To Be or Not to Be: The Practical Implications of Choosing Foreign Arbitration for Purely Domestic Contracts

by Cao Lijun and Lu Leilei

Zhong Lun Law Firm

The 2014 case of Application for the Recognition and Enforcement of Foreign Arbitral Awards between Beijing Chaolaixinsheng Sports and Leisure Co Ltd and Beijing Suowangzhixin Investment Consulting Co Ltd.

The Beijing Chaolaixinsheng case is the first occasion on which China’s Supreme People’s Court (SPC) has confirmed that arbitral awards are unenforceable in China where purely domestic contracts provide for arbitration at an overseas venue. This case was followed by the publication of China’s Draft Foreign Investment Law on 19 January 2015 and the promulgation on 4 February 2015 of a new Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the PRC (Fa Shi [2015] No 5, 30 January 2015) (the SPC Interpretation). In the light of these developments, this posting considers the consequences of choosing foreign arbitration to resolve disputes where a foreign investor enters into a domestic contract with a Chinese counter-party.

The relevant provisions that apply to clauses of this kind (referred to collectively in this posting as ‘the Provisions’) are as follows.

  • Article 128 of the PRC Contract Law states that parties to a foreign-related contract may apply for arbitration either to a Chinese arbitral institution or to any other arbitral institution.
  • Article 271 of the PRC Civil Procedure Law provides that (1) where any dispute arises out of foreign economic relations and trade or foreign-related transport and maritime activities, and (2) if the parties have agreed to arbitrate at a PRC arbitral institution or at any other arbitral institution, an action may not be brought before a PRC court.
  • Article 304 of the Opinions of the Supreme People’s Court on Several Issues Concerning the Application of the Civil Procedure Law of the PRC (Fa Fa [1992] No 22, 14 July 1992) (the Opinions) states that a civil case is ‘foreign-related’ where (1) either contracting party is a foreign citizen, enterprise or organisation; (2) the facts that trigger, change, or terminate the civil relationship take place outside PRC territory; or (3) the subject-matter is located outside PRC territory.

Taken collectively, these Provisions imply that parties may submit a dispute to a foreign arbitral institution if the contract has a foreign element. The SPC has traditionally interpreted them to mean that arbitration before a foreign institution is only available for disputes with a foreign element. Few cases, however, have come to the SPC for a determination of whether a resultant award is enforceable in China.

The Beijing Chaolaixinsheng case involved a contract to operate a golf course in Beijing concluded between a Chinese company and a wholly foreign-owned enterprise (WFOE) that was registered in Beijing and owned by a Korean citizen. The arbitration clause provided for arbitration at the Korean Commercial Arbitration Board (KCAB) in Seoul. A dispute involving a claim for compensation was so referred. The Beijing Second Intermediate People’s Court (the Beijing Court) proposed to hold that the award renderedby the KCAB tribunal was unenforceable.  This holding was confirmed by the SPC, pursuant to its function of reviewing such proposals under the pre-reporting system.

On the basis of the Provisions, the SPC concluded that there were no foreign elements in the contract, given that the subject-matter was located in China, the contract was concluded and performed in China and the WFOE had the status of a Chinese enterprise. Further, the SPC stated that “the applicable law of the underlying contract and its arbitration clause, whether explicitly or [implicitly] agreed [upon] by the parties, shall be deemed as PRC law.” The SPC went on to hold that PRC law did not authorise the parties to refer domestic disputes not containing a foreign element to foreign arbitration. Accordingly, the arbitration clause was invalid and the KCAB tribunal therefore had no jurisdiction over the dispute.

The SPC also upheld article V.1(a) (invalid arbitration clause) of the New York Convention as a ground for rejecting the recognition and enforcement of the KCAB award. Significantly, the SPC rejected a proposal by the Beijing Court to rely also on article V.2(b) of the Convention (public policy) as a ground for refusing enforcement, stating that “to apply the public policy ground provided for in Article V(2)(b) of the New York Convention is inappropriate and should be corrected.” The SPC’s tendency to invoke public policy grounds sparingly will be welcomed by the arbitration community.

The SPC Interpretation replaced the Opinions with effect from 4 February 2015. Article 522 of the Interpretation replaces article 304 of the Opinions and subsumes the three categories that constituted a ‘foreign element’ under the latter.  Article 522, however, adds two new sub-clauses aimed at broadening the definition. A civil case may now also be foreign-related where (1) the habitual residence of either or both contracting parties is located outside PRC terrritory, and (2) there exist “other circumstances” that can constitute a foreign-related element. This residual provision may give the PRC courts more discretion in characterising a case as either foreign-related or domestic. It may also be noted that article 522 of the Interpretation has the same wording as a pre-existing provision, article 1 of the SPC Interpretations (I) on Several Issues Concerning the Law on the Application of Laws to Foreign-Related Civil Relations (Fa Shi [2012] No 24, 28 December 2012) (the 2012 Interpretations), which was complemented by the Opinions. The courts have not, however, applied the 2012 Interpretations in defining foreign-related civil cases, but have instead preferred to apply article 304 of the Opinions.

For the first time, the new Draft Foreign Investment Law provides a definition of ‘foreign investor’ for the purposes of that draft law. Article 11 provides that domestic enterprises controlled by a foreign citizen, enterprise or organisation are deemed to be foreign investors, thus giving rise to the question whether having a foreign-invested domestic enterprise as a contracting party might render the contract ‘foreign-related’.

It will be interesting to see how the PRC courts approach these new developments and whether the categorisation of ‘foreign-related’ cases will indeed broaden their scope.

In light of the above, and subject to any further clarifications from the SPC, parties should be aware of the following risks if they choose to use foreign arbitration clauses for disputes without a foreign element.

Firstly, where a foreign investor initiates foreign arbitration proceedings, it may be uncertain whether the Chinese counterparty would challenge the validity of such a clause and if so, in which court. The validity of such clauses has consistently been denied by the Chinese courts.

Secondly, instead of going to a PRC court, a party may make relevant objections in the arbitration, in order to preserve rights to challenge later the award or its enforcement.

Thirdly, the Chinese party may also initiate parallel proceedings on the merits of the case in the PRC courts. This may give rise to a dilemma for the foreign investor.  On the one hand, participation by that party may give rise to a negative inference as to the validity of foreign arbitration proceedings already initiated.  On the other hand, non-participation may result in an unfavourable default judgment in court.

Multiple proceedings or additional objections would involve increased costs and may also cause delays, which could give the relevant party time to divest itself of assets in an attempt to frustrate an award made against it.

The authors are aware of a number if alternative clauses used by foreign investors  They may not, however, be as useful as they appear.

A party may wish to include a foreign parent company as guarantor of performance of the contract, in the hope that this would constitute a ‘foreign element’. Although issues with the guarantee itself may be arbitrated at a foreign arbitral institution, the problems previously discussed may still apply if a tribunal appointed by that institution hears the main contract.

Foreign investors may try to use foreign arbitration with China as the seat of arbitration, for example through the ICC in China. Although the SPC confirmed the validity of such clauses in 2014, their enforcement remains uncertain.

Foreign parties may wish to choose arbitration through the CIETAC Hong Kong Arbitration Center. A special chapter of the CIETAC Arbitration Rules 2015, however, distinguishes CIETAC Hong Kong from the CIETAC in Mainland China. It is very likely that the PRC courts would  consider CIETAC Hong Kong a ‘foreign’ arbitral institution, thus giving it the same legal status as foreign arbitration institutions proper.

In the light of these problems, it is recommended that a properly tailored and well-drafted domestic arbitration clause should be used, one which would have exclusive jurisdiction over domestic disputes without a foreign element. Importantly, under PRC law, property and evidence preservation orders by PRC courts are available only in support of arbitrations conducted at domestic institutions.

There is also scope within the CIETAC Rules to tailor the arbitration to the parties’ needs, for example, by the parties appointing foreign arbitrators from outside the CIETAC panel list, and also appointing their own presiding arbitrator in order to avoid an appointment by CIETAC. In an important development, the SPC has confirmed the validity of arbitration clauses that provide for CIETAC arbitration under the UNCITRAL Arbitration Rules (see Zhe Yong Zhong Que Zi No 4, 17 March 2014). In such proceedings, CIETAC may form an international tribunal with a presiding arbitrator from a country neutral to the parties involved. The tribunal may then ensure that the proceedings comply with international standards; but more importantly, CIETAC tends to adopt international practices where the tribunal is international.

Using a tribunal comprising international arbitrators would be just as effective as conducting arbitration overseas, but with the important assurance that the arbitration clause and the corresponding award would be valid and enforceable in China.


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Meet the Author: Interview on Private Dispute Resolution in International Business, Third Edition

by Eleanor Taylor

Kluwer Law International

The publishers of this blog cordially invite you to their brief webinar for practitioners and academics in the field of arbitration and mediation on Tuesday 10th March (4pm Central European time/3pm UK time/10am Eastern Standard Time).

