KRUPPA V BENEDETTI: WHEN IS AN AGREEMENT TO ARBITRATE NOT AN AGREEMENT TO ARBITRATE? WHEN IT’S AN AGREEMENT TO ENDEAVOUR TO ARBITRATE

by Nicholas Fletcher

Berwin Leighton Paisner LLP

By Nicholas Fletcher QC and Victoria Clark of Berwin Leighton Paisner LLP

In the recent decision of Christian Kruppa v Alessandro Benedetti and Bertrand des Pallières [2014] EWHC 1887 (Comm), Mr Justice Cooke sitting in the English Commercial Court was asked to decide whether or not or a governing law and jurisdiction clause constituted an “arbitration agreement” within the meaning of Section 6(1) of the Arbitration Act 1996 (“the Act”).

The relevant clause read as follows:

In the event of any dispute between the parties … the parties will endeavour first to resolve the matter through Swiss arbitration. Should a resolution not be forthcoming the courts of England shall have non-exclusive jurisdiction.”

Internally contradictory clauses that include an arbitration clause and a jurisdiction clause are not uncommon in practice and the courts generally adopt a pro-arbitration stance rather than decline to give effect to an arbitration provision. For example, when faced with the conjunction of an arbitration clause and an exclusive or non-exclusive jurisdiction agreement, the courts have tended to give priority to the arbitration clause and to restrict the jurisdiction clause to ancillary matters relating to the supervision or enforcement of the arbitration and awards.

Mr Justice Cooke himself adopted this approach in his decision in Sul America CIA Nacional de Seguros SA v Enessa Engenharia SA [2012] I Lloyd’s Rep 275. In a passage that was cited to him by both parties, he said:

The English courts, when faced with an exclusive jurisdiction clause and an arbitration agreement, look to the strong legal policy in favour of arbitration and the assumption that the parties, as rationale businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered to be decided by the same tribunal. … A liberal approach to the words chosen by the parties in their arbitration clause must now be accepted as part of our law.”

In this case, however, the dispute centred on whether the clause in question could be construed as a binding agreement to arbitrate. The defendants submitted that the word “arbitration” on its own was sufficient for the court to find a binding arbitration agreement. They argued that the court should give effect to the words “Swiss arbitration” and confine the jurisdictional provisions to ancillary matters, in line with the court’s policy in favour of arbitration. Mr Justice Cooke disagreed and his decision highlights some of the very real difficulties with badly drafted or “pathological” arbitration clauses.

Before examining the decision in more detail, it is helpful to consider section 6(1) of the Act, which is in very similar terms to section 7 of the UNCITRAL Model law, and defines an arbitration agreement. Section 6(1) provides as follows:

“6(1) In this part an “arbitration agreement” means an agreement to submit to arbitration present, or future disputes (whether they are contractual or not).”

The first difficulty that Mr Justice Cooke identified with the wording of the clause in this case was that the parties had not agreed to submit to arbitration. They had agreed to “endeavour to first resolve the matter through Swiss arbitration”. He took the view that an agreement that a party will “endeavour” to resolve a dispute through Swiss arbitration lacked the essential requirement that the parties must agree to submit to a binding arbitration.

In addition, the clause did not specify the number of arbitrators or how the arbitrators would be appointed and, because the clause failed to specify a cantonal seat, it was not clear to which cantonal court a request to appoint arbitrators would have to be made in the absence of agreement. The effect of this was that the parties would have to reach further agreement on these points before any reference could proceed. Mr Justice Cooke saw this as being further evidence that there was no binding agreement to arbitrate, only an agreement to attempt to resolve disputes by a process of arbitration.

The second difficulty was that the clause appeared to provide for a two stage dispute resolution process whereby the parties should first “endeavour to resolve” the matter through Swiss arbitration and, if unresolved, either party could refer the dispute to the English courts. Mr Justice Cooke held that it is logically not possible to have an effective multi-tiered clause consisting of one binding tier (arbitration) followed by another binding tier (litigation). His view was that the parties must have intended that there would be an attempt to agree a form of arbitration between them in Switzerland and, if they failed to do so, the English court would have non-exclusive jurisdiction.

Mr Justice Cooke concluded that the clause lacked the requirement to submit to a binding arbitration and that, in the light of the two-stage process envisaged by the clause, such a requirement would be inconsistent with the clause as a whole. On this basis, he held that the clause did not require the parties to refer any dispute to arbitration in the sense required by section 6(1) of the Act.

The decision provides a salutary lesson for those drafting arbitration clauses. Both parties accepted that English law required that the clause should be construed with the aim being to ascertain the intention of the parties and what a reasonable person would have understood the parties to have meant with all the relevant background knowledge that they had at the time. However, it is always going to be difficult to ascertain the intention of the parties from a badly drafted agreement. Did the professionals who drafted the clause in this case really intend that there should be an attempt to agree a form of arbitration in Switzerland or did they perhaps think that the words “Swiss arbitration” made it sufficiently clear that they intended to refer disputes to arbitration?

An effective arbitration agreement is an essential pre-condition to arbitration but, in spite of this, a significant percentage of arbitration clauses are pathological in some way. Whether this is due to a lack of expertise on the part of those drafting clauses, imperfect compromises over the negotiation of a clause, or overly complicating the language used, the net result is often a clause that defies construction, harmonious or otherwise.

Back in October 2010, the IBA Council approved Guidelines for Drafting International Arbitration Clauses that were specifically designed to assist parties and their counsel to achieve effective arbitration clauses which unambiguously embody the parties’ wishes. In spite of these and other guidelines, cases like Kruppa v Benedetti demonstrate that, for whatever reason, pathological arbitration clauses are no closer to extinction.


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Young ICCA Workshop at the Occasion of the ICCA Congress, Miami, 10th of April 2014: “The Art of Persuasion”

by Aysha Mutaywea, Neeti Sachdeva and Marike Paulsson

Young ICCA

The Young ICCA’s Workshop on “The Art of Persuasion” brought together, from all parts of the world, a future generation of arbitration lawyers and the reunited outgoing and incoming presidents of ICCA: Professors Jan Paulsson and Albert Jan van den Berg. Who else would be better to divulge on the subject of persuasive advocacy?

The faculty was complemented with practitioners from an array of nationalities including the Dutch/Bahraini Speaker Professor Marike Paulsson (Director International Arbitration Institute and Lecturer in Law, Miami School of Law), Ms. Neeti Sachdeva (Senior Associate, ELP) of India, and Mrs. Aysha Mutaywea (Acting Senior Case Manager BCDR-AAA) from the Kingdom of Bahrain.

The Session was kicked off by Professor Marike Paulsson, demonstrating the power of silence to the participants and giving a number of lessons. The Findings are related below:

Lessons Learned From Marike Paulsson

It is truly an amazing effect that a measly 30 seconds of silence can have on a room or a tribunal. It is easy for lawyers to hide behind words; in fact, they are the masters of this stealthy technique. The result of this can be that, for some, silence is immensely intimidating. Young lawyers tend to fear establishing a rapport with an arbitral tribunal and doubly have a great fear of silence.

Lesson One: Cross-over from written pleading to the oral argument

Firstly, consistency is key. Counsel must know their case file, i.e. all briefs, exhibits, etc. In some instances, a cross over from the written pleadings happen due to “progressive insight”, which requires counsel to abruptly change course and shift to oral pleadings. If well prepared, the lawyer should be able to manage this shift seamlessly.

Lesson Two: The magic is in the preparation

The one who is most likely to win is the one who knows the file best. Proper organization of the file is key to enabling the lead counsel to access every detail of it subconsciously within the blink of an eye. Useful tools to make large files easily accessible during the hearing are mini bundles, cross references, and chart-overview that set out the line of arguments within each brief.

Lesson Three: Dumbo’s stick  –  have it, use it

Just like the tale of Disney’s Dumbo, one can only fly with the aid of a stick. Sometimes one feels safe with presentation aids, power points, visual and audiovisual aids, or written aids. Whatever the “stick” is be comfortable to use it.

Lesson Four: Don’t go solo

Remember: you are always part of a team.

