The Rise of Russia’s Far East Is Likely to Prompt Changes in Arbitration Geography

by Olga Boltenko

Arbitral Clerk to Neil Kaplan CBE QC SBS

Introduction and background

Vladivostok is often perceived as the ‘capital’ of Russia’s Far East. It is also often portrayed, however, as Moscow’s backward colonial outpost, with few cars on the streets and where the supermarkets’ half-empty shelves offer nothing but Bulgarian pickles and stale bread. This perception is misguided.

Russia’s Far East encompasses 36% of Russia’s entire territory: that is, 6.2 million square kilometres, or about 8,700 times the size of Singapore or 5,600 times that of Hong Kong. The region produces over 60% of Russia’s gold, 90% of its diamonds, 65% of its fish products, 30% of its timber, and an increasing share of Russia’s oil and gas. The region is fortunate to enjoy proximity to the resource-hungry Asia-Pacific economies, where it has a ready market for its products. Vladivostok is about 6,437 kilometres from Moscow but just 1,335 kilometres from Beijing and 1,062 from Tokyo. It shares a 3,600 kilometre frontier with China, while it is loosely linked to Moscow through the Trans-Siberian Railway, on which transport tariffs are high but the quality of service is low. The region is naturally gravitating towards Asia, and this is driving an increasing number of large-scale commercial operations in the region. Given this level of trade and investment activity, disputes involving Russia’s Far East are inevitable.

In addition, Russia’s Far East is strategically situated in the north Pacific at the intersection of the interests of several major powers. This has generated a number of border delimitation disputes of major political sensitivity. These include Russia’s long-running territorial dispute with Japan over four South Kuril islands, now exacerbated by Japanese sanctions, and Russia’s dispute with China over several islands on the Amur and Ussuri rivers.

Implications for dispute resolution

Despite its significant presence in the Asia-Pacific – including in terms of disputes – little attention is paid to the region’s arbitration laws and to how its numerous disputes are being resolved. There are many reasons for such neglect. The region’s resource wealth and its proximity to the Asian export markets have traditionally been superseded by the fact that the region was previously locked into a colonial relationship with Moscow. Until recently, Russia’s Far East relied on investment policies generated by Russia’s federal treasury. It functioned under constraints imposed by Moscow to meet Russia’s national economic and geopolitical goals. With Russia’s shift towards Asian markets, now accelerated by sanctions, however, this is about to change.

In 2009, presidents Dmitry Medvedev and Hu Jintao signed an agreement to link the development of Manchuria to that of Russia’s Far Eastern provinces. The agreement foresees large-scale cross-border investment projects, such as mineral resource extraction.

In December 2013, Russia’s President Putin announced that the Government was contemplating the establishment of a special economic zone in Russia’s Far East. He said:

“I propose setting up a network of special advanced economic development zones in the Far East and East Siberia, offering preferential terms for setting up manufacturing and processing productions aimed, among other things, at export markets.”

On 18 August 2014, the Government passed a decree by virtue of which Vladivostok and its surroundings would become a Russian special economic zone. The zone was created within the framework of Russia’s Federal Law on Special Economic Zones. The zone is scheduled to commence operations on 1 January 2016. Potential investors will be granted tax exemptions and will benefit from reduced administrative barriers to the pursuit of their activities within the zone’s borders. Vladivostok is likely to permit foreigners to obtain visas on arrival (whereas they must currently obtain visas at least one month before the date of travel). A simplified customs regime is being introduced. Many other benefits are also anticipated.

At the time of writing, Russia’s Ministry of Foreign Affairs has listed on its website no less than 23 foreign investment projects in the Primorsky Region of Russia’s Far East. These projects include construction of LNG plants, oil and gas processing facilities, large-scale agricultural projects, casinos and tourist resorts.

Disputes are an inevitable side effect of economic development. While most Russian-Asian commercial disputes have traditionally been resolved through negotiation and mediation, and often in local courts, larger disputes have often been resolved through arbitration administered by the Arbitration Institute of the Stockholm Chamber of Commerce or in other European arbitration centres. This trend appears to be changing. For disputes emanating from Russia’s Far East, Stockholm seems like a remote and foreign forum, plagued by sanctions and associated uncertainty and suspicion.

Arbitrating those disputes in Russia and in particular in the International Commercial Arbitration Court in Moscow enjoyed some success. This option has become less popular, however, because Russia’s legal environment is perceived as unstable. In May 2015, Russia’s government submitted to the State Duma a new set of laws aimed at amending Russia’s arbitration legislation. A lengthy document envisages amendments to the Codes of Arbitral Procedure, Civil Procedure and Criminal Procedure, as well as to the Federal Law on International Commercial Arbitration. The proposed amendments are vast. They include (inter alia) redefining what is arbitrable in Russia, clarifying the courts’ supervisory role, and introducing criminal liability for arbitrators for “improper” decisions. The new amendments attempt to render ad hoc arbitration clauses in Russia unenforceable, much as in China. If adopted, the amendments are likely to enter into force on 1 September 2015.

The remaining option is to arbitrate Russian Far East disputes in Asia. The China International Economic and Trade Arbitration Commission is currently administering a number of Russia-related disputes. The Hong Kong International Arbitration Centre has registered a number of Russian-Asian disputes; a number of other disputes have found their way to the Singapore International Arbitration Centre.

Prompted by the opening up of Russia’s Far East, Asian arbitration centres are likely to experience an influx of disputes emanating from that region.


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The ICSID Recent Decision on Greek PSI: Can Sovereign Bonds Be Protected as Investments?

by Epameinondas Stylopoulos

Stylopoulos & Associates

A ruling issued on the 9th April 2015 by the International Centre for Settlement of Investment Disputes (ICSID) rejected a case brought by a Slovak bank and its shareholders against the 2012 PSI bond ‘haircut’ in Greece via the activation of Collective Action Clauses (CACs) (the award is available here).

Poštová banka (a Slovakian bank) and one of its shareholders (Istrokapital SE) filed an international arbitration claim against Greece for the Private Sector Involvement Program (PSI), invoking the claim that Greece adopted measures in breach of international treaties, depriving the value of their investments in Greek bonds back in 2012.

Concerning the factual background of the case, it is important to highlight that due to the global financial crisis of 2008, Greece experienced a major economic downturn. Among the obligations of the Greek Government were five series of Greek Government Bonds, held at various times by Poštová banka. These bonds were subject to the 2012 haircut together with the implementation of the Greek Bondholder act1 that the Greek government was obliged to pass in order to adopt the sovereign debt restructuring. Accordingly, the claimants argue that under the Greece-Slovakia BIT they are entitled to compensation for their losses.

The main issue at stake was whether the shares held by Istrokapital in Postova bank on one side and the acquisition of bonds by Postova bank on the other side were considered protected investments under the Greece-Slovakia BIT. If the answer was affirmative, then the said Court would have jurisdiction to further address the compensation claim itself.

Firstly, in order to analyse the question whether Istrocapital’s shares in Postova bank can be protected and compensated as an investment, the court implemented the general doctrine of commercial law in all jurisdictions, namely that a company is an independent and separate legal entity, distinguished from its shareholders, having its own assets, rights and obligations. Therefore, the fact that Postova bank held Greek bonds and made an investment in Greece does not automatically render the shares held by Istrocapital eligible to be characterized as an investment. The only owner of the Greek bonds is Postova bank. Accordingly, Istrocapital’s claim was rejected a priori for reasons of jurisdiction.

