ArbWorld – Good Faith: The “LCIA Rules 2.0” Hidden Feature

by Duarte Gorjão Henriques

BCH Advogados

Being a fan of Mac as I have been for many years now, I have always enjoyed reading magazines related to those nifty computer products. Macworld is among the regular publications on my reading list. Two particular sections of it have always grabbed my attention. The first section is dedicated to “mac gems”, that is, those singular external applications to the operating system that perform specific tasks not available within that operating system. The other section is dedicated to the “hidden features” of MacOS, that is, those particular features and tools not immediately visible to the end-user but embedded in the operating system. Among other purposes, these “hidden features” allow every end-user to adapt the system to their needs, to better perform some tasks and even to solve issues that pop-up from time to time when using a computer.

On the other hand, as we all know, software programs are labelled according to their release version. That is the reason why Apple has just released a new version of its “OS” numbered MacOS X 10.10.

One may probably wonder what all this has to do with arbitration. As a matter of fact, there exists no such connection and these short introductory lines were evidently written for analogy purposes only.

Indeed, LCIA has recently approved a new set of arbitration rules. Most likely, someone else has already counted the versions and he/she is in a better position to number the current version. Although missing this important historical information, I would nevertheless be tempted to number the new set of rules as “LCIA Rules 2.0” by reference to the 1998 Rules available online at the LCIA website.

The most relevant features and tools of the “LCIA Rules 2.0” have already been thoroughly summarised, explained and commented on by others. The “source code” of the “LCIA Rules 2.0” has been opened to the arbitral community many times now. Accordingly, there is no need to further elaborate on these topics. However, one may add a word or two about a few “gems” and a “hidden feature”.

In fact, the most notorious “gem” is the “Annex” setting forth the “General Guidelines for the Parties’ Legal Representatives”. Indeed, this is a very up-to-date set of features available to arbitrations administered under the auspices of the LCIA, thus allowing the arbitral tribunal to sanction the conduct of the parties’ representatives.
Applying here the Macworld computer lexicon, I would say that the “Guidelines” and their sanctions are true “gems”. For one, the Guidelines were drafted as an “annex” and, secondly, to some extent one could say that the LCIA guidelines are a purified summary of other guidelines already available in the world of arbitration. In this sense, the “Guidelines” are an external legal plug-in to the “operating system”. At the same time, they are adapted to perform remarkable tasks within the set of rules of LCIA. Due to their outstanding character, these tools may well be seen as a precious cornerstone of the “LCIA Rules 2.0”.

Hidden Feature of “LCIA 2.0” – The Good Faith
According to the computer lexicon that I am referring to, a hidden feature is a particular tool or option that is not publicised in the manuals, advertising materials and general comments. Although unnoticed, it is available to everyone who uses the “operating system” and its placed within its native “environment”.

That is precisely the role to be played by “Good Faith” within the “LCIA Rules 2.0”.

Indeed, the “LCIA Rules 2.0” incorporate two provisions setting forth the obligation to act in arbitration according to the principles of good faith. It having been newly incorporated within the Rules, its existence has been forgotten in most recent comments and communication materials. However, the role of good faith is of extreme importance. Further, the fact that it has been foreseen in these new rules is also of extraordinary relevance.

In fact, Art. 14.5 provides that

‘… at all times the parties shall do everything necessary in good faith for the fair, efficient and expeditious conduct of the arbitration, including the Arbitral Tribunal’s discharge of its general duties.’

More impressively, Art. 32.1 provides that

‘for all matters not expressly provided in the Arbitration Agreement, the LCIA Court, the LCIA, the Registrar, the Arbitral Tribunal and each of the parties shall act at all times in good faith (…)’

This is not an unprecedented move within the world of arbitration: Art. 15 of the “Swiss Arbitration Rules”, Art. 23 of the “CEPANI Rules” and Art. 26 of the rules of the “Corte de Arbitraje de la Cámara de Comercio de Madrid” (Art. 26), contemplate a provision setting forth a general principle of good faith in arbitration. Yet, in truth, regarding the rules of arbitral institutions, these are the only provisions I have been able to find from my research.

Nonetheless and as I have said, these LCIA provisions are of extreme importance.

It is true that a universal definition of good faith is yet to be found. One of course could resort to Cicero’s thoughts: the words good faith ‘express all the honest sentiments of a good conscience, without requiring a scrupulousness which would turn selflessness into sacrifice; the law banishes from contracts ruses and clever manoeuvres, dishonest dealings, fraudulent calculations, dissimulations and perfidious simulations, and malice, which under the guise of prudence and skill, takes advantage of credulity, simplicity and ignorance’.(Marcus Tullius Cicero, “De Officiis”, 3, 17.) However, there is no express rule or written principle to invoke when presenting a definition of “good faith”.

At the same time, one may also have to be confronted with Blaise Pasqal’s paradox: ‘The truth on this side of the Pyrenees, error on the other.’

Notwithstanding this philosophical pothole and the hindrance appearing in the task of defining, good faith is undoubtedly the “salt” that tempers the interpretation and application of the law. Good faith and its corollaries are the legal means that, according to the flavoured Latin expression, allow us to apply the law “cum grano salis” (literally, “with a grain of salt”). Good faith carves the interpretation and application of the law in light of the particular circumstances of each case, by opening the door to a miscellany of values intrinsic to human nature when oriented towards the “good”. It may well be referred to as the key that “opens the contractual system to the ethics of what is just and equitable, the latter, according to CICERO’s dream, linking all men, citizens or pagans, in a universal society of boni viri, of good men”.(René-Marie Rampelberg, Repères romains pour le droit européen des contrats, L.G.D.J., Systèmes, Droit, 2005, p. 44.)

I have written elsewhere that the interpretation and application of “guidelines” carry in themselves the risk of being mathematical. The analogy with the computer binary world, filled with zeros and ones without any half unit (let alone with double and triple units) may be called upon. Yet, this vision will not be resumed here, namely in consideration of the good faith that is foreseen in the “LCIA Rules 2.0”. That is the reason why setting up general principles of good faith is so important in the context of the new rules. They will simply obliterate any risk of a binary application of rules, even though they may appear disguised as simple “guidelines”.

On the other hand, the use of good faith and its corollaries (namely, the principles of prohibition of abuse of rights, prohibition of “venire contra fact proprium” / “estoppel by representation” and the like) will allow well-known intricate issues to be resolved. That would be the case where a counsel would intervene in an on-going arbitration with the aim of raising reasonable doubts concerning the independence and impartiality of the arbitrator: the fundamental right to appoint a representative of the party would simply be barred on the basis of an abusive exercise of rights, which is a corollary of good faith.

Finally, the fact that the “LCIA Rules 2.0” now provide for the obligation to act in arbitration according to good faith, applicable to all participants in arbitration without exceptions, is of an extraordinary relevance in the light of the traditional reluctance of the common law culture to admit the importance of good faith in the application of the law.

One may recall Lord Bingham’s words in Interfoto Picture Library Ltd. v. Stiletto Visual Programmes, Ltd.:

‘English Law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness’ [such as the “estoppel” institute]. (1989 QB 433, 439, CA.)

One may also cite Lord Ackner in Walford v. Miles:

‘the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. (…) A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party.’ (Walford v. Miles, [1992] 2 A.C. 128 (H.L.) 138 (U.K.). cited by Bernardo Cremades, in “Good Faith in International Arbitration”, AM. U. INT’L L. REV., p. 774.)

Considering this tradition, these new provisions of the “LCIA Rules 2.0” are outstanding, to say the least.

Final remarks
The considerations above are consistent with a representation of good faith as an open or abstract clause that is filled in through a decision-making process. In this sense, good faith may be used in every circumstance and has the virtue of being used everywhere. Furthermore, the judge and arbitrator’s own conceptions of law, their own legal traditions and their legal background will be called upon (and will be decisive as well) in determining the use of the fact specifics of each case to fulfill that normative provision.

However and for that reason, some have spoken about good faith being the ‘terrorist of law, allowing for arbitrariness in judicial decision making.’ (Fernando De Trazegnies Granda, Desacralizando la buena fe en el derecho [Desecrating the Good Faith in Law], in 2 TRATADO DE LA BUENA FE EN EL DERECHO 19, 43, 45 (Marcos M. Córdoba ed., 2004))

That is also the reason why good faith must be used, but without abuse. It is also the reason why a high degree of attentiveness is required when resorting to such legal institution.

We may well say that in the “ArbWorld” a hidden feature of the “LCIA Rules 2.0” is now targeted as a gem, to be used and nurtured as a gem should be, but never treated in a binary fashion.


