Upholding Delocalized Enforcement of ICSID Awards

by Karen Halverson Cross

The John Marshall Law School,
for ITA

In Mobil Cerro Negro, Ltd., et al v. Bolivarian Republic of Venezuela, a New York federal district court rejected Venezuela’s sovereign immunity challenge and upheld use of an ex parte procedure available under New York law to convert an ICSID award into a U.S. court judgment. The decision highlights the delocalized nature of ICSID awards and illustrates how ICSID award creditors are increasingly resorting to judicial enforcement. The decision also promotes New York’s reputation as a creditor-friendly jurisdiction at a time of controversy in Europe over the consistency of an intra-EU ICSID award with EU policy.

Typically, enforcement of an arbitration award against a foreign state is subject to personal jurisdiction, service of process, and venue requirements under the U.S. Foreign Sovereign Immunities Act (FSIA), in addition to New York Convention defenses. In contrast, the ICSID Convention provides for automatic recognition of awards. It requires any ICSID Contracting State to recognize and enforce an award’s monetary obligation as if it were a final judgment in that state, subject only to domestic rules governing the immunity of sovereign property from execution. The U.S. legislation implementing the Convention (Section 1650a) provides that an ICSID award shall be accorded the same full faith and credit that a U.S. state judgment would enjoy.

In 2007, Mobil Corporation and several of its subsidiaries filed a request for arbitration with ICSID, seeking compensation for the expropriation by Venezuela of their interest in crude oil joint ventures they formed with Venezuela’s state oil company, PDVSA. One of the Mobil subsidiaries, Mobil Cerro Negro, also commenced ICC arbitration against PDVSA, invoking an arbitration clause in one of the project agreements. In 2011, the ICC panel issued Mobil Cerro Negro a USD 747 million award. In October 2014, the ICSID panel issued a USD 1.6 billion award in favor of the Mobil subsidiaries. Several weeks later, ICSID provisionally stayed enforcement of the award pending Venezuela’s application to revise it in order to prevent double recovery.

One day after the ICSID tribunal issued its award (but before ICSID stayed the award’s enforcement), the Mobil subsidiaries brought an ex parte petition in New York federal district court to convert the award to a judgment. The court granted the petition, and Venezuela moved to vacate the judgment, arguing that the FSIA requires a creditor seeking recognition of an ICSID award to file a plenary action against the foreign state. Since the Mobil subsidiaries failed to comply with the FSIA’s jurisdictional, venue, and service of process requirements, Venezuela argued that the court lacked authority to issue the judgment. Venezuela characterized the claimants’ arguments in favor of expedited proceedings as unconvincing, since enforcement of the underlying award had been stayed.

The court denied Venezuela’s motion to vacate, but stayed enforcement of the judgment pending resolution of the ICSID revision proceeding. Relying on several previous ex parte recognition decisions, the Mobil Cerro Negro court found that Section 1650a, which does not specify a procedure for recognition, allows resort to ex parte procedures available under state law to convert an ICSID award to a federal judgment.

Venezuela also argued that the FSIA, enacted in 1976, superseded the ICSID Convention and Section 1650a. The court acknowledged that under U.S. law, the clear language of a later-in-time statute may supersede an existing treaty. However, the court invoked the Charming Betsy canon of statutory interpretation, the rule that wherever possible, a U.S. court should interpret a statute to avoid conflict with U.S. international obligations. In light of the FSIA’s silence as to its applicability to the recognition of ICSID awards, and the ICSID Convention’s aim of creating a self-contained arbitral regime with no judicial review, the Mobil Cerro Negro court found that the FSIA’s procedural requirements do not apply to petitions to recognize ICSID awards. The court characterized the ICSID Convention as seeking “to depart from, not to double down on” the New York Convention’s recognition and enforcement procedure.

Venezuela has appealed the judgment to the Second Circuit Court of Appeals. The ICSID revision proceeding is still pending. In February 2015, Venezuela filed a petition with ICSID to annul the award.

Mobil Cerro Negro is one of a small but growing number of petitions in U.S. court to enforce ICSID awards. The ICSID Convention requires Contracting States to comply with awards issued against them. For this reason, and perhaps also because ICSID is part of the World Bank Group, ICSID awards traditionally have been honored voluntarily, without the need for an award creditor to resort to judicial enforcement. Although petitions to enforce ICSID awards used to be a rarity, since 2007 there have been at least nine U.S. judicial decisions involving petitions to recognize or enforce ICSID awards against foreign states, including Grenada, Argentina, Egypt, Zimbabwe, Peru, Democratic Republic of the Congo, and Venezuela. This increase may be a function of the significant growth in investment arbitration claims adjudicated over the past decade. But the increase may also reflect a change in position by certain countries towards ICSID arbitration.

In spite of Mobil Cerro Negro, judicial enforcement of ICSID awards remains very difficult. The Mobil subsidiaries, like other ICSID award creditors, still face the significant challenge of finding nonimmune Venezuelan assets against which to enforce their judgment. Mobil Cerro Negro facilitates ICSID award enforcement in two respects. By allowing an award creditor to use ex parte recognition procedures, the decision allows an award to be converted to a U.S. judgment simply and quickly. Significantly, the decision also makes it easier for an award creditor to take advantage of broad post-judgment discovery available under U.S. law to enforce judgments against a foreign state. In Republic of Argentina v. NML Capital, Ltd., the U.S. Supreme Court held that the FSIA does not limit post-judgment discovery of a foreign sovereign judgment debtor’s extraterritorial property. The 2014 NML decision upheld bank subpoena orders for information on how Argentina moves its assets around the world, orders that were intended to allow a New York federal district court to serve as a “clearinghouse for information” to assist NML in its enforcement efforts. Additional information on the NML decision can be found here.

Mobil Cerro Negro honors the ICSID Convention’s intent to create an arbitral regime that is independent of domestic courts, and may prompt additional ICSID award creditors to bring enforcement actions to U.S. courts. Mobil Cerro Negro coincides with an ongoing European debate over intra-EU investment arbitration. The European Commission recently announced that an ICSID award against Romania in favor of Swedish investors contravenes EU rules prohibiting state aid.1 One of the Swedish investors petitioned a U.S. court to recognize the ICSID award. On April 16, 2015, for reasons that are to be explained in a forthcoming opinion, the court dismissed the petition and directed the investor to bring a plenary enforcement action on behalf of all claimants. The April 16 order is from a District of Columbia federal district court and not the court that decided Mobil Cerro Negro.


