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Interviews with Our Editors: Nicole Smith, Vice-President of AMINZ

Wed, 2022-06-15 01:53

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

Welcome Nicole, thank you for joining us today!

 

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

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

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

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

 

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

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

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

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

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

 

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

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

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

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

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

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

 

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

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

 

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

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

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

Tue, 2022-06-14 01:28

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

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

 

The two underlying arbitrations at issue

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

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

 

The Court’s Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tue, 2022-06-14 00:47

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

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

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

  1. The Opinion of the Supreme Court

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The court’s footnote read in pertinent part:

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

 

  1. NBC’s textual analysis

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

  1. Section 1782 Today

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

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

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

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

 

  1. The District Court’s Discretionary Authority

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

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

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

 

  1. So How Should the Supreme Court Have Decided?

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

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

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

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

 

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

References[+]

References ↑1 In a simple google search, I found this definition: “The international arbitration tribunal is the independent and non-governmental panel of independent and impartial experts most often composed of three members nominated by the Parties (or appointed by the international arbitration institution, or more rarely by a national court) on the basis of their legal and practical expertise and knowledge, to render a final and binding award.” available here ↑2 165 F.3d 184, 190 (2d Cir. 1999). ↑3 Ibid. (emphasis added) ↑4 As the amicus brief of Federal Arbitration Inc. in support of ZF Automotive points out, “courts should not presume that the language of a statute is ambiguous. See United States v. LaBonte, 520 U.S. 751, 757 (1997) (“We do not start from the premise that [the statutory] language is imprecise. Instead, we assume that in drafting legislation, Congress said what it meant.”). Similarly, courts may not impose their own limitations upon a plain and unambiguous statute or resort to legislative history to upend its commonsense construction.” [citing cases]. Brief of Federal Arbitration, Inc. (FEDARB) as Amicus Curiae in support of Petitioner, at 7. (last visited February 21, 2022) ↑5 Robinson v. Shell Oil Co., 519 U.S. 337, 339 (1997). ↑6 Robinson v. Shell Oil Co. involved a Title VII action by Mr. Robinson, an African-American person who had been fired by Shell. Mr. Robinson filed a charge with the EEOC, alleging that Shell had discharged him because of his race. While that charge was pending, Mr. Robinson applied for a job with another company. That company contacted Shell, as Mr. Robinson’s former employer, for an employment reference. Shell allegedly gave him a negative reference in retaliation for his having filed the EEOC charge. Section 704(a) of Title VII of the Civil Rights Act of 1964 makes it unlawful “for an employer to discriminate against any of his employees or applicants for employment” who have either availed themselves of Title VII’s protections or assisted others in so doing. The issue was whether the term “employees” as used in §704(a) includes former employees, such that Robinson could bring suit against his former employer for post-employment actions allegedly taken in retaliation for his having filed a charge with the EEOC. The Court found that in several sections of Title VII the term “employee” necessarily meant to include former employees whereas in other sections it necessarily meant current employees. ↑7 In fact, Prof. Smit quotes in this connection in a footnote the text of the 1958 version of §1782: “The deposition of any witness within the United States to be used in any judicial proceeding in any court in a foreign country with which the United States is at peace may be taken before a person authorized to administer oaths designated by the district court of any district where the witness resides or may be found. The practice and procedure in taking such depositions shall conform generally to the practice and procedure for taking depositions to be used in courts of the United States.” 62 Colum. L. Rev. at 1267, n. 18. ↑8 The language quoted by the NBC court is followed by this sentence: “The correctness of this view was sustained by the United States–German Mixed Claims Commission when the American agent tried to invoke the 1930 act.” 62 Colum. L. Rev. at 1267. From the context I surmise that the word “owes” in the sentence quoted by the NBC court has a typo and that it should read “owed” instead. ↑9 For a full report on the activities of the Commission on International Rules of Judicial Procedure, including the text and explanatory notes of all the reform measures developed by the Commission and the Project on International Procedure of the Columbia University School of Law (the “Project”), see Fourth Annual Report of the Commission on International Rules of Judicial Procedure, H.R. Doc. No. 88, 88th Cong., 1st Sess. (1963). The explanatory notes are reprinted almost verbatim in S. REP. No. 1580, 88th Cong., 2d Sess. (1964) [herein  the “Senate Report”]. Professor Smit was the Director of the Project and the Reporter for the Commission. function footnote_expand_reference_container_41936_30() { jQuery('#footnote_references_container_41936_30').show(); jQuery('#footnote_reference_container_collapse_button_41936_30').text('−'); } function footnote_collapse_reference_container_41936_30() { jQuery('#footnote_references_container_41936_30').hide(); jQuery('#footnote_reference_container_collapse_button_41936_30').text('+'); } function footnote_expand_collapse_reference_container_41936_30() { if (jQuery('#footnote_references_container_41936_30').is(':hidden')) { footnote_expand_reference_container_41936_30(); } else { footnote_collapse_reference_container_41936_30(); } } function footnote_moveToReference_41936_30(p_str_TargetID) { footnote_expand_reference_container_41936_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_41936_30(p_str_TargetID) { footnote_expand_reference_container_41936_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Empirical Analysis of National Court Judgements in Commercial Arbitration: What Do the Data Tell Us?

Mon, 2022-06-13 06:05

On June 6, 2022, the Journal of International Arbitration Special Issue on Empirical Work in Commercial Arbitration, was released, edited by Dr Monique Sasson, Dr Crina Baltag, Roger P. Alford, Matthew E.K. Hall, under the general editorship of Prof. Dr Maxi Scherer. The Special Issue also includes articles authored by Prof. Loukas Mistelis, Prof. Dr Maxi Scherer, Dr Ole Jensen, Giammarco Rao, Laurence Shore, Vittoria De Benedetti, Mario de Nitto Personè, Cecilia Carrara, Elina Mereminskaya, Ioana Knoll-Tudor, Arthur Dong, and Alex Yuan.

The empirical research featured in this Special Issue is based on the Kluwer Arbitration Database (“Database”) and relies on a data set that includes all national court decisions on recognition, enforcement and setting-aside of international commercial arbitration awards available in the Database and rendered from January 1, 2010, to June 1, 2020. The empirical research comprises 504 vacatur actions and 553 recognition and enforcement actions. National courts in 74 different jurisdictions issued these decisions.

The research coded every argument raised by respondents in opposing the recognition and enforcement of awards under Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as well as every argument raised by respondents in attempting to set-aside awards based on the grounds in Article 34 of the UNCITRAL Model Law on International Commercial Arbitration.  Several other grounds, outside the two instruments mentioned above have been identified in the Database.

This type of empirical research is routinely done in investment arbitration, but it is rarely attempted in commercial arbitration. Understanding success in enforcement and setting-aside proceedings is usually left to reliance on anectodical evidence, which is unsatisfactory. Moreover, it is necessary to consider the data from several jurisdictions to understand the extent to which the general impression that commercial arbitral awards are ultimately upheld by the courts is correct.

The empirical research concerned court judgments involving 104 claimant nationalities (50% of the cases were from 16 nationalities; the US was the largest percentage at 8.8%) and 107 respondent nationalities (50% of the cases were from 14 nationalities; the US was the largest percentage at 9.8%).

The majority of these court judgements arose from administered arbitrations. There were 110 different arbitral institutions (9 institutions administered 48% of the relevant awards) mentioned in the court judgments. The probability of an award being enforced was 78% in all actions filed in proceedings administered by the nine most represented arbitral institutions. In vacatur proceedings, 75% of the applications filed by respondents seeking to set-aside the award were rejected (thus, a 75% success rate in preserving the award).

 

The research first analyzed the general data and then addressed certain specific issues:

(i) Invalidity of Arbitration Agreements and Applicable Law —  Professor Scherer and Dr. Jensen analyzed the challenges to the validity of arbitration agreements, which were at issue in almost one-fifth of the database court decisions.

(ii) Non-Signatories — Professor Mistelis and Dr. Rao addressed the ‘extension’ of the arbitration agreement to non-signatories threatened the enforcement of the award.

(iii) Pathological Clauses — Mr. Shore, Dr. De Benedetti and Dr. De Nitto Persone looked at this jurisdictional objection, which was raised in 21% of the Database enforcement cases and successful only in 23% of the cases.

(iv) Conflicts of Interest — Dr. Carrara considered the issue of conflicts of interest, impartiality and independence of arbitrators.

(v) Enforcement of Annulled Awards — Professor Baltag analyzed the enforcement of awards vacated at the seat.

(vi) Public Policy — Dr. Sasson analyzed the decisions on public policy. Objections based on public policy were 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.

(vii) Annulment, Recognition and Enforcement Proceedings in Latin America — Dr. Mereminskaya addressed the most recent jurisprudential approaches to international arbitration in Latin America, specifically Argentina, Colombia, Costa Rica, Chile, Dominican Republic, Mexico and Peru.

(viii) Annulment, Recognition and Enforcement Proceedings in France — Dr. Knoll-Tudor examined NY Convention and annulment cases in France.

(ix) Recognition and Enforcement Proceedings in China. Dr. Dong and Dr. Yuan analyzed judgements by the Chinese courts.

 

 General Conclusions to be Drawn From the Data  

i) The Low Vacatur Application Success Rate: 23% (19% in the nine largest jurisdictions) without significant variations between courts in various jurisdictions.

ii) The High Enforcement Success Rate: 73% (71% in the nine largest jurisdictions), again without significant variations between courts in various jurisdictions.

 

It is noteworthy that, despite the lack of uniformity in the setting-aside legislative acts across the world, the percentages of confirmations of awards under national arbitration acts, and of recognition and enforcement of foreign awards under the New York Convention are very similar (77% and 73%).  This indicates that the general impression that setting-aside proceedings are parochial and not especially arbitration-friendly, because of a lack of an international convention regulating them, is misguided.

Second, there is no statistically significant evidence that the choice of arbitration institution will measurably affect enforcement outcomes. The ICC represented over 20% of cases in the data set; there was no evidence that this institution fared better than others in terms of enforcement or vacatur action outcomes. This database also highlights the widespread use of arbitration institutions from around the world, from Albania to Zambia.

Third, international commercial arbitration is overwhelmingly a private affair. Government parties features in only 6 % of the cases in the Database. Moreover, regardless of whether or not there was a government party in the arbitration, there is little evidence of a “home field” advantage. That is, there is no direct evidence connecting the nationality of the parties and the outcome of the vacatur or enforcement proceeding.

Fourth, the most common grounds for challenge are not the most successful. Arguments based on public policy or invalid arbitration agreement are most frequently raised by respondent in enforcement proceedings, but are relatively unsuccessful. Similarly,  arguments based on public policy and inability to present one’s case are most frequently raised in the vacatur context, but are relatively unsuccessful (“no notice of arbitrator appointment” was the most successful).

 

 

This empirical analysis is only a starting point. There are many unanswered questions that flow from this study. We have not analyzed, for example, questions such as the cost or duration of arbitration, the composition of tribunals or demographics of arbitrators, the enforcement of arbitration agreements. Further research is needed to answer these and other questions.

Finally, the articles in the Special Issue offer a detailed empirical analysis of national court enforcement of international commercial arbitration awards. But, it is not comprehensive, and many questions require further research. We focused on analysis of cases since January 1, 2010, and coded national court proceedings that were included in the Database. There is an inherent selectivity bias in analyzing these cases, because the reporters and editors chose to include in that database only those cases that are likely to be relevant to the international commercial arbitration community.

There is no other equivalent database relating to international commercial arbitration decisions in national courts. One must therefore draw conclusions and extrapolate from these cases, recognizing the limitations of the database. We hope that the enthusiasm with which practitioners and scholars have embraced legal empiricism in the investment arbitration context will translate to the world of international commercial arbitration

 

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International Law Talk Podcast and Arbitration: What Data Tells You About International Commercial Arbitration?, In Conversation with Monique Sasson

Fri, 2022-06-10 07:59

International Law Talk is a series of podcasts through which Wolters Kluwer provides the latest news and industry insights from thought leaders and experts in the fields of International Arbitration, IP Law, International Tax Law and Competition Law.  Here at Kluwer Arbitration Blog, we highlight the podcasts focused on international arbitration.

 

In this latest episode, Prof. Dr Maxi Scherer, General Editor of the Journal of International Arbitration (JOIA) interviews Dr Monique Sasson, one of the editors of the Journal of International Arbitration Special Issue on Empirical Work in Commercial Arbitration, together with Dr Crina Baltag, Roger P. Alford, Matthew E.K. Hall.  The Special Issue also includes articles authored by Prof. Loukas Mistelis, Prof. Dr Maxi Scherer, Dr Ole Jensen, Giammarco Rao, Laurence Shore, Vittoria De Benedetti, Mario de Nitto Personè, Cecilia Carrara, Elina Mereminskaya, Ioana Knoll-Tudor, Arthur Dong, and Alex Yuan.

 

The podcast discussion considers and explores “What Data Tells You About International Commercial Arbitration?”, namely:

  • First, the reasons why the empirical research study has been commenced, why “data is the new gold”, and research based on data has become a hot topic in recent years.  In addressing these questions, Monique Sasson highlighted that we have seen various empirical research data in investment arbitration, which enable users to predict possible outcomes of certain arguments. At the same time, such tendency is not visible in the commercial arbitration setting, where there is more “anecdotal evidence”, i.e. unverifiable and unquantifiable information, originating from “each other’s stories”.
  • Second, how the empirical research study is structured and what is comprised in the dataset.  The dataset is composed of judicial decisions rendered in setting aside and enforcement actions, more precisely 504 and 553 respectively, covering the time frame of the last ten years (January 2010 – January 2020).  The judgments originated from 74 jurisdictions, with 64% of which reflected the practice of 9 jurisdictions, namely Germany, the United States, Switzerland, Spain, the United Kingdom, the Netherlands, France, Brazil, and the People’s Republic of China.  The majority of these cases concerned arbitral awards in cases administered by institutions – over 100 arbitral institutions -, whereas ad hoc arbitrations constituted a smaller “fraction” of the data.
  • Third, what was done to the dataset and how it was coded.  The grounds for coding the dataset were divided into 19 groups for the setting aside and enforcement data. For the setting aside data, the grounds were based on Article 34 of the UNCITRAL Model Law. While for the enforcement data, the coding was based on Article V of the New York Convention.
  • Fourth, what the general and specific findings of the empirical research study were.  Among other things, some of the general conclusions, which Monique Sasson has noted to be “expected conclusions”, included the finding that the setting aside application success rate is 23%. At the same time, in the enforcement proceedings, such attempts are successful in 73% of cases.
  • Fifth, the findings of the research conducted by Prof. Dr. Maxi Scherer and Dr. Ole Jensen with respect to the grounds for invalidity of the arbitration agreements in 171 decisions.  The named decisions were coded with respect to the grounds for invalidity invoked in the setting aside or enforcement proceedings.  Some of the “surprises” related to the argument on formal invalidity of the arbitration agreement: although it is believed that it is one of the most frequently invoked grounds, the data does not confirm that.  The data showed that this ground was relied upon only in 9.3% of cases.  On the other hand, the two of the most “successful” grounds for the challenge were that (i) the arbitration agreement did not come into existence or was not applicable (36.5% success rate), and that (ii) one of the parties did not sign the arbitration agreement (42% success rate).  Finally, Prof. Scherer highlighted that there is a mismatch between the frequency in which the grounds for challenge are invoked and their success rates.

 

http://arbitrationblog.kluwerarbitration.com/wp-content/uploads/sites/48/2022/06/Trailer.mp4

 

Listen to the discussionWhat Data Tells You About International Commercial Arbitration?, In Conversation with Monique Sasson.

Follow the coverage of the International Law Talk arbitration podcasts on Kluwer Arbitration Blog here.

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The Intersection of International Arbitration and Sustainable Development: Perspectives from Sarajevo

Wed, 2022-06-08 01:41

On 18 March 2022, academics and arbitration practitioners convened in Sarajevo (Bosnia & Herzegovina) for an international conference dedicated to cutting-edge topics related to the intersection of international arbitration and sustainable development. This post outlines some of the highlights of a rich discussion that was part of a broader effort to engage the legal and academic communities in Bosnia and Herzegovina in the international reform processes in this area.

The conference was part of the annual training and a Willem C. Vis Pre-Moot, co-organized by the U.S. Department of Commerce Commercial Law Development Program (CLDP), the Faculty of Law of the University of Zenica, GIZ, Association ARBITRI and the American Chamber of Commerce Bosnia and Herzegovina Sarajevo. A diverse audience of Willem C. Vis Moot teams (from Azerbaijan, Bosnia and Herzegovina, Georgia, Germany, Kosovo and Saudi Arabia), representatives of the business sector and practitioners contributed to the richness of the discussions. Following the welcome address and introduction by CLDP representatives, the U.S. Embassy in Bosnia and Herzegovina and AmCham, the conference unfolded through two keynote speeches, two panels and an interactive presentation.

The two keynote speeches were dedicated to the law applicable to the arbitration agreement, and delivered by Mr. Steven Finizio (Wilmer Hale, London) and Prof. Dr. Helmut Ruessmann (Saarland University). In final session of the conference, Ms. Amanda Lee (Costigan King) and Honorable Virginia M. Covington (District Court Judge, Middle District of Florida) shared tips and best practices for a career in international arbitration. The session was moderated by Ms. Amina Hasanović (University of Zenica, Faculty of Law). The panels of the conference focussed upon the intersection between international arbitration and sustainable development and form the focus of this post.

 

Arbitrating for a Greener Future: How SDG Disputes are Changing the Landscape of International Arbitration

Ms. Nevena Jevremović (University of Aberdeen) opened the discussion by discussing the implications of the Sustainable Development Goals (SDGs) on trade and investment. Although the international arbitration jurisprudence is yet to see the first awards related to SDGs (including climate change), international instruments and procedural reforms are taking place on parallel tracks to prepare for the anticipated increase in caseload in this field. Given the fast pace and ambitious goals of the energy transition and adoption of green policies worldwide, many challenges lie on the horizon for policymakers and arbitration practitioners alike. More broadly, the need for accountability for adverse social, environmental, and human rights impacts of trade and investment is only increasing.

