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Posts Tagged ‘Pro arbitration’

Herbert Smith Freehills

by Justin D’Agostino and Briana Young

On 28 March 2013, Hong Kong gazetted The Arbitration (Amendment) Bill 2013. The Bill proposes amendments to Hong Kong’s Arbitration Ordinance (Cap. 609) to implement an arrangement for mutual enforcement of awards between Hong Kong and Macao, allow for enforcement of emergency arbitrator decisions in Hong Kong, and provide for court taxation of arbitration costs on a “party and party” basis.

The Bill will be introduced to Hong Kong’s Legislative Council on 24 April, and it is hoped the amended legislation will come into force by the end of August 2013.

In January this year, Hong Kong and Macao signed the Arrangement Concerning Reciprocal Recognition and Enforcement of Arbitral Awards between the Hong Kong Special Administrative Region and the Macao Special Administrative Region. The Arrangement aims to facilitate efficient enforcement of Hong Kong arbitral awards in Macao, and vice versa. It is not uncommon for a party holding a Hong Kong award in its favour to want to enforce against assets in Macao, so this is a welcome development, particularly viewed alongside a similar arrangement – already in force – between Hong Kong and mainland China.

In order to implement the Arrangement, it is necessary to amend the existing Arbitration Ordinance (Cap. 609), to enable Hong Kong courts to enforce arbitral awards made in Macao. Under the proposed amendments, a Macao award will be enforceable in Hong Kong either by action in the Court of First Instance, or in the same manner as a Hong Kong award (with leave of the court).

The Bill proposes a number of other amendments to the Ordinance, aimed at further supporting Hong Kong’s arbitral regime.

These include provision for enforcing in Hong Kong an order, award or decision made by an emergency arbitrator, reflecting the trend among leading arbitral institutions, including ICC and SIAC, for including emergency arbitration procedures in their rules. Such procedures allow a party seeking urgent relief before the tribunal is constituted to appoint an emergency arbitrator, who will make a decision on an urgent basis. The Hong Kong International Arbitration Centre (HKIAC) is expected to introduce an emergency arbitration procedure in its revised Administered Arbitration Rules, due for release later this year. Although the amendment was initially prompted by the anticipated change to the HKIAC Rules, it will allow Hong Kong courts to enforce decisions of emergency arbitrators under any arbitral rules agreed by the parties, whether they were made in or outside Hong Kong (subject to certain conditions).

The Bill also amends s.75 of the Arbitration Ordinance, which regulates taxation of the costs of an arbitration by a Hong Kong court. The Bill proposes that taxation should be on the “party and party” basis (on which the successful party is indemnified against the necessary expense to which he has been put in prosecuting or defending the action). Currently, s.75(1) of the Ordinance allows the court to order payment “on any basis on which the court can award costs in civil proceedings before the court”.

The amendments proposed by the Bill are welcome evidence of the Hong Kong government’s continuing support for the arbitration process in the city, which is one of the world’s leading seats for international arbitrations.

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www.marcgold.ca

In recent years, Canada has an enjoyed a reputation as an arbitration-friendly country. This is due to a number of factors, including the incorporation or adaptation of the Model Law into the arbitration legislation at the provincial and federal level, a sophisticated arbitration community well versed in both the common and civil law traditions, and, more than anything else, a judiciary that has come to respect, and indeed to encourage, the arbitration process once it has been properly invoked by the parties. In this respect, the Supreme Court of Canada has played a central role by giving a broad interpretation to the scope of arbitral power and taking what all would agree was a pro-arbitration stance.

The question is whether that stance has changed in light of the Court’s decision of last year in Seidel v. TELUS Communications Inc. [2011] 1 S.C.R. 531. The purpose of this note is to assess the Canadian case-law citing Seidel to determine what impact it had on the attitude of Canadian courts to the arbitration process.

At issue in Seidel was the enforceability of clause inserted into the standard form cellular phone services contract, which referred disputes to private and confidential mediation and arbitration and purported to waive any right to commence or participate in a class action. A class action against Telus was commenced alleging deceptive and unconscionable practices under section 172 of the Business Practices and Consumer Protection Act of British Columbia (S.B.C. 2004, c. 2). Telus brought an action to stay the proceedings on grounds that the matters were properly subject to arbitration. Although the argument did not prevail before the judge of first instance, the British Columbia Court of Appeal held that the arbitration clause applied and ordered a stay of all proceedings pending arbitration. The Supreme Court of Canada reversed. By a majority of 5-4, the Court held that claims brought against Telus were inarbitrable. The Court characterized the provisions of the Act as creating a public interest remedy, one in which the public interest would not be served by being addressed in private and confidential arbitration hearings. The Court inferred a legislative intent to have such claims dealt with by the ordinary courts, and accordingly allowed the class action to proceed.

In a posting sharply critical of the case, Professor Frédéric Bachand worried that Seidel will have the effect of changing the attitude of Canadian courts to the arbitration process. In his view, “[t]he key lesson is that, when faced with an ambiguity in statutory provisions or precedents bearing on an arbitration law issue, Canadian courts can no longer be safely expected to prefer the pro-arbitration solution”. Responding to his concern, others thought that the case would be relatively confined to the area of consumer protection legislation and remedies.