Secondly, the tribunal clarified the matter of Postova bank’s bond acquisition in the light of the Greece-Slovakia BIT and the ICSID Convention. According to art. 1 of the Greece-Slovakia BIT “investment means every kind of asset and in particular, though not exclusively includes: ….c) loans, claims to money or to any performance under contract having a financial value and the list is non-exclusive.

One must then determine whether the bonds acquired by Postova bank can fall within the definition of the term “investment”. It is very important to underline that each BIT gives a different definition on the term “investment’’ and one cannot give broadly or arbitrarily another meaning to the word, in order to fall within the treaty’s protection.

In this case, the tribunal analysed the difference between loans and bonds: the latter are held generally by anonymous groups of creditors and are subject to several alterations of their value and are connected in this case with sovereign debt. It concluded that while the article expressly protects debentures, it does not protect sovereign debt, an obvious omission that was considered of high importance by the court and led to the conclusion that Postova bank’s bonds cannot be protected under the Treaty as investments. Neither can Istrocapital’s shares, as analysed above. After this admission, the tribunal noted that the implementation of the ICSID Convention rules in this case was essentially unnecessary and the remarks expressed did not add anything crucial to the ruling.

Summing up, this decision substantially strengthens the PSI agreement in the international legal system, especially after the Decision no 1116-1117/2014 (21.03.2014) of the Greek Council of State that confirmed the legitimacy of the PSI in the internal and European legal system. In the near future, a decision on the PSI will be issued from the perspective of the European Convention of Human Rights, an issue that will reawaken the conflict between private sector investors, the public sector and each country’s citizens on the legitimacy of the measures implemented in the context of the European financial crisis.


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  1. L. 4050/12 (PSI Law): Inserted retroactive collective action clauses on Greek bonds, forcing holdouts to participate in the debt swap offer. In other words, the particular Law forced (despite the voluntary nature of the involvement) the private sector to “sacrifice” the value of their bonds in order to facilitate the public debt restructuring.

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The Evolution of Arbitration in the Arab World

by Cherine Foty

Lerins Jobard Chemla Avocats,
for ArbitralWomen

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 law firm.

Arbitration in the Arab World is a hot topic these days. Over the past few decades the Arab World has become a region at the forefront of international arbitration expansion. With increasing numbers of commercial actors coming out of the Arab World and with regional arbitration centers being established in many Arab states, large numbers of international arbitration cases are now linked to the Arab World.

The increased use of arbitration in the Arab World has often been attributed to foreign investment and the presence of foreign business in the region. However, many scholars and practitioners have failed properly to contextualize arbitration’s strongly rooted presence in the Arab World.

In fact, arbitration, or “tahkeem – تحكيم ” in Arabic, is deeply rooted in Arab and Muslim history. It was the method of dispute resolution preferred by the Prophet Mohammed, who favored mediation and the finding of a just result over strong argumentative skills. Modern Islamic Law also encourages the arbitration and mediation of disputes through direct settlement or conciliation via third-party intervention, with the aim of reaching a compromise between the parties in private proceedings.

Such justifications, including the confidentiality of proceedings, the use of a neutral third party arbiter of disputes, and the finding of a balanced, equitable solution between the parties, certainly sound quite familiar, as they are often the same arguments used to promote arbitration in other jurisdictions. It is certainly not surprising then that Arab states were some of the earliest states to ratify the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1959 (Egypt, Syria, Morocco) and many other Arab states followed suit, so much so that today only four Arab states are not signatories (Iraq, Libya, Yemen, Sudan).

Despite this history, the application of modern international arbitration in the Arab World has not proceeded in an entirely positive manner. International arbitration was initially perceived negatively by many Arab states which viewed arbitration proceedings as unfairly biased towards colonial powers and their companies. In the 1950’s, a series of early arbitration cases involving oil concessions reinforced the notion that international arbitration was unfair and existed solely as a means to allow Western actors to avoid the application of Arab national laws.

One of the early cases, Petroleum Development Ltd. v. The Ruler of Abu Dhabi (1952), arbitrated by the British arbitrator Lord Asquith, served to illustrate the manner in which such proceedings were cloaked in an inherent power differential and substantive bias. In that case, Lord Asquith dismissed the application of Abu Dhabi law as “primitive,” “a purely discretionary justice” for which it would be “fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments.” Instead, he applied principles rooted in the “good sense and common practice of civilized nations”: that is, of course, English Law principles.

Other international arbitration cases of the 1950’s and 1960’s similarly held that Qatari and Saudi Law among others, did not contain “any principles which would be sufficient to interpret” the contracts at hand and therefore would be insufficient to apply to the arbitration of the disputes. These cases and their decisions to sideline clearly applicable national Arab law in favor of Western legal principles served to bolster Arab suspicion and cast a long shadow on international commercial arbitration, lasting into the 60’s and 70’s.

However, as the benefits of international arbitration began to touch not only Western actors, but Arab states and commercial entities, the trend began to reverse itself, continuing into the present day. Beginning in the 1970’s, Arab states began to receive sizeable awards in international arbitrations and Arab commercial actors began initiating arbitration as claimants, utilizing arbitration as a tool for their benefit. This resulted in a more nuanced role of Arab actors in the international arbitration context, as both Arab State respondents and Arab commercial claimants came onto the scene.

It was during this period that important regional treaties for the enforcement of arbitral awards were concluded in the Arab World, and many Arab states signed several bilateral investment treaties with other states around the world. In addition, many Arab states began adopting national legislation in favor of arbitration, often times based on UNCITRAL Model Law or on the 1981 French Law of Arbitration.

In 1979, the first regional arbitration center was created in the Arab World: the Cairo Regional Center for Commercial Arbitration (“CRCICA”), which was followed in the 1990’s by a large number of additional regional centers, currently handling hundreds of cases.

In addition, a number of multilateral investment treaties have been concluded between Arab nations, most notably the Agreement on the Promotion, Protection and Guarantee of Investments of the Organisation of Islamic Cooperation (“OIC”), which provides that investors of one of its 57 member states will receive certain protections when making investments in another signatory state.

An arbitral tribunal in Hesham T. M. Al Warraq v. Republic of Indonesia, analyzed Articles 16 and 17 of the OIC Agreement to determine whether it had jurisdiction over a dispute submitted to ad hoc arbitration under the UNCITRAL Rules.It held that in the context of modern investment treaty arbitration, the language of Article 17 of the OIC Agreement should be interpreted in the same manner as similar clauses in bilateral investment treaties: that is, as an open offer to arbitrate disputes, made by member states at the time of ratification, which could be accepted by investors at any point in time without an additional express agreement to arbitrate.

This interpretation was hotly contested by the government of Indonesia which argued that the member states not only did not contemplate such an interpretation at the time of drafting, but expressly rejected the possibility of investors being able to initiate arbitration proceedings against a member state under the treaty, unless that state had so agreed in a separate contract.This case opens up the possibility for any investor in an OIC member state to initiate arbitration proceedings against such a state, potentially threatening the very sustainability of the OIC system itself. It remains to be seen how subsequent arbitral tribunals will address such issues.

In addition to the significant impact of the Hesham Al Warraq decision upon the future of arbitration in the Arab World, the recent Arab uprisings have also significantly affected the legal landscape in which arbitration operates. Questions abound as to whether the very foundations of arbitration in the Arab World have been shaken by the political events of the past few years. In the aftermath of these resistance movements, throughout the streets of the Arab World, demanding “bread, jobs and social justice,” many question whether the Arab uprisings will serve to reverse the trend of increased use of international arbitration in the Arab World. The critics cite decreased foreign investment, increased politicization of international disputes, and increased difficulty in enforcing international arbitration awards in post-Arab uprising national courts. TDM dedicated an entire issue to these very questions. Whatever way you look at it, the manner in which the Arab World proceeds will crucially impact the forthcoming era of international arbitration.