While States have taken steps to address these challenges – from the Paris Agreement to the UN 2030 Agenda to numerous soft law instruments – developing and capital importing countries are struggling to put in place a policy framework compliant with these international obligations while retaining foreign investments. KAB readers will be familiar with the concept of “regulatory chill”, which presents one of the main hindrances for adopting meaningful SDG legislation and measures. States are hesitant to disrupt their foreign investment protection regime for fear of facing lengthy and expensive investment arbitrations. While it is difficult to measure the extent and real effects of “regulatory chill”, it is a growing concern that modern investment protection treaties aim to address by expressly safeguarding the States’ right to regulate in the public interest.

Ms. Jevremović then reflected on SDG interactions and global value chains (GVCs), explained the existing international and national regulatory framework, and laid the groundwork for discussing the implications of SDG considerations for Investor-State Dispute Settlement (ISDS). She concluded with an example of a recent groundbreaking decision of The Hague District Court – Milieudefensie et al. v. Royal Dutch Shell – where the court ruled that the Shell group is responsible for its CO2 emissions and those of its suppliers. The court in that case further held that Shell must cut its CO2 emissions by 45% compared to 2019 levels. In its reasoning, the court heavily relied on scientific research and reporting on the effects of climate change and also various international instruments, primarily the UN Guiding Principles on Business and Human Rights, to interpret and apply the Dutch standard duty of care standard.

The decision is particularly noteworthy for two reasons. First, it embraces a broad, and some may say bold, take on the scope of responsibility carbon majors have in their supply chains for adverse climate change effects. Second, the decision builds on the famous Urgenda decision. On 20 December 2019, the Dutch Supreme Court ruled that the Dutch government has obligations to reduce emissions urgently and significantly in line with its human rights obligations. More specifically, it ordered the Dutch State to reduce greenhouse gas emissions by at least 25% as of late 2020 relative to 1990 levels.

The Dutch experience in Urgenda and with climate change policy more broadly illustrates certain of the concerns associated with regulatory chill noted above. The Dutch Climate Act entered into force on 1 September 2019, setting a framework for the development of policy geared towards a permanent and gradual reduction of greenhouse gas emissions in the Netherlands to a level that will be 95% lower in 2050 than in 1990, to curb global warming and climate change. However, in response to the Climate Act, RWE filed a claim against the Kingdom of Netherlands under the Energy Charter Treaty requesting compensation for banning the use of coal in electricity generation from 2030. One can expect the connecting points between liability for adverse climate change, social, human rights, and environmental impacts, the ISDS system, and climate change litigation to multiply going forward.

Dr. Kabir Duggal (Arnold & Porter) addressed the changing landscape of ISDS and the tension between investors’ rights and States’ rights to regulate in the public interest. He reflected on the high stakes of ISDS proceedings for less developed states and the role of human rights and environmental concerns in ISDS. Turning to the ongoing reform processes in ISDS, Dr. Duggal commented on the focus on procedural reforms in ISDS, particularly the reform options deliberated and developed in the UNCITRAL Working Group III (ISDS Reform). Considering that the mandate of WG III is limited to concerns and reforms associated with dispute resolution (such as the consistency of awards, costs and duration of the proceedings and ethical rules for ISDS adjudicators), the discussion of substantive issues, including SDG concerns, remains off the table of international bodies, at least for the foreseeable future. This isolated process cannot effectively resolve the most problematic issues concerning the States’ ability to regulate in the public interest while maintaining an attractive investment environment. Therefore, there is a risk of the reform process being another missed opportunity to bring about meaningful change in the field.

 

Shifting the Paradigm of Investment Arbitration: State Rights and Investor Obligations

Following the discussion about the changing landscape of global business and trade and ISDS, the second panel turned to explore the evolving positions of States and foreign investors in ISDS. Ms. Fahira Brodlija (GIZ) opened the discussion by highlighting the trajectory of the development of the existing ISDS system. Initially, bilateral investment treaties (BITs) and the ISDS clauses served a dual role: on the one hand, they were a safeguard for foreign investors from developed States venturing into developing States, while developing States used them as a tool to attract foreign investment.  The European Union, which is now the main advocate for the abandonment of ISDS and the establishment of a standing Multilateral Investment Court, once encouraged the conclusion of BITs among its Member States “as a means of establishing a favorable climate for private investment.” She noted the reversal in the attitude of States towards investment arbitration as a feature of their investment protection framework, and the growing tendency of states to safeguard their regulatory space, to the exclusion of direct recourse of foreign investors against States. This opens the door for the paradigm shift in the roles of investors and States in ISDS.

Mr. Arne Fuchs (McDermott Will & Emery) identified several approaches that could be applied to soften the tension between investment treaties and State rights to regulate. States have already started lowering investment protection standards, by exempting certain measures from the scope of investment treaty protection and judicial review. Mr. Fuchs noted that this may raise inconsistencies in practice and that a much better approach would be to change the perspective on the traditional investment protection standards and to engage directly with investors when adopting significant policies of public interest. In addition, Mr. Fuchs reflected on the possibility of using investment treaties to enforce States’ international obligations (e.g., in relation to the environment). As the notions of investment treaties as instruments of investment protection shift to a purpose od investment facilitation, the understanding of investor obligations and the State’s duties to comply with global environmental obligations will likely impact the outcomes of future investment arbitration cases.

Prof. Catherine Rogers (Arbitrator Intelligence) laid out the prospects of States acting as Claimants, rather than as Respondents as is the norm in ISDS. To illustrate the nature and implications of such actions by States, Prof. Rogers presented some prominent examples from US case law, where States acted as claimants – including an action by 40 US States against tobacco companies in the courts that resulted in a US$365 billion settlement. Prof. Rogers also highlighted the role of contingency fee arrangements in claims brought by States against private companies, as well as the high settlement rate of such cases. Finally, Prof. Rogers commented on the importance of international adjudication in any form and the prospects of increasing rates of State claims and counterclaims as an incentive for settlement.

 

***

 

It is undeniable that the world of international arbitration cannot exist in a vacuum and that it will have to tune into the challenging landscape of ESG regulations and disputes in the near future.   The conference laid the groundwork for future debates in this field among policy makers, practitioners and academics in Bosnia and Herzegovina, many of whom were among the Vis Moot participants who were in attendance. The full recording of the program is available online.

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Arbitration and the Decommissioning of Oil and Gas Assets: An Australian Perspective

Tue, 2022-06-07 05:20

As the oil and gas industry continues to mature, the number of mid-to-late life assets grows. A key challenge for the energy sector is how to effectively manage the decommissioning of these assets, especially those situated offshore. In Australia:

  • decommissioning work is expected to be required for up to 65 offshore platforms by 2026, and
  • the cost of decommissioning over the next 30 years is predicted to be in the order of $60 billion.

The challenge is not one for engineers and operators alone. Decommissioning presents legal issues that implicate oil and gas companies, investors, contractors, and the government. As with the original construction projects, decommissioning is a minefield for disputes; in particular, disputes in relation to the mechanisms used to mitigate the risks associated with the newly implemented trail liability provisions set out below, and the estimation of decommissioning costs, their impact on the value of assets and who will be responsible for those costs. Arbitration remains the preferred method of dispute resolution for these types of energy projects, particularly due to confidentially and ease of enforcement.

Nor is the challenge one for Australia alone. While the current buoyancy of energy commodity prices is likely to push out some decommissioning work, a wave of decommissioning is expected over the next decade, with a significant number of assets around the world reaching the end of their economic life phase.

 

Context

At the macro level, the timing of decommissioning of oil and gas assets depends in large part on government policy as well as the market for energy commodities.

Even as Covid-19 disruption eases globally (with the notable exception of China), the war in Ukraine and redoubled sanctions against Russia, compounded by Russia itself cutting supply of natural gas to a number of European countries, threaten to push prices even higher.

While disruptions in the short to medium term look set to continue, the transition towards renewable energy in the mid to longer term continues to press forward. In Australia, the newly elected Labour-led government has committed to reducing emissions by 43% by 2030 (a more ambitious target than the previous Government’s goal of 26-28%).

Though, for example, hydrocarbon prices are likely to sustain their current highs for the foreseeable future, prolonging decommissioning for some oil and gas fields in the short to medium term, the long-term outlook in the coming years and decades remains unchanged.

 

Decommissioning in Australia

Decommissioning of oil and gas assets is not a simple “pack-up” exercise. It involves a range of activities necessary to safely dispose of the various installations of piping and platforms, and restoration of the site to an “agreed” status (as determined by contract, typically a joint operating agreement, and any legislation). However, decommissioning is more than a technical engineering challenge. Prior to any work being undertaken, pre-abandonment surveys will be carried out, and a decommissioning plan must be prepared for regulatory approval.

Though decommissioning is gathering pace globally, Australia faces a particular challenge in this regard. A Wood Mackenzie study on the subject noted:

“Unlike in the Gulf of Mexico and the North Sea, decommissioning is still in its infancy in Australia, and all involved (i.e., regulators, operators, and the service sector) need to be prepared for the coming wave as assets approach the end of their producing lives.”

 

The legislative landscape

Offshore oil and gas decommissioning is currently regulated by the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth).

Until recently, the registered titleholder was responsible for decommissioning, with no financial assurance required to ensure liquidity to cover associated costs. Things changed following an incident in 2019, when the Northern Oil and Gas Australia group of companies went into liquidation, leaving the Australian government responsible for extensive decommissioning costs in the Timor Sea. A review was established (the Walker Review) to investigate the liquidation, and make recommendations to improve practices, policies and legislation. The key recommendations were adopted in the Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Act 2021 (Cth) (the Act).

One of the key changes introduced by the Act was the “trailing liability” provisions, whereby earlier titleholders would not be absolved of responsibility for remediation and decommissioning. The National Offshore Petroleum Safety and Environmental Management Authority has the power to “call back” not just former titleholders but (1) any person that has significantly benefited from the operations, (2) anyone who was in a position to influence the extent of another person’s compliance with their obligations under the Act, or (3) has acted jointly with a titleholder in their operations. The sweeping provision encompasses employees, advisers, financiers and royalty holders.

The provisions, which came into effect on 2 March 2022, are intended to be used as a “last resort”. Residual issues that could involve calling back a former titleholder include where a previously plugged and abandoned well has a leak or impacts arise from a previously decommissioned activity.

Along with the trail liability provisions, other key changes in the Act add yet further transactional and regulatory complexity.

 

Disputes avoidance – navigating the labyrinth

The trailing liability provisions pose a significant risk factor for investors in oil and gas assets, as well as those wishing to divest. As many of the larger companies look to sell-down their Australian portfolios to smaller, later-life-stage operators, these provisions contribute an added layer of complexity to any transaction.

In other countries where trail liability can be imposed by regulators on a wide range of parties (such as the UK), the response has been to implement decommissioning security agreements (DSAs), whereby buyers and sellers, as well as other joint venture parties, contribute funds (in tiered amounts, according to their stake and involvement) into a trust set aside for decommissioning costs.

Disputes may arise in relation to the mechanisms and structures used to mitigate the risks associated with trail liability. For example, disputes can arise between parties to a DSA, in connection with the estimate of sufficient security to cover the costs of decommissioning, and the respective contributions of different parties to the agreement.

DSAs also rest on intrinsic assumptions as to when decommissioning will occur, which is a key input into the expected net cost of decommissioning and how that should be split over time. Disputes can then ensue when oil or gas prices rise or fall, altering the optimal decommissioning date, and thereby thwarting parties’ expectations as to the extent or duration of their contributions. In the UK, the decision in Apache v Esso provided that a former titleholder would not be liable for decommissioning of wells drilled after the titleholder ceased to be the owner of the relevant oil and gas assets.1) Apache UK Investment Limited v Esso Exploration and Production UK Limited [2021] EWHC 1283 (Comm). jQuery('#footnote_plugin_tooltip_41789_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41789_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); By contrast, the regulatory guidance note in Australia acknowledges that the trail liability provisions do not differentiate between property that was:

  • in the title area at the time that person was involved and
  • brought in subsequent to that person’s involvement“.2) Department of Industry, Science, Energy and Resources, Guideline: Trailing liability for decommissioning of offshore petroleum property (2 March 2022), at 3.9, available here. However, in issuing a remedial direction, the regulator will give consideration to whether a person was responsible for a specific installation or well. jQuery('#footnote_plugin_tooltip_41789_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41789_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Disputes can also arise as to the scope of decommissioning required, the execution, and environmental remediation (which is not always straightforward) and interpretation of the relevant legislation.

The potential for disputes increases with the time taken for approval of decommissioning plans and execution of the works, particularly if any delays accrue (for example, because of weather conditions), or the actual scope of required decommissioning changes (for example, if a site or rig deteriorates and becomes more hazardous to work on).

For older agreements, it is not uncommon for the contract not to include precise mechanisms for dealing with abandonment (which may not have been considered or thought out at the time the contract was signed). This can give rise to issues of unexpected liability, where it must be decided who is to bear the cost of regulatory compliance. Parties in this position should be aware of the applicable regulatory framework and what that may require of them and proactively engage with stakeholders and regulators to front foot and minimise their risk.

Offshore oil and gas facilities are often developed by joint ventures that operate under Joint Operating Agreements (JOAs). JOAs typically include a provision for the creation of a decommissioning fund. The trigger date for decommissioning is usually a point at which the net value of the remaining reserves reaches a percentage of the costs. However, estimating the value of both decommissioning and reserves involves assumptions, which are difficult to make during periods of market volatility and can give rise to disputes when the expectations underlying those assumptions are unfulfilled.

Other issues to keep an eye on include:

  • Records for older assets may not provide a complete picture, particularly where the construction was decades ago, and records were not kept or converted to digital. In such instances, the inherent uncertainties involved in decommissioning are exacerbated by incomplete information.
  • Delay issues can also arise where sub-contractors are mobilised to remote locations but are required to wait on standby due to delays. Where various sub-contractors provide mutually dependent services to a tight schedule, one delay can cause cascading issues for successive decommissioning steps.

To avoid disputes escalating, parties should be mindful of maintaining robust contract management practices, including, on the employer’s part, providing clear instructions, and on the contractor’s part, issuing unambiguous notices of claim, and submitting timely and detailed variation requests where a claim is intended.

References[+]

References ↑1 Apache UK Investment Limited v Esso Exploration and Production UK Limited [2021] EWHC 1283 (Comm). ↑2 Department of Industry, Science, Energy and Resources, Guideline: Trailing liability for decommissioning of offshore petroleum property (2 March 2022), at 3.9, available here. However, in issuing a remedial direction, the regulator will give consideration to whether a person was responsible for a specific installation or well. function footnote_expand_reference_container_41789_30() { jQuery('#footnote_references_container_41789_30').show(); jQuery('#footnote_reference_container_collapse_button_41789_30').text('−'); } function footnote_collapse_reference_container_41789_30() { jQuery('#footnote_references_container_41789_30').hide(); jQuery('#footnote_reference_container_collapse_button_41789_30').text('+'); } function footnote_expand_collapse_reference_container_41789_30() { if (jQuery('#footnote_references_container_41789_30').is(':hidden')) { footnote_expand_reference_container_41789_30(); } else { footnote_collapse_reference_container_41789_30(); } } function footnote_moveToReference_41789_30(p_str_TargetID) { footnote_expand_reference_container_41789_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_41789_30(p_str_TargetID) { footnote_expand_reference_container_41789_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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Textual, Contextual, Good Faith, or Common Intent: The Need for a Baseline for Evidentiary and Interpretative Standards in International Arbitration

Mon, 2022-06-06 01:00

Generally, the choice of substantive law applicable to a particular contract will affect the outcome of a case.  It is common, however, for the evidentiary and interpretive rules to also have important implications for a case’s outcome.  Arbitral rules leave such matters to a tribunal’s discretion that can be exercised in different ways.  For instance, suppose that two disputes arise under the terms of a form agreement and that parole evidence points to a particular interpretation of the contract. Let us further suppose that one dispute is heard by an arbitrator in a jurisdiction where parole evidence is admissible as a matter of course, and the other dispute is heard in a jurisdiction where such evidence is generally inadmissible.  The outcome of the arbitrations is likely to diverge even though the arbitrators are interpreting the same agreement.  Regrettably, this is not an isolated example of how the choice of evidentiary and/or interpretative rules can affect the outcome of a given dispute.

We argue that greater uniformity in evidentiary and interpretive rules in international arbitrations would ensure that outcomes turn on the choice of substantive law and—unless the parties prefer otherwise—not, for example, on the vicissitudes of how an arbitrator reads a contract.  To that end, we survey the different approaches to interpreting contracts in California, New York, and a few select civil law jurisdictions.  We then propose some potential reforms to evidentiary and interpretative approaches that will reduce subjectivity in outcomes irrespective of the substantive law that the parties have chosen.

 

Textual v. Contextual Debate in Common Law Countries

Contract interpretation in the U.S. is by no means monolithic.  Indeed, there is significant disagreement amongst U.S. states as to the centrality of contractual text when interpreting the parties’ agreement.

Generally speaking, New York courts, and a majority of other jurisdictions in the United States, focus on the “plain meaning“ of the terms within the “four corners” of a contract: the so-called “textual” approach.  The rule in the U.S. is most clearly stated in Greenfield v. Philles Records, in which New York’s highest state court held as follows:

‘The best evidence of what parties to a written agreement intend is what they say in their writing.’ Thus, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms … Extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous …

In practice, New York courts will consider the words of a contract next to each other and in light of the overall document; the query is not of their literal dictionary definitions strictly devoid of other context.  However, if the contract “on its face is reasonably susceptible of only one meaning,” New York courts cannot alter or read other ideas into it.

In California and a handful of other jurisdictions in the United States, courts preliminarily consider all credible evidence of the parties’ intent in addition to the language of the contract under the so-called “contextual” approach.  The California approach is premised on the notion that we have not yet attained an adequate “degree of verbal precision and stability” in our use of language, and what may appear clear to a judge, based on their read of the text, may not be clear among the parties or be their intended meaning at the time of drafting. California state courts maintain that “rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. Such evidence includes testimony as to the ‘circumstances surrounding the making of the agreement … including the object, nature and subject matter of the writing …’ so that the court can ‘place itself in the same situation in which the parties found themselves at the time of contracting.’”

