A Guide to the IBA’s Revised Guidelines on Conflicts of Interest

by Khaled Moyeed, Clare Montgomery and Neal Pal

Clyde & Co. LLP,
for Clyde & Co.

The IBA recently revised its Guidelines on Conflicts of Interest in International Arbitration. This was the culmination of a review by the IBA Arbitration Committee, which began in 2012. The salient changes address the rise of advance declarations by arbitrators; third-party funding; increasing significance of arbitral secretaries; and the possibility that an arbitrator, and counsel to one of the parties, operate from the same chambers. The Guidelines are widely consulted when arbitrators evaluate whether they can accept appointments, or if they first need to make disclosures to the parties about potential conflicts. This article outlines the key changes in the revised Guidelines.

Structure of the Guidelines

The revised Guidelines retain the previous structure comprising Part I: General Standards and Part II: Application Lists. The General Standards contain seven sets of principles to which arbitrators should adhere in order to ensure that they are not subject to a material conflict of interest. The Application Lists give practical examples of when an arbitrator cannot act at all (the Non-Waivable Red List); when the arbitrator can only act if he or she first makes disclosures and the parties expressly agree to the appointment (the Waivable Red List); when the arbitrator has a duty to disclose but can nonetheless act unless the parties make a timely objection (the Orange List); and when disclosure is not necessary (the Green List).

Key changes to the General Standards


Advance declarations by arbitrators:
The new General Standard 3(b), which is the most prominent addition to the revised Guidelines, addresses the increasing use by prospective arbitrators of advance declarations or waivers in relation to possible future conflicts of interest. While the Guidelines state that the validity and effect of such advance declarations or waivers will depend on the case in question, the applicable law and the specific wording of the waiver, they make clear that they do not discharge the arbitrator from his or her ongoing duty of disclosure.

Arbitral Secretaries:
The new General Standard 5(b) states that the Guidelines also apply to arbitral secretaries and assistants. This reflects the increasing use of arbitral secretaries and their significance over the last ten years since the Guidelines were first issued. The previous version’s explanatory notes stated that the impartiality and independence of secretaries were the responsibility of the arbitrator. The revised explanatory note now states that it is the responsibility of the Arbitral Tribunal to ensure that this duty of independence and impartiality is respected by arbitral secretaries. Further, the duty is to be respected at all stages of the arbitration, and applies irrespective of whether or not the particular arbitration institution requires arbitral secretaries to sign declarations of independence and impartiality.

The same standard for arbitral secretaries already appears in the Young ICCA’s Guide on Arbitral Secretaries in the following words: “The arbitral tribunal shall confirm to the parties that the proposed candidate for arbitral secretary is independent, impartial and free of any conflicts of interest.” Perhaps the best illustration of the growing importance of arbitral secretaries is that the Young ICCA’s Guide acknowledges that the role of arbitral secretaries may go beyond purely administrative matters to drafting procedural orders and appropriate parts of the award.

Arbitrator’s law firm:
The revised Guidelines make clear that “the arbitrator is in principle considered to bear the identity of his or her law firm” (General Standard 6(a)). The explanatory note says that a balance has to be struck between a party’s desire to appoint an arbitrator who may be a partner in a large international law firm and the importance of maintaining confidence in the independence and impartiality of arbitrators. Any potential conflicts that an arbitrator might have should be examined on a case-by-case basis. In determining any potential conflicts, consideration should be given to the involvement that a firm has with a party beyond representation in a legal matter. Perhaps surprisingly, the 2014 Guidelines state that barristers’ chambers may not be equated with law firms and no general standard is given for barristers’ chambers.

Third-party funders:
The previous Guidelines provided that managers, directors or persons having a controlling interest of a legal entity that is a party to an arbitration shall be considered to be the equivalent of that same legal entity. The 2014 Guidelines extend this list to include third-party funders and insurers who have a “…direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration” (General Standard 6(b)). This means that third-party funders and insurers may now be considered to bear the identity of the party that they are funding.

The revised General Standard 7(a) also provides that parties must now disclose any direct or indirect relationship between the arbitrator and a third-party funder. The explanatory note confirms that the parties’ duty of disclosure has been extended to include third-party funders. This General Standard now says that the relevant party must make the notifications “at the earliest opportunity,” whereas before the duty applied “before the beginning of the proceeding or as soon as [the party] becomes aware of such relationship.”

Identity of counsel:
General Standard 7(b) is new and provides that each party is obliged to state the identity of its counsel as well as any relationship, if such exists, between its counsel and the arbitrator by virtue of being members of the same barristers’ chambers. This should be done at the earliest opportunity and upon any change in its counsel team.

Practical Application of the General Standards

Non-Waivable Red List: It is now explicitly stated that in situations covered by the Non-Waivable Red List, arbitrators should not act even when there is no timely objection by the parties. The list now clarifies that the arbitrator cannot be an employee of a party, have a controlling interest in a third-party funder or have his or her firm regularly advise a party.

Waivable Red List:
The definition of an arbitrator’s “close family member” who has a significant financial interest in the outcome of the dispute has been widened to include not only a spouse, sibling, child, parent or life partner but also “any other family member with whom a close relationship exists.” Regular advice by the arbitrator to any party or affiliate which is not a significant source of income for the arbitrator or his firm is now flagged. Previously, only regular advice to the appointing party or its affiliate was flagged. Where an arbitrator derives significant financial income from advising a party regularly, this is dealt with in the non-waivable red list.

Orange List:
The Guidelines now state that the Orange List is a non-exhaustive enumeration of specific circumstances that “may give rise to doubts” about the arbitrator’s impartiality or independence. The updated notes state that while situations falling outside of the Orange List or the time limits therein will usually not be subject to disclosure, they should be assessed on a case-by-case basis. In addition, examples are given of situations that are not in the Orange List but may require disclosure, depending on the circumstances: repeat past appointments by the same party or the same counsel beyond the normal three-year period; an arbitrator concurrently acting as counsel in an unrelated case that involves similar legal issues; and an appointment made by the same party or the same counsel while the case is ongoing.

New entries in the Orange List include instances where enmity exists between on the one hand, an arbitrator and, on the other hand, counsel, a senior representative of a party, or a third-party funder. There is also a new entry in the event where the arbitrator, within the past three years, has acted as co-counsel with another arbitrator or counsel for one of the parties. The arbitrator publicly advocating a position on the case is now flagged – it no longer need be a specific position to be relevant.

Green List: The entry concerning when the arbitrator’s law firm has acted without the involvement of the arbitrator against a party or affiliate on an unrelated matter has been deleted. There is a new entry in the event where the arbitrator either teaches in the same faculty as another arbitrator or counsel to one of the parties, or serves as an officer of an entity with another arbitrator or counsel for one of the parties. Similarly, a new entry includes circumstances where the arbitrator was involved in a conference, seminar or working party with another arbitrator or counsel to one of the parties. Finally, there is a new entry in the event where the arbitrator has a relationship with a party or affiliate through a social media network, which has become increasingly common through websites such as LinkedIn.

Conclusion

The revised Guidelines mark an evolution rather than a sea change from when they were first issued in 2004. They maintain a framework that is pro-disclosure rather than pro-disqualification. While retaining their existing structure, they have been adapted to include recent developments and norms. When the Guidelines were originally issued, it was always envisaged that, following their adoption and use, they would later be supplemented, revised and refined. Following the most recent revisions, it will be interesting to see how they evolve further in the next decade.


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EU Law and Investment Law: Two Worlds Apart?

by Nikos Lavranos

European Federation for Investment Law and Arbitration (EFILA)

The Inaugural Conference of the European Federation for Investment Law and Arbitration (EFILA) took place on Friday, 23 January 2015, in the Senate House of the Queen Mary University of London. 160 participants ranging from academics, arbitrators, arbitration institutions, companies, lawyers to NGOs reviewed a full day long the EU’s first 5 years of European investment policy.

The conference was kicked off by the first panel which immediately dived into the fundamentals, namely, the pros and cons of the existing investor-state dispute settlement system (ISDS). The range of the critique was broad spanning from essentially leaving it to arbitral tribunals to find the right balance, over possible and necessary reforms towards outright rejection of any place for arbitral tribunals in a constitutional law-based system. That discussion showed that it very much depends on the perspective as to whether ISDS continues to provide benefits or whether it is to be considered a serious danger to a democratic system.

