Tipping Point?: What Does the Perenco case say about Fair and Equitable Treatment?

by James Jones and Sapna Jhangiani

Clyde _ Co. LLP,
for Clyde & Co.

The case of Perenco Ecuador Limited v Republic of Ecuador, ICSID Case No. ARB/08/6 (Decision, 12 September 2014), is one of a number of investor-state disputes to arise from the Ecuadoran government’s policies on the so-called “extraordinary income” of oil companies operating in its territory in the mid to late 2000s. Keen followers of international arbitration will recall three previous cases concerned with the same issues:

Murphy Exploration & Production Company – International v. Republic of Ecuador, (UNCITRAL, PCA Case No. AA434 / ICSID Case No. ARB/08/4), which is now proceeding in an UNCITRAL arbitration after the ICSID proceedings were dismissed for lack of jurisdiction;
Repsol YPF Ecuador, S.A. and others v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador), (ICSID Case No. ARB/08/10) which was discontinued; and
Burlington Resources Inc. v. Republic of Ecuador (ICSID Case No. ARB/08/5), which has been delayed at the quantum stage following Ecuador’s successful application to disqualify one of the arbitrators.

In its decision, the tribunal in Perenco found Ecuador to be in breach of a number of its obligations, both under the underlying exploration contract, and of its obligations under the France-Ecuador BIT. As regards whether Ecuador was in breach of its fair and equitable treatment obligations (“FET”), the tribunal found that it was, but that the breach occurred later than Perenco had alleged. This is of potential broader significance, given what the tribunal said about the current state of international law with regards to FET.

The two key measures that were the focus of the case on FET were (i) Ecuador’s introduction of ‘Law 42′ in June 2006, which introduced a windfall tax of 50% on the revenue Perenco derived from the increase in oil prices in the mid-2000s (as measured against the original ‘reference price’ in Perenco’s exploration contract); and (ii) ‘Decree No. 662′, issued in October 2007, which increased Ecuador’s share of revenue from such sales from 50% to 99%.

When considering the FET issue, the tribunal recited and considered the oft-quoted passages in Waste Management Inc v Mexico, Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania and Saluka Investments BV v Czech Republic. The tribunal then noted that the adjectives used in Waste Management such as ‘arbitrary’, ‘grossly’, ‘unfair, unjust or idiosyncratic’ and ‘manifest’ “implies a search for the ‘something more’ that distinguishes an act in violation of international law from the perceived unfairness occasioned by many governmental actions that do not rise to a breach of international law. The challenge is to discern between the two.”

The tribunal held that the 50% adjustment in Law 42 did not fulfil this ‘something more’ requirement. The tribunal’s reasoning for this was that the increase in oil prices had been “extraordinary” and similar measures were taken at around the same time by other states to harness some of the extra oil dollars being generated by the exploration in their territory. The tribunal noted the increase in price had not deprived Perenco of its anticipated revenue but rather only reduced the upside it stood to gain as a result of the higher prices. The tribunal also placed weight on the fact that the contract (and the law upon which the contract was based) envisaged future re-negotiation of the distribution of revenues. The fact that such negotiations were eventually subsumed by later developments did not mean that at the time of Law 42 Ecuador was in breach of its FET obligations.

Conversely, the tribunal found that Decree No. 662 fundamentally changed the contract from a ‘participation’ model to a service-type contract. The tribunal was perturbed also by the lack of transparency from Ecuador regarding how the contracts were to be further altered thereafter.

On one level, it is difficult to see a fundamental difference between a windfall tax set at 50% and a windfall tax set at 99%. Both could be seen as confiscatory and both (at least according to Perenco) frustrated Perenco’s legitimate expectations. Perenco argued that the participation nature of the contract entitled it to expect both that (i) it would be able to retain all of the upside on the back of increased oil prices; and (ii) that its contract would not be unilaterally amended. However, the tribunal was clearly persuaded that given the “profoundly different” state of the oil market in 2006-2007 as against when the exploration contract was first agreed, negotiations to amend the contract might well have been successful.

When deciding whether a state has breached FET standards, investment tribunals have tended to face greater challenges in relation to determining how criteria should be applied to the divergent factual backgrounds that turn up at ICSID, than in establishing the criteria against which a state’s conduct should be judged. The Perenco case reinforces the notion that FET is best viewed as a spectrum, with the tribunals ultimately having to decide where on the spectrum of state behaviour to draw the line of culpability; and then where to place the particular case before them on that line.


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Are Anti-Suit Injunctions Back on the Menu? The AG’s Opinion in Gazprom

by Stephen Lacey

Linklaters

On 4 December 2014, the Advocate General (“AG”) of the CJEU handed down an opinion in the Gazprom case (C-536/13) which will surprise. The case concerns the compatibility with EU Regulation 44/2001 (the “Brussels I Regulation”) of an anti-suit award made by an EU seated arbitral tribunal against EU court proceedings elsewhere. In approving this, the AG has, however, also opined that the CJEU’s decision in West Tankers (C-185/07) is now to be regarded as incorrect and that intra-EU anti-suit injunctions in support of arbitration are generally permissible. The opinion is not binding on the CJEU but looks set to reignite debate.

Gazprom concerns the supply of gas by Gazprom to Lithuania via a Lithuanian company, Lietuvos dujos AB (“LD”). LD was, at the time of the facts of the case, owned by Gazprom, E.ON and the Lithuanian State. Under certain agreements the price LD paid for gas was set by a formula which had been renegotiated a number of times. A shareholders’ agreement between Gazprom, E.ON and the Lithuanian Ministry of Energy (“MoE”) obliged those parties to safeguard this gas supply and contained an arbitration clause (SCC arbitration, Stockholm seat).

In 2011 the MoE commenced domestic court proceedings against LD, its managing director and two board members appointed by Gazprom. In these, the MoE alleged that the setting of the gas price had been contrary to LD’s interests and sought an investigation, under the Lithuanian Civil Code, into LD.

In response, Gazprom commenced an arbitration in Stockholm under the shareholders’ agreement. It sought an order that the MoE should have arbitrated these matters and that it should withdraw its court proceedings. In July 2012 the tribunal made such an award.

Meanwhile, in September 2012, the first instance Lithuanian court found that the matter was within its jurisdiction and granted the MoE’s request for an investigation.

Before the Lithuanian Court of Appeal, Gazprom sought recognition of the tribunal’s award. This was rejected. The Court of Appeal held that the statutory investigation was, under Lithuanian law, non-arbitrable and that the award was contrary to public policy. Recognition was thus refused under Articles V(2)(a) and (b) of the New York Convention 1958 (the “NYC”).

This decision was appealed to the Lithuanian Supreme Court. There, the MoE relied on the NYC but also argued that recognition of the tribunal’s award would be contrary to the Brussels I Regulation, in particular the CJEU’s decision in West Tankers (In West Tankers, the CJEU outlawed the grant of an anti-suit injunction by an EU court against proceedings in “breach” of an arbitration clause in another EU court. This was because although the injunction proceedings fell within the scope of the arbitration exclusion in the Brussels I Regulation, the court proceedings elsewhere were regarded as proceedings within the scope of the Regulation which could not be interfered with in such a way).

Consequently, the Supreme Court referred a number of questions to the CJEU which essentially raised two issues:

First, should the court refuse to recognise the arbitral tribunal’s award on the basis that it is incompatible with the Brussels I Regulation in restricting the right of the court to determine its jurisdiction? and

Second, did the award otherwise violate the concept of “public policy” in Article V(2)(b) NYC in limiting the court’s right to decide on its own jurisdiction under the Brussels I Regulation?

As to the first issue, the AG considered that the Brussels I Regulation did not require the court to refuse to recognise the award. That question, in his view, fell to be determined by reference to the NYC (paragraph 157 of his opinion – numbers in brackets which follow are references to such paragraphs).

The AG rested his conclusion on two, independent, bases. The first, and more controversial, was the impact of Recital 12 of EU Regulation 1215/2012 (the “Recast”).

(The Recast is, of course, replacing the Brussels I Regulation in respect of proceedings commenced in the EU on or after 10 January 2015 and Recital 12 aims to strengthen the arbitration exclusion in order to address a number of the wider problems raised by West Tankers).

