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University of Portsmouth,
for ITA

Over the last two decades the world has witnessed a spectacular growth of investor-state dispute resolution by arbitration (i.e. from a few dozen in 1992 shooting up to 514 cases by the end of 2012). But that trend could stall in the foreseeable future with the realization of the users that international arbitration (investor-state arbitration, in particular) is increasingly becoming formalized and akin to be ‘liti-arbitration’ or ‘arbitral litigation’, losing its fundamentals that make it attractive to the international business community. In the case of investor-state arbitration various issues have been raised with wider implications beyond the field of arbitration itself as concerns have been expressed about the role of arbitrators vis-à-vis the respondent state’s public interest in regulating various matters including environmental protection, low-carbon investments, social and human rights, etc.; dire economic consequences flowing from arbitrators’ decisions who lack in democratic legitimacy of a domestic or international judicial institution; and inconsistency in arbitral interpretation of investment treaty obligations, hence unpredictability in arbitral decisions on similar or identical issues. Added to this list of concerns may be the growing phenomenon of third-party funding of investor-state arbitration pushing up the costs and the increasing tendency of amicus briefs leading investor-state arbitration to be more confrontational and non-confidential.

The adverse impact of excessive investor-state arbitral awards has recently prompted some resource-rich Latin American countries such as Bolivia, Ecuador and Venezuela to withdraw from the ICSID and to intend to discard the existing BITs to which they are parties. Argentina has also threatened to do so. Australia has discarded investor-state arbitration in favour of its domestic courts. Various interest groups including the U.S. State Legislators have lately urged in their Open Letters the negotiators of the ongoing Trans-Pacific Partnership (TPP) to reject investor-state arbitration. One may wonder if there seems to be a progressive revolution in the field of investor-state dispute resolution.

In some recent ADR surveys in the USA, Europe and Asia-Pacific [e.g., Cornell/Pepperdine/CPR (Fortune 1000 corporations) (2011) , CPR survey (the Asia-Pacific Region) (2011) and IMI (International Corporate Users Survey) (January-March 2013) it is shown that as an alternative dispute resolution mechanism mediation is increasingly attracting more favourable support in business for various reasons such as cost control, efficiency in time management, privacy, confidentiality, preservation of relationship, informality and flexibility. The phenomenon is true at both domestic and international levels. One survey has noted that binding arbitration has reached its “tipping point” . It is also noteworthy that the settlement rate of investor-state disputes at ICSID before any final award is rendered is estimated approximately at 30%-40% percent. It points in the direction that there is a good prospect of investor-state dispute settlement by mediation which needs to be explored further.

In response to the growing desire to switch to non-arbitration ADR, namely mediation, well-known institutions such as the OECD and the IBA have taken the initiative to propagate such an alternative. Under the auspices of the OECD a series of symposia took place on investor-state mediation in the past few years and lately on 4 October 2012 the IBA adopted a set of rules on the subject entitled “IBA Rules for Investor-State Mediation” (hereinafter the IBA Mediation Rules). There is more to follow from various other sources, national and international, in the days ahead.

However, two principal issues may prove to be stumbling blocks for the progress of investor-state mediation, viz., (i) the failure to understand the type of mediation that is desirable in investor-state disputes; and (ii) the state authorities’ disinclination to mediation for palpable political risk (e.g. being blamed for bowing to the foreign party’s pressure or for any dubious deal, etc.) to be faced in their country. It has to be acknowledged that investor-state disputes are not the same as international commercial disputes nor are the mechanisms in which they are often settled. In the former there could be issues of public interest or the tax payers’ concern which is not the case in the latter.

In respect of investor-state dispute settlement it may not always be appropriate to conduct mediation in the same style as in international commercial disputes. There is a garden variety of mediation styles such as facilitative mediation, evaluative mediation, deal making mediation, deal mending mediation, transformative mediation, settlement mediation, expert advisory mediation, wise counsel mediation, and tradition-based mediation [See Nadja Alexander, “The Mediation Meta Model: Understanding Practice Around the World”, 26 Conflict Resol. Q. 97 (2008)]. Out of these varieties, as far as an investor-state dispute is concerned, regard must be had to the ones that cater for the accountability of dispute resolvers (state authority or representatives) to the tax payers. Evaluative mediation, which is often called ‘legal mediation’, may be closer to satisfying these requirements. Such mediation is right based and not interest based. In an evaluative mediation the third-party neutral looks at the disputing parties’ positional briefs and evaluates them objectively in light of his / her expertise to predict how they would fare in a legally binding decision or arbitration and accordingly makes suggestions to the parties (preferably individually in private) which accord with their legal rights and obligations, industry norms, or other objective social standards. It has, at least, a psychological effect on the concerned state representatives in terms of confidence-building that they stand upon some credible platform in respect of their negotiation with the foreign investor for dispute settlement. It may provide them with some legitimacy for their negotiation, hence a shield for deflecting any political criticism later on. It may be recalled that in the first ICSID conciliation case between Tesoro Petroleum Corporation and the Government of Trinidad and Tobago, the conciliator (Lord Wilberforce) conducted, in essence, evaluative mediation between the parties. The ICSID conciliation process thus differs from interest-based mediation (facilitative) but is closer to legal mediation as reflected in that case. However, only in a handful of cases (i.e. 6 cases so far) was the ICSID conciliation resorted to. The reasons for this least recourse to conciliation are often mentioned as: (i) inadequate publicity and efforts to popularize the ICSID conciliation mechanism; (ii) the ICSID conciliation process is unlike any traditional mediation (i.e. interest based); and (iii) there are fewer experts readily available for ICSID conciliation, etc. In order to redress these, the ICSID has lately entertained the idea of introducing the traditional style interest-based mediation in its dispute resolution system. However, the question remains whether traditional mediation should replace the ICSID conciliation mechanism (or evaluative mediation) for the settlement of investor-state disputes.

It is true that often evaluative mediation in certain circumstances may not lead to the resolution of a dispute because the stronger party as evaluated, be it the state / state entity or the foreign investor, could be less willing to give in. At this juncture comes the need for assisted negotiation by a mediator. Thus, the mediator who has evaluated the parties’ positions can assist the parties to reach a ‘win-win’ solution acceptable to both parties. Here is the crunch point! Having had their respective positions evaluated the disputing parties can look around to find out where their respective interests lie and can weigh and balance them to reach a solution themselves in which process the mediator can play a crucial facilitative role. For example, if the dispute is about environmental regulatory expropriation as the foreign investor’s cost of running the business runs excessively high for fulfilling the regulatory requirements, the state party might agree to extend the duration of the project by a reasonable number of years or by any other method to allow the foreign investor’s investment balance sheet in a longer term bearable. In an investment dispute various closely related but non-investment issues concerning labour, human rights, environment and climate change, etc., which investor-state arbitral tribunals tend to avoid somehow can be dealt with in mediation for the mutual benefit of the disputing parties.

Given the context of investor-state disputes that concerns public policy issues, state representatives’ accountability to the public or the tax payers, it may sound plausible that the mediator starts with the evaluation of the parties’ respective positions and then assists them to reach a solution to their disputes in their own terms. Thus, the mediator’s style could be described as evaluation-driven-facilitative mediation or evaluative-facilitative mediation (EFM). The parties need to provide in their contract the appropriate dispute mechanism in detail. However, the mediator needs to be cautious that throughout the process impartiality and confidentiality are maintained according to the parties’ wishes.

If mediation reaches an impasse, arbitration can be resorted to as a fallback (i.e. Med-Arb) with the same person as the mediator and arbitrator or a different person as the arbitrator as the parties might agree. It should be mentioned that this process should be a structured and sequential one, given the fact that the state party needs to get its position evaluated for its public accountability purposes (at least for its confidence’s sake) before it can explore an interest-based resolution (i.e. facilitative mediation) of the dispute with its counterparty.

It is noteworthy that the aforementioned IMI survey finds a wide support (in respect of dispute resolution generally) for evaluative mediation and for more proactive encouragement from arbitration tribunals and the courts to incorporate mediation into litigation and arbitration proceedings. Such a mechanism (Med-Arb) can be adopted by the disputing parties under the IBA Mediation Rules. Serious considerations may be given to include it in a new generation of bilateral investment treaties (BITs).