It has now been well over a year since Seidel was decided, and it appears fairly clear that the worst fears about the impact of Seidel have not been realized. Equally interesting, it also appears that Seidel has not had a dramatic impact even in the area of so-called consumer protection legislation.

At the time of writing, Seidel has been cited in sixteen cases. (For a list of these cases and links thereto, see here.) Of these, six are irrelevant for our purposes, Seidel typically being cited for the proposition that consumer legislation should be interpreted generously in favour of consumers or for the general rules governing class actions. No arbitral issue was raised in these cases.

In the remaining ten cases where an issue of arbitration did arise, there is no evidence that Seidel has had a negative impact on courts’ attitudes towards the arbitration process.

In cases where consumer protection legislation was not at issue, the courts citing Seidel have tended to support the arbitration process, whether deferring to arbitrators’ ruling on the scope of their jurisdiction, or upholding the scope of an arbitrator’s remedial powers. (Regarding jurisdiction, see Padmawar v. Altig and Altig International, 2011 BCSC 682 (CanLII); 1338121 Ontario v. FDV Inc., 2011 ONSC 3816 (CanLII); Boxer Capital Corporation v. Marine Land Developments Ltd., 2012 BCSC 684 (CanLII); Ontario v. Imperial Tobacco Canada Limited, 2011 ONCA 525 (CanLII). Regarding remedial powers, see Mercer Gold Corporation (Nevada) v. Mercer Gold Corp (B.C.), 2012 BCCA 103 (CanLII).)

Even where class action proceedings were at issue, Seidel seems to be limited in its impact. Where a class action was allowed to proceed despite the existence of an arbitration agreement, it was strictly on the basis that the defendant in the class action suit was not a party to the arbitration agreement in question. (See Ontario v. Imperial Tobacco Canada Limited, 2011 ONCA 525 (CanLII). Indeed, in the case of the parties to the agreement, the Court upheld the arbitrator’s determination that he had jurisdiction over the dispute.) In another case, an application to exclude a class from a class action suit because of an ostensible arbitration agreement was rejected on the basis that there was no evidence of the arbitration agreement. (Toronto Community Housing Corporation v. Thyssenkrupp Elevator (Canada) Limited, 2011 ONSC 4914 (CanLII).) In neither case can it be said that Seidel had a material bearing on the orientation of the courts towards arbitration.

What then of those cases where consumer protection legislation was at issue? Even here, Seidel has not had the anti-arbitration impact that some feared.

In Kary v. 1147237 Alberta Ltd., 2011 ABPC 178 (CanLII), a provincial court judge in Alberta cited Seidel for the proposition that an arbitration clause did not preclude a class action proceeding based upon provincial consumer legislation, but the case was informed by the judge’s doubts as to whether or not an arbitration agreement was, in fact, in effect at all.

More significantly, in Telus v. Comtois, 2012 QCCA 170 (CanLII), the Quebec Court of Appeal had to consider an arbitration clause between Telus and its corporate customers. Seidel was cited on a number of occasions, first for the proposition that in the absence of a contrary provision of law, an arbitration clause should be deferred to by courts and later to support the proposition that the arbitration clause in the service contracts with Telus’ corporate customers were valid and not abusive as per the terms of the relevant Quebec legislation. This hardly reflects an anti-arbitration virage by Canadian courts.

Indeed, one court seems to have gone out of its way to place Seidel in the context of the pro-arbitration line of Supreme Court of Canada cases. In Murphy v. Compagnie Amway Canada, 2011 FC 1341 (CanLII), the Federal Court had to consider the relationship of the class action remedy under the Competition Act (RSC 1985, c. C-34) with the existence of an arbitration clause in the Registration agreement between the plaintiff and Amway. The Court rejected the analogy between the Competition Act and the consumer protection legislation at issue in Seidel, and held that the arbitration clause applied. It is worth citing the Court’s reasons for judgment at some length.

[42] Although more recent, the Siedel case comes after a long string of Supreme Court of Canada decisions which have contributed to confirming Canada’s status as an “arbitration-friendly” jurisdiction. In particular, the Court recalls the Supreme Court of Canada’s landmark decision in Desputeaux v Éditions Chouette (1987) inc., 2003 SCC 17 (CanLII), 2003 SCC 17, [2003] 1 SCR 178 [Desputeaux], which stands for the principle that a statute cannot be assumed to exclude arbitration unless it so states (para 42). This principle was also acknowledged in Dell Computer Corp. v Union des consommateurs, 2007 SCC 34 (CanLII), 2007 SCC 34, [2007] 2 S.C.R.801 [Dell], Rogers Wireless v Muroff, 2007 SCC 35 (CanLII), 2007 SCC 35, [2007] 2 SCR 921 [Rogers] and Bisaillon v Concordia University, 2006 SCC 19 (CanLII), 2006 SCC 19, [2006] 1 SCR 666 [Bisaillon]. These cases – and the Siedel case does not take exception to this – all illustrate that arbitration agreements must be enforced by courts absent specific legislative language to the contrary.