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  1. See also the recent post on the European Commission’s position on the ICSID award in Micula v. Romania

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Conference report on Wendy Miles’ keynote speech at the YAF/YAPP conference in Vienna (28 March 2015): “The Role of Young Arbitrators in the Rule of Law”

by Ileana M. Smeureanu

Jones Day,
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.

This year, Wendy Miles delivered the keynote speech at the YAF/YAPP Annual Conference on the second day of the Vis Moot. Attuned to the audience, the speech began with a note of encouragement and ended on a counterpoint of responsibility: though the future belongs to the young arbitrators, they are entrusted with nothing less than the future of the rule of law.

Following a prelude that traced the origins of the rule of law, from the Magna Carta of 1215 to various human rights instruments adopted over the centuries, Miles explored how international arbitration has fostered and spread the rule of law.

Miles set the tone by quoting Lord Bingham’s definition of the rule of law, which distinguishes between thin and thick understandings of the concept. According to Lord Bingham, the “thin” sense, refers to “conduct that is in compliance with the letter of the law”. In this understanding, the rule of law is meant to lie at the heart of sustainable, long-term growth, protect private ownership, create an investment-friendly climate, and ultimately protect the orderly resolution of disputes. In this context, Miles cited Lord Bingham’s observation that “international arbitration, properly resorted to and fairly conducted has a supremely important contribution to make to the rule of law”. As such, through arbitration the rule of law can spread from the prominent arbitral seats like London, New York, Hong Kong, Singapore, Paris and Vienna to emerging markets in Africa, Asia, and Latin America, whose importance in international arbitration is currently increasing.

The limits of the “thin” sense of the rule of law can be seen in countries where irregularities are cloaked in an appearance of legality, and where the rule of law is observed superficially but not in substance. For these situations, Lord Bingham and Miles turn to the “thick” sense of the rule of law, that is the content of the rule of law as well as the machinery used to administer it.

Following and taking into account recently expressed views from two other distinguished legal minds of our time, Lord Neuberger, the President of the UK Supreme Court, and Geoffrey Ma, the Chief Justice of the Hong Kong Court of Final Appeal, Miles reiterated that international arbitration is an example of the “machinery” needed to implement the rule of law. However, she warned that in order for arbitration to serve as an effective mechanism for administering the rule of law, the arbitration community must be aware of its effects and must constantly strive to improve. As Lord Neuberger puts it, “with increased freedom and power to resolve disputes through arbitration comes an increased responsibility”. Miles took Lord Neuberger’s call one step further by insisting that arbitration be treated as a trustworthy and effective system of administering the rule of law, which must be nurtured and maintained.

Preserving such an effective system requires embracing the eight strands through which Lord Bingham defined the rule of law. Weaving these strands together, Miles presented their importance for international arbitration.

First, law must be “accessible, intelligible, clear and predictable”. Miles observed that this standard, applicable to both the merits and the procedure alike, raises a number of concerns in international arbitration. In the investor-State context, it triggers the criticism that the dispute resolution system lacks transparency. In the commercial arbitration setting, the differing results that arbitrators sometimes reach by interpreting the same rules may lead to a lack of predictability. Though it can provide the often-praised and sought-after flexible nature of arbitration, practitioners must be aware that it can also be seen to undermine the rule of law. According to Miles, young arbitrators must rise to the challenge to explain the system to those who do not know it, preserve its integrity by abiding by the law, and to behave ethically at all times. Only in this manner can the rule of law be protected and fostered.

Second, “questions of legal rights and liability should ordinarily be resolved by application of the law and not the exercise of discretion.” Miles recalls that in some cases arbitrators have the authority to resolve disputes ex aequo et bono and as amiable compositeurs, which under the second strand may perhaps become questionable.

The third strand refers to the application of the law to all subjects alike, save where “differences justify differentiation”. Miles notes that the standard becomes questionable where foreign investors are given preferential treatment over local investors. While the difference of treatment and ISDS generally are currently on the agenda of public debates, if the system is not properly explained and understood, it may be wholly undermined, potentially affecting commercial arbitration as well.

Fourth, the law should protect human rights. Human rights issues arise not infrequently in arbitration, although they are not necessarily associated with this legal field. For example, the debate on climate change, in a broader human rights context, presents an opportunity for young arbitrators who can explain the role of, and “clear the name” of, ISDS where it has been damaged.

The fifth rule of law strand is that the law should provide means to resolve “without prohibitive cost of inordinate delay” bona fide disputes that the parties cannot themselves resolve. Miles referred in this context to the issue of costs, a delicate issue in international and frequently complex disputes. Noting the efforts that ICC made by issuing the “Report on Techniques for Controlling Time and Costs in Arbitration”, Miles concludes that the ultimate responsibility for costs rests on the counsel. Young lawyers are urged to focus on cost effective and efficient service to serve the purpose of the rule of law.

For the last three strands, which respectively concern the role of the State, the conduct of State officials, and the courts, Miles stressed that the rule of law depends on States complying with their international obligations. In consequence, public officials must exercise their powers within the bounds of their authority and for the purpose they were given. Finally, adjudication must be fair and accessible to the public. These will be important values for today’s young arbitrators to remember when they are eventually called on to advise States or perhaps become government officials themselves over the course of their careers.

For the finale, Miles recalled the inspiring words of Lord Bingham, who insisted that we lawyers “who, in any capacity, devote our professional lives to the service of law” are not “mere custodians” of the legal order but are instead “guardians of an all but sacred flame which animates and enlightens the society in which we live.” Miles thus reminded us all¬¬ – young and old – to serve our clients loyally while never forgetting that we are called to a greater purpose: serving the “Rule of Law”.