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U.S. Free Trade Agreements and Bilateral Investment Treaties: How Does Ratification Differ?

by Jonathan T. Stoel and Michael Jacobson

Hogan Lovells,
for Hogan Lovells

A lot has been written recently about the importance of Trade Promotion Authority (TPA) in the context of the ongoing Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) negotiations. TPA is the authority Congress grants to the President to enter into certain reciprocal trade agreements that Congress can approve or disapprove but cannot amend or filibuster (i.e., passing an agreement would require solely an “up or down” vote by Congress). Many observers believe that TPA is a necessary piece to the successful conclusion of either agreement—it will be difficult for negotiating parties to put their best offers forward without some assurance that Congress will not renegotiate portions of finished and signed agreements. Achieving TPA in the forthcoming “lame duck” session appears to be an uphill battle, and without TPA the path to finishing TPP and TTIP remains uncertain.

TPA is particularly important because of how the United States treats Congressional-Executive Agreements (CEAs), including comprehensive Free Trade Agreements (FTAs), under U.S. law. CEAs are treated differently than U.S. treaties, such as bilateral investment treaties (BITs), peace treaties, double taxation treaties, and others. The treatment of CEAs is also different than executive agreements, which enter into force with the President’s signature, not requiring any legislative approval. Executive agreements are much more prevalent than treaties or CEAs, with the President approving 17,300 executive agreements from 1939-2013 (including CEAs), as compared with approximately 1,100 treaties during that time period.

Customary international law and the Vienna Convention on the Law of Treaties regard each mode of international agreement as equally binding. The distinction between treaties and CEAs therefore, has solely domestic significance and, specifically, how each agreement is ratified.

Article II, Section 2 of the United States Constitution grants the President power to make treaties with the “advice and consent” of two-thirds of the Senate. Bilateral Investment Treaties (BITs) (such as the BIT concluded between Rwanda and the United States in 2008 and ratified in 2012) are treaties as defined in the Constitution. On the other hand, CEAs (e.g., the North American Free Trade Agreement (NAFTA); the recently-ratified US-Colombia, US-South Korea, and US-Panama FTAs; and TPP and TTIP) must be enacted via an implementing law, requiring majority votes from both the Senate and the House and the signature of the President.

The issue of how CEAs (and, specifically, FTAs) may be enacted has been the subject of previous judicial scrutiny. In Made in the USA Foundation v. United States, plaintiffs argued that because the NAFTA was made without the advice and consent of two-thirds of the Senate, the agreement and its implementing legislation was unconstitutional. The United States District Court for the Northern District of Alabama disagreed and held that the Foreign Commerce Clause of the U.S. Constitution, combined with the Necessary and Proper Clause and the President’s Article II foreign relations power, provide a sufficient constitutional basis for the President and the Congress to have elected to enact the agreement in this manner.

Following plaintiffs’ appeal, the U.S. Court of Appeals for the Eleventh Circuit held that the question whether an international commercial agreement such as the NAFTA is a treaty (and therefore requires the advice and consent of two-thirds of the Senate) is nonjusticiable. The Eleventh Circuit stated that “with respect to commercial agreements, we find that the Constitution’s clear assignment of authority to the political branches of the Government over our nation’s foreign affairs counsels against an intrusive role for this court in overseeing the actions of the President and Congress in this matter.” The Eleventh Circuit also pointed to the Supreme Court’s long-standing recognition of the power of both the legislative and executive branches to conclude “agreements that do not constitute treaties in the constitutional sense.” The Supreme Court subsequently denied certiorari.

The President and Congress thus have significant latitude, subject to very limited judicial oversight, to structure international agreements as either treaties or congressional-executive agreements. The legislative approval processes for CEAs (such as FTAs) and treaties (such as BITs) involve different political calculi, leading to varying probabilities of successful ratification. BITs need only be approved by the Senate, which for the last 25 years has been more supportive of free trade than the House. Notably, the most recent United States BIT (with Rwanda) was approved by the Senate through unanimous consent in September 2011. The October 2011 vote for the most recent United States FTA (with South Korea), which was far more economically and politically significant agreement than the U.S.-Rwanda BIT, included 83 Senators (or 83% of the Senate) who voted to approve the FTA, as opposed to 278 Members of the House of Representatives (or 64% of the House).

However, depending on the context of the international agreement, garnering a 67 vote supermajority of the Senate could pose a higher bar than a simple majority of both chambers of Congress. Some of the more economically significant U.S. FTAs, including the North America Free Trade Agreement in 1993 and the Dominican Republic-Central America-United States FTA in 2005, passed without a supermajority of the Senate’s vote. Some important factors include the level of Senate attention and interest surrounding any particular agreement, the country at issue, the foreign policy issues at play, and the essential economic issues relevant to a particular agreement. The balance of power of political parties, the strength of the President’s support, and the proximity in time to the next election cycle are important factors that often play a major role in the likelihood of passage of any bill, including a bill implementing an international agreement.

This question is important in light of possible vote on the TPP in 2015. The TPP, like the TTIP, is important to both U.S. strategic and economic interests, and its influence will be greater than all but a handful of past U.S. treaties and other international agreements. Indeed, the TPP and TTIP combined will include four of the five largest trading partners of the United States (the other, China, is a potential future member of the TPP).

Special thanks to David Steenburg, student at the Columbus School of Law, The Catholic University of America, for his assistance with this blog post.


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Bad faith claims in challenge proceedings and counsel’s liability for costs

by Alexandre Mazuranic

Schellenberg Wittmer,
for Schellenberg Wittmer

Has the number of bad faith challenges against arbitral awards increased? Is there a need to better control parties and their counsel, and to sanction them should they not play by the rules?

The topic was discussed earlier this year at a seminar organized in Stockholm by the Swedish Arbitration Association.1 The debate was prompted by discussions in Sweden2 on how to make court proceedings for the challenge of awards more time-and-cost efficient in view of the “increasing” number of challenges and of the high rate of dismissals (90-95%),3 as well as by recent decisions of the Svea Court of Appeal making counsel liable for costs on the basis that the challenges brought were patently unfounded.4

This issue arises in other jurisdictions, too. For instance, US courts have imposed monetary sanctions to counsel for bringing frivolous claims frustrating the enforcement of awards (see e.g. Enmon v. Prospect Capital Corp., where counsel was imposed a USD 354,000 monetary sanction).5

Although Swiss law provides for sanctions in case of bad faith conduct in proceedings before the Swiss Federal Tribunal (the court tasked with ruling on challenges of international arbitral awards in Switzerland), their application in challenges of award is unheard of, or at a minimum very, very exceptional.

It is first important to provide some background information on challenge proceedings in Switzerland. According to the most recent statistics for Switzerland,6 435 challenges were brought before the Swiss Federal Tribunal between 1989 (the date of enactment of the current arbitration law) and 2013, of which 331 only reached a decision on the merits (61 were dismissed for lack of admissibility and 43 were withdrawn). Out of these 331 decisions, only 25 set aside partially or completely the award. Hence, only 7.5% of the challenges were successful between 1989 and 2013 (the ratio appears to be similar in Sweden). In the last years, the Swiss Federal Tribunal has rendered 35 decisions on arbitration per year on average, although there are many more awards rendered in Switzerland each year.

The Swiss Federal Tribunal has on occasion defined what constitutes bad faith or reckless conduct in proceedings pending before it, although not in proceedings regarding the challenge of an award. Such behaviour may include a party not describing and motivating its case as required by law, or filing a submission after expiry of the time limit.7 Legal scholars also apply the notion of reckless behaviour to a party arguing facts that it knows are not true or making an argument that completely ignores an undisputed factual element.8

In light of the above, it is not surprising that there are no known cases of sanctions for bad-faith challenges of an award.
Nonetheless, the Swiss Federal Tribunal has weapons to deal with bad-faith behaviour that are similar to those of courts in most other jurisdictions.

First, the federal judges may order the unsuccessful party to bear the court costs. These costs are based on a scale established on the amount in dispute and capped at CHF 100,000, unless exceptional circumstances justify higher fees.9

Second, the federal judges may order the unsuccessful party to bear the other party’s costs. The costs owed to the party who won are determined on the basis of the amount in dispute and not the costs actually borne by that party, and they are capped at 1% of the amount in dispute (in case of an amount in dispute exceeding CHF 5 million).10

The upper limit of the parties’ costs may appear at first sight to be low, but one has to bear in mind that challenge proceedings in Switzerland are quick and somewhat straightforward. The entire proceedings last on average 5-6 months. There are between 1 and 2 rounds of written submissions only, after which the Swiss Federal Tribunal renders its award. There is no hearing, no full review of the facts, no oral pleading. The procedure is in writing. This, in addition to the efficiency and experience of the Swiss federal judges, is probably the main reason for the short duration of the proceedings. In contrast, challenge proceedings in other jurisdictions—like in Sweden—may last a year or more and will generally include an evidentiary hearing with witnesses (and possibly arbitrators). This naturally increases not only the duration of the proceedings, but also the costs related thereto.

