Peter Plachy

Paneuropean University

The new Slovak Arbitration Act (“SAA”) was adopted by the Parliament (Act. No. 336/2014 Coll.), and is in force as of January 1, 2015. In order to see whether the SAA will promote Slovakia as an arbitration venue, main novelties and amendments brought by this new act are analysed in this blog entry.

Arbitrability: Under the old law, parties were allowed to arbitrate disputes, which were subject to settlement in courts under art. 99 of the Slovak Code on Civil Procedure. The amendment provides under art. 1(2) that arbitrable disputes are those, which are related to legal relations and “can be settled by an agreement of the parties [under art. 585 of the Slovak Civil Code (“SCC”)] including disputes regarding the declaration whether there is a right or a legal relation or not”. The second part of the definition, related to the validity of legal acts, was prompted by several Slovak court decisions, which held that parties to an arbitration agreement cannot apply for a declaratory relief regarding the validity of the arbitration agreement to an arbitral tribunal (Case No. 26 Cob 161/2009 of 21 December 2009, Regional Court of Nitra and 2 Cob 178/2008 of 18 December 2008, Regional Court of Bratislava). It was held that a civil court must, in turn, decide such a question. These decisions were in a direct conflict with the Kompetenz-Kompetenz doctrine, incorporated in art. 21(1) of the SAA, which explicitly states that the tribunals have the capacity to decide upon the validity of arbitration clauses. The clarification in the new SAA is thus welcomed, but the decisions of the Slovak courts will need to be tested against this amendment.

Moreover, one of the main changes in the Slovak arbitration regime is the exclusion of consumer disputes from the application of the SAA. For this purpose a brand new Act. No. 335/2014 Coll., which focuses exclusively on consumer disputes, was adopted.

Permanent Courts of Arbitration: Under art. 12 of the SAA, Permanent Courts of Arbitration (“PCAs”) may only be established by a civil association (under Act. No. 83/1990 Coll.), an association of legal entities under the SCC and by chambers of commerce. This change aims to dissuade regular corporations from establishing PCAs for profit, and in turn ensures independent arbitral awards. The existing PCAs must have complied with this change within three months after the SAA came into force.

The regime of the PCAs in Slovakia was (and still remains) the most glaring problem of the legislation. The old law led to the establishment of more than 170 PCAs because their constitution was not regulated at all. The change of the SAA, in all fairness, seems only to partially address this issue. A the same time, the Czech Arbitration Act (Act No. 216/1994 Coll.) allows only the existence of arbitral institutions established by law, and the Czech Chamber of Commerce enjoys a significant amount of arbitrations in the Czech Republic. Nevertheless, it is worth to wait and see whether the SAA is to provide a ground for the establishment of a reliable institution in Slovakia.

Arbitration Clause: In this matter, the SAA reflects the decision of the Slovak Supreme Court (2 Cdo 245/2010 of 30 November 2011, Slovak Supreme Court), which was later followed by lower courts and which stated that the requirement of a “written” arbitration clause is a more formal requirement than the one contained in the SCC. More specifically, the Supreme Court held that an arbitration agreement incorporated by reference into a loan agreement between a bank and its corporate client was invalid due to lack of written form. Consequently, the SAA now explicitly states in art. 4(4) that an arbitration clause can be incorporated by reference without a signature on the incorporated document. Addressing the concern of a recent post, this reference does not need to be specific, i.e. it can be general. Additionally, under a new provision of art. 4(7) of the SAA, the Slovak legislator has finally expressly adopted a practice of considering a valid arbitration clause to be constituted when respondent submits its first memorandum without objecting to the tribunal’s jurisdiction. This addition should also guide the civil courts away from the overly formalistic approach towards the “written” arbitration clause requirement described above.

Interim Orders: The legislator opted to incorporate an extended version of art. 17 of the UNCITRAL Model Law on interim measures and preliminary orders into the SAA. In line with the model legislation, the arbitral tribunal is now competent to order a party to:
• “provide a means of preserving assets out of which a subsequent award may be satisfied”,
• “maintain or restore the status quo pending determination of the dispute”,
• “take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself” and to
• “preserve evidence that may be relevant and material to the resolution of the dispute”.

Importantly, under art. 22a of the SAA, if the parties agree, an interim order may be rendered even before the arbitral tribunal is constituted and without any submission from the respondent (ex parte). Such an interim order, however, is not enforceable through the courts unlike other interim measures (art. 22c of the SAA). All interim orders are, nevertheless, subject to the review of civil courts pursuant to art. 22d of the SAA.

Annulment of an Arbitral Award: A significant amendment was adopted in art. 40(1) of the SAA which is a verbatim adoption of the grounds for the annulment of an arbitral award from art. 34 of the UNCITRAL Model Law. The reasons now include the ground of public policy pursuant to art. 40(1)(b) in conjunction with art. 50(2) of the SAA, which was not a ground for annulment in the old law. For this reason, there were cases when the Constitutional Court took it upon itself to annul an arbitral award due to lack of the public policy ground for annulment (Case No. III. ÚS 162/2011 of 31 May 2011). The empowerment of the civil courts with this ground is, therefore, welcomed. Additionally, the period for the initiation of the annulment proceedings is prolonged to 60 days (from 30) under art. 41 of the SAA.

The Slovak legislator did not choose to follow the solutions of the French and Belgian arbitration acts according to which the parties can waive their right to seek recourse at the national courts against an arbitral award since this is still prohibited in art. 42 of the SAA. Nevertheless, more efficiency in annulment proceedings is ensured because only three district courts now have the competence to deal with arbitration matters. This was achieved by an accompanying amendment of the Act No. 371/2004 Coll. on courts’ districts.

Conclusion

In conclusion, the SAA is a big step made in the pro-arbitration direction, but a long journey still lies ahead. Art. 43(1) of the SAA still states that if a court annuls an award because the arbitration clause was not valid or due to lack of arbitrability, the court will continue in the proceedings as if the claim was made there originally. Ultimately, there is no reason why a verbatim adoption of the UNCITRAL Model Law would not be more efficient. In fact, that is essentially what happened with the reform of the provisions on interim orders and the grounds for annulment.

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Joanne Greenaway

As a fitting tribute to the vision of the first dedicated arbitration education institution, the School of International Arbitration (SIA) marked its 30th anniversary with a two day conference looking back and looking forwards. Entitled “The Evolution and Future of International Arbitration: The Next 30 years”, it brought together over 200 graduates, academics and practitioners to reflect on the achievements in the field and the challenges ahead. Highlights included some blue-sky thinking as to the dramatic impact technology will have on the landscape of arbitration and some critical introspection as to the ongoing relevance of many of the key practices that the arbitral community holds dear.

Introducing the conference, Professor Julian Lew QC, founder of SIA, remarked on the huge geopolitical shifts in the last 30 years that have rebalanced the world’s power and resources and unravelled “colonialism’s umbilical cord”, all contributing to the increasing relevance of international arbitration. He described 4 major developments:

• A recognition of the differences in international arbitration (IA) from its domestic counterpart which have led to a reduction in restrictions on arbitrability and enforcement and a reduced tendency to over-review;
• The creation of IA legislation has facilitated the development of practice and influenced national legislation;
• The explosion of IA publications and notably of the teaching of IA with the establishment of academies and institutions worldwide; and
• A distinct preference for IA from international business.

Of the 8 panel sessions, one was dedicated to the evolution of the IA process and another to its future.

Delivering the first keynote address, Professor Filip de Ly (Erasmus School of Law) reviewed the sources of IA law and practice, noting the Anglo Americanisation of procedure. Assessing the future landscape he surmised that we are moving towards a hybrid between diversity and uniformity of arbitral practice. Globalised rules and guidelines can never go as far as to override the differences in legal and cultural attitudes and traditions. Cutting across this dichotomy are several clashes of principles: namely of party versus arbitrator autonomy, autonomy and a fair hearing, autonomy and efficiency and a fair hearing and efficiency.

Professor Sebastien Besson (Python & Peter Atorneys at Law) went on to consider the role of case law in the evolution of IA, its centrality but also its limits as regards the development of actual arbitral practice. Analysing trends, Professor Luke Nottage (University of Sydney), noted the success of efficiencies in IA but the comparative lack of success in containing rising costs, even in the Asia Pacific region where costs structures are lower, perhaps because arbitration remains “the only game in town for resolving international commercial disputes”.

Finally, Dr Laurence Shore (Herbert Smith Freehills) provided some critical perspective on the evolution of practice from the time when electric typewriters were used to draft briefs. His comments focussed on the “holy grail” of document production, witness statements and cross-examination. Redfern Schedules, he argued, initially intended to organise and discipline parties to produce only certain types of documents, have become “a trial within a trial”. The complexity of the system of matching documents to categories and the determination of counsel to procure what they say they need has “made the system simply unworkable”. In the age where tablet devices will replace bundles, cases should be led by “what the arbitrator needs to decide rather than what counsel thinks they need”. Challenging our over-reliance on witness statements, Dr Shore noted that tribunals rarely rely on witness statements in their award. Fact statements are key since documents rarely speak for themselves but the fallibility and flawed recollection of witnesses points to the need for thinking around the development of a new system that is more conducive to reaching the truth, such as video evidence-in-chief or a Q&A system. As regards cross-examination, Anglo-Americanisation is often criticised, sometimes justifiably and often because is the cross-examination is poorly executed and used simply to get documents into the evidence. Ultimately, Shore argued, whilst recognising the lawyers need to put their case, the process should be structured to put the arbitrators in a position to make a sound decision.

Looking forwards, the panel on the evolution of process considered how to regulate counsel conduct in the years to come, how institutions and arbitrators can and should manage the process and, finally, how the enormous technological advances will impact upon the conduct of international arbitration. On counsel conduct, Michael Hwang stressed the need to develop sanctions for offending counsel for behaviours such as bribery, breaches of confidentiality to a third party and copying notes of opposing counsel. He noted the concerns that sanctions introduced pre-award may lead to allegations of bias on the part of the tribunal; post-award is even more problematic given that the tribunal would be functus officio. Hwang recommended establishing independent disciplinary committees that would be responsible for sanctioning. This, he argued, would create “uniform standards of appropriate sanctions and stimulate best practice”.

Turning to the issue of conflicts disclosure, Alexis Mourre (Castaldi Mourre & Partners) insisted that this was the cornerstone of trust and confidence. In his view, it is the arbitral institutions that should continue to take responsibility for sanctioning failures in this regard and should be as demanding as possible. He underlined the importance of the soft law that the IBA has developed (and recently refined) in creating the consensus around this issue. The evolution of this area may well extend to the publication by institutions of challenge decisions, despite the ICC’s official reluctance to do so.

Michael Schneider (Lalive) went on to raise and critically analyse several new conceptual models that could transform the way we (and arbitrators in particular) manage arbitration in the coming years and decades: the ‘Reed retreat’ is an idea involving gathering arbitrators together pre-hearing to frontload their preparation and be in a position to ask questions of the parties and invite them to focus on particular areas. Similarly, the Rifkin ‘town elder model’ is premised on more interaction between arbitrator and parties, allowing the arbitrator to involve him/herself in the presentation of the dispute and better advise the parties about preparing their case. Finally, ‘collaborative arbitration’ could involve the arbitrator as a continuous helper to the parties, involving constructive discussion as to which evidence would suffice. A clear theme emerged around the various proposed models that arbitrators should assume a more hands-on role, directing the parties to the dispute and focussing their evidence. Schneider acknowledged that this approach had already begun to find its way into the rules. The LCIA Rules, for example, give the arbitrators power to take the initiative and the IBA Evidence Rules encourage the tribunal to identify issues for preliminary determination. He also acknowledged the spectrum along which this role could be played out, from impartial referee to dispute resolver but that the ownership transfer of the case from counsel to arbitrator should no longer be deferred until the hearing and post-hearing stage.

