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

by Paul Taggart

Dispute Resolution Board Foundation

Introduction

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

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

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

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

2. Legislation

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

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

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

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

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

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

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

Practical Considerations

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

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

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

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

Conclusion

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

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

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


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

by Dmytro Galagan

Central European University

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

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

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

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

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

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

Arbitral assistants and secretaries in international arbitration

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

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

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

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

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

Conclusion

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


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The New Dutch Arbitration Act 2015

by Barbara Rumora-Scheltema and Bo Ra Hoebeke

NautaDutilh ,
for ArbitralWomen

The views expressed in this article are those of the authors alone and should not be regarded as representative of, or binding upon ArbitralWomen and/or the authors’ law firm.

1. Introduction

In this overview, the highlights of the New Dutch Arbitration Act will be discussed. The New Act entered into force on 1 January 2015 in relation to arbitrations commenced on or after 1 January 2015. The New Act is an amendment to the former Dutch Arbitration Act, which dates back to 1986 , many aspects of which remain unchanged in the New Act. Although the Act is not based on the UNCITRAL Model Law (2006), the Dutch legislator, in its preparation for the New Act, did look to the Model Law (2006).

The New Act still forms part of the Dutch Code of Civil Procedure (“DCCP”) (Articles 1020-1076 DCCP). Apart from the provisions regarding the recognition and enforcement of foreign arbitral awards, Title One (Arbitration in the Netherlands) of the New Act is applicable if the place of arbitration is located within the Netherlands. Title One has a monistic basis, i.e., in principle, no distinction is made between national and international arbitrations.

Overall, in the New Act, the legislator has granted the parties more autonomy to shape the arbitration as they deem fit. In fact, only a few provisions in the New Act, all relating to due process, are of a mandatory nature.

2. Highlights of the New Dutch Arbitration Act

A full unofficial English translation of the text of the New Act is available on the website of the Netherlands Arbitration Institute (http:/www.nai-nl.org/en/). The below summarizes the highlights of the amendments incorporated into the New Act.

Arbitration agreement: The provisions regarding arbitration agreements contain several noteworthy amendments. Firstly, consumer protection is extended by way of an amendment to the Dutch Civil Code (“DCC”); an arbitration clause contained in general terms and conditions is voidable if it does not provide the consumer with the option to submit the dispute to state courts. Secondly, several arbitration-related changes were implemented in Dutch private international law (Book 10 DCC). Inspired by the Swiss Private International Law Act, Dutch private international law now includes (i) the rule that a State cannot invoke its internal law in order to dispute the validity of the arbitration agreement in case the other party was neither aware nor should have been aware of such internal law, and (ii) the so-called favor-principle providing that an arbitration agreement is valid, if it is valid according to the law chosen by the parties with regard to the arbitration agreement itself, or to the law of the place of arbitration, or absent the aforementioned choice of law, to the law that applies to the legal relationship to which the arbitration agreement relates.

Emergency arbitration: The possibility of emergency arbitration as already contained in the former Act is maintained in the New Act. Firstly, the emergency arbitrator may render a decision in the form of an award. Secondly, Dutch law does not oblige any of the parties to commence arbitral proceedings on the merits within a certain time limit after having instituted arbitral emergency proceedings. Of course, if a party does commence arbitral proceedings on the merits, the arbitral tribunal is not bound by the findings of the emergency arbitrator.

Procedural matters: The New Act introduces several provisions on procedural issues. For example, the New Act specifically allows that parties agree to institutional challenges exclusively, as opposed to challenge proceedings before the Dutch courts. Also, the New Act explicitly includes the principles of due process and prevention of unreasonable delay. In addition, the New Act provides a statutory framework for e-Arbitration, including a provision on electronic arbitral awards.

Consolidation of arbitrations: The New Act slightly amended the provision on consolidation of arbitral proceedings. In respect of arbitral proceedings pending in the Netherlands, a party may request that a third party, typically but not limited to an arbitration institute, designated to that end by the parties, order consolidation with other arbitral proceedings pending within or outside the Netherlands, if the parties agreed on such a third party. Absent a third party designated to that end by the parties, the provisional relief judge of the district court of Amsterdam may be requested to order consolidation of arbitral proceedings pending in the Netherlands, unless the parties have agreed otherwise.

Arbitral awards: The New Act also contains several practical – but important – amendments that relate to the final stages of the arbitration. Firstly, the New Act allows the parties to agree, after the arbitration has commenced, that arbitrators need not reason the award. Secondly, the New Act abandons the requirement that the tribunal deposit the award with the registry of the relevant court, unless the parties agree to such requirement.

Limited/streamlined court involvement: The Dutch legislator sought to limit and streamline the Dutch courts’ involvement in arbitrations, while increasing the support provided by courts. Under the New Act the Dutch courts’ assistance to arbitrators is explicitly limited to what arbitrators are not able to timely do themselves. Court assistance, such as the examination of witnesses, is also available with regard to arbitrations that take place outside the Netherlands.

Setting aside proceedings and enforcement proceedings regarding foreign arbitral awards are streamlined to one factual instance only, before the Courts of Appeal (in total four). More importantly, an opt-out possibility is introduced with regard to appeal to the Supreme Court in setting aside proceedings (unless one of the parties is a consumer). In addition, the New Act states that only a serious non-compliance by a tribunal with its mandate can provide a ground to set aside an award. In addition, in case an award is set aside – other than on the basis of a lack of a valid arbitration agreement – the New Act abandons the rule that the relevant national court’s competence revives, and confirms that the arbitration agreement remains in force.

Remission: Finally, the New Act introduces the possibility of remission of a case to the arbitral tribunal by the Court of Appeal in setting aside proceedings. The Court of Appeal may suspend the setting aside proceedings in order to allow the arbitral tribunal to rectify a ground for setting aside by reopening the arbitration and, after having heard both parties, rendering a new award that replaces the award in relation to which these setting aside proceedings were instituted. Subsequently, the Court of Appeal will render its judgment in the setting aside proceedings, taking into account the amended award.

3. Conclusion

The New Act contains considerable improvements that favour international arbitration and the role of arbitration institutions. This reflects the Dutch legislator’s aim to promote the Netherlands as a neutral venue for international arbitrations, especially in view of the international arbitration institutions present in the Netherlands, such as the Permanent Court of Arbitration and P.R.I.M.E. Finance, both located in The Hague. These improvements – combined with the arbitration friendly policy of Dutch courts – will certainly contribute to promote Dutch arbitration practice and to make the Netherlands an even more attractive venue for international arbitrations.


