In January 2015, a new arbitration institution, under somewhat ambiguous name of the Civil Arbitration Court (“Parnični arbitražni sud”) [“CAC”], was established. The program and rules provided by the CAC reveal its dedication to provide parties with an alternative forum for the resolution of disputes related to small claims, as in accordance with the principles set by the Regulation (EC) No 861/2007 of the European Parliament and of the Council of 11 July 2007 which established a European small claims procedure. The main features of such procedure are: no need for the parties to be represented by counsels, shorter deadlines for the delivery of decision, no hearing except necessary, the use videoconference or similar modern technology etc.
In today’s arbitration world, when the community is constantly warned on the overregulation and bureaucratization of arbitration, it is unusual to see arbitration rules with no more than 15 provisions, aimed at the resolution of disputes related to small claims within rather short deadlines. For that reason, the procedure before CAC tribunals is simplified, sometimes in a very peculiar way. Some of the most peculiar provisions are presented in this post:
Applicable procedural and substantive laws
According to the CAC Procedural Rules (available in Croatian here) [“CAC Rules”], applicable law to the merits is Croatian law. As to procedure, the CAC Rules provide for the application of these Rules, while all the issues not covered therein are left for tribunals to be solved in a way they find it appropriate, subject to the parties’ right of equal treatment. The CAC Rules further provide a possibility for a tribunal to secondarily apply the Croatian Civil Procedure Code and the Arbitration Act, especially the provisions on the calculation of deadlines, the form of a claim and other submissions etc.
At the first sight, these rules seem to be a step back in the development of arbitration practice. The bifurcation of the civil procedure rules and arbitration laws was one of the first obstacles for the development of arbitration. However, in this case, the rules of civil procedure are freely agreed upon by parties by choosing the CAC Rules. Moreover, it is often emphasized by arbitration experts that the overlap of the substantive and procedural laws in arbitration leads to less possible legal issues once arbitration commences. If arbitrators will mostly be Croatian lawyers, this rule serves the predictability and the principle of efficiency at the highest level. On the other hand, the CAC Rules explicitly provide only for a possibility for party autonomy in regard of the rules on procedure, while they are unclear whether there is any possibility for the parties to depart from Croatian law as the law applicable to the merits. It would be a somewhat undesirable solution to leave the parties without such a choice.
The choice, challenge, and fees of arbitrator(s)
The default rule is that a sole arbitrator, appointed by the CAC, resolves a dispute. Parties are free to agree on a higher number of arbitrators and free to appoint them – in that case, the arbitrator appointed by the CAC will be the presiding. The body which decides on the challenge is an appellate arbitrator who would otherwise decide on the appeal in such a case. The choice of a sole arbitrator by the CAC simplifies the procedure of appointment, and makes it, in combination with the default rule on a sole arbitrator and the assigned fee rates, considerably less costly.
According to CAC’s fees schedule, fees are initially paid by the claimant, and can be allocated at the end of proceedings. The initial payment by the claimant may raise certain issues as to the bias of arbitrator(s). A better solution would be to follow the usual arbitral practice of paying the initial costs by both parties in equal shares.
Deadlines and a “no paper session” rule
Short deadlines and a “no paper session” rule are the main basis for achieving speedy and less costly proceedings. Firstly, CAC tribunals are required to render a decision within 60 to 90 days in a dispute regarding the claim which is lower than 350,000 HRK (cca. EUR 45,000), or within 120 days where an amount in dispute is above 350,000 HRK. The time reserved for the work of experts, or when otherwise the tribunal is reasonably unable to work on the case, is not calculated in deadlines.
Other rules also promote the faster and more cost-effective resolution of disputes. For example, hearings are held in a limited number of cases, depending on the amount in dispute. In disputes below 10,000 HRK in civil matters and 75,000 HRK in commercial matters, hearings are held only exceptionally and only if the tribunal finds them necessary. If it is decided that there will be hearings, the maximum number of hearings is two, and, after that, no further evidence is examined. Furthermore, hearings are audio recorded, which is one of the applications of a “no paper session” rule. This rule shapes also the delivery of submissions, which are delivered and received solely via e-mail.
The rules are clearly in service of cutting down the unnecessary hearings, travelling, and the endless production of evidence; consequently, they aim at saving time and costs for parties involved. This is all, of course, done by “paying the price” that a decision will not necessarily provide substantive justice, and this might be an issue. Namely, small claims are not to be mistaken for less complex claims. An amount in dispute may indicate so, but this is not written in the stone, so tribunals should consider a possibility of the extension of a number of hearings. Another unaddressed issue in the Rules is what happens if the rather short deadlines of 60-90 (120) days are violated. Is an arbitrator who decided the case in such a situation exceeding her or his mandate? Probably yes. Is there a possibility for an extension, and who should grant it? Does an elapsed deadline have any influence on the validity of an arbitration agreement for that particular claim? There is no rule which provides answers to these questions. When one poses such short deadlines, one should also provide the solutions for these issues.
An opt-out appeal provision
Following the need for legal certainty, the CAC Rules provide for a possibility to appeal an award before the Appellate Civil Arbitration Court [“ACAC”], unless parties agree on another appellate procedure. An appeal needs to be submitted within 15 days after the award is rendered, and the ACAC arbitrator (tribunal) has to decide within 90 days. An appeal is not allowed for disputes related to small claims (amounts defined under Rule 13), unless parties agree otherwise, while it is a default rule for disputes with a higher amount at stake. That means that parties should explicitly opt-out from these provisions. An appellate arbitrator(s) is appointed by the CAC or by the parties, and a chosen person must be a lawyer with six-year experience after she/he passed the bar exam. It is unclear from the Rules whether these professional requirements apply in the situations when the parties decide to appoint an appellate arbitrator. It is also unclear why they are necessary and provided only for appellate arbitrators. However, as long as the parties freely agree to the Rules, without derogating this provision, one cannot contradict. Again, the principle of short deadlines is followed, and an ACAC tribunal shall render a decision on appeal within 90 days. The appellate tribunal may confirm or change the first instance decision, or, in exceptional situations, remit the decision to the CAC tribunal.
The procedure created under the Rules clearly serves the purpose of accommodating the claimants with a forum for small claims. Also, certain features of the Rules show that the targeted market is the domestic one. As such, it could serve well the purpose of unburdening civil judiciary in Croatia.
It has been some time since Judge Gunnar Lagergren – 52 years precisely – arbitrated a case (ICC No. 1110) whose underlying contract involved an agreement to pay bribes, and where he proffered a landmark award holding that “a case such as this, involving such gross violation of good morals and international public policy, can have no countenance in any court . . . nor in any arbitral tribunal.”
Since then, a number of arbitral tribunals have been confronted with allegations of corruption, deciding either that such conduct was not present, and therefore applying the contract, or that corruption was proven and so refusing to apply it [ICC Case No. 6401 – Westinghouse v. National Power Corporation and the Republic of Philippines; ICC Case No. 7664 – Frontier AG v. Thomson CSF; ICC Case 3913; ICC Case No. 3916, among others]. Tribunals in investor-state arbitrations have also been charged with the duty of deciding upon corruption allegations. Cases such as World Duty Free v. Kenya [ARB/00/7] and Metal-Tech v. Uzbekistan [ARB/10/3] produced lengthy and thorough analysis on the investors’ corrupt conducts, which were raised by the States as a defense, and are today milestones in the matter.
It is important to note, however, that there are two scenarios in which corruption can become an issue in an arbitral procedure. First and more obvious, if the parties raise the issue. Second, if the arbitrators become suspicious of certain circumstances in the underlying relationship that brought the parties to the arbitration. In this last situation, tribunals will normally become concerned after identifying one or more so-called red flags, which serve the purpose of alerting prosecutors, judges, arbitrators, and the society in general, about situations that could be labelled as “suspicious” [see Metal-Tech Award §293].