Arguably the most thought-provoking ideas were presented by Rob Smit (Simpson, Thatcher & Bartlett LLP), outlining the advances in technology that could transform the arbitration landscape. The pace of change, with computer power doubling every 18 months, makes the future (for which we must plan) almost inconceivable. Nonetheless, given current advances, huge shifts are likely to occur in the way we conduct hearings, hear witnesses and deal with multi-lingual nature of international arbitration. As regards hearings, currently extremely costly and disruptive, the future, he argued, resides not in videoconferencing but in telepresence, a projection of 3D figures so that parties can attend “holographically”, and one may not know until one tries to hand over a document to a virtual party, that they are in fact not actually there. This could indeed change the cost-benefit analysis of whether hearings are required. Linguistic differences will be managed not through human translators but through universal translation technology using electrodes that read reverberations and translate them into sound, or through computers that lip-read and synthesise, thereby cutting costs and improving accuracy and fluidity. Reliability of witness evidence will also be enhanced enormously by scanners that have a vastly superior record in detecting truth compared to human arbitrators.

These advances in technology will no doubt bring fundamental changes to the way in which we conduct ourselves in the next 30 years. However, whether they will fundamentally change the nature of arbitration is less certain. Technology could enhance efficiency and materially impact the roles of the various players but ultimately advocates will still have to present a story and arbitrators to decide cases.

Balancing the counsel’s imperative to present the case with the arbitrators need to deal with it fairly and efficiently was perhaps the key concern of all those who presented over the course of the conference. There was clear consensus that to achieve the appropriate balance, there should be a never-ending process of trying to improve the way we conduct international arbitration in light of changing needs. The next 30 years may no longer hold a place for complacency and reflexive behaviours. The SIA has certainly produced an enormous cadre of graduates, thinkers and institutions worldwide built on a similar model, all of whom will be well placed to address these challenges.

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Francisco Málaga

Linklaters

The facts of the situation are simple: the claimant goes to the domestic courts and the defendant argues that there is an arbitral agreement. The court judge upholds the jurisdictional objection and refers the parties to arbitration but, once the arbitration proceedings are over, the claimant party appeals to have the award annulled on the grounds that the very same arbitral agreement is invalid or doesn’t exist. Is the court judge’s decision binding on the court that hears the annulment petition?

The problem described doesn’t come up in countries like France, where the domestic courts have to decline jurisdiction and refer the parties to arbitration unless the arbitral agreement is manifestly invalid or inapplicable. However, it does arise in countries like Spain, where judges have full powers to analyse jurisdictional objections without any kind of restriction, which allows them to make findings in full detail on the existence, validity and applicability of the arbitral agreement.

In recent years, a number of Spanish courts have found in favour of the res judicata effect of judicial decisions to decline jurisdiction and higher court decisions upholding these on appeal. This was held, for example, by the regional courts (Audiencias Provinciales) of Madrid (Judgements of 26 June 2009, 26 October 2010 and 29 September 2011 and Order of 16 April 2010), Valencia (Decision by the 9th Panel on 27 January 2010) and Córdoba (Order of the 2nd Panel on 20 February 2003).

In my view, these precedents are wrong for two reasons:

On the one hand, because they are contrary to what it says in Article 222 of Spain’s Civil Procedure Rules (Ley de Enjuiciamiento Civil, “LEC”), which limits the res judicata effect to judicial decisions (sentencias). Jurisdictional objections (including those on the grounds of submission to arbitration) are ruled on by orders (autos) which, as such, do not have that effect. Where Spanish law is intended to give orders the effect of res judicata, it does so explicitly (e.g. Article 743 LEC, on interim measures). Article 222 may be open to question and in fact I don’t agree with it, but the Spanish civil process is governed by the principle of procedural legality and judicial decisions cannot go against the law.

On the other hand, to understand that judicial decisions on jurisdictional objections based on submission to arbitration have a res judicata effect is to invalidate the Kompetenz-Kompetenz principle. And this is because that effect, if it exists, would not be limited to the action to annul the award. It would also extend to arbitrators’ decisions on their own jurisdiction, precluding it. Article 22 of the Arbitration Act provides that arbitrators have the power to decide on their own jurisdiction, even on defences relating to the existence or validity of the arbitral agreement or any other objections that, if upheld, preclude looking at the merits of the case. This provision is incompatible with attributing the res judicata effect to decisions on jurisdictional objections.

It is clear that the solution de lege ferenda involves limiting the powers of countries’ judges to revise arbitral agreements, as happened in France. However, until that occurs, the res judicata effect should at least be denied for decisions on jurisdictional objections. Otherwise, this could mean doubling or even tripling the oversight of the existence and validity of the arbitral agreement, with the consequent risk of contradictory findings. The last word, as is logical, will be had by the domestic court that rules on the possible petition for annulment of the award.

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Daniela Paez-Salgado (Assistant Editor for South America)

Herbert Smith Freehills

The controversial dispute between the Ecuadorian government and the multinational corporation Chevron arose from the operations undertaken by Texpet –a subsidiary of Texaco at that time- on the country’s Amazon region during the eighties. Texpet was the operator undertaking the exploration and exploitation of hydrocarbons in association with Petroecuador, formerly CEPE, the state-owned oil company of Ecuador.

In the early nineties, Texaco ended its operations in Ecuador and invested approximately 40 million dollars in a remediation project for the zones in the rainforest that had been polluted during the joint operation carried out with Petroecuador. In 1998, Texaco subscribed Release Agreements with the Ecuadorian State that released the company from any further environmental obligation related with environmental remediation.

In 1993, various Ecuadorian plaintiffs filed a class action lawsuit against Texaco before a New York court for public nuisance –among other claims- caused by the environmental damage perpetrated during its operation in Ecuador. Texaco defended itself arguing that American courts were not the most appropriate forum to settle the dispute under forum non conveniens doctrine. In fact, the plaintiffs and the evidence were all located in Ecuador. Thus, Texaco used this argument to persuade the court that it had no jurisdiction to adjudicate the dispute. The court agreed and dismissed the claim.

Accordingly, the plaintiffs embraced a new strategy to sue Texaco before the Ecuadorian courts. Since in 2001 Chevron acquired Texaco and all of its assets, the plaintiffs decided to sue Chevron as the legal successor of Texaco. In 2003, around 40 plaintiffs filed a claim against Chevron before the Lago Agrio courts. Lago Agrio is the first town where Texaco discovered oil. Ecuadorian lawyer Pablo Fajardo and Harvard educated lawyer Steven Dozinger acted as counsels for the plaintiffs in what is today known as the ‘Lago Agrio litigation’. The claim was financially backed by investment funds.

The judge in Lago Agrio took eight years to give judgment. The judge condemned Chevron to pay 18 billion dollars to the plaintiffs for remediation and compensation of the environmental damage caused by its operations during the nineties. Chevron appealed the judgment and also requested a review of the appellate decision before the National Court of Justice acting as a court of cassation. On its decision, the National Court of Justice confirmed the judgment but lowered the amount of compensation to 9,5 billion dollars. At the moment, a decision of the Constitutional Court, the highest judicial court in Ecuador, is pending.

The plaintiffs have initiated enforcement proceedings against Chevron based on the National Court’s decision. Since Chevron never operated in Ecuador, it has no assets in the country; thus, the plaintiffs have been trying to enforce the Lago Agrio judgment filing claims to freeze the multinational’s assets in other jurisdictions such as Argentina, Canada and Brazil.

On its defense, Chevron has mainly alleged that (i) the claims were precluded due to the Release Agreements reached with the Ecuadorian authorities in the nineties and that (ii) the procedure and judgment rendered in Lago Agrio were vitiated by fraud committed between the plaintiffs’ lawyers and the judge. According to Chevron, the fraud included forgery of plaintiffs’ signatures, ghostwriting of procedural orders and judgment and the falsification of an expert witness report on the determination of damages.

In February 2011, Chevron filed a civil lawsuit against the plaintiffs’ counsels before a New York court under the Racketeer Influenced and Corrupt Organizations Act (RICO Act) seeking to hold them accountable for fraud, extortion and other misconduct associated with the Lago Agrio litigation.

Last year, United States District Judge, Lewis Kaplan ruled that RICO Act was applicable to civil plaintiff’s counsels, such as Mr. Donziger and his co-counsels, who attempted and/or committed illegal acts such as bribery, blackmail, extortion, witness tampering and fraud. See, Chevron Corporation v. Steven Dozinger et. al., S.D.N.Y., 4 March 2014. In addition, the decision prevented Dozinger to benefit from any money that derives from the enforcement of the Lago Agrio judgment. See, ibid.

In his nearly 500-page ruling, Kaplan agreed with Chevron’s position that Mr. Donziger and his litigation team engaged in conspiracy and criminal conduct. Certainly, this decision will give any judge that has been requested to enforce the Lago Agrio judgment second thoughts on the legality of such request. The defendant Mr. Dozinger has appealed the judgment. A decision from the Second Circuit is now pending.

Chevron is also pursuing relief against the Ecuadorian State through international arbitration for denial of justice during the Lago Agrio litigation. In 2009, Chevron brought its claim under the U.S.-Ecuador BIT. The arbitration is administered by the PCA. The Arbitral Tribunal decided to divide the dispute into two tracks. Track 1 would deal with the question of whether the Release Agreements entered into by Texaco and the State precluded the claims in the Lago Agrio litigation. Track 2 will focus exclusively on the denial of justice claims.

On September 2013, the Tribunal issued a partial award (Track 1A) in favor of Chevron and its subsidiary TexPet. The Tribunal found that the Release Agreements released TexPet and its affiliates of any liability for all public interest or collective environmental claims and did not preclude individual claims for personal harm. See, Chevron v. The Republic of Ecuador, PCA No. 2009-23, First Partial Award on Track I, 17 September 2013.

On its next decision (Track 1B), the tribunal had to determine whether the Lago Agrio complaint involved or not collective claims (also known as ‘diffuse rights claims’), which were precluded under the Release Agreements. See, Chevron, Decision on Track 1B, 12 March 2015, ¶ 3. On its recently issued decision, the majority of the Tribunal concluded that the Lago Agrio litigation involved both, diffuse rights claims and individual claims. ¶ 183. The tribunal pointed that the plaintiffs did not seek compensation particular to each plaintiff for a particular harm but asserted reparation of the collective rights granted to the community. ¶ 163-164. Since the settlement agreements only barred individual claims, the Tribunal rejected in limine Chevron’s preclusion contention. ¶ 183.

The award implies that the plaintiffs had a legitimate cause of action against Chevron, notwithstanding the execution of the Release Agreements and the remediation undertaken by Texaco in the past. Now that the Tribunal has decided that the plaintiffs had a right to bring a claim and legitimately did it, it will look at the development of the local proceedings to resolve the denial of justice claims that assert that the litigation was tainted by fraud. On their side, the Ecuadorian courts in their decisions on appeals and cassation rejected all of the fraud related claims raised by Chevron.

President Correa has embraced the tribunal’s latest decision acknowledging it is a “great victory” for the Ecuadorian State. However, the majority expressly recognized in the award that their determination was just preliminary and that their decision could change when resolving Track 2.

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Matthew Koh

Rajah & Tann Singapore LLP For YSIAC

Introduction

On 12 July 2016, a five-member arbitral tribunal (the Tribunal) constituted under Annex VII of the United Nations Convention on the Law of the Sea (UNCLOS) issued its long-awaited award on the merits in an arbitration brought by the Philippines against China.

The tribunal’s jurisdiction is derived from UNCLOS; all State parties to UNCLOS agree to compulsory dispute settlement procedures under Part XV, Section 2 of the treaty. China objected to the tribunal’s jurisdiction on the basis that it had submitted a declaration at the time it ratified UNCLOS, exempting disputes over sea boundaries and land territory from compulsory arbitration. On this basis, China did not participate in the arbitration.