A majority of U.S. jurisdictions follow New York’s textual approach, though the UCC Sales and Restatement (Second) of Contracts recommend the contextualist approach. Importantly for arbitration, a majority of corporate parties to arbitrations have historically preferred textualist jurisdictions, as seen in choice-of-law provisions that still generally favor New York over California.

Although New York and California were chosen for discussion in this blog post as jurisdictions that best epitomize this split within the common law tradition, such debate between textualism and contextualism also exists in other common law jurisdictions such as the United Kingdom (textualist) and New Zealand (contextualist), among others.

 

Good Faith and Common Intent in Civil Law Countries

In contrast to the U.S. and other common law jurisdictions, civil law jurisdictions are more uniform in their interpretive approach.  At the heart of the civil law tradition are the principles of good faith and common intent.  The idea of good faith is both objective—used to enhance fairness and level the playing field in contractual relations—and subjective—a person acts with the belief that what they are doing is right or lawful.  Common intent simply refers to the natural meaning of words, rather than some inferred meaning.  But whereas the common law focuses mainly on objective intent, using a reasonable-person or reasonable-business (trade usage) standard to determine meaning, civil law approaches tend to focus on a subjective inquiry: the provisions of a contract mean what the parties intended them to mean.  In case of doubt, provisions are generally construed against the author of the clause (see Italian Code Art. 1370, French Code Art. 1190).

For instance, under the French Code, “a contract is to be interpreted according to the common intention of the parties rather than by stopping at the literal meaning of its terms” (Art. 1188), but “clear and unambiguous terms are not subject to interpretation as doing so risks their distortion” (Art. 1192).  While on first brush seemingly contradictory, this approach can be understood as essentially encapsulating the common-law divide, albeit with a more subjective flair: if the words are clear and unambiguous, the inquiry stops there; if they are not, the court turns to other factors (which may be described as contextual by a California court), in order to ascertain the parties’ intent.  Put another way, all courts will first look to the natural or plain meaning of the words in a contract, and then, depending on the legal tradition, turn to a consideration of either objective or subjective factors, and ultimately extend or confine their consideration of the underlying context to varying degrees.

 

Soft Law Instruments May Not Always Provide a Clear Answer

Common law and civil law jurisdictions also diverge in how they may respect evidentiary approaches in contract disputes.  On an international level, proponents of the civil law system have recently developed the Rules on the Efficient Conduct of Proceedings in International Arbitration (“Prague Rules”) as a response to what was seen as the common law assumptions underlying the IBA Rules on the Taking of Evidence in International Arbitration.  Both sets of rules and comparative analysis have been the subject of extensive writing (see here, here, here, and here).  While it is true that both sets of rules, which concern the taking of evidence, have certain fundamental differences based largely on the inherent systemic divergences of the adversarial vs. inquisitorial approaches, as concerns the interpretation of evidence both sets of rules are silent.

As a prior blog post (coauthored by one of the present authors) has pointed out, “both sets encourage tribunals to take initiative in identifying relevant factual or legal issues; exclude witness testimony considered irrelevant to the case; … and draw adverse inferences.”  Yet, identification of relevant issues and powers to admit or exclude certain evidence is where the rules leave off: there is very little direction as to which factors to take into account in the weighing of evidence to identify those relevant issues and make an informed decision.  Indeed, the selection of a substantive law may not always suffice for interpretative matters as these are within a tribunal’s discretion.  Article 9 of the IBA Rules, concerning “Admissibility and Assessment of Evidence,” merely states that an arbitral tribunal shall “determine the admissibility, relevance, materiality and weight of evidence” and then sets forth the grounds for exclusion, privilege, and production.  It is silent as to grounds for assessing the weight of evidence.  The Prague Rules do not even contain this type of provision.  The need for a more uniform, objective approach in interpretative practices is thus clear irrespective of the common law or civil law background of the tribunal or arbitrators.

 

Closing the Gap

As this piece has signaled, there is a lacuna in both the common law and civil law approaches to contract interpretation, especially on evidentiary matters that can lead to multiple, competing interpretations between fora—and sometimes even multiple meanings under the ‘one plain meaning rule.’ While a measure of discretion in arbitration is generally unavoidable, at present, practitioners cannot help but feel that there is a randomness to the manner in which a contract is interpreted, and even the outcome of a case, is dependent on the arbitrator and their background, which may suggest a degree of arbitrariness in the system. The development of a soft law to assist the various courts and arbitrators spanning both common law (including the NY and CA approaches) and civil law to apply a contract would reduce arbitrator discretion and increase objectivity.  While Chapter 4 of the UNIDROIT Principles 2016 and the Vienna Convention on the Law of Treaties provide a good foundation regarding the rules for interpreting instruments at the international level, we believe that a lex specialis that provides guidance as to international evidentiary and interpretive guidelines in international disputes is desirable.  This can be done by arbitral institutions themselves or through international bodies, such as UNIDROIT, tasked with developing international norms.  These could be developed in consultations with all stakeholders which we propose to develop in subsequent posts.

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LIDW 2022: States as First-Class Citizens?

Sun, 2022-06-05 01:40

As part of the 2022 London International Disputes Week, 3 Verulam Buildings, Clifford Chance, Kroll, Mayer Brown, QMUL, Three Crowns and White & Case organized a conference on “States as first-class citizens? Special treatment for states in international disputes”. This post covers both panels of the program.

 

Panel One:  Procedural and Substantive Peculiarities of Arbitration Proceedings with a State Party

The stellar panel was composed of Loukas Mistelis (QMUL, Clyde&Co),  Leilah Bruton (Three Crowns), Jessica Gladstone (Clifford Chance), Rachael O’Grady (Mayer Brown), and Vikki Wall (Kroll).

The panel discussed the procedural and substantive peculiarities of arbitration proceedings with a State party. They considered both investor-State and commercial arbitrations.

Loukas Mistelis opened the discussion with a historical observation. While the 1980s and 1990s saw the rise of non-state actors on the global scene, in the last two decades, States are reassessing and recalibrating their sovereign roles in international economic and investment law. Despite the focus on sovereignty, States themselves have become more complex, expanding their range of activities, including emerging roles in commercial transactions and participating in sovereign wealth funds with admirable investment portfolios. Prof Mistelis observed that States stand generally at the receiving end of investment arbitration, however, in commercial matters they may (and increasingly do) appear as the claimant. Does being a State party to an arbitration proceeding change the procedural dynamics? Does being a State Party to an arbitration proceeding change the behaviour of the tribunal? In other words, are States dealt with as first-class citizens in international arbitration?

To Jessica Gladstone (Clifford Chance), several phenomena come into play when a State is a party to an arbitration:

  1. Even the decision to pursue or defend a claim has its own complexities. Considerations may include “opening the floodgates”, maintaining the confidentiality of elements under dispute, and perhaps preferring the political cover of a judicial order over a political decision when it comes to explaining an outcome to a domestic audience.
  2. Diplomatic considerations may also drive a State’s decision on how to deal with a dispute. Sometimes, a formal dispute process may be preferred to separate out and insulate the wider diplomatic relationship from the dispute.
  3. The State may also need to manage particular public relationship implications with both a domestic and international audience.

In terms of evidence, States often present tribunals with the challenge of dealing with refusal to disclose  government documentation that is classified as secret. In such cases, tribunals must be persuaded of the genuine purpose behind an application to redact or withhold a document.  The IBA Rules on the Taking of Evidence in International Arbitration support this with a specific provision enabling the exclusion of evidence where there are grounds of special political or institutional sensitivity that the Tribunal has determined to be compelling (Art 9.2(f)). Ultimately, the arbitral tribunal must be sensitive to the challenges posed by evidentiary issues in cases involving states, and determine the relevance, materiality and the appropriate weight to be accorded to the evidence in all the circumstances.

Procedural issues may also arise. In general, States may take longer to organize themselves internally, consulting with a wide range of stakeholders from across the government before putting forward their legal or factual case. Similarly, jurisdictional objections arise more frequently in arbitrations with a State party, as the consent to arbitrate of a sovereign is often very specifically drawn. Finally, Jessica Gladstone argued that the potential concurrence of domestic and international proceedings has to be taken into account when arbitrating with a State party. In environmental cases, for instance, domestic proceedings may be preceding or parallel to an investor-state dispute. Questions may arise as to the relevance of and interaction between the parallel proceedings.

Reacting to the comment on public relations, Prof Mistelis recalled that the mere existence of disputes may affect the credit rating of the State. He further asked the panel whether it was true that representing a State these days had better-winning chances.

According to Leilah Bruton, tribunals ensure a fair level-playing field, and State representation benefits from advantages in the procedural phase. The most important privilege is timing. Tribunals are usually sympathetic to the State’s specific circumstances. States may appoint or instruct specialist counsel very late, sometimes when the proceedings have already begun. This may lead to a disruption of the procedural timetable. Issues of instructions may arise too. When a State is a party, an instructing body is constituted within the government to instruct the outside counsel. That body may have a number of stakeholders, from the ministry of justice, ministry of energy, of international affairs, up to the agency that has substantive links with the dispute at stake. This may create extra layers of time in consulting and seeking instructions. The State’s potential inconsistency is another issue The State may change its legal strategy throughout an arbitral proceeding, depending on a counsel adjustment, a policy shift or government change. Finally, State files can be kept by different state authorities. However, in Ms. Bruton’s experience,  tribunals are accommodating and fair.

Bouncing off these potential disruptions, Prof Mistelis asked whether the panellist perceives a level of asymmetry in the arbitral decisions. Whether the equality of arms is maintained or whether they see an asymmetry of weapons. More generally, with the growing attention to the right to regulate, public interest challenges, such as climate change or the redrafting of new-generation BITs, is there a disadvantage in representing a non-state party?

To Ms. Bruton, access to evidence can create an inequality of arms. In particular, documents linked with the exercise of the State’s police powers are difficult to produce. From her experience, tribunals take initiatives to ensure that fairness is ensured. For instance, they may appoint a third-party reviewer to maintain a level playing field. In her view, tribunals are not unfair on the substance; they may be understanding of delays and timing issues that create a slight imbalance. To Rachael O’Grady (Mayer Brown), tribunals generally ensure a standard playing field level. In this sense, she noted that the new ICSID rules allow greater equality of arms, too.

The panel then turned to experts’ appointments. In her capacity as expert in arbitral proceedings, Vikki Wall describes an asymmetry of information when appointed as accountant for the state party. In particular, access to financial information may be limited or inexistent. Often, her first contact with the State is through a specifically appointed counsel. She pointed out that the quantum of damages was a very important issue for claimants, but often left to the last day of a hearing, when asked whether tribunals pay enough attention to expert witnesses on accounting. She also noted that one way of assisting tribunals with engaging with expert evidence is for arbitral tribunals to appoint experts themselves, although seen only 11 times in 130 recent BIT cases where damages were awarded. Further, Prof Mistelis and Ms Wall remarked that a lack of diversity currently existed in the appointment of expert witnesses, but hoped to see improvement.

Another issue addressed was the conflict of state representation when two competing governments claim legitimacy or control over a specific territory – such as in Venezuela or Yemen.

In Ms Bruton’s view, an issue of standing might arise when competing political factions claim to represent the same State. In general, arbitral tribunals have treated this as a procedural issue – they usually maintain the status quo and place the burden of proof on the authority seeking to change the party to the proceeding. For instance, in the case of Yemen, two competing governments coexist. One is internationally recognised; the other is not. One minister of legal affairs intervened in an UNCITRAL case to claim that it had authority, and the tribunal stayed the proceedings. Usually, tribunals afford greater weight to the territorial control in relation to the claim rather than the international recognition of the party to the proceedings. In any event, this raises significant issues that have yet fully known implications.

Last, Rachael O’Grady (Mayer Brown) looked at how in investment disputes, have procedural shields and a sword with counterclaims.

Counterclaims can be defined as positive claims by the State seeking relief from the foreign investor. Counterclaims seem counterintuitive in investment arbitrations since bilateral investment agreements (BITs) are meant to primarily protect investors from State’s measures. Nevertheless, counterclaims are possible under article 46 of the ICSID Convention, which states the following:

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

Rachael O’Grady elaborated on the three conditions set out by the article:

  1. Both parties must have agreed to allow counterclaims. This is considered an issue of consent. Despite Reisman’s opinion, arbitral tribunals generally have determined the consent by an agreement outside the ICSID convention. Tribunals infer consent from the treaty language underlying the dispute at hand. In particular, they may look for the fact that the treaty covers “all disputes concerning an investment”.
  2. The counterclaim must “arise out of the subject of the dispute”. In other words, the counterclaim must arise out of the main claim. In Saluka v Czech Republic, the tribunal agreed that a counterclaim could be heard but decided that it was not connected sufficiently to the subject of the dispute.
  3. The counterclaim must be within the “within the jurisdiction of the Centre”, meaning it must fall within article 25 of the ICSID convention. In practice, the State and eventually the tribunal must establish a positive obligation on the investor, not the State. In Urbaser v Argentina, the tribunal found that the BIT was broad enough to allow counterclaims. However, it could not pinpoint an international law obligation on the part of the investor. While there is not a general rule that international law obligations only apply to States, in this case, the tribunal could not find an applicable law to the investor’s conduct.

Counterclaims raise interesting questions. What kind of positive obligation may come to be placed on investors? Will the new wave of investment treaties refer to positive international obligations on the investor? Will these obligations be substantial enough to find liability? Other questions of procedural economy and equality of arms may arise in case of parallel proceedings in domestic courts too. Finally, could counterclaims eventually defeat the original purpose of BITs?

 

Panel Two: Whether States have Preferential Treatment before the English Courts in Arbitration-related Cases

The second brilliant panel was composed of  David Goldberg – Moderator, White & Case), Mark Wassouf (3 Verulam Buildings), Zahra Al-Rikabi (Brick Court Chambers), and Cameron Miles (3 Verulam Buildings). This panel revolved around the question of whether States have preferential treatment before the English courts in arbitration-related cases. The panel took opposing views in answering this question, thereby creating an engaging discussion.

Mark Wassouf argued that States do not receive any special treatment before English courts and, in consequence, they do not have a privileged standing. In fact, it was said that States are generally treated as regular commercial parties.

Under English law, the only statutory advantage that States have is the State Immunity Act. Although it gives States immunity from the court’s adjudicative and enforcement jurisdiction, commercial judges in England try to avoid granting the State special treatment in arbitration-related applications. Admittedly, this trend can be seen in the General Dynamics v Libya saga, in which the Court of Appeal found a way around the statutory requirement set forth in Section 12 of the State Immunity Act. However, this judgment was later overturned by the Supreme Court.

Another example of this stance is the case Micula v Romania. Here, the Supreme Court decided whether enforcement proceedings against Romania could continue, even if such enforcement implied that the State would breach its international obligations under EU law. The Supreme Court analysed the issue without paying deference to any of Romania’s international obligations. In short, it was treated like any other commercial party would have been treated. The panellist concluded that counsels representing States before English courts are better off grounding their “arguments in ordinary commercial and legal logic”.

Conversely, Zahra Al-Rikabi considered that States do have, as a matter of fact, some advantages under the State Immunity Act. For instance, unlike commercial parties, States are not precluded from raising objections to the arbitral tribunal’s jurisdiction that were not disputed before. As the court in PAO Tatneft v Ukraine held, there is no foreclosure of the type of arguments that the State may raise as to the applicability of the State Immunity Act, regardless of what might have occurred before the arbitral tribunal.

In general, the panellist discussed that there are several obstacles when claimants face proceedings involving a State. Parties need to tackle this issue both from the adjudicative and enforcement immunity perspective. In particular, claimants must be able to address the court’s jurisdiction and prove why the State cannot benefit from the immunity as established in the State Immunity Act.

Finally, Cameron Miles offered a more pragmatical approach to the treatment of States in English courts. It was discussed that the State Immunity Act is not only driven by customary international law. In fact, considerations of comity are always relevant. Section 15 of the act supports such an argument. For that reason, where the case deals with issues of State immunity, depending on the judge and its background, some outcomes might be preferred over others.

Touching upon the previously mentioned General Dynamics v Libya cases, the panellist suggested that the decisions adopted by the Court of Appeal and the Supreme Court can be explained by taking into account the judges’ backgrounds. Interestingly, it was argued that the Court of Appeal’s judgement gave more weight to the commercial arguments of the case because the panel was composed of two judges that had been members of the Commercial Court and the Chancery Division, respectively. On the other hand, the Supreme Court’s decision to overturn the appeal was taken by a majority composed of former academics, one of them specialising in public international law. Arguably, they were more inclined to give the State special treatment. The panellist concluded that both rulings could be justifiable. The differences between them can be better described as conflicting approaches to the same issue.

The key takeaway of the session is that English courts take State immunity seriously but maintain a fair level-playing field between the parties. Even though the State Immunity Act does raise additional hurdles for claimants, counsel acting for States should not only rely upon State immunity arguments.

 

Conclusion

The first panel showed the many procedural and substantive intricacies that arise when a State is party to an arbitral proceeding – whether commercial or Investor-State. Three main topics are of importance and may raise concerns of fairness: the privileges over the production of (expert) evidence, the issue of standing before arbitral tribunals and the increase of counterclaims.  Bearing in mind that a State must manage public and diplomatic relationships when taking part in arbitration, the panel opined that arbitral tribunals have and should continue to offer a balanced level-playing field to all parties.

The second panel demonstrated that cases involving States before domestic courts can be tricky. States enjoy a differential treatment before courts that is established in law. States’ sovereignty and immunity is to be taken seriously as it poses specific challenges to the jurisdiction and access to evidence. However, to the panel, immunities and privileges must be assessed cautiously, and should be grounded in well-reasoned commercial and legal logic to win over the opinion of domestic courts.