In the context of the second scenario – the purpose of this piece – one might ask whether arbitrators can ex officio initiate an investigation regarding possible corrupt conduct by one or both of the parties when analyzing the underlying contract. Like it or not, there is the possibility of arbitrators coming across these red flags and no explicit rule exists with regard to the approach arbitrators must take in these situations. Some clarification on this matter – if any – might be found in case law and scholarly opinion.
One possible tension that could arise is between the tribunal’s mandate to decide the matters agreed by the parties and the fundamental principle of international arbitration of ultra petita. Does the tribunal have the jurisdiction to self-initiate a corruption investigation and analysis? The opinion of some scholars is that it does, because sometimes the issue of corruption can be a question of illegality linked directly to the validity of the arbitration clause itself, that is, to the question of whether the tribunal has jurisdiction to decide the case. In this context, an ex officio investigation by the tribunal on issues of corruption or other illegalities might not be ultra petita, because after such investigations the tribunal will come to “a legal conclusion as to the validity of the main contract, the claims under that contract and/or the arbitration agreement” [A. J. van den Berg, International Commercial Arbitration: Important Contemporary Questions, 2003, 239].
In his 1963 award, Judge Lagergren, strongly suspecting that the parties had been guilty of misconduct in the formation and purpose of their contract, felt that he had a duty to self-police allegations of corruption because there were public policy concerns that put the validity of the arbitration agreement at stake. Likewise, practitioner and scholar Richard Kreindler explains [2008, 28] that a self-initiated investigation into illegality, such as corruption, can be relevant to the affirmation or denial of arbitrability and/or jurisdiction. Therefore, the right of arbitrators to ascertain arbitrability and jurisdiction on their own might not be ultra petita.
However, Kreindler makes an important caveat; if the illegality is irrelevant for issues of arbitrability, jurisdiction, and enforceability under the law of the seat, then arbitrators “have no right or duty” to investigate such illegality when this investigation is in fact within the province of the public authorities of the state where the arbitration or the corrupt conduct happened.
Now, should an arbitrator or a tribunal decide to conduct a self-initiated investigation, they “must be mindful [not only] of the public policy control but also of the due process control, such that the parties must be made aware of, and be given a reasonable opportunity to comment in particularized fashion, on the suspicion or evidence of illegality” [Kreindler, 2008, 27]. That is, if the tribunal suspects corruption and decides to go further and make a decision on that matter, it must let the parties know of its concern and give them equal opportunities to make their cases. The tribunal must be very careful not to aid the party that might benefit from confirmation that corruption had occurred, especially when that party only became aware of the allegation of corruption thanks to the tribunal’s cue [van den Berg, 218].
The other side of the coin
Arbitrators do not always feel comfortable digging into corruption investigations. Some believe that arbitrators might refuse to address issues of corruption because they are concerned that they lack sufficient powers to deal with them, either because they lack effective powers to compel parties to hand over possible incriminating documents, or because the contractual nature of their mandate relates only to commercial disputes between the parties, without the possibility of going beyond that.
In some cases, arbitrators decided not to look into corruption allegations because more important issues have already been proved and therefore, looking at the corruption allegations would not affect the outcome of the decision. In other cases, the tribunal found that there was not sufficient evidence provided by the party to substantiate the allegation of corruption.
This was the case in arbitrations such as TSA Spectrum v. Argentina [ARB/05/5] and Lucchetti v. Peru [ARB/03/4]. In TSA the tribunal noted that “investigations about criminal offences in connection with the Concession granted to TSA have been initiated in Argentina [and have not been terminated]” and so it decided not to go further with the analysis of the allegations because the materials they had available were not sufficient to establish corruption [§§174, 175]. In Lucchetti the tribunal did not address at all the allegations by Peru that the judgments granting Luccheti its construction permits and operation were obtained through undue influence. Instead, the tribunal concentrated on analyzing the ratione temporis issue and declined jurisdiction on that ground [§61].
No prohibition against ex officio duty/right to self-investigate corruption
Those who advocate an ex officio duty or right of the arbitrators to self-investigate corruption and other illegalities believe that there is no explicit prohibition against arbitrators engaging in self-initiated investigations of potential illegalities from corruption on the basis of the tribunal’s own reasoned suspicions. Taking for example the 2012 ICC Arbitration Rules, Kreindler believes that Article 41 (General Rule) actually empowers arbitrators to make a self-initiated investigation into corruption and other illegalities, by stating that “the Court and the Arbitral Tribunal . . . shall make every effort to make sure that the Award is enforceable at law.” In other words, arbitrators must make an inquiry into suspected corruption in order to avoid an arbitral proceeding and/or an arbitral award that could violate international and transnational public policy and thus, be unenforceable at law [in van den Berg, 2003, 227].
Moreover, if the potential corruption is relevant for issues of arbitrability, jurisdiction, and overall enforceability of the award under the law of the seat, there is no reason to argue that it would be ultra petita to inquire more deeply into a prima facie suspicion – or even mere suspicion – of corruption, and that it might lead to the rendering of an award on the merits that could be seen as accepting and endorsing an illegal enterprise, by “asserting jurisdiction where none may be asserted, or contributing to a violation of local or transnational public policy or all of the above” [van den Berg, 217, 218].
Although it was presented for the first time 52 years ago, corruption is on the agenda of international arbitration. Other issues besides the one presented here are also present, such as the standard of review of the evidence related to corruption (i.e. balance of probabilities, clear and convincing evidence, or beyond reasonable doubt), or the question whether arbitrators should report to domestic authorities corruption allegations made within the arbitral process; and so, reforms might be needed in these and other areas, in order to make international arbitration a useful mechanism to combat cross-border corruption and preserve its main feature of giving international trade and investment security and certainty.
As Mariel Dimsey has observed, a key challenge posed by investment treaties is that – at the point of ratification – they expose States to arbitrations of ‘as-yet-unknown scope and against as-yet-unknown claimants’. Gus van Harten and Martin Loughlin argue that this feature differentiates investment disputes from those heard in other fora, transforming investment disputes into something akin to ‘domestic judicial review of state conduct’. In light of such potential implications, it is important to consider whether the ‘unknown claimant’ really is a problematic feature of investment treaty arbitration and – to the extent that it is – what has or might be done about it.
Scope of the Problem
At the outset, it must be observed that the issue of the ‘unknown claimant’ arises only in respect of particular categories of dispute. The issue will not arise, for example, where the dispute concerns alleged interference by a host State with particular investments or investors with whom it has a pre-existing legal relationship. A host State is on notice at the time of concluding a concession contract with a foreign investor, for example, that that investor might ultimately come to file a claim under an investment treaty (should there be one available). In that sense, the class of claimants is known or knowable before the host State assumes international obligations in respect of the investor. For other types of dispute, however, the class of claimants is less easily identifiable and – in many cases – only identifiable at the point at which a claimant files a claim. This is particularly so where general measures form the basis of an investment treaty claim. A host State implementing a general legislative program, for example, may not necessarily know or be able to find out which protected investors or investments may be affected by that legislation. Here, the issue of the ‘unknown claimant’ becomes relevant because the measures are not directed towards particular investors or investments.
A Problem in Need of Solution?
The extent to which the ‘unknown claimant’ is a problem depends upon what an investment treaty seeks to achieve and what obligations it imposes upon a host State. To the extent that an investment treaty imposes upon a State an obligation to ‘consult…foreign investors and properly take into consideration the impact of proposed domestic policy changes on them‘, for example, it would evidently be of utility to a host State to know in advance the investors it must consider or with which it must consult.