The tribunal emphasised that China’s non-participation did not deprive it of jurisdiction (Annex 7, article 9 of UNCLOS). Nevertheless, in deciding on its jurisdiction, it considered a position paper that China published in December 2014 setting out its views on the tribunal’s jurisdiction.
On 29 October 2015, the tribunal issued its Award on Jurisdiction and Admissibility (the Award), holding that it had jurisdiction over seven of the matters raised in the Philippines’s submissions and reserving the issue of its jurisdiction with respect to seven other submissions for decision together with the merits. Subsequently, the tribunal held that it had jurisdiction over the other submissions as well. Generally, the tribunal held that the Philippines’s submissions did not require it to adjudicate on a sea boundary dispute or issues of sovereignty over land territory.

The Award

The arbitration revolved around whether China’s claim to sovereignty over much of the South China Sea was compatible with UNCLOS. The tribunal ruled in favour of the Philippines on almost all issues, in particular that:

(1) China’s historic rights in the South China Sea, if any, were extinguished when it ratified UNCLOS;
(2) none of the features China has occupied in the Spratly group generate an Exclusive Economic Zone (‘EEZ’): many, being rocks, do not even have a territorial sea;
(3) China violated the sovereignty of the Philippines over its EEZ;
(4) China breached its obligations to protect and preserve the marine environment; and
(5) China’s activities aggravated the dispute.

The Tribunal did not, however, have jurisdiction over sovereignty claims. It could not, therefore, decide which State has sovereignty over features or on the legality of China’s activities on features with territorial seas.

The first noteworthy aspect of the Award is the holding that any historic rights China previously had in the South China Sea, insofar as they are incompatible with the EEZs of other States, were relinquished when China ratified UNCLOS (at [271]). The Tribunal found that there was no evidence that China had historically exercised exclusive control over the South China Sea. Prior to UNCLOS, any waters outside of territorial seas would have constituted the high seas. Therefore, Chinese navigation and fishing in the South China Sea were simply exercises of high seas freedoms rather than of any historic rights (at [270]).

The Tribunal emphasised that the underlying rationale of UNCLOS was to give resources in EEZs to coastal States; correspondingly, States with only a presence on small features would not have the same entitlements as coastal States (at [517]-[519]). The Tribunal noted that the drafters of UNCLOS had explicitly rejected proposals for it to recognise the historic rights of States (at [250]).

On the status of features, the Tribunal held that several of the features China has occupied are low-tide elevations (‘LTEs’) as defined in article 13(1) of UNCLOS: these included Mischief Reef and Second Thomas Shoal (at [646]-[647]). LTEs are not entitled to maritime zones of their own and cannot be the subject of a sovereignty claim unless they are within 12 nautical miles (‘NM’) of an island (UNCLOS, article 13(2)).

The second noteworthy (and perhaps the most remarkable) aspect of the Award is the Tribunal’s interpretation of article 121(3) of UNCLOS, which states:

“Rocks which cannot sustain human habitation or economic life of their own shall have no exclusive economic zone or continental shelf.”

The Tribunal held that a feature is not a rock if, objectively speaking, it can, in its natural condition, sustain either a stable community of people or an economic activity that is not dependent on outside resources or is not purely extractive in nature (at [504]-[505]).

On this basis, the Tribunal concluded that all the high-tide features in the Spratlys are rocks (at [643]-[646]): these include Scarborough Shoal, Johnson Reef, Fiery Cross Reef and Itu Aba Island. Therefore, each feature only has a 12-mile territorial sea and not an EEZ.

In so concluding, the Tribunal noted that modern habitations on many of these features, being dependent on outside resources, are not evidence of whether they can sustain human habitation or economic activity in their natural condition (at [578]). Temporary occupation of the features in the past also did not amount to habitation by stable communities and all historical economic activity had been purely extractive (at [624]). In fact, the Tribunal presumed that if a feature has never hosted a stable community, “the most reasonable conclusion would be that the natural conditions are simply too difficult for such a community to form and that the feature is not capable of sustaining such habitation” (at [549]).

The Tribunal therefore established a very high threshold for proving that an island is not a rock. While it could be argued that this high threshold is not reflective of the interconnectedness of modern human communities, the better view is that it is more consonant with what the drafters of UNCLOS intended.

Thus, on the basis that China was acting within the EEZ of the Philippines, the Tribunal held that China violated the sovereignty of the Philippines in its EEZ by:

(1) interfering with petroleum exploration in Reed Bank;
(2) prohibiting fishing by Philippine vessels;
(3) protecting and failing to prevent Chinese vessels from fishing at Mischief Reef and Second Thomas Shoal; and
(4) constructing installations and artificial islands at Mischief Reef without authorisation by the Philippines.

In particular, the Tribunal’s holding on Mischief Reef may pose problems for China. This feature now falls within the Philippines EEZ: therefore, the Philippines legally has jurisdiction and control over Mischief Reef and installations that China has constructed on it. In addition, since Mischief Reef does not generate a territorial sea, nations such as the United States and Australia may extend their freedom of navigation and overflight operations to within 12 NM of Mischief Reef. This could lead to tense engagements with Chinese military vessels and aircraft.

Interestingly, the Tribunal held that both China and the Philippines had historic rights in the territorial sea around Scarborough Shoal (at [805]). Therefore, in preventing Philippine fishermen from accessing the Shoal, China violated its duty to respect the historic rights of the Philippines (at [812]). Furthermore, China also breached its obligations under the Convention on the International Regulations for Preventing Collisions at Sea 1972 when its vessels, in preventing Philippine vessels from entering the Shoal, created a serious risk of collision with Philippine vessels (at [1109]).

As a consequence of the Tribunal’s decision on this point, any area beyond the territorial sea would be the Philippines’s EEZ and China would have no historic rights therein. This raises the question of how the two States will exercise their co-existing historic rights within the territorial sea of Scarborough Shoal. As the Tribunal had no jurisdiction over sovereignty claims, it could not have ruled on this question.

The Tribunal also held that China’s land reclamation and construction of artificial islands in the Spratlys, and failure to prevent Chinese fishermen from harvesting endangered sea life, breached its obligations under articles 192 and 194 of UNCLOS to preserve and protect the marine environment (at [992]). China’s activities, such as constructing a large artificial island on Mischief Reef and destroying evidence of the natural condition of the features, were also held to have aggravated and extended the dispute (at [1181]).

China’s reaction to the award

Following publication of the Award, the Foreign Affairs Committee of China’s National People’s Congress issued a statement asserting (inter alia):

(1) that China has sovereignty over four groups of islands (including the Spratlys), which have internal seas, territorial seas and contiguous zones, and are entitled to EEZs and continental shelves; and.
(2) that China has historical rights in the South China Sea.

This statement appears to be the first time that China has explicitly set out these particular legal positions. Interestingly, it makes no mention of the so-called ‘nine-dash line’ that has hitherto formed the basis of its claim to the South China Sea.

Effect and implications of the Award

The Award is final and binding on both parties (article 296 of UNCLOS) and it is hoped that China will comply with it voluntarily. This is an opportunity for China to repair any reputational damage resulting from its non-participation in the arbitration. In any event, even if China does not comply, the Award confirms the compulsory nature of the UNCLOS dispute resolution mechanism and reinforces the rule of law in the oceans. The Award also upholds the EEZ regime, one of the predominant aspects of the Law of the Sea. It should, however, be noted that UNCLOS lacks a formal enforcement regime; there is, therefore, no legal means of enforcing China’s compliance with the Award. Nonetheless, China’s failure to comply with the Award could naturally have negative ramifications for its international reputation.

One of the most significant implications of the Award is that it may encourage States to compromise on sovereignty claims in the South China Sea while favouring joint development instead. Joint development may be the most practical and peaceful way for States to exploit resources in this contentious region. A feature like Scarborough Shoal, where multiple States have historic rights, is an ideal subject for joint development. In this regard, the Award could be a starting point for improved diplomatic relations between the States. China has urged the Philippines to return to bilateral negotiations. For its own part, the Philippines has indicated willingness to conduct negotiations with China and explore the possibility of joint development.

The Tribunal observed that the disputes arose, not because either State intended to infringe the rights of the other, but from “fundamentally different understandings of their respective rights under the Convention” (at [1198]). On this note, given that the Award has clarified each State’s rights in the disputed area, there is still reason to hope that they will both respect it, modulate the tone of their exchanges with each other and moderate their future conduct in accordance with it.

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Irene Gee

Clyde & Co. For Clyde & Co.

The Court of Appeals for the Second Circuit, which covers the district courts of New York, Connecticut and Vermont, was recently called to decide the effect that a vacatur of an award in the seat of arbitration (in that case, Mexico) had in an ongoing enforcement proceeding in New York.

The Court of Appeals held that while the vacatur was important to the decision as to whether to enforce the award, the New York Convention did not create an obligation to refuse enforcement in such situations, but only a permission to refuse enforcement. It is the resisting party’s obligation and burden to put forward its best case to have the award vacated. The Court of Appeals then went on to enforce the vacated award, a decision that appears to be only the second since Chromalloy was decided twenty years ago.

The Background of the Dispute

In 1997 COMMISA and PEP, a Pemex subsidiary, contracted for COMMISA to build oil platforms in the Gulf of Mexico. When logistical and financial issues arose the parties signed a new agreement, which also in turn, did not solve the dispute. Eventually, in 2003, PEP gave notice of its intent to rescind the contract and it was then COMMISA who filed an arbitration demand with the ICC under Mexican law in Mexico. In 2006, the ICC tribunal issued a preliminary award finding jurisdiction and enjoining any attempt by PEP to collect on performance bonds.

The Vacatur

In 2007, a supervening law came into effect in Mexico which created a prohibition for public entities to arbitrate issues related to rescission of public contracts. PEP then filed a request for reconsideration of the preliminary award, which was rejected by the arbitral tribunal in December 2009.

Shortly afterwards, in August 2010, COMMISA filed an enforcement petition in the Southern District of New York and PEP filed an “amparo” (a type of mandamus/ injunction) in the Mexican courts. In September 2011, the Mexican court, applying the supervening 2007 law, found that the arbitral award violated Mexico’s public policy and vacated it.

Meanwhile, the Southern District of New York, which had already confirmed the award in 2010, received the case back from the Court of Appeals to reconsider its decision in light of the vacatur in the seat. Ultimately the Southern District declined to defer to the Mexican court ruling and confirmed the award on the ground that the annulment violated basic notions of justice insofar as it applied a law retroactively and left COMMISA without a forum to adjudicate its disputes. PEP appealed the judgment to the Second Circuit relying on the vacatur in the Mexican court.

In a majority opinion, the Court of Appeals held that because PEP did not reinstate its personal jurisdiction objections that it had put forward in its first appeal, it had forfeited that defense.

Second, the Court of Appeals held that PEP was for all intent and purposes a foreign government with no distinct juridical status vis-à-vis the Mexican government.

Substantively, the Court of Appeals for the Second Circuit observed that the United States was a signatory of two conventions on enforcement of foreign arbitral awards, both of which displayed a pro-enforcement bias. The Court then went on to explain that the pro-enforcement bias is reflected in the requirement that a district court must enforce an arbitral award unless a litigant satisfies one of the seven enumerated defenses. If one of the defenses is established the district court might, but it is not required to, refuse recognition of the award.

In practice, very few courts since Chromalloy have used their discretion and enforced an arbitral award vacated at the seat of arbitration. The judicial practice to defer to the judgment in the seat of the arbitration is based on the principle of international comity.

International comity, on the other hand, is limited by U.S. public policy. As enunciated by the D.C. Circuit, a “judgment is unenforceable as against public policy to the extent that it is ‘repugnant to fundamental notions of what is decent and just in the State where enforcement is sought.’” (Tahan v. Hodgson, 662 F.2d 862, 864 (D.C. Cir. 1981)).

