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Posts Tagged ‘Seat of the arbitration’

Notre Dame Law School

As reported yesterday, the recent tragedies in Bangladesh factories have resulted in a major breakthrough with the signing of the Accord on Fire and Building Safety in Bangladesh. Thus far, leading retailers such as H&M, Marks & Spencer, Tesco, Sainsbury’s, Benetton, and Calvin Klein are on board. Notably absent from the list are leading U.S. retailers such as Wal-Mart and Gap.

As noted in my previous post, I have been arguing for years that international arbitration could serve as an important procedural tool for promoting human rights in global supply chains. I applaud the commitment of these retailers to join with leading labor rights groups and enter into a binding agreement to improve working conditions in Bangladesh factories.

I do take issue with the drafting of the arbitration agreement, which clearly could have benefited from a quick review by a lawyer with international arbitration experience. Here’s the relevant language:

Any dispute between the parties to, and arising under, the terms of this Agreement shall first be presented to and decided by the SC [seven-member Steering Committee], which shall decide the dispute by majority vote of the SC within a maximum of 21 days of a petition being filed by one of the parties. Upon request of either party, the decision of the SC may be appealed to a final and binding arbitration process. Any arbitration award shall be enforceable in a court of law of the domicile of the signatory against whom enforcement is sought and shall be subject to The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention), where applicable. The process for binding arbitration, including, but not limited to, the allocation of costs relating to any arbitration and the process for selection of the Arbitrator, shall be governed by the UNCITRAL Model Law on International Commercial Arbitration 1985 (with amendments as adopted in 2006).

Note the peculiarities. There is no governing law clause, no arbitration seat, and no arbitration rules. If a party refuses to arbitrate, there will be no obvious court for the petitioner to file a motion to compel arbitration. Instead the arbitration proceedings are to be governed by the UNCITRAL Model Law on International Commercial Arbitration as a sort of free-floating “anational” governing clause. I suppose that makes the UNCITRAL Model Law the chosen arbitration rules, but I’ve never seen the Model Law function in this fashion. If that’s what the clause does, then any court where an action is brought can compel arbitration and the arbitral panel will be empowered to fill in most of the gaps, including determining the arbitration seat, the governing law, and the scope of its jurisdiction (See Articles 8, 16, 20, 28). Not ideal, but it may do the trick.

Second, the arbitration clause has a peculiar scope. Only disputes “arising under” the Agreement are subject to arbitration, apparently limiting the scope to breach of contract and excluding disputes relating to third-party injuries that relate to the agreement. The scope appears to be further limited by the fact that arbitration is an appellate function only, which may mean that the arbitral tribunal is limited to reviewing legal or factual errors of the Steering Committee.

Third, there is a question as to whether decisions of the Steering Committee are subject to enforcement pursuant to the New York Convention. It appears that only the arbitration awards rendered following an appeal of the Steering Committee decision are subject to such enforcement. This may mean that an appeal is necessary simply to create a binding mechanism for enforcing the parties’ obligations.

My hunch is that despite these errors, if a dispute arises from this agreement the parties will muddle through and find a way to make the dispute resolution clause work. Perhaps in the near term they can clarify these ambiguities when they develop the Implementation Plan mandated by the agreement.

So it’s probably not a pathological arbitration clause, but it could have benefited from a good scrubbing.

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

Notre Dame Law School

As reported yesterday, the recent tragedies in Bangladesh factories have resulted in a major breakthrough with the signing of the Accord on Fire and Building Safety in Bangladesh. Thus far, leading retailers such as H&M, Marks & Spencer, Tesco, Sainsbury’s, Benetton, and Calvin Klein are on board. Notably absent from the list are leading U.S. retailers such as Wal-Mart and Gap.

As noted in my previous post, I have been arguing for years that international arbitration could serve as an important procedural tool for promoting human rights in global supply chains. I applaud the commitment of these retailers to join with leading labor rights groups and enter into a binding agreement to improve working conditions in Bangladesh factories.

I do take issue with the drafting of the arbitration agreement, which clearly could have benefited from a quick review by a lawyer with international arbitration experience. Here’s the relevant language:

Any dispute between the parties to, and arising under, the terms of this Agreement shall first be presented to and decided by the SC [seven-member Steering Committee], which shall decide the dispute by majority vote of the SC within a maximum of 21 days of a petition being filed by one of the parties. Upon request of either party, the decision of the SC may be appealed to a final and binding arbitration process. Any arbitration award shall be enforceable in a court of law of the domicile of the signatory against whom enforcement is sought and shall be subject to The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention), where applicable. The process for binding arbitration, including, but not limited to, the allocation of costs relating to any arbitration and the process for selection of the Arbitrator, shall be governed by the UNCITRAL Model Law on International Commercial Arbitration 1985 (with amendments as adopted in 2006).

Note the peculiarities. There is no governing law clause, no arbitration seat, and no arbitration rules. If a party refuses to arbitrate, there will be no obvious court for the petitioner to file a motion to compel arbitration. Instead the arbitration proceedings are to be governed by the UNCITRAL Model Law on International Commercial Arbitration as a sort of free-floating “anational” governing clause. I suppose that makes the UNCITRAL Model Law the chosen arbitration rules, but I’ve never seen the Model Law function in this fashion. If that’s what the clause does, then any court where an action is brought can compel arbitration and the arbitral panel will be empowered to fill in most of the gaps, including determining the arbitration seat, the governing law, and the scope of its jurisdiction (See Articles 8, 16, 20, 28). Not ideal, but it may do the trick.

Second, the arbitration clause has a peculiar scope. Only disputes “arising under” the Agreement are subject to arbitration, apparently limiting the scope to breach of contract and excluding disputes relating to third-party injuries that relate to the agreement. The scope appears to be further limited by the fact that arbitration is an appellate function only, which may mean that the arbitral tribunal is limited to reviewing legal or factual errors of the Steering Committee.

Third, there is a question as to whether decisions of the Steering Committee are subject to enforcement pursuant to the New York Convention. It appears that only the arbitration awards rendered following an appeal of the Steering Committee decision are subject to such enforcement. This may mean that an appeal is necessary simply to create a binding mechanism for enforcing the parties’ obligations.

My hunch is that despite these errors, if a dispute arises from this agreement the parties will muddle through and find a way to make the dispute resolution clause work. Perhaps in the near term they can clarify these ambiguities when they develop the Implementation Plan mandated by the agreement.

So it’s probably not a pathological arbitration clause, but it could have benefited from a good scrubbing.

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

Habib Al Mulla & Co.

On 14 October 2012, Justice David Williams of the DIFC Court of First Instance (Dubai International Financial Centre) applied a course correction by issuing a decision confirming the jurisdiction of the DIFC Courts to grant a stay in the presence of a valid arbitration agreement providing for a seat of arbitration outside the DIFC.

Justice Williams in his decision in International Electromechanical Services Co. LLC v Al Fattan Engineering LLC (First Defendant) and Al Fattan Properties LLC (Second Defendant), CFI 004/2012 – departed from a previous decision issued earlier this year by Justice Sir David Steel on 6 March 2012 in Injazat Capital Limited and Injazat Technology Fund ITF against Denton Wilde Sapte refusing to grant a stay of the proceedings brought before him in violation of a none DIFC seated arbitration agreement – A case note on the latter decision can be found here.

The two claims Al Fattan and Injazat are similar in many ways. Both contracts subject matter of the disputes included arbitration clauses providing for arbitration outside the DIFC, and the claimants in the two cases filed DIFC proceedings in violation of the arbitration clauses. The same defense was raised to grant a stay in application of article 13 of the DIFC Arbitration Law (Law No. 1 of 2008), and both Justices had to decide whether the Court can grant such a stay by each applying their own interpretation of that article and of the purpose of the DIFC as such. Concerns over the violation of article II(3) of the New York Convention of 1958 were taken into account in both cases as well, with the Injazat decision giving it a less favorable stance in face of the clarity and precision of article 13(1) of the DIFC Arbitration Law.

The latter article provides the following:

“If an action is brought before the DIFC Court in a matter which is the subject of an Arbitration Agreement, the DIFC Court shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, dismiss or stay such action unless it finds that the Arbitration Agreement is null and void, inoperative or incapable of being performed.”

However, article 7(1) on the scope of application of the same Law provides:

“Parts 1 to 4 and the Schedule of this Law shall all apply where the Seat of the Arbitration is the DIFC.”

In face of the clarity of the provisions of both articles above, Justice David Steel in Injazat decided that since article 13 is in Part 3 of the Law, there was no room for interpreting it consistently with the New York Convention. The Court therefore had no statutory jurisdiction to grant a stay since it did not apply to non-DIFC seated arbitration agreements, and thus its powers were confined to the bounds of the DIFC Arbitration law without any particular reference to the Court’s obligations to grant a stay under article II(3) of the New York Convention to which the UAE is a member State since 2006.

The response came quickly from Justice David Williams in Al Fattan case. In the matter at hand, the Court concurred with the Injazat decision that article 13 of the DIFC Arbitration Law is not applicable in this case as the seat of arbitration is not the DIFC. However, the Court declined to follow the ruling in Injazat and decided that it has an inherent jurisdiction to grant a stay.

On a true construction of the DIFC Arbitration Law, it considered that the latter does not exclude the established jurisdiction to grant stays or injunctions in support of arbitration seated outside the DIFC. In this line of argument, Justice Williams considered that where the purpose of articles 7 and 13 is to render it mandatory for the Court to stay proceedings in breach of arbitration agreements in the DIFC, the Court may stay proceedings brought in breach of a valid agreement to arbitrate outside the DIFC, but need not do so.

This contrast between mandatory stays and discretionary stays was also raised in Injazat decision, but the latter considered that the DIFC Arbitration Law would have expressly provided for discretionary stays in the case of an arbitration seated outside the DIFC. The Court in the present case rejected such reasoning and considered that discretionary stays are “allowed unless provided otherwise”.

The decision in Injazat raised several critics as to the respect of the DIFC Courts of the UAE international commitments arising from the New York Convention. In the present case, the Court considered that a decision such as the one in Injazat would “thwart the promotion of the DIFC as a jurisdiction supportive of arbitration.” The wordings of Justice Williams are clear enough to re-emphasize the envisaged role of the DIFC to ensure that companies in the region will have an expeditious and cost effective dispute settlement mechanism to Courts, making the system more attractive to the international community (DIFC consultation papers issued in February 2008).