The team of lawyers usually consists of a partner, senior associates, mid-level associates, junior associates, paralegals, secretaries, and information technology (“IT”) experts. Each member of the team is a vertebrae in the counsel’s backbone when presenting oral arguments: “you are only as strong as your weakest link”. In the hearing room, only a well-oiled machine will succeed.

Lesson Five: Choose your battles

What is the most important message to get across to the tribunal? Rather than reproducing every single argument contained within the briefs during oral argument, counsel would more likely please the tribunal by simply highlighting the essentials and respecting the time slots that are allocated.

Lesson Six: A l’improviste: yes, if you must

Be prepared to face the unexpected and be ready to deal with issues such as the:

(i) opposing counsel pulling out a “smoking gun”;
(ii) arbitral tribunal asking you to waive a due process right with the phrase “all was fine?”
(iii) arbitral tribunal wanting to shorten the hearing; or
(iv) arbitral tribunal changing the sequence of witness examinations.

Lesson Seven: Establish a rapport with the tribunal

Make sure you have done all of the research concerning the tribunal. What is the arbitrator’s background? Does the arbitrator come from a civil law jurisdiction or a common law jurisdiction? Does the arbitrator act as counsel as well as an arbitrator? Is the arbitrator known for his or her mathematical skills, organizational skills, etc.?

During the hearing, counsel must never lose connection with the arbitral tribunal. Read the signs. Is the arbitrator asleep? Is the arbitrator checking his/her phone? Does the arbitrator push for questions in a certain direction?

The use of silence is a great tool should you lose the attention of the arbitral tribunal. Make sure to interact with the tribunal by guiding them through all of the exhibits and highlight the important parts therein.

Lesson Eight: Use your own style

It is easy to watch and learn from the senior partner; however, copying style is strongly discouraged. What works for one may not work for the other. One’s style must be tailored and should not be copied. Some can persuade arbitrators with a sense of humor, while others are comfortable with a more formal approach.

Lesson Nine: The art of persuasion is the art of communication

The future generation of arbitrators and current generation of counsel may have lost touch with personal communication. Emerging speech patterns brought about with cultural technology such as Twitter, Facebook, and texting, may be beyond the imagination and jargon of today’s pool of arbitrators.

Lawyers are encouraged to pay attention to the types of personalities and cultural backgrounds of arbitrators. Do not attempt to create an environment that levels out all cultural differences. Rather, embrace the cultural difference you will inevitably face in a hearing room.

Gesture with silence, posture, eye contact, and non-verbal communication. Keep the oral presentation simple by understating rather than overstating. Articulate your points clearly and firmly.

Lesson Ten: Believe

Believe in it, even if you do not. Even if your client has presented you with a complex, challenging case to argue, one that is hard to win or hard to defend, believe in it. For if you do not, surely the tribunal will not.

“How do we perceive ourselves in the hearing room” by Aysha Mutaywea

We see the world, not as it is, but as we are1

Mrs Aysha Mutaywea brought forward an array of illustrations and images and relied on their visual effects as a tool in demonstrating their power to influence and convince the relevant audience. Bringing forward the psychological perspective and theory into play, she argued:

“Advocacy means a number of things. Pleadings are one of the main components. When pleading your case, you are advised to take into consideration the following points:2

Theoretical points
(1) Start with jurisdiction issues;
(2) Know your audience, case and your adversary;
(3) Start by stating the main issue;
(4) Lead with strong arguments;
(5) Concentrate your fire – take time to select your best argument; and
(6) Present case law and evidence.

Practical Points
(1) Do not overstate your case;
(2) Occupy the defensible terrain;
(3) Yield indefensible terrain;
(4) Communicate clearly;
(5) Appeal not just to rules, but also to justice and common sense;
(6) Posture and tone; and
(7) Powerful close.”

It is not the speed of an answer, but the quality and substance of it

The adaptation of the general rules and guidelines of the profession may seem straightforward, but in fact there is an underlying variable which complicates the implementation of these guidelines.

Taking From Daniel Kahneman’s book Thinking Fast and Slow,3 psychologists have theorized that human beings operate using two mental systems. System One, which operates on effortless impressions, is an automatic and quick system. This system operates with little or no effort and without a sense of voluntary control. This system is responsible for quickly answering questions such as “What’s 2+2?” and “Complete the saying ‘bread and….’” System One is also able to detect hostility and ranges in tones. This system is otherwise known as “thinking fast.”

System Two operates conscious reasoning and decision making; allocating attention to the mental activities and deals with complex operations, choices, and concentration. This is otherwise known as “thinking slow.” This system kicks in when one is bracing for the starter gun in the race, looking for a face in the crowd, or when parking in a narrow parking spot.

An oral argument starts with System Two – planned and structured points in accordance with the professional guidelines. However, once the arbitrator interrupts counsel with questions, counsel risks to be thrown off his sequence and System One becomes dominant – the tendency to give quick and obvious answers. This is why it is not always easy to do as we were taught or to follow the guidelines.

This conflict between Systems One and Two creates problems with one’s conscious and unconscious decision making. “This is your system one talking, slow down, and let your system two take control”. The good news is that system two can change the ability of the way system one works with the aid of time and experience. Just remember that no one will judge you on the speed of your answer, but instead, the quality and substance of it.

Psychology plays a major role in mastering the art of persuasion. Two people can see the same thing, disagree and yet be right; it is not logical, it is psychological. This is called the “Paradigm Shift” . You can demonstrate this with a simple test, by using a single abstract image, you will see that different people see different things. Arbitrators looking at the same set of documents/evidence will not necessarily see one thing, and even if they do, what they see, will depend on their psychology. The phrase “the document speaks for its self” is not necessarily true.

So what are the main components that form the individual psyche? The psychological development of a person is determined not only by their own perceptions but also by complex social and cultural influences. Some of these major components are language, religion, gender, history, life experience, etc. For instance, what does the barrier of language do? If the arbitrator’s first language is French, and the proceedings and documents are in English, it is granted that this arbitrator is fully capable to hear the proceedings in English. However, the simple differences in reading text might mean something a bit different from what the arbitrators understand.

Perception is really an externally guided hallucination. Our brains not only process data but also make inferences from it. In conclusion, when we see the world, we see it as we are, not as it is.

The Zen of Persuasion according to Neeti Sachdeva

Neeti Sachdeva argued that in order to be heard one must first listen – that is the Zen of persuasion. Spoken words have the immense power to create or destroy. Hence, it is essential that one speaks only when one’s words have more meaning than the comparative silence. The choice of words is most critical to effective and persuasive argument.

Oral argument is an opportunity when counsel has the unique license to modulate her speech in order to emphasize and to use the power of words to reach a conclusion.

In order to be persuasive and convincing, it is essential to have empathy. In Harper Lee’s To Kill A Mockingbird, Atticus Finch poignantly says to Scout, “You never really understand a person … until you consider things from his point of view.” Especially in an international arbitration, with arbitrators from different jurisdictions, it is essential to be empathic of their diverse legal backgrounds in order to be able to make persuasive and convincing arguments. The motive must be to get into the mind of the audience (arbitrators) and get across to them what they really ought to hear.

Drawing on the famous Chinese proverb “spilled water cannot be retrieved”, the same applies to words. Once spoken, words cannot be retrieved. Unlike written arguments, where one would have more than one opportunity to review and rewrite before they are published, the same might not always be true for oral arguments.

That leads us to another important aspect of effective oral advocacy, which is preparation. Preparation and practice gives a more polished, provocative, and passionate delivery. Oral advocacy requires preparation before delivery. To be able to persuade is a virtue, which comes only with hard work. Being extempore is good, but being prepared is better. It leads one to think on their feet and handle unexpected questions and situations in a more effective manner. Being prepared also means leaving little to chance. Be prepared and think not only about how you would argue your case but rather how your opponent would argue theirs.

As the famous Sufi teacher Idries Shah once said in Caravan of Dreams, “Three things cannot be retrieved: The arrow once sped from the bow, the word spoken in haste, and the missed opportunity”. During the stage of oral arguments, a counsel should not speak in haste and must take every opportunity to put forth his case in a more coherent manner. It is also essential to hear arbitrators’ questions and take note to understand the mindset of the arbitrators and answer accordingly. A counsel should never jump to answering the Tribunals questions in a zest, but rather should put forth a prepared, credible, and persuasive argument.