As an example of the types of disputes arising out of the Arab uprisings, one can look to the case brought by the Israeli-American company East Mediterranean Gas S.A.E. (“EMG”) against the state-owned Egyptian Natural Gas Holding Company (“EGAS”) and the Egyptian General Petroleum Company (“EGPC”). That case arose out of a 20-year contract signed in 2005 for the exclusive sale of Egyptian natural gas to Israel, significantly below-market price. At the time EMG was co-owned by a close friend of Mubarak’s and a former Israeli Mossad agent, who allegedly sold the gas to Israel at higher prices, pocketing the difference, causing a corruption scandal that dominated the Egyptian press. After Mubarak’s overthrow, the protest movement called for an end to that deal and EGAS and EGPC informed EMG that they were terminating the contract. EMG initiated arbitration proceedings in October 2011 which are still underway.

In the period commencing about a year after the beginning of the Arab uprisings (July 1st, 2013 to June 30th, 2014), 15% of new ICSID cases involved Arab states. Many announced that this marked increase, surpassing Latin America’s mere 7% for the same period, was due to the hostility of the new Arab governments to the respect of previously concluded agreements with non-Arab actors. Many states that witnessed uprisings, such as Egypt and Tunisia, found claims brought against them. In the nine months following the Egyptian uprisings, four requests for arbitration were brought against the Egyptian state at ICSID, versus two in the five previous years.

However, a closer examination reveals that although there was an initial increase, the final statistics for 2014 have shown that only 5% of new ICSID cases were from the Arab World, in relative proportion to what they had previously been. This may be due to the fact that many Arab states have made efforts at engaging in amicable settlement, with Egypt, Tunisia and Libya forming amicable dispute settlement committees to attempt to resolve such disputes. Furthermore, these statistics do not include international commercial arbitration cases which seem to continue to show a constant presence in various commercial arbitration institutions such as the ICC, CRCICA and DIAC among others.

It is unclear what lies in the future of arbitration in the Arab World. However, given its history, it will be important to ensure that arbitration continues to be representative of the combined interests of Arab commercial actors and Arab states, as well as those of the Western world involved in commercial and investment transactions in the Arab World. The greater presence of Arab actors not just as respondent states, but also as claimants and investors, and hopefully in the future increasingly as arbitrators and counsel, will result in the continuing confidence of the Arab World in the system of international arbitration as a mechanism for dispute resolution that is closely connected to its historical roots in the region.


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The Recent Amendments to the Brazilian Arbitration Act – One Step Back, Two Steps Forward?

by Camila Tomimatsu and Mariana Cattel Alves

Atelier Juridico

On May 26, 2015, the law containing the amendments to the Brazilian Arbitration Act (BAA) was finally enacted (Law n. 13,129/2015), almost 20 years after the publication of the BAA. It will soon enter into force, on 27 July 2015.

Though Law n. 13.129/15 amended certain provisions of the BAA and introduced some innovations, it maintained the structure of the BAA, as well the substantial achievements contained therein. It went further to reflect consolidated practices in Brazil, as well as to strengthen the practice of arbitration in the country. Some of the amendments are likely to stir discussions in practice and before the courts (as anticipated in one of last week’s post). The aim of this post is to briefly introduce the main modifications to the BAA, and to explain what, in our opinion, could represent a ‘step back’ and what could constitute the ‘steps forward’.

Background

The discussions on the need and the appropriateness of a reform began back in 2012, when Brazilian Senator Renan Calheiros proposed the creation of a Commission of Jurists in the Senate to discuss the reform. At that time, the reasons put forward to justify it were that arbitration had become a preferential dispute resolution method in the country, and that there was a need for an adaptation to new demands of international trade (as explained and assessed in previous posts of this Blog: see [1], [2] and [3]). The referred Commission of Jurists was established in April 2013, presided by Superior Court of Justice Judge Luis Felipe Salomão.

The path to the reform: a careful approach

The Brazilian arbitration community questioned the immediate need to reassess the BAA, in view of its successful application so far. As the reform was inevitable at some point, it motivated lengthy and qualified discussions involving the arbitral community, politicians and other interested parties. In December 2013, the proposal of the Commission of Jurists was revealed and approved with amendments by the Constitution, Justice and Citzenship Commission (Comissão de Constituição, Justiça e Cidadania) of the Senate (Senate Bill n. 406 of 2013). The Brazilian arbitral community praised the proposed Bill, as it maintained the advancements achieved with the BAA, and pushed for innovative solutions.

In February 2014, the Bill was sent to the analysis of the Chamber of Deputies (Chamber of Deputies Bill n. 7108/2014). Its Constitution, Justice and Citizenship Commission approved a final text in March 2015, and then sent it back to the Senate. The version that was approved by the Chamber of Deputies contained two amendments, one of them a rather controversial one: it restricted the recourse to arbitration involving the Public Administration to the cases in which it was provided for in the bidding terms or in the contracts, thus being dependent on previous regulation. Back to the Senate, such amendment was rejected, as it was considered a major setback. The approved Bill was then sent to Presidential approval.

The President in-office, before sanctioning the Law, sadly vetoed three provisions related to: (i) adhesion contracts: an arbitration clause would only be effective if it was written in bold or in a separate document; (ii) a consumption relationship established through an adhesion contract: an arbitration clause would be effective if the adherent party took the initiative of filing for arbitration or expressly agreed with its filing; and (iii) labor contracts, which provided for the possibility of establishing an arbitration clause only in a narrow situation: when the employee is or may become or act as statutory director or administrator, being the clause effective only if such employee took the initiative of filing for arbitration or expressly agreed with its filing.

Various representatives of the arbitral community criticized such vetoes. They argued that the vetoed provisions were in fact more protective to consumers and workers than the previous text, which permitted the recourse to arbitration in case of adhesion contracts (being labor contracts included therein, as some have argued) under specific circumstances; in addition, that the vetoes were the result of misinterpretation and other political concerns that prevailed. We understand the importance and the sensitiveness of the rights and interests connected to this discussion, but agree that the vetoed provisions had been carefully written to enhance the already protective legal regime in labor and consumer disputes. However, in practice, this discussion is not a clear-cut one, especially if one reflects upon the risk of an inappropriate and generalized use of arbitration to solve those kinds of disputes (but still within the strict limits of the law) in the Brazilian context, which could be detrimental to the institute of arbitration and its users. In other words, this topic will certainly continue to be debated in Brazil despite the abovementioned vetoes.

Overall, we understand that, at a first glance, the vetoes could be considered a step back in comparison to the 1996 text of the BAA.

Which are the amendments that could be deemed as ‘steps forward’, then?