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About the Ostrich, the Micula Brothers and other European Fables

by Gloria Alvarez (Associate Editor)

 ‘By putting its head in the sand, the ostrich can see no problems, and if it can’t see any problems, they don’t exist”[1]

To what extent can legal systems differ? Can these differences be legitimate enough to collapse a “conflictive” legal system? These two ambitious questions are difficult to be answered in one go, and are rather susceptible to being answered differently. Regardless of the legal context and origin of the given answers, only one general rule should apply: no ostriches are allowed. And please allow me to explain what I mean by that.

By burying its head in the sand, the ostrich limits itself to internally scrutinise a broken view, this action hinders the ostrich’s full panorama. As a consequence, the ostrich is not able to detect major risks and failures. There is no consciousness of the ostrich’s externality and thus the possibility of detecting external solutions to external problems is null.

The apparent conflict between EU Law and Investment Arbitration has opened the door to the active interest of the stakeholders involved in this relationship. In particular, the European Commission has played different roles; while in some cases the Commission has been characterised as a friend of the court (amicus curiae) it has also adopted a more adversarial role as an investigating authority.

Under ICSID Rules (Rule 37), the Commission has frequently participated as a non-disputing party by submitting amicus curiae opinions. AES Summit v Hungary, Electrabel v Hungary, Antin v Spain, Eiser v Spain are some of the Commission’s amici participations, which have been already addressed in this blog by Epaminontas Triantafilou, Carlos Gonzalez-Bueno and Laura Lozano.

However, the participation of the Commission in investment cases is not limited to the ICSID rules and framework of international law.  As part of the EU policies and internal actions laid down in the Lisbon Treaty (TFEU), the European Commission has the possibility to investigate and decide if Member State measures qualify as (illegal) aids. These internal provisions have been used by the DG Competition Authority (part of the Commission) to investigate the Micula award (ICSID Case No. ARB/05/20).

The outcome of the investigation concluded the illegality of the ICSID award as it allegedly infringes EU state aid rules. In doing so, it is possible that the Commission has ignored the holistic interaction of legal systems. By impersonating an ostrich, the Commission has wrongly applied internal laws to an international decision but it also refused to contribute to the legitimization of the EU as an actor of international investment law. By burying its head in EU Law, the Commission believes to have protected the rules of EU Competition Law, while in reality it has provoked Romania’s breach of international obligations under one of the most important hallmarks of international law.

In 2005, the Romanian government revoked duty exemptions, which affected the Micula Brothers and three of their companies’ investments. Micula et.al initiated ICSID proceedings under the Sweden-Romania BIT arguing breach of fair and equitable treatment by the Romanian Government. Romania’s primary defence was to invoke the incompatibility of the duty exemptions with EU Law. Hence, prior to Romania’s accession to the EU, any incentive or aid prohibited under the EU acquis favouring certain investors ought to be rescinded.

The ICSID Tribunal awarded $ 250 million against Romania and partial payment of the award was implemented by offsetting taxes owed by one of the claimants. Romania then sought the Commission’s services to determine the possibility of paying the outstanding amount of the award to a natural person (i.e. the Micula Brothers). The Commission initiated investigation proceedings under TFEU Article 108(2), while issuing a “suspension injunction” against the final payment of the award.

The path of reasoning taken by the Commission was centred on the award’s purpose. If the main objective of the award constitutes the repayment of the duty exemptions initially withdrawn, this repayment would constitute a new and illegal state aid. On March 30th 2015, the Commission concluded that payment of the ICSID award would constitute an economic advantage for the investor, which is an unlawful aid under EU Law.

Assertively, the Commission seemed to recognise and describe the award as a payment in compensation. However, the Commission also used indistinctively the wording of economic measure and award. The consequence of analysing the award as an economic measure rather than a compensation payment modifies the nature and purpose of the award itself (See Chorzow Factory Case, were distinction was drawn between economic measure and compensation payment).

In this particular case, the difference is that while economic measure is a very generic concept that indeed could cause an illegal preferential treatment to an undertaking, payment for compensation is a specific international sanction, where obligation(s) of international law have been breached and damages to the investor ought to be paid (i.e. breach of FET protections under a BIT).

Outside the acquis, the Commission indirectly divested the functions granted to ICSID tribunals and ad hoc committees (Chapter VII ICSID Convention). In particular, the Commission’s scrutiny implemented to the Micula Award could be treated as the type of revision ad hoc committees are competent of (ICSID Convention Article 52(3)). In the opinion of the author, DG Competition went even beyond ad hoc committees’ competences. This is because the Commission went all the way at looking into the merits of the dispute when analysing the appropriateness and the proportionality of the compensation payment.

The ICSID ad hoc faculties divested are not the only sensible issue at stake. With the categorisation of the ICSID award as illegal, the principle of observing an ICSID award as final and binding (Article 53 and 54 of ICSID convention) has also been breached by a third authority that is not jurisdictionally competent to do so, at least in the scope of the BIT and ICSID Convention. At the moment, the Micula award is also under the scrutiny of an ICSID ad hoc committee, this committee is expected to assume consciously its externality and potential impact with other legal systems, hopefully in this ICSID forum no ostriches will be allowed


[1] Jan Klabbers, Treaty Conflict and the European Union, Cambridge University Press (2009), p 11.


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Launch of the first extensive commentary of the CAS Rules by Despina Mavromati & Matthieu Reeb

by Eleanor Taylor

Kluwer Law International

tas-cas

The Court of Arbitration for Sport (CAS) is pleased to host a launch for a new book by Despina Mavromati & Matthieu Reeb, “The Code of the Court of Arbitration for Sport: Commentary, Cases and Materials”.

The book comprehensively analyses the rules of the CAS Code within the more general context of international arbitration. Each provision is supplemented by relevant doctrine, case law and materials from internal CAS practice.

The authors will shortly present the book, followed by an open discussion with the participants and an aperitif. The book can be ordered directly from Kluwer at www.kluwerlaw.com.

The book launch will take place on Wednesday 6 May 2015 in Lausanne and is by invitation only.

Invitations may be requested at [conference@tas-cas.org] (limited number only).


