Israeli Supreme Court Lost between the Israeli Arbitration Act and the New York Convention

by Tamar Meshel

University of Toronto (SJD Candidate)

The dispute in Siemens AG and Siemens Israel Ltd. v. Israeli Electric Cooperation Ltd. (3331/14, Supreme Court of Israel Judgment, 13 August 2014) arose out of a request for tenders for the purchase and maintenance of gas turbines issued by the Israeli Electric Cooperation (IEC), following which it entered into several contracts with Siemens Israel and Siemens AG. All of the contracts contained an identical arbitration clause providing for arbitration “to be held as promptly as possible at such place in Israel as may be mutually agreed upon between the parties”. In 2013, IEC commenced an action against Siemens in the Israeli District Court, claiming that the contracts were signed as a result of a bribe paid by Siemens to one of IEC’s directors. Siemens applied to the District Court to stay the proceedings pursuant to the Israeli Arbitration Act, 1968 (IAA) and the arbitration clause contained in the contracts. The District Court refused to grant a stay of proceedings and Siemens applied for leave to appeal to the Supreme Court of Israel.

In its decision to dismiss the request for leave to appeal, the Supreme Court made two disconcerting findings. First, the Court found that the New York Convention did not apply to the parties’ arbitration agreement because, even though IEC and Siemens AG were from different countries, they selected Israel as the seat of arbitration. On this basis, the Court concluded that Article 5 of the IAA, which governs domestic arbitration and grants the court broader discretion to refuse to stay proceedings, applied to the dispute, rather than Article 6, which governs foreign arbitrations and generally grants narrower discretion to the courts. Second, the Court found that even if Article 6 were applicable, it allows the courts to refuse to stay proceedings for a “special reason” as provided in Article 5.

With respect to the application of the New York Convention, the Supreme Court applied a restrictive interpretation of what should be considered an ‘international’ arbitration agreement. While the New York Convention does not define its scope of application with respect to arbitration agreements, it has been said to adopt a “sweeping approach towards arbitration agreements, placing no literal limitation on those agreements that are subject to its…regime” (Gary B. Born, International Commercial Arbitration, 2014, at 319). The ‘internationality’ of an arbitration agreement may result, therefore not only from having a foreign seat, but also, for instance, from the nationality or domicile of the parties or from the underlying transaction. According to well-established international arbitration practice, when determining whether an arbitration agreement that provides for a seat in the forum state falls within the scope of the Convention, the domestic court should apply it if the arbitration agreement has some ‘foreign’ or ‘international’ connection (Gary B. Born, International Arbitration: Law and Practice, 2012, at 46-47). Although under the IAA an arbitral award is considered foreign only if it is “made outside of Israel”, there is no such requirement where an arbitration agreement is concerned. Therefore, the courts may find an arbitration agreement to be ‘international’ or ‘foreign’ even though Israel is also the seat of the arbitration. In finding that the arbitration agreement should be considered to be domestic because the seat of arbitration is Israel, the Supreme Court relied, inter alia, on Israeli academic authorities explaining that “the New York Convention applies also to agreements between two Israelis so long as the arbitration is conducted in a foreign country”. However, while this requirement applies to arbitration agreements between two Israeli parties, it does not necessarily apply where the arbitration agreement is between an Israeli party and a non-Israeli party.

In the present case, IEC entered into separate contracts with Siemens Israel, an Israeli party, and with Siemens AG, a foreign party. Therefore, while its arbitration agreement with the former may well be considered as domestic, its arbitration agreement with the latter should arguably have been viewed as international. Since the existence of these two contracts raises issues of ‘split’ proceedings, which in themselves may justify a refusal to grant a stay of proceedings, the Court’s pronouncement that the arbitration agreement between IEC and Siemens AG should also be considered as domestic, and that the action against Siemens AG should not be stayed for this reason, seems to add little to the analysis other than potential confusion and a restrictive application of the New York Convention.

With respect to its interpretation of Article 6 of the IAA, the Supreme Court unnecessarily blurred the distinction between Articles 5 and 6. It has long been recognized in Israeli jurisprudence that the courts’ discretion to refuse a stay of proceedings under Article 6 is much narrower than under Article 5 and is generally limited to the grounds set out in Article II(3) of the New York Convention. On the facts of this case, a finding that the issues of bribery and fraud underlying the dispute are “incapable of settlement by arbitration” according to Article II(1) of the New York Convention could have sufficed to justify the lower court’s refusal to stay the proceedings, without the Court having to pronounce on the, now seemingly unlimited, nature of the courts’ discretion to stay proceedings under Article 6. Instead, the Supreme Court not only found that the Israeli courts have discretion to refuse a stay of proceedings under Article 6 of the IAA even where the New York Convention’s exceptions do not apply, but also went further to equate this discretion with the much broader discretion granted to the courts under Article 5 by subordinating the former to the latter. The Court found that regardless of which Article an arbitration agreement fell under, Article 5(c), which allows the courts to find there is “special reason” to refuse a stay of proceedings, is fully applicable. This finding of the Court seems overly broad as well as unnecessary in light of its existing discretion to find, as it in fact did, that the subject matter of the dispute is not arbitrable and refuse to stay the proceedings on this basis. It also arguably begs the question of why the Israeli legislature chose to include a separate provision in the IAA regarding stay of proceedings in favor of international arbitrations subject to an international convention, if the ultimate result would effectively be the same as under Article 5.

While the ultimate holding of the Supreme Court may be correct, these pronouncements are disconcerting as they may result in a misunderstanding and misapplication of the New York Convention and Article 6 of the IAA in future stay of proceedings decisions. This is particularly so in light of the Supreme Court’s justification of its decision in terms of the rationale underlying the New York Convention. The Court found this rationale to be “the concern that the courts of member states would be reluctant to refer domestic parties to arbitration taking place in a foreign country, which could incentivize parties to turn to their own local courts in order to have disputes heard in their preferred forum” (emphasis in original). The Court therefore concluded that “in the present case it is clear that refusing to stay the proceedings does not undermine this purpose since, under the parties’ agreement, the arbitration would have in any event taken place in Israel” (emphasis in original). However, the rationale underlying the New York Convention, and presumably also Article 6 of the IAA, arguably extends also to the concern that domestic courts would be reluctant to relinquish their jurisdiction and refer parties to an ‘international’ dispute to arbitration, regardless of its seat. Accordingly, it has been said that “[t]he purpose of the New York Convention is to promote…the settlement of international disputes through arbitration…With respect to arbitration agreements, the drafters sought to secure that the parties’ original intention to have their disputes settled by arbitration would not be frustrated by a subsequent unilateral submission of the dispute to courts.” (ICCA’s Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges, at 14-15, 36).