One major misconception with regard to oral arguments is that that the oral arguments are a test of memory. It is not essential to remember your speech by heart; however, making notes and outlines is highly important. On the other hand, reading out a written speech is monotonous and it will make it hard to get the tribunal’s attention.

While delivering the oral arguments, it is essential to appear to be open and appear as ambiguous or equivocal. Be assured but not arrogant; commanding but not closed. Even a simple beginning that states “May it please the Court/Arbitral Tribunal” is an instinctive recognition that the most important key to persuade the audience is by pleasing it. And in order to please the arbitrator one of the tools that should be employed is a weaving of a story around the arguments. A common thread and theme needs to run within one’s arguments in order to give it credibility and recall value.

To conclude, given that arbitration offers procedural flexibility, the techniques of persuasion shall continue to be ever evolving and will be an important tool in the hands of counsels to obtain favorable awards.


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  1. To quote Stephan R. Covey.
  2. Antonin Scalia & Bryan A. Garner, Making Your Case: The Art of Persuading Judges (Thomson West, 2008)
  3. D. Kahneman, Thinking, Fast and Slow (Allen Lane, 2011)

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Answer Key for Arbitration Word Search and Crossword Puzzle

by Michael McIlwrath

General Electric Company

Below are the answer keys to the international arbitration word search and crossword puzzle that accompanied the August 14, 2014 post Summer Arbitration Quiz 2014.

The answers to the quiz itself will be posted in early September.

Reminder: the first person to submit correct answers to the Summer Arbitration Quiz (or the one who comes closest) will receive a dinner in Florence, Italy (travel and hotel excluded) and, if they wish, their name published here. To participate, send your quiz answers to Oskar Toivonen at Kluwer.arbitration.quiz@gmail.com. This email account will only be active until the end of August 2014.

International Arbitration Word Search

Word Key - 20140816_210003 - 1

International Arbitration Crossword Puzzle

Screen Shot 2014-08-15 at 8.01.43 PM

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Revisions to the HKIAC’s Model Clauses address uncertainty regarding the law governing arbitration clauses

by Justin D'Agostino

Herbert Smith Freehills,
for Herbert Smith Freehills

By Justin D’Agostino and Timothy Hughes, Herbert Smith Freehills

The Hong Kong International Arbitration Centre (“HKIAC“) has amended its Model Clauses in order to include an optional provision that specifies the parties’ choice of law to apply to an arbitration clause. The express designation of a particular law to govern an arbitration clause does not displace the parties’ choice of law to govern the substantive contract. However, as noted on the HKIAC’s website, “the law of the arbitration clause potentially governs matters including the formation, existence, scope, validity, legality, interpretation, termination, effects and enforceability of the arbitration clause and identities of the parties to the arbitration clause.” The growing body of discordant judicial decisions on this issue demonstrates that it is important for parties to expressly agree upon the law that will govern an agreement to arbitrate.

As a starting point, one of the following three laws may apply to an arbitration clause:
1. The law expressly chosen to apply to an arbitration clause;
2. The law applicable to the substantive contract; or
3. The law of the seat of arbitration.

For some time there has been considerable uncertainty regarding courts’ approaches where the parties have not expressly agreed upon the law to apply to an arbitration clause.

For example, in 2012 the English Court of Appeal decided the case of Sulamérica CIA Nacional de Suguros SA and others v Enesa Engenharia SA and others [2012] EWHC 42 (Comm), in which the Court determined that (1) it is not proper to assume that the law of the arbitration clause will follow the law of the contract; and (2) the law of the arbitration clause will be determined by a three-stage inquiry into (i) an express choice, (ii) an implied choice, or (iii) the law with the closest and most real connection to the arbitration clause. In addition, the Sulamérica Court applied a rebuttable presumption that an express choice of law to govern the substantive contract would also apply to the arbitration clause. Whilst the Court ultimately determined that the law of the seat of the arbitration (England & Wales) governed the arbitration clause, the case illustrated that failing to specify the law of the arbitration clause could have dramatic results. If the Court had instead determined that the substantive law of the contract (Brazil) applied to the arbitration clause, under Brazilian law the claimant would not have had a right to initiate the arbitration due to the nature of the contract.

However, in a very recent case (FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12) the Singapore High Court took a different approach and declined to apply the rebuttable presumption applied by the English Court of Appeal. The Singapore High Court instead ruled that in the absence of contrary indications, parties will have impliedly chosen the law of the seat of the arbitration to govern the agreement to arbitrate.

The uncertainties surrounding the law applicable to agreements to arbitrate may lead to difficult and expensive litigation, particularly in situations in which – as in the Sulamérica case – the application of one or another potentially applicable body of laws could dramatically change the landscape of a dispute. Whilst many lawyers have considered the impacts of the developing jurisprudence in their contract drafting advice to clients, among arbitral institutions other than the HKIAC, the London Court of International Arbitration (“LCIA“) has taken action to address this concern. The recently revised arbitration rules of the LCIA – which will go into effect on 1 October 2014 – provide that the law of the arbitration clause will be the law of the seat of the arbitration, unless otherwise specified. By revising its Model Clauses at this time to address the needs of commercial parties for certainty, the HKIAC too has demonstrated its continued initiative to remain at the vanguard of international best practices in arbitration.


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The Summer Arbitration Quiz!

by Michael McIlwrath

General Electric Company

Crossword
Down
Across
Mid-August is that time in the northern hemisphere when absence from their cases makes vacationing arbitration professionals fidget at the beach or in the mountains.

What to do after you have breezed through volume VII of Gary Born’s salacious yet authoritative “50 Shades of Arbitration Procedure”, discovered hundreds of folding patterns in the ICDR arbitration rules, and converted the ICC Secretariat’s copious correspondence into a fleet of paper airplanes?

Sure, you could spend more time with family. But whenever you suggest another game of “Pick the Chair of the Tribunal” your children suddenly remember their summer homework, and your spouse has threatened divorce if you so much as hum the “Pathological Arbitration Clause” one more time.

It’s not your fault that other people don’t know how to have fun. Therefore, to help fight the boredom of arbitration-less holidays, we bring you the Summer Arbitration Quiz. As with the previous edition, readers are invited to submit answers by the end of August to the email address at the bottom of this post. The first to send correct answers (or the one who comes closest) wins a dinner in Florence (travel and hotel costs excluded) and, if they wish, their name published here.

Rules, Rules, and Guidelines

1. Which one of the following institutions did NOT introduce revised arbitration rules in 2014?
A. LCIA
B. ICC
C. ICDR
D. WIPO

2. Which of the following arbitration institutions introduced revised mediation rules in 2014?
A. LCIA
B. ICC
C. ICDR
D. SIAC

3. The International Bar Association (IBA) has published rules or guidelines for all but which of the following areas of international arbitration practice?
A. Costs
B. The conduct of party representatives
C. Evidence
D. Conflicts of interest
E. How to draft an arbitration clause

Local Protectionism

4. Which of these institutions was sued in a national court for allegedly promoting the unlawful practice of law by foreign lawyers, and by whom?
A. The American Arbitration Association (AAA), by the National Trial Lawyers Association
B. The Court of Arbitration of the Milan Chamber of Commerce, by the Italian National Bar Association
C. The Russian Association of Arbitration (RAA), by the Federal DUMA (parliament)
D. The LCIA India, by the Association of Indian Lawyers

5. True or False: the English Arbitration Act of 1996 has been interpreted by the English courts to require any arbitrator appointed in an arbitration seated in London to be from the caste of Queens Counsel or higher.
A. True
B. False
C. They wish
D. “Higher”?

