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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Surveys Seek Input on Settlement Enforcement

by Michael McIlwrath

General Electric Company

Time Sensitive

Over the next two weeks, two surveys will be gathering input from dispute resolution professionals on the challenge of enforcing settlement agreements across borders.

The surveys are intended to provide empirical data to aid the decision making process for the proposed UNCITRAL convention on the international enforcement of settlements reached in mediation.

IMI Survey of Corporate Needs

The first survey is just four questions, and is from the International Mediation Institute. It is focused on the level of corporate demand for such a convention.

The results of the IMI survey will be discussed and developed further at the October 29, 2014 convention in London on Shaping International Dispute Resolution.

University of Missouri Survey of Dispute Stakeholders

The second is somewhat more comprehensive, and is from the University of Missouri. The Missouri survey is aimed at gathering information about enforcement difficulties from all stakeholders.

The Missouri survey covers a variety of issues that may be of interest to the international community.

Your Input Requested

Readers of this blog are encouraged to provide their input to the surveys.

In order to respond to either, you do not need to have previously participated in an international commercial mediation or conciliation.


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Apotex III’s Application of Res Judicata Ensures Finality, Legal Security and Judicial Economy

by Nicole Thornton

US Department of State

The recently published Award in Apotex Holdings Inc. and Apotex Inc. v. United States of America (Apotex III Award) is the first NAFTA award to apply the doctrine of res judicata. The Apotex III Tribunal confirmed that the operative part, together with the underlying reasoning, of an earlier award determined that Apotex’s abbreviated new drug applications (ANDAs) did not qualify as “investments” under the NAFTA. As such, the Tribunal, by a majority,* held that Apotex was barred from relitigating the issue despite Apotex’s argument that the earlier award concerned different kinds of ANDAs (those that were tentatively approved by the U.S. Food and Drug Administration as opposed to those that were finally approved). Apotex’s attempt to distinguish its new claims on this basis was rejected as impermissible “claim-splitting.” The Apotex III Award’s approach to res judicata promotes the doctrine’s objectives of finality, legal security and judicial economy, and should be followed by future investor-State tribunals.

Background
In February 2012, Apotex Holdings Inc. and Apotex Inc. initiated arbitration against the United States. Apotex claimed that a 2009 Import Alert placed on two of Apotex Inc.’s Canadian manufacturing facilities violated the United States’ obligations under NAFTA Chapter Eleven to accord Apotex and its U.S. investments national and most-favored-nation treatment. Apotex also claimed that the United States adopted the Import Alert without due process, in violation of the customary international law minimum standard of treatment.

Apotex asserted that certain of its ANDAs which had been finally approved by the U.S. Food and Drug Administration qualified as “investments” in the United States under NAFTA Article 1139. The United States disagreed, and thus argued that the Tribunal lacked jurisdiction to hear Apotex’s claims on this basis. On June 14, 2013, a final award had been issued in an earlier NAFTA proceeding, Apotex Inc. v. United States of America (Apotex I & II Award). In that proceeding, Apotex contended that two of its tentatively-approved ANDAs qualified as “investments” for purposes of the NAFTA. The Apotex I & II Award held that Apotex’s ANDAs did not so qualify and dismissed Apotex’s claims in their entirety. The United States then objected in Apotex III that Apotex’s claim that its ANDAs qualified as “investments” was barred by res judicata.

Apotex III Award
The Apotex III Award, by a majority, upheld the United States’ objection and made several important determinations with respect to res judicata under the NAFTA and international law.

First, the Apotex III Tribunal rejected the claimants’ argument that NAFTA Article 1136(1) barred the operation of res judicata. That Article provides that “[a]n award made by a Tribunal shall have no binding force except between the disputing parties and in respect of the particular case.” Article 1136(1) closely parallels Article 59 of the ICJ Statute (and the earlier PCIJ Statute) and has been understood to mean that the Court has no rule of stare decisis. Given that the Court has nevertheless applied res judicata, the Tribunal found that Article 1136(1) similarly did not preclude the application of res judicata under the NAFTA:

If the position were otherwise, the Claimants’ submission would effectively mean that it could re-litigate the same claims over and over again in different arbitrations against the same party, which would be an absurd result for an arbitral procedure intended to produce finality with a legally binding decision.