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A blast from the past… the ‘unified Arab investment treaty’ and finality of arbitration awards

by Khalil Mechantaf

Baker & McKenzie

In one of the very rare decisions issued by courts in the Arab world applying the provisions of the Unified Agreement for the Investment of Arab Capital in the Arab States (the “UAIAC”), the Cairo Court of Appeal has revived in its decision dated February 5, 2014, the principle of finality of arbitration awards, by which it rejected a claim for annulment of a UAIAC award, filed by the State of Libya (first claimant to annulment), the Libyan ministries of Economy and Finance (second and third claimants) and the General Authority for encouraging investments (fourth claimant), against a kuwaiti investor, Al-Kharafi & Sons Co. (case n° 39, judicial year 130/2014). The ratio decidendi of the court’s decision reads the following:

“Since the arbitral award, subject matter of this annulment, is rendered on the basis of the Unified Agreement for the Investment of Arab Capital in the Arab States, to which the Arab Republic of Egypt is a member, such award shall be considered as final immediately following its render by the arbitral tribunal, and the application for annulment shall therefore be rejected pursuant to Article 2(8) of the treaty’s Annex”.

Many of you may be aware of the arbitral proceedings between the parties that lead to a final award rendered in Cairo on March 22, 2013, and was reported on IA Reporter and GAR. In summary, Al-Kharafi & Sons Co. (Claimant in arbitration), brought a claim for damages against the State of Libya on the basis of clause 29 of the contract concluded between them in 2006, which provides for a UAIAC clause, as follows:

“Any dispute arising between the parties in connection with the interpretation or enforcement of this contract shall be settled amicably, failing which the dispute shall be referred to arbitration in accordance with the Unified Agreement for the Investment of Arab Capital in the Arab States dated 26 November 1981″.

The claim was brought following the decision n° (203/2010) issued by the General People’s Committee for Industry, Economy and Trade in Libya, which terminated the investment project without awarding the Claimant an appropriate compensation. The final award rendered by a UAIAC tribunal ruled in favor of the Claimant awarding it an astonishing USD 930 Million, which left the State of Libya with no choice but to refuse honoring the award and bring an action for annulment before the Egyptian courts, being the courts of the seat of arbitration.

The Cairo Court of Appeal’s decision is beyond any doubt one of the very rare decisions, if not the first decision, issued in respect of a UAIAC award, and confirms with it the application of one of the supranational principles of international arbitration… the finality of arbitral awards. In fact, the challenges brought against investment treaty awards has remained one of the dark little secrets of investment treaty arbitration as enforcement of international awards is becoming increasingly unpredictable and expensive, belying the efficiency and effectiveness of arbitration. That should not be anymore the case if an investor is lucky enough to have a UAIAC arbitration as the parties’ agreed dispute resolution mechanism.

By way of background, the UAIAC was signed on November 26, 1980 in Amman, Jordan, during the Eleventh Arab Summit Conference. It entered into force in Egypt on July 19, 1992, and is now applicable in twenty-one Arab States. The finality of arbitration awards is provided under Article 2(8) of the treaty’s Annex, which reads the following:

“Awards of an arbitral tribunal rendered in accordance with the provisions of this article shall be final and binding. Both parties must comply with and implement the award immediately upon its render unless the tribunal specifies a deferral of its implementation or of the implementation of a part thereof. No appeal may be made against arbitration awards”.

Based on the foregoing, arbitral awards are final and cannot be subject to any challenge brought before the courts of a member State, even if that challenge is on grounds of domestic public policy. The validity of the arbitration award is therefore subject only to the provisions of the UAIAC, irrespective of the grounds of annulment laid down in the law of the seat of arbitration. The principle of finality of awards was included by the drafters of the UAIAC to avoid the common pitfalls in investment treaty arbitration, which allow the courts of the host State to avoid the enforcement of an award condemning the national government’s attitude towards inward foreign investments. Additionally, the UAIAC is absent of any provision in respect of the need for an execution order within the meaning of its Article 2(8). This is evidenced by the provisions of Article 11 of the UAIAC, which provides:

“Where the decision of the arbitral panel fails to be implemented within three months of its render, the matter shall be brought before the Arab Investment Court to rule on such measures for its enforcement as it deems appropriate”.

Accordingly, an award debtor has three months to voluntarily enforce an arbitration award. Failing to do so will result in a compulsory enforcement process that can be brought before the Arab Investment Court (AIC). Interestingly, Article 11 limited the powers of the AIC to only review applications for enforcement, instead of annulment of awards, which thus confirms the finality and binding effect thereof. The Cairo Court of Appeal took a formalistic approach in applying such provisions and emphasized the need to respect its international commitments, as follows:

“Any international treaty signed and ratified by the Arab Republic of Egypt becomes an integral part of Egyptian law. If such a treaty includes special rules with regard to arbitration, those rules shall override any other rules laid down in the Egyptian arbitration law n°27/1994″.

As a result, awards rendered under the context of UAIAC do not need to fit in internationalist or nationalist-positivist views and can operate outside the constraints of national legal systems in the Arab world. The court reviewing any claim for annulment in that regard would only be allowed to reject the claim, even when it includes a challenge on the application ratione materiae and ratione personae of the UAIAC, or even a challenge on public policy.

It is expected that the surge of investment claims under the UAIAC as a result of the Arab uprising will trigger further court decisions issued by other member States, which should provide further clarity on the application of Article 2(8) and determine, if any, the limits of application of the principle of finality.


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The Growth of Arbitrator Power to Control Counsel Conduct

by Margaret Moses

Loyola University Chicago School of Law,
for ITA

There have been increasing calls over the past few years for an international code of conduct for counsel in international commercial arbitration, and for arbitrators to have more power to control counsel conduct. The growing concern is related to significant changes that have taken place in international arbitration practice. Arbitration is no longer controlled by an elite group of arbitrators whose judgment, neutrality and expertise were rarely questioned and who resolved disputes with a minimum of acrimony between the parties. Today, international commercial arbitration differs in significant ways from the days of the “Grand Old Men.” In the modern global arena, arbitrators are themselves more diverse, and must deal with a far more complex, contentious and diverse practice.

These changes mean that arbitrators confront many situations in which there is no clear rule to follow. The issues that come before arbitrators today are no longer simply contract disputes and related issues, but also complex statutory issues that may involve the public interest, such as issues of anti-trust law. Arbitrators may be faced with questions of fraud and corruption, which could involve collusion of the parties. The parties themselves come from increasingly diverse backgrounds, with different legal standards and ethical traditions. Arbitration clauses, rules and laws do not typically spell out for arbitrators the scope of their power to act in many of these situations.