The main modifications to the BAA

Law 13,129/2015 has put forward substantial improvements to the BAA. We focus on the following ones:

1. The inclusion of an express provision authorizing the direct and indirect Public Administration to have recourse to arbitration to resolve disputes related to disposable patrimonial rights. In fact, the Concessions’ Law and the Public-Private Partnerships’ Law already provided for this possibility, and the Superior Court of Justice had recognized it in its decisions. Notwithstanding, it still raised questions regarding arbitrability issues that justified amending this provision;

2. The creation of the arbitral letter (carta arbitral) – an instrument of cooperation between the Arbitral Tribunals and the Courts, to guarantee the enforcement by the Courts of the acts determined by the arbitrator. The confidentiality set forth in the arbitral proceedings must be preserved when complying with the arbitral letter. As to the formal requirements of the arbitral letter, they are provided for in the New Code of Civil Procedure;

3. The inclusion of a specific provision dealing with the provisional remedies and interlocutory reliefs, which ratified the power of the arbitrators to grant such measures after the beginning of the arbitration, as well as to maintain, modify, or revoke such interlocutory reliefs granted by the courts before the filing of an arbitral proceeding;

4. The possibility for the parties to appoint as arbitrator someone who is not part of the list of arbitrators of a certain arbitral institution or chamber, subject to the analysis of the competent organ of that institution – which protects the freedom of the parties to constitute an arbitral tribunal of their choice;

5. The inclusion of an express provision authorizing the arbitrators to issue partial arbitral awards – which was already a uniform arbitration practice. In addition, the parties and the arbitrators, by mutual agreement, may extend the deadline for the issuance of the arbitral award;

6. Regarding the statute of limitations: the inclusion of a provision according to which the institution of an arbitral proceeding interrupts the limitation period, with retroactive effect to the date of the arbitration request, even if the arbitration were extinguished due to absence of jurisdiction;

7. It amended the Brazilian Law of Corporations providing for a minimum quorum to include the arbitration clause in the articles of incorporation so that it binds all shareholders, ensuring the dissenting shareholders’ right to withdrawal, and defining the lapse of time for the effectiveness of the arbitration clause. Such inclusion aimed at strengthening the use of arbitration in corporate disputes.

Conclusions

At this point, the discussions concerning the need of reforming the BAA have been overcome for now by the enactment of Law n. 13.129/2015.

In sum, the amendments to the BAA either: (i) set down in writing, through specific provisions, some practices that were already consolidated in the Brazilian legal system (such as the issuance of partial awards and the arbitrability of disputes involving the direct and indirect Public Administration regarding disposable patrimonial rights); (ii) clarified certain provisions that had been the subject of controversy (such as the one concerning the inclusion of an arbitration clause in the articles of incorporation); or (iii) presented an innovation (for instance, the arbitral letter).

There are those who sustain that “reform” would not be the best word to refer to the amendments set forth by Law n. 13.129/2015 to arbitration in Brazil, as they largely reflect practices and positions already consolidated in the arbitral practice. Nonetheless, we understand that the outcome was positive thanks to the efforts and the careful approach taken by the arbitral community during this whole process. Even though the abovementioned vetoes could represent a ‘step back’, the transposition of consolidated practices and positions in Brazil (a civil law country) to the legal text will certainly strengthen even more the use of arbitration in Brazil at its best, representing not only two, but numerous steps forward a promising future.


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The Proposed Mediation Convention: UNCITRAL at a Crossroads in Vienna

by Michael McIlwrath

General Electric Company

Vienna can be a confounding place for an outsider. In one moment, the city projects itself confidently into an innovative, international future and yet in the next moment can appear irrevocably bound to traditions.

Being forward-minded in dispute resolution, Vienna is host this week to the IBA-VIAC International Mediation and Negotiation Competition, a four-day event in which 16 teams will seek to use consensual dispute resolution to resolve the problems of the 2015 Vis Moot Competition, which is itself hosted in Vienna. And, lest anyone forget, the Vienna International Arbitration Centre (VIAC), a regional and global leader in dispute resolution, will celebrate its 40th birthday this coming September.

Also this week in Vienna, the UNCITRAL Commission will discuss whether its Working Group II should start work on an international convention for the enforcement of mediated settlement agreements.

Among the countries that will be deciding the fate of the proposed convention, some have raised concerns that appear rooted in the past or that do not appreciate how modern mediation practice has developed.

For example, one country lamented in its comments to the proposal that, “there seem to exist no standards for mediation/conciliation proceedings (both on the national and on the international level) that warrant sufficient trust in the proceeding itself, its independence from either party and from negative influence from outside, the quality of mediators/conciliators… Such trust, however, seems indispensable if one considers rendering the result of such a proceeding directly enforceable.”

Concern over trustworthiness of the process is reasonable and it is not without precedent. Take, for example, this statement by one country’s delegate at a previous meeting on the subject of an international enforcement regime:

Some of the proposals tended to minimize judicial supervision…. In the view of his delegation, judicial supervision was of the utmost importance, for it alone could ensure that justice was done.

The above objection, however, was not made in reference to the proposed mediation convention. It comes from the May 1958 travaux préparatoires for the New York Convention on foreign arbitral awards.

And the delegation expressing this concern? The United States.

As everyone today knows, the New York Convention went on to become the primary motor behind the growth of international arbitration, and the USA itself today has a robust international arbitration practice.

Objections to the New York Convention in 1958 were based on how dispute resolution was perceived and practiced at the time. Since then, decades of practice and legislative adaptation have shown them to be largely unfounded.

If concern over standards were equally applicable to both mediation and arbitration, it would put mediation in a good light. Mediation today is ahead of arbitration in developing national and international standards, and it should be undisputed that modern mediation practice is leaps and bounds beyond where arbitration was in 1958.

In many countries, mediators are regularly subjected to certification and continuing legal education requirements, while arbitrators are not. In fact, the UNCITRAL commissioners need not leave Vienna to find sound examples of mediation’s deep roots domestically and the introduction of modern safeguards. In 1869, Austria established a legal basis for enforcing settlement agreements reached before municipal conciliation offices (Gemeindevermittlungsamt), and in 2004 was one of the first countries in the EU to enact a law that sets out quality standards for mediators and proceedings.

Internationally, arbitration still cannot boast an equivalent of the International Mediation Institute (IMI), a body whose sole purpose is to set quality standards and whose governing board includes users and the representatives of leading mediation and international arbitration institutions.

Fortunately, concern over the trustworthiness of mediation has been raised by only a few countries, and the chances for work to proceed on the proposed convention seem relatively good. Other countries have raised questions more about the practicalities of how a new mediation convention would operate, one mistakenly casts mediation as a threat to international arbitration, many have expressed no preferences at all, and then there are those who are unequivocally positive.

In the positive camp, not surprisingly, is Singapore, a global center of international dispute resolution with an undisguised desire to grow its market share. In its comments to the proposed mediation convention, Singapore stated that the country is, “generally supportive of mediation/conciliation processes, and the enhanced enforceability of international mediated/conciliated settlement agreements will be useful for mediation users.”

With consensual forms of dispute resolution increasingly being adopted for resolving 21st century conflicts, it will be interesting to see which direction UNCITRAL takes at this crossroads in Vienna, towards ideas for the future or concerns from the past.


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Does The “Culture” Of International Arbitration Serve Its Users?

by Tomas Vail

Freshfields Bruckhaus Deringer LLP,
for ITA

The 27th Annual Workshop of the Institute for Transnational Arbitration (“ITA”), which took place on June 17-18 in Dallas, Texas, examined  “Subconscious Influences in International Arbitration”.  The Workshop was organized by co-chairs José Astigarraga of Astigarraga Davis (Miami), Professor Margaret Moses of Loyola University Chicago School of Law (Chicago) and Luke Sobota of Three Crowns LLP (Washington, DC).

In keeping with the theme, an illuminating panel, featuring a keynote speech by Professor Jeffrey J. Rachlinski of Cornell University Law School, focussed on the influence of human psychology on decision-making by arbitrators and empirical studies reflecting such influences.

Another key theme, however, emerged during the course of the Workshop: Is there a “culture” of international arbitration? If so, has it developed through careful, deliberate analysis or simply through habit such as the adoption of common law and/or civil law litigation practices?

Such questions have been and continue to be considered within the arbitration community, and were recently touched on by Professor Emmanuel Gaillard’s discussion of the “Sociology of Arbitration” during the 29th annual Freshfields Arbitration Lecture.