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Effects of Settlements in Investor-State arbitration

by Daniela Paez-Salgado (Assistant Editor for South America)

What are the effects of a settlement agreement between the locally incorporated company and the host state on the foreign shareholder’s pending BIT claim? Two views have emerged under investment treaty arbitration case law. The first view, adopted in Sempra v. Argentina (ICSID Case No. ARB/02/16) and Hochtief v. Argentina (ICSID Case No. ARB/07/31) decisions, holds that a settlement agreement does not prevent the shareholder from pursuing international proceedings against the State. The second view, sustained in SAUR v. Argentina (ICSID Case No. ARB/04/4), contends that the effects of a settlement agreement preclude the investor from proceeding with an international action against the State. The first approach seems correct, it acknowledges the different legal personalities of a shareholder and the locally incorporated company and differentiates between the rights of investors under BITs and the rights of a local company under local municipal law.

Investment arbitration case law shows a trend in international law to recognize the independence that shareholders have from the corporation that they own shares in. Both entities are not only independent legal persons but also because they hold different rights of action against a State for any harmful measures: a shareholder has “a separate cause of action under the Treaty in connection with the protected investment, […] which can be asserted independently from the rights of [the company]”. See, CMS v. Argentina, ICSID Case No. ARB/01/8, ¶ 68.

In practice, shareholders will sue a host State under the BIT provisions for reflective loss when, for example, the local company’s assets have been expropriated. For breaches of other standards such as fair and equitable treatment, full protection or security, national treatment or most-favored-nation treatment; the damage to the shareholders can take the form of a diminution in the value of his shares. The shareholder therefore has a right to pursue a claim against the host State because his interests have been prejudiced. Also, a shareholder can suffer a direct loss upon an injury to the company if he has entered into loan agreements to fund the activities of the local company.

On one side of the debate, the tribunal in Sempra recognized the ‘procedural independence’ that exists between an investor and the local company. A shareholder filed a suit before ICSID for regulations that affected natural gas distribution licensees’ tariffs during the Argentine crisis. After negotiations with the government, the local company settled the dispute with the Argentine state. However, the shareholder did not sign or agree to the settlement agreement between the company and the Government. The tribunal held that the investor could not be bound by an agreement he was not a party of and, therefore, his interests were still covered by the BIT. See, ¶ 227.

In the same way, the tribunal in Hochtief had to address a very similar issue when the majority of members in a consortium settled a claim with the government and the claimant did not. The tribunal recognized two independent causes of action, one under municipal law and another one under treaty law. Then, the tribunal concluded that the “question must be addressed within the particular context of the BIT, and not by proceeding from principles of municipal company law.” ¶ 157. The decision reasoned that since there was no evidence that the claimant’s rights under the BIT were transferred to the local company to take action in his own name, the claimant retained his standing to bring claims with respect to the treatment of his shareholding under the BIT. See, ¶ 168.

Contrary to the prior decisions, the decision in the SAUR case gives full power to the release agreement signed between the local company and the Argentine government. The decision dismisses the shareholder’s expropriation claims – which were settled – on admissibility grounds. The tribunal begins its reasoning by accepting that a release agreement, as any other contract, has binding effects for the parties to that agreement. The award agrees on that the only parties to the release agreement were OSM (the national company) and the Argentine government. However, it then concludes that such agreement has binding effects for the investor and that his claims (based on expropriation measures that were settled by the company) are precluded from being adjudicated by the arbitrators.

The approach in SAUR disregards a potential conflict of interest that may arise between the shareholders of a company and the company itself (i.e. on a real case, the board of directors of El Triunfo Company in El Salvador fraudulently ratified a petition for bankruptcy before the local courts so that the company could enter into winding up proceedings to intentionally dismantle the investment of its shareholders). See, Douglas, Zachary. The International Law of Investment Claims. Cambridge: Cambridge University Press, 2009, p. 425. For instance, where the managerial body of the local company decides to settle a dispute with the governmental authorities notwithstanding the opposition of the minority shareholders or, when a company decides to settle a claim with the host State for undervalue. Shareholders’ rights under the treaty would remain available because those shareholders have not withdrawn or gave express power to the company to settle their BIT claims in their behalf. A decision like the one in SAUR leaves the interests of minority shareholders defenseless. According to its reasoning, a settlement agreement between a company and the host State implies an immediate withdraw of the opposing minority shareholder’s rights under the treaty regime.

Furthermore, the decision in SAUR is problematic under a strict legal-technical approach. The decision in SAUR is justified under the provisions of the Argentinian civil code and the principles of civil law that apply to a settlement agreement as a contract. The tribunal considers the application of res judicata principle, but disregards the application of another essential principle in contract law: res inter alios acta, also known as privity of contract. The parties to a contract are those subjects upon whom the legal effect of the contract bears. By legal effects, we refer to the rights and obligations that each party undertakes as a result of the agreement. The main obligation that arises under a settlement agreement is a negative one: abstention to sue the other party. That obligation can only be enforced against the party who agreed on that obligation; in these three cases, is the local company, not the shareholder. Under basic principles of contract law, a bilateral contract such as the settlement agreement can never bind third parties – minority shareholders – without their express consent.

Also, res judicata can be successfully raised as a defense to a claim when a party files the exact same claim for a second occasion. To proof that both claims are the same, they must share the same object, parties and cause of action. In agreements like those explored above, the claim settled with the local company has for object (i) compensating the local companies’ rights under local municipal law and (ii) preventing any future lawsuits against the State; the parties to the agreement are the local company and the State; and the cause of action is any that national law recognizes for expropriation without compensation. On the other hand, under an investor-state arbitration, the object of the claim is the compensation of the investor for State violations to BIT protections standards; the parties to the arbitration are the investor (shareholder under our proposition) and the host State; the cause of action is solely based on rights conferred upon a foreign investor under the treaty. From a simple review, none of the three elements to admit res judicata defense are present in the suit between the local company and the State. Hence, the tribunal in SAUR omitted the three-part test for admission of res judicata defense by the host State.

Therefore, it might be worth considering that the decision in SAUR is not well motivated under civil law principles. Also, it doesn’t consider the procedural rights of investors under BITs nor the economic realities of a business where there can be a conflict of interest between majority shareholders and the managerial bodies of the company on one side, and the minority shareholders’ interests, on the other.

