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

by Dirk De Meulemeester and Cederic Veryser

Lexlitis

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

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arbitration will not proceed or will be suspended or – under certain arbitration rules – the claim will be considered withdrawn.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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When Does an Arbitration Agreement Have a Binding Effect on Non-Signatories? The Group of Companies Doctrine vs. Conflict of Laws Rules and Public Policy

by Kirstin Schwedt and Julia Grothaus

Linklaters

A recent decision of the German Federal Supreme Court dated 8 May 2014 (case reference no. III ZR 371/12) again calls for a debate on the binding effect of an arbitration agreement for a non-signatory – a well-known and highly-debated phenomenon since the Dow Chemical arbitration.

The Dow Chemical case

According to the award rendered in the Dow Chemical arbitration (ICC Case No. 4131, Y.C.A. Vol. IX (1984), 131), a third party non-signatory to the contract containing the arbitration clause can be obliged to submit to arbitration proceedings if the common intentions of the signing parties demand for such interpretation. This may be the case in particular if the non-signatory company has effectively and individually participated in the conclusion, performance and termination of the respective contract, appeared as the actual party both to the contract and to the arbitration clause and has taken or will probably take advantage of such appearance. In addition, the arbitral tribunal rendered its decision on jurisdiction by taking into account ‘usages conforming to the needs of international commerce, in particular, in the presence of a group of companies’ (the so-called ‘group of companies doctrine’). It is important to note that the arbitral tribunal in Dow Chemical reached its conclusion on the basis of alleged general international principles instead of a careful interpretation of the parties’ intentions under the applicable law. The award was upheld by the Cour d’Appel de Paris (Rev. Arb. 1984, 98) and has caused numerous arbitral tribunals in subsequent cases to accept jurisdiction over non-signatories of the arbitration clause.

Differing approaches in international case law

The ‘group of companies doctrine’ is well established in particular in France, where scholars supported this doctrine early on. In other countries, it is highly disputed among international scholars, and both arbitral tribunals and national courts have taken differing views.

The debate is spurred by the fact that national courts usually have the final say, either in ordinary court proceedings if the respondent objects that the matter is subject to an arbitration agreement, or when deciding on an application for annulment (particularly in jurisdictions that adopted the UNCITRAL Model Law, cf. Article 34(2)(a)(i) 2nd alternative) or on the recognition and enforcement under the New York Convention (cf. Article V(1)(a) 2nd alternative). Consequently, national court decisions must be taken seriously to avoid a success in the arbitration becoming a Pyrrhic victory.

Case law of national courts other than France clearly shows that the courts tend towards a prudent approach and to thorough analysis of the specific circumstances of a case. Yet, the efforts made by the courts differ significantly. On the one hand, there are court decisions that treat the issue without mentioning the group of companies doctrine, without determining the applicable law and without properly considering related principles such as agency or implied consent. A recent example is a judgment handed down by the Dutch Supreme Court (judgment of 20 January 2006, LJN:AU4523). On the other hand, there are other courts that take the issue more seriously. A good example is the well-known English High Court decision in Peterson Farms Inc. vs. C&M Farming Ltd. (judgment of 4 February 2004, [2004] EWHC 121 (Comm)) which partly set aside an ICC award while carefully analysing the law applicable. Whilst the arbitral tribunal had accepted jurisdiction over non-signatories of the arbitration clause based on the ‘group of companies doctrine’, the High Court considered “the issue as one subject to the chosen proper law of the Agreement and that excludes the doctrine which forms no part of English law” (no. 62). According to the High Court, “the ‘law’ the tribunal derived from its approach was not the proper law of the Agreement nor even the law of the chosen place of the arbitration but, in effect, the group of companies doctrine itself” (no. 47), an approach it considered as “seriously flawed in law” (no. 44).

The case before the German Federal Supreme Court

In line with this thorough approach, the German Federal Supreme Court carefully examined several questions connected with the binding effect of an arbitration agreement for a non-signatory under German law in its recent ruling. The questions arose in ordinary court proceedings in which the respondent raised the objection that an arbitration agreement was in place regarding the matter in dispute.

The claimant was a company based in Denmark which produces casings for electrical equipment. The managing director and sole shareholder of the claimant, L, owns a patent to a three-dimensional frame design. The respondent to the proceedings is a company based in India that is active in the same market as the claimant. The claimant initiated proceedings against the respondent following the Hannover trade fair in 2010. It accused him of having presented casings covered by the patent without being entitled to do so. The claimant, simply presented, derived its right to bring an action against the respondent from L who had assigned his claims to the claimant.

The respondent raised the objection that the matter brought before the court is subject to an arbitration agreement contained in a licence contract concluded in 1999 between IPH, a Mauritius-based company represented by L, and BIP, an Indian-based company and the respondent’s legal predecessor. With the licence contract, BIP had acquired the right of use of the design subject to L’s patent. The contract’s arbitration clause provided that any disputes between the parties were to be solved by ICC arbitration in New Delhi. According to the respondent, the claimant was bound by the arbitration clause due to its close connections with IPH and L.

The regional court considered the respondent’s arbitration objection as unfounded. The Higher Regional Court of Braunschweig dismissed the subsequent appeal as the claimant was not bound by the arbitration agreement. The ‘group of companies doctrine’ was not recognised under the applicable Danish law and violated German public policy.

The German Federal Supreme Court’s ruling

The German Federal Supreme Court disagreed with the lower court’s ruling. It set aside the judgment and referred the case back to the appeal court as the latter had not determined all facts necessary to render a final judgment on the respondent’s arbitration objection. When doing so, it inter alia instructed the lower court how to decide on (i) the law applicable to the question whether a third party is bound by an arbitration agreement, (ii) the form requirements in such cases and (iii) the question whether such an interpretation of an arbitration agreement violates German public policy.

The law applicable to determine the binding effect of an arbitration agreement on a third party

Regarding the applicable law, the German Federal Supreme Court did not follow the Dow Chemical approach. It did not answer the question on the basis of principles of international law but rather chose to determine the applicable national law and looked for the appropriate conflict of laws rule. In this regard, the court first of all noted that there are no precedents it could rely on and that the question has also been rarely addressed by scholars. It then stated that there are mainly two approaches: First, one could apply the law applicable to the arbitration agreement which is, absent an express choice of law or an implied choice of the law applicable to the main contract, the law of the place of arbitration. Secondly, the question could be answered based on the law supposedly applicable to the legal relationship between the third party and one of the parties to the arbitration agreement. The court agreed that, otherwise, the parties to the arbitration agreement would have the power to determine the applicable law to the third party’s detriment. Yet, the court held that there was no necessity in the present case to protect L as he had been involved in the conclusion of the arbitration agreement between IPH and BIP. The court thus regarded it as appropriate to also apply the law applicable to the arbitration agreement to the question whether L is bound by it. In the case at hand, this was Indian law.

Does such an interpretation meet the writing requirement of Article II(1) of the New York Convention?

With view to the form requirements for arbitration clauses, the German Federal Supreme Court found that Article II(1) of the New York Convention does not necessarily prevent the application of the arbitration clause in question to the claimant due to the most-favoured nation principle of Article VII(1) of the New York Convention. Under this principle, German conflict of laws rules can be applied according to which a contract is formally valid if it either satisfies the formal requirements of the applicable substantive law or the law of the country in which it was concluded. The appeal court thus will have to determine the arbitration agreement’s formal validity under Indian law.

Does the ‘group of companies doctrine’ violate German public policy?

It then went on to address whether public policy considerations applicable by virtue of German conflict of laws rules prevent the arbitration agreement from being extended to the claimant. According to the appeal court, this is the case. It provided this additional reasoning without even analysing whether the group of companies doctrine formed part of the applicable law. The German Federal Supreme Court decided that this reasoning falls short of the special circumstances of the case: L is not only the assignor of the claim but was also involved in the conclusion of the arbitration agreement. In addition, the court clarified that the public policy exception does not discharge the courts from actually applying foreign law and determining the result in the particular circumstances of the case. Only if this particular result, as opposed to the potential result of a rule of foreign law as such, contradicts the fundamental principles of German law and notions of justice shall its application be refused for violation of German public policy.