Last but not least, for credible and successful investor-state mediation, apart from the subject-matter expertise of the mediator along with other well-perceived qualities, the representation on the state-party side by its some heavyweight (professional or political) and popular figure in high-value or complex cases could be a plus.

More from our authors:

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

Herbert Smith Freehills LLP

The recent Rompetrol Group NV v Romania award provides rare guidance as to the requirements to be satisfied for a successful treaty claim arising from State conduct against individual company officers rather than the claimant investor itself. The investor claimed, inter alia, that the arrest, detention, criminal investigations and wire-tapping of its directors constituted State-sponsored harassment that breached BIT guarantees enjoyed by its investment. The Tribunal held that the State conduct directed against the company officers had to have a sufficiently close link to the investment or investor to fall within the zone of the treaty’s protection. The requisite connection was found in relation to certain elements of Romania’s conduct which amounted to a “pattern of disregard” for the rights of Rompetrol’s employees and constituted a breach of Rompetrol’s right to fair and equitable treatment. Rompetrol, however, failed to prove damages.

The award raises interesting questions regarding the balance between a State’s legitimate interests in tackling crime and the investor’s treaty rights. It also notes future tribunals’ likely sensitivity to allegations that the arbitration itself is being brought to deter a State from legitimate pursuit of criminal investigations.

Background

Rompetrol claimed that Romania had breached its obligations under Article 3(1) and 3(5) of the Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of The Netherlands and Romania (the “BIT”) to provide its investment in Rompetrol Rafinare SA (“RRC”) fair and equitable treatment, full protection and security and non-impairment. The claims arose from measures taken by Romanian anti-corruption and criminal prosecution authorities against two individuals, Mr Patriciu and Mr Stephenson, who directed the affairs of RRC, a company born through the privatisation of the State oil-refining industry after the fall of Ceausescu in 1989. Rompetrol alleged that the investigations, which included the arrest, detention, travel-ban and wire-tapping of Mr Patriciu, were politically and commercially motivated and breached the guarantees in the BIT. Romania’s response was that the investigations were a legitimate part of its implementation of the National Anti-Corruption Strategy that it had pursued in order to gain access to the European Union.

A requisite link between State conduct against individuals and the investor

The Tribunal emphasised the “special character” of this case given that the claims arose from measures directed against individuals linked to the investor rather than against the investor itself, noting that these cases were rare amongst reported awards. The individuals were not claimants under the BIT and their rights were personal and distinct from those of Rompetrol. As such, even if the alleged State-sponsored harassment of the individuals through an unlawful criminal investigation had breached the individuals’ personal rights, Rompetrol had to show that there was a connection between the State’s conduct against the individuals and State conduct against the investment itself in order for that conduct to qualify as a violation of the BIT protections. Rompetrol’s case would “[stand or fall] by whether it is able to make out its claim that the criminal investigations have breached the rights of [Rompetrol] itself” [para 151].

The Tribunal concluded that three kinds of actions could fall within the area of protection under the BIT: “(a) actions against the investor itself (or its investment); (b) action against the investor’s executives for their activity on behalf of the investor; and (c) action against the executives personally but with the intent to harm the investor” [para 200].

No co-ordinated campaign of harassment

The Tribunal recognised that its role was not “to pronounce on the rightness or wrongness of the pending criminal charges…” [para 174] but to determine whether the authorities’ conduct constituted a breach of the BIT guarantees. In so doing, the Tribunal examined whether the requisite link to the investment was present. The Tribunal did find that there had been “animus and hostility” towards Mr Patriciu on behalf of the prosecutorial officials and that this may have affected the authorities’ tactical approach [para 245 and 248]. As regards the detention and attempted imprisonment, the Tribunal accepted that there had been procedural irregularities but that it could not find “anything wrongful” in the prosecutor’s execution of its rights to apply for pre-trial detention [para 251].

In perhaps the clearest example of conduct that lacked sufficient connection to the investment, the Tribunal found that whilst the wire-tapping by the Romanian Intelligence Service had been devoid of the necessary threat to national security and that Mr Patriciu’s personal rights of privacy had been affected, there had been no harm to his business activities [para 260 – 261]. Overall there had been no co-ordinated campaign of harassment [para 276].

A legitimate expectation during criminal proceedings

Nevertheless, the Tribunal recognised that “a State may incur international responsibility for breaching its obligations under an investment treaty to accord fair and equitable treatment to a protected investor by a pattern of wrongful conduct during the course of a criminal investigation or prosecution, even where the investigation and prosecution are not themselves wrongful.” It asserted further provisos: (1) the pattern must be sufficiently serious and persistent that the interests of the investor must be affected; and (2) there must be a failure by the State to pay adequate regard to how those interests ought to be duly protected. In the Tribunal’s view, the legitimate expectations of a protected investor include the expectation that the State authorities will seek means to avoid unnecessary damage or at least to minimise or mitigate the adverse effects on the investment if the investor’s interests become entangled in the criminal process directly or indirectly [para 278].

It was on this point that Rompetrol obtained partial success. The Tribunal found that there had been a “pattern of disregard by the [prosecutorial and investigation agencies] for the procedural rights of [Rompetrol's] executives, and in particular for the likely and foreseeable effects on the interests of [Rompetrol] itself as a protected foreign investor”, as demonstrated by, inter alia, the procedural irregularities during the criminal investigation, the conduct of the prosecutors, and the arrest and attempted imprisonment of the executives.

A crucial element in establishing the State’s failure to pay adequate regard to the investment was the documentary evidence showing that the authorities “knew that the interests of [Rompetrol] stood directly or indirectly in the line of fire.” Indeed the prosecution’s request for Mr Patriciu’s detention referred directly to the investment arbitration and “the Dutch investor” i.e. Rompetrol.

Rompetrol however failed to show that Romania’s breach of the BIT guarantees had caused any actual economic loss and failed on in its claim for moral damages.

Conclusion

This award provides useful guidance on the treatment of a company’s officers that will likely be influential in other treaty cases. As noted by the Tribunal, “association with the management of a foreign investor or a foreign investment cannot serve to immunize individuals from the normal operation of the criminal law” [para 152]. However, in situations where political and commercial motives may be at play, investors would be wise to ensure that the State authorities are on notice regarding the investment and their duty to mitigate the adverse effects that might result from their enforcement activities.

More from our authors:

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

Herbert Smith Freehills LLP

An important issue for any business engaged in international transactions is the ability to obtain effective relief if it becomes involved in legal proceedings. A key benefit of international arbitration is the ability of successful parties to enforce awards across multiple jurisdictions, which is made easier because of the 1958 New York Convention on the Enforcement and Recognition of Foreign Arbitral Awards. However, special considerations apply where the party against whom enforcement is sought is a sovereign State or a State-owned corporation. Those considerations are particularly important because States may choose to rely on the doctrine of sovereign, or State, immunity to insulate their assets from enforcement.

Questions of sovereign immunity must be considered at two levels – in relation to (1) jurisdiction and (2) execution. With respect to immunity from jurisdiction, in most cases, the agreement to arbitrate constitutes a waiver of that immunity – both in relation to the arbitral proceedings themselves and any ancillary proceedings in the national courts. However, with respect to enforcement, often neither the arbitration agreement itself nor the New York and ICSID Convention constitute a waiver of the right to immunity from execution. As a result, the incidence and success rate of State parties seeking to resist arbitral awards is higher compared with awards made against commercial entities.

It is important for any business engaged in international transactions to consider the application of sovereign immunity in the jurisdictions in which they operate. The cases discussed below provide a snapshot of some of the recent activity in this area, demonstrating the significant variation in the recognition and application of the principles of sovereign immunity between jurisdictions.

1 Australia

The scope of sovereign immunity in Australia was recently considered by the High Court and Federal Court of Australia in proceedings concerning the Australian Competition and Consumer Commission (ACCC) and PT Garuda Indonesia Ltd (Garuda), an Indonesian state-owned entity. Under Australian law, foreign States and “separate entities” of foreign States are immune from the jurisdiction of the Australian courts, subject to a number of exceptions, including where the proceedings concern a commercial transaction, contract of employment or personal injury. “Separate entity” is defined under the Foreign State Immunities Act 1985 (Cth) (the Act) as an individual or body corporate that is an agency or instrumentality of the foreign State.

