Kluwer Law International

Posts Tagged ‘Costs in arbitral proceedings’

Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

The Singapore International Arbitration Centre (“SIAC”) has issued new rules that came into force on April 1, 2013. The rules changes are accompanied by new Practice Notes for cases administered by SIAC under its rules and the UNCITRAL rules that also came into force on the same date. While the changes do not reflect a significant overhaul of the prior version of the institution’s rules, they do contain important changes of which practitioners should be aware.

The 2013 rules are the fifth set of rules issued by SIAC, which promulgated previous versions in 1991, 1997, 2007, and 2010. The SIAC rules are one of several sets of arbitral rules to be updated in the last few years; other recent updates include the CIETAC rules (2012), the ICC rules (2012), the Swiss rules (2012), and the UNCITRAL rules (2010).

SIAC’s new rules are significant in part because of the institution’s substantial and growing caseload involving parties from around the world. According to its website, SIAC registered 235 cases during 2012 (the largest number of cases ever registered in a single year at SIAC) involving parties from 39 jurisdictions and was handling a total of 525 active cases at year’s end. The largest number of cases filed at SIAC in 2012 involved parties from Singapore, China, India, Indonesia, the United States, and Hong Kong. However, SIAC’s caseload extends well beyond the Asia-Pacific region, also including parties from Bermuda, the British Isles, the British Virgin Islands, Cayman Islands, Cyprus, Denmark, France, Germany, Liberia, Mauritius, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Arab Emirates, and the United Kingdom.

The most salient changes to the new rules are detailed below.

Court of Arbitration

The new SIAC rules establish a Court of Arbitration (“Court”) that takes over case administration functions from SIAC’s Board of Directors (“Board”), which will now focus on corporate and business development matters. The Court is comprised of 16 members from jurisdictions around the world with Dr. Michael Pryles serving as the Founder President of the Court.

The responsibilities of the Court under the new rules include rendering decisions on challenges to arbitrators (Rule 13) and jurisdictional challenges (Rule 25). The President of the Court will have responsibility for determining applications for expedited procedures (Rule 5) and appointment of arbitrators (Rules 6-10) and emergency arbitrators (Schedule 1). While the SIAC rules now use terminology similar to that of the ICC International Court of Arbitration, the SIAC Court does not exercise the more involved review function of its ICC counterpart.

Commencement of the Arbitration

The new rules give the SIAC Registrar the power to determine when an arbitration has commenced. Under Rule 3.3, the Registrar is now responsible for determining that a notice of arbitration is in “substantial compliance” with Rule 3.1, which sets out the requirements for notices of arbitration.

Time Limits

Changes in the new SIAC rules to time limits are minimal but important. A new Rule 2.5 has been added that permits the Registrar to “extend or shorten any time limits prescribed under” the rules. In addition, Rule 9 on multi-party appointment of arbitrators has been amended to give parties 28 days or a time period set by the Registrar to make a joint appointment (absent an agreement by the parties) calculated from the date on which the Registrar received the notice of arbitration rather than the date of the filing of the notice of arbitration as had been the standard in the previous version of the rules.

Investment Arbitration

In a nod to the growing number of investment arbitration cases being heard at arbitral institutions other than ICSID, Rule 3.1(d) of the new SIAC rules notes that the notice of arbitration must include a reference to the contract “or other instrument [e.g., investment treaty]” underlying the dispute.

Substitute Arbitrators

Rule 14.1 now allows a substitute arbitrator to be appointed in cases involving the “removal” of an arbitrator. Previously, the rules provided for the appointment of a substitute arbitrator only in the event of a “death” or “resignation” of an arbitrator.

Party Representatives

The new rules loosen the regulation of party representatives by SIAC and arbitral tribunals comprised under it. Whereas the former version of Rule 20 provided that “[a]ny party may be represented by legal practitioners or any other representatives, subject to such proof of authority as the Registrar or the Tribunal may require,” the new version of Rule 20 dispenses with the proof requirement and simply provides that “[a]ny party may be represented by legal practitioners or any other representatives.” This is an important change that reaffirms the fundamental principles of party autonomy and the freedom of a party to choose its own counsel in international arbitral proceedings.

Witness Interviews

In direct recognition of the various approaches taken by different jurisdictions to witness preparation, Rule 22.5 of the new SIAC rules expressly permits witness interviews. The former version of Rule 22.5 stated that “[s]ubject to the mandatory provisions of any applicable law, it shall be proper for any party or its representatives to interview any witness or potential witness prior to his appearance at any hearing.” The new rule has discarded the mandatory law exception and now states that “[i]t shall be permissible for any party or its representatives to interview any witness or potential witness (that may be represented by that party) prior to his appearance at any hearing.” While the new Rule 22.5 would not override applicable mandatory national law prohibiting witness interviews in an international arbitration (which, in any event, would arguably be inconsistent with the New York Convention), it nevertheless reflects the practice and expectations of parties and tribunals in international arbitration.

The change also brings the SIAC rules into line with other leading rules on arbitral procedure that expressly recognize the permissibility of interviewing witnesses prior to hearings, including Rule 25.2 of the Swiss Rules of International Arbitration, which provides that “[i]t is not improper for a party … to interview witnesses, potential witnesses, or expert witnesses,” and Rule 4.3 of the IBA Rules on the Taking of Evidence in International Arbitration, which similarly provides that “[i]t shall not be improper for a Party … to interview its witnesses or potential witnesses and to discuss their prospective testimony with them.”

Additional Powers of Tribunals

Rule 24 of the new SIAC rules broadens the powers of tribunals. The former version of Rule 24(e) provided that “the Tribunal shall have the power to … order the parties to make any property or item available, for inspection in the parties’ presence, by the Tribunal or any expert.” The presence requirement and the qualification that the tribunal or any expert must be able to perform the inspection have been eliminated. Rule 24(e) now broadly provides that “the Tribunal shall have the power to … order the parties to make any property or item available for inspection.”

Rule 24(n) is a completely new provision made in response to the Singapore Court of Appeal’s decision in PT Prima International Development v. Kempinski Hotels SA [2012] SGCA 35. Rule 24(n) provides that “the Tribunal shall have the power to … decide, where appropriate, any issue not expressly or impliedly raised in the submissions filed under Rule 17 [written submissions] provided such issue has been clearly brought to the notice of the other party and that other party has been given adequate opportunity to respond.” This provision thus empowers a tribunal to act in a situation where a new issue has arisen, for example, during document disclosure or at a hearing, so long as there is notice and an opportunity to be heard on the new issue.

Jurisdiction Challenges

Rule 25.1 has been amended to create a two-step procedure for addressing a challenge made to the jurisdiction of SIAC prior to the constitution of a tribunal. Under the new version of the rule, the challenge will go first to the Registrar, who will determine if the objection should be referred to the Court. If the Registrar refers the matter to the Court and the Court determines that “it is prima facie satisfied” that there is a valid arbitration agreement, then the case goes forward without prejudice to the tribunal’s competence to rule on its own jurisdiction. The previous rule had a one-step process, i.e., a Committee of the Board (the predecessor to today’s Court in terms of case-administration matters) decided the matter without having a preliminary decision made by the Registrar.

Further, the term “scope” has been deleted from Rule 25.1. As a result, a party cannot raise an objection (prior to the appointment of the tribunal) that the scope of an arbitration agreement does not cover a claim or counterclaim. Parties were able to do so under the previous version of the rules.

Rule 36.1, which is an entirely new addition to the rules, provides that “the decisions of the President, Court and Registrar with respect to all matters relating to an arbitration shall be conclusive and binding upon the parties and the Tribunal” and that they “shall not be required to provide reasons for such decisions.” Rule 36.2, which is also new, goes on to provide that “the parties shall be taken to have waived any right of appeal or review in respect of any decisions of the President, the Court and the Registrar to any state court or other judicial authority.”

Publication of Awards

Rule 28.10 is another entirely new provision providing that “SIAC may publish any award with the names of the parties and other identifying information redacted.” This provision will prove to be very helpful to practitioners and academics but, at the same time, potentially unappealing for parties.

Post-Award Interest

Under Rule 28.7, tribunals established under the SIAC rules are now permitted to award post-award interest. The earlier version of this rule permitted interest to be awarded “ending not later than the date of the award.” The change makes the SIAC rules consistent with amendments to §§ 12(5) and 20 of Singapore’s International Arbitration Act made in 2012.

Costs

A new addition to Rule 30.2 permits the Registrar to fix separate advances on arbitration costs for claims and counterclaims. In addition, the term “apart from the costs of arbitration” has been deleted in Rule 33, which relates to legal and other costs. This change was made because Rule 31 already permits tribunals to apportion the costs of arbitration among parties, making the term in Rule 33 redundant and unnecessary.

Gary B. Born, Michelle Glassman Bock, and Thomas R. Snider

More from our authors:

	Litigation in the Netherlands. Civil Procedure, Arbitration and Administrative Litigation - 2nd Edition by Marieke van Hooijdonk, Peter V. Eijsvoogel € 70
	Yearbook Commercial Arbitration Volume XXXVII 2012 by Albert Jan Van Den Berg (ed.) € 215
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

The Singapore International Arbitration Centre (“SIAC”) has issued new rules that came into force on April 1, 2013. The rules changes are accompanied by new Practice Notes for cases administered by SIAC under its rules and the UNCITRAL rules that also came into force on the same date. While the changes do not reflect a significant overhaul of the prior version of the institution’s rules, they do contain important changes of which practitioners should be aware.

The 2013 rules are the fifth set of rules issued by SIAC, which promulgated previous versions in 1991, 1997, 2007, and 2010. The SIAC rules are one of several sets of arbitral rules to be updated in the last few years; other recent updates include the CIETAC rules (2012), the ICC rules (2012), the Swiss rules (2012), and the UNCITRAL rules (2010).

SIAC’s new rules are significant in part because of the institution’s substantial and growing caseload involving parties from around the world. According to its website, SIAC registered 235 cases during 2012 (the largest number of cases ever registered in a single year at SIAC) involving parties from 39 jurisdictions and was handling a total of 525 active cases at year’s end. The largest number of cases filed at SIAC in 2012 involved parties from Singapore, China, India, Indonesia, the United States, and Hong Kong. However, SIAC’s caseload extends well beyond the Asia-Pacific region, also including parties from Bermuda, the British Isles, the British Virgin Islands, Cayman Islands, Cyprus, Denmark, France, Germany, Liberia, Mauritius, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Arab Emirates, and the United Kingdom.

The most salient changes to the new rules are detailed below.