Conclusion

A number of conclusions can be drawn from this decision:

• First and foremost, the Federal Supreme Court confirmed its commitment to adopt an arbitration-friendly stance, in particular when it comes to interpreting arbitration clauses. At the same time, the court takes seriously that party autonomy is one of the foundation stones of arbitration, which means that a party must have consented to it. Otherwise, there is no legal basis for depriving it of its right of access to the national courts.

• It is within this area of tension that the Federal Supreme Court clarified that German courts will base their decision whether a third party must submit to, or can be included in, arbitration proceedings on the applicable national law instead of general principles of international law. To determine the applicable law, the courts will make a thorough conflict of laws analysis and either opt for the law applicable to the arbitration agreement or, if the third party requires protection, the law that is supposedly applicable to the legal relationship between the third party and one of the parties to the arbitration agreement. Subsequently, the courts will assess the agreement under the applicable law, both regarding its content and formal validity.

• Finally, German courts will carefully examine whether the result is in line with German public policy. There is no set answer to this question. The decision rather shows that the courts will decide on a case-by-case basis whether the outcome is contrary to fundamental principles of German law. In the context of annulment or enforcement proceedings, it seems highly likely that German courts would look at the result and examine on the basis of the specific circumstances of the case whether the result is in line with the applicable national law and German public policy.

• Arbitration practitioners are thereby reminded that succeeding in the arbitration based on the ‘group of companies doctrine’ is only half the battle. The arbitration will almost always be followed by annulment proceedings; in addition, the award will most likely be challenged when it comes to enforcing the award abroad. The decision to go for arbitration against non-signatories of the arbitration agreement must thus be taken with eyes wide open.

All views expressed in this post are those of the authors alone and do not necessarily represent the views of their institution.


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Enforcement of Worldwide Freezing Orders in Ukraine

by Konstantin Pilkov

CAI & Lenard

I. General Aspects of Enforceability

English Worldwide Freezing Order (“WFO”) being called by Matthias Scherer and Simone Nadelhofer one of the “nuclear weapons” of commercial litigation and arbitration, is a preliminary injunction preventing a defendant from disposing of assets pending the resolution of the underlying substantive (arbitration or court) proceedings. Its issue in support of an arbitration proceeding significantly impacts further enforcement of an award. However, as WFOs are often sought without prior notice to the defendant, their recognition and enforcement may become problematic. Ukrainian courts only recently were addressed issues related to enforceability of WFOs.

There is no separate procedure for enforcement of foreign court orders on interim measures, thus formally the English WFO can be recognised and enforced as a foreign court judgement. Generally a foreign court judgment may be recognized and enforced in Ukraine either on the basis of a respective multilateral/bilateral international treaty of Ukraine, or in the absence of such treaty on the basis of the principle of reciprocity which existence is presumed by the domestic rules of civil procedure (the Code of Civil Procedure of Ukraine, the CCP). As there is no international treaty governing issues of recognition and enforcement of court judgments in civil and commercial matters between Ukraine and the United Kingdom, English court judgments are enforceable in Ukraine on the basis of the reciprocity principle.

Upon receiving an application for recognition and enforcement, the court shall notify the debtor against whom the recognition and enforcement is sought and establish a one month term for filing objections by the debtor. Upon receiving objections or upon the expiration of the term for objection, the court appoints the hearing and shall notify the parties of the place and time of the hearing at least 10 days before it takes place. During the hearing, the parties have the right to give statements and provide explanations. The court can hold the hearing and issue a ruling in absence of any of the parties, if that party was properly notified of the hearing. The court is obliged to issue its ruling within two months after the proceedings are instituted, but this term can be prolonged. The approximate time of the proceedings in the court of first instance (district court) is 2-7 months.

The law does not establish any particular terms in which the enforcement can be granted. The court is not entitled to make any changes to the foreign court judgments left to enforcement. As a WFO would be considered as a foreign court judgment, the competent Ukrainian court cannot impose any conditions of its enforcement (e.g. deposit or promise to compensate loss caused by that enforcement). Taking into account that a WFO is an interim relief and its enforcement does not require any Ukrainian interim measures, we also believe that Ukrainian courts would not grant any additional interim relief. The ruling of the court on recognition and enforcement of foreign court judgment and arbitration award is subject to an appeal following general procedure.

However, the competent Ukrainian court may refuse to recognize and enforce a WFO upon one of the grounds listed in Article 396 of the CCP. Among those grounds there is a situation when a defending party did not have an opportunity to participate in the court proceedings because it was not properly notified of time and place of the hearing. This makes foreign court judgments issued against individuals and legal entities which were not joined to the proceedings (non-cause of action defendants (“NCADs”)), practically unenforceable in Ukraine.

II. Enforcement of WFOs against shares

Even if a WFO has been issued against a cause of action defendant (‘CAD’) its enforcement against shares in an NCAD-resident of Ukraine, belonging to that CAD may face problems. An application for enforcement of a foreign court judgment is submitted to a general court at the location of the debtor (CAD in foreign proceedings). If the debtor has no location in Ukraine or the debtor’s location is unknown, the application shall be filed with the court having jurisdiction over territory of location of the debtor’s assets in Ukraine.

As follows from the case law Ukrainian courts are reluctant to positively rule on their jurisdiction if enforcement is sought against corporate rights (shares in Ukrainian LLCs and wholly owned subsidiaries) belonging to a foreign debtor. On 7 February 2013 the judge of Pecherskyi District Court of Kyiv City returned the application for granting leave for enforcement of the Judgment of the High Court of Justice, Queen’s Bench Division, Commercial Court of London dated 23 November 2012 (claim No. 2009 Folio 1009 d), which was filed by Kazakh BTA Bank.

The application was supported with evidence that the defendant, a foreign company ZRL Beteligungs AG, was a shareholder in Ukrainian subsidiary Yupiter Trade which was located in Pecherskyi District. However, the judge ruled that ‘the mere fact that a legal entity being an independent subject of commercial activity is located in administrative territory of Pecherskyi District and has the debtor among its shareholders does not prove that any of the debtor’s assets are located in the territory of Ukraine’ (Ruling of Pecherskyi District Court of Kyiv City dated 7 February 2013). Similar opinion was expressed in another case upon the application of BTA Bank for granting leave for enforcement of the same judgment against Interfunding Facilities Limited, a foreign company which was the owner of the Ukrainian subsidiary MP Invest. On 30 January 2013 the judge ruled that the debtor was the subsidiary’s shareholder, which however ‘does not prove that the territory of Pecherskyi District is the place of location of the debtor’s assets’ (Ruling of Pecherskyi District Court of Kyiv City dated 30 January 2013). In its ruling dated 18 April 2013, the Court of Appeal of Kyiv City supported that opinion. However, BTA Bank resubmitted its applications; they were approved by Pecherskyi District Court of Kyiv City. This time the courts came to an opposite opinion and granted the leave for enforcement against Interfunding Facilities Limited (Ruling of 3 June 2013) and ZRL Beteligungs AG (Ruling of 12 June 2013).

The above rulings are not mandatory to other courts and obviously do not show any strong tendency in forming unified court practice. However, they are among the few court decisions which dealt with enforcement of the English judgments against shares in NCADs in Ukraine. Thus, although there is no unified court practice of enforcement of foreign judgments or arbitration awards against shares in NCADs belonging to foreign CADs and assets belonging to NCADs, I believe that the enforcement of a WFO is possible against the shares of the CADs in the Ukrainian NCADs, if the shares belong to the CAD directly. If the CAD is controlling the NCADs indirectly (through holding companies or nominees) those holding companies or nominees might be considered by Ukrainian courts as independent entities, not responsible for the debts of the CAD. In case a liquidator is appointed by an English Court over the CAD with power to collect in the CAD’s assets, and this appointment gives him the power to act on behalf of the CAD, he can use his corporate governance power (as a representative of the shareholder in the Ukrainian holding company) to initiate the convening of the shareholders meeting and pass relevant resolutions on sale of assets of that Ukrainian holding company, but not on the collection and/or sale of assets of the Ukrainian subsidiary company owned by that holding company (unless the charter documents of the subsidiary contain special provisions, which allow the corporate decisions to be passed by the company’s owner, but not the special corporate body of the subsidiary (shareholders meeting, or the special status of the subsidiary is established in the law). Normally, the shareholder meeting of the Ukrainian holding company can pass the resolution on granting a mandate to a representative of the holding company to initiate the convening of the shareholders meeting in the Ukrainian subsidiary, which than can pass resolutions on corporate matters of that subsidiary (e.g. dismissal of executive officers, liquidation of assets).