Third, the Swiss Federal Tribunal may also order the unsuccessful party’s counsel—and not only the party itself—to bear the above costs.11 This factor also constitutes good ground for counsel not to frivolously challenge awards rendered in Switzerland.

Fourth, Swiss Federal Judges may also impose a fine on counsel, although the amount seems insignificant when compared to the US case referred to above (the amount is capped at CHF 2,000, CHF 5,000 in case of repetition), or they may notify the bar’s oversight committee of the lawyer’s conduct.

A fifth element—one that is often considered by counsel when determining whether to challenge an award or not—is related to the reputation of the counsel. The Swiss Federal Tribunal has a sophisticated understanding of arbitration and renders good decisions (with a handful of questionable decisions which usually generate great debate within the arbitration community). Counsel experienced in arbitration will therefore think twice before filing a challenge against an award and will probably file it only when they are convinced that there is some chance of success (which, considering the success rate, is not often). This may also explain why bad faith conduct is not that common in challenge proceedings in Switzerland.

In conclusion, although there are no statistics regarding what one may consider a bad faith challenge of an award, it would appear that most of the challenges in Switzerland do not fall in that category, or to the very least, have not been considered as such by the Swiss Federal Tribunal, which has rarely, if ever, ordered any sanction. Should there be, however, a change in parties’ conduct (or that of their counsel), the Swiss Federal Tribunal is well equipped to deal with this situation.

As a final word, it worthwhile noting that although the sanctions described above are not governed by the Swiss arbitration law (i.e. Chapter 12 of the Swiss Private International Law Act), the current revision process of the Swiss Arbitration law has no intention to modify or reinforce the sanctions currently available, thus implicitly acknowledging that the solutions in place are deemed to be sufficient.


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  1. Seminar of the Swedish Arbitration Association organised in Stockholm on 13 May 2014.
  2. Earlier this year, the Swedish government formed a special committee to consider whether a revision of the Swedish Arbitration Act was required.
  3. Between 1 January 2004 and 31 May 2014, 191 challenges of awards were brought before the Swedish Courts of Appeal.
  4. Decisions of the Svea Court of Appeal in cases No T 6147-10 dated 28 March 2013 and No T 6123-12 dated 22 April 2013.
  5. Enmon v. Prospect Capital Corp., 675 F.3d 138, 149(2nd Cir. 2012).
  6. Statistical data provided by the Swiss Federal Tribunal in its yearly Rapport de gestion, published at www.bger.ch; Felix Dasser, Challenges of Swiss arbitral awards – Selected statistical data as of 2013, 27 April 2014, published on http://www.arbitration-ch.org/pages/en/asa/news-&-projects/details/974.challenges-of-swiss-arbitral-awards-%E2%80%93-selected-statistical-data-as-of-2013.html.
  7. Decision of the Swiss Federal Tribunal dated 4 February 2010 in the matter 2C_744/2009; decision of the Swiss Federal Tribunal dated 10 July 2007 in the matter 1B_116/2007.
  8. Yves Donzallaz, Loi sur le Tribunal fédéral, Commentaire, Berne 2008, para. 484.
  9. Article 65(5) of the Swiss Law on the Federal Tribunal (RS 173.110).
  10. Article 68 of the Swiss Law on the Federal Tribunal (RS 173.110) and Article 8 of the Regulation on the tariff of judicial fees of the Federal Court (RS 173.110.210.1).
  11. This is provided for under Articles 66(3) and 68(4) of the Swiss Law on the Federal Tribunal (RS 173.110).

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Reflections on HKIAC’s Revised Model Arbitration Clause and Its Impact on Chinese Practice

by Arthur Dong

AnJie Law Firm

The Hong Kong International Arbitration Centre (“HKIAC”) has recently revised its Model Arbitration Clause to include a choice of law provision.

“Any dispute, controversy, difference or claim arising out of or relating to this contract, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered by the Hong Kong International Arbitration Centre (HKIAC) under the HKIAC Administered Arbitration Rules in force when the Notice of Arbitration is submitted.

The law of this arbitration clause shall be … (Hong Kong law).
The seat of arbitration shall be …(Hong Kong).
The number of arbitrators shall be … (one or three). The arbitration proceedings shall be conducted in …(insert language).”

It’s understood that this change is aimed at advancing the efficiency and to avoid unnecessary twists and turns of arbitration proceedings. From the perspective of a Chinese practitioner, this addition is a highly sophisticated development.

In arbitration, there are two areas where different governing law may apply, 1) the disputes on the merits of the case, and 2) the disputes on the validity of the arbitration agreement. Parties usually identify the governing law of the contract in their arbitration clauses, but it is common that the parties fail to choose the law, which governs the validity of the arbitration clause. In such a case, any uncertainty about the interpretation of the arbitration agreement may result in a dispute on which law should govern its validity. Under the Chinese practice of judicial review, parties, especially the Chinese party may bring challenges to the validity of the arbitration agreement utilizing one or all of the following procedures: 1) a separate judicial assistance procedure called Application to Confirm the Validity of the Arbitration Agreement; 2) the application to set aside the arbitral award; and 3) the application of non-enforcement of the arbitral award. In some circumstance, the Chinese party may also bring a lawsuit in a Chinese court directly on the assumption that the arbitration agreement is invalid based on Chinese law. The foreign parties may object to the Court’s jurisdiction before the first hearing of the case in the first instance. All of these procedures are time consuming, emotionally frustrating and costly in terms of money and energy all of which is potentially avoidable by expressly choosing the governing law of the arbitration clause.

This example is not merely theoretical. For example, in a case before the China Supreme People’s Court (“SPC”) submitted by Jiangsu High Court seeking for instruction. (Docket number: Min Si Ta Zi No. 1 [2006], Appellate: Zhangjiagang Gang Xi Electronics Ltd., a Chinese company; Appellee: Brose International GmbH, a German company.) The two parties reached an arbitration clause which reads:

“if any dispute arises from this contract, parties shall first resolve the dispute through friendly conciliation. If parties cannot resolve in the dispute within 60 days, any party could initiate the arbitration proceeding under ICC rules. The arbitration shall take place in Switzerland. The English version of this contract shall be submitted to the arbitrators, with the arbitration proceedings conducted in English. This arbitration shall have three arbitrators. Each party could name one arbitrator while the arbitration commission names the presiding arbitrator. The arbitration award shall be final and binding on both parties. The losing party shall bear the cost of arbitration”.

Under the Chinese Arbitration Act, an arbitration clause is valid only if three elements have been satisfied, an arbitration clause should have 1) statement of parties’ intention to arbitrate; 2) the subject matter of arbitration; and 3) designation of a valid arbitration commission. However, the arbitration laws in other countries may not be as rigid.

In this case, the trial court of the first instance ruled that the Arbitration clause is independent from the main contract; its validity is not dependent upon the effectiveness of the main contract. So the arbitration clause has its own governing law, which shall not be based on the applicable law of the main contract. According to Paragraph 1(1) of Article 5 of the New York Convention, in reviewing the validity of an arbitration clause, the law which the parties expressly agreed upon shall apply. In absence of such agreement, but if the arbitration seat has been chosen, the law of the seat shall apply.

However, the appellate court, Jiangsu Higher People’s Court held that Chinese law shall be the governing law of the clause based on two reasons. First, parties have an express choice on the applicable law of the main contract, which shall also govern the validity of the arbitration clause. Second, the main contract in this case is Sino-foreign Joint Venture Contract, which shall be mandatorily governed by Chinese Contract Law as required by Paragraph 2 of Article 126 of Chinese Contract Law which states “The Sino-foreign Joint Venture Contract, Sino-foreign Cooperative Enterprise Contract and Contract for Sino-foreign Cooperation in Exploring and Developing Natural Resources within the territory of the People’s Republic of China, the laws of the People’s Republic of China shall apply.”