His reasoning in this regard was that:

First, although the case fell within the Brussels I Regulation, Recital 12 of the Recast still applied. This was because its function (there being no change to any relevant articles in the two instruments) was to explain how the arbitration exclusion must and always should have been interpreted (91). Second, Recital 12 showed that EU court proceedings concerning, even as an incidental matter, the existence of an arbitration agreement were (contrary to the CJEU’s view in West Tankers) excluded from the scope of the Brussels I Regulation; at least until that court has ruled that there is no arbitration agreement (125-133). Accordingly, up until then there can be no objection to an anti-suit injunction being granted by another EU court against the same (134-136). Further, Recital 12 states that the Recast does not apply to “ancillary proceedings” relating to an arbitration (137-140). Thus, as intra-EU court anti-suit injunctions in support of arbitration are permissible under Recital 12, as applied to the Brussels I Regulation, a fortiori there was also nothing in the tribunal’s award which offended that instrument (187).

The second basis was less controversial – it being that an arbitral tribunal is not bound by the Brussels I Regulation (and so there was no objection to the grant of such an award), and that, likewise, recognition and enforcement of a tribunal’s award is simply not subject to that Regulation (153-156).

Of course, the AG’s conclusion that the Brussels I Regulation was not relevant in respect of the first issue would still leave the Lithuanian courts free to decide whether to recognise the award under the NYC.

In that event, however, the second issue then became relevant as it sought to ask whether the public policy exception of Article V(2)(b) NYC was engaged by any such interference with a court ruling on its own jurisdiction under the Brussels I Regulation. In this respect the AG’s view was that it was not; that instrument being incapable of being characterised as public policy provisions under EU Law (180-188).

Before focussing on the AG’s conclusions on West Tankers and intra-EU court anti-suit injunctions in support of arbitration, it should not be forgotten that, ultimately, Gazprom does not directly concern such measures. It is about the effect of an anti-suit award by a tribunal and, in this respect, the AG’s support of such an award is to be welcomed. It is hoped that the CJEU reaches the same ultimate result.

By contrast, the AG’s wider observations on West Tankers are more radical. If followed by the CJEU the consequence would be that intra-EU court anti-suit injunctions in support of arbitration would be permissible both under the Recast and in respect of proceedings remaining governed by the Brussels I Regulation.

What will the CJEU do? In the light of Turner v Grovit (C-159/02) the extent to which Recital 12 of the Recast permits such injunctions remains highly debatable, as does the separate issue of it having retroactive application, and it seems unlikely that the CJEU will follow the AG on this point. Moreover, it does not actually need to touch the issue. First, there exists a far more orthodox ground for deciding the case, namely the AG’s second basis for his opinion on the first issue discussed above. And, second, it could hold that the entire reference is simply unnecessary to determine the case (as the Lithuanian Court can, in any event, as it has done, refuse to recognise the award on the basis of Article V(2)(a) NYC).

However, there is a dilemma for the CJEU. If it leaves the point open the AG’s opinion will remain as ammunition for litigants, before EU courts with a tradition of anti-suit injunctions, to try to reopen West Tankers or even (particularly in proceedings wholly within the temporal scope of the Brussels I Recast where Recital 12 undoubtedly applies) to argue that the measures that case outlawed are allowed. The CJEU will no doubt realise this and so the opinion may stir it into not only reaffirming the position under the Brussels I Regulation but also a pre-emptive strike against matters under the Recast.

Finally, what might happen if a litigant tried such an application before the CJEU’s decision? That is difficult to predict. The AG’s opinion is not law, the relevant legal points differ considerably whether the Brussels I Regulation or the Recast are involved and no doubt a national court would feel pressure to stay the matter, or even refer the questions to the CJEU, given Gazprom is pending. There is also the risk that whatever the CJEU says in that case could render such an application nugatory. In short, it would not be something to be done without careful consideration beforehand.

Click here for a copy of the AG’s opinion.


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Third party funding in international arbitration – lessons from litigation?

by Daniel Kalderimis

Chapman Tripp

and Paula Gibbs, Chapman Tripp

Introduction
The spotlight continues to shine on third party funding in international arbitration, following the recent Alemanni decision and unsuccessful disqualification proposal filed against Dr Gavan Griffith QC in the RSM v St Lucia ICSID arbitration (reported on in this blog by Carlos Gonzalez-Bueno and Laura Lozano).

A similar spotlight shines also in domestic litigation. For instance, the English High Court in Excalibur Ventures LLC v Gulf Keystone [2014] EWHC 3436 (Comm) recently ordered third party funders who funded “a hopeless case” to pay the winning side’s costs on an indemnity basis.

This blog briefly explores whether international arbitration can learn any lessons from litigation regarding how best to approach third party funding.

Lessons from the Courts
There are presently several questions facing the international arbitration community in relation to third party funding:
1. Is automatic disclosure of the existence of third party funding required?
2. In what circumstances, if any, must the details of the third party funding agreement be disclosed?
3. Can, and if so when should, a tribunal order security for costs against third party funders?
4. Can, and if so when should, a tribunal award costs against third party funders?
5. Can third party funders recover their costs as part of a costs award?
Many of these questions have already been addressed in domestic courts. But the results have not always been consistent.

Some courts remain resistant to third party funding:
• In Singapore, due to the enduring influence of the common law torts of maintenance and champerty, third party funding agreements may be unenforceable (see The Law Society of Singapore v Kurubalan s/o Manickam Rengaraju [2013] SGHC 135; Otech Pakistan Pvt Ltd v Clough Engineering Ltd [2007] 1 SLR 989)
• In New Zealand, a claimant must automatically disclose third party funding and may be ordered to disclose details of the funding agreement (Waterhouse v Contractors Bonding Ltd [2013] NZSC 89). A defendant can apply for a stay of the proceedings if the “level of control able to be exercised by the funder and the profit share of the funder” amounts to an assignment of the legal claim
• In Finland, Nigeria, Sweden and Brazil, third party costs may be irrecoverable because the claimant has not incurred those costs, and the funder does not have standing to recover its own costs.

Other courts have accepted third party funding:
• In Switzerland, the role of third party funding in providing access to justice prompted the Supreme Court to strike down a law prohibiting it (Bundesgerichtsentscheid 131 I 223, 2P.4/2004, 10 December 2004)
• In France (where litigation funding is relatively uncommon because parties typically bear their own costs), the Versailles Court of Appeal held that it lacked jurisdiction to consider the validity of a third party funding agreement in an international arbitration, and declined to declare the agreement void (Société Foris AG v SA Veolia Properte, CA Versailles, No 05/01038, 1 June 2006)
• In Australia, it is not an abuse of process for a funder to exercise a degree of control which renders the plaintiff’s interests subservient (Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41). In New South Wales, South Australia, ACT and Victoria the torts of maintenance and champerty have been abolished
• In England or Ireland, it is not necessary to disclose the details of the third party funding agreement. As noted above, funders were recently ordered to pay indemnity costs in Excalibur Ventures.

Other jurisdictions are cautiously embracing third party funding. In certain states in the US, including Maine and Ohio, legislation has been introduced to deal with litigation funding. In other states, the level of control exercised by funder may have costs implications. For instance, Florida’s Third District Court of Appeal has held that a funder was a party to the suit and liable to pay costs where it had such control as to be entitled to direct the course of the proceedings (Abu-Ghazaleh v Chaul 36 So 3d 691, 694 (Fla App Dist 2009)).

What to make of it all?
On one view, domestic case law on third party funding does not send a clear message, and so is of little interest to the international arbitration community.

On another view, however, the disparate domestic case law reveals a conceptual struggle as to how properly to regard third party funders. This struggle is relevant to international arbitration, because it needs to make the same choices.

The domestic cases reveal a continuum between those jurisdictions which essentially see third party funding as illegitimate, and those which essentially see it as legitimate. The first category, which might be called the ‘true claimant’ approach, is influenced by the concern with officious intermeddling inherent in the maintenance and champerty torts. It takes the view that there is a true claimant who must either bring, or not bring, its own claims.