The concept of legal independence of legal entities from their shareholders in civil relations is established in Ukrainian law and strongly supported by Ukrainian courts. Thus, unless the court judgment is entered against holding companies or nominees, the enforcement in Ukraine against their shares in NCADs can be problematic. In case any person (liquidator or asset manager) is appointed by an English Court over the CAD and that person is acting on behalf of the CAD, his actions in a shareholders meeting in the NCAD would not be considered in any relation to enforcement, but as exercise of corporate rights.

III. Enforcement of WFOs against assets

Similar principles are applied to assets in Ukraine belonging to an NCAD-resident of Ukraine. The NCAD is considered as an independent owner of its assets, which is not responsible for any obligations of its shareholders. If statutory documents of the NCAD do not contain any specific provision making it responsible for the debts of its owner or shareholder and no special status is given to that NCAD by law, the judgment (I would remind that a WFO is considered as a foreign judgment) entered against the CAD would not be possible to enforce against the assets of NCAD – resident of Ukraine.

IV. Case law

There is no established court practice of enforcement of English WFOs against NCADs (its development actually started in 2012), only a few case law examples of such enforcement by the courts of Ukraine can be provided.

BTA Bank (first case). On 1 June 2012, Golosiivskyi District Court of Kyiv City granted recognition of the Order of the High Court of Justice, Queen’s Bench Division, Commercial Court (Claim No 2009, Folio 1099) dated 12 November 2009 issued upon the request of Kazakh BTA Bank (Ruling of Golosiivskyi District Court of Kyiv City dated 1 June 2012). Although, none of the defendants had a place of location or residence in Ukraine, the Court found that one of the defendants owned shares in Ukrainian company “Maks-Vell” Medical Centers LLC, and ruled on its jurisdiction over the case. On 29 November 2012, the ruling of the District Court was set aside by the Court of Appeal of Kyiv City. The Court of Appeal found that the applicant applied for recognition of the foreign court judgment, but not for leave for enforcement, however the District Court issued a ruling on recognition of the judgment that imposed seizure of assets, which obviously required enforcement (Ruling of the Court of Appeal of Kyiv City dated 29 November 2012). After the case had been returned, the District Court considered the application and issued a new ruling on recognition of the freezing order (Ruling of Golosiivskyi District Court of Kyiv City dated 5 August 2013). The District Court came to a conclusion that the Order was a foreign court judgment that did not require enforcement and needed only to be recognized in Ukraine.

BTA Bank (second case). On 5 August 2013, Golosiivskyi District Court of Kyiv City granted recognition of the Order of the High Court of Justice Queen’s Bench Division Commercial Court (Claim No 2009, Folio 2099) dated 6 August 2010 on appointment of directors of KPMG United Kingdom PLC as asset managers of the assets of a defendant in the court case upon the claim of BTA Bank. (Ruling of Golosiivskyi District Court of Kyiv City dated 5 August 2013).

VAB Bank Case. Kyiv-Svyatoshynskyi District Court of Kyiv Region also issued a ruling addressing the enforceability of an English WFO in Ukraine. Initially, the claimant had requested the District Court to declare two WFOs of the London High Court of Justice enforceable. However the claimant did not request to order any protective measures against the defendants and NCADs listed in the Order. The District Court approved the request and granted leave for enforcement of the WFO of the London High Court of Justice dated 16 January 2013 in relation to a defendant and the WFO dated 2 May 2013 in relation to 13 Ukrainian companies (Ruling of Kyiv-Svyatoshynskyi District Court of Kyiv Region dated 15 January 2014).

In both BTA Bank cases, applicants applied for and obtained a mere declaration of enforceability without actually seeking to enforce the WFO against specific assets. In VAB case, the ruling only formally granted enforcement, in fact there was only a mere declaration of enforceability. We will follow those and other similar cases to reveal whether the WFOs have any effect. As for now we can see that only few courts of Ukraine are familiar with English WFOs and their enforcement in Ukraine against NCADs was not distinguished from enforcement of foreign court judgments. It is a relatively new and developing practice.


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German Federal Supreme Court Underlines Non-Intervenistic and International Approach of German Arbitration Law

by Mathias Wittinghofer and Friso Heukamp

Herbert Smith Freehills LLP,
for Herbert Smith Freehills

In an order dated 28 January 2014 (file number III ZB 40/13), the German Federal Supreme Court (Bundesgerichtshof, the “Court”) clarified that an arbitral award can only be set aside in recognition or enforcement proceedings by a state court in “extremely exceptional cases”, i.e. if an award breaches the fundamental principles of the German legal system in a manifest way.

The Court considered this clarification was necessary because by its wording, the relevant provision of the German arbitration law, Sect. 1059 para. 2 no. 2 b) of the code of civil procedure (Zivilprozessordnung – “ZPO”), does not require such “manifest” breach of the fundamental legal principles. The wording of the prior version of the arbitration law which had been in force until 1997, did however contain this limitation. This offered some room for debate as to whether the standard for the setting aside of arbitral awards had changed in 1998 when the new arbitration law entered into force.

The Court ruled that, nevertheless, the “manifest” criterion must be applied when reviewing arbitral awards under the current German arbitration law. To explain this, the Court referred to the motives of the German legislator. According to the motives of the legislator, the scope of the control of arbitral awards was not meant to change when the current arbitration law was enacted. To the contrary, the legislator wanted to promote arbitration as an equal alternative to the state court system. Therefore, a révision au fond remained prohibited. The changes to the wording of Section 1059 were, according to the Court, for linguistic reasons only.

The Court referred in its arguments on the prohibition of the révision au fond to precedents and legislation under European law. The Court made particular reference to two rulings of the European Court of Justice (“ECJ”, judgment of 28 March 2000 – C-7/98 para. 37 and judgment of 11 May 2000, C-38/98 para. 30), which were rendered after the current German arbitration law had been enacted. In these judgments, the ECJ confirmed that a breach of law in a court’s decision has to be manifest for such decision to be set aside in a different Member State, otherwise the prohibition of the révision au fond would be bypassed. Also, the Court stated that the prohibition of the révision au fond is an important element of European legislation since it is contained in various acts of European legislation such as, for example, Art. 21 of the Rome-I Regulation, Art. 26 of the Rome-II Regulation, Article 12 of the Rome-III Regulation and Art. 34 no. 1 of the Brussels Regulation.

The Court rendered the order in respect of a domestic arbitral award. The order does however also apply to foreign awards subject to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which Germany is a signatory. This is because the order shows the general understanding of the Court of the German ordre public: in the official headnotes, the Court does not distinguish between domestic and foreign awards. Also, in the reasoning of the order, the Court, without reservation, referred to laws and decisions which deal with the enforcement of foreign court decisions and foreign arbitral awards.

With this decision, the German Federal Supreme Court has again underlined the non-intervenistic and international approach followed by German arbitration law ever since Germany enacted the UNCITRALModel Law on International Commercial Arbitration in 1998.


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In-House Counsel Take Note: ICC’s John Beechey Won’t Be Sitting You at the Children’s Table

by Michael McIlwrath

General Electric Company

Arbitration service providers often seem to handle parties, especially in-house counsel, with gentle kid gloves. A good example is any “roundtable of in-house counsel”, which is now as common at arbitration conferences as children’s tables are at weddings.

Just like at weddings, the adults occasionally wander over to check on things and ask, “did you like the arbitration? Wasn’t it good!” Then they go back to ignoring the little ones until someone starts to cry.

Not so with John Beechey. The President of the ICC Court of Arbitration wants parties to know they can come to him with any complaints about arbitration, but they won’t be babied if they do.

As reported by Mirèze Philippe last week here on Kluwer Arbitration, Beechey recently kicked off a Paris conference held to launch the ICC’s Guide for In-House Counsel and Party Representatives to Effective Management of Arbitration by directing some frank words at parties that fail to take advantage of tools available to make an arbitration more to their liking.