After that fundamental discussion, the focus turned towards the increasing interaction between EU law and investment law. This interaction – or rather tension – is progressively more visible in all aspects of the EU’s investment policy. The tension was heavily debated in the second panel on intra-EU issues, where the different perspectives determine the outcome of that interaction. Those who have an EU law perspective are firmly based on the principle of primacy of EU law over all other sources of law. For them, EU law is the game changer, which pushes aside any existing obligations of the EU Member States, which may exist by virtue of intra-EU BITs, the Energy Charter Treaty (ECT) or the ICSID Convention. In contrast for those who continue to approach investment law arbitration from a public international law perspective, there is no reason to treat EU law any different than any other source of international law. Consequently, any existing obligations ought to be respected by the EU and its Member States and any conflicts should be resolved on the basis of the usual instruments of treaty interpretation and rules of conflicts.

The same tension was also central to the third panel which looked at the extra-EU issues. The recent opinion of the Court of Justices of the EU (CJEU) regarding the accession to the ECHR, does not seem to make it easier to turn the tension into a fruitful judicial dialogue. The primacy of EU law and the exclusive, final, authoritative jurisdiction of the CJEU combined with the preliminary ruling systems, seems to leave little room for international arbitral tribunals. Indeed, as the Micula case shows, the influence of the EU institutions becomes ever wider, reaching from intervening as amicus curie towards preventing the payment of the award.

Essentially, two solutions were suggested. The first, more practical and realistic solution was the advice for investors who want to bring arbitral proceedings against the EU and/or a EU Member State to stay as far as possible away from the EU. The second, more theoretical solution, was that the CJEU and arbitral tribunals adopt the “Solange”- approach (as long as), similar to the one which the European Court of Human Rights and the CJEU have been using to accommodate their co-existence as supreme courts within their respective legal systems.

The final two panels looked into future treaty making and future EU investment policy.

The essential message of those panels was that states are back in control. States are increasingly changing the rules of the game by modifying the contents of the investment treaties. Those treaties have become longer and more complex with more carve-outs. States re-asserting their control in arbitral proceedings as well: from adopting binding interpretations to further limiting the rights of investors turned claimants. Governments and members of Parliament (both European and national ones) as well as the European Commission are the new actors, who shape the future EU investment policy on the basis of other factors than was the case in the past. Investor and investment protection have been pushed into the background, while the preservation of policy space and other (sometimes irrational) political concerns dominate the decision-making process.

In sum, the timing and the topic of EFILA’s Inaugural conference could not have been better. If the conference has made one thing clear, it is that EU law and investment law are two worlds apart and that it is going to be very difficult to build a bridge between those worlds unless both worlds introduce some more flexibility in their perspectives.

Nikos Lavranos is the Secretary-General of EFILA.


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Are a Bilateral Investment Treaty Arbitration and a Proceeding Before the European Court of Human Rights Compatible?

by Guillaume Croisant

Linklaters

Although a bilateral investment treaty (“BIT”) arbitration and an application made before the European Court of Human Rights (“the Court”) could, at first glance, present opposite objectives, investors alleging a violation of their rights by a State may be inclined to make use of both remedies. As it will be elaborated below, the case law shows that a strict application of the triple identity test (i.e. same parties, same facts, same cause of action) by the arbitral tribunals and the Court generally entails the rejection of lis pendens or admissibility objections based on BITs’ “fork in the road” provisions or Article 35, §2, b) of the Convention, which provides that the Court shall not deal with a matter already submitted to another procedure of international investigation or settlement. Investors can therefore make use of both remedies, even in parallel, provided they carefully formulate their petitions.

Concurrent jurisdiction of a BIT arbitral tribunal and the European Court of Human Rights

A situation where an investment would be jeopardised by a State’s behaviour could give rise to an alleged violation of both a BIT and the European Convention on Human Rights (“the Convention”). This is particularly the case where investors invoke, in one way or another, a breach to their right to property since this right is both enshrined in Article 1 of Protocol No. 1 to the Convention and classically protected by BITs under non-expropriation or unfair treatment clauses. One may also think about the overlapping of provisions on protection from discrimination, guaranteed by Article 14 of the Convention and its Protocol No. 12, as well as under national treatment or most favoured nation treatment clauses usually found in BITs. In some sensitive sectors, it is also conceivable that jeopardising an investment may constitute a “structural obstacle” to certain rights or freedoms guaranteed by the Convention (for an example of structural obstacle to the freedom of expression in the media sector, see Centro Europa 7 S.R.L. and di Stefano v. Italy [GC], no. 38433/09, 7 June 2012, §§ 129 to 138).

In all these hypothesises, a case brought before both the BIT arbitral tribunal and the European Court of Human Rights is conceivable. May these two remedies be undertaken by investors?

The arbitral tribunal’s perspective

Some BITs, such as the Energy Charter Treaty (“ECT”), provide for so-called “fork in the road” provisions that require investors to choose a single avenue of relief at the outset of a dispute and preclude them from switching forums after having filled a request for arbitration or having started a proceeding in court. Others refer to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”) which provides, in its Article 26, that “[c]onsent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy”.

However, arbitral tribunals usually consider that such provisions do not impede investors to make use of the two remedies. For instance, in the Yukos and Amto cases (PCA Case No. AA 226, Hulley Enterprises Ltd (Cyprus) and others v. Russia, Interim award on jurisdiction and admissibility, 2009, §§ 586 to 593 ; Final award, 2014, §§ 1256 to 1272 / Arbitration Institute of the Stockholm Chamber of Commerce, n°080/2005, Amto v. Ukraine, 2008, p. 44), parallel applications based on similar facts were brought before the European Court of Human Rights and an arbitral tribunal. The latter held that a “triple identity” test should be applied in the context of “fork in the road” provisions: namely, identity of parties, cause of action and object of the dispute. Since the causes of action (the Convention and the Energy Charter Treaty) and the parties to the proceedings were different in these cases, the tribunal rejected lis pendens objections invoked by the defendant States. As stated in the final award of Amto,

“This is a case of an international tribunal and a supra-national court having concurrent jurisdiction over a dispute arising out of similar facts. With regard to the parties, EYUM-10 is not a party to the present arbitration and AMTO is not a party to the ECHR proceedings. With respect to the causes of action, the present arbitration is based on alleged breaches of the ЕСТ, while proceedings before the ECHR are based on Article 6(1) of the European Convention and its Protocol No. 1, Article 1. These circumstances are sufficient to disqualify the Respondent’s lis pendens objection”.

The same solution a fortiori applies where no “fork in the road” provisions are provided for by the applicable BIT.

The European Court of Human Rights perspective

Pursuant to Article 35, §2, b) of the Convention, “[t]he Court shall not deal with any application that is substantially the same as a matter that (…) has already been submitted to another procedure of international investigation or settlement”. At the outset, it must be stressed that it is not the date of submission to a parallel set of proceedings that is decisive, but whether a decision on the merits has already been taken in those proceedings by the time the Court examines the case (Peraldi v. France (dec.), no. 2096/05, 7 April 2009). The mere fact that an arbitration is ongoing will therefore not be a procedural ground for inadmissibility; it may only be so if an award were issued before the judgment of the Court.

Where a decision on the merits has been taken, the Court verifies whether the applications to the different international institutions concern substantially the same matter. In doing so in the Yukos case (Oao Neftyanaya Kompaniya Yukos v. Russia, no. 14902/04, 20 September 2011), the Court has strictly applied a triple identity test, in a way reminiscent of the arbitral tribunal cases highlighted above. The Court has indeed highlighted that “the assessment of similarity of the cases would usually involve the comparison of the parties in the respective proceedings, the relevant legal provisions relied on by them, the scope of their claims and the types of the redress sought” and has concluded that the majority shareholders of the applicant (three companies) as well as several groups of its minority shareholders were different parties than the applicant. The Court has also emphasised the applicant’s own right under the Convention, which is different from the investment complaints (§§ 521 to 525).

Besides this strict application of the triple identity test, it is also doubtful that an arbitral proceeding could be qualified of “procedure of international investigation or settlement” in the meaning of Article 35, §2, b) of the Convention. In the above-mentioned Yukos case, the Court considered that, since the applications were not substantially the same, there was no need to examine whether the arbitral proceedings could be seen as another procedure of international investigation or settlement (§523). This dicta can be read in conjunction with the Lukanov v. Bulgaria case where the European Commission on Human Rights – a body that used to consider whether an application was admissible to the Court but was abolished in the wake of the European Court of Human Rights’ restructuring in 1988 – has held that the “terms ‘international investigation or settlement’ refers to institutions and procedures set up by States, thus excluding non-governmental bodies” (no. 21915/93, 12 January 1995). It has therefore held that the procedure before the Human Rights Committee of the Inter-Parliamentary Union was not a procedure of international investigation or settlement since this Union was a non-governmental organisation.