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Arbitration of Cross-Border M&A Disputes

by Joe Liu

Hong Kong International Arbitration Centre

In recent years, the mergers and acquisitions (M&A) market has shown steady signs of recovery from the effects of the Global Financial Crisis. According to a survey of over 735 M&A professionals recently conducted by KPMG, 82% of survey participants said they were planning acquisitions in 2015.  Respondents cited large cash reserves, opportunities in emerging markets and the availability of credit on favourable terms as some of the key drivers of deal activity.  Research conducted by Deloitte in 2014 suggests that a surge in deal activity is set to continue into 2015.  84 per cent of 2,500 corporate and private equity respondents anticipated a sustained pace of M&A activity over the next 24 months. This optimism has been shared by leading law firms, which have predicted significant M&A activity across a wide range of sectors, including financial services, energy, healthcare, technology, media and communications.

Arbitration clauses are now a regular feature of M&A contracts, particularly those of an international nature, anda trend has emerged of subjecting M&A disputes to arbitration.  For example, the €480 million dispute between Philips and Funai Electric over a failed sale of the former’s consumer multimedia entertainment business is among a number of high-profile M&A cases in which companies have turned to arbitration over a soured acquisition.

In Hong Kong, the number of M&A disputes administered by the Hong Kong International Arbitration Centre (HKIAC) rose by more than half during 2012 and into 2013.  The actual number of deals that have descended into arbitration disputes could be far higher, however, as many cases are resolved by ad hoc arbitration in Hong Kong.

Common disputes in M&A transactions

M&A disputes can arise across the entire spectrum of the phases of a deal, from pre-closing to post-closing disputes.

M&A disputes commonly arise at the post-closing stage.  In this regard, contractual representations and warranties represent a major cause of dispute, as these statements have become increasingly far-reaching.  M&A contracts often contain representations that (1) the financial statements of the target company are accurate, complete and prepared pursuant to the applicable accounting standards, (2) the target has not concluded any non-disclosed material contracts, or (3) there have been no material adverse changes in the operation of the target.  Conflicts arise if these representations are breached, in which case claims for breach of contract, damages, indemnity and/or rescission are often raised against the seller.  Fraudulent misrepresentation is sometimes alleged against the seller.  The management of or exit from an investment vehicle (eg, a joint venture (JV)), the competing exercise of put or call options and claims by shareholders against directors for failure to conduct a competitive sale are other common causes of post-closing disputes.

Purchase price adjustment disputes are also a recurring theme.  M&A agreements usually provide for post-closing price adjustment mechanisms, as completion can take a significant amount of time after the relevant agreement has been signed.  It is common to base purchase price adjustments on future profits or turnover of the target (earn-out provisions).  Such provisions, however carefully drafted, are a notorious source of dispute, as difficulties often arise over the interpretation of these provisions (eg, as to the applicable accounting principles) and the quantum of the consideration.  As substantial amounts of money are usually at stake, parties often try to influence the price adjustment mechanism in their favour.

Conflicts between the parties to an M&A transaction can also arise at any time before the acquisition actually takes place.  For example, a dispute may result from one buyer’s decision to acquire the target company alone or to withdraw from the transaction.  Pre-closing disputes may also relate to breach of the letter of intent or the confidentiality or exclusivity agreement.  The non-fulfilment of conditions precedent, such as failure to obtain necessary governmental permits or confirmation by the board of directors, often leads to disputes between the parties at the pre-closing phase.

Arbitration as a preferred means of resolving M&A disputes

Arbitration is one of the most commercially effective and pragmatic means by which parties can resolve M&A disputes.  It offers a number of significant advantages, such as confidentiality, the ability to select a suitable and neutral seat of arbitration, the appointment of arbitrators who are familiar with M&A transactions, the choice of suitable and convenient languages and the enforcement of arbitral awards worldwide.

Parties can further enhance the effectiveness of arbitration by selecting suitable arbitration rules, such as the 2013 HKIAC Administered Arbitration Rules (the HKIAC Rules), as the applicable procedural rules and Hong Kong as the seat of arbitration.  For the following reasons, HKIAC arbitration is among the most prevalent choices for resolving international M&A disputes concerning high-value and complex matters.

  • Neutral forum – The HKIAC provides a neutral forum for M&A disputes between parties from different countries.  According to the World Economic Forum’s Global Competitiveness Report for 2014-2015, Hong Kong is ranked fifth worldwide and first in Asia for judicial independence.  The Hong Kong courts have not refused to enforce any awards since 2011, including those against Chinese State-owned enterprises.  While Hong Kong is the default seat of arbitration under the HKIAC Rules, parties are free to choose a different seat for their arbitral proceedings.
  • Confidentiality – the HKIAC Rules contain robust confidentiality provisions in respect of arbitral proceedings and awards. The Hong Kong Arbitration Ordinance (Cap 609) extends the protection of confidentiality to cover arbitration-related court proceedings and judgments, and therefore offers the highest level of protection of confidentiality in the Asia-Pacific region.  This is of vital importance to M&A disputes.  Sellers would not want to disclose any price-sensitive information or any confidential information regarding the business and operation of the target company.  Having spent a significant amount of time and money evaluating a transaction, a buyer would wish to preserve confidentiality of its investment from other potential acquirers.
  • Efficiency – Speed can be critical in a pre-closing dispute, otherwise the closing of the transaction can be put at risk.  Given the time pressure involved, a quick determination of price may be required prior to completion.  Under the HKIAC Rules, a party can apply for the arbitral proceedings to be conducted on an expedited basis.  This process will generally result in the appointment of a sole arbitrator, who will decide the dispute based on documents only, a limited number of briefs and within a short timeframe.  The HKIAC can also appoint an emergency arbitrator within two days of an application for emergency relief being accepted.  The emergency arbitrator is under a 15-day time limit to decide the application.  In a recent case, the HKIAC appointed an emergency arbitrator within just five hours to hear an application for emergency injunctive relief in relation to a US$1.9 billion dispute regarding the acquisition of a large online game company. The emergency arbitrator issued an emergency award only a few days after the hearing.
  • Multi-party/multi-contract disputes – International M&A deals are usually concluded under a suite of transaction documents involving multiple parties.  The HKIAC Rules provide highly sophisticated and practical mechanisms to deal with this type of dispute through comprehensive provisions on joinder of additional parties, consolidation and commencement of a single proceeding under multiple contracts.  Suppose, for example, that disputes arise between parties to a JV arrangement involving a shareholder agreement, a share purchase agreement, a credit agreement, a security agreement and a guarantee.  If each of these documents contains a compatible HKIAC clause, the HKIAC will offer the rare possibility of consolidating these disputes into a single arbitral proceeding if there is a common question of law or fact and the claims arise out of the same transaction or series of transactions.