I was at the Paris conference and found Beechey’s candor refreshing. Since he was in Florence recently for an ICC seminar, I asked if he could repeat what he had said in front of a microphone.

The audio can be downloaded here: John Beechey on party complaints about arbitration.

He starts by directly addressing parties: “you have called our bluff; now it is our turn to call yours….”

Beechey explains that among the changes made in the 2012 revision to the ICC Rules in order to respond to user comments and to complaints about time and cost in arbitration in particular, was the introduction of a mandatory case management conference at the beginning of the proceedings. Parties may be invited to participate and, indeed, are encouraged to attend. He says that while he will always listen to anyone’s complaint, among the first questions he will now ask is whether the party concerned expressed any views at the case management conference, or even attended it.

“By all means complain, and if it’s our fault, we’ll sort it out. But if it’s something over which you had control in what you call ‘your case’, then put it right. Take ownership. It’s no good complaining about the arbitrators, or complaining about the institution, if the principle cause of your complaint is said to be an attenuated process, when you put up your hand at the outset and said this is what I wanted.”

Tough talk for sure. But this toughness shows respect for parties and the role in-house counsel can play in an arbitration.

If you are an in-house counsel with responsibility for managing arbitration anywhere (not just a case before the ICC), then I invite you to lend John your ear. It may be the most useful two and a half minutes you can spend before an arbitration gets fully underway.

If, however, you are someone organizing a conference on arbitration, then I invite you to do something else: stop sitting us in-house counsel at the children’s table.


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Get Rid of the Presiding Arbitrator?

by Duarte Gorjão Henriques

BCH Advogados

In his President’s Message (ASA Bulletin, Vol. 32, no. 2, 2014), Elliott Geisinger proposes a real challenge to the arbitration community. In a simple but rather persuasive rhetorical style, Geisinger places in confrontation Me. Paul Philibert Confus, Avocat à la Cour and Sir Reginald Muddle, QC, giving life to a debate that seems to be overlooked nowadays.

Is it really necessary to have a “presiding arbitrator”? This is the crux of the discussion.

Sir Muddle advocates that the theatre of arbitration should get rid of that character, while Me. Confus contends that fundamental principles of arbitration, like having a chairman – or chairwoman, for that matter – should be kept alive. There should always be someone neutral, in the middle, he argues.

Why not have just two party-appointed arbitrators that are bound to reach consensus between themselves, on penalty of have an “umpire” appointed, that will force them to split and reduce their fees?, Sir Muddle challenges. Why should the existence of a presiding arbitrator guarantee stronger independence and impartiality if the parties had provided for arbitrators that are independent and impartial in the first place? insists Reginald Muddle.

Get rid of that 40/30/30 fees split, plus hotel and travel expenses, and alike. Opt for a 50/50 split instead. Warn arbitrators and parties that failing to reach a consensus between the party-appointed arbitrators will imply a different percentage of fees (50% for the “Presiding Arbitrator” and 25% for each of the co-arbitrators) and threaten them with a delay penalty clause of – let’s say – 5% for each month of delay in rendering the award.

By the end of the dialogue, Me. Confus was compelled to agree that this proposal might work in practice. But would it work in theory?

This perspective is a quite interesting.

The conceptual and theoretical idea may seem to be reasonable enough. Indeed, why not have just two arbitrators appointed, mandate them to reach a consensus, and decide the case in the best interests of an expeditious, fair and equitable solution? At the end of the day, if the party-appointed arbitrators are not able to reach a consensus as to what their decision should be, the final adjudication should be referred to an umpire.

However, one might ask, are things that simple?

I can think of some practical and theoretical objections. Other solutions might also appear in this scenario.

On the one hand, in respect to practical aspects, resorting to an umpire will most likely entail the need of a full and thorough revision of the case by the appointed umpire. Time and costs will be lost. Secondly, admitting party appointed arbitrators may lead to admitting this kind of appointment in its entirety, that is, one may have to admit the appointment of real representatives of the parties. In fact, the line of impartiality and independence, sometimes still hard to draw, may be thinner and less clear than before. We might as well admit straightforward pure representatives of the parties and, therefore, dispense with either the counsels or the arbitrators.

On the other hand, this practical consideration may lead to theoretical concerns. In my opinion, the impartiality and independence of the arbitrators are corner stones of arbitration and without them we do not have arbitration, but rather another form of dispute resolution. The legal framework and the conceptual layout of arbitration may never dispense with, or even jeopardise, those fundamental principles of independence and impartiality of the arbitrators and Sir Reginald Muddle’s proposal might put those principles at risk.

Finally, there seem to be alternative solutions for this proposal. Indeed, one may think of resorting to a sole arbitrator, or having a mediation proceeding or even mandate counsels to settle the differences between the parties.

Besides all of that, one should note that this scheme is not new at all. In fact, a simple historical research will show us that this is an old mechanism in the common law arbitration setting. The English Arbitration Act 1950, the Irish Arbitration Act 1950 and the New Zealand Arbitration Act 1908 provided for the mechanism of resorting to an umpire in case of the party-appointed arbitrators were not able to reach a decision, just to mention a few historical examples. This experience was progressively abandoned in favour of a tripartite or of a single solution, as we may observe in arbitration nowadays. It would be interesting to study the reasons why this solution is not so common and why was abandoned.

Yet, in my opinion, all those objections, alternative solutions and historical observations do not detract the merits of recovering ancient traditions and solutions, if that is the way things should be put, specially if they aim a time and cost effective proceeding. Costs and time are most likely saved. Independence and impartiality concerns will always exist irrespective of the composition of the arbitral tribunal and the tools we now use to assess challenges of arbitrators will remain as much valid and effective as they are now today.

It is true that the appointment of an umpire will imply the need of another full and thorough revision of the case. However, this risk will most likely be compensated with the likelihood of having the two party-appointed arbitrators reaching a consensus on account of a different fees split.

Indeed, why not dispense with the presiding arbitrator?


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Notes on the Persistent Latin American Countries’ Attitude Towards Investment Arbitration and ICSID

by Ricardo Dalmaso Marques

Pinheiro Neto Advogados

Investment arbitration is a crucial and sensitive dispute-resolution method, notably because the treatment given to foreign investment matters may materially affect the economic and social realities of a country or region, particularly those in development. In the last decade, however, as already reported and addressed in this blog by, among many others, Vanessa Giraud and Carlos González-Bueno, countries in Latin America — a true hot-spot for foreign investment1 — have been either ignoring, denouncing or resisting the International Centre for Settlement of Investment Disputes (“ICSID”), the dispute-resolution framework for investment protection enacted under the Washington Convention of 1965.2

The most notable examples of this Latin American trend include: (i) Brazil’s refusal to ratify the ICSID Convention, purportedly for both political and economic reasons;3 (ii) Bolivia’s, Ecuador’s and Venezuela’s withdrawal from the ICSID Convention, due to alleged structural and legal problems with it;4 and (iii) Argentina’s threat to withdraw, according to a bill pending before its Congress.5 The legal problem to be addressed, therefore, is the apparent reluctance of Latin American countries to subject themselves to ICSID as an effective international investment protection forum. Accordingly, Latin American countries must determine whether avoiding ICSID is the appropriate solution, given the need for foreign investment in the region.

Although not expressly acknowledged, this dissatisfaction of certain Latin American countries clearly results from the exponential increase of ICSID arbitrations brought against these countries. These cases have arisen mostly from financial crises, as well as nationalization and expropriation initiatives.6 Brazil, however, is a different story; its decision not to adhere to ICSID seems to be more closely related to its actual advantages, considering that the country is already a major recipient of investment in Latin America and one of its largest economies.7

The facts that only Latin American countries have withdrawn from the ICSID Convention and that Brazil is one of the only world economic forces not to adhere to it are not per se indications of a bad policy. Indeed, ICSID is not the only investment protection system available, and should not be treated as such. On the other hand, as previously addressed in this blog by Mariano Tobías de Alba Uribe, UNASUR’s8 announced desire to create its own (regional) investment arbitration center to replace ICSID, in fact, seems to deserve some criticism.

