DIFC Courts Practice Direction No. 2 of 2015: Adopted at Last!

by Gordon Blanke

Baker & McKenzie Habib Al Mulla

The DIFC Courts Practice Direction No. 2 of 2015 on the Referral of Judgment Payment Disputes to Arbitration (available online on the official website of the DIFC Courts at http://difccourts.ae/difc-courts-practice-direction-no-2-2015-referral-judgment-payment-disputes-arbitration/) was finally adopted on 16 February 2015 and is now in full force. For conceptual accuracy, the more appealing title of “Practice Direction on the Conversion of DIFC Court Judgments into DIFC-LCIA Awards”, which was used in the consultation exercise (on which I previously reported in my blog of 20 July 2014), has now been watered down to “Practice Direction on the Referral of Judgment Payment Disputes to Arbitration”. This being said, the general thrust and objective of the Practice Direction remain unchanged: The Practice Direction essentially allows creditors to enforce payment judgments issued by the DIFC Courts against non-compliant debtors, i.e. debtors that have failed to comply with the terms of the judgments voluntarily, that is are unwilling to pay, through arbitration. The main benefit will be the enhanced enforceability of “judgment-converted-awards” under international enforcement instruments typically applicable to international arbitration awards, e.g. the 1958 New York Convention on the recognition and enforcement of foreign arbitral awards. A secondary objective of the Direction is to encourage settlement of payment disputes prior to escalation to arbitration given the deterrent effect of the enhanced global enforceability of a DIFC judgment-converted-award.

No need to repeat here the concerns expressed by the local legal community in anticipation of the adoption of the draft Practice Direction over the course of the consultation exercise in the latter half of last year and the way the revised Practice Direction sought to deal with them: I have extensively reported on both in previous blogs (see my blogs of 20 July 2014 and of 23rd November 2014 respectively). Suffice it to recall that the Practice Direction is “the first of its kind globally” (see DIFC press release, “Another Innovative World First for DIFC Courts”, 25 February 2015, available online at http://difccourts.ae/another-innovative-world-first-difc-courts/) and “an experiment without parallel in arbitration history” (as per Chief Justice Michael Hwang, giving the DIFC Court Lecture on “The DIFC Courts Judgment-Arbitration Protocol – Referral of Judgment Payment Disputes to Arbitration” on 19 November 2014). With this in mind, the workability of the mechanism envisaged by the Practice Direction will ultimately depend on its proper implementation by arbitral tribunals and the receptiveness of international courts that are seized of the recognition and enforcement of DIFC judgment-converted-awards. As incisively put by Chief Justice Michael Hwang, the author of the Practice Direction:

[…] the success of this protocol [i.e. Practice Direction No. 2 of 2015] will obviously depend on whether the arbitrators of our Arbitration Centre [i.e. the DIFC-LCIA] will apply the protocol in the way it is supposed to work. Accordingly, there will be briefings for potential arbitrators at the Centre (including a copy of this Lecture to enable them to understand the theoretical underpinnings of this protocol and how it is to be applied in practice). They will in due course have to exercise their own independent judgment on each case that comes before them pursuant to this protocol, but the tribunal hearing such arbitrations will have to ensure that whatever decision that it may make on the merits of the case must be based on sound arbitration principles (as indeed is this protocol).

(Chief Justice Michael Hwang, “The DIFC Courts Judgment-Arbitration Protocol – Referral of Judgment Payment Disputes to Arbitration”, The DIFC Courts Lecture, 19 November 2014, available online at http://difccourts.ae/difc-courts-chief-justices-explanatory-lecture-notes-referral-judgment-payment-disputes-arbitration-november-2014/, at para. 12(d))

The overall reactions from our legal community in the DIFC have been largely encouraging of our intention to give DIFC judgments more global reach. If our experiment subsequently proves successful, we will have developed an important tool to synthesize litigation and arbitration by giving concurrent remedies for enforcement and thereby resolve one of the great problems of international litigation which other jurisdictions can follow. This is because there is nothing in our protocol that changes the existing common law; indeed, our protocol builds on it. If we can develop a model for the rest of the common law world, civil law countries may also be able to adopt it, because ultimately it is a question of persuading courts to interpret, not the national laws of any country, but the meaning of an “award” under the NYC, which is a matter of international, rather than domestic, law. If our bold step proves successful, this would be the ultimate partnership between commercial courts and arbitration […].

(Ibid., at para. 14)

Chief Justice Michael Hwang’s words are, no doubt, borne out of the best of intentions and it is to be hoped that the new DIFC Courts Practice Direction will bear out its anticipated potential in practice. Time, for sure, will tell …


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The Use of Arbitration for Derivative Contracts

by Joe Liu

Hong Kong International Arbitration Centre

In recent years, international arbitration has increasingly been recognised as the preferred dispute resolution mechanism for cross-border derivative transactions, particularly those involving parties from emerging markets. The key reasons for this popularity include the growing diversity of counterparties and jurisdictions involved in derivatives trading, worldwide enforceability of arbitral awards against assets located in over 150 countries, access to neutral and specialist decision-makers, and confidentiality requirements.

Due to the complexities and considerable risks associated with derivative transactions (including their customers’ varying degrees of financial sophistication), there is room for legal uncertainty and a propensity for disputes. Common types of claims or defences raised by customers in derivative transactions include:

  • that a party did not have the capacity to enter into a transaction;
  • that the transaction documents are inaccurate or incomplete;
  • that the valuation of the derivative position is wrong;
  • that the financial institution mis-sold the financial product(s) to the customer;
  • that the financial institution has breached a duty of care owed to the customer;
  • that the financial institution made a misrepresentation that induced the customer to enter into the transaction(s); and
  •  that transactions are invalid or unenforceable under the alleged mandatory provisions of the law of the place of the customer.

Banks typically seek to invoke standard terms in the transaction documentation to defeat customers’ claims, such as non-reliance, own-judgment, non-advisory and exclusion of liability clauses, relying on the principle of contractual estoppel. This principle is firmly established under both English and Hong Kong law. The Singapore courts, however, appear to have taken a slightly less bullish approach in applying the banks’ standard terms. In Deutsche Bank v Chang Tse Wen [2013] SGCA 49, the Singapore High Court hesitated to apply the doctrine of contractual estoppel.  This holding was subsequently questioned by the Court of Appeal which, however,   declined to elaborate on the issue, thus leaving unclear the status of the doctrine of contractual estoppel under Singapore law.

There are a number of advantages for parties in arbitrating disputes arising under derivative contracts. These advantages also apply to many other types of financial disputes. The key advantages are summarised below.

Enforceability. The increased use of arbitration is driven primarily by the worldwide enforceability of arbitral awards under the New York Convention. At the time of writing, 154 States have acceded to the New York Convention (including the world’s most prevalent financial markets). The Convention requires the courts of the Contracting States to recognise and enforce arbitral awards, subject to limited grounds for non-enforcement. This is crucial in a derivative transaction with a counterparty that has assets in multiple jurisdictions, because arbitration allows the award creditor to enforce against assets in several places.

Neutrality. Many parties to derivative transactions involving emerging jurisdictions are increasingly reluctant to litigate disputes in their counterparties’ local courts, given concerns of bias, corruption, delay, lack of expertise by judges and the use of local language in court proceedings. In contrast, arbitration allows parties to arbitrate their disputes in a neutral forum and with the ability to select suitable arbitrators and language.

Relevant expertise of arbitrators. Another significant advantage arbitration can add to the resolution of derivative disputes is the ability of the parties to select legal and derivatives experts with relevant industry expertise and experience to act as arbitrators. Judges in many local courts simply do not have knowledge of how derivatives work.

Privacy and confidentiality. Unlike court proceedings, which are usually public, arbitral proceedings are commonly held in private, and information disclosed and decisions made during the arbitral process are generally confidential. To allow a customer to disclose his/her losses or to broadcast the details of the dispute might result in a negative perception of the viability of the underlying derivatives and damage to the reputation of the bank or financial institution, as well as  attracting similar claims from other customers.

Narrow scope of disclosure. The scope of discovery of documents in arbitration is generally narrower than in court proceedings in (for example) London or New York. The International Bar Association’s Rules on the Taking of Evidence in International Arbitration 2010 (the IBA Rules) are often used as guidance or adopted in arbitral proceedings with respect to the production of documents. The IBA Rules allow a party to request the production of specific documents that are relevant to the case and material to its outcome. This can be advantageous to banks and financial institutions, which often bear the burden of disclosure in contentious proceedings.

An arbitration conducted under the Hong Kong International Arbitration Centre’s Administered Arbitration Rules 2013 (the HKIAC Rules) offers a number of useful tools and procedures that the parties may use in resolving their derivative disputes cost effectively and efficiently.  They include the following:

  • HKIAC maintains a panel of approximately 400 international arbitrators, many of whom have extensive experience and expertise in complex financial disputes.
  • HKIAC arbitrations in Hong Kong enjoy the complete protection of confidentiality, which covers arbitral proceedings, awards, related court proceedings and judgments.
  • An HKIAC arbital tribunal can order a wide range of interim relief in various forms, including orders to preserve assets and evidence, injunctions and security for costs. Where a party needs urgent relief before the tribunal is constituted, HKIAC can appoint an emergency arbitrator within two days and the parties can expect a decision from that arbitrator within 15 days.  Such a decision is enforceable in Hong Kong under its Arbitration Ordinance (Cap 609), which expressly recognises the enforceability of emergency arbitrators’ decisions.
  • The HKIAC Rules also contain a comprehensive set provisions designed to deal with complex arbitrations involving multiple transactions, contracts or parties. An additional party can be joined to an existing arbitration provided that, prima facie, it is bound by the arbitration agreement that gives rise to the arbitration. Where multiple disputes arise out of the same or series of transactions involving a common question of fact or law, HKIAC has the power to consolidate them into a single arbitration proceeding. Alternatively, a party may simply commence a single arbitration under multiple contracts from the outset, provided that certain conditions are met.  These provisions are particularly useful for derivative disputes, which commonly involve multiple parties and multiple contracts.
  • HKIAC has an expedited procedure, which will normally result in the appointment of a sole arbitrator, the dispute being decided on a documents-only basis and a summary award being issued within six months from the date when the arbitrator receives the file.  In a recent US$420 million financial dispute, the parties agreed to apply the HKIAC expedited procedure and received a final award within two months from the commencement of the arbitration.
  • Finally, the HKIAC Rules are the first to offer parties the choice of remunerating the arbitral tribunal on the basis either of the amount in dispute or on an hourly basis. This allows the parties to choose the most economical way of determining the tribunal’s fees and so can effectively reduce the costs of arbitration.