[43] More particularly, the majority reaffirmed this principle in Seidel at paras 2 and 42:

[2] The choice to restrict or not to restrict arbitration clauses in consumer contracts is a matter for the legislature. Absent legislative intervention, the courts will generally give effect to the terms of a commercial contract freely entered into, even a contract of adhesion, including an arbitration clause. …

[42] For present purposes, the relevant teaching of Dell and Rogers Wireless is simply that whether and to what extent the parties’ freedom to arbitrate is limited or curtailed by legislation will depend on a close examination of the law of the forum where the irate consumers have commenced their court case. Dell and Rogers Wireless stand, as did Desputeaux, for the enforcement of arbitration clauses absent legislative language to the contrary. [Emphasis in Original]

[44] The Court accordingly may not, absent legislative language to this effect, assert jurisdiction over a matter that is subject to an arbitration agreement. The enforcement of arbitration agreements has long been recognized by Canadian jurisprudence as an acknowledgment of the “jurisdictional choice” made by the parties. This has been the case in the face of class action waivers applicable to matters subject to public order consumer protection legislation void of language to the contrary (Dell).

It is hard to imagine a stronger pro-arbitration stance by a judge, one that seems designed to ensure that Seidel does not become a point de départ for a change in judicial attitude towards the arbitration process.

In conclusion, a review of the sixteen cases in which Seidel was cited reveal no clear change in the Canadian judiciary’s attitude towards the arbitration process. Even in cases where consumer legislation and class action remedies were at issue, Canadian courts do not appear to have wavered from a generally pro-arbitration stance. In this respect, it would appear that the worst fears of some commentators have not been realized.

To be sure, it may take longer for the full impact of Seidel to be felt as lawyers incorporate it into their arguments at trial and on appeal, and any predictions about how courts will incorporate its teachings should be approached with cautious reservation. (I recall my constitutional law professor observing that she who lives by the crystal ball must be prepared to eat glass.) Nonetheless, it does seem safe to say that the arbitration process is alive and well in Canada and that the pro-arbitration stance of the Canadian judiciary appears to be holding.

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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.

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Pinheiro Neto Advogados

Ana Carolina Beneti
Ricardo Dalmaso Marques

(a) Introduction

1. The Brazilian Superior Court of Justice (“STJ”) was called, in September 2010, to decide on a compelling matter: the possibility (or not) of recognizing and enforcing a foreign award rendered devoid of grounds and whether this decision would violate public policy if it produced effects in the Brazilian territory.

2. The case was known as the “Kanematsu Case”[1] and its outcome was much awaited, mostly because the Brazilian company — against which the recognition of the award was requested — alleged that the arbitral award had been rendered devoid of any grounds, thus implying a violation of the principle that all decisions are to be justified (article 93, IX of the Brazilian Federal Constitution).[2]

3. The STJ decision did not end up discussions raised on the matter of unjustified arbitral decisions, but clearly demonstrates the important role that the STJ has played over the past years in offering safer grounds for arbitration. The case was decided almost two years ago, but it still provides an interesting idea of the complexity and importance of the cases the Brazilian courts have been deciding — and very well.

(b) The Case

4. Kanematsu USA Inc., a New York company, moved the STJ for recognition and enforcement of an arbitral award issued in August, 2000 under the Arbitration Rules of the International Centre for Dispute Resolution/American Arbitration Association (“ICDR/AAA”). Under such arbitral award, the arbitrators sentenced Brazilian company ATS – Advanced Telecommunications System do Brasil Ltda., with headquarters in the city of São Paulo, to redress the US company for losses incurred from breach of an international telecommunications equipment and products purchase agreement (approximately R$ 1,400).

5. Against the argument of lack of justification for the decision, the US company alleged, among others, that justification was unnecessary as provided for in article R-44 of the Arbitration Rules of the ICDR/AAA,[3] whose applicability had been agreed upon between the parties. Moreover, the US company contended that only arbitral awards rendered in Brazil (domestic awards) should necessarily be motivated, and that Law 9,307 of 1996 (“Brazilian Arbitration Law”) did not impose such condition on foreign arbitral awards.

6. The case therefore aroused enormous interest among arbitration scholars for dealing with a sensitive matter that had not yet been examined by Brazilian courts, and, it was hoped, would be resolved after a detailed analysis in relation to the principle of reasoned decisions and, moreover, article 26, II of Brazilian Arbitration Law, which establishes as mandatory “the grounds substantiating the decision, where factual and legal issues will be analyzed, expressly stating whether the arbitrators ruled in equity.”

7. Opposite stands supported by reputed jurists added more fuel to discussions,[4] especially taking into consideration the position apparently adopted by the Brazilian Federal Supreme Court (at a time when it had competence to hear requests for recognition of foreign awards) that unreasoned decisions were not to be acknowledged under Brazilian law,[5] reason why the motivation should essentially be present in the award so that it could be enforceable in the Brazilian territory.[6]

8. In particular, the respectability of the Brazilian STJ precedents on arbitration issues raised the bar of expectations over its stand in this case, which would hopefully become a real leading case in the area.

(c) The Ruling

9. The STJ eventually denied recognition, but without addressing the possibility (or not) of a non-reasoned award producing effects under the Brazilian legal system. Unfortunately, the relevant question of lack of grounds was not reviewed by Reporting Justice Francisco Falcão. The STJ decision was fully based on the opinion issued by the Federal Attorney-General’s Office in the case, and denied recognition and enforcement for want of irrefutable evidence that an arbitration clause had been stipulated in the agreement between the parties (and, by extension, competence of the arbitral tribunal had allegedly not been evidenced as required in article 38, II of Brazilian Arbitration Law).