New Horizons

6. In 2014, UNCITRAL Working Group II decided to explore the possibility of a new multi-lateral convention on which of the following topics?
A. Recognition and enforcement of foreign court judgments
B. Recognition and enforcement of foreign arbitral awards
C. Recognition of famous arbitrators
D. International standards of conduct for arbitrators
E. Enforcement of foreign settlement agreements reached in mediation

7. Which of the following locations announced plans in 2014 to introduce new mediation procedures, quality control, and certification requirements to become a more attractive international forum for business disputes?
- Singapore
- London
- New York
- Switzerland
- Berlin

Local Idiosyncrasies

8. The procedural device known in the USA as “depositions”, oral testimony taken in advance a hearing, is routinely used in the domestic arbitration of which other countries?
A. England and Wales
B. Germany
C. Australia
D. Singapore
E. Brazil
F. None of the above

9. For the purpose of calculating arbitrator fees, in which country are hearings broken into “sittings” typically of 2 to 4 hour duration, with anything over considered a second sitting entitling the tribunal to additional fees?
A. India
B. Hong Kong
C. Finland
D. Russia
E. England

Numbers big and small

10. In July 2014, the largest arbitration award in history, USD 51 billion, was rendered in the Yukos cases against Russia. With respect to the possibility of collecting such an award, comparisons might be made with Franz Sedelmayer, who once successfully collected a different arbitration award for expropriation against Russia. Sedelmayer says this took over 10 years and required some 60 enforcement cases and litigation in 80 countries.
How large was Sedelmayer’s award compared with Yukos?
A. 16%
B. 6%
C. 0.6%
D. 0.06%
D. 0.00006%

11. For the price of $30, you can still buy which of the following in support of an international arbitration?
- an hour of document review by a qualified lawyer at a legal process outsourcing company in India
- coffee for an arbitration hearing held at the Intercontinental Hotel in Geneva (three arbitrators, tribunal secretary, and a counsel and party for each side)
- a new copy of the Kluwer book, International Arbitration and Mediation: A Practical Guide, by Messrs. Mcilwrath and Savage
- Discounted tickets to a new Broadway musical for an arbitral tribunal holding evidentiary hearings in New York

Efficient and Effective Methods

12. Which one of the following is advice contained in the ICC Guide for Inhouse Counsel and other Party Representatives:default
A. Because ICC Rule 30 requires an arbitral tribunal to render its award within six months, parties should refuse to pay the advance on fees unless the tribunal commits to comply with this requirement
B. Parties should ask themselves whether it would be better not to hear any witnesses in the arbitration
C. In order to encourage efficient handling of the case, parties should inform the tribunal at the case management conference that they intend to publish the arbitration award and all information about how the case was conducted
D. Parties should always appear at the case management conference in person rather than remote participation via video or teleconferencing

13. Which of the following is NOT a recommendation of the IBA Guidelines on Party Conduct in International Arbitration?
A. Parties may communicate with an appointed arbitrator they nominated in order to discuss potential candidates for presiding arbitrator
B. Parties may compensate witnesses for the loss of their time in preparing to testify (and for testifying)
C. Where there is a finding of severe misconduct by a Party Representative, arbitral tribunals may take the remedial step of an order prohibiting their further participation in the proceedings
D. If a Party Representative believes false evidence may be presented, she or he should promptly take steps to prevent this, including by resigning from the case

14. Which of the following arbitration institutions once had the practice of publishing on the stock exchange the name of any party that failed to comply with an arbitral award?
A. The American Arbitration Association in New York (AAA)
B. The Hong Kong International Arbitration Centre (HKIAC)
C. The Court of Arbitration of the Finnish Chamber of Commerce in Helsinki (FCC)
D. Arbitration Centre of Lisbon (ACL) of the Portuguese Chamber of Commerce and Industry

How to Submit Answers to the Quiz

Send your answers to Oskar Toivonen at Kluwer.arbitration.quiz@gmail.com. This email account will only be active until the end of August 2014. Official answers to the quiz (and the crossword) will be published in a subsequent post in early September.

By submitting answers, readers agree to have any disputes resolved by the rules of Bushkazi to be held in the Grand Duchy of Fenwick, and expressly disclaim the application of any law limiting the use of contracts of adhesion.

:
Children’s Corner: International Arbitration Word Hunt
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Find 18 international arbitration words!

Find 18 international arbitration words!


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Same claims, same evidence, different claimant: abuse of process for defendant to raise same defences?

by Sabrina Pearson

Lalive,
for YIAG

In the recent case of OMV Petrom SA v Glencore International AG [2014] EWHC 242 (Comm) (07 February 2014) (“Petrom v Glencore”), the English Commercial Court was faced with the question of whether issues arising and decided in an arbitration should be treated as settled in subsequent court proceedings brought by a non-party to the arbitration.

The factual and procedural background to this case is particularly interesting and pertinent.

The dispute arose out of contracts for the supply of crude oil to Romania between Glencore, and a commission agent, a company called SC Petrolexportimport SA (“Petex”). Petex alleged that Glencore had supplied crude oil that did not comply with the contractual specifications, more specifically, that the deliveries were made up of blended, cheaper and heavier, crude oils. The arbitral tribunal held that Glencore was in breach of the supply contracts but that Petex itself, as agent, had not suffered any loss and was therefore not entitled to damages. The arbitral tribunal further held that even if Petex was entitled to damages, it would be limited to the smaller amount of the actual value of the cargo supplied, as put forward by expert evidence, rather than the discounted value of the cargo claimed by Petex.

Subsequently, Petex assigned its rights under the supply contracts to its principal, Petrom, who then brought a second arbitration under the same supply contracts against Glencore. Petrom’s claim, however, failed on the ground that, as an assignee of Petex, its claim was res judicata.

Thereafter Petrom initiated court proceedings against Glencore before the English Commercial Court. Subsequently, Petrom sought an order from the Commercial Court striking out parts of Glencore’s defence on the grounds that it was an abuse of process to raise such defences again as these matters had already been decided in the first arbitration.

The Commercial Court acknowledged that the claims, evidence and defences were essentially the same as in the first arbitration and that the main difference was the different claimant. Nonetheless, it held that, on the facts, there was no abuse of process.

The Commercial Court first reiterated the standard to be applied in deciding whether there was an abuse of process. According to the leading case of Secretary of State for Trade and Industry v Bairstow [2004] Ch 1, in the event that the parties are not the same in both proceedings, there will be an abuse of process if (i) it would be manifestly unfair to a party to the later proceedings to re-litigate the same issues or (ii) it would bring the administration of justice into disrepute to permit such re-litigation. The Commercial Court emphasized that the burden lies on the party making the abuse of process argument and that it is an “exacting test”.

The Commercial Court then confirmed (as held in the case of Michael Wilson & Partners Limited v Sinclair [2013] 1 All ER (Comm) 476), that abuse of process may be relied on where the earlier decision is that of an arbitral tribunal, rather than that of a court. However, the Court noted that the principle that arbitration proceedings are confidential to the parties to the arbitration will be taken into account when deciding whether or not the subsequent proceedings are an abuse of process and will militate against such a finding.

The Commercial Court went on to apply the abuse of process standard to the facts.

The Court pointed to three factors in favour of a finding of an abuse of process. First, that it may be perceived as unfair on witnesses that they should be subject to further cross examination on the same facts. Second, that one of the witnesses had died since the arbitration. Third, that a significant period of time had passed since the arbitration hearings in 2005.

However, according to the Commercial Court, four factors pointed the other way. First, that – in contrast to the situation where a party has brought proceedings in order to re-litigate the question whether it is guilty of certain charges – a court should be slow in preventing a party from continuing to deny serious charges of which it has already been found guilty. This factor, according to the Court, was sufficient to dismiss the strike out application. Second, Petrom should not be allowed to argue that Glencore should be prevented from rearguing factual issues decided against it but that, conversely, it should be permitted to reargue the findings of the arbitral tribunal on quantum. Third, Petrom raised the strike out application belatedly once the court proceedings were well under way. Fourth, Petrom’s application to strike out parts of Glencore’s defence submission on the grounds of abuse of process was internally inconsistent and would make its submission incomprehensible. Furthermore, it was unclear from the application which issues would remain to be decided at trial.

Commentary

Given that the claims, evidence and defences were undisputedly the same in both proceedings, it seems a waste of time and money to re-litigate the whole dispute. In addition, as a result of the significant passage of time, the testimonial evidence presented to the Court will be of inferior quality.