Despite observing that the public policy exception standard was high and infrequently met, the Court of Appeals for the Second Circuit concluded that the lower court did not abuse its discretion in confirming the arbitral award despite the annulment in Mexico. The Court of Appeals held that under the public policy exception (1) the need to ensure legal claims find a forum, (2) the prohibition against government expropriation, (3) the vindication of contractual undertakings and waiver of sovereign immunity and finally, (4) the repugnancy of retroactive legislation that disrupts contractual expectations trumped international comity.

Although justified in both Articles V and VII of the New York Convention, the discretion exercised by courts in recognizing and enforcing awards set aside at the place of arbitration has been seldom used in the United States. This is explained in large part to the high standard that must be met in order to displace the international comity principles guiding U.S. courts.

It should be interesting to monitor if this recent decision represents a shift in American jurisprudence of if it only reflects the unusual facts that the COMMISA v. PEP case presented.

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Patricia Nacimiento, Thomas Weimann, Mathias Wittinghofer and Tilmann Hertel

Herbert Smith Freehills For Herbert Smith Freehills

The situation that the Bundesgerichtshof was recently faced with in a case is not uncommon: whilst a state court still reviews an arbitral tribunal’s preliminary ruling on its competence, the arbitral tribunal delivers its final award on the merits. This raises one question: What are the implications for the pending challenge to jurisdiction?

In previous cases, the Bundesgerichtshof held that the rendering of the final award on the merits puts a stop to the review proceedings in respect of the decision on jurisdiction. As a consequence, the issue of jurisdiction had to be tried again in potential set-aside proceedings. This approach led to the criticism that it frustrated a party’s efforts to challenge jurisdiction and created unnecessary costs. In decision of 9 August 2016, docket number I ZB 1/15, the Bundesgerichtshof revised its approach: the review proceedings in respect of the tribunal’s decision on jurisdiction remain admissible and pending even after the arbitral tribunal has issued its final award. As regards the three-month period for filing an application to set-aside the arbitral award, the Bundesgerichtshof found the following solution: the three-month period only commences once the state court rendered a final decision in the review proceedings.

As Germany’s arbitration law is based on the UNCITRAL Model Law, this recent turn-around not only impacts upon arbitrations seated in Germany. It may potentially also have implications for other Model Law jurisdictions.

The case before the Bundesgerichtshof: facts and background

In the case before the Bundesgerichtshof a defendant in an arbitration challenged the jurisdiction of the arbitral tribunal. The defendant, represented by an administrator over the estate of an insolvent company, essentially argued that the arbitration agreement had been terminated before the commencement of the arbitration as well as that the tribunal lacked jurisdiction because the parties did not hold pre-arbitral settlement negotiations. The place of arbitration was in Germany. The ad-hoc arbitration was not administrated by an institution.

Absent any institutional rules that could apply to the proceedings, one has to take a closer look at the relevant provision in the German Civil Code of Procedure (“ZPO”). Under section 1040 (2) ZPO, which reflects article 16 (2) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”), a plea that an arbitral tribunal lacks jurisdiction shall be raised no later than in the statement of defence. Further, and this mirrors article 16 (3) of the Model Law, German law provides that an arbitral tribunal may rule on the plea of lack of jurisdiction by means of a preliminary ruling. Pursuant to German law as well as the Model Law, this decision by the arbitral tribunal can be brought before the state courts for review within one month after having received notice of the arbitral tribunal’s decision (also referred to as “review proceedings”). If a party does not challenge an arbitral tribunal’s decision on jurisdiction within the one month period, this party will be precluded with a plea of lack of jurisdiction at the enforcement stage.

What happened in the case before the Bundesgerichtshof is the following:

Having received the tribunal’s decision on jurisdiction, the defendant commenced the review proceedings before the competent German court of appeal. As it is expressly allowed to do so pursuant to section 1040 (3) ZPO, which finds its equivalent in Art. 16 (3) of the Model Law, the arbitral tribunal continued the arbitral proceedings and eventually handed down its final award. By that time, however, the Bundesgerichtshof had not ruled on the challenge of the arbitral tribunal’s preliminary ruling on jurisdiction.

This overlap is a problem for the following reason: Under German law, receipt of the final award by the parties triggers the three-month period of section 1059 (3) ZPO for an application to have the award set-aside. However, since the review proceedings still pending, this has raised the issue of the interdependence of the pending review proceedings on the one hand and the set-aside proceedings on the other. This question arises in particular since the lack of jurisdiction is one ground for setting aside an arbitral award, section 1059 (2) No 1 ZPO.

The Bundesgerichthof‘s past approach: lack of admissibility

Until recently, the Bundesgerichtshof took the view that with the issuance of the final award, the review proceedings become inadmissible because the applicant no longer had an actionable interest in the review proceedings (see e.g. Bundesgerichtshof, decision of 19 September 2013, docket number III ZB 37/12). The Bundesgerichtshof essentially reasoned as follows:

– Even if the state court held that the arbitral tribunal did not have jurisdiction, this finding as such would neither render the final award null and void nor would it lead to a vacation of the award. Rather, the award could only be set aside in separate proceedings.

– In addition, if one were to find differently this could undermine the regime on the challenge and enforcement of arbitral awards with its strict three-month deadline.

A change of mind: an indefinite extension of the time period for the commencement of challenge proceedings.

Now, only three years later the Bundesgerichtshof was apparently no longer convinced by this line of reasoning. Another senate of Germany’s highest civil court revisited the court’s previous stance and ruled that the issuing of the final arbitral award does not render the review proceedings inadmissible. The court did not provide extensive reasoning for its ruling. In summary, it held that:

– It is in the interest of the parties not to have wasted time, efforts and costs on the review proceedings so that the review proceedings should be continued even if a final award has been handed down in the meantime.

– The conflict that arises from the fact that the issuance of the final award triggers the three month period for the commencement of the challenge proceedings can be solved: applying section 1059 (3) ZPO by analogy, the three-month period does not commence with the receipt of the final award. The three-month period for the commencement of challenge proceedings instead commences with the receipt of the Bundesgerichtshof’s decision in the review proceedings.

In addition, and only as a side note, the Bundesgerichtshof held that the arbitral tribunal rightfully assumed jurisdiction over the dispute. It held that the arbitration clause was not automatically terminated by the insolvency proceedings – and could not be terminated by the insolvency administrator based on German insolvency law. It further held that even if the parties had not adhered to the provision of an escalation clause calling for pre-arbitral settlement talks, this could not question the competence of the arbitration tribunal. The tribunal was still the right forum to decide on the adherence with the escalation clause – which decision went to the admissibility of the claim, as opposed to jurisdiction.

Potential implication of the recent development – a comment:

This recent change of mind of the Bundesgerichtshof may have a number of implications, some of which are considered below:

– Whilst the decision can be welcomed as fostering procedural efficiency (the same issue may not have to be tried twice), it also creates a certain degree of legal uncertainty. If a decision on jurisdiction of an arbitral tribunal is challenged, the commencement of proceedings to have an arbitral award set aside may potentially be postponed for an indefinite time.

– This postponement may particularly become relevant if enforcement is sought outside of Germany under New York Convention 1958. A foreign court will not necessarily be impressed by the pending review proceedings in Germany – in particular if they are basically open ended. It is doubtful whether a foreign court seized with exequatur proceedings will adjourn the decision on the enforcement of the award pursuant to Article VI of the New York Convention, because this would require that an application for setting aside or suspension of the award has been made at the seat of arbitration – and the review proceedings technically are no such application for setting aside or suspension of the award. Thus, the foreign court and may recognise the award and declare it enforceable since enforcement of a foreign arbitral award only can be denied if the award was set-aside at the seat of the arbitration, Article V (1) (e) of the New York Convention.

– Further, as a result of the most recent decision, parallel proceedings before the German courts may be brought: a successful party in the arbitration may still commence enforcement proceedings in Germany regardless of the pending review proceedings. Similarly, the other party may potentially also commence parallel proceedings to have the award set aside. In both instances the question arises whether the review proceedings and the enforcement proceedings are interdependent and how the courts would deal with this. The Bundesgerichtshof did not provide guidance on this. It appears, however, that the challenge proceedings will not be inadmissible because of lis pendens. Thus, it may be a possibility that the enforcement proceedings be stayed until the review proceedings have been concluded. If both, review proceedings and enforcement proceedings are pending before the same court, the court may also consider consolidating the proceedings.

– In any event, only under exceptional circumstances will the German courts declare the award as preliminarily enforceable – which would allow a party to seize and freeze assets.

As a final remark: The German government only recently constituted an expert committee to assist the legislator in its review of the German law on arbitration. The Bundesgerichtshof‘s old approach was put on the committee’s agenda – and so will the revised approach. It remains to be seen whether the discussions lead to another change of the situation in Germany, including clear codification of the recent approach in the ZPO.

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Anne-Karin Grill and Sebastian Lukic

Schoenherr For Schoenherr

The decisive underlying reasoning (motifs, Begründung) is, without doubt, an essential part of any arbitral award and as such bears the potential of frustrating parties and arbitrators alike. On the one hand, elaborate reasoning in arbitral awards more often than not comes at the price of long waiting periods for the issuance of the awards, and periods of meticulous drafting on the part of the arbitrator(s). On the other hand, a lack of elaborate reasoning may likewise be a headache, since it exposes the arbitral award to setting aside.

From a practitioner’s point of view, how do you reconcile the extremes? When can the decisive underlying reasoning of an arbitral award be considered sufficient against the background of possible setting aside proceedings? Clearly, these are questions that must be determined on a case-by-case basis. Further, any assessment will necessarily be informed by the relevant lex arbitri.

As for arbitral awards issued by tribunals seated in Austria, a key provision in this respect is Section 611(2) para 5 of the Austrian Code of Civil Procedure (“ACCP”). This provision states that arbitral awards shall be set aside if the arbitral proceedings were conducted in a manner that is in conflict with the fundamental values of the Austrian legal system (procedural ordre public). Prevailing scholarly opinion argues that procedural ordre public may only be invoked where severe breaches of procedural law have materialised.

Up until recently, scholarly opinion in Austria also supported the finding of the Austrian Supreme Court that the failure to include any decisive reasoning in the arbitral award whatsoever or to include only insufficient reasoning, did not constitute a violation of Austrian procedural ordre public. The most recent judgment on the subject matter issued by the Austrian Supreme Court stems from September 2016 and marks an important turnaround regarding the relevance of the decisive reasoning underlying arbitral awards (OGH 28.09.2016, 18 OCg 3/16 i). In the case at hand, the Austrian Supreme Court was called upon in connection with setting aside proceedings relating to an interim award (Zwischenschiedsspruch). One of the questions before it was whether the decisive reasoning underlying the interim award was “insufficient” to a degree rising to the level of a violation of Austria procedural ordre public. By reference to the amendments introduced to the Austrian Arbitration Act (Schiedsrechtsänderungsgesetz 2006), the Austrian Supreme Court overturned its longstanding jurisprudence on the setting aside of arbitral awards on the basis of violations of Austrian procedural ordre public, finding that non-adherence to certain standards applicable to the underlying decisive reasoning in arbitral awards can be a ground for setting aside under Section 611(2) para 5 ACCP. According to the Austrian Supreme Court this is necessarily so in light of the fact that the standards applicable to arbitral awards are not the same as those applicable to judgements of civil courts. In this context, the Austrian Supreme Court called upon arbitral tribunals to strictly implement formal quality (formale Qualität) in their awards, especially in the absence of an appellate mechanism in the context of arbitration by which legal flaws in the decision – be them formal or material in nature – could be addressed. In particular, the Austrian Supreme Court held that

– arbitral awards are subject to setting aside pursuant to Section 611(2) para 5 of the ACCP if the decisive underlying reasoning consists merely of “meaningless phrases” (inhaltsleere Floskeln);

– if arbitral awards, in the decisive underlying reasoning section, make reference to the submissions of one party only, such reference does not imply “insufficiency” in the given context; and that

– an arbitral award is sufficiently reasoned (ausreichend begründet) if the arbitral tribunal discusses its own position in the course of the proceeding and, in the subsequent award, makes reference to this position.