It seems to us that, despite the State’s involvement as party to the BIT and to the arbitration proceedings, a BIT arbitration may generally not be considered as an institution or procedure set up by States. It may be different only in exceptional hypothesises, where tribunals are organised through intergovernmental institutions such as the Permanent Court of Arbitration in the Hague, in so far as the arbitral panel itself (as opposed to merely the appointing authority) is composed of arbitrators appointed by the member States of the institution.

Conclusion

It follows from the above that, because of a strict application of the triple identity test by arbitral tribunals and the European Court of Human Rights, investors that carefully draft their petitions are likely to overcome lis pendens or admissibility objections and be able to lodge, even in parallel, a petition before both the BIT arbitral tribunal and the Court. In this regard, distinguishing the causes of action (the investment rights on the one hand, human rights and fundamental freedoms on the other) and/or the plaintiffs (usually the shareholder(s) of a company operating in the State that allegedly violated the investment rights on the one hand, this latter company on the other) of the two remedies is of paramount importance.


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More Than a Friend of the Court: The Evolving Role of the European Commission in Investor-State Arbitration

by Carlos González-Bueno and Laura Lozano

González-Bueno & Asociados

The controversial role of non-disputing parties has been the object of a significant amount of literature. While third party funding was a hot topic hitherto, the so-called amicus curia, and its evolving role, might be back in the spotlight. Since the first ICSID amicus case -the Bechtel case- until today, the rights, interests at stake and role of the amici have evolved.

Initially, NGOs and indigenous communities were the ones filing amicus briefs asserting impartiality in the outcome of the dispute and humanitarian concerns. However, the European Commission (EC) has recently readopted an active and ambitious role in investment arbitration, analyzing the relationship between intra-EU investment agreements and EU law. Such stance can be observed, amongst others, in the amicus petitions submitted in the Antin Infrastructure Services Luxembourg S.à.r.l., Antin Energía Termosolar B.V. v. Spain, Eiser Infrastructure Limited and Energía Solar Luxembourg S.à.r.l. v. Spain and RENERGY S.à r.l. v. Spain cases.

The legal standard for access of the EC as a non-disputing party to investment arbitration has opened a broad debate. According to ICSID Arbitration Rule 37.2, the arbitral tribunal shall consider whether the non-party submission (a) “would assist the tribunal in the determination of a factual or legal issue – by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties”, (b) “would address a matter within the scope of the dispute” and (c) would reflect “a significant interest in the proceeding” by the nonparty itself.

The current expansive role of EC participation in investment treaty proceedings between EU Member States and third countries could be explained by Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries. Pursuant to its Art. 13 (b) “the Member State shall also immediately inform the Commission of any request for dispute settlement lodged under the auspices of the bilateral investment agreement as soon as the Member State becomes aware of such a request. The Member State and the Commission shall fully cooperate and take all necessary measures to ensure an effective defence which may include, where appropriate, the participation in the procedure by the Commission”.

EC as amicus curia under ICSID’s auspices

The first case in which the EC filed an amicus brief in an ICSID case, was the AES v Hungary case, an ECT claim, already addressed in this blog by our colleague Epaminontas Triantafilou. The arbitral tribunal ruled that the EC could intervene in the arbitration by submitting legal arguments; however it denied access to the parties’ submissions. The amicus initially challenged the tribunal’s jurisdiction; nonetheless the tribunal did not accept such stance as the parties had not raised the challenge. The EC’s brief held that the agreement at issue was illegal as a matter of European Community Law. In particular, the EC claimed that the contract between the parties could violate the EC’s restrictions on State aid and discussed the relationship between EU law and the ECT.

In the same vein, the EC discussed the aforementioned relationship between EU law and the ECT in the Electrabel v Hungary case in another amicus brief. In view of the EC, Hungary had not breached its treaty obligations since the changes in policy under scrutiny were introduced in order to comply with EU law. The arbitral tribunal accepted that the EC offered a distinct perspective and permited the access to the parties’ submission.

Another interesting amicus petition was filed in Micula v. Romania. The interest at stake was EU state aid regulations. As stated in the EC’s amicus brief, the BIT (Sweden-Romania) should be interpreted in light of EU law as otherwise the award would be unenforceable in the EU. Remarkably, after the arbitration the EC, by letter of 26 May 2014, informed Romania of its decision to issue a suspension injunction obliging Romania to suspend any action which may lead to the enforcement of the pending part of the award. According to the EC, such enforcement would constitute unlawful State aid. Thus, the EU launched a formal investigation under Art. 108 (2) of the Treaty on the Functioning of the EU at the beginning of last November.

A look into recent case law suggests a new approach. In two recent ECT-ICSID investor state arbitrations claims against Spain where the EC has also submitted amicus briefs, both arbitral tribunals have considered the EC’s intervention to be premature (Antin v Spain and Eiser v Spain). Of particular note, the arbitral tribunals have rejected the amicus petitions, despite the fact that the EC might later succeed its attempt to obtain participation rights. This could imply the beginning of a new trend in amicus where the privacy of the dispute prevails and the legal interest of the EC is not considered as relevant as it used to be. Indeed, such decisions reveal that the EC does not enjoy a special procedural status. However, only time will let us know whether the EC finally appears in these two proceedings.

The evolving nature of the EC’s amicus interventions

The wave of amicus petitions filed by the EC in most of the EU investor state claims can be a source of caution and concern. Truly, there is an ongoing debate. What is more, the role adopted by the EC, in the Micula case has evolved from its mere participation as amicus to an active stance against the enforcement of the ICSID award.

From the investor’s perspective, the EC is clearly not a party to the proceeding and parties should not be burdened by its participation, which could undoubtedly lengthen and increase the cost of the proceeding. Consequently, such participation could “unfairly prejudice either party” contradicting ICSID Arbitration Rule 37. In the same light, the investor might consider that the privacy of the proceeding is jeopardized. Bear in mind that in accordance with Art. 13 of the EU Regulation the respondent EU Member State shall fully cooperate and take all necessary measures to ensure an effective defense.

By contrast, from the EC approach, the reasons that explain such stance are, inter alia, the protection of the public interest in the proceedings, a desire of transparency and the EU’s direct legal interest in the outcome of the dispute. Indeed, the EC is currently engaged in the EU investment protection policy. Likewise, the experience and expertise of the EC in energy matters and state aid (in line with the latest EU ICSID claims) might be a factor to be taken in consideration by the arbitral tribunals. However, the EC is not a mere third party to proceedings concerning EU Member States and EU law, a fact that clearly influences its expansionary intervention in such proceedings.

Under this panorama the following issue arises: should an investor against an EU Member State in an ICSID claim simply expect the participation of the EC as an amicus? Considering the current EU regulation, the answer seems to be in the positive. However, recent case law is a good illustration that the legal interest in the dispute is not always justified by the amici and its presence could even compromise the proceeding. To use the words of a senior practitioner, “the friend of the court should not be the friend of one of the parties”. (A. Mourre, Are Amici Curiae the Proper Response to the Public’s Concerns on Transparency in Investment Arbitration?, LPICT, Volume 5, 2006, Issue 2, pp. 257-271). Only time will evidence whether the EC maintains its increasingly active presence as a non-disputing party and the effect of these interventions on investor-state proceedings.


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Amendments to the Internal Rules of the Brazilian Superior Tribunal of Justice on Recognition of Foreign Awards

by Aline Cavalcanti

Herbert Smith Freehills LLP,
for Herbert Smith Freehills

In article 35 of the Brazilian Arbitration Law (“BAA”) it states that, in order to be enforced in Brazil, a foreign arbitral award (i.e., an award issued outside Brazil’s territory) must be recognized by the judiciary. This judicial recognition rests with the Superior Tribunal of Justice (Superior Tribunal de Justiça – “STJ”), which retains exclusive competence to analyse requests for recognition of foreign judgements and arbitral awards, pursuant to article 105, I, (i), of the Brazilian Constitution, as amended in 2004.

In line with its new role, in 2005 STJ issued Resolution 9/2005, setting out the procedure for cases involving recognition of foreign awards and the standards it would apply in considering such requests. On 17 December 2014, STJ amended its internal rules (“Internal Rules”) to modify, among others, the provisions on recognition of awards. Resolution 9/2005 was revoked and its articles were transferred, with some modifications, to the Internal Rules, as articles 216-A to 216-X.

The most relevant amendment related to the recognition of foreign awards is the inclusion of offense to human dignity as a ground for refusing to recognize a foreign award. Article 216-F of the Internal Rules now provides that “foreign decisions that are against national sovereignty, human dignity and/or public policy shall not be recognized”.