An investment dispute-resolution forum that favors sovereign power and regionalism over international standards will inevitably raise questions as to its neutrality and, as a result, fall into disuse. Hence, the instability and lack of clarity concerning investment protection caused by this “regionalization” of justice is expected to decrease the amount of foreign investment in the region, with a severe impact on its social reality — which is marked by alarming rates of poverty, unemployment and illiteracy.9 This is an unfortunate truth even in Brazil, which, though not currently in a position where it needs to encourage foreign investment, perhaps won’t be able to sustain the current level of investment in the long-term.10 Latin America has, in fact, demonstrated a growing acceptance of international commercial arbitration (as reported, for instance, by Manuel A. Gómez), but that alone may not be enough.

Moreover, by isolating Latin America from the international investment standard, Latin American policymakers may undermine the enforcement of rule of law in the region, which would negatively impact the region’s economic and social development.11 Without a doubt, a rebirth of the so-called Calvo Doctrine — which, for some, has never vanished completely within the region — is not an adequate solution, given especially the existing competition over FDI with African and Asian countries (a number of them parties to ICSID and to BITs).

In brief words, such an extreme position would likely have serious repercussions on the welfare of the region by impacting (i) the countries’ receipt of foreign investment, and (ii) the development of international and domestic law. It is manifest that Latin American countries cannot afford such an important loss right now. The proper answer, instead, seems to be related to the ability of Latin America to establish a legal framework that enables it to refuse unwanted investments, and that gives preference to the needs of the host states. Latin American countries could repeal ICSID, as long as they take other relevant measures to ensure investments’ growth and stability — which unfortunately has not yet been the case.12

Besides, if thoroughly analyzed, the Latin American countries’ complaints about ICSID — or at least the ones based on scientific and logical grounds, and not on ideological components — seem not to be sustainable if an investment protection framework beneficial to both investor and State is enacted. And even if the “structural” dissatisfaction with ICSID could be considered justifiable, BIT’s options for ad hoc arbitration proceedings under the auspices of UNCITRAL or ICC Rules, for instance, are still a valuable option, along with investor-state mediation, which has demonstrated a high percentage of effective results (as reported by Muniz Maniruzzaman).

As a preferable solution, therefore, Latin American should focus on the fact that, to ensure economic and social development, these countries must enact substantive laws to protect investments, rather than “concentrating” investment justice in the region’s own hands.13 While some may view ICSID as expendable in the region, one thing is for certain: the enforcement of rule of law is not.

The author deeply thanks Fernanda Marques Dal Mas, associate at Pinheiro Neto Advogados (São Paulo, Brazil), for her kind and crucial assistance in the revision of this post.


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  1. Unit on Investment and Corporate Strategies of the Division of Production, Productivity and Management of the Economic Commission for Latin America and the Caribbean (ECLAC), Foreign Direct Investment in Latin America and the Caribbean 2012 (2013), (reporting that, in 2012, Latin America received US$ 173.361 billion in investments, an increase of 5.7% from the previous year, as opposed to a worldwide foreign direct investment decrease of 14%).
  2. While ICSID is not the only international arbitral forum available, it is certainly the most prominent option. See ICSID, ICSID Caseload – Statistics, Issue 2013-2, 7 (2013), (reporting that, as of June 30, 2013, ICSID had registered 433 cases under the ICSID Convention and Additional Facility Rules). See also Sergio Puig, Emergence and Dynamism in International Organizations: ICSID, Investor-State Arbitration, and International Investment Law. Geo. J. Int’l L. 44, 531, 597 (2013), (affirming that “time has proven the deep reach of the Convention, as well as ICSID’s status as not simply another arbitration facility”).
  3. Gilberto Giusti & Ricardo Dalmaso Marques. Dispute Resolution, in BRAZILIAN COMMERCIAL LAW – A PRACTICAL GUIDE, 271, 331 (Silvia Fazio ed., Kluwer Law International 2013) (describing that, despite the fact of having its economic growth based on a market economy supported by incoming capital flow, Brazil has not ratified the ICSID Convention, and signed fourteen (14) Bilateral Investment Treaties – BITs, but never ratified them).
  4. Ignacio Vincentelli, The Uncertain Future of ICSID in Latin America, Social Science Research Network (SSRN), 13 (February 20, 2009), (detailing this movement and reporting that some of these countries even initiated a widespread termination of BIT’s that provided for the ICSID dispute-resolution method).
  5. Argentinean Congress (March 21, 2011). See also Argentina acuerda pagar 500 mln dlr por demandas ante paneles Banco Mundial, ONU, Reuters (October 19, 2013), (outlining that, albeit Argentina has recently accepted to fulfill the payment of agreements arising from ICSID arbitrations in the amount of US$ 500 million, the Argentinean Finance Minister affirmed that the settlement was reached “under local legislation” and that such attitude illustrates a “ratification of Argentina’s position towards ICSID.”).
  6. Katia Fach Gómez, Latin America and ICSID: David versus Goliath? (November 12, 2010), Social Science Research Network (SSRN), 3, (emphasizing that, among the main criticisms made by these countries against ICSID are the alleged: (i) concerns that hostility toward ICSID might impede access to World Bank credit; (ii) pressure to hire expensive foreign law firms; (iii) lack of attention to non-commercial interests, such as health or environmental protection; (iv) arbitrator bias in favor of the investor; and, maybe more decisively, (v) lack of sensibility by the tribunals on issues relating to collective interests, such as human rights and indigenous peoples).
  7. Gilberto Giusti & Adriano Drummond C. Trindade, As arbitragens internacionais relacionadas a investimentos: a Convenção de Washington, o ICSID e a posição do Brasil, Revista de Arbitragem e Mediação 7, 45, 48 (2005) (detailing the legal, economic and political reasons for Brazil’s decision not to ratify the ICSID Convention nor the fourteen BITs previously signed).
  8. The Union of South American Nations, an intergovernmental union integrating Mercosur and the Andean Community of Nations (CAN) as part of a continuing process of South American integration, and inspired and modeled after the European Union. UNASUR’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay, and Venezuela. Panama and Mexico hold an observer status.
  9. Economic Commission for Latin America and the Caribbean (ECLAC), Social Panorama of Latin America 2012 (2013) (reporting that 167 million Latin Americans (28.8% of the region’s population) were living under the poverty line in 2012, including 66 million (11.4% of the region’s population) living in indigence).
  10. More than that, Brazil also has been playing an important role as an “exporter” of investment, and these investments will also require protection beyond “shell and holding companies”, as asserted by Jean Kalicki in discussions held at the IBA Annual Conference, 2013, in Boston. IBA panel shares arbitration tips for energy lawyers, Global Energy Review (October 14, 2013).
  11. David W. Rivkin, The Impact of International Arbitration on the Rule of Law: The 2012 Clayton Utz/University of Sydney International Arbitration Lecture, Arbitration International 29, 327, 340, (LCIA 2013) (stressing that investor-state arbitration is a “different animal” than international commercial arbitration, not only because it involves sovereign states and “public goods and money”, but also due to the fact that it has a profound impact on the development of public international and national laws; a true impact on the enforcement of rule of law).
  12. One cannot disregard that the Latin American countries could benefit from establishing a new and more balanced system of international investment, mainly in virtue of the many unfavorable BIT’s to the region signed in the past — for some, practically allowing the abuse of the first world in Latin America through the exploitation of resources by foreign companies. See Katia Fach Gómez, Latin America and ICSID: David versus Goliath? (November 12, 2010), Social Science Research Network (SSRN), 26.
  13. Jonathan C. Hamilton. A Decade of Latin American Investment Arbitration, in LATIN AMERICAN INVESTMENT TREATY ARBITRATION: THE CONTROVERSIES AND CONFLICTS, 69, 78 (Mary H. Mourra, ed., Wolters Kluwer 2008) (expressing his similar view in the sense that “(a)s that (ICSID) system confronts certain stresses, it is important to recall the complexities of the era that lacked such a system and the fact that the legal framework for investment disputes put into place over many years is not likely to be quickly deconstructed”).