Second, the Tribunal found that res judicata was a “general principle of law and thus an applicable rule of law within the meaning of NAFTA Article 1131,” NAFTA’s governing law provision. With respect to res judicata’s traditional “triple identity test”– same persona, petitum (object), and causa petendi (grounds), it was undisputed that Apotex Inc. and the United States were both parties to the prior and current arbitrations. The Tribunal, moreover, found Apotex Holdings to be a “privy” with Apotex Inc. and bound by the Apotex I & II Award to the extent that Holdings’ claims depended on Apotex Inc.’s ANDAs as “investments” under the NAFTA.

The Tribunal noted, however, the questionable division between object and grounds. Requiring that the object and grounds be exactly as pleaded in the first arbitration could enable litigants to evade res judicata by modifying slightly the requested relief or legal arguments in the second proceeding (a tactic known as “claim-splitting”). The Tribunal cited jurisprudence in favor of a simpler, two-part test. For example, the Pious Fund of the Californias award required only sameness of parties and the “subject-matter that was judged”.

Third, the Tribunal found that international courts and tribunals regularly examine a prior award’s reasoning in determining the scope and preclusive effect of its operative part. In this connection, the Tribunal considered (as a matter of legal logic and consistent with international law) that under Article 32 of the 1976 UNCITRAL Rules,** the relevant reasons in the Apotex I & II Award “can be read together with the operative part for the purpose of applying the doctrine of res judicata[.]”

Applying NAFTA Article 1131(1), the rules of international law and the UNCITRAL Arbitration Rules, the Tribunal concludes that the Apotex I & II Award, with its relevant reasons, operates in this arbitration as res judicata as regards both named parties to that arbitration[.]

After making these determinations, the Tribunal then examined the effect of the Apotex I & II Award on Apotex’s claims in Apotex III.

Critically, the Tribunal accepted that Apotex pleaded specific claims in Apotex I & II that differed from those advanced in Apotex III. Namely, the former claims related to tentatively approved ANDAs rather than finally approved ANDAs. Nevertheless, examining the reasons in the earlier award, the Tribunal held that:

It is clear from those reasons that the parties put distinctively in issue ANDAs generally, not limited to tentatively approved ANDAs but also including finally approved ANDAs; that the tribunal actually decided that issue; and that, as that tribunal saw it, that decision, amongst others, was necessary to resolve the parties’ dispute before it.

[…]

In the Tribunal’s view, the operative part … and its relevant reasons in the Apotex I & II Award apply equally to all ANDAs, whether tentatively approved or finally approved. As part of their essential character, as distinctly decided in the Apotex I & II Award, Apotex Inc.’s ANDAs are no more than applications operating as quasi-import licences which support cross-border sales by Apotex Inc. to its consignees in the USA of products manufactured at its Canadian facilities. The possibilities of Apotex Inc. selling or transferring ANDAs (albeit revocable and remaining site-specific to the designated manufacturing facility) do not change the inherent nature of these ANDAs, as decided in the Apotex I & II Award. ANDAs are not commodities in the territory of the USA.

The Tribunal therefore applied the concept of issue estoppel (“the principle that a party in subsequent proceedings cannot contradict an issue of fact or law not reflected in the dispositif if it has already been distinctly raised and finally decided in earlier proceedings between the same parties”), even if it did not expressly use the term.***

To confirm the logic of its holding, the Tribunal asked “the simple question”: how would the Apotex I & II tribunal respond to Apotex’s claims in Apotex III?