In addressing the issue of the ‘unknown claimant’, States (as well as investors) may secure a range of benefits. From the perspective of good governance, foreknowledge of the interests at stake may result in better informed policy-making, including a greater capacity to actively consider how proposed policies might be brought into compliance with treaty obligations. Foreknowledge as to the investors who may be impacted might also result in there being greater scope for disputes to be settled prior to the initiation of costly or protracted arbitral proceedings. that claims are not settled, identification of the specific investors which might be affected by a policy decision would at least allow States to identify potential claimants and to proactively prepare themselves to defend potential claims at an earlier stage than they otherwise might. Finally, upon commencement of arbitral proceedings, greater ex ante transparency about the identity of investors and the scope of their investments might support tribunals to assess threshold issues concerning, for example, the nature and scope of an investor’s investment, claims of abusive nationality planning, or claims of ‘double dipping’ by investors with overlapping investment interests.
Making the Unknown Investor Knowable
The best means of addressing the issue of the ‘unknown claimant’ is to ensure that an investor notifies the host State in some way of its investment at the point of acquiring it. Conceivably, there are at least four ways in which such a situation might be achieved.
First, the class of investments protectable under an investment treaty could be specifically limited to those in which the ‘unknown claimant’ issue does not arise. Thus, for example, the class of investments protected under a treaty might be restricted to those based upon contractual or concessionary arrangements. As noted above, such arrangements do not raise the problem of the ‘unknown claimant’. Instead, like commercial investment disputes, they raise only uncertainty as to the timing and amount of any future claim.
Second, States might address the issue of the ‘unknown claimant’ by imposing treaty requirements of admission or registration. By admitting or registering investments through some formal process, States are better able to identify in advance the investors which may be affected by proposed measures. There are a range of means through which a registration or admission requirement could be imposed. For example:
- the investments protected under the treaty could be limited to those interests which can only be obtained through registration (for example, land holdings, or certain types of intellectual property rights); or
- the definition of investment could impose a requirement that an investment be ‘admitted’ or ‘registered’ in compliance with host State law.
This latter option has already been adopted by many States. The ASEAN Investment Agreement, for example, stipulates in Article II that:
This Agreement shall apply only to investments…which are specifically approved in writing and registered by the host country…
This provision was successfully invoked in Yaung Chi Oo Trading Pte Ltd v Government of the Union of Myanmar, the Claimant having failed to gain approval of its investment from the host State. By contrast, in Desert Line Projects LLC v Yemen, whilst noting that the investor had failed to obtain a required ‘investment certificate’, the Tribunal upheld jurisdiction. It considered that insisting on the registration requirement would be ‘artificial’ because the provision’s purpose had been achieved: the investor had made its investment ‘at the request and with the approval of the President and the Cabinet’. The capacity of such provisions to address the issue of the ‘unknown claimant’ will thus turn to a significant degree on the clause’s precise wording. ‘Admission’ and ‘registration’ requirements differ, for example, to provisions requiring that investments be ‘made’ in accordance with host State law. This latter type of provision was invoked in Mytilineos Holdings S.A. v The State Union of Serbia and Montenegro and Republic of Serbia. In that case, the Respondents contended that the Claimant’s investment had not been ‘made’ in accordance with domestic law, which required registration and approval by the federal government. The Tribunal rejected that argument, finding that there was no evidence that the Claimant’s investment was ‘illegal’ and thus holding that it had been ‘made’ in accordance with domestic law. The Tribunal specifically distinguished the provision from that in Yaung Chi, noting that it did not “require any approval on the part of the host States”.
Third, investors might be encouraged to make themselves known to States should they see benefit from doing so. Thus, for example, a State proposing to adopt a general measure may itself overcome the issue of the ‘unknown claimant’ by undertaking a consultation process.
Finally, investors also be encouraged to register their investments should registration be required under domestic law, even if the applicable investment treaty itself is silent as to the relevance of such registration. For example, the UK has recently announced plans to introduce requirements for foreign companies to disclose details of all their land and property holdings in the UK. Such a proposal – which targets foreign holdings – has scope to play a role in investor-State proceedings. In particular, the fact of registration – as well as details of an investor’s nationality and the size of its investment – may ultimately come to be invoked as an element of proof in the context of jurisdictional submissions in cases concerning the investors or investments identified on the register.
While there is much to be gained by addressing the issue of the ‘unknown claimant’, there are also a number of potential pitfalls. As most of the above options depend upon the creation of accurate registration systems, there is scope for administrative overburdening of States and the creation unnecessary red-tape. In fact, in light of pre-investment commitments contained in many treaties, errors or delays in the administration of registration systems might themselves result in investor-State claims! Another potential pitfall is presented by the sheer number of investments that would need to be registered, as well as the possibility that policy agencies may not themselves be involved in administering (or even aware of the existence of) registration databases. Conversely, such requirements – where used overly officiously – might result in a greater potential for regulatory chill. Finally, it would be necessary to guard against the risk that a host State might misuse such requirements, including by unilaterally de-registering investments in order to escape liability.
Whilst remaining cognisant of these potential pitfalls, it is evident that the issue of the ‘unknown claimant’ is not being neglected by States. As these solutions come to be considered more frequently by arbitral tribunals, States may gain further insights into how best to balance the pitfalls in order to better address this issue of the ‘unknown claimant’.
In September 2015 the UNCITRAL Working Group II (Arbitration and Conciliation) continued its work on formulating legal framework on the enforcement of settlement agreements, including a convention, model provisions or guidance texts.
Currently, parties can request arbitration tribunals to record their settlement agreements as consent awards, i.e. an arbitral award on terms agreed upon by the parties. Consent awards are widely used in international arbitration and give rise to a number of legal problems which parties may not anticipate until they actually face them.
Rendering a Consent Award: A right or an Obligation of the Tribunal?
One issue is whether rendering a consent award constitutes a right or an obligation of the arbitral tribunal: in other words, whether an arbitrator should reject a request to record a settlement agreement as an arbitral award if he/she finds that the award may be used for an improper or illegal purpose. A closely related issue is what the consequences of arbitral tribunal’s establishment of an illegality hidden in the consent award are.
In an award rendered in June 2014 under the Rules of the International Commercial Arbitration Court (ICAC) at Russian Chamber of Commerce and Industry, the parties (a Latvian and a Russian company) reached a settlement agreement and asked the arbitral tribunal to render an award on the terms agreed by the parties. The parties also asked the arbitrators to hold no hearing in the case. The arbitrators found out that in the settlement agreement the parties settled not only the dispute submitted to the ICAC, but also several other disputes arising from other contractual relations. Those disputes were not submitted to arbitration, and no correspondent arbitration fee was paid.
The arbitrators rendered a consent award, which did not include all provisions of the settlement agreement but only those covered by the arbitration agreement. Subsequently, the respondent failed to perform the agreement and the claimant requested a commercial court in Saint Petersburg to enforce the consent award. The respondent objected and argued that the arbitral tribunal violated its rights by not including part of the terms of the settlement agreement in the consent award. The court refused to grant the enforcement in July 2015 on the ground that the respondent was deprived of the opportunity to present its position on the terms of the settlement agreement, and to negotiate its amendment with the claimant. A higher court sustained its judgment in September-October 2015. This case suggests that the consent award should reflect a lawful agreement, but also should fully reflect the parties’ will.
Enforcement of Consent Awards under the New York Convention
One important difference between consent awards and usual arbitral awards is that an arbitral tribunal records the agreement of the parties rather than renders its own decision on the merits. Such an award will be enforceable under the 1958 Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), but not in all cases.
A necessary precondition of an “award” in the sense of the New York Convention is the existence of “difference” between the parties. Article I of the New York Convention provides that “This Convention shall apply to the recognition and enforcement of arbitral awards . . . arising out of differences between persons, whether physical or legal.” Article II also mentioned submission “to arbitration all or any differences which have arisen or which may arise between them.”
Where parties appoint an arbitral tribunal after a settlement merely to record the settlement in the consent award, there is no “difference” between the parties to resolve; the parties have already settled their dispute. Indeed, the arbitrator is not presented with a current dispute. The dispute is extinguished and there is nothing to resolve but to grant the settlement as a form of an arbitral award. Therefore, arguably, where an arbitrator is appointed merely to record the agreement of the parties in an award, such award does not meet a necessary precondition to become internationally enforceable under the New York Convention.
