have been a reflection of the larger number of practitioners in the room who identified with the consequences of CFAs on practitioners that were debated.

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

Wed, 2022-06-29 01:23

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

Although the Code is still a work in progress, it has recently featured prominently in a disqualification proposal filed in Misen Energy AB (publ) and Misen Enterprises AB v. Ukraine, ICSID Case No. ARB/21/15.1)The analysis in this post does not reflect the author’s opinions on the merits of the disqualification proposal, the decision, or any personal views about the parties and arbitrators involved. jQuery('#footnote_plugin_tooltip_42005_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_42005_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This proposal illustrates how the Code may be interpreted and used by State parties, should it become binding in investment disputes. This post takes a deeper dive into the existing disclosure provisions of the Code, aiming to assess them through the eyes of a Respondent State. The post concludes with some lessons that may be drawn for the Code’s drafters as they continue to shape the contours of a universal standard of disclosure for adjudicators in investment disputes.

 

The Disqualification Proposal in Misen

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

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

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

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

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

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

 

Failure to Disclose as a Stand-Alone Ground for Disqualification

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

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

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

 

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

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

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

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

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

 

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

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

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

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

References[+]

References ↑1 The analysis in this post does not reflect the author’s opinions on the merits of the disqualification proposal, the decision, or any personal views about the parties and arbitrators involved. function footnote_expand_reference_container_42005_30() { jQuery('#footnote_references_container_42005_30').show(); jQuery('#footnote_reference_container_collapse_button_42005_30').text('−'); } function footnote_collapse_reference_container_42005_30() { jQuery('#footnote_references_container_42005_30').hide(); jQuery('#footnote_reference_container_collapse_button_42005_30').text('+'); } function footnote_expand_collapse_reference_container_42005_30() { if (jQuery('#footnote_references_container_42005_30').is(':hidden')) { footnote_expand_reference_container_42005_30(); } else { footnote_collapse_reference_container_42005_30(); } } function footnote_moveToReference_42005_30(p_str_TargetID) { footnote_expand_reference_container_42005_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_42005_30(p_str_TargetID) { footnote_expand_reference_container_42005_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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ICC Austria: Emerging Expropriations and Investment Protection in Russia

Tue, 2022-06-28 01:00

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

 

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

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

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

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

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

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

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

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

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

 

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

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

 

Shift of ownership or control to a more favorable jurisdiction

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

 

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

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

 

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

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

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

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

 

3. Enforcement and the Iran-US Claims Tribunal Model

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

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

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

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

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

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

Mon, 2022-06-27 01:21

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

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

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

 

Interview with Claudia Salomon: Establishing an Arbitration Career

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

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

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

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

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

 

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

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

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

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

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

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

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

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

 

Takeaways: Consider Context and Clear Communication Channels

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

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

Sun, 2022-06-26 01:15

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

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

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

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

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

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

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

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

Sat, 2022-06-25 01:34

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

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

 

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

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

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

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

 

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

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

 

Contested Topics in the Last Negotiation Rounds

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

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

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

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

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

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

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

 

Outlook

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

 

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

Fri, 2022-06-24 01:00

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

 

The Background to the National Proceedings

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

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

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

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

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

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

 

The Supreme Court’s Decision

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

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

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

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

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

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

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

 

The Future of this Case and Investment Arbitration in Europe

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

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

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

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

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

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

 

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

Thu, 2022-06-23 01:00

The 31st of January 2022 marked twenty-five years from the day the Arbitration Act 1996 was brought into force. Inspired by the UNCITRAL Model Law but, at the same time distinctly English, the Act has rightly been hailed as an ‘exemplary piece of legislation’.1) Merkin and Flannery on the Arbitration Act 1996 (6th Edition Informa Law Routledge). jQuery('#footnote_plugin_tooltip_41992_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41992_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It is a comprehensive, coherent and progressive Act which made it harder for a party to challenge an arbitration award before English courts and accorded parties greater freedom to conduct their arbitration and agree on the procedure that should be followed.