In sum, it is undisputed in international treaty arbitration that shareholding in a company can be a form of investment that enjoys the full protection that BITs offer to foreign investors. In investor-state arbitrations, shareholders are not exercising the contractual rights of the local company but rather their own rights under the Treaty. Thus, under the proposed set of facts, a settlement agreement will have no preclusive effects on an ongoing arbitration if the suing-investor has not agreed on the settlement or given sufficient authority to the company to represent his rights under the BIT and settle them directly with the host State.

* It is important to bear in mind that this post does not address the double compensation issue that will be discussed in a subsequent one. 


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Looking behind the Statistics for Investment Arbitration

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

Both UNCTAD and ICSID have recently released documents designed to provide snapshots of key developments and trends in investor-State arbitration. Both documents draw upon a statistical analysis of case filings and outcomes to generate overviews of the lay of the land in this area of law. The documents highlight a number of important trends, and provide easily digestible at-a-glance updates on key issues and developments in investment arbitration. While there is much to be commended in this work, an accurate understanding of such trends necessitates both looking more deeply into what is included in these documents, and accounting for what is not.

Trends in Investment Arbitration

On 19 February, UNCTAD released a document providing an overview of trends in investment treaty practice and a statistical run-down of cases filed and/or completed in 2014. The UNCTAD statistics reveal that 2014 was a significant year for investment arbitration. From the perspective of treaty practice, the document indicates that some 27 treaties with investment protection provisions were concluded. As UNCTAD notes, this equates to “one every other week”. On case filings, the statistics indicate that:

In 2014, claimants initiated 42 known treaty-based ISDS cases. With 40 per cent of new cases initiated against developed countries, the relative share of cases against developed countries has been on the rise (compared to the historical average of 28 per cent)…The two types of State conduct most commonly challenged by investors in 2014 were cancellations or alleged violations of contracts, and revocation or denial of licences.

A prominent issue during 2014 was the compatibility with EU law of investment treaties between EU Member States (“intra-EU BITs”). On 23 January, ICSID produced a document providing an overview of cases registered with ICSID up to March 2014 involving EU Member States. The ICSID statistics present an overview of such cases, without engaging in, or endorsing either side of, the underlying debate. The ICSID statistics indicate that, as of 1 March 2014, 463 cases had been registered under the ICSID Convention and Additional Facility (AF) Rules. Of these:

  • 54% (some 260 cases) involved a claimant that was from an EU Member State; and
  • 12% (55 cases) involved a respondent State that was a member of the EU.

Of the 55 cases involving an EU Member State as respondent, 71% (31 cases) invoked intra-EU BITs (and so involved a claimant and respondent from within the EU). In these 55 cases, Hungary (11 cases) and Romania (9 cases) were the EU Member States most frequently represented as respondents. At first glance, then, the ICSID statistics indicate that investors from the EU are highly active as claimants in ICSID proceedings and that EU Member States are much more likely to be party to an “intra-EU” claim than to a claim filed by an investor from outside of the EU.

Looking into the Substance behind the Statistics

Despite their evident utility, the documents produced by UNCTAD and ICSID must be read with some caution.

One key caveat is that UNCTAD is necessarily only able to report statistics for “known” cases. This is a particular methodological problem for any statistical analysis of non-ICSID cases. This is because, unlike ICSID cases, non-ICSID proceedings are as yet not subject to any specific reporting or transparency framework. As such, even basic data about non-ICSID cases, including party details or indeed the case’s very existence, will not necessarily be in the public domain. In fact, it may be years before the details of cases filed and/or concluded in 2014 begin to surface, if indeed they ever do. This is significant principally because of the number of cases upon which the UNCTAD statistics are based. For example, UNCTAD is only speaking of 16 cases when it says that 40% of new cases initiated in 2014 were brought against developed countries. Assuming that previous years recorded a similar number of filings as in 2014 (i.e. 42 cases), the “historical average” of claims filed against developed countries was 11 cases per year. Evidently, even 4 or 5 unaccounted for cases can have a significant effect on these statistics. This caveat is equally, if not more, applicable when speaking of the types of measures under challenge, where the statistics are based upon single digit numbers.

While the UNCTAD statistics are weakened by being over-inclusive but incomplete, the ICSID statistics are weakened because they are complete but under-inclusive. The ICSID statistics are under-inclusive primarily because they rely on data from only ICSID and ICSID(AF) cases. While this is quite understandable given that they are produced by ICSID to focus upon ICSID cases, it does mean that care needs to be taken when using the statistics to comment upon investment treaty arbitration more generally. As with the UNCTAD statistics, the non-inclusion of cases in the dataset has the potential to significantly skew the statistics. Relatedly, though, it is important to emphasise that cases will generally only end up being registered at ICSID where the States Parties to a particular BIT are members of the ICSID Convention and/or specifically agree in the BIT that investor-State disputes will be subject to ICSID arbitration. In this respect, particular States show different preferences and treaty drafting practice. That is to say: some States will be more or less likely to refer disputes to ICSID arbitration, and, as a result, ICSID may be likely to receive more cases involving particular States as respondent, or more claimants of one particular nationality than of another. This is significant only because ICSID’s document seeks to analyse the characteristics of case filings based upon the nationality of claimants or respondents party to ICSID cases. Treaty drafting practice could be one explanation for why 71% of ICSID cases involving an EU Member State have been brought under an intra-EU BIT (insofar as EU Member States might be more likely to conclude BITs referring disputes to ICSID arbitration than non-EU States). Similarly, it could explain why States like Hungary or Romania feature most frequently among their EU counterparts as respondents to those claims.

Finally, in identifying disputes involving an “EU Member State”, it is important to note that the ICSID statistics assess membership status as at 1 March 2014 but cover all ICSID disputes ever having involved that State. This means that proceedings filed and concluded before a State became an EU Member are nevertheless recorded as having been brought against an “EU Member State”. In fact, of the 55 cases in which “EU Member States” are reported to have been respondents, some 17 were filed before the relevant State became an EU Member. Five alone were brought against Romania before it attained EU Membership in January 2007. This may make no difference depending upon the use to be made of the statistics, but it is worth noting that a temporal mapping of claims against the date of the relevant State’s accession presents a very different picture.