Enforcement of Consent Awards Arising out of Mediation
Additional issues arise with regard to international enforceability under the New York Convention of consent awards resulting from mediation. As in arbitration, parties may want to endow their agreement resulting from mediation with additional enforceability to avoid the necessity and expense of suing on the settlement agreement when the other party fails to fulfil it. The expedited enforcement of a mediated settlement may become important for the parties, especially in international disputes. The parties may agree to appoint the mediator or another person as arbitrator, only to formalise their settlement in an arbitral award. The question is whether such agreements should be enforced as arbitration awards.
It appears from the text of the New York Convention that it does not apply to mediated settlements reached before the commencement of arbitral proceedings. Article I provides that the Convention applies to “the recognition and enforcement of arbitral awards”; this article also states that the term “arbitral awards” shall include “not only awards made by arbitrators appointed for each case, but also those made by permanent arbitral bodies to which the parties have submitted.” This implies that the New York Convention covers only the awards rendered in ad hoc or institutional arbitrations. Indeed, unlike an arbitrator, a mediator is not deciding the dispute on the merits and not rendering a binding decision.
When parties appoint an arbitral tribunal merely to record a settlement in a consent award, there is no “difference” between the parties to resolve: the parties already negotiated or mediated such difference. From the plain text of the New York Convention it follows that a “difference” is a necessary precondition of an “award” in the sense of the convention. The parties which appoint the arbitrators merely to obtain a consent award actually submit to the arbitral tribunal their agreement rather than difference between them. Notably, the UNCITRAL Model Law on International Commercial Arbitration does not cover a situation where a mediated settlement was reached before the commencement of arbitration; this article provides only for a settlement reached within an arbitration procedure.
Therefore, if the settlement agreement was concluded before the start of arbitral proceedings, then such agreement should not fall within the notion of an arbitral award under the New York Convention. Such settlement agreement should have the status of a contract and be internationally enforceable as such rather than as an arbitral award.
The full text of the article “Consent Awards in International Arbitration: From Settlement to Enforcement” published earlier this month in Brooklyn Journal of International Law is available here.
The Swiss Arbitration Association (“ASA”) has called recently for the creation of a transnational body, the Global Arbitration Ethics Council, to whom matters of alleged unethical conduct would be referred. This entity would provide a truly global solution to a global problem and overcome one of the main criticisms levelled against both the IBA Guidelines on Party Representation in International Arbitration (the “IBA Guidelines”) and the 2014 Arbitration Rules of the London Court of International Arbitration (the “LCIA Rules”) and their Annex, namely that they place on arbitrators responsibilities for ethical issues that are alien to the arbitration process.
Indeed, under both the IBA Guidelines and the LCIA Rules, the enforcement of ethical rules and the power to pronounce sanctions against offending counsel are put in the hands of the arbitral tribunal. It is referred here to sanctions for purely ethical issues, as opposed to the other issues dealt with by these Guidelines and Rules, such as the consequences that the arbitral tribunal may draw from a given counsel conduct as regards, for instance, the admissibility and weighing of evidence or the decision on costs, which were already part of the arbitrators’ inherent powers. It is not referred either to ex parte contacts between counsel and arbitrators, or the subsequent appointment of counsel which has the effect of conflicting an arbitrator, which arguably are more an issue of independence and impartiality of arbitrators, rather than an issue of counsel ethics.
Two considerations are usually put forward in favour of granting to the arbitral tribunal the power to enforce ethical rules. First, the arbitral tribunal is best placed to deal with alleged breaches by counsel of ethical duties, since it knows what happened and can put it into perspective. The second is that local bar rules and councils are designed for the local legal market and are thus inappropriate or ill-equipped to deal with the complexity of multi-cultural international matters.
The first consideration is debatable. The true role of the arbitral tribunal is to resolve a dispute between the parties. It is not to decide whether counsel acted ethically or unethically. The proper administration of justice requires a separation between the judicial body that decides the case on the merits and the disciplinary body that decides whether counsel has breached any ethical duty. This is significantly the case in most jurisdictions. It is unhealthy for the judge or arbitrator deciding on the merits of the case to also rule on the ethical or unethical conduct of counsel arguing the case. Not only does it create disruption to the arbitration proceedings (thereby causing delay and costs), but it constitutes a danger for the independence and impartiality of the arbitrator. For instance, in the case of counsel accused of lying or assisting in the concealment or destruction of documents, how can the arbitral tribunal continue to be seen as impartial after embarking on the review of privileged communications between one party and its counsel in order to rule on such accusations? Moreover, should the arbitral tribunal eventually find the counsel’s conduct unethical, the party having retained said counsel will likely challenge some if not all of the arbitrators, thereby causing further delay and costs.
As to the second consideration, it is indeed true that local bar councils or supervisory bodies may not be the appropriate forum for deciding matters relating to ethical conduct of counsel in international arbitration. It may even not be easy to identify which national entity would have jurisdiction, especially when individual counsel working collectively (within a firm or as co-counsel) are admitted to practice in different (or even multiple) jurisdictions that have conflicting rules. Nonetheless, this does not, in and of itself, justify putting counsel ethics in the hands of the arbitrators, as done by the IBA Guidelines or the LCIA Rules.
In short, neither the arbitral tribunal nor the local bar councils are satisfactory fora to rule on allegations of unethical counsel conduct in international arbitration.
It is this very observation that prompted ASA’s proposal to create a transnational body dedicated to international arbitration to whom matters of alleged unethical conduct would be referred. It is the Global Arbitration Ethics Council, which would have jurisdiction to enforce ethical rules and to sanction any violation thereof.
The Global Arbitration Ethics Council would be formed of delegates of the major arbitration associations (such as, for instance, IBA, ICCA, ASA, CIArb, CEA) and arbitration institutions (such as ICC, LCIA, SCC, Swiss Chambers, SIAC, HKIAC, Corte de Arbitraje de Madrid) that will, hopefully, adhere to the project.
From this pool of arbitration practitioners, a panel of decision-makers would be formed for each matter referred to the Global Arbitration Ethics Council, taking into consideration cultural, legal, geographical and other particularities of the case. The panel will not be the same to decide a case, for instance, between US counsel involved in an arbitration seated in New York, or between Swiss and French counsel involved in an arbitration in Geneva, or between UK lawyers practicing in Singapore involved in an arbitration in Dubai.
The proceedings before the Global Arbitration Ethics Counsel would be completely separate from the underlying arbitration proceedings. Any referral to the Global Arbitration Ethics Council would have no impact on the arbitration (except if the arbitral tribunal decides otherwise). This would ensure that the arbitral tribunal can focus on its job (i.e. resolving the dispute between the parties) and that complaints about alleged unethical conduct do not disrupt the arbitral proceedings (by causing delay or putting the arbitrators’ impartiality at risk). Except emergency situations, the proceedings relating to ethical issues should even take place after the arbitration is completed, thus allowing counsel to better concentrate on the merits and, by the same token, providing for a useful cooling off period.
The arbitration associations and institution that adhere to the project would elaborate a joint set of core ethics principles, a kind of ‘ordre public réellement international’, that apply irrespective of the legal or geographical background of counsel or parties. In addition to these core principles, each panel would remain free to apply any other rules or guidelines (such as the IBA Guidelines or local bar rules) that it finds relevant under the circumstances of the case.
The sanctions that could be pronounced by the Global Arbitration Ethics Council would range from a simple admonishment to the suspension of membership rights, or even the expulsion from the association of which the offending counsel is a member. Arbitral institutions could refuse to accept representation by offending counsel. Monetary fines could also be an option (albeit an option that would require much caution).