Parties can also choose other alternatives to resolve M&A disputes, such as mediation and expert determination, and these mechanisms can be combined with arbitration.

Conclusion

Sufficient attention should be paid to the drafting of arbitration clauses in M&A contracts, particularly in multi-party and multi-contract situations.  Buyers and sellers should give serious consideration to the disputes that could conceivably arise, the choice of arbitration seat and rules, and the interplay between any arbitration clauses in all related agreements.  Parties should ensure that their arbitration clauses are tailored to the needs of the underlying transaction(s) and that they will promote an efficient and cost-effective dispute resolution process.


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The Hidden Amiable Compositeur

by YSIAC

by Anya George, Schellenberg Wittmer Ltd

for YSIAC

 

An arbitrator who decides a case by reference to general notions of fairness and equity, rather than in accordance with a strict application of legal rules, is generally referred to as an amiable compositeur or as deciding ex aequo et bono (even though these notions are not completely synonymous, the terms will be used interchangeably here). In such cases, the arbitrator will, as a rule, be acting with the express authorisation of the parties.

 

However, there may be situations in which arbitrators, without being so empowered, take it upon themselves to depart from the terms of the contract or a rigorous application of the law and, in effect, act as hidden amiables compositeurs.

 

A recent post here on the Kluwer Blog reported the results of a survey of experienced U.S. arbitrators, which revealed a worrying statistic: It appears that one quarter of the respondents to the survey indicated that, “at least some of the time”, they felt free to follow their own sense of equity and fairness in rendering an award, even if the result would be contrary to applicable law.

 

Of course, one should be wary of drawing hasty conclusions from such statistics, or of extrapolating general trends for the international arbitration community as a whole. Indeed, the respondents to this particular survey appear to be predominantly active as arbitrators in domestic cases. Nearly half of them indicated that international disputes only made up 1-10% of their caseload in the past five years. It may also be useful to bear in mind that, historically, arbitration in the United States bore many resemblances to amiable composition and, in some domestic contexts, still does.

 

Nevertheless, this statistic could be seen as a manifestation – albeit a rather extreme one – of an underlying phenomenon that may also exist in international arbitration, whereby arbitrators depart from or temper the effect of applicable rules of law, or reach other forms of compromise results, without being expressly empowered to act as amiable compositeur. This issue is often dealt with under the misnomer “splitting the baby”. To the extent that this refers to a purported tendency of arbitrators to thoughtlessly divide claims down the middle, i.e. award approximately 50% of the amount(s) claimed, the notion has, quite rightly, been challenged as a myth, supported by little or no empirical evidence.

 

However, “baby-splitting” is often used to denote a wider range of issues resulting in awards that are not justified by fact and/or law. For example, in some cases the losing party might be awarded what seems to be a consolation prize, or the amount of the winning party’s claims might be reduced, with little or no legal justification. In others, the arbitral tribunal may appear to have taken a shortcut when determining the quantum of damages rather than fully coming to grips with complex rules of valuation.

 

The possible reasons for such “compromise awards” are manifold:

 

  • In some cases, the compromise may be the result of the inability or, more rarely, the unwillingness of the arbitrator(s) to fully comprehend complex issues of fact or law. Unfamiliarity with the applicable law may play a part here. Indeed, it may be the case that not all, or even none, of the members of the arbitral tribunal have in-depth knowledge of the relevant legal framework. 
  • Members of an arbitral tribunal may engage in “horse-trading”. This can stem from a genuine difference of opinion as to the facts or the law. It may also (again more rarely) occur where one arbitrator actively promotes the arguments of the party that appointed him, possibly in the hope of repeat appointments. This tactic can be more or less successful, depending on how attached the chairman of the tribunal is to having a unanimous decision. 
  • And to come back to the point raised at the start of this post, compromise awards may also come about where arbitrators, without being empowered to do so by the parties, decide the case by reference to general notions of fairness and equity, rather than in accordance with a strict application of legal rules. In such cases, the arbitrators’ reliance on fairness and equity will not necessarily be directly apparent. They may seek to justify the result of the award by reference to the applicable legal rules, but without actually determining the effect of those rules. Hence the difficulty in identifying such cases of hidden amiables composition

The last scenario distinguishes itself from the first two in that arbitrators who reach such “equitable” decisions most likely believe that what they are doing is right, even if it is not quite (procedurally) correct. They may also believe that, despite not having been expressly authorised to act as amiables compositeurs, they are entitled to do so pursuant to a general expectation of the parties that arbitral tribunals, unlike national courts, will temper the effect of strict legal rules with a dose of fairness.

 

There may be a grain of truth in this perception of the parties’ ex ante expectations. Indeed, during an e-convention hosted in London in October 2014 in which approximately 150 delegates from over 20 countries took part, 54% of the delegates falling into the category of arbitration “users” indicated that they agreed with the following statement:

 

“In international disputes, arbitrators should always be empowered to make binding decisions based solely on what is fair and equitable (possibly ignoring applicable laws), unless the parties expressly agree otherwise”.

 

The delegates in question therefore appear to have presumed that arbitrators were empowered to decide ex aequo et bono unless specifically prohibited from doing so. However, this presumption is not mirrored in national laws or any other sources of authority. On the contrary, most national laws (including those that have adopted Art. 28(3) of the UNCITRAL Model Law) and most institutional rules provide that the arbitral tribunal may decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so.

 

Given the above, it is surprising that both arbitrators and arbitration users, in two wholly independent surveys, have indicated a belief that there is an implicit power for arbitrators to decide according to principles of equity and fairness. Of course, “fairness” is, above all other considerations, what users look for in arbitration, or indeed in any dispute resolution mechanism. But “fairness” in this context means ensuring that the arbitrators are impartial and fair-minded and that the requirements of fair and due process are met. It cannot, by any stretch, be understood as a blanket authorisation allowing considerations of fairness and equity to trump the applicable rules of law. On this point, there is perhaps a need to educate users and practitioners, at least those less familiar with international commercial arbitration standards and practices.