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British Columbia Signals To The International Community That It Is An Enforcement-Friendly Jurisdiction

by Henri C. Alvarez

Fasken Martineau DuMoulin LLP,
for ITA

By Henri Alvarez and Alexandra Mitretodis, Fasken Martineau DuMoulin LLP

In Sociedade-de-fomento Industrial Private Limited v. Pakistan Steel Mills Corporation, decided on June 2, 2014, the Court of Appeal of British Columbia set the test in international arbitration for enforcing foreign arbitral awards by freezing assets. The decision confirms that a party with limited association to British Columbia may enforce an arbitral award by Mareva injunction without an onus to first establish that enforcement elsewhere was not possible. In considering when to grant an injunction, the court may consider the relative ease or difficulty of enforcement abroad, among other factors. Delay, inconvenience and financial loss are some of the factors that indicate difficulty in enforcement.

The Court of Appeal held that the New York Convention provides a presumption of a ‘real and substantial connection’ and explicitly permits parties to an international arbitration to enforce an award in any contracting state.

In June 2010, Sociedade-de-Fomento Industrial Private Limited (“SFI”), a company incorporated in India, obtained an arbitral award of $8, 673, 492.55 (“the Final Award”) against Pakistan Steel Mills Corporation (Private) Limited (“PSM”), a Pakistani state owned steel manufacturer, in an arbitration conducted under the arbitration rules of the ICC. Following the award, PSM did not pay SFI. SFI was unable to identify any overseas assets of PSM against which it could seek to enforce its award. SFI eventually became aware of the fact that PSM had purchased and would be importing coal of a value of $16.5 million from British Columbia.

SFI filed a petition in the BC Supreme Court for payment of the Final Award on April 21, 2011. It also applied for and obtained an ex parte Mareva injunction, preventing the use of PSM’s assets (including the coal delivered F.O.B.) or removal from British Columbia until $9,000,000 was paid into court. The Mareva Order required SFI to provide an undertaking as to any damages that PSM or a third party might suffer by reason of the Order.

On December 1, 2011, the Court recognized and enforced the Final Award. SFI sought to recover all of its costs in enforcing the Final Award. PSM argued that the Mareva injunction was wrongly obtained and SFI should bear the costs.

The BC Supreme Court considered the core principles for granting a Mareva injunction: the applicant must show a good arguable case for the underlying claim, and the granting of the injunction must on balance be just and convenient. The Court found that the limited association of either party with British Columbia and the ability of SFI to enforce its award elsewhere, in particular in Pakistan, was a material fact that should have been disclosed to obtain the Mareva injunction. The Court held that the lack of evidence that SFI had made an inquiry regarding the possibility of enforcement of the award in Pakistan and the fact that SFI did not disclose that Pakistan is a signatory to the New York Convention constituted material non-disclosure.

Accordingly, the injunction was set aside and SFI was held liable to PSM for the damages caused by the Mareva injunction. SFI appealed the ruling.

The Court of Appeal considered whether the court of first instance erred in deciding that an injunction to secure an international arbitration award ought not to have been issued where the parties had little connection to British Columbia and where the arbitration award could have been enforced in Pakistan.

The Court of Appeal confirmed that the test for the granting of a Mareva injunction is the balance of justice and convenience between the parties. Depending on the facts of the case, important factors may include the merits of the underlying claim, the risk of dissipation of the asset, the balance of convenience and the interests of third parties.

The Court of Appeal addressed the effect of the New York Convention and the enabling legislation in British Columbia and found that for jurisdictional purposes, an international arbitral award is recognised on the same basis as if it were a domestic award originating in the province. The recognition and enforcement of international arbitral awards is governed by the international commercial arbitration acts of each province, which incorporate the UNCITRAL Model Law. The enforcement of foreign awards is governed by the New York Convention. The relevant legislation in British Columbia is the Foreign Arbitral Awards Act, RSBC 1996 c 154 and the International Commercial Arbitration Act, RSBC 1996, c 233 (“ICCA”). Section 4 of the Foreign Arbitral Awards Act provides that foreign arbitral awards may be enforced in British Columbia by application to the Supreme Court of British Columbia. Section 35(1) of the ICAA, which also provides for enforcement of awards, is expressly not limited to arbitration conducted within British Columbia. Section 10 of the Court Jurisdiction and Proceedings Transfer Act, SBC 2003, c 28 (“CJPTA”) provides that a real and substantial connection is presumed to exist in a proceeding to enforce an arbitral award made outside of British Columbia.

The Court of Appeal found that the New York Convention, as implemented in British Columbia, removes jurisdictional boundaries and the “need for expansive inquiries into whether a proceeding has a real and substantial connection to British Columbia as an enforcing jurisdiction”. The statutory scheme is unambiguous in its presumption of a real and substantial connection which is not limited to final judgments and applies equally to interlocutory remedies. The Court noted that the statutory scheme implementing the New York Convention anticipated an action to enforce the award and that there were only limited grounds on which a defendant could resist recognition and enforcement under Article V of the New York Convention and Section 36 of the ICAA. Accordingly, there was no basis for finding that a real and substantial connection existed for some, but not all, purposes in pursuing a claim for enforcement.

The Court found that while the availability of enforcement proceedings in Pakistan was not an entirely irrelevant factor to the balance of convenience analysis, the court of first instance ought to have taken into account the delay that would accompany enforcement proceedings in Pakistan, as well as the considerable challenges to the enforcement of the Final Award under Pakistani law. The expert evidence presented by the parties conflicted on how long the enforcement process would take in Pakistan. One expert maintained that the estimated enforcement process would take between 12 and 18 months, while the other expressed the view that inordinate delay occurs in all Pakistani judicial proceedings. Both experts agreed that one of the defences available to PSM in Pakistan would have been a public policy defence, which has been interpreted as incorporating Islamic Law with respect to the payment of interest. The issue remains unsettled under the law of Pakistan.

The Court of Appeal concluded that in considering whether it was just and convenient to grant the injunction, the analysis ought to have taken into account the delay that would accompany enforcement proceedings in Pakistan, as well as the considerable doubt about the enforcement of that part of the award representing interest under Pakistani law. The Court of Appeal held that the injunction was properly ordered, set aside the order that SFI was liable to PSM for the damages suffered by it as a result of the injunction. The Court also awarded SFI its costs of enforcing the award as damages, which were remitted to court of first instance for assessment.

This appears to be the first case of its kind in Canada in which a court has granted a Mareva injunction in support of the enforcement of an arbitral award. This case reaffirms British Columbia’s flexible approach to the granting and upholding of Mareva injunctions, particularly in support of international arbitration.

This case clarifies the situation in British Columbia on enforcement. This is a significant decision for the international community as foreign litigants may increasingly be looking to Canadian courts to recognize and enforce foreign arbitral awards, even when the parties to the underlying arbitration may have little or no connection to Canada. Of particular note is the Court’s finding that under the British Columbia legislative scheme implementing the Convention and the British Columbia CJPTA, a real and substantial connection is presumed to exist within British Columbia in a proceeding to enforce an arbitral award made outside of British Columbia. This decision contrasts with the uncertain and difficult situation in respect of jurisdiction taken by certain US courts upon application to enforce foreign and international awards. In view of its interpretation that the Convention explicitly permits parties to an international arbitration to enforce an award in any contracting state, the Court could have reached the same decision without the support of the legislative scheme of the CJPTA.
With this decision, British Columbia has positioned itself as an enforcement-friendly jurisdiction in which the courts are prepared to uphold the spirit and purpose of the Convention.


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Effective Management of Arbitration; A Guide for In-House Counsel and Other Party Representatives

by Mirèze Philippe

Special Counsel, Secretariat of the ICC International Court of Arbitration,
for ArbitralWomen

The worldwide launch of the Guide for In-House Counsel and Other Party Representatives on Effective Management of Arbitration Guide took place on 6 June 2014 in Paris. The Guide provides a checklist for the procedural decisions that need to be made at each principal phase of an arbitration. Useful in both large and small cases, it enables in-house counsel worldwide to participate effectively in the tailor making process throughout the arbitration proceedings. The Guide was drafted by a Task Force of the ICC Commission on Arbitration & ADR (“Commission”).