The recent judgement of the Austrian Supreme Court is certainly to be welcomed. From both arbitrators’ as well as counsels’ perspective, it provides essential guidance: in the process of drafting their awards, arbitrators will forthwith have to bear in mind the minimum standards expressly determined by the Austrian Supreme Court. Counsels, on the other hand, in assessing the chances of success of potential setting aside proceedings in Austria, will be mindful that while the recent judgment may have opened a new door for setting aside in Austria, even awards that contain only insufficient reasoning will not be set aside by the Austrian state courts. This will be so in cases where (i) the parties expressly waived their right to receive a reasoned award (Verzicht auf die Begründung des Schiedsspruchs, Section 606(2) ACCP) or, more importantly, where (ii) the parties did not request an explanation of the award (Erläuterungsantrag, Section 610(1) para 2 ACCP). The latter, in particular, is a remedy that will have to have been exhausted before an application for the setting aside of the award may be lodged.

In conclusion, a word of reassurance may be in order. While the Austrian arbitration landscape is now richer in terms of grounds for setting aside, it is unlikely that we will see a surge in complaints as regards the quality of the decisive underlying reasoning in awards issued by arbitral tribunals seated in Austria. If anything, the change of direction regarding the jurisprudence of the Austrian Supreme Court will serve to improve the quality of Austrian arbitral awards even further.

*Anne-Karin Grill was recently named “Future Leader in Arbitration 2017” by Who’s Who Legal.

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Inna Uchkunova

International Moot Court Competition Association (IMCCA)

Co-authored with Ivaylo Dimitrov, George Washington University Law School

Foreword

A recent award rendered in the case of Standard Chartered Bank (Hong Kong) Limited v. Tanzania Electric Supply Company Limited (TANESCO) (ARB/10/20, Award, 12 September 2016) (hereinafter: “SCB HK v. TANESCO”) seems to put an end to a dispute which had sparked lately relating to an arbitral tribunal’s power to revise or reconsider its previous interim decisions in ICSID arbitration.

The tribunal in SCB HK v. TANESCO decided unanimously that it can exercise a power to reconsider its earlier Decision on jurisdiction and liability, thus becoming the first ever ICSID tribunal to do so. It reasoned, inter alia, that:

“In exercising a power to reopen a decision, a tribunal should be guided by, although not bound by, the limitations on reopening that apply to awards. Whatever the power the tribunal has to reconsider a decision that power must at least extend to the grounds for reopening an award in Article 51…” (Award, para. 322)

Facts

The factual background of the case is very complex involving numerous court proceedings in various jurisdictions. For present purposes, it may be briefly stated that the case relates to the 2001-2003 loan restructuring of the Independent Power Tanzania Limited (“IPTL”), the latter being in charge of constructing and operating an electricity generating facility in Tanzania.

Initial Dispute and the 1st ICSID Proceedings

In 1995, IPTL and TANESCO, an entity wholly owned by the Republic of Tanzania and designated as an agency pursuant to Article 25(1) of the ICSID Convention, concluded a power purchase agreement (“PPA”).

In 1998 however, a dispute arose between the parties to the PPA which resulted in TANESCO initiating ICSID proceedings claiming that IPTL has failed to comply with the financial model (debt/equity ratio) for the project leading to a higher tariff and overcharges.

The 1st ICSID tribunal acknowledged that IPTL had imprudently incurred costs and the tariff was recalculated.

Debt Restructuring and SCB HK’s Involvement

In 2004, following a renewed invoice dispute, TANESCO refused to make capacity payments and instead began to deposit the sums due under the PPA into an escrow account. IPTL, for its part, took to restructure its debt. The refinancing was effectuated without the knowledge of TANESCO. The Respondent’s position is that the new loan exceeded the amounts authorized by the 1st ICSID tribunal.

In 2005, SCB HK acquired IPTL’s loan and in 2010, further to IPTL’s default, SCB HK exercised its step-in rights and initiated ICSID proceedings claiming that all contractual rights of IPTL under the PPA are vested in it as the lender-assignee. TANESCO countered that the claimant’s debt acquisition was invalid under local law since the security assignment was not registered with the Tanzanian trade register.

The 2nd ICSID Tribunal’s Decision

In its Decision on jurisdiction and liability dated 12 February 2014, the tribunal found that the assignment was valid. The tribunal however provided only declaratory relief refusing to order TANESCO to pay the claimed sums to SCB HK rather than to IPTL, essentially, for the following reasons: (1) in light of the winding up proceedings with regard to IPTL, which had in the meantime been initiated by VIP Engineering and Marketing Ltd, IPTL’s minority shareholder, the possibility for the appointment of a liquidator was still open, therefore, the tribunal did not wish to interfere with the jurisdiction of Tanzanian courts which were in a better position to determine the priority among IPTL’s creditors; (2) the existence of the escrow account and the funds held therein provided at least some protection to SCB HK’s rights.

Developments on the Ground

Following the Decision, it transpired that with the support of TANESCO and the Government of Tanzania (“GoT”) all shares in IPTL had been transferred to Pan Africa Power Solutions (T) Ltd (“PAP”), a Tanzanian company. It remains unknown when and how Mechmar, the majority shareholder in IPTL, had transferred its shares to PAP. What is known is that after all affairs of IPTL had passed to PAP, TANESCO has agreed to settle the dispute regarding the outstanding payments and GoT released the funds from the escrow account and paid them to PAP which used part of the money to pay for the purchase of IPTL’s shares.

Reconsideration

Given that at the time of the tribunal’s Decision it was not known to either the claimant or the tribunal that TANESCO and IPTL had reached a settlement and that the escrow account funds have been released, SCB HK sought reconsideration of the Decision on jurisdiction and liability in light of those developments which affected the claimant’s situation.

After discussing the question whether a tribunal has a power to revisit its previous decisions and agreeing that it does since in this case important information had been withheld or misrepresented by the Respondent, the tribunal decided that it should reconsider its previous Decision.

Indeed, the tribunal noted that in the Decision it had provided a mere declaratory relief so as not to interfere with the local courts’ authority and in order to leave open the possibility of a liquidator being appointed for IPTL since it is for the liquidator and the courts to determine the question of priority among IPTL’s creditors. But now that the dispute between TANESCO and IPTL has been settled there was no likelihood for the appointment of a liquidator and what is more the situation of SCB HK has been rendered worse since the funds from the escrow account have been released in favour of PAP.

The tribunal, therefore, decided that it must grant the relief originally sought by the claimant and that in addition to making a declaration of the amount owed by TANESCO to SCB HK, it will also order the payment of that amount. The tribunal also recalculated the tariff applicable to the PPA.

A Note on the Tribunal’s Power to Reconsider Its Pre-Award Decisions

Following Prof. Georges Abi-Saab’s landmark dissent in ConocoPhillips v. Venezuela (ARB/07/30, Decision on respondent’s request for reconsideration, 10 March 2014), the question of the tribunal’s power to reopen its previous decisions was brought to the forefront.

The main argument of those denying that such a possibility exists has been that interim decisions are intended to be res judicata and thus not subject to review separately from the final award.

This argument is unsubstantiated for two main reasons:

1) arbitral awards rendered under the ICSID Convention are also intended to be final and binding but nevertheless they are subject to post-award remedies such as interpretation, revision, or annulment;
2) it has been claimed that under the ICSID Convention only awards are subject to remedies such as interpretation, revision, or annulment to the exclusion of interim decisions, but as seen in Waste Management II, this contention does not hold true since the tribunal there recognized that:

“…it had the power, while still exercising its functions and prior to the closure of the proceedings, to give any necessary interpretation of any of its decisions, to make any necessary supplementary decision, and to correct any error in the translation of a decision.” (emphasis added) (Waste Management, Inc. v. United Mexican States, ARB(AF)/00/3, Award, 30 April 2004, para. 17)

Prof. Schreuer has similarly commented that:

“Art. 51 is designed specifically for situations in which the tribunal has terminated its activity. A tribunal that is still in session can always revise its preliminary decisions informally.” (Christoph Schreuer, The ICSID Convention: A Commentary (CUP: 2009) at p. 880)

Importantly, even in Perenco Ecuador Limited v. Ecuador the tribunal acknowledged that “only in exceptional circumstances would it be open for the Tribunal to reconsider its prior reasoned decisions.” (emphasis added) (ARB/08/6, Decision on Ecuador’s reconsideration motion, 10 April 2015, paras. 3, 6)

It is also worth mentioning that in reconsidering their decisions arbitral tribunals must be guided by the standard contained in Article 51 of the ICSID Convention and not that contained in Article 52 thereof concerning annulment since, as noted by Prof. Andreas Bucher, it was never intended for the same tribunal to determine, e.g., whether it has made an excess of powers in its own decisions. (ConocoPhillips v. Venezuela ARB/07/30, Dissenting Opinion in relation to the Application for Reconsideration of part of the Decision on the Merits, 9 February 2016)

In sum, tribunals may and in cases such as SCB HK v. TANESCO should use the power to reconsider their decisions guided by Article 51 of the ICSID Convention, namely where a fact has been discovered of such a nature as to decisively affect the decision of the tribunal and the concerned party’s ignorance of that fact is not due to negligence, probably excepting cases in which the fact relates to a belated jurisdictional objection. (See Award, para. 323) Such a fact must have existed at the time of the decision. (Cf. Schreuer, supra p. 884, marginal para. 19) It remains, however, still unclear whether a tribunal may reconsider its decisions on its own motion in case of error of law. (See Waste Management, Inc. v. United Mexican States, supra, para. 17; Prof. Georges Abi-Saab’s D.O., supra, para. 62)

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Daniela Páez-Salgado (Assistant Editor for South America) and Zach Li, FTI Consulting

Herbert Smith Freehills

On December 21, 2016, the Tribunal in Hochtief v Argentina issued an award on damages against Argentina in an arbitration brought under the Argentina-Germany BIT.  The Claimant had alleged multiple treaty breaches by Argentina, arising out of the 2000 economic crisis, and originally sought US$ 54 million in damages.  Although the Tribunal found that Argentina had violated the fair and equitable treatment clause, the damages award was only US$ 13.41 million.

A consortium of five companies, including Hochtief, a German construction company, participated in a bidding process for the construction of a toll highway and a bridge in Argentina.  The consortium was granted the concession in 1998.  The Concession Contract required the consortium to incorporate a local company for the purpose of performing the contract. Consequently, the consortium created Puentes del Litoral S.A. (“PdL”), with the consortium members as PdL’s shareholders.

Under the Concession Contract, PdL was entitled to a basic toll rate and an adjustment mechanism to absorb the effects of inflation in Argentina.  In 2002, in the midst of the Argentinean economic crisis, the Government passed the Emergency Law (the “Law”). Hochtief alleged that the Law eliminated the rights guaranteed in the Concession Contract and destroyed the project’s viability.  PdL was unable to fulfill its obligations to third parties, and in 2007 it initiated bankruptcy proceedings.  Hochtief then brought the treaty claim for the diminution in the value of its investment in PdL.

Around the same time, the Government started a renegotiation process with PdL.  In 2012, PdL and the majority of its shareholders entered into a Transitory Agreement with the Government to settle its claims.  Despite that agreement, the Tribunal found, in 2014, that the Government’s conduct violated the BIT’s fair and equitable treatment provision, due to the Respondent’s failure to redress the commercial balance of the contract after the pesificación.