The second category takes a more ‘market-oriented’ approach. It is animated by the access to justice principle. It regards legal claims as assets which, like any other asset class, can be funded by the financial market. Accordingly, claimants can go to the market and partner with financial backers to prosecute their claims.

Certain procedural decisions relating to third party funding follow from either perspective. With the true claimant approach comes the notion that third party funding should be closely scrutinised by the court or tribunal and only permitted in appropriate cases. This is where Singapore and New Zealand tend to come from. Where third party funding is used inappropriately, security for costs should be ordered, or the claimant’s action should be stayed. But, as in Finland, orders are not made against the third party funder directly, as they are not the true claimant.

By contrast, with the market approach, the third party funder is regarded almost as a shadow co-claimant. There is no need for the court or tribunal to review the funding agreement. But it may be necessary for the court or tribunal to make orders directly against the funder. Accordingly, as in Florida, orders for costs – or as in the Excalibur case, orders for indemnity costs – can be made against them if the claim is unsuccessful. On this approach, funders are treated as having a legitimate seat at the table, but must accept the concomitant responsibilities.

It is tempting to think that arbitration should follow the market approach; not least because it is itself a market-based system. But it is constrained by its contractual foundations which require that any claimant be a party to an arbitration agreement against any respondent. Thus, while it may be tempting to embrace the market model, the main tool of that model is the power to make costs orders directly against third party funders. If this tool is unavailable, the practicalities of this model need to be considered.

For this reason, there is some merit in international arbitration adapting techniques from the true claimant model of seeking to regulate and supervise third party funding from the outset, where it is less likely to cause jurisdictional problems down the road. But this can lead to the criticism levelled at the St Lucia decision on security for costs, which are – at least traditionally – a rarity in international, and especially ICSID, arbitration.

However, even if arbitration has no option but to use the tools of the true claimant model, it can choose to use them in different, and perhaps more permissive, ways. International arbitration is, for good reason, not influenced by historical common law torts. Third party funding is effectively after-the-event insurance and whether one likes it or not, is now a part of the landscape.

Future tribunals must use the tools at their disposal to ensure that the presence of a third party funder does not give rise to injustice and practical difficulties in making effective costs orders for either side. For this reason, tribunals will continue to contend with: (i) applications by respondents for security for costs orders against claimants who are significantly funded by third parties; and (ii) applications by successful claimants for costs which have been incurred through third party funding. It is hoped that, when faced with such applications, a spirit of common sense and pragmatism will prevail.


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Consent in Multiparty Investment Arbitration – The Most Recent Installment

by S.I. Strong

University of Missouri School of Law,
for ITA

On November 17, 2014, the tribunal in Alemanni v. Argentine Republic issued its long-anticipated decision on jurisdiction and admissibility. Alemanni is the third in a series of large-scale arbitrations arising out of Argentina’s default on its sovereign debt, and the most recent decision bears some resemblance to the preliminary awards rendered in the other two matters (Abaclat v. Argentine Republic and Ambiente Ufficio v. Argentine Republic). However, Alemanni puts its own distinctive stamp on the question of mass and multiparty claims in the investment context.

The facts in Alemanni are substantially similar to those in Abaclat and Ambiente Ufficio and therefore need not be discussed at length. Essentially, the three disputes involve claims asserted by varying numbers of Italian bondholders following Argentina’s default on certain sovereign bonds. All three matters saw Argentina objecting to the arbitral proceedings on both procedural and substantive grounds. However, the number of claimants in each matter differed significantly. Abaclat involved by far the largest number of claimants (60,000), while Ambiente Ufficio and Alemanni saw much more modest numbers of claimants (90 and 74, respectively).

All three awards considered a variety of substantive objections relating to whether the types of claims at issue could be considered “investments” under the relevant treaties and whether the claimants could be considered “investors.” Though interesting, these matters are not the subject of this post. Instead, the emphasis here is on certain procedural questions, particularly with respect to the consent of the respondent state.

In Alemanni, the parties argued the question of consent in a manner that was very similar to the positions adopted in Abaclat and Ambiente Ufficio. However, the tribunal in Alemanni noted that it was “not impressed by either of the two opposing arguments: either that a multi-party arbitration can only be brought where there has been a second, special consent to that effect; or (conversely) that the parties’ (or the respondent’s) specific consent is of no special relevance, in the particular context of a multi-party arbitration, to the establishment of the tribunal’s jurisdiction.” (para. 268) Instead, the tribunal indicated that “[i]n a BIT case . . . where the consent of the respondent State is in issue, the question for consideration remains simply: on the proper interpretation of the BIT, has the respondent, or has it not, given a consent which is wide enough in scope to cover the proceedings brought (as in this case) by the multiple group of co-claimants.” (para. 269).

In deciding this and other questions, the tribunal relied heavily on the Vienna Convention on the Law of Treaties and noted in this context that Article 31(1) of the Vienna Convention speaks of interpreting a treaty in good faith and “in accordance with the ordinary meaning to be given to the terms of the treaty.” (para. 270) However, the tribunal did not believe that this aspect of the Vienna Convention contemplated the imposition of “a sort of lexicographical literalism.” (para. 270) As a result, the tribunal in Alemanni decided that focusing primarily on whether the bilateral investment treaty in question used the word “investor” in the singular or plural was inappropriate, thereby rejecting certain aspects of both Abaclat and Ambiente Ufficio as well as the briefing of the parties.

Instead, the tribunal considered the key question to be whether “the words ‘dispute arising directly out of an investment, between a Contracting State . . . and a national of another Contracting State’ as they appear in Article 25(1) of the ICSID Convention [are] to be understood as meaning ‘dispute between a Contracting State and one, but only one national or another Contracting State.’” (para. 270) The tribunal concluded that there was nothing in the context of the ICSID Treaty or additional materials to support importing the phrase “but only one” into the analysis. (para. 271)

As a result, the tribunal framed the question of the respondent’s consent as turning on whether the large number of claims in this particular matter could be considered to constitute “a dispute.” (paras. 273, 286) The tribunal in Alemanni believed that Abaclat did not address this issue at all, with Ambiente Ufficio only considering the matter “in a somewhat tentative way.” (para. 290) Therefore, Alemanni departs from these other cases in a potentially significant manner.

The tribunal in Alemanni found the emphasis on “a dispute” to be subsumed within Article 25(1) of the ICSID Convention as well as both the ICSID Institution Rules (Article 2) and the ICSID Arbitration Rules (Rule 1). (para. 292) “The Tribunal . . . indicated that it is perfectly possible, in its opinion, for ‘a dispute’ to have more than one party on the claimant’s side. But the interest represented on each side of the dispute has to be in all essential respects identical for all of those involved on that side of the dispute.” (para. 292).

In this case, the tribunal believed that “the substance of that jurisdictional issue is so closely entwined with the substantive disagreement between the Parties, both factual and legal, that it has to be joined to the merits.” (para. 293) As a result, the tribunal indicated that it would delay its decision on this matter until after the merits phase.

The tribunal went on to decide a number of other matters relating to jurisdiction and admissibility. Many of these discussions are quite intriguing, particularly with respect to the extent to which the tribunal relies on or distinguishes reasoning found in Abaclat and Ambiente Ufficio. However, the decision with respect to consent of the respondent gives rise to a number of observations relating to the future development of large-scale disputes in investment arbitration.

The first two observations are positive in tone. First, by framing the question as one relating to the definition of “a dispute” rather than as requiring a detailed search for plural or singular nouns in the relevant bilateral investment treaty, Alemanni does much to advance the sophistication of the jurisprudence relating to large-scale arbitration. Furthermore, the Alemanni approach effectively avoids the debate about whether, in allowing mass, collective or multiparty arbitration, tribunals are elevating the “spirit” of the treaties over the language of the text. In so doing, Alemanni may help provide a more predictable and universally acceptable basis for decisions relating to multiparty disputes.

Second, Alemanni provides a rule that will be useful not only in cases involving so-called “mass” arbitrations such as Abaclat but also in cases involving smaller “multiparty” disputes such as Ambiente Ufficio and Alemanni. Since the future of large-scale investment arbitration more likely lies in these types of more modest cases, Alemanni could prove more persuasive than Abaclat in the coming years.