In order to provide a legal basis for the disciplinary powers of the Global Arbitration Ethics Council, the participating associations would have to include in their by-laws a rule providing that any member agrees to comply with the aforementioned core principles and to be subject to the jurisdiction of the Global Arbitration Ethics Council. This is typically the legal mechanism used by national bar organisations, but in a larger global scale. Similarly, participating institutions would require counsel to execute a document, at the start of the proceedings, in which they agree to comply with core principles and be subject to the disciplinary powers of the Global Arbitration Ethics Council.
Many details remain yet to be defined before the Global Arbitration Ethics Council is created. This will be the purpose of the global ethics summit that will be held on 26 November 2015 in Geneva. More than fifteen major arbitral associations and institutions have confirmed their presence, thereby guaranteeing truly global discussions leading, hopefully, to a truly global solution. To be continued.
The Middle East is undergoing a period of extreme political, economic and social unrest. In modern Iraq, the chaos wrought by Da’esh is causing major difficulties for the government and for ordinary businesses and individuals. However, in the midst of this turmoil, on 18 November 2015, Iraq finally made good its promise by ratifying the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 (the ICSID Convention). In accordance with its Article 68(2), the ICSID Convention will enter into force for Iraq on 17 December 2015. Notably, this development is in tandem with the other major development in Iraq in October 2015, being the amendment to the Iraqi Investment Law No. 13 of 2006 (Investment Law). The questions are, why now, and what next?
Before analyzing the effect of this important legal development, it would be interesting to consider whether the change is surprising, or whether it has always been on the cards. And if the latter, then why now?
It is worth noting, perhaps, that at the time of writing, the price of crude oil is reported to have dropped a further 10% from an already all-time low. This will undoubtedly affect the state of Iraq’s economy, and may provide the impetus for improving its investment regime, so as to attract the maximum level of inward foreign direct investment (FDI).
In March 2014, I published an article in Transnational Dispute Management journal, in which I stated that in as far back as 2013, the Iraqi parliament was alleged to have approved a resolution permitting entry by the Iraqi executive into the ICSID Convention. At that time, a ministerial communication issued by the National Investment Commission of the Council of Ministers of Iraq supported the reports. Furthermore, the Commercial Law Development Program (CLDP) of the U.S. Department of Commerce had reported on its website that the Iraqi State Shura Council (ISSC) was in the process of reviewing two laws, one on ICSID membership and another on international arbitration. The ISSC approached the CLDP in the same year, to devise and implement a seminar focused on bilateral investment treaties and ICSID State/investor dispute resolution mechanisms. As such, the decision to sign and ratify ICSID does not come out of the blue. It is a strategic decision, and comes at a time when Iraq is most in need of inward FDI and international resources and expertise.
I leave aside the issue of whether there is a proven direct correlation between ratification of ICSID and the level of inward FDI, of which I am skeptical. What does the entry into the ICSID Convention mean, in concrete legal terms, for Iraq? To understand this, we should briefly consider the current regime for investment disputes in Iraq.
Investors have recourse to arbitration in Iraq through two principal methods: under contracts, for which the Investment Law usually applies, or under investment treaties entered into with other States, for which either the Investment Law, international law, or a combination of the two may apply. In relation to the first, the author currently understands that Iraq is signatory to thirty-two bilateral, and nine multilateral agreements within the Arab League, with respect to Investment Promotion and Protection (IPPA). BITs also exist with India, Iran, Japan, Jordan, Kuwait, Mauritania, Republic of Korea, Sri Lanka, Syria, Tunisia, Turkey, the United Kingdom, Vietnam and Yemen amongst others. In addition, Iraq has bilateral free trade area (FTA) agreements with the United Arab Emirates (UAE), Oman, Qatar, Algeria, Egypt, Jordan, Lebanon, Syria, Tunisia, Yemen, and Sudan. Interestingly, of these, only the Japanese agreement has been registered with UNCTAD, as well as a Kuwaiti agreement. Conversely, an online search further revealed treaties with France and Germany. Of the four treaties that are found online (whether on UNCTAD’s website or otherwise), only the Kuwaiti agreement is in force. According to a Ministerial Communication, there are agreements pending with Lithuania, South Korea, Sudan, Jordan, Slovakia, Iran, the UAE, the Czech Republic, Belarus, Bahrain, China, Lebanon, Macedonia, Vietnam, Italy, Netherlands, and Poland.
Without entering into an in-depth analysis, certain provisions of the Investment Law are worthy of note. Article 1 of the Investment Law defines an “investment” as “the investment of capital in any economic or service activity or project that results in a legitimate benefit for the country”. Article 10 of the Investment Law bestows the same rights and privileges to foreign investors as it does to Iraqi nationals. Importantly, the Investment Law, at the time of verification, did not apply to the petroleum sector. Lastly, the Investment Law regulates national and foreign investments in Iraq exceeding USD 250,000.
The Investment Law indirectly permits arbitration to be used as a method to settle international investment disputes because in its specific reference to the Iraqi law, it implies acceptance of the Iraq’s domestic arbitration law (Arbitration Law). Article 27 of the Investment Law states:
“Disputes arising between parties who are subject to the provisions of this law shall be subject to the Iraqi law unless otherwise agreed”.
In the Public Government Contracts Law No.1 of 2008 (PGCL), arbitration is expressly permitted in relation to contracts entered into between foreign entities or persons, and the Iraqi government. Article 11 expressly states:
“The contracting agency may select international arbitration to settle disputes provided that the contract shall provide for this facility, and when one of the parties is a foreigner, taking into account the procedural mechanism agreed upon in the contract when using this method, and one of the international arbitration associations shall be selected to settle the dispute”.
The substance of the Investment Law or the PGCL themselves are perhaps not so problematic. After all, these were post-occupation laws that were largely driven and shaped by, amongst others, sophisticated lawyers trained abroad. Rather, it is what happens to the investor’s claim in the unsophisticated Iraqi courts that is of concern. The theoretical permissibility of arbitration in Iraq in relation to investment disputes may not be enough to displace the government’s attitude towards the process. The attitude was unfortunately, historically, distrustful. This is an attitude that has likely spread to the Iraqi judges.
As such, the Iraqi courts could conceivably continue to refuse, or complicate the avenues to, recourse to arbitration under contractual disputes with the State or Iraqi private parties. This is because of the barriers to enforcement under its current Arbitration Law, and the fact it is still surprisingly not a party to the New York Convention (see below). The key difference in this scenario being that without the ICSID option, the investor will end up in the Iraqi national courts when attempting to enforce its award. This is a scenario that investors will wish to avoid, and that which makes ratification of ICSID of prime importance for foreign investors.
Under the ICSID Convention, Iraq will be forced to accept the so-called de-localised effect of eligible treaty-based disputes or contract-based disputes with an ICSID provision, and the direct enforcement of ICSID awards under pressure from the World Bank. The related and much-vaunted advantages of ICSID are that it provides investors with a direct access to a form of settlement of a dispute they may have with a host State, investors do not need to rely on the unreliable mechanism of diplomacy, and the enforcement provisions of the ICSID Convention make it highly probable that final ICSID awards will be effectively enforceable.
But what will ICSID not solve?
For one, the legalities of ownership by investors of Iraqi property under the revised Investment Law, where it applies, which is a matter for Iraqi law alone. In this regard, many foreign companies are still hesitant to provide FDI to Iraq, because of fears that the security situation is too unstable in Iraq. Notably, the revised Investment Law does not give investors the right to full ownership rights over property in relation to international projects.
Furthermore, under international law, whether or not the ICSID path is taken, there may be ‘escape’ routes. Notably, in Iraq’s case, this could include invocation of the state of necessity defence under international law, preventing Iraqi government action from breaching its investment treaty commitments. For an example of how this defence is characterized and applied, the annulment decision regarding the award in CMS Gas Transmission v Argentine Republic (ICSID Case No. ARB/01/8) is worth reading. Wider margins of appreciation in this context may serve to exempt Iraq from otherwise expropriatory or other violations under investment treaties which are brought under the ICSID Convention.