10. The STJ justices did not find relevant the fact that the Brazilian company had submitted itself to arbitration; produced evidence; and exercised its right of defense on it. The US company had put its best efforts to demonstrate that such conduct, according to the Brazilian Federal Supreme Court’s precedents, should be viewed as a “confirmation to the arbitration agreement”.[7]

11. Therefore, the Brazilian company’s allegations that it had not validly submitted to arbitration because no agreement containing an arbitration clause in writing had been signed by the parties took prominence.[8]

12. Unfortunately, an interesting question remained unanswered as to ineffectiveness in the Brazilian territory of a foreign arbitral award that is rendered without grounds, as made possible by several rules of foreign arbitration chambers.

(d) Brazilian STJ practice in requests for recognition of foreign arbitral awards

13. Nevertheless, such decision may also be analyzed under a different viewpoint than the need (or not) of arbitrators to motivate their decisions. The Brazilian STJ practice can surely be considered a reason for Brazilian “arbitralists” to be proud of the work that has been done in favor of this mechanism.

14. Under Brazilian law, a foreign award (i.e., rendered outside Brazil) is only enforceable in the Brazilian territory when recognized[9] by the STJ in response to a request for recognition of foreign arbitral award. In this proceeding, a circumstantial analysis of the procedural aspects of an arbitral award is carried out, and only then can an arbitral award be considered enforceable by local courts.

15. The main difficulties that might be faced in a recognition proceeding are related to the validity examination mentioned above, which does not address the merits of the arbitral award itself. More specifically, according to recent precedents on the matter, the STJ will only analyze the formal aspects of an award, verifying basically whether it violates any of the provisions of article 38 of the Brazilian Arbitration Law, namely:

“Article 38. – The recognition or enforcement of a foreign arbitration award may only be denied when the defendant makes proper evidence that:

I. - the parties to the arbitration agreement were incapacitated;
II. - the arbitration agreement was invalid under the laws to which the parties submitted themselves or, in the absence of such indication, under the laws effective in the country where the arbitration award was handed down;
III. - no notice was served on the defendant regarding the appointment of the arbitrator or the arbitration procedure, or that the due process of law was violated to the detriment of the defendant’s right of full defense;
IV. - the arbitration award was handed down beyond the scope set forth in the arbitration agreement, and the excessive portion could not be set aside from the dispute actually referred to arbitration;
V. - the arbitration procedure was not in keeping with the arbitration commitment or the arbitration clause; and
VI. - the arbitration award is still not binding on the parties; has been rendered null and void; or has been stayed by the courts sitting in the country where the arbitration award was handed down.”

16. Therefore, the Brazilian Arbitration Law not only sets forth the specific grounds by which a foreign arbitral award should not be recognized by the STJ, but also imposes on the opposing party the duty of producing evidence on the occurrence of any these impeditive reasons. The merits of the arbitral award cannot be reviewed.

17. It is worth emphasizing that, although such system brought about by the Brazilian Arbitration Law is fully in line with article V of the New York Convention, the reference by STJ to said legal text (ratified by Brazil by means of Decree 4,311 of 2002) is minimal. There are still few past decisions where an express mention to any provision of the New York Convention can be found.[10]

18. Until 2004, ruling on requests for recognition of foreign awards was entrusted with the Brazilian Federal Supreme Court,[11] which had already built an important case law on the matter by then. In December, 2004, however, such competence was conferred on the STJ,[12] which has tackled this issue remarkably ever since.

19. And it is a unanimous opinion among Brazilian legal scholars and experts that the STJ has been acting out its role masterly. An the same conclusion can be inferred from the position taken by the Reporting Justice Francisco Falcão, who stressed and followed strictly the several STJ judgments that take the same stand,[13] followed unanimously by the other judges hearing the case.

20. Fortunately, one can affirm without a doubt that Brazil has regularly earned the right to be considered an arbitration-friendly jurisdiction. And the STJ, within this practice in the past years, has demonstrated through its role in the process of recognizing foreign arbitral awards before they are enforced in the Brazilian territory (such as in the review of the decisions rendered by the lower federal and state appeal courts). And this support is also shown by its careful examination of the cases, typical of a court that is the guidepost for case law in the country, and by the application and enforcement of international arbitration principles.[14]

(e) Conclusion

21. In brief, even though the relevant question of unreasoned arbitral decisions was not addressed in the Kanematsu Case, we can affirm that the decision not only follows strictly the well-settled court precedents on the matter, but also seems correct, since examination as to the existence of an arbitration agreement takes precedence over the other possible irregularities found in the proceedings.

22. The decision, after all, matches entirely the extremely positive attitude shown by the STJ, performing brilliantly its position as a role-model to all Brazilian law practitioners.

23. It is undisputable that the Brazilian courts have a long way to roam in their stand toward arbitration. However, it must be stressed that milestones have already passed along the way, and a lot of this development is due to the STJ performance in the past years.

______________________
[1] SEC 885/US, Reporting Justice FRANCISCO FALCÃO, SPECIAL COURT, ruled on August 2, 2010, Court Gazette (DJ) September 10, 2010.

[2] “IX – all judgments of the Judicial Branch are open and reasoned decisions under penalty of nullity (…)”.

[3] American Arbitration Association – Commercial Dispute Resolution Procedures (including Mediation e Arbitration), as amended and effective on September 1, 2000.