The third and final point inserts a note of caution and concern. Although the Alemanni tribunal’s emphasis on the factual nature of “a dispute” makes sense as a matter of jurisprudence, this approach, if adopted by other tribunals, may very well delay many jurisdictional determinations. As a result, large-scale investment arbitration could become even more expensive and time-consuming, since tribunals may be increasingly inclined to delay their decisions about consent until the merits phase. Of course, some future matters may be more amenable than Alemanni is to a preliminary decision about the nature of “a dispute” with multiple claimants, but this type of fact-laden analysis could arise in other circumstances as well.

Although Alemanni may not generate as much discussion in the international community as Abaclat, the decision on jurisdiction and admissibility is well worth reading. Indeed, Alemanni demonstrates an increasing sophistication in the analysis of large-scale investment arbitration and may become more influential than Abaclat in the coming years.


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The French Law Standard of Review for Conformity of Awards with International Public Policy where Corruption is Alleged: Is the Requirement of a “Flagrant” Breach Now Gone?

by Patricia Peterson

Linklaters

For many years, the standard of review by French courts of awards rendered in international arbitration proceedings on grounds of violation of international public policy has been controversial. Scholars have debated the relative merits of a “minimalist” as opposed to a “maximalist” approach. In court decisions, the “minimalist” approach prevailed.

In the area of competition law, the “minimalist” standard of review found expression, perhaps most famously, in the 2004 Paris Court of Appeal decision in SA Thales Air Defence v. GIE Euromissile and SA EADS France (1er Ch., sect. C, 18 November 2004) with the requirement that relevant breach of international public policy be “flagrant, actual and concrete” (“flagrante, effective et concrète”) on the face of the award. This standard was also applied by the French Cour de cassation in Sté SNF v. Sté Cytec Industries BV (1er Ch. civ., 4 June 2008), a challenge to an exequatur order alleging a breach of competition law. Proponents of the “minimalist” approach consider this standard to be justified by principles such as the finality of arbitration awards and the prohibition of the revision of awards on their merits by the courts. Critics have argued that the requirement of a “flagrant” breach of international public policy on the face of the award has led to a formalistic standard of review, which amounts to no real review at all.

Since the 2009 decision of the Paris Court of Appeal in the Schneider case, affirmed by the Cour de cassation in February 2014, it appeared that the same “minimalist” standard of review was also applicable with respect to the challenge of an award on the basis of allegations of corruption (cf. Sté M. Schneider Schältegerätebau und Elektroinstallationen GmbH c. Sté CPL Industries Limited, Paris CA, 10 September 2009; Cour de cassation, 1er Ch. civ., 12 February 2014). The ruling in Schneider departed from earlier decisions in challenges to awards based on corruption allegations. Previous case law permitted a review of the law and the facts insofar as they related to the application of the relevant rule of public policy (cf. Sté European Gas Turbines SA v. Sté Westman International Ltd, Paris CA, 1er Ch., 30 September 1993).

Decided shortly after the Cour de cassation ruling in Schneider, three recent Paris Court of Appeal decisions now suggest that the courts may, at least in the case of allegations of corruption, return to the previous position allowing for fuller review of facts and law in relation to the grounds for challenge. Most striking in these decisions is the absence of the word “flagrant” in the standard of review that has been applied.

In the first of these decisions, Sté Gulf Leaders for Management and Services Holding Company (“Gulf Leaders”) v. SA Crédit Foncier de France (“CFF”), rendered on 4 March 2014, the Court formulated the standard of review as follows:

“Where it is claimed that an award gives effect to a contract obtained by corruption, it is for the judge in set aside proceedings, seized of an application based upon article 1520-5° of the Code of Civil Procedure, to identify in law and in fact all elements permitting it to pronounce upon the alleged illegality of the agreement and to appreciate whether the recognition or enforcement of the award violates international public policy in an actual or concrete manner.” (Paris CA, Pôle 1, Ch.1)

The Gulf Leaders case involved a loan (USD 157.5 million) granted by CFF, payable in three tranches, and the subject of a USD 4.5 million underwriting fee. After payment of the first two tranches, CFF, for various reasons, refused to pay the third tranche and rescinded the loan contract, claiming repayment of the funds.

CFF commenced ICC arbitration proceedings against Gulf Leaders to recover the outstanding amount. Gulf Leaders contended that the loan contract was a product of corruption and therefore void for illegal cause, a defence that would have enabled it to avoid restitution. According to Gulf Leaders, CFF’s payment of a USD 4.5 million fee to a Panamanian company, Riveroca, was a hidden commission (allegedly financed through the underwriting fee, said to have no basis), paid in view of the relationship between the company’s manager and the CEO of Gulf Leaders at the time. The Tribunal found that corruption had not been proven and rendered an award in favour of CFF. Gulf Leaders challenged the award on grounds of violation of international public policy.

After reviewing the Tribunal’s reasoning, the Court of Appeal considered the facts in light of its own definition of corruption in the conclusion of a private contract. Since it was not alleged that Riveroca’s manager worked for Gulf Leaders, nor that Gulf Leaders’ CEO had received any commission or advantage, the Court concluded that corruption had not been established. Further, it found that Riveroca’s manager had participated in contract negotiations with representatives of Gulf Leaders, suggesting no concealment of activities, and he had been engaged by CFF as a Middle East expert. It was therefore only after conducting its own review of the facts on the record, and applying the relevant principle of law, that the Court dismissed the application.

In the second decision, Congo v. SA Commissions Import Export (“Commisimpex”), the Paris Court of Appeal applied the same standard of review (Pôle 1, Ch. 1, 14 October 2014). Commisimpex involved a 1992 agreement providing for a payment schedule for the repayment of debts owing by Congo to the claimant, a supplier in the context of public works. The arbitration proceedings involved a claim by Commisimpex based on a 2003 agreement, providing for an additional debt, and founded upon a letter dating from 1992, said to have recorded decisions taken at meetings in that year. The 1992 letter had apparently disappeared and was “rediscovered” in 2003. Congo alleged that this letter had been falsified. It also contended that the 2003 agreement could only be explained by “a general climate of corruption”, of which Commisimpex had taken advantage, and was therefore void for illegal cause. Further, Congo questioned whether the signatories of the 2003 agreement had the requisite powers. In a majority decision, the Arbitral Tribunal rejected Congo’s arguments and enforced the 2003 agreement.

In set aside proceedings on grounds of violation of international public policy, Congo advanced three arguments: (i) the 2003 agreement was void for illegal cause; (ii) the arbitral tribunal’s finding that a debt was owed had no evidentiary basis; and (iii) the signatories of the 2003 agreement lacked the requisite powers.

Applying the same standard of review as the Court in Gulf Leaders, the Paris Court of Appeal examined the reasoning of the tribunal and provided its own analysis of the facts to conclude that Commisimpex had not shown that the award gave effect to a contract that was obtained through corruption. The Court added that it could not be accepted, without ruining the binding force of contracts, that a State could free itself of contractual obligations by alleging “a general climate of corruption” within its administration without specifying the individuals involved and without the alleged beneficiaries being prosecuted. The Court refused to consider the second and third arguments (above) advanced by Congo on the basis that they were an invitation to the court to revise the award on the merits, which is not permitted in set aside proceedings.

Most recently, the Paris Court of Appeal in SAS Man Diesel & Turbo France (“Man Diesel”) v Sté Al Maimana General Trading Company Ltd (Pôle 1, 1er Ch., 4 November 2014) applied the same standard of review to dismiss an appeal of an exequatur order regarding an award rendered in Switzerland (an application to set aside was dismissed by the Swiss courts). Among the grounds advanced, the appellant alleged that the enforcement of the award in France would violate international public policy since the relevant contract was tainted with corruption. After an analysis of the facts, the Court concluded that corruption had not been proven.

This trilogy of decisions from the Paris Court of Appeal suggests a shift towards more substantive review of awards on grounds of violation of international public policy, at least in cases of corruption. An application to set aside has been filed with the Cour de cassation in the Gulf Leaders case and such applications could still be filed in relation to the decisions in Commisimpex and Man Diesel. It therefore remains to be seen whether this approach will be upheld by the Cour de cassation. Should this be the case, another matter still to be determined is whether the requirement that the violation of international public policy be “flagrant” will be eliminated with respect to the review of awards in cases other than those involving allegations of corruption, as many scholars have recommended.