Conclusion

Statistical analysis of investment treaty claims provides a useful tool for policy-makers, investors and States respondent to arbitral proceedings. The aim of this post has been to highlight a number of caveats that must be borne in mind when considering data of the type produced by ICSID and UNCTAD in recent months. Despite some weaknesses, the documents can be welcomed as a best efforts representation of trends in investment arbitration by year and subject-matter. In this respect, it is to be hoped that UNCTAD’s calls for information-sharing about as-yet non-public proceedings are answered, leading to the ability to create a more fulsome statistical overview of investment arbitration activity in 2014 and beyond.


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Arbitration Agreement the New Zealand Way

by Petra Butler

Victoria University of Wellington, Faculty of Law

It is nearly a trite truism that New Zealanders are, in proportion to New Zealand’s size, over represented in international arbitration. A truism confirmed by John Beechy during an address at the AMINZ International Arbitration Day in Auckland on 18 February. The theme of the Day was how New Zealand could play a more prominent role in the international arbitration world other than sending its daughters and sons off- shore. With this aim in mind, AMINZ has suggested some changes to the New Zealand Arbitration Act 1996 (see John Walton here). One of the sought changes is a reversal of the Supreme Court decision in Carr v Galloway. The Court had set aside the arbitration agreement, expressed to be subject to rights of recourse including a non-existent appeal on “questions of fact”. Readers might remember that the case was at the heart of the Willem C Vis Moot problem last year. It is not the aim of this contribution to reiterate the Vis Moot problem (readers will find an apt treatment in the winning memoranda here) but instead the focus is on an aspect of the Supreme Court decision which has recently been the centre of two German Supreme Court decisions.

The issue in Carr v Galloway arose in regard to the following provision in the agreement between the parties:

The parties agree as follows:

1. Arbitral tribunal and remedies

1.1 The dispute is submitted to the award and decision of the […] as Arbitrator whose award shall be final and binding on the parties (subject to clause 1.2).

1.2 The parties undertake to carry out any award without delay subject only to such rights as they may possess under Articles 33 and 34 of the First Schedule to the Arbitration Act 1996 (judicial review), and clause 5 of the Second Schedule (appeals subject to leave) but amended so as to apply to “questions of law and fact” (emphasis added). [Italics and brackets in the original contract]

In regard to clause 1 the Supreme Court was asked to decide what constituted an arbitration agreement in light of the purpose and the statutory context of the Arbitration Act 1996. The Court found that in the context of the Arbitration Act “arbitration agreement” had a broad meaning going beyond the formal submission of disputes to the arbitral tribunal. The Court took note especially of sections 12 and 14 of the Act (at [39]). Section 12 contemplated that the parties may, in their arbitration agreement, modify the powers of an arbitral tribunal. The Court concluded that s 14’s mandate that the parties may agree “in the arbitration agreement or otherwise” to terms governing the privacy and confidentiality of the arbitral proceedings was further evidence that an arbitration agreement under the 1996 Act encompassed more than just the formal submission of the dispute to an arbitral tribunal. Furthermore, several procedural rules in Schedule 1 of the Act supported, in the Court’s view, the finding that “arbitration agreement” had a broad meaning (at [40]-[41]). Overall the Court concluded: “if parties’ contractual assent to arbitration is made conditional, in the specific clause submitting the dispute to arbitration, upon certain procedural matters or other terms, it must follow that those conditions are part of the arbitration agreement.“ (at [46])

Recently, the German Supreme Court (BGH) in BGH, NJW 2014, 3652 (24 July 2014) was confronted with the following arbitration clause (translation from German)

16. Arbitral tribunal.

16.1. All disputes which arise from or in relation with this contract or attachments to this contract, including disputes in regard to the validity or the existence of this contract, excluding those disputes, which are not arbitrable under [German] law will be finally decided in accordance with the arbitration rules of the German Institution of Arbitration (DIS) without the possibility to appeal to the ordinary courts. The arbitral tribunal has the competence to decide upon the validity of the arbitration agreement.

The Court held that an exclusion of the ordinary courts to decide ultimately on the jurisdiction of the tribunal (cl 16.1. 2nd sentence) was not in line with § 1040 (3) No 2 ZPO and § 1059(2) No 1(a) ZPO and therefore invalid. Like in Carr the question arose whether the invalid 2nd sentence of clause 16 rendered the entire arbitration clause invalid. The Court held, lacking any evidence to the contrary, that parties who intentionally submitted their disputes to an arbitral tribunal, instead of to the ordinary courts, would also have done so if they would have known that the ultimate competence on the arbitral tribunal’s jurisdiction remained with the ordinary courts (at [11]). Like in Carr the issue arose as to what constituted an arbitration agreement since the contract which contained cl 16 had to be notarised under German law. And even though the clause had been notarised the DIS arbitration rules referred to in cl 16.1. had not been notarised. The Court was asked to find, therefore, the entire cl 16 invalid. The BGH relied on § 1029(1) ZPO for what constituted an arbitration agreement. § 1029(1) ZPO, like s 2 of the Arbitration Act 1996, implements Art 7(1) of the Model Law by stating that an arbitration agreement is “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” The Court clearly and unequivocally stated that the agreement had to be distinguished from the possible regulation of the procedure the parties wanted to adopt in regard to the arbitration (at [15]; see also Trittmann/Hahnefeld in Boeckstiegel, Kroell, Nascimiento, Arbitration in Germany: The Model Law in Practice, 2nd ed, Kluwer, 2015, § 1031 para 7). The BGH in its decision had built on its earlier decision of 18 June 2014 (NJW 2014, 3655). In the latter decision the Court had made clear that a distinction had to be drawn between the agreement to arbitrate and the agreement of the parties as to the formation of the arbitral tribunal (at [10]). Therefore, an invalid agreement as to the formation of the arbitral tribunal (in the particular case it was questionable whether the agreement to appoint a sitting judge as an arbitrator was in accordance with German law) would not render the agreement to arbitrate invalid too.

The divergent approaches can be justified by the particular statutory context and purpose of the New Zealand Arbitration Act. Section 5 (b) of the 1996 Act however states that one of the purposes of the Act is “to promote international consistency of arbitral regimes based on the Model Law on International Commercial Arbitration.“ In its reasoning the Supreme Court has failed to address the latter purpose of the Act. A comparative analysis and discussion of the international treatment of the meaning of “arbitration agreement“ of which the German approach reflects international opinion would have been desirable.