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New ICSID Arbitration Rules: A Further Step in The Regulation of Third-Party Funding

Fri, 2022-06-03 01:06

On March 21, 2022, the Member States of the International Centre for Settlement of Investment Disputes (“ICSID”) approved a comprehensive reform of its rules and regulations, including the rules of procedure for ICSID arbitration proceedings (“New ICSID Rules”). Drafted over a five-year consultation process and six working papers, this profound amendment aims to “modernize, simplify, and streamline the rules” and will enter into force on July 1, 2022. The highlights of the recently approved amendments have recently been covered on the Blog (here).

One of the overarching aims of the New ICSID Rules is to increase transparency in various aspects of ICSID proceedings, thereby aligning the ICSID Rules with a recognizable trend among arbitration rules worldwide. This post focusses on the approach taken under the New ICSID Rules to third-party funding (“TPF”) disclosures, analyzing the scope of the duty to disclose in comparison with other institutional rules, and the underlying policy concerns.

 

TPF and the Duty to Disclose

The TPF phenomenon has been at the center of extensive debates recently. It suffices to note that TPF is a form of non-recourse financing, in which a funder – typically a specialized company with no direct involvement in a dispute – undertakes to bear the costs of a party to an arbitration. In the event that the funded party prevails, the third-party funder receives a profit, typically consisting of a percentage of the award or a multiple of the funds provided, whichever is higher. However, TPF agreements can materialize in different forms, including contingency fee agreements with a party’s legal counsel.

At a first glance, one might think that TPF is a tool primarily directed towards impecunious parties that would otherwise not be able to afford arbitration. However, TPF has also become a viable instrument for financially stable entities that seek funding to facilitate smoother cash-flow management.

The rise of these new actors in arbitration proceedings has provoked various concerns, mainly related to possible conflicts of interests that may arise out of relationships between funders and arbitrators, counsels or parties.

This has spurred some arbitral institutions to develop ways to shed light on the existence of funding agreements, including by granting tribunals the power to order disclosure of TPF arrangements, or by imposing a generalized duty on parties to disclose details as to the existence and nature of their funding agreements. The very first institutional rules addressing TPF were the SIAC and CIETAC investment arbitration rules in 2017 (Articles 24(l) and 27, respectively), followed by the HKIAC arbitration rules in 2018 (Article 44), the BAC investment arbitration rules in 2019 (Article 39), the CAM arbitration rules in 2020 (Article 43), the ICC arbitration rules and the VIAC investment arbitration rules in 2021 (Article 11(7) and Article 13a, respectively). The amendments in the New ICSID Rules build, at least in part, on these precedents.

 

What to Disclose?

The principal divergence that arises from the above institutional rules is the extent to which such disclosure is required; that is, what kind of agreements should be disclosed; and to what extent should those agreements be disclosed?

The new Rule 14(1) of the amended ICSID Arbitration Rules provides:

A party shall file a written notice disclosing the name and address of any non-party from which the party, directly or indirectly, has received funds for the pursuit or defense of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding (“third-party funding”). If the non-party providing funding is a juridical person, the notice shall include the names of the persons and entities that own and control that juridical person.

At the beginning of the arbitration or “immediately” after concluding the funding arrangement, the party is to file such notice (and any updates) with the Secretary-General, who in turn is to transmit it to the parties and any arbitrator proposed for appointment or appointed in the proceeding (Rules 14(2)–(3)).

Rule 14(1) presents a number of noteworthy features not seen elsewhere.

First, while certain rules do not define TPF (e.g., the HKIAC and CAM rules), Rule 14 sets forth a broad definition of TPF, reflecting the wide variety of TPF agreements employed in practice. By doing so, it aims at preventing possible issues of interpretation on what qualifies as TPF and what does not.

Second, Rule 14(1) includes in the TPF definition arrangements with party representatives, such as contingency fee agreements with legal counsel, thereby further extending the scope of the duty to disclose. This is in contrast with, for instance, the VIAC investment arbitration rules (Article 6), in which the definition encompasses only agreements with persons who are not a party nor “party representatives”.

Third, the last sentence of Rule 14(1) requires a party to reveal the names of the entity or individuals ultimately controlling the funder (if the funder is a juridical person). This was introduced in the sixth working paper in order to ensure additional “transparency regarding the identity of the funder” and to “allow the arbitrators to accurately identify any conflict of interest” involving the “ultimate beneficial owner” of the funding entity. This provision, invoked by a number of States and by the European Union, had been initially rejected by the Secretariat (in the fifth working paper) because, among other things, this language risked creating confusion among the interpreters and, in any event, did not respond to concerns actually encountered in practice (accordingly, no other sets of rules feature similar provisions). Criticisms have been risen also by commentators, including because Rule 14(1) oddly requires disclosure of more information from the funder than from the funded party itself, which is not required to reveal its shareholders. On the other hand, one can see that, in circumstances where the funder is a shell company, limiting the duty to disclose details only to the funder might defeat the purpose of disclosure.

Lastly, while many sets of rules (e.g., the HKIAC, ICC and VIAC rules) generically refer to the disclosure of the “identity” of the funder, new Rule 14 specifies that the written notice shall include its “name and address” to avoid any confusions.

 

The Funding Agreement Dilemma

Under the new Rule 14(4): “The Tribunal may order disclosure of further information regarding the funding agreement and the non-party providing funding …”. This open wording appears to be a halfway solution to the heated discussion surrounding the duty to disclose the details of any TPF agreement.

The policy considerations upon which the duty to disclose is premised include the assumption that a funded party is likely to be financially distressed and might thus be unable to comply with an adverse costs award in the event of an unfavourable outcome in the arbitration. All the more so provided that the funder might not have any contractual obligation to cover adverse costs and, in any event, might benefit from termination clauses or other contractual tools to escape responsibility deriving from such an award (the so-called “arbitral hit and run”).

Therefore, disclosure of the funding agreement to allow the assessment of the extent of the funder’s rights and obligations might be sensible to protect the non-funded party, especially when it comes to deciding on an application for security for costs1)Coherently, the new Rule 53 requires tribunals to consider the involvement of a funder when deciding an application for security for costs jQuery('#footnote_plugin_tooltip_41785_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41785_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });.

This appears to be the reason why, for instance, the 2021 UNCITRAL proposals for provisions on TPF in ISDS suggest the systematic disclosure, among other things, of “the funding agreement and the terms thereof”. Arbitral institutions have so far adopted less-onerous approaches to TPF than those advanced by the UNCITRAL2)The UNCITRAL proposals seem overall overly sceptical towards TPF. For instance, among the proposed approaches, there is the generalized prohibition of TPF aimed inter alia at eliminating the risk of an increased number of frivolous claims. However, this issue is at least overstated for the obvious reason that funders have zero interest in funding baseless claims jQuery('#footnote_plugin_tooltip_41785_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41785_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });. For instance, Article 39(2)(d) of the 2019 BAC investment arbitration rules requires parties only to reveal “whether or not the third-party funder has committed to cover adverse costs liability”, as opposed to the entire agreement. Other institutions, such as the ICC and the HKIAC, do not grant tribunals any powers concerning any funding agreement.

Avoiding a general obligation to disclose the funding agreement seems entirely reasonable, primarily because nowadays it is far from certain that a funded party is impecunious since, as mentioned above, TPF is increasingly becoming a cash-flow management tool used also by stable entities. Consequently, always requiring the parties to reveal the confidential and commercially sensible information contained in funding agreements does not appear justified.

In light of the above, the ICSID’s decision to give tribunals a discretional power to require additional information about the funding agreement only when and to the extent necessary (e.g., in circumstances in which the funded party strongly appears to be financially distressed and an application for security for costs is brought) appears appropriate. Nonetheless, how these issues will be addressed will only be revealed through their use in practice and it is easy to foresee the opening of a new battleground around whether, and to what extent, such power ought to be exercized.

 

Conclusion

The new provisions of the ICSID Rules dedicated to TPF can be favorably welcomed, as they address the critical point of conflict of interests with more precision than other sets of rules, while maintaining a balanced and modern approach to the delicate issue of disclosure of the funding agreement.

References[+]

References ↑1 Coherently, the new Rule 53 requires tribunals to consider the involvement of a funder when deciding an application for security for costs ↑2 The UNCITRAL proposals seem overall overly sceptical towards TPF. For instance, among the proposed approaches, there is the generalized prohibition of TPF aimed inter alia at eliminating the risk of an increased number of frivolous claims. However, this issue is at least overstated for the obvious reason that funders have zero interest in funding baseless claims function footnote_expand_reference_container_41785_30() { jQuery('#footnote_references_container_41785_30').show(); jQuery('#footnote_reference_container_collapse_button_41785_30').text('−'); } function footnote_collapse_reference_container_41785_30() { jQuery('#footnote_references_container_41785_30').hide(); jQuery('#footnote_reference_container_collapse_button_41785_30').text('+'); } function footnote_expand_collapse_reference_container_41785_30() { if (jQuery('#footnote_references_container_41785_30').is(':hidden')) { footnote_expand_reference_container_41785_30(); } else { footnote_collapse_reference_container_41785_30(); } } function footnote_moveToReference_41785_30(p_str_TargetID) { footnote_expand_reference_container_41785_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_41785_30(p_str_TargetID) { footnote_expand_reference_container_41785_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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Blip on the Radar: An Anomalous Refusal to Enforce on Public Policy Grounds in Korea or a Sign of More to Come?

Thu, 2022-06-02 01:57

Under Article V(2)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (the New York Convention, “NYC”), a court may refuse to recognize or enforce a foreign award if “recognition or enforcement of the award is contrary to the public policy of that country.”

The NYC does not define the term “public policy” and instead permits each state to interpret the rule. Nonetheless, similar to many other jurisdictions (see, e.g., here and here), the courts in the Republic of Korea have traditionally adopted a narrow interpretation of Article V(2)(b), establishing a high threshold for a given circumstance to be deemed contrary to public policy.

In November and December of 2018, the Supreme Court of Korea issued back-to-back decisions in which the public policy argument failed in the first but prevailed in the second. The latter case was notable because it was a rare publicly available Supreme Court judgment to (partially) deny enforcement of a foreign award on grounds of Article V(2)(b). Although these decisions were rendered a few years ago, they may have slipped “under the radar” to some extent. In light of the relative dearth of publicly available case law on public policy challenges in Korean courts, these ones are worth revisiting.

 

Overview of Korean Arbitration Act and “Public Policy”

Korea’s Arbitration Act is based on the UNCITRAL Model Law. However, the Act does not adopt Chapter VIII of the Model Law concerning enforcement and recognition of foreign awards. Instead, Article 39 of the Act states that “recognition and enforcement of foreign arbitral awards subject to the NYC shall be governed by the NYC.”

Consequently, there is no direct statutory guidance on what constitutes “public policy” in the Korean legal regime. There is a comparable legal term “good customs and other social order” (“good customs”) that appears in Article 217(1)(3) of the Civil Procedure Act, Article 10 of the Act on Private International Law, and Article 103 of the Civil Act. The prevailing view is that “good customs” in the meaning of the Civil Procedure Act is most comparable to the “public policy,” since Article 217 governs the enforcement of foreign court judgments.

 

The Norm: Rejection of the Public Policy Argument

In 2016Da18753, decided in November 2018, the Supreme Court affirmed the decision of the Seoul High Court to grant enforcement of a foreign award despite its inconsistencies with domestic law.

The award in dispute was rendered by a tribunal seated in The Netherlands which ordered a South Korean company, Shinhan Apex, to transfer two of its patents to a Dutch company, Euro-Apex B.V.

Importantly, the tribunal ordered an “indirect compulsory performance” (i.e., a monetary enforcement measure) if Shinhan Apex failed to transfer the patents. On its face, this was contrary to Korean law because indirect compulsory performance is not permitted for transfer of patents, according to the Civil Execution Act.

Nonetheless, the Supreme Court held that the award does not contravene Korea’s public order to the extent that enforcement must be denied. It reasoned, inter alia, that indirect compulsory performance does not amount to a major restriction on the freedom of choice, because it merely applies psychological pressure to induce voluntary performance.

This pro-arbitration approach conforms with previous Supreme Court decisions. Starting from 93Da53054 and reiterated in several other cases, the Supreme Court repeatedly noted that “the fact that a foreign law applied to an award contravenes the mandatory provisions under the Korean law does not necessarily become grounds for non-recognition.” Further, in 2001Da20134, the Supreme Court held that the stability of the international trade order must be considered together with the domestic circumstances. This position, in effect, restricts the scope of the denial of enforcement.

 

The Exception: Acceptance of the Public Policy Argument but in Unusual Circumstances that Only Arose After the Award Was Rendered

However, in December 2018, the Supreme Court accepted the public policy argument in another case, 2016Da49931. LSF-KDIC Investment Company Ltd. (“LSF-KDIC”), a company jointly established by Korea Resolution & Collection Co., Ltd. (“KR&C”), requested that KR&C be held liable for 50% of the additional expenses incurred as a result of the sale of real estate, which included corporate taxes of KRW 23.7 billion. An ICC tribunal sided with the LSF-KDIC, which then sought enforcement in Korean courts.

During the enforcement stage, LSF-KDIC prevailed in a separate lawsuit against the local tax authorities. The corporate taxes were slashed to just KRW 370 million. Based on this decision, KR&C argued that, in light of the public policy exception, the award should not be enforced because, under Article 44 of the Civil Execution Act, a debtor may file a “lawsuit of demurrer” to suspend or block the compulsory execution of a binding decision.

Although KR&C’s public policy argument was unsuccessful in the lower courts, the Supreme Court sided with KR&C and remanded the case to the Seoul High Court.

The Supreme Court determined enforcement would constitute a contravention of “public order and good morals,” given the following circumstances:

  1. The tax was significantly reduced.
  2. LSF-KDIC was already dissolved.
  3. Awards are not subject to appeal, so such changes must be taken into consideration during the enforcement stage.

The Court noted that there were circumstances amounting to Article 451(1)(8) of the Civil Procedure Act – the alteration of an administrative disposition (i.e., taxation) by a different judgment or administrative disposition – which is grounds for a retrial.

However, since retrial is not permitted in international arbitration, the Court reasoned that KR&C must be able to raise such an objection during the enforcement stage as a last resort. In this case, it was clearly contrary to the “good morals” of Korea for KR&C to accept the enforcement of the award.

One notable contrast with 2016Da18753 (i.e., the case decided in November 2018) was that unlike in that case, where the Court found the level of contravention of Korea’s public order and good customs to be minor, here, the Court found the magnitude of contravention to be highly significant. This seems to indicate that the Court takes into account the level of practical impact on the parties.

Subsequently, in 2018Na10878, the Seoul High Court partially denied the enforcement of the award by deducting the exempted tax amount. It could be argued that denial of enforcement in this context is akin to correction of an arbitral award based on new circumstances that arose after the rendering of the award, and one might observe that the main reason why a court is forced to make the correction is that the tribunal has become functus officio.

At the same time, the High Court stressed the importance of maintaining a high threshold for the public policy argument:

  1. Arbitration is a form of alternative dispute resolution based on the parties’ consent.
  2. Parties usually have equal standing in arbitration.
  3. If domestic courts around the world attempt to prioritize local interests and deny enforcement of awards in the name of public policy, international trade will become unstable, and the arbitration will lose its effectiveness.
  4. NYC encourages widespread recognition and enforcement of awards.

As such, the High Court reasoned that the “public policy” under NYC is an “international public order.” Accordingly, denial of enforcement requires a violation of the fundamental principles of the domestic legal system which may not be allowed despite the international character of the dispute.

This case illustrates that even when public policy arguments are partially successful, Korean courts are cautious about denying enforcement of a foreign award.

 

Conclusion

Following the Supreme Court’s reasoning in 2016Da49931, there is a possibility that other grounds for retrial under Article 451(1) of the Civil Procedure Act may provide a basis for a demurrer, and consequently, denial of enforcement according to Korean “public policy.”

The following grounds for a retrial under Article 451(1) appear particularly relevant in the context of a potential public policy challenge of a foreign award:

  • “When a party has been led to make a confession, or obstructed in submitting the method of offence and defense to affect the judgment, due to the criminally punishable acts of another person” (Article 451(1)(5));
  • “When a document or any other article used as evidence for the judgment has been forged or fraudulently altered” (Article 451(1)(6));
  • “When the false statements by a witness, an expert witness or an interpreter, or those by a sworn party or legal representative have been adopted as evidence for the judgment” (Article 451(1)(7));
  • “When a judgment is contrary to the final and conclusive judgment which has been previously declared” (Article 451(1)(10));

It is yet to be seen if the “public policy” argument will prevail under grounds for retrial other than Article 451(1)(8). Given the paucity of Supreme Court cases concerning “public policy,” future judgments are necessary to settle this issue.

Nonetheless, those who seek to rely on the “public policy” argument will face an uphill battle. Korean courts maintain a pro-arbitration approach by presenting a narrow definition of “public policy,” looking beyond the domestic legal system and heeding the international trade order.

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Tulip Trading Limited v Bitcoin Association & Others: What Duties for Blockchain Platforms and Core Developers?

Wed, 2022-06-01 01:54

On 25 March 2022, as reported inter alia by Bird & Bird who acted for the successful defendants, the High Court of Justice in England (hereinafter the “High Court” or “Court”) rendered its eagerly-awaited judgment in the dispute between Tulip Trading Limited v Bitcoin Association & others.

An alleged hack had prevented Tulip Trading Limited (“TTL”), or more precisely its CEO, Dr Craig Wright, from accessing over a million dollars’ worth of digital currency assets held at two addresses within the relevant networks (the “Networks”). TTL sought to hold the networks and their core developers accountable, notably on the basis that they owed users a fiduciary duty to counter the effects of the hack and allow Dr Wright access to his assets.

This is a ground-breaking development for the blockchain and cryptocurrency community that provides important insight into the application of English law to the digital economy.

The decision deals with several procedural applications made by the Parties. This comment focuses on the Court’s treatment of the claimant’s allegation that the defendants were in breach of the common-law tort of fiduciary duty and thereby liable for the loss of the claimant’s digital currency as a result of the alleged hack.