During this brief webinar, Professor Klaus Peter Berger, author of the third edition of Private Dispute Resolution in International Business, will share his insights on this important Book.

Professor Berger is executive director of the Center for Transnational Law (CENTRAL) at the University of Cologne. He is also President of the German Institution of Arbitration (DIS), board-member of the Arbitration Institute at the Stockholm Chamber of Commerce and a practicing international arbitrator.

This new third edition pursues three goals. First, the text of the Handbook has been updated and revised to take account of recent developments in the law and practice of ADR in international business. Second, the user-friendliness of the Handbook has been improved, so that this not only provides Answers to the Questions posed in the Case Study at the end of each Scenario, but also doubles as a stand-alone reference manual for international ADR. Third, the usability and graphical interface of the enclosed materials – now on USB Card instead of a DVD – has been improved and the ‘Skills & Advocacy’ Section improved and enlarged with new interactive training tools.

Overall, the changes reflect the dual purpose of this project, which deals not only with the law, but also with the advocacy skills required for a successful career in ADR in international business.

Register for this webinar today and receive the book at 10% discount.

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If you require further information, please contact the team at marketing@kluwerlaw.com


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Constitutional Review of Arbitral Awards: Between Protectionism and Interventionism

by Camilo Muriel-Bedoya

Pérez Bustamante & Ponce

Could protectionism turn into interventionism? There is a fine borderline between helpful assistance of the courts and abuse of the available judicial remedies within arbitration. If crossed, the entire purpose of opting for such an institution is undermined and its essentialness is jeopardised. The title of this post refers to an uncommon practice that has taken place in Ecuador, as an unusual review mechanism is being applied to arbitration through a special constitutional remedy. As a result, Ecuador is facing a delicate tension between arbitration and constitutional law where a dualism between long procedures (though full of remedies) and arbitration’s principles, such as celerity and finality, collide. The position taken by the Ecuadorian legal system embraces the former scenario, making it appear to be a protectionist jurisdiction; however, important questions have arisen regarding the endangerment of arbitration and its nature.

Ecuador’s new Constitution entered into force in 2008 and brought with it a number of reforms. The 2008 Constitution defines Ecuador as a “constitutional State of rights and justice, which differs from the wording of the 1998 Constitution that defined Ecuador as a social state “de derecho.” The use of the plural in the former completely changes the meaning of the original text in Spanish, as the latter phrase refers to what would be understood in English as the rule of law; thus, the 1998 Constitution was based on the rule of law, whilst the 2008 Constitution took a different approach where the centre of the juridical framework is not the law, but the rights protected by the Constitution. This modification does not mean that Ecuador does not embrace the rule of law; however, this approach seeks to establish a protective constitutional framework where the rights guaranteed are the axis of the State.

Following this rationale, the Ecuadorian Constitutional Court is conceived as the highest body of constitutional control, interpretation and administration of justice in Ecuador. It exercises several tools regarding its constitutional control powers and the Constitution has set different jurisdictional guarantees that seek the protection of constitutional rights. One of these is the Extraordinary Action of Protection (EAP). Under this special constitutional action, a person may challenge judgments or final decisions within which there have been violations of constitutional rights. Hence, the EAP can be sought once every available remedy has been exhausted (i.e. horizontal, vertical, ordinary and extraordinary recourses), unless these are not attributable to the negligence of the party that seeks the EAP.

Additionally, the Constitution determines that an EAP can be filed against resolutions with the force of a judgment and that its admissibility will depend on the fulfilment of formal requirements: (i) that the judgments, decisions and resolutions are firm and binding; and (ii) that the party who files the EAP demonstrates the violations of due process or other recognised constitutional rights.

Against this backdrop, the EAP was seen as a new mechanism to challenge arbitral awards and related judgments (e.g. judgments regarding annulment proceedings against arbitral awards) and constitutional norms were extensively interpreted to expand the powers of the Constitutional Court due to the purported protectionism proposed by the Constitution. Regarding this last matter, the position of the Ecuadorian Professor Edgar Neira is notably sensible. He considers that the EAP is not applicable to arbitral awards nor to any decision issued by an arbitral tribunal due to various reasons: (i) the Constitution does not consider this specific scenario; (ii) the alternative nature of arbitration; (iii) the nature of the subject matter of the arbitration; and (iv) because the Constitutional Assembly, which enacted the 2008 Constitution, did not establish the application of the EAP against arbitral awards.

Nonetheless, the Constitutional Court has considered that the EAP is applicable not just to arbitration, but even noted that constitutional violations could take place at pre-arbitral phases during administered proceedings (Judgment No. 123-13-SEP-CC, issued on December 19 2013). Accordingly, arbitral awards may be under its control and it seems to be that pre-arbitral phases could be subject to its review as well. The Court has determined that this should not be understood as an evaluation on the merits or a determination on how the judge should decide the case, but there are several obscurities that still need to be clarified.

The extraordinary and residual nature of the EAP is ambiguous. The Constitutional Court has not clearly determined when proceedings should be considered exhausted or when these are ineffective or inadequate. For instance, it is uncertain whether an annulment action, which is the only available remedy against an arbitral award under the Ecuadorian Arbitration and Mediation Law, should be filed, even if the law does not establish a particular ground (e.g. the lack of a reasoned award or public policy; these are not expressly determined as grounds for annulment); moreover, it is still not apparent whether the decision on the annulment action is subject to appeal. Additionally, the current trend seems to consider that casación (i.e. the legality control of judgments exercised by the Ecuadorian National Court) is unavailable against arbitral award annulment judgments, but there have been different and even opposite positions rendered by the courts.

Consequently, there is not harmony amongst the courts and some EAPs have been filed against the rejection of an annulment action, others after long procedures against a dismissed casación or against the denial of leave to appeal that denied the appeal of the annulment decision, which, in turn, rejected the annulment of an arbitral award. Furthermore, other EAPs have directly challenged arbitral awards and in some cases the EAP was not admitted because the annulment action was not exhausted, although the ground of challenge was not one of those determined in the law and therefore, the annulment action was in principle ineffective. Yet, the Constitutional Court has also admitted a direct EAP against an arbitral award.

As noted, there are a number of issues that the Ecuadorian arbitral system faces. The obscurity and lacunas of the law, though extensively, permitted the application of inappropriate ordinary rules and remedies against arbitration, creating a further constitutional challenge-regime through a constitutional action which was never intended to by applied against arbitration nor to pre-arbitral phases. Arbitration was never meant to be isolated from the Constitution, as all the parties involved are not exempted from applying it. Furthermore, party autonomy is not absolute and judicial review is needed, hence the rationale of annulment proceedings.

Accordingly, constitutional control is not the appropriate mechanism to review decisions within which the goal is usually to avoid compliance with an arbitral award or an annulment decision regarding a commercial dispute, no matter how many technicalities and forced interpretations are attempted. This does not mean that violations could not be committed within arbitration, but allowing the abusive filing of EAPs results in a constitutional torpedo, as the constitutional action may be used to avoid compliance with previous adjudicative decisions, or at least attempted in order to severely delay proceedings until the Constitutional Court considers the case. As a noteworthy fact, the constitutional control exercised through an EAP is already present in international investment arbitration proceedings, where provisional measures proceedings were asked to be suspended because of the EAP (Constitutional Court judgment No. 028-14-SEP-CC and PCA case No. 2012-10: Merck Sharpe & Dohme Corporation v. The Republic of Ecuador).

The fine boundary between politics and law ought to be considered at all times. Looking at the bigger picture, there are several events that are not isolated from each other, nor from the issues previously exposed. The actions taken by Ecuador, such as the termination of several BITs, the denouncement of the Washington Convention, the creation of a special commission for the audit of BITs and the investment arbitral system (CAITISA), the apparently future establishment of an international arbitration centre by the Union of South American Nations (UNASUR), and the new bill project on the enforcement of awards and judgments (which is being revised by the Ecuadorian National Assembly) have already attracted national and international attention and will surely lead to interesting judicial outcomes and academic debates in the future.

In conclusion, judicial review is necessary as long it truly contributes to judicial harmony; thus, proper control is vital for a healthy adjudicative system. The excessive and helpless intervention by the courts is negative, as it undermines arbitration’s principles and benefits. The consequence of the denaturalization of a dispute settlement mechanism such as arbitration through an invasive system might result in reluctance towards this institution and in the unattractiveness of the legal framework that embraces it, which in turn could eventually be avoided for its lack of certitude. Accordingly, the courts should condemn the abusive conduct against arbitration’s nature and render judgments that provide judicial certainty.