In this Tribunal’s view, that question admits of only one answer: the Apotex I & II tribunal would say that it had already decided the essential issues relating to these claims in its award; and, applying the same … operative part with its same supporting reasons, that these claims failed to meet the requirements of NAFTA Article 1139 for jurisdiction under NAFTA’s Chapter Eleven.

In reaching its conclusion, the Tribunal appeared to endorse the Pious Fund award’s simpler two-part test for res judicata, remarking that it was “impermissible to parse the two sets of claims” to artificially distinguish one case from the other. In this connection, Apotex (represented by new counsel) raised new arguments in Apotex III concerning the interpretation of Article 1139 and why its ANDAs should be considered “investments.” The Tribunal found that allowing a party to escape the effects of res judicata by simply reformulating their claims and arguments (i.e., “claim-splitting”) would multiply the cost and time expended in already costly and lengthy arbitrations and thwart the purpose of the doctrine to end litigation by one final and binding award.

Conclusion
The Apotex III Award represents a significant milestone for the interpretation and application of res judicata in investor-State arbitration. The Tribunal rejected more formalistic approaches and read res judicata to include an award’s operative part and also its underlying reasoning. In so doing, the Tribunal accepted the concept of issue estoppel, finding that the question of Apotex’s ANDAs as “investments” had been distinctly put in issue and actually decided in a decision that was necessary to the resolution of the parties’ earlier dispute. Apotex’s attempt to “split” its claims and avoid res judicata was rejected given the Apotex I & II Award’s reasoning.

The Apotex III Tribunal’s approach should be employed by future investor-State tribunals where the same issue, involving the same treaty, was litigated by the same parties and actually determined by the prior tribunal in a binding award. This approach ensures finality and legal security, protecting parties (particularly defendants) from having to litigate twice and avoiding potentially divergent decisions with respect to the same matter. It also promotes judicial economy by preventing the costly and time-consuming relitigation of repeat claims.

* The Apotex III Tribunal was comprised of John R. Crook, J. William Rowley, and V.V. Veeder (presiding). Mr. Rowley, dissenting on this issue, would have concluded that the Apotex I & II tribunal did not decide the specific question of whether Apotex’s finally approved ANDAs constitute an “investment” under NAFTA Article 1139.

** The Apotex I & II proceedings were conducted pursuant to the 1976 UNCITRAL Rules, Article 32(2) of which provides that the award “shall be final and binding on the parties” and Article 32(3) of which provides that an award “shall state the reasons upon which the award is based.”

*** Earlier in the Award, the Tribunal found it was “clear” that past tribunals had applied forms of issue estoppel (e.g., Orinoco Steamship, Amco v. Indonesia, and Grynberg v. Grenada), even if some tribunals had not used the term.

The author, Nicole C. Thornton, is an Attorney-Adviser in the United States Department of State, Office of the Legal Adviser, Office of International Claims and Investment Disputes (L/CID). The views in this article are expressed by the author solely in her personal capacity and do not necessarily represent those of the U.S. Government.


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Making a Muddle of Moral Damages

by Jarrod Wong

University of the Pacific, McGeorge School of Law,
for ITA

Let’s get this straight: When awarded to persons, including foreign investors, moral damages are compensatory in nature. They are not discretionary. They are not symbolic. They are not exemplary. They are not punitive. Rather, as the commentary to the ILC Draft Articles 36 and 37 on State Responsibility notes, “[c]ompensable personal injury encompasses not only associated material losses . . . but also non-material damage . . . (sometimes, although not universally referred to as ‘moral damage’).” Put differently, “[m]aterial and moral damage resulting from an internationally wrongful act will normally be financially assessable and hence covered by the remedy of compensation.” As with your run-of-the-mill material damages then, once it is determined that the investor has suffered moral damages, the tribunal must provide full reparation. This is accomplished by awarding “a judicially ascertained compensation for wrong” that is “commensurate with the loss, so that the injured party may be made whole.” (See here and here for a fuller exposition of the compensatory nature of moral damages.)