 

Facts

Dr Wright explained that, on 8 February 2020, he accessed his wallet and noticed transactions that neither he nor his wife had actioned, and which had occurred a few days before. He further noticed that the system logs had been erased, along with the encrypted files in which he kept his private keys. He reported the hack to the police, however the judgment notes that there was no indication that material progress was ever made in identifying the perpetrators.

Some of the defendants were located abroad and challenged the Court exercising jurisdiction over them. The claimant applied for permission to serve proceedings out of the jurisdiction. In considering whether permission to serve out should be granted, the Court had to apply the general principles governing service out including, importantly, that there be a serious issue to be tried and that the claimant have a good arguable case.

It is in this context that Mrs Justice Falk considered inter alia the possible fiduciary and tortious duties which, on the claimant’s case, the defendants might owe to TTL. While the Court found that no such duties existed, its reasoning is worth exploring in greater detail.

 

Judgment

Serious issue to be tried

Mrs Justice Falk was satisfied that there was a serious issue to be tried that TTL was the owner of the vanished bitcoin, and that there was a plausible evidentiary basis for the claimant’s proposition that a hack had occurred.

 

Good arguable case

TTL claimed that the defendants owed it fiduciary duties, as a consequence of which they were or could be required to take all reasonable steps to provide TTL with access to and control of the stolen bitcoin, and to take all reasonable steps to ensure that effect not be given to the fraud. The failure to take such steps, said TTL, amounted to a breach of fiduciary duty, which justified an order requiring such steps to be taken and/or equitable compensation.

As to this, after an exhaustive review of the caselaw put before her, Mrs Justice Falk said that she was unable to conclude that TTL had a realistic prospect of establishing that the facts pleaded amounted to a breach of fiduciary duty owed by the defendants to TTL. It is worth recalling that the threshold for fiduciary duty in English law is high: it requires a demonstration that the fiduciary has undertaken a duty to act solely in the interests of the principal.

Mrs Justice Falk noted that one “difficult part” of TTL’s case was that it was founded on duties allegedly owed to all owners of digital assets recorded on the Networks, “who are by definition an anonymous and fluctuating class with whom the defendants have no direct communication, and certainly no contractual relationship.”

Against the notion that the developers owed a duty to introduce a software patch to enable TTL to regain control of its assets, Mrs Justice Falk found that:

“[D]evelopers are a fluctuating body of individuals. As a general proposition it cannot realistically be argued that they owe continuing obligations to, for example, remain as developers and make future updates whenever it might be in the interests of users to do so.”

Mrs Justice Falk added that the obligation of undivided loyalty, the distinguishing feature of fiduciary relationship, would be owed to all users of the Networks, and not only to the claimant. Yet the change sought by the claimant might be to the disadvantage of other users. This, Mrs Justice Falk said, was fatal to the claimant’s fiduciary duty argument.

 

Duty of care

TTL claimed that the defendants were in breach of a duty of care by failing to include in the software the means to allow users of the Networks to recover their private keys in the event of a loss or theft and more generally to include sufficient safeguards against wrongdoing by third parties.

As regards the tortious duties, Mrs Justice Falk first set out principles in detail in order to assess whether they could find application in this unprecedented scenario. Mrs Justice Falk considered that the complaint made was of failures to protect or act, as opposed to addressing bugs or other defects that would threaten the operation of the Networks. There was no allegation that any of the defendants was involved in the alleged hack or that they had acted in a way that had created or increased the risk of harm. Bearing in mind that the loss was purely economic, Mrs Justice Falk could not see a basis to depart from the general rule that the law imposes no duty of care to prevent third parties causing loss or damage. The Court also took into account the unlimited nature of the class to whom a tortious duty would be owed, as well as its open-ended scope.

 

The disclaimer in the software licence

Interestingly, the Court referred to the disclaimer contained in the software licence, which reads as follows: “[…] In no event shall the authors or copyright holders be liable for any claim, damages or other liability, whether in an action of contract, tort of otherwise, arising from, out of or in connection with the software or the use or other dealings in the software.”

On this point, Mrs Justice Falk considered the wording to be broad and possibly not reasonably understood as meaning that controllers of the relevant Networks assume no responsibility. The Court’s remarks may offer guidance for drafters wishing to ensure the exclusion of liability through software licences.

In addition, the High Court included an interesting, albeit probably not unexpected, observation regarding the possibility for legislative developments to cater for similar situations. While the Court considered that there was no foundation for TTL’s claims under existing law, it expressly referred to the Law Commission’s project on digital assets, which considers inter alia the appropriate legal remedies and/or actions, and the possible resulting future developments of the law.

 

Comments

The Court made several references to the Law Commission’s project on digital assets, as well as the UK Cryptoassets Taskforce. These references demonstrate the Court’s recognition of the practical importance of the reports, statements and analyses carried out by these bodies.

The core of the Court’s decision pits the values of blockchain against off-chain, legacy principles of law. The blockchain is premised on a decentralised, a-legal space (here it may be of interest to point out that Dr Wright, the claimant’s CEO, claims to be Satoshi Nakamoto, the creator of bitcoin). The claimant’s decision to frame its case as one of fiduciary duty was risky given that, in English law, the evidentiary hurdle of demonstrating that the defendants agreed to act in the sole interests of users of the Networks is high. While somewhat rare, breaches in network happen, as evidenced by the recent Ronin breach. With increasingly important on-chain activity, the provision of an efficient and reliable dispute resolution mechanism will need to be addressed. Whether the release of a specific patch to give back control, as per the claimant’s request, or the option to activate a fork, like in the case of the Ethereum DAO Hack, are viable remains to be assessed.

Finally, the impact of this decision on the arbitration of future blockchain disputes is an open question. A different applicable law might recognise that duties of care are owed to users by blockchain platforms and/or core developers. Against this background, considerations relating to forum shopping and principles of private international law are relevant. Indeed, a harmonized legal framework for blockchain-related legal issues, whilst it is the subject of emerging initiatives, does not appear likely in the foreseeable future; thus, outcomes are likely to vary depending on the relevant law and/or jurisdiction. As part of a wider discussion, one would encourage arbitration services providers to design a version of the arbitral process that provides blockchain disputes with the flexibility and speed that are the staples of the Web3 economy.

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Investment Claims Against Russia in the Economic Sanctions Era

Tue, 2022-05-31 01:00

The commencement of the war in Ukraine triggered the imposition of unprecedented sanctions affecting almost all sectors of the Russian economy. Many foreign companies operating in Russia ceased or temporarily put on hold their business activities. In response, the Russian government adopted several retaliatory measures.

This post offers an overview of these measures and their legal implications for foreign investors; investigates avenues available to foreign investors to assert their rights through investor-state dispute settlement (ISDS) proceedings; and discusses challenges that foreign investors may face at the enforcement stage as a result of economic sanctions currently in place.

 

FDI in Russia

Until recently, Russia accounted for more than 40% of foreign direct investment (FDI) inflows in the so-called transition economies of South-East Europe, the Commonwealth of Independent States (CIS), and Georgia. In 2020, the level of FDI into Russia amounted to USD 8,6 billion and Russia was, up until the military conflict, still ranked among the top 20 European investment destinations.

 

Measures Affecting Foreign Investments

In response to the brisk suspension of business operations by foreign companies after Russia’s invasion of Ukraine on 24 February 2022, the Russian government adopted retaliatory measures directed primarily against companies from designated “unfriendly countries,” i.e. countries that had imposed sanctions against Russia, including the US, all EU member states, the UK, and Japan.

The key measure is a proposal for a federal law On External Administration for the Management of an Organization. The draft law, which proposes to impose external administration on companies that discontinue their operations without clear economic reasons, was adopted by the Duma on 24 May 2022 and is expected to come into force shortly. External administration, which may be imposed only by way of court decision, could affect any company that is at least 25% owned or controlled by a person with a connection to an “unfriendly country,” and whose activity is crucial to the stability of the Russian economy, e.g. a manufacturer of first necessity products. The stated objective of the draft law is not to nationalise foreign assets, though it remains to be seen whether, in practice, the law will effectively be applied only in limited circumstances with a forced bankruptcy solely as a remedy of last resort.

Other measures that can interfere with foreign investments and limit the free transfer of funds are restrictions on transactions with persons and companies from “unfriendly countries,” laid down in the Governmental Decree dated 6 March 2022 (No 295). The Decree provides that the transfer of shares and securities as well as real estate transactions must be approved by the Government Commission on Monitoring Foreign Investment, which oversees foreign investments in Russia. Authorisations must also be obtained for the transfer of foreign currency outside of Russia. If an investor decides to sell its assets to a Russian company, the approval of the board of directors of the Central Bank of Russia must be obtained according to the Decree of the President of 18 March 2022 (No 126).

 

Claims Under BITs

The measures discussed above have far-reaching consequences and will inevitably affect foreign investments in Russia.

As Russia has entered into bilateral investment treaties (BITs) with most of the said “unfriendly countries,” a foreign investor adversely impacted may have recourse to investment arbitration proceedings under any such applicable BIT. BITs between Russia and “unfriendly countries” consistently guarantee foreign investors inter alia fair and equitable treatment (FET), protection against expropriation and discrimination under most-favoured nation (MFN) and national treatment (NT) clauses, as well as the right to freely transfer funds. The scope of arbitration clauses varies, however, from one BIT to another, with some clauses encompassing only disputes regarding compensation in case of expropriation and/or the guarantee of free transfer of funds (though such limitations may potentially be overcome through use of MFN provisions in the relevant treaties1)RosInvestCo v. Russia, SCC No. V079/2005, Award on Jurisdiction, 2007, ¶ 133. jQuery('#footnote_plugin_tooltip_41725_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41725_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });).

 

Enforcement Challenges in Case of Asset Freeze

Arbitral awards rendered against the Russian Federation are binding and enforceable under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC).2)Russia ratified the NYC on 24 August 1960. It has not ratified the ICSID Convention. jQuery('#footnote_plugin_tooltip_41725_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41725_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Given, however, Russia’s systematic failure to honour awards, enforcement proceedings appear virtually inevitable. Such proceedings, challenging in and of themselves, become all the more burdensome when economic sanctions are in place.

Even if Russian assets that are not shielded by sovereign immunity are identified, Russia will likely seek to rely on some of the grounds laid down in Article V NYC in order to resist enforcement, including public-policy-related arguments (Article V(2)(b) NYC). Enforcement endeavours may yet be further complicated if assets against which enforcement could be sought are frozen, as is currently the case of the assets of hundreds of Russian individuals and entities, including state-owned enterprises and subsidiaries thereof.

Under blocking sanctions, all assets and economic resources owned, held or controlled by designated persons and entities are blocked and no funds or economic resources may be made available, directly or indirectly, to them or for their benefit (see, for example, Council Regulation (EU) No 269/2014, Article 2). That said, many sanctions programs provide that an authorisation (or licence) may, in certain circumstances, be granted for the release of frozen assets. Accordingly, the question to be investigated is whether an award-creditor might be able to secure such an authorisation so as to enforce an award against frozen assets. Note that should a licence for the release of frozen funds be granted by the competent authorities of the state of enforcement, this obviously means that the use of such assets for purposes of satisfying the award is no longer prohibited; a fortiori, enforcing the award against released assets cannot be deemed to be in conflict with the public policy of the enforcement state, even if the award-debtor itself remains listed.

The question of the need to secure a licence might in fact arise even before the actual enforcement, if the award-creditor is seeking to attach the award-debtor’s frozen assets. An attachment may be necessary, under the laws of the place of enforcement, to create a forum for enforcement proceedings or it may simply be sought as a protective measure if the award-creditor wishes to ensure the right to be paid on a priority basis over other creditors. Should an attachment be deemed, under the applicable law, to have the legal effect of changing the destination of frozen assets (this is not the case under all laws), the attachment might itself require a licence or authorisation from the competent authority, even if it does not entail an actual removal of frozen assets from the designated person’s estate.3)See the ECJ Judgment of 11 November 2021 in Case C-340/20, ¶¶ 38 et seq. jQuery('#footnote_plugin_tooltip_41725_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41725_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Switzerland’s Ordonnance instituant des mesures en lien avec la situation en Ukraine du 4 mars 2022 stipulates that payments from frozen accounts, transfers of frozen assets and the release of frozen economic resources may exceptionally be authorised to honour debts pursuant to a judicial, administrative or arbitral decision (Article 15(5)(c)).

As regards US sanctions against Russia, Executive Order 14065 of 21 February 2022 provides that the assets of listed individuals and entities are frozen “except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order […]” (section 2(b)). § 589.506(d) of the Ukraine-/Russia-Related Sanctions Regulations also stipulates, inter alia, that “[…] the enforcement of any […] arbitral award […] purporting to transfer or otherwise alter or affect property or interests in property blocked pursuant to § 589.201 is prohibited unless licensed pursuant to this part.” Thus, an award-creditor must secure a licence from the US Department of the Treasury Office of Foreign Assets Control (OFAC) to be able to enforce an award against blocked property. This was recently confirmed in the Opinion of 2 March 2022 (Case No. 17-mc-151-LPS) of the US District Court for the District of Delaware in Crystallex International Corporation v. Bolivian Republic of Venezuela. Crystallex had obtained an ICSID award against Venezuela and sought to enforce it against the assets of the state-owned enterprise Petróleos de Venezuela S.A. (PDVSA). The US District Court stated, in respect of the auction of shares owned by PDVSA, that while it would “proceed with the sale process, up to and including selecting a winning bid[,] [it would] not, however, permit the sale to be executed unless and until OFAC grants a specific license (or unless and until the sanctions regime is materially changed).

As to the EU sanctions program, Article 5(1)(a) of EU Council Regulation No 269/2014 only allows authorisations for the release of funds intended to satisfy arbitral awards rendered prior to the relevant listing (in stark contrast to the possibility of funds being released to satisfy judicial and administrative decisions rendered in the EU even thereafter). In addition, it is required that “the funds or economic resources will be used exclusively to satisfy claims secured by such a decision or recognised as valid in such a decision […]; the decision is not for the benefit of a [listed] natural or legal person, entity or body […]; and recognition of the decision is not contrary to public policy in the Member State concerned” (Article 5(1)(b) through (d)). Importantly, granting enforcement of an award against released assets is compatible with Article 11 of EU Council Regulation No 269/2014, which prohibits only the satisfaction of claims made bydesignated natural or legal persons, entities or bodies listed in Annex I [or] any natural or legal person, entity or body acting through or on behalf of one of the [latter],” not the satisfaction of claims (including claims for the recognition or enforcement of arbitral awards (Article 1(a)(v))) made against listed individuals and entities.4)Regarding the interpretation of Article 38(1) of EU Council Regulation No 267/2012, the wording of which is close to that of Article 11(1) of EU Council Regulation No 269/2014, see Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd (24 July 2019) High Court of Justice [2019] EWHC 1994 (Comm) and Court of Appeal [2020] EWCA Civ 145. jQuery('#footnote_plugin_tooltip_41725_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41725_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Finally, it is noteworthy that some states, such as the US and Canada, have initiated procedures to adopt statutes intended to allow the seizure and repurposing of frozen assets. The legality of such measures and whether they could somehow be relied upon to satisfy investment claims against Russia remains to be seriously investigated.

References[+]

References ↑1 RosInvestCo v. Russia, SCC No. V079/2005, Award on Jurisdiction, 2007, ¶ 133. ↑2 Russia ratified the NYC on 24 August 1960. It has not ratified the ICSID Convention. ↑3 See the ECJ Judgment of 11 November 2021 in Case C-340/20, ¶¶ 38 et seq. ↑4 Regarding the interpretation of Article 38(1) of EU Council Regulation No 267/2012, the wording of which is close to that of Article 11(1) of EU Council Regulation No 269/2014, see Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd (24 July 2019) High Court of Justice [2019] EWHC 1994 (Comm) and Court of Appeal [2020] EWCA Civ 145. function footnote_expand_reference_container_41725_30() { jQuery('#footnote_references_container_41725_30').show(); jQuery('#footnote_reference_container_collapse_button_41725_30').text('−'); } function footnote_collapse_reference_container_41725_30() { jQuery('#footnote_references_container_41725_30').hide(); jQuery('#footnote_reference_container_collapse_button_41725_30').text('+'); } function footnote_expand_collapse_reference_container_41725_30() { if (jQuery('#footnote_references_container_41725_30').is(':hidden')) { footnote_expand_reference_container_41725_30(); } else { footnote_collapse_reference_container_41725_30(); } } function footnote_moveToReference_41725_30(p_str_TargetID) { footnote_expand_reference_container_41725_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_41725_30(p_str_TargetID) { footnote_expand_reference_container_41725_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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A Controversial Turkish Precedent on Arbitrators’ Jurisdiction on Claims Initiated Through Bankruptcy Proceedings?

Mon, 2022-05-30 01:31

The General Assembly of the Civil Chambers of Turkish Court of Cassation (“Court”) rendered a controversial decision on 21 December 2021 with No. K.2021/1710 (“Decision”).

The Decision provides that, notwithstanding a valid arbitration agreement, Turkish courts, not arbitrators, shall have jurisdiction to determine whether an alleged debtor, against whom a bankruptcy proceeding has been initiated, is indebted or not. This practically means that, when creditors initiate bankruptcy proceedings, they can circumvent the arbitral tribunal’s jurisdiction and facilitate Turkish courts to hear the merits of the dispute although the parties agreed to arbitrate and thus not to litigate.

This post first summarizes the Turkish enforcement and bankruptcy proceedings, and their interplay with arbitral tribunals’ jurisdiction. It then elaborates on the reasoning of the Decision and its potential practical impacts on the arbitration practice in Turkey.

 

Turkish enforcement and bankruptcy proceedings

The Decision revolves around the particularities of Turkish enforcement and bankruptcy proceedings. As these are unfamiliar to most jurisdictions, this section summarizes these proceedings first.