HKIAC has witnessed an increasing number of financial disputes being referred to arbitration. With its leading arbitration rules in place and ample experience in handling financial cases, HKIAC arbitration provides an attractive forum for complex and high-value disputes arising out of cross-border derivatives and other types of financial transaction. In 2013, the International Swaps and Derivatives Association (ISDA) published its guidance (the ISDA Arbitration Guide) on the use of an arbitration clause with the ISDA Master Agreement as a result of a growing demand for the use of arbitration for disputes arising out of over-the-counter derivatives transactions. Recognising HKIAC’s competence in handling such disputes, the Arbitration Guide recommends an HKIAC arbitration clause as one of the model clauses for use with the ISDA Master Agreement.


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A Step toward Greater Transparency: The UN Transparency Convention

by Esme Shirlow (Assistant Editor for Australia & New Zealand)

On 17 March 2015, the UN Convention on Transparency in Treaty-Based Investor-State Arbitration was opened for signature. So far, nine countries have signed the treaty (among them, Canada, France, Germany, the United Kingdom and the United States). The Convention will enter into force six months after the first three instruments of ratification have been deposited by any of the States which have signed the Convention (Article 9(2)). This post briefly considers how the Convention operates, its notable features, and possible implications should States show a willingness to ratify it.

Operation of the Convention

The Convention is designed to provide additional scope for the application of the UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration. The Rules came into effect on 1 April 2014, and are incorporated into the 2013 UNCITRAL Arbitration Rules by Article 1(4) of those Rules. The Transparency Rules provide for increased transparency in investor-State proceedings conducted under the UNCITRAL Arbitration Rules. They provide, inter alia, for publication by a central repository of basic information about filed cases; public release of key documents, including the tribunal’s decisions, and the statements of claim and defence; participation of non-disputing third parties in certain circumstances; and open hearings.

Subject to certain exceptions, the Rules apply automatically – but only to UNCITRAL arbitrations which are filed under treaties concluded after 1 April 2014. For UNCITRAL arbitrations instituted under pre-April 2014 investment treaties, the Rules only apply if the parties to the dispute or the treaty parties themselves agree to their application. The Transparency Convention provides a mechanism by which States can express such agreement to the application of the Rules.

Once the Convention enters into force, it will operate to constitute consent by the States party to it for the Transparency Rules to be applied in proceedings (whether or not conducted under the UNICTRAL Rules) brought under pre-April 2014 investment treaties to which they are party. In subscribing to the Convention, States can elect to expressly exclude from coverage any proceedings brought under specified treaties and/or those conducted in accordance with particular arbitral rules (other than the UNCITRAL Rules).

Notable Features of the Convention

The Convention has two particularly interesting textual features that bear emphasis.

First, Article 2(5) governs the interaction between the Transparency Rules and most-favoured nation (“MFN”) provisions in investment treaties. It provides that:

The Parties to this Convention agree that a claimant may not invoke a most favored nation provision to apply, or avoid the application of, the UNCITRAL Rules on Transparency under this Convention.

The travaux preparatoires to the Convention clarify that this provision should not be taken to imply that the parties to the Convention have taken a view as to the applicability or otherwise of MFN provisions to procedural matters more generally. Whilst it usefully clarifies the interaction between the Rules and MFN clauses, the provision only applies where both the home and host States in the relevant dispute are party also to the Convention; in other cases the position is less clear (see Articles 30(3) and 30(4) of the Vienna Convention).

Second, the Convention does not specifically address the effect of the Rules on otherwise applicable domestic law (for example, at the seat of arbitration). The implications of this textual silence will depend upon the view that is taken as to role of the Convention in altering the relationship between the Rules and mandatory provisions of domestic law. The Working Group appears to have considered that the Rules would prevail over inconsistent domestic law, noting at its 58th session that:

It was recalled that the Working Group had expressed unanimous support for the proposal that it was not permissible for a State to adopt in its investment treaties the rules on transparency and then to use its domestic laws to undermine the spirit of those rules. The Working Group unanimously reaffirmed that view.

As Lise Johnson discusses in more detail in a helpful annotated guide to the Convention, the actual status of the Rules remains somewhat unclear. It is possible that the Convention might even be construed to allow the Rules to override domestic laws which provide for more transparent procedures than those envisaged in the Rules (to the extent of any inconsistency).

Possible Implications of the Convention

Both the Rules and the Convention address the “public interest in transparency in treaty based investor-State arbitration” (Article 1(4), Rules). In so doing, they are responsive to a key criticism that has been levelled against investor State arbitration since its inception: that investment tribunals frequently decide matters of public importance behind closed doors. The Convention extends the reach of the Rules and – assuming it is widely adopted – has the potential to have a significant effect on approaches to transparency in future investor-State arbitral proceedings. The Convention also has the potential to affect the investor-State system more generally.

As noted in a previous post, for example, the lack of generally applicable requirements for the reporting of basic information about investor-State claims (including the very existence of such claims) has, to-date, significantly hampered the capacity to monitor and collect statistics as to the features of non-ICSID arbitrations. By providing for the publication of basic data about filed cases, the Rules and Convention may make it more possible in the future to accurately identify both the number and types of claims being brought against States under investment treaties. By improving information flows, increased transparency could also play a role in informing public discussions of investor-State arbitration and, potentially, (for better or worse!) perceptions as to its viability as a means of dispute settlement.

The increased publication of arbitral decisions and awards may also influence arbitral reasoning and encourage coalescence around particular interpretations of applicable treaty norms. Indeed, it is often observed that the development of a system of precedent (or, at least, something like it) depends to a significant degree upon ease of access to past decisions. With improved prospects for the release of decisions into the public domain, it might be expected that improvements in systemic coherence and predictability will be (very) incrementally achieved.

Finally, as Stephan Schill notes:

While many comprehensive multilateral reforms are slow to progress, the Mauritius Convention has relatively quickly resulted in a consented text by focusing on a clearly defined and narrow, but no less important issue. Its exclusive focus on a single issue (transparency and third-party participation) prevented cross-deals with other issues on the reform agenda and helped to streamline negotiations.

In this respect, the Convention can be welcomed as a means by which other rules or procedures applicable in investor-State arbitration might in the future be revised.

It is difficult to predict how popular the Convention will be or how the Rules will be interpreted and applied in arbitral proceedings. Regardless of uptake, the Convention may nevertheless be welcomed as at least a small step toward greater transparency: only time will tell whether it may precipitate a giant leap forward for investment arbitration.


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Conflating Politics and Development?

by Susan D. Franck

Washington and Lee University School of Law,
for ITA

The University of Virginia’s Spring 2014 symposium focused on the topic of international development. One panel focused on the role of international politics in the context of international dispute settlement. With the mandate to examine elements related to both politics and development, I was asked to explore outcomes in investment treaty arbitration (ITA) as a function of these twin variables. My recent article, published in the Virginia Journal of International Law, focuses on this intersection.

Recognizing that debates about ITA are reaching the mainstream in venues including The Economist, Wall Street Journal, New York Times, dueling editorials in the Washington Post, and even John Oliver, it is more important than ever to take a data-driven approach to evaluating the net costs and benefits of investment treaties and dispute settlement. While it is not a comprehensive assessment of all the relative value of specific treaties, my article, Conflating Politics and Development?, provides some data and offers context to the ongoing debate.

Some of the key points from the article are:

1. The available data did not support notions that the average final ITA outcome was either in favor of investors or awarded investors multi-hundred-million-dollar awards. When comparing the outcomes of cases won by either investors (i.e., some award over US$0) or by governments (i.e., an award with a finding of US$0 liability), investors won less than 50% of disputes. Rather, for every two cases investors won, governments won roughly three cases (2:3). In the small sub-set of cases where investors did win, on average, investors were awarded less than US$50 million and roughly one-third of their claimed damages.

2. Based on the available data, development status had little, if any, influence on ITA awards. In replication of earlier research, states’ development status was not generally an accurate predictor of ITA outcomes. It was not possible to identify any statistically reliable difference in either: (a) raw wins-losses or (b) investors’ relative success and the development status of respondent states. This finding was replicated across all analyses using three different development measures, namely measures from the Organisation for Economic Co-operation and Development (OECD), the World Bank, and the United Nations Development Programme (UNDP).

3. There was only one test, namely using amounts awarded (without adjusting for the amount in controversy), that identified a reliable link between respondent states’ development status and case outcomes – but only such that Upper-Middle Income states experienced higher amounts awarded when compared to High Income states. There were, however, no reliable differences between amounts awarded when comparing High Income states with Lower-Middle Income and Low Income states. While that one link could reflect instinctive concerns about a potential disparate impact on developing world respondents, it does not withstand stricter scrutiny. Argentina was an Upper-Middle Income state, and 10 of the top 20 largest awards in the entire dataset were awards against Argentina, which could partially explain the disparate results for Upper-Middle Income states. It also raises the question of whether cases against Argentina are representative of other ITA disputes.

4. None of the analyses described above in points 2 and 3, however, controlled for the level of internal state democracy to identify how democracy levels, which can reflect good governance infrastructure, might contribute to outcomes. After controlling for the effect of a state’s internal democracy levels using Polity IV—a measure political scientists created to assess where a state falls on the political spectrum between autocratic and democratic government—twenty-one different analyses were unable to identify a reliable link with ITA outcomes and development status irrespective of: (1) whether all of the awards in the dataset or just the sub-set of investor wins was analyzed, (2) whether an “outcome” was defined as a raw win/loss, amount awarded, or relative investor success, and (3) whether “development” status was defined using OECD, World Bank, or UNDP measures.