John Beechey (President of the ICC International Court of Arbitration) launched the conference, noting that the ICC Rules of Arbitration (“ICC Rules”) require parties and arbitrators to conduct cases in a time and cost efficient manner. “I sometimes see letters from in-house or outside counsel, complaining of delay in the arbitral process. If we establish that our systems or procedures are at fault, we take the criticism on board and improve things. However, when users say that they own the case, we tell them: “OK, we will help you, but if it is your case, own it and make sure you take an active part.” The Guide is intended to encourage a more pro-active role on the part of users of arbitration services” said Beechey.

“In order to assist arbitration users, this Guide is specifically designed to provide them with tools for making decisions to ensure the cost effectiveness of each arbitration”, added Peter Wolrich, Former Chairman to the ICC Commission of Arbitration & ADR. He explained that the ICC Rules were drafted to enable the parties and the arbitrators to create a tailor-made procedure that is adapted to the particular needs of each case. However, too often, the parties and arbitrators do not tailor-make the procedure but either apply standardized procedures or decide procedural matters piecemeal as the case moves along. This tends to increase time and cost. This is why it is necessary to determine which procedures are cost effective, i.e. whether their benefit in terms of improving chances of success is worth the cost. For example, it is faster and cheaper to have one round of briefs rather than three. In each case it is necessary to determine whether the benefit of additional rounds is worth the cost. This is ultimately a business decision. Parties must have a good understanding of the procedural options and the pros and cons of the various options so that they can make an effective cost/benefit analysis and choose the optimum procedure for their case. The new guide provides party representatives with tools to assist them in accomplishing this important task. Wolrich walked through the guide by explaining the sections on ‘settlement considerations’ and ‘case management conference’ and the various Topic Sheets: 1. Request for Arbitration; 2. Answer and Counterclaims; 3. Multiparty Arbitration; 4. Early Determination of Issues; 5. Rounds of Written Submissions; 6. Document Production; 7. Need for Fact Witnesses; 8. Fact Witness Statements; 9. Expert Witnesses; 10. Hearing on the Merits; 11.Post-Hearing Briefs.

A panel of in-house counsel, moderated by Vera van Houtte (Vice President, ICC International Court of Arbitration) shared their experience about each of the stages defined in the Topic Sheets.

Maria Vicien-Milburn (General Counsel, UNESCO) provided an insight of how party representatives from international organisations deal with decisions related to arbitral procedural issues. International organisations are usually in the position of respondent and rarely institute arbitration, although they have the legal capacity to do so. Vicien-Milburn covered the topic sheets “answer and counterclaim” which she considered in many aspects similar to preparing a request for arbitration.

Jeffrey Robert Holt (Head of Legal Affairs, Saipem Offshore Norway) dealt with the Topic Sheet “multi-party arbitration”. Holt was of the opinion that having multi arbitrations joined together is possible, but it is something parties may wish to avoid. CEOs may be of the view that it is possible to get all involved in the various arbitrations around one table and solve the problem, but that is where the in-house counsel has a role to play; the pros and cons in the Topic Sheet are helpful.

Pierre-Jérôme Abric (Vice President, General Counsel Litigation, AREVA) added that the tailor making approach is achieved with the case management conference where parties and arbitrators must be able to determine the best timetable for the case. The process is a partnership matter between in-house and outside counsel, and parties should not let outside counsel take any direction without the input of the client.

Holt and Abric addressed the issue of experts and whether there should be any. One of the difficulties of this issue is the difference of cultures of the parties.

The early determination of issues that can dispose of all or a meaningful part of a case has been a controversial topic and the failure to consider this possibility can lead to the highest level of frustration among in-house counsel, said Michael McIlwrath (Global Chief Litigation Counsel, GE Oil & Gas). Because early disposition is one of the procedural tools that is most effective and the least used, the Guide rightly encourages parties to contemplate at the outset what issues can have a critical impact on the life of the case; for example, it often makes sense to split quantum and damages, or determine the application of key contractual provisions. With respect to the number of rounds of written submissions, McIIwrath noted that the Guide encourages parties to consider what is really necessary for their case rather than just following the usual script, which he said is a trap, even for experienced professionals. “This Guide is extremely useful not just for in-house counsel but for everyone, parties, counsel and arbitrators. There is nothing new under the sun here, as the Guide refers to concepts which have been around for a while, but it is helpful to remind all of the stakeholders about how to adapt arbitration to the needs of each case.”

Isabelle Hautot (General Counsel, Orange) described “this Guide as an important turning point in the life of arbitration”. In-house counsel feel shy and do not have the courage or knowledge to interfere. Parties should not embark in proceedings as something inevitable. The arbitration is not the final word even if the award is successfully enforced; settlement remains always possible. Parties may also decide to keep one or two fundamental issues for the arbitration and discuss other matters which may be settled or left out of the arbitration.

Van Houtte referred to the obligation under the ICC Arbitration Rules to list the issues in the terms of reference which forces the parties and the arbitrators to focus on what is really at stake. Nonetheless terms of reference often do not list the issues and arbitrators and parties miss the opportunity to verify, whether there are among the issues any which may be the subject of early determination. Van Houtte, tongue in cheek, finally asked whether it may become a professional duty or at least best practice for counsel in arbitration to refer their clients to this Guide and to suggest that they read it thoroughly before starting the arbitration?

In his closing remarks, Jean-Claude Najar (Founder & Member, Steering Committee, Corporate Counsel International Arbitration Group, CCIAG,) said that “The users’ voice is heard”. The Guide is a do-it-yourself toolkit allowing the parties to take business decisions and to participate in the shaping of the arbitration. “My plea to in-house counsel is ‘please participate’”.

The conclusions were made by Andrea Carlevaris (Secretary General, ICC International Court of Arbitration). In-house counsel were absent from the arbitration scene for a long time and nothing was done to take them into consideration for many reasons. This has changed and in-house counsel now regularly participate in conferences on arbitration, including as speakers, and have a prominent role even in the bodies of some institutions including the ICC International Court of Arbitration and the ICC Commission on Arbitration and ADR. We all welcome these developments. However, these developments are not sufficient. In order for in-house counsel to re-appropriate a system that belongs to them, appropriate tools were put in place to allow them to be involved in the relevant procedural decisions. The Guide contributes to filling this gap. “The Guide puts in-house and outside counsel on the same footing” he added. Strategy is part of the process but it is not part of this Guide. “The Guide was drafted with the ICC Rules and ICC arbitration in mind but can be used in any kind of arbitration and by all participants. It is the kind of contribution an institution like the ICC is expected to make in the interest of users” Carlevaris concluded.

Mirèze Philippe, Special Counsel, Secretariat of the ICC International Court of Arbitration, with special thanks to Dr. Helene van Lith, Secretary to the ICC Commission on Arbitration and ADR and member of the Drafting Group.


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The Jurisdiction of Indian Courts over Arbitrations Seated Outside India. An Outsider’s Perspective.

by Felipe Sperandio

Clyde & Co LLP,
for Clyde & Co.

The potential intervention of Indian courts over foreign seated arbitrations is a hot topic in international arbitration. On 28 May 2014, the Supreme Court of India (“SCI”) heated up the debate by handing down a judgment in Reliance Industries Limited & Anr v Union of India. The SCI found that Indian courts had no jurisdiction to set aside an award made in London – which is undoubtedly correct. But can this recent SCI decision be considered a development in Indian arbitration-related case law?

Facts

The disputes between Union of India and Reliance arose from two oil and gas production-sharing contracts. These contracts were governed by Indian substantive law, and provided for UNCITRAL arbitration, with the seat in London, and the arbitration agreement governed by the laws of England. Reliance commenced arbitration, and Union of India challenged the arbitrability of certain claims. On 12 September 2012, the tribunal issued a final partial award concluding that the claims put forward by Reliance were arbitrable.

Union of India started proceedings to set aside that award in the Delhi High Court, India. These proceedings were filed according to Section 34, Part I, of the Indian Arbitration and Conciliation Act 1996 (“ACA”). Section 34, in essence, provides for the application for setting aside an arbitral award.

Although the seat of the arbitration was London, the Delhi High Court accepted jurisdiction to hear the set aside proceedings. It reasoned this decision on three points: (i) the applicability of Part I of the ACA had not been excluded; (ii) English procedural law did not extend to issues of arbitrability or challenges to an award; and, (iii) since the dispute raised by Union of India carried considerations of the public policy of India, the jurisdiction of the Indian courts could not be excluded.