Court of Arbitration

The new SIAC rules establish a Court of Arbitration (“Court”) that takes over case administration functions from SIAC’s Board of Directors (“Board”), which will now focus on corporate and business development matters. The Court is comprised of 16 members from jurisdictions around the world with Dr. Michael Pryles serving as the Founder President of the Court.

The responsibilities of the Court under the new rules include rendering decisions on challenges to arbitrators (Rule 13) and jurisdictional challenges (Rule 25). The President of the Court will have responsibility for determining applications for expedited procedures (Rule 5) and appointment of arbitrators (Rules 6-10) and emergency arbitrators (Schedule 1). While the SIAC rules now use terminology similar to that of the ICC International Court of Arbitration, the SIAC Court does not exercise the more involved review function of its ICC counterpart.

Commencement of the Arbitration

The new rules give the SIAC Registrar the power to determine when an arbitration has commenced. Under Rule 3.3, the Registrar is now responsible for determining that a notice of arbitration is in “substantial compliance” with Rule 3.1, which sets out the requirements for notices of arbitration.

Time Limits

Changes in the new SIAC rules to time limits are minimal but important. A new Rule 2.5 has been added that permits the Registrar to “extend or shorten any time limits prescribed under” the rules. In addition, Rule 9 on multi-party appointment of arbitrators has been amended to give parties 28 days or a time period set by the Registrar to make a joint appointment (absent an agreement by the parties) calculated from the date on which the Registrar received the notice of arbitration rather than the date of the filing of the notice of arbitration as had been the standard in the previous version of the rules.

Investment Arbitration

In a nod to the growing number of investment arbitration cases being heard at arbitral institutions other than ICSID, Rule 3.1(d) of the new SIAC rules notes that the notice of arbitration must include a reference to the contract “or other instrument [e.g., investment treaty]” underlying the dispute.

Substitute Arbitrators

Rule 14.1 now allows a substitute arbitrator to be appointed in cases involving the “removal” of an arbitrator. Previously, the rules provided for the appointment of a substitute arbitrator only in the event of a “death” or “resignation” of an arbitrator.

Party Representatives

The new rules loosen the regulation of party representatives by SIAC and arbitral tribunals comprised under it. Whereas the former version of Rule 20 provided that “[a]ny party may be represented by legal practitioners or any other representatives, subject to such proof of authority as the Registrar or the Tribunal may require,” the new version of Rule 20 dispenses with the proof requirement and simply provides that “[a]ny party may be represented by legal practitioners or any other representatives.” This is an important change that reaffirms the fundamental principles of party autonomy and the freedom of a party to choose its own counsel in international arbitral proceedings.

Witness Interviews

In direct recognition of the various approaches taken by different jurisdictions to witness preparation, Rule 22.5 of the new SIAC rules expressly permits witness interviews. The former version of Rule 22.5 stated that “[s]ubject to the mandatory provisions of any applicable law, it shall be proper for any party or its representatives to interview any witness or potential witness prior to his appearance at any hearing.” The new rule has discarded the mandatory law exception and now states that “[i]t shall be permissible for any party or its representatives to interview any witness or potential witness (that may be represented by that party) prior to his appearance at any hearing.” While the new Rule 22.5 would not override applicable mandatory national law prohibiting witness interviews in an international arbitration (which, in any event, would arguably be inconsistent with the New York Convention), it nevertheless reflects the practice and expectations of parties and tribunals in international arbitration.

The change also brings the SIAC rules into line with other leading rules on arbitral procedure that expressly recognize the permissibility of interviewing witnesses prior to hearings, including Rule 25.2 of the Swiss Rules of International Arbitration, which provides that “[i]t is not improper for a party … to interview witnesses, potential witnesses, or expert witnesses,” and Rule 4.3 of the IBA Rules on the Taking of Evidence in International Arbitration, which similarly provides that “[i]t shall not be improper for a Party … to interview its witnesses or potential witnesses and to discuss their prospective testimony with them.”

Additional Powers of Tribunals

Rule 24 of the new SIAC rules broadens the powers of tribunals. The former version of Rule 24(e) provided that “the Tribunal shall have the power to … order the parties to make any property or item available, for inspection in the parties’ presence, by the Tribunal or any expert.” The presence requirement and the qualification that the tribunal or any expert must be able to perform the inspection have been eliminated. Rule 24(e) now broadly provides that “the Tribunal shall have the power to … order the parties to make any property or item available for inspection.”

Rule 24(n) is a completely new provision made in response to the Singapore Court of Appeal’s decision in PT Prima International Development v. Kempinski Hotels SA [2012] SGCA 35. Rule 24(n) provides that “the Tribunal shall have the power to … decide, where appropriate, any issue not expressly or impliedly raised in the submissions filed under Rule 17 [written submissions] provided such issue has been clearly brought to the notice of the other party and that other party has been given adequate opportunity to respond.” This provision thus empowers a tribunal to act in a situation where a new issue has arisen, for example, during document disclosure or at a hearing, so long as there is notice and an opportunity to be heard on the new issue.

Jurisdiction Challenges

Rule 25.1 has been amended to create a two-step procedure for addressing a challenge made to the jurisdiction of SIAC prior to the constitution of a tribunal. Under the new version of the rule, the challenge will go first to the Registrar, who will determine if the objection should be referred to the Court. If the Registrar refers the matter to the Court and the Court determines that “it is prima facie satisfied” that there is a valid arbitration agreement, then the case goes forward without prejudice to the tribunal’s competence to rule on its own jurisdiction. The previous rule had a one-step process, i.e., a Committee of the Board (the predecessor to today’s Court in terms of case-administration matters) decided the matter without having a preliminary decision made by the Registrar.

Further, the term “scope” has been deleted from Rule 25.1. As a result, a party cannot raise an objection (prior to the appointment of the tribunal) that the scope of an arbitration agreement does not cover a claim or counterclaim. Parties were able to do so under the previous version of the rules.

Rule 36.1, which is an entirely new addition to the rules, provides that “the decisions of the President, Court and Registrar with respect to all matters relating to an arbitration shall be conclusive and binding upon the parties and the Tribunal” and that they “shall not be required to provide reasons for such decisions.” Rule 36.2, which is also new, goes on to provide that “the parties shall be taken to have waived any right of appeal or review in respect of any decisions of the President, the Court and the Registrar to any state court or other judicial authority.”

Publication of Awards

Rule 28.10 is another entirely new provision providing that “SIAC may publish any award with the names of the parties and other identifying information redacted.” This provision will prove to be very helpful to practitioners and academics but, at the same time, potentially unappealing for parties.

Post-Award Interest

Under Rule 28.7, tribunals established under the SIAC rules are now permitted to award post-award interest. The earlier version of this rule permitted interest to be awarded “ending not later than the date of the award.” The change makes the SIAC rules consistent with amendments to §§ 12(5) and 20 of Singapore’s International Arbitration Act made in 2012.

Costs

A new addition to Rule 30.2 permits the Registrar to fix separate advances on arbitration costs for claims and counterclaims. In addition, the term “apart from the costs of arbitration” has been deleted in Rule 33, which relates to legal and other costs. This change was made because Rule 31 already permits tribunals to apportion the costs of arbitration among parties, making the term in Rule 33 redundant and unnecessary.

Gary B. Born, Michelle Glassman Bock, and Thomas R. Snider

More from our authors:

	International Arbitration and Forum Selection Agreements: Drafting and Enforcing - 4th edition by Gary B. Born € 85
	International Arbitration in Switzerland - 2nd Revised Edition by Elliott Geisinger, Nathalie Voser, Angelina M. Petti (eds._ € 150
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

Pepperdine University School of Law

A new study of dispute resolution practices in Fortune 1,000 corporations shows that many large companies are using binding arbitration less often and relying more on mediated negotiation and other approaches aimed at resolving disputes informally, quickly and inexpensively. The 2011 survey of corporate counsel developed by researchers at Cornell University’s Scheinman Institute on Conflict Resolution, the Straus Institute for Dispute Resolution at Pepperdine University School of Law, and the International Institute for Conflict Prevention & Resolution (CPR) produced results that appear to be strongly reflective of U.S. practices and trends, but thoughtful practitioners and scholars will ponder its implications for the future of international practice.

Although the approaches of large corporations to managing conflict vary widely, their strategies typically boil down to how best to control cost and risk in dispute resolution processes and outcomes. As the U.S. experienced what some have called a “quiet revolution” in dispute resolution in the 1980s, corporate counsel played a critical role. They were in the forefront of efforts to avoid the expense and risk of hardball litigation. They began using settlement-oriented approaches like mini-trial, and, more significantly, negotiation with the help of mediators. They banded together to form the Center for Public Resources (now CPR), which actively promoted corporate and law firm pledges to seek out-of-court solutions before resorting to litigation.

Around the same time, corporate counsel also participated in efforts to address what they perceived to be the limitations or inadequacies of binding arbitration as a substitute for litigation. Although forms of arbitration had been a mainstay of business dispute resolution throughout much of the latter half of the Twentieth Century, arbitration was thrust into an even more prominent role as a substitute for public trial thanks to a series of U.S. Supreme Court decisions strongly promoting the enforcement of arbitration agreements.

When in 1997 Cornell conducted the first survey of Fortune 1,000 corporate counsel on their attitudes and practices regarding dispute resolution, mediation and arbitration were both prominently and positively portrayed. Corporate counsel expressed positive views of many perceived benefits of these options, including savings of time and cost and more satisfactory, durable results. A majority of respondents predicted that their companies would make use of both mediation and arbitration in the future.

The 2011 survey, reflecting the responses of more than 300 Fortune 1,000 corporate counsel, presents a very different, decidedly mixed picture. The respondents, almost half of whom are general counsel, assert that their companies are less likely to employ hardball litigation as a primary strategy, and instead broadly embrace mediation as a tool for resolution of all kinds of disputes now and in the future. They are also becoming more proactive in managing conflict in the early stages of litigation and employing third parties to evaluate and assess different dimensions of a legal dispute. Around two-thirds of responding counsel said their company employ some form of “early case assessment”—an approach that in companies like DuPont is a formalized and systematic method of analyzing all aspects of a dispute in the early stages in order to plot the appropriate course for its resolution.

At the same time, however, corporate counsel tend to be markedly less assured of the potential benefits of “alternative dispute resolution,” perhaps reflecting a more realistic (or more cynical) view borne of long experience. As a group, they are less certain that these processes will be deemed satisfactory, or that they will produce satisfactory settlements or durable results. These data may mirror anecdotal evidence that mediation is often subject to manipulation by attorneys seeking to prolong or frustrate the dispute resolution process or “spin” mediators.