Moreover, as commercial arbitration has grown to involve very high stakes disputes, there are increasing complaints about guerilla tactics, where counsel deliberately impede or obstruct the arbitral process. A tribunal’s failure to be able to control counsel prevents effective and efficient resolution of the dispute. Given their obligation to try to issue an enforceable an arbitral award and their duty to ensure a fair procedure, arbitrators need to be armed with sufficient power to rein in improper conduct, to level the playing field, and to prevent the undermining of the entire process.

Nonetheless, there is a risk that if arbitrators assume an authority to which they are not clearly entitled, their award may be vacated on the ground that they have exceeded the scope of their power. This dilemma has refocused attention on what is meant by the “inherent” power of arbitrators. To what extent can an arbitrator be deemed to have the proper power to act in situations where no express power is available?

The International Law Association’s Committee on International Commercial Arbitration has issued a helpful Report on the concepts of inherent and implied powers of arbitrators (“ILA Report”). The ILA Report does not put forth specific definitions in light of the highly contextual nature of the proper application of such powers. However, it suggests a generally workable framework for understanding the terms. Basically, it views implied powers as those that can be implied from the text of the arbitration agreement or rules, or which are included within specific discretionary powers expressly provided to the tribunal. Such powers tend to be those that an arbitrator needs to move the arbitration forward. Inherent powers, on the other hand, tend to be called upon when novel or controversial situations arise, for which no express or implied rule appears to apply. These powers are deemed to derive from the nature and function of the tribunal. In recent times, arbitrators have assumed many of the same obligations and duties of a court, and like a court, have an obligation to ensure a fair process for the parties. In functioning as an adjudicatory body, the tribunal must have the power to safeguard the integrity of the arbitral process.

Although inherent powers may at times be necessary, they are not unlimited. Arbitrators cannot, for example, assert an inherent power if there are specific provisions in the law or applicable rules that prohibit that power. In addition, arbitrators must be able to establish that the inherent power is necessary for the tribunal to fulfill its proper adjudicatory function. Finally, in light of their obligation to try to render an enforceable award, arbitrators must not exercise an inherent power in a manner that could lead to non-enforcement. Because the parameters of inherent powers are still somewhat indistinct, arbitrators must struggle to determine when such powers can be properly applied.

There is help in sight, however. Effective October 1, 2014, the new London Court of International Arbitration Rules (LCIA Rules), by giving arbitrators more extensive express and implied powers to deal with the conduct of counsel, contribute to shrinking the conceptual space where the dilemma of inherent power resides. An Annex to the LCIA Rules, entitled General Guidelines for the Parties’ Legal Representatives, deals directly with arbitrator power to control attorney conduct. The Guidelines address the issue of guerilla tactics by prohibiting obstructionist activities and unfounded challenges to the arbitrator’s appointment or jurisdiction. The Guidelines also prohibit the legal representatives from presentation of false evidence, from the knowing concealment of documents required to be produced, and from ex parte contact with any member of the tribunal or the LCIA Court (excluding the Registrar). Importantly, the Guidelines give the tribunal specific power under Article 18.6 of the Arbitration Rules to impose sanctions for any violation by a legal representative.

The sanctions that an arbitrator can impose under Article 18.6 include any measure necessary to fulfill the arbitrator’s general duties under Article 14.4(i) and (ii). These provisions describe the general duties of the tribunal, which include a duty to act fairly and impartially as between all parties, to adopt suitable procedures, to avoid unnecessary delay and expense, and to provide a fair, efficient and expeditious means to resolve the parties’ dispute. In essence, these Rules provide arbitrators with the powers necessary to discharge their adjudicatory function. Even if these powers are considered to be implied, because not every potential sanction is enumerated, nonetheless the ability to control counsel is based on broad powers under the LCIA Rules, and not on inherent powers.

Two other sections of the LCIA Rules require that a party must receive the tribunal’s approval to appoint new counsel once the tribunal has been constituted (Article 18.3), and that the tribunal can withhold approval where such change could compromise the tribunal or the award (Article 18.4). This makes express a power that had been considered inherent in two widely cited investment arbitration cases — Hvratska Elektopriveda v. Slovenia, where a counsel who was added at the last minute was disqualified by the tribunal, and Rompetrol v. Romania, where a challenged counsel was not disqualified. The use of inherent power to disqualify counsel in this kind of situation, much discussed by the tribunals in these two cases, becomes a non-issue in commercial arbitrations under the LCIA Rules.

The LCIA Rules bind those parties who choose them. Similar Guidelines on Party Representation, adopted earlier by the International Bar Association (May 2013), will apply if parties agree, or if the tribunal decides the Guidelines are appropriate, after having determined it has the power to apply them. Thus, if the parties do not choose to apply the Guidelines, any tribunal who wants to apply them must first consider whether it has the power to do so. This may slow down their specific use or application by arbitrators, who may be cautious about their authority to apply Guidelines not agreed to by the parties. Nonetheless, like the successful IBA Guidelines on Taking of Evidence and on Conflicts of Interest, these Guidelines may influence thinking about what constitutes a proper international standard.

Like the LCIA Rules, the IBA Guidelines prohibit false representations of fact or evidence, knowing concealment of documents, and ex-parte communications with the tribunal. They also permit the tribunal to exclude a party representative appointed after the constitution of the tribunal if such an appointment would create a conflict. Finally, arbitrators have broad power to impose sanctions for misconduct of a party representative.

To the extent that the kinds of powers exercised by arbitrators under these Rules and Guidelines are seen as express or implied rather than inherent, they are less likely to be viewed as novel or controversial. They may influence arbitrators who are not subject to the same rules to nonetheless call upon similar powers, which, even though inherent, increasingly appear to be both non-controversial and necessary to carry out their adjudicatory function.

There has been some negative response to the IBA Guidelines, particularly to Guideline 12, which requires a party representative, in a situation where document production is likely to be required, to inform the client that it needs to preserve documents. This has been described as simply providing “an opportunity to waste time and money on procedural skirmishes” (See Michael Schneider, President’s Message in 31 ASA Bulletin 3/2013 (September)). The Swiss Arbitration Association (ASA) has criticized the approach of both the IBA and the LCIA because it believes a better solution to developing international ethical standards would be to create a “truly transnational” independent body with power to enforce ethical standards in arbitration (Out-Law.com, 10/21/2014). However, the development of such a body, assuming an agreement to do so could be widely accepted and implemented in the international community, would probably take a number of years. In the meantime, the use of the IBA Guidelines and the LCIA Rules may well help develop a global standard for the conduct of Party Representatives.