To calculate the compensation owed to Hochtief, the Tribunal calculated the loss of value of its shareholding (26 percent) in PdL.  The loss of value of the subsidiary, according to the Tribunal, included “the sums that [the subsidiary] should have received if pesification had not occurred and if the toll rates had been revised annually.” (Decision on Liability, ¶316).

The Decision on Liability also directed the parties to attempt to agree among themselves on the proper amount of damages.  When the parties failed to reach agreement, they went back to the Tribunal for a final decision.  The Claimant took this opportunity to apply for reconsideration of the Tribunal’s prior pre-judgment interest determination. However, the Tribunal denied the application.

International arbitral tribunals commonly direct the parties’ quantum experts to engage in a joint meeting, where they can determine their points of agreement and disagreement without intervention by counsel.  These joint meetings usually take place after the submission of the experts’ first or reply reports, but in advance of the hearing on quantum, so that the experts can file a joint report in which it is hoped that they can narrow some fo their differences.  Indeed, it is not uncommon for the experts to make certain concessions, which aid the arbitrators in their determination of damages.  Notably, however, in Hochtief v Argentina, the Tribunal directed the Parties, not the experts, to agree on a sum.

As to the pre-judgment interest issue, the Claimant argued that the rates of short-term US Treasury Bills (total damages of US$ 54 million) specified in the Decision on Liability did not allow for full reparation of its losses.  The Claimant provided two alternatives:(i) pre-judgment interest rate calculated based on the Claimant’s weighted average cost of capital (total damages of US$ 103 million); or (ii) commercial interest rate, as referred to in Article 4(2) of the BIT (total damages of US$ 72.8 million).

While many bilateral investment treaties have a clause that specifies the applicable pre-judgment interest rate under a lawful expropriation, the treaties often do not prescribe such a rate in cases of unlawful expropriation.  In addition, the determination of the proper pre-judgment interest rate is often perceived as a pure legal matter.  The combination of these factors has led to a multiplicity of approaches in investment arbitration case law.  Two of the most significant approaches to date are the return on alternative investments approach and the corporate borrowing rate approach.

The return on alternative investments approach is probably the most frequently selected. It embraces the rationale that claimants should be compensated based on an interest rate that reflects the return they could have otherwise achieved if they were given the opportunity to invest in an alternative investment.  Common benchmarks selected by tribunals under this approach are short-term US treasury bills or US government bond yields, rates in the financial markets, or other indicators that they deem as a fair proxy.

The corporate borrowing rate approach, on the other hand, bases the pre-judgment interest rate on the interest rate that the claimant must pay based on its credit rating, ability to access capital markets and other market considerations. In addition, tribunals have also awarded pre-judgment interest based on the host state’s legislation. On a few occasions, tribunals have adopted a pre-judgment interest rate based on exercise of judgment that they deemed to be reasonable, fair, and appropriate.

With respect to the two alternatives that the Claimant advanced, the Tribunal found no reason to modify its previous decision.  Further, the Tribunal specified that one-year US Treasury Bills provided the applicable pre-judgment interest rate.

Regarding the Tribunal’s assessment of the parties’ calculation on damages with respect to Claimant’s entitlement of 26% of the damages caused to PdL by the State, the Tribunal noted that the Claimant interpreted the Decision on Liability to mean that it was entitled to 26% of PdL’s direct cash flow.  The Tribunal found that this interpretation was in fact contrary to the approach that it had adopted in the Decision on Liability, which was for the calculation to include the impact of PdL’s financial obligations on its performance.

The Tribunal generally agreed with the main points made by State’s experts.  Specifically, the Tribunal found that the Claimant’s expert calculated the value of the Claimant’s investment in PdL instead of the Claimant’s share of the value of PdL. This finding appears to be consistent with the State’s argument regarding Claimant’s change in valuation methodology from “Free Cash Flow to Equity” to “Free Cash Flow to Firm”. Further, the Tribunal found that the Claimant’s expert excluded the repayment of PdL’s debt from the “but-for” cash flows to the shareholders. This finding appears to accept the State’s position that the Claimant’s valuation included compensation for the Claimant’s credit’s claims.

Thus, the Tribunal concluded that the Claimant was only entitled to an award of US$ 13.41 million for the diminution in the value of the Claimant’s shareholding in PdL caused by State’s breach of the BIT.

With respect to the parties’ calculation regarding the compensation that the Claimant would have received if pesification had not occurred and if the toll rates had been revised annually, the Tribunal determined that the cost incurred by the Claimant would not have been pesified during the relevant period.  Therefore, the Tribunal rejected the Claimant’s claim for US$ 4 million.

Finally, and of considerable interest to arbitration practitioners, the Tribunal sanctioned the Claimant on costs on the grounds that its expert had disobeyed the Tribunal’s instructions as set out in the Decision on Liability.  It is highly unusual for a tribunal to punish a prevailing party by reducing its costs due to the misbehavior of its expert.  A tribunal might do so in cases where, for example, counsel instructed an expert not to address an issue that counsel knew to be material or relevant to the dispute.  Additionally, the IBA Guidelines on Party Representation in International Arbitration, Guidelines  26 and 27, explain that a costs sanction may be appropriate when a party has extended the proceedings through frivolous applications. Specifically, Guideline 26(c) states that the arbitrators may “consider the party’s representative misconduct in apportioning the costs of the arbitration.” (See a further analysis of counsel misconduct in a prior post here).  Hochtief v Argentina takes this guidance one step further: the arbitrators may also consider the parties’ quantum experts’ misconduct in apportioning the costs of the arbitration.

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Jonathan Mackojc

Corrs Chambers Westgarth

2016 was an important year for international arbitration. Lord Chief Justice of England and Wales challenged the legitimacy of international arbitration, while supporters such as former Chief Justice of the High Court of Australia (Robert French AC) came forward to defend its coexistence with commercial courts. Several institutions such as ACICA, SIAC and KCAB updated their arbitration rules for 2016, while SCC and ICAC introduced new rules for 2017. SIAC also released its draft Investment Arbitration (IA) Rules, followed by a public consultation process and finally enactment of its new rules. Several institutions published detailed practice notes and statistics: HKIAC, SIAC, LCIA, SCC and the ICC updated its note on the conduct of arbitration. The year concluded with Hong Kong and Singapore reforming their respective laws in order to allow for third party funding arrangements – arguably one of the most important developments in 2016.

This article discusses 10 key areas which will continue to play a significant role in further developing international arbitration beyond 2020.

1. Transparency

In response to the 2015 Queen Mary International Arbitration Survey, several institutions were seen as leading the international arbitration arena by publishing detailed practice notes and statistics in 2016. It is highly likely that this will continue in 2017, as the purpose of these practice notes is to clarify certain provisions and respond to market changes – such as recent developments regarding third party funding in Singapore and Hong Kong. Both jurisdictions will need to supplement their existing rules with practice notes shortly. However, it is worth noting that several provisions in the 2017 SIAC IA Rules already address these developments. They are discussed in a previous article.

2. Arbitrator Selection Process

Although largely ignored over the years, this area will likely be explored in 2017, though developments are unlikely to surface until at least 2018. Institutions are hesitant to disclose, let alone discuss, the selection process as it leads to significant debate among arbitrators, law firms, and academics. What cannot be denied is that it is inherently difficult to assess whether parties are in a better position to appoint arbitrators, or whether the task should be left to the arbitral institution – as the answer will depend on the experience of the parties.

Developments in this area could vary from the release of practice notes with basic guidelines, to publishing an arbitrator selection framework – where institutions would implement their own guidelines in order to clarify the various factors that must (or should) be considered before an arbitrator is appointed. The other, more difficult, option is to wait for a multilateral framework. Though only soft law, it would be comparable to the IBA guidelines on conflicts of interest in international arbitration – which emphasise best practice.

3. Investment Arbitration Rules

On 1 January 2017 SIAC released the first edition of its IA Rules. This modern set of investment arbitration rules are quite different to the ICSID Rules, as they are a hybrid of commercial and investment arbitration rules. It will be interesting to observe whether a significant number of parties will now settle disputes with SIAC, as opposed to ICSID. In 2017, global arbitration conferences will undoubtedly discuss and evaluate these developments. Beyond 2017, some institutions may follow suit, though most will be proud to highlight that they will remain commercial dispute resolution centres.

4. Third Party Funding

Both Singapore and Hong Kong have reformed laws which previously prohibited third party funding arrangements. On 10 January 2017, the Singapore Parliament passed a bill allowing for third party funding for arbitrations in Singapore. On 11 January 2017, Hong Kong similarly introduced a bill to its Legislative Council (LegCo) with Mr Rimsky Yuen SC moving the second reading of the bill. Developments in both jurisdictions indicate that their respective governments are strong supporters of international arbitration. Litigation funders in both jurisdictions have been gearing up for work over the last year, and this area will continue to be discussed heavily at global arbitration conferences in 2017.

5. Rise in Financial Institution Arbitration

The ICC Commission on Arbitration and ADR published a comprehensive report in November 2016 titled ‘Financial Institutions and International Arbitration’. The Report concluded that many institutions have, in large part, failed to fully embrace international arbitration as a viable dispute resolution method. The report has been discussed in a previous article. The HKIAC was quick to invite the co-chair of the ICC task force on Financial Institutions and International Arbitration to present at an event in December 2016. These developments will lead to institutions targeting a broader set of clients from 2017 onwards. Once financial institutions recognise the commercial benefits associated with international arbitration, they will undoubtedly provide global arbitral institutions with lucrative dispute resolution work.

6. Potential Appeal Mechanism (by consent)

One of the benefits of arbitration over litigation is that it does not allow for appeals. Arbitration has always encouraged finality, to ensure that parties can resolve their disputes swiftly and with certainty. Critics, who tend to discourage resolving disputes via arbitration, may argue that justice cannot truly be achieved without an appeal process. In response to question 14 of the questionnaire that the ICC’s distributed before it published its ‘Financial Institutions and International Arbitration’ report, some institutions expressed an interest in an appeal process subject to two broad conditions: that the consent of all parties is obtained at an early stage, and that certainty is not undermined. While the first of these is achievable, it will be difficult (if not impossible) to achieve certainty if an appeal process is introduced.

7. Sanitising Arbitral Awards

Another perceived advantage of resolving disputes via arbitration is confidentiality, which inevitably comes at the expense of precedent. Precedent not only ensures consistent decisions, but also promotes certainty. The ICC report also found that several financial institutions viewed confidentiality as being less important than precedent, particularly where disputes related to syndicated lending and derivatives. The report also reminds readers that although an arbitration is private, it is not expressly confidential according to the ICC Rules. The UNCITRAL rules are also silent as to confidentiality, but publication is addressed in Art 34.5. Other institutions have strict provisions that deal with confidentiality and publication: Article 42 in the 2013 HKIAC Rules, Article 22 in the 2016 ACICA Rules, and Rule 24.4 of the 2016 SIAC Rules. Interestingly, SIAC has taken an extra step to confirm that the tribunal may issue an order or award for sanctions or costs if a party breaches their confidentiality obligations in Rule 39.4. Also worth noting is that the 2017 SIAC IA Rules have provided greater clarity with respect to publishing of awards in Rule 38. Confidentiality, and more specifically publication, provisions are likely to be reformed in all new international arbitration rules from 2017 onwards. More sanitised awards will also be published by institutions.

8. A Shift to the East

It is no secret that Hong Kong and Singapore have become some of the most frequently used jurisdictions for international arbitration within the last 5 years. This is due to a multitude of reasons, some of which include: both jurisdictions being competent in administering a high volume of cases as well as high-value disputes, strong panels of arbitrators, state-of-the-art facilities, geographic convenience, modern arbitral rules, and most importantly a supportive judiciary and government. In 2016, both experienced sharp growth, and this is likely to continue beyond 2017.