When it comes to adjudication, more companies seem to be turning back to litigation in court. Binding arbitration usage has dropped for most kinds of disputes (including commercial, employment, environmental, intellectual property, real estate and construction disputes), and corporate counsel are now evenly divided on the question of their company’s future use of arbitration. Notable exceptions to this marked downward trend are consumer and products liability cases, as some companies appear to be taking advantage of U.S. Supreme Court’s decisions supporting the use of binding arbitration clauses in standardized consumer contracts, including provisions waiving the right to participate in class actions.

The common theme in these changing patterns appears to be a desire for maximal control of the dispute resolution process. Corporate attorneys logically prefer to manage outcomes, so mediation and other approaches that aim at achieving a mutually acceptable settlement are strongly favored. The evidence suggests that in the U.S. the models they currently embrace are heavily lawyered, with the emphasis on third party predictions or evaluations of a case’s chances in adjudication. The great majority of cases are resolved prior to hearings on the merits; thus, the incidence of court trial has fallen dramatically, and there are also fewer cases going to arbitration hearings.

Where settlement cannot be achieved, some large companies—perhaps as many as half the Fortune 1,000—then want to try their commercial cases in court despite the well-known costs and risks, if only because of the traditional “second chance”—the opportunity to overturn a faulty verdict or judgment on appeal. For many corporate counsel, concerns about the inability to overturn arbitration awards that do not comport with applicable law or proven fact, coupled with suspicions about the abilities or motivations of arbitrators, are paramount.

But many other corporate attorneys continue to view the preference for litigation as ironic, since the alternative—binding arbitration—is a choice-based process that affords countervailing advantages such as options for enhanced confidentiality, speed and efficiency, expertise . . . and even, potentially, private appeal to another tier of arbitration! All too often, however, it seems that corporate counsel fail to recognize or take advantage of such options, and instead complain about the shortcomings of arbitration. To make active choices regarding arbitration means overcoming formidable barriers such as the prevalent caution among corporate counsel about leaving traditional comfort zones, and the low priority assigned to dispute resolution in the negotiation and drafting of business agreements. These are the source of great inertia. As one expert on corporate deal-making recently explained when asked why the companies he advises had not rushed to employ a particular new program for dispute resolution, “My clients prefer to cross the street in a group.”

What do trends among Fortune 1,000 corporations portend for international arbitration and dispute resolution practice? First off, it must be said that because of the unique and critical role played by binding arbitration in the resolution of international commercial disputes, both as an alternative to national courts and as a framework for worldwide enforcement of adjudicated results, one cannot imagine in the international arena the kind of market competition between arbitration and litigation observable in the U.S. and reflected in the 2011 Fortune 1,000 survey. In other words, arbitration will undoubtedly remain the preferred mechanism for adjudication of international business disputes.

But there remains the important question of the future evolution and impact of mediated negotiation and other strategies that afford parties at least the possibility of earlier, quicker, less expensive, less formal, more private, and more appropriately tailored solutions to business conflict. It would be a mistake to assume the U.S. experience with mediation, so reflective of our culture and our system of justice, will be fully replicated internationally. On the other hand, it is reasonable to expect that over time international businesses will increasingly probe the opportunities to enhance their control and active management of conflict, including intervention strategies that help to promote greater cross-cultural and cross-border communication and which reduce the need for arbitration hearings. Such developments are likely to be stimulated to the extent that businesses perceive international arbitration is becoming more costly and less efficient—a perception that has factored significantly in recent years on the American scene.

What are your perspectives on the future of international commercial arbitration and dispute resolution? What questions or concerns, if any, are raised by observed trends among Fortune 1,000 corporations? The complete study, “Living with ADR: Evolving Perceptions and Use of Mediation, Arbitration and Conflict Management in Fortune 1,000 Corporations” by Thomas J. Stipanowich and J. Ryan Lamare may be found at http://ssrn.com/abstract=2221471.

More from our authors:

	Litigation in the Netherlands. Civil Procedure, Arbitration and Administrative Litigation - 2nd Edition by Marieke van Hooijdonk, Peter V. Eijsvoogel € 70
	Yearbook Commercial Arbitration Volume XXXVII 2012 by Albert Jan Van Den Berg (ed.) € 215
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

University of Portsmouth,
for ITA

As its Council Member I attended the ICC Institute of World Business Law’s 32nd annual meeting on ‘Third-Party Funding in International Arbitration’ held in Paris on 26 November 2012. It was a grand success as it drew many professionals, arbitrators, experts, academic specialists and, above all, representatives from some major third-party funding bodies such as Burford Group Ltd., Calunius Capital LLP, Fulbrook Management LLC and others, and the discussion and debates generated a great deal of interest among the participants. The presented topics ranged from the concepts of litigation and arbitration financing to more complicated issues such as ethical issues of third-party funding (TPF), due diligence and decision making process in investing in claims by third parties, conflict of interests for arbitrators / counsel, arbitrator’s independence and impartiality, confidentiality and disclosure of TPF and the problems of TPF in investor-State arbitration. The purpose of this blog is to highlight some of the burning issues passionately debated in the meeting. Following the Chatham House Rule the views express herein will not be specifically attributed to any individual or organization.

One of the issues debated was the concept and nature of TPF itself. As the concept is ever evolving in recent years in the field of arbitration, the participants’ views did not seem to point to a consensus on a fixed definition of TPF. However, certain existing models in practice were articulated in the discussion. The notion of third-party litigation financing (in a broad sense) is not new as it has been in practice in the USA for more than a century now (i.e. contingency fee arrangement), though in Europe it is relatively a new phenomenon and fragmented in practice (e.g. conditional fee arrangement is permitted in England; pure contingency fee arrangement is permitted in Italy while it being prohibited in England and in many other countries in Europe such as France, Switzerland, Sweden and Spain). In the field of arbitration TPF is recently emerging as an attractive option facilitating access to justice to an impecunious party who may have a credible / meritorious claim. Arbitration finance is a specialty corporate finance focused on arbitration claims (i.e. the award proceeds) as assets being used as collateral to obtain such finance which is a non-recourse one. The reward or return of the third-party funder is said to be determined on a case-by-case basis. Normally, a percentage of the damages ranging from 20 percent to 40 percent or a cost multiple, usually running from two to four, or a combination of these is applied to determine the third-party funder’s return. Some participants expressed various ideas around the concept of TPF such as third-party funder’s buying equity interest in the claim or a share in the proceeds of a prospective arbitral award, or a joint venture (in the sense of equity joint venture, i.e. by monitizing the claim) arrangement between the client and the third-party funder. As opposed to the aforementioned narrow connotation to TPF, others tended to suggest a broad one encompassing also other contracts as “derivatives” such as contingency fees arrangements between a client and counsel and insurance contracts (e.g. for adverse costs), etc. Some third-party funders indicated that TPF, in time, might evolve into complex financial engineering (e.g. credit default swaps) involving other related financial products, but it remains to be seen as the market develops and demand grows in the years ahead. The third-party financing is an investment per se in arbitration (albeit a high-risk investment) to be described as a portfolio investment rather than direct. Both claimants and respondents can take the advantage of TPF at any stage during the arbitration proceedings and beyond, i.e. at the stage of the enforcement of the arbitral award.

A significant amount of time was dedicated to the debate of ethics of TPF and thereby conflict of interests that might arise in that respect. The involvement of a third-party funder may raise the issue of impartiality or independence of an arbitrator in certain circumstances. For example, a situation could arise where a person acts as an arbitrator in a case in which the claimant is financed by the same third-party funder who had also financed a claimant in another case in which the same person (i.e. the arbitrator) acted as that claimant’s Counsel. So, the same third-party funder’s involvement in two cases with the same person acting in two different capacities, i.e. arbitrator and counsel, could raise issues of impartiality or / and independence of the latter, i.e. conflict of interests. Apart from that, the third-party funder’s influence or involvement, if any, in the choice of an arbitrator could also beg the question whether that might bring to bear on the determination of the eventual amount of damages in the prospective arbitral award. Among the other concerns expressed was the probability of a third-party funder’s abuse of its stronger bargaining leverage against a vulnerable impecunious party in any way. Furthermore, the involvement of a third-party funder could deter the prospect of a settlement of the dispute by the parties if it does not satisfy the funder’s requirements, though acceptable to the client, whilst, on the other hand, it was argued by some funders to the contrary that TPF could rather be used as a weapon for a satisfactory settlement, after all, for all the parties involved.

Since there is a possibility of conflict of interests or ethical issues arising in the presence of a third- party funder in an arbitration, it was felt by many participants that such presence should be disclosed. On this point various issues were raised as to the nature (i.e. whether mandatory or voluntary disclosure) and the extent of disclosure (i.e. whether of the mere existence of a third-party funding arrangement or of the actual funding agreement), to whom to disclose (whether to the arbitral tribunal and / or to all the parties and stakeholders involved) and the time to disclose (before or at the beginning of the arbitration, or at some point in the arbitral proceedings)[See on the issue of timing of TPF impacting ICSID jurisdiction in a most recent case: Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, ICSID Case No. ARB/09/1(Decision on Jurisdiction, December 21, 2012, paras. 239-259), including Dr Kamal Hossain’s Separate Opinion, paras. 34-37] It was felt that the representatives of the third-party funding companies present were not in favour of an extensive disclosure of the terms and conditions whatever might have been agreed between the third-party funder and its client as in many respects confidentiality rules apply for various reasons (including the sensitive nature of information, or matters involved may be concerned with the economics of the deal, etc.) and in their view no question of mandatory disclosure should arise, let alone the fact that there does not exist so far on the international level any established rules requiring such disclosure. Some participants felt that in some situations there may be a need for disclosure in good faith, otherwise it would lead to the breach of procedural good faith. When some participant questioned as to why third-party funders are ‘secretive about disclosure’ to which a funder representative retorted by saying that it is preferable to use the expression ‘cautious about disclosure’ to better reflect the state of affairs. According to third-party funders, if for any reason the conflict of interests, transparency, adverse costs, or security for costs is in issue, or a settlement is being discussed, only limited disclosure of third-party funding is tolerable.

One of the important issues discussed concerned TPF in the context of investor-State arbitration. Thus, as a recipient of TPF a State party may have its sovereign authority issues or political implications as a third-party funder may exercise control over the dispute strategy and management whilst the former may have little or no control as it may have to submit to the whims and considerations of the third-party, often contrary to the State’s public policy. There could also be the possibility of the state’s regulatory or nationalization measures being attributed to the interest of the third- party funder which might not be unusual though in the case of some corrupt governments. Thus, there could be issues of public policy, transparency and the State’s accountability to the public when the relationship between the State and the third-party funder may not be perceived as level playing because of the overbearing control exercised by the third-party funder. It has been warned by some participants that the disclosure of the presence of a third-party funder on the other side is essential to the State party in the public interest.