Although the seat of arbitration in the present case is in Dubai, a domestic seat to which the provisions of article II(3) are not applicable, the seat of arbitration in Injazat was in London, thus putting the UAE in breach of the New York Convention. Article 5 of the Federal Law No. 8 of 2004 that created the DIFC provided for the respect of the Financial Free Zones of any international agreements to which the UAE is or shall be a party. As a clear response to the decision in Injazat, Justice David Williams decided that this cannot lead to finding that the intention of article 7 of the DIFC Arbitration Law is to remove the DIFC Court’s inherent jurisdiction to stay proceedings for arbitration agreements seated outside the DIFC.

This is a welcome decision that reminds the DIFC Courts of the requirement to comply with the UAE international obligations, and we hope that other decisions will follow the same.

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On 6 September 2012, the Indian Supreme Court delivered its much-awaited judgment in Bharat Aluminium Co v. Kaiser Aluminium Technical Services (‘BALCO’). For the reasons discussed in detail below, the 190-page long BALCO decision is likely to go down in the annals of arbitration reports as the watershed decision that heralded a new dawn for Indian arbitration.

The broad thrust of the BALCO decision is to protect the future from the erroneous and anachronistic decisions of the past and, consistent with underlying philosophy and ethos of the New York Convention and UNCITRAL Model law, exhort Indian courts to become more arbitration-friendly and thereby less prone to intervene in the arbitral process. To this end, BALCO certainly lives up to the buzz and hype created in the international arbitration community after news broke out earlier this year that the Indian Supreme Court was hearing a case that sought a reconsideration of its earlier decisions in Bhatia International v. Bulk Trading SA¹ (‘Bhatia’) and Venture Global Engineering v. Satyam Computer Services Ltd² (‘Venture Global’).

Overruling the Bhatia and Venture Global decisions

Readers are likely to be familiar with the problems caused by the much-criticised Bhatia and Venture Global decisions. Although the Indian Arbitration and Conciliation Act, 1996 (‘the 1996 Act’) is based on the UNCITRAL Model Law, on a clearly erroneous statutory construction of the 1996 Act, the Indian Supreme Court in these decisions assumed that, unless the parties expressly or implied agreed to the contrary, the Indian courts had jurisdiction with respect to foreign-seated arbitration akin to their curial jurisdiction with respect to arbitrations seated within India under Part I of the 1996 Act. Based on this flawed analysis of the 1996 Act, Indian courts had hitherto asserted their jurisdiction to grant interim measures in aid of foreign-seated arbitrations (Bhatia) and even set-aside awards made pursuant to foreign-seated arbitrations (Venture Global).

The Indian Supreme Court in BALCO has now unequivocally overruled Bhatia and Venture Global on the basis that Part I of the 1996 Act does not apply to foreign-seated arbitrations. This conclusion principally stems from two fundamental propositions that the court underscored in its judgment viz. (i) the application of the UNCITRAL Model Law was intended to be limited to the territorial jurisdiction of the seat of arbitration i.e. the territoriality principle and (ii) the seat of the arbitration is the ‘centre of gravity’ of the arbitration and therefore a choice of a foreign-seated arbitration by the parties ordinarily meant that the parties also agreed to the application of the curial law of that foreign country.

The court considered that an acceptance of the statutory construction of the 1996 Act espoused in the Bhatia and Venture Global decisions was tantamount to giving extra-territorial application to the 1996 Act, which was not the intention of the Indian Parliament when it enacted this law.

The legal consequences of overruling Bhatia and Venture Global

From a doctrinal perspective, there are several consequences that flow by dint of the Bhatia and Venture Global decisions being discredited by the Indian Supreme Court in the BALCO decision.

(1) First, it is now plain that Indian courts should not assert jurisdiction in matters concerned with, in particular, (i) the grant of interim remedies in aid of foreign-seated arbitrations purportedly pursuant to section 9 of the 1996 Act; (ii) the making of default appointment of arbitrators in foreign-seated arbitrations purportedly pursuant to section 11 of the 1996 Act; and (iii) applications to set aside foreign awards purportedly pursuant to section 34 of the 1996 Act.

(2) Secondly, insofar as the Indian court’s jurisdiction will no longer depend on its attempt to divine the express or implied intentions of the parties, it will accordingly not be necessary for parties to expressly exclude the application of Part I of the 1996 Act in arbitration agreements that provide for foreign-seated arbitration on or after 6 September 2012. Following the Bhatia and Venture Global decisions, this had become a standard drafting practice for parties who wanted minimal intervention from the Indian courts with respect to their contracts that involved at least one Indian party and contained a foreign-seated arbitration clause.

(3) Thirdly, it has been made abundantly clear in BALCO that the Indian courts will also not have jurisdiction to entertain an ordinary civil suit filed under the Code of Civil Procedure for the purpose of seeking interim relief in aid of foreign-seated arbitrations. This is because such interim relief is not a substantive cause of action so as to warrant the institution of a civil suit under Indian law. Interestingly, the position under Indian law now appears to the same as it was under English law (see Siskina (Cargo Owners) v. Distos Compania Naviera SA³ AC 210.]) and Singapore law (see Swift-Fortune Ltd v. Magnifica Marine SA⁴ 1 SLR 629.]) prior to supervening legislation being enacted in those two countries to specifically redress this issue.

(4) Finally, Part I of the 1996 Act will continue to apply to all arbitrations (i.e. domestic and international) seated in India. In arbitrations seated in India, the Indian courts, in their capacity as the supervisory courts at the seat of arbitration, will have broad jurisdiction under Part I of the 1996 Act to supervise and support the arbitral process (including the power to set aside an award made pursuant to such arbitration).

BALCO represents a paradigm shift away from the pre-1996 arbitral jurisprudence

Quite apart from the legal consequences discussed above, there is another important aspect of the BALCO decision that needs to be underscored. This is the refreshing manner by which the Indian Supreme Court has embarked on a direct inquiry as to the intention and purpose behind the relevant provisions of the UNCITRAL Model Law and the New York Convention, as discernible from the travaux préparatoires, in addition to appreciating how those operative provisions are understood in several other jurisdictions.

This is an important development because it represents a paradigm shift away from its previous case-law and practice. The apex court’s willingness to do so, in fact, resoundingly conveys the message that Indian courts will no longer hesitate to be directly guided by the terms of the relevant international conventions, as they are understood internationally, and, if the need arises, construe Indian legislation in conformity with the same. This is all the more significant in view of the fact that, even now, one of the major hurdles that arbitration users face in India is the Indian courts’ difficulty in being able to adapt and transition to arbitrations governed by a law based on the UNCITRAL Model Law, despite it being enacted in 1996.

For over five decades prior to 1996, Indian arbitration was governed by the Arbitration Act of 1940 (‘the 1940 Act’) which was based on even older English statutes of Victorian vintage. The dilatory and inefficient conduct of arbitrations under the 1940 Act laced together with the excessive intervention of the courts made an Indian Supreme Court judge famously remark once that:

‘[The 1940 Act] has made lawyers laugh and legal philosophers weep. Experience shows and law reports bear ample testimony that the proceedings under the [1940] Act have become highly technical accompanied by unending prolixity, at every stage providing a legal trap to the unwary.’⁵ (emphasis supplied)

That the arbitration culture and mindset prevalent under the pre-1996 arbitration regime has permeated and coloured the working of the 1996 Act is itself evident from the flawed analysis set out in the Bhatia and Venture Global decisions, as I explain below.

Prior to the enactment of the 1996 Act, the Indian Supreme Court decided in National Thermal Power v. Singer Company⁶ (‘Singer’) that a foreign award could be set aside by the Indian courts in the event that the arbitration agreement between the parties was governed by Indian law. Although this decision could have been narrowly based on a statutory carve-out under the pre-1996 arbitration regime (which has been expressly omitted in the 1996 Act), the court in Singer went much further.

It reasoned that though the contract, in that case, provided for ICC arbitration in London, the governing law of the contract was Indian law and therefore, in the absence of an unmistakable intention to the contrary, the law applicable to the arbitration agreement was Indian law as well. Ex hypothesi, the court considered that although the parties could in theory, either expressly or impliedly, make a choice as to the curial law, the jurisdiction of the Indian courts was concurrent with the jurisdiction of the English courts with respect to curial matters (including the determination of an application to set aside the ICC award made in London). This was on the mistaken basis that since the law applicable to the arbitration agreement was Indian law, it necessarily followed that Indian courts had ‘jurisdiction over all matters concerning arbitration.’

Instead of clearly departing from the erroneous analysis set out in Singer after the commencement of the 1996 Act, the Bhatia and Venture Global decisions took it to one step further by asserting that Indian courts had jurisdiction with respect to foreign-seated arbitrations involving an Indian party under Part I of the 1996 Act, regardless of the governing law of the contract. To the extent that these decisions are now overruled, the BALCO decision has definitively broken the shackles of the arbitration culture and mindset prevalent under the pre-1996 arbitration regime.

Post-BALCO landscape: The challenges that lie ahead

Whilst the BALCO decision provides the necessary impetus to enable the Indian courts to make a fresh start, there are several serious issues that will need to be dealt with by the Indian courts in the aftermath of that decision.

The foremost concern arises from the fact that the BALCO decision will apply prospectively i.e. only to arbitration agreements which are concluded on or after 6 September 2012. This effectively means that Part I of the 1996 Act will continue to apply to foreign-seated arbitrations with respect to arbitration agreements concluded prior to that date, unless the parties have either expressly or impliedly agreed otherwise.

The doctrine of prospective overruling is a tool that has been applied on several occasions in the past by the Indian Supreme Court. The classic cases, which ordinarily warrant its application, are cases where the court has decided to invalidate a constitutional amendment⁷ or a statutory enactment⁸ but considers that gravely unfair or disruptive consequences would follow from such invalidity if past transactions were not immune from judicial scrutiny.

Even if one were to gloss over the fact that the Indian Supreme Court has not invalidated a constitutional amendment or statutory enactment in the BALCO decision (but rather its own previous rulings), the question still arises which particular past transactions need judicial immunity so that gravely unfair or disruptive consequences would not follow from the overruling of the Bhatia or Venture Global decisions.