 

It may be the case that a hidden amiable compositeur is acting with the best of intentions and even according to the expectations of some users. It may also be the case, however, that arbitrators rely on notions of fairness and equity to justify (to or amongst themselves) shortcuts in the decision-making process. Either way, if the misapprehension described above is allowed to persist, it could end up fuelling the myth that arbitrators do in fact engage in baby-splitting or that they lack intellectual integrity. There can therefore be no room for the hidden amiable compositeur in international arbitration.


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Appointing the Dispute Board – Why It Differs from Arbitration Appointments

by Lindy Patterson

Dispute Resolution Board Foundation

As contracts containing Dispute Adjudication Boards (“DAB’s”) as a mandatory prerequisite to arbitration are on the increase (and being recognised as such by many legal systems) what issues are there around enforcing the establishment of such a Board? There is always, especially when a contentious situation has arisen, a party more reluctant to engage in resolving matters. In contracts which provide for dispute boards this is evident where one of the party which refuses to agree the appointment of a board and will not sign a dispute adjudication agreement. Can a dispute board be properly constituted by only one party? Is it any different to appointment of an arbitration tribunal and if so why?

The party initiating the appointment of the board will usually be the contractor. Some employers will do all they can to avoid appointment of a board. If you take the typical clause 20 Dispute Board provision in FIDIC red book –what does it provide for in the event of such non co-operation?

Clause 20.2 provides that parties shall jointly appoint a DAB. Clause 20.3 provides that where parties fail to agree upon a sole DAB member or, in the case of a three member board, one party fails to nominate a member, the appointing entity steps in to appoint. Clause 20.3 states “this appointment shall be final and conclusive”. It also provides that parties shall each be responsible for one half of the cost. So far, so good. Only one of the party’s participation is required to get to this stage. In the case of a one man board it will have meant the participating party has not obtained its choice of DB member- it will have had to rely on the appointing body’s selection. But it has obtained an appointment. So what then?

Clause 20 then refers to a tripartite agreement being entered into among the two parties and the DAB. It states the agreement between the parties and the board shall incorporate by reference the General Conditions of the Dispute Adjudication Agreement. These General Conditions are set out as an appendix to the FIDIC contract. If both parties do not sign the agreement, the wording of clause 20.3 is such that these General Conditions will not apply. This is unfortunate as they contain extremely useful procedural rules as well as dealing with the level and timing of the DAB Members’ fees and expenses. So what happens then? Is the DAB not able to be established?

The absence of such an agreement does not in my view prevent a DAB coming into effect. The provisions leading to appointment of a DAB sit separately from the obligation for parties to enter in to an agreement with the DAB. What it does do, however, is leave the remuneration of the DAB members to that which is fair and reasonable rather than daily rates as agreed. And leaves the procedure much more open to debate. Some DAB members will not be keen to operate in such circumstances.

How does this process compare with arbitration? As with dispute boards, in most cases arbitration is as a result of an arbitration agreement between the parties. However in most legal systems the arbitration process will be underpinned by legislation or case law. This will recognise party autonomy in agreeing an alternative to the courts. It is also likely to provide a support mechanism where the courts can step in and appoint a tribunal where the contractual arbitration mechanism just does not work (including where this is because of an unwilling participant). In addition in some jurisdictions, default procedural rules are, such as those contained in the English and Scottish Arbitration Acts will apply in the absence of agreement of the parties on other applicable rules. So if there is no other agreement as to procedure they are already there.

These are the significant differences between appointing an arbitration tribunal and a Dispute Board. One has the underlying support of legislation and the courts. The other does not. Dispute Boards depend entirely on the contract terms establishing them and the courts’ enforcement of these as a matter of contractual obligation. Accordingly any underpinning of the process can only come through the terms of the contract. The more that the appointment of the DAB and its terms can be enshrined with the contract itself rather than a separate “agreement to agree” relying on both parties’ co-operation, the better.


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30th Anniversary of the School of International Arbitration Live Streamed at Kluwer Arbitration Blog

by Gloria Alvarez (Associate Editor)

SIA30image

We are pleased to announce the 30th Anniversary of the School of International Arbitration, Queen Mary University of London. To commemorate its anniversary, the School of International Arbitration will be presenting in London a Celebration Conference on the “The Evolution and Future of International Arbitration: The Next 30 Years”.

Kluwer Arbitration Blog will be live streaming on the 20th & 21st April, both days from 9:15 am to 6:00 pm British Summer Time (here).

The event features some of the School of International Arbitration Academics: Professor Julian Lew QC, Professor Loukas Mistelis, Professor Stavros Brekoulakis, Norah Gallagher and Dr Remy Gerbay.

The Anniversary will also have the participation of Professor Gabrielle Kaufmann-Kohler, Professor Sébastien Besson, 
Professor Luke Nottage, 
Dr Laurence Shore, Claus von Wobeser, Professor Andrea Bjorklund, Professor Stefan Kroell, Gerry Lagerberg, Professor Bernard Hanotiau, John Fellas, Philippe Pinsolle, Audley Sheppard, Professor Nathalie Voser, Lord Lawrence Collins, Professor Frédéric Bachand
, Dr Crina Baltag
, Dr Roman Khodykin, Donald Donovan, Dr Mohamed Abdel Raouf
, Andrea Carlevaris, Paul Friedland, Dr Fan Kun, Fidelis Oditah QC, Eduardo Zuleta, Professor Catherine Kessedjian, Michael Hwang, Alexis Mourre, Michael Schneider, Rob Smit, Professor Linda Silberman, Dr Patricia Shaughnessy, Professor Jack Coe, Professor Janet Walker, Dr Jan Kleinheisterkamp, Professor Christophe Seraglini, Professor Thomas Stipanowich, Dr Romesh Weeramantry, Professor Christopher Drahozal, Dr Michael Waibel and Dr Thomas Schultz.

You can follow the full programme here .