In 2009, the ACCC commenced proceedings against a number of airlines including Garuda. Garuda sought an order that the proceedings brought by the ACCC be dismissed or stayed, claiming sovereign immunity.
The key issues in the proceedings were:

• whether Garuda was a separate entity, which would entitle Garuda to invoke sovereign immunity; and
• whether the conduct alleged by the ACCC concerned a commercial transaction, which would prevent the application of principles of sovereign immunity.

The Full Court of the Federal Court held that Garuda was a separate entity. The Court considered that in order to determine whether an entity satisfies the separate entity definition, it must first be determined whether the entity is an agency or instrumentality of the foreign State. In relation to this question, “[t]he most relevant factor in determining whether a natural person or a corporation is an agency or instrumentality is whether that body is carrying out the foreign State’s functions or purposes.” Regard should be had to:

• the ownership and control of the entity;
• the functions performed by the entity, the foreign State’s purposes in supporting the entity; and
• the manner in which the entity conducts itself or its business.

In Garuda’s case, factors leading to the Court’s conclusion that it was a separate entity included Indonesia’s substantial shareholding (95.5%, with the remaining shares held by corporations controlled by the Indonesian Government) and the fact that all of Garuda’s shareholders were governed by Indonesian State ownership laws. By contrast, the Court held that Malaysian Airline System Berhad, another airline involved in the proceedings, did not meet the definition of separate entity, as it was a public, listed company with private shareholders.

Notwithstanding Garuda’s prima facie entitlement to claim sovereign immunity, the Full Court found that the conduct alleged by the ACCC fell within the “commercial transaction” exception, preventing Garuda from invoking the immunity. The Court considered that the term “commercial transaction” should be construed broadly and could extend to alleged breaches of competition law, including to commercial activities of an entity acting “in the manner of a private player within the market.”

The High Court affirmed the decision holding that nothing in the legislation limited the exception to private parties to the transaction or to proceedings concerning activity of a contractual nature.

2 France

In a series of related judgments, the French Supreme Court, the Cour de cassation, recently extended the application of particular rules relating to the scope of sovereign immunity in the context of an express waiver given by a State. The case built upon the principles enunciated in related proceedings in 2011, in which it was held that, for a waiver of sovereign immunity to extend to the diplomatic assets of a State, the waiver has to expressly and specifically provide for such.

In March 2013, the French Supreme Court considered the position where an entity sought to execute a judgment against non-diplomatic assets used for public purposes (monies owed by French companies to Argentina, constituted by tax and social revenues) in circumstances where Argentina had purportedly waived, in writing, its right to State immunity.

The Court held that a waiver in respect of public assets, as with assets used for diplomatic purposes, must be express and specific in describing the particular goods, or class of goods, in relation to which the waiver is granted. In making its decision, the Court relied on principles of customary international law, as reflected in the 2004 United Nations Convention on Jurisdictional Immunities of States and their Property.
Since the purported waiver was not express and specific, Argentina had not waived its immunity from execution of the relevant claims against those assets.

3 Singapore

The principles of sovereign immunity were also recently considered by the Singapore Court of Appeal in a case in which the Maldives Government and a company wholly-owned by the Maldives Government claimed that an injunction should not have been granted against them because it contravened principles of sovereign immunity.

Although the Court of Appeal set aside the injunction on grounds of balance of convenience, it rejected the claim for sovereign immunity and found that it had jurisdiction to grant an injunction. In reaching this conclusion, the Court of Appeal had particular regard to the fact that:

• the underlying agreement between the parties effectively contained a waiver of sovereign immunity; and
• the acts in question were not done in the exercise of the State’s sovereign power but, rather, the dispute was properly characterised as one of private law, to which private law remedies applied and, therefore, sovereign immunity was not available.

4 Germany

A recent German case considered whether the Government of Thailand was immune from the jurisdiction of German courts.

The relevant acts of the Thai Government which led to the dispute were properly characterised as sovereign, or public, in nature, rather than commercial dealings. Thailand could not, therefore, be prevented from relying on principles of sovereign immunity on that basis.

To determine whether the Thai Government could in fact invoke sovereign immunity, the Supreme Court then considered whether such immunity had been waived in a bilateral investment treaty (BIT) between Germany and Thailand.

The Court held that:

• a party will only be taken to have waived sovereign immunity where circumstances clearly evidence such an intention; and
• the fact that an initial arbitral award as to jurisdiction has not been appealed by a State party is not relevant to the question of waiver, nor will it prevent that party from claiming sovereign immunity in subsequent proceedings.

For the waiver in question to exist, the dealings between the parties must have been properly covered by the scope BIT and its arbitration clause. The case was remitted to a lower court to make this determination.

5 United Kingdom

Sovereign immunity was also considered in cases before United Kingdom courts last year. In one such case, the Privy Council considered whether La Generale des Carrieres et des Mines Sarl (Gecamines), a corporation owned by the Democratic Republic of Congo (DRC), was directly liable for debts which the DRC owed to F.G Hemisphere Associates LLC (Hemisphere). The primary question in relation to Gecamines was whether its juridical personality and its apparently separate commercial assets and business were so far lacking in substance and reality as to justify assimilating Gecamines and the State for all purposes.

In finding that Gecamines was not an organ of the State, the Privy Council held that there was a presumption that the State-owned corporation was a separate entity and that this presumption should only be displaced in “quite extreme circumstances”. Circumstances relevant to determining the separate entity question were considered in more detail in Rahima Patel’s blog piece.

In another case, the Supreme Court of the United Kingdom provided guidance on when property is “for the time being in use or intended for use for commercial purposes” (an exception to sovereign immunity under United Kingdom legislation).

The property in question was held not to be in use for a commercial transaction. In reaching this conclusion, the Court considered the construction of the commercial transaction exception to sovereign immunity, holding that, (1) the origin of the property against which execution is sought, and (2) whether the property has been used for commercial purposes in the past, are irrelevant. The Court noted that this exception is narrower in wording than other provisions of United Kingdom legislation governing sovereign immunity, which refer to proceedings “relating to” or “in connection with” a commercial transaction.

6 Conclusion

It has been recognised for a long time that States and their entities are entitled to some immunities from the jurisdiction of the courts of other countries. However, there are also good arguments for limiting the scope of that immunity, especially in the modern era of state capitalism, where the “‘sovereign”’ not only governs but engages in commercial transactions. However, until that position is reached in international law, and in light of the vigour with which States and State-owned entities are seeking to resist enforcement proceedings, it seems sensible to seek, where possible, an express waiver of immunity from jurisdiction and enforcement, in terms which are as specific as possible. It is important to ensure that the waiver is effective both in the jurisdictions in which enforcement may be sought and under the domestic laws of the State party.

At a minimum, it is essential that companies engaging in cross border transactions or business involving States or State-owned entities turn their mind to the issue of sovereign immunity and the way in which it may limit the protection and relief they might otherwise be afforded.

Leon Chung, Erin Christlo, Alexandra Payne , Herbert Smith Freehills

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Investment Arbitration Reporter

It looks like the first state-to-state arbitration under the U.S.-Central America Free Trade Agreement (CAFTA) may have fizzled out.

In August of 2011, I reported in this space that the United States of America was initiating arbitration against the Republic of Guatemala.

The U.S.A. turned to arbitration after determining that Guatemala was failing to enforce its own labor laws, thus running afoul of pledges made in the CAFTA itself.

In principle, the U.S.A. v. Guatemala arbitration should have played out rapidly, with Chapter 20 of the CAFTA providing for a fast-track arbitration process that is geared to take a mere 8 months to determine whether a government is not complying with its CAFTA obligations.

Indeed, I’d noted that the constitution of an arbitral tribunal was designed to take only a month – in stark contrast with the slow process seen in some investor-state arbitrations initiated under a separate CAFTA chapter.

However, as reported in a follow-up blog post in March of 2012, the months following the U.S. request for arbitration yielded no further news about the constitution of an arbitral tribunal – much less arbitration of the merits.

Inquiries to the Office of the U.S. Trade Representative revealed that the U.S.A. had opted to “engage” with a newly-elected government in Guatemala City. While those diplomatic talks took place the parties agreed to put the CAFTA arbitration on hold.

More than a year has passed without further news on the arbitration.