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

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

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

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

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

 

ARTICLES

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

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

 

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

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

 

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

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

 

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

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

 

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

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

 

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

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

 

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

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

 

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

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

 

CASE NOTES

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

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

 

Alexandre Rivière, Acceptance of DCF in Expropriation Claims

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

 

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

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

 

BOOK REVIEW

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

References[+]

References ↑1 Merkin and Flannery on the Arbitration Act 1996 (6th Edition Informa Law Routledge). function footnote_expand_reference_container_41992_30() { jQuery('#footnote_references_container_41992_30').show(); jQuery('#footnote_reference_container_collapse_button_41992_30').text('−'); } function footnote_collapse_reference_container_41992_30() { jQuery('#footnote_references_container_41992_30').hide(); jQuery('#footnote_reference_container_collapse_button_41992_30').text('+'); } function footnote_expand_collapse_reference_container_41992_30() { if (jQuery('#footnote_references_container_41992_30').is(':hidden')) { footnote_expand_reference_container_41992_30(); } else { footnote_collapse_reference_container_41992_30(); } } function footnote_moveToReference_41992_30(p_str_TargetID) { footnote_expand_reference_container_41992_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_41992_30(p_str_TargetID) { footnote_expand_reference_container_41992_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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The EU Termination Agreement and Sunset Clauses: No ‘Survivors’ on the (Intra-EU) Battlefield?

Wed, 2022-06-22 01:51

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

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

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

 

Article 2: Simultaneous Termination of BITs and Their Sunset Clauses

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

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

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

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

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

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

 

Article 3: Terminating Active Sunset Clauses of Prior Terminated BITs

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

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

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

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

 

Conclusion  

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

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

Tue, 2022-06-21 01:52

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

 

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

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

 

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

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

 

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

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

 

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

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

 

Cecilia Carrara, Conflicts of Interests

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

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

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

 

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

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

 

Monique Sasson, Public Policy in International Commercial Arbitration

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

 

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

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

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

 

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

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

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

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

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

 

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

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

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Revisiting ‘Investment’ under Article 25 of the ICSID Convention

Mon, 2022-06-20 01:00

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

 

Contextualising State Consent

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

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

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

 

Requirement of an Outer-Limit

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

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

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

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

 

Scope of the Article 25 Prerequisite

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

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

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

 

Conclusion

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

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

Sat, 2022-06-18 01:24

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

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

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

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

 

The Concept and the Definition of Public Policy

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

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

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

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

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

 

Examples of Violations of Public Policy

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

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

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

 

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

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

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

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

 

Conclusions

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

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

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

 

 

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

 

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Building the Case for Family Business Arbitration in the GCC Region

Fri, 2022-06-17 00:11

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

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

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

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

 

Stepped dispute resolution: mandatory mediation or conciliation before commencing arbitration

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

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

 

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

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

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

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

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

 

Compile, curate and publish a roster of appropriate arbitrators

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

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

 

Costs capping

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

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

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

 

The future

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

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

Thu, 2022-06-16 00:10

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

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

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

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

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

 

Identifying the Correct Counterfactual in Post‑M&A Disputes

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

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

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

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

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

 

When Does it Matter if Price and Value Differ?

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

 

Why Might Price and Value Differ?

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

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

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

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

 

Conclusion

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

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

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

 

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

 

 

References[+]

References ↑1 Elsing/Pickrahn/Pörnbacher/Wagner, M&A-Streitigkeiten vor DIS-Schiedsgerichten (C.H. Beck, 2022) ↑2 Adam Kramer, The Law of Contract Damages, 2nd ed. (Hart Publishing, 2017), 227. ↑3 For example, Glossop Cartons and Print Limited v Contact (Print & Packaging) Limited [2021] EWCA Civ 639. ↑4 For example, OLG Munich, 03.12.2020 – 23 U 5742/19. ↑5 Wächter, M&A Litigation, 3rd ed. (RWS Verlag Kommunikationsforum GmbH, 2017), 551. ↑6 Michael C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review 76 (2), 71–92.  ↑7 Max H. Bazerman and Don A. Moore, Judgment in Managerial Decision Making, 8th ed. (Wiley, 2013), 123 – 131. Even in instances where it can be shown, however, that prices cannot be justified by reasonable assumptions — for example, when observing two prices that are each based on a set of assumptions where movements in the prices and assumptions produce a contradiction — it can be difficult to identify which of the two prices is irrational. ↑8 See Bazerman and Moore, 130–31. function footnote_expand_reference_container_41884_30() { jQuery('#footnote_references_container_41884_30').show(); jQuery('#footnote_reference_container_collapse_button_41884_30').text('−'); } function footnote_collapse_reference_container_41884_30() { jQuery('#footnote_references_container_41884_30').hide(); jQuery('#footnote_reference_container_collapse_button_41884_30').text('+'); } function footnote_expand_collapse_reference_container_41884_30() { if (jQuery('#footnote_references_container_41884_30').is(':hidden')) { footnote_expand_reference_container_41884_30(); } else { footnote_collapse_reference_container_41884_30(); } } function footnote_moveToReference_41884_30(p_str_TargetID) { footnote_expand_reference_container_41884_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_41884_30(p_str_TargetID) { footnote_expand_reference_container_41884_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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