This is a brand new provision and it raises questions as to whether this amendment will make it harder to enforce a foreign arbitral award in Brazil.

First, it should be noted that this new ground is not found in either the New York Convention (ratified by Brazil in 2002) or the BAA, which are the primary legislative sources for the recognition and enforcement of foreign awards in Brazil.

Constitutionally, any amendment to the scope or content of the BAA or Brazil’s application of the New York Convention must be done through the legislative process. The Internal Rules are drafted and issued internally within STJ and do not form part of that legislative process. As a result, it is highly doubtful that the Internal Rules can create a new requirement for the recognition of foreign awards

Some might also say that the addition of this ground is unnecessary. Respect for human dignity is expressly recognized by the Brazilian Constitution (article 1, III) as an essential principle for the State. As an “essential principle”, it is arguable that there is no need for specific mention of “human dignity” in article 216-F, as such a concept should fall within Brazilian public policy.

Public policy is tricky to define. Making a long story short, it can be understood as “the group of essential moral, social and legal interests elected by the State to be protected in a certain historical moment” (Adriana Noemi Pucci, “Homologação de Sentenças Arbitrais Estrangeiras”. Arbitragem: estudos em homenagem ao Prof. Guido Fernando Silva Soares, São Paulo: Atlas, 2007, p. 350 – free translation).

It is highly arguable that, in Brazil at least, the concept of public policy would include within it the principle of human dignity, rendering express reference to it in the Internal Rules redundant.

With all that said, it is rash to assume that the inclusion of “human dignity” is superfluous. The provision was deliberately added to the Internal Rules, and, until proven otherwise, it would be wise to work on the assumption that the commission in charge of the amendments found a justifiable reason for the inclusion. However, it may well be that this language was not added specifically with arbitration in mind. The Internal Rules in articles 216-A to 216-X do not deal only with the recognition of foreign arbitral awards, but also with foreign rulings related to any matter, including human rights or family law, for example. Decisions within those fields might easily involve “human dignity” and could be the reason for the amendment, to establish clear and doubtless application (even for the purpose of strengthening fundamental rights).

Considering the short time the amendment has been in force, it has not been challenged or even discussed in judgements yet. As a result, it is not possible to precisely predict how the STJ will interpret or apply this provision. Nevertheless, the STJ has generally adopted an arbitration-friendly approach to the recognition of foreign arbitral awards, restricting the application of the public policy exception to very rare cases. It is likely that even though the human dignity exception is considered applicable to arbitral awards and autonomous from public policy, giving more room to recalcitrant parties to challenge the request for recognition, the STJ will deal with the “new requirement” in a restricted way.

The other amendments to the provisions of Resolution 9/2005 refer to the procedural aspects of actions to recognize foreign arbitral awards. Some of these make small improvements in the language without material effect, while others have brought more substantive changes.

The first of these substantial changes can be found in article 216-C of the Internal Rules. The new provision consolidated articles 3 and 5 of Resolution 9/2005 about the documents that must be presented together with the request for recognition. Among other formal requirements (such as a sworn translation of the award and the arbitration agreement), Resolution 9/2005 provided that the foreign award had to be authenticated by the Brazilian Consulate in the country of origin. According to the new article 216-C of the Internal Rules, this authentication is no longer essential. The new wording excludes the word “indispensable” and establishes that such measure is only necessary in certain cases. These exceptional cases, however, are not specified in the Internal Rules. It will be difficult for practitioners to know where to draw the line in seeking authentication and some may prefer to seek authentication “just in case” until some clarity is given.

Article 216-E of the Internal Rules also contains a provision not found in Resolution 9/2005 regarding the amendment of the request to recognize a foreign award. If the request does not comply with the requirements established by the Internal Rules or presents any irregularity or defect that causes difficulties for the case to be judged, the requesting party must be notified to amend the request in five days. If, following notification the party does not make the necessary amendment, the case will be shelved without the analysis of the merits – in this case, considering the general procedural rules in force in Brazil, it is likely that a new request can still be filed.

In addition, while Resolution 9/2005 only determined the presentation of an answer by the defendant, article 216-J of the Internal Rules now provides that after the answer, a reply and a rejoinder can be presented, establishing the time period of five days for each one.

Finally, article 216-K gives the reporting judge assigned to the case the chance to decide on the request alone. The regular procedure is to submit the request to be analysed and judged by the judges that compose the Special Court (“Corte Especial”) of the STJ. According to the new provision, the reporting judge can analyse and judge the request by him/herself when analogous cases have already been decided by the Special Court.

These amendments brought provisions that can be found in the Civil Procedure Code, so they are not new to Brazilian practitioners. The authorization for the reporting judge is particularly important. Even if the decision is challenged by the parties (as authorized by the Internal Rules), the fact is that a singular ruling by a reporting judge is usually issued faster than a judgment by a panel or larger body and can expedite the proceeding. The two other measures are in line with due process and are not likely to unduly delay the proceeding, because of the short time periods given.


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“Investment Arbitration Is Now On Broadway, And The Critics Are Not Being Kind”

by Vernon Cassin

Baker Botts LLP

That was the assessment of Constantine Partasides QC, founding partner of Three Crowns, during his keynote address to the joint ITA-IEL conference. According to Mr. Partasides, there is a developing consensus among states that it is acceptable, and even virtuous, to challenge investor-state arbitration as an infringement on the rights of the public to pass laws through their democratically-elected representatives. Thus it has become de rigueur for a sovereign to challenge and obstruct the arbitral process, through challenges to the appointed arbitrators, jurisdictional objections, and post-award challenges to awards and their enforcement. Resistance to investor-state arbitration is increasing even in the developed world, with voices in France, Germany and England now questioning whether to include an arbitration provision in the EU-US Transatlantic Trade and Investment Partnership (“TTIP”).

Adopting the Churchillian approach to prognostication—that “it is much better to prophesy after the event has already taken place”— Mr. Partasides predicted that “the ever-increasing precariousness of sovereign respondent participation in investor-state arbitration will only get worse.”

Mr. Partasides drew a sharp contrast between these developments and early arbitrations like the 1977 dispute of Aminoil v. the Government of Kuwait. There, despite an arbitration clause in the concession agreement that required appointment of arbitrators by the British Political Resident—a position that no longer existed—Kuwait did not seek to obstruct the arbitration and instead worked with Aminoil to negotiate a fresh arbitration agreement and appoint a tribunal. In the proceeding that followed, both parties participated in good faith to maximize the efficiency of the process and the quality of its outcome. For its part, the tribunal gave early directions to the parties as to the precise issues on which it wanted to hear, and even as to the order in which they should address those points, helping the parties avoid a scorched earth litigation on every possible issue and argument. When the tribunal issued its award, Kuwait paid it promptly—in the words of Professor Martin Hunter, by a “check in the post.” Disputes like Aminoil promised a future of investor-state arbitration in which parties and tribunals would tailor the proceedings to the dispute and achieve a fair, and reasonably-costed, approach.

How can investor-state arbitration fulfill its original promise? Mr. Partasides made three proposals. First, greater transparency in investor-state arbitration will help blunt the criticism that confidential arbitration is not well-suited for the resolution of public disputes. Initiatives like the recent UNCITRAL Rules on Transparency in Treaty-based Investment Arbitration and the brand new UN Convention on Transparency in Treaty-based Investment Arbitration are making great strides towards this goal.

Second, business must do more to defend the investor-state dispute settlement process to the public. Criticism continues to mount that investor-state dispute settlement has become a tool of multinational corporations that use arbitration panels to circumvent, or even alter, national laws at their whim. In Germany, a public consensus appears to have formed that investor-state dispute settlement should be dropped entirely from the TTIP. And the English House of Lords’ European Union Committee referred in a May 2014 report to a “growing consensus of concern” about the inclusion of investor-state dispute settlement because of its propensity to interfere with the process of appropriate law-making. A recent editorial in the Economist is emblematic of this growing suspicion of investment arbitration, using phrases such as “foreign firms,” “special rights,” secretive tribunals,” and “highly paid corporate lawyers.” Arbitration practitioners—while staunch defenders of the process—are always susceptible to claims of self-interest. Business needs to take a leadership role in the battle over the existence of investor-state dispute resolution through dialogue with governments and opinion makers.

Finally, arbitration practitioners must work harder to make the arbitral process worthy of such defense. In particular, Mr. Partasides recommended that arbitrators conduct a “Substantive Case Review Conference” after the first substantive exchange of briefs. During that conference, the tribunal could hear argument from the parties, provide guidance on the issues truly in dispute, and then set a procedural direction for the remainder of the arbitration, including setting contours for any document production, and the necessary focus of further written and oral submissions. Dividing the proceeding into two separate “acts” would allow tribunals to guide the parties to a more efficient resolution of their dispute and help avoid the “scorched earth” approach on every issue currently weighing down the investor-state process.