Correspondingly, arbitration must not be seen as a mechanism alienated from the Constitution, nor as an instrument to evade fundamental rights or principles. The Ecuadorian experience shows that the balance between party autonomy and reviewability must be sensible, otherwise an uncertain legal and judicial environment might prevail. It follows that clear norms are desirable, but this is not the ultimate solution either, since it is meaningless if these are not applied or if these are given distorted interpretations that disregard their purpose. Likewise, the remedies for violations of constitutional rights or due process do not reside on an absolute constitutional control, but on the correct application and understanding of the Constitution and the institutions recognised by it.

 


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Unilateral Option to Arbitrate: Valid in the UAE?

by Richard Ashmore

Herbert Smith Freehills,
for Herbert Smith Freehills

Dispute resolution provisions in banking and finance transaction documents in the UAE sometimes include a unilateral option provision which, where a dispute arises, purports to reserve to the contracting bank, investment fund or lender, the right to choose arbitration or litigation, or sometimes litigation in a different forum to the local courts.

The rationale for such clauses is that it makes sense for a party to be able to choose between arbitration and litigation at the time that a dispute arises because it is only at that stage that the party may make an informed decision about which option will be the more effective forum for resolving the dispute. For example, a small debt claim may be more appropriately resolved by court proceedings than by arbitration proceedings.

Typically such clauses are drafted so that the financial institution has “the exclusive right, at their option” to choose between litigation and arbitration, with the counterparty having no say in the matter whatsoever. Such clauses therefore give the financial institution superior rights to their counterparty in the choice of forum for resolving the dispute. This often reflects the unequal bargaining positions of the parties to the agreement at the time of signing.

Bank lending agreements epitomise the issue. They usually provide for an agreement to arbitrate, but with an option only available to the bank to sue in any court of competent jurisdiction (or sometimes a specific court) together with a waiver of any forum non conveniens objection in that court.

A typical clause may provide as follows:

20. DISPUTES

20.1 Arbitration

20.1.1 It is agreed that any dispute or claim arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement or the consequences of its nullity or any dispute regarding non-contractual obligations arising out of or in connection with this Agreement) (a “Dispute”) shall be referred to and finally resolved by arbitration administered by the DIFC-LCIA Arbitration Centre. Disputes submitted to arbitration shall be resolved in accordance with the rules of the DIFC-LCIA Arbitration Centre (the “Rules”) which are deemed to be incorporated by reference into this Clause. The tribunal shall consist of three arbitrators who shall, in the absence of agreement between the parties, be appointed in accordance with the Rules. The place of arbitration shall be the Dubai International Financial Centre and the language of the arbitration shall be English.

20.2 Jurisdiction

20.2.1 Notwithstanding the provisions of Clause 20.1 above, it is agreed that a Finance Party may elect instead of arbitration to bring proceedings relating to a Dispute in the Courts of the Dubai International Financial Centre.
20.2.2 The Company agrees that the Courts of the Dubai International Financial Centre are the most appropriate and convenient courts to settle any Dispute and accordingly the Company will not argue to the contrary.

20.3 Benefit of this Clause 20

This Clause 20 is for the benefit of the Finance Parties only. As a result, the Finance Parties shall not be prevented from taking proceedings relating to a Dispute in any other jurisdiction. To the extent allowed by law, the Finance Parties may bring concurrent proceedings in any number of jurisdictions.

The risk with such a provision arises from the practice of the UAE courts to accept jurisdiction if a claim is brought by any party in connection with any agreement negotiated, signed, or performed in whole or in part within the UAE. Accordingly, by including both an arbitration clause and a clause which provides for the Courts of the DIFC (or any other courts) to have jurisdiction, a UAE court could disregard the arbitration provisions agreed between the parties and consider itself to have jurisdiction.

Less common is where the dispute resolution provisions provide for a dispute to be resolved by litigation, but with one party having a unilateral option to arbitrate. The question arises whether such a clause is a valid arbitration agreement as a matter of UAE law and would therefore be recognised and enforced by the UAE courts.

Until the mid-1980s, mutuality, i.e. that either party may, in the event of a dispute arising, refer it to arbitration, was presumed to be an essential ingredient of a valid arbitration clause under English law. That is certainly no longer the case in England, but the position in the UAE is far less clear. There have been no reported cases in the UAE in which the validity of unilateral option clauses has been considered. Save where an arbitration agreement is governed by DIFC law (where English law principles are relevant), the position adopted in England, or other common law jurisdictions, is unlikely to inform the position that the UAE courts adopt.

The starting point of analysis is the attitude of the UAE Courts to arbitration clauses generally.

Agreeing to arbitrate in the UAE

Arbitration is widely recognised and accepted throughout the Middle East as an alternative to local court litigation and federal law (Federal Law No. 11/1992, Article 203(5)) gives statutory force to arbitration agreements in the UAE.

However, great value is placed in the UAE on a citizen’s right to have access to the local courts for protection and justice. The view that arbitration agreements amount to a sacrifice of that protection means that any doubt as to the existence of an effective agreement to arbitrate is resolved against the party seeking to establish its existence. The position was described by the Dubai Court of Cassation as follows:

“It is settled that arbitration is an exceptional path for disputes between parties and it must be expressly agreed upon because it involves a departure from the path of litigating before the competent courts of law and the guarantee bestowed by the ordinary courts” (Dubai Cassation No. 51/1992 dated 24 May 1992).

Consequently, whereas, for example, the courts of England, Singapore and Australia will seek to construe arbitration clauses in a way that provides them with enforceable content, the UAE courts are much less forgiving. In the UAE, the validity of an agreement to arbitrate must be established with a high degree of certainty. This approach to arbitration clauses has led some arbitration practitioners to describe the UAE as being ‘hostile’ or ‘suspicious’ of arbitration.

Moreover, as a matter of UAE law, arbitration is a matter of the joint intention of the parties to refer their dispute to arbitration and the UAE Courts require proof of that joint intention. The position was described by the Dubai Court of Cassation in Petition No. 220 of 2004 as follows:

“The arbitration agreement can only be valid when it is proved that the parties had the joint intention to refer their dispute to arbitration, which can be inferred from the existence of an arbitration clause within the agreement or from both parties signing a subsequent arbitration agreement.”

It is far from certain that the UAE courts would accept that an agreement between two persons to confer on one them alone the right to refer a dispute to arbitration is proof of a joint intention to arbitrate.

Why have some jurisdictions found unilateral option clauses to be invalid?

In considering the likely attitude of the UAE Courts to unilateral option clauses, it is submitted that there is merit in understanding the reasons why courts elsewhere have found such clauses to be invalid and considering the extent to which those reasons may resonate with the UAE courts.

A review of decisions from other jurisdictions suggests that unilateral option clauses are typically exposed to the following broad lines of attack:

• Void as a matter of public policy;
• Void for uncertainty; and
• Void for unconscionability.

Public policy

In Resolution No. 1831 / 12 of the Presidium of the Supreme Arbitration Court dated 19 June 2012 featuring case No. А40-49223/11-112-401 “Russian Telephone Company CJSC v. Sony Ericsson Mobile Communications Rus”, an arbitration agreement stated that all disputes arising out of a supply agreement would be referred to arbitration under the ICC Rules, but also gave one party (Sony) the right to file a claim to the state courts notwithstanding the arbitration clause. The Russian Supreme Court decided that the provision was invalid as a matter of public policy because it put Sony in a privileged position and therefore violated the principle of equality between the parties.

In the UAE, against the background that arbitration agreements amount to a sacrifice of a citizen’s right to have access to the local courts for protection and justice, it is submitted that there is a significant prospect that the UAE courts would find that, as a matter of public policy, a provision which does not provide for bilateral rights of reference to arbitration is not a valid agreement to arbitrate.

Uncertainty

In Decision No. 2013/16901 of the Turkish 11th Civil Division, the Turkish court noted the exceptional character of arbitration and emphasised the need for an arbitration agreement to state in clear and unequivocal terms that all or certain disputes are to be exclusively resolved through arbitration. The court held that a dispute resolution provision purporting to give the courts of Istanbul jurisdiction over disputes that could not be resolved by arbitration was incompatible with Turkey’s International Arbitration Law due to a lack of clear and definitive intent to arbitrate.

The exceptional character of arbitration is a concept that certainly will resonate with the UAE Courts. Arbitration in the UAE is typically described by the courts as an “exceptional” method of dispute resolution, meaning an exception to the default mechanism of the local courts. Accordingly, a dispute resolution provision with both a jurisdiction clause submitting any dispute to a court and an arbitration clause, both dealing with the same subject matter, may be invalid as a matter of UAE law due to a lack of clear and definitive intent to arbitrate.