Two panels of the ITA Workshop, one on procedural flexibility and one on advocacy and arbitral decision-making, addressed this recurring question.

Procedural Flexibility

First, a panel composed of Noradèle Radjai of Lalive (Geneva) and Fabiano Robalinho Cavalcanti of Sergio Bermudes Advogados (Rio de Janeiro) introduced the issue by examining whether, in the light of certain widely accepted practices, international arbitration truly offers procedural flexibility.

Whilst parties to an arbitration are often free to agree on the procedure to be followed (as reflected, for example, in Article 19 of the UNCITRAL Model Law on International Commercial Arbitration), they may not act on the opportunity to tailor procedural rules to fit the needs of each case.

Indeed, although certain aspects of arbitral procedure appear to be widespread in practice, there is a demonstrated discrepancy between the experiences and preferences of some practitioners. The 2012 Queen Mary/White & Case International Arbitration Survey on “Current and Preferred Practices in the Arbitral Process” demonstrates the following  examples:

-        Submissions:  A sequential exchange of two rounds of submissions by each party is the norm, even though some practitioners would prefer wider use of only one round of submissions and simultaneous exchange to save on time and costs.

-        Witnesses:  Use of witness statements, party-appointed experts and questioning at the hearing by counsel are the norm, even though some practitioners do not find party-appointed experts to be vastly more effective than tribunal-appointed experts and would prefer tribunals be more involved in questioning witnesses.

-        Document production: Requests for document production are the norm, even though some practitioners, particularly those with a civil law background, would prefer stricter (if any) disclosure and tend not to consider that documents obtained through document production materially affected the outcome of the case.

Why don’t more practitioners tailor the arbitral procedure to meet their preferences? Are certain procedural aspects of international arbitration more widespread because they are a “necessary evil” or simply adopted as part of the “culture” of international arbitration?

One panel attendee, a London barrister, noted that more deviation from procedural norms could give rise to a later challenge to the award on procedural grounds. He also observed that a common culture among arbitration practitioners often arises as a result of shared mentors and training.

Another attendee, a Swiss arbitration counsel, suggested that the tribunal has the duty to maintain procedural flexibility, as a proposal by one party to deviate from a norm would likely be interpreted by the other party with suspicion. This view was echoed by a US-based arbitrator, who noted that it was the tribunal’s responsibility to convince the parties to adopt certain procedures, such as applying the 2010 IBA Rules on the Taking of Evidence in International Arbitration.

Reflecting on the role of (proliferating) arbitration guidelines, one panel attendee, a US arbitration counsel, observed that as more litigators become involved in arbitration there would be greater reliance on such guidelines.

Radjai closed the session by observing that guidelines may serve as a “lowest common denominator” or middle ground between parties from different legal backgrounds, and querying whether the parties might not be better off starting with a clean slate to formulate their arbitral procedure.

Advocacy and Arbitral Decision-Making

Another panel, moderated by Doak Bishop of King & Spalding LLP (Houston) and composed of Andrés Jana of Bofill Mir & Alvarez Jana (Santiago), June Junghye Yeum of Clyde & Co LLP (Singapore and New York), David Brynmor Thomas of Thirty Nine Essex Street Chambers (London) and Laurent Lévy of Lévy Kaufmann-Kohler (Geneva), focused on the subconscious influences on advocacy and judging which might arise from differing national and legal backgrounds.

Lévy opened his remarks by citing a phrase often attributed to French Prime Minister Édouard Herriot: “Culture is what is left when everything else is forgotten.” In a similar vein, Brynmor Thomas observed that, in respect of international arbitration culture, practitioners behave based on what they learned first.

Lévy noted that there is now clearly an international arbitration culture as reflected in a consistent approach to advocacy – although he added that skilled advocates are chameleons, able to adapt their styles of advocacy to the different legal backgrounds of tribunal members and skilled arbitrators should similarly be able to adapt to the backgrounds of the parties.

Echoing comments from the previous panel, Jana observed that arbitrators were suspicious of idiosyncratic arguments and approaches to arbitration, valuing certainty and predictability in proceedings.

Reflecting on Bishop’s question as to whether an arbitrator’s background would influence how witness testimony is received, Lévy cited the principle of testis unus testis nullus (“one witness is no witness”) and observed that the principle continues to apply in parts of the Arab world.  Lévy further noted that French court procedure tends not to give much weight to witness statements and, in civil litigation matters, only allows witness statements where there is a low value in dispute.

Yeum agreed that there is a culture of international arbitration, but noted that Asian users of arbitration often fail to understand that culture. She described an arbitration where the parties had differing understandings of their document retention obligations, and queried whether it would be proper for the tribunal to sanction the party which was less experienced in international arbitration.

Yeum also noted that other cultural norms might conflict with the culture of international arbitration as it is commonly understood. For example, Western arbitration practitioners emphasize the value of an individual’s honesty, whereas aspects of Asian culture focus on loyalty and the needs of the community. Differing cultural values therefore need to be taken into account in arbitration practice.

An Answer?

The question regarding a “culture” of international arbitration and how it has come about was present throughout the Workshop, although most directly addressed in the two panels described above.

The commonly expressed view was that there is indeed a “culture” of international arbitration. But in order for international arbitration to continue to serve its users, practitioners need to challenge themselves to make sure their approaches continue to meet the parties’ needs, whether in respect of arbitral procedure, advocacy or otherwise. This will become more and more important as new users increasingly get involved in international arbitration.

 


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Section 69 almost 20 years on….

by Matt Marshall

Enyo Law LLP,
for YIAG

When the English Arbitration Bill was being debated in early 1996, a controversial issue considered was whether to retain a right of appeal on a point of law. Contrary to a number of civil code jurisdictions, the right was retained under English law, albeit in limited form and with the option to “opt-out”. A key justification given at the time was that a limited right of appeal on a point of law was not inconsistent with the decision to arbitrate instead of litigate. Almost 20 years on, does this provision still serve a useful purpose or does it damage the popularity of London as a seat of arbitration?

The limited right of appeal

The English Arbitration Act 1996 (the Act) permits a limited right of appeal on a point of law. The right exists under section 69 of the Act and affects arbitrations seated in England and Wales (as the Act applies only when that is the seat of the arbitration) and where the law governing the merits is English law.

The right of appeal is limited. For instance, an appeal can only be brought following an award either with the agreement of all the other parties, or (more commonly) with the permission of the English court. Permission will only be granted in limited circumstances, which include: i) that the determination of the question will substantially affect the rights of one or more of the parties; ii) that the question is one which the tribunal was asked to determine; and iii) that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question.

The parties are also free to “opt out” of section 69 by agreement. This commonly occurs through choice of certain institutional rules that contain a standard waiver (e.g. ICC, LCIA, SIAC), but will also be deemed where the parties have agreed to dispense with reasons for the tribunal’s award.

Rationale for the inclusion of a limited right of appeal

The reasons for the inclusion of a limited right of appeal on a point of law were explained during the drafting of the Arbitration Bill, which would eventually become the Act.

‘…[t]he great balancing act which this Bill has had to perform is between those who wish to exclude the courts from all aspects of arbitration procedure and those who would like to preserve a significant measure of court supervision. Generally I believe that this Bill has got that balancing act about right…’. (Lord Byron from a House of Lords debate on 18 January 1996)

‘…[w]e received a number of responses calling for the abolition of any right of appeal on the substantive issues in the arbitration… We have considered it carefully, but we are not persuaded that we should rec-ommend that the right of appeal should be abolished. It seems to us that with the safeguards we propose, a limited right of appeal is consistent with the fact that the parties have chosen to arbitrate rather than litigate….’. (Departmental Advisory Committee Report on the Arbitration Bill)

It was considered that there was a balance to be struck between, on the one hand, excluding the courts from unduly interfering with the arbitration procedure and, on the other hand, ensuring the parties’ chosen law was properly applied. It was deemed that a limited right of appeal correctly addressed that balance.