9. Diversity in International Arbitration

Another area which has received little attention is diversity, particularly among arbitrators and with respect to both gender and ethnicity. They key question that needs to be asked is: why is diversity still an issue when there has been a significant increase in the use of international arbitration globally? Other discussions need to focus on the impact this may have on the tribunal’s orders and awards, solutions such as quotas, as well as how current obstacles can be overcome. Arbitral Women is an organisation that was set up to address this gender imbalance, and has almost 1000 members in over 40 countries. The non-profit Arbitrator Intelligence also claims that it will ‘facilitate increased diversity in arbitrator appointments’. For greater discussion on this topic, refer to another post which discusses a recent survey on diversity which was published in January 2017.

10. Appropriate use of: Emergency Arbitration, Summary Dismissal, Expedited Procedure, Joinder and Consolidation

Most institutions are reforming their old rules in order to include these innovative procedures. As each serves a unique purpose, they are not automatically relevant to every dispute. In 2017, global arbitration conferences will likely discuss the most recent provisions such as SIAC’s Early Dismissal of Claims and Defences (Rule 29) and SCC’s Summary Procedure (Article 39). Joinder, consolidation and emergency arbitration have already received a fair amount of attention since around 2013.

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Sebastiaan Barten and Marc Krestin

Linklaters

In the context of investor-state dispute resolution in The Netherlands, the Yukos case has recently captured the spotlight in the global arbitration arena and beyond. While much of the attention has been focused on the setting-aside proceedings and the issue of jurisdiction of the arbitral tribunal, the case also raises interesting questions regarding the enforcement of arbitral awards against a states’ assets and the principle of state immunity.

Following the adoption of the so-called “Yukos Law” in Belgium and similar legislation in France regarding the attachment of foreign states’ assets, the Dutch Supreme Court has recently shed new light on the scope of state immunity from enforcement in The Netherlands. In its judgment of 30 September 2016, the Dutch Supreme Court ruled that assets of foreign states located in the Netherlands cannot be subject to attachment and enforcement, unless those assets are used for non-governmental purposes. It is the attachment creditor that bears the burden of proof in this respect. This applies to both conservatory attachments and measures in satisfaction of a judgment or award.

In its judgments of 14 October 2016 (published here and here), the Dutch Supreme Court confirmed this general presumption of sovereign immunity from enforcement of judgments and arbitral awards against a state’s assets. It also made clear that a possible waiver of state immunity must be made expressly and cannot be implied from the general provisions contained in bilateral or multilateral arbitration agreements between state parties.

The sovereign immunity defence – customary international law

The doctrine of state immunity under Dutch law has been primarily shaped by case law and international conventions. The legal basis for the sovereign immunity defence is laid down in a single provision of the General Provisions Act of 1829, which incorporates standards of customary international law into the Dutch legal system of enforcement measures.

In line with the International Court of Justice ruling in Jurisdictional Immunities of the State, Dutch case law has developed along the lines of Article 19 of the UN Convention on Jurisdictional Immunities of States and their Property (the “UN Convention”), most of which – although not yet in force and not yet ratified by The Netherlands – is considered to be customary international law.

Consequently, the Dutch Supreme Court ruled that the three exceptions to sovereign immunity of a foreign state‘s assets listed in Article 19 of the UN Convention are applicable under Dutch law. In summary, this means that assets of a foreign state may only be attached:

i. with the express consent of the state;
ii. if the state has allocated or earmarked property for the satisfaction of the claim; or
iii. where it has been established that the property is specifically in use or intended for use by the state for other than government non-commercial purposes.

No distinction between conservatory and executorial measures

One of the aspects that was heavily debated among the signatories to the UN Convention was whether the ‘commercial purposes exception’ should also be available with regard to conservatory measures against a state’s assets. The consensus reached is reflected in Article 18 of the UN Convention, which rules out the possibility of levying conservatory attachments on a state’s assets without the state’s prior express consent.

However, the Dutch Supreme Court has expressed the view that the distinction made between conservatory and executorial measures in the UN Convention does not reflect international customary law and consequently does not apply under Dutch law. Provided that a creditor succeeds in proving that the state’s targeted assets in The Netherlands are intended to be used for commercial purposes, the Dutch courts will permit conservatory attachment of those assets.

Presumption of immunity

The presumption of immunity as confirmed by the 2016 Dutch Supreme Court decisions puts creditors to the challenge of proving that the foreign state’s targeted assets are intended to be used for non-governmental (i.e. commercial) purposes. Creditors should not expect to receive any assistance from the Dutch courts in meeting this challenge. The Dutch Supreme Court has held that the state party is under no obligation to disclose any information regarding its assets, nor are states required to appear in the proceedings and put forward a sovereign immunity defence.

The Dutch Supreme Court has not gone as far as to exclude so-called ‘mixed funds’ from attachments, e.g. funds of a state held in a Dutch bank account for governmental as well as commercial (or other) purposes. In order to attach ‘mixed funds’, however, a creditor will need to demonstrate the extent to which the funds are intended to be used for a non-governmental purpose.

Pre-attachment judicial review

Any party who wishes to attach assets in The Netherlands will have to use the services of a bailiff. Bailiffs are under a statutory obligation to submit a report to the Dutch Ministry of Justice as soon as they receive instructions to attach assets of a foreign state which may be in violation of the Dutch State’s international obligations.

The Dutch Ministry of Justice has the power to prevent the attachment of assets, or render an attachment which has already been levied null and void, until the creditor has demonstrated in court proceedings initiated against the Dutch State that the relevant assets are not covered by sovereign immunity. As a result of the confirmed presumption of immunity, the Dutch Ministry of Justice may be inclined to challenge virtually any attachment intended to be levied against a foreign state’s assets.

This results in a system of pre-attachment judicial review similar to those introduced in Belgium and France, albeit that in The Netherlands the executive branch of government essentially determines whether such judicial review should take place.

No implied waivers

An exception to the presumption of sovereign immunity exists if the investor can demonstrate that the state has waived its right to invoke such defence. Unlike the UK State Immunity Act 1978, which contains an arbitration exception to state immunity, there is no general rule under Dutch law which provides that a state is taken to have waived its immunity defences by entering into an arbitration agreement with a private party.

In accordance with the UN Convention, the Dutch Supreme Court found in one of its 14 October 2016 rulings that express consent from the state is required for a waiver of immunity to be effective. More specifically, it found that neither Article 10(2) of the Energy Charter Treaty 1994, which provides that “Each Contracting Party shall ensure that its domestic law provides effective means for the assertion of claims and the enforcement of rights with respect to Investments, investment agreements, and investment authorisations”, nor Article 26(8), which provides that “…Each Contracting Party shall carry out without delay any such award and shall make provision for the effective enforcement in its Area of such awards” could be interpreted as an express waiver of state immunity.

Both provisions deal only with the enforcement of arbitral awards within the territory of one of the contracting states involved in the dispute, not third party states. Many bilateral investment treaties contain similar provisions, which are thus unlikely to be interpreted as express waivers of immunity in relation to measures of constraint against a state’s assets in The Netherlands.

Comment

Although some authors have advocated to limit the scope of state immunity in an era of free trade and foreign investments, the 2016 decisions of the Dutch Supreme Court seem to follow a recent international trend towards absolute state immunity from enforcement against a state’s assets.

One thing is certain: if it was not already an uphill battle to enforce arbitral awards against foreign states in The Netherlands, it now certainly is a mighty mountain to climb. It will be challenging for creditors to prove that the state’s assets they wish to attach serve commercial rather than governmental purposes, especially because states have no obligation to assist in adducing any evidence in that respect. An upside for creditors seeking enforcement in The Netherlands is that – contrary to some other jurisdictions – the commercial purposes exception also applies to conservatory attachments.

Investors are therefore advised to seek a waiver of immunity from enforcement when contracting with states. It is important to ensure that the waiver is express and specific, and that it is effective not only under the domestic laws of the state party involved, but also under the laws of jurisdictions in which enforcement proceedings may be pursued.

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Claire Morel de Westgaver and Brian Kotick

Bryan Cave LLP

The obligation for an arbitral tribunal to deliberate before rendering an award is at the heart of the arbitral process. In fact, parties typically agree to submit their disputes to a panel of three arbitrators for the purpose of ensuring objectivity, well thought decisions and equal treatment. Deliberation is so fundamental to the arbitral procedure that its absence, or abuse, could form the basis of annulment proceedings. This is what happened in the Puma case, in which the Spanish Supreme Court recently held that a party to an annulled award was entitled to recover arbitrator fees paid to two arbitrators on the basis that by excluding the third arbitrator from the deliberations they had been reckless and engaged their liability under section 21 of the Spanish Arbitration Law (Judgment of the Spanish Supreme Court, 102/2017).

Most leading arbitration rules are virtually silent on the requisite formalities, if any, of deliberations. Arbitration rules routinely address their confidential nature and sometimes specify that they may take place at a place different from the seat of the arbitration, but they do not generally include provisions relating to the timing (Article 15.10 of the LCIA Rules being an exception) or the conduct of the deliberations. Certain arbitration regimes address the possibility of a decision rendered by a truncated tribunal, including in the event that an arbitrator refuses to participate in deliberations and/or sign an award. Yet, aside from arbitrators’ overarching obligation to be impartial and fair, arbitration rules and statutes tend to remain silent on any duties of arbitrators to conduct the deliberations in a specified manner.

As a result, the standard a court should apply when faced with an arbitral tribunal that does not properly deliberate is far from clear. It has been argued that deliberation is an implied right of the parties derived from their right to be heard and their right to equal treatment. Others have suggested that it is an arbitrator’s duty based on international public policy, since its absence would result in a decision not taken by the arbitral tribunal but by one or two individuals abusing their power.

In the Puma case, the arbitral award was set aside on the basis that Mr. Santiago Gastón de Iriarte, the arbitrator appointed by Puma AG RDS (“Puma”), had not participated in the final deliberation. After several meetings between all three arbitrators, the deliberations regarding damages to be paid by Puma broke down. Two days after the last of these meetings, and with knowledge that Mr. Gastón was travelling, the remaining two arbitrators met, without summoning Mr. Gastón, and rendered an award on terms on which Mr. Gastón did not agree. The parties were notified of the award that same day.

In its decision of 15 February 2017, the Spanish Supreme Court affirmed the ruling of the Provincial Court of Appeal of Madrid, finding that the deliberations had been conducted contrary to the principle of arbitral collegiality. The Supreme Court held that a violation of the principle of collegiality was a violation of the right to a fair trial (Article 24 of the Spanish Constitution) and constituted a ground for annulment for public policy (section 41.1(f) of the Spanish Arbitration Law). The Court came to this conclusion after confirming that the non-participation of the third arbitrator was not the result of purposeful delay, obstruction or intervention in the decisive final discussion in which the final award was to be rendered (which under most arbitration regimes would have allowed a truncated tribunal to issue an award).

The Court stated that deliberation and voting “operates as a means of internal control of its members […]. In other words, it is not the case of that, once the possibility of the majority has been envisaged, or by the agreement of those who support a particular proposal or decision, the participation of the remaining members can be rejected ‘ad limite’, since they have the right and obligation to know […] the internal reasons that justified the decision and final vote”.

The issue of improper deliberations, as discussed in the Puma case, is not a novel one. In Sweden, for example, the absence of a proper deliberation on contentious issues has been relied upon as a ground for annulment as early as 1924 (see Årsbackaträvaruaktiebolag v. E. Hedberg, NJA 1924 p. 569). More recently, the award in Czech Republic v. CME was challenged, though unsuccessfully, on the basis of the alleged exclusion of an arbitrator from the deliberations (Svea Court of Appeals, Case no T 8735-01).