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DIFC Court of Appeal confirms the DIFC’s status as host jurisdiction for recognition of domestic awards

by Gordon Blanke

Baker & McKenzie Habib Al Mulla

In a recent ruling of the DIFC Court of Appeal (see Case CA-005-2-14, ruling of the DIFC Court of Appeal of 3rd November 2014), Justice Sir David Steel affirmed the previous ruling of the DIFC Court of First Instance in Banyan Tree v. Meydan Group LLC (see Case No. ARB 003/2013 – Banyan Tree Corporate PTE LTD v. Meydan Group LLC, ruling of the DIFC Court of First Instance of 27 May 2014 and my previous blog). As a result, it can now be taken as established (at least pending onward enforcement before the Dubai Courts) that the (offshore) DIFC Courts do have competence to hear actions for the ratification of domestic (onshore) Dubai awards (in the present case an award rendered under the auspices of the Dubai International Arbitration Centre (DIAC)) even in the absence of any geographic nexus with the DIFC, not even the presence within it of assets belonging to the award debtor. In this context, it is worth mentioning that the DIFC Court of First Instance’s analogical findings in relation to the ratification and enforcement of foreign awards rendered outside the UAE in Case No. ARB 002/2013 (see Case No. ARB 002/2013 – (1) X1, (2) X2 v. (1) Y1, (2) Y2, ruling of the DIFC Court of First Instance, undated, 2014 and my previous blog) equally stand affirmed, no appeal having been mounted by the award debtor within the prescribed time-limit.

By way of background, a brief reminder of the facts: Banyan Tree Corporate PTE LTD (“Banyan”), an award creditor incorporated in Singapore, sought from the DIFC Courts an order for recognition and enforcement of a DIAC award against the UAE-based Meydan Group LLC (“Meydan”), the award debtor. Meydan objected to the DIFC Courts’ jurisdiction and competence to hear applications for recognition and leave to enforce of awards not rendered in the DIFC. To the best of anyone’s knowledge, the parties’ relationship was devoid of any geographic link with the DIFC, it not even being certain whether Meydan may have any assets there.

In his ruling, Justice Sir David Steel categorically rejected any purported requirements for in personam or subject-matter jurisdiction of the DIFC Courts by analogy to requirements under the prevailing UAE federal law to hear an action for recognition and enforcement of an onshore Dubai award. To the contrary, Sir David Steel confirmed that “[o]n the face of it [Article 42 of the DIFC Arbitration Law (see DIFC Law No. 1 of 2008 as amended)] imposes an obligation on the DIFC court to recognise and to enforce an award irrespective of the state or jurisdiction in which it was made.” (see Case CA-005-2-14, para. 14) According to Sir David Steel,

“[t]he DIFC (and its Court) is in effect exempted from the Commercial and Civil laws of the Union [i.e. the UAE]. The State of Dubai is afforded freedom under [Federal] Law 8 of 2004 to promulgate appropriate legislation. DIFC Law No. 10 of 2004 included jurisdiction in respect of any application over which the DIFC court has jurisdiction by virtue of DIFC laws and regulations. These included the enforcement of the arbitration awards both by virtue of Article 7 of Law No. 12 of 2004 and Art. 11 of DIFC Law No. 1 of 2008 (Arbitration Law).” (see Case CA-005-2-14, para. 27)

In this context, Sir David Steel confirmed that once service had properly been effected in compliance with the Judicial Authority Law as amended (see Dubai Law No. 12 of 2004 as amended by Dubai Law No. 16 of 2011), “the court must recognize the award” subject to the exhaustive grounds for refusal set out in Article 44 of the DIFC Arbitration Law (see Case CA-005-2-14, para. 32). In addition, Sir David Steel noted that

“[t]he absence of assets in the jurisdiction may be relevant consideration to the exercise of discretion to grant execution. But even then a judgment creditor is entitled to levy execution against assets which come into the jurisdiction after the judgment is entered or which did not even exist at the time. Furthermore an enforcement order alone may be of value in the tracing of assets by, for example, oral examination […]. In any event, it is clear that there is no barrier to enforcement given the absence of assets within the jurisdiction. […]” (see Case CA-005-2-14, para. 33)

Justice Sir David Steel equally rejected an argument of forum non conveniens, emphasising that in reliance on Article 42 of the DIFC Arbitration Law “[t]he DIFC Courts ha[d] exclusive jurisdiction and [that] thus the point fail[ed] in limine.” (see Case CA-005-2-14, para. 39) Consequently, Sir David Steel concluded that “the judge [at first instance] was quite correct to conclude that Article 5(A)(1)(E) of the Judicial Authority Law acted as the gateway by which Article 42 of the [DIFC] Arbitration Law conferred jurisdiction on the DIFC Courts to recognise the award as binding within the DIFC. That jurisdiction is not circumscribed by any requirements for in personam or subject matter connection with the DIFC.” (see Case CA-005-2-14, para. 37)

Finally, Justice Sir David Steel rejected an argument of abuse of process in the following, self-explanatory terms:

“43. It is right to say that there is no evidence that Meydan has assets within the DIFC (or otherwise within the jurisdiction of the DIFC Courts). But there is no basis for asserting that the application for enforcement within the DIFC has no independent purpose. I do not understand it to be accepted that no such assets exist or alternatively that no such assets (whether they currently exist or not) may come within the jurisdiction following an order for enforcement. In any event an order for enforcement would enable Banyan to engage the court’s machinery (in the form of saying a freezing order or an oral examination) for obtaining details of any assets that are or become available.

44. It is also right to say that by virtue of Article 7 of the Judicial Authority Law and the Protocol of Jurisdiction between the DIFC Court and the Dubai Courts [i.e. the Dubai DIFC Protocol No. 999 of 2009], Banyan is enabled to present a DIFC order for enforcement to an execution judge of the Dubai Courts without that judge being enabled to consider the merits of the underlying order. But it is difficult to classify the use of that machinery as an abuse, not least before that machinery is even invoked. […] If in due course the matter is left to be raised before the courts of Dubai (which are the courts of the seat) the question whether the bar on considering the merits of the DIFC order before the execution judge would also inhibit the Dubai courts from ruling on a challenge to the validity of the underlying award is a matter for the Dubai courts and is a matter on which we have heard no argument.”