Then, last week, the Office of the U.S. Trade Representative issued a lengthy press release hailing a series of enhanced labor enforcement measures that Guatemala has agreed to pursue. These measures include the hiring of significant numbers of new labor inspectors and the creation of fast-track processes for labor courts to adopt fines recommended by Guatemala’s Ministry of Labor for labor law violations.

The press release makes no mention of the “stick” used to bring about these enhanced enforcement efforts in Guatemala. However, the filing of a CAFTA state-to-state arbitration clearly led to the diplomatic “engagement” that ultimately yielded last week’s announcement.

Given the agreement reached between the U.S. and Guatemala, it looks like the first CAFTA state-to-state arbitration may be relegated to the dustbin. Thus, we’ll have to wait for a future case – be it trade, investment, labor or otherwise – in order to see whether the CAFTA’s expedited state-to-state arbitration process is capable of arbitrating such disputes in a mere 8 months.

Luke Eric Peterson is the Editor of InvestmentArbitrationReporter.com an online news and analysis service focused on investor-state arbitration and policy. He has been a contributor to Kluwer’s Arbitration Blog since its launch.

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

UC Davis School of Law,
for ITA

On this first of April I thought it might be useful and timely to remind blog readers that the U.S. Supreme Court is considering whether to grant certiorari in BG Group Plc. v. Republic of Argentina. The Supreme Court asked the Solicitor General’s Office for its views on the cert. petition, which suggests that at the least the case has captured the Court’s interest; whether that interest will survive the SG’s filing in the case remains to be seen – and likely will be seen by early May (I plan to update you when the SG files his views).

For those of you who cannot wait until May to consider the pressing issues raised by the BG Group case, and other “gateway” issues as well, I commend to you the upcoming conference to be hosted in two days (on the morning of April 3) by the Institute for Transnational Arbitration and the American Society of International Law (ASIL) just prior to the ASIL annual meeting. This 10th ITA-ASIL event – Gateway Issues in International Arbitration – has an all-star line-up. George Bermann, Jean Monnet Professor of EU Law and Walter Gellhorn Professor of Law at Columbia Law School and Chief Reporter for the ALI’s Restatement of the U.S. Law on International Arbitration, will present the keynote address. His remarks will be followed by two panels. The first, chaired by Tom Stipanowich of Pepperdine University’s Law School, features Alan Rau of the University of Texas and Tim Nelson of Skadden Arps and will address gateway issues primarily as they intersect with commercial arbitration. The second panel, chaired by Sophie Nappert, arbitrator and solicitor dual-qualified in Canada and the U.K., will feature Larry Shore of Herbert Smith and Abby Cohen Smutny of White & Case, who will discuss the peculiarities that arise when gateway matters meet international investment arbitration. For a reminder about the gist of the BG Group decision, see below.

In Republic of Argentina v. BG Group PLC, 665 F.3d 1363 (D.C. Cir. 2012), the D.C. Circuit determined that the arbitral tribunal exceeded its authority by exercising jurisdiction notwithstanding BG Group’s failure to seek relief in Argentine courts for 18 months before submitting a claim to arbitration, as required under the applicable investment treaty. The court followed typical U.S. practice in using the term “arbitrability” to “denote every condition or requirement that must be met in order for an arbitration to go forward”, rather than adopting the more limited use of the term common in most of the rest of the world to denote only those matters that are “legally incapable of being arbitrated.”

The D.C. Circuit asked two questions. First, did the contracting parties (Argentina and the United Kingdom) intend that an investor should be able submit a claim to arbitration without having fulfilled the treaty requirement that an investor seek relief in Argentine courts for an antecedent period of time? Second, as an antecedent matter, did the contracting parties intend that question to be answered by a court or by an arbitrator? That latter question illustrates an idiosyncrasy of U.S. arbitral practice: if the parties agreed to submit the arbitrability question itself to the arbitrators, then their decision on that point is entitled to special deference from a reviewing court. “Did the parties agree to submit the arbitrability question itself to arbitration? If so, then the court’s standard for reviewing the arbitrator’s decision about that matter should not differ from the standard courts apply when they review any other matter that parties have agreed to arbitrate.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995). In this respect U.S. practice gives more deference to arbitrators than most other jurisdictions. The D.C. Circuit sought the answer in the Argentina – U.K. BIT. It is not altogether surprising that the court found it difficult to identify evidence of the intent of the contracting parties vis-à-vis the arbitrability question given that neither of the parties negotiated the treaty with U.S. arbitral law in mind. Yet the court determined that most jurisdictional issues under the treaty were entrusted to the arbitrators; the 18-month period, in contrast, preceded the proper constitution of the tribunal. Thus differences arising from a failure to honor the 18-month local-remedies period could not be entrusted to the tribunal.

Though not necessarily fatal to its consideration of the other question – whether failure to comply with the 18-month waiting period negated consent to arbitrate under the treaty – the D.C. Circuit’s approach to the arbitrability issue foreshadowed its decision on that issue. Much of the D.C. Circuit’s decision, including its decision about allocating authority regarding arbitrability, might be understood as trying to grapple with what the parties intended with respect to the condition precedent. Questions of procedural arbitrability – including questions of ripeness – are usually treated as matters of admissibility, with an arbitral tribunal determining the effect of nonexistent or ineffective recourse to other remedies. The D.C. Circuit recognized the relatively easy analogy between the 18-month recourse to local courts and multiple cases in which attempts at conciliation or mediation are to precede the arbitral process. Attempting to distinguish those cases explains the court’s emphasis on the treaty’s requirement that redress initially be sought in court rather than in mediation or conciliation. Further evidence of party intent might have been found had the court considered more fully the follow-on question: could Argentina have impeded or made difficult access to its courts and thus thwarted the constitution of the investment tribunal? Those considerations evidently animated the B.G. Group tribunal, because Argentina had required for some months an automatic stay of all cases challenging Argentina’s emergency measures and precluded licensees who challenged the measures from participating in the contract renegotiation process.

The cert. petition emphasizes prior U.S. case law that whether or not a party has complied with a multi-stage arbitration process is a question for arbitrators to decide and emphasizes the Circuit split caused by the B.G. Group decision. The opposition to certiorari focuses primarily on whether or not Argentina had ever consented to arbitrator given the failure to comply with the 18-month local court requirement. If there was never a valid arbitral agreement, then there are simply no questions for an arbitral tribunal to decide because there is no valid arbitral tribunal.

The case challenges most of the presumptions that have surrounded the investor-state dispute settlement process. The D.C. Circuit’s approach would seem to be inconsistent with the very purpose of the treaty – to accord substantive protections to an investor and permit it to vindicate those rights in a neutral forum – because it gives host government the authority to impede access to the tribunal. In addition, that neutral tribunal would seem the appropriate body to determine whether the preconditions of access to it were fulfilled or otherwise excused.

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University of Victoria Faculty of Law

At a conference a few years back, a well-known and respected arbitrator was speaking on the topic of predictability and consistency of arbitral decision making in investment treaty arbitration.  The arbitrator asked whether arbitrators should fly solo or in flocks.  He made a strong and persuasive case for the independence of the arbitrator, to fly solo—perhaps into uncharted territory.  The arbitrator used the example of the condor—flying high in the sky, with clear-sighted vision taking in the expanse of the territory below it.

Using animal and bird metaphors for arbitrators and arbitral tribunals has its dangers. The condor is a member of the Vultur genus. According to Wikipedia, a “vulture is primarily a scavenger, feeding on carrion. It prefers large carcasses”.  It nests “at elevations of up to 5,000 m…. generally on inaccessible rock ledges”.  Particularly in light of the publication of the controversial report Profiting from Injustice, most arbitrators probably do not wish to characterized as inaccessible scavengers feeding on large carcasses.  (The report, in any event, only uses the ignominious term “legal vultures” to refer to law firms!)

Canada is well known for its iconic animals, many of which are featured on our currency: the hard-working beaver on the five cent coin, the majestic polar bear on the two dollar coin, the migrating Canada goose on the silver dollar and the great northern loon on the dollar coin.   But as animal metaphors for arbitral tribunals, there are some troubling public relations issues.  We have a nocturnal, large semi-aquatic rodent, a hunter and carnivore, a bird that makes an annoying honk and, truth be told, is not very smart and, finally, the loon is now immortalized on our one dollar coin, known as the loonie—enough said.