As explained above, the Bhatia or Venture Global decisions enabled Indian courts to assert jurisdiction with respect to foreign-seated arbitrations involving an Indian party, unless the parties had expressly or impliedly agreed to the contrary. Seen in that light, it is important to note that these decisions did not affect the validity of foreign-seated arbitration clauses involving an Indian party. With respect, it is thus a non-sequitur to argue that by overruling these decisions, such foreign-seated arbitration clauses would be somehow susceptible to being invalidated as well. On the contrary, the only past transactions that were susceptible to being invalidated in the wake of the BALCO decision were court proceedings (either pending or those having attained finality) commenced in India on the basis of the Bhatia or Venture Global decisions. Accordingly, the BALCO decision should have been applied prospectively to the commencement of any proceedings in India rather than the execution of any new arbitration agreements.

This is, in fact, likely to become a contentious issue in the future. Given the significant delays in court proceedings in India and the fact that it is not uncommon to obtain a final decision only after litigating there for at least 7 to 10 years, the BALCO decision effectively means that despite Bhatia and Venture Global being expressly overruled, those precedents will ironically continue to guide the Indian courts for another decade or so with respect to arbitration agreements entered into prior to 6 September 2012. Unless the Indian Supreme Court subsequently backpedals on this issue, to the extent I discussed above, there is likely to be a lot of confusion created in any attempt made by the Indian courts to maintain two parallel regimes for the next decade or so.

Another major issue arises from the fact that, besides the Bhatia and Venture Global decisions, there are still several other previous decisions of the Indian Supreme Court that remain good law and which can potentially create problems in international arbitrations involving Indian parties.

For example, the BALCO decision did not have occasion to consider the broad ‘public policy’ doctrine enunciated in ONGC v. Saw Pipes⁹ and its applicability as a standard to challenge the enforcement of foreign awards in India. Significantly, the Indian Supreme Court recently applied this standard whilst deciding a case concerning the enforcement of a Russian Chamber of Commerce and Industry award made in Moscow.¹⁰ Although the challenge did not succeed on the merits of the case, this ruling does create a disconcerting precedent.

The BALCO decision also does not affect the judicial rule, endorsed by the Indian Supreme Court, to refuse to refer a matter to arbitration where either a serious allegation of fraud has been made or there are complicated questions of fact or law that require extensive oral or documentary evidence.¹¹ The Indian courts consider that, in such circumstances, it is inapposite to refer the disputes to arbitration and will accordingly retain jurisdiction to decide such cases. Although, there are no known reported cases where an Indian court has refused to refer matters to international arbitration on the basis of such a rule, nothing prevents a court from refusing to do so in the future unless this rule is overruled or deemed to be not applicable to international arbitration.

Finally, even after the BALCO decision, it remains arguable on the basis of the decision of the Indian Supreme Court in TDM Infrastructure Private Limited v. UE Development India Private Limited ¹² that it is inconsistent with Indian public policy for an Indian incorporated entity to contract out of the application of Indian substantive law in a contract that it enters into with another Indian incorporated entity. This is despite the fact that such a contract may contain a foreign-seated arbitration clause. Accordingly, in the event that two Indian incorporated entities wish to enter into a contract that provides for a foreign-seated arbitration, it still remains prudent to stipulate Indian law as the governing law of such a contract.

Conclusion

These aforesaid decisions make it plain that the BALCO decision is not the panacea for all the ills associated with arbitration in India but certainly a good starting point by the Indian Supreme Court in the right direction. Whilst there will be, no doubt, a long and arduous path ahead, fraught with difficult legal and policy challenges, before India can truly be considered an arbitration friendly jurisdiction, the BALCO decision inspires hope that a new and promising era has begun for arbitration in India.

(The views expressed in this article are those of the author alone and do not necessarily reflect the views of his law firm).

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Legaleidescope

The Supreme Court of India has finally spoken to deliver a definitive ruling on the role of Indian courts in international arbitrations seated outside India. Overruling the controversial decision of Bhatia International v Bulk Trading (2002), the Supreme Court held that Indian courts do not have supervisory authority over international arbitrations taking place outside India. The Court examined and defined the scope of Indian Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and clarified the concept of seat of arbitration under the Indian law. The Court also unequivocally affirmed that the Arbitration Act adopted the territorial principle of the UNCITRAL Model Law and accepted the views of leading experts in international arbitration on Article V(1)(e) of the New York Convention.

Bharat Aluminum Co. v Kaiser Aluminum Technical Services, Inc. (2012) involved several appeals but the same broader legal question: was Bhatia International correctly decided? The issue was whether courts of India can perform supervisory functions relating to arbitrations seated outside India? The Supreme Court replied to this question with an emphatic “no” on 6 September 2012. This effectively means that the courts of India can no longer make interim orders regarding arbitrations with seats outside India or entertain annulment challenges to foreign arbitration awards.

The proceedings of Bharat Aluminum were watched closely by all quarters with great interest. A five-member bench of Chief Justice S.H. Kapadia and Justices D.K. Jain, S.S. Nijjar, Ranjana Desai, and J.S. Khehar heard the case earlier this year. Justice S.S. Nijjar authored the judgment, which was joined by all members of the bench. The Supreme Court’s 190-page ruling is certainly a landmark judgment and resolves various lacunas of Indian arbitration law.

The Indian Arbitration Act

The regulation of arbitration, according to Bharat Aluminum, consists of four stages: a) commencement of arbitration; b) conduct of arbitration; c) challenge to arbitration award; and d) recognition and enforcement of arbitration award.

Part I of the Arbitration Act deals with all four stages and provides for comprehensive regulation of arbitration proceedings. In particular, Section 9 of Arbitration Act gives courts of India vast powers to make interim orders in relation to arbitration proceedings. Section 34 allows courts to entertain challenges and set aside an arbitration award under specified circumstances. Part II of the Arbitration Act deals with recognition and enforcement of foreign awards.

Bhatia International and Venture Global Engineering

In Bharat Aluminum, the Supreme Court was asked to revisit the jurisprudence of Bhatia International which held the field for around ten years. The ruling of Bhatia International was not only affirmed by later rulings of the Court, but the scope of judicial intervention in arbitral proceedings outside India was further expanded by the Court.

In Bhatia International, the Supreme Court held that provisions of Part I of the Arbitration Act would apply to international commercial arbitrations taking place outside India “unless the parties by agreement… exclude all or any of its provisions.” This would mean that a party to international arbitration proceedings outside India could apply to an Indian court under Section 9 of Arbitration Act for an ex parte interim injunction relating to arbitration outside India.

In fact, one of the appeals before the court in Bharat Aluminum emanated from an ex parte ad interim injunction given by District Court of Mangalore under Section 9 relating to an arbitration in London. The District Court’s decision was set aside by the High Court of Karnataka on appeal and a special leave petition was filed before the Supreme Court against High Court’s judgment.

The scope of Bhatia International was further broadened by the Supreme Court in Venture Global Engineering v Satyam Computer Services Ltd. (2008). The Court stated: “Though in Bhatia International the issue relates to filing a petition under Section 9 of the Act for interim orders the ultimate conclusion that Part I would apply even for foreign awards is an answer to the main issue raised in this case.” (emphasis added)

Pursuant to Venture Global Engineering, a court of India could hear and decide on challenge to a foreign arbitration award under Section 34 of Arbitration Act. In one of the appeals in Bharat Aluminum, a party had challenged two arbitration awards delivered in London under section 34 of the Arbitration Act. The challenge was rejected by District Court of Bilaspur and High Court of Judicature at Chattisgarh. An appeal was subsequently filed before the Supreme Court of India.

The missing word – “only”

A large part of the Supreme Court’s decision centers around the absence of a word -“only” – in Section 2(2) of Arbitration Act. Section 2(2) of Arbitration Act, falling in Part I, says no more than “this Part shall apply where the place of arbitration is in India.” As Section 2(2) does not say that Part I shall apply only where the place of arbitration is in India, Part I will apply, one side contended, even if place of arbitration is not India.

The word “only” would not have been significant had it been not used in Article 1(2) of UNCITRAL Model Law. Article 1(2) of UNCITRAL Model Law (prior to 2006) stated: “The provisions of this law, except Articles 8, 9, 17(H), 17(I), 17(J), 35 and 36 apply only if the place of arbitration is in the territories of this State.”(emphasis added). As the word “only” is conspicuously omitted in Article 2(2) of Arbitration Act, did it express the conscious decision of India’s legislature to widen the applicability of Part I of Arbitration Act to arbitrations outside India?

The Supreme Court rejected this proposition. The omission of “only” in Section 2(2) of Arbitration Act does not indicate that Indian courts could supervise arbitrations taking place outside India. The Court determined that the Arbitration Act adopted a scheme different from UNCITRAL Model Law. In Article 1(2) of the UNCITRAL Model Law, it was necessary to include the word “only” to clarify that, expect for certain provisions, Model Law would be applicable on strictly territorial basis. The exceptions stipulated in Article 1(2) of UNCITRAL Model Law were not enumerated in Section 2(2) of Arbitration Act. The word “only” would have been superfluous in Section 2(2) of Arbitration Act.

The territorial principle

The Court then turned to territorial principle that forms the conceptual basis of Article 1(2) of UNCITRAL Model Law. The principle was adopted by the UNCITRAL in the 18th Session at Vienna in 1985. The principle, as the Report of UNCITRAL on 18th Session stated, means that Model Law would only apply where the place of arbitration was the enacting State. The territorial link between the place of arbitration and the law governing arbitration has been accepted by leading experts and commentators on international commercial arbitration. The law of other countries, such as England and Switzerland, also maintain the link between the seat of arbitration and lex arbitri.

The Court affirmed that the Arbitration Act adopted the territorial principle of UNCITRAL Model Law. “The Scheme of the Act,” the Court held, “makes it abundantly clear that the territorial principle, accepted in the UNCITRAL Model Law, has been adopted by the Arbitration Act, 1996.” The application of Part I of Arbitration Act is, therefore, restricted to arbitrations taking place in India. Arbitrations outside India are not covered by Part I of Arbitration Act because they lack the territorial link with India.