However, the threshold for an abuse of process argument to succeed in the event that the parties are not the same in both proceedings is high. The threshold is even higher in cases where the earlier decision is that of an arbitral tribunal due to the principle that arbitration proceedings are confidential to the parties to the arbitration. In the present case, it was the Commercial Court’s reluctance to adopt the findings of dishonesty made by the arbitral tribunal which persuaded the Court to reject the strike out application. Understandably, the Court deemed that it would be less unfair if Petrom were required to prove the charges of dishonesty again than if Glencore was prevented from defending itself again against such serious charges.

Interestingly, it was the serious nature of the charges brought against Glencore and not Glencore’s status as a defendant that persuaded the Commercial Court to dismiss the strike out application. Indeed, the Commercial Court noted that Glencore’s status as a defendant in both proceedings, although relevant, was not decisive in determining whether there was an abuse of process. In this regard, the Court referred to the case of North West Water Ltd v Binnie & Partners [1990] 3 All ER 547 in which it was held that it can be an abuse of process for a defendant to seek to reopen issues decided against it as defendant in previous court proceedings. In the latter case, the court held that it was an abuse of process for consulting engineers to continue to deny, in proceedings brought by the water authority, allegations of negligence which had been decided against them in previous proceedings brought by the victims of an explosion of the underground tunnel they had designed.

In the present case, one is left to wonder whether the application would have succeeded if the charges brought against Glencore had been less serious. Given the importance attached by the Commercial Court to Petrom’s behaviour, namely, its contradictory stance and its belated and unworkable strike out application, the Court may well have rejected the application on this basis alone. Undoubtedly, however, not only would a great deal of time and money have been saved if the application had ultimately been successful but the risk of contradictory findings on the facts would also have been avoided.


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Compensation for a Dismissed Arbitrator?

by Günther J. Horvath

Freshfields Bruckhaus Deringer LLP,
for Freshfields Bruckhaus Deringer

The Austrian Supreme Court (OGH) confirmed that an arbitrator who is dismissed during the arbitration by a state court because of conflict of interest before the award is rendered may recover compensation for (useful) services rendered until dismissal (Austrian Supreme Court, Der Oberste Gerichtshof, OGH, 17 February 2014, 4 Ob 197/13v).

The president of an arbitral tribunal was dismissed by a state court before the award was rendered due to his conduct during the proceedings. Thereafter, the claimant in the arbitration filed a claim in state court (Commercial Court Vienna) requesting damages and declaratory relief. The claimant sought compensation from the former president of the arbitral tribunal for any damages arising out his conduct and requested, inter alia, the repayment of claimant’s contribution towards his compensation in arbitration, EUR 150,000, (50 % of the total compensation paid to the president before his removal).

The Court of First Instance (Commercial Court Vienna) dismissed claimant’s requests on the grounds that terms of reference restricted liability of the arbitrator to gross negligent and/or intentional acts. The Commercial Court Vienna held that the arbitrator in question was not acting with gross negligence or intent and denied tort liability of the arbitrator. With regard to the request for repayment of claimant’s contribution towards the arbitrators compensation it held that the services rendered by the arbitrator until dismissal justify the payment of the compensation.

The Court of Appeals (Higher Regional Court Vienna) confirmed that the arbitrator in question was not acting with gross negligence or intent and denied tort liability of the arbitrator. It held that the arbitration per se has not been frustrated and that claimant did not specify additional expenses arising out of the dismissal of the arbitrator. It granted, however, the repayment claim, stating that due to his dismissal the arbitrator in question cannot perform his contractual duty to render an award and therefore has no compensation claim. The Court of Appeals permitted an appeal to the Austrian Supreme Court because no case law with regard to the compensation for a dismissed arbitrator existed (classified as a legal issue of fundamental importance).

Both parties subsequently appealed to the Austrian Supreme Court. The OGH rejected claimant’s appeal for formal reasons and accepted the arbitrator’s appeal on the merits.

In its appeal to the OGH, the claimant merely addressed its claim for damages and did not address reimbursement of compensation paid to the president of the tribunal. Thus, the OGH examined whether the findings of the courts of lower instance with regard to the claims for damage of claimant were reasonable.

The OGH held that the liability of an arbitrator due to conduct must be determined separately from whether reasonable doubts as to the arbitrator’s impartiality existed because of the arbitrator’s behaviour in the arbitration (the second question had already been decided in another state court proceeding, whereby the arbitrator was dismissed by the Commercial Court Vienna). In general the tort liability of the arbitrator for a breach of procedure presupposes in itself that the award is successfully challenged due to the procedural breach.

In the case at hand, the terms of reference restricted liability of the arbitrator to gross negligent and/or intentional acts. Claimant did not challenge this contractual restriction of liability, however, argued that the arbitrator acted with gross negligence. The OGH held that the assessment of the courts of lower instance in question, according to which the arbitrator was not acting with gross negligence or intent, and thus denying plaintiff’s requests for declaratory relief and damages on the basis of the contractual limitation of liability of the arbitrator, is reasonable. As claimant did not refer in its appeal a legal issue of fundamental importance, the appeal was rejected by the OGH. Whether the general principle regarding tort liability of an arbitrator is also applicable if the arbitrator is dismissed before the award is rendered was left open.

With regard to the appeal of the arbitrator, which referred to the request for repayment of the compensation, the OGH (on the merits) held that the compensation of an arbitrator does not expire because of any shortcomings of the arbitral proceeding and is not dependent on whether the award is successfully challenged.

Since the terms of reference were silent on arbitrators’ fees in the event that one arbitrator was removed before rendering the award, the Court interpreted the contract by means of “supplementary interpretation” and held that the compensation claim of the arbitrator could not be dismissed in its entirety. The OGH held that the dismissed arbitrators’ compensation must be reduced with respect to the proportionate share of the rendered service. In the case at hand, the court held that the compensation paid to defendant was justified due to the services rendered before removal as an arbitrator. The Court did not address whether its decision would differ if the new tribunal was unable to make use of the service rendered by the arbitrator (e.g. repetition of the proceedings).

Comment

Under Austrian law the terms of reference are covered by specific procedural rules in the Austrian Civil Procedure Code (ZPO), the provisions relating to contracts for specific work in the Austrian Civil Code (ABGB, §§ 1165 et seq.), and power-of-attorneys (§§ 1002 et seq.).

According to § 1168a ABGB the contractor has a duty to warn the respective buyer, e.g. if the material provided by the buyer is clearly unsuitable for the work and as a result the work cannot be finished. If the contractor fails to do so, he loses his claim for compensation. This general duty to warn the other contracting party is applied mutatis mutandis to terms of reference in arbitration, especially with regard to the disclosure of possible grounds of impartiality.

In the case at hand, the arbitrator in question was not biased prior to the proceedings. Thus, he did not breach his obligation to disclose any facts or circumstances which might give reasonable doubts as to his impartiality prior to the proceeding and therefore complied with the duty to warn the other contracting party. A breach of this duty to disclose any possible grounds of impartiality would have led to the expiration of the (full) compensation claim. It remains to be seen, whether compensation in part is granted if a new tribunal is unable to make use of the service rendered by the dismissed arbitrator (e.g. repetition of the proceedings).

Although the arbitrator’s behaviour vis-à-vis the Claimant in the arbitration gave rise to reasonable doubts as to his impartiality, the OGH did not find that these doubts gave rise to an inference of gross negligence or intentional behaviour. Instead, it generally held that gross negligence is only present if the arbitrator in question acted in stark contradiction to the applicable procedural rules by “strikingly violating” his duties as an arbitrator – actions which must therefore lead to a dismissal due to partiality. It remains to be seen whether this approach will be adopted by other chambers of the Supreme Court. One must not forget, however, that the OGH only examined the findings of the courts of lower instance in this respect with regard to reasonability. Whether the general principle regarding tort liability of an arbitrator is also applicable if the arbitrator is dismissed before the award is rendered was left open by the Supreme Court.