If the Gulf Leaders test is upheld, one of the future challenges for the courts will be to determine the extent to which an examination of the facts can and should involve going behind the findings of fact of the arbitrators, particularly where witness evidence is involved and the tribunal has had the benefit of observing the relevant witnesses. Weighing competing interests of finality of arbitration awards and safeguarding the fundamental values that are meant to be protected by international public policy (the content of which may also be debated) is an exercise where the right balance is often difficult to discern.


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The Recast Brussels Regulation and “Domestic” Arbitrations

by Harry Ormsby

Herbert Smith Freehills LLP,
for Herbert Smith Freehills

As has been discussed previously on this blog, the recast Brussels Regulation contains a number of important clarifications to the arbitration exception. Paragraph 3 of Recital 12 and Article 73(2) make it clear that the recast Regulation shall not affect the application of the New York Convention (the “Convention”). The recast Regulation should allow a court to enforce an arbitral award considered valid under the Convention when it is confronted with a conflicting Member State court judgment, though the Regulation is vague as to how the enforcing court is to assess priority between the award and the conflicting judgment. Perhaps unsurprisingly for a pan-European Regulation, there has been little focus on domestic awards, where enforcement is sought at the seat against a conflicting judgment of another Member State court.

Take for example a London-seated arbitration between two Brazilian parties in relation to a power plant in Brazil. An award is rendered. Meanwhile, in breach of the arbitration agreement one of the parties has gone to the Spanish Court. The Spanish Court decides that the arbitration agreement is null and void and issues a judgment on the merits. Because the award is London-seated and therefore not a “New York Convention award” under the Arbitration Act 1996, the “precedence” accorded to the Convention by paragraph 3 of Recital 12 has no relevance as far as the English court is concerned. The English court would have no scope under the Regulation to refuse enforcement of the Spanish court judgment. The judgment would be a Regulation judgment and therefore entitled to recognition in the English courts.

This problem is not new to the recast Regulation, but the addition of Recital 12 has highlighted the difficulties in reconciling parallel court proceedings and the enforcement of domestic awards. This post suggests that it may be possible to extend Recital 12 to domestic awards where they have sufficiently international characteristics, by bringing them within Article 1(1) of the Convention as non-domestic awards.

A “non-domestic award”

Article 1(1) provides that the Convention applies to two categories of arbitral awards: those made in the territory of a State other than the State where the recognition and enforcement of such awards are sought (“foreign awards”); and those awards not considered as domestic awards in the State where their recognition and enforcement is sought (“non-domestic awards”). This second category of non-domestic awards may be recognised and enforced in the same State as the seat, under the Convention.

The question of whether an award is considered non-domestic is dependent upon the national law of the enforcement state. The application of the Convention to non-domestic awards is discretionary, but may arise in three situations:

(i) an award is made in the enforcement State under the arbitration law of another State;
(ii) an award is made in the enforcement State under the arbitration law of that State but involving an international element (such as foreign parties); and
(iii) an award is made that is not governed by any arbitration law and is regarded as a-national.

The first category of award is rare, though it provided the basis for certain civil law countries to propose the inclusion of the concept of the non-domestic award in the Convention. Not only is the third type of award rare, it is also controversial whether the Convention can apply to such awards at all. The question of what constitutes a non-domestic award has therefore focused on the second category of awards, though this has received little judicial attention outside of the United States.

The issue has been considered by US courts because of the wording of the provision of the Federal Arbitration Act which implements the Convention. This excludes from its scope arbitration agreements arising out of a relationship which is entirely between citizens of the United States, unless that relationship had a reasonable connection with one or more foreign states. In Bergesen v Müller 710 F.2d 928 (2d Cir. 1983), the US Court of Appeals for the Second Circuit enforced an award made in New York under New York law between a Norwegian and a Swiss party in accordance with the Convention by classifying it as a non-domestic award under Article 1(1) of the Convention. The Court found that “non-domestic” awards meant awards which are subject to the Convention not because they are made abroad, but because they are made within the legal framework of another country, for example “pronounced in accordance with a foreign law or involving parties domiciled or having their principal place of business outside the enforcing jurisdiction“.

It is possible to see how this reasoning could be applied to bring domestic arbitral awards in Member States within the scope of the Convention and Recital 12 of the recast Regulation, provided that they are sufficiently “international” in nature.

National legislation

Much will depend on whether the law of the relevant Member State can be interpreted to identify domestic and non-domestic awards for the purposes of the Convention. It appears that the majority of national laws adopt a strictly territorial approach, treating any awards made on national territory as domestic, though some exceptions exist. Article 1504 of the French Code of Civil Procedure provides that an arbitration seated in France will be considered “international” when international trade interests are at stake. It is possible to see how a “non-domestic” argument could be made in such circumstances.

The position in England is less clear. Looking again at the London award involving Brazilian parties, Part III of the Arbitration Act would not apply to the award because Section 100(1) defines a “New York Convention award” purely in terms of the first part of Article 1(1) of the Convention, i.e. a foreign award. The London award would be enforced like any other arbitral award with its seat in England, under Section 66.

Could the London award nevertheless be classified as a non-domestic award for the purposes of the Convention and ultimately the recast Regulation? The framework for identifying such a non-domestic award arguably exists within the Act. Section 85(2) defines a “domestic arbitration agreement” as an arbitration agreement which provides for a UK seat and to which at least one of the parties is a UK party. An arbitration agreement with a seat in the England between two Brazilian parties would not, therefore, be a “domestic arbitration agreement”.

To use the language of Bergesen v Müller, the arbitration agreement, and by implication the award, would be “made within the legal framework of another country“, involving parties domiciled outside the enforcing jurisdiction. Section 85(2) evidences Parliament’s recognition of the difference between English-seated arbitrations which have an international element and those which are truly domestic.

It is, of course, the case that Section 85 was not brought into effect because of fears that a distinction between domestic and international arbitration could lead to an infringement of EC law on grounds of discrimination and a restriction on the freedom to provide services. This therefore presents difficulties for any argument that the Convention should be extended to cover “non-domestic” awards within England and Wales. However, the use of the domestic/international distinction to extend the application of the Convention should not produce these results, as it broadens the categories of parties who may avail themselves of Recital 12. A corollary of such non-domestic awards falling within the scope of the Convention may be that only the grounds set out in Article V could be used to refuse enforcement, though the practical difference from the grounds used to refuse enforcement under section 66 should not be overstated. The court’s power to set aside the award should still be available by virtue of Article V1(e) of the Convention, though whether the grounds for set aside would themselves be limited to the grounds for refusal of enforcement set out in Article V is an open question. Despite these issues, it is nevertheless possible to see how the recast Regulation’s recognition of the competence of Member State courts to decide matters of enforcement “in accordance with” the Convention could be interpreted liberally by a pro-enforcement English court in future.

Conclusion

The issue of whether an award is non-domestic for the purposes of the Convention has hitherto been a relatively obscure issue, seldom having practical importance. However, the addition of Recital 12 of the recast Regulation has highlighted the difficulties in reconciling parallel Member-State court proceedings and the enforcement of domestic awards. This difficulty could be limited if domestic awards which are sufficiently international in nature are able to be categorised as non-domestic awards for the purpose of the Convention, thus enabling Member State courts to rely on Recital 12 of the Regulation. This will ultimately depend on whether the law of the relevant Member State can be interpreted to identify domestic and non-domestic awards, though the potential for such an approach appears to exist in France and the UK.

The views expressed above are those of the author.


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Multilateral Investment Treaties? A View from China

by Fernando Dias Simões

University of Macau, Faculty of Law

The rise of China as a major economic and political actor is one of the defining features of the twentieth-first century. Much of China’s growing power comes from its ever-expanding economy. In order to expand its blossoming economy, China needs to tap into new markets. In an age of intense market integration and economic competition, China’s global resources quest is changing geopolitics around the world. Even though Chinese investment is currently spread around the world, we can identify three regions or blocks where this trend is especially noticeable: Africa, the Portuguese-speaking world, and Latin America.