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The Most Recent Decision in the Pechstein Saga: Red Flag for Sports Arbitration?

by Nathalie Voser

Schellenberg Wittmer,
for Schellenberg Wittmer

and David Mamane and Hannah Boehm, Schellenberg Wittmer

With its interim judgment of 15 January 2015, the Higher Regional Court of Munich added a new chapter to the longstanding legal dispute between the German speed skater Claudia Pechstein and the International Skating Union (“ISU”) (see the previous report on this story). The full decision has not yet been published. So far, the court has only issued a press statement.

Shortly before the 2009 World Speed Skating Championships in Hamar, Ms Pechstein was tested positive in a doping control. Subsequently, the ISU banned her from all ISU competitions for two years. Based on the dispute resolution clause in the registration form for the championships in Hamar, Ms Pechstein challenged this ban before a tribunal of the Court of Arbitration for Sport (“CAS”), but lost the case. She then took the matter to the Swiss Federal Tribunal in two sets of proceedings, first requesting that the tribunal’s award be set aside, then that it be revised. Neither request was successful (see here the report).

Ms Pechstein then initiated proceedings before the Regional Court of Munich (“Regional Court), claiming damages of approximately 4 million Euros from the ISU and the German national skating union. In a decision of 26 February 2014, the Regional Court held that the arbitration agreement entered into by the athlete was invalid, because there had been a “structural imbalance” between Ms Pechstein and the monopolistic ISU. As a result, Ms Pechstein had not voluntarily agreed to arbitration. Nonetheless, the Regional Court dismissed the case on the merits, holding that the award rendered by the CAS had res judicata effect with regard to the doping ban. According to the Regional Court, the imbalance between Ms Pechstein and the ISU had been remedied in the arbitration proceedings as Ms Pechstein, who had legal counsel, had taken part in the CAS proceedings without objecting to the jurisdiction of the CAS tribunal. The athlete appealed this decision to the Higher Regional Court of Munich (“Higher Court”).

In an interim decision, the Higher Court allowed Ms Pechstein’s claim for damages.

Unlike the first instance, the Higher Court did not evaluate the validity of the arbitration agreement based on whether or not it had been entered into voluntarily. Rather, the Higher Court held that the arbitration agreement between Ms Pechstein and the ISU was invalid because it was contrary to mandatory competition law. According to the Higher Court, the ISU, as sole organizer of speed skating world championships, enjoys a monopolistic position in speed skating and is therefore dominant pursuant to the German Act Against Restraints of Competition. The Higher Court was of the opinion that a dominant entity may not impose business terms that would not prevail in a market with effective competition.

The Higher Court held that it is not per se an abuse of a dominant position if the organizer of international sporting events requests the athletes to sign an arbitration agreement. It concluded, however, that the ISU had abused its market power by requiring Ms Pechstein to sign an arbitration agreement providing for arbitration before a CAS panel as a prerequisite to her participation in speed skating competitions. The court reasoned that under the CAS arbitration rules in force when Ms Pechstein signed the arbitration agreement in question in January 2009, the sports-related bodies’ influence on the choice of CAS arbitrators outweighed the athletes’ influence on the choice of CAS arbitrators. As a result of this structural imbalance, the court considered that the independence of the CAS was questionable. The court furthermore noted that the structural imbalance between athletes and sports-related bodies is aggravated by the fact that in all disputes concerning decisions of sports-related bodies, the president of the arbitral tribunal is directly appointed by the President of the CAS Appeals Division who is a member of the International Council of Arbitration for Sport (“ICAS”), a body that is highly dependent on the sports-related bodies.

According to the Higher Court, athletes accept this one-sided designation of the CAS arbitrators only because they have no choice if they want to compete at an international level.

Unlike the Regional Court, the Higher Court furthermore concluded that the res judicata effect of the CAS tribunal’s decision does not prevent Ms Pechstein from bringing a claim for damages before the German state courts. The court reasoned that the tribunal’s award cannot be recognized in Germany because it violates a core principle of competition law which forms part of the ordre public. If the court were to implicitly recognize the decision of the CAS tribunal, this would perpetuate the ISU’s abuse of its monopolistic position and would deprive Ms Pechstein of her right to have access to a court of law.

The ISU already declared that it will appeal the decision of the Higher Court to the German Federal Supreme Court.

Although this latest chapter in the Pechstein saga could be (wrongly) seen as discrediting arbitration as a means of resolving disputes between athletes and sports associations in general, it is important to emphasize that the Higher Court did not consider that making the athletes’ participation in sports events contingent on their agreement to arbitration in general was an abuse of a dominant position. Rather, the abuse of a dominant position leading to the invalidity of the arbitration agreement resulted from the fact that the athletes were required to agree to CAS arbitration, given the CAS’ rules regarding the selection and appointment of arbitrators.

In this context, the Court pointed out that there are valid reasons to rely on arbitration to resolve sports-related disputes and that the consistent case law of a central “sports court” serves to ensure that the athletes participating in competitions have equal opportunities.

When Ms Pechstein entered into the arbitration agreement with the ISU in January 2009, three out of five arbitrators on the CAS list were chosen upon proposal by the IOC, the international federations and national Olympic committees and only two out of five arbitrators were chosen among persons independent from those bodies.

However, the 2012 revision of the CAS Code abolished the fixed quotas for arbitrators nominated by the sports-related bodies and the ICAS now “call[s] upon personalities (…) whose names and qualifications are brought to the attention of the ICAS, including by the IOC, the IFs [international federations] and the NOCs” (see Article S14 of the CAS Code). This wording leaves the CAS considerable leeway to meet the requirements set out by the Higher Court. As long as the CAS makes use of this possibility, Ms Pechstein’s victory does not necessarily signal the end of sports arbitration by means of the CAS.

From a competition law perspective, the decision C-519/04 Meca-Medina of the European Court of Justice (ECJ) has established that sporting rules, including anti-doping rules, are not per se shielded from competition law. However, an assessment of such rules must take into consideration whether any effects restrictive of competition are inherent in the pursuit of the objectives of such rules and are proportionate to them (the so-called regulatory ancillarity, cf. ECJ, case C-309/99 Wouters). On this basis, anti-doping rules have generally been considered not to be anticompetitive, given that they are justified by a legitimate objective: they are inherent in the organization and proper conduct of competitive sport. Based on the information provided in the press release it is not yet clear if the Higher Court scrutinized whether competition law is applicable to the ISU and whether the anti-doping rules could be justified on the basis of their legitimate objective. That other organizational rules would be conceivable does not mean that the current rules are per se an abuse. In order to determine whether there is an abuse, the actual effect of the rules must be taken into account.

From a more general competition law point of view, the focus on specific details of the enforcement mechanism is striking and it is unclear, under what heading such a clause would qualify as abusive (i.e. exploitative or exclusionary?). Has there been any exclusion of competing companies or participants, or have consumers or market participants been exploited with such practices? In addition, an assessment of the actual effects would be important in light of possible repercussions on other arbitration mechanisms. In particular, given that under EU competition law, legal proceedings are generally only considered to be an abuse of a dominant position in very limited circumstances (ECJ, case T-111/96, ITT Promedia), it is questionable whether the rules of an arbitral institution can as such – and absent an assessment of actual excluding or exploitative effects – be considered anticompetitive.


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Arbitrator Intelligence: The Pilot Project and Beyond

by Catherine A. Rogers

Penn State Law and Queen Mary

and Alex Wiker, Dickinson School of Law

On January 14, the Pilot Project for Arbitrator Intelligence—whose launch was first announced here on the Kluwer Blog—came to an official close. We could not be more pleased with the Pilot results, which we will share with readers below. But first, a bit of background about the methodology behind the Pilot.

The Pilot’s purpose was to jumpstart Arbitrator Intelligence. The larger aim of Arbitrator Intelligence—to promote transparency, fairness, and accountability in the selection of international arbitrators—is an enormous undertaking. So we had to start somewhere. We decided to begin by collecting arbitral awards. Specifically, for the Pilot we aimed to collect at least 100 previously unpublished awards, and overall as many awards as possible.

Why start with arbitral awards? First, parties and counsel have overwhelmingly reported to us prior awards made by prospective arbitrators would always be welcome data points. More information to evaluate prospective arbitrators is always better, they say.