[4] Carlos Alberto Carmona, one of the harbingers of Brazilian Arbitration Law, strongly defends that the “reasoning requisite”, in the Brazilian legal system, only applies to judicial decisions, not to those rendered in arbitration. Carmona also decries a small tendency from the Brazilian Superior Court of Justice in this sense. In: “<em>Arbitragem e Processo. Um comentário à Lei 9.307/96.” 3rd edition. São Paulo: Atlas, 2009, pp. 476-479.

[5] SE 2766, Reporting Justice OSCAR CORREA, ruled on July 1, 1983, Court Gazette (DJ) September 23, 1983; SE 3977, Reporting Justice FRANCISCO REZEK, ruled on July 1, 1988, Court Gazette (DJ) August 26, 1988; SE 3976, Reporting Justice PAULO BROSSARD, ruled on June 14, 1989, Court Gazette (DJ) September 15, 1989.

[6] However, a different standing can be found in SEC 4590 (ruled on June 5, 1992, Court Gazette (DJ) July 1, 1992, reported by Justice MARCO AURÉLIO, for whom the reasoning is not indispensable once (i) the award shall be covered by the required formalities in force where it was rendered, and not in Brazil; and (ii) in recognition proceedings, it is not possible to analyze whether the arbitrators have decided correctly or not.

[7] SEC 38978/290, Reporting Justice NERI DA SILVEIRA, ruled on March 9, 1995, Court Gazette (DJ) May 26, 1995; SEC 5.828-7, ruled on December, 6, 2000, Court Gazette (DJ) February, 23, 2001; SEC 3707, ruled on September, 21, 1988, Court Gazette (DJ) February, 17, 1989.

[8] In its reasons, the Brazilian company made perfectly clear that it should not be subject to arbitration, and that this impeditive fact had been timely raised throughout the arbitration.

[9] Since the enactment of the Brazilian Arbitration Law, foreign arbitral awards no longer have to be recognized by a judge in the country where they are rendered in order to produce effects in the Brazilian territory. The so-called need for double homologation no longer subsists in the Brazilian legal system.

[10] Recently, the STJ promoted a lecture with Professor Albert Jan van den Berg, who then stressed the importance for Brazilian case law of decisions based on articles of the New York Convention. According to Prof. van den Berg, the STJ judgments would be more robust if judges made more express reference to the New York Convention rather than to the enforcement provisions of the Brazilian Arbitration Law which are, in his own words, “remarkably similar, but not the same, as the core provisions of the [convention].” GAR Arbitration – March 28, 2012 – in “In praise of Brazilian enforcement”.

[11] Article 102, I, “h” of the Brazilian Federal Constitution, enacted in October, 1988.

[12] The Constitutional Amendment 45-2005, dated as of December 8, 2004, changed this system and concentrated the competence for recognition of awards solely in the Superior Court of Justice.

[13] “The absence of signature in the clause electing arbitration, contained in the purchase and sale agreement in its first addendum, and in appointment of the arbitrator on behalf of the respondent, rules out the request for recognition and enforcement as it violates article 4, paragraph 2 of Law 9,307 of 1996, the principle of free will and Brazilian public policy. 3. Request for recognition and enforcement of a foreign arbitral award denied.” (SEC 978/GB, Reporting Justice HAMILTON CARVALHIDO, SPECIAL COURT, ruled on December 17, 2008, Court Gazette (DJe) March 5, 2009) “3. The unfounded evidence of the expression of a party’s will to adhere to and constitute arbitration violates public policy, considering that it affronts the principle inscribed in our legal system that requires express acceptance of the parties to submit to arbitration for resolution of disputes that arise in private contractual legal business. 4. In the case in question, no express statement was made by the respondent in relation to election of arbitration, which impedes use of this jurisdictional channel in this dispute. 5. Request for recognition and enforcement is denied.” (SEC 967/GB, Reporting Justice JOSÉ DELGADO, SPECIAL ASSEMBLY, ruled on February 15, 2006, DJ March 20, 2006 p. 175)

[14] According to Prof. Albert Jan van den Berg, “Brazil was ‘a late arrival to the arbitration ball’, which ratified the 1958 New York Convention as recently as 2002, (…) borrowing imagery from a recent GAR article. It quickly became the belle of the ball”, gaining on other countries that had signed the convention decades before”. GAR Arbitration – March 28, 2012 – in “In praise of Brazilian enforcement”.

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
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This is an update on the post of 27 January 2012 dealing with the African Fertilisers decision. Last week, the English Court of Appeal handed down its judgment in the latest episode of the West Tankers dispute, upholding the first instance decision and approving the decision of the Commercial Court in African Fertilisers. The decision affirms the continued pro-arbitration stance of the English courts, the Court of Appeal emphasising that “the efficacy of any award by an arbitral body depends on the assistance of the judicial system”.

The factual background to West Tankers has been widely discussed (and is summarised in paragraphs 1 to 14 of the judgment) and there is no need to do so again here. Before the Court of Appeal, West Tankers submitted that judgment be entered under s. 66(2) of the English Arbitration Act 1996 (the “Act”) against the insurers on the terms of a declaratory arbitral award. This was on the basis that such a judgment would allow West Tankers to establish the primacy of the award over any judgment by Italian courts in ongoing proceedings of the same dispute. The High Court held that “[t]he purpose of s. 66 (1) and (2) [of the Act] is to provide a means by which the victorious party in an arbitration can obtain the material benefit of the award in his favour other than by suing on it” and that “[w]here … the victorious party’s objective in obtaining an order under s. 66 (1) and (2) is to establish the primacy of a declaratory award over an inconsistent judgment, the court will have jurisdiction to make a s. 66 order because to do so will be to make a positive contribution to the securing of the material benefit of the award”.