Domestic Award under Arbitration Act

The decision of Bharat Aluminum is crucial for understanding the difference between the foreign and domestic awards under the Arbitration Act. The Court clarified that Part I of Arbitration Act applies not only to arbitrations in India where both parties are Indian, but also to international commercial arbitrations which take place in India. The awards in arbitrations seated in India are domestic awards, distinguishable from foreign awards, for the purposes of Arbitration Act. The difference is significant because domestic awards can be challenged and annulled under Section 34 of Arbitration Act.

The Arbitration Act does not recognize international awards, i.e., awards rendered in India in an international arbitration. All awards rendered in India, the Supreme Court made clear, are domestic awards under the Arbitration Act. Similarly, Part I applies to all arbitrations with a seat or place of arbitration inside India irrespective of whether or not it’s an international arbitration or a “purely domestic” arbitration.

The Centre of Gravity: Seat of Arbitration

“The seat of an arbitration,” Alan Redfern wrote in Law and Practice of International Commercial Arbitration (1986), “is thus intended to be the central point or its center of gravity.” By recognizing that this principle applies equally to the Arbitration Act, the Court in Bharat Aluminum endorsed one of the most fundamental concepts of arbitration law.

Just as the case with English law, the Indian law does not recognize de-localized arbitration proceedings or, as stated in Dicey & Morris on Conflict of Laws, “arbitral procedures floating in the transnational firmament, unconnected with any municipal system of law.” If the parties have not selected the law governing the conduct of arbitration, the law of the seat of arbitration governs the arbitration proceedings because it is “most closely connected with the proceedings” (Dicey & Morris on Conflict of Laws).

By agreeing to a seat or place of arbitration outside India, the parties choose the laws of seat of arbitration to govern the conduct of arbitrations. This is an issue of party autonomy and the Arbitration Act allows parties to opt out of Arbitration Act by choosing the seat of arbitration in another country. Part I of the Arbitration Act would not apply in such a case.

Enforcement and Annulment

The language of Article V(1)(e) of New York Convention, adopted by Section 48(1)(e) of Arbitration Act, is a bit quizzical. The provision says that enforcement of a New York Convention award can be refused where it “has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.” According to Hans Smit, as the Supreme Court noticed, choice of this language is “both most fateful and most regrettable” because it would mean that the award could be concurrently challenged in “the country in which…the award was made” as well as in “the country…under the law of which the award was made.”

The Supreme Court in Bharat Aluminum correctly recognized that this would be recipe for litigations. The Court held that the correct interpretation of Article V(1)(e) of New York Convention is that an award can be challenged in “the country…under the law of which the award was made” only if the annulment action in “the country in which…the award was made” is not available.

The Court further specified that the terms “under the law” in Article V(1)(e) refer to procedural law of arbitration proceedings rather than substantive law of arbitration. The Court wholeheartedly endorsed the view of Gary Born in International Commercial Arbitration (2009) that “under the law” refers to the procedural law of arbitration. Therefore, an annulment action could only be brought in the country “under the law of which the award was made” in “once-in-a-blue-moon” situation where parties have agreed upon a procedural law other than that of the arbitral seat.

The Conclusions

The Court’s decision in Bharat Aluminum brings conceptual clarity and resolves some of the most controversial issues in the Indian arbitration law. The Court’s conclusions can be effectively summarized as follows:

a) The Indian courts does not have the authority to supervise conduct of international commercial arbitrations seated outside India because, amongst other reasons, the Arbitration Act adopts the territorial principle of UNCITRAL Model Law;

b) The Indian courts can only exercise supervisory role where the seat of arbitration is in India because Part I of Arbitration Act only applies to arbitrations that take place in India;

c) There is no overlap between Part I and Part II of the Arbitration Act and courts of India cannot annul foreign arbitral awards (unless, perhaps, the procedural law of arbitration is Indian law);

d) The Indian courts cannot make interim orders relating to arbitrations seated outside India under Section 9 of Arbitration Act and applications for interim orders relating to foreign arbitration proceedings are not maintainable;

e) The law laid down by Bharat Aluminum would apply, to avoid rocking the boat, prospectively to all arbitration agreements executed after 6 September 2012.

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by Mike McClure , Herbert Smith LLP

One of the oft quoted advantages of arbitration is the perceived certainty that the national courts of New York Convention states should enforce an arbitral award unless one of the limited grounds for refusal is met. However, the relationship between national courts and arbitration is far from straightforward. In particular, one notable area where there are differing views amongst a number of supposedly ‘pro-arbitration’ states is whether or not an arbitration award that has been set aside by the national courts at the seat of the arbitration can then be enforced in another jurisdiction. Indeed, despite a number of high-profile cases in various jurisdictions, this issue is far from settled.

This issue has been thrust into the limelight recently by the decision of the Tribunal de Grande Instance in Paris to recognise a Russian arbitral award in favour of Mr Nikolay Maximov. In this case, Mr Maximov sought enforcement of an arbitral award in his favour for almost US$300 million against Novolipetsky Steel Mill (NLMK). The award had been issued by the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC) in accordance with a share sale and purchase agreement between Mr Maximov and NLMK. However, the award was subsequently set aside by the Moscow Arbitrazh Court (whose judgment was upheld by the Federal Arbitrazh Court of the Moscow District and the Supreme Arbitrazh Court). The reasons for setting aside the award included a ruling that disputes arising out of an agreement aimed at the transfer of shares cannot be resolved by arbitration because corporate disputes are not arbitrable as a matter of Russian law. In any event, notwithstanding the decision of the Russian courts (which, in itself, has proved to be controversial), Mr Maximov sought enforcement of his award in France. On 16 May 2012, the Tribunal de Grande Instance in Paris concluded that the fact the award had been set aside by the Russian courts was not sufficient to refuse recognition in France. The court said that the ICAC award was a valid arbitration award which had been procured in accordance with the parties’ agreed contractual method and it should therefore be recognised and enforced.

This post seeks to summarise the contrasting positions taken by a number of ‘pro-arbitration’ European jurisdictions in relation to the enforcement of awards that have been set aside by the courts of the seat. The starting point for any debate on such issues is Article v. of the New York Convention, which sets out the circumstances in which recognition and enforcement of an arbitral award ‘may’ be refused. These circumstances include where the award has been set aside or suspended by the competent authority of the country in which the award was made (Article V(1)(e)). On a plain reading of the language of the New York Convention, the word ‘may’ denotes an option and, therefore, there should in theory be no bar to a state recognising and enforcing an arbitral award if it has been set aside at the seat of the arbitration. Indeed, a number of states take such view. However, a significant number of states also take the contrasting view and will not recognise or enforce such awards. The reason for this is that the central issue in this debate does not turn on the language of the New York Convention alone. Rather, it depends on the response to a much more basic (and arguably more controversial) question, namely: what is the role of the seat of the arbitration?

There are two main views. The first view is that the seat of the arbitration is chosen for little more than the sake of convenience. Arbitral tribunals need not operate like the national courts of a particular state simply because they have their seat there. Arbitrators do not derive their powers from the state in which they have their seat, but rather from the sum of all the legal orders that recognise, under certain conditions, the validity of the arbitration agreement and the award. It is for such reasons that it can be said that arbitrators have no forum per se and it follows, therefore, that decisions of the national court at the place of the arbitration should have no (or very little) bearing on the validity of the underlying award.

This first view is dominant in a number of civil law countries, most notably France. In the seminal Hilmarton case, the Court of Cassation ruled that a Swiss arbitral award was of an international nature, meaning that it was not attached to the Swiss legal order and thus continued to exist despite its annulment at the seat of arbitration. In the subsequent (and equally well known) Putrabali case, the Court of Cassation affirmed the Hilmarton principle and stated that an international arbitral award is an international decision grounded in a non-national, arbitral legal order and, therefore, its annulment by a state court has no bearing on its enforcement in another state. There have been a number of other similar decisions, and it is now well established that the French courts will enforce an arbitral award even if it was set aside by the courts at the seat. Indeed, the Maximov decision is the latest example of this ever increasing bank of case law (although the decision may yet be appealed).

The Dutch courts take a similar approach to the French. The best known example is the case of Yukos Capital v. Rosneft, where the Amsterdam Court of Appeal held that the fact that a Russian court had set aside a Russian arbitral award was not sufficient to prevent enforcement in the Netherlands. Moreover, in this particular case, the Court of Appeal noted that there was evidence that the decision of the Russian court was partial and dependent and was clearly influenced by the Russian state’s ‘campaign’ against the claimant. In such circumstances, the Court of Appeal was able to assist the claimant in seeking justice. Interestingly, Mr Maximov sought to enforce his ICAC award in the Netherlands last year, but his application was rejected at first instance. This decision is currently being appealed to the Amsterdam Court of Appeal.

Indeed, for a period of time last summer, it even looked like Russia (not traditionally viewed as a pro-arbitration state) might join France and the Netherlands as being prepared to enforce arbitral awards that have been set aside by the national courts at the seat of the arbitration (Ciments Français v. Sibirskiy Cement). It should be noted, however, that this decision was based on an analysis of Article IX(2) of the Geneva Convention which limits the application of Article V(1)(e) of the New York Convention by providing that the fact an award has been set aside will only be relevant if the reason it was set aside was one of an exhaustive list of reasons set out in Article IX(1) of the Geneva Convention. The Geneva Convention will only apply, however, if the state of the award’s origin, the state of enforcement, and the place of residence of all parties to the arbitration agreement are all signatories to the Geneva Convention. In any event, the decision of the Russian court has since been successfully appealed.

In contrast, the second view is that the seat of the arbitration is almost equivalent to the municipal jurisdiction’s forum. Under this view, the law of the seat governs the arbitration agreement and will govern the formation and composition of the tribunal as well as the procedure and form of the award. The courts at the seat oversee the proper functioning of the procedural aspects of the arbitration and, therefore, at the end of the process have the power to confirm or set aside the award. In other words, under this approach, the seat anchors the arbitration to the legal order of the state in which it takes place.