Second, awards are historical documents not only about cases, but about arbitrators. An award deals with a completely different dispute, but it is nevertheless rich in detail about an arbitrator’s actual past experience, decision-making, and work product. What standard did the prior award use in granting or denying interim relief? How extensive or limited was witness testimony at hearings or document production? Was proposed consolidation permitted or prohibited? Was the contract language strictly interpreted, or did the equities of the situation seem to influence the tribunal’s analysis? How long did it take the award to be rendered after the final substantive submissions were filed?

These are precisely the kinds of questions that parties are interested in when seeking to appoint arbitrators. And answers to these questions are often at least partially discernable from awards. But parties and counsel draw details about an arbitrator from a range of sources—inevitably of varying reliability—in an attempt to understand that arbitrator’s suitability for the current dispute.

There are obvious limitations to what may be reasonably inferred about an individual arbitrator from a past award, particularly if decided by a tripartite tribunal. Arbitral awards are not crystal balls. They cannot accurately predict how arbitrators will decide these issues in future cases. And it is natural that arbitrators want to avoid being misunderstood or pigeonholed because of specific past cases.

A few have attempted to go one step further arguing that these limitations are reason not to even collect awards at all. As far as we know, however, that view has been publicly expressed only by a small handful of arbitrators. Instead, our overall sense from the Pilot is that most arbitrators are proud of the awards they render, understand why they might be of interest in the arbitrator selection process, and trust that parties and counsel are aware of the limitations described above.

Prior awards are simply another source of information about arbitrators. They are a unique source, however. Unlike reports from practitioners, the information in arbitral awards is unfiltered by subjective interpretation and personal memory. In this respect, awards can provide interesting, and otherwise unavailable, bits of information to enhance the mosaic that counsel and parties create about prospective arbitrators during the selection process.

Having decided to start with awards, we wanted to use a means of collecting them that would embody the nature and purpose of Arbitrator Intelligence itself. Arbitrator Intelligence is often referred to as a “database.” But that is not quite right. To the extent there is a technological analogy, Arbitrator Intelligence is more like a form of interactive, online crowd-sourcing than a database passively accessed by users. Ultimately, Arbitrator Intelligence aims to have Members themselves help build a collective resource that can then harness the benefits (in the longer term) that modern informatics can bring to strategic decision-making about arbitrator selection.

With these general goals in mind, we developed a website that would facilitate crowd-sourcing our award-collection efforts for the Pilot. The centerpiece of this website is an interactive map that indicates court cases in various jurisdictions around the world in which arbitral awards were sought to be annulled or recognized or enforced. All these court files are believed to contain arbitral awards. We then made a general plea to Members and supporters to help us find those awards, to add new court cases to the interactive map, and to submit awards from other sources.

The turnout has been overwhelming! In under four months, we accomplished our self-imposed goal of collecting in excess of 100 previously unpublished international arbitration awards. The award bringing us over the top was Torno/Yöntaş Ortak Girişimi v. Istanbul Büyükşehir Belediyesi Su ve Kanalizasyon Genel Müdürlüğü (İSKİ), a Turkish Award submitted by Arbitrator Intelligence Member Inan ULUC.

We have learned a lot during the Pilot. For example, in many countries such as Belgium, Georgia, and Russia (and apparently soon Germany), some awards are inaccessible due to national and local rules precluding public access to court files. Also, in some places (such as New Zealand), the parties must give explicit consent before an award may be released. At the same time, other jurisdictions (particularly in Latin America) have recently computerized their judicial case management systems so that theoretically awards could be remotely accessed from those files. We hope to use what we have learned and accomplished so far to build our community further and collect the potentially thousands of more awards that are in court files around the world.

Now for the specific outcomes from the Pilot. From 22 September 2014 through 14 January 2015, we collected 104 unpublished awards as part of an estimated 600 total awards (we have a backlog of awards yet to be certified, so we can’t give an exact number yet). Additionally, we collected new information about 50 confirmation/annulment-related court cases that have been added to the pre-existing 847 cases on our interactive map. We amassed a community of nearly 400 Members from 59 different jurisdictions. People from 103 countries viewed the Arbitrator Intelligence site over 4500 times, with the most active jurisdictions being (in descending order) United States, United Kingdom, France, New Zealand, Germany, Russia, Italy, Brazil, Belgium, and Switzerland. Visits to the site supplemented personal emails of support and awards contributed separately.

We couldn’t have achieved success on the Pilot without the Arbitrator Intelligence community, which worked creatively and enthusiastically to help us meet our goals. In addition to the Members who contributed awards, cases, stories, and feedback, an expanding number of Special Advisers and Supporters (listed here) provided crucial guidance and ideas, Prizes, funding, administrative support, and PR.

A few supporters deserve special mention. Gwen de Vries of Kluwer, Professor Chris Drahozal, and Gary Born of WilmerHale have provided essential practical and conceptual advice from the very first stages of development. We also must specially acknowledge the extraordinary and extraordinarily generous pro bono legal support from Alston & Bird and GleissLutz. And for all of you wondering who put together the sleek web design, that was Concepcion Design.

As noted at the beginning of this post, the Pilot was only the beginning. As for next steps, Arbitrator Intelligence will move beyond arbitral awards. Ultimately, Arbitrator Intelligence aims to develop a survey to collect feedback from users in individual cases. To that end, we will be developing another online interactive tool through which members of the international arbitration community can contribute their ideas about how to frame the structure of the survey, how to formulate its questions, and how best to distribute the survey and collect its results.

So stay tuned! And in the meantime, please keep those awards coming!


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The CIETAC Feud: Big Brother Is Watching – But Is It Also Settling The Fight?

by Lear Liu and Clarisse von Wunschheim

WunschArb

The split between CIETAC headquarters in Beijing and its two former Shanghai and Shenzhen sub-commissions following the adoption of CIETAC’s 2012 Arbitration Rules has remained in the spotlight. The feud escalated with the assertion of independence by the two sub-commissions and the revocation by headquarters of their authorisation to administer cases. To add to the confusion, Chinese local courts have adopted different approaches to cases involving the CIETAC split brought before and after 4 September 2013 (as previously commented here on the Blog, as well as here).

On that date, the Supreme People’s Court (‘SPC’) issued a ‘Notice on Relevant Issues concerning Correct Handling of Judicial Review of Arbitration Matters’ (Fa (2013) 194 Hao) (‘the 2013 Notice’), requesting lower courts to report arbitration-related cases affected by the CIETAC split to the SPC for instructions before issuing rulings.

The dust initially appeared to settle following the 2013 Notice. A decision of 31 December 2014 by the Shanghai No. 2 Intermediate People’s Court (‘IPC’) ([2012] Hu Er Zhong Min Ren (Zhong Xie) Zi Di 5 Hao: see SHIAC’s news report), however, has stirred the waters once again. The IPC confirmed the validity of an arbitration clause designating ‘CIETAC Shanghai Sub-Commission’ by interpreting it as actually designating the Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Center (SIETAC/SHIAC), as the institution having jurisdiction over the dispute.

Read in conjunction with 2013 Notice, the IPC’s ruling raises the question whether it has much broader significance – i.e has the SPC implicitly reached a consensus on how to settle the dust in the CIETAC split? If so, on what terms?

Background

On 8 July 2010, two Chinese individuals (the Chinese parties) entered into a share purchase contract (the ‘Contract’) in Shanghai with a company registered in Hong Kong. The Contract contained an arbitration clause (the ‘Arbitration Clause’), stipulating that any dispute should be submitted to “the China International Economic and Trade Arbitration Commission Shanghai Sub-Commission (hereinafter ‘CIETAC Shanghai Sub-Commission’)” for arbitration. Disputes subsequently arose and, on 21 November 2012, the Hong Kong company filed a Request for Arbitration with CIETAC Beijing, which accepted the case shortly thereafter.

On 5 December 2012, the Chinese parties filed an Application for Verification of the Validity of the Arbitration Agreement (the ‘Application’) before the IPC, requesting it to rule that (1) the Arbitration Clause was valid; (2) CIETAC Shanghai Sub-Commission was the only arbitration institution having jurisdiction to resolve the dispute; and (3) the other party should bear the court acceptance fee. The IPC accepted the case on that day.

On 7 December 2012, CIETAC Beijing issued a ‘Decision on Jurisdiction and Case Acceptance’, confirming that the Arbitration Clause was valid and that it had jurisdiction over the dispute.

Notwithstanding CIETAC Beijing’s decision, the IPC instructed it on 8 January 2013 to suspend the arbitration proceedings pending the Court’s decision.