After looking into the case, the SPC outlined the legal framework for determining the validity of an arbitration clause if the parties did not agree on the governing law of the arbitration clause:

“1) If the parties have agreed on the governing law of the arbitration clause, the agreed governing law shall apply. 2) If the parties did not agree on the governing law of arbitration clause, but choose the place of arbitration, the law of the place of arbitration shall apply. 3) Only if the parties failed to choose the governing law for the arbitration clause and failed to name the place of arbitration, PRC law shall apply.”

Eventually the SPC determined that the parties chose the place of arbitration to be Switzerland. Therefore, the court applied the law of Switzerland, ultimately upholding the validity of the arbitration clause.

To provide a guiding principle for choosing proper law during foreign-related civil activities, the Law of the People’s Republic of China on Application of Laws to Foreign Related Civil Relations was enacted by Chinese legislature and came into force on April 1st, 2011. Article 18 of this law is specially crafted to address the issue of how to determine the governing law of an arbitration agreement:

“Parties concerned may agree upon the laws applicable to an arbitration agreement. Where the parties have made no such choice, laws of the domicile of the arbitration institution, or laws of the place of arbitration shall apply.”

Although there is no case applying the above-mentioned rules to date, this approach is widely recognized by the international arbitration practice, for example, the approach taken by the Singapore High Court in FirstLink Investments Corp Ltd v. GT Payment Pte Ltd and other [2014] SGHCR 12. The Court in Firstlink Investments held that in the absence of a selection of the law governing the arbitration clause, a court will apply the law of the seat of the arbitration as governing the agreement to arbitrate.

To provide an overall solution to this typical issue, Article 14 of the Judicial Interpretation of the Law on Application of Laws to Foreign Related Civil Relations promulgated by the SPC, which took effect on January 7th, 2013, further clarifies certain special circumstances silent in the Law:

“Where the parties concerned do not select the law applicable to a foreign-related arbitration agreement and do not stipulate the arbitration institution or the place of arbitration or the stipulation is unclear, the people’s court may apply the laws of the People’s Republic of China to judge the effectiveness of the arbitration agreement.”

In practice, the choice of law governing the validity of an arbitration clause is a topic confusing to many clients. Quite often, the argument on the choice of law between parties after disputes arise resembles a web spun in opposing directions. Adding to a client’s frustration is the difficulty in discerning the difference between the choice of substantive law and choice of governing law of arbitration agreement. This nuance, however, is crucial as it has the potential to determine the fate of the arbitration clause. Thus, HKIAC’s newly revised Model Clause draws users’ attention to this issue and reminds them to choose the law governing their arbitration clause. By proactively deciding the law governing the arbitration agreement, parties can eliminate uncertainty and increase the chance of their arbitration clause being upheld.


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The Consolidation Arbitrator – An Arbitrator Too Far?

by Elizabeth Kantor

Herbert Smith Freehills LLP,
for Herbert Smith Freehills

Whilst many institutional rules now contain provisions which expressly address the complex issue of consolidation, the recently revised rules of the International Centre for Dispute Resolution (the “ICDR”), the international arm of the American Arbitration Association (the “AAA”), are the first to have introduced the novel concept of the “consolidation arbitrator”. Under the ICDR Rules, rather than granting the power to consider and ultimately order consolidation to either the institution itself or a tribunal which has already been appointed in one of the existing arbitrations, a separate, specifically-appointed consolidation arbitrator is appointed for the task.

Whilst this innovation seeks to address a number of procedural complexities associated with the issue of consolidation, this post also examines some of the potential difficulties and disadvantages which might arise in practice.

Under Article 8 of the ICDR rules, a party can request the Administrator of the ICDR to appoint a consolidation arbitrator, who has the power to consolidate two or more arbitrations into a single arbitration. Consolidation may be ordered when (i) the parties have expressly agreed to consolidation (ii) all the claims are made under the same arbitration agreement or (iii) all the claims are made under more than one arbitration agreement, the arbitrations involve the same parties, the disputes in the arbitrations arise in the same legal relationship and the consolidation arbitrator finds the arbitration agreements to be compatible.

The consolidation arbitrator is afforded broad powers. In particular, he or she has the power to stay any or all of the pre-existing arbitrations which are subject to potential consolidation. Further, when arbitrations are consolidated, whilst the default position is that they shall be consolidated into the arbitration that commenced first, the consolidation arbitrator has the discretion to decide otherwise. Therefore, theoretically, the consolidation arbitrator could decide to appoint an entirely new tribunal. Relevant circumstances which can be taken into account include the applicable law, whether one or more arbitrators have been appointed in more than one of the arbitrations, the progress already made in the arbitrations, whether the arbitrations raise common issues of law and/or facts, and whether the consolidation of the arbitrations would serve the interests of justice.

The introduction of a consolidation arbitrator ensures that the decision-making function relating to what is a complex and difficult issue is performed by an independent and appropriately-qualified third party. It therefore avoids the potential conflict of interest posed by vesting such a power in an arbitrator who has already been appointed, and it also divorces what is a substantive decision-making function from the administrative division of the institution.

However, it is possible to identify a number of potential draw-backs of this mechanism.

First of all, it appears from the rules that a consolidation arbitrator can be appointed even when both parties agree to consolidate the proceedings (upon the request of a party). In such circumstances, it may be that the appointment of a consolidation arbitrator is a mere formality, to assist with the practical implementation of the agreement to consolidate. However, this is not clear from the ICDR Rules. Rather, it seems that a consolidation arbitrator would still have the power to consider the relevant circumstances and decide not to consolidate the proceedings. If so, in circumstances where the parties have reached agreement and there is no procedural or substantive “dispute” as to the way forward, there is a question as to whether the consolidation arbitrator would have the jurisdiction to take such a decision. Is it a sufficient basis for jurisdiction that the parties have agreed to implement the ICDR Rules? It is arguable that the jurisdiction of the consolidation arbitrator is derived solely in relation to a dispute concerning the issue of consolidation. In the absence of such a dispute, there is a question as to whether the jurisdictional basis for such an appointment would be open to challenge, presumably before the consolidation arbitrator (under the principle of kompetenz-kompetenz) or in the courts of the seat. In practice however, if the parties are agreed to consolidation, they could agree to amend the arbitration agreement so as to provide for consolidation without appointment of a consolidation arbitrator, disapplying Article 8. It would be slightly unfortunate if, the parties having agreed to the ICDR Rules, they then find themselves re-opening the arbitration agreements before their disputes are resolved.

It is also unclear what the status of the consolidation arbitrator’s pronouncement is. Article 8 refers to a “decision” but arguably the consolidation arbitrator issues an award. It finally resolves the only issue of substance between the parties put before the consolidation arbitrator, and it is intended to be final and binding. However, if it is an award, it could be challenged in accordance with the laws of the seat and presumably, could be recognized and enforced under the New York Convention. If so, is the “award” of a consolidation arbitrator more valuable than a consolidation “order” from an existing tribunal – which cannot be challenged (but equally cannot be enforced)?

Lastly, there is the issue of cost. Issues of consolidation can be extremely complex, particularly where there are multiple parties and multiple agreements to be taken into consideration. Whilst it is important that the consolidation arbitrator has the power to conduct as thorough an investigation as possible in order to reach a considered decision (and the ICDR Rules provide for this by listing a number of factors to be taken into consideration), there will no doubt be an additional cost associated with such a process. Parties will have to pay the fees of an additional arbitrator alongside the costs of that arbitrator’s consultation (which could involve additional time spent by the tribunals already established), which could include a detailed investigation of relevant facts and law, potentially involving an element of duplication, as some aspects may have already been pleaded before an existing tribunal. This process may also take considerable time, slowing down the progress of the arbitration(s).

Whilst the ICDR’s provision for a consolidation arbitrator may be an advantage for some parties, particularly in complex multi-party and multi-contract scenarios, this must also be weighed against its potential for causing a disproportionate increase in costs, even in circumstances where the parties may largely agree on the way forward.

The views expressed are those of the author.


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Interpreting Investment Treaties

by Roberto Castro de Figueiredo

Tauil & Chequer in association with Mayer Brown LLP

One of the recurrent controversial issues in the investment arbitration practice relates to the application of the general rule of treaty interpretation of the Vienna Convention on the Law of Treaties in the interpretation of the provisions of the ICSID Convention and of investment treaties in general.