Counsel and the courts should in the future make a particular effort to engage with the jurisprudence on the Model Law of other Model Law states. The engagement should not be curtailed to the jurisprudence of Model Law countries with a common law background. To fully appreciate the nuances in interpretation of the Model Law recourse should also be had to the jurisprudence of civil law Model Law countries.

Extensive and in depth commentary in English is available in regard to some of the jurisdictions, e.g. Boeckstiegel, Kroell, Nascimiento, Arbitration in Germany: The Model Law in Practice, 2nd ed, Kluwer, 2015).


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Review of Class, Mass, and Collective Arbitration in National and International Law, by S.I. Strong

by Gary Born

Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

As Professor Stacie Strong describes in the conclusion to her impressive work on Class, Mass, and Collective Arbitration in National and International Law, “[t]he last few decades have seen a number of significant shifts in the social, legal, and economic world order, resulting in the increased incidence of large-scale harms in both domestic and cross-border contexts.” These shifts also require changes in the methods used to respond to such harms.

Class, mass, and collective arbitration (which I will refer to below as “group arbitration”) provide an additional procedural mechanism for bringing claims that may not be feasible as individual proceedings (such as those involving consumers and employees), thereby also responding to concerns of access to justice globally. Moreover, as Professor Strong observes, group arbitration can often be more advantageous than litigation for particular claims, especially with respect to considerations such as procedure and enforcement. Her book comprehensively addresses the ways in which arbitration can be used to resolve multi-party, large-scale disputes in both national and international contexts, thus comprising a much-needed addition to arbitration scholarship. It also provides an enormously useful guide to practitioners drafting dispute resolution clauses or weighing the pros and cons of bringing a group claim in arbitration.

Group arbitration proceedings are, as of yet, still relatively rare, and may be unfamiliar to many. Readers will likely be aware of class arbitration, the child of the civil class action suit, which is an action brought by one or more named claimants on behalf of a group of similarly-situated individuals pursuing related claims. Nonetheless, class arbitration is a little-used procedure about which there remain many theoretical and practical questions.

The latter two types of group arbitration referenced in Professor Strong’s title, mass and collective arbitration, are likely even less familiar. Mass arbitration is a sui generis type of group proceeding in the international investment dispute context, arising from the procedure adopted in the recent ICSID jurisdictional award in Abaclat v. Argentine Republic. There, 60,000 Italian bondholders were permitted to pursue claims against Argentina following its default on USD 100 billion in sovereign debt. And, as Professor Strong explains, collective arbitration “includes a variety of different large-scale procedures unified only by the fact that they are private (non-treaty-based) mechanisms that do not bear the hallmarks of U.S.-style class arbitration,” based on an opt-in (rather than opt-out) procedure.

Professor Strong places group arbitration in its historical context, noting that class arbitration arose in the US “as a result of a failed strategy by the corporate community to eliminate relief on a class-wide basis.” She explains that, because the debate

has been framed as an either-or proposition, with respondents attempting to eliminate class relief in all fora and claimants attempting to identify increasingly ingenious ways of retaining the ability to proceed as a group, very little time has been spent considering whether class arbitration might, in fact, provide a better means of resolving large-scale disputes than similar forms of litigation.

Professor Strong’s book usefully fills this gap by providing a thorough description and assessment of the relative benefits of arbitration as compared to litigation, a theme that runs throughout her work. While noting the benefits of arbitration in this context, Professor Strong reminds readers that the relative advantages of arbitration or litigation depend on the precise nature and circumstances of the dispute.

In addition to providing historical context, Professor Strong looks ahead, discussing the likelihood of group arbitration being adopted in new jurisdictions and contexts:

•Group arbitration is currently most prevalent in the U.S., being available only on a more limited basis in certain other jurisdictions (for example, Germany and Spain). Against this backdrop, she queries whether group arbitration can arise only in countries that allow group litigation in national courts – taking the view, in persuasive terms, that the development of group arbitration in new jurisdictions is not limited in this way.
• Professor Strong expands on the potential for the development of “regulatory arbitration” (a term coined by Marc Blessing to refer to arbitration of competition law disputes). On this topic, she addresses the question whether regulatory arbitration could be precluded by what she describes as “procedural non-arbitrability,” the idea that certain procedures are acceptable only in litigation and not in arbitration. She generally – and persuasively – rejects this thesis.
• Few group arbitrations having been resolved on the merits to date, Professor Strong ends her book by assessing how the New York Convention would apply to the enforcement of awards in group arbitration, and in the case of its application, when its provisions might preclude recognition and enforcement. She recognizes that there are arguments in both of these veins against the enforcement of group awards, but demonstrates ways in which these might be overcome – again showing the potential for the effective use of arbitration in addressing large-scale harms.

Perhaps the most impressive of the many strengths of Professor Strong’s work is the manner in which it confronts foundational questions about the nature of arbitration. Departing from the U.S. Supreme Court’s statement in Stolt-Nielsen S.A. v. AnimalFeeds Intl’l Corp. that class arbitration “changes the nature of arbitration,” the overarching theme of the book is the question whether group arbitration is a different beast from “arbitration proper.” Professor Strong demonstrates it is not, but her discussion also compels the reader to reflect on the nature of arbitration – what aspects are so fundamental that, if discarded, would cause a process to be something other than arbitration? What aspects, when added to a dispute resolution process, make that process something other than arbitration? These are questions that are important to the general development of arbitration, both in group proceedings and otherwise.

Professor Strong’s work is an extremely welcome and important addition to the commentary on the use and development of group arbitration. More generally, it is a very valuable contribution to the broader subject of arbitration and its theoretical roots.

By Gary Born and Eleanor Daley


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Arbitration in Kuwait: Time for Reform?

by Dalal Al Houti

Al Tamimi & Company

Arbitrating in the Gulf 

The oil and gas sector constitutes one of the most important and competitive market in Gulf countries and despite the recent slide in oil prices, the majority of the Gulf Cooperation Council (GCC) members have reserves and savings from the boom period of 2003-2014 that can underpin spending programmes. It is sensible, however, in light of recent events, for governments throughout the region to use this opportunity to undergo reforms and take the necessary measures to decrease habitual oil dependency and increase private sector development and productivity.  As the Gulf ventures beyond the traditional oil and gas production, demand for international investment is expected to increase. One of the central issues that investors may face is the settlement of disputes arising from contracts through binding arbitration or other ADR. For this reason, it is essential for the region to pro-actively take measures promoting effective mechanisms of dispute resolution that are in line with modern international standards.