Finally, a word should be said about the strange fact that in all of this ‘progess’, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention) has been left by the wayside. This treaty is arguably more important for foreign investors than the ICSID Convention, and has been on the Iraq’s radar for a long time.
The New York Convention is more significant than ICSID, for three reasons. First, because many transactions entered into with the Iraqi government under a treaty may not satisfy the requirements of the ICSID Convention (such as the “nationality” or “investment” requirements). This would mean that, if anything, only the ICSID Additional Facility Rules would be available, and without ratification of the New York Convention an award rendered under the Additional Facility Rules would face the same problems in the Iraqi courts as that of an ad hoc or institutional international arbitration.
Second, many transactions are concluded under contract and not treaty, and barring the application of an umbrella clause in an applicable treaty or specific provisions for ICSID dispute settlement, such claims cannot be brought under the ICSID Convention.
The third problem is a practical one. ICSID is currently an empty shell, where Iraq is concerned. As explained above, currently there are few known examples of eligible treaties that are in force between Iraq and third States and I do not have any specific knowledge of contracts concluded with ICSID provisions. It will be a question of time before Iraq develops a sophisticated network of treaties that would trigger claims under the ICSID Convention. Needless to say, Iraq must be wary to exercise great drafting caution going forward, in this respect.
Finally, foreign investors should take note that ICSID is not necessarily the most efficient and neutral method of resolving conflicts with the Iraqi State. In this regard, it is perhaps not surprising that Brazil, one of the most important of the South American countries for inward investment, has deliberately chosen not to ratify the ICSID Convention. It is a well known fact amongst users that there are major flaws with ICSID’s annulment system, and the appointment process, which on many occasion has resulted in inconsidered and/or extremely delayed appointments, leaves much to be desired. On the other hand, the suitably of arbitration institutions traditionally designed for commercial disputes, such as the ICC, may prove to be a better alternative to ICSID. The 2012 ICC Rules, for example, contain clauses that make the process for appointment of arbitrators involving a party that is a State or State entity much more rapid and efficient, such as Article 13(4), which allows the Court to bypass National Committees in finding candidates. Accordingly, these are just some of the considerations an investor should have in mind when evaluating their options.
To conclude, Iraq’s favourable attitude towards ICSID, on the one hand, and reticent stance towards the New York Convention, on the other, is illogical for two main reasons. First, international arbitration is arguably just as, if not more, suited to international private trade relationships as it is to disputes involving State interests. Second, greater risk is arguably inherent in subjecting the Iraqi State’s organs to investment disputes under the wide range of treaties that it entered into with third States, which it may have done without proper guidance. That Iraq should accede to the ICSID Convention and relinquish power and authority in relation to such disputes to the autonomous organs of ICSID, but apparently exhibit greater caution in relation to the New York Convention, is indeed curious.
In any event, it is clear that time (and the nature of future claims) will reveal the real effect that ratification of the ICSID Convention will have on the Iraqi economy and its people. From the point of view of foreign investors however, it can only be a positive step.
Following a recent announcement of the London Court of International Arbitration (LCIA) (see http://www.lcia.org//News/difc-lcia-arbitration-centre-relaunched-today.aspx), its Dubai-based sister organisation, the Dubai International Financial Centre (DIFC)-LCIA Arbitration Centre, re-launched its operations from a new location in the DIFC with effect from 18 November 2015. The move to the DIFC Gate Building, which has become an iconic landmark of the DIFC, was reportedly motivated by a desire to emphasise the DIFC-LCIA’s complete independence from the DIFC Courts. There have been concerns in the past that the caseload and growth of the DIFC-LCIA, which launched for the first time in 2008, were negatively impacted by a general misperception – created by the geographical proximity of the DIFC Courts and the DIFC-LCIA Arbitration Centre – that the DIFC-LCIA was in some way affiliated with the DIFC Courts.
The relocation of the DIFC-LCIA Arbitration Centre marks the completion of the restructuring of the Centre with the assistance of the DIFC Dispute Resolution Authority and the DIFC Arbitration Institute, both originating in Dubai Law No. 7 of 2014, amending certain provisions of Dubai Law No. 9 of 2004, concerning the Dubai International Financial Centre (DIFC) (for previous reporting, see here).
The DIFC-LCIA Arbitration Centre’s current docket of a total of twenty-eight past and present references over a period of 8 years since its foundation is moderate by international (and most certainly LCIA) standards. There is a general hope that the restructured Arbitration Centre will attract an increased workload and take the DIFC-LCIA to new levels. With the same objective in mind, the DIFC-LCIA is also currently contemplating the recruitment of a new Registrar, who is anticipated to facilitate the migration of all DIFC-LCIA related casework from the LCIA in London to the DIFC in Dubai. These developments will be accompanied by the imminent revision of the DIFC-LCIA Arbitration Rules to bring them in line with the amendments and improvements introduced by the 2014 LCIA Arbitration Rules. Such improvements include without limitation the introduction of an emergency arbitrator mechanism and provisions governing the consolidation of arbitrations. More controversial will likely be the new provisions on the tribunal’s powers to take quasi disciplinary action against the parties’ legal representatives for failure to comply with a prevailing set of ethical guidelines set out in annex to the Rules. This being said, it may be worth noting by way of reminder that as regards the choice of seat, bar the parties’ agreement to the contrary, a DIFC-LCIA arbitration will be seated in the DIFC by default, hence triggering the application of the DIFC Arbitration Law (DIFC Law No. 1 of 2008 as amended), which in turn is based on the UNCITRAL Model Law, and the curial function of the DIFC Courts.
Whether the restructured DIFC-LCIA Arbitration Centre will become a serious contender for other arbitration organisations in the region – amongst which the leading onshore Dubai International Arbitration Centre (DIAC) – and whether it will hence be bound for a brighter future will be the proverbial proof of the pudding. There is no doubt an inherent attraction for international investors to seat there arbitrations in the common law DIFC under a set of rules that bears familiarity and provides procedural comfort. Irrespective of the ultimate average number of annual references the restructured DIFC-LCIA will be able to command, the DIFC-LCIA will always offer an interesting and desirable alternative to other onshore arbitration centres and for that reason alone deserves a place on the institutional landscape of arbitration in the UAE and the wider Middle East.
The issue of transparency is hardly a new topic in legal scholarship addressing international arbitration. Last year, in an important contribution to this blog, Loukas A. Mistelis broke with the conventional wisdom that investor-state dispute settlement, or ISDS, is in need of court-like transparency, arguing that extending court-like transparency to arbitration “would not benefit the arbitration process or the disputing parties.” Arguments for court-like reforms have led to important efforts, including the 2014 UN Transparency Convention. But what if Professor Mistelis is right and the transparency reforms do little to improve the oft-controversial system of ISDS?
In an upcoming article, together with Emilie Hafner-Burton and David G. Victor, two preeminent political scientists based at the University of California San Diego, we explore the role of transparency reforms in ISDS. We suggest, based on empirical evidence, that the reforms adopted at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) with the goal of fostering transparency have not been followed by a general decline in secrecy. In fact, the largest effort to produce greater transparency in the field—a set of procedural reforms adopted by ICSID in 2006—preceded a noticeable rise in the probability of secret arbitration. We suggest that the general lack of an observable impact on transparency may be rooted in the fact that reforms have never been designed to have much impact on settlements. Reformers have focused on procedural issues rather than the underlying incentives motivating the preference for secrecy, and parties have preserved many ways of keeping inconvenient information away from the public eye—using settlement foremost among other mechanisms.
Our paper is not a plea against transparency reforms. Instead, we argue that transparency reforms should look also at the rich history of debate regarding settlements within national legal systems. In fact, using statistical models we demonstrate that it is possible to identify historical patterns to explain why information is concealed in certain types of disputes. This suggests that the theoretical literature about the incentives for settlement within national legal systems is a reasonable starting point for a wave of new empirical scholarship on the question of secrecy internationally.