China’s interest in Africa is especially self-evident. Starting in the late 90s, China’s presence in the continent experienced a phenomenal expansion. The country is becoming a major player in Sub-Saharan Africa, having replaced the European Union and the United States as Africa’s major trading partner. The Chinese government has also identified the Portuguese-Speaking world as a strategic group for investment and cooperation. The Lusophone world represents a vast marketplace, especially if one takes into account that most Portuguese-speaking countries are developing economies well-suited for acquiring low-cost Chinese goods; and that some of them (namely Brazil, Angola, and Mozambique) are growing rapidly and thus represent a chance for additional expansion. China and Brazil have one of the most prosperous alliances in the developing world at present. Brazil is China’s most important partner in Latin America and Brazil’s top trading partner. China’s presence grows ever larger in Latin America. China is now the largest trading partner and creditor of several Latin American countries and the regions’ second largest investor.

With the progress of its economic reform, participation in international co-operation platforms has become one of China’s key interests. Beijing’s diplomacy has become more ‘creative’, and its new attitude labelled as a ‘charm offensive’. One of the defining features of this new policy is the creation of multilateral platforms. China has identified three strategic blocks and is approaching them not only on a bilateral level, but also on a multilateral level. Chinese interest in Africa, Portuguese-speaking countries, and Latin America follows a similar pattern, with China actively promoting the creation of multilateral organizations designed to promote trade and investment between the Member States. In order to strengthen economic cooperation and development between China and Africa, in 2000 China created the Forum on China-Africa Cooperation (FOCAC). The Forum is a multilateral platform for exchange and cooperation between China and African countries that have formal diplomatic relationships with China, covering various aspects of politics, trade, and economy. Three years later China established the Forum for Economic and Trade Cooperation between China and Portuguese-Speaking Countries, known as ‘Macau Forum’. The Forum is a multilateral organisation composed by China and Lusophone countries, targeting at encouraging mutual development by augmenting cooperation and promoting trade relations between its members and conceiving and executing common projects in several fields. China is creating a similar dialogue mechanism with Latin America. A cooperation forum between China and the Community of Latin American and Caribbean States (CELAC), the China-CELAC Forum, was founded in Brasilia last July.

I previously discussed how to make use of the similarities between countries, legal cultures, and languages so as to facilitate international dispute resolution (‘Commercial Arbitration between China and the Portuguese-Speaking World’, Kluwer Law International, 2014). Trade and investment cannot be promoted and strengthened without the support of an effective international legal framework. The creation of regional blocks and multilateral platforms to boost economic exchange depends, sooner or later, on the creation and maintenance of effective mechanisms of dispute resolution. The idea put forward by the Macau Forum in 2010 of promoting Macau as a centre for arbitration of commercial disputes between enterprises from China and Portuguese-speaking countries is an example of how arbitration may play an important role in China’s economic policy. China is approaching the Lusophone countries (including Brazil) as a block through the Macau Forum. The China-CELAC Forum seems to follow the same pattern. Significantly, Brazil, an emerging economy which is a member of the BRICS, like China, is a member of both CELAC and the Macau Forum.

Arbitration is a key component in many trade and investment treaties. The question is knowing whether it would be possible to move from Bilateral Investment Treaties to Multilateral Investment Treaties. Multilateral Investment Treaties would be a development of the traditional structure of Bilateral Treaties. The idea would be to take advantage of the similarities between jurisdictions as regards their legal systems, cultures, or languages, so as to design common legal frameworks that hopefully would reduce some of the problems associated with the atomistic, bilateral approach. Would the creation of a Multilateral Investment Treaty be useful to reduce the costs associated with language diversity and the existence of different domestic legal frameworks? Would this multilateral approach be feasible? To what extent would it reduce the perils associated with investment in such diverse countries? Would this approach be useful as regards Chinese investment in Portuguese-speaking countries, in Africa, or in Latin America? Would it be possible to design a Multilateral Investment Treaty between nations that have so much in common, but still so many differences between them? Are these multilateral platforms the right forum to achieve such a demanding and ambitious purpose? And would the potential creation of a specific arbitral institution, under the aegis of such a forum, specialized in dealing with these disputes, facilitate their resolution?

Investment treaty arbitration in not exactly the most consensual topic these days. A much discussed article published in the Economist last month entitled ‘The arbitration game’ argues that governments are souring on treaties to protect foreign investors. According to this piece the implementation of the idea of encouraging foreign investment by protecting investors from discrimination or expropriation – which was the cornerstone of investment treaties – has been disastrous, and is becoming so controversial that it threatens to ruin trade deals the European Union is negotiating with both America and Canada. The article goes on to affirm that scholars are increasingly questioning whether investor-state dispute settlement delivers the benefits it is supposed to, in the form of increased foreign investment, mentioning the example of Brazil, which continues to receive lots of foreign investment, despite its long-standing refusal to sign any treaty with a mechanism of this sort.

Furthermore, some countries, namely in Latin America, have historically rejected international mechanisms to resolve disputes with foreign investors. Despite its numerous advantages, some Latin American States have resisted investment arbitration. Specifically, Bolivia, Ecuador and Venezuela withdrew from the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. International treaties for the promotion and protection of foreign investment have also been under intense scrutiny by certain Latin American countries. However, the attitude toward investment arbitration in Latin America has been evolving. Most Latin American countries adopted legal changes aimed at promoting free markets. At the same time, they gradually changed their policies with respect to investment protection and international arbitration. As part of this process, most Latin American countries ratified the ICSID Convention. Investment treaty protection and arbitration involving Latin America have taken on new relevance as foreign investment across the region increases, especially coming from China.

I think it is possible to draw a parallel between China’s approach to the Portuguese-speaking world, Africa, and Latin America. China seems interested in approaching different countries as a block, benefiting from their similarities to implement common strategies, and trying to reduce costs associated with the bilateral approach. I also think that it makes sense to at least question whether it is possible to devise multilateral mechanisms of dispute settlement as regards commercial disputes and investor-state disputes. In the last years the number of investor-state proceeding cases has increased sharply, but many oppose this model. Mechanisms for the resolution of investment disputes are becoming quite controversial and difficult to negotiate. This underlines the importance of thinking of a new model, or at least rethinking the existent one.

The development of international trade and investment depends largely upon the success of intercultural communication between parties from different countries, with diverse legal and cultural backgrounds. As economic correlations continue to expand and become more intense, these legal relationships also become correspondingly more complex. If the settlement of disputes and the enforcement of claims arising from economic transactions and foreign investment are uncertain and time-consuming, it can only hamper international economic co-operation and the smooth development of markets. The creation and development of appropriate dispute settlement mechanisms must necessarily accompany the creation and development of trade and investment. In addition to using a body of international law, international organisations and multilateral platforms such as the Macau Forum and the China-CELAC Forum may use alternative methods of dispute resolution to create a framework for cooperation and interstate relations. At present, the large number of bilateral and regional agreements including some investment protection indicates the need for a multilateral agreement with broader coverage as well as a simplified and standardized set of rules. The content of a Multilateral Investment Treaty is relatively easy to outline because of numerous, rather similar Bilateral Investment Treaties and investment chapters in Free Trade Agreements.

The creation of a specialized institution to administer arbitration proceedings regarding disputes between China and the other members of these organizations could be one of the major benefits from a multilateral approach. One important aspect that can be witnessed in the last years has to do with a much greater specialization in arbitration. This means that certain arbitral institutions specialise in certain industries or businesses. Following on this concept of specialisation, such an arbitral institution would specialise in China-related arbitration. China, Africa, and Latin America are strengthening their relationship. The market is getting bigger while the world is getting smaller and closer. While the ‘flattening’ of the world affords unimaginable business opportunities, it also presents new challenges. In order to thrive in this flattened world, investors and states must be willing to undertake innovative approaches so as to create environments for success in the global markets.


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The Court of Arbitration at the Polish Chamber of Commerce Adopts New Rules

by Michał Kocur and Jan Kieszczyński

Kocur & Partners

The Court of Arbitration at the Polish Chamber of Commerce in Warsaw (the Court) has just published new arbitration rules (the Rules) that will come into force as of 1 January 2015. The Court is the oldest arbitral institution in Poland. It handles around 350-450 cases each year, with around 20-25% of them being international cases.