5. Focusing on democracy levels in host states and their good governance practices potentially offers a more productive basis of research and policy discussion, rather than focusing on development status in isolation. Given that democracy levels mitigated any effect of development status, the article raises the possibility that states’ internal democracy levels, aspects of domestic political infrastructure, or derivative good governance practices could influence case outcomes and whether tribunals vindicate state practice. It may be worthwhile, therefore, to focus more upon the substantive provisions in investment treaties to ensure that the scope of substantive investment protection is properly delineated to support norms of transparency, appropriate and clear levels of retained state sovereignty, and good governance practices.

As with any empirical paper, the article also delineates the dataset, the coding methodology, the statistical analyses used, and the inevitable limitations that come from conducting scientific research of international legal phenomena. These limitations are discussed at multiple places within the text. It is noteworthy that, for the null findings, the majority of potential latent effects were less than statistically small, which suggests that the results were not underpowered; but it remains a risk that the absence of an effect cannot conclusively prove there was no effect. Even if there was a power problem, given the small potential effects, it would be necessary to generate more than 600 final ITA cases to confirm, contradict, or supplement the findings.

These results do not prove that ITA is a perfect form of dispute settlement, but they do offer a context for ongoing conversations about the actual operation of ITA. Undoubtedly, anyone familiar with dispute systems design will tell you that any system of adjudication is always in need of improvement. Perhaps this is why, in the context of U.S. domestic litigation, there is an Advisory Committee on the Federal Rules of Civil Procedure that works tirelessly to implement procedural improvements into the court system. It is also why entities—such as the International Bar Association, the International Centre for the Settlement of Investment Disputes, and the United Nations Conference on Trade and Development—and legal scholars—including Nancy Welsh, Andrea Schneider, and Mariana Hernandez-Crespo—have begun exploring the strategic use of mediation in international investment disputes.

No doubt, the policy debate will continue about how best to craft the substantive provisions and derivative dispute resolution options in international economic law treaties. My primary hope is that by focusing on facts and variables that demonstrably contribute to variance in ITA outcomes, stakeholders can construct more appropriate international dispute settlement processes in a time of international economic transition. Weeding out the sensational and substituting the observable is a sensible place to start.


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English Courts Set Aside Award on Grounds of Serious Irregularity under Section 68 of the Arbitration Act 1996

by Maguelonne de Brugiere

Herbert Smith Freehills LLP,
for Herbert Smith Freehills

An often cited advantage of arbitration, as opposed to litigation, is the finality of the process. The grounds for time-consuming and costly challenges and appeals are limited.

Under the English 1996 Arbitration Act (the “Act”), parties can only challenge or appeal an arbitration award on three grounds: (i) a challenge on the grounds that the tribunal lacks substantive jurisdiction under Section 67, (ii) a challenge on the grounds of serious irregularity causing substantial injustice under Section 68, and (iii) an appeal on a point of law under Section 69. Only Sections 67 and 68 are mandatory provisions. There is a high evidentiary threshold to be met in order for the grounds under any of these sections to be met, and few and far between are those cases where the challenges have been found successful.

The recent Judgement of the Technology and Construction Court in The Secretary of State for the Home Department v Raytheon Systems Limited [2015] EWHC 311 (TCC) and [2014] EWHC 4375 (TCC) contains helpful guidance on the evidentiary tests which applicants will need to satisfy in order for a section 68 challenge to be successful.

Section 68 of the Act provides for challenges to an award on an exhaustive list of nine grounds of ‘serious irregularity’ affecting the tribunal, the proceedings or the award. Assuming one of nine grounds is met, the additional precondition to be satisfied in order for there to be a serious irregularity, is that the irregularity has caused or will cause ‘substantial injustice’ to the applicant.

‘Serious irregularity’ was a new term introduced by the Act, and was intended to deal with cases where “the Tribunal has gone so wrong in its conduct of the arbitration in one of the respects listed in section 68, that justice calls out for it to be corrected”.1 The threshold to meet this test is considered high, and Section 68 has been described as a ‘long stop’ to deal with ‘extreme cases’ where something ‘went seriously wrong with the arbitral process’.2

There is good reason for this. The parties, by agreeing to submit the dispute to arbitration, have also consented to the risks which accompany arbitration, including the extremely limited grounds for appeal.

The Recent Case of The Secretary of State for the Home Department v Raytheon Systems Limited

In two recent judgements handed down in The Secretary of State for the Home Department v Raytheon Systems Limited, Mr Justice Akenhead found that the tribunal which had been formed to hear the dispute between the parties had failed to consider two significant issues of liability and quantum in its award in favour of the respondent in the arbitration proceedings, Raytheon. The failure to address these issues was found to constitute a ‘serious irregularity’ under Section 68 of the Act, which had caused a substantial injustice to the applicant.

In a later judgement, Mr Justice Akenhead considered the appropriate relief to be granted in the circumstances of the case. After due consideration of the sparse case law on the matter, he concluded that the award should be set aside, and that the case be heard again by a new tribunal. Leave has been granted to the parties to appeal the judge’s decision.

Facts of the Case

Raytheon Systems Limited (Raytheon), the defendant in the proceedings, was engaged by the Home Office to design, develop and deliver a new e-border technology system to reform border control. The value of the contract was a high nine-figure sum. In July 2010, the Home Office purported to terminate the contract. A dispute arose regarding the responsibility for termination, and the Home Office instituted arbitration proceedings, in which Raytheon subsequently alleged that the Home Office had wrongfully terminated the supply agreement.

In a Partial Final Award handed down on 4 August 2014 (and subsequently corrected on two occasions by way of memorandums), the tribunal found that the Home Office had unlawfully terminated the agreement between the parties, that it had repudiated the agreement, and that Raytheon had accepted that repudiation. The Tribunal awarded damages in excess of £126 million, and additional sums of approximately £60 million plus interest.

High Court Challenge of the Award

The Home Office brought proceedings in the Technology and Construction Court to have the Partial Award set aside and be declared to be of no effect. It relied on Section 68(2)(d) of the Act, on the grounds of ‘serious irregularity’ by reason of a ‘failure by the tribunal to deal with all of the issues put to it’. In particular, the Home Office argued that the Tribunal had failed to deal with two issues of liability and three issues of quantum in relation to the £126 million awarded which had been put to it, which it argued were critical to the determination of the arbitration.

In a first hearing to determine whether a ‘serious irregularity’ had occurred under Section 68 of the Act, Mr Justice Akenhead carefully considered the case law and practice around Section 68. He noted that Section 68 reflects “the internationally accepted view that the court should be able to correct serious failures to comply with the “due process” of arbitral proceedings”, quoting the judgement handed down in Lesotho Highlands Development Authority v Impregilo SpA [2005] UKHL 43. He also reiterated that there was a ‘high threshold’ to be met to establish that a failure to address an issue constitutes a serious irregularity causing substantial injustice to the applicant. Mr Justice Akenhead added that courts should strive to uphold arbitration awards and should not approach awards “with a meticulous legal eye endeavouring to pick holes, inconsistencies and faults on awards with the objective of upsetting or frustrating the process of arbitration”.3

However, looking more precisely at the case law relating to Section 68(2)(d), he noted that there would be a ‘failure to deal with an issue where “the determination of that “issue” is essential to the decision reached in the award […] An essential issue arises in this context where the decision cannot be justified as a particular key issue has not been decided which is critical to the result and there has not been a decision on all the issues necessary to resolve the dispute or disputes”. He added that it did not matter if the issue was dealt with well, badly or indifferently, so long as it was dealt with. Significantly, he noted a failure by a tribunal to set out each step by which they reached their conclusion, or deal with each point made by a party was not the same as failing to deal with an issue.

If it was found that a tribunal has not dealt with an issue in the case, an applicant would still need to demonstrate that this failure caused it ‘substantial injustice’, in order for the test under Section 68(2)(d) to be satisfied. Relying on Vee Networks Limited v Econet Wireless International [2005] 1 Lloyd’s Rep 192, Mr Justice Akenhead noted that, in order to satisfy the ‘substantial injustice’ test, an applicant did not need to demonstrate that it would have succeeded on the issue which the tribunal failed to deal with, but it was only necessary for him to show that “(i) his position was “reasonably arguable”; and (ii) had the tribunal found in his favour, the tribunal might well have reached a different conclusion in its award”.

Having considered the law, Mr Justice Akenhead turned to consider the liability and quantum challenges made by the Home Office. He found that Liability Ground 2 had been made out, namely that the tribunal had failed to address the case made by the Home Office that all or substantially all of the delays in the performance of the agreement milestones were the actual fault or responsibility of Raytheon. Mr Justice Akenhead considered that the failure to address this issue was a ‘substantial injustice’ stating that “[t]he substantial injustice arises not simply from the fact that these issues were not clearly dealt with. They arise in the context that both parties spent a large amount of time, resources and indeed money in presenting their cases and evidence as to responsibility for the delays, disruption and inefficiencies”.

Mr Justice Akenhead also found in favour of the Home Office in respect of Quantum Ground 3, namely that the Tribunal had not addressed the issue raised by the Home Office that Raytheon should not be permitted to recover sums on a global basis without any consideration of Raytheon’s own actual or possible breaches of contract. He considered this to be a very important issue, not least because the consequences of the failure to deal with this issue affected the sum of damages awarded to Raytheon. He noted that “[i]t almost goes without saying that, necessarily, there has been a substantial injustice because the arbitrators have not addressed the key issues as to (a) whether or not there were problems which were the fault and responsibility of Z [Raytheon] and (b) if so, what impact that had on the cost recovery claim which formed the basis of the substantial award […]“. He went on to state that this failure to deal with the issues “cannot be classified as anything less than substantial injustice because the arbitrators have not applied their minds to the issue at all and any right minded party to arbitration would feel that justice has not been served”.

Appropriate Relief for a Failure to Deal with an Issue Put to the Tribunal

In a second hearing, Mr Justice Akenhead considered what the appropriate relief under section 68(3) of the Act was for the tribunal’s failure to deal with the issues mentioned above.