Ultimately, Sir David Steel concluded, quoting H.E. Omar Al Muahiri of the DIFC Court of First Instance with approval:

“I reject the submission […] that it cannot have been the intention of the Dubai legislator in promulgating the Judicial Authority Law to allow the DIFC Courts to be used as a conduit jurisdiction for enforcement of an arbitration award against assets in Dubai (outside the DIFC) in circumstances where the owner of those assets has a legitimate expectation that such enforcement action can only properly be brought in the Dubai Courts. It seems to me plain, from the provisions in Article 7 of the Judicial Authority Law, that the legislator did contemplate that there could be circumstances in which recognition of a foreign arbitral award by the DIFC Court could trigger enforcement proceedings, through the Dubai Courts, against assets in the Emirate of Dubai (but outside the DIFC) without the need for separate recognition of the award by the Courts of Dubai; and vice versa.” (see Case CA-005-2-14, para. 49)

Importantly, both Justice Roger Giles and H.E. Justice Ali Al Madhani, one of the two UAE local DIFC-resident judges, fully concurred in Justice Sir David Steel’s ruling. In this context, it is also worth reminding that the Court of First Instance ruling in the present case was originally handed down by H.E. Justice Omar Al Muahiri, the other DIFC-resident judge of UAE origin. Given the local pedigree of the DIFC Courts’ rulings, it is hard to believe that the Dubai Courts would not lend their full support and carry through with any enforcement actions within the strict (permissive) terms of Article 7 of the Judicial Authority Law as amended.

This being said, there is some residual concern that in a follow-on enforcement action, the Dubai Courts may seek to rely upon a public policy argument to the effect that in personam and/or subject-matter jurisdiction, which in turn is a question of public policy under UAE law and may therefore be raised ex officio by the Dubai Courts in actions before them (see e.g. Case No. 14 of 2013 – Canal de Jonglei, ruling of the Dubai Court of Cassation of 18 August 2013 and my related blog), would have properly rested with the Dubai Courts. In my preliminary view, this argument lacks merit given that in the express terms of Article 7(3)(c) of the Judicial Authority Law as amended, “the [Dubai Court] execution judge may not reconsider the merits of the judgment, decision or order [including a DIFC Court order ratifying an arbitral award]”, which in turn is not subject to a public policy exception. It is hence arguable that if the Dubai Courts were to rely upon a public policy argument to refuse enforcement of a DIFC ratified award, they would be in violation of their obligations under Article 7(3)(c) of the Judicial Authority Law as amended. It is further arguable that the Judicial Authority Law as amended does not provide for a public policy exception expressly because if it did, it would violate the regime of mutual trust and recognition of judgments, decisions and orders and hence their intended free movement between the Dubai and DIFC Courts and vice versa in the terms laid down in Article 7 of the Judicial Authority Law as amended. It would also be questionable to what extent contracting parties could ever be empowered to contract into the jurisdiction of the DIFC Courts by virtue of Article 5(A)(2) of the Judicial Authority Law as amended if the Dubai Courts on the other hand retained a valid objection of public policy on the basis of their purported in personam and/or subject-matter jurisdiction. To invoke a public policy argument of that nature would simply defeat the very purpose of the codified regime of mutual co-operation in the execution of judgments, decisions and orders between the Dubai and DIFC Courts in the terms of Article 7 of the Judicial Authority Law as amended. In other words, in my view, it must be understood that the Judicial Authority Law (having been adopted by the Ruler of Dubai) expressly limited any ground for recourse by the Dubai and DIFC Courts on the basis of public policy, giving preference to a regime of trust and mutual recognition in the enforcement of judgments, decisions and orders emanating from the respectively other court. This would, in my humble submission, also find support in the fact that constitutionally speaking, the DIFC Courts form part of the legal system of the Emirate of Dubai and as such ultimately qualify as a Dubai Court.

This being said, only time will tell the manner in which the Dubai Courts will ultimately exercise their jurisdiction and lend or not support to the natural consequences of the recent ruling of the DIFC Court of Appeal.


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Juries for Foreign Investment Disputes

by Martin Jarrett

University of Mannheim, Germany

Paraphrasing Churchill, investment arbitration is the worst form of foreign investment dispute resolution, except for all the others. Post-Suez, governments are more civilised than to employ gunboat diplomacy for their own investors, and local courts are inherently partial. Achieving neutrality is the objective, and the only means: investment arbitration. This is the conventional wisdom for rationalising the use of arbitration for foreign investment disputes.

Investment arbitration is imperfect. An oft-cited cause of this imperfection is doctrinal inconsistency, with an ICSID appellate body being trumpeted as the antidote. Partiality of arbitrators, propensity to annul decisions, and lack of transparency have also been identified.

Although these reasons might appeal to legal academics and practitioners, they fail to explain the substantial popular dissatisfaction with investment arbitration. The popular discontent is grounded in something more fundamental: investment arbitration suffers from a legitimacy deficit. This legitimacy deficit has two sources being neocolonialism and legal formalism.

The genesis of foreign investment law is neocolonial justice. Investors expect Western standards of justice, and the assumption is that local courts do not offer it. Operatively, foreign investment law imports Western standards of justice for foreign investment disputes, by way of investment arbitration, to satisfy this expectation. Even with the jurisdictional condition precedent to first use local courts for disputes, foreign investment law reserves ultimate jurisdiction on foreign investment disputes for investment arbitration.

Neocolonialism manifests itself in many ways in investment arbitration.

Foremost is the use of arbitration itself for resolving foreign investment disputes. Modern arbitration is a by-product of colonialism. In its formative years, modern arbitration developed as British traders began to exploit commercial opportunities created by the British Empire – land law occupied British courts were ill-suited to resolve foreign trade disputes.

Additionally, there are other factors that make neocolonialism apparent, from the usual identity of the parties and the arbitrators, to the educational backgrounds of the arbitrators, and the dominance of Anglo-American law firms as legal counsels. The consequence is that investment arbitration is perceived as being far from neutral, but more ‘Western’.

Subconsciously aware of their perceived partiality, arbitrators instinctively adopt legal formalism in an attempt to dispel this perception. They are well intentioned, but it is ultimately a flawed strategy.

First, the nature of foreign investment disputes means that there is a myriad of pertinent factors in question, not only legal factors. All the other factors, most particularly the economic factors, are discarded when arbitrators subscribe to pacta sunt servanda.

Second, and most importantly, the vagueness of foreign investment law requires arbitrators to construe it. In this respect, the distinction between construction and interpretation must be appreciated. Construction is the process of giving meaning to vague terms, while interpretation is the process of selecting the correct meaning of ambiguous terms.

Construction necessarily involves creating law. Take, for example, the vague standard of protection ‘fair and equitable treatment’. To address its vagueness, arbitrators have developed ‘sub-rules’ which define ‘fair and equitable treatment’, such as the ‘dominant element’ of the legitimate expectations of the investor.

When arbitrators create these sub-rules, they engage in law making. It could be countered that the nature of foreign investment law means that this is the task of arbitrators. This is not dispute. What is in dispute is the appropriateness of that task for arbitrators, particularly considering the perception of neocolonial justice. In summary, arbitrators do not have the mandate or authority to legislate for developing states.

If the reasons above are accepted, the conclusion is that the legitimacy deficient means that investment arbitration is not merely imperfect, but flawed.

Juries are the mechanism to overcome these problems.