Before presenting the most notable features of the new Rules, it is useful to outline the Court’s organisational structure. The Secretary General oversees on-going arbitral proceedings, with the President of the Court managing the external and internal affairs of the whole Court. The Arbitration Council acts as an appointing authority and supervises other issues concerning arbitrators, such as deciding on motions to dismiss arbitrators, or allowing an incomplete tribunal to conclude proceedings.

In line with the needs of modern disputes, which increasingly often involve multiple parties, the Rules accommodate for situations where more than two parties are to take part in the arbitral proceedings. Any of the parties to arbitration may move to consolidate multiple cases pending before the Court and the Rules provide that consolidation may take place even if the parties in the consolidated cases are not the same. In this situation, all the parties to the cases that are the subject of consolidation must agree to it (§ 9 point 1-2). Consolidation can take place if the disputes are based on the same arbitration clause or, where the claims in the cases are interconnected, even if they are based on different arbitration clauses. The prerequisite for consolidation is that all cases subject to consolidation must be pending before a panel composed of the same arbitrators. With regard to joinder, a third party may join or be joined to arbitral proceedings in capacity of a party in cases where the third party, on the basis of an arbitration clause, could sue either of the parties to the proceedings, or be sued by any of those parties (§ 10 point 1).

The Court has a list of recommended arbitrators, though the parties are generally free to nominate arbitrators who are not listed. Only the presiding arbitrator, or a sole arbitrator, must be chosen from the list of recommended arbitrators. At the request of both party-nominated arbitrators, or both parties themselves, the Arbitration Council may confirm a presiding arbitrator or a sole arbitrator who is not listed (§ 16 point 3). Unlike in some arbitral institutions (e.g. the ICC), arbitrators do not need to be formally confirmed by the Court. In line with common practice, once nominated, all arbitrators must file statements on their independence and impartiality. Arbitrators must also notify the Secretary General in case any circumstances impairing their independence and impartiality arise during the proceedings (§ 15 point 3 and 7).

The Rules provide a novelty with regard to the powers of an incomplete tribunal. If a party-appointed arbitrator mandate expires after the evidentiary proceedings have been completed or if an arbitrator is willingly not taking part in the proceedings, the Arbitration Council may decide that the remaining two arbitrators can continue to arbitrate the case and issue an award (§ 21 point 3).

The Rules provide that, if multiple entities on the claimant’s or the respondent’s side cannot reach a decision on a joint nomination, the arbitrator for that multiple-entity party will be nominated by the Arbitration Council (§ 19 point 5). However, the other party still has the right to nominate an arbitrator. This solution contrasts with ICC and SCC arbitration rules which, in the wake of the Dutco case, provide that in such circumstances none of the parties should have the right to nominate an arbitrator, and the whole arbitral tribunal will be nominated by a relevant body of the arbitral institution.

The Rules vest the arbitral tribunal with the power to rule on interim measures. The tribunal may decide on a party’s request for an interim measure only after giving the other party the right to express their view (§ 30 point 1). This means that the arbitral tribunal cannot decide on interim measures ex parte. The Rules do not provide for the institution of an emergency arbitrator, which has recently been introduced in many arbitration rules around the world. Nor do the Rules give any grounds for arbitrators to issue an order for the security of costs.

The Rules oblige the arbitral tribunal to prepare a procedural timetable of the proceedings at the outset of the proceedings. The timetable should contain deadlines for party briefs, the production of evidence, and the dates of hearings, as well as a date for the completion of proceedings (§ 31 point 1). In order to plan the timetable, the tribunal may organise a case management conference with the parties and their representatives, before deciding on those issues (§ 31 point 2). The case management conference can be conducted face-to-face, by telephone or video conference.

When it comes to document production, the tribunal is vested with the power to order a party to produce documents or other evidence under its control (§ 33 point 4). In order to shorten and improve the quality of the hearings, the tribunal may rule that witnesses called for by the parties must produce witness statements before they will be heard directly. With consent from all the parties, the tribunal may decide not to hear witnesses at a hearing, and rely only on their witness statements (§ 33 point 8).

During the proceedings, the arbitral tribunal must inform the parties if it is considering ruling the case on a point of law not brought by any of the parties in the case (§ 6 point 2). This provision ensures that the parties and the arbitral tribunal will communicate with regard to any crucial legal issues in the case. It helps to avoid situations where the parties would be taken by surprise by the arbitrators having an outlook on the case that is different to that of the parties.

The arbitral award should be issued within nine months from the day the proceedings were initiated. The proceedings may be initiated by a notice of arbitration or a statement of claim (§ 24). The deadline can only be prolonged by the Secretary General if there are valid grounds, such as complex points of fact or law at dispute (§ 40 point 2).

The Rules amended an important point pertaining to recoverable legal costs. In previous version of the Rules, a cap on the costs of legal representation was introduced, limiting the amount of recoverable costs that could be awarded to the prevailing party. The Rules now provide that “reasonable” costs may be awarded, but place no specific cap, thus potentially allowing a party to recover full legal costs (§ 51 point 1).

The revision of the Rules was inspired by a recent wave of changes to the rules of the leading global arbitral institutions. It aims to bring the arbitral process conducted on their basis to the best international standards, addressing the demand for reliable, swift and cost-effective arbitration proceedings. The new Rules reflect the maturity and sophistication of the business environment in Poland, which is one of the most stable and steadily-growing economies in the European Union.


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Preliminary Findings From An Empirical Study of International Commercial Mediation and Conciliation

by S.I. Strong

University of Missouri School of Law

Two months ago, readers of the Kluwer Arbitration blog were asked to participate in some ongoing surveys relating international commercial mediation and conciliation. The studies were being conducted to assist UNCITRAL and UNCITRAL Working Group II (Arbitration and Conciliation) as they consider a proposal from the Government of the United States regarding a possible convention in this area of law. The issue will be taken up at the Working Group II meeting in February 2015, with a report from the Working Group due to the Commission in July 2015.

The survey that was being conducted by the University of Missouri School of Law has now been completed, and a preliminary report of the research findings is available for free download here. The study was very successful, thanks in large part to the assistance of the readers of this blog, and generated responses from 221 participants from all over the world. Survey respondents included private practitioners, neutrals, in-house counsel, government lawyers, academics and judges with expertise in both domestic and international proceedings.

The project was constructed with two goals in mind. First, the study attempted to discover and describe current behaviors and attitudes relating to international commercial mediation and conciliation so as to set a benchmark for further analysis in this field. This sort of foundational research was critical, since there have been no previous in-depth empirical studies dedicated solely to consensual means of resolving international commercial disputes.

Although the information sought in this part of the survey was somewhat basic, it nevertheless provided important insights to parties and policymakers regarding current practices and procedures in this area of law. Thus, this part of the study obtained data relating to how often mediation and conciliation are currently used in the international commercial context; how mediation and conciliation are initiated in the international commercial context; why parties do or do not use mediation or conciliation in international commercial disputes; how parties might be encouraged to use mediation and conciliation in the international commercial context; and which types of international commercial disputes are best suited to mediation and conciliation.

The results to these questions were intriguing and will doubtless be very useful as the international legal and business communities consider the use of consensual forms of dispute resolution in the coming years. However, the data also identified one area where the survey could have done more. According to the respondents, parties hesitate to use mediation and conciliation in international commercial disputes because they know very little about the procedures and even less about the purported benefits of the process, most particularly the extent to which parties can expect to save time and money as a result of mediation and conciliation. Unfortunately, this study did not ask any questions about economic and related issues. Hopefully additional studies on this issue will be conducted quickly so that parties and policymakers have sufficient information on which to base their decisions.

The study’s second goal was to support UNCITRAL’s work relating to a proposed new international convention. Thus, the survey asked a variety of questions relating to issues of interest to the UNCITRAL debate in order to provide participants in the UNCITRAL process with information that would be useful to their deliberations.

The results from this series of questions were particularly surprising, both because these types of questions had never been asked before and because of the content of the answers. Although the intensity of responses varied according to the question, one of the clearest aspects of the study was the level of interest in a new international convention relating to international commercial mediation and conciliation. Not only were participants very strongly in favor of a new instrument in this area of law, but respondents were very clear that any convention that is drafted in the area of international commercial mediation and conciliation should address both the front end of the process (ie, agreements to mediate or conciliate a dispute) and the back end of the process (ie, settlement agreements arising out of an international commercial mediation or conciliation).