URL:

Judges: Dr. Schenk, Dr. Vogel, Dr. Jensik, Dr. Musger and Dr. Schwarzenbacher.


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Interim Measures and Anti-Arbitration Injunctions in Brazil

by André de A. Cavalcanti Abbud and Gustavo Santos Kulesza

BM&A Advogados

Do international arbitrators have the power to overturn interim measures granted by a Brazilian court? Do Brazilian courts have the power to stay international arbitrations? A recent decision rendered in the Petroplus Sul Comércio Exterior S.A. (“Petroplus”) et al. v. First Brands do Brasil Ltda. et al. (“First Brands”) dispute has just provided its answer to those questions. And the response was a bit alarming, at least from an arbitration perspective. The Court of Appeals of the Mato Grosso do Sul state recently upheld an anti-arbitration injunction requested by Petroplus ordering First Brands to adjourn recently initiated ICC proceedings (Interlocutory Appeal n. 1401116-61.2014.8.12.0000/50000; see here). That decision runs afoul of some fundamental international arbitration concepts and precedents of the Brazilian Superior Court of Justice (“STJ”). The STJ will soon have a chance to readdress those same questions hopefully with more promising answers.

The Petroplus et al. v. First Brands et al. dispute is not new in the Brazilian arbitration scenario. The conflict involves numerous parties who entered into joint venture and shareholders’ agreements providing for the resolution of disputes by arbitration. For the sake of brevity, this post refers only to Petroplus and First Brands to designate each side of the dispute.

The first chapter of the conflict led to the rendering of an ICC arbitral award in Miami. First Brands sought the recognition of the arbitral award before the STJ in Brazil while Petroplus tried to annul that same arbitral award before the São Paulo Courts. First Brands seems to have won here: the STJ recognized the award (Contested Foreign Judgment nº 611; see here and here) and the São Paulo Court of Appeals dismissed the proceeding to set aside the award (Appeal n. 0014578-23.2004.8.26.0100).

In the most recent chapter of their dispute, the parties filed new lawsuits before the São Paulo and Campo Grande Lower Civil Courts. A lawsuit brought by Petroplus before the 3rd Campo Grande Lower Civil Court (procedure n. 0822794-52.2012.8.12.0001) led to the decision that is the subject of this post. During those proceedings, the judge granted an interim measure requested by Petroplus to prevent First Brands from voting at shareholders’ meetings of some of the companies involved in the dispute. First Brands appealed that decision, but the Mato Grosso do Sul Court of Appeals dismissed the appeal (Interlocutory Appeal nº 4005756-58.2013.8.12.0000; see here). First Brands has successfully taken the matter to the STJ (Special Appeal nº 1463780), which recently suspended the effects of the lower court’s decision until the judgment of First Brands’ special appeal (Provisional Measure nº 22575; see here).

In parallel, First Brands initiated new ICC arbitral proceedings requesting the arbitral tribunal to grant an interim measure overturning the judge’s decision and allowing First Brands to vote at the shareholders’ meetings. Petroplus reacted by requesting the judge to require First Brands immediately to dismiss the arbitration proceedings. The judge denied Petroplus’ request on the ground that First Brands had the right to present its claims before the arbitral tribunal if First Brands considered that forum to be the appropriate forum for solving the parties’ dispute. Petroplus appealed the decision at first instance to the Mato Grosso do Sul Court of Appeals, which granted the appeal by majority decision, ordering First Brands to suspend the arbitral proceedings, subject to a daily penalty.

The Mato Grosso Court of Appeals’ decision was not unanimous. The reporting justice would have dismissed the appeal based on the wrong assumption that the arbitral tribunal did not have jurisdiction to interfere in judicial proceedings, e.g. by voiding the interim measure previously granted in the lower court. Therefore, according to his dissenting opinion, there was no reason to order the suspension of the arbitral proceedings.

The reporting justice’s opinion did not prevail. The Court of Appeals granted the appeal: although the majority shared the reporting justice’s incorrect assumption that the arbitral tribunal lacked jurisdiction to override judicial decisions, it decided to grant the appeal based on the contempt of court doctrine.

The Court referred to Article 14, V, of the Brazilian Code of Civil Procedure, which states that the parties must not impose obstacles to the efficacy of judicial decisions. According to the Court’s reasoning, although the arbitral tribunal did not have powers to modify the decision previously granted in court, the mere risk that the arbitrators could grant First Brands’ interim measure would present hindrances to the full effectiveness of the lower court judge’s decision.

Additionally, according to the Court, the maintenance of the arbitral proceedings would violate Brazilian sovereignty, since the arbitration would continue under the assumption that an international arbitrator’s decision, although subjected to the Brazilian Courts’ approval to be enforced, could prevail over an earlier decision rendered by a judge in Brazil.

The Court stated that First Brands should have first complied with the judge’s interim decision and then requested the dismissal of Petroplus’ action based on the existence of the arbitration agreement, as provided for in Articles 267, VII, and 301, IX, of the Brazilian Code of Civil Procedure (whose effects are similar to that of Article II.3 of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards). By initiating arbitral proceedings before the judge had decided whether to dismiss the action, First Brands allegedly hindered the effectiveness of the judge’s interim decision. In the Court of Appeals’ view, First Brands’ conduct constituted contempt of court (our translation):

The commencement of international arbitration, with requests that contradict what has been expressly decided by this Court, and by the judges of other suits involving the same parties or related entities and involving the same facts that permeate the action brought before the ordinary courts, prior to a decision on whether the Courts’ jurisdiction prevails or, if that is the case, on whether it is possible to invoke international arbitration for the matter at issue in the action in course before the 3rd Campo Grande Lower Civil Court, represents the contempt of court provided for in Article 14, V, of the Brazilian Code of Civil Procedure and violates item II of the same procedural rule. (p. 18, our translation).

For those reasons, the Court of Appeals (i) decided to order First Brands to adjourn the arbitration proceedings until the lower court judge decided whether to extinguish the lawsuit due to the existence of the arbitration agreement; and (ii) imposed a penalty of approximately USD 500,000 plus a daily penalty of USD 200,000 for failure to comply with the order. Moreover, the Court (iii) authorized Petroplus not to comply with any arbitral tribunal’s decision, which would violate the sovereignty of the Brazilian Courts.

The Mato Grosso do Sul Court of Appeals’ decision is an exceptional case that swims against the arbitration-friendly tide generated by cases decided by the STJ, Brazil’s highest court on non-constitutional issues.

First, the Court of Appeals’ view that the arbitrators do not have the authority to overturn an interim measure granted by the ordinary courts contradicts the STJ’s precedents on the same subject. In the Itarumã Participações S.A. v Participações em Complexos Bioenergéticos S.A. – PCBIOS case (Special Appeal nº 1.297.974; see here and here), the STJ confirmed that, whenever the parties have entered into an arbitration agreement, the ordinary courts have jurisdiction to render interim measures only in exceptional circumstances, e.g. before the constitution of the arbitral tribunal. Once the arbitral tribunal is constituted, the arbitrators’ immediately have power to grant provisional measures and the arbitrators can maintain, modify or even terminate measures granted by the ordinary courts. Indeed, according to the STJ, any decision rendered by the ordinary courts is provisional and must be confirmed by the arbitrators in order to remain valid. Therefore, the Court of Appeals’ position that the arbitral tribunal cannot terminate the interim measure granted in favour of Petroplus seems to be ill-founded and most likely will not prevail when taken to the STJ.

Second, the Court of Appeals’ anti-arbitration injunction also goes against the pro-arbitration stance adopted by the STJ. In Ferro Atlântica S.L. v. Zeus Mineração Ltda. (Provisional Measure nº 17868; see here), the STJ decided that the ordinary courts’ intervention in an ICC arbitral proceeding would violate the parties’ freedom of contract in submitting their dispute to arbitration. Also, in accordance to the competence-competence principle, recognized by the Brazilian Arbitration Act (Law nº 9307/1996, Article 8, sole paragraph), the STJ decided that the arbitrators have jurisdiction to resolve any issue regarding the validity of the arbitration agreement. Moreover, in Samarco Mineração S.A. v. Jerson Valadares da Cruz (Special Appeal n. 1.278.852; see here), the STJ stated that when the parties have entered into a “complete” arbitration agreement (“cláusula arbitral cheia”), the arbitrators have priority over the ordinary courts in deciding on the validity of the arbitration clause.