It is submitted that a group of twelve randomly selected jurors should make the decision, by a qualified majority of eight, on the merits question: has the host state failed to protect the investment? In theory, a dispute resolution process for foreign investment disputes, which includes juries, could take place at any arbitral institution, although the administrative facilities of ICSID make it the most appropriate forum.

It might be nauseating to some, but when vague rules have to be applied to complex and multilayered fact scenarios, value based decisions pervade. All the relevant factors may be taken into account, not merely the legal factors. This should be celebrated. Value based decisions should be made in foreign investment disputes, and the proposed jury has the credibility to make these kinds of decisions, as opposed to a three member arbitral panel.

On questions of procedural law, creating the perception of justice is paramount. In this regard, it should be considered: would a decision of a ‘global jury’ on the natural resources of a state offer a greater perception of justice than the current system? Following this logic, the credibility of the jury would be solidified by constituting it with jurors of various nationalities: a global decision-making body for a global area of law.

Juries are not without their difficulties and disadvantages.

The principal problem would concern logistics. Who could serve on a jury? How would the jury pool be created? Would the jury selection process intolerably delay proceedings?

These problems could be overcome. The potential jurors could be drawn from the diplomatic service in Washington and New York. Jury selection process could be limited by restricting the grounds for challenge. Moreover, challenges against jurors would be limited by virtue of the limited information legal counsel would have on the jurors, compared to the wealth of information available on arbitrators.

Another problem lies in the legal framework. Foreign investment law does not provide for juries. There are two options to overcome this problem: amendment or augmentation.

Amendment involves rewriting the Washington Convention to provide for juries. As the proponents of an ICSID appellate body have fatalistically recognised, however, amending the Washington Convention is not realistic.

Augmentation would involve creating an optional protocol to the Washington Convention. By signing this optional protocol, signatories would stipulate that if they are sued at ICSID, a jury would be used during the merits phase. This is a viable option for creating a workable legal framework for juries.

There will be considerable psychological aversion to juries in foreign investment dispute resolution, much of it borne out of unfamiliarity with juries and the complexities they entail.

The current system is attractive because of its simplicity, but this creates a striking disparity between the substantive nature of the disputes, and the procedure for their resolution. In some disputes, the future of the natural resources of developing states is in question. How should the average citizen of such a state react when informed that the wealth, upon which this state hopes to develop, is decided by such a simple process?

A global jury might not completely satisfy this hypothetical citizen, however, it would certainly be more satisfactory than informing him or her that three Western educated arbitrators will decide.


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Job Posting: Associate Editor of the Kluwer Arbitration Blog

by Roger Alford (Editor)

Notre Dame Law School

I am writing to announce an opening for the position of Associate Editor for the Kluwer Arbitration Blog.

The Associate Editor will report directly to me and work closely with the Kluwer team and Crina Baltag, our other Associate Editor. The essential duties of the Associate Editor are (1) collecting, editing and reviewing guest submissions for posting on the blog; (2) coordinating the blog posts of the permanent contributors; (3) writing period blog posts as a permanent contributor; and (4) assisting the editorial team with strategic planning for the blog. As part of your duties you will liaise every week with some of the best arbitration counsel in the world.

Monique Sasson has ably served us in this position (along with Crina Baltag) for the past two years but has taken a position in the private sector. She will continue to serve as a Managing Editor for the ITA Board of Reporters of the Kluwer Arbitration database.

The Associate Editor will work remotely and the anticipated workload is approximately 5 hours per week. If you are interested please submit a resume, writing sample, references and cover letter by email to me at ralford@nd.edu. The deadline for receiving applications is November 21, 2014.


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Arbitration under the Mexican Energy Reform: The Lessons of COMMISA v. PEMEX

by Herfried Wöss

Wöss & Partners SC

1. Background

Modern arbitration in Mexico commenced with the reforms to the Mexican Commercial Code in 1989 and with the incorporation in such code of the UNCITRAL Model Law on International Commercial Arbitration in 1993. Project agreements with state entities such as Petróleos Mexicanos (PEMEX) and the Federal Electricity Commission (CFE) may be submitted to arbitration since 1993. In 2009, arbitration was made available for all federal government procurment contracts under the Federal Law for Public Works and Services (Public Works Law) and the Federal Law for Acquisitions, Leases and Services of the Public Sector (Public Acquisition Law), with the exception of the administrative rescissión and termination of contracts and project agreements which is actually not found in the laws governing PEMEX and CFE. The Public-Private Partnerships Law (PPP-Law) as of January 16, 2012 extends non-arbitrability to any act of authority by a State entity.

The limitations of arbitrability in the Public Works and Acquisition and the PPP laws seem to have been provoked by the COMMISA v. PEMEX case. In such case, claimant pursued constitutional litigation (amparo) parallel to the arbitration in order to have the aministrative rescission of the project agreement by PEMEX declared as an act of authority, which is a requirement of admissibility in any amparo action, and to have such act annulled because of purported violations of the Mexican Federal Constitution. Whereas the courts finally recognized that the administrative rescission, that had hitherto been considered as of a commercial nature de iure gestionis, was an act of authority de iure imperii, claimant lost the amparo. The arbitral award was annulled in Mexico due to the binding force of the act of authority and the res iudicata effect of the amparo judgment which denied the annulment of such act of authority on the arbitration.

Under French law, on which Mexican law is based, State contracts, by definition, are not arbitrable save when the contrary is expressly established by law, as has been the case with PEMEX and CFE since 1993. French and Mexican law provides for exorbitant powers of the State, allowing for the unilateral modification and termination of a contract. Unilateral administrative acts are considered to be valid unless annulled in an ordinary administrative procedure or an annulment action in an administrative or amparo court procedure, as confirmed by the Second Chamber of the Mexican Supreme Court in 2006, as part of the COMMISA amparo procedure, which makes arbitration redundant in case of the administrative rescission or termination of a contract with a State contract.

The COMMISA case is also an example of the problematic use of the French law institution of the ‘contrat administratif’, as used in Mexico and in various Latin American countries, as already observed by Hector Mairal in 2002. Whereas in France contract termination or events distorting the contractual balance trigger indemification obligations of the State or State entity, in Mexico and many Latin American countries such indemnification obligations are very rudimentary or non-existent. Combined with the inherent inarbitrability of acts of State, this creates a considerable political risk which is likely to provoke investment arbitrations.

The Mexican energy reform, through its secondary laws as of August 11, 2014, makes a radical change abandoning the institution of the administrative contract in favour of project agreements based on commercial law, with the partial exception of the administrative termination or rescission of contracts for the exploration and extraction of oil and gas.