There is no dearth of views on the question of whether arbitrators should go solo or fly in flocks. The Freshfields lectures by Professor Kaufmann-Kohler in 2006 and by Professor Reisman in 2012 are reflective of two very different approaches.  In articles and a series of arbitral decisions, Professor Kaufmann-Kohler has expressed the view that arbitrators have a duty to strive for consistency and predictability, and thus to follow a consistent line of cases.   This view is reflected in the oft-quoted statement by the tribunal in Saipem v. Bangladesh, which postulates two duties on tribunals: (i) a duty to adopt solutions established in a series of consistent cases; and (ii) a duty to seek to contribute to the harmonious development of investment law.  In contrast, in his Freshfields lecture in November 2012, Professor Reisman is reported as saying that investment arbitrators “best serve the system by being case specific”, while acknowledging three exceptions: (i) thoughtful consideration of previous awards, (ii) interpretation of the object and purpose of an investment treaty and (iii) “occasional” supplementary interpretation.

Professor Kaufmann’s Kohler’s and Professor Reisman’s lectures highlight two different approaches to the role of arbitrators and to the question of whether predictability and consistency of arbitral decision-making is important.  Few would argue that predictability and consistency are not important aspects of the rule of law.  If the application of legal standards is so unpredictable and inconsistent that results become arbitrary or depend on the personal views of the judge, there is little left of the rule of law. Further, few would argue that decision makers should not have at least an eye to the harmonious development of the law.  Having a collection of inconsistent and contradictory rules is antithetical to the rule of law. But, in the context of investment treaty arbitration, aspirations for predictability, consistency and harmonious development of the law should not be viewed as imposing a duty on arbitrators to adopt the solution in a consistent line of cases.  Rather, the overriding duty of arbitrators is one of providing clear reasons for their decisions.  Where there is a jurisprudence constante (the development of doctrine through the accretion of a consistent line of cases), arbitrators do not have a decisional duty to adopt the solution in the doctrine, rather, I agree with other commentators who argue that arbitrators have a duty to provide cogent and detailed reasons for not following jurisprudence constante (see Irene Ten Cate, “The Costs of Consistency: Precedent in Investment Treaty Arbitration” on decisional burdens).   The duty is not one of result (adopting the solution) in a consistent line of cases.  The duty is one of means—there is a persuasive or argumentative burden on the arbitrator to demonstrate why jurisprudence constante should not be followed (see Stephen Schill, “From Sources to Discourse: Investment Treaty Jurisprudence as the New Custom” on argumentative burdens).

In a number of decisions, Professor Stern has written that the duty of the arbitrator is to decide each case on its own merits independently of any jurisprudential trend.  This approach goes too far if it is interpreted as meaning that the arbitrator has a duty to decide the case without any reference to jurisprudential trends.  Where there is a jurisprudential trend, the arbitrator has the duty to confront that jurisprudence in his or her reasons.  And certainly, this is what Professor Stern has done in practice, as exemplified by her 32 page dissenting opinion in Impregilo v. Argentine on the question of the application of an MFN clause to investor-state arbitration provisions.  (To be clear, I not arguing that there is  jurisprudence constante on whether a “garden variety” MFN clause applies to dispute settlement.  I am simply using Prof. Stern’s opinion as an example of the type of thoroughly reasoned decision that arbitrators have a duty to provide if they are going to depart from jurisprudence constante.)

In Glamis v. The United States, the Tribunal stated at para. 8 that: “a NAFTA tribunal, while recognizing that there is no precedential effect given to previous decisions, should communicate its reasons for departing from major trends present in previous decisions, if it chooses to do so.” [emphasis added].  That proposition should be reframed to say that a tribunal must communicate its reasons for departing from major trends.  From where does this duty arise?  It arises from the arbitrator’s duty to apply the applicable law and the duty to provide reasons, particularly in the context where the parties have made extensive submissions referring to previous cases.

The predictability and consistency challenge faced in a number of areas of investment law is, of course, that there is no jurisprudence constante and that there may be conflicting jurisprudential trends.  This can been seen most obviously on the question of the interpretation of MFN and observance of undertakings clauses. I am not optimistic that predictability and consistency is attainable in light of the varied approaches tribunals have taken to the interpretation of specific MFN and observance of undertakings clauses.  We do not have an investment treaty system with a vertical hierarchy.  We have a fragmented, horizontal network of treaties, institutions, rules and actors.  Further, just like there are pathological arbitration agreements, there are pathological treaty provisions that point in multiple directions at the same time.  In this disorder, arbitrators are the guardians of a process—not the gatekeepers of consistency.

By making this comment, I do not want to be understood as suggesting that there is massive inconsistency and unpredictability in international investment law.  My view is quite the opposite.  In Stephen Schill’s recent article on the literature and sociology of international investment law he writes that following:

The monographs on international investment law that had been published since 2007 all dealt with the theme of fragmentation as it emerged from these inconsistent arbitral decisions. Almost paradoxically, however, mainstream international investment law literature did not perceive inconsistent arbitral awards as a fundamental problem, nor did it view it as an obstacle to the doctrinal reconstruction of substantive and procedural investment law. Instead, convergence in arbitral jurisprudence is the main theme of the numerous textbooks dealing with international investment law, even though the substantive law is enshrined in a myriad of bilateral treaties and implemented by one-off arbitral tribunals.

What is most striking to me is not inconsistent jurisprudential trends, but that after 23 short years of investment treaty jurisprudence, there is such a remarkable level of jurisprudence constante in an area of international law where there has been such intense ideological divisions in the past.

I will conclude this post with a few thoughts on how to improve consistency.

• Ultimately, only States can resolve deep jurisprudential divides such as whether an MFN clause in a particular treaty applies or does not apply to dispute settlement. It is unlikely that this type of issue can be resolved jurisprudentially within the existing structure of investment treaty arbitration.
• States have to take a more active role in clarifying the meaning of existing treaty obligations.   In future treaties, they must ensure that treaty provisions are clearly drafted to address the jurisprudential divides – for example by either clearly specifying that MFN applies or does not apply to dispute settlement.
• Arbitrators should welcome, rather than be hostile to, the possibility of applying Article 31(3)(a) and (b) of the Vienna Convention, which provide that (i) any subsequent agreement between the treaty parties and (ii) and subsequent practice establishing an agreement of the parties with respect to interpretation of the treaty shall be taken into account.  The concern that States will use this mechanism abusively to provide restrictive or unreasonable interpretations is exaggerated, given the practical and political difficulties of the home state of the investor agreeing to an interpretation that seriously prejudices its own investors.  Claims that the NAFTA Free Trade Commission’s interpretative statement on Article 1105, Minimum Standard of Treatment were abusive, unfair, contrary to the rule of law or an unauthorized amendment of NAFTA are simply wrong and fail to recognize the mandatory rules in the Vienna Convention.
• With respect to tribunals, one proposal I would like float is that whenever there is a disputed question of treaty interpretation, that the tribunal take steps to request the investor’s home state to provide its views on contested matters of treaty interpretation.  This would ensure that the tribunal has the views of both treaty parties, as well as the investor, before it.  Where the tribunal cannot make the request on its own initiative under the applicable rules because of duties of confidentiality, it could seek the agreement of the parties to provide for such a process.  This default procedure would ensure that both State parties to the treaty are given an opportunity to provide their views on the proper interpretation of the treaty.  Any agreement between the State parties regarding interpretation or subsequent practice that establishes agreement of the State parties regarding interpretation shall – must be taken into account.
• More generally, state parties should take a more active role in treaty interpretation and the new generation of investment treaties should include mechanisms for the involvement of all state parties whenever there is a contested interpretation – which, of course, will likely be in every case.

Anthea Robert’s thesis in her wonderful article, Power and Persuasion in Investment Treaty Arbitration: The Dual Role of States, is compelling.  Arbitral tribunals and states share interpretative powers.  There should be a greater emphasis and encouragement of home state practice in the interpretation of investment treaty obligations.  Although this will not necessarily result in greater predictability and consistency, there is a greater likelihood that any tribunal interpretation will be more, rather than less, consistent with the state parties’ treaty obligations.