The Chinese parties argued that the Arbitration Clause was valid since it fulfilled all the requirements of article 16 of the PRC Arbitration Law (1994), i.e. an express intent to arbitrate, a clear description of the matters subject to arbitration, and an arbitration institution. The Chinese parties argued that the designated arbitration institution was the CIETAC Shanghai Sub-Commission, which had been renamed SIETAC/SHIAC. As such, in accordance with the parties’ intentions, only SIETAC/SHIAC and not CIETAC Beijing had jurisdiction over the dispute.

The Hong Kong company argued that the validity of the Arbitration Clause was not disputed by the parties, the only question being the interpretation of the reference to ‘CIETAC Shanghai Sub-Commission’. Such question was not, however, subject to the Court’s jurisdiction and the IPC had no legal basis for accepting the Application. The company further contested the IPC’s powers to instruct CIETAC Beijing to suspend the arbitration proceedings and argued (inter alia) that since CIETAC Beijing had revoked the authorisation of the CIETAC Shanghai Sub-Commission to administer cases, its successor entity, SIETAC/SHIAC, could not be deemed as ‘CIETAC Shanghai’. The designated arbitration institution was therefore CIETAC Beijing.

The Decision

Having examined the history and previous legal structure of the CIETAC Shanghai Sub-Commission as part of the China Council for the Promotion of International Trade (CCPIT), the IPC then noted that, according to its own announcement dated 17 April 2013, the sub-commission had been officially renamed concurrently as SIETAC/SHIAC. On 1 May 2013, SIETAC/SHIAC adopted new arbitration rules and established a new panel of arbitrators. The announcement also stated that SIETAC/SHIAC would accept cases “to be arbitrated by SIETAC/SHIAC upon agreement between the parties” and continue to accept cases “that should be arbitrated by CIETAC Shanghai Commission/Branch/Sub-Commission upon agreement between the parties”.

The Court answered two preliminary questions as follows.

(1) The arbitration institution designated in the Arbitration Clause, the CIETAC Shanghai Sub-Commission, was domiciled within the jurisdiction of the IPC. The Court therefore had jurisdiction to rule upon the Application, pursuant to article 12 of the SPC Interpretation of the PRC Arbitration Law (2006) (SPC Interpretation [2006] No. 7).

(2) As the case involved a party registered in Hong Kong, the Arbitration Clause was deemed to be Hong Kong-related. Absent party choice as to the law applicable to the validity of the Arbitration Clause, the law of the place of the arbitration institution, i.e. PRC law, should apply, in accordance with article 18 of the PRC Law on the Laws Applicable to Foreign-Related Civil Relations (2010).

On the core question of the validity of the Arbitration Clause, the IPC ruled as follows.

(1) A valid arbitration clause shall contain the following particulars, per article 16(2) of the PRC Arbitration Law (1994): (i) an expression of intention to apply for arbitration; (ii) the matters to be referred to arbitration; and (iii) a designated arbitration commission.

(2) In the present case, the parties had agreed on all of these factors. In particular, the designated arbitration institution, ‘CIETAC Shanghai Sub-Commission’, now called SIETAC/SHIAC, was established according to law and entitled to administer arbitration cases by agreement of the parties.

The Arbitration Clause was therefore valid and the dispute between the parties should be dealt with by SIETAC/SHIAC as clearly stipulated thereunder.

The IPC therefore confirmed the validity of the arbitration clause and also ordered the Hong Kong company to bear the court fee.

Authors’ Commentary

The key question is: does this decision only reflect the view of the Shanghai No. 2 IPC in the specific case, or should it be more broadly interpreted as indicating a general trend that SIETAC/SHIAC is now recognised as the official successor to the CIETAC Shanghai Sub-Commission?

The IPC clearly rules that SIETAC/SHIAC is the deemed successor to the CIETAC Shanghai Sub-Commission and that a clause designating the CIETAC Shanghai Sub-Commission must be read as designating SIETAC/SHIAC and not CIETAC Beijing.

Whilst there is no official published statement by the SPC under the 2013 Notice regarding this case, it may reasonably be assumed that the IPC duly reported the case to the SPC and that the latter approved the former’s views. This would mean that the SPC supports the interpretation of clauses referring to ‘CIETAC Shanghai Sub-Commission’ as now referring to SIETAC/SHIAC and not to CIETAC Beijing. It follows that a similar inference could be drawn with regard to references to ‘South China Sub-Commission’ being interpreted as referring to the South China International Economic and Trade Arbitration Commission/Shenzhen Court of International Arbitration (SCIETAC/SCIA).

This would mean that CIETAC Beijing has lost the battle in Shanghai and Shenzhen and is now reduced to administering cases (i) which refer simply to ‘CIETAC’ or ‘CIETAC Beijing’ arbitration, or (ii) where the parties have otherwise agreed that the case should be handled by CIETAC Beijing.

As a matter of interest, on the very day of the IPC’s decision (31 December 2014), CIETAC posted two announcements on its official website regarding the reorganisation of its Shanghai and Shenzhen sub-commissions.

The first, in abbreviated form, is entitled ‘Decision of the CCPIT (China Chamber of International Commerce) on the Reorganization of the CIETAC South China Sub-Commission and CIETAC Shanghai Sub-Commission’, according to which the CCPIT decided to reorganise the former sub-commissions following their changes in name and structure and their refusal to remain “under the leadership of CIETAC“.

The second announcement is entitled, in abbreviated form, ‘CIETAC Announcement on the Reorganization of CIETAC South China Sub-Commission and Shanghai Sub-Commission’. This sets out details of the reorganisation programme, by which CIETAC appears to be reconstituting its current liaison offices in Shanghai and Shenzhen as new ‘Sub-Commissions’. CIETAC had opened these liaison offices after revoking its authorisation to the newly established SIETAC/SHIAC and SCIETAC/SCIA to administer CIETAC cases.

Is this really a coincidence, or is CIETAC trying to re-establish ‘Sub-Commissions’ in order to undermine the reasoning of the Shanghai No. 2 IPC and of any other court that may be inclined to adopt similar reasoning?


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Inoperability of Arbitration Agreements due to Lack of Funds? Revisiting Legal Aid in International Arbitration

by Georg von Segesser

Schellenberg Wittmer,
for Schellenberg Wittmer

co-authored by Georg von Segesser and Mirina Grosz, Schellenberg Wittmer Ltd.

In a recent decision, the Swiss Federal Tribunal rejected an appeal to set aside a final award of the Court of Arbitration for Sport (“CAS”) (Decision of the Swiss Federal Tribunal (“DFT”) of 11 June 2014, 4A_178/2014). The appellant, a professional cyclist who faced disciplinary charges after testing positive in an anti-doping test, argued inter alia that the CAS tribunal had violated the principle of equal treatment and public policy by rejecting his request for legal aid. The Federal Tribunal, however, found that the appellant’s arguments failed for lack of substantiation. It particularly held that since legal aid is excluded for domestic arbitration in Switzerland (Article 380 Civil Procedure Act), there is no reason why this principle should not also apply to international arbitration.

For procedural reasons, the Swiss Federal Tribunal then left open the issue whether and under what conditions a party may unilaterally terminate an arbitration agreement for lack of financial resources to initiate and pursue arbitration proceedings, in order to then bring its case before the state courts, along with a request for legal aid. In doing so, the Federal Tribunal however referred to several legal scholars in Switzerland that all acknowledge the impecunious parties’ right to free themselves of an arbitration agreement they have entered into for good cause, to ensure that they can exercise their right of access to justice as guaranteed particularly under Article 6(1) of the European Convention on Human Rights (reference was particularly made to Berger/Kellerhals, International and Domestic Arbitration in Switzerland, 2nd ed. 2010, N 1043; Kaufmann-Kohler/Rigozzi, Arbitrage International, 2nd ed. 2010, N 280; Dasser in: Oberhammer et al. (eds), Kurzkommentar ZPO, 2nd ed. 2013, Article 380 N 3).

A comparative analysis of different arbitration laws reveals that diverging views exist as to whether the lack of sufficient funding may have an impact on the applicability of arbitration agreements. For example, while the right to terminate the arbitration agreement was originally also acknowledged in Germany, the German Federal Court of Justice (“Bundesgerichtshof”) went one step further in its bespoken “plumber’s case”, when it ruled that the impecuniosity of a party may render the arbitration agreement “inoperative or incapable of being performed”, thus allowing the impecunious party to validly commence proceedings before state courts (Bundesgerichtshof, 14 September 2000, III ZR 33/2000, BGHZ 145, 116). English courts adopted a different view when they held that the lack of sufficient funding should only justify the rendering of arbitration agreements as “incapable of being performed” or “inoperative”, if the lack of funding is due to the same breach of contract which is the issue in dispute (Janos Paczy v. Haenlder & Natermann GmbH [1981] 1 Lloyd’s Rep 302 (CA); see also Wagner, Impecunious Parties and Arbitration Agreements, SchiedsVZ 2003, Heft 5, pp. 206 et seq.).