Overall, the study collected detailed data on 34 different questions, making it the most detailed empirical research in the area of international commercial mediation and conciliation to date. The results described in the preliminary report will be published next year in an article that will not only present an expanded final analysis of the underlying data but that will also include several normative proposals regarding the shape of any future international action in this area of law.

Study findings can currently be found on SSRN under “Use and Perception of International Commercial Mediation and Conciliation: A Preliminary Report Relating to the Proposed UNCITRAL Convention on International Commercial Mediation and Conciliation”, by Prof. S.I. Strong of the University of Missouri School of Law.


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Allocation of Costs in ICSID Arbitration

by Inna Uchkunova

International Moot Court Competition Association (IMCCA)

and Oleg Temnikov

1. Approaches to cost allocation

There are, generally, two approaches to costs allocation (“CA”), namely:
(1) pay your own way (“PYOWA”) whereby the parties share the costs of the proceedings and bear their own legal costs;
(2) loser pays or also called “costs follow the event” approach (“CFTEA”) under which the losing party bears the costs of the proceedings and the legal costs of the winning party. In case the winning party has lost on some procedural events or a number of its claims, the tribunal will make an adjustment downwards in proportion to the relative success of the parties (costs follow the event pro rata).

In addition to the above approaches, the tribunal may take into account the procedural conduct of the parties and would shift the costs to a party which has misbehaved in the proceedings thereby contributing to the increase of costs or in case the claimant has filed a fraudulent claim (conduct-based approach).

Below we will argue, as do some previous researches (e.g. Mr. Hodgson), that there is a tendency of boarder application of the CFTEA, but in its pro rata variant. This post does not address costs in annulment proceedings or the reasonableness of costs.

2. Comparison

Allegedly, the traditional approach in ICSID arbitration has been the PYOWA. The tribunal in Tza Yap Shum v. Peru has explained that PYOWA represents a remnant from public international law, given that in state-to-state disputes the costs are split. (ARB/07/6, Award 7 July 2011, para. 296) However, investment arbitration operates in a different setting – between an individual and a State. Moreover, in contrast to Article 61(1) of the ICSID Convention which deals with conciliation and explicitly provides that costs “shall be borne equally by the parties”, no such rule exists with regard to arbitration proceedings, suggesting that the tribunal shall apportion the costs rather than split them. (Togo Electricité v. Togo, ARB/06/07, Decision on annulment 6 September 2011, para. 257) Even tribunals strictly applying the PYOWA have recognized that it would be unfair to leave the winning party to bear all of its costs. (Nations Energy v. Panama, ARB/06/19, Award 24 November 2010, para. 709)

It has also been argued that tribunals have shifted the costs to the losing claimant only if the latter’s claim was fraudulent. Our study shows that in the majority of cases dealing with fraudulent claims this fact did not serve as the main reason for CA, rather the tribunal’s reasoning was based on a default CFTEA. (E.g. Cementownia “Nowa Huta” S.A. v. Turkey, ARB(AF)/06/2, Award 17 September 2009, para. 177)

Other arguments cited in support of PYOWA include the fact that BITs give investors a unilateral right to sue, that is, if their claim fails this does not amount to a violation for which the State deserves compensation in the form of costs recovery. A powerful counter-argument is contained in the Piero Foresti et al. v. South Africa:

“if one party is entitled to withhold something, and is obliged to defend itself in arbitral proceedings against a demand for that thing, it should not have to bear the costs of defending its right to withhold the thing.” (ARB(AF)/07/1, Award 4 August 2010, para. 110)

Given that the right to reimbursement of costs is a procedural right, arguments relating to party equality support the application of a CFTEA even in case the respondent wins.

It has also been claimed that a default CFTEA affects the investor’s access to justice. A default PYOWA however works in the same direction since it “could leave claimants with unrecoverable costs that are prohibitive for initiating arbitration.” (Stephan Schill, Cost-Shifting in Investment Treaty Arbitration, 7 J.W.I.T. 653 (2006) at 685)

As to arguments such as impecunious party, these considerations are subjective, extraneous and have not been consistently applied. Thus, in CDC v. Seychelles the tribunal shifted the costs to the losing Respondent despite the fact that it was virtually impecunious. (ARB/02/14, Decision on the application for annulment 29 June 2005, para. 89) Moreover, the lack of financial means has not prevented tribunals from issuing an award, consequently, it shall not be taken into account in terms of CA.

Some tribunals have cited the novelty of the issues involved as a reason not to shift the costs to the losing party. In this regard, the tribunal in International Thunderbird v. Mexico has stated:

“investment arbitration… [has] become so well known… Thus, this factor is no longer applicable…” (UNCITRAL Rules, Award 26 January 2006, para. 218)

A number of tribunals have, on the basis of the States’ substantive conduct preceding the arbitration, refused to shift the costs to the losing claimant even though the latter has failed to prove that this conduct was a breach of the BIT. Such an approach disregards the fact that the burden of proof is on the Claimant and even tends to shift the onus to the Respondent. Importantly, the tribunal in S.D. Myers, Inc. v. Canada has stated that “[t]he purpose of an award of costs is not to punish a respondent for the conduct that made it liable to the claimant.” (UNCITRAL Rules, Final Award 30 December 2002, para. 45) Consequently, only the procedural conduct of the parties should be relevant in terms of CA.

3. The majority of tribunals have decided on the basis of the relative success of the parties

We have made a study of ICSID awards rendered in the period 2000-September 2014. The awards are split according to who won the case. The two tables may be viewed here and here.

The study shows that in the majority of cases previous tribunals have applied the CFTEA pro rata, that is, according to the relative success of the parties. This means that the costs of the winning party are not automatically shifted to the losing party on the mere basis of its overall success in the case, rather the tribunal will subtract those issues, claims or events on which the winning party is itself the loser – in most cases, for example, States fail on their counterclaims.

Thus, in e.g. Spyridon Roussalis v. Romania in view of the fact that the claimant lost on the merits and the Respondent did not succeed in the presentation of its counterclaim, the tribunal decided that “Claimant be ordered to pay 60% of the costs of the arbitration and of Respondent’s legal costs and fees.” (ARB/06/1, Award 7 December 2011, para. 882)

The CFTEA pro rata approach could lead to non-allocation if neither party makes a strong win – for example, in Meerapfel Söhne v. the CAR given that the respondent failed in its objections to jurisdiction and its counter-claim, while the claimant did not succeed in all of its claims, the tribunal made no order on costs. (ARB/07/10, Award 12 May 2011)

Nevertheless, as noted by the tribunal in GEA Group v. Ukraine “[i]n circumstances where no part of the Claimant’s endeavour in commencing these proceedings has been successful… the Respondent ought to recover its reasonable costs.” (ARB/08/16, Award 31 March 2011, para. 365)

Similarly, in our opinion, decisions in which past tribunals have made no CA based on the fact that the respondent won the merits but lost on jurisdiction, deserve criticism since it cannot be true that the time and efforts spent on the merits is lest the time and efforts spent on jurisdiction, consequently the respondent should be compensated for part of its costs.

4. Conclusion

In their pleadings, States, as well as investors, typically refer to CFTEA, meaning that it is supported in practice and this could even amount to an agreement between the parties as to CA. (E.g. Piero Foresti et al. v. South Africa, para. 109; Telenor Mobile Communications A.S. v. Hungary, ARB/04/15, Award 13 September 2006, para. 105) Additionally, some tribunals have drawn analogy from the UNCITRAL rules and there is even a tendency to convergence. (Cargill v. Mexico, ARB(AF)/05/2, Award 18 September 2009, para. 545; International Thunderbird v. Mexico, para. 214) Significanlty, the UNCITRAL rules were revised in 2010 and were aligned to the CFTEA. This may be viewed as another signal for the change in attitude as to the “traditional” PYOWA.

In view of the above, it may be stated that the CFTE pro rata approach is best suited to the needs of international arbitration and finds support in the majority of cases.


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