This second view is similar to the position taken by the English courts. In particular, the English courts have traditionally taken the view that where a foreign arbitral award has been annulled by a court of the seat, the English courts are unable to recognise or enforce that award as the act of annulment creates an issue estoppel (Yukos Capital SARL v. OJSC Rosneft Oil Co). However, it should be noted that following the recent decision in Sulamerica v. Enesa, under English law the law of the arbitration agreement will not automatically be the law of the seat. Rather, the court will look to determine the law of the arbitration agreement by reference to: (i) express choice; (ii) implied choice; and (iii) close connection – which may or may not be the law of the seat.

The German approach accords closely with that of the English courts and prohibits enforcement of such awards, save where the court judgment setting aside the award must be recognised under German procedural law (examples of such situations include where the respondent was not served properly, or where the foreign judgment is irreconcilable with German public policy). Germany is also a signatory to the Geneva Convention, which, as noted above, limits the application of Article V(1)(e) of the New York Convention in certain circumstances.

In conclusion, it appears unlikely that there will be consensus on this issue in Europe (or, indeed, worldwide) any time soon. In the meantime, therefore, litigants like Mr Maximov will have to hope that if their award is set aside by the national courts in the country in which the award was made that their counterparty has assets in a jurisdiction such as France or the Netherlands that may still permit enforcement of the award.

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The China International Economic and Trade Arbitration Commission (“CIETAC“) has recently published its revised Arbitration Rules, which will come into force on 1 May 2012 (the “2012 Rules“). This is the seventh revision of the CIETAC Rules since they were first published in 1956. Whilst the majority of the changes in the 2012 Rules are aimed at clarifying existing practice, a number of the developments may have a significant impact on the conduct of CIETAC proceedings in the future.

The publication of the 2012 Rules comes at a time when CIETAC’s influence is perhaps greater than it has ever been. Whilst many alternatives exist, CIETAC maintains a dominant position in China, where PRC law restricts offshore arbitration in certain circumstances. Furthermore, even where offshore arbitration is available, there is an increasing trend amongst PRC parties to seek to negotiate CIETAC clauses (with a Mainland seat) in their international contracts. As explained further below, the new rules will allow CIETAC to increase its influence still further, providing for the administration of proceedings outside of Mainland China for the first time, and purporting to allow CIETAC to administer proceedings brought under the rules of other arbitral institutions.

Some of the major amendments include:

1. Arbitral tribunals empowered to grant interim measures in certain circumstances

Under the PRC Arbitration Law and the PRC Civil Procedure Law, the power to grant conservatory measures – including orders for the preservation of property or the protection of evidence – is reserved to the competent Chinese court. The current position under the CIETAC Rules, therefore, which is reflected in Article 21.1 of the 2012 Rules, is that, wherever a party applies for conservatory measures pursuant to the laws of the PRC, “the secretariat of CIETAC shall forward the party’s application to the competent court designated by that party in accordance with the law“.

Under Article 21.2 of the 2012 Rules, however, an arbitral tribunal may also now order “any interim measure it deems necessary or proper in accordance with the applicable law“. This provision will apply, for example, in any CIETAC arbitration seated outside of Mainland China where the law of the seat permits arbitral tribunals to grant interim measures (such as in Hong Kong, where CIETAC has already announced plans to establish a new sub-commission later this year). It is also possible that Article 21.2 will apply to arbitrations in the Mainland wherever the type of interim relief sought falls outside of the exclusive jurisdiction of the Chinese Courts. It remains to be seen, however, whether Article 21.2 will be invoked in Mainland arbitration proceedings and, if so, whether any interim measures granted by an Arbitral Tribunal can be enforced in practice.

2. Expert witnesses required to give oral evidence if called to do so by the Arbitral Tribunal

One feature of CIETAC arbitration which has attracted plaudits and criticism in equal measure is the limited use of witness evidence in some cases. Both the existing and new CIETAC Rules afford a broad discretion to the Arbitral Tribunal to conduct the proceedings “in any way that it deems appropriate“. Article 42.3 of the 2012 Rules, however, now stipulates that expert witnesses must participate in any oral hearing and “give explanations” on their written reports if called to do so by the Tribunal. There is no similar provision for factual witnesses, but the new rules may nevertheless be of assistance in cases where the examination of experts would otherwise be limited.

3. New rules on consolidation

Currently, the CIETAC Rules make no provision for the consolidation of parallel proceedings dealing with related issues (whether between the same parties, or, for example, multiple parties under a suite of related contracts). The 2012 Rules now provide a mechanism for parallel proceedings to be consolidated into a single arbitration.

To some extent, the new CIETAC Rules mirror the provisions of the recently revised ICC Rules, which also contain detailed provisions on consolidation. Under both sets of rules, for example, consolidation will only be possible with the consent of all parties (Article 17.1 of the 2012 Rules and Article 10 of the ICC Rules). Equally, under both sets of rules, the decision as to whether to consolidate the proceedings will be taken by the institution rather than the Arbitral Tribunal. Unlike the ICC Rules, however, which provide clear guidance on the criteria which must be satisfied before any application for consolidation will be granted (Article 10, ICC Rules), the 2012 Rules provide a broad discretion to the CIETAC to take into account “any factors it considers relevant” in making the decision (Article 17.2). This may include: (i) whether all of the claims are made under the same arbitration agreement; (ii) whether the arbitrations are between the same parties; and (iii) whether one or more arbitrators have been nominated or appointed in the arbitrations (although this list is non-exhaustive). The introduction of consolidation provisions is to be welcomed: it can prove particularly useful in complex disputes involving multiple parties or multiple contracts. Users of CIETAC arbitration will therefore watch with interest to see how the institution exercises its discretion under the new Rules moving forward.

4. New rules for determining the seat of arbitration

Under the current Rules, where parties have not agreed on the seat of arbitration, it is deemed to be the city where CIETAC (or any of its sub-commissions) is located, namely a place inside Mainland China. The 2012 Rules now allow CIETAC to decide that the seat shall be a city other than the location of CIETAC (or any of its sub-commissions), which could be a city outside Mainland China (Article 7.2).

This is a significant change, at least on paper, given that the seat determines both the law governing the arbitration procedure and the courts which will retain supervisory jurisdiction over the arbitration. It remains to be seen, however, how often CIETAC will exercise its new discretion in favour of a seat outside of Mainland China.

It is worth noting, however, that arbitration outside of Mainland China is only permitted for “foreign-related” disputes. Whether a dispute is “foreign-related” is therefore a key question. The Supreme People’s Court has published two judicial interpretations which indicate that disputes with one or more of the following three elements will be considered as “foreign-related” (and it should be noted that Hong Kong is deemed a “foreign” jurisdiction for these purposes): (i) at least one of the parties is “foreign“; (ii) the subject matter of the contract is or will be wholly or partly outside Mainland China; and (iii) there are other legally relevant facts “as to occurrence, modification or termination of civil rights and obligations” which occurred outside Mainland China.

5. Broader provisions on the language of the arbitration

Under the current Rules, in the absence of party agreement on the language of the arbitration, the arbitration must be conducted in Chinese. The 2012 Rules allow CIETAC to determine that the language of arbitration shall be “any other language… having regard to the circumstances of the case” (Article 71.1). This is a welcome development, particularly for disputes where all of the relevant documents (including the underlying contract) may have been written in a language other than Chinese. As with the other changes to the rules, however, only time will tell how often this discretion is invoked in practice.

6. Default provision for administration by CIETAC Beijing

Unlike many other arbitral institutions, CIETAC proceedings are administered by different “sub-commissions“, located in various cities in Mainland China (and which will soon include a sub-commission in Hong Kong). Parties are advised to stipulate in their arbitration agreement which particular sub-commission they wish to administer their dispute. Previously, where the clause did not include any such designation, the party commencing proceedings was entitled to express a particular preference. The other party, however, had the right to object, which would occasionally cause delay as parties would often prefer for the dispute to be administered by different entities. The 2012 Rules, therefore, provide that if a CIETAC arbitration clause does not specify a particular sub- commission, CIETAC Beijing will administer the arbitration (Article 2.6). The new provision is welcome, and serves as a useful reminder that it is important to state the relevant CIETAC entity expressly and in full when drafting a CIETAC clause (and in this regard it is important to refer to the relevant sub-commission explicitly; a simple reference to “CIETAC arbitration in Shanghai” may not be enough and, under the 2012 Rules, may lead to the dispute being administered by CIETAC Beijing).

7. Use of other arbitration rules in CIETAC administered arbitrations

One potentially controversial development in the 2012 Rules concerns Article 4.3, which provides that: “where the parties agree to refer their dispute to CIETAC for arbitration but have agreed on … the application of other arbitration rules” CIETAC “shall perform the relevant administrative duties“. In other words, CIETAC will not only administer ad hoc arbitrations under, for example, the UNICTRAL Rules, but will also administer proceedings commenced under the rules of other arbitral institutions. This potentially brings CIETAC into conflict with, for example, the ICC, which has recently amended its rules to make clear that only the ICC Court is authorised to administer ICC arbitration proceedings (Article 1(2) ICC Rules). It is best practice, in any event, to avoid arbitration clauses which seek to allow one arbitral institution to administer proceedings brought under the rules of another institution. This may not only lead to uncertainty in the conduct of the proceedings, but can also expose the award to challenge (as evidenced by the case of Insigma Technology Co Ltd v Alstom Technology Ltd [2009] SGCA 24, where SIAC purported to administer a dispute brought under the ICC Rules).

8. Changes to the appointment of arbitrators in multi-party disputes

CIETAC has also amended its rules regarding the appointment of arbitrators in multi-party cases. Under the new Rules, where there are multiple claimants and/or multiple respondents in any proceedings, and the multiple claimants and/or respondents are unable to jointly nominate an arbitrator, CIETAC will appoint all members of the tribunal and designate the presiding arbitrator (Article 27.3). Previously, CIETAC would only appoint the arbitrator for the party in default. The objective of the new rule – which also reflects current practice at the ICC and SIAC (amongst others) – is to minimise the risk of a challenge to the arbitral award on the grounds of unfair treatment (as occurred in the well-known decision of the French Cour de Cassation in Siemens AG/BKMI Industrienlagen GmBH v Dutco Construction Company).

9. New provisions regarding mediation in CIETAC arbitrations

Article 45.8 of the 2012 Rules allows CIETAC to “assist” with the settlement of disputes through the process of mediation part-way through arbitral proceedings, if requested to do so by the parties. It is not yet clear how this rule will operate in practice, however, as the new Rules do not provide any indication of who will be responsible for the mediation (i.e. whether this is to be conducted by the administrative staff of CIETAC or whether professional mediators will be engaged by CIETAC on the parties’ behalf).