Last but not least, the serious question whether TPF should be regulated or not was debated passionately. If it is to be regulated, then how – by hard law or soft law? The issues such as the extent of regulation and its modus operandi were also discussed. The overall question of regulation of TPF centred on dealing with some ethical issues, i.e. to prevent the: (i) abuse of TPF arrangement for excessive and unreasonable profiteering (e.g.. 90% of the award proceeds) in some cases, (ii) unreasonable exertion of influence in arbitration strategy including selection of arbitrators defying the requirement of impartiality and independence of arbitrators, (iii) possible exploitation of attorney-client privilege and confidentiality and (iv) funding of frivolous cases intended to inflate the value of funders’ portfolios, and, above all, to avoid a subprime-mortgage-induced financial disaster like situation of the recent past in the field of arbitration that might cause irreparable reputational damage to arbitration as an institution itself. The soft-law, i.e. non-binding, instrument such as the Code of Conduct for Litigation Funders (November 2011) issued by the Association of Litigation Funders of England and Wales was not considered robust enough to deal with the concerns expressed, let alone the question of its applicability to international arbitration. One participant reminded the International Chamber of Commerce of its duty to serve the international business community in this respect by taking timely measures to develop principles and rules to regulate TPF. Some other participants also called for initiatives by other international professional bodies such as IBA and ICCA, etc., in this respect.

These were just some of the concerns expressed in respect of TPF. It was, however, felt by the majority of the participants that whilst TPF is a welcome option and not a bad idea at all as it allows a financially distressed party, either claimant or respondent, to have access to justice otherwise denied, it needs to be regulated for the welfare of the arbitrating parties (and not in the least for the protection of the reputation of third-party arbitration funders) and the stability and the longevity of arbitration as an institution itself (perhaps a reminder in the wake of some states’ renouncing of investment treaty arbitration lately!).

One thus needs hardly reminding:

‘Fire can burn down the earth, but if its use is regulated it can contribute to the welfare of all on the planet’.

More from our authors:

	Litigation in the Netherlands. Civil Procedure, Arbitration and Administrative Litigation - 2nd Edition by Marieke van Hooijdonk, Peter V. Eijsvoogel € 70
	Yearbook Commercial Arbitration Volume XXXVII 2012 by Albert Jan Van Den Berg (ed.) € 215
	International Arbitration: Law and Practice by Gary B. Born € 30
	Arbitrating Under the 2012 ICC Rules. An Introductory User’s Guide by Jacob Grierson, Annet van Hooft € 140

Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

In its important 2011 decision AT&T Mobility v. Concepcion, the United States Supreme Court sharply limited the grounds on which a court may invalidate an arbitration agreement. A recent ruling by the United States Court of Appeals for the Eleventh Circuit, In re Checking Account Overdraft Litigation MDL No. 2036, illustrates how lower courts are starting to find ways around the Supreme Court’s strict enforcement of arbitration agreements. This is the first published, post-Concepcion case where a federal court of appeals has rejected an element of an arbitration agreement as unconscionable under state law. The decision also suggests how the drafters of arbitration agreements might avoid such judicial rejection.

Lacy Barras, a customer of BB&T, a commercial bank, sued the bank as part of a putative class of plaintiffs alleging the improper charging of overdraft fees. Page one of the customer agreement between Ms. Barras and the bank contained an arbitration clause providing for arbitration of any disputes under the AAA rules. Page fourteen of the agreement also had a separate provision stating the following:

COSTS, DAMAGES, AND ATTORNEYS’ FEES. You agree to be liable to the Bank for any loss, costs, or expenses, including, without limitation, reasonable attorneys’ fees, the costs of litigation, and the costs to prepare or respond to subpoenas, depositions, child support enforcement matters, or other discovery that the Bank incurs as a result of any dispute involving your account.

Thus, strictly read, the customer was responsible for all of BB&T’s costs and fees in any litigation or arbitration against the bank, regardless of the outcome of the dispute. Even if Ms. Barras sued BB&T and won, she still would have to reimburse the bank for its costs of defending the suit.

The case was consolidated into a larger multidistrict litigation based in the United States District Court for the Southern District of Florida. BB&T moved to compel arbitration of Ms. Barras’s claims. Perhaps realizing that the cost-shifting provision was difficult to defend on the merits, the bank argued that the provision did not apply to proceedings brought under the arbitration clause and effectively promised not to try to enforce it. The bank also argued that the case should be submitted to arbitration even if the cost-shifting provision was invalidated.

The district court twice denied BB&T’s motion to compel arbitration, holding the arbitration agreement was unconscionable under South Carolina state law, which governed the dispute. BB&T appealed to the United States Court of Appeals for the Eleventh Circuit, which considered the district court’s ruling in light of the Supreme Court’s Concepcion decision.

In Concepcion, the Supreme Court considered the “saving clause” in section 2 of the Federal Arbitration Act, which permits a court to refuse to enforce an arbitration agreement “upon such grounds as exist at law or in equity for the revocation of any contract.” The Supreme Court explained that this clause leaves the door open to allowing arbitration agreements to be “invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability.” But the Court effectively narrowed the potential grounds for invalidation, holding that a state rule against class action waivers in customer agreements was preempted by the FAA, because the rule “interferes with fundamental attributes of arbitration” – even though, on its face, the rule was generally applicable to both arbitration and litigation.

Reviewing Ms. Barras’s case, the Eleventh Circuit reversed the lower court’s ruling, but only insofar as it had denied effect to the arbitration clause in the customer contract. The Eleventh Circuit agreed with the district court that the cost-shifting provision in particular was unconscionable under state law, and held that Concepcion did not change this result. At the same time, the court of appeals ruled that the invalid provision could be severed from the arbitration clause, and therefore ordered arbitration of the claims.

The fact that BB&T’s cost-shifting provision was buried in the middle of a long agreement of adhesion, coupled with its egregiously one-sided content, made this case a relatively straightforward application of state common law unconscionability. Left unanswered was what would have happened had BB&T’s customer agreement been slightly different.

In particular, if BB&T had been a bit more careful in drafting its cost-shifting provision, Concepcion might have saved it. Specifically, a provision that required the customer to pay the arbitrator’s fees and administrative costs, but not BB&T’s attorney’s fees, would have been an arbitration-specific clause that state law might not be able to touch.

Central to the Eleventh Circuit’s ruling was its articulation of a longstanding principle – equally applicable to both litigation and arbitration – “that attorney’s fees and costs generally are not recoverable by a non-prevailing party.” Under Concepcion, the FAA preempts state rules against enforcement “that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” A state rule that singled out as invalid a provision that focused on arbitrator’s fees would arguably have been just such a rule. After all, there is no analogue to such a rule in litigation; litigants do not (legally) pay the judge or jury.

True, a court might get out of this conundrum by arguing that a rule against requiring the customer to pay the arbitrator’s fees is subsumed into the more general principle that a winning party should not be forced to pay the losing party’s costs. But this might be hard to defend where the Supreme Court in Concepcion made clear that the FAA preempts any state law that “interferes with fundamental attributes of arbitration.” The principle that the parties are responsible for paying an arbitrator is, if anything, more of a fundamental attribute of arbitration than the individual-action principles that led the Court to strike down the state rule against class-action waivers in Concepcion. And perhaps an even more fundamental attribute of arbitration is the notion that the terms of the parties’ agreement to arbitrate – including any agreement on allocation of costs – will be given effect.

An aggrieved customer might also complain that the arbitrator’s costs could exceed the value of the potential award, particularly for a small-scale consumer claim. However, again Concepcion forecloses this very argument. In striking down the state rule against class-action waivers, the Concepcion Court rejected the contention that class proceedings were “necessary to prosecute small-dollar claims that might otherwise slip through the legal system.” Rather, the Court held that the FAA preempted such a rule “even if it is desirable for unrelated reasons.”

Another variation on the facts here could also have led to a different result. The Eleventh Circuit observed that while the arbitration clause was prominently displayed on the first page of BB&T’s customer agreement, the cost-shifting provision was far down in the fine print. The inconspicuous appearance of this provision “weigh[ed] heavily” in the court’s finding that the provision was procedurally unconscionable. The court also separately found that the content of the provision was substantively unconscionable. Under the law of South Carolina and many other states, a contractual provision is invalid only if it is both procedurally and substantively unconscionable. The logical implication, then, is that a customer-pays provision, however one-sided it might appear, would still be legal under state law if it were adequately disclosed. Indeed, the Eleventh Circuit observed in a footnote that “[b]ecause arbitration is a matter of private contract, parties are of course free to agree that one party will bear the other party’s costs and attorneys’ fees, and, as in any contract, the parties are bound to this agreement so long as it is enforceable.” If BB&T’s cost-shifting provision had been – like the arbitration clause – displayed in bold writing, on the first page of the customer agreement, it might not have contained the “element of surprise” that led the court to find that “Barras lacked a meaningful choice in agreeing to the provision.” Can an egregious cost-shifting provision survive judicial scrutiny, so long as it is prominent enough in the agreement? Eventually, perhaps an audacious company will put it to the test.

Gary B. Born & Adam Raviv

More from our authors:

	International Arbitration: Law and Practice by Gary B. Born € 30
	Commercial Mediation in Europe. An Empirical Study of the User Experience by Ewald Filler € 140
	Arbitrating Under the 2012 ICC Rules. An Introductory User’s Guide by acob Grierson, Annet van Hooft € 140
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

International Moot Court Competition Association (IMCCA)

“Research is formalized curiosity…” – Z. Hurston

In what follows I have tried to gather information from publicly available sources regarding some of the questions which have troubled my mind lately. It is hoped that the results would be of interest to the readers. For me, this proved to be one of my most exciting projects so far. The idea was conceived during my work in the IMCCA – Bulgaria (International Moot Court Competition Association) which unites past and present Ph. C. Jessup Moot Court participants (as well as participants from other moot courts) who share their love for International Law in a country where it is not lectured in-depth in universities. IMCCA and America for Bulgaria Foundation provide us with the necessary stimuli to learn more and to achieve more.

The information presented is subject to the caveat that not all ICSID awards are public or may have otherwise escaped my acquisition efforts. In this and any other regard, I would appreciate further supplement or corrections.