The insurers appealed, arguing that Field J had erred in his construction of s. 66 of the Act, specifically in the meaning of the word “enforced”, and that a declaratory judgment (and in particular a negative declaratory judgment) is incapable of being “enforced” under the meaning of the section. Lord Justice Toulson, in the leading judgment, however agreed with West Tankers that a broader interpretation of the phrase ‘enforced in the same manner as a judgment to the same effect’ in s. 66 is “closer to the purpose of the Act and makes better sense in the context of the way in which arbitration works”. He rejected the insurers’ argument that in the present case the court would not be enforcing an award but only the rights determined by an award as being “an over subtle and unconvincing distinction [that] sits on shaky foundations”, emphasising that “the enforcement of any judgment or award is the enforcement of the rights which the judgment or award has established”. However, Toulson LJ emphasised that the language of s. 66 is permissive and requires the court to determine whether it is appropriate in the situation before it to enter judgment – it is not “an administrative rubber stamping exercise”.

Although Toulson LJ emphasised that the issue before the Court of Appeal “is not a question with a distinctively European flavour”, the consequences of the judgment, and more generally of the approach of the English courts, clearly are (as illustrated earlier in African Fertilisers). It remains uncertain whether the judgment falls under the arbitration exception to the Brussels Regulation 44/2001, thereby underlining the need for reform of the Regulation. As any such reform is likely to take time, there remains the real possibility that the English courts may, before any such reform, be faced with enforcement proceedings under the Regulation of an (inconsistent) judgment of the Italian courts. The questions presented by African Fertilisers remain unanswered for the time being.

Phillip Capper and Christian Blank

White & Case LLP
London

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Following the path of the hotly debated West Tankers decision, in African Fertilizers v BD Shipsnavo, the English Commercial Court held that a declaratory award is enforceable, allowing judgment to be entered on the same terms as the arbitral award. Such an order enables a party to obtain the material benefit of the award and indicates the continuing trend of the English courts in favour of arbitration and the enforcement of arbitral awards. However, this approach does raise questions for the health of the inter-twining co-existence of the arbitration and court systems.

The declaratory award (on the tribunal’s jurisdiction) was made pursuant to an arbitration agreement contained in a bill of lading for the carriage of African Fertilizer’s cargo from Romania to Nigeria. The English court had given the claimant, Shipsnavo, leave to enforce the arbitration award and to enter judgment again the defendant, African Fertilizers.

The English court had previously issued an injunction restraining African Fertilizer from continuing an arbitration in Romania, as well an interim declaration that such arbitration proceedings, together with court proceedings commenced in Romania, were both in breach of the arbitration agreement.

Shipsnavo had sought an order for enforcement under s66 of the Arbitration Act 1996 because it was concerned that, should African Fertilizer be successful in its Romanian court proceedings, then it would seek to enforce that judgment under Article 34 of the Brussels Regulation 44/2001, notwithstanding the arbitration award. If Shipsnavo had already obtained an English judgment, then it could seek to resist the recognition of an irreconcilable judgment of the Romanian court.

African Fertilizers resisted the application on the ground that the English court had no jurisdiction to make such an order because the material terms of the award were in purely declaratory terms.

First, it argued that enforcement of an award of a purely declaratory nature is not possible (notwithstanding the ruling – albeit on appeal – in West Tankers). Second, it argued that a judgment entered under s66 of the 1996 Act does not constitute a judgment within the meaning of Article 34 of the Brussels Convention, relying on the ECJ case Solo Kleinmotoren v Boch.

The first limb raised questions of the distinction between “recognition” and “enforcement” in the context of New York Convention awards. African Fertilizers argued that the West Tankers decision was incorrect, that Shipsnavo really intended simply “recognition” of their award in order to defend any adverse Romanian court judgment, and enforcement was not appropriate. The court disagreed, aligning itself with the West Tankers decision and giving primacy to the party’s right to the benefit of the award. The court preferred the plain meaning of “enforce” in s66 of the Act, and cited both textbooks and case law in support of its jurisdiction to enforce a declaratory award.

The second limb was also rejected. The court distinguished the Solo Kleinmotoren decision as being a case about a court approved settlement, in which the ECJ held that a settlement agreement recorded in a court order is not a judgment for the purposes of Article 34(3). Beatson J commented that a settlement is essentially contractual, and while the “submission to arbitration is consensual, the outcome of the arbitration and contents of the award are not”. Further, there were public policy considerations. Citing Briggs on Civil Jurisdiction, Beatson J noted that an English court could not give “leave to enforce an arbitral award and then be required to recognise and enforce a foreign judgment which undermined or contradicted that arbitral award”.

However, there are public policy considerations not considered by the court. Shipsnavo’s objective in seeking to enforce the declaratory award was to pre-empt the enforcement of any irreconcilable judgment that may be given by the Romanian court. What happens if the Romanian courts do find in favour of African Fertilizers? The parties could each have irreconcilable judgments from England and Romania, arising from the same agreement.