Number of section 69 applications made

Twenty years down the line, how often is section 69 actually relied upon? A manual review of reported decisions involving a section 69 application shows the following*:

Image 1

These figures are very low. Whilst, they may understate the position (applications for leave to appeal determined on the papers alone without a hearing are not reported) they indicate that very few applications are made each year, of which even fewer are successful.

It is difficult to put these figures in context. There is no means of gauging the total number of awards made with arbitrations seated in England and with an English governing law clause. It is safe to assume, judging by the number of reported LMAA cases (referred to below), that such number is most likely to be in the thousands.

Shipping cases

As previously indicated, a number of institutions that deal with general commercial arbitration include in their institutional rules a standard waiver of the parties’ right to any form of appeal, review or recourse to any state court or other legal authority (e.g. ICC, LCIA, SIAC). Most likely as a consequence of such standard waivers, the most common type of dispute dealt with in section 69 applications relates to shipping. (The statistics below have been collated from a manual review of reported decisions in the High Court. They are not official statistics (and should not be relied upon as such), as there is no central database that collects this information.)

Image 2

To put these figures in context, LMAA statistics show that at least 500 awards were made each year between 2010 to 2014 (excluding awards made under the intermediate claims, fast and low cost, and small claims procedures) (link). As the LMAA does not register all arbitrations commenced under LMAA Terms and Procedures, its statistics are based upon enquiries made by members. It is therefore most likely that the total number of LMAA awards made each year far exceeds this number.

Because, as confirmed by the LMAA, almost all arbitrations conducted on LMAA Terms involve contracts governed by English law, it would appear that only a very small fraction of the total number of awards made in shipping cases each year are appealed.

Opt-in or Opt-out

There are so few applications made under section 69 each year that it seems of little consequence whether or not section 69 is retained or repealed. The right has been marginalised by standard waiver provisions that appear in many institutional rules. Even where standard waiver provisions do not exist, for instance in shipping cases, the right of appeal is used sparingly.

Yet, arguably, section 69 contributes (rightly or wrongly) to the misconception that English law is not as arbitration friendly as other jurisdictions. This, in turn, may adversely affect the popularity of London and English Law as the seat and governing law of an arbitration, respectively (see, for instance, the results of the “2010 International Arbitration Survey: Choices in International Arbitration” conducted by the Queen Mary School of Arbitration (link)).

Given section 69 is approaching its twentieth birthday and England continues to thrive as a hub of international arbitration, perhaps such concern is purely theoretical. Nonetheless, with increasing competition for international arbitration work, the concern (theoretical of otherwise) might be dismissed by varying section 69 from an “opt-out” to an “opt-in” provision, leaving a mechanism available for parties who consider the proper application of their choice of law to be paramount, but otherwise reinforcing the perception that English law respects the parties’ choice of arbitration over litigation.


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The New General Organic Code of Processes: A Trojan Horse for Arbitration in Ecuador

by Hugo Garcia

Universidad San Francisco de Quito & Corral Rosales Carmigniani Pérez

 

On May 22, the new General Organic Code of Processes (GOCP) was enacted (Official Register Supplement N. 506). Excluding constitutional, electoral and criminal matters, the GOCP will regulate all judicial procedures in Ecuador. It is a long expected and generally very welcome reform in the Ecuadorian judicial system. It replaces an outdated spaghetti bowl of judicial norms, some of them rather odd and confusing. In general, the GOCP is a modern code based on an oral and adversarial system, which contains few and simple procedures and is expected to significantly reduce the length of procedures in today’s judiciary system. Nevertheless, despite its benefits, one measure was not received with enthusiasm in the arbitral community: the GOCP has substantially changed the rules for the enforcement of international arbitral awards in Ecuador.

Background

Prior to the enactment of the GOCP, Ecuadorian legislation did not have an express procedure designed to recognise and enforce foreign awards. The Arbitration and Mediation Law (AML) assimilated international arbitral awards to domestic arbitral awards. The final paragraph of Article 42 of the AML stated that “awards pronounced in an international arbitration proceeding shall have the same effects and shall be enforced in the same manner as awards issued in a local arbitration proceeding,” which, pursuant to Article 32 of the AML, are enforced in the same way as final judgments rendered by local courts. This is done through the so-called judicial order for enforcement without delay (immediate execution). This mechanism was simple and, to a certain extent, expeditious. This procedure was confirmed by the Ecuadorean courts in the cases Doug W. Cannaday v. Glenn Allan Good and Hampton Court Resources Ecuador S.A. (Procedure No. 812-2006, Decision of 8 February 2008) and Daewoo Electronics America, Inc. v. Expocarga S.A. (Procedure No. 469-2009, Decision of 26 October 2009).

Recognition and enforcement of international arbitral awards under the GOCP

The GOCP has repealed the last paragraph of Article 42 of the AML, which governed the enforcement of international arbitral awards, and has replaced it with a two-fold procedure: first recognition and then enforcement. In a nutshell, a party seeking to enforce an international award has to first initiate an exequatur procedure before a Provincial Court and once it has obtained leave for enforcement, it can resort to a judge of first instance for the enforcement of the award.

Article 104 of the GOCP sets forth the requirements to obtain the recognition and leave for enforcement of an international award. According to this provision, the Provincial Court has to verify that:

  1. The award bears all necessary external formalities to be considered authentic in the State of origin.
  2. The award is final and has res iudicata effect under the law of the State of origin, and all necessary annexed documents are duly legalised.
  3. The award, if not in Spanish, is duly translated.
  4. The respondent in the arbitral procedure was duly served and the parties’ right of defence (due process) was guaranteed. The parties will have to prove this was the case by presenting the necessary documents pertaining to the arbitration in question and pertinent certifications.
  5. The request for recognition states the place where the person or legal entity against whom the award will be enforced has to be served.

The last paragraph of Article 104 of the GOCP adds, in a rather confusing language, that:

For the recognition of judgements and arbitral awards against the State, since they do not pertain to commercial matters, it shall also be demonstrated that they do not contravene the provisions of the constitution and the law, and that they are in conformity with treaties and international conventions in force. Where no treaties or conventions exist, they would be fulfilled if they are contained in a letter rogatory or if its efficacy and validity is recognised under the law of the State of origin.

Once the Court has verified that the above requirements have been fulfilled, it will order that the person or legal entity against whom the enforcement is sought be served, granting him 5 days to oppose to the request. As the GOCP is silent on the grounds on which a person might oppose the recognition of arbitral awards, it appears that Article V of the New York Convention (or Article V of the Panama Convention) applies (Article 425 of the Ecuadorian Constitution allows domestic judges to directly apply treaty provisions). Article 105 of GOCP provides that the Court must rule based on the merits of the case within 30 days, however, a hearing can take place if there is a well-grounded opposition and the case has a certain degree of complexity. In this scenario, the hearing date has to be set within 20 days of the filling of the opposition. The decision of the court is final and cannot be appealed.

Once a party has obtained the recognition of an award and its leave for enforcement, it can initiate enforcement proceedings before a judge of first instance for civil matters in accordance with Article 362 et seq. of the GOCP.