Which arbitrators have sat the most in ICSID cases?
(in alphabetical order, including cases which have been settled)

Alexandrov, Stanimir A.
Álvarez, Henri C.
Berg, Albert Jan van den
Berman, Franklin
Bernardini, Piero
Böckstiegel, Karl-Heinz
Brower, Charles N.
Crawford, James R.
Cremades, Bernardo M.
El-Kosheri, Ahmed Sadek
Fernández-Armesto, Juan
Fortier, L. Yves
Gaillard, Emmanuel
Griffith, Gavan
Guillaume, Gilbert
Hanotiau, Bernard
Kaufmann-Kohler, Gabrielle
Lalonde, Marc
Lowe, Vaughan
McLachlan, Campbell
McRae, Donald M.
Naón, Horacio A. Grigera
Oreamuno, Rodrigo
Paulsson, Jan
Stern, Brigitte
Tercier, Pierre
Thomas, J. Christopher
Veeder, V.V.
Vicuña, Francisco Orrego
Williams, David A.R.
Wobeser, Claus von

Who is the first woman to sit as an arbitrator in an ICSID case?

Mme Rosalyn Higgins in 1987, in the resubmitted Amco case.
It is noticeable that international arbitration remains a man-dominated profession.

Which is the Claimant which has filed the most applications?

Impregilo, S.p.A has appeared as Claimant in 5 cases so far (most of them discontinued):
Impregilo S.p.A and Rizzani De Eccher S.p.A. v. United Arab Emirates (ICSID Case No. ARB/01/1)
Impregilo S.p.A. v. Islamic Republic of Pakistan (ICSID Case No. ARB/02/2)
Impregilo S.p.A. v. Islamic Republic of Pakistan (ICSID Case No. ARB/03/3)
Impregilo S.p.A. v. Argentine Republic (ICSID Case No. ARB/07/17)
Impregilo S.p.A. v. Argentine Republic (ICSID Case No. ARB/08/14)

Which is the State appearing the most times as a Respondent?
(includes cases which have been settled or discontinued)

Argentina 49
Venezuela 36
Egypt 17
Ecuador 12
Congo 12
Peru 11
Ukraine 10

Curious facts regarding the composition of some of the Tribunals

● All the initially appointed arbitrators in the cases MTD v. Chile (ICSID Case No. ARB/01/7), Vannessa Ventures v. Venezuela (ICSID Case No. ARB(AF)/04/6) and Víctor Pey Casado v. Chile (ICSID Case No. ARB/98/2) resigned.

● Two of the three arbitrators in the annulment proceedings in the cases of MTD v. Chile and CMS v. Argentina were the same which made the outcome of e.g. the later-in-time decision on stay of enforcement.

● The arbitrators in the Malaysian Historical Salvors v. Malaysia (ICSID Case No. ARB/05/10) annulment proceedings were all past and present Judges from the International Court of Justice.

● The arbitrators in the cases of Pioneer v. Argentina (ICSID Case No. ARB/03/12) and Pan American v. Argentina (ICSID Case No. ARB/03/13), and Alcoa Minerals v. Jamaica (ICSID Case No. ARB/74/2), Kaiser Bauxite Company v. Jamaica (ICSID Case No. ARB/74/3) and Reynolds v. Jamaica (ICSID Case No. ARB/74/4), respectively, were all the same.

Which law firms have served the most times in ICSID cases?
(in alphabetical order)

Arnold & Porter LLP
Freshfields Bruckhaus Deringer LLP
King & Spalding LLP
Latham & Watkins LLP
Shearman & Sterling LLP
Sidley Austin LLP
White & Case LLP

Which prominent scholars have served as party-representatives or counsels in ICSID cases?

Judge Stephen M. Schwebel
Prof. Dr. James R. Crawford
Prof. Christopher Greenwood
Prof. Alain Pellet
Prof. Philippe Sands, QC
Prof. Antonio Crivellaro

In which fields of economic activity most of the cases find their origin?

Hydrocarbon concessions, petroleum and oil exploration and production, gas supply and distribution 71
Electric power generation, distribution and sale 39
Mining concessions and mineral exploration 31
Construction contracts, including real estate, dams, etc. 21
Highway construction contracts 14
Telecommunications 13
Water services 12

Which is the first ICSID award?

The Award rendered on August 29, 1977 in the case of Adriano Gardella S.p.A. v. Côte d’Ivoire (ICSID Case No. ARB/74/1).

What is the highest award amount so far?

The highest award amount of US$ 1,769,625,000 was awarded in the case of Occidental v. Ecuador (ICSID Case No. ARB/06/11) Award of October 5, 2012.

What is the lowest award amount so far?

It seems that the lowest award amount of US$ 460,000 (as principal) was awarded in Asian Agricultural Products Ltd. v. Sri Lanka (ICSID Case No. ARB/87/3) Award of June 27, 1990.

How much does an ICSID case cost in terms of legal costs?

The information below was intended to bring light to the question how much does an ICSID case cost in terms of legal representation. The information provided must be retained with caution since legal costs depend, among others, on the duration and the complexity of the case. Moreover, many awards are not publicly available and most Tribunals order that each party bears its own costs of legal representation without mentioning the sums.

Here are some examples of the practice of ICSID Tribunals:

● In CDC v. Seychelles (ICSID Case No. ARB/02/14) Award of December 17, 2003, Seychelles were ordered to pay the Claimant the sum of £ 100,000 representing legal fees.

● In Pantechniki v. Albania (ICSID Case No. ARB/07/21) Award of July 30, 2009, the cost claims of the parties were among the lowest – EUR 154,523 and EUR 269,657, respectively.

● In Telenor Mobile v. Hungary (ICSID Case No. ARB/04/15) Award of September 13, 2006, the Counsel for Hungary demanded the reimbursement of US$ 1,249,340.29.

● In Siag v. Egypt (ICSID Case No.ARB/05/15) Award of June 1, 2009, Egypt was ordered to pay the the sum of USD 6,000,000 in legal costs.

● In Spyridon Roussalis v. Romania (ICSID Case No. ARB/06/1) Award of December 7, 2011, the Claimant had to pay 60% of the Respondent’s legal fees in the amount of EUR 6,053,443.78.

● The Tribunal in Cementownia Nowa Huta S.A. v. Turkey (ICSID Case No. ARB(AF)/06/2) Award of September 17, 2009 found that:

“the Respondent’s legal fees and expenses are not unreasonable having regard to the course of these proceedings and that, therefore, the Claimant is to bear such costs in the amount of USD 4,904,822.06.” (para. 178)

● In Kardassopoulos & Fuchs v. Georgia (ICSID Case Nos. ARB/05/18 and ARB/07/15) Award of March 3, 2010, the Respondent was liable to pay the Claimants their costs for the proceedings in the total amount of US$ 7,942,297.

● In ADC v. Hungary (ICSID Case No. ARB/03/16) Award of October 2, 2006, the Claimant demanded US$ 7,623,693 in respect of the Claimants’ costs and expenses. The Tribunal found

“no reason to depart from the starting point that the successful party should receive reimbursement from the unsuccessful party.” (para. 533)

See also Abaclat et al. v. Argentina (ICSID Case No. ARB/07/5) at para. 682.

● The Tribunal in Gemplus & Talsud v. United Mexican States (ICSID Cases Nos. ARB (AF)/04/3 & ARB (AF)/04/4)) Award of June 16, 2010 recognized that:

“It is well-known that legal costs incurred by respondent-state parties are usually much lower than costs incurred by claimant-private parties, partly because a claimant bears a greater burden in presenting and proving its case, partly because a state’s billing practices with its legal representatives are different and partly, as here, where there is more than one claimant bringing claims under more than one treaty.” (para. 17-25)

Which is the most invoked BIT?

From the information available it may be concluded that this is the Argentina – U.S. Bilateral Investment Treaty which was relied upon, inter alia, in the following cases:
CMS v. Argentina (ICSID Case No. ARB/01/8)
Azurix Corp. v. Argentina (ICSID Case No. ARB/01/12)
Continental Casualty Company v. Argentina (ICSID Case No. ARB/03/9)
Pan American Energy LLC and BP Argentina Exploration Company v. Argentina (ICSID Case No. ARB/03/13)
Enron v. Argentina (ICSID Case No. ARB/01/3)
LG&E v. Argentina (ICSID Case No. ARB/02/1)
Sempra v. Argentina (ICSID Case No. ARB/02/16)
AES Corporation v. Argentina (ICSID Case No. ARB/02/17)
El Paso Energy v. Argentina (ICSID Case No. ARB/03/15)

How long does an ICSID case take?

Approximately 3.6 years. See Sinclair, A., ICSID Arbitration: how long does it take?, 4:5 GAR J. (2009), available here .

Which is the shortest merits award (in terms of length)?

CDC v. Seychelles (ICSID Case No. ARB/02/14) Award of December 17, 2003 – 23 pages.

Which is the longest merits award (in terms of length)?

Gemplus & Talsud v. United Mexican States (ICSID Cases Nos. ARB (AF)/04/3 & ARB (AF)/04/4)) Award of June 16, 2010 – 382 pages

Are there claims filed by a State against an investor?

Gabon v. Société Serete S.A. (ICSID Case No. ARB/76/1)
The basis of jurisdiction was a contract. The case was eventually settled.

Romania’s counterclaim in Spyridon Roussalis v. Romania (ICSID Case No. ARB/06/1) was admitted on the basis of the umbrella clause found in Article Article 2(6) of the Romania-Greece BIT. (Award of December 7, 2011, para. 781)

Which cases may be called landmark cases?

While it may be said that every decision and award rendered by an ICSID Tribunal (or committee) contains interesting findings of law, among them the following may be mentioned as particularly interesting:

● Santa Elena v. Costa Rica (ICSID Case No. ARB/96/1) Final award of February 17, 2000, on the compound interest. Up until this point, most of the ICSID Tribunals denied awarding compound interest relying on a citation from Marjorie Whiteman in her book Damages in International Law vol. III (1943) at p. 1997:

“[t]here are few rules within the scope of the subject of damages in international law that are better settled than the one that compound interest is not allowable.”

This is, among other things, evidence of the influence a scholar can have on international law.

● Maffezini v. Spain (ICSID Case No. ARB/97/7) Award of November 9, 2000, as to attribution of State responsibility.

● Salini v. Morocco (ICSID Case No. ARB/00/4) Decision on Jurisdiction of July 23, 2001, regarding the so-called Salini test for the notion of investment.

● Vivendi v. Argentina (ICSID Case No. ARB/97/3) First Annulment, Decision on Annulment dated July 3, 2002, as to the relation between treaty and contract.