To follow the event on social media

#SIA30

#‎30SIAAnniversary‬


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The New Slovak Arbitration Act Applicable From January 2015: Has It Progressed Sufficiently?

by Peter Plachy

Paneuropean University

The new Slovak Arbitration Act (“SAA”) was adopted by the Parliament (Act. No. 336/2014 Coll.), and is in force as of January 1, 2015. In order to see whether the SAA will promote Slovakia as an arbitration venue, main novelties and amendments brought by this new act are analysed in this blog entry.

Arbitrability: Under the old law, parties were allowed to arbitrate disputes, which were subject to settlement in courts under art. 99 of the Slovak Code on Civil Procedure. The amendment provides under art. 1(2) that arbitrable disputes are those, which are related to legal relations and “can be settled by an agreement of the parties [under art. 585 of the Slovak Civil Code (“SCC”)] including disputes regarding the declaration whether there is a right or a legal relation or not”. The second part of the definition, related to the validity of legal acts, was prompted by several Slovak court decisions, which held that parties to an arbitration agreement cannot apply for a declaratory relief regarding the validity of the arbitration agreement to an arbitral tribunal (Case No. 26 Cob 161/2009 of 21 December 2009, Regional Court of Nitra and 2 Cob 178/2008 of 18 December 2008, Regional Court of Bratislava). It was held that a civil court must, in turn, decide such a question. These decisions were in a direct conflict with the Kompetenz-Kompetenz doctrine, incorporated in art. 21(1) of the SAA, which explicitly states that the tribunals have the capacity to decide upon the validity of arbitration clauses. The clarification in the new SAA is thus welcomed, but the decisions of the Slovak courts will need to be tested against this amendment.

Moreover, one of the main changes in the Slovak arbitration regime is the exclusion of consumer disputes from the application of the SAA. For this purpose a brand new Act. No. 335/2014 Coll., which focuses exclusively on consumer disputes, was adopted.

Permanent Courts of Arbitration: Under art. 12 of the SAA, Permanent Courts of Arbitration (“PCAs”) may only be established by a civil association (under Act. No. 83/1990 Coll.), an association of legal entities under the SCC and by chambers of commerce. This change aims to dissuade regular corporations from establishing PCAs for profit, and in turn ensures independent arbitral awards. The existing PCAs must have complied with this change within three months after the SAA came into force.

The regime of the PCAs in Slovakia was (and still remains) the most glaring problem of the legislation. The old law led to the establishment of more than 170 PCAs because their constitution was not regulated at all. The change of the SAA, in all fairness, seems only to partially address this issue. A the same time, the Czech Arbitration Act (Act No. 216/1994 Coll.) allows only the existence of arbitral institutions established by law, and the Czech Chamber of Commerce enjoys a significant amount of arbitrations in the Czech Republic. Nevertheless, it is worth to wait and see whether the SAA is to provide a ground for the establishment of a reliable institution in Slovakia.

Arbitration Clause: In this matter, the SAA reflects the decision of the Slovak Supreme Court (2 Cdo 245/2010 of 30 November 2011, Slovak Supreme Court), which was later followed by lower courts and which stated that the requirement of a “written” arbitration clause is a more formal requirement than the one contained in the SCC. More specifically, the Supreme Court held that an arbitration agreement incorporated by reference into a loan agreement between a bank and its corporate client was invalid due to lack of written form. Consequently, the SAA now explicitly states in art. 4(4) that an arbitration clause can be incorporated by reference without a signature on the incorporated document. Addressing the concern of a recent post, this reference does not need to be specific, i.e. it can be general. Additionally, under a new provision of art. 4(7) of the SAA, the Slovak legislator has finally expressly adopted a practice of considering a valid arbitration clause to be constituted when respondent submits its first memorandum without objecting to the tribunal’s jurisdiction. This addition should also guide the civil courts away from the overly formalistic approach towards the “written” arbitration clause requirement described above.

Interim Orders: The legislator opted to incorporate an extended version of art. 17 of the UNCITRAL Model Law on interim measures and preliminary orders into the SAA. In line with the model legislation, the arbitral tribunal is now competent to order a party to:
• “provide a means of preserving assets out of which a subsequent award may be satisfied”,
• “maintain or restore the status quo pending determination of the dispute”,
• “take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself” and to
• “preserve evidence that may be relevant and material to the resolution of the dispute”.

Importantly, under art. 22a of the SAA, if the parties agree, an interim order may be rendered even before the arbitral tribunal is constituted and without any submission from the respondent (ex parte). Such an interim order, however, is not enforceable through the courts unlike other interim measures (art. 22c of the SAA). All interim orders are, nevertheless, subject to the review of civil courts pursuant to art. 22d of the SAA.

Annulment of an Arbitral Award: A significant amendment was adopted in art. 40(1) of the SAA which is a verbatim adoption of the grounds for the annulment of an arbitral award from art. 34 of the UNCITRAL Model Law. The reasons now include the ground of public policy pursuant to art. 40(1)(b) in conjunction with art. 50(2) of the SAA, which was not a ground for annulment in the old law. For this reason, there were cases when the Constitutional Court took it upon itself to annul an arbitral award due to lack of the public policy ground for annulment (Case No. III. ÚS 162/2011 of 31 May 2011). The empowerment of the civil courts with this ground is, therefore, welcomed. Additionally, the period for the initiation of the annulment proceedings is prolonged to 60 days (from 30) under art. 41 of the SAA.

The Slovak legislator did not choose to follow the solutions of the French and Belgian arbitration acts according to which the parties can waive their right to seek recourse at the national courts against an arbitral award since this is still prohibited in art. 42 of the SAA. Nevertheless, more efficiency in annulment proceedings is ensured because only three district courts now have the competence to deal with arbitration matters. This was achieved by an accompanying amendment of the Act No. 371/2004 Coll. on courts’ districts.

Conclusion

In conclusion, the SAA is a big step made in the pro-arbitration direction, but a long journey still lies ahead. Art. 43(1) of the SAA still states that if a court annuls an award because the arbitration clause was not valid or due to lack of arbitrability, the court will continue in the proceedings as if the claim was made there originally. Ultimately, there is no reason why a verbatim adoption of the UNCITRAL Model Law would not be more efficient. In fact, that is essentially what happened with the reform of the provisions on interim orders and the grounds for annulment.