Thomas Wälde in one of his last writings pointed out that “[t]ribunals often do not practise what they preach; reference to the Vienna Rules is now mandatory, but such reference does not mean the Rules are taken and applied seriously” and “it is difficult to find a tribunal which formally and properly applied the Vienna Rules step by step” (Interpreting Investment Treaties: Experiences and Examples, in International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer, Oxford University Press, 2009, at 730 and 746). Michael Reisman and Mahnoush Arsanjani note as well that the “provisions [of the Vienna Convention] have become something of a clause de style in international judgments and arbitral awards: whether routinely and briefly referred to or solemnly reproduced verbatim, they are not always systematically applied” (Interpreting Treaties for the Benefit of Third Parties: The “Salvors Doctrine” and the Use of Legislative History in Investment Treaties, 104 AJIL 597 (2010), at 598-599).

The misapplication of the general rule of treaty interpretation was also heavily criticized by Jan Paulsson in his dissenting opinion given in the case of Hrvatska Elektroprivreda d.d. v. Slovenia, in which Paulsson accused the tribunal of relying on a “commercial logic” in disregard of the general rule of treaty interpretation:

“As far as I can discern, the majority’s Decision proceeds in ignorance of this fundamental and much-discussed constraint on the freedom of international judges and arbitrators to interpret treaties. […]. They seem to ignore that they are allowed to refer only to the context of the terms of the Treaty, i.e. the internal consistency of the text as one whole. This fundamental error, it seems, has freed the majority to impose its vision of commercial reasonableness on the entire history of Krsko NPP. This is not what States submit themselves to when concluding a Treaty. The majority’s vision of commercial logic leads them to all manner of reading between the lines of the Treaty and of various more or less related, more or less contemporaneous, and more or less superseded documents. […].” (Dissenting Opinion to the Decision on the Treaty Interpretation Issue of June 12, 2009, at para. 44)

In most cases, the misapplication of the Vienna Convention is related to a misunderstanding of the method established by the general rule of treaty interpretation, in which each element plays a relevant role as a source of the parties’ intention.

Article 31(1) of the Vienna Convention provides that “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” This is the so-called textual approach, according to which treaty interpretation should be primarily based on the actual terms employed in the treaty as the main source of the parties’ intention, which must be assumed to have been employed in their ordinary meaning. The term “context” does not mean that a treaty may be interpreted in accordance with its historical or political context, or the circumstances surrounding its conclusion, but refers to the context of the terms ― not of the treaty ― in order to ensure a consistent interpretation of the treaty as a whole. In addition, the reference to the object and purpose is not an autonomous source of the parties’ intention and may not be used to override the text of the treaty. Its use is a second step and contingent upon the ordinary meaning of the terms.

The proper application of the general rule of treaty interpretation is not something theoretical and deprived of practical effects. In the context of the ICSID Convention, one could argue that a decision that asserts or denies the jurisdiction of the Centre over a dispute based on a misapplication of the general rule of treaty interpretation is subject to annulment for manifest excess of power of the tribunal. One could also argue that the decision is subject to annulment on grounds of manifest disregard of the law if the tribunal misapplies the general rule of treaty interpretation in construing the provisions of an investment treaty in deciding the merits of the dispute.

It should be noted that the Vienna Convention is not formally applicable as an international treaty to the ICSID Convention. First, not all Contracting States of the ICSID Convention are parties to the Vienna Convention. Secondly, the ICSID Convention was concluded on March 18, 1965, and entered into force on October 14, 1966; the Vienna Convention was concluded on May 23, 1969, and entered into force on January 27, 1980. This does not mean, however, that the rules of the Vienna Convention are not applicable to the ICSID Convention. Pursuant to Article 4 of the Vienna Convention, “[w]ithout prejudice to the application of any rules set forth in the present Convention to which treaties would be subject under international law independently of the Convention, the Convention applies only to treaties which are concluded by States after the entry into force of the present Convention with regard to such States.”

The rationale behind the first sentence of Article 4 of the Vienna Convention lies in the idea that several provisions of the Vienna Convention are the outcome of the codification of the rules on the law of treaties existing in customary international law by the International Law Commission (“ILC”). After several years of study, the ILC concluded the final version of its Draft Articles on the Law of Treaties in 1966, which served as the basis for the discussions at the United Nations Conference on the Law of Treaties held in 1968 and 1969 in Vienna.

However, not all provisions of the Vienna Convention are the product of the codification of the existing customary international law, but are included in the category of progressive development of international law. The Vienna Convention, on the other hand, does not indicate which rules are the product of codification or of progressive development, nor do the Draft Articles on the Law of Treaties. When the Draft Articles on the Law of Treaties were submitted by the ILC, it was stated that “[t]he Commission’s work on the law of treaties constitutes both codification and progressive development of international law in the sense in which those concepts are defined in Article 15 of the Commission’s Statute, and, as was the case with several previous drafts, it is not practicable to determine into which category each provision falls” (Yearbook of the International Law Commission, 1966, vol. II, at 177).

As regards the rules pertaining to treaty interpretation, it is well settled that Article 31(1) of the Vienna Convention, which states the general rule of treaty interpretation, reflected the existing customary international law. On several occasions the International Court of Justice (“ICJ”) recognized that the general rule of treaty interpretation of the Vienna Convention is the product of the codification of the existing customary international law on the law of treaties. For instance, in the Arbitral Award of 31 July 1989 case, the ICJ observed that the principles of treaty interpretation “are reflected in Articles 31 and 32 of the Vienna Convention on the Law of Treaties, which may in many respects be considered as a codification of existing customary international law on the point” (Judgment of November 12, 1991, ICJ Reports 53 (1991), at 70). In the Territorial Dispute case, the general rule of treaty interpretation was applied to a treaty concluded in 1955 ― before the conclusion of the ICSID Convention ― on the basis that it reflected the existing customary international law on the rules of treaty interpretation (see Judgment of February 3, 1994, ICJ Reports 6 (1994), at 21-22).

Accordingly, an ICSID tribunal or ad hoc committee may not rely on the fact that not all Contracting States of the ICSID Convention are parties to the Vienna Convention and that the ICSID Convention predates the Vienna Convention in order to avoid the application of the general rule of treaty interpretation. Being the existing customary international law at the time that the ICSID Convention was concluded and entered into force, the general rule of treaty interpretation of the Vienna Convention is as mandatory as any rule of a treaty to which the Contracting States of the ICSID Convention consented to be bound.


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What Can We Infer from the Ascendi Case?

by José Miguel Júdice

PLMJ – Sociedade de Advogados, RL

By José Miguel Júdice and Luís Castilho, PLMJ – Sociedade de Advogados

Three years after the entry into force of the Portuguese Tax Arbitration Regime, the European Court of Justice (“the Court”) has, in the Ascendi Case (Case 377/13), finally issued a groundbreaking decision regarding the long standing question of whether the Tax Arbitral Court (the “CAAD”) is a true “jurisdictional body” for the purposes of the preliminary ruling mechanism.

Despite being directly established in the preamble of the Portuguese Tax Arbitration Regime that the Tax Arbitration Court could present preliminary rulings before the ECJ – within the context of an arbitral tax proceedings – the real matter to be clarified was whether the ECJ would consider itself competent to issue those rulings. That decision relied on whether the Tax Arbitral Court could be considered as a “jurisdictional body” within the meaning of Article 267 TFEU.

In Ascendi, following a request for a preliminary ruling on the interpretation of Articles 4, 7 and 10(a) of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital brought on by the Portuguese Public Arbitration Centre, the ECJ, as a preliminary matter, established that arbitration tribunals dealing with tax issues should be considered a court or tribunal of a Member State for the purposes of Article 267 TFEU.

The decision was not unforeseen. In fact, it was long time anticipated given the special condition held by the Tax Arbitration Court as well as the existence of previous ECJ case law upholding the possibility of arbitral courts from member states presenting preliminary rulings (in cases such as Doris Salzmann). Ultimately, it was the apparent intense similarity between any regular domestic Court and the Tax Arbitral Court that led the ECJ to conclude that the later was a real “jurisdictional body”.

In light of the pending case law, the factors that the ECJ took into account when undertaking the assessment were namely, whether the body is established by law, whether it is permanent, whether its jurisdiction is compulsory, whether its procedure is inter partes, whether it is independent and whether it applies rules of law.

The Tax Arbitral Court was deemed to meet all those factors in Ascendi, and thus qualified as a “jurisdictional body” for the purposes of the preliminary reference procedure. This decision was the ultimate clarification of an issue that has been unlocked since the Portuguese Tax Arbitration Regime first came out.

Concerning the legal origin of the Tax Arbitration Court, the Court took notice that arbitral tribunals are included in the list of national courts by Article 209 of the Constitution of the Portuguese Republic.