Section 68(3) of the Arbitration Act provides that, if there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may either (i) remit the award to the tribunal, in whole or in part, for reconsideration, (ii) set the award aside in whole or in part, or (iii) declare the award to be of no effect, in whole or in part. Section 68(3) provides that remission of the award to the tribunal for reconsideration should be the default option, and that the court “shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration”.

Noting the sparse case law on Section 68(3), Mr Justice Akenhead stated that, in deciding whether to remit or set aside an award, the court needed to “consider all the circumstances and background facts relating to the dispute, the award, the arbitrators and the overall desirability of remission and setting aside, as well as the ramifications, both in terms of costs, time and justice, of doing either”. He considered Merkin’s Arbitration Law review of the pre-1996 authorities which indicated that quashing the award would be appropriate in the following circumstances where: (i) there has been a serious miscarriage of justice affecting evidence and the arbitrators cannot reasonably be expected to approach the matter afresh; (ii) one or both of the parties has justifiably lost confidence in the arbitrators in the light of the manner in which the arbitration has been conducted; (iii) the outcome of remission would require a full hearing or re-hearing; (iv) the remission would inevitably lead to the award being reversed; (v) the conduct of the arbitrator is such as to show that, questions of partiality aside, he is, through lack of talent, experience, or diligence, incapable of conducting the reference in a manner which the parties are entitled to expect; and /or (vii) the delay between the arbitration hearing and the outcome of the judicial proceedings is such that the parties and the arbitrators cannot reasonably be expected to remember what transpired in the original proceedings.

Mr Justice Akenhead, examining also the post-1996 authorities, determined that this was a case where the award should be set aside. In reaching this decision, he cited the following reasons:

(i) Both of the issues which he found had not be dealt with by the Tribunal under Section 68(2)(d) were “towards the more serious end of the spectrum of seriousness in terms of irregularity”. He noted that the fact that the tribunal had taken some 16 months after final oral submissions to produce their award “might lead a fair minded and informed observer to wonder (rightly or wrongly) at least whether (subconsciously) the tribunal was seeking some sort of shortcut”.

(ii) Citing the case of Lovell Partnerships (Northern Ltd) v AW Construction plc (1996) 81 BLR 83, he noted that it would be “invidious and embarrassing [for the tribunal] to be required to free [itself] of all previous ideas and to re-determine the same issues”, and that even for a conscientious tribunal, re-determining issues could create “its own undesirable tensions and pressures”.

(iii) Mr Justice Akenhead considered that it was unlikely that a new arbitration would lead to a significant re-drawing of the issues in the arbitration. He added that he would expect that “on many of the individual issues on which each party lost, the losing party would not seek to re-argue them”, failing which he anticipated that the party having previously lost on an individual issue in the first arbitration, and electing to run the same argument again in the new arbitration, would face cost sanctions.

(iv) He added that, in the new arbitration, he expected that much of the factual and expert evidence would be redeployed.

(v) Mr Justice Akenhead also expressed doubt that the current tribunal, having likely not considered in detail the evidence on the delays to the disputed project, would have any significant recollection of the evidence. He commented on the delays between the date evidence was given in the first arbitration and this hearing, and further added that these delays would likely extend to 4 years if an appeal was pursued.

Costs in the application were awarded to the Home Office, at a discount. Mr Justice Akenhead did not address the question of costs in the first arbitration, whose award had now been set aside.

Comment

This recent decision adds to the slim body of authorities on challenges to awards under Section 68(2)(d) of the Act. It provides useful guidance to applicants seeking to challenge arbitration awards under Section 68(2)(d) on the evidentiary tests which need to be satisfied.

Should Agreeing a List of Issues Become the Norm in Arbitration?

This judgement serves as a reminder to all arbitrators, regardless of their experience and seniority, of the importance of ensuring that their awards consider and address all issues in a case, even if only in passing. The gravity of the failure to address key issues in the case was emphasised on multiple occasions by Mr Justice Akenhead. However, there remains a fine distinction to be drawn between addressing all essential issues in the case, and dealing with every disputed point raised by the parties. This distinction has been emphasised in previous authorities, but where a large number of disputes facts and issues are raised in a case, it may not always be clear which are considered ‘essential’ and likely to lead to a ‘substantial injustice’ if not addressed.

In these circumstances, arbitrators may choose to avoid such potential pitfalls, by requiring the parties to agree in advance the list of issues which must be determined in the arbitration. This is already envisaged in certain institutional rules, such as those of the ICC, to assist tribunals in navigating these distinctions. The ICC Rules require a tribunal to draw up Terms of Reference in the case which, unless the tribunal considers it inappropriate, should include a list of issues to be determined. Because the parties are required to sign such Terms of Reference, it necessarily renders it more difficult for them to bring later challenges under Section 68(2)(d) of the Act unless the issue addressed was already included in the agreed list of issues. Such list would also facilitate the tribunal’s own process of preparing the award.

Are Cost Sanctions Appropriate in New Arbitrations, Where an Initial Award has been Set Aside?

Another point of particular interest was Mr Justice Akenhead’s suggestion that parties should anticipate cost sanctions against them where a party who lost on a given factual or legal issue before the current tribunal seeks to argue it again and loses it before a new tribunal. This comment reminds parties of their responsibility in ensuring the arbitration proceeds efficiently and expeditiously, and has economic merit.

This implication of potential cost sanctions, however pragmatic in terms of economic and procedural merit, is slightly controversial as this runs counter to the legal position that when an award has been set aside it no longer has legal effect in the seat of arbitration. Accordingly, parties should retain the discretion of raising the same, or new, legal arguments in the new arbitration, on the basis that the new tribunal may well reach different conclusions than the first tribunal which heard the case. Mr Justice Akenhead noted this conundrum in his judgement, observing that, whilst he was conscious that in setting aside the whole award for re-hearing by a different tribunal, a number of findings in the first arbitration may be re-opened before a new tribunal, he anticipated that “it will be a foolhardy party who, without obviously good reason, seeks to do so”.

Where an Award is Set Aside, What Happens to the Costs in the First Arbitration?

Another interesting question which this judgement raises concerns the overall costs awarded in the first arbitration. The award in the first arbitration having now been set aside, the cost orders which were made in the original award no longer have legal effect. The parties will need to incur further legal and other costs in subjecting the dispute to arbitration again.

What remains unclear, and was not addressed in this judgement, is whether the parties will be able to seek their costs in the first arbitration proceedings in a second arbitration on the same facts and legal issues. This will likely depend on whether the wording of the arbitration clause of the supply contract between Raytheon and the Home Office is broad enough to grant the new tribunal jurisdiction to determine such costs. To avoid any doubt as to whether a new tribunal would have such jurisdiction, the parties could have raised the issue in the court proceedings. Having not done so, they can alternatively now seek to agree that this issue will fall within the jurisdiction of a new tribunal.

Even if it were within the jurisdiction of a new tribunal to determine whether the parties could recover their costs in the first arbitration whose judgement was set aside, it will necessarily be a complex process for the new tribunal to assess those costs, having not procedurally overseen the first arbitration.


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  1. Petroships Pte Ltd of Singapore v Petec Trading and Investment Corporation of Vietnam and Others (the Petro Ranger) (2001) 2 Lloyd’s Rep 348.
  2. Fidelity Management SA v Myriad International Holdings BV (2005) EWCH 1193 (Comm).
  3. Quoted the judgement in Fidelity Management v Myriad International case (2005) 2 Lloyd’s Rep 508.

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Conduct of Legal Representatives under the 2014 LCIA Arbitration Rules: How to Apply the New Provisions

by Maxi Scherer

Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

and Queen Mary University of London

This article is published as a result of the cooperation agreement between Kluwer Arbitration Blog and ArbitralWomen. The views expressed in this article are those of the author alone and should not be regarded as representative of, or binding upon ArbitralWomen and/or the author’s law firm.

Issues relating to the conduct of legal representatives in international arbitration have attracted significant attention in recent years.1 There is a lively debate as to whether and how counsel conduct can or should be regulated. On the one hand, one might argue that regulation is necessary to level the playing field in an area where legal cultures differ greatly.2 Lawyers from jurisdictions with strict ethical standards might feel a competitive disadvantage compared to colleagues from jurisdictions where no such detailed or stringent standards exist. On the other hand, there are more and more voices in the arbitration community warning about risks of overregulation.3

The new LCIA Arbitration Rules, which entered into force on 1 October 2014 (hereafter the ‘2014 LCIA Rules’ or ‘Rules’) are at the core of this debate since they are the first institutional rules that have included provisions regulating the legal representatives’ conduct. Article 18 of the Rules deals with the parties’ fundamental right to choose legal representatives,4as well as with the consequences of any change or addition to the parties’ legal representation after the formation of the arbitral tribunal.5 In their Annex, the Rules contain ‘General Guidelines for the Parties’ Legal Representatives’ (hereafter the ‘Guidelines’).

It is not the purpose of this post to discuss whether the LCIA’s decision to include these provisions in the 2014 LCIA Rules was an opportune one. Rather, this post will focus on how these provisions will apply in practice. In particular, this post will briefly analyze a number of selected issues concerning (i) the Guidelines’ scope, (ii) their content, and (iii) the tribunal’s powers in the case of a violation thereof. A comprehensive and detailed discussion of Article 18 of the Rules and the Guidelines can be found in the forthcoming book: Scherer/Richman/Gerbay, Arbitrating under the 2014 LCIA Rules – A User’s Guide (Kluwer Law International 2015).

1) Scope of the Guidelines: To whom do they apply?