Unconscionability

In Bragg v Linden Research Inc. (487 F. Supp. 2d 593, 605-11 (E.D. Pa. 2007)), a Californian court held that an arbitration clause was procedurally unconscionable as a take-it-or-leave-it contract of adhesion and substantively unconscionable for forcing the weaker party to arbitrate claims but allowing the stronger party a choice of forums, imposing high costs for arbitration, designating an inconvenient forum for arbitration and imposing confidentiality on the arbitration proceedings.

It is submitted that, again, these concepts will resonate with the UAE Courts. The UAE Civil Code (Articles 145 and 248) confers upon the courts the right to redress the balance between two contracting parties if the contract is a contract of adhesion and contains oppressive provisions. The court has the right to vary these oppressive provisions in such a way as to reduce the burden on the adhering party or to exempt him therefrom in accordance with the dictates of justice. Accordingly, where there is an inequality of bargaining power, a dispute resolution provision allowing the stronger party to choose the forum may amount to an unenforceable unconscionable contract of adhesion at UAE law.

By Article 246(1) of the UAE Civil Code, parties are obliged to perform their contract in a manner which is consistent with the requirements of good faith. Accordingly, the UAE Courts are unlikely to recognise the reference of a dispute to arbitration as valid where it is made pursuant to a unilateral option clause which is exercised in bad faith.

Conclusion

The author’s view is that a unilateral option to arbitrate may not be recognised by the UAE Courts as a valid arbitration agreement.

Even if the courts in the UAE were to accept the validity of such a clause, it is conceivable that they would impeach the exercise of such an option where there is an inequality of bargaining power or where the option was exercised in a manner that was oppressive, abusive or otherwise inconsistent with the obligations of good faith.


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Mass Claims in Investment Arbitration- The Need of the Hour

by Deepu Jojo Sushama

Association for International Arbitration

Mass claims proceedings have become increasingly important in the current dispute resolution scenario prevailing in the world. In international law, the role mass claims proceedings play is beyond dispute. Tribunals such as the Iran-US Claims Tribunal & United Nations Compensation Commission (UNCC) have certainly highlighted the importance which has been played by mass claims tribunals. Although these international mass claims processes are established to consider the legal claims which result from significant historical events and they mostly constitute large-scale reparation programs for victims of armed conflicts. What makes these claims commissions a great success is that they are able to provide access to justice for individuals who otherwise simply cannot afford to obtain a high standard legal representation. Perhaps a leaf can be taken from the success of the international mass claims commission for the usage of similar aspects in international investment arbitration.

Currently, we are witnessing something extraordinary in investment arbitration, which is the arrival of the average man before ICSID proceedings. It is widely regarded that investment arbitration can be a long drawn out and expensive affair. Studies have even showed that the average claim may cost in the region of US$9,743,000 (Counting the costs of investment treaty arbitration, Global Arbitration Review Online News, 24th March, 2014). This is where mass claims can play a major role. It has to be noted that the methods which are followed by the international mass claims are different from the mass claims in investment arbitration. In international mass claims commissions such as the IRAN-US Claims Tribunals, case by case arbitration is conducted and each claim is treated as a separate one (JR Crook, ‘Mass Claims Processes: Lessons Learned Over Twenty-Five Years’, in International Bureau of the Permanent of Arbitration (ed), Redressing Injustices Through Mass Claims Processes : Innovative Responses to Unique Challenges (2006) 41,44). This approach which is followed by the international mass claim commissions won’t be practical for application in mass claims proceedings in investment arbitration, as there are often a massive number of claimants who wants speedy justice. As a result of this, in investment arbitration the mass claims are consolidated into a single case.

The residual power that is given under Article 44 of the ICSID convention has a major role to play in the development of the mass claims proceedings in investment arbitration. It opens the doors for the tribunal to have some space for itself whilst taking decisions. According to Article 44,

“Any arbitration proceeding shall be conducted in accordance with the provisions of this Section and, except as the parties otherwise agree, in accordance with the Arbitration Rules in effect on the date on which the parties consented to arbitration. If any question of procedure arises which is not covered by this Section or the Arbitration Rules or any rules agreed by the parties, the Tribunal shall decide the question”.

In the case of Abaclat v. The Argentine Republic (Abaclat and Others (Case formerly known as Giovanna a Beccara and Others) v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility (Aug. 4, 2011)), a divided tribunal came to the conclusion that it had the jurisdiction to deal with a mass claim which was brought by 60,000 bondholders. The case arose as a result of a sovereign debt default by Argentina. The tribunal held that the case was admissible under the ICSID Rules (Rule 19) and the ICSID Convention (Art 44) and that it was consistent with their spirit to seek to establish a procedure to deal with claims collectively. This conclusion was reached even though the BIT on which the claim was based did not mention collective proceedings. The tribunal considered the silence of the ICSID framework not as a prohibition of mass proceedings (paras 517-19). The tribunal, rightly, realized that the rejection of the rights of the bondholders would be an unacceptable denial of justice to the claimants (paras 517-19). In the case of Abaclat there was a strong dissenting opinion by Georges Abi-Saab against collective proceedings. But in the case of Giovanni Alemanni v. The Argentine Republic (Giovanni Alemanni and Others v. The Argentine Republic, ICSID Case No. ARB/07/8, Decision on Jurisdiction and Admissibility (Nov 17, 2014)), the tribunal was unanimously in favor of allowing the proceedings to continue. This was a case which was also brought under the Italy-Argentina BIT, and it is the latest in the line of mass claim proceedings in investment arbitration, and, perhaps not surprisingly, it also includes a case of sovereign debt default. With regard to the question whether the collective proceedings were compatible with the ICSID Convention, the tribunal came to the conclusion that the compatibility was indeed present and that it was not rational to impose an implied limitation on the scope of the ICSID Convention so as to prohibit multiple claimants from bringing in a single dispute (paras 323-325).

Investment arbitration has been rightly classified by Van Harten and Martin Loughlin (G Van Harten and M Loughlin, ‘Investment Treaty Arbitration as a Species of Global Administrative Law’ (2006) 17 EJIL 121) as a ‘comprehensive form of administrative law’. It can be said to be entering a quasi-constitutional realm. In such a scenario, the role which is played by the arbitrators is to be highlighted greatly, they have the power to decide how the future of mass claims arbitration is going to be like.

It has been argued by Sant’Ambrogio and Zimmerman that class action suits have the advantage of allowing agencies to avoid duplicate efforts to resolve common issues. Instead, the agency is able to resolve the issues in one swoop, thus giving the agency “the first bite at solving categories of common problems that otherwise may never receive a hearing in federal court or—worse yet—reach federal court without counsel capable of developing a factual record that describes the system-wide harm.” (Michael D. Sant’Ambrogio & Adam S. Zimmerman, The Agency Class Action, 112 Colum. L. Rev. 1992 (2012) at 2053). I completely agree with this statement and I am of the opinion that mass claims in investment arbitration has a similar role to play, thus enabling the arrival of the average man before ICSID proceedings. The ICSID regime also appeals greatly to an investor due to the slick recovery process which is provided by it.

It has been agreed by the experts that the type and amount of large scale legal injuries will continue to expand in the coming years. This would require the need for mechanisms which can handle group claims on a national and international basis (S.I Strong, Class Arbitration Outside the United States : Reading the Tea Leaves, in Dossier VII: Arbitration and Multiparty Contracts 183, 198 (Bernard Hanotiau & Eric A. Schwarts eds. 2010)). Currently, due to upcoming issues such as sovereign debt restructuring, situations where investors will come in heavy conflict with states are likely to occur. In a tight financial scenario, there is every chance that a state might just choose to leave the ICSID system, as opposed to being subject to fiscal austerity. This is why the ICSID regime should strive to arrive on a consensus as regards the mass claims against a state. Doing so would enable to obtain decisions which are more consistent. As I pleaded once before, consistency in investment arbitration would enable to gain the trust of states and investors. The ICSID/BITs system has already seen countries such as Bolivia, Ecuador and Venezuela dropping out. It wouldn’t be advisable to add further countries to the list due to an unclear situation, which is sure to have a major impact on investment arbitration in the future.


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Arbitration Clauses Incorporated by Reference: An Overview of the Pragmatic Approach Developed by European Courts

by Alessandro Villani

Linklaters

and Manuela Caccialanza, Linklaters LLP

The question about whether or not an arbitration clause incorporated “by reference” must be regarded as valid and binding between the parties has been, and still is, central to an animated debate in most European jurisdictions.

The New York Convention 1958 on the recognition and enforcement of foreign arbitral award (“NYC”), which also deals with the obligation of the contracting States to recognize and enforce arbitration agreements, in Article II(3) states that:

“Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.
The term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams”.

However, the requirement of a written form as set out by the NYC has not been construed uniformly by European courts when they come to rule upon the validity of arbitration clauses incorporated by reference to a document other than the main contract entered into by the parties.