As for the permanent character required, the Court found that even though the composition of arbitral tribunals dealing with taxation is ephemeral and its activity ends once a final ruling has been issued, the Tax Arbitration Court, as an element of the judicial system, meets the necessary requirements to be considered of a permanent nature.

The special condition of the Tax Arbitration Court is particularly visible concerning the compulsory jurisdiction requirement. In contrast to contractual arbitration, where the contracting parties are under no obligation, either in law or in fact, of commending their dispute resolution to arbitration, in tax arbitration if the private entity so wishes the Tax Authority is not allowed to refuse the arbitration and therefore is neither involved in the decision to opt for arbitration nor required to intervene of their own accord in the proceedings before the arbitrator. In other words, its establishment is not subject to a prior agreement between the parties as to the submission of the dispute to arbitration.

As for the requirement of inter partes procedure before the arbitral tribunals dealing with taxation, the Court considered that such requirement was also fully met in Ascendi, since pursuant to Articles 16 and 28 of Decree-Law No 10/2011 the arbitration proceeding is conducted with respect to the principles of equality between parties and the guarantee of adversarial process. Additionally, in accordance with Article 2(2) of the aforementioned Decree-law and as stated by the Court in Ascendi, the Tax Arbitral Court follows criteria of strict legality, being, in fact, demanded to adjudicate on the basis of statutory law. Furthermore, the recourse to equity is utterly prohibited under the Tax Arbitration Regime.

Concerning the independence of the Tax Arbitral Court, the Court noted that, according to the Portuguese Tax Arbitral Regime, the arbitrators comprising the established Tax Arbitration Court are appointed by an independent body – Ethics Board of the Centre for Administrative Arbitration – from a list of potential candidates drawn up by that institution. Besides, according to the above mentioned Decree-Law, arbitrators must respect the principles of impartiality and independence, as well the impediment to the exercise of the function of arbitrator and the existence of any personal or professional relationship between the arbitrator and one of the parties to the dispute.

Finally, the binding character of the decisions issued by the Tax Arbitral Court, especially towards the Tax and Customs Authority, was another strong hint in favour of the affirmation of this Court as a real “jurisdictional body”. The ECJ found to be quiet clear that pursuant to Article 1 of the Decree-Law, the arbitration tribunals dealing with tax matters give binding judgments of a jurisdictional nature.

Even though Portuguese tax scholars have been unanimously sustaining for a long time that the CAAD constitutes a ‘tribunal’ within the meaning of Article 267 TFEU, the recent decision of the Court has the virtue of both erasing any doubts that might still endure regarding the jurisdictional nature of the tax arbitral tribunals and, at the same time, reinforcing the legitimacy of CAAD within the Portuguese jurisdictional system.

There are however some logistic setbacks. The fact is that arbitration has historically been designed to be a speedy and efficient alternative to dispute resolution implemented through the judicial system. Hence, suspending the domestic proceedings in order to wait for the ECJ to issue a ruling on a given matter may turn arbitration in a more costly and time-consuming recourse. This matter is further aggravated by the fact that the Portuguese Tax Arbitration Regime establishes a maximum mandatory deadline of one year for the final decision to be issued (initial deadline of six month, extendable for an additional six), which may very well be impossible to meet if the Tax Arbitration Court presents a preliminary ruling before the ECJ. It is still highly uncertain among the Portuguese scholars which legal outcome will result from the breach of the maximum mandatory deadline. It simply never happened.

It is probably unlikely that the groundbreaking decision in the Ascendi Case will be extended to other types of arbitral tribunals, mostly since the ECJ’s decision relied primarily in the fact that contrary to contractual arbitration, where the contracting parties are under no obligation, either in law or in fact, of commending their dispute resolution to arbitration, the tax arbitration – at least the Portuguese Tax Arbitration – is not subject to a prior agreement between the parties as to the submission of the dispute to arbitration, it derives directly from a legal statute that was subscribed by the Portuguese Tax Authority. One can even argue that ECJ’s decision in the Ascendi Case has also served the unintended purpose of ruling out any possible chance that other types of arbitral courts will ever be able to resort to the preliminary ruling mechanism.

Lastly, there is one last implication certainly worth mentioning concerning the Ascendi decision. In fact, Portuguese scholars have long wondered whether the decisions issued by the Tax Arbitral Court – found to be in contradiction with a ECJ decision – would be subject to revision by a Portuguese Administrative Court. The decision issued in Ascendi was thus determinant to cease this quarrel (which was recently successfully sustained for the first time before Portuguese Supreme Administrative Court). Truth be told, if the ECJ is indeed competent to issue preliminary rulings brought to it by a Tax Arbitral Court, it is only reasonable to sustain that its final decision should be subject to revision if found to be inconsistent with a decision of the ECJ on EU-law related issues.


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Admitting illegally obtained evidence in CAS proceedings – Swiss Federal Supreme Court Shows Match-Fixing the Red Card

by Georg von Segesser

Schellenberg Wittmer,
for Schellenberg Wittmer

By Georg von Segesser / Elisabeth Leimbacher / Katherine Bell, Schellenberg Wittmer Ltd.

In two almost identical German language decisions dated 27 March 2014 (Decisions 4A_362/2013 and 4A_448/2013) the Swiss Federal Supreme Court (“Supreme Court”) considered that the reliance on an illegally obtained video recording in a CAS award does not violate public policy (these decisions are also summarized in the related ITA Arbitration Reports).

This post takes a closer look at the assessment of admissibility of illegally obtained evidence in sport arbitration. Such an assessment is generally undertaken by balancing the interest in finding the truth against the legal interests which were harmed when the evidence was obtained.

Both cases relate to a match-fixing scandal uncovered in the Ukraine in 2008. The football teams FC Karpaty and FC Metalist played against each other. FC Metalist won 4:0, whereas one goal was an own goal scored by FC Karpaty player A. who also received a red card in the further course of the match.

After rumors of match-fixing, the president of FC Karpaty launched an internal investigation and summoned A. to his office. A. revealed that X., the sport director of FC Metalist had called him on the night before the match and offered him money to lose the game. A. then called all key members of the team and together they decided to accept the offer. The next day a car appeared outside A.’s hotel and he was handed USD 110’000 in cash to be distributed among the players (the senior players received USD 10’000, the junior players USD 9’000 and the substitute players USD 1’000 each).

This conversation between the president of FC Karpaty and A. was secretly videotaped without A.’s knowledge.

In 2013, a CAS panel upheld a decision of the Ukrainian Football Federation’s Appeal Committee which relied on the above mentioned videotape and had imposed penalties on all persons involved in the match-fixing, including fines of USD 10’000 in addition to a 5-year long professional bans for A. and X.

A. and X. challenged the CAS award before the Swiss Federal Supreme Court on the ground that the CAS award was in violation of public policy on the account of the reliance on the illegally obtained video recording.

An award is contrary to public policy pursuant to art. 190 para. 2(e) PILA if it violates a fundamental principle of substantive or procedural law. The inadmissibility of illegally obtained evidence is indeed a recognized principle in Swiss procedural law. It is an important aspect of the right to a fair trial as stipulated in art. 29 para. 1 of the Federal Constitution and art. 6 no. 1 ECHR. In Swiss domestic law, it can be found in art. 152 para. 2 of the Swiss Civil Procedure Code (CP) and in art. 141 of the Swiss Code of Criminal Procedure. The underlying rationale is that “legality must not be enforced by way of illegality”.

However, the admissibility of illegally obtained evidence is not ruled out in any event. There are situations which may warrant an exception. According to art. 152 para. 2 CP, “illegally obtained evidence shall be considered only if there is an overriding interest in finding the truth”. Domestic courts may admit such evidence if they consider that the interest of pursuing the truth overrides the legal interests harmed by the illicit obtaining of the evidence.

The Supreme Court in the present case confirmed that, just as in civil litigation, there is no strict rule excluding illegally obtained evidence in arbitral proceedings. Instead, the arbitral tribunal too must balance the interest of pursuing the truth against the violation of rights that the procurement of the evidence caused.

In this case, the Supreme Court found that the CAS had correctly weighed these two elements for each piece of evidence presented before it and concluded that the arguments brought forward by the petitioners were not conclusive of a violation of the Swiss procedural public policy.

Because it does not have authority to do so, the Supreme Court did not remark on how exactly the CAS weighed the interests i.e. which interests were taken into account and which criteria was used for weighing them against each other. However, the Supreme Court’s considerations allow for a deduction of certain elements which might have been relevant by the CAS.

Hereinafter we will examine the two sides of the balance and apply the criteria to determine the interests to the present case.