● SGS v. Pakistan (ICSID Case No. ARB/01/13) Decision of the Tribunal on objections to jurisdiction of August 6, 2003 and SGS v. Philippines (ICSID Case No. ARB/02/6) Decision of the Tribunal on objections to jurisdiction of January 29, 2004, with regard to the so-called umbrella clause.

● ADC v. Hungary (ICSID Case No. ARB/03/16) Award of October 2, 2006, in relation to valuation in cases of unlawful expropriation.

● Phoenix Action v. the Czech Republic (ICSID Case No. ARB/06/5) Award of April 15, 2009, as to bona fide investments.

● Abaclat et al. v. Argentina (ICSID Case No. ARB/07/5) Decision on jurisdiction and admissibility August 4, 2011, regarding admissibility of mass claims of 60,000 Claimants (the total number of whom at the time of initiation of the arbitration exceeded 180,000) mostly natural persons of Italian nationality relating to bonds issued by Argentina.

Which States have refused to comply with ICSID awards or have considerably obstructed compliance?

Argentina is well known for its interpretation of Articles 53 and 54, i.e. that the successful Claimant’s recourse to enforcement in its national courts is a pre-condition for payment of the award (See for e.g. Enron v. Argentina (ICSID Case No. ARB/01/3) Decision on the Argentine Republic’s Request for a Continued Stay of Enforcement of the Award, 7 October 2008, available here).

Which States have withdrawn from the ICSID Convention?

Bolivia, Ecuador and Venezuela.

Which States are not parties to the ICSID Convention?

Brazil and India are not among the 158 Members to the ICSID Convention.

Other curious facts

● After the award in the RSM v. Grenada (ICSID Case No. ARB/05/14) was rendered, RSM tried to sue Freshfields Bruckhaus Deringer LLP counsel for Grenada alleging that Freshfields conspired to violate the Racketeer Influenced and Corrupt Organizations Act by, for e.g., Jan Paulsson and Brian King being part of the conspiracy to bribe Grenada officials and deny RSM its licensing rights. RSM claimed the excess of US$500 million in damages. The claim was dismissed. See US District Court for the District of Columbia, Civil Action No. 10-00457 available here.

● Both the Claimant and the Respondent in the Europe Cement Investment v. Turkey (ICSID Case No. ARB(AF)/07/2) Award of August 13, 2009, ended up claiming that the Tribunal lacked jurisdiction. This is one of the Uzan family-related cases against Turkey. The Claimant wanted to discontinue the proceedings but the Respondent State disagreed. (See para. 139 of the Award)

Funniest quote from an ICSID award

“[H]appiness is multiple pipelines”

Mentioned in the case of Kardassopoulos & Fuchs v. Georgia (ICSID Case Nos. ARB/05/18 and ARB/07/15) Award of March 3, 2010, para. 5, in relation to the Western Route which was of

“significant national and strategic importance for Georgia as a means of securing its sovereignty following the break up of the Soviet Union and deepening its ties to the West.” (para. 3)

Recommendations

The site of ICSID is informative and accessible. Still it may be improved by, for e.g., adding information as to the basis of the jurisdiction in the particular case, nationality of the Claimant, amount claimed, amount awarded, who represented the parties, which was the successful party, costs of the proceedings, etc.

More from our authors:

	International Arbitration: Law and Practice by Gary B. Born € 30
	Commercial Mediation in Europe. An Empirical Study of the User Experience by Ewald Filler € 140
	Arbitrating Under the 2012 ICC Rules. An Introductory User’s Guide by acob Grierson, Annet van Hooft € 140
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

Arnold & Porter LLP

Monday’s New York conference on “Arbitration with States and State Entities under the ICC Rules” got me thinking about the possibility of amicus submissions in investment cases before the ICC or other institutions beyond ICSID. A few musings:

Are amicus debates likely to arise in the ICC context? The answer is yes. Although most ICC cases involving States or State entities have arisen from contracts, a number already have alleged breach of investment treaties, and more presumably are to come. A recent ICC task force suggested that roughly 20% of BITs allow some possibility of using the ICC Rules, either by expressly providing that option or by allowing the parties to agree on an institution and rules beyond those specified in the treaty. Treaty cases frequently present issues of broader public interest. Indeed, such issues can arise even in contract cases involving States; the ICC Court reportedly twice has considered amicus issues in contract cases, one involving the European Commission and another a U.N. agency. The fact that ICC filings are not publicly posted, the way ICSID registrations customarily are, does not mean that civil society groups will not learn of their pendency and ask to be heard. The parties may quietly notify supportive groups and encourage their participation.

Would an ICC tribunal have authority to accept amicus submissions? The powers of the arbitrators fundamentally stem from the terms of consent. In investment cases, unless the claimant has a contract with the State providing for arbitration, the consent generally arises from treaty. But most treaties, with the exception of a few based on recent U.S. Model BITs, do not contain advance consent to nonparty submissions. Even in the NAFTA context, which has involved several amicus submissions, the consent stems not from the treaty but from a 2003 joint Statement of the Free Trade Commission.

If treaties are silent, the next potential source of consent are the procedural rules the State offered and the investor accepted. The ICSID Rules expressly address nonparty submissions, and place the issue squarely within the arbitrators’ discretion to decide. But the ICC Rules, like the current version of the UNCITRAL Rules, are silent. The UNCITRAL working group is currently considering a rules revision to parallel the ICSID approach. The task force behind the recent ICC Rules revision similarly considered adding a provision on amici but ultimately declined, reportedly worrying that it might complicate proceedings and discourage parties from choosing the ICC, perhaps over ICSID.

The ICC task force believed that if both parties agreed, a tribunal could admit amicus submissions under the general procedural discretion provided by Article 19(1). This surely is right: parties by consent generally may frame the arbitral process. But this general discretion probably could not be stretched to allow a tribunal to accept amicus submissions over the objections of a party, as may now occur in ICSID cases. The issue might be considered analogous to arbitrators’ relying on independent research, beyond the facts or law presented by the parties; doing so could well expose their award to challenge for exceeding their authority.

If a tribunal has discretion, what standards should it apply? ICSID Rule 37 provides useful guidance. It identifies as relevant the extent to which the nonparty submission “would assist the Tribunal in the determination of a factual or legal issue — by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties,” “would address a matter within the scope of the dispute,” and would reflect “a significant interest in the proceeding” by the nonparty itself. The Tribunal should also consider whether the submission would “disrupt the proceeding or unduly burden or unfairly prejudice either party,” and ensure that the parties can present observations on the submission.

The track record of amicus applications in investment cases been mixed, depending on who the amicus is and whether it is considered to offer any special knowledge that could usefully guide the tribunal’s decision. The European Commission was granted permission in AES v. Hungary and Electrabel v. Hungary (full disclosure: I represented the respondent); the tribunals essentially accepted that it offered a distinct perspective. It was the enforcer in first instance of EU law, which Hungary invoked to defend its actions; the disputes involved claims by European companies against a European State; and the European Communities themselves were signatory to the Energy Charter Treaty, which governed the claims. By contrast, amicus applications by NGOs have had mixed success. Some have been granted, as in Biwater v. Tanzania, Suez v. Argentina and Glamis v. United States; others were rejected, as in Chevron v. Ecuador and in two parallel cases against Zimbabwe.

The Glamis case is interesting because it reminds us that amicus applications can be in favor of either side. Although environmental and labor groups arguably have been most vocal in arguing for transparency and nonparty submission rights, presumably to defend vigorous State regulation, business promotion groups also may have an interest in being heard on the side of aggrieved investors. In Glamis, the tribunal accepted briefs from both the Quechan Indian Nation, arguing for government’s duty to preserve sacred lands, and from the National Mining Association, arguing that regulation should not undermine protected interests of the mining sector.

What parameters should tribunals consider to maximize the utility of nonparty submissions while ensuring fairness to the parties? Here there are many factors to consider. To pose just three of the tougher ones:

1. Should a tribunal allow amici access to the parties’ submissions? The tribunals in AES and Electrabel came to opposite conclusions: the first denied the Commission’s request for access and the second granted it, subject to possible redactions. What is the argument? On one side, granting access allows an amicus to more meaningfully join issue; if the rationale for accepting its submission is that the tribunal believes the amicus has special knowledge or insight, wouldn’t the tribunal benefit from helping that amicus target its submissions to the precise questions presented for determination? That reasoning led the Foresti v. South Africa tribunal to allow several NGOs access to the parties’ submissions. But doing this raises questions about confidentiality. What if the amicus is a commercial actor in the same market sector as one of the parties, or an NGO with its own vested interest in the sector? The Biwater and Suez tribunals denied amici access to the parties’ filings, in part because of confidentiality concerns. That result seems even more logical outside the ICSID rules, which at least grant tribunals procedural discretion over the amicus process. ICC arbitrators, like arbitrators under most rules, are subject to obligations of confidentiality. Absent exceptions arguably flowing from discretion granted in the rules, how could arbitrators ethically release the parties’ submissions to a nonparty over their express objection?

2. Could a tribunal ever require the amicus to be available for cross-examination? Generally the parties oppose amicus participation at the hearing, and generally tribunals deny these requests. But to date the issue has been addressed mostly before the parties see the written submissions themselves. In principle a party may feel differently if the submission makes important assertions of fact. If the very reason for allowing the submission is that the non-party arguably offers some special factual knowledge or technical expertise, shouldn’t the parties have an opportunity to test its assertions through cross-examination? Why should all other presenters of fact or expertise be subject to questioning, so the tribunal can evaluate the persuasive value, but not the amici?

3. Finally, could a tribunal ever invite amicus contributions to costs? Nonparty submissions clearly add to the cost of a proceeding. The parties have to prepare observations in response, perhaps of significant length (some past cases have involved submissions from five different amici, each presenting its own perspective). This results in extra argument at the hearing and extra time by the arbitrators to consider the arguments and possible address them in their decision. Should the parties alone bear the attendant costs? Would it ever be proper for a tribunal to ask a nonparty to contribute to those extra costs? That could chill the involvement of civil society on issues of broader public interest. But if public interest is the appropriate consideration, why should the cost of subsidizing the broadening of the dispute, into a form of public notice-and-comment proceeding, fall entirely on the parties?

There are no easy answers. Fundamentally, these questions devolve into one basic one (“whose arbitration is this anyway?”), with a subsidiary one (“should the answer be different for investment disputes?). Are investment disputes still basically disputes between two distinct parties, or are they a forum for resolving issues of public interest?

The question leaves ample room for debate. As the ICC and other institutions try to move into the investment arbitration sphere largely dominated by ICSID, they too will have to grapple with these issues — with even less guidance in their procedural rules than the ICSID Rules now provide.