Commentaries

The new code is indeed a welcomed modernization of the judicial system in Ecuador. It brings various benefits and allows for modern, effective, and more expeditious litigation. But, as Virgil said in the Aeneid, “I fear the Greeks, even when they bear gifts”, because some of them could be Trojan horses. The new two-fold mechanism for the recognition and enforcement of arbitral awards might be such a gift. The new rules on this matter constitute a clear retrogression for arbitration in Ecuador.

First, the new procedure is not simple, clear, nor expeditious. It is far more complex and burdensome than the former procedure. Second, contrary to the international trend, the new rules impose on the applicant the burden of proof of the legality and finality of the award. Third, many problems will arise with respect to some of the requirements that the applicant must fulfil in order to obtain leave for enforcement. In particular, the requirement of proving that the parties’ right of defence was ensured imposes a disproportionate burden of proof on the applicant. It requires to prove a negative fact, i.e., that the parties’ right of defence was, in fact, not breached. Furthermore, the manner in which a party is required to do so can become a real obstacle for the enforcement of the award. It is quite possible that the entire arbitration can run up to several thousands of pages and documents; imagine what it would be to file such certified and legalised copies of the file to the court. Fourth, the requirement that the award should be final and should have res iudicata effect under the law of the State of origin clearly precludes the possibility of enforcing interim and partial awards that are not final and awards that have been set aside in the place of the arbitration. Fifth, as an international award is deprived of any legal value if it is not first recognised by the local courts, it is highly dubious whether it could be used to obtain provisional measures in order to secure the payment of the awards before starting the exequatur procedure. Sixth, the procedure is more burdensome when it comes to the enforcement of awards against the State. The last paragraph of Article 104 of the GOCP presumes that there cannot be a commercial award against the State, hence, that States always act in a sovereign capacity. This simply does not hold true. Therefore, we can have at least two interpretations of this provision: 1) when enforcing an awards against the State, regardless of the award’s nature, the applicant must prove that the award is not in conflict with Ecuador’s Constitution and laws; or, 2) that this provision does not apply to commercial matters but only to matters where the State has acted in its sovereign capacity. To the extent that one wishes to have an arbitration friendly jurisdiction (or a degree of it), the second interpretation should be preferred. For these reasons, one might wonder if this new procedure is in conformity with Ecuador’s obligation under the New York Convention.

Lastly, it is worth clarifying that this procedure pertains to the recognition and enforcement of international arbitral awards and does not apply to the enforcement of provisional measures ordered by international arbitral tribunals. Article 363 of the GOCP makes clear that provisional measures ordered by international tribunals do not require a prior exequatur for its direct enforcement.


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Arbitration 2015: The Best of Times or the Worst of Times? A Debate

by Jessica Withey

Clifford Chance LLP

This was the title of one of four sessions comprising the dispute resolution module held as part of the fifth Institute for Energy Law (IEL) and IBA Section on Energy, Environment, Natural Resources and Infrastructure Law (SEERIL) International Oil and Gas conference, which took place in London on 3-5 June 2015. The dispute resolution module was presented by the Institute for Transnational Arbitration (ITA).

The debate saw leading practitioners going head-to-head on the pros and cons of some of arbitration’s most “recent developments and ‘innovations’”. Batting for Team 1 was Sophie Lamb, of Debevoise & Plimpton and Dr. Jan Kleinheisterkamp, of the London School of Economics. Vera van Houtte, of Van Houtte Partners and Christopher Newmark, of Spenser Underhill Newmark LLP, took up the charge for Team 2.

Jacomijn van Haersolte-van Hof, LCIA Director General was appointed as judge. However, in a fitting innovative twist, it was the delegates, not Haersolte-van Hof, who were required to cast their votes via their mobiles on each of the four motions put forward by the teams. The advocates were keen to point out from the beginning that their views were not to be construed as necessarily their own or representative of their firm or institution. Delegates logged in and mobiles at the ready, the debate kicked off.

Motion 1: Rules of counsel conduct, including cost allocation mechanisms, are a laudable innovation in international arbitration. Newmark spoke for the motion. He argued that recent rules on counsel conduct, such as those of the IBA or LCIA, are not only laudable but “essential to the success of arbitration”. In arbitration’s potential “wild west” environment, he suggested that such rules not only “discourage bad behaviour but also legitimize good behaviour.” Querying whether an arbitral tribunal was an effective body to enforce such rules, Newmark stressed that it was and in doing so, the tribunal does not take on a regulatory function; it is simply well placed to assess the impact of any problematic counsel conduct on the proceedings and to take necessary steps to safeguard the process. Arguably such steps could amount to nothing more than a “gentle wrap on the knuckles”. However, since “lawyers don’t like getting told off” the potential sanctions could nonetheless act as an effective deterrent, Newmark suggested. In conclusion, he also argued that the rules might also give counsel an effective tool to persuade clients as to appropriate conduct.

Kleinheisterkamp provided a robust response. He first criticised the suggested contrast between having either a “wild west” or “international harmony” in arbitration. Instead of the latter begin realised, the innovation of rules on counsel conduct has instead brought about increased complexity and uncertainty regarding the duties owed by counsel and which may apply, Kleinheisterkamp argued. In this context, he recalled the criticisms of Michael Schneider on the IBA Guidelines on Party Representation. Kleinheisterkamp argued that we are not “dreaming the transnational dream” but instead left at a point when the only things that can potentially be agreed upon are the “lowest common denominator”. Rather than various rules on counsel conduct, what we instead need, he argued, are arbitrators willing to intervene as necessary to ensure efficiency of proceedings; we need arbitrators with the “courage to discipline parties”.

The vote? Motion passed with a 63% majority.

Motion 2: Tribunals do not fulfil their mandate unless they are proactive. In a similar vein as Kleinheisterkamp, van Houtte argued that tribunals need the “courage” to “roll up their sleeves” and be proactive. A key driver for this, van Houtte argued, was the need to ensure parties are not put off arbitration and resort to other dispute resolution mechanisms. Van Houtte appeared to argue that a cooperative approach was necessary; the tribunal should make enquiries with the parties as to how proactive they would like it to be, with consideration paid to the parties’ capability to organise themselves and manage their own proceedings. Querying how the tribunal should go about doing this, van Houtte noted that terms of reference can be very beneficial although the tribunal should be open to these being amended later if necessary. She also suggested a tribunal’s mandate should include it having its “eyes open” at all time on whether negotiations as to mediation and/or settlement can be resumed.

Speaking against the motion, Lamb first noted it was ironic she was adopting such a position, as she is known as an advocate for proactive tribunals. She would nonetheless venture five things: first, an observation: tribunals cannot always save parties from themselves, not matter how proactive they are. Second, a criticism: terms of reference and other case management techniques are not always useful; they can be formulaic, adversarial, costly and time-consuming, and ultimately lead to increased “bureaucracy” of proceedings. Third, an objection: Lamb queried whether tribunals should be tasked with “administering a wider system of justice”, noting that sophisticated parties will know when to mediate and how. Fourth, Lamb advised that parties should build their own proceedings “up from scratch” and consider what are the particular requirements for their specific case. Fifth and finally, a prophecy: Lamb described the arguable simplicity of sports arbitration proceedings and that certain lessons could be learnt from this (for example, time and costs savings).

The motion was opposed by a very small majority of 51%.

Motion 3: Governments should support international arbitration as a relevant and legitimate means for resolution of investor-state disputes. Kleinheisterkamp most notably argued that the rule of law can be preserved through strong government support of investor-state disputes (ISD) (i.e. entering into bilateral investment treaties (BITs)). He suggested that it is arguably for this reason that politicians should “risk their political capital” and taxpayers’ monies. In response, van Houtte argued that the issues encountered in ISD are not those of “everyday business” and commercial arbitration. For example, arbitrators may lack the requisite specialisms for dealing with public international law. There may also be concerns as to the transparency of the proceedings and the likelihood of interested non-party participants (for example, NGOs). Rather than advocate governments disengage from ISD mechanisms entirely, van Houtte instead pleaded a case for a new supra-national court which BITs could refer.