An Overview of the Region

As a gateway to attract trade and investment, GCC members have taken positive steps forward by enacting more ‘arbitration friendly’ laws, as well as the establishment and development of new arbitration hubs. For instance, all members of the GCC have acceded to the New York Convention and are able to position themselves as the most attractive venue for arbitrations. Moreover, the modernization of domestic arbitration laws is evidence that Gulf States have taken their pro-arbitration policy one step further.

By way of example, the collaboration between the Dubai International Financial Centre (DIFC) and the London Court of International Arbitration (LCIA), allows international parties the option to submit their civil or commercial contractual disputes to the DIFC-LCIA with an agreed seat in the DIFC thereby allowing clients to avoid any unconventional arbitration laws (although any arbitral rules may be used with the DIFC as a seat).). The DIFC Arbitration Law No. 1 of 2008 is based upon the UNCITRAL Model Arbitration law which makes it more familiar to clients.  Following this trend, on 11 January 2010, the Kingdom of Bahrain, partnering with the American Arbitration Association (AAA) created the BCDR-AAA. The BCDR-AAA created an arbitration “free-zone” by ensuring an arbitral process with jurisdictional and legal certainty through exclusion of any judicial review and minimal court intervention.

Most recently, in 2012 the Kingdom of Saudi Arabia adopted a new arbitration law generally based on the UNCITRAL Model Law. The law recognizes international arbitration proceedings in line with international customary practice, provides rules to govern arbitration proceedings, and deals with the enforcement of foreign arbitral awards.

The above demonstrates the region’s predominant involvement and commitment to international arbitration. Unfortunately, Kuwait has been somewhat slow to show similar initiative in this respect. The legislative framework that governs arbitration in Kuwait is codified under Law No. 11 for the Year 1995 Concerning Judicial Arbitration in the Civil and Commercial Matters (the “Judicial Arbitration Law”) and Law No. 38 of 1980 Promulgating the Civil and Commercial Procedures Law (the “Procedures Law” or “Optional Arbitration”) which repealed article 177 of the Procedures Law and is replaced with the Arbitration Law. Seemingly drafted with domestic arbitration in mind, the aforementioned laws governing Kuwaiti arbitration, in particular that of Judicial Arbitration Law are composed of a series of what some may call ‘arbitration-unfriendly’ provisions that neglect to distinguish between the domestic and international arbitration. In sum, the arbitral mechanism is overshadowed by local judicial concepts, which to a great extent enable Kuwaiti courts an intrusive scale of influence.

In view of the fact that a large volume of cases governed by arbitration law would be of a domestic character, the practical outcome is that traditional local concepts are being forced on international disputes, which can frustrate the needs of international contracting parties.

Arbitrating in Kuwait: Does it Curtail International Businesses?

Deviating from the core characteristics and norms of modern practice, the governing arbitral regulations of Kuwait, in particular that of Judicial Arbitration Law, are seen to be a little out of line in attempting to fully capture the essence of arbitration as an effective tool of dispute resolution. It may draw a closer resemblance to the practice of litigation.

The somewhat intrusive role of the judiciary in arbitration could stem from the feelings of distrust arising from the determination of arbitral awards rendered in the 1950s and 1960s against the Gulf region.[1] While for the majority of the GCC, the feelings of distrust are now in the background of this new initiative aimed at encouraging international arbitration, it is perhaps taking longer for international arbitration to present itself as a viable option in Kuwait.

A recent example of an unfavourable award against Kuwait is the 2012 case of Petrochemical Industries Company of Kuwait v. the Dow Chemical Company where Kuwait was ordered to pay over $2 billion in damages. Such awards are not likely to endear Kuwait to arbitration despite the rapid growth of international arbitration in the Gulf region.

It is this author’s view that Kuwait should reconsider its arbitration laws in order to fall in line with the rest of the initiatives adopted by its neighboring GCC member states. This will enhance Kuwait’s attractiveness for foreign direct investment.

The Current Arbitration Law in Kuwait

Article 173 of the Procedures Law confers on the parties the power to submit their dispute to any arbitral procedure provided that the contracting parties agree to it in writing. If parties fail to express in their contract their choice of any other system of arbitration, the Judicial Arbitration Law shall apply by default and the contracting parties will be subject to the jurisdiction of the arbitration board of the Court of Appeal.

The Judicial Arbitration Law applies to three distinct procedures. First, it allows an arbitral tribunal to exercise jurisdiction over disputes referred to it by the free will of the parties. The consent of the parties may be either in the form of a clause or subsequent agreement, to submit such disputes to the tribunal’s jurisdiction. The second category mandatorily enforces jurisdiction over disputes concluded after the enforcement of the Judicial Arbitration Law, which include provisions concerning the settlement of possible disputes through arbitration, but neglected to stipulate an arbitral body to which such disputes are to be submitted. The third category, falling under mandatory arbitral jurisdiction, are disputes arising between Governmental bodies such as Ministries, Public Corporations and the Companies whose capital is fully owned by the State-Government or between all such institutions. This has been rationalized by the need to reduce the burden on the judiciary since these disputes typically concern the issue of public funds. In addition, the arbitration board will only hear matters whose value does not exceed five hundred thousand Kuwait Dinars (KD 500,000), including those financial conflicts arising from administrative contracts.

The appointment of the members of a tribunal under ‘Optional Arbitration’ enables parties to exercise the greatest level of autonomy. A tribunal can be constituted in three ways: a) by direct nomination, b) by referring such a nomination to a third designated person such as an arbitral institution, c) the parties can also agree to refer their dispute to the arbitration board established in Kuwaiti courts in accordance with the Judicial Arbitration Law. In the event that the international parties subject themselves before the arbitration board of Kuwait, the parties should first have knowledge of the relevant provisions existing under Procedures Law.

In the case that the parties refer the dispute to the arbitration board, the construction of the arbitral panel under Judicial Arbitration Law comprises of three male judges appointed by the Supreme Judiciary Council and two arbitrators, one of whom is selected by each of the litigants. Although some commentators argue that this hybrid system saves the parties the effort of having to go through the normal troubles usually encountered when selecting a third arbitrator, it also ensures that the judicial element of this formation will always hold the majority. In fact, the position of the presiding arbitrator belongs to a judge.