While the pro-arbitration stance of the English courts is welcome, this approach can result in inconsistent judgments within Europe. It may be that the current proposals to reform the Brussels Regulation will go some way to temper this risk. The European Parliament’s Legal Affairs Committee (LAC) has proposed maintaining the arbitration exception to the Regulation, but with clarifications for the interface between arbitration and the courts. The first reading of the LAC’s report is reported to take place on 18 April 2012 and the process can take several years to pass through the European parliament. Are those reforms appropriate? And meanwhile, are there risks for the health of the inter-twining systems of justice that are arbitration and litigation?

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Last month’s judgment of the Hong Kong Court of Appeal (“CA“) in Gao Haiyan and Xie Heping v. Keeneye Holdings and another CACV 79/2011, is the latest in a long line of cases demonstrating the pro-enforcement approach of the Hong Kong courts. The decision makes clear that it is not the place of the Hong Kong courts to comment on the merits of an arbitral award. Rather, the courts’ role in enforcing arbitral awards should be as mechanistic as possible. This is consistent with existing caselaw on enforcement and reinforces the respect of the Hong Kong courts for the finality of arbitral awards.

The CA in Keeneye reversed the much-discussed decision of the Hong Kong Court of First Instance (“CFI“) to refuse enforcement of a PRC arbitral award on grounds of public policy. The CFI had held that the conduct of an arbitration in which one of the arbitrators and the General Secretary of the Xian Arbitration Commission acted as mediators (a so-called “arb-med” procedure) was tainted by apprehended bias. The CFI therefore refused enforcement of the award on the basis that it would be against the public policy of Hong Kong, pursuant to section 40E(3) of Hong Kong’s old Arbitration Ordinance (Cap. 341) (which was then in force, but has since been superseded by section 95 of the new Arbitration Ordinance, Cap. 609).

The CA allowed Gao and Xie’s appeal against the CFI decision, and approved the enforcement of the award in Hong Kong on two principal grounds.

First, Keeneye had failed to raise any objection to the “arb-med” procedure during the arbitration itself, and had therefore waived its right to do so in the enforcement proceedings. This decision was underpinned by the governing arbitral rules (the Xian Arbitration Commission Arbitration Rules), which specifically provided for waiver of the right to object in such circumstances. (Similar rules on waiver exist in many institutional rules, including Article 28.1 of the HKIAC Administered Arbitration Rules, Article 39 of the new ICC Rules (which came into effect on 1 January this year), and Article 36.1 of the SIAC Rules.) On this point, the CA also emphasised the principle that a party may not keep a complaint about impropriety or bias “up his sleeve” for potential use at a later stage.

Secondly, the “arb-med” procedure adopted in the arbitration did not disclose apprehended bias giving rise to an issue of public policy in any event. This part of the CA’s decision may come as a surprise to some, given the striking factual circumstances in this case. These included the facts that (i) the mediation took place in the form of a private meeting over dinner at the Xian Shangri-la Hotel, (ii) the mediation was not held in the presence of both parties, and (iii) the mediators appeared to make a settlement proposal on their own initiative. However, in reaching its conclusion that there was no apprehended bias, the CA indicated that due consideration should be given to how mediation is typically conducted in the jurisdiction of the seat (here, the PRC). In this regard, the CA placed considerable weight upon the fact that the local court in Xian (which had supervisory jurisdiction over the arbitration) had refused an application to set aside the award – citing with approval English authority that such circumstances will be a “very strong policy consideration” for the court to take into account in deciding whether or not to enforce an award.

According to the CA, the test for determining what is contrary to public policy in Hong Kong is whether the relevant matter is contrary to “fundamental conceptions of morality and justice” in Hong Kong. Thus, if the procedure is acceptable practice in the jurisdiction in which it took place, it will not be in breach of public policy in Hong Kong unless it was so serious as to be contrary to fundamental conceptions of morality and justice.

Although this “when in Rome” approach might seem slightly troubling at first sight, the conclusion of the CA appears to be the right one. In particular, when a party consents to arbitration in a particular jurisdiction, it agrees to be bound by the rules and procedures of that seat. Whilst there is a public policy ceiling on adopted procedures beyond which the enforcing courts will be unwilling to cross, this outer limit will be narrowly construed in practice. For those engaging in “arb-med” procedures in the PRC (where practices often differ significantly from those in Hong Kong and other jurisdictions), the Keeneye judgment may provide some comfort that the mediation procedure will not in itself threaten the enforceability of any award in Hong Kong on the basis of public policy.

The CA’s recent judgment is likely to generate much (further) discussion about the development of arb-med in Hong Kong. Whilst the judgment acknowledges that arbitrators can act as mediators in the course of arbitration proceedings (a practice which is recognised expressly in section 33 of Hong Kong’s new Arbitration Ordinance, Cap. 609), the acceptable boundaries of that role in Hong Kong are far from clear. Moreover, the concept as a whole can be rather alien to common law lawyers.

It is suggested that parties and counsel should keep an open mind to the possibility of adopting arb-med in the light of the pivotal role such procedures have played in the settlement of disputes in other jurisdictions. That said, for a number of reasons (including the fact that arbitrator-mediators are compelled by Hong Kong’s arbitration legislation to disclose to all parties any confidential but materially relevant information they learned during private caucus sessions), it is likely that arb-med procedures in Hong Kong will favour an evaluative, rather than a facilitative, approach (with appropriate waivers from the parties). Such an approach would avoid the risk of any subsequent complaint about ex parte communications between a party and the arbitrator-mediator – as was featured in Keeneye.