The issue gathers prominence also in terms of recognition and enforcement of arbitral awards rendered abroad, as Article V of the NYC decrees that recognition and enforcement may be refused by the seized court if, inter alia, the arbitration agreement “is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made”; thus, as the legislatures of many contracting States (like Italy or France) require that arbitration clauses be in a written form, the risk exists that the party against which enforcement is sought challenges the validity of the arbitration agreement by incorporation on the grounds that it does not comply with the applicable law.

Traditionally, a distinction has been drawn by jurisprudence between two categories of arbitration agreements incorporated by reference, in respect of which a different approach has been taken by courts, and namely:
(i) the main contract makes express reference to an arbitration clause contained in a separate contractual document (so called “relatio perfecta”); or
(ii) the main contract makes general reference to the separate document as a whole, with no specific mention of the arbitration clause contained therein (so called “relatio imperfecta”).

An overview of European case-law shows that, so far, courts have revealed a more tolerant approach vís-a-vís specific reference than vís-a-vís global reference, as they generally tend to admit the validity of an arbitration clause which is expressly referred to by a main contract, whereas the question as to whether general words are capable of incorporating terms which include an arbitration clause is much more disputed.

In those last cases, according to the majority of authorities in Europe, the judgment of the court should be centred not so much on the form of the agreement but rather on the substance of the parties’ will, the matter to be determined being whether or not the party objecting to the arbitration agreement had actual knowledge of its existence and intended to express his acceptance thereof.

French courts have long since held that when the contract globally refers to standard terms and conditions containing an arbitration clause, enforcement thereof is not prevented in itself, it rather being a matter of investigating whether or not both parties had actual knowledge of the arbitration clause in question and intended to accept it, even tacitly (Cassation Commerciale, Dreistern Werk v. Crouzier, 26 June 1990).

The same conclusion was confirmed by the French Cour de Cassation in a case (Societé Bomar Oil N.V. v. Entreprise tunisienne d’activités pétrolières (ETAP), 9 November 1993), relating to a sale and purchase contract referring to “other conditions” of the “standard contract” used by the seller, which included an international Chamber of Commerce (ICC) arbitration agreement. The Court of Appeal, seized by the defendant with a claim to set aside the arbitral award given by the tribunal (on the grounds that the arbitration agreement, not included in the document signed by the parties, should be deemed non-existent), dismissed the action reasoning that Article II(3) of the NYC does not exclude that a contract formed by exchange of correspondence signed by the parties refers to another document containing an arbitration agreement and concluding that such manner of incorporation must be regarded as allowed when the consent of the parties is clear and unequivocal. The Cour de Cassation upheld the decision, finding that an arbitration agreement by reference to a document such as a general conditions form is valid, even in the absence of any mention thereto in the main contract, provided that the party challenging the arbitration agreement was aware of the content of the document at the time the contract was entered into.

Italian case law appears non-unanimous on the matter. In its decision No. 11529 dated 19 May 2009 (Dreyfus Commodities Italia v. Cereal Mangimi), the Italian Court of Cassation, in its United Chambers, upheld the “relatio perfecta” theory, ruling that the requirement of a written form set out by both Article II of the NYC and Article 808 of the Italian Code of Civil Procedure is fulfilled by an arbitration clause which is contained in a document other from the main contract, provided that the reference to the said document explicitly mentions the arbitration clause contained therein, whereas a mere generic reference to the separate document or form containing the arbitration agreement would not suffice (the rationale was that only a specific reference to the arbitration clause can guarantee that both parties had knowledge of its existence).

However, in the more recent decision No. 13231 given on 16 June 2011 (Del Medico v. Iberprotein), the same Court of Cassation seemed rather more inclined to adhere to the “relatio imperfecta” theory, as it ruled that global reference made by an international sale and purchase agreement to a general terms and conditions form containing an arbitration clause must be regarded as valid and binding. In so finding the Court observed that, on the one hand, such an interpretation would not contrast with the New York Convention, whose definition of “arbitration agreement” is so much extensive to admit even incorporation by general reference; and, on the other hand, being a qualified commercial operator the defendant was supposed to know the standard rules referred to in the main contract, frequently used in that commercial practice (thus maintaining that an investigation into the actual knowledge, or at least knowableness, of the arbitration agreement in question is required on a case by case basis).

Also in the English jurisdiction a number of divergent precedents can be found on the subject of what are the requirements for an effective incorporation by reference.

In Aughton Limited v. MF Kent Services Limited (1991), the Court of Appeal, adopting a strict approach on the grounds that arbitration agreements are to be treated differently from the other terms of a standard form contract, concluded that an arbitration clause “must be expressly referred to in the document which is relied on as the incorporating writing. It is not incorporated by a mere reference to the terms and conditions of contract to which the arbitration clause constitutes a collateral contract”. The same reasoning was supported by subsequent cases like Alfred McAlpine construction Ltd v. RMG Electrical (1994) and Ben Barrett and Sons (Brickwork) Ltd v. Henry Boot Management Ltd (1995).

Such views seem to have been gradually retracted following the enactment of the Arbitration Act 1996, whose Section 6 sets out a specific provision dealing with arbitration agreements by reference, decreeing that “The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement”. Furthermore, Section 5(3) of the Act clarifies that “where parties agree otherwise than in writing by reference to terms which are in writing, they make an agreement in writing”; thus, an oral agreement which incorporates by reference the terms of a written form containing an arbitration clause would now constitute a valid arbitration agreement.

Recent decisions have adopted a more lenient perspective, admitting that in principle even a general wording of incorporation would be sufficient, at least when the question arises in the context of dealings between experienced players on a well-known market (see Sea Trade Maritime Corp v. Hellenic Mutual War Risks Association (Bermuda) Ltd (the Athena), 2006; Habas sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL, 2010).

To date, there has been no consistency in the way European courts have been tackling the issue of arbitration agreements incorporated by reference; from an overview of case law in different jurisdictions it emerges that in most cases such arbitration agreements would be analysed in terms of existence and extent of the parties’ consent to have their disputes referred to arbitration. However, in the absence of either an univocal position expressed by jurisprudence or any international or domestic rules clarifying the requirements for a proper incorporation, it is still strongly advisable for any party which, in the context of its business, has to deal with standard forms or general commercial terms to include in the main agreement an express mention of the arbitration clause contained in the secondary document.


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SIAC Announces a New President and Releases its 2014 Results

by Lynne Atherton

Singapore International Arbitration Centre,
for YSIAC

SIAC ended speculation as to who would succeed Dr Michael Pryles as the next President of the SIAC Court of Arbitration by announcing, at the SIAC Annual Appreciation Event on Monday 2 March 2015, the appointment of Mr Gary Born of Wilmer Cutler Pickering Hale and Dorr LLP, with effect from 1 April 2015. At the event, SIAC also released its 2014 case statistics, which showed that over the last 10 years, new case filings at SIAC have grown by almost 200%, reinforcing its position as one of the fastest growing arbitral institutions in the world.

In 2014, SIAC received 222 new cases from parties from 58 jurisdictions. This was a 14% dip compared with 2013, but was nevertheless still a strong performance by SIAC, as it has managed to maintain new caseload levels at over 200 new cases per year for the last three years. The total number of new cases handled by SIAC from 2004 to 2014 is shown below:

Total number of new cases

The total sum in dispute for 2014 amounted to S$5.04 billion and the highest claim amount was S$2.40 billion. Excluding the respective cases with the highest claim amounts for 2014 and 2013, the average sum in dispute for 2014 was S$12.42 million, roughly a 20% increase from the average sum dispute for 2013.

81% of new cases filed in 2014 were international in nature, which means that they included at least one foreign party. The top ten chart of foreign users of SIAC in 2014 is shown below:

Top ten nationalities (excluding singapore)

SIAC has been at the forefront internationally in terms of the number of Emergency Arbitrator cases handled, having received and accepted 42 applications since the introduction of the provisions in July 2010. Since SIAC introduced its Expedited Procedure provisions, also in July 2010, it has received a total of 159 applications, of which 107 had been accepted as at 31 December 2014.

2014 saw the beginning of a new trend of investor-state disputes being referred to SIAC. In order to enhance SIAC’s standing as a preferred forum for investment disputes, the SIAC Rules 2013, which were introduced in April 2013, specifically provide that a party may commence an arbitration in relation to disputes arising out of a legal instrument such as an investment treaty.

The CEO of SIAC, Ms Lim Seok Hui, explained at the event that 2014 had been a year of innovation for the Centre. SIAC had embarked on an exciting new project, namely, the filming and production of the SIAC Arbitration Training Video – a unique teaching and business development tool that demonstrates an international commercial arbitration and depicts the workings of SIAC. One of the highlights of SIAC’s events programme for 2014 was a series of conferences with panel discussions structured around the Video. SIAC will be running a similar series of conferences in the region during 2015.