The motion was passed a 59% majority.

Motion 4: Emergency arbitration proceedings are not window dressing. Lamb spoke for the motion, suggesting first that to argue anything to the contrary would be to go against the recent practice and rules of the world’s leading arbitration institutions (such as, of course, Haersolte-van Hof’s LCIA). Lamb noted that the rules for emergency arbitration proceedings had been drafted very carefully to maximise their effectiveness and to also contain sanctions as to their misuse. Various institutions are seeing the measures being increasingly used and in inventive ways, the conclusion being that they are seen as useful and user friendly, Lamb argued.

Newmark responded strongly. He first queried the effectiveness of the so-called “emergency” proceedings when the process could take up to two weeks and could not be used on an ex-parte basis. Noting that local courts may be required to enforce any resulting award, Newmark suggested that it was questionable why parties didn’t simply seek court relief from outset in such circumstances. In this respect, he suggested that a key reason for seeking such relief, to avoid unfavourable local courts, became obsolete. Newmark also raised issues as to costs and uncertainty of outcomes. In conclusion, he suggested that emergency arbitration was still a “novelty” and “new toy to play with”; he suspected its popularity will not last much longer than the “honeymoon period” it was currently enjoying.

The final vote? Motion opposed with a majority of 64%.

The other dispute resolution sessions at the conference covered a case study focused on a fictional oil and gas company facing parallel civil litigation, regulatory and criminal proceedings, issues in arbitration involving re-opening of gas prices, and oil and gas technology disputes. The conference also included modules focused on updates from various regions, legal challenges and M&A trends involved in operating in unconventional and mature basins, and debt and equity financing for E&P companies.

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


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Debating ISDS

by Simon Lester

Cato Institute

Thanks to the Kluwer Arbitration Blog editors for this chance to weigh in on the ISDS debate.  I have been a frequent critic of the existing ISDS system, but I take a different approach than many other opponents.  For me, the discussion should focus on two main issues, one related to access to international rights protections and the other related to substantive obligations:

1.  Why do foreign investors have recourse to enforceable international law to assert their rights, whereas virtually no one else does?

2.  What should the scope of international investment law obligations be?

In this post, I will highlight these two issues, and I look forward to hearing the responses of ISDS supporters.

On the issue of who has access to enforceable international law, it is widely acknowledged that international law is a fragmented system. However, it is nonetheless possible to step back and evaluate it as a whole, to see how various groups are treated. When you compare international investment law to other areas, such as human rights, it is clear that foreign investors have been given a fairly effective enforcement mechanism, whereas ordinary citizens generally have not (one or two regional rights treaties aside).  We should ask why that is.  On its face, this situation does not seem, well, “fair and equitable.”

Some have argued that international investment law is a progressive force that can be used as the basis for expanding rights to others.  That is a principled position.  However, in practical terms, it is not likely that this will happen anytime soon, if ever. The rights of foreign investors are a one-off grant; there is no movement to extend these rights to others.  Thus, supporters of the system need to accept that the current system gives rights to some and not others, and that is not likely to change.

Is there a justification for giving special rights only to foreign investors?  If this were the 1950s, when newly independent countries were asserting their sovereignty and nationalizing the investments of foreign companies, there might have been a better case for it. In a situation where certain national governments are targeting foreign investors, the idea of a neutral international tribunal to adjudicate the issues could have some merit.

But today, the situation of foreign investors is very different. Except in fairly rare circumstances, governments are not targeting foreign companies on the basis of nationality.  (And if they were, a non-discrimination provision alone could address the problem. I will discuss the substantive obligations further below.) In fact, the bigger problem with governments and foreign investors is probably the large subsidies governments keep offering to lure them in. To take an example, even as the United States and the European Union battle at the WTO over the subsidies each provides to Boeing and Airbus, respectively, U.S. state governments are offering subsidies to that foreign competitor Airbus!

Of course, it is certainly true that governments treat investors, and citizens more generally, badly sometimes. In many countries, even the more advanced ones, the absence of rule of law can be a serious problem.  But it is hard to make the case that most countries are targeting investors because they are foreign.  The truth is, governments treat a lot of people badly; mostly this means treating their own people badly, but foreign investors do sometimes get caught up in this general problem.

The strange thing about ISDS is that it addresses only a small subset of this problem of bad government treatment, in that it only addresses the problem as it pertains to foreign investors. What is particularly odd about it is that foreign investors are often in a much better position to defend their rights than are domestic investors or ordinary citizens. There are certainly a range of foreign investors, and not all are big multinational companies. However, in order to engage in investment outside of your country, significant resources are usually required. By contrast, domestic investors are often small companies, such as dry cleaners or pool maintenance companies. As it stands now, though, it is only foreign investors who get the protections under international law, not domestic investors, or ordinary citizens for that matter.

There are arguments for addressing gaps in the rule of law through international treaties, either with an international standard or a requirement to incorporate such standards in domestic law. But the ISDS approach of providing such protections only for foreign investors undermines the rule of law as much as it promotes it. It is akin to saying in a domestic constitution that the only rights we will protect are those of wealthy property owners.

Turning to the substantive obligations, the discussions of what international investment law requires often blur together some very different rules. Sometimes defenders of the system portray it as only about prohibiting discrimination against foreign investors; other times they focus on the issue of expropriation of physical assets. If these were the only obligations, ISDS may never have made headlines in the first place.

In truth, the biggest issues are the international investment law rules on regulatory expropriation and on the minimum standard of treatment, including fair and equitable treatment. My sense is that some defenders see these as very narrow obligations, which would only affect a small percentage of government actions, those which cross a very high threshold of bad behavior.  In practice, however, some broad interpretations of these provisions have created opportunities for litigators to challenge a wide range of government actions and inactions.

While some critics worry about the “regulatory chill” that may result, my fears are broader than that.  It seems to me that we have given foreign investors an opportunity to challenge just about any government behavior that they do not like.

Of course, that does not mean that investors will win every challenge. But to me, the win-loss record is not the most important thing. The more interesting issue is what kinds of challenges are being brought, and what impact they are having on governments. When I see claims made against governments who decide to withdraw subsidies, it raises concerns.

Note that it would not be very difficult to fix the problems of overbroad legal obligations. In the context of regulatory expropriation, a number of agreements have added language to make clear that nondiscriminatory regulation will almost never violate this provision. Something similar could be added to the minimum standard of treatment provisions.  Or, a general exception for legitimate social policies could be included. This would not be unprecedented, as some agreements already have a provision like this. The resistance to adding such language in U.S. and EU investment obligations is somewhat baffling, although I suppose the obvious explanation is that business groups are lobbying hard against it.

I have tried hard to engage with supporters of the existing ISDS system on these issues, on twitter, on various blogs, and via e-mail. It has been difficult to get much of a response. Usually when I raise the issue of the broad scope of fair and equitable treatment, for example, they disappear from the debate, leaving me wondering what their position is.  If ISDS is about the treatment of foreign investors, why isn’t a non-discrimination provision enough?  And why have an international legal system that requires fair and equitable treatment, and compensation for expropriation, for foreign investors, but not for anyone else?

I appreciate the opportunity from the editors of this blog to raise some of these issues, and I look forward to hearing any responses from ISDS supporters.


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