The Guidelines apply to any ‘legal representative appearing by name’ before the arbitral tribunal. 6 A legal representative includes any third person (lawyer or non-lawyer) chosen by a party to represent it in the arbitration. 7 An in-house lawyer is likely not considered as a ‘legal representative’ of the company in which he or she works, but rather as a part or extension of the legal entity that is the company.8 Accordingly, the Guidelines do not apply to in-house lawyers. However, since they are part of the parties’ legal entities, they are bound by the parties’ obligations in the arbitration, including, for instance, the duty under Article 14.5 to ‘do everything necessary in good faith for the fair, efficient and expeditious conduct of the arbitration’.9

One could query whether the wording ‘appearing by name’ before the arbitral tribunal could be interpreted as limiting the scope of the Guidelines to those expressly named as the parties’ representatives. For instance, the parties are sometimes represented by large law firms which staff numerous lawyers on the case, all of whom will not necessarily be expressly named on the file as legal representatives. However, it would undermine the entire purpose of the Guidelines if one could circumvent their application by simply not naming someone on the record as a legal representative. Rather, it is submitted that any person involved in the case under the supervision of the legal representatives appearing by name should be considered a sub-agent and be required to abide by the Guidelines. Therefore, the consequences of any violation, including any possible sanctions, should be borne by the party representatives appearing by name, in accordance with the principle that the agent is liable for the acts of his or her sub-agent.

2) Content of the Guidelines: What do they cover?

The aim of the Guidelines is to ‘promote the good and equal conduct of the parties’ legal representatives’.10 In order to achieve this goal, the Guidelines contain five relatively short paragraphs about what legal representatives should (or rather should not) do in international arbitration proceedings under the LCIA Rules, including not to (i) unfairly obstruct the arbitration or jeopardize the award (paragraph 2); (ii) knowingly make any false statements (paragraph 3); (iii) procure or assist in the preparation of, or reply upon, any false evidence (paragraph 4); (iv) conceal or assist in the concealment of any document (paragraph 5); or (v) enter into ex parte communications with the tribunal or members of the LCIA Court involved in making any decision regarding the arbitration (paragraph 6).

As a preliminary remark, one cannot but notice that these obligations are fairly general and high-level. The 2013 IBA Guidelines on Party Representation in International Arbitration contain similarly bland propositions that have been criticized as being ‘uncertain’.11 The risk of rules that are general and vague seems somewhat inherent in any attempt to formulate universally acceptable principles for the conduct of the parties’ legal representatives. A high level of abstraction is required in order to find consensus.12 Given the broad character of the LCIA Guidelines, it will not be straightforward for parties and tribunals to apply them.

For instance, paragraph 2 of the Guidelines stipulates that legal representatives ‘should not engage in activities intended unfairly to obstruct the arbitration or to jeopardise the finality of any award’. Such activities, which are sometimes called ‘guerrilla tactics’, aim at exploiting various procedural possibilities in order to delay or even derail the arbitration.13 Paragraph 2 provides as an example the ‘repeated challenges to an arbitrator’s appointment or to the jurisdiction or authority of the Arbitral Tribunal known to be unfounded by that legal representative’. However, this example is by no means exhaustive and one can think of other, similar activities which could fall under paragraph 2, including:

– requesting multiple unjustified extensions of deadlines;
– seeking disclosure of documents that are known not to exist or not to be relevant; and
– initiating unjustified parallel actions in national courts, possibly combined with the use of anti-arbitration injunctions.

While such procedural actions (e.g., requesting extensions of deadlines, seeking production of documents, challenging arbitrators, etc.) may individually and generally be permissible, the repeated and knowingly unfounded nature of them destroy their status as a legitimate exercise of procedural rights and could be considered by a tribunal as attempted sabotage of the arbitral proceedings.

Arbitral tribunals should, however, be careful in applying paragraph 2 of the Guidelines. While activities that aim at obstructing the arbitration or jeopardizing the finality of the award should be sanctioned, the tribunal also needs to keep in mind that sometimes repeated procedural steps (e.g., arbitrator challenges or requests for extensions) might be necessary to represent effectively a party in the arbitration. Importantly, the Guidelines also protect ‘any legal representative’s […] obligation to present that party’s case effectively to the Arbitral Tribunal’. 14 Accordingly, paragraph 2 of the Guidelines must be interpreted in light of this obligation and therefore only clear cases of obstructive activities should be considered to trigger sanctions under the Guidelines.

3) Consequences of a Violation of the Guidelines: What Are the Tribunal’s Powers?

One of the most controversial and significant developments in the 2014 LCIA Rules is that they expressly establish the tribunal’s power to determine violations of the Guidelines and to order sanctions against the legal representative(s) in the case of a violation.15 Article 18.6 lists possible sanctions a tribunal may order if it finds that a legal representative has violated the Guidelines. Pursuant to Article 18.6(i) and (ii), the tribunal may issue a ‘written reprimand’ or ‘written caution as to future conduct in the arbitration’.16 declares the lawyer’s conduct to be improper but does not limit his or her right to practice law’. See Black’s Law Dictionary 1494 (10th ed., 2014). Both reprimands and sanctions aim at putting legal representatives on notice that the tribunal is mindful of the compliance with the Guidelines. They might also be a first step while the tribunal considers whether further and stronger sanctions are necessary.] Article 18.6(iii) further provides that the tribunal can take ‘any other measure necessary to fulfil within the arbitration the general duties’ of the tribunal under Article 14.4.

While some argue that the arbitrators’ power to sanction is necessary to preserve the integrity of the arbitral proceedings before them,17others are of the opinion that such ‘policing’ powers should not lie with the arbitral tribunal, but be reserved for domestic, or possibly transnational, professional regulatory bodies.18

In order to address the latter concern, the drafters of the LCIA Rules were careful to leave the tribunal with important leeway in using their powers under the Guidelines. According to Article 18.6, the tribunal ‘may’ decide whether the legal representative has violated the Guidelines, and ‘may’ order sanctions. The tribunal’s discretion is broad and applies not only to the decision whether or not to order sanctions (and which ones), but also to the question of whether or not the tribunal wishes to assess the legal representatives’ conduct in the first place. In other words, there is no obligation on the tribunal to ‘police’ the legal representatives’ conduct under the Guidelines. However, if the tribunal is aware of any violation of the Guidelines, the tribunal should, at a minimum, consider whether or not a sanction is necessary.

* * * * * *

Due to space constraints, this post has only dealt with a selected number of issues relating to the new provisions on conduct of legal representatives found in the 2014 LCIA Rules. There are many others, and it will be interesting to see how these provisions will be applied in practice by counsel and arbitral tribunals. Regrettably, however, most decisions will remain confidential and it will therefore be difficult to assess and develop “best-practices” in this context.


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  1. See generally on the issue, C. Rogers, Ethics in International Arbitration (Oxford University Press 2014).
  2. See, e.g., W. Park, A Fair Fight: Professional Guidelines in International Arbitration, 30 Arb. Intl 409 (2014).
  3. See, e.g., T. Landau & J. Weeramantry, A Pause for Thought, in International Arbitration: The Coming of a New Age? 496, 498 (A. van den Berg ed., Kluwer Law International 2013).
  4. LCIA Rules (2014), Article 18.1 (‘Any party may be represented in the arbitration by one or more authorised legal representatives appearing by name before the Arbitral Tribunal.’). See also LCIA Rules (1998), Article 18.1. Compare UNCITRAL Rules (2010), Article 5; ICDR Rules (2014), Article 12; Swiss Rules (2012), Article 15.6; WIPO Rules (2014), Article 13(a); ICC Rules (2012), Article 26.4; HKIAC Rules (2013), Article 13.6.
  5. LCIA Rules (2014), Articles 18.3, 18.4. As shown in the well-known Hrvatska case, the change or addition of new legal representatives after the formation of the tribunal, may affect the tribunal’s impartiality and independence. See Hrvatska Elektroprivreda d.d. v. Republic of Slovenia, ICSID Case No. ARB/05/24, Decision of 6 May 2008, at §§33-34. See also Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Decision of 14 January 2010, at §§26-27.
  6. LCIA Rules (2014), Article 18.5, Guidelines, para. 1.
  7. In the 1998 version of the LCIA Arbitration Rules, Article 18.1 allowed parties to be represented either by ‘legal practitioners or any other representatives’, which clearly indicates that the parties’ representatives need not to be legally trained or qualified. In the 2014 revision process, the wording ‘legal practitioners or any other representatives’ was replaced by ‘legal representatives’. This change does not mean, however, that the 2014 Rules require the parties’ representatives to be lawyers. Indeed, the term ‘legal’ does not refer to the representatives’ legal training, but to the fact that these persons legally represent the party in the arbitration.
  8. On the one hand, the formulation of Article 18.1 seems wide enough to include any person appearing by name in the arbitration on behalf of the party, even a party’s in-house counsel. On the other hand, it has been argued forcefully, and rather convincingly, that in-house lawyers do not represent ‘their’ company but are rather a part or extension thereof. See J.-C. Najar, A Pro Domo Pleading: Of In-House Counsel, and Their Necessary Participation in International Commercial Arbitration, 25 J. Intl Arb. 623-630 (2008). See also W. Park, Two Faces of Progress: Fairness and Flexibility in Arbitration Procedure, 23 Arb. Intl 499 (2007).
  9. LCIA Rules (2014), Article 14.4 (‘Under the Arbitration Agreement, the Arbitral Tribunal’s general duties at all times during the arbitration shall include: (i) a duty to act fairly and impartially as between all parties, giving each a reasonable opportunity of putting its case and dealing with that of its opponent(s); and (ii) a duty to adopt procedures suitable to the circumstances of the arbitration, avoiding unnecessary delay and expense, so as to provide a fair, efficient and expeditious means for the final resolution of the parties’ dispute.’)
  10. LCIA Rules (2014), Annex, para. 1.
  11. . Waincymer, Regulatory Developments in the Control of Counsel in International Arbitration – The IBA Guidelines on Party Representation in International Arbitration and the New LCIA Rules and Annex, 30 Arb. Intl 513, 527-528 (2014) (‘uncertain norms’); U. Draetta, Counsel as Client’s First Enemy in Arbitration? 116 (Juris 2014).
  12. Landau & Weeramantry, A Pause for Thought, in International Arbitration: The Coming of a New Age? 503.
  13. Cf. G. Horvath, Guerrilla Tactics in Arbitration, an Ethical Battle Field: Is There Need for a Universal Code of Ethics?, 2011 Austrian Y.B. Intl Arb. 297 (C. Klausegger et al. eds, Manz’sche Verlags- und Universitätsbuchhandlung 2011); W. Rowley, Guerrilla Tactics and Developing Issues, in Guerrilla Tactics in International Arbitration §1.04 (G. Horvath & S. Wilske eds, Kluwer Law International 2013).
  14. LCIA Rules (2014), Annex, para. 1.
  15. LCIA Rules (2014), Article 18.6, Guidelines, para. 7. In other contexts, some arbitral tribunal have found that they possess inherent power to take measures against the parties’ representatives if such measures are necessary to preserve the integrity of the arbitration. See Unpublished Decision of ICSID Annulment Committee (2008), in R. Bishop & M. Stevens, Advocacy and Ethics in International Arbitration: The Compelling Need for a Code of Ethics in International Arbitration: Transparency, Integrity and Legitimacy, in Arbitration Advocacy in Changing Times (ICCA Congress Series Vol. 15) 391 (A. van den Berg ed., Kluwer Law International 2010). See also A. Rau, Arbitrators without Powers? Disqualifying Counsel in Arbitral Proceedings 457, 502.
  16. A ‘reprimand’ may be defined as ‘a form of disciplinary action that […
  17. Landau & Weeramantry, A Pause for Thought 517-527.
  18. See, e.g., E. Geisinger, President’s Message: Counsel Ethics in International Arbitration – Could One Take Things a Step Further? (September 2014), available at www.arbitration-ch.org/pages/en/asa/news-&-projects/presidents-message/index.html (the president of ASA, the Swiss Arbitration Association, criticized the approach in the 2014 LCIA Rules and proposed that the issue would be better suited for a transnational body with the jurisdiction to decide over the implementation of international rules of conduct for counsel).