Alright then, but when should moral damages be awarded in the investment context? As laid out in the ICSID case of Lemire v. Ukraine, moral damages are appropriate only when the actions of the host state involve physical duress, have a grave cause and effect, and result in mental suffering or loss of reputation (which is the relevant moral injury that must be compensated). A prime example — indeed, the first case in which moral damages were awarded under a BIT — is the ICSID case of Desert Line v. Yemen. In Desert Line, the foreign investor had been coerced by the Yemeni government into an unfavorable settlement of a prior arbitral award concerning its investment, with its employees having been physically threatened, arrested and detained in the process. No wonder then that moral damages were appropriate and awarded there.

But despite Lemire’s articulation of moral damages and the precedent set by Desert Line, various tribunals continue to struggle with the concept of moral damages. In Stati v. Kazakhstan, the tribunal determined that Kazakhstan had violated its obligations under the Energy Charter Treaty to treat the claimants fairly and equitably by subjecting the investors to coordinated harassment from various state institutions, including the Financial Police. In the process, the tribunal also considered but rejected the investors’ claim for moral damages. This was so even though the investors’ employee had been detained, arrested and incarcerated for months pursuant to a criminal charge that the tribunal found was unjustified under Kazakh law. Indeed, the tribunal further acknowledged that Kazakhstan’s treatment of the investors was “severe, intentional and multi-faceted.” Inexplicably, however, the tribunal concluded that the claimants did not prove the Lemire requirements, which it emphasized were found only in “very exceptional circumstances.” One certainly hopes it is uncommon for host states to throw their investors’ employees into jail without cause, but moral damages may not be refused when moral injury has been inflicted whatever its frequency of occurrence. There is surely no question here that the employee had endured mental suffering in a situation involving physical duress and a grave cause and effect, and that the investors should thus have additionally been compensated with moral damages. Even more starkly, in Rompetrol Group v. Romania, the tribunal characterized the claim for moral damages as “both notional and widely discretionary,” and thus contrary to the principles set forth in the ILC draft Articles and as applied in Desert Line and Lemire.

Amidst this confusion over moral damages, investment tribunals have been singularly hesitant to award the same. A notable exception can, however, be found in the recent case of Al-Kharafi v. Libya, in which the tribunal awarded the claimant USD 30 million in moral damages for the damage caused to its worldwide professional reputation (in the stock market as well as in the global business and construction markets) after the respondents had unjustifiably cancelled a project previously approved for a period of 83 years. But for better or worse, its contribution to the international jurisprudence in this area is arguably limited insofar as the tribunal was relying on the Libyan Civil Code provisions on moral damages in issuing its award.

So what else then is in store for moral damages? There are on the horizon two high-profile cases involving moral damages, but for different reasons, neither will test threshold questions pertaining to its doctrine. In Mykhailenko v. Belarus, the investors have filed a notice of intent to arbitrate what could become the mother of all moral damages claims. The notice alleges that Mr. Mykhailenko not only had his factory expropriated by Belarus but was forced to spend six years in an overcrowded Belarus labor camp under deplorable conditions. Assuming these allegations are true, the claim meets the Lemire requirements in spades, and the question will not be whether moral damages are due but rather how much. In BSG Resources v. Guinea, the claimant has very recently brought a claim against Guinea for the alleged unlawful taking of its mining investments in Guinea. While the request for arbitration seeks moral damages, it does not explicitly point to any physical duress on the part of Guinea. As such, it is highly unlikely that the tribunal there will award any moral damages, at least based upon the request. Accordingly, as preliminarily alleged, Mykhailenko is a slam dunk whereas BSG Resources is a losing proposition as far as moral damages are concerned. Notwithstanding these apparently clear-cut outcomes, one hopes that future tribunals visit no further violence upon the doctrine of moral damages by treating Mykhailenko as the new gold standard or BSG Resources as seeming evidence of such claims lacking merit in general. More immediately, one hopes that the tribunals in these cases will fully and finally appreciate the categorically compensatory nature of moral damages as awarded to investors.


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