Turkish law provides creditors with mainly two legal routes to directly initiate enforcement through enforcement offices without resorting to litigation or arbitration:

  • They can directly initiate debt collection proceedings before enforcement offices; or
  • The creditors can also pursue enforcement by way of requesting (again from the enforcement offices) the bankruptcy of the debtor. The debtors can be subject to this bankruptcy proceedings for their due and payable debts, even for insignificant amounts. It is, therefore, irrelevant whether the assets of the debtors cover their liabilities.

The defining difference between the two proceedings relates to the role and rights of the creditors. Namely, if the creditor prevails in bankruptcy proceedings and the debtor is eventually declared bankrupt, not only the creditor who initiated the bankruptcy proceedings, but all creditors of the debtor shall be entitled to satisfy their receivables from the bankrupt debtor’s estate. In contrast, in debt collection proceedings, the procedure only concerns the debtor and the creditor, and other creditors are not involved unless they similarly initiate such proceedings.

In both proceedings, the enforcement office issues a payment order to the debtor where it states that the debtor must either pay, or object to the order within seven days.

In bankruptcy proceedings, the procedure to be followed upon the creditor’s objection is provided under Article 156(3) of the Enforcement and Bankruptcy Code, No. 2004 (“Bankruptcy Code”):

If the debtor objects to the payment order, the proceedings stop, and the creditor can ask the Commercial Court with a petition to lift the objection and decide on the bankruptcy of the debtor.

Only courts can decide on the bankruptcy of the debtor. This is clear. The controversial point is the first prong of the claim under Article 156(3), i.e., “lifting the objection”. To lift the objection, commercial courts must render a decision on the merits and confirm the indebtedness of the debtor to the creditor.

 

Arbitrators’ Jurisdiction

Turkish law is silent on the question whether arbitrators have jurisdiction to lift such objection. In view of this silence, Turkish jurisprudence developed two schools of thought:

  • The first school argues that the two prongs of the claim (i.e., “lifting the objection” and “deciding on bankruptcy”) are intrinsic and thus not separable. Given this, and as it is established that only courts can decide on bankruptcy, it must also be the same commercial courts to decide on whether the objection would be lifted (“First Approach”). The argument follows that, since Article 156(3) is mandatory and concerns public policy, the parties cannot sever this intrinsic structure with an arbitration agreement to confer jurisdiction on arbitrators to decide on lifting the objection. There are precedents following this approach (e.g., the decision of the 19th Civil Chamber of Court of Appeal dated 13 October 2005, and numbered K. 2005/10004).
  • The second school argues that the claims are separable. As such, if there is a valid arbitration agreement, the decision on bankruptcy can be rendered by the courts only after the arbitrators decide on the merits that the debtor is indebted (“Second Approach”). This is mainly based on the premises that (i) Turkish law does not prevent the arbitrators from deciding on lifting the objection; and (ii) Turkish arbitration law (including Article II of the New York Convention) requires the courts to refer this matter to arbitration. The Court of Cassation has also rendered decisions in line with the second school of thought (e.g., the decision of the 23rd Civil Chamber of Court of Appeal dated 28 June 2013, and numbered E. 2013/4113.).

 

The Decision

The dispute subject to the Decision is based on the loss of revenue claims of the employer under the construction agreement due to the contractor’s delay in completing the work. The parties agreed their disputes to be resolved by arbitration in accordance with the Rules of Arbitration of the Istanbul Chamber of Commerce Arbitration and Mediation Center (also known as ITOTAM).

The employer (creditor) initiated bankruptcy proceedings against the contractor (debtor). The debtor objected and the creditor filed a claim before the court of first instance under Article 156(3) of the Bankruptcy Code. The court dismissed the claim based on the Second Approach. The Court of Appeal upheld this decision. Having referred to the First Approach, however, the 15th Chamber of Court of Cassation quashed these decisions. On remand, the court of first instance resisted and reiterated its initial decision. Following this, the Court decided that the arbitrators shall not have jurisdiction to decide on lifting the objection claims under Article 156(3) of the Bankruptcy Code.

 

Going forward

The Court’s Decision is final and binding on the parties. However, it is not a binding precedent for Turkish courts, and they can still render decisions based on the Second Approach. Having said that, traditionally, Turkish courts rarely deviate from the precedents of the Court unless and until it is changed by the Court itself. In other words, although the Turkish courts have been divided on this issue, this may no longer be the case and the First Approach might be practically more decisive in questions surrounding arbitrators’ jurisdiction in cases where the bankruptcy proceedings are initiated.

If applied by the Turkish courts, the Decision will have significant impacts. This is because, by initiating bankruptcy proceedings, a claimant can effectively circumvent arbitration proceedings (and in fact jurisdiction of the foreign courts, if chosen) and facilitate Turkish courts to decide on the merits of the dispute as part of the lifting the objection claim.

On a final note, we would like to underscore two possible mitigants against such impacts.

First, as a practical mitigant, the disadvantages of the bankruptcy proceedings from a creditor perspective are likely to limit the number creditors who would be inclined to follow such bankruptcy route. That is to say; a creditor may not be willing to take the risk of competing with other creditors as they might end up empty-handed if the entire bankruptcy estate is allocated to the receivables of, for instance, preferred creditors.

Second, another mitigant might be found within the Decision itself. The Court noted, obiter dictum, that “[…] the parties have not stipulated a limitation that no bankruptcy proceedings shall be initiated in the event of a dispute” (par. 38). This implies that the Court might have decided differently if the parties explicitly agreed to exclude the jurisdiction of Turkish courts in respect of the bankruptcy proceedings. Out of an abundance of caution, the parties may wish to provide such exclusion in their agreements. It is doubtful, however, whether this will be an effective mitigant. This is mainly because Article 156(3) of the Bankruptcy Code is a mandatory rule concerning Turkish public policy and thus cannot be excluded by the parties, this being one of the main arguments of the First Approach and the Decision itself.

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The Russian Ruble Decree-Crisis: Can European Gas Buyers “Pay in Rubles without Paying in Rubles”? What May Be the Consequences if Not?

Sat, 2022-05-28 01:00

The Russian aggression in Ukraine has not only brought immense human tragedy, but also unprecedented uncertainty upon the European energy markets. Gas supply has emerged as a particularly weak spot of the entire European economy, being massively overdependent on Russian supplies. When Russian President Vladimir Putin issued the infamous Presidential Decree No. 172 of 31 March, requiring payments for the delivery of gas to be made in Rubles (the “Ruble Decree”), the situation grew even more complex. Not only is the Russian demand contrary to the payment terms of existing Gas Supply Agreements (“GSAs”), but it is also at variance with EU sanctions. Securing continued gas flows from Russia may, hence, require buyers to square a circle.

In this post, we will attempt to untangle some of the legal issues buyers face at this critical time, the resolution of which may have implications beyond the gas sector.1) Zeiler Floyd Zadkovich recently hosted a public webinar, discussing some of the problems triggered by the Ruble Decree and the disputes it may create. jQuery('#footnote_plugin_tooltip_41787_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41787_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Events are quickly unfolding as we write, with many European GSAs currently at a watershed moment: Whilst the Russian Gazprom Export has already halted supplies to Poland and Bulgaria in late April, and lately also to Finland, payment is due under many European contracts these days. At this turning point, we may see gas supply contracts – including the arbitration of disputes – evolve into an extended battlefield of economic warfare.

Sanctions and Countersanctions – the Russian “Ruble Decree”

In response to the Russian invasion of 24 February 2022, the EU introduced new economic sanctions against Russia, building on the existing framework established after the annexation of Crimea in 2014. To date, the EU has introduced five sanction packages, each addressing different segments of the Russian economy. None of these packages expressly targeted Russian natural gas supplies to Europe.

In reaction to these sanctions, Russia issued its own countersanctions. Of these, the Ruble Decree is probably the most notorious. To comply with the terms of the Ruble Decree, European buyers must open two special (conversion) bank accounts with Gazprombank JSC (“Gazprombank”), one denominated in the foreign currency designated in the GSA – i.e. Euros or US Dollars – and one in Rubles. To make payments under the GSA, buyers must first transfer the owed amounts to their foreign currency account with Gazprombank. This initial payment constitutes an irrevocable order to Gazprombank to convert the funds into Rubles, triggering a cascade of transactions whereby Gazprombank purchases Rubles at the Moscow Stock Exchange on behalf of the buyer, credits these Rubles to the second newly opened account of the buyer, and finally, credits the Rubles to the designated account of the seller. Importantly, the buyer’s payment obligation is only deemed fulfilled once this final transfer is completed.

If a buyer fails to comply with those terms, the Russian supplier Gazprom Export will be prohibited from delivering gas: such failure hence prompts an export ban. As can be seen above, the change in payment terms is beyond a mere technical shift, but extends the buyer’s risk sphere substantially.

The Ruble Decree caused a considerable stir among European leaders as well as key market players. The initial reactions ranged from complete refusal by the German chancellor to quick acceptance by the Hungarian president. Importantly, however, the Commission issued a statement, suggesting that compliance with the Ruble Decree would be in violation of the EU sanctions. This made the lives of the European importers even more difficult, adding the question of how to make payments in line with the Ruble Decree, whilst complying with EU sanctions.

 

Summary of EU Sanctions

Since the system of EU sanctions is quite intricate, for the purposes of this blog post we shall focus only on EU Regulation 833/2014 (“Regulation”). The Regulation contains a number of sectoral sanctions, among others, the prohibition of certain exports to Russia or the prohibition of any dealings with listed entities. Importantly, neither of the rules explicitly targets supplies of Russian natural gas as such.

Nevertheless, as a consequence of the Regulation’s general language, some sanctions now may as well affect natural gas supplies indirectly. For example, Art. 3a prohibits, among others, financing of any entity operating in the Russian energy sector. “Financing” is defined as any action whereby the entity concerned disburses its own funds or economic resources. The only exception to this definition is payment of the agreed price made “in line with normal business practice”. The sanction includes a carve out for gas supply, which, however, applies only for steps which are “strictly necessary”.

Other sanctions which could become relevant for gas supplies include the prohibition of engaging in certain financial transactions with listed Russian credit institutions under Art. 5. It is conceivable that the purchase of Rubles at the Moscow Exchange could be considered as such a transaction. Furthermore, sanctions in Art. 5a prohibit certain transactions with the Central Bank of Russia. Therefore, its involvement in the prescribed payment scheme could also lead to a breach of EU sanctions. With regard to this last point, the subsequent Decree No. 254 clarified that conversions – currently – do not involve the Russian Central Bank.

Also, the EU sanctions regime is new and untested, and there is only very little authoritative interpretation. Cases of violation would be addressed locally by authorities of individual EU members states, whose approaches may not be fully harmonized due to the lack of CJEU case law. Finally, the Regulation prohibits not only breaches of the individual sanctions, but also their circumvention. While the circumvention must be intentional, according to the CJEU, it is sufficient that the actor be aware that its participation may lead to circumvention and accept this possibility, making for a relatively low threshold.

 

Impact on Gas Supply Agreements

Evidently, all this puts EU importers of Russian gas in a difficult spot. In order to keep gas flowing, the Russian side demands full compliance with the Ruble Decree and as evidenced by Gazprom’s recent curtailment of supplies to Bulgaria, Poland and Finland, it appears poised to stay true to its word.

However, compliance with the Ruble Decree is fraught with serious risks for European buyers.

First, as discussed above, although the EU sanctions regime was not originally intended to target gas supply, the language of the relevant provisions is general and unclear. Therefore, the risk of committing a violation appears to be significant. Against this background, the EU Commission issued a guidance paper indicating that European buyers may open accounts with Gazprombank and pay in the designated currency on the first conversion account, as long as buyers declare unilaterally that they consider their payment obligation fulfilled with that first payment. This seems to offer a compromise, however, as of the date of writing, the Russian reaction to the procedure suggested by the Commission remains unknown. At the very least, the EU guidance paper makes it clear that plain abidance by the Ruble Decree would fall foul of EU sanctions.

Second, the payment mechanism provided for in the Ruble Decree significantly disrupts the risk allocation in European GSAs, not only by changing the agreed currency – invariably USD or EUR – but also by adding a third-party risk on the buyer’s side. As indicated above, the Ruble Decree stipulates that the payment obligation of the buyer is discharged only once Gazprom Export receives the Rubles in its account. Therefore, there is a gap of several days during when the buyers bear all risks that follow Gazprombank’s conversion and transmission of the sum, hence effectively acting as an agent for the buyer. It is unclear what would happen if the currency exchange was delayed or where the Russian government decided to seize the funds before the final Ruble payment is made, although the Russian Central Bank “explained” that payment irregularities caused by Gazprombank transactions should not lead to an export ban where the buyer had made timely payments “in good faith” and in compliance with the Ruble Decree. However, the official explanation contained an important caveat: Where conversion fails due to sanctions issued by unfriendly states, the export ban still applies. Therefore, overall, this falls short of addressing EU buyers’ concerns.

Also, while it may depend on the specific terms of an individual GSA, the Russian supplier will likely not be entitled to unilaterally impose the Ruble Decree payment scheme. This will hold particularly true where such GSAs are legally rooted in the jurisdiction of an “unfriendly state”, e.g. by choosing an EU, British or Swiss seat of arbitration and governing law.

It remains to be seen whether European efforts to allow buyers to “pay in Rubles without paying in Rubles” will suffice to keep the gas flowing. Given the volatility of this extraordinary situation and the stakes involved, arbitration lawyers may soon see a host of disputes come their way, a new wave of gas supply arbitrations, if you will: If the Russian side stops gas deliveries because payments made by European buyers in compliance with EU guidance would – despite all efforts – be deemed contrary to the Ruble Decree, would that be a breach of contract? Would it give rise to damages? What if, conversely, buyers refuse to comply with the Ruble Decree altogether? Would that give rise to any claims by Gazprom? All of these and many other questions will have to be addressed by arbitral tribunals, whose constitution may be particularly challenging these days.

References[+]

References ↑1 Zeiler Floyd Zadkovich recently hosted a public webinar, discussing some of the problems triggered by the Ruble Decree and the disputes it may create. function footnote_expand_reference_container_41787_30() { jQuery('#footnote_references_container_41787_30').show(); jQuery('#footnote_reference_container_collapse_button_41787_30').text('−'); } function footnote_collapse_reference_container_41787_30() { jQuery('#footnote_references_container_41787_30').hide(); jQuery('#footnote_reference_container_collapse_button_41787_30').text('+'); } function footnote_expand_collapse_reference_container_41787_30() { if (jQuery('#footnote_references_container_41787_30').is(':hidden')) { footnote_expand_reference_container_41787_30(); } else { footnote_collapse_reference_container_41787_30(); } } function footnote_moveToReference_41787_30(p_str_TargetID) { footnote_expand_reference_container_41787_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_41787_30(p_str_TargetID) { footnote_expand_reference_container_41787_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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Georgetown Brazilian Arbitration Day: Report on the Current Brazilian Arbitration Landscape

Fri, 2022-05-27 01:26

Organized by the Georgetown International Arbitration Society and the Georgetown Brazilian Law Association, in cooperation with the Arbitration Channel, the I Georgetown Brazilian Arbitration Day took place on April 8, 2022. The first edition of the conference discussed some of the main topics of interest in international arbitration as well as the latest developments in arbitration in Brazil.

The recording of each panel can be accessed in the Arbitration Channel page on Youtube.

 

Introduction

The keynote speaker, Professor Anne Marie Whitesell (Georgetown University Law Center, Washington DC), opened the conference reminding the audience that Brazil nowadays is one of the leading examples for how arbitration can flourish and be effective. Professor Whitesell stated that this is, in part, due to the number of Brazilian lawyers interested in international arbitration and seeking to specialize on the subject. Professor Whitesell then started the program by sharing her excitement about the enormous advancements and developments that have taken place in international arbitration in Brazil in recent years.

 

Is Brazil a truly arbitration-friendly jurisdiction? Current challenges and next steps for Brazil to become a more popular seat of arbitration

Mr. Lucas Passos (LL.M Candidate at Georgetown University Law Center, Washington DC) moderated the first panel of the day, and provoked the panelists Mrs. Ana Carolina Beneti (Beneti Advocacia, São Paulo), Mr. Jose Sanchez (Vinson & Elkins LLP, New York), Mrs. Laura França Pereira (Three Crowns LLP, Washington DC) and Mr. Marcelo Roberto Ferro (Ferro, Castro Neves, Daltro & Gomide, Rio de Janeiro) on giving their views on the state of play of arbitration in Brazil.

Mrs. Beneti commenced her presentation by stating that Brazil is a force to be reckoned with in the field. Although the history of arbitration is recent in Latin America, when compared to other countries in the region, Brazil has been a case of success. Mrs. Beneti shared that the latest ICC Report placed Brazil as the preferred seat for arbitration in Latin America and 5th place worldwide, 2nd place in terms of number of parties for 2020 and 2021, and 5th place in number of arbitrators.Mr. Ferro presented an overview of recent – and controversial – decisions by the Superior Court of Justice (“STJ”) in relation to conflict of jurisdiction (“conflito de competência”), a unique device to Brazil where an incidental motion is filed in proceedings when a conflict arises between two competent adjudicatory bodies. In 2022, the STJ admitted a conflict of jurisdiction motion discussing a conflict between two arbitral tribunals. Mr. Ferro warned that this could represent a denial of the competence-competence principle in the country. Another relevant decision was issued in 2019 by the STJ, in relation to a case involving the state-owned Petrobras, where the STJ reopened the discussion on whether state-owned companies are authorized to arbitrate, which had been extinct with the amendment to the Brazilian Arbitration Act (BAA) in 2015 that expressly included a provision authorizing state-owned companies to have recourse to arbitration (BAA, Article 1, paragraph 1).

Mrs. Laura França Pereira (Three Crowns LLP, Washington DC) followed with a presentation on the potential for Brazil to become even more prominent in international arbitration as a seat involving foreign parties. Mrs. Pereira commented that even though data shows that arbitration proceedings seated in Brazil have grown 20% over the past few years, only 8% involved foreign parties.