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Evolving Meaning: The Interpretation of Investment Treaties and Temporal Variations

by Roberto Castro de Figueiredo

Tauil & Chequer in association with Mayer Brown LLP

International investment law is shaped by key terms such as “investment”, “indirect expropriation”, “national treatment”, “most favored nation”, “fair and equitable treatment”, among others, which are at the heart of most investment treaties. But after 1959, when West Germany and Pakistan signed what is known as the first ever bilateral investment treaty, and, since then, the conclusion of more than three thousand investment treaties, the meaning of these key terms has been exposed to potential temporal variations. This raises the question as to whether the interpreter should look for the meaning of the term at the time of the conclusion of the investment treaty or for the current meaning of the term, at the time of the application of the treaty.

Gerald Fitzmaurice, whose work on the practice of the International Court of Justice inspired the codification of the general rule of treaty interpretation embodied in the Vienna Convention on the Law of Treaties, identified as one of the major principles of treaty interpretation the so-called principle of contemporaneity. According to Fitzmaurice, the principle of contemporaneity entails that “[t]he terms of a treaty must be interpreted according to the meaning which they possessed, or which would have been attributed to them, and in the light of current linguistic usage, at the time when the treaty was originally concluded” (Fitzmaurice, G. G., The Law and Procedure of the International Court of Justice 1951-4: Treaty Interpretation and Other Treaty Points, 33 BYIL 203 (1957), at 212).

The principle of contemporaneity is founded on the idea that, if the purpose of treaty interpretation is to reveal the intention of the parties, the text of the treaty, as the main source of the intention of the parties, must be understood in accordance with the meaning the parties intended to give to the terms. Accordingly, the starting-point of the interpretation of a treaty must be based on the meaning its terms had at the time that the treaty was originally concluded.

The principle of contemporaneity finds support in the decision rendered by the International Court of Justice in the Rights of Nationals of the United States of America in Morocco case. In determining the meaning of certain terms employed in two treaties concluded between Morocco and the United States in 1787 and in 1836, the International Court of Justice observed that “in construing the provisions of Article 20 — and, in particular, the expression ‘shall have any dispute with each other’ — it is necessary to take into account the meaning of the word ‘dispute’ at the time when the two treaties were concluded” (Judgment of August 27, 1952, ICJ Reports 176 (1952), at 189).

This does not mean, however, that the interpreter is prevented from taking into account temporal variations of the meaning of the terms of a treaty. The question as to whether one should interpret a term of a treaty in accordance with the meaning existing at the time of the conclusion of the treaty, or with its current meaning, is contingent upon the specific wording adopted in the treaty. Generic terms employed in treaties with continuing duration are assumed to be intended to follow temporal variations of their ordinary meaning.

In the case concerning Legal Consequences for States of the Continued Presence of South Africa in Namibia (South West Africa) Notwithstanding Security Council Resolution 276 (1970), interpreting the Covenant of the League of Nations, which was concluded in 1919, the International Court of Justice observed that:

“Mindful as it is of the primary necessity of interpreting an instrument in accordance with the intentions of the parties at the time of its conclusion, the Court is bound to take into account the fact that the concepts embodied in Article 22 of the Covenant — ‘the strenuous conditions of the modern world’ and ‘the well-being and development’ of the peoples concerned — were not static, but were by definition evolutionary, as also, therefore, was the concept of the ‘sacred trust’. The parties to the Covenant must consequently be deemed to have accepted them as such.” (Advisory Opinion of June 21, 1971, ICJ Reports 16 (1971), at 31)

Likewise, in the Aegean Sea Continental Shelf case, the International Court of Justice concluded that the use of a generic term creates the presumption that such term was employed with the intention to follow temporal variations of its meaning. In this case, the International Court of Justice had to decide whether the expression “the territorial status”, contained in the instrument of accession of Greece to the General Act for the Pacific Settlement of International Disputes of 1928, could be deemed to refer to the rights over the continental shelf. This question arose out of the fact that, at the time that Greece acceded to the General Act in 1931, the concept of continental shelf had not been developed in international law yet. The International Court of Justice noted, however, that:

“Once it is established that the expression ‘the territorial status of Greece’ was used in Greece’s instrument of accession as a generic term denoting any matters comprised within the concept of territorial status under general international law, the presumption necessarily arises that its meaning was intended to follow the evolution of the law and to correspond with the meaning attached to the expression by the law in force at any given time.” (Judgment of December 19, 1978, ICJ Reports 3 (1978), at 32)

Similarly, in the Kasikili/Sedudu Island case, the International Court of Justice noted that “[i]n order to illuminate meaning of the words agreed upon in 1890, there is nothing that prevents the Court from taking into account the present-day state of scientific knowledge, as reflected in the documentary material submitted to it by the Parties” (Judgment of December 13, 1999, ICJ Reports 1045 (1999), at 1060). And in the case concerning the Dispute Regarding Navigational and Related Rights, the International Court of Justice interpreted a term employed in a treaty concluded in 1858 in accordance with its current meaning and not with the meaning the term had at the time that the treaty was concluded. In this case, the question before the International Court of Justice was whether the term “comercio”, as employed in a treaty concluded by Costa Rica and Nicaragua in 1858, should be interpreted as referring exclusively to commerce of goods or could be deemed to include services providing the transport of persons. The International Court of Justice decided that, once “comercio” was a generic term, used in a treaty entered into for an unlimited duration, it had to be understood in the light of the meaning of the term existing at the time of the application of the treaty. According to the decision:

“It is true that the terms used in a treaty must be interpreted in light of what is determined to have been the parties’ common intention, which is, by definition, contemporaneous with the treaty’s conclusion. That may lead a court seised of a dispute, or the parties themselves, when they seek to determine the meaning of a treaty for purposes of good-faith compliance with it, to ascertain the meaning a term had when the treaty was drafted, since doing so can shed light on the parties’ common intention. The Court has so proceeded in certain cases requiring it to interpret a term whose meaning had evolved since the conclusion of the treaty at issue, and in those cases the Court adhered to the original meaning […].

This does not however signify that, where a term’s meaning is no longer the same as it was at the date of conclusion, no account should ever be taken of its meaning at the time when the treaty is to be interpreted for purposes of applying it.

On the one hand, the subsequent practice of the parties, within the meaning of Article 31 (3)(b) of the Vienna Convention, can result in a departure from the original intent on the basis of a tacit agreement between the parties. On the other hand, there are situations in which the parties’ intent upon conclusion of the treaty was, or may be presumed to have been, to give the terms used — or some of them — a meaning or content capable of evolving, not one fixed once and for all, so as to make allowance for, among other things, developments in international law. In such instances it is indeed in order to respect the parties’ common intention at the time the treaty was concluded, not to depart from it, that account should be taken of the meaning acquired by the terms in question upon each occasion on which the treaty is to be applied.” (Judgment of July 13, 2009, ICJ Reports 213 (2009), at 242)

Referring to the Aegean Sea Continental Shelf case, the International Court of Justice noted that the decision given in that case “is founded on the idea that, where the parties have used generic terms in a treaty, the parties necessarily having been aware that the meaning of the terms was likely to evolve over time, and where the treaty has been entered into for a very long period or is ‘of continuing duration’, the parties must be presumed, as a general rule, to have intended those terms to have an evolving meaning” (Dispute Regarding Navigational and Related Rights, at 243. See also Pulp Mills on the River Uruguay, Judgment of April 20, 2010, ICJ Reports 14 (2010), at 83.)

The practice of the International Court of Justice allows the conclusion that generic terms employed in investment treaties must be interpreted in accordance with their current meaning, existing at the time of the application of treaty. But whether a term is employed as a generic term will be contingent upon the wording of each investment treaty.


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New Arbitration Center in Bulgaria

by Eleonora Mateina

Tsvetkova Bebov Komarevski, Attorneys-at-law

In November 2014, a new arbitration center was established in Bulgaria – the KRIB Court of Arbitration (KRIB – Confederation of Employers and Industrialists in Bulgaria). The establishment of this institution was awaited by the Bulgarian business.