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From Iura Novit Curia to Zeno’s Paradox of Motion

by Daniela Paez-Salgado (Assistant Editor for South America)

The recent annulment decision in Tza Yap Shum v. Peru (ICSID Case No. ARB/07/6) has brought back the discussion regarding the ‘pure’ adversarial nature of investor-state arbitration system.

Mr. Shum, a Chinese investor claimed indirect expropriation under the Agreement on Promotion and Reciprocal Protection of Investments (APPRI) between the Governments of Peru and China arising out of several measures taken by Peru’s tax authority SUNAT. Peru challenged the jurisdiction of the tribunal arguing that the claim regarding the unlawfulness of the expropriation was not within the scope of the offer to arbitrate. However, the tribunal upheld its jurisdiction, found a violation of the APPRI and ruled in favor of the investor. Subsequently, Peru requested the annulment of the award before ICSID.

One of the grounds for annulment raised by Peru was article 52(1)(d) of the ICSID Convention (serious departure from a fundamental rule of procedure) because the Tribunal had failed to (i) analyze the evidence presented by the parties, (ii) state reasons on which it based its decision and (iii) denied the State the opportunity to express its opinion about the interpretation adopted by the Tribunal of article 8(3) of the APPRI which contained a “fork in the road” provision. See, ¶114-121.

This post will address the later claim in the light of the Latin legal maxim iura novit curia (the court knows the law). Under this principle, a decision-maker (either a judge or arbitrator) is deemed to know the law beforehand and, therefore, can reach its legal reasoning on the outcome of the case, independently from the legal theories defended by the parties. Hence, if the claimant argued ‘A’ and the defendant argued ‘B’, under iura novit curia the tribunal can perfectly decide under legal reasoning ‘C’.

The Supreme Court of Switzerland was the first body to uphold the application of iura novit curia in arbitration in 1994. The Court explained that by virtue of the principle iura novit curia if a conclusion reached by the tribunal is given sufficient reasoning, the arbitral tribunal can apply the law ex-officio without limiting itself to the arguments advanced by the parties. See, Westland Helicopters Ltd. v. The Arab British Helicopter Company (ABH) and the Arbitral Tribunal, point 3.-a).

In a similar way, the UK Arbitration Act allows arbitrators to decide a dispute in accordance with considerations ‘determined by the tribunal’. See, article 46(1)(b). This view seems to have been adopted also by the arbitration rules of the LCIA, which grant power to the tribunal to take the initiative itself to identify the relevant issues of the case, ascertain relevant facts, the law applicable to the arbitration agreement, to the arbitration and to the merits of the dispute. Yet, the Rules expressly limit this prerogative to “giving the parties a reasonable opportunity to state their views”. Article 22(1)(iii).

The reasoning behind the later approach is that an adjudicator of rights always has to permit the parties to point their views about new arguments that the tribunal might be considering to decide a case. An ‘interference’ by the arbitrator in the procedural debate of the case without counting with the parties participation may contravene the parties’ rights of contradiction and defense, and result in judgments that are not congruent with the arbitral proceeding.

In Tza Yap Shum v. Peru the tribunal took the opposite approach following the reasoning of the Annulment Committee in Klockner v. Republic of Cameroon (ICSID Case No. ARB/81/2). In this case, the arbitral tribunal decided the case undertaking an intermediate position (different from those advanced by the parties) on the interpretation of a provision of the Protocol of Agreement. On the annulment stage, the Annulment Committee held that arbitrators must be free to rely on arguments addressed and not addressed by the parties:

Even if it is generally desirable for arbitrators to avoid basing their decision on an argument that has not been discussed by the parties, it obviously does not follow that they therefore commit a ‘serious departure from a fundamental rule of procedure’. Any other solution would expose arbitrators to having to do the work of the parties’ counsel for them and would risk slowing down or even paralyzing the arbitral solution to disputes. ¶91.

In Tza Yap Shum v. Peru, the legal discussion was focused on the interpretation of the phrase “a controversy that involves the amount of compensation” of Article 8(3) of the APPRI. The Peruvian State argued that the jurisdiction of the tribunal was limited to the amount of the compensation sought by the investor and not to the lawfulness or not of the expropriation. The arbitral tribunal disagreed opting for its own interpretation of the relevant provision.

In the annulment phase, Peru contended that the tribunal did not permit the parties to discuss on that specific issue. ¶ 52. The Committee first held that since the tribunal had to consider the relevant provisions of the APPRI to decide on its own competence, the Peruvian State should have reasonably anticipated that the interpretation of that phrase would be the key question for any decision relating to the scope of that rule. ¶ 129.

Furthermore, the Committee expressed a practical concern regarding the argument sustained by Peru which would create an extraordinary burden on the tribunal by having to submit their legal reasoning to a discussion between the parties which would result in that no award could ever be adopted before the parties had had the chance of submitting arguments about the relevancy of the tribunal’s legal reasoning. ¶ 130.

At this point, the Committee brought up ‘Zeno’s paradox of motion’ to illustrate its reasoning. The paradox proposes that time is comprised by a number of moments and that when someone throws an arrow; the arrow is seen as being motionless during each of its positions; leading to the conclusion that since the arrow is static in each moment of motion, it will never hit the target. The Committee compared each moment that the arrow is deemed to be static and impaired from advancing towards the target to every time an arbitrator would have to submit his legal reasoning to the parties in order to obtain their observations. Consequently, the arbitrator would never reach a final award. See, 131.

Finally, the Committee concluded that the tribunal did not have an obligation to get back to the parties to ask them about the last sentence of article 8(3) which the parties had not focused on. Even if the parties did not specifically address the argument regarding the interpretation of article 8(3), the State did not prove that it could have not reasonably anticipated that the argument was going to be taken into consideration by the arbitrators. See, ¶141.

In sum, in the annulment decision in Tza Yap Shum v. Peru, the iura novit curia principle was implicitly endorsed. The only issue the Committee addressed was whether the parties had the right to defend their views on the interpretation undertaken by the tribunal. Nevertheless, the Committee did not discuss whether the tribunal was entitled or not to adopt a legal reasoning other than the one presented by the parties in its pleadings.

 


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