With the growth in Investor-State Disputes throughout Latin America, Mrs. Pereira stated that Brazil may effectively host ISDS cases, as the country offers superior arbitration regulation compared to neighbor countries. Brazil’s solid track record for recognition and enforcement procedure, neutrality and impartiality of local courts as well as a modern and well drafted national arbitration statute should aid Brazil’s case for being a preferred seat.

Closing the first panel of the conference, Mr. Jose Sanchez (Vinson & Elkins LLP, New York) commented on how Brazil is a significant player in international arbitration, as well as on the trend to conduct arbitration proceedings in Portuguese and governed by Brazilian law. With Brazil being the largest economy in Latin America with great prospects of investment growth, the Brazilian market is significant for the economic activity of the region, which directly impacts the dispute resolution market. Mr. Sanchez also commented on how courts in different states in Brazil are highly deferential to arbitrators’ findings of their own jurisdiction – something not seen elsewhere in the region. Mr. Sanchez concluded that Brazil is a world-class jurisdiction and the best choice for a seat in Latin America.

All panelists concurred that Brazil indeed is an arbitration friendly jurisdiction, but challenges to arbitration practice in the country still exists, and efforts to further improve the system in Brazil are still warranted.

 

The Brazilian litigation culture: Impressions from international arbitrators

The second panel, moderated by Mr. Leandro Felix (Machado Meyer Advogados, São Paulo), kicked-off the panel by asking questions regarding the differences between Brazilian and international arbitration practice to each member of the panel, composed of Mr. Hermes Marcelo Huck (Huck Otranto Camargo, São Paulo), Mrs. Maria Claudia Procopiak (Procopiak Arbitration, London), Mr. José Gabriel Assis de Almeida (J.G. Assis de Almeida Advogados, Rio de Janeiro) and Mr. Mauricio Gomm Santos (GST LLP, Miami).

On the advantages and disadvantages of lawyers who practice both litigation and arbitration, Mr. Huck pondered that arbitration is a much more light and flexible process than litigation, and that lawyers working exclusively in this field understand this and behave accordingly. In this regard, Mrs. Procopiak commented that arbitration is a type of litigation and that practicing advocacy skills, be it in litigation or arbitration proceedings are advantageous. However, practices exclusive to litigation should not be replicated in arbitration. Likewise, Mr. Gomm warned the audience on the risks of bringing too much of a domestic and litigation mindset to arbitration proceedings.

In relation to the main differences between legal submissions, Mr. Huck considered that cultural differences might impact the style or even content of a legal submission, but the art of legal writing is to be clear, objective and understandable, without being tiresome. Mr. Gomm also advised against the abuse of citation of case law and scholarly opinions and the use of passive voice by civil law practitioners.

In terms of different approaches to the taking of evidence, witness testimony, cross-examination, and the conduct of hearings, Mr. Huck opined that different cultures and different approaches to each case affect counsel behavior, but in practice, no basic difference in evaluating evidence between domestic and international arbitration exists. Mrs. Procopiak shared her view that common law tradition prevails when it comes to the production of evidence in international arbitration.

In turn, Mr. Gomm stated that with more foreign practitioners, lawyers and arbitrators fine-tuning their Portuguese skills, the common law and civil law systems receive inputs from one another and meet halfway, creating what he called the phenomenon of “internationalization of the Anglo-Saxon system”.  In regard to document disclosure issues, Mr. Almeida stated that the key point for counsel is to anticipate potential conflicts and where the evidence can be gathered from and stored throughout the parties’ contractual relationship.

Concerning the differences in term of time frame for arbitration proceedings, Mr. Almeida stated that international arbitral tribunals usually have a higher degree of predictability and efficiency when compared to domestic cases.

Finally, Mrs. Procopiak and Mr. Gomm addressed the fact that arbitration is a melting pot for international practitioners, bringing together professionals from different backgrounds, experience and culture. Both agreed that various language skills are a must in order to break into the market.

 

Enforceability of foreign arbitral awards and international judicial cooperation

The third panel was chaired by Antonia Azambuja (Machado Meyer Advogados, Rio de Janeiro), the panel was composed of Mrs. Carmen Tibúrcio (Barroso Fontelles, Barcellos, Mendonça & Associados, Rio de Janeiro), Mrs. Emily Westphalen (Herbert Smith Freehills, New York), Mr. Fabio Peixinho (Tauil & Chequer Advogados in association with Mayer Brown, São Paulo) and Mrs. Marcela Kohlbach (ICC YAF Representative for Latin America, Rio de Janeiro).

Mrs. Tibúrcio provided an overview of the Brazilian legal system regarding the recognition and enforcement of foreign arbitral awards. She presented statistics showing the number of cases filed before the STJ regarding the recognition of US arbitral awards in Brazil and addressed important practical issues. She was followed by Mrs. Westphalen, who analyzed recognition and enforcement proceedings under a US perspective by addressing the relevant provisions of the Federal Arbitration Act (“FAA”), the requirements for the confirmation of arbitral awards and defenses to the enforcement of arbitral awards in the US.

Mrs. Kohlbach focused on the failure to disclose and impacts on the enforceability of arbitral awards. She addressed the Abengoa v. Ometto case, where issues of public policy were raised regarding the neutrality and impartiality of the arbitrators. In spite of this precedent, the STJ took a different turn in Levi Strauss v. Ganaderia Brasil, where the Court only analyzed whether the formal requirements of the enforcement proceedings were met, since its analysis should not overrun the merits of the case.

In his presentation, Mr. Peixinho discussed whether state courts could grant enforcement of arbitral award if the award was set aside in the seat of arbitration. Finally, he spoke about the problems that arise from “enforcement races” of arbitral awards in different jurisdictions as a result of the absence of a harmonized international approach to deal with this issue.

 

Corruption in international commercial arbitration: Key issues and Brazilian specificities

The last panel, moderated by Mrs. Mônica Murayama (LL.M Candidate at Georgetown University Law Center, Washington DC), focused on corruption in arbitration, and was composed of Mr. Carlo Verona (Demarest Advogados, São Paulo), Mrs. Érica Franzetti (King & Spalding LLP, Miami; Georgetown University Law Center, Washington DC), Mrs. Michelle Grando (White & Case LLP, Washington DC), Mr. Pedro Jardim de Paiva Barroso (Petrobras, Rio de Janeiro) and Mr. Rafael Francisco Alves (MAMG Advogados, São Paulo).

Mrs. Franzetti and Mr. Barroso discussed whether allegations and possible findings of corruption could impact the jurisdiction of arbitration tribunals and concluded that it would occur when corruption affects the consent to arbitrate or the arbitrability of the dispute. They added that, unless the arbitration clause itself is tainted by corruption, allegations or findings of corruption should not impact the jurisdiction of an arbitral tribunal. They further explained that the jurisdiction analysis considering corruption allegations is different in commercial and investment disputes.

Mrs. Grando and Mr. Barroso addressed that there are different views on the standard of proof for proving corruption. Some argue that there should be a high standard of proof, such as the criminal standard of beyond reasonable doubt or the clear and convincing evidence standard. However, others argue that the standard of the preponderance of evidence should apply. Regardless, a party can rely on circumstantial evidence or red flags to prove corruption.

Mrs. Franzetti and Mr. Barroso discussed parallel proceedings, since it is common that internal or administrative criminal investigations be undertaken concerning entities or individuals involved in corruption allegations during the pendency of an arbitration. Mrs. Franzetti argued that there are tribunal decisions confirming that corruption findings in administrative or internal proceedings are not binding on an arbitral tribunal, but may be treated as probative evidence of corruption.

Mr. Verona and Mr. Alves addressed the duty of the arbitrators to corruption investigations. The speakers discussed different views on whether arbitrators have a duty to disclose and to investigate sua sponte potential corruption practices and to report potential acts of corruption to authorities – or, contrarily, the arbitrator would only have powers to investigate and report, but no duty. Mr. Rafael Alves also addressed the topic of misuse of arbitration for the corrupt purposes or money.

Lastly, Mrs. Grando commented on the annulment of arbitral awards on corruption grounds, which can occur when there is corruption in the arbitral proceeding, highlighting that courts are asked to analyze these issues based on public policy grounds, which serves as grounds for annulment.

 

Conclusion

The First Georgetown Brazilian Arbitration Day provided insightful discussions on a variety of important topics in international arbitration and arbitration in Brazil, as well as under an international and comparative law perspectives, which was obtained by the participation of brilliant Brazilian and non-Brazilian practitioners and arbitrators. In so, the question raised in the first panel can be answered affirmatively: Brazil is an arbitration friendly jurisdiction, given its modern and solid legal framework, limitations on state courts intervention in arbitration and the strong influence of international arbitration principles and institutes.

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Some Highlights of the Amended ICSID Arbitration Rules

Thu, 2022-05-26 01:00

On 21 March 2022, the Administrative Council of the International Centre for Settlement of Investment Disputes , or ICSID, approved extensive amendments  of ICSID’s Regulations and Rules. The Regulations and Rules prominently include the rules of procedure for arbitration proceedings initiated under the constituent treaty of ICSID, the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. These rules of procedure are commonly called the ICSID Arbitration Rules. They have governed most of the many so-called ISDS cases—investor-State arbitrations initiated pursuant to international investment agreements, or  IIAs—that have been brought during the last three decades.

The recently approved amendments have thoroughly overhauled the ICSID Arbitration Rules. This post examines some highlights of the amended Arbitration Rules. It looks at amended Arbitration Rules 14, 23, 41, 53, and 62. These have introduced improvements in the system of investor-State arbitration under the ICSID Convention while remaining within the broad and mostly flexible confines of that system (since amendments of the ICSID Convention itself are exceedingly difficult to make, requiring ratification by all States parties to the Convention, which now number 156).

Amended ICSID Arbitration Rule 14 is a new provision on third-party funding. It will obligate parties to disclose the name and address of any non-party funding their participation in the proceeding. The disclosure requirement will apply throughout the proceeding. Potential or serving arbitrators are to be informed, to enable them to avoid inadvertent conflicts of interest. While not extending the disclosure requirement to the funding agreement, the amended rule provides that the arbitral tribunal may order the funded party to divulge “further information” regarding the agreement. (For an extensive analysis of risks of requiring the disclosure of third-party funding agreements, see here.)

Under the ICSID Convention, a challenge of an arbitrator for lack of independence, or ineligibility to serve on the arbitral tribunal, is to be decided by the other members of the tribunal unless they are evenly divided, in which case the challenge will be decided by the Chairman of the Administrative Council (the President of the World Bank).  Amended ICSID Arbitration Rule 23 should temper this much-criticized feature of the system of the ICSID Convention, of having the possible disqualification of a member of a tribunal normally determined by his or her colleagues on the tribunal. In accordance with amended Rule 23, the other members of the tribunal will, if they are unable to decide the challenge “for any reason,” be deemed to be “equally divided” for the purpose of the ICSID Convention, with the result that the challenge will instead be decided by the Chairman of the Administrative Council. (For a blog noting the problematic “optics of relying on arbitrators for a neutral ruling on their colleague’s challenge,” see here.)

The 2006 amendments of the ICSID Arbitration Rules provided an innovative procedure for the early dismissal of claims manifestly lacking legal merit. In cases in which the procedure was invoked, it was seen as covering claims that were unsustainable from the jurisdictional as well as the substantive viewpoint, even though this was not clear from the 2006 provision. Newly amended ICSID Arbitration Rule 41 eliminates the ambiguity, making it clear that the procedure allows for the early dismissal of claims that are manifestly ill-founded as to jurisdiction.

The ICSID Convention authorizes arbitral tribunals to issue provisional measures to preserve the respective rights of either party. Tribunals have commonly been requested to exercise this authority to order a party to provide security for costs. But the requests have seldom been granted. In several cases, this was because the tribunals considered that they could not issue provisional measures in respect of rights that were hypothetical or to be created only in the event of the requesting party prevailing in the arbitration. Amended ICSID Arbitration Rule 53 confirms the power of an arbitral tribunal to order a party to post security for costs as a stand-alone authority, separate from the power to grant provisional measures. The amended rule also affirms that the tribunal may discontinue the proceeding in the event of non-compliance with such an order to furnish security.

In accordance with the ICSID Convention, the Centre may not publish an award without the consent of the parties. The earliest amendments of the ICSID Arbitration Rules, in 1984, included one permitting ICSID, even in the absence of consent of the parties, to publish excerpts of the legal holdings of an award. Such publication by ICSID of award excerpts was made mandatory when the provision was again amended in 2006. Newly amended ICSID Arbitration Rule 62 takes the bold further step of deeming the parties to have given their consent to the publication of the entire award by ICSID if neither objects within 60 days after the dispatch of the document. The amended rule should help to foster greater consistency among arbitral awards by assuring the wider dissemination of their full contents.

In 2018, at the outset of its current efforts on the reform of ISDS in general, Working Group III of the United Nations Commission on International Trade Law identified various concerns as meriting the development of reforms. Several of the identified concerns have been addressed in these amended ICSID Arbitration Rules: concerns pertaining to third-party funding, concerns over the adequacy of mechanisms to deal with challenges of arbitrators and unmeritorious claims, concerns about security for costs, and concerns regarding inconsistency of investment awards.

A challenge for Working Group III has been to bring reforms in these and other areas to bear on proceedings under the very large number pre-existing IIAs. This problem, however, has had limited relevance in the ICSID ISDS context. The Arbitration Rules applicable to the conduct of an ICSID Convention arbitration proceeding are, unless the parties agree otherwise, those in effect on the date of the parties’ consent to arbitration. When the parties consent on different days, the date of consent is the date on which the second party acts. Thus, to determine the applicable version of the ICSID Arbitration Rules—in an ICSID Convention ISDS case—the date of the consent of the parties will normally be the date of the investor’s consent, which will ordinarily be given on or soon before submitting the case to ICSID. In other words, ICSID Convention ISDS proceedings initiated after the adoption of amendments of the ICSID Arbitration Rules are, in general, subject to the rules as amended, irrespective of the date of the underlying IIA containing the consent to arbitration of the State.

Along with the other amended Regulations and Rules, the newly amended ICSID Arbitration Rules will come into force at the start of the next fiscal year of ICSID, on 1 July 2022. They generally will apply to all ICSID Convention ISDS proceedings initiated on or after that date. Responding to widely shared concerns about ISDS in several areas, the now concluded process of amending the ICSID Arbitration Rules is therefore poised for immediate implementation.

 

 

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Breaking Traditions in Favor of German Efficiency? Frankfurt As a “Safe Seat” for International Arbitration

Wed, 2022-05-25 01:00

Frankfurt am Main (“Frankfurt“) – Germany’s No. 1 city for international arbitration – could serve as a cost-effective and safe seat for international disputes. A “safe seat” of arbitration offers a fair, just and cost-efficient dispute resolution mechanism by offering effective arbitral law and practice (see here). The criteria for distinguishing a safe seat of arbitration is based upon objective parameters, as enshrined in the London Principles. Reputation, tradition, and recognition are therefore not relevant aspects for classifying a seat as safe but are rather crucial factors that determine the seat’s final selection in the arbitration agreement (see here). In this sense, safe and traditional seats of arbitration (e.g. London, Paris, Singapore, New York, Geneva, and Hong Kong – see here) are usually at the forefront of a party’s mind for good reasons. Frankfurt however could join the race of arbitral seats and be considered as a viable alternative.

 

A Safe and Cost-Efficient Seat

Frankfurt, known as the most important financial centre in continental Europe, could serve as a safe and cost-efficient seat for international arbitration users. This is mainly due to its excellent legal infrastructure, arbitral practice, accessibility, and reasonable costs.

The German law of arbitration is substantially based on the UNCITRAL Model Law on International Commercial Arbitration from 1985 (the “Model Law“). In this sense, the Tenth Book of the German Code of Civil Procedures (available in English here) is inspired by the Model Law and conforms with Germany’s modern legislation for both domestic and international arbitration (Sections 1025-1066). With regard to the few deviations made in respect of the Model Law, practitioners have considered the German arbitration law as more “arbitration-friendly” than the Model Law (see here). Importantly, Germany is also a signatory to the New York Convention (here).

As to the arbitration rules, parties are always free to choose the rules that they prefer when selecting Frankfurt as the seat of arbitration (such as the ICC Rules or the DIS Rules). Regarding the latter, the latest DIS statistics reveal that one third of the arbitration proceedings carried out pursuant to the DIS Rules are conducted in the English language (here).

From a practical perspective, the courts of Frankfurt have demonstrated experience with arbitration. Courts have traditionally been receptive to the notion of arbitration both at a regional and federal level:

  • The Higher Regional Court of Frankfurt (“OLG Frankfurt“) carries out most of the judicial functions for international arbitrations seated in Frankfurt. The OLG Frankfurt has a specialized chamber (No. 26) dealing with arbitration-related matters (here). This feature highlights the level of competence of the Frankfurt judiciary in arbitration.
  • The 26th Chamber of the OLG Frankfurt has stressed that an arbitral award may only be set aside in extremely exceptional cases (26 Sch 1/19), interprets arbitration clauses broadly to uphold the parties’ choice to pursue arbitration (26 Sch 1/18), and has refused to review whether tribunals had wrongly admitted belated evidence (26 Sch 18/20 and here). Recent studies show that only 3.31% of the cases before this court from 2012 to 2016 have been successful whereby a party raised a public order ground to set aside an award (here).
  • German courts are also known for strongly favoring arbitration, and can generally be relied upon to uphold, recognize, and enforce arbitral awards (see here, and here). The German Supreme Court has also adopted a non-interventionist approach towards international arbitration (here, here, or here). Furthermore, after reviewing more than 500 decisions concerning the setting aside and enforcement of awards in Germany, a study concluded that German courts generally treat foreign and domestic parties equally (here).

In terms of convenience, Frankfurt is one of the most accessible cities in central Europe (and worldwide). The Frankfurt International Airport is one of the largest passenger airports in the world and is located only 12 km away from the city centre (here). The Frankfurt Hearing Centre also offers rooms and accommodating services for arbitration hearings in the middle of Frankfurt (here). These features strongly highlight the attractiveness of Frankfurt as a place where in-person (or hybrid) arbitration hearings could be conducted. In this sense, it is not uncommon for Frankfurt to be considered as a place for arbitration in investment disputes as well.