Returning to the introduction, if I was forced to choose an animal metaphor for an arbitral tribunal it would be an owl.  The owl is solitary and, of course, wise.  The owl has 360 degree vision.  The owl acts independently but provides wise reasons for its decisions, reasons that identify and illuminate tensions in the cases and result in a reasoned decision.  One owl’s decision does not create law or jurisprudence constante.  But it is different with a group of owls – the literary collective noun for a group of owls is a parliament – and parliaments have a law making function.  A parliament of owls establishes a jurisprudence constante.  Tribunals are key actors in the creation of law—they play a constitutive role in law creation by interpreting and applying treaties.  The doctrine of legitimate expectations as an element of fair and equitable treatment is a creation of tribunals—it was not mandated by the treaty term fair and equitable treatment.

The only problem with the owl metaphor for arbitrators is that owls approach small prey silently from above, eat it whole and regurgitate the indigestible parts.  But, then again, no one really wants to have to read anything indigestible in a tribunal award.

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Conway & Partners

A week ago today, it was my privilege to participate in the annual UNCITRAL/VIAC/YAAP Joint Conference, addressing hot topics in international arbitration. The conference successfully considered many key topics, including my topic, liability of counsel in international arbitrations. This topic, similar to my recent book topic (Kluwer Law International, Third-Party Funding in International Arbitration), is receiving a lot of attention with limited actual changes.

In 2011, the IBA released their latest guidelines on this area, entitled The IBA Principles on Conduct for the Legal Profession (referred to generally herein as Guidelines), which replace a much older version, the Code of Ethics from 1954 and edited in 1988. This set of Guidelines provides 10 very general statements on essentially the ethical conduct of the counsel representing parties in international arbitrations. Much is said, published, etc. on the behavior of the arbitrators; however, there are limited resources available on the counsel.

Post-the IBA Guidelines, I must wonder whether truly any changes have occurred? First let us step back at some of the allegations raised to assert the need for a sort of ethical code. First, in a comment by Edna Sussman and Solomon Ebere (see All’s Fair in Love and War, The American Review of International Arbitration, 2011/ Vol. 22, No.4), a small survey was conducted of players in international arbitrations to attempt to discover what questionable ethical tactics were commonly employed. Some of these tactics would clearly be illegal under one jurisdiction, but, in reverse, clearly unethical for the counsel to NOT do in another jurisdiction. Some interesting tactics used – guerilla tactics as labeled by the authors – included threatening witnesses, asserting frivolous new claims at the last hour and threatening to appeal on the grounds of due process if the claim was not allowed, asserting frivolous challenges against the arbitrators as a delay tactic to the proceedings, and unprofessional behavior against the other counsel and even the tribunal during the proceedings. There were other discovered tactics as these are just a few.

Others in other conferences looked to specific cases to indicate the need for such a code – pointing to the more transparent ICSID cases in which parties may appoint a counsel with a potential conflict of interest to their team AFTER the establishment of the tribunal, for example. So, it is clear that different behaviors occur in such a multi-cultural dispute resolution forum and everyone approaches whether these tactics are ethical or not from a different paradigm. So, does finally creating guidelines truly resolve this behavior? And, more importantly, who and how should such an ethical code (or any ethical rules – i.e. the ones of the jurisdiction of the counsel acting out or the situs of the arbitration) be enforced to effectively avoid abuse during the proceeding? Should it be through the tribunal or the institution? What if it is an ad hoc proceeding – should then it be incorporated in the UNCITRAL Model Arbitration Rules to cover, supposedly, a large portion of the ad hoc proceedings?

I applaud the efforts made and the no doubt hard work of those who have worked diligently on these guidelines or others like them. I just have to wonder – have they truly addressed the practical problems of how to interpret and apply ethical guidelines universally? Of who and how they should be enforced? With so many jurisdictions (and thus cultural differences) abounding in international arbitration, is it possible to construct a method that can be universally embraced? If any readers have successfully been influenced by the efforts thus far made, I would gladly receive their thoughts.

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Herbert Smith Freehills LLP,
for YIAG

On February 6, 2013, Achmea (a Dutch insurer, better known by its former name, Eureko) initiated UNCITRAL arbitration proceedings against the Slovak Republic on the basis of the Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic (the “Netherlands-Slovakia BIT“) [The Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic was signed on 29 April 1991 and came into force on 1 October 1992.] These proceedings appear to be of a new kind: aimed at preventing a likely expropriation [Achmea press release "Achmea undertakes legal steps against Slovak Republic", 6 February, 2013; L. E. Peterson, "Dutch investor seeks to test limits of investment treaty arbitration by asking arbitrators to block state from expropriating its assets", IA Reporter; K Karadelis, "Measures targeting health insurers lead to new claim against Slovakia", GAR, 7 February 2013].

The 2013 arbitration proceedings are the latest episode in a dispute between Achmea and the Slovak Republic dating back to 2006. In 2006, the Slovak Republic enacted a law banning private health insurers operating in the country from distributing profits to their shareholders. Further to Achmea’s (Eureko at the time) previous claim, an arbitral tribunal upheld jurisdiction on the basis of the BIT and found Slovakia liable for breaching the fair and equitable treatment and the free transfer provisions of the Netherlands-Slovakia BIT in December 2012 [Achmea v Slovakia, PCA Case No 2008-13, Award of 7 December 2012 (not public); Achmea press release, "International arbitration tribunal rules in favour of Achmea", 7 December 2012]. Although the Slovak Constitutional Court reversed the law as unconstitutional in 2011, the arbitral tribunal ordered Slovakia to compensate Eureko, to the amount of €22 million, for the damage suffered within the period during which the law was in force. Slovakia challenged the final award before the German courts, as it had already done, without success, in respect of the decision on jurisdiction.

With the re-election of prime-minister Robert Fico in spring 2012, the dispute entered a new stage. On July 25, 2012, the government voted unanimously in favour of a new project aiming at instituting a single, state-run health insurer and pushing out the two existing private providers by 2014 [The Slovak Spectator, "Fico targets private health insurers again", 26 July 2012]. On October 13, 2012, the Health Ministry presented a draft proposal containing three alternatives to the government: the acquisition by the state of the shares in the private health companies, the takeover of management of the private insurers’ client portfolios or the expropriation of the private health insurance companies. In order to take effect, however, the draft law still has to receive parliamentary approval.

Achmea’s new notice of arbitration dated 6 February 2013 appears to be a direct reaction to the new regulation that may be enacted by the State. The request for arbitration is not publicly available and the only information available so far is based on Achmea’s press release, according to which the arbitration “seeks to avert the outright expropriation of UZP.” Assuming that there is no other claim, this arbitration thus amounts to a request for purely pre-emptive measures against a State; in other words a request that a State refrain from enacting a law that would constitute a violation of the BIT.

The Achmea II case thus presents two original elements.

First, according to the press release, it seems that no pecuniary measures have been requested at this stage, since no damage has occurred. Although not uncommon in international arbitration against states (investment tribunals have on several occasions agreed to grant non-monetary relief [On non-monetary relief in investment arbitration, see for instance: C. Schreuer, "Non-pecuniary Remedies in ICSID Arbitration", AI, 2012; M. Endicott: "Remedies in Investor-State arbitration: restitution, specific performance and declaratory awards" in P. Kahn, T. Wälde, New aspects of international investment law, 2007; C. Malinvaud, "Non-pecuniary Remedies in Investment Treaty and Commercial Arbitration", ICCA Congress Series, 2009; P. Dunand, M. Kostytska, "Declaratory Relief in international arbitration", JIA, 2012] in the form of declaratory awards [See for instance: Saudi Arabia v Aramco, 27 ILR 117, 1963; Biwater Gauff v Tanzania, ICSID case n° ARB/05/22, Award of July 24, 2008], orders for specific performance [See for instance: Texaco v Libya, J.D.I, 1977, pp. 350-389], prohibitory injunctions or mandatory orders [ATA v Jordan, ICSID case n° ARB/08/2, Award of May 18, 2010. In two pending cases, the Claimant made requests for provisional injunctions: Philip Morris v Uruguay (UNCITRAL), Request for arbitration of February 19, 2010; Chevron v. Ecuador, PCA Case No 2009-23, First Interim Award on Interim Measures of January 25, 2012] ), arbitral tribunals generally favour pecuniary measures [C Dugan, D Wallace, N Rubins, B Sabahi, Investor State Arbitration, 2008, p. 569]. Furthermore, claims based solely on such measures are quite rare [To our knowledge, only the Saudia Arabia v Aramco case was entirely limited to non-pecuniary remedies in the field of investor-state. This was, however, a very specific case since the parties had agreed that the award should be only declaratory. Saudi Arabia v. Arabian American Oil Company (Aramco), see above].