In the case at hand, not only the arbitration clauses are “complete”, but also Petroplus itself confirmed the existence of valid arbitration agreements between the parties when Petroplus started the first ICC arbitration. The Court of Appeals therefore seems to have made a mistaken decision in ordering First Brands to wait until the lower court judge decides whether to extinguish the action before putting the arbitral proceedings back on track. First Brands is now trying to take the case to the STJ. It remains to be seen what will be the STJ’s reaction to the Court of Appeal’s anti-arbitration injunction, especially in light of the fact that the arbitration seat is outside Brazil. Hopefully the STJ will embrace the opportunity to make another dent in favour of arbitration.

The Petroplus et al. v. First Brands et al. dispute is far from an end. Those who follow the development of Brazilian arbitration law should watch the next chapters of this dispute closely.


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An Insider’s Perspective on Reliance v Union of India: What the Supreme Court of India Got Right and What it Got Wrong

by Niyati Samir Gandhi

National Law School of India University, Bangalore

A few days ago, this blog published an outsider’s perspective on the decision of the Supreme Court of India (SCI) in Reliance v Union of India (Reliance v Union of India, Civ App No. 5675 of 2014 (Supreme Court of India)) which has been applauded by international practitioners around the world since it curbed the jurisdiction of Indian courts over an arbitration agreement supplementing the pro-arbitration jurisprudence coming from the SCI over the last two years. The writer has commented not only as an outsider but also and more particularly as a Civil Lawyer, proposing an excellent alterative to the court’s approach. However, it may be necessary to have an insider’s perspective on the judgment.

The dispute was between the Union of India (Respondent) on one side and Reliance India Limited and BG Exploration and Production India Limited (Claimants Appellants) and arose out of two Production Sharing Contracts (PSCs). The detailed dispute resolution clauses of the contract provided that:
i. The substantive law governing the contracts was: Laws of India,
ii. The law governing the arbitration agreement was: Laws of England
iii. The venue of arbitration was: London, England

The contract was amended at a later stage as follows:

“Except the change of venue/seat of Arbitration from London to Paris, the [dispute resolutions clauses] Articles 32 and 33 of the [PSCs} shall be deemed to be set out in full..."

After the dispute arose and the arbitral tribunal was constituted, the tribunal rendered a Partial Consent Award recording that-

"...the juridical seat (or legal place) of arbitration for the purposes of arbitration initiated under the Claimants' Notice of Arbitration... shall be London, England."

The Respondent contended that that "laws of India" included the Indian Arbitration and Conciliation Act, 1996 and since the contract was entered into before the BALCO judgment (since it only laid down the law prospectively), the award can be challenged under section 34 of the Act before the Delhi High Court which went on to uphold jurisdiction.

In the present judgment, the Supreme Court of India overruled the Delhi High Court stating that it had "wrongly intermingled issues relating to the challenge to the arbitral proceedings or the arbitral award" which is exactly the issue my learned colleague points out as a logical inconsistency in the decision when he says “it should be immaterial whether the set aside proceedings are based on grounds of non-arbitrability or public policy. The nature of the challenge does not interfere with the jurisdiction of the courts of the seat to set aside an award.”

The SCI went on to hold that even though the case had to be decided based on the position of law as laid down in Bhatia International (Bhatia International v Bulk Trading, (2002) 4 SCC 105 (Supreme Court of India)), the applicability of Part I of the Act had been impliedly excluded since London had been designated as the seat of arbitration and the parties had agreed upon approaching the Permanent Court of Arbitration and not the Chief Justice of India for appointment of the Chairperson of the arbitral tribunal and the arbitration proceedings had to be conducted as per the UNCITRAL rules.

At this stage I would like to explain the test of the implied exclusion of Part I of the Indian Arbitration & Conciliation Act, 1996 [ACA], which has been criticized in the aforementioned post. India is a common law jurisdiction with great focus on precedent. In the last decade, through its rulings in Bhatia International and Venture Global (Venture Global Engineering v Satyam Computers, Civ App No. 309 of 2008 (Supreme Court of India)), the SCI interpreted ACA to mean that a foreign award could be challenged in India just like a domestic award would be under Section 34. However, Bhatia had also provided a way out by saying that the application of Section I of the ACA (which applies only to domestic awards) would not extend to foreign-seated arbitrations if the parties had expressly or impliedly excluded the application of Part I of the ACA. Since these judgments have not been expressly overruled for contracts entered into before 6 September, 2012, the Bhatia requirement must continue to apply. The issue with regard to why the SCI decided to overrule Bhatia only prospectively, is a debate for another post.

Furthermore, despite the reputation of India as an arbitration-unfriendly jurisdiction, the SCI has previously acknowledged that courts of the seat enjoy exclusive supervisory jurisdiction. The court was faced with the contradiction in the position of law as put forth by Bhatia i.e. courts in India maintaining jurisdiction over a particular foreign-seated arbitration alongside that exercised by courts of the seat in Enercon v Enercon (Enercon v Enercon, Civ App No. 2086 of 2014 (Supreme Court of India)). In this case, the conflict was between the SCI maintaining jurisdiction versus sending the dispute to English courts owing to confusion with respect to whether ‘London’ was mentioned in the arbitration clause as the seat or the venue. Since the court ended up finding that it was included only as a venue and found that the parties intended New Delhi to be the seat, the court kept jurisdiction. (Whether or not their reasoning was sound was previously discussed here).

Since we are still in the domain of the determination of the various applicable laws, I must attempt to answer some other questions raised in the post. It was pointed out that-

the SCI did not clarify what would happen in the following scenarios:
- Seat in London, Indian substantive law, and no agreement with respect to the law applicable to the arbitration agreement; or
- Seat in London, Indian substantive law, and arbitration agreement governed by Indian law.

This question is not important to determine jurisdiction, because it is important to note that Indian courts understand that courts of the seat exercise exclusive supervisory jurisdiction. This question is important in the determination of what is the law governing the arbitration agreement.

First, if the seat would be London, Indian substantive law would be applicable to the subject matter of the dispute and there is no mention of the arbitration agreement, it would be necessary to refer to NTPC v Singer (NTPC v Singer, AIR 1993 SC 998 (Supreme Court of India)) which provides that substantive law is normally be the law governing the arbitration agreement as well. However, in exceptional circumstances and if there is no substantive law defined, the law of the seat will be deemed to be the governing law as the law bearing the “closest connection” to the dispute. (What such expectations would entail is an unclear matter.)

In the second scenario proposed, the law applicable to the arbitration agreement has been agreed upon as Indian law.

This gives me the right context to introduce my own analysis of the judgment. In Reliance the substantive issue raised was with regard to arbitrability. As agreed to by the SCI in the judgment (citing Mustill and Boyd, The Law and Practice of Commercial Arbitration in England, 2nd Edn),

…where the law governing the conduct of the reference [law of the seat] is different from the law governing the underlying arbitration agreement, the court looks to the arbitration agreement to see if the dispute is arbitrable, then to the curial law to see how the reference should be conducted and then returns to the [law governing the arbitration agreement] to give effect to the resulting award.

In saying so, the court, in my opinion correctly laid down the law with respect to jurisdiction and sent the case back to the courts of England. But we must not ignore the error made by the court with respect to arbitrability which is not being pointed out by any other scholars and practitioners discussing this case.

The court first recognized that the issue of arbitrability is governed by the law applicable to the arbitration agreement. By this line of reasoning, the English courts would decide the application to set aside the award by applying English law and the problem would only arise when an application of enforcement would be filed in India where Indian courts would be able to examine the decision on grounds of public policy. However, the court took a logical leap by going on to say that “since substantive law governing the contract is Indian Law, even the Courts in England, in case the arbitrablity is challenged, will have to decide the issue by applying Indian Law viz. the principle of public policy etc.” It fails to stand to reason how the court in para 69 cites Sumitomo Heavy Industries v ONGC (Sumitomo Heavy Industries v ONGC, (1998) 1 SCC 305 (Supreme Court of India)) in respectful agreement with the case which clearly states that the issue of arbitrability is determined by the law governing the arbitration agreement but then in the dispositive para 74 (iii) goes back to the logic of the Delhi High Court to apply substantive law to the issue of arbitrability.