More from our authors:

	Arbitration Law and Practice in China - 3rd Edition by Jingzhou Tao € 125
	Arbitration - The Next Fifty Years by Albert Jan Van Den Berg € 110
	Arbitrating Under the 2012 ICC Rules. An Introductory User’s Guide by acob Grierson, Annet van Hooft € 140
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

General Electric Company

Here are some recent issues colleagues or acquaintences tell me they are facing with international arbitration, without (or with slightly altered) information that might identify a particular proceeding or party.
My own comments follow each. I invite readers to amplify with their own views on how to handle these situations, or compare with issues they are facing.

I recently received this note from a transactional lawyer who is engaged in a contract negotiation in Asia:
The customer’s terms and conditions specify dispute resolution before a local arbitration chamber, ABCD. We rejected this and offered instead a number of different options, both institutional and UNCITRAL arbitration.
We just received the following ultimatum from the customer: “As per our legal advice, your proposed options are not acceptable. Arbitration is only admissible under ABCD rules, in [city of customer]. Please confirm by COB today you will withdraw your exception to the arbitration clause and accept what is stated in our terms and conditions.”
Our sales team really wants to close the deal, but I do not think we can accept this institution.

Problems like this are not uncommon in international commercial contract negotiations. There has been a proliferation of local or regional institutions in recent years, and which should be carefully vetted before being accepted. Typically, we would start with information available on the institution’s website, but ABCD’s website is not helpful. Over half the site’s pages are under construction or broken links. We tried to contact their offices by phone and e-mail, but never received an answer.
While the sales team will always want to close a deal, my colleague’s instincts are right. The term “dealbreaker” was invented for rare situations like this when a lawyer will play a decisive role.
In this case, there is nothing to indicate that ABCD could manage an arbitration fairly and competently, especially with the complexities of international parties. It is also suspicious that the counterparty will not even consider any of the other options proposed.
The would be folly to tell the sales team they can accept ABCD.

A colleague involved in negotiating large infrastructure contracts mentioned a recurring problem:
A repeat issue we are seeing is that major [certain heavy industry] companies in Europe, with sites located in France and Netherlands, will not agree to arbitration as our contractual dispute resolution. They have told us that arbitration is a waste of money and that the Paris courts in particular are better and neutral enough to address issues between international companies.

My colleague’s company finds the court option unattractive but not necessarily a “dealbreaker” as in the first example. Most of their project documents are in English and it would be costly and cumbersome to translate them for use in Dutch or French courts in the event of a dispute. Her company also believes that the court of first instance in Paris is not well suited to deciding the legal issues that can arise in large international contract disputes.
She is looking for options. One is to try to find a compromise mechanism that suits the interests of both parties. Perhaps the other side prefers courts because their disputes are highly technical and they believe they prefer resolution via an expert by the court to determine where fault lies (and Paris courts are well-known for doing this). If so, my colleague could propose a bespoke arbitration process in which technical issues will be decided by a neutral expert appointed either by the tribunal or an arbitral institution, with a simplified (and less costly) resolution process. (But she should check first whether the institution will appoint technical experts.)
If, however, the other party will not budge from its preference for the courts, then the options will be more limited: (a) insist on arbitration at the risk of losing the deal (not usually a desired outcome); (b) accept the courts but in exchange for something else of value in the contract’s terms and conditions, such as better price (to cover the perception of increased risk of a non-preferred forum); and/or (c) include a step-mediation requirement, as a means to mitgate acceptance of a sub-optimal forum by increasing the likelihood of settling before a court is called upon to decide any disputes.

Here is an issue raised by an acquaintance in-house counsel whose company is not regularly involved in arbitration:
Our contract provides for arbitration, UNICTRAL rules, and specifies three arbitrators. The claims and counterclaims in our dispute total [less than $500,000] and the respondent rejected our proposal to agree to have a sole arbitrator instead of three. We appointed the tribunal, which then asked the parties to pay a deposit that is half the amount of the total dispute. Both sides voiced a concern, and the tribunal just answered that their advance is based on the complexity of the claims, and that there will be a cost allocation in the final award. That was no consolation to my business manager, who is furious that we will pay these fees upfront, before we even pay the lawyers. She is demanding we either force the tribunal to reduce their fee or we stop including arbitration clauses in our contracts.

While your manager’s anger is understandable from a business point of view, you might want to show you have a spine as well. Point out that the advance could be interpreted as a means of encouraging the parties to settle befor they incur substantial costs, either of the arbitrators or appointed counsel. (The arbitrators could have billed in phases for the same or a greater amount, but they are telling the parties upfront what the proceeding will cost them.)
There is also the option of revisiting the cost issue with the tribunal. Obviously, it would be more effective to do this together with the other side. It would be even more helpful to present a change in circumstances that justify the issue being given new attention. For example, you could propose to the other side to reduce the number of claims or simplify the issues in dispute. In response, the tribunal might accept to modify its advance in proportion to the reduced complexity.
For the future, however, you might consider adapting your arbitration clauses to provide for either a sole arbitrator or the common language of “one or three arbitrators”. This will avoid situations like this, in which three arbitrators are unlikely to be worth the added cost.
Another protection, especially if your business is not regularly involved in arbitration, would be to specify an arbitration institution instead of ad hoc proceedings. An institution will administer the tribunal’s compensation and, perhaps more importantly, provide each of the parties a protected channel to convey unhappiness to the tribunal about their handling of certain matters, such as this one.

More from our authors:

	Arbitrating Under the 2012 ICC Rules. An Introductory User’s Guide by Jacob Grierson, Annet van Hooft € 140
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350
	The Core Standard of International Investment Protection. Fair and Equitable Treatment by Alexandra Diehl € 160
	Challenge and Disqualification of Arbitrators in International Arbitration by Karel Daele € 160

Yesterday’s post set the stage by describing the main provisions of a new voluntary Code of Conduct for “funding of resolution of disputes within England and Wales,” released in November 2011. Today’s post examines criticisms of that initiative from several corners, and notes important questions that persist in the arbitration arena, including issues surrounding the obligations of disclosure.

Despite the novelty and best intentions of the U.K. initiative, the Code has been strongly criticized both for its non-binding character and its lack of detail. Both the U.S. Chamber of Commerce’s Institute for Legal Reform (“ILR”) and the European Justice Forum (“EJF”) have expressed concern that the Code is not a sufficient replacement for the development of binding, official regulation of third-party funders in litigation. While these critiques focus mostly on ramifications of the Code for litigation funding, the concerns they raise also have implications for international arbitration, where third-party funding increasingly is in use.

In a report issued on 22 December 2011, just one month after the Code was released (available at http://www.instituteforlegalreform.com/doc/ilr-comments-on-the-code-of-conduct-for-litigation-funders), the ILR expressed concerns about (1) the voluntary and self-regulatory nature of the Code; (2) the potential conflicts of interest for counsel raised by funding, including the degree of control a Funder may directly or indirectly exert over the litigation; and (3) the lack of protection for potential defendants. The ILR enunciated a preference that “litigation funding should be discouraged in all circumstances,” but urged that if allowed to occur at all, funding should be strictly regulated through official channels (ILR Comments at 9).

The ILR criticism of the Code centers on the belief that its self-regulating nature undercuts its efficacy. In particular, the ILR points to the lack of any disciplinary mechanism in the Code as a barrier to its effectiveness as a regulatory tool (ILR Comments at 2). Additionally, the ILR argues that the Code’s definition of “Funder” is under-inclusive and creates the potential for abuse (ILR Comments at 2-3). At the least, the ILR urges a cap on the fees that a third-party funder may charge and a requirement that all litigation funding agreements (“LFAs”) be in writing to protect litigants who use third-party funding (ILR Comments at 4, 8).

The European Justice Forum issued comments on 26 February 2010, before the final version of the U.K. Code of Conduct was released (see http://europeanjusticeforum.org/faq/current-issues/costs-of-litigation.html). Nonetheless, the EJF Comments reflect some of the same discomfort with the voluntary nature of effort at self-regulation voiced by the ILR. In their criticisms of the Code, the ILR and EJF both emphasize the potential for conflict of interest created when legal counsel develops close relationships with third-party funders. Thus, while the Code requires the “Funder” to ensure that the “Litigant” receives outside legal advice regarding the terms of an LFA, its critics note that such a legal advisor also may have a pecuniary interest in the funding of the claim. This is particularly problematic if the same advisor is also counsel to the Litigant in the underlying dispute and thus dependent on funding to be arranged in order to earn prospective legal fees from the representation (ILR Comments at 4, 8; EJF Comments at 11).

The ILR also notes that the Code does not address the issue of referral fees between Funders and attorneys and strongly urges a ban on such fees. In fact, both the ILR and EJF argue that the Funder should have no contractual relationship with the Litigant’s counsel and that all LFAs should be strictly between the Funder and the Litigant in order to reduce the risk that the Funder and counsel would collude to “maximize their own profits” (ILR Comments at 8; see also EJF Comments at 11). Along this same line, the ILR would prohibit Funders from owning or being owned by law firms, a practice which apparently already is occurring in England (see, e.g., http://www.cdr-news.com/litigation/109-articles/1132-barristers-join-third-party-litigation-funding-bandwagon). These proposed measures seek to delineate guidelines that are not expressly contemplated by the Code for interactions between Litigants, Funders, and outside counsel.

The ILR also expresses concern over the lack of protection for defendants in the Code (ILR Comments at 5-6). While the Code ensures that the funded Litigant is informed about the terms of the agreement and is funded by a party with adequate financial resources, it does little to protect the potential defendant from frivolous or unsubstantiated litigation brought in order to increase leverage for a settlement. In particular, the ILR argues that without a prohibition on funding of collective actions, the Code leaves potential defendants exposed to the threat of large collective suits which may prove lucrative for attorneys and funders by increasing pressure for settelements, even if the underlying claims ultimately lack legal merit (ILR Comments at 7). The EJF likewise has expressed concern over the potential for one-way cost shifting in collective claims (EJF Comments at 3).

Even aside from collective claims, the ILR points out that a defendant seeking to recover an award of adverse costs may be unable to do so, because the Code does not require Funders to support Litigants’ liability for cost awards. Indeed, the Code stipulates only that any liability of the Funder for such costs must be stated in the LFA (Code, clause 8). Since Funders may decline to guarantee payment of an adverse cost award, the ILR asserts that a potential defendant is left vulnerable not only to being dragged into a frivolous claim that might not have been pursued in the absence of third-party funding, but also to being unable to recover the costs it would incur defending such a suit, even if the adjudicator ultimately rules in the defendant’s favor and awards costs against the impecunious claimant.