Another new development was the collaboration between SIAC and the Singapore International Mediation Centre (SIMC), which launched on 5 November 2014, to offer an Arb-Med-Arb service, which is the first of its kind anywhere in the world.

SIAC re-launched Young SIAC in 2014 as YSIAC, for younger lawyers in the under 40 age group, and formed a new and enthusiastic Committee who are keen to plan and implement various YSIAC initiatives, including establishing YSIAC as an affiliate blogger on the Kluwer Arbitration Blog.

The flagship event for 2015 is the inaugural YSIAC Conference which will be held on Thursday, 4 June at Maxwell Chambers in Singapore. The Conference, titled “The Dynamics and Challenges of International Arbitration – The Road Ahead”, will be a full-day event and the guest of honour will be Ms Indranee Rajah, Senior Minister of State, Ministry of Law and Ministry of Education. Leading arbitration practitioners, arbitrators, senior in-house counsel and academics are being invited to participate as speakers and moderators. An Essay Competition, with cash prizes and a registration fee waiver for winners for the YSIAC Conference, has also been launched.

Singapore has built on the success of SIAC and has plans to become a leading dispute resolution hub in Asia with the establishment of SIMC and the Singapore International Commercial Court (SICC), which launched on 5 January 2015. At the inaugural SIAC Congress in June 2014, the guest of honour, Mr K Shanmugam, Minister for Foreign Affairs and Law, praised SIAC for establishing itself as a “global contender” in the arbitration field and said that SICC and SIMC, together with SIAC, will provide a “complete suite of dispute resolution offerings to parties, especially those with cross-border disputes”.

Dr Michael Pryles, Founder President of the SIAC Court of Arbitration, has been instrumental in developing SIAC into a world-class arbitration centre during his term in office. Mr Gary Born said of his appointment, “I am honoured to be succeeding Michael as President of the SIAC Court of Arbitration. SIAC is one of the world’s pre-eminent international arbitral institutions and I am privileged to have the opportunity to serve as President. I look forward to working with the SIAC Court of Arbitration and the SIAC Secretariat to ensure that SIAC is firmly at the forefront of international arbitration, both in Asia and worldwide.”

SIAC has also appointed new Members to the SIAC Court of Arbitration. Full details can be found in the SIAC press release.

To download the SIAC Annual Report 2014 and for further information about SIAC events in 2015 please go to www.siac.org.sg.

For further information about YSIAC and to join please go to http://www.siac.org.sg/ysiac/about-us.

The views expressed are the views of the author and do not necessarily represent the views of YSIAC.


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A Question of Democracy: The German Debate on International Investment Law.

by Stephan Schill

Faculty of Law, University of Amsterdam,
for ITA

Germany’s position on international investment law and investor-State arbitration is attracting increasing attention since the signing of the Canada-EU Comprehensive Economic and Trade Agreement (CETA) in September 2014 has been deferred, inter alia, because of opposition from Sigmar Gabriel, Germany’s Federal Minister for Economic Affairs and Energy. Is Germany, the country that not only has concluded the first bilateral investment treaty (BIT) in 1959 but also has the densest network of BITs worldwide, as some fear, joining the coalition of critics in fundamentally reversing its international investment policy?

Mounting Criticism of International Investment Law in Germany in Context

As I argue in the Editorial of the latest issue of the Journal of World Investment and Trade, the matter is not quite that tragic. To appreciate fully the current debates they must be put into context. That context is first and foremost an ongoing investment arbitration regarding Germany’s nuclear power phase-out (Vattenfall II v. Germany). This is already the third investment treaty case against Germany. However, none of the earlier ones, a little-known UNCITRAL proceeding under the Germany-India BIT from the 1990s and Vattenfall I v. Germany, which involved environmental standards for a coal-fired power plant, had significant political repercussions.

Vattenfall II, however, is special because it involves more than the (simple) challenge of a politically sensitive legislative measure. Rather, the nuclear power phase-out touches on an issue that has marked Germany’s social and political culture over the past three and a half decades like no other issue apart from the fall of the Berlin Wall and German reunification. The Green movement, which initiated and later mainstreamed a process of fundamental social, political and ecological transformation of German society, would have been virtually unthinkable without opposition to nuclear power. The 2011 nuclear power phase-out marks the keystone of this transformatory process. Its challenge in Vattenfall II not only questions a fundamental social and political settlement, but is also easily instrumentalized to turn public opinion against investor-State arbitration more generally. Add to that an at best half-informed press, and you have a scary-looking storm of public skepticism of investor-State arbitration. This peculiar setting hypes public opinion.

The Emergence of a Broad and Open-Ended Political Debate

Notwithstanding the wide-spread criticism, it is important to note that no official government position to reverse Germany’s stance on international investment law generally has been taken. On the contrary, rather than rushed action, we are seeing the emergence of a debate that – beyond the inevitable political saber-rattling – tries to be objective, representative, open, and open-ended. In fact, core political actors in Germany appear determined to create a rational and well-informed framework for the debate about CETA and future investment agreements, such as the Trans-Atlantic Trade and Investment Partnership (TTIP), which always looms in the background, more generally.

First, both chambers of the German parliament have started conducting expert hearings and plenary debates on CETA and international investment law more generally. Second, a TTIP Advisory Group with representatives of various stakeholders, including German industries, labor unions, churches, consumer associations, environmental groups, agricultural production, local communities, and transparency international, amongst others, has been created to advise the Ministry for Economic Affairs and Energy, which is in charge of international investment agreement. And finally, the Ministry commissioned a legal opnion on whether the investment chapter in CETA restricted the legislator’s policy space beyond existing restrictions under Germany constitutional law and EU law. I had the occasion to render this legal opinion and report on it further below. All of this has the purpose to rationalize the debate and provide a basis on which political institutions, social interest groups, and the public at large can form an opinion on investor-State arbitration.

Policy Space under CETA, the German Constitution and EU Law

On substance, one of the core concerns for assessing investment treaty disciplines is the extent to which they reduce ‘policy space’, in particular that of the legislator, for pursing democratically endorsed policies. To answer this question, a comparison between investment treaty disciplines and existing limitations under constitutional and supranational law is instructive. After all, the claim that investment treaty disciplines afford better protection than existing constraints is wide-spread.

Yet, in my study for the German Federal Ministry for Economic Affairs and Energy, I come to quite a different conclusion as regards the relationship between CETA, the German Constitution and EU law when it comes to the restriction of policy space. This is how my conclusion translates in relevant part:

- The international legal obligations in CETA that grant protection to investments of Canadian investors impose restrictions on the legislator that are independent of German constitutional and State liability law as well as of EU law. … Yet, CETA hardly imposes restrictions on the legislator’s regulatory space that go beyond those already in existence under constitutional and EU law. Only the right to national and most-favored-nation treatment results, to the extent none of the numerous exceptions applies, in a substantial improvement of the legal protection of Canadian investors. Through CETA, they are granted protection that is, as regards market access and protection of existing investments, equivalent to that enjoyed by domestic investors under the constitution’s fundamental rights and by EU investors under fundamental freedoms and fundamental rights granted under EU law. This reduces the legislator’s policy space insofar as discriminations of foreign investors due to their Canadian nationality become inadmissible. This notwithstanding, the numerous exceptions that CETA contains significantly narrows the right to equal treatment both for Canadian investors in Germany, as well as for German (and other European) investors in Canada.

- As regards the protection of existing investments against interferences by the legislator other than discriminatory treatment, CETA falls short of the protection granted by German constitutional law and EU law. In relation to legislative measures, the right to fair and equitable treatment under CETA is essentially limited to a prohibition of manifestly arbitrary measures and a minimum level of protection of legitimate expectations. By contrast, the protection granted by the concept of the rule of law (‘Rechtsstaatsprinzip’) and the principle of proportionality under the German constitution are more comprehensive. Similarly, the provisions in CETA protecting against direct and indirect expropriation are not farther-reaching than parallel protections under the German constitution. In addition, the legislator’s policy space is expressly protected against limitations through a variety of exceptions in CETA, including for the protection of national security, the environment, or public health, as well as exceptions regarding taxation and the regulation of financial markets.

- Differences between constitutional law and EU law, on the one hand, and the provisions protecting investments under CETA’s investment chapter, on the other hand, exist with respect to the legal consequences of breaches of the respective provisions. However, divergences in this respect are essentially due to structural differences of the legal regimes in question. Unlike under constitutional law and EU law, the legal consequences of a breach of CETA are limited to compensation and damages; the repeal or the adoption of a legislative measure cannot be demanded. As a substitute for the absence of a right of an investor to demand the establishment of a CETA-compliant state of affairs, CETA permits an immediate claim for compensation and damages; it thereby deviates from the situation under constitutional law where compliance with primary obligations takes precedence over the State’s liability for damages. Yet, since the restrictions CETA imposes on legislative action are less imposing than those under constitutional law and EU law, the liability risk is manageable. Similarly, the standard for calculating compensation and damages, including interests, only marginally deviates from German State liability law. Yet, depending on the circumstances, the costs for pursing claims in investor-State arbitration may be higher than in proceedings before domestic courts.