Therefore, though I respectfully disagree with the outsider’s view of this case, I am not a supporter of this judgment. Although it is certainly reflective of a better understanding of the principles of international commercial arbitration, it is not a judgment that should be lauded in its entirety as it has created a controversy, unintentionally as it may be, with respect to what law governs the issue of arbitrability.


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Failing to pay the advance on costs and the risk of inoperability of the arbitration clause – Remedy?

by Dirk De Meulemeester and Cederic Veryser

Lexlitis

The advance on costs at the outset of the arbitration ensures that arbitrators are covered for the fees and expenses made upon rendering their final award. It is common practice both in institutional and ad hoc arbitration that the procedure will only continue – or even start – upon payment in full of the advance on costs. It is also common practice that upon indentifying the advance on costs, both sides are invited to pay half of the advance. And finally, it is becoming more and more common that a party – predominantly respondents – fail to meet this requirement as part of – in most cases – a dilatory tactic.

When a party fails to make payment of the advance, the other party is requested to fulfil this obligation. If that party refuses to do so, the arbitration will not proceed or will be suspended or – under certain arbitration rules – the claim will be considered withdrawn.

There have been several cases whereby a claimant, upon being confronted with a respondent unwilling to pay its share of the advance, considers the arbitration agreement inoperable, abandons the arbitration and reverts to the state court to rule on the merits. In some of those cases the respondent then raises the exceptio arbitri, stating that the state court has no jurisdiction because there is a valid arbitration agreement. The result is then that the claimant has no other choice than to further pursue the arbitration – or relaunch it – by i.a. paying the advance on costs in full. In other instances, a state court has held that the arbitration agreement did become inoperable. The latter is rather worrying and would mean that arbitration practice would not have a sufficient answer to these sort of dilatory tactics.

In a 26 February 2014 judgement of the English Queen’s Bench Division, Commercial Court, the Hon. Mr. Justice Hamblen decided that – based on the facts before him – an arbitration agreement had not become inoperable, giving an interesting overview of the existing doctrine and case law. The case is known as BDMS LIMITED v RAFAEL ADVANCED DEFENCE SYSTEMS [2014] EWHC 451 (Comm).

The dispute in BDMS v RAFAEL concerned sums allegedly due to BDMS by RAFAEL under a consultancy agreement. The agreement contained an arbitration clause which specified that the arbitration would take place under the 1998 ICC-Rules and would have its seat in London. After filing the request for arbitration on 28 April 2011, the ICC fixed the advance on costs at $27,000 and invited both parties to pay half of the advance on costs (Article 30(3) 1998 ICC-Rules). A similar provision can be found in many – if not all – arbitration rules of established arbitration institutions.

BDMS paid its part of the advance, RAFAEL however was only willing to pay its part of the advance if BDMS would provide an adequate security for costs, a demand BDMS was not willing to meet. Equally, BDMS was not willing to pay the other half of the advance on costs. Subsequently, the ICC had no other choice than to invite the arbitrator to suspend his work and to inform the parties that the claim would be considered withdrawn. On 13 March 2012 – almost one year after the request for arbitration – the ICC informed the parties that the claim was withdrawn by operation of Article 30(4) 1998 ICC-Rules.

In the meanwhile, on 7 February 2012, BDMS had already issued its Claim Form and Particulars of Claim before the High Court. Following that, RAFAEL filed an Application stating that the court had no jurisdiction. Article 9(4), juncto 9(1) of the 1996 Arbitration Act states that the state court shall grant a stay of proceedings when a claim – governed by an arbitration agreement – is brought in front of it, unless the arbitration agreement is null and void, inoperative, or incapable of being performed.

Subsequently, BDMS submitted that the failure of RAFAEL to pay its part of the advance was a repudiatory breach of the arbitration agreement, i.e. a breach that the law regards as sufficiently serious to justify termination as it goes to the root of the contract, thus allowing BDMS to pursue its claim before the state court and disregard the arbitration clause altogether.

The Hon. Mr. Justice Hamblen rightly stated that there are different views on whether the requirement to pay an advance on costs is a contractual obligation or a procedural obligation, relying on Derains and Schwartz (A Guide to the ICC Rules of Arbitration) and Buhler and Webster (Handbook of ICC Arbitration).

The contractual approach holds that since the arbitration agreement refers to in casu the ICC-Rules, these rules become part of the agreement and thus the payment of the advance on costs is a contractual obligation. Any dispute with regard to that obligation falls within the scope of the arbitration agreement and can be resolved by way of an award.

The procedural approach holds that the arbitration institution is responsible for i.a. the advance on costs and that the arbitral tribunal is only competent to decide which party shall bear the costs of the arbitration. Thus an order to pay the advance could only be made by way of an interim measure.

The court took a so-called contractual approach to the question on whether or not the failure to pay the advance on costs involves a breach of the arbitration agreement, as this contractual approach is supported by most arbitral and court decisions, as well as most commentators. It was expressly agreed upon that the arbitration agreement shall take place under the ICC-Rules. Article 30(3) 1998 ICC-Rules prescribes the obligation to pay the advance on costs by each party, which RAFAEL failed to do so. Consequently, the court decided that this failure did indeed involve a breach of the arbitration agreement.

However, in its judgment, the court was not of the opinion that this breach was to be considered repudiatory because the refusal of RAFAEL to pay its share of the advance was not absolute (it was a refusal unless security for costs was provided). Furthermore, the breach did not deprive BDMS’s right to arbitrate since it could have paid the advance on costs itself in order to avoid the claim being withdrawn and could subsequently have sought an interim award or interim measure in order to oblige RAFAEL to (re)pay its part of the advance. Finally, BDMS could bring the same claim to arbitration again.

It is hard to so see how the non-payment of the advance on costs would render an arbitration agreement inoperative. It would lead to a stay of the proceedings or a withdrawal of claim allowing a party to relaunch its claim in a later stage, but the arbitration agreement itself would not become inoperative.

However, in the RESIN case it was held that the refusal to pay did indeed render the arbitration agreement unworkable and thus inoperative because a claimant should not be compelled to post a defaulting party’s share of an advance deposit, unless the applicable rules or arbitration agreement clearly require it to do so (see: Eamon and Holub).

The approach taken by the Hon. Mr. Justice Hamblen has – to a certain extend – been part of the SCC Arbitration Rules since 2007 and has proven to be successful. Apart from the classic rule that if a party fails to make a required payment, the other party will have the opportunity to do so, Article 45(4) SSC Arbitration Rules adds that; “If the other party makes the required payment, the Arbitral Tribunal may, at the request of such party, make a separate award for reimbursement of the payment”. In its 2013 Arbitration rules, the Danish Institute of Arbitration adopted a similar rule (Article (6(2)).

Of course, the adding of this sentence is of a rather ‘educational nature’ since (1) a party can always request the tribunal for a separate award or interim measure (unless excluded expressis verbis) and (2) it remains at the discretion of the tribunal to grant such a request or not.

In a very interesting contribution by Gretta Walters on this SCC Practice, it was reported that in the period 2007-2011 in 23 SCC-cases a party requested a separate award for advance on costs, resulting in a staggering 22 awards in favour of the request. In most awards, the reasoning was not very extensive and makes reference to the possibility provided for by Article 45(4) SCC-Rules.

One could state that the SCC approach could avoid a party from abandoning the arbitration and filing with the state court, but the SCC solution is not 100% waterproof. A party could still try to make the case that the arbitration agreement became inoperable, because some jurisdictions will hold that a partial award on advance on costs is not a final resolution of a dispute and therefore not enforceable under the New York Convention. As was the case in a decision of the Supreme Commercial Court of the Russian Federation in 2010 (Resolution No 6547/10 – see the contribution of Ekaterina Butler).


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