Providing for a fixed number of arbitrators not only produces an unbalanced formation of the arbitral panel but it also fails to account for multi-party disputes. For instance, if one party were to consist of several individuals (e.g. a group of companies), the restriction imposed on the nomination of a single arbitrator per side wrongly assumes that persons forming one party of the dispute all share the same interest.  What is more, the Judicial Arbitration Law stipulates that the administrative secretary must be a staff member of the Court of Appeal and the hearing should take place at the Court of Appeal, unless the presiding arbitrator (a member of the judiciary) decides otherwise. Also, the Judicial Arbitration Law restrains the parties to opt for a procedure other than that applied before state courts; to refer the dispute to arbitrators chosen by the parties; and to decide on a place of arbitration isolated geographically from the local courts.

Although the Judicial Arbitration Law prohibits the publication of an arbitral award, there is no express statutory provision for confidentiality. According to the Judicial Arbitration provisions, the arbitral award (in whole or in part) shall not be published without securing the consent of the two disputing parties (Article 7). The Explanatory Memorandum of the Judicial Arbitration Law clarified that this is to be done in appreciation of the disputants’ privacy. However, this provision challenges the wording of the first paragraph of the same article, which provides that the award shall be pronounced in an open session.

Conclusion

The enactment of a new law will not automatically bring an end to the existing problems in Kuwait; however it would demonstrate a positive change in the right direction. The judiciary and relevant arbitral bodies should be encouraged to unite with the common goal of improving and promoting the changes to the system in order to reassure and uphold the interest of an investor. Only then would it be reasonable to assume that legislative reform will progress in the direction of preserving the efficacy of the arbitral process.


[1]  See example Sheikh Abu Dhabi v Petroleum Development Ltd (1952) I.C.L.Q. 247, Ruler of Qatar v International Marine Oil Company Ltd [1953] 20 Int’l Law Rep. 534 and Aramco v Government of Saudi Arabia (1963) 27 Int’l Law Rep. 177.


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What is an Arbitration, and Does it Really Matter? (An Australian Perspective)

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

The question of what constitutes an “arbitration” is unlikely to be one that arbitral practitioners have cause to ponder on a daily basis. In fact, such a question might appear at first to be purely theoretical or academic. A recent case (ASADA v 34 Players) from the Victorian Supreme Court in Australia, however, shows the important implications that such matters of definition might have.

In December 2014, the Australian Sports and Anti-Doping Authority (“ASADA”) applied to the Supreme Court of Victoria seeking orders for the issue of subpoenas in aid of proceedings before the Australian Football League’s (“AFL”) Anti-Doping Tribunal. The Tribunal proceedings concerned allegations that 34 current and former AFL players had used prohibited substances during the 2012 AFL season in violation of an industry-based Anti-Doping Code. ASADA sought subpoenas from the Supreme Court to compel the attendance of two witnesses and to require four corporate entities to produce documents to the Tribunal. The proceedings before the Supreme Court relied upon section 27A of the Victorian Commercial Arbitration Act 2011, which provides that the Supreme Court may issue a subpoena to require a person to attend or produce documents to an “arbitral tribunal”. The Act applies to “domestic commercial arbitrations”, but does not define precisely what an “arbitral tribunal” is or what constitutes an “arbitration”. A threshold issue for the Victorian Supreme Court was thus whether the Act applied at all to the proceedings before the Anti-Doping Tribunal.

So what characterises an “arbitration”?

The judgment of the Court was issued by Croft J on 19 December 2014. Croft J observed that providing “anything in the nature of a comprehensive and prescriptive definition of ‘arbitration’ is extremely difficult” (para 14). Ultimately, however, he adopted ten criteria from recent English case-law to assess whether the proceedings before the Anti-Doping Tribunal were an “arbitration” for the purposes of the Act. These were as follows:

(i) It is a characteristic of arbitration that the parties should have a proper opportunity of presenting their case

(ii) It is a fundamental requirement of an arbitration that the arbitrators do not receive unilateral communications from the parties and disclose all communications with one party to the other party

(iii) The hallmarks of an arbitral process are the provision of proper and proportionate procedures for the provision and for the receipt of evidence

(iv) The agreement pursuant to which the process is, or is to be, carried on (“the procedural agreement”) must contemplate that the tribunal which carries on the process will make a decision which is binding on the parties to the procedural agreement

(v) The procedural agreement must contemplate that the process will be carried on between those persons whose substantive rights are determined by the tribunal

(vi) The jurisdiction of the tribunal to carry on the process and to decide the rights of the parties must derive either from the consent of the parties, or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration

(vii) The tribunal must be chosen, either by the parties, or by a method to which they have consented

(viii) The procedural agreement must contemplate that the tribunal will determine the rights of the parties in an impartial manner, with the tribunal owing an equal obligation of fairness towards both sides

(ix) The agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law

(x) The procedural agreement must contemplate a process whereby the tribunal will make a decision upon a dispute which is already formulated at the time when the tribunal is appointed

Despite endorsing these criteria, Croft J’s judgment emphasised the non-definitive nature of the majority of them. In fact, he expressly acknowledged that at least six of the ten criteria were satisfied by the Anti-Doping Tribunal (being (i)-(iii), (vii), (viii) and (x)). In holding that the Tribunal was not an “arbitral tribunal” covered by the Act, Croft J appears to have found influential the following two, related, points:

  1. “the Tribunal is a domestic disciplinary tribunal operating in a framework or web of contractual provisions”, and
  2. the decisions of the Tribunal are only enforceable by the AFL under contract, and not by domestic courts as arbitral awards.

Aside from having evident practical implications for the case at hand, the decision as to what constitutes an “arbitration” under the Victorian Commercial Arbitration Act has much broader significance, including for the following four reasons.

First, the Victorian Act is not unique among domestic statutes governing arbitral proceedings in leaving the concept of “arbitration” undefined. In Australia alone, each of the state-level Commercial Arbitration Acts mirror the Victorian Act’s (non-)definition of the term “arbitration”. The federal-level International Arbitration Act 1974  is equally non‑prescriptive. So too, other jurisdictions’ legislation leaves the concept undefined (see, for example, the English Arbitration Act, or the Singapore International Arbitration Act). This notwithstanding, the applicability of such legislation in any concrete case is predicated upon identification of an arbitral tribunal or arbitral proceedings.