- An important difference between CETA and constitutional law and EU law concerns the enforcement mechanism in investor-State arbitration proceedings. Yet, access to arbitration is subject to high procedural hurdles and is only available for a narrow class of claims. The risk that arbitral tribunals under CETA further develop the applicable legal standards, and thereby extend State liability, are mitigated by institutional mechanisms. This cannot be seen as a limitation of the legislator’s policy space that goes beyond constitutional law and EU law.

- Overall, CETA essentially imposes no restrictions on the legislator that go beyond existing restrictions under constitutional or EU law. On the contrary, in central aspects CETA lags behind the level of investment protection offered under constitutional law and EU law. Concerns in respect of liability risks of the Federal Republic of Germany or of the limitation of the legislator’s policy space because of the provisions on the protection of investments in CETA are therefore negligible. Rather, the relatively low level of international investment protection puts the value of the investment chapter in CETA for the protection of German and European investors in Canada into question.

The Need for Democratic Endorsement of Investment Rules

Whether Canada and the EU can live with the CETA investment chapter both in respect of their defensive and offensive interests is a political question beyond legal expertise. My conclusions suggest, however, that the investment chapter in CETA is neither the anti-democratic, policy-space-eating beast that some opponents of investment treaty disciplines evoke, nor does it represent the same high level of investment protection contained in the 1300+ existing Member States’ BITs.

Yet, what the study tries to do is to furnish a rational basis for the current debates. Having this debate is, despite the heat with which it is sometimes conducted, a positive development because only the type of public debate we are now seeing in Germany will enable international investment law to develop, on a solid democratic basis, into its next phase, that of large-scale trade and investment agreements between major regional economic blocks, whether between the EU and the United States or between the EU, China, India, and ASEAN. After all, in order to be effective and legitimate, international investment law must be democratically endorsed – and that is why debates, such as the one we are seeing in Germany, should be encouraged more generally, rather than stalled.


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Dispute Boards as Pre-Arbitration Tools: Recent Developments and Practical Considerations

by Paul Taggart

Dispute Resolution Board Foundation

Introduction

Initially created as a tool for construction contracts, a dispute board may be defined as an intermediate dispute resolution mechanism established at the outset of the project and remaining in place until the end thereof whereby board members, with the expertise of the relevant construction sector, upon request provide prompt recommendations or decisions whenever a dispute arises. In the case of the latter, the decision has a binding effect on the parties unless and until it is reversed by the arbitral tribunal or court. When defined so, it is clear it serves mainly for dispute avoidance along with providing interim relief of the dispute until a final award is made to that respect.

In a recent conference where I made a speech on the dispute board mechanism in construction contracts, I encountered a strong statement by a very large construction company’s in house lawyer to the effect that: “We do not think dispute boards may be effective, therefore we do not use them”. Very surprising when articulated, but it is a fact that such an approach exists. On the contrary, an evaluation of the recent developments in the usage of dispute boards as well as certain practical considerations may prove to be useful for a better understanding of the benefits of this prominent pre-arbitral dispute resolution tool.

Developments
1. Rules and Revisions
Available and widely known dispute board rules are firstly those incorporated in the FIDIC 1999 suite of contracts drafted for the international construction sector. These were followed by the ICC Dispute Board Rules initially introduced in 2004 and mainly, but not exclusively, used for the construction contract related disputes. Further examples of dispute board rules are to be found in the American Arbitration Association (AAA), the Dispute Resolution Board Guide Specifications for construction contracts where actually the concept was initially created, effective as of 2000; and finally those drafted by the UK Chartered Institute of Arbitrators (CIArb) in August 2014.

The last of these represents a significant development as the CIArb in producing its rules; demonstrated the growing usage and need for tailoring the rules according to demand. The most significant aspect of the recent rules is their underlying flexibility and applicability to all types of disputes in all types contracts and in all types of industries, potentially widening the use of dispute boards beyond the field of construction.

2. Legislation

Another noteworthy recent development in dispute boards is the official encouragement for their use especially in emerging markets where even other alternative dispute resolution methods are fairly new and recently established.

A good example of this is to be found in Peru. Following the initiative by the Catholic University’s Center for Dispute Resolution, Lima and the Peruvian Society of Construction Law, dispute boards become mandatory prior to the ultimate dispute resolution, in Public Works Law and in Framework Law in Public-Private Partnerships. Likewise, in Honduras the Law of Public Works includes dispute boards as an obligatory step for public contracts above a certain threshold.

3. Case-law
Lastly, world-wide case-law is in process of establishing dispute board “case precedents”, especially that related to the enforceability of dispute board decisions and dispute board agreements; thus permitting a better functioning of this pre-arbitral tool.

The famous Persero cases quite recently decided in the Singapore High Court are noteworthy with regard to the enforceability of binding dispute board decisions. In this regard the second HC decision rendered on 16 July 2014 (“Persero II”, CRW Joint Operation vs. PT Perusahaan Gas Negara (Persero) TBK) approved an interim arbitral award for the interim enforcement of a DAB decision emphasizing that “nothing in its interim award precludes the same tribunal from determining the primary dispute on its merits and with finality in future” (Persero II, paragraph 115).Without going into the details of the discussion, it may simply be stated that such an approach is in line with the intention of dispute board mechanism: effectiveness in time.

Alongside the cases on enforceability of the decisions, enforceability of the dispute board provisions in a contract has also recently been elaborated. Here the Swiss Supreme Court in its decision dated 7 July 2014 (Case no. 4A 124/2014) decided that FIDIC Clause 20 established the dispute board as a mandatory step before arbitration so that even the absence of a time limit to appoint the dispute board did not change its mandatory nature.

Similarly, the Technology and Construction Court of the English High Court decided on 10 October 2014 (Peterborough City Council vs Enterprise Managed Services Ltd [2014 EWHC 3193 (TCC)] ) that “in the absence of any agreement to the contrary, the [DAA] is to be in the form set out in the Appendix to Conditions[…]” (paragraph 28) and that even the signing of the dispute adjudication agreement should not be an imposed obligation given that “if a party without good reason refused to sign the agreement, I cannot see why it could not be compelled to do so by an order for specific performance at the suit of one or more of the other parties” (paragraph 31).

Both decisions undoubtedly favour the applicability of the dispute board provisions against parties’ attempts to overcome such step.

Practical Considerations

Having listed certain recent developments, I would also like to offer certain suggestions as to dispute board practice that require to be adopted so as to obtain the best possible outcome from it.

One issue that is often encountered as shown in the recent case law cited above, is the key issue of timely appointment of the dispute board. Whether a time limit is set forth or not, it is most advisable to appoint the board at the very initial stage of the contract to avoid any future discussions over the validity of the dispute board clause and the enforcement thereof. To save time, dispute board member candidates are to be contacted at the initial stage if not prior to conclusion of the contract, to ensure their availability as well as to eliminate any conflict of interest problems. Parties may well consider contract closure or effectiveness as dependent on the boards appointment.

Again at the stage of appointment, another element to be taken into consideration is the careful selection of dispute board members sufficiently experienced in the type of work comprising the contract and the jurisdiction in which the attached project is undertaken. Simple put it may be that, these two considerations, when not undertaken properly, may result in unintended expenses and ineffective decisions as the board is not familiar with the project type, contract interpretation, or without as regards the chairperson knowledge of law including that of the jurisdiction any decision has been rendered in.

Finally, a food for thought. One of the most problematic areas especially in construction disputes is the calling of the performance bond by the project owner, which can be unconditional and irrespective of existence of any default on the part of the contractor. There is an imbalance between an unconditional demand guarantee (thus, heavily favouring the owner) and a demand guarantee that may be called only upon a favourable arbitral award (thus, heavily favouring the contractor). A requirement of a dispute board decision stating the contractor is in breach (or not) in order to call the guarantee may provide the necessary balance and accordingly discourage any lengthy disputes which are not good for either party.

Conclusion

“We do not think dispute boards may be effective, therefore we do not use them” was a call to arms. It highlighted to me lack of knowledge of the width of application and current usage of dispute boards and their attendant benefits. Dispute boards installed at the outset of a project following it closely are now entrenched in international forms of construction contracts and increasingly state legislation as the primary step for avoiding and resolving disputes at an early stage and preventing them from festering and graduating into something more protracted and resource consuming in nature. The plethora of forms of dispute boards and rules now available is testimony to the dispute board systems growing reputation and attraction as an early intervention “real time” approach. The dispute avoidance role performed by the board is a fast developing craft in itself.