Second, by contrast with existing awards ordering non-pecuniary measures, the investor’s new claim is entirely aimed at pre-emptively challenging a new regulation which has not yet been adopted, thus assuming that the contemplated expropriation would not be in the public interest, would not be implemented in accordance with due process and would be discriminatory.

This kind of action raises a number of unresolved questions. Some of these questions are at the heart of the rationale of investor-state arbitration, according to which an arbitral tribunal is only entitled to exercise jurisdiction over disputes which the parties have agreed to submit to arbitration: (1) whether there is an existing dispute where there is a threat of expropriation but none has yet occurred, and (2) whether the State’s consent to arbitration under the Netherlands-Slovakia BIT would apply to this kind of pre-emptive claim.

1. Is there a “dispute” between Achmea and Slovakia?

1.1 Pursuant to article 8 of the Netherlands-Slovakia BIT, “Each Contracting Party hereby consents to submit a dispute (…) to an arbitral tribunal…” [Netherland –Slovakia BIT, Article 8].

1.2 The pre-emptive nature of the Achmea II case raises the question of the existence of a dispute when the investor has not yet suffered any prejudice, and where expropriation is envisioned as a possibility but the conditions of its implementation remain unknown.

1.3 Under general international law, the ICJ has defined a legal dispute as a “disagreement on a point of law or fact, a conflict of legal views or interests between the parties” [See for instance: Mavrommatis Palestine Concessions, Judgment No 2, 1924, P.C.I.J.; Case Concerning certain property (Liechtenstein v Germany), Preliminary objections, Judgment of 10 February 2005, §24]. Several ICSID arbitral tribunals have used this definition [See for instance: Maffezini v Spain, ICSID Case n°ARB/97/7, Decision on Jurisdiction, 25 January 2000, §94; Tokios Tokelès v Ukraine, ICSID Case n°ARB/02/18, Decision on Jurisdiction, 29 April 2004, §106] and there appears to be no reason why an ad hoc tribunal whose jurisdiction is based on a BIT should not follow the same path.

1.4 In addition, while commenting on article 25 of the ICSID Convention, Pr. Schreuer states that “[t]he existence of a dispute may be in doubt in several ways. An open question may not have matured into a dispute between the parties. Or a difference of opinion may not be sufficiently concrete to amount to a dispute that is susceptible of conciliation or arbitration” [C. Schreuer, The ICSID Convention: A Commentary, 2009, Article 25, §41].

1.5 Although it remains uncertain whether this commentary can be applied directly to non-ICSID arbitrations [AES v Argentina, ICSID Case n° ARB/02/17, Decision on Jurisdiction of April 26, 2005, §43], an interpretation of the “ordinary meaning” of article 8 of the BIT in accordance with general international law [Pursuant to Article 31 of the Vienna Convention on the Law of Treaties] might lead to a similar conclusion.

1.6 The question would thus be whether a mere draft law aimed at expropriating assets of a foreign investor, but not yet voted on by the Parliament, might rise to the level of a dispute under this definition.

1.7 In the ICSID case of Enron v Argentina [Enron v Argentina, ICSID Case n°ARB/01/3, Award of 14 January 2004], the investor alleged that certain taxes which had been assessed but not yet collected amounted to a breach of the BIT. As here, Enron had thus not yet suffered any damage and would probably not suffer any should, ultimately, no taxes be collected. Logically, Argentina argued that the dispute between the parties was purely hypothetical, since the taxes might never be collected, or be collected only in a small amount [Enron v Argentina, §72]. The arbitral tribunal however rejected this argument on the ground that once taxes are assessed, there is, from the state’s perspective, a liability on the part of the investor and a claim seeking protection under the treaty is thus no longer hypothetical because a specific dispute can be identified [Enron v Argentina §74].

However, in Achmea’s case, the dispute is one step earlier: the act of the state at the origin of the dispute, and which is aimed at the expropriation of Achmea’s subsidiary Union, has not even been voted on by the Parliament. Furthermore, the exact conditions under which the project would be implemented do not appear clear, as three are scenarios concerning how to return to a single-insurer system but none has been selected. Accordingly, whether an arbitral tribunal will, following the same line of reasoning as Enron, consider that, from the state’s perspective, there is already, at this stage, a liability on the part of the investor remains doubtful. The context of the dispute and the previous regulations enacted by the State could, however, constitute an argument for Achmea that there is actually a dispute which is not hypothetical, in view of the state’s previous attitude.

1.8 In any event, one might also ask whether Slovakia consented to submit purely pre-emptive claims to the arbitral tribunal by signing the BIT.

2. Did Slovakia consent to submit requests for pre-emptive claims to an arbitral tribunal under the BIT?

2.1 It is likely that Slovakia will argue that the arbitral tribunal does not have jurisdiction because, under the Netherlands-Slovakia BIT, it has not agreed to UNCITRAL’s jurisdiction for pre-emptive claims. The investor will thus have to prove that the parties’ consent to arbitration under the Netherlands-Slovakia BIT would extend to purely pre-emptive actions. It has long been established within the framework of ICSID arbitration that consent is the “cornerstone” of the jurisdiction of ICSID tribunals. The same can be said for ad hoc arbitrations in which the consent to arbitrate is based on a BIT.

As such, ordering purely pre-emptive remedies might collide with the fact that “[r]estrictions upon the independence of states cannot be presumed [Permanent Court of International Justice, Decision of September 7th, 1927, §18] “. According to this principle, the state should explicitly agree to any restriction of its legislative power. No aspect of the Netherlands-Slovakia BIT indicates any intent on the part of the contracting states to grant the tribunal powers to deal with a hypothetical future violation of the Netherlands-Slovakia BIT. Accordingly, the tribunal may also refuse jurisdiction over Achmea’s claim on the ground of lack of consent.

2.2 However, the arbitral tribunal might equally consider that the absence of any reference to claims of this sort in the Netherlands-Slovakia BIT does not necessarily mean that it has no jurisdiction over these claims, which are of a peculiar nature. For instance, the arbitral tribunal might interpret Achmea’s claim as a purely procedural question, to be solved in the course of the proceedings. This is the approach adopted when issuing injunctive orders during arbitration. However, in those cases, the arbitral tribunals are not seized solely on the basis of the non-pecuniary relief sought against a state.

The question of consent appears therefore in a specific light in the Achmea II case, and it remains to be seen which position the tribunal will adopt.

In conclusion, Achmea’s claim raises jurisdictional questions in relation to the notion of an actual dispute as well as to the scope of the State’s consent to investor-state arbitration. At the same time, considering the overall context of this dispute, the practical interest of the kind of claim made by Achmea is obvious: this is a situation where the investor has already been subject to measures by the same government that have been considered by an arbitral tribunal to be a violation of the Netherlands-Slovakia BIT. An arbitral tribunal may thus be tempted to consider that this new claim is part of a broader dispute in which the investor has openly and repeatedly been targeted by Mr. Fico. On that basis, an arbitral tribunal may want to consider that there is a dispute and that as the State has agreed to submit all disputes to arbitration, without specific restriction, it has jurisdiction.

Should that be the case, however, what would be the kind of award that an arbitral tribunal could then pronounce on the merits without interfering with the state’s sovereignty? It would not be acceptable to order a State not to enact a law. Could it be a declaration that, should the State enact the law in question, it will be in breach of the Netherlands-Slovakia BIT? How then would the arbitral tribunal determine the frontier between granting or refusing a pre-emptive measure and according to what criteria? How then would such an award be enforced against the State? Even assuming that an arbitral tribunal would have jurisdiction over such a claim, a number of additional open questions would remain.

The author would like to thank Lisa Bohmer for her valuable assistance in preparing this blog.

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Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

The U.S. Federal Arbitration Act (FAA) provides that a federal district court may vacate an arbitration award, among other reasons, “where there was evident partiality or corruption in the arbitrators.” 9 U.S.C. §10(a). However, as illustrated by a recently decided case in the Southern District of New York, U.S. district courts apply different standards of “evident partiality,” depending on the circuit in which they are located.