Second, the UNCITRAL Model Law – upon which many domestic arbitration laws are based – itself leaves the concept of “arbitration” undefined. The Model Law adopts a rather circular definition of arbitration as “any arbitration whether or not administered by a permanent arbitral institution”. The inclusion of this ‘definition’ was quite deliberate: the UNCITRAL Working Group discussed at some length how to define the concept but ultimately decided that it would be better not to provide a comprehensive definition. In adopting the Model Law, countries thus have discretion to develop their own definitions. Like Australia, however, many have not done so.

Third, in applying the criteria, Croft J distinguished the rules constituting the Anti-Doping Tribunal from other “arbitral” rules. The decision thus indicates that tribunals operating under certain rules are more likely than others to meet the definition of “arbitral tribunals” for the purposes of the Act. Croft J described as “well accepted” and in use by “domestic arbitral tribunals in this country” the arbitration rules of, for example, the Australian Centre for Commercial Arbitration, International Chamber of Commerce, and Singapore International Arbitration Centre (see para 23). This matches Croft J’s acknowledgement that “in some cases the answer might be clear, and in others…the answer may need to be reached intuitively” (para 14).

Fourth, Croft J’s judgment canvassed a range of sources to define the notion of “arbitration” under the Act. This included commentary to the Model Law, academic commentary generally, and English case-law. To the extent that it engaged with these sources, the Supreme Court entered into a dialogue of global reach about what an “arbitration” actually is.

The decision in ASADA v 34 Players grappled with definitional concepts of fundamental importance to arbitration practitioners. It will be interesting to see the extent to which such definitional criteria are picked up, developed or applied by the courts of other jurisdictions in the future, and to see whether different jurisdictions develop differing notions of this important concept. 


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Gaillard and Banifatemi on Strategy Insights into the Yukos Arbitration at Harvard Law School

by Daniela Paez-Salgado (Assistant Editor for South America)

On Friday, February 6, Emmanuel Gaillard, Head of the International Arbitration Group for Shearman & Sterling LLP, and Yas Banifatemi, Head of the Public International Law practice of the same firm, visited Harvard Law School to give a talk about the recent award in the Yukos case. Both of these practitioners represented claimants in three arbitrations initiated in 2005 by the majority shareholders of the former Yukos Oil Company against the Russian Federation. According to Gaillard, “Yukos represents the largest award ever in the history of arbitration by far.” The second largest award was for 2.5 billion dollars in the dispute of Dow Chemical against Kuwait followed by the 1.7 billion dollars award in Occidental Petroleum v. Ecuador.

Gaillard began the talk by describing Yukos as a “highly political case” and acknowledging that the tribunal treated it as such. “The case shows that investment instruments such as BITs and the Energy Charter Treaty, in this case, are international law that can be part of the political framework in the international community,” he added.

“A panoply of complex issues,” the case raised questions about topics such as the application of the denial of benefits clause, the clean hands doctrine and the functioning of tax referral mechanisms used to expropriate investments. All of these issues “make this case interesting from the legal stand point of those who follow investment arbitration,” Gaillard said.

Yas Banifatemi started her presentation about the jurisdictional stage of the proceedings by remembering, “at the time when we started the arbitration, everybody told us we were nuts… we were trying to sue Russia under a treaty that Russia had not ratified.” Indeed, the Energy Charter Treaty (ECT) was never ratified by the Russian Federation. Nevertheless, Russia had accepted the provisional application of the treaty, which meant that – pending ratification – they agreed to apply the treaty to the extent that it was consistent with their own constitutions, laws and regulations. Banifatemi explained that their team had to prove that under international law and substantive Russian law, the provisional application of a treaty had been accepted. They accomplished that task, relying mostly on expert testimony on Russian law.

Focusing on the other issues related to the merits of the dispute, Banifatemi addressed Article 17 of the ECT, which contains a denial of benefits clause that allows a contracting state to deny a benefit of investment protection to a company if two requirements are met:

  • First, the claimant is owned or controlled by nationals of a third party state; and
  • Second, the claimant does not have a substantial business activity in that country.

Given the corporate structure of Yukos, whose ownership indirectly rested on Russian nationals as ultimate beneficiaries of a trust, Banifatemi pointed out, “it was an extremely complex issue which required us to explain to the tribunal issues of trust law.” The Tribunal held that the denial of benefits provision in Article 17(1) did not affect the dispute resolution mechanism in the Treaty and could not be exercised as to defeat the investors’ legitimate expectation of substantive treaty protection under Part III of the Treaty. Also, the Tribunal found that a ‘third State’ under this provision refers to a non-Contracting State and therefore does not include the State hosting the investment, which in this case was Russia.

The ECT also contains a taxation carve-out clause in Article 21 that prohibits tax claims from being arbitrated under the ECT dispute resolution system. However, article 21(5) of the ECT contains an exception to that rule; the so-called “claw-back” provision, according to which actions that are taken only under the guise of taxation, but in reality aim to achieve an entirely unrelated purpose – such as the destruction of a company or the elimination of a political opponent – cannot qualify for exemption from Article 21 protection. The tribunal agreed with the claimants’ argument that Article 21(1) did not apply to the case because Russia labeled all of its measures as taxes with the sole purpose of expropriating Yukos.

Banifatemi added, “if you want to write a thesis about the perfect expropriation, this is the case. You have the executive targeting against Yukos and the Russian courts upholding the application of the expropriation measures hidden under tax law. Everything in the Russian state was deeply driven to destroying Yukos.” Banifatemi expressed that the political motivation was one of the “hardest factors for us conducting this case.”

The panelists also emphasized that not only was the amount awarded massive, but also the entire litigation process was conducted on a massive scale. The arbitration lasted over 10 years. The document production was massive: Russia produced over 50,000 pages of documents, 500-page memorials on the claimant side and an 800-page memorial on the respondent side. The hearing on jurisdiction lasted 10 days and hearings for the merits stage lasted 5 weeks. In the room where the hearings took place (at the Peace Palace), 16 lawyers were present representing the claimant and 33 lawyers represented Russia. “The room was packed,” Banifatemi added.

Even though the Russian Federation has challenged the award before The Netherlands local courts, Shearman & Sterling intends to defend the validity of the award and, simultaneously, continue its efforts to enforce the award both inside and outside of Russia.

 


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