On one hand we have the “pursuit of the truth“. The law does not provide any further instructions on how to undertake this honorable quest. Therefore, it is left to the arbitrators’ wide discretion to decide how important the establishment of the truth is in a particular case. Based on the Supreme Court’s decision, one can imagine that the following consideration might have been taken into account by the CAS in the decision-making process:

1) The amount in dispute and the penalties at stake can contribute to the determination of the importance of finding the truth. The higher the amount in dispute, the more is at stake and the more important the pursuit of the truth. In the present case the imposed fine was only of the amount of USD 10’000. However, taking into account the 5 year professional ban leads to an increase in the amount in dispute due to the missed earning opportunity.

2) Arbitrators may also take into account whether the interested party has evidentiary difficulties i.e. whether the evidence in question is the only and crucial piece of evidence for the party carrying the burden of proof with regard to their claim. In this case, the Court considered that the CAS had made an individual and thorough assessment which even led to certain other illegally obtained pieces of evidence being dismissed. However it is not stated why these other pieces of evidence were dismissed. The arbitrators might have reached a different conclusion if there had been other pieces of (legally obtained) evidence which were just as conclusive as the illegally obtained video recording.

3) Furthermore, in the context of sport the fight against corruption is vital. There is a big public interest to uncover corruption in connection with the highest national football leagues.

On the other hand we have the “legally protected interests” of the party in question. Here it depends on the rank of the affected interest and the intensity of the impairment.

1) Evidence which was obtained in violation of a person’s physical or mental integrity i.e. by using force or uttering threats is generally inadmissible. However if “only” a person’s property was affected i.e. if evidence was stolen, such evidence is often deemed admissible. The weighing of interests is especially difficult if a person’s right to privacy has been violated. In this case, the CAS made sure that A.’s videotaped confession had not been made under duress or undue pressure.

2) Arbitrators may also take into account whether or not the affected party displays an interest in defending its legally protected interests. First, the Court noted that A. and X. themselves relied on the video for their defense and that they did not demand that the video be declared inadmissible. Secondly, the Supreme Court further observed that during the arbitration, A. and X. had been fully entitled to contest the authenticity and/or materiality of the videotape. Their right to be heard was not violated at any stage. However A. and X. waited two years to oppose the admissibility of the videotape, which was considered to be too late.

A criterion which arbitrators must not use for its assessment is whether the illegally obtained evidence was obtained by the other party itself or a third party. Such circumstances do not have an influence on the pursuit of truth or the legally protected interests. Equally irrelevant to ascertain a violation of procedural public policy according to the Supreme Court were the arguments that A. subsequently withdrew its confession and that the Ukrainian prosecutor stopped its investigation on that case.

This case brings to mind the Adamu award rendered in 2012 where the CAS panel relied on a secretly taped video showing a member of the FIFA executive committee accepting money for his vote regarding the 2018 FIFA World Cup (see the interesting article by Dr. Gurovitts/T.Livschitz/D. Frenkel). Some of its key findings are also relevant here and relate to:

- The applicable rule of evidence to ascertain the admissibility of illicitly obtained evidence in CAS proceedings (see §§ 81-82 of the Adamu award) (in the case discussed above the Supreme Court didn’t really touch on this interesting topic);

- The violation of Swiss procedural public policy and the elements to be taken into consideration: in this case the CAS considered that “the use of the Recordings in a disciplinary context did not lead to an “intolerable contradiction with the sentiment of justice” and is not “incompatible with the values recognized in a State governed by the rule of law” (see § 130 of the Adamu award);

- The consideration of public interest: the CAS considered that there was a significant public interest to reveal corruption practices relating to such an important sport event as a FIFA World Cup (see § 101 of the Adamu award).

The latter point shows that compared to criminal or civil proceedings, in sport arbitration, where the public interest of fighting bribery and match-fixing is acute, arbitrators might be more inclined to favor fair play in sports over foul play in obtaining evidence.


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Was the Bar Set Too High to Sustain RICO Jurisdiction? More on the Conproca vs. Pemex Case.

by Cecilia Flores

Haynes and Boone LLP

In a recent decision, the United States Court of Appeals for the Second Circuit considered Pemex’s allegations insufficient to sustain RICO jurisdiction in the Conproca vs. Pemex case. This prompts out a number of interrogations:

Was the bar set too high for Pemex to sustain RICO Jurisdiction?

Was the underlying reason of the Court’s decision to uphold the award?

Is this an example of the US courts’ pro-arbitration policy?

Does this kind of decisions encourage the parties to look for enforcement of awards before the US courts?

Does it trigger forum shopping for the enforcement of awards?

Pemex is a Mexican public entity dealing with the oil and gas industry. Conproca is a Mexican corporation owned by SK Engineering & Construction (Korean) and Siemens (German). Pemex and Conproca executed public works contracts to modernize and expand a refinery in Nuevo León, Mexico.

Under the relevant contracts, Pemex should pay Conproca for work orders required by unexpected events. In fact, Conproca submitted to Pemex several claims for cost overruns related to the unexpected problems at the project. For the payment of such claims, Pemex entered into several additional agreements with Conproca extending construction deadlines and approving claims for cost overruns and expenses.

Disputes arose in connection with the project and Conproca commenced arbitration by filing a claim with the ICC. The arbitral tribunal issued an award on liability, ruling in favor of Conproca on a majority of its claims and rejected the majority of Pemex’s counterclaims; later on, the arbitral tribunal issued its award on quantum.

Conproca filed before the United States District Court for the Southern District of New York (Stanton, J.) a petition to confirm the award on liability, prior to the issuance award on quantum in the arbitration, to avoid possible forfeiture of its right to seek confirmation. Once the award on quantum was issued, Conproca amended petition to confirm.

Pemex then filed an appeal before the United States Court of Appeals for the Second Circuit. Pemex amongst others that Conpoca had violated the RICO Act for bribing Pemex officials to approve overrun and expense payments in the course of an oil refinery rehabilitation project.

Pemex brought three main claims: (i) violations of RICO; (ii) conspiracy to violate RICO; and (iii) common-law fraud. In support of its claims, Pemex alleged a variety of conduct related to seven specific invoices Conproca submitted to Pemex, including bribes allegedly paid to unidentified individuals at Pemex and business consultants; the entry by Pemex into a contract with Conproca in violation of Mexican law; and the failure of Pemex’s Technical Committee and counsel to follow Pemex’s own internal procedures. Pemex also assented that ongoing proceedings might unearth information regarding cost overruns and bribes that may provide a basis for them to plead additional domestic contacts.

Conproca considered the District Court’s dismissal of Pemex’s extraterritorial RICO claims was clearly correct and sustained that Pemex’s insurmountable problem is that it sought to apply U.S. statutes to a dispute primarily involving foreign actors and foreign acts. Conproca based its arguments on the following: (i) RICO does not apply extraterritorially; (ii) Pemex’s amended complaint provides for an extraterritorial scheme; (iii) the use by Pemex of a United States bank account does not make a its extraterritorial scheme domestic; and (iv) Pemex failed its attempt to escape Morrison and Norex. Moreover, Conproca alleged that Pemex’s Amended Complaint failed adequately to allege RICO elements: (i) predicate acts of wire or honest services fraud; (ii) a continuous and related pattern of predicate acts; (iii) RICO conspiracy; (iv) a plausible, non-speculative chain of direct causation, as Pemex did not adequately plead a direct causal connection between its injury and acts of racketeering.

Therefore the Court of Appeals had to decide whether the District Court correctly dismissed Pemex’s RICO claims because they allege an impermissibly extraterritorial foreign conspiracy against a foreign victim conducted by foreign defendants participating in foreign enterprises.

By ruling dated July 16, 2014, the Court of Appeals dismissed Pemex’s complaint by considering its allegations insufficient to sustain RICO jurisdiction, under the following basis:

- In a recent decision in European Community v. RJR Nabisco, Inc.,(F.3d. -, 2014 WL 1613878 (2d Cir. April 23, 2014)), the Court of Appeals held that: “the extraterritorial application of RICO [is] coextensive with the extraterritorial application of the relevant predicate statutes.” It also held that wire fraud cannot serve as such an extraterritorial predicate. Here, because Pemex relied exclusively on the wire fraud statute in pleading predicate acts, the Court of Appeals considered that it had failed to state a claim sufficient to support extraterritorial application of RICO Act.