It is common practice in China for arbitral tribunals to facilitate the settlement of disputes by way of mediation or conciliation. Under both the new and existing CIETAC Rules, arbitral tribunals have a wide discretion to conduct so-called ‘arb-med’ procedures in any manner they consider appropriate. Arb-med can be effective in helping parties to settle complex disputes at a relatively early stage, saving considerable time and costs as a consequence. Although many common law practitioners remain sceptical of such processes, they can work well in particular cases, albeit that an evaluative rather than facilitative mediation may be more appropriate depending on the circumstances of the dispute.

10. New criteria for the selection of arbitrators by the CIETAC Chairman

Article 28 of the 2012 Rules describes the criteria which the Chairman of CIETAC may take into consideration when appointing arbitrators in the absence of party agreement. In addition to the law of the contract and the place and language of the arbitration (and any other factors considered to be relevant), the Chairman will also be able to take into account the “nationalities of the parties“. The 2012 Rules do not, however, require that the presiding or sole arbitrator be of a different nationality to the parties. If this is desirable, therefore, parties should make express provision for this in their arbitration agreements.

11. Increased threshold for CIETAC’s summary procedure

Under the existing CIETAC Rules, parties may apply for a “summary procedure” (effectively a form of fast-track arbitration) if the amount in dispute falls below a certain threshold (currently RMB 500,000). Cases heard under the summary procedure will be determined by a sole arbitrator unless otherwise agreed by parties and the time limit for rendering an award is 3 months from the constitution of the tribunal, as opposed to 6 months under the standard procedure.

Under the 2012 Rules, the relevant threshold for the summary procedure has been increased to RMB 2 million. Furthermore, if the amount in dispute later exceeds the threshold because of, for example, amendments to claims or counterclaims, the summary procedure will continue to apply unless otherwise agreed by the parties. This marks a departure from the existing Rules, where cases exceeding the RMB 500,000 threshold would automatically be transferred to the standard procedure unless otherwise agreed.

Conclusion

The changes introduced with the 2012 Rules seek to address the growing complexity of contemporary arbitration proceedings, affording parties greater autonomy and flexibility in some respects such as more freedom for parties to agree on the seat and language of arbitration, whilst also codifying and clarifying several important aspects of CIETAC’s existing practice. The new Rules reflect CIETAC’s ambition and its desire to compete with other major international arbitration institutions, all of which have witnessed a significant increase in China-related business over recent years.

Only time will tell how the new provisions will be applied in practice. Whilst many of the changes are welcome, it remains important to draft CIETAC arbitration clauses carefully. Amongst other things, it is important to make express provision for the language of the arbitration and the CIETAC sub-commission which will administer the proceedings (preferably Beijing or Shanghai, which have more experienced case administrators). In cases involving non-Chinese parties, it is also helpful to provide expressly that the sole arbitrator or chairman be of a nationality different from the parties and that the parties be permitted to appoint arbitrators from outside of the CIETAC panel.

With thanks for invaluable contributions to May Tai, Jessica Fei and Weina Ye (Herbert Smith, Beijing), Simon Chapman (Herbert Smith, Hong Kong) and Tracy Wu (Herbert Smith, Shanghai)

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In 1961, three years after the adoption of the New York Convention, the European Convention on International Commercial Arbitration was adopted in Geneva (the Geneva Convention). At the time, the Geneva Convention was noteworthy as being the first international instrument to refer to “international commercial arbitration” by name. Today, however, many practitioners give little consideration to the Geneva Convention and consider it to be of no more than academic interest. The likely explanation for this position is the Geneva Convention’s limited scope of application, in particular the fact that its application depends not only on both the state of the award’s origin and the state of enforcement being signatories, but also requires that all parties to an arbitration agreement must have their place of residence or seat in a contracting state. This is a particular problem given the fact that the Geneva Convention has only been ratified by 31 states. Indeed, while the signatories include many EU states and several non-EU members such as Russia, notable absentees include Switzerland, Sweden and the UK (a full list of signatories is set out the end of this blog). Nonetheless, as a recent decision from the Arbitrazh Court of Kemerovo Oblast in Siberia demonstrates, should the relevant factors align so that the Geneva Convention is triggered, it can be a useful piece of legislation, particularly in relation to enforcement of arbitral awards.

The Geneva Convention regulates issues such as the appointment of arbitrators (Article IV), objections to jurisdiction (Article V), and the applicable law (Article VII). However, it is the Geneva Convention’s provisions in relation to enforcement that are its most prominent feature. In particular, Article IX(2) of the Geneva Convention which limits the application of Article V(1)(e) of the New York Convention.

Article V(1)(e) of the New York Convention provides that recognition and enforcement of an award may be refused if the award has been set aside in the country in which it is made. However, Article IX(2) of the Geneva Convention provides that the fact the award has been set aside will only be relevant if the reason it was set aside was one of an exhaustive list of reasons set out in Article IX(1) of the Geneva Convention. The list of reasons in Article IX(1) of the Geneva Convention essentially mirror the grounds set out in Article (V)(1)(a) to (d) of the New York Convention (party incapacity; lack of notice and a right to be heard; issues beyond the scope of the arbitration agreement; and irregularity in the composition of the tribunal or the procedure). Notably, however, the exceptions set out in Article V(2) of the New York Convention do not appear in Article XI(1) of the Geneva Convention (namely: (i) lack of arbitrability; and (ii) public policy). Therefore, if an award has been set aside in the country of origin on the basis of these reasons (or, indeed, any other reason not set out in Article IX(1) of the Geneva Convention), the enforcing state’s courts may not refuse enforcement of the award on this basis.

Despite the limitations imposed by Article XI of the Geneva Convention, it is important to note that an enforcing state that is party to the New York Convention and the Geneva Convention can still refuse to enforce should the laws of the enforcing state provide that the subject matter of the dispute cannot be resolved by arbitration, or that enforcement would be contrary to public policy. Rather, the limiting factor in the Geneva Convention is that unless an award was set aside in the country of the arbitration for one of the reasons listed in Article IX(1), then the fact it was set aside cannot be used as a reason to refuse enforcement.

There are also two other notable features of the Geneva Convention. First, the Geneva Convention explicitly provides that “legal persons of public law” can validly conclude arbitration agreements (Article II). The term “legal persons of public law” has a wide scope and includes public corporations, the state itself and any of its independent state agencies as well as any federal states. This provision overrides any contradictory law within the home state’s jurisdiction, although it is possible for contracting states to make a reservation on this issue (to date, only Belgium has done so).

Second, the Geneva Convention contains provisions that may help overcome the problem of defective/pathological arbitration agreements (Article IV). In particular, the Geneva Convention provides a mechanism for determining certain details of ambiguous and unclear arbitration agreements, including: (i) whether the parties to an arbitration agreement have to refer their dispute to ad-hoc or institutional arbitration; and (ii) as regards institutional arbitration, which institution a dispute must be referred to.

Nonetheless, as set out at the beginning of this blog, the significant limitation of the Geneva Convention is the fact that its application depends not only on both the state of the award’s origin and the state of enforcement being signatories, but also that all parties to an arbitration agreement must have their place of residence or seat in a contracting state. Coupled with the fact that the Geneva Convention has been ratified by only 31 states, the Geneva Convention’s application is, in reality, severely limited.

However, on 20 July this year, the Arbitrazh Court of Kemerovo Oblast in Siberia relied on the Geneva Convention to recognise a partial ICC award that had been set aside in the country of the seat of the arbitration (Turkey). The decision is a timely reminder of the potential benefits of the Geneva Convention in promoting the enforcement of arbitral awards should all the relevant factors necessary to trigger the Geneva Convention apply.

Ciments Francais, a French company, Sibirskiy Cement, a Russian company, and Cimento Istanbul, a Turkish company, signed an SPA in 2008 under which Sibirskiy Cement undertook to buy shares in various Turkish companies controlled by Ciments Français. Sibersky paid a €50 million advance. The deal fell through and Ciments Français filed for arbitration under the ICC Rules with its seat in Istanbul. The tribunal rendered a partial award which declared that the agreement was valid and Clements Français was entitled to retain the €50 million advance.

The award was subsequently set aside by a Turkish court on three grounds set out in the 2001 Turkish arbitration law. These grounds were: (i) that the arbitrators exceeded their authority by ruling on matters that fell outside the scope of the arbitration; (ii) that the case overran the time limits in the ICC Rules; and (iii) that the award violated Turkish public policy.

Despite the Turkish court ruling, Ciments Français applied to the Arbitrazh Court for recognition of the partial award. Under Article 13(4) of the Arbitrazh Procedure Code of the Russian Federation, if an international treaty signed by the Russian Federation establishes rules other than those which are provided for by the law, the Arbitrazh Court shall apply those rules of the international treaty. In this scenario, the two relevant treaties were the New York Convention and the Geneva Convention.

As set out above, under Article IX(2) of the Geneva Convention, where states are party to both the New York Convention and the Geneva Convention, the provisions of the Geneva Convention regarding recognition and enforcement of awards that have been set aside will prevail. Accordingly, the Arbitrazh Court concluded that none of the grounds for setting aside the award were present in Article IX(I) of the Geneva Convention. It therefore found in favour of Ciments Français and recognised the partial award.

The decision is significant for two main reasons. First, it is the first known instance where a Russian court has agreed to recognise an ICC award which has been annulled at the place of arbitration. This brings Russia (historically a jurisdiction that is perceived as hostile to international arbitration) into line with a select number of jurisdictions which have done so (notably France and the Netherlands). While the decision does not go as far as the French Hilmarton and Putrabali decisions, or the Dutch Yukos decision, it is nevertheless significant as it demonstrates that the Russian courts take the view that local standards of annulment at the place of arbitration shall not prevail if they are contrary to the applicable international standards – this is a very arbitration friendly position.

Second, the decision provides a rare examination of the interrelationship between the New York Convention and the Geneva Convention. It demonstrates that despite the Geneva Convention’s limitations, it can be a powerful tool to be used in enforcement proceedings should circumstances dictate that it applies. However, at the same time, the decision also highlights a notable disparity between the Geneva Convention and the New York Convention.