Unlike Mistelis we believe that the high level of secrecy in ISDS is problematic, largely because it has created a spiral in which parties face ever-stronger incentives to keep outcomes secret. This spiral is bad news for the legitimacy of international investment law, as its expanding scope and depth are creating stronger public needs for disclosing the issues addressed in such disputes as well as how governments conclude such disputes. Settlement occupies a pivotal role in this crisis because it is the mechanism of choice for litigants who want secret outcomes—exactly what Owen Fiss argued in the now iconic Against Settlement and the rich literature that resulted from his provocation against private settlements. Re-wiring the incentives and procedures could help fix the problem, but halting settlements is neither feasible nor wise since full transparency can impede some efficient outcomes. Hence, we argue for policy reforms that lead to disciplined settlements or, in plain English, against secret settlement.
MOL v. Republic of Croatia: The ICSID Case Where Investor Corruption as a Defense Strategy of the Host State in International Investment Arbitration Might Succeed
In the landscape of international investment arbitration the allegations of corruption have become more and more common. Confronted with investor’s claims before an arbitral tribunal, host states employ all possible legal arguments available to avoid potential liability and the subsequent payment of compensation. Investor’s corrupt acts have emerged as a potentially viable state defense in international arbitration. Many cases brought corruption-related issues to the forefront of international arbitration, but only World Duty Free v. Republic of Kenya and Metal-Tech Ltd v. the Republic of Uzbekistan resulted in the ICSID tribunals accepting the corruption defense invoked by the host states and the allegations of corruption as proven. No matter how outrageous the host states’ conduct toward the investors were in the above mentioned cases, the fact of the investors’ involvement in corruption to procure and win government contracts deprived the investors of the favorable award and appropriate protection of their rights, and the host states were able to evade any potential liability for investment violations and in fact profit from their violation of international investment law. Although no formal concept of precedent exists in international investment arbitration, future ICSID tribunals might consider World Duty Free and Metal-Tech as concrete guidance in forming their conclusions and denying the recovery to corrupt investors.
In MOL v. Republic of Croatia, the investor, MOL Hungarian Oil and Gas Plc (MOL), initiated an ICSID arbitration against Croatia pursuant to the Energy Charter Treaty (ECT) claiming that the host state breached its obligations in connection with MOL’s investments in Industrija Nafte dd (INA). In 2003 the Croatian government and parliament decided to privatize INA, Croatia’s most significant enterprise in the field of oil and gas, and MOL acquired a 25% stake + 1 share in the company, while the Croatian government remained the major shareholder. As a part of the arrangement, MOL and the Croatian government entered into a Shareholders’ Agreement dated 17 July 2003. Between 2003 and 2007, the Croatian government continued the process of privatizing INA through reducing its own shareholding, which led in turn, in early 2008, to the negotiation of a modification of the Shareholders’ Agreement, as the basis for MOL to increase its stake in INA to 49.08%. The negotiations culminated in two agreements concluded on 30 January 2009 (the 2009 Shareholders’ Agreements). As a result, MOL became INA’s biggest shareholder with just under 50 percent stake in INA and got management control of the company.
The circumstances in which the negotiations and conclusion of the 2009 Shareholders’ Agreements occurred lie at the heart of the ICSID arbitration. The Croatian government relies on corruption as a defense strategy, and argues that the 2009 Shareholders’ Agreements were procured through bribery of Croatia’s then Prime Minister Ivo Sanader by MOL’s CEO and Chairman Zsolt Hernádi. The host state emphasizes the fact that in November 2012 Mr. Sanader was convicted and sentenced to an eight-year prison term before the Croatian court for taking the bribe in the amount of 5 million euros from the investor in exchange for facilitating the 2009 Shareholders’ Agreements. However, in July 2015, Croatia’s Constitutional Court annulled the corruption conviction against Mr. Sanader citing procedural errors, and ordered the retrial. In September 2015, the Croatian court started a retrial of former Prime Minister Sanader on a case of a bribe allegedly taken from MOL to allow it to acquire a dominant stake in INA. In addition, the Croatian authorities raised an indictment against Mr. Hernádi for paying bribes in exchange for MOL getting a large stake in INA, but Mr. Hernádi is evading prosecution.
The host state alleges that corruption that underlies the 2009 Shareholders’ Agreements forms a jurisdictional objection based on inter alia lack of consent, lack of “investment” and a violation of public policy. In the host state’s view, the investor never made a valid investment and it argues that the tribunal lacks jurisdiction to hear the case. On the other hand, the investor denies any wrongdoing, saying that neither MOL nor Mr. Hernádi has been convicted of any crime in relation to the 2009 Shareholder’s Agreements, and that the criminal charges against Mr. Hernádi are being pursued in an effort by the host state to take control of INA. Further, the investor indicates that the factual determinations made in Croatian criminal proceedings are not dispositive for the ICSID tribunal.
Adjudicating international investment disputes where it is alleged that the government contract has been obtained by bribery and where the facts and circumstances suggest that bribery has tainted the contract underlying the dispute frequently present difficult issues for arbitrators. Generally, it is very difficult to prove bribery as there is usually little or no physical evidence. In MOL v. Republic of Croatia the ICSID tribunal will need to determine how to approach this particular situation because the investor vigorously disputes the allegations of bribery while the facts and circumstances of this case suggest the 2009 Shareholder’s Agreements may have been contaminated by bribery. The tribunal has to decide who has the burden of proof and whether such burden of proof might be discharged in an easier way by evidence of sufficient “red flags” established by the international community as indicators of corruption. The tribunal may be ready to use presumptions rather than full-fledged and hard to obtain evidence. In any case, bribery must be sufficiently proven to convince the tribunal that it lacks jurisdiction over the MOL claim.
So far, ICSID tribunals have not dismissed any ECT claim due to the allegations of investor’s bribery, although the tribunal in Plama Consortium Limited v. Bulgaria held that there was an implied requirement of “clean hands” in order to bring a claim under the ECT. However, the Plama tribunal did not refer to the “clean hands” doctrine in explicit terms. The tribunal relied on the general principle incorporated in international law that tribunals will not assist investors who have engaged in illegal activities. Thus, in MOL v. Republic of Croatia the tribunal will certainly discuss whether MOL can recover under the ECT because of the alleged illegality of its investment.
By invoking the corruption defense, the Croatian government hopes that the ICSID tribunal will dismiss the investor’s claim, and impose no financial liability on Croatia. Thus, the tribunal has to address the issue whether the investor is entitled to the substantive protection offered by the ECT and the evidence of bribery generated from the criminal investigation in Croatia might be crucial for the tribunal when it will decide the outcome of this arbitration. The tribunal may hold that the protection under the ECT does not cover investments that are contrary to domestic or international law, notwithstanding that the ECT does not expressly provide that investments must be made in conformity with particular law. In addition, the tribunal should take into consideration that the ECT must be interpreted in accordance with the Vienna Convention on the Law of Treaties and that the introductory note to the ECT provides that the ECT purpose is “to strengthen the rule of law on energy issues.” As a result, the tribunal may conclude that the substantive protection of the ECT cannot apply to investments that are made contrary to law. The tribunal may find that the investment in this case violated not only Croatian laws, but also applicable rules of international law, pursuant Article 26(6) of the ECT, which provides that disputes need to be decided in accordance with “applicable rules and principles of international law.” Thus, the tribunal may find that granting the ECT’s protection to the MOL’s investment would be contrary to the basic notion of international public policy and accept the host state’s corruption defense that MOL cannot recover under the ECT because the 2009 Shareholders’ Agreements were procured through bribery.
Ideally, findings of corruption should not come down heavily only on MOL, and the tribunal should weigh the illegal actions of the state and investor and not accept absolutely and unconditionally the corruption defense of the host state. In any case, the tribunal should not allow the host state to profit from its own violation of international law.