In terms of costs, which are often perceived as arbitration’s worst feature, daily hotel rates in Frankfurt have been reported to be less expensive than in other European cities. Hourly rates for German counsel are also very competitive, especially the rates of boutique law firms specializing in international arbitration. German counsel may also be more inclined to avoid or limit the use of discovery and document production, thereby reducing the overall cost of the arbitration.

The above affirms that, due to its legal framework, judiciary, accessibility, and cost-efficiency, Frankfurt can be catalogued as a safe and cost-effective seat for international disputes.

 

Frankfurt as an emerging seat for international arbitration

If Frankfurt is such a safe and convenient seat, then why is it only now improving its visibility within the top ranked arbitration seats?

First of all, it is important to mention that Frankfurt has seen an exponential growth of international arbitrations in the last few years (here). Frankfurt was mentioned as one of the preferred seats in the 2021 International Arbitration Survey by Queen Mary University and White & Case, and was listed by 4% to 2% of the respondents, together with other eminent seats such as Zurich, Vienna, Washington DC, Miami, Shenzhen, São Paolo, and The Hague.

The fact that Frankfurt is not in the current “top 10” of the most preferred cities could be due to the parties’ unwillingness to grant a home-field advantage. As the world’s third largest exporter (after the US and China), German parties are largely involved in international transactions. Thus, non‑German parties may protest against the selection of a German seat or opt for a seat, which they perceive as being more neutral.

Furthermore, due to the German federal system, Frankfurt closely competes with other German cities (e.g., Hamburg, Munich, Düsseldorf, Stuttgart, Berlin, Cologne) that are known for offering arbitration‑related services. Thus, there may be a decentralization of arbitral seats in Germany. As competition tends to improve quality, this factor may ultimately contribute to a higher degree of sophistication in the German arbitration market at competitive prices.

The use of language may also be a relevant factor within this discussion. The standard rule is that German is the court language in German court proceedings pursuant to Section 184 of the Courts Constitution Act. Nonetheless, courts in Frankfurt are well acquainted with international proceedings. This is highlighted by the introduction of an English-speaking Chamber for International Commercial Disputes at the Regional Court (Landgericht) of Frankfurt in 2018. Furthermore, lawyers in Germany usually have a very high proficiency in English.

Finally, tradition and biases may play an important role in the selection of an arbitral seat and, as described above, Frankfurt may not yet be perceived as the “go-to” city in international arbitration.

 

Conclusion

The newly launched GAR CIArb Seat Index rates various seats of arbitration in one-page reports in accordance with each of the London Principles. Right now, the index only covers six jurisdictions (namely, Hong Kong, London, New York, Paris, Singapore, and Switzerland). According to the page, the index will be expanded over time to include additional cities and will be sorted according to grades in the style of bond ratings, or country risk (AAA, AA, A, BBB, BB, B, CCC, etc.). For the reasons mentioned above, Frankfurt should be included in the next round of expansions with a high rank, revealing Frankfurt as a hidden gem for international arbitration.

 

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New Directions in International Investment Law: Towards Energy Transition

Tue, 2022-05-24 01:53

The investor-State dispute settlement system (ISDS) is increasingly confronted with disputes related to climate-related measures. Consequently, this fora has been described as the new frontier in climate-change disputes, as tribunals are slowly becoming a de facto source of climate policy making that directly impacts the regulatory landscape. This blog post discusses the following issues: (i) whether the international investment arbitration system protects fossil fuels, and (ii) whether the international investment system can be used to foster investments in renewable energies.

 

Does The International Investment Arbitration System Protect Fossil Fuel Investments? 

Both the latest IPCC Report and the International Energy Agency (IEA) Net- Zero by 2050 Report emphasized the need to reduce carbon emissions from fossil fuels to limit global temperature rise to a maximum of 1.5°celcius. Nonetheless, international investment treaties continue to protect investments in fossil fuels. The mere threat of an investment proceeding may forestall a State from taking climate change measures to limit fossil fuel exploitation, resulting in regulatory chill. On this basis, civil society and other that international investment law (and ISDS) conflict with the imperatives of the Paris Agreement.

Certain ISDS cases indicate that such criticisms may be correct. For example, in Grenada Private Power & WRB Enterprises Inc v. Grenada, Grenada sought to implement its Nationally Determined Contributions (NDCs) under the Paris Agreement, diverging from fossil-fuel energy to renewable energy. To accomplish this, Grenada enacted legislation that ended the monopoly of GRENLEC – a fossil fuel energy provider and the island’s sole energy provider – over the energy sector. In response, GRENLEC swiftly commenced investment arbitration against Grenada. In the arbitration, Grenada made several policy arguments invoking, inter alia, its national interest in renewable energy development, the failure of GRENLEC to act as a good corporate citizen, and the energy cost savings for Grenadians that would be gained from renewable energy. In a unanimous decision, the Tribunal rejected these arguments stating: “the task of the Tribunal is to determine whether the complex contractual arrangements between the Parties have been complied with and, if not, what remedy should be awarded.” (para. 8) The Tribunal ultimately found that Grenada’s 2016 energy restructuring legislation violated the investment contract between Grenada and GRENLEC and ordered Grenada to repurchase shares in the investment vehicle.

Such a decision illustrates the capacity for ISDS awards to act as de facto tools of climate governance. The Tribunal’s award prevented Grenada from ending GRENLEC’s monopoly, and thus, limited the capacity of the island to reform its regulatory environment to foster investment in renewable energies to comply with its NDC commitments. In this regard, the award limited the capacity for Grenada to implement its energy transition policy, thereby exemplifying civil society’s criticism that the international investment law system may undermine the capacity for States to adopt energy transition measures.

 

Can the International Investment System Foster Investments in Renewable Energy? 

The nature of clean energy projects makes it critical that countries create a stable operating environment for investors. Clean energy projects are highly capital intensive, require long repayment periods, and are exposed to regulatory risks. Confronted with these risks, without investment protection, there are weak prospects for long-term return on renewable energy investments. Additionally, countries that do not provide a strong framework for the protection of renewable energy investments may find it challenging to attract foreign investors, compared to countries which offer a protective investment environment. Therefore, the international investment law system may foster investments in renewable energy because it grants foreign investors a sense of security over their investments.

Thus, international investment law may be used to encourage and protect investments in renewable energy and low-carbon technology, by creating a stable operating environment for investors. Post-COP 26, the IEA estimates that annual clean energy investments must more than triple by 2030 to around USD 4 trillion if States are to fulfill their decarbonization pledges. For emerging and developing economies, receiving trillions of dollars in private investment will be key to achieving decarbonization. Thus, many countries are designing incentive regimes to attract foreign investment in clean energy.

ISDS has indeed been used to protect investments in renewables. The Energy Charter Secretariat reports that 60 % of ISDS filed under the ECT have been to protect investments in renewables. UNCTAD Dispute Navigator shows that foreign investors have initiated at minimum 35 arbitrations in  , Italy and the Czech Republic over the rollback of incentive regimes. In at least 18 of the arbitrations against Spain investors have been successful. The saga of arbitrations against Spain show that, despite the lack of uniformity in these rulings, some tribunals do favor stability and certainty in the legal frameworks of renewable energy cases. In arbitration cases  against Italy, at least 3 awards have been rendered in favor of the investor. Given the success of ISDS in protecting renewables, it would be inappropriate to generalize the international investment law system as inimical to the energy transition.

ISDS being invoked to protect renewables shows no sign of abatement. In 2021, investors initiated arbitrations against Currently, there are many investment arbitration scenarios confronting Mexico because of the Electricity Industry Law 2021, which  reverses incentives initially granted to renewables.

 

New Trends in IIAs Can Incentivize Investments in Renewable Energy

International investment arbitration is changing with the introduction of new generations IIAs containing carve-outs, a state’s right to regulate and the obligation of investors to protect the environment and respect human rights. These novel provisions in new generation IIAs are welcome considering that, historically, environmental provisions were not a feature of most IIAs. OECD  research shows that since 2008, 89% of newly concluded IIAs contain references to environmental matters. This development highlights the growing concern of States to balance their environmental policies with the commitments made to foreign investors.

New generation IIAs such as the Netherlands Model BIT, Morocco- Nigeria BIT or the Singapore- Indonesian BIT, contain progressive features recognizing an explicit right to regulate and investors’ environmental obligations. For instance, Article 11 of the Singapore – Indonesia BIT expressly grants the host State the right to regulate for environmental objectives. Similarly, Article 8 (2) of the Morocco- Nigeria BIT provides that investors have the obligation not circumvent international environmental law duties. Such language in new generation IIAs rebalances the States’ environmental policy against the investors’ economic interests by expressly protecting the State’s environmental concerns in activities conducted by foreign investors.

Additionally, new generation IIAs, for example, Article 6.6 of the Netherlands Model BIT, incentivize foreign investment that aligns with the imperatives of the Paris Agreement. This provision reminds the Parties they are not free to opt-out of their obligations under the Paris Agreement, but what is more, they reaffirm their commitments within the scope and application of international investment law.. In this regard, in sectors difficult to decarbonize, investments should consider carbon set-offs, and where available, carbon capture and storage technologies. The strength of language in new generation IIAs is that, if drafted accurately, they are capable of limit new fossil-fuel investments and encourage renewable energy investments aligned with the Paris Agreement.

Another benefit and incentive from new generations IIAs, is that investors in renewable energy can structure their investment to take advantage of investment protection. For example, new generation IIA containing an environmental non-regression provision may potentially safeguard an investor from a state derogating environmental standards and incentives existing at the time when the renewable energy investment was made. For instance, Article 1114(2) of NAFTA first introduced a non-regression clause in an IIA, providing that parties shall not induce investment by relaxing measures of general application introduced to protect, among others, the environment in their territories. Similarly, Article 24.4.3 of the USMCA provides that parties recognize that it is inappropriate to encourage trade or investment by relaxing environmental law protection. This is particularly useful for renewable energy investments, which are capital intensive and immovable, such as photovoltaic plants or wind energy project, that require predictable investment environments. As noted before, despite the lack of uniformity in the rulings, the Spanish Saga Cases, are again, proof that international investment law fosters a stable legal framework where investors are entitled to have a legitimate expectation of legal certainty at the initial time of investment and throughout the life of the investment.

 

Conclusion

The foregoing analysis has examined how IIAs and ISDS create a predictable and secure operating environment for foreign investors, including guaranteeing a fair and equitable standard of treatment and protection against indirect expropriation. Despite this, the global energy transition has many questions including whether ISDS protects fossil fuel investments and whether it is subject to fostering investments in renewable energies. The new trends in ISDS are likely to foster investment in renewables. Thus, the future of IIA suggests that tribunals can become a tool of global climate governance, serving as a de facto source of climate policy that impacts the internal regulatory landscape of host countries.

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Arbitration Tech Toolbox: Interview with Dr. Nikos Lavranos and Ewa Cairns-Szkatuła on the Wolters Kluwer Data-Driven Profile Navigator and Relationship Indicator Tools

Mon, 2022-05-23 01:32

Wolters Kluwer recently launched the Profile Navigator and Relationship Indicator tools within the Kluwer Arbitration Practice Plus suite of arbitration products. Kluwer Arbitration Blog recently met with Dr. Nikos Lavranos and Ewa Cairns-Szkatuła to discuss this new development.

Dr. Lavranos is Founder of NL-investmentconsulting and acts as legal counsel, arbitrator, mediator and offers a broad range of services covering investment law and arbitration, EU law and WTO law.

Ewa Cairns-Szkatuła is Associate Director for Technology Product Management at the International Group within Wolters Kluwer Legal and Regulatory US.

 

  1. Selecting arbitrators can be a laborious process. What are the Profile Navigator and Relationship Indicator tools, and how can they facilitate better decision-making during arbitrator selection?

Ewa: Indeed, putting the pieces together to gain confidence in the choices you make can be time-consuming. Our tools are based on data extracted from Kluwer Arbitration’s rich collection of commercial and investment awards and from appointment data published by arbitral institutions. Collating the data, the tool can assist in the selection of an arbitrator and in the investigation of potential conflicts of interest of arbitrators as well as other stakeholders involved in the case, such as expert witnesses and counsel. The tools also provides links from the profile to awards and publications associated with the arbitrator, for easy navigation and review of their views and approach.

Nikos: The advantage of these tools is that they help to verify the initial selection of a potential arbitrator by using objective and comprehensive data. They also allows for the consideration of potential arbitrators that were not initially considered. In this way the selection process can be more inclusive and thus help achieve a better balance regarding gender, age, experience and geographical representation.

 

  1. How do the new Profile Navigator and Relationship Indicator tools complement existing solutions offered by Kluwer, such as the “practical insights” modules within Kluwer Arbitration Practice Plus?

Ewa: Kluwer Arbitration Practice Plus (KAPP) is a practical extension of Kluwer Arbitration. KAPP provides enhanced support in case preparation and strategy by combining deep domain expertise and comprehensive collection of international awards with practical tools and guidance. Other tools of Practice Plus, such as Practical Insights by Topic or Quick Answers cover, among other arbitration steps, the appointment and challenge of an Arbitrator, including the opportunity to compare by jurisdiction or institutional rules. An advantage of these tools is that they quickly direct users to key information about the topic, thereby allowing users to focus on the subsequent steps of their legal work, such as developing their legal strategy.

 

  1. Why are data-driven decisions so important for the field of commercial and investment arbitration?

Nikos: Using data to support decision-making ensures that the decisions taken are supportable and comprehensive. It allows for a comprehensive analysis of all relevant aspects both regarding the suitability of a potential Arbitrator as well as any potential conflicts of interest or issue conflicts. It also helps to reduce the risk of challenges of a selected Arbitrator. Finally, it helps in discussions with the client, who is ultimately the one that must feel comfortable with the selection of the Arbitrator.

Ewa: The stakes in arbitrator selection are high and using data to support these decisions provides confidence in your case strategy and chosen arbitrator.  Below is a sneak preview of the Profile Navigator and Relationship Indicator tools, but it only shows a small portion of the extensive information available.

  1. How do the Profile Navigator and Relationship Indicator tools approach issue conflicts, particularly with regard to the disclosure obligations found within the draft Code of Conduct being discussed at UNCITRAL Working Group III?

Nikos: The new Code of Conduct that will soon be adopted by UNCITRAL Working Group III will impose significant disclosure obligations on potential and selected Arbitrators (more analysis of the UNCITRAL code of conduct, including earlier drafts, here, here and here). These obligations include inter alia the disclosure of all the cases in which the prospective arbitrator was involved in various roles, not only as arbitrator but also as counsel or expert. The comprehensive data provided by KAPP allows all parties involved to verify the information disclosed by the arbitrator. It also enables the user to analyse with whom a prospective arbitrator has worked in past cases. In this way KAPP’s comprehensive tools are already taking into account this development, which in no doubt will spill over into commercial arbitration practice.

 

  1. How do you ensure the accuracy and currency of information?

Ewa:  Over more than 30 years Wolters Kluwer has developed a reputation for delivering high quality expertise to support decision making. That is where the expertise of Nikos Lavranos comes in as one of our lead Subject Matter Experts (SMEs). We are grateful to have excellent SMEs working on this project in combination with machine learning. Regarding currency of information – we are continuously adding awards from various sources and use robot/automated scraping. Importantly, our technology makes sure to retrieve the information on any new award released publicly and accounts for data that reflects any changes to the tribunal’s composition.

Nikos: Generally, it is important to highlight that all information is double checked by the various layers of SMEs, so that the information in the system is as accurate as possible. If necessary, the data is verified by confirming it with other publicly available information. The system is also constantly updated and new data is rigorously double checked. In this way the combination of machine learning and human data collection and verification ensures the highest possible standard.

 

  1. Can arbitrators supplement their own profiles?

Ewa: The data-driven arbitrator profiles that already exist in our database can be supplemented by information that is presented in a structured way. Please contact Eleanor.Taylor@wolterskluwer.com if you would like further information.

 

  1. There is still much work to do within the international arbitration community to boost diversity. Do you see the Profile Navigator and Relationship Indicator tools as playing a positive role in profession-wide initiatives to promote diversity, equity and inclusion?

Ewa: Our database includes nearly 14,000 (and growing) professionals including arbitrators, expert witnesses and counsel at all stages of their career, with expertise across all geographies and sectors. All the information is based on data so the user can easily assess the expertise and fit for the case. Our advanced search allows users to search by criteria that fit the case needs and suggests profiles that otherwise would have not been considered. As Nikos has previously mentioned, using objective and comprehensive data allows the selection process to be more inclusive.

 

  1. Do you have plans for further enhancements to the Profile Navigator and Relationship Indicator tools?

Ewa: Absolutely. The obvious one is adding more profiles, more awards, more data, and increasing the involvement of artificial intelligence (AI).

The practice of international arbitration has been evolving and our products do as well. By use of technology, combined with our rigorous quality control measures, we want to equip our users with the most comprehensive database of arbitrators and other stakeholders involved in the arbitration process. Applying the data opens many doors and new options on how technology can be applied to other aspects of the arbitration process and decision making.

 

  1. What parting words do you have for Kluwer Arbitration Blog readers?

Ewa: We are continuing to expand Kluwer Arbitration’s capabilities as a full-service solution that provides our customers with the right tools to drive to the best possible outcomes during the arbitral process. However, we cannot do it without you. Kluwer Arbitration and KAPP have been developed in collaboration with the arbitration community. Any feedback, including constructive criticism, suggestions and ideas are welcome! We will consider them all.

Nikos: Ultimately, the aim is to provide accurate and comprehensive information to serve the arbitration community in resolving disputes as well and as cost-effective as possible.

Arbitrators wishing to amend their profiles on the Profile Navigator and Relationship Indicator tool can contact Wolter Kluwers here.

Further posts on our Arbitration Tech Toolbox series can be found here.

The content of this post is intended for educational and general information. It is not intended for any promotional purposes. Kluwer Arbitration Blog, the Editorial Board, and this post’s authors make no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information in this post.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
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