Mike McClure, Herbert Smith Moscow

The following states are signatories to the Geneva Convention: Albania, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Burkina Faso, Croatia, Cuba, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Kazakhstan, Latvia, Luxembourg, Macedonia, Moldova, Montenegro, Poland, Romania, the Russia Federation, Serbia, Slovakia, Slovenia, Turkey and Ukraine.

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by Justin D’Agostino

In a landmark provisional judgment in Democratic Republic of the Congo v. FG Hemisphere Associates FACV Nos. 5, 6 & 7 of 2010, the Hong Kong Court of Final Appeal (CFA) has held by a majority of 3:2 that absolute sovereign immunity applies in Hong Kong, with no exception for purely commercial transactions or assets. Taken with the judgment of the Hong Kong Court of First Instance (CFI) in Intraline Resources SDN BHD v. The Owners of the Ship or Vessel “Hua Tian Long” HCAJ 59 of 2008 in relation to crown immunity in April 2010, the CFA’s judgment means that both sovereign immunity and crown immunity are absolute under the law of Hong Kong. The CFA also confirmed that immunity cannot be waived through a pre-dispute contractual waiver, with important consequences for enforcement against State assets located in Hong Kong. However, and whilst the judgment raises a number of interesting political and constitutional issues, it should not affect the choice of Hong Kong as a leading seat of arbitration when contracting with States and State entities, particularly in PRC-related contracts. In this blog, we take a look at the practical implications of this important judgment, including its impact on arbitral proceedings seated in Hong Kong and potential risks when seeking enforcement against State assets situated in Hong Kong.

Sovereign immunity is premised upon the principle that the courts of one State may not assume jurisdiction over another State without consent (i.e. unless sovereign immunity is validly waived in accordance with the principles discussed below). Accordingly, sovereign immunity in the Hong Kong context will be relevant where the counterparty is a State other than the PRC or a non-PRC State entity. Crown immunity, on the other hand, is premised upon the principle that the courts of a State may not assume jurisdiction over that State (the crown) without its consent. Accordingly, in Hong Kong, crown immunity will be relevant if the counterparty is the PRC or a PRC State entity. (Crown immunity does not apply to the Government of the Hong Kong SAR, against which actions can be brought under the regime set out in the Crown Proceedings Ordinance (Cap. 300)).

It is now clear that both sovereign immunity and crown immunity are absolute under the law of Hong Kong. There is no exception for transactions and assets which are of a purely commercial rather than a sovereign nature (in contrast to the “restrictive” doctrine of sovereign immunity which is applied by many jurisdictions). An entity entitled to immunity will be able to assert it in all transactions and in respect of all assets, regardless of their commercial or sovereign character. Whilst the position in relation to sovereign immunity is technically provisional pending the consideration by the Standing Committee of the National People’s Congress (SCNPC) of certain questions referred to it by the CFA under Hong Kong’s Basic Law, it seems likely that the interpretation to be rendered by the SCNPC will endorse the overall tenor of the CFA’s provisional judgment.

The CFA in FG Hemisphere affirmed the earlier findings of the Court of Appeal (CA) in relation to waiver of sovereign immunity, holding that any waiver must be express and “in the face of the court” in order to be effective. In practice, this means that the waiver must be made at the time the court is to exercise jurisdiction. Pre-dispute contractual provisions, such as a Hong Kong court jurisdiction clause or an express waiver clause, will not, therefore, suffice to constitute a waiver of immunity. Based upon the judgment of the CFI in Intraline, it appears likely that the same principles regarding waiver will apply to crown immunity as to sovereign immunity at any stage at which the doctrine may be invoked. Where a party is dealing with a State counterparty, it is therefore advisable not to adopt a Hong Kong court jurisdiction clause – although arbitration, including in Hong Kong, will be a viable option, as discussed below. In addition, it would be prudent not to place reliance upon express waiver of immunity clauses, although these should still be included in contracts with State counterparties wherever possible, since they will be effective in many other jurisdictions. Identifying whether or not an entity is part of the State or the crown, and therefore entitled to immunity, may not always be straightforward, and it may be necessary to seek specific advice on a case-by-case basis.

The question of sovereign or crown immunity, and therefore of waiver, does not, strictly speaking, arise in relation to the jurisdiction of an arbitral Tribunal. Arbitration is a consensual process derived from a private contract between the parties, and the authority of the arbitral Tribunal flows from that contract. The adjudication of a dispute by an arbitral Tribunal does not, therefore, involve the exercise of jurisdiction by the courts of a State over any State, whether their own State (in the case of crown immunity) or a foreign State (in the case of sovereign immunity). As the CFA stated in FG Hemisphere, “when a State enters into an arbitration agreement with a private individual or company, that act does not constitute a submission to any other State’s jurisdiction. It involves merely the assumption of contractual obligations vis-à-vis the other party to the agreement.” Therefore, no immunity will be engaged by the assumption of jurisdiction by an arbitral Tribunal. It is therefore strictly a misnomer to refer to an arbitration clause as constituting an implied waiver of immunity from the arbitration proceedings themselves, although they are nevertheless commonly characterised in this way (including, for example, in the judgment of the CA). What is clear is that sovereign and crown immunity will not apply to the arbitration proceedings themselves. In this regard, section 34 of Hong Kong’s new Arbitration Ordinance (Cap. 609) expressly preserves the principle of “kompetenz-kompetenz”, which holds that it is for the arbitral Tribunal (and not, for example, the courts of the seat) to rule upon its own jurisdiction.

Although the CFA did not itself express an opinion on the question of whether or not an arbitration clause will amount to an implied waiver of the supervisory jurisdiction of the courts of Hong Kong over an arbitration seated in Hong Kong or otherwise, it cited a leading work on State immunity by Lady Hazel Fox CMG QC, an eminent commentator on this area, which concludes that “the exception for arbitration agreements operates… to remove state immunity from the first stage of arbitration in which the national courts exercise supervisory powers.” That conclusion had itself been quoted and approved (albeit in obiter remarks) by the CA, an endorsement which was not disturbed by the judgment of the CFA. It is therefore strongly arguable that the law of Hong Kong accords with customary international law on this issue and an arbitration clause will amount to an implied waiver of immunity in respect of the supervisory jurisdiction of the Hong Kong courts. Furthermore, court proceedings in support of arbitration are relatively rare in practice, and most arbitrations proceed from beginning to end without requiring the input of domestic courts. Moreover, in several important aspects of arbitral procedure, Hong Kong’s new Arbitration Ordinance (Cap. 609) shifts responsibility for functions which have traditionally been part of the supervisory role of the courts to the Hong Kong International Arbitration Centre (HKIAC) (for example, in relation to determining the number of arbitrators, appointing arbitrators and appointing mediators), further narrowing the circumstances in which it will be necessary to invoke the supervisory jurisdiction of the courts.

Whilst there is, of course, an unquantifiable risk that a State counterparty might take this point in any proceedings before the Hong Kong courts in support of an arbitration, Hong Kong remains a very attractive seat. This is particularly so in relation to PRC-related contracts, since Hong Kong is a readily acceptable venue for PRC counterparties who may otherwise be reluctant to agree an offshore seat. In practice, therefore, the judgments of the CFA in FG Hemisphere and the CFI in Intraline should not affect the choice of Hong Kong as a seat for arbitration.

The most significant impact of the FG Hemisphere and Intraline cases is in relation to enforcement and execution against assets belonging to a State or a State entity located in Hong Kong. The CFA confirmed in FG Hemisphere that an arbitration clause will not operate as an implied waiver of immunity either from enforcement proceedings in the Hong Kong courts or from execution or attachment against assets. In addition, because any effective waiver of immunity must be made “in the face of the court” , an express waiver clause will not be effective to waive immunity in respect of enforcement and execution either. The risk posed by immunity in respect of enforcement and execution will be relevant where State assets against which enforcement might be sought are located in Hong Kong, and particularly in cases in which they are the only such assets of the relevant State or State entity. However, the position will be the same regardless of the jurisdiction in which the relevant arbitral Award or court judgment was rendered. Accordingly, whilst immunity in respect of enforcement and execution is an important issue of which to be aware, it should not affect the choice of Hong Kong as a seat of arbitration. In addition, the combined effect of the FG Hemisphere and Intraline judgments upon dispute resolution in Hong Kong should not be overstated: the issue of sovereign or crown immunity will only apply in the case of contracts with States and State entities, and not those with purely commercial counterparties. With a modern arbitration regime under the new Arbitration Ordinance (Cap. 609), one of the leading arbitral institutions in the HKIAC, and reliable, supportive courts, Hong Kong continues to be an attractive venue for arbitration – particularly when dealing with PRC counterparties.

Justin D’Agostino
Partner
Herbert Smith, Hong Kong

Martin Wallace
Registered Foreign Lawyer
Herbert Smith, Hong Kong

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by Justin D’Agostino

The new Hong Kong Arbitration Ordinance (Cap. 609) (the “Ordinance”) comes into effect today, having been approved by the Hong Kong Legislative Council at the end of last year. The Ordinance represents the culmination of many years of discussion and consultation and marks a significant milestone in the development of Hong Kong as a world-class international arbitration centre. Its stated intention is to facilitate the “fair and speedy” resolution of disputes, providing for maximum party autonomy and minimal court intervention (Section 3). In that respect, the Ordinance draws heavily on the internationally-recognised and accepted framework of the UNCITRAL Model Law (the “Model Law”), with certain modifications (and additions) which reflect the specific features of arbitration in the region.

Overview

The new Ordinance will be of considerable interest (and importance) to all parties and practitioners dealing with or considering arbitration in Hong Kong. In this blog we provide a brief overview of certain key features of the new regime including:

1. the abolition of the distinction between ‘domestic’ and ‘international’ arbitration (and the transitional provisions which apply in the context of domestic proceedings);

2. the influence of the Model Law;

3. the availability of interim measures (including the basis on which the Hong Kong Courts may grant interim measures in support of foreign arbitral proceedings);

4. the new codified obligation of confidentiality;

5. the promotion of alternative dispute resolution (including the specific provisions of the Ordinance relating to so-called ‘med-arb’ and ‘arb-med’); and

6. the particular provisions which apply with regard to the enforcement of arbitral awards (including awards rendered in Mainland China).