It remains to be seen which direction the development of arb-med in Hong Kong will take. In the meantime, the Keeneye judgment serves as a powerful reminder to parties to raise any objections they may have to the arbitral procedure promptly. Failure to do so may result in a waiver of the right to object at a later date, including in the context of enforcement proceedings.

Justin D’Agostino, Martin Wallace and Ula Cartwright-Finch

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In this post, we will first deal briefly with the facts in the case of Jivraj v Hashwani and the findings of the first instance judge and the Court of Appeal, which by now would be very familiar to anyone reading this blog. We will then look at the Supreme Court’s judgment ([2011] UKSC 40), in particular its observations on the “genuine occupational requirement” (GOR) issue (discussed below) which robustly support the broad autonomy of the parties inherent in consensual arbitration to appoint decision makers with an understanding of their legal systems, social traditions and commercial background.

The dispute arose out of an arbitration clause in a joint venture agreement which provided for disputes to be resolved by three arbitrators who “shall be respected members of the Ismaili community and holders of high office within the community”. Mr Hashwani challenged the validity of this requirement on the basis that it was caught by the anti-discrimination provisions contained in the Employment Equality (Religion and Belief) Regulations 2003 (the Regulations).

At first instance, David Steel J rejected this challenge on the ground that arbitrators were not “employees” within the scope of the Regulations (which defined “employment” as “employment under…a contract personally to do any work”). He held that even if the Regulations did apply, the case fell within the GOR exception in the Regulations which applies in cases where an employer has an ethos based on religion or belief and being of a particular religion is a GOR for the position in question.

The Court of Appeal overturned this decision on the basis that an arbitrator was an employee of the appointing parties, providing services under a “contract personally to do any work”. The Court of Appeal also held that the GOR exception could not save the arbitration clause because no particular religious requirements were necessary for the discharge of the function of an English seated tribunal determining the dispute in accordance with English law.

The Supreme Court unanimously overruled the Court of Appeal decision, holding that an arbitrator’s role is not “naturally described as one of employment at all” and he is in effect a “quasi-judicial adjudicator”. The Court explained that although an arbitrator may provide services on a personal basis he “does not perform those services or earn his fees for and under the direction of the parties”; rather an arbitrator is an “independent provider of services who is not in a relationship of subordination with the parties who receives his services”.

Although the Court’s conclusion on the first issue that arbitrators are not employees was dispositive of the matter, the majority considered the GOR issue as it had been fully argued (Lord Mance, who delivered a separate judgment concurring with the majority on the employment issue, preferred not to deal with it).

The issue before the Supreme Court was whether the requirement that arbitrators be of a particular religion or belief (and by extension, other cultural or personal characteristics) can constitute a genuine, legitimate and justified requirement. Observing that this was on objective question for the Court, the majority rejected the reasoning of the Court of Appeal that an English law dispute in London under English curial law does not require an Ismaili arbitrator, as “too legalistic and technical”. The majority quoted with approval the observations of the first instance judge citing ethos of Ismaili community for dispute resolution contained within the Ismaili community, and observed that an arbitrator of the Ismaili community would bring with him or her an understanding of the parties’ conduct and moral and ethical codes which would assure the parties of an acceptable arbitration procedure in which they could have particular confidence.

The Court’s decision demonstrates an understanding that, besides the functional component in terms of application of a given national law to the dispute, arbitration has a very significant process-based dimension which is largely left to the discretion of the arbitrators by most national arbitration legislations, major institutional rules and other international codes (such as the UNCITRAL Model Law), subject only to certain safeguards necessary in the public interest. The exercise of this discretion and an arbitrator’s approach to the resolution of the dispute are bound to be influenced by a number of characteristics linked to his/her nationality, cultural background, ethos, legal training and experience. Indeed, even if, in fact, an arbitrator is not so influenced, the objective perception of the parties would always be otherwise. This point is well illustrated by the different attitudes and practices of arbitrators from diverse legal, cultural and regional backgrounds, which might manifest themselves in a predisposition towards adversarial or inquisitorial or conciliatory approach, or attitude towards confidentiality, written or oral procedures, disclosure, interpretation of contracts, treatment of witnesses and promotion of settlement etc. For instance, it has been observed that in East Asia and Middle East, social norms and values may have a greater role in shaping resolution of disputes and tendency may be to structure arbitration in a conciliatory fashion, in contrast with the Western approach which generally gives primacy to legal formality, set procedures and written agreements.

In practice, and in light of these considerations, it is a common trend for parties to incorporate requirements in their arbitration agreements which decisively influence the choice of a prospective arbitrator, ranging from nationality and language to expert knowledge or training in a specific industry, legal discipline or applicable law. By upholding the arbitration clause in Jivraj, the Supreme Court has acknowledged this practice and thereby strongly endorsed the ethos of consent and choice on which dispute settlement through arbitration is premised.

Matthew Gearing
Partner, Allen & Overy LLP

Manish Aggarwal
Associate, Allen & Overy LLP

(Allen & Overy LLP acted for the International Chamber of Commerce (the ICC) as intervener in the appeal, arguing for the Court of Appeal’s ruling to be overturned)

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