A body of DB jurisprudence giving support to force of boards and the interim enforcement of DB decisions is also accumulating which is dispelling any early fragility concerns. That development gives gravitates to a system which has enjoyed its successes in the USA even without that. The author has experienced cases where disputes referred to a dispute board and which have then proceeded to arbitration have returned the same outcome, yet the cost and time to resolve has multiplied many fold.

Of course for such a system to be successful, certain fundamentals should be observed. It is desirable that boards are appointed early in the project and adopted as part of the project team, and board members be qualified impartial professionals with the ability to acquire the trust and confidence of the parties such that when they apply their combined technical and contractual knowledge to the facts presented, well-reasoned recommendations or decisions are result …and all in real-time.


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The Challenge of the Yukos Award: an Award Written by Someone Else – a Violation of the Tribunal’s Mandate?

by Dmytro Galagan

Central European University

Co-Authored with Patricia Živković (Assistant Editor for Europe)

On July 18, 2014, the arbitral tribunal (“Tribunal”) rendered final awards (“Award”) in three cases brought by former shareholders of OAO Yukos Oil Company (“Yukos”). As already well known, the Tribunal unanimously decided that the Russian Federation had breached Article 13(1) of the Energy Charter Treaty by taking measures having an effect “equivalent to nationalization or expropriation” of the claimants’ investment in Yukos (Award, paras. 1580, 1585), and ordered the Russian Federation to pay damages in excess of USD 50 billion. However, on January 28, 2015, the Russian Federation filed three writs (“Writ”) with The Hague District Court, that seek to annul the Award, alleging, inter alia, that the arbitrators did not fulfil their mandate personally because the Tribunal’s assistant played a significant role in analyzing the evidence and legal arguments, in the Tribunal’s deliberations, and in drafting of the Award (Writ, paras. 15(b), 21(c), 363(3), 509). It is this particular ground for setting aside of the Award that is the focus of this blog post.

Did the Tribunal’s assistant act as the fourth arbitrator?

The Russian Federation argues that the arbitrators delegated substantive responsibilities to the Tribunal’s assistant and thus breached their mandate to perform their duties personally, Therefore, they say, the Award should be set aside on the basis of Article 1065(1)(c) of the Dutch Code of Civil Procedure (Writ, para. 469). At the first organizational hearing in October 2005, the chairman, The Hon. L. Yves Fortier QC, informed the parties that Mr. Martin Valasek had been appointed as Assistant to the Tribunal to provide administrative assistance and exercise liaison duties (Writ, paras. 487, 488, 490).

According to the Russian Federation’s position in the setting aside proceedings, the delegation of the arbitrators’ duties to the Tribunal’s assistant is evident from the disproportionate fees billed by Mr. Valasek, which amount to EUR 970,562 (Award, para. 1863), whereas the fees of other arbitrators – Dr. Charles Poncet, Judge Stephen M. Schwebel, and The Hon. L. Yves Fortier QC – amount to EUR 1,513,880, EUR 2,011,092, and EUR 1,732,937 respectively (Award, paras. 1860-1862). Applying the hourly rate of 250-325 EUR for the assistant and 750-850 EUR for each arbitrator, the Russian Federation suggests that the Tribunal’s assistant spent more hours on the arbitrations than any other member of the tribunal, especially on the merits stage of the case (Writ, para. 492). Overall, Mr. Valasek worked 3,006 hours on the Yukos arbitrations: only 381 hours through the hearings on jurisdiction and admissibility, but as many as 2,625 hours through the merits hearing and drafting of the Award (Writ, para. 494). This is 40% to 70% greater than the number of hours spent by any of the arbitrators (Writ, paras. 496-497).

The Russian Federation claims that time spent on the case by the Tribunal’s assistant cannot be explained by his administrative or logistical role, because two staff members of the Permanent Court of Arbitration, Brooks Daly as the Tribunal’s secretary and Judith Levine as the Tribunal’s assistant secretary, already spent more than 5,200 hours on these arbitration proceedings (Writ, paras. 469, 499). Also, the Russian Federation understands the Tribunal’s refusal to further elaborate on the Tribunal’s assistant work on the ground that doing so would engender “the confidentiality of the Tribunal’s deliberations” as an admission that Mr. Valasek participated in the deliberations (Writ, paras. 469, 500).

Arbitral assistants and secretaries in international arbitration

Given the above circumstances, one of the issues to be decided can be phrased in the following way: which type of tasks may be entrusted to the arbitral tribunal’s assistants and, more broadly speaking, to arbitral secretaries, without jeopardizing the mandate of the arbitral tribunal? Arbitral practice, especially in investment arbitration, shows that arbitral assistants are sometimes appointed (See: Caratube International Oil Company LLP v. Republic of Kazakhstan, ICSID Case No. ARB/08/12, Award, 5 June 2012; Glamis Gold, Ltd. v. United States, Award, 8 June 2009; Duke Energy International Peru Investments No. 1, Ltd. v. Republic of Peru, ICSID Case No. ARB/03/28, Decision on Jurisdiction, 1 February 2006; The Rompetrol Group N.V. v. The Republic of Romania, ICSID Case No. ARB/06/3, Decision on Respondent’s Preliminary Objections on Jurisdiction and Admissibility, 18 April 2008; Compañía de Aguas del Aconquija S.A., Vivendi Universal v Republic of Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007). Such appointments might not be a surprise given the complexity of the cases and the abundance of the submissions made by the parties. In at least one of these cases, the tribunal justified the appointment of the tribunal’s assistant by the need for “logistical assistance on the file in this case” (Caratube International Oil Company LLP v. Republic of Kazakhstan, ICSID Case No. ARB/08/12, Award, 5 June 2012). What can such “logistical assistance” include?

The Young ICCA Guide on Arbitral Secretaries 2014 (“Guide”) provides in Article 3 a non-exhaustive list of the arbitral secretaries’ roles, many of which are of purely administrative or organizational nature (for example, Articles 3(2)(a), (c) and (d) of the Guide). According to the same Article, the role of an arbitral secretary may go beyond the purely administrative, subject to “appropriate direction and supervision by the arbitral tribunal”. Some clearly non-administrative tasks are drafting tasks, more specifically “[d]rafting procedural orders and similar documents” and “[d]rafting appropriate parts of the award” (Guide, Article 3(2)(g) and (j)). However, not all parts of the award are equally acceptable to be drafted by the arbitral secretary: drafting controversies especially arise regarding the “Legal Reasoning” and “presumably the final analysis and operative portions of the award” (Guide, Commentary to Article 3(2)(j)).

The role of a secretary and an assistant in the arbitration proceedings can be understood by the comparison given in the IBA Guidelines on Conflict of Interest in International Arbitration 2014 (“IBA Guidelines”) that both “secretaries and assistants to the Arbitral Tribunal are bound by the same duty of independence and impartiality (including the duty of disclosure) as arbitrators” (IBA Guidelines, General Standard 5(b)). However, this still does not clarify the assistant’s tasks in the proceedings and the thin line between drafting the award and deciding the case may not always be visible.

Tribunal’s mandate in commercial arbitration: case of Sacheri v Robotto (1989)

In commercial arbitration, a similar situation was addressed in a decision by the Italian Supreme Court rendered on 7 June 1989 in the case Sacheri v. Robotto (“Decision”, excerpt available in Yearbook Commercial Arbitration, Volume 16, Kluwer Law International 1991, pp. 156-157; Commented also in: Julian D. M. Lew, Loukas A. Mistelis, et al., Comparative International Commercial Arbitration, Kluwer Law International 2003, pp. 234, 637). Arbitrators, who had no legal training, did not participate in drafting the award. Instead, they hired a lawyer, who was appointed as an expert, to draft the award for them. The adjudication of their mandate was clear in this case, as the Supreme Court noted that “[d]ue to the arbitrators’ professed incapacity to decide issues other than technical construction problems, it amounted to delegating a third person to formulate the final decision, which the arbitrators were not able to conceive and which they could not critically examine once it had been drafted” (Decision, para. 1). The Supreme Court emphasized that legal decision-making is a task which cannot be delegated to the persons other than the arbitrators (Decision, paras. 3, 4).

Conclusion

The proceedings on setting aside of the Yukos Awards has brought to light an interesting question: may the tribunal entrust its assistant with substantive obligations with regard to analysis of the parties’ arguments and drafting of the award? Earlier, the Italian Supreme Court set a clear rule that a tribunal composed of non-lawyers may not delegate a third party to solve the legal issues of the case. On the contrary, all the arbitrators in the Yukos arbitration were highly renowned and respected lawyers, so it remains to be seen where the court will draw a line in determining the limits on the arbitral tribunal’s assistant’s competences.


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