The concerns highlighted by the ILR and EJF center on litigation, but recent debates through Global Arbitration Review, on OGEMID and in other fora have drawn attention to persisting questions about the Code’s applicability in the context of international arbitration as well. In particular, it is unclear whether a litigant would be required to disclose the existence of a third-party funding arrangement to the adverse party, the administering institution, or potential arbitrators. This uncertainty, creates the possibility of undisclosed conflicts that could threaten the fairness or enforceability of awards down the road. In some cases, disclosure may proceed transparently and thus lessen the probability of conflicts surfacing only late in the case. This occurred recently in the investment arbitration Oxus Gold PLC v. Republic of Uzbekistan et al., conducted under the UNCITRAL Rules. Nonetheless, the Code is silent on the issue of disclosure, leaving it entirely to the discretion and judgment of the parties concerned.

Indeed, during the recent Global Arbitration Review roundtable discussion on third-party funding, one third-party funder expressed concern that transparency could have negative consequences, including the risk that the opposing party’s knowledge of financing arrangements could lead it to raise abusive arguments aimed solely at extending the length and increasing the costs of the case. Others in the arbitration community have suggested that knowledge of an opposing party’s use of outside funding could influence a party’s evaluation of the reasonableness of settlement offers. Concerns about disclosure have also touched on the possibility that tribunals themselves could be influenced by this information with respect to whether to order security for costs during the course of an arbitration, or to assess liability at the close of proceedings against an unsuccessful litigant for the prevailing party’s costs. The third-party funder, of course, will not be subject to the tribunal’s jurisdiction, and not liable to fund an order for costs, absent voluntary agreement to do so in the LFA it negotiated with the litigant at the outset of its involvement.

In short, while the U.K. Code may be a welcome first step in attempting to impose some voluntary order on a process and set of relationships that heretofore have been entirely unregulated, many questions remain. It remains to be seen how the practice will evolve in the arbitration arena, in the wake of both the Code and increasing public attention and debate. One thing is certain however: whether regulated or not, the use of third-party funding in major arbitration cases is a development that is here to stay. The genie is out of the bottle, and no one in the arbitration community has suggested that it ever may be persuaded to return.

By Jean E. Kalicki, Amy Endicott and Natalia Giraldo-Carrillo

More from our authors:

	The Energy Charter. The Notion of Investor. by Crina Baltag € 150
	The 33rd America's Cup Judicial and Arbitral Decisions by Henry Peter, Hamish Ross, Graham McKenzie € 125
	Yearbook Commercial Arbitration. Volume XXXVI. 2011 by Albert Jan van den Berg € 255
	Confidentiality in International Commercial Arbitration by Ileana Smeureanu € 145

The use of third-party funding for international arbitration has been growing for several years, and its potential benefits and risks have received increasing attention from the arbitration community. The November 2011 release in the United Kingdom of a Code of Conduct for funders has galvanized the debate. The Code is the first-ever attempt at voluntary self-regulation by litigation funders, and could apply not just to third-party funders based in England and Wales, but arguably also to other funders of arbitrations seated in those jurisdictions. The Code has been welcomed as an innovative attempt to impose restraints on funding practices that otherwise raise significant ethical concerns, but it also has been criticized as insufficiently stringent and lacking detail. Today’s post (Part 1 of 2) summarizes the main provisions of the U.K. initiative, setting the stage for a following post (Part 2 of 2), which examines recent criticisms and identifies persisting questions, including the issue of disclosure.

Third-party funding is understood as a “nascent” but growing industry involving the funding of litigation or arbitration by specialized providers who are neither parties to the dispute nor closely connected with it, and whose sole interest is potential profit in return for providing financing. The potentially high awards in certain commercial and investment arbitrations have attracted funding providers. Claimants likewise have been drawn to third-party funding to provide access to justice where litigation costs otherwise might be prohibitive and obtain an early independent assessment of the merits of a potential claim.

It is not yet clear how workable the model will prove for respondents in arbitration. By definition, respondents would be required to reward funders for their investment in successful defenses, in exchange for hedging against the costs of unsuccessful proceedings. This proposition is unlikely to be attractive to sovereign State respondents who may have difficulty politically justifying State payments to foreign financing companies, particularly for frivolous cases. However, in the purely commercial context, funders participating in a recent Global Arbitration Review roundtable suggested that shareholders of some respondent companies have proven receptive to shouldering the higher costs of third-party funding, particularly as cases approach the later stages of arbitration.

The U.K. particular has experienced huge growth in the number of investment funds willing to invest in both litigation and arbitration. While no country has developed an official binding system of regulation, funding providers in the U.K. have established an industry organization, the Association of Litigation Funders of England and Wales (“ALF”), which in November 2011 released a proposed Code of Conduct for its members (available at http://www.judiciary.gov.uk/about-the-judiciary/advisory-bodies/cjc/third-party-funding). Membership in the ALF is voluntary but requires compliance with the Code’s “standards of practice and behaviour” for those who choose to join. Supporters of the Code have suggested that while membership and thus compliance with the Code remains optional, in practice most funders are likely to join because clients will likely hesitate to contract with funders that operate outside of the ALF and the industry standards it sets.

The Code consists of ten principles that regulate the formation, use and termination of litigation funding agreements (“LFAs”), which, once signed, are contractually binding for “funding of resolution of disputes within England and Wales” (clause 6). It is unclear whether this language refers solely to the location of the funder or the litigant being funded (“funding . . . within England and Wales”), or also to the situs of the dispute proceedings (“disputes within England and Wales”). This ambiguity raises the possibility that non-U.K. funders may feel pressure to join the ALF also, so that they can offer services to U.K. litigants or foreign litigants in arbitrations seated in the U.K.

The Code defines “Funder” as either an entity with immediate control over funds or an entity that acts as the exclusive investment advisor to a investment fund with immediate control over funds. These funds must be sufficient to enable each funded party (the “Litigants” as defined in the Code) to meet the cost of resolving their disputes in litigation or arbitration (clause 2). To this end, the Code requires a Funder to ensure that its funds are adequate to pay debts at all times and to cover funding liabilities under its LFAs for at least thirty-six months (clause 7(d)(ii)). The drafters added the thirty-six-month funding requirement in response to concerns raised about an earlier draft, which required adequate funding only for three months. The Code is vague as to how this “adequate funds” requirement is determined, since reasonable minds can differ about the value of aggressive but costly litigation strategies. The Code states that a Funder shall “not seek to influence the Litigant’s solicitor or barrister to cede control or conduct of the dispute to the Funder” (Clause 7(c)), but this is unlikely to require the Funder to guarantee a “blank check” for any and all litigation strategies. Nor is the Funder required to meet any liability of the Litigant to provide security for the opposing party’s costs, to pay premiums to enable that Litigant to obtain insurance against possible future awards of costs, or to finance such cost awards. To the extent the Funder agrees to assume such responsibilities, the extent of its liability must be recorded in the LFA (clause 8).

In return for funding a Litigant’s claim, the Funder is entitled to a share of the proceeds if the claim is successful (clause 2(a)). By the same token, the Funder is prohibited from seeking payment in excess of the proceeds of a successful claim, unless the Litigant is in “material breach” of the LFA (clause 2(b)), a term which is not defined in the Code.

The Code also loosely defines the role of the Funder, and the limits of its role.. The Funder must refrain from taking steps “likely to cause” the Litigant’s attorney to violate his professional duties or to influence that attorney to cede control of the dispute (clause 7(b) and (c)). In referencing the professional duties of attorneys, the Code implicitly refers to U.K. ethics rules for solicitors and barristers that have specific regulations on fee sharing and referrals. It is unclear, however, whether and how this provision of the Code would apply to non-U.K. attorneys participating in arbitrations seated in England and Wales, or working with third-party funders and clients based in those jurisdictions. The Code also requires the Funder—who may insist on broad access to information in order to assess the merits of the claim and conduct of the litigation—to observe the confidentiality of all information as defined by relevant law and the LFA (clause 5) and states that the terms of the LFA shall control the extent of the Funder’s ability to provide input on the Litigant’s decisions in relation to settlement (clause 9(a)).

The Code also requires the LFA to state whether and how the Funder can terminate the agreement (clause 9(b)). If the LFA grants the Funder the right to terminate the agreement, that right is limited to three circumstances (clause 9(b)). First, the LFA may provide a method for termination if the Funder “reasonably” ceases to be satisfied with the merits of the dispute. Second, the LFA may provide a mechanism for termination if the Funder “reasonably” believes that the dispute is no longer commercially viable. Third, the LFA may allow the Funder to terminate it if the Funder “reasonably” believes the Litigant is in material breach. Though the Code offers no definition of a “reasonable” belief, it limits the Funder’s discretion to terminate to these grounds (clause 10). If the Funder nonetheless does terminate the LFA, it remains liable for all funding obligations accrued to the date of termination, unless termination arises from the Litigant’s material breach (clause 11(a)). In the event a dispute arises over termination of the LFA, the parties may obtain a binding opinion from a Queen’s Council (clause 11(b)).

Finally, the Code prohibits Funders from using any misleading or unclear literature to promote these agreements to potential clients (clause 4). Additionally, any Funder must take reasonable steps to ensure that the Litigant receives independent advice on the terms of the LFA. This requirement may be satisfied if the Litigant confirms in writing that it has taken advice from the solicitor instructed in the underlying dispute (clause 7(a)).

As the Code was released only in late November of 2011, much remains to be seen about its eventual use and interpretation in international arbitration proceedings, and the nature of any disputes that subsequently arise. While the international arbitration community has acknowledged the Code as an important first step towards fulfilling the potential of litigation funding to provide greater access to justice, concerns remain. The next post will discuss some of the criticisms of the Code—particularly about lack of detail and non-binding status—raised by the U.S. Chamber of Commerce Institute for Legal Reform and the European Justice Forum (the latter in comments on an earlier draft of the Code), as well as persisting questions about its applicability to international arbitration, including with respect to important issues of disclosure.

By Jean E. Kalicki, Amy Endicott and Natalia Giraldo-Carrillo

More from our authors:

	The Energy Charter. The Notion of Investor. by Crina Baltag € 150
	The 33rd America's Cup Judicial and Arbitral Decisions by Henry Peter, Hamish Ross, Graham McKenzie € 125
	Yearbook Commercial Arbitration. Volume XXXVI. 2011 by Albert Jan van den Berg € 255
	Confidentiality in International Commercial Arbitration by Ileana Smeureanu € 145