1. Abolition of the distinction between domestic and international proceedings

One of the most significant changes introduced by the new legislation, and one which will be celebrated by most practitioners and parties alike, is the abolition of the dual regime for ‘international’ and ‘domestic’ arbitrations. Under the previous legislation, and in keeping with the practice adopted in many other major arbitral centres (including Singapore), a distinction was drawn between ‘international’ and ‘domestic’ arbitrations, with different provisions of the previous Arbitration Ordinance (Cap. 341) applying accordingly.

In practice, what this new reform means is that practitioners no longer need concern themselves with analysing the characteristics of the parties and the dispute in order to work out which particular provisions apply to any given arbitration. Instead, the intention is that all arbitrations in Hong Kong will be governed by a single unified regime based on the Model Law, and the drafting of arbitration agreements seated in Hong Kong need not differentiate international from domestic proceedings.

There is a caveat to this. Under pressure from certain sectors (most notably the construction industry), Hong Kong legislators chose to retain the key features of the ‘domestic’ regime in a series of ‘opt-in’ provisions set out in Schedule 2 of the new Ordinance. These will apply in place of certain of the Model Law-based provisions, where parties so choose. These specialised ‘opt-in’ provisions include, for example: (i) the ability of the courts to determine preliminary points of law; (ii) appeals to the courts allowed on questions of law arising from arbitral awards; (iii) challenges to awards permitted on grounds of serious irregularity; and (iv) provision for the consolidation of arbitrations or hearings. These features may, of course, be of use to many users of arbitration depending on their particular circumstances, but a distinguishing feature of the Hong Kong legislation (and one which sets it apart from other jurisdictions, notably England & Wales) is that these are ‘opt-in’ provisions; parties will only be subject to the greater court intervention prescribed under Schedule 2 if they expressly provide for this in their arbitration agreement.

A further caveat which is important to note – albeit one which is transitional in nature – is that the various ‘opt-in’ provisions set out in Schedule 2 will apply automatically to all arbitration agreements which provide for ‘domestic arbitration’ and which are entered into before or within six years of the new Ordinance coming into effect. In the longer term, however, it is anticipated that parties in the construction industry will be the primary users of the ‘opt-in’ system, albeit that other international parties may choose to avail themselves of this regime should they wish.

2. The influence of the Model Law

As noted above, the drafters of the new Ordinance have opted to rely heavily on the internationally-recognised and accepted framework of the Model Law. The new Ordinance generally follows the Model Law’s headings and chapters, which, in turn, mirror the chronological steps of a typical arbitration procedure. The Ordinance states clearly which features of the Model Law have been adopted (whether in whole or in part) and which aspects of the Ordinance are unique to Hong Kong.

The fact that the Ordinance draws heavily on the Model Law is a positive development which reflects Hong Kong’s position as a leading centre for arbitration. The Model Law (which was last updated in 2006) establishes certain minimum standards for national arbitration legislation. Amongst other things, the Model Law describes the (limited) circumstances in which domestic courts should be permitted to intervene in the arbitral process, confirming that arbitral tribunals are empowered to grant a wide-range of interim measures and rule on their own jurisdiction (the principle of kompetenz-kompetenz). The Model Law also provides that parties should be free to agree upon the procedure of any arbitration (subject to certain fundamental safeguards) and provides an outline framework which can be adopted in the absence of agreement (including provision for what is to happen in the event of default by any party). These features can all be found in the new Hong Kong Ordinance.

It would not be correct, however, to suggest that the Ordinance follows the Model Law slavishly. In certain instances, the language of the Model Law has been modified in order to impose a slightly different standard. For example, Article 18 of the Model Law provides that parties should have a “full” opportunity to present their respective cases, whereas the equivalent provision in the Hong Kong Ordinance (Section 46) provides that parties should have a “reasonable” opportunity to do so. In other instances, the provisions of the Model Law have been replaced entirely with bespoke clauses which reflect the peculiarities of arbitration in the region (the regime for the enforcement of arbitral awards being one such example, as described in greater detail below). Generally speaking, however, Hong Kong has adopted many of the salient features of the Model Law with little or no amendment. In that respect, the new Ordinance can be said to reflect best international practice.

3. Interim measures

One of the central themes underpinning the new legislation is the notion of minimal court intervention, with provisions of the new Ordinance vesting as much power as possible with arbitral tribunals. Adopting the Model Law’s provisions regarding interim measures, arbitral tribunals seated in Hong Kong are able to grant temporary measures, for example, to preserve assets or evidence, or to maintain or restore the status quo – and the Ordinance expressly confirms that this power includes the granting of injunctions. In addition, and again in line with the Model Law, Hong Kong arbitral tribunals can award preliminary orders preventing parties from frustrating any interim measure.

Separately, arbitral tribunals seated in Hong Kong are empowered inter alia to award security for costs and direct the discovery of documents or delivery of interrogatories – retaining the ‘general powers’ of an arbitral tribunal provided under the previous regime. Moreover, and an important feature of the new legislation, arbitral tribunals may make peremptory orders, which in other jurisdictions are a useful but underused resource of arbitral tribunals, specifying time limits for parties’ compliance in order to assist with the enforcement of their orders or directions.

Section 45 of the Ordinance also empowers the Hong Kong Courts to grant certain interim measures in support of arbitral proceedings – whether seated in Hong Kong or not – albeit that the Courts may decline to grant such relief if it is considered more appropriate for the interim measure sought to be granted by the arbitral tribunal. Furthermore, the Hong Kong Courts may only grant interim measures in support of proceedings seated outside of Hong Kong if: (a) the arbitral proceedings are capable of giving rise to an arbitral award which may be enforced in Hong Kong; and (b) the interim measure sought belongs to a type or description of interim measure which may be granted in Hong Kong.

4. Confidentiality

A feature of the new legislation likely to prove attractive to many parties is the inclusion of express provisions in relation to confidentiality. Although confidentiality is often perceived as a major advantage of arbitration, it is not always guaranteed. In certain jurisdictions (including, for example, Singapore and England & Wales) an obligation of confidentiality is said to be ‘implied’ into the arbitration agreement between the parties, albeit that the precise boundaries of this obligation are somewhat uncertain. In other jurisdictions, notably Australia, the concept of imposing any obligation of confidentiality in arbitral proceedings by law has been rejected by the national courts.

The new Hong Kong Ordinance expressly prohibits parties from disclosing any information relating to the arbitral proceedings or the award, subject to the usual exceptions regarding disclosure to professional advisors or disclosure required by law. In addition, and marking another significant change from the previous regime, the default position under the new Ordinance is that court proceedings relating to arbitration are to be conducted in closed court. Parties with arbitrations seated in Hong Kong can therefore assume that duties of confidentiality will bind their proceedings without the need for any additional drafting in this regard.

5. Mediation

A further specialised feature of the new Ordinance, and one which has been borrowed and enhanced from the old regime, is that express provision is made for both ‘med-arb’ (where a mediator is appointed to try and resolve the dispute before arbitral proceedings are commenced) and ‘arb-med’ (where the arbitral tribunal assumes the role of mediator part way through the proceedings in an effort to bring about an early settlement). These provisions follow the spirit of the recent Civil Justice Reform in Hong Kong in promoting ADR (at present, if a litigant in the Hong Kong courts fails unreasonably to engage in mediation, they face potentially adverse costs consequences) and set Hong Kong apart from other leading arbitration centres.

Under the Ordinance, a member of an arbitral tribunal is permitted to serve as a mediator after arbitration proceedings have begun, provided that all parties give their written consent. The Ordinance provides that, in these circumstances, the proceedings are to be stayed in order to afford the mediation the maximum chance of success – although if the mediation fails, the arbitrator-mediator is required to disclose to all parties any confidential information obtained during the mediation which he considers to be “material to the arbitral proceedings”. This latter requirement may deter some parties from engaging in frank discussions during any mediation (particularly during any caucus sessions with the arbitrator-mediator), which may impede the effectiveness of the overall process. Furthermore, parties should also be wary of anything which might jeopardise the enforceability of a subsequent arbitral award; whilst the Ordinance states that the existence of the ‘arb-med’ process will not in itself give rise to a ground for challenge if the relevant provisions of the legislation are respected, recent case law from the Hong Kong Courts illustrates that awards may be set aside on grounds of public policy if the ‘arb-med’ process is conducted in such a manner as to create an impression of bias (Gao Haiyan v Keeneye Holdings Ltd [2011] HKEC 514).

6. Enforcement of arbitral awards

One final feature of the new Ordinance which is worth flagging concerns the regime for the enforcement of arbitral awards, which departs from the provisions of the Model Law in favour (largely) of the enforcement procedure established under the previous regime. The key point is that arbitral awards are enforceable in the same manner as a court judgment but leave of the court is required. Moreover, separate provisions in the new Ordinance distinguish between: (i) awards rendered in Mainland China; (ii) awards rendered in New York Convention states (referred to in the Ordinance as “Convention Awards”); and (iii) other awards (e.g. awards rendered in Taiwan). Whilst the evidentiary requirements are the same for all three categories of award (the party seeking enforcement must produce an original or certified copy of both the award and the underlying arbitration agreement), the rules which govern enforcement will depend on the place in which the award was rendered. For example, subject to certain limitations, awards rendered in Mainland China may not be enforced in Hong Kong if an application for enforcement is also outstanding on the Mainland (Section 93 of the Ordinance). These features illustrate that, whilst the Hong Kong Ordinance largely reflects international practice, there are certain aspects of the legislation which are tailored to the particular circumstances of the region.

Conclusion

Hong Kong is already a major centre for international arbitration in Asia. As the gateway to China, enjoying the rule of law and New York Convention signatory status, Hong Kong is a natural option for international parties looking to trade in the region. The reforms introduced by the new Ordinance, couple with the recently promulgated HKIAC Administered Arbitration Rules and the opening by the ICC of a branch of its Secretariat in Hong Kong, are likely to enhance further Hong Kong’s position as a major hub for dispute resolution in the Asia-Pacific region and as an important centre for international arbitration more generally.

Justin D’Agostino, Simon Chapman and Ula Cartwright-Finch
Herbert Smith

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