- To the extent Pemex relied on several allegations of domestic activity to support its RICO claim, these, too, were considered insufficient by the Court of Appeals: “[S]imply alleging that some domestic conduct occurred cannot support a claim of domestic application.” (Norex Petroleum Ltd. v. Access Indus., Inc., 631 F.3d 29, 32–33 (2d Cir. 2010))

- The scheme alleged by Pemex possesses three minimal contacts with the United States: (i) the financing was obtained there; (ii) the invoices were sent to the bank for payment; and (iii) the bank issued payment. Absent from the pleadings are any allegations that the scheme was directed from or to the United States. The activities involved in the alleged scheme–falsifying the invoices, the bribes, the approval of the false invoices–took place outside of the United States.

- In the supplemental briefing Pemex asserted that ongoing proceedings might unearth information regarding cost overruns and bribes that may provide a basis for them to plead additional domestic contacts. However, Pemex did not adduct any information that would demonstrably alter the substance of its complaint. See In re Am. Exp. Co. S’holder Litig. (39 F.3d 395, 402 (2d Cir. 1994), holding that “leave to amend may be denied if the amendment would be futile”); see also Pac. Inv. Mgmt. Co. LLC v. Mayer Brown LLP (603 F.3d 144, 160 (2d Cir. 2010), “Plaintiffs do not disclose to us those recently discovered facts and there is therefore no basis for suggesting, much less concluding, that plaintiffs could amend their claims . . . in a way that would make them viable.”).

Hence, the US Court of Appeals for the Second Circuit dismissed Pemex’s complaint alleging that Conproca had violated the RICO Act, supposedly by bribing Pemex officials to approve overrun and expense payments in the course of an oil refinery rehabilitation project.


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The Pemex case: the Ghost of Chromalloy Past?

by Lorraine Brennan

JAMS Arbitration, Mediation, and ADR Services,
for ArbitralWomen

By Lorraine M. Brennan, Esq 1

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

The international arbitration community sat up and took notice when a recent decision issued by Judge Alvin K. Hellerstein from the Southern District of New York in the Pemex 2 case ordered that an arbitration award that had been set aside by the Mexican courts could be enforced in the United States. The case was particularly noteworthy because there is only one other reported case in the United States—Chromalloy 3 from 1996—which ordered the same result, albeit for different legal reasons.

In most cases, awards that have been set aside at the seat of the arbitration are typically not enforced in other countries pursuant to Article V(1)(e) of the New York Convention. In Chromalloy, the award had been set aside in Egypt, and the U.S. court used Article VII and not Article V of the New York Convention to conclude that it must enforce the vacated Egyptian award because to decide otherwise would violate clear U.S. public policy in favor of enforcement of binding arbitration clauses. While Chromalloy was widely discussed, it was not followed here in the U.S., and several subsequent cases specifically rejected its reasoning.

Now, some 17 years after the Chromalloy decision we have the Pemex case. While the Court in Pemex did not rely on the Article VII 4 analysis from Chromalloy (the Pemex matter was governed by the Panama and not the New York Convention and there is no equivalent Article VII in the Panama Convention), it did remark that Chromalloy remains alive. It examined two significant cases, discussed below, that stated that Courts should hesitate to defer to a judgment of nullification which conflicts with fundamental notions of fairness. And that principle is precisely what the Court in Pemex relied upon—the fact that the decision of the Mexican Court annulling the Pemex award was so fundamentally unfair that it should not be allowed to stand.

The factual and procedural background of the Pemex case is lengthy and contains many twists and turns, and readers can review the Court’s 32 page decision (filed 8/27/13) for more detail. In brief, a panel of arbitrators in Mexico City issued an ICC arbitration award worth approximately $400 million USD in favor of the Petitioner, COMMISA, a subsidiary of KBR, Inc., a U.S. construction company. COMMISA obtained a judgment confirming the award in the Southern District of New York. Pemex appealed, and filed litigation proceedings in the Mexican courts to nullify the award. Pemex was successful in getting the award annulled in the Mexican Courts. In a 486 page decision by the Eleventh Collegiate Court (an appellate Court), the case was remanded to the lower court to issue a judgment in favor of Pemex. Thus the Mexican Courts considered the Pemex award a nullity.

Simply put, the Mexican Court held that arbitrators were not competent to hear and decide cases brought against the sovereign or an instrumentality of the sovereign, and that the proper recourse of an aggrieved commercial party would be in the Mexican district court for administrative matters. What made this ruling particularly noteworthy (and egregious in the eyes of the U.S. Court) is that the Mexican Court based its decision in part on a statute that was not in existence at the time the parties entered into their contract. The end result was that COMMISA was left without the apparent ability to obtain a hearing on the merits of its case.

Back in the U.S., the Second Circuit remanded the case to Judge Hellerstein to address the effect of the nullification in Mexico on the Award. Judge Hellerstein reviewed two significant Circuit Court cases in his decision—Baker Marine 5, and TermoRio v. Electranta 6, which noted that there may be circumstances where an arbitration award should be confirmed despite a nullification at the seat of arbitration. The TermoRio Court observed that there is a “narrow public policy gloss on Article V(1)(e) of the Convention and that a foreign judgment is unenforceable as against public policy to the extent that it is repugnant to fundamental notions of what is decent and just in the United States” or, stated another way, if the judgment “violated any basic notions of justice to which we subscribe” then it need not be followed. The TermoRio Court cited Chromalloy, which noted that “a decision by this Court to recognize the decision of the Egyptian Court would violate clear U.S. public policy in favor of binding arbitration clauses.”

Judge Hellerstein concluded that under the standard announced in TermoRio, the decision vacating the award in Mexico violated “basic notions of justice” and that deference was therefore not required. The Court found it particularly compelling that when COMMISA initiated arbitration at the end of 2004 it had every reason to believe that its dispute with Pemex could be arbitrated, and that retroactive application of laws and the unfairness associated with such application was at the center of the dispute before it. Moreover, the unfairness was exacerbated by the fact that that the Mexican Court’s decision left COMMISA without a remedy as, by the time the Mexican Court’s opinion was issued, the governing statute of limitations, only 45 days, had run out.

Judge Hellerstein was clear in noting that in deciding to enforce the vacated award the Court was neither deciding nor reviewing Mexican law. Rather it was basing its decision on the application to events that occurred before the law’s adoption. Under these circumstances, the Court found that the decision of the Mexican Court violated basic notions of justice, and therefore it declined to give deference to its decision.

While the court in Pemex did not rely on the specific reasoning in Chromalloy, it did remark that Chromalloy remains alive. It seems unlikely that this case will open the floodgates in the U.S. to enforcement of awards that have been set aside abroad. The facts in this case distinguish it from many of its predecessors. Nevertheless, it would be difficult to fathom how the court could or should have reached a different result under these circumstances. And it also gives a nod to a case that many thought had been dismissed as an outlier, and reminds us that parties remain captive to the courts at the seat of arbitration when it comes to nullification of international arbitration awards. Fortunately, the language of international arbitration conventions provides parties with a solution for tough cases such as this one. Auspiciously for the integrity of the international arbitration system, as of this writing (August 2014) Pemex has lost its attempt to annul the $500 million US award in the courts of Mexico.

An earlier version of this article was originally published by LAW.COM and is reprinted with their permission.


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  1. Lorraine M. Brennan is a full-time arbitrator and mediator at JAMS, specializing in international and domestic dispute resolution. Her bio can be found at www.jamsadr.com. Based in the New York office, Ms. Brennan was the Managing Director of JAMS International for three years and worked at the ICC International Court of Arbitration as well as the CPR Institute in New York City. She is a litigator by training and clerked in the SDNY. She has been an adjunct at Cornell Law School, Georgetown Law Center and Shantou University Law School in Guangdong, China. The views expressed in this piece are her own and not those of JAMS.
  2. Corporación Mexicana de Matenimiento Integral, S. de R.L. de C.V. v. Pemex-Exploración y Producción, No. 10 Civ. 206 (AKH), 2013 WL 4517225 (S.D.N.Y. Aug. 23, 2013).
  3. In Re Chromalloy Aeroservices and the Arab Republic of Egypt, 939 F. Supp. 906 (D.C. Cir. 1996).
  4. The governing Convention in the Pemex case is the Inter-American Convention on International Commercial Arbitration (1975) (the Panama Convention), but its Article 5 provisions are substantially identical to those of the New York Convention.
  5. Baker Marine (Nig.) Ltd. v. Chevron (Nig.) Ltd., 191 F. 3d 194 (2d Cir. 1999).
  6. TermoRio S.A.E.S.P. v. Electranta S.P, 487 F. 3d 928 (D.C. Cir. 2007).

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