In France, the Court de Cassation considered the principle of collegiality in a similar context in the case of Papillon Group Corporation vs. Arab Republic of Syria and Others decided in 2011. In this case, the Court de Cassation held that given that the Paris Court of Appeal had found that a collegial meeting had taken place and that the third arbitrator had had an opportunity to voice his opposition through a dissenting opinion, the presumption that the arbitral award was rendered after deliberation had not been refuted by the challenging party. As such, the Court de Cassation held that the Paris Court of Appeal was right in concluding from these elements that there had not been any violation of the principle of collegiality described by it as “suppose[ing] that every arbitrator has the right to debate any decision with his colleagues” (Decision n° 706, F-D, R 09-17.346, 29 June 2011).

Without more guidance on the manner in which they should be conducted, deliberations are left exposed to abandonment or abuse. This consequence is exacerbated by the confidential nature of deliberation which makes the occurrence of an impropriety more difficult to establish. In this context, the rising demand for more transparency in international arbitration might lead arbitral institutions to become more inclined to promote a more formal and transparent deliberation process. However, one may legitimately wonder whether doing so would thwart inevitable – often frivolous – challenges and thereby better protect the integrity of the arbitral process. Or, on the contrary, whether a more regulated approach to deliberations would open the door to yet more undue scrutiny over arbitrators and their awards, which in turn could negatively impact the decision-making process and arbitrators’ independence.

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Léonard Stoyanov

On 11 January 2017, the Swiss Federal Council proposed a revised version of the Swiss International Private Law Act (“SPILA”) relating to international arbitration (art. 176 et seq.) with a view to increasing the attractiveness of Switzerland as a place of arbitration while preserving the concise, liberal and flexible traits of the SPILA. More precisely, the Federal Council aims at (i) updating the provisions of the SPILA by implementing elements of the Federal Tribunal’s jurisprudence and clarifying ambiguities, (ii) reinforcing parties’ autonomy and (iii) improving the law for a simplified application. This initiative follows on from the modernisation process initiated by other countries.

While the proposed amendments mainly relate to the SPILA, the Federal Tribunal Act (“FTA”) and the Civil Procedure Code (“CPC”) will also be affected if the proposed amendments are adopted by the parliament.

I. Implementing the Federal Tribunal’s jurisprudence and clarifying ambiguities

A. Clarification of the scope of application of chapter 12 SPILA

In its current wording, article 176 I SPILA provides that the provisions of chapter 12 apply to any arbitration if the seat of the arbitral tribunal is in Switzerland and if, at the time when the arbitration agreement was entered into, at least one of the parties had neither his/her/its domicile nor his/her/its habitual residence in Switzerland.

In a decision of 2002 disputed among scholars, the Federal Tribunal held that one ought to take into account the parties’ situation at the time when the arbitral proceedings are initiated rather than at the time when the arbitration agreement was entered into. This created legal uncertainty as one cannot determine from the outset, but only at the time when the parties start arbitration proceedings, which law will apply (chapter 12 SPILA or the internal arbitration rules contained in the CPC). The proposed revised article 176 I SPILA specifies that the parties are those “to the arbitration agreement” so as to make the time of the entry into the arbitration agreement relevant. This would however probably not affect the current federal jurisprudence for parties to arbitral proceedings who/which will not have signed the arbitration agreement.

B. Ancillary procedures

As at today, the CPC is silent with regard to the type of proceedings applicable when the judge is seized in his capacity as “juge d’appui” (e.g. with regard to the appointment, challenge, replacement of arbitrators; see infra, IV with regard to the opportunity of creating a unique Swiss local judge). Hence a new article 251a is proposed which provides that ancillary proceedings relating to international arbitration be conducted in the form of summary proceedings (another provision would be amended to the same extent with regard to internal arbitration).

C. Means of recourse available against an award

While the Federal Tribunal reckons that an award may be rectified, interpreted, completed or revised, the SPILA does not as at today mention the possibility to challenge an award by way of correction, interpretation, addition or revision.

To fill this gap, draft articles 189a and 190a SPILA will, if adopted, exhaustively govern the recourses available against an arbitral award thereby incorporating the federal jurisprudence (these means of recourse are also available in the context of national arbitration in the CPC).

According to draft article 189a SPILA, unless provided otherwise, any party may require from the arbitral tribunal to correct obvious mistakes or interpret or complete certain passages of the award within a thirty day deadline following communication of the award. In the meantime, the arbitral tribunal may on its motion correct, interpret or complete its award. The request does not suspend the deadline to challenge the award before the Federal Tribunal but a new deadline starts for the sole part of the award which was corrected, interpreted or completed.

Draft article 190a SPILA expressly allows for the revision of an award, what both scholars and the Federal Tribunal already opine is possible. Thus, according to this draft provision, a party may request that an award be revised (i) if said party discovers relevant facts or means of proof after the arbitration (provided however that they are not subsequent to the award) and (ii) if criminal proceedings establish that the award was influenced to the detriment of the party challenging the award even in the absence of a conviction (if criminal proceedings are not possible, evidence may be adduced otherwise). The request may be filed within ninety days following the discovery of the revision motive (within a ten year time limitation period). The parties’ autonomy will however prevail insofar as they may agree in their arbitration agreement or at a later stage to exclude the right to a revision.

D. Addressing the impossibility to request the appointment of an arbitrator by the local judge

Pursuant to article 176 III SPILA, if the parties have not specified the seat of the arbitral tribunal, the arbitrators themselves may choose it if both the parties and the arbitration institution designated by them failed to do so. If neither determined the seat, several provisions become inapplicable starting by article 176 I SPILA which governs the applicability of the SPILA itself and extending to all the provisions governing the ancillary jurisdiction of Swiss tribunals and notably article 179 III SPILA which provides that where a tribunal is called upon to appoint an arbitrator, it shall make the appointment.

Accordingly, the draft bill contains an additional sentence to article 179 II SPILA providing for the jurisdiction of the Swiss tribunal first seized.

II. Reinforcing the parties’ autonomy

While the current wording of article 178 I SPILA provides that an arbitration agreement is valid if made in writing, by telegram, telex, telecopier or any other means of communication which permits it to be evidenced by a text, the proposed revision (inspired by the corresponding provision governing internal arbitration) provides that such an agreement is valid if made in writing “or by any other means which permits it to be evidenced by a text”. More importantly, the revised text provides that said condition is deemed to be met even though it is satisfied by only one party to the arbitration agreement, in which case the validity of the agreement as regards its substance will still be examined in light of article 178 II SPILA (which is not due to change).
Thus, to take the example cited by the Federal Council, if party A sends party B a written proposal to enter into a contract which contains an arbitration clause and party B starts performing the contract without signing it, the arbitration clause would be considered as accepted by party B provided that performance of the agreement would be formally reckoned (art. 178 I SPILA) as the acceptance of the offer made by party A as a matter of substantive law (art. 178 II SPILA).

Article 178 SPILA is further due to be completed by a new paragraph extending to unilateral arbitration clauses (and not solely arbitration agreements) contained for example in a will or a trust deed.

The requirements for the parties to renounce the application of chapter 12 SPILA in favour of the internal rules of arbitration (part 3 of the CPC) will continue to be stringent for the sake of legal certainty: a written agreement will be necessary.

III. Increasing of the appeal of the laws governing international arbitration

Rather than amending the SPILA with references to articles of the CPC governing internal arbitration which would apply by analogy, a consolidated version of the SPILA has (rightly) been preferred in view of easing the understanding of the Swiss rules governing international arbitration for foreigners. Accordingly, existing references in the SPILA to provisions in the CPC will be replaced.

Today, briefs filed before the Federal Tribunal must be filed in an official language and may thus not be filed in English. The door is however not completely closed to English as the Federal Tribunal often renounces the requirement of a translation of exhibits in English filed by a party before it unless the other party or parties object thereto.

It is proposed that submissions may be drafted in English in the future. The aim is to avoid translation expenses for the parties. Bearing in mind that the proposed revision does not impact existing restrictions applicable to foreign lawyers to represent parties before the Federal Tribunal, the parties who/which were represented in arbitral proceedings by a lawyer not admitted to represent such party before the Federal Tribunal may be tempted to have such lawyer draft the submission(s) and have it (them) filed by a local lawyer in his/her own name as this would avoid the need to inform the local lawyer of the specifics of the dispute (in some cases perhaps the need for translation) and the related costs. This may however be a miscalculation, aside from political considerations of protectionism, professional ethics or civil liability issues. Indeed, neither the limited grounds for challenging an arbitral award nor the very stringent formal requirements relating to the drafting of the submissions (particularly the recourse), which both explain the very low success rate of challenges of arbitral awards in Switzerland, will be altered in the revised law. The purpose sought with this proposal is solely to avoid translation costs with the Federal Tribunal not to facilitate challenges of awards. No amendment of the FTA with regard to the language of the decision is foreseen such that the decision will still be rendered in an official language (but which one?). Lastly, this proposal may be regarded with some reluctance not only by Swiss lawyers but by the federal judges themselves.

IV. What the Federal Council has decided not to amend

Tomorrow like today, jurisdictional objections will be examined differently depending on whether the seat of the arbitral tribunal is in Switzerland (in which case art. 7 SPILA will apply) or abroad (in which case art. II/3 of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards will apply).

The scope of the examination by the judge seized of an action in a matter in respect of which the parties have entered into an arbitration agreement will continue to be limited to a summary examination when the seat of the arbitral tribunal is in Switzerland whereas the scope of the judge’s examination will be full whenever the seat of the arbitral tribunal is abroad.

To justify the status quo, the Federal Council refers to the Federal Tribunal, which expressed the view that when it is seized of a recourse against an award, it has full power to review whether the arbitral tribunal rightly or wrongfully declared itself competent whenever the seat of the arbitral tribunal is abroad. One may however argue that instead of ruling on this point from the outset with full examination, the narrow scope of examination of the judge entails the risk of being counterproductive in the event the Federal Tribunal later denies the arbitral tribunal’s competence, in which case the parties will have lost time and money (subject to article 186 I bis in fine SPILA).

The idea of a sole “juge d’appui” was also rejected for reasons relating to the federal structure of the State had a cantonal tribunal acted as the national local judge (why such cantonal tribunal rather than another?) and because this task would have interfered with the Federal Tribunal’s duty had it been chosen to act in such capacity for its task must remain that of the uniform application of federal law in the country. Besides, it would have required the judges composing the tribunal in its contemplated capacity as local judge to recuse themselves in the event of a later recourse against the arbitral award. The creation of a separate federal judicial instance was regarded as disproportionate.

V. Conclusion

The proposed amendments do not dramatically reshape the existing chapter 12 of the SPILA but tend to update it and make it easier to use and thus more appealing. The draft bill will be available for consultation until 31 May 2017.

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Emma Morales

Linklaters

On 4 April 2017, the Madrid High Court of Justice (“TSJM”), the court in Spain that handles appeals for the annulment of awards, issued two decisions – Case numbers 43/2016 and 63/2016 – in which it confirms the doctrine already advanced by means of a previous judgment rendered by the same court (see Judgment of the TSJM dated 28 February 2017 [JUR 2017/ 89938]). In brief, according to these three decisions, once the parties file an appeal for the annulment of an arbitral award for any of the reasons described in article 41.2 of the Spanish Arbitration Act (the “Arbitration Act”, Law 60/2003 dated 23 December 2003), they cannot waive or withdraw the appeal filed.

Art. 41:
1. The award may be annulled only if the party requesting the annulment claims and proves:
B) That he has not been duly notified of the appointment of an arbitrator or of arbitration proceedings or has not been able, for any other reason, to assert his rights.
E) That the arbitrators have resolved on matters not subject to arbitration.
F) That the award is contrary to public order.
2. The motives contained in paragraphs b), e) and f) of the previous section may be appraised by the court hearing the action for annulment ex officio or