2. The arbitration regime of PEMEX and the CFE after the energy reform

Under new Ley de Petroleos Mexicanos (new PEMEX law) as of August 11, 2014, project agreements are governed by such law and commercial law as expressly stated in articles 3 and 7, second paragraph. In particular the new PEMEX law does not contain any reference to administrative rescission or termination and expressly allows for commercial terms in project agreements.

Of utmost importance is the new article 80 of the new PEMEX law, which establishes that all acts during the public tender proceeding until the award of a project are considered administrative acts. Once the contract has been signed, any contract related acts are considered of a private law nature or, in case of PEMEX, de iure gestionis, and are governed by mercantile law or civil law. This evidences the mercantile character of project agreements under the 2014 PEMEX law. By expressly stating that future project agreements are commercial agreements and omitting any reference to the administrative rescission and termination of the project agreement, the COMMISA contingency seems to have been eliminated.

Article 115 of the new PEMEX law expressly provides for arbitration and any other means of amigable dispute resolution to be agreed by PEMEX and its subsidiaries, based on commercial law and international treaties, without any exception as regards arbitrability ratione materiae.

The same legislative approach has been taken with the Federal Electricity Commission under the new CFE law as of August 11, 2014. Articles 3 and 7 of the new CFE law expressly refers to commercial legislation applicable to its project agreements. Any acts of the entity in public tender procedures are considered administrative acts, however, and as article 82 of the new CFE law clearly establishes, commercial law is applicable to projects agreements. Article 118 of the new CFE repeats the authority to compromise in arbitration with the same wording as under the new PEMEX law.

With the new PEMEX and CFE laws, the Mexican Congress has taken an important step to eliminate the political risk caused by the ruling of the Second Chamber of the Supreme Court on the non-arbitrability of the administrative rescission and termination as a consequence of the COMMISA amparo, by expressly providing for a mercantile regime and confirming the lack of any non arbitrability issues with respect to project agreements.

The new Electricity Industry Law provides for commerial contracts between the State and private entities in its articles 5 and 66 based on the Mexican Commercial Code including permits or concessions, save where the law expressly provides for the State acting as authority. The law does not contain any provisions with respect to the administrative rescission or termination of a contract. Due to the mercantile character of energy contracts, arbitration seems to be permitted, though there is no express provision to that respect in the law. The Energy Regulatory Commission resolves disputes with respect to interconections and disputes of companies of the energy sector with the National Energy Control Center. Contracts with land owners relating to rights of way and other encumbrances necessary for the transmission and distribution of energy are subject to dispute resolution before federal tribunals. Similar provisions are found in the new Geothermal Energy law.

The energy reform left untouched the inarbitrability issues under the public works and acquisition laws, with respect to the administrative rescission and termination, as well as with any act of authority under the PPP law. Moreover, the notion of act of authority is not clearly defined in Mexican jurisprudence.

3. Oil and Gas Exploration and Production Contracts under the new Hydrocarbon Law

Oil and gas exploration and production contracts with the National Hidrocarbons Commisions are governed by commercial law, subject to the imperative provisions contained in the Hidrocarbon Law, as expressly established in article 22 of the new Hidrocarbon Law as of August 11, 2014 and its future regulations. This is confirmed in article 97 of the new Hidrocarbons law which expressly refers that the acts of the hydrocarbon industry are considered mercantile providing for the application of the Mexican commercial and civil codes.

Such contracts with the new National Hidrocarbons Commission under the Hydrocarbon Law as of August 11, 2014 relate to natural resources such as oil and gas that are the property of the Nation. In spite of their mercantile character, article 19, section VIII, of the Hidrocarbons Law clearly establishes that provisions for the administrative rescission and termination have to be included in these contracts. The causes for administrative rescission are expressly regulated in article 20 of the new Hidrocarbons Law and refer to gross non-performance of the contractor.

Article 21 of the new Hidrocarbon law provides for arbitration of oil and gas exploration and production contracts subject to the the Mexican Commercial Code as lex arbitri. The administrative rescission and termination is expressly excluded from arbitration as a matter of inarbitrability ratione materiae. This means that according to the judgment of the Second Chamber of the Mexican Supreme Court as of 2006, the administrative rescission and termination would have to be litigated before Mexican federal courts in administrative matters, which are quite competent in tax matters, water and perhaps also competition and intellectual property law, but fairly ill-equiped to hear cases on complex infrastructure projects.

Article 20, paragraph 6, of the new Hidrocarbon law expressly states that in case of an administrative rescission, the contractor has to transfer the contractually assigned area including any ‘connected and accessory goods and equipments’ to the State without indemnification. However, compensation provisions may be established in the oil and gas exploration contract according to paragraph 7 of article 20 of the new Hidrocarbon law, which seems to indicate that the contractor will not be able to refuse the return the exploration and production area including its sunk investment, but may obtain a compensation established in the contract and executed through an ordinary administrative procedure before Mexican federal courts. Therefore, it will be important that the future oil and gas exploration and production contracts contain straightforward lump sum compensation provisions with respect of any sunk investment made by the contractor.

4. Conclusions

The secondary laws of the Mexican energy reform are an important step to guarantee full arbitrability with respect to PEMEX and CFE contracts and to recoup the status ex ante COMMISA, albeit under a modern commercial law regime. However, the effects of the judgment of the Second Chamber of the Mexican Supreme Court rendered as a consequence of the COMMISA amparo are still felt in the general federal contract regime and the PPP law. A particular situation exists under the new Hidrocarbons Law where considerations relating to the public domain of oil and gas seem to have motivated the administrative rescission regime, albeit in the context of a commercial project agreement, which will pose considerable challenges to contract drafters. This leads to three categories of federal project agreeements or concessions: (a) administrative contracts, (b) hybrid contracts based on commercial law but subject to administrative rescission or termination which can only be litigated in ordinary administrative litigation or amparo, and (c) commercial project agreements which are fully arbitrable such as under the new PEMEX and CFE laws.


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The Urgent Need for Data: Are the Needs of Users and the Dispute Resolution Market Misaligned?

by Deborah Masucci

and Michael Leathes

Seismic tremors emanating from London’s Guildhall on October 29th 2014 are set to send change-inducing shockwaves, around the international dispute resolution community. It is widely known that dispute resolution’s customers, the disputants, have different needs and interests from the supply side of the market such as external counsel, ADR providers, and educators. The shock comes from the initial data generated at this Convention, suggesting just how far out of alignment the supply side may be with the views and needs of the users. Additional data is needed on an international scale.