In Ometto v. ASA Bioenergy Holding A.G., decided this past January, the petitioners (collectively “Ometto”) brought a motion to vacate two arbitration awards against them totaling almost $120 million. Ometto’s motion was based on the fact that after the underlying arbitration began, the presiding arbitrator’s law firm had advised clients regarding corporate transactions involving one of Ometto’s opposing parties in the arbitration or an affiliate. Ometto argued that the presiding arbitrator “was rendered evidently partial” due to these conflict of interests and the arbitrator’s failure to disclose them as required by the ICC rules. Ometto v. ASA Bioenergy Holding A.G., 2013 WL 174259 at *2 (S.D.N.Y. 2013). Relying principally on the Ninth Circuit case Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994), Ometto argued that the presiding arbitrator, even if he had not actually been aware of the conflicts, should be charged with “constructive knowledge” of his firm’s engagements. Id.

The district court ordered an evidentiary hearing to help it ascertain the facts with regard to the presiding arbitrator’s knowledge of the conflicts; at the hearing, both the court and the parties’ counsel were given the opportunity to question the arbitrator. Ometto, 2013 WL 174259 at *3. In its decision, the court found that there was “no material evidence refuting [the presiding arbitrator’s] sworn assertion that he was, in fact, completely unaware of the conflicts … when he authored the awards.” Id. at *4. The court further found that the arbitrator’s “lack of awareness was largely the product of his own administrative carelessness in the manner he undertook a conflicts check at the advent of the arbitration.” Id.

Whether or not Ometto would have prevailed in its arguments in the Ninth Circuit is debatable, but given the presiding arbitrator’s lack of knowledge of the conflicts it was easy for the New York district court to reject the imputation of “constructive knowledge” and to find that the “evident partiality” standard had not been met under the law of the Second Circuit, under which a court “may only find evident partiality sufficient to vacate an award when a reasonable person, considering all of the circumstances, would have to conclude the arbitrator was partial to one side.” Ometto, 2013 WL 174259 at *4 (internal quotation marks omitted) (emphasis in the original). The court noted that under the Second Circuit standard “the arbitrator is quite unlike a judge, who can be disqualified in any proceeding in which his impartiality might be reasonably questioned.” Id. (internal quotation marks omitted).

The court then contrasted the Second Circuit’s standard against that of the Ninth Circuit, which only requires “an impression of possible bias,” and found that “the petitioner’s reliance on [Ninth Circuit caselaw] to invite this Court to impute constructive knowledge [on the presiding arbitrator] invokes precedent that is both non-binding on this Court and countermanded by the more circumspect view of ‘evident partiality’ adopted by this Circuit.” Id.

The U.S. federal circuit courts are split as to which is the correct standard of “evident partiality.” The Fifth, Eighth, Tenth and Eleventh circuits have adopted standards akin to that of the Ninth Circuit—that there exists a “reasonable impression” of bias. The First, Third, Fourth, Sixth and Seventh circuits have adopted standards akin to that of the Second Circuit—that a “reasonable person would have to conclude” there was bias. In an opinion issued this month, the Third Circuit, “[i]n response to the parties’ confusion” reaffirmed the “would have to conclude” standard, which it had previously “embraced … in a footnote” in the 1994 case Kaplan v. First Options. See Freeman v. Pittsburgh Glass Works, LLC, 2013 WL 811884 at *8-9 (3rd Cir. 2013). The D.C. Circuit has not clearly articulated either standard, but would appear to lean toward the standard of the Second Circuit. See Thian Lok Tio v. Washington Hosp. Center, 753 F.Supp2d 9, 17 (2010) (a party alleging “evident partiality bears a heavy burden to establish specific facts that indicate improper motives on the part of an arbitrator.”) (internal quotations omitted).

Suffice to say that in U.S. caselaw there is an “absence of consensus on the meaning of ‘evident partiality’” under the FAA. Montez v. Prudential Securities, Inc., 260 F.3d 980 (8th Cir. 2001). Not only are the circuit courts almost evenly split regarding whether the standard is that of “reasonable impression” of bias or something closer to actual bias, but even circuits within the same general camp apply the standard differently. For example, the notion in the Ninth Circuit caselaw relied on by Ometto that an arbitrator’s “constructive knowledge” of a conflict can lead to a “reasonable impression” of bias satisfying the “evident partiality” standard has been expressly rejected by the Eleventh Circuit, which also applies a “reasonable impression” of bias test. See Gianelli Money Purchase Plan and Trust v ADM Inv. Services, Inc., 146 F3d 1309 (11th Cir. 1998). The Fifth Circuit, in an en banc decision, opined that the Ninth Circuit Schmitz case was an “outlier” and found that “nondisclosure by an arbitrator” would not lead to vacatur of an award “unless it creates a concrete, not speculative impression of bias.” Positive Software Solutions, Inc. v. New Century Mortg. Corp., 476 F.3d 278, 283, 286 (5th Cir. 2007). The dissent in that case accused the majority of “substitut[ing] actual bias, or the reasonable impression of bias, or concrete impression of bias for the Supreme Court’s ruling that dealings that might create only an impression of possible bias must be disclosed.” Positive Software Solutions, at 287 (dissenting opinion).

The confusion in the U.S. courts about the meaning of “evident partiality” stems from the U.S. Supreme Court case Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145 (1968). In that case, the Court’s 6-3 plurality decision vacated an award based on the presiding arbitrator’s undisclosed business relationship with one of the parties, related to the subject matter of the arbitration. However, the Court was unable to articulate a standard for “evident partiality” that garnered the majority of votes. Justice Black’s opinion of the court, which was joined by three other justices, stated that arbitral tribunals “should avoid even the appearance of bias,” that arbitrators should be held to higher standards than judges since they “have completely free rein to decide the law as well as the facts and are not subject to appellate review,” and that an arbitrators should “disclose to the parties any dealings that might create an impression of possible bias.” Commonwealth Coatings, 395 U.S. at 149. Justice White’s concurring opinion, which was joined by Justice Marshall, took a different view, finding that arbitrators are not necessarily to be held to the “standards of judicial decorum of [U.S. federal] judges, or indeed of any judges.” Id. at 150. See also G. Born, International Commercial Arbitration 1466-1470 (2009) (discussing Commonwealth Coatings and its progeny). The Second Circuit and like-minded circuits have found that they should follow the tenor of Justice White’s opinion since it was the narrowest ground upon which the Commonwealth Coatings Court ruled. See e.g. Morelite Const. Corp. v New York City Dist. Council Carpenters Ben. Funds, 748 F2d 79, 83 (2d Cir. 1984) (finding that in light of Justice White’s opinion “much of Justice Black’s opinion must be read as dicta”).

Given the clear differences among the federal circuit courts—a reason for granting a petition for certiorari under U.S. Supreme Court jurisprudence—it would appear that the time is ripe for the U.S. Supreme Court to remedy its previous lack of clear guidance regarding the meaning of “evident partiality.” We note that the “reasonable impression” of bias test used in the Ninth Circuit—and perhaps only the Ninth Circuit—is somewhat similar to the generally accepted standard for challenges to an arbitrator for lack of independence or impartiality in international arbitration. A recent ICSID decision, for example, found that “[a]n appearance of … bias from a reasonable and informed third person’s point of view is sufficient to justify doubts about an arbitrator’s independence or impartiality.” Urbaser SA v. Argentine Republic, Decision on Claimants’ Proposal to Disqualify Professor Campbell McLachlan, Arbitrator, ICSID Case No. ARB/07/26 (12 August 2010), ¶43. However, it should be remembered that the context of the FAA’s “evident partiality” standard is that of vacatur of an arbitral award, and clearly there should be a higher standard for vacating an award once the arbitral proceedings have ended than there is for accepting a challenge to an arbitrator during the course of the proceedings. In addition, the plain meaning of the text of the FAA, and specifically the word “evident,” connotes something more than just an “impression” of bias. Thus, in our opinion, the U.S. Supreme Court should clarify the meaning of “evident partiality” by adopting the standard of the Second Circuit.

Gary B. Born & Claudio Salas

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	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

Pepperdine University School of Law

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

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

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

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

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

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

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

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

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

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

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

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

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

More from our authors:

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