The establishment of a new arbitral institution in Bulgaria is an important step, since arbitration is a widely used method of dispute resolution in Bulgaria, especially for commercial disputes. In 2014, more than 40,000 new arbitration proceedings were commenced, including both institutional and ad hoc arbitrations. Even if most of those new cases concern utilities contracts (electricity supply, heat supply, mobile phones contracts etc.), still this number is considerable for a small country like Bulgaria. The importance of arbitration as a way of dispute resolution in Bulgaria is evident from the presence of more than 15 arbitration centers in the country as well. Currently, the main arbitration institutions in Bulgaria are those of the Bulgarian Chamber of Commerce and Industry (BCCI), which was established more than 50 years ago, and of the Bulgarian Industrial Association (BIA). Despite the presence of more than 15 arbitration centers, during the last years businesses started to require arbitration institutions which reflected the tendencies in arbitration and, the most important, which restored trust in arbitration as a way of dispute resolution mechanism. At these volatile times for the Bulgarian arbitration, the KRIB Court of Arbitration was established. The institution was established in order to address the requirements of the local and foreign businessmen operating in Bulgaria. This attempt is mirrored in the structure of the institution and, most of all, in its rules.

The KRIB Court of Arbitration is based in Sofia. Its structure includes an Arbitration Council, a Supervisory Board, an Arbitration Panel and a Secretariat. There are several guarantees for internal democracy and independence of the authorities of the institution. However, the time will tell whether these guarantees are operative in practice.

The KRIB Rules of Arbitration are very similar to the ICC Rules 2012. This is a safe approach since first, the ICC Rules of Arbitration has proven their effectiveness; second, there is well-established practice in ICC how certain procedural problems that may occur shall to resolved and, of course, there is well established ICC case-law. The close relation between the ICC Rules and the KRIB Rules of Arbitration, considerably facilitate the use of ICC cases and publications.

One of the main advantages of the KRIB Court of Arbitration is the implementation of the regime for scrutiny of the arbitral award, which is a relatively new concept for Bulgarian arbitration institutions. This type of control over arbitral awards inside the institution is borrowed from the ICC Rules of Arbitration 2012. Actually, this is one of the main achievements of the ICC Rules and made them preferred rules applicable to the arbitration proceedings worldwide. This regime mitigates the risk of rendering arbitral award that might be set aside by the courts at the place of arbitration or that might be subject to refusal of recognition and enforcement under Art. V of the New York Convention for Recognition and Enforcement of Foreign Arbitral Awards by the courts where the award is to be recognized and enforced (usually where the respective party has its assets).

To the point, Art. 38 of the KRIB Rules of Arbitrations provides that, before signing the arbitral award, the arbitral tribunal shall submit it in draft to the Secretariat. The Secretariat shall send the draft of the arbitral award to the Arbitration Council. The Arbitration Council request modifications as to the form of the award, and, without affecting the arbitral tribunal’s liberty of decision, may also draw its attention to points of material or procedural character. The Arbitration Council issues a decision and gives the tribunal a reasonable period of time to correct the award, if necessary. No award can be rendered by the tribunal before successfully completing the procedure provided in Article 38 of the KRIB Rules of Arbitration.

As evident, such a regime decreases the possibility of erroneous awards to be rendered by the arbitral tribunals since after the drafting of the award by the tribunal the award will be “reviewed” in order to ensure the completeness and validity of the arbitral award, of course without affecting the tribunal’s liberty of decision.

A question that may arise in this regard is whether such a regime is valid under the Bulgarian law. The answer is more likely to be positive, since there are several arbitral awards rendered under the ICC Rules which have already been recognized and enforced by Bulgarian courts. These awards have been subject to scrutiny under Art. 33 of the ICC Arbitration Rules. Therefore, such a “control” inside the arbitral institution should be in compliance with Bulgarian law and should not be considered as breaching any mandatory norms and/or Bulgarian public order.


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Bound by Oral Arbitration Agreement. Failing to Object During Negotiations

by John Kadelburger

Kadelburger Law

In the Swedish case Profura v. Blomgren (T 2863-07, Court of Appeals for Western Sweden), from 19 March 2008 known as Profura v. Stig Blomgren, an appeal was brought against award according to which the arbitral tribunal had rejected its jurisdiction.1 The court found – contrary to the competent arbitral tribunal2 – that a binding arbitration agreement had been concluded orally between the parties during the course of a negotiation of a share purchase agreement, despite the fact that no final and binding written share purchase agreement had been signed. The court therefore set aside the award.

The appeal against the award, was based on Section 36 of the Swedish Arbitration Act, which provides that an award may be appealed3 (as opposed to a challenge under Section 34) in case the tribunal has declined jurisdiction and failed to determine the issues it was asked to consider (when the tribunal, held a dispute inadmissible or otherwise terminated the proceedings without ruling on the merits of the dispute). The court thus has the final word as to the scope of the jurisdiction of the tribunal, the existence, validity and scope of the arbitration agreement.4 In a procedure under Section 36 the case is heard again in its entirety, including the merits. To the extent that the arbitral tribunal has found that it lacks jurisdiction, the judgement of the court will – if the appeal is successful – determine, with res judicata effect, that there is a valid arbitration agreement that applies to the dispute. The court will not remand the case to the same tribunal but a new tribunal must be appointed.5

The case is worthwhile noting, as the court found that an oral arbitration agreement had been entered into which in itself does not rise any eyebrows in Sweden, as Swedish law does not require that the arbitration agreement is in writing.6 This is at variance with the Model Law and the New York Convention and many other national arbitration laws. It is worth noting that an arbitration agreement under Swedish law can be concluded both orally, implicitly or tacitly and that parties have been considered bound to arbitrate also based on the contractual practice developed and established between them.7 Although the absence of a form requirement does provide for flexibility it also gives rise to concerns and commands caution of contracting parties, in particular if enforcement is to be sought under the New York Convention. One also has to be cautious to draw too far reaching conclusions from this case as it is pronounced by the Court of Appeals of Western Sweden which has very limited experience in arbitration matters and has surprised also several of those involved.

In its analysis, the court separated the analysis of the conclusion of the main contract as such and then the arbitration agreement as distinct from the main contract – as also the arbitral tribunal did –. The principle of separability is manifest law in Sweden and was explicitly incorporated in the Swedish Arbitration Act of 1999.8

Thus the court first had to determine whether a main agreement (SPA), failing a signed contract, still had been concluded and then if that also meant that, or separated therefrom, or regardless of the main agreement, an arbitration agreement had been concluded as well or nevertheless.

The question was when, and on the basis of what, a binding contract arises between parties who are in the process of negotiating a transaction which lasts for some time. In this case the court noted that there had been numerous drafts exchanged and the main commercial points (in particular the price) were settled and, on the basis of the evidence in the case, the court found that an oral main agreement had been concluded between the parties. However, in this context it should be noted that only one of the parties (Profura) had sent drafts to the other – so there had been no real exchange of drafts – and, even if some common view had been found on the price, none of the representations and warranties had been discussed in any detail.

The court then continued its analysis in order to determine whether the parties, by entering into the main agreement (SPA), also had entered into a binding arbitration agreement. The court’s conclusion was that since the arbitration clause had been in the drafts from (NB from one of the parties only) the beginning and, at no time during the negotiations had, the party objecting to the jurisdiction of the arbitral tribunal, made any comments or even less objected to the arbitration clauses as such in the drafts, the arbitration agreement was validly concluded orally as well. In addition, the court noted that Mr Blomgren had made some comments to one of the agreements but not to the arbitral clause therein or in any of the drafts. The court’s conclusion is very questionable, as the arbitration agreement had not been the object of any specific discussion or comments, assumingly because Mr Blomgren thought it was premature to comment on the dispute resolution clauses in the drafts and in addition the parties to the agreement that was commented did not include Mr Blomgren himself.

The arbitration agreement under Swedish law is viewed as any other contract, regardless of it having both procedural and civil law effects. Therefore, the principles of interpretation of contracts apply in regard to both its content and how it is entered into i.e. when the binding effect arises. This assumes that there is a meeting of wills to contract. There is some precedent which emphasizes that it has to be particularly clear and evident that the parties agreed to arbitration and not to some other form of dispute resolution. However, the general jurisprudence seems to indicate that there is no support for a doctrine of stricter requirements to apply to arbitration agreements than to other contracts.9

The court seems to have given much weight to and was influenced by the testimonies of the professional advisers, including one lawyer, who witnessed and participated in the negotiations, and confirmed that an agreement had been concluded. The court attributed more weight to these testimonies than the arbitral tribunal did. The court found that the seller simply had accepted an offer orally (“hand shake”). The court found it particularly relevant that nothing in the written documentation evidenced that the seller had raised any objections or made any other comments that any agreement was subject to any conditions and, thus, there was only a conditional acceptance. The written documentation almost exclusively related to price discussions.

It must however be noted that it was a domestic Swedish case, where both parties were Swedish, and enforcement would be sought in Sweden. The situation would of course be very different if it would have been an international arbitration, where the award eventually might have had to be enforced under the New York Convention and, thus, enforcement could be refused failing a written arbitration agreement.

The case therefore should alert parties to the fact that when a contract is signed, they should be cautious of the effects on agreeing step-by-step on various issues during the negotiations and, in particular, of the main issues during the negotiations, which may be agreed upon orally, unless they make such agreements conditional, with or without handshake, and subject to final written agreement each time.

Although the case must be considered case specific and although it is neither authoritative in regard to Swedish contract law and principles of interpretation nor in regard to a non-party, non-signatory of an arbitration agreement, the court’s conclusions are supported by the decision of the Svea Court of Appeals in State of Ukraine v. Norsk Hydro10. In this case, the court noted that the party not singing or wishing to be bound by an arbitration agreement has to take active steps to make his disagreement known to the other party. Whereas passivity normally would not result in the formation of a contract the case should be distinguished when a party should or ought to realize that the other party believes or assumes that a binding agreement has been concluded. This was the case here. In such a situation, which applies to the Profura case, there is an obligation to inform the other party that no such agreement has been formed.

Finally it is noteworthy – and somewhat surprising-, that the court found that, despite the fact that Mr Blomgren was not even a named party to the alleged share purchase agreement with Profura, (although he would have been a party one of the transactions but with another party), the claim brought against Mr Blomgren was considered to have such a connection to the transaction between Profura and the seller that the scope of arbitration agreement extended also Profura’s claim against Mr Blomgren on the basis of an alleged overriding oral frame agreement.