Reliance, in turn, lodged a special appeal in the SCI. It argued that the parties had excluded the application of Part I of the ACA and, therefore, the set aside proceedings should have been filed in the seat of the arbitration, i.e., English courts.

The SCI overturned the Delhi High Court’s decision on jurisdiction. It found that the Indian courts had no jurisdiction to hear the set aside proceedings because the arbitration agreement provided for: (i) London-seated arbitration; and (ii) English law as the law governing the arbitration agreement. According to the SCI, this “would clearly show that the parties have by express agreement excluded the applicability of Part I of the [Indian Arbitration Act] to the arbitration proceedings”.

Analysis

The question that arises in Reliance v Union of India is: do the national courts of the seat have exclusive jurisdiction to hear set aside proceedings? Although the answer seems clear, and the issue has been settled in many jurisdictions,1 it is not the case in India.

In 2002, the SCI concluded in Bhatia 2 that: “[i]n cases of international commercial arbitrations held out of India provisions of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions”. Bhatia meant that Indian courts assumed jurisdiction to set aside awards rendered in arbitrations with a foreign seat.

On 6 September 2012, the SCI amended its position in Balco,3 and decided that Part I of the ACA does not apply to foreign seated arbitrations. Indian courts, therefore, have no jurisdiction to hear set aside proceedings if the seat is outside India. However, the SCI only partially solved the issue as it determined that Balco has prospective application.

As such, both Bhatia and Balco are good law. And the jurisdiction of Indian courts over arbitral proceedings with a nexus to India is dependent upon the date on which the parties entered into the arbitration agreement:
- Arbitration agreements entered into before 6 September 2012, foreign seat: Indian courts have jurisdiction to hear proceedings to set aside an award, unless the application of Part I of the ACA had been excluded by agreement of the parties.
- Arbitration agreements entered into after 6 September 2012, foreign seat: Indian courts have no jurisdiction to entertain set aside proceedings.

In Reliance v Union of India, the parties entered into the arbitration agreement in 1994. The SCI therefore focused on the intention of the parties, and concluded that a seat in London, coupled with reference to English law as the law applicable to the arbitration agreement, evinced the parties’ intention to exclude the application of Part I of the ACA. The fact that the arbitration agreement was governed by English law was a key factor considered by the SCI to reach its conclusion.

Therefore, Reliance v Union of India set out a two-fold test in order to circumvent the Indian courts’ jurisdiction for arbitration agreements entered into prior to 6 September 2012: (i) foreign seat; and (ii) arbitration agreement governed by foreign law.

Commentary

Reliance v Union of India correctly curbed the jurisdiction of the Indian courts. However, somewhat problematically, the SCI did not clarify what would happen in the following scenarios:
- Seat in London, Indian substantive law, and no agreement with respect to the law applicable to the arbitration agreement; or
- Seat in London, Indian substantive law, and arbitration agreement governed by Indian law.

The courts of the seat of the arbitration have “supervisory” jurisdiction over an award. In other words, the courts of the seat ought to have exclusive jurisdiction to hear set aside proceedings. Moreover, the selection of London as the seat means that the arbitral proceedings will be mandatorily conducted in accordance with the English Arbitration Act (“EAA”).4 Thus an application to set aside the award must be filed before the English courts, in accordance with the grounds specified in sections 67, 68 or 69 of the EAA.5 This automatically renders Section 34 of the ACA incompatible with any arbitral proceedings seated in London.

Hence the law applicable to the arbitration agreement should be entirely irrelevant. Equally, it should not matter whether parties intend to exclude the application of the Part I of the ACA. Selection of the seat ipso facto grants exclusive jurisdiction to the courts of the seat to set aside awards.

From the perspective of a non-Indian lawyer, it is difficult to understand why the ACA, which is a national law, should cross India’s borders and govern arbitral proceedings with a foreign seat.

In Reliance v Union of India, even if the parties had agreed to (i) Indian substantive law, plus (ii) Indian law as the law of the arbitration agreement – the English courts should have retained exclusive jurisdiction to set aside the award.

This was the case in Union of India v McDonnell.6 2 Lloyd’s Rep 48. Although this decision is prior to the English Arbitration Act 1996, and the Indian Arbitration and Conciliation Act 1996, the position remains. ] The parties agreed on Indian substantive law and Indian law to govern the arbitration agreement, with a London seat. Moreover, the parties expressly agreed to arbitral proceedings conducted in accordance with the Indian Arbitration Act 1940. The English Commercial Court reasoned that, by choosing the seat of the arbitration, the parties incorporate the laws of that country to govern their arbitral proceedings. Thus the parties had chosen English law as the law to govern their arbitral proceedings, while importing from the Indian Arbitration Act 1940 only those provisions which were not inconsistent with the choice of English arbitral procedural law. For these reasons, the court concluded that any award made by the tribunal was subject to the supervisory jurisdiction of the English courts.

In addition, it should be immaterial whether the set aside proceedings are based on grounds of non-arbitrability or public policy. The nature of the challenge does not interfere with the jurisdiction of the courts of the seat to set aside an award. In Reliance v Union of India, the English courts, while deciding set aside proceedings, would have to ascertain which law governs the arbitrability of the claims. But the English courts’ jurisdiction is neither dependent on the law applicable to issues of non-arbitrability, nor to the law applicable to the arbitration agreement (if different).

In order to understand the issue fully, the SCI should not have asked:
- Did the parties agree to exclude Part I of the ACA?”

Instead, the SCI should have asked:
- Does the selection of the seat grant exclusive jurisdiction to the courts of seat to set aside an award?

In Reliance v Union of India, the SCI implied that it could have reached a different conclusion if Indian law applied to the arbitration agreement. Worryingly, this approach raises more questions than it answers.

Conclusion

In Reliance v Union of India, the position should have been that the Indian courts had no jurisdiction because London was the seat of the arbitration – and not because the parties excluded Part I of the ACA, or because the applicable law to the arbitration agreement was English.

The law applicable to the arbitration agreement governs, amongst other things, the substantive validity of the arbitration agreement itself. But this law has no influence in respect to the jurisdiction to set aside an award.

This post submits that the SCI’s test “did parties agree to exclude the application of Part I of the ACA” is improper. This means that Indian courts, as well as the courts of the seat of the arbitration, could have concurrent jurisdiction to set aside an award. This is a recipe for uncertainty and conflicting decisions. In addition, neutral decision-makers are highly desirable in international arbitration. And neutrality is seriously undermined if one party is allowed to bring the dispute back to the courts of its home jurisdiction.

Moreover, Union of India may still deploy the arbitrability and public policy defences to resist enforcement of an award in India (art. V(2)(a)(b) New York Convention).

According to this outsider’s perspective, it seems that the SCI cured the patients’ disease, but did so while prescribing the incorrect medication. Meanwhile, the ghost of the Bhatia decision – which clashes with international case law – may still haunt parties that entered into arbitration agreements executed prior to 6 September 2012, and did not expressly exclude Part I of the ACA.

All views expressed in this post are that of the author alone and do not necessarily represent the views of his institution.


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  1. See for recent examples: Brazil, 3 April 2014: First Brand do Brasil v Petroplus Sul, Apelação no. 0014578-23.2004.8.26.0100, Tribunal de Justiça de São Paulo. Mauritius, 28 March 2014: Cruz City 1 Mauritius Holdings v Arsanovia Limited, record no. 107967, Supreme Court of Mauritius.
  2. Bhatia International v Bulk Trading SA and Anr. (2002) 4 SCC 105 (“Bhatia”), the Supreme Court of India.
  3. Bharat Aluminium v Kaiser Aluminium (2012) 9 SCC 552 (“Balco”), the Supreme Court of India.
  4. Section 2(1) of the English Arbitration Act provides that the provisions of Part 1 of the Act are to apply where the seat of the arbitration is England or Wales.
  5. Schedule I of the English Arbitration Act provides for its mandatory provisions. Sections 67 and 68 apply to any arbitration with seat in England or Wales. But parties may opt out section 69.
  6. Union of India v McDonnell Douglas Corporation [1993

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