It is fair to say that arbitration is already a widespread dispute mechanism in Portugal, broadly used not only for commercial disputes but also for disputes in other areas such as, for example, consumer, administrative and tax disputes.
As for intellectual property, the possibility of submitting disputes to arbitration has been a reality in Portugal for some years now. In fact, not only do such disputes fall within the arbitrability criteria adopted by the Portuguese Voluntary Arbitration Law – which determines that dispute concerning the nature of patrimonial interests may be submitted by the parties, through an arbitration agreement, to arbitration (the “patrimonial interest” criteria) -, but also, since 2003, the ability of applicants to opt to arbitrate any future disputes related to a certain application for an industrial property right has been expressly foreseen in Articles 48 and 49 of the Portuguese Industrial Property Code.
More recently, Law no. 62/2011 of 12 December 2011, implemented mandatory arbitration for certain cases of infringement disputes concerning patents and Supplementary Protection Certificates (“SPCs”). According to Law 62/2011, disputes concerning industrial property rights, including preliminary injunctions, related to reference medical products 1 or to generics medicines, are subject to ad hoc or institutionalized mandatory arbitration (Article 2 of Law 62/2011).
It is important to highlight that Law no. 62/2011 has just two articles specifically addressing the new mandatory arbitration regime. The Law starts by specifying that the industrial property right holder that wants to enforce its right has 30 days to present a request for arbitration following the Portuguese National Authority for Medicines and Health Products’ (INFARMED) publication that a Marketing Authorization (MA) has been requested for a generic medicine. The Law further determines that: (i) if the company applying for the MA does not file a statement of defence within 30 days after being notified by the Arbitral Tribunal to do so, it will not be able to commercially explore its generic products in Portugal while the IP rights invoked by the claimant remain in force; (ii) if, on the contrary, the company files a statement of defence, the hearing shall take place within 60 days; and, (iii) parties can appeal against the Tribunal’s decision to the Court of Appeal (Article 3 of Law 62/2011).
Given the very succinct nature of Law no. 62/2011, several questions have been raised in relation to its scope and to the proceedings that should be followed by the parties. In fact, although such Law only expressly addresses the arbitration procedure for arbitrations following an MA application for a generic product, its scope is defined in very broad terms and some Courts have considered that it includes not only such disputes but all infringement disputes where a reference product or a generic product is involved (Decision of the Lisbon Court of Appeal, 19.03.2013, proceedings no. 227/13.5YRLSB-7). In any event, there is one aspect that remains outside the competence of the Arbitral Tribunals: the validity of patents, which remains subject to the exclusive jurisdiction of State Courts. (Article 35, no. 1, of the Portuguese Industrial Property Code; this has also been confirmed by the Courts. For instance, see Decision of the Lisbon Court of Appeal, 13.02.2014, proceedings no. 1053/13.7YRLSB-2)
As for other aspects of the procedure not specifically dealt with in these two articles, Law no. 62/2011 establishes that the Tribunal shall apply the rules of the arbitration institution chosen by the parties or, in the case of ad hoc arbitration, the Portuguese Voluntary Arbitration Law.
Following the enactment of Law no. 62/2011, there have been hundreds of arbitrations in Portugal between industrial property rights holders and generic companies that have applied for MAs. It is unquestionable that these hundreds of arbitrations have contributed to completely changing the panorama of the case law relating to the infringement of patents and SPCs , having also presented an opportunity for Tribunals and Courts to deal with interesting issues such as, for example, the ability of Tribunals in mandatory arbitrations to submit preliminary rulings to the Court of Justice of the European Union. (Cfr. Order of the Court of Justice of the European Union (Eighth Chamber), 13.02.2014, case C‑555/13. Along the same lines, see the prior Decision of the European Court of Justice, 17.10.1989, Danfoss, 109/88, Colet., p.3199, no.7 – 9)
Another issue that has led to considerable debate is the repeated appointment of arbitrators by the same parties and/or law firms. As in many countries, the number of industrial property experts is low in Portugal and clearly insufficient when compared to the hundreds of arbitrations being launched every year. Whilst it is possible to argue that the same reasons that justify the exceptions to disclosure foreseen in the IBA Guidelines related to maritime, sports or commodities arbitration should also be applicable in the case of industrial property arbitration,2 this question is causing a heated debate, with some of Portuguese Courts reaffirming the need to disclose previous appointments. (Cfr. Decisions of the Lisbon Court of Appeal dated 24.03.2015, proceedings no. 1361/14.0YRLSB.L1-1 and 29.09.2015, proceedings no. 827/15. Article 13 of the Portuguese Voluntary Arbitration Law specifically foresees the duty of arbitrators to reveal, without delay, any circumstances that may give rise to questions on their impartiality and independence.)
Law no. 62/2011 has also been subject to criticism in relation to the exceptionally short 30 day deadline 3 to start the arbitration proceedings and the economic pressure put on the pharmaceutical industry that now has to arbitrate whenever an MA application is filed – something that happens frequently and at times on a daily basis. In fact, considering that the arbitration does not suspend Infarmed procedure to grant the generic medicine MA, it seems to be of little interest to force parties to arbitrate at such an early stage.
Although it seems clear that some adjustments are needed, especially in relation to the timings implemented by Law no. 62/2011, it is also indisputable that this new regime has made possible for cases to be heard – and preliminary injunctions to be granted – within a reasonable period of time. Although now a distant reality, before 2012, all industrial property cases were heard by commercial courts which, especially in Lisbon, were tremendously busy with other cases such as, for example, shareholders disputes or insolvency matters, making it extremely difficult (if not impossible) to obtain a quick decision (in less than one year), even in preliminary injunctions.
In August 2015, Portugal completed the ratification of the Unified Patent Court (UPC) Agreement,4 thus becoming the eighth country to do so. It is not clear how this will ultimately impact the arbitration practice for industrial property disputes now in place in Portugal. In any event, considering that the new system also includes a patent mediation and arbitration centre with seats in Ljubljana and Lisbon, it seems that the use of arbitration in Portugal to resolve at least some disputes related to industrial property rights – at least related to European patents and European patents with unitary effect – will remain a reality for years to come.
- The reference medicinal product is a medicinal product which has been granted a marketing authorization on the basis of a complete dossier, i.e., with the submission of quality, pre-clinical and clinical data in accordance with Article 3, no. 1 of Decree Law no. 176/2006, 30 August 2006, and to which the application for marketing authorization for a generic/hybrid medicinal product refers, by demonstration of bioequivalence, usually through the submission of the appropriate bioavailability studies. ↩
- According to footnote 5 in paragraph 3.1.3. of the Orange List of the 2014 IBA Guidelines, “It may be the practice in certain types of arbitration, such as maritime, sports or commodities arbitration, to draw arbitrators from a smaller or specialized pool of individuals. If in such fields it is the custom and practice for parties to frequently appoint the same arbitrator in different cases, no disclosure of this fact is required, where all parties in the arbitration should be familiar with such custom and practice”. ↩
- This deadline has been interpreted by some Tribunals and Courts of Appeal as a caducity right, meaning that IP holders would be prevented from enforcing their IP rights against the generic after that 30 days period (see, for example, Decision of the Lisbon Court of Appeal, 30.09.2014, in the proceedings no. 512/14.9YRLSB-A-7). However, the Portuguese Constitutional Court has ruled in one case that such deadline would be contrary to the Portuguese Constitution if interpreted as limiting the ability of industrial property rights holders to enforce their rights afterwards (Decision no. 123/2015, 12.02.2015). ↩
- Cfr. the Unified Patent Court Agreement (16351/12). At least 13 member states (which must include France, Germany and the UK) need to ratify the Agreement for it to enter into force. For now, only, Austria, Malta, Belgium, Denmark, France, Luxembourg, Sweden and Portugal have ratified it. ↩