It might also be of interest to know that, a subsequent arbitral tribunal, which then was bound by the court’s decision on jurisdiction, found that no main agreement had been concluded orally or in writing and dismissed the claim, as had the first arbitral tribunal.11 This is also what would be the expected outcome. Under normal circumstances parties in this kind of transaction (complexity and value) would typically be entering into a letter of intent which would explicitly provide that any binding effect would be subject to signed formal agreements and thus avoid the problem.


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  1. Case also commented in Hobér, Kaj, International Commercial Arbitration in Sweden, 2011, p. 110.
  2. Including one of the very experienced judge Ingemar Persson, then at the Svea Court of Appeals, now sitting Supreme Court Justice.
  3. The action for an appeal under Section 36 must also be brought to the court of appeals within the jurisdiction of which the respondent resides.
  4. Swedish traveaux préparatoires: SOU (Parliamentary Report) 1994:81 p 295; Prop. (Government Bill) 1998/99:35 pp 238.
  5. Franke, Magnusson et al, International Arbitration in Sweden: A Practitioner’s Guide, p 238 et seq
  6. Heuman, L, Arbitration Law of Sweden: Practice and Procedure, 2003, p 30, 32-33; Swedish traveaux préparatoires: SOU (Parliamentary Report) 1994:81 p 95 ; Prop. (Government Bill) 1998/99:35 pp 67-68.
  7. Värmeledningsaktiebolaget Radiator v. Skanska AB, decision by the Svea Court of Appeal made on 15 Nov. 1988 in case no Ö 2840-87, RH 1989:83.
  8. Section 3 of the Swedish Arbitration Act: “Where the validity of an arbitration agreement which constitutes part of another agreement must be determined in conjunction with a determination of the jurisdiction of the arbitrators, the arbitration agreement shall be deemed to constitute a separate agreement.”
  9. For a further brief description of the formation of contracts refer to Franke, Magnusson et al., International Arbitration in Sweden: A Practitioner’s Guide, pp. 54 et seq.
  10. Franke, Magnusson et al., International Arbitration in Sweden: A Practitioner’s Guide, footnote 24 and 25 p 78. See also Hobér, Kaj, International Commercial Arbitration in Sweden, 2011, p. 100 et seq (110-111) and Dillén, Bidrag till läran om skiljeavtalet, 1933, 140-141.
  11. The subsequent arbitral award is not public.

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Chinese Court Enforces HKIAC Awards Despite Alleged Violations of PRC Regulations

by Arthur Ma and Joanna Du

Herbert Smith Freehills LLP

The terms ‘variable interest entity’ (‘VIE), ‘valuation adjustment mechanism’ (‘VAM’) and ‘public (social) interest of China’ (otherwise, Chinese ‘public policy’) each entail complex legal issues.  They have in the past caused heated debate in China as to their legality (in the cases of VIE and VAM) and their boundaries in the context of enforcement of foreign arbitral awards (in the case of public policy).  Thus, when a recent PRC court ruling linked all three topics, it instantly became a leading judicial precedent.

Introduction

On 5 November 2014, the Fuzhou Intermediate People’s Court (‘the Fuzhou Court’ or ‘the Court’) handed down a civil ruling in Fujian Across Express Information Technology Co Ltd and others v China MediaExpress Holdings Inc (2014) Rong Zhi Jian Zi No 51 (‘the Fujian Across Express case’).  The ruling confirmed that two HKIAC awards concerning related transactions should be enforced in Mainland China under the Arrangement on the Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (1999) (‘the Arrangement’).

The two HKIAC awards

Cheng Zheng was a shareholder in China MediaExpress Holdings Inc (‘China MediaExpress’).  Cheng was also the legal representative of Fujian Across Express Information Technology Co Ltd (‘Across’) and Fujian Fenzhong Media Co Ltd (‘Fenzhong’).  In 2009, China MediaExpress went public in the United States via a reverse takeover.  In January 2010, Starr Investments Cayman II Inc (‘Starr’) entered into a Share Purchase Agreement (‘SPA’) and Investor’s Rights Agreement (‘IRA’) with China MediaExpress.

Following closure of the transaction, Starr discovered that Cheng and others had been involved in secret dealings that violated the SPA and IRA.  To protect its interest, Starr commenced arbitration before HKIAC against Cheng and the three companies (collectively, the ‘Applicants’).  On 19 December 2012, the arbitral tribunal rendered two arbitral awards ordering the Applicants to compensate Starr for losses incurred.

Enforcement of the awards

Starr subsequently applied to the Fuzhou Court for enforcement of the awards under the Arrangement.

The Applicants submitted that the HKIAC awards seriously violated the ‘public interest of the Mainland’.  They contended that (1) the VIE structure adopted in the underlying transactions was prohibited by mandatory provisions of Chinese law; (2) the VAM arrangement in the SPA infringed the interests of China MediaExpress, its creditors and other shareholders; and (3) the arbitration agreement had applied US law with the purpose of sidestepping mandatory provisions of Chinese law.

Starr responded that enforcing the awards would not violate the ‘public interest of the Mainland’.  It contended that (1) the wording of article 7 of the Arrangement required the court only to examine whether the consequences of enforcement would violate the public interest, not the a violation of the applicable law would do so; (2) enforcing the awards would force the Applicants to compensate the losses incurred by Starr and therefore encourage people to abide by  agreements into which they had entered; and (3) the term ‘public interest of the Mainland’ was not equivalent to mandatory rules in the Mainland; it should be interpreted only as referring to the basic legal system of China and the fundamental interest of society.

The Fuzhou Court ruled in Starr’s favour.  Firstly, it agreed with Starr that enforcing the awards would encourage people to abide by agreements they had entered into, uphold the spirit of contract law and act in accordance with the public interest.

Secondly, the Court relied upon a decision of the Supreme People’s Court (‘SPC’) in a previous case in concluding that violations of certain regulations concerning VIE and VAM did not necessarily constitute a violation of the ‘public interest of the Mainland’.

VIE and its legal status under PRC law

A VIE arrangement in China refers to a business structure that typically involves an onshore wholly foreign-owned enterprise (‘WFOE’) or foreign-invested enterprise (‘FIE’) owned by overseas investors (and sometimes Mainland Chinese founders).  This in turn controls a domestic company, which holds the necessary licence to operate in China in certain sectors in which foreigners are restricted or prohibited and is therefore widely used by foreign investors to bypass China’s stringent rules on foreign ownership in certain sectors.  The legality of the VIE is, however, currently unclear. It is controversial in practice because it circumvents (1) China’s regulations on foreign investment in certain restricted or prohibited sectors, and (2) approvals required from relevant government authorities in China.

VAM and its legal status under PRC law

VAM is even more problematic because this investment tool commonly used by private equity houses was declared unlawful under certain circumstances by the Chinese courts in 2012.   This mechanism incentivises investors by mitigating uncertainties and risks associated with an investee company’s financial performance following the investment.  Typically, a VAM provides that if the investee company meets (or fails to meet) certain financial targets within an agreed period following the investment, the investee company’s valuation will be adjusted accordingly.  For example, it is usually agreed that if the investee company fails to meet agreed financial targets, investors would be compensated either by additional shares or cash.

The legality of VAM under PRC law remained unclear until the decision in Haifu v Shiheng, Wisdom Asia and Lu Bo (2012) Min Ti Zi No 11, in which the SPC ruled that a VAM arrangement under a capital increase agreement was (1) as between the original shareholders and the investors, valid and enforceable, but (2) as between the investee company and the investors, invalid and unenforceable. The SPC’s ruling provides some comfort to investors who are uncertain of VAM’s legal status in China.

Public policy as a ground for refusing enforcement of foreign awards in China

When the SPC drafted the Arrangement in 1999, inspiration was taken from the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the ‘New York Convention’) in setting thresholds for non-enforcement of arbitral awards made in Hong Kong.  One of these thresholds is violation of the ‘public interest of the Mainland’.  Article 7(3) of the Arrangement stipulates that if a Mainland court believes that the enforcement of a Hong Kong arbitral award would violate the ‘public interest of the Mainland’, the court may refuse its enforcement.

This ground for non-enforcement mirrors article V.2(b) of the New York Convention, which allows the court in the country where recognition and enforcement are sought to refuse to recognise and enforce an award if it finds that to do so would “be contrary to the public policy of that country”.

Notably, since China’s accession to the New York Convention, the SPC has held a very tight line in interpreting ‘public policy’.  On a number of occasions, Chinese courts have held that a mere breach of mandatory provisions of Chinese law or regulations does not amount to a violation of the public policy of China. In an earlier case, the SPC expressed the view that –

“the issue of public policy shall only be restricted to the circumstances where recognising the arbitral award will violate Chinese basic legal system and damage Chinese basic social interest [sic].”

(See SPC’s Reply to Request for Instructions regarding Haikou Intermediate People’s Court’s Refusal to Recognise and Enforce the Arbitral Award of the Stockholm Chamber of Commerce,  13 July 2005; SPC’s Reply to the Request for Instructions on Non-Recognition of No 07-11 (Tokyo) Arbitral Award of the Japan Commercial Arbitration Association, 29 June 2010.)

The significance of the Fuzhou Court decision

In conclusion, the Fujian Across Express case is significant in at least two regards.

Firstly, the decision makes clear that, when determining a challenge to enforcement of an award brought under the Arrangement on the ground of an  alleged violation of the ‘public interest of the Mainland’, the court should focus on the effect or consequences of enforcement, rather than on the content of or substantive issues in the award.

Secondly and more significantly, the decision clarifies that the ‘public interest of the Mainland’ or ‘public policy’ in China is by no means equal to mandatory provisions of Chinese law or regulations.  A mere violation of government regulations would therefore be insufficient to establish a case of violation of ‘public interest’ or ‘public policy’ of the Mainland.

On a broader level, the Fujian Across Express case once again evidences the narrow approach of the PRC courts in their interpretation of public policy and their commitment to enforcing Hong Kong awards under the Arrangement, thus reinforcing an excellent record of enforcement.


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