By balancing the right of access to justice with the principle of pacta sunt servanda, these approaches tend to refer impecunious parties to state courts if their right of access to justice appears to be at risk. The consequences are far-reaching: Valid arbitration agreements are set aside and cases are brought before state courts, despite the parties’ agreement on a settlement of their dispute by means of arbitration before a neutral forum. Not least in view of possible strategic attempts to circumvent arbitration agreements in this manner, it is not surprising that a cautious and restrained acknowledgment of such cases has been called for (see, e.g., Kühner, The Impact of Party Impecuniosity on Arbitration Agreements: The Examples of France and Germany, Journal of International Arbitration 2014, Volume 31 Issue 6, p. 816; Wagner, loc. cit., pp. 211, 213-214). What these discussions however generally do not address are the questions whether and, if so, how legal aid or other forms of financing access to justice should be made available or can be improved for international arbitration. The reason for such an omission may well be that it is rather difficult to find mechanisms which provide a solution to the problem.

In state court proceedings, the right to legal aid is acknowledged as a means to prevent a party’s lack of financial resources resulting in a loss of its rights. Legal aid generally comprises an exemption from the obligation to pay advances and provide security, an exemption from court costs, as well as the appointment – usually by the court – of a legal agent at the government’s expense, if this is perceived as necessary to protect the rights of the party concerned.

The right to legal aid however does not apply to arbitration proceedings in numerous jurisdictions (Berger/Kellerhals, loc. cit., N 572 and N 1043). The exclusion of legal aid for Swiss domestic arbitration – to which the Swiss Federal Tribunal referred in its decision – is frequently explained with the argument that arbitration lies outside of the scope of state court proceedings. According to this line of argument, it is not the state’s responsibility to make proceedings before tribunals more accessible if they are not part of the state judiciary (see DFT 99 Ia 325, consid. 3b). Furthermore, it is generally pointed out that the parties that submit to arbitral proceedings do so on a voluntary basis and thus renounce to the advantages of state court proceedings, which include the possibility of requesting legal aid (Dasser, loc. cit., Article 380 N 2, N 6 et seq.; Stacher in: Boog et al. (eds), Berner Kommentar zur Schweizerischen Zivilprozessordnung, Band III 2014, Article 380 N 2).

The question that remains for both domestic and international arbitration is how to deal with situations in which the parties to the dispute do not meet on equal terms for financial reasons. Legal scholars have particularly pointed this out in view of recent developments to include arbitration clauses in consumer contracts as well as employment contracts or contracts on medical care – a development that is currently particularly observed in the United States (see, e.g., Niedermaier, Arbitration Agreements between Parties of Unequal Bargaining Power, ZDAR 1/2014, pp. 12-13).

Sports arbitration has also been the subject of criticism in this regard, due to the fact that arbitration is generally mandatory for athletes. In response to this situation, legal aid as well as “pro bono counsels” have been made available for arbitration before the CAS, thereby proving the Swiss Federal Tribunal’s finding wrong according to which legal aid is not applicable to international arbitration. Pursuant to Article 5 of the Guidelines on Legal Aid that have entered into force as of 1 September 2013 (available at ), “legal aid is granted (…) to any natural person provided that his income and assets are not sufficient to allow him to cover the costs of proceedings, without drawing on that part of his assets necessary to support him and his family“. Legal aid is however refused “if it is obvious that the applicant’s claim or grounds of defence have no legal basis” as well as “if it is obvious that the claim or grounds of defence are frivolous or vexatious.” Applicants are requested to make their requests in writing by enclosing a completed and signed “Legal Aid Application Form” to the CAS Court Office. It is then the President of the International Council of Arbitration for Sport (“ICAS”) that decides on the requests for legal aid and gives reasons for his decision (for an overview see also Rigozzi/Hasler, Chapter 5, Part III: Commentary on the CAS Procedural Rules, Article R64, in: Arroyo (ed.), Arbitration in Switzerland, The Practitioner’s Guide 2013, pp. 1069-1071). Whether similar mechanisms are conceivable for other areas of arbitration, remains questionable at present.

This is not least due to the fact that one of the first issues that comes up when discussing legal aid in arbitration is where the required funding can be made available from. An approach that has been suggested for institutional arbitration involves the creation of respective funds by arbitration centers that are fed by surpluses of fees levied in other arbitration cases, as most if not all institutions do not have any other resources. In practice, however, such a mechanism of legal aid has not been established and it appears to be questionable, whether such a form of “public service” should at all be made available for arbitration (see, e.g., Kudrna, Arbitration and Right of Access to Justice: Tips for a Successful Marriage, in: New York University Journal of International Law and Politics Online Forum, February 2013, p. 8 with further references [available at ]; Cremades, La falta de recursos economicos para participar al arbitraje pactado, in: Fernàndez-Ballesteros/Arias (eds), 2010 Spain Arbitration Review, Issue 8, pp. 162-163). It will be particularly interesting in this context to follow the legislative process in Switzerland regarding the Swiss Federal Financial Services Act, as the current draft seeks to facilitate the adjudication of private clients’ claims vis-à-vis financial service providers. For this purpose, the draft Act suggests a cost-effective or cost-free arbitration solution or as an alternative a “procedural costs fund” as a new form of financing – the latter, however, limited to state court proceedings. The parliamentary discussion of the draft has yet to follow.

But there are also other means of facilitating impecunious parties’ access to arbitration. For example, one party may agree to pre-finance the costs of its counterparty in whole or in part until the final award is rendered. Such a solution is envisaged, for example, by the model arbitration clauses for trusts and foundations under the 2012 Rules of Arbitration of Liechtenstein (available at ). Where institutional rules provide for a system that allows parties to also pay their counterparty’s share of the advance on costs if that party is in default, this generally only works in situations where the respondent party is in default and the claimant party is willing to bear additional costs in order to be able to bring its case before an arbitral tribunal. But the situation is quite different when it is the claimant party that lacks financial resources, since a respondent party will have little cause to help fund the counterparty’s claim.

Particularly in order to address constellations in which the claimant is unable to pay its share on the advance on costs, it is at least conceivable that an arbitral institution could lower the advance that would normally result from the institution’s scale of costs. It is also imaginable that the impecunious party would be allowed to pay the advance on costs in installments. In practice, however, arbitral institutions will usually be reluctant to accord any special treatment to a party because of its alleged impecuniosity, particularly in view of the principle of equal treatment (see Cremades/Mazuranic, Chapter 9: Costs in Arbitration, in: Geisinger/Voser (eds), International Arbitration in Switzerland: A Handbook for Practitioners, 2nd ed. 2013, p. 186).

Where classic legal aid mechanisms that involve the judicial system’s support are not available, private funding mechanisms may provide remedies. However, bank-related instruments such as bank loans or bank guarantees for example, tend to only be available to parties that are financially sound at the time of contracting with the banks (see, e.g., Kröll, Bank-related Instruments to Secure the Right to Arbitration despite the Impecuniousness of a Party, in: German Institution of Arbitration (ed.), Financial Capacity of the Parties, 2004, pp. 151-164; Cremades, loc. cit., pp. 161-163). Additionally, third-party funding may be an option. Third-party funding is an increasingly used mechanism, according to which a professional of the finance industry bears all the costs related to the arbitration proceedings against a portion of the proceeds collected from the losing party if the case is won. If the case is lost, the funded party has no reimbursement obligation towards the funder. As confirmed by the Swiss Federal Tribunal, third-party funding is allowed in Switzerland (DFT 131 I 223). However, it is important to consider in advance the questions that such a financing mechanism may raise. For example, confidentiality issues may arise. Additionally, third-party funding will generally have to be disclosed, not least to avoid conflict of interest situations (see, e.g., Roney/von der Weid, Third-Party Funding in International Arbitration: New Opportunities and New Challenges, in: Müller/Rigozzi (eds), New Developments in International Commercial Arbitration 2013, 2013, pp. 183 et seq.). Perhaps the contingent fee practice could also be of some use in situations of impecunious claimant parties, but it may raise issues of admissibility under ethical provisions of the applicable bar rules and would most likely leave the burden of the cost of the arbitral tribunal on the shoulders of the losing party.

As this brief outline shows, with the exception of the CAS legal aid guidelines, there are practically no available mechanisms that correspond with the traditional system of legal aid granted by state courts. Elaborating further on possible solutions to avoid that arbitral agreements become inoperative remains an interesting challenge.


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