A high tech Convention on Shaping the Future of International Dispute Resolution hosted by the Corporation of the City of London, enabled over 150 delegates from over 20 countries in North America, Europe, Asia, Australasia, the Middle East and Africa to vote, using electronic handsets, in real time, on more than 20 core issues that have a direct influence on how mediation and arbitration should develop in the future. The technology enabled responses from users, advisors, providers/mediators/arbitrators and educators to be instantly segmented and compared, accompanied by anonymous chats from delegates using iPads under the Chatham House Rule. Almost half of the 30 panellists at the Convention, and almost 20% of all delegates, were corporate users, many of whom represented the needs and interests of leading multinationals as well as some small and medium-sized enterprises. Leaders of most of the largest international ADR service provider organizations also participated as panellists.

The initial data harvested at this major Convention may encourage ADR’s stakeholders to re-think some of their strategies. It suggests that international dispute resolution (IDR) services need to change in significant ways if they are to meet the needs of their users.

The voting data and voting chats are available for review and download on the web portal of the International Mediation Institute, a co-host of the Convention. Here are some highlights:

1. Two thirds of users rank risk reduction and cost reduction equally as the two most important factors in IDR, and few rank focusing on the key issues of the dispute highly. However, advisors rank focusing on the key issues higher than risk reduction while only 13% of users thought this to be a key factor. Providers ranked cost reduction low (15%).

2. Over three quarters of users think mediation should be used as early as possible in a dispute’s life cycle, but only 44% of advisors and, surprisingly, 42% of providers agree. Users strongly favoured mandatory mediation (66%), but advisors ranked it low (16%).

3. Two thirds of users and providers value contractual dispute resolution clauses that require mediation to precede litigation and arbitration. Only 16% of advisors agree. Advisors were unique in selecting litigation as the preferred method of resolving disputes.

4. Almost 80% of users desire arbitration institutions and tribunals to explore, in a first meeting, what other forms of dispute resolution may be appropriate to resolve a given case. But only half the advisors and less than half of the providers think the same.

5. Over half of the users, but only a quarter of advisors, think that in cases over a certain value, courts and tribunals should automatically initiate a mediation process from which the parties can opt out. Providers seemed evenly split on this issue, with a slight preference favouring opt-outs as well. Three quarters of educators favour this.

6. Almost all users (92%) wish that mediators, conciliators and arbitrators should be certified and held accountable to transparent standards of conduct set and applied by professional bodies. However, only a third of advisors felt the same way. Half of all advisors actually voted against certification, in direct contradiction to the views of users.

7. 85% of users, but only 47% of advisors see the need for an UNCITRAL convention on the recognition and enforcement of mediated settlements (i.e. a mediation equivalent of the New York Convention on the recognition and enforcement of arbitral awards). No users, but over a quarter of advisors, voted against such a convention.

8. Over two thirds of users, but less than a third of their advisors, desire cooling-off periods in arbitration proceedings to make a good faith attempt to settle using a mediator.

9. Most users, but only half of advisors, think an international platform should be created that enables users to express their international dispute resolution needs clearly.

10. Almost three quarters of users, but only 38% of advisors and 54% of providers, believe that mediators should be used in deal-making – i.e. the negotiation of international contracts even where no dispute has arisen.

These stark differences need to be validated by further empirical studies, but the data does raise many fundamental questions. Providers, users and advisors all faulted in-house counsel for not taking a more central role and stronger interest in getting together to express their needs to providers and responders. Surprisingly, 56% of voters attributed the ineffective use of ADR as being due to in-house lawyers and senior management not communicating their needs, and only 19% of voters attributed this to external lawyers. Even more surprisingly, 60% of users attributed this reluctance to apparent lack of skills and interest in ADR by in-house lawyers. Providers also confirmed that when changing their rules or offering new products or services, they tend to be influenced by feedback from advisors, rather than users. This data clearly suggests that users need to express themselves, and take a greater interest in ADR. When there is commitment to ADR within a corporation, sophisticated in-house counsel partner with the businesses to determine the “appropriate” dispute resolution tool to use, and the timing for its use that is invariably earlier rather than later. Managing risk as well as costs is an important goal. The focus is placed on retaining, growing, and strengthening business relationships. Examples from some multinationals suggested that ADR requires strong commitment and leadership not only from in-house lawyers but from senior business executives as well.

But it was not all opinion divergence. Gratifyingly, the various stakeholders were very much in alignment on at least some important issues:

1. The main challenge to the use of mediation was widely perceived to be that one of the parties is unfamiliar with mediation.

2. About half of all stakeholder groups agreed that arbitral tribunals should be empowered to award cost sanctions where a party unreasonably refuses to mediate, even if it should be the winning party.

3. About three quarters of the stakeholder groups (though only half the providers) believed that ADR providers should always collect feedback on mediators and arbitrators, and provide users with appropriate summaries based on that feedback.

4. Three quarters of all delegates, with broad agreement in all stakeholder groups, believed that there should be an Investor-State dispute resolution clause in all international investment treaties, which provides for mediation. The draft Transatlantic Trade and Investment Partnership (TTIP) treaty currently being negotiated, was voted on as a specific example, with 76% of all delegates favouring a dispute resolution clause with a mediation provision in the TTIP treaty. 14% abstained, leaving only 10% opposed to this, all of them being providers and advisors, and none being users, educators or others.

5. Almost all delegates felt that mediation should be tried first in international disputes involving issues of national heritage, such as works of art.

6. Almost everyone agreed that the dispute resolution community should set up a series of international “Pound Conferences” (named after the 1976 conference in the United States that many regard as the start of modern mediation) based on the London Convention, but adapted to local and regional circumstances.

Although sceptics may claim that any conference on mediation is likely to attract delegates who are in favour of mediation, it became quickly apparent to all delegates that no accurate or empirical data has ever been generated before that allowed the needs of users to be compared to the beliefs of providers, advisors, educators and legislators. The data generated by this interactive Convention provides much food for thought. If this initial data should be supported by further similar research, it would signify a dramatic need for a fundamental sea change by users to become far more actively engaged in the handling of their disputes and learning more about process design, such as ADR hybrids and how to achieve faster, cheaper and better outcomes that do not destroy value or put a strain on future business or personal relationships.

Similar events should be held elsewhere in the world to verify the accuracy of this initial data, from which real decisions and actions can be taken that will not merely tinker with international dispute resolution, but reform it, putting users back in the centre of dispute resolution proceedings and better catering to their needs. With that thought in mind, 79% of all delegates voted in favour of setting up a series of Global Pound Conferences around the world based on the London Convention but adapted to local and regional circumstances. Watch this space! Expect aftershocks.


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

by Duarte Gorjão Henriques

BCH Advogados

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

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

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

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

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

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

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

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

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

In fact, Art. 14.5 provides that

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

More impressively, Art. 32.1 provides that

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

by Jonathan T. Stoel and Michael Jacobson

Hogan Lovells,
for Hogan Lovells

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

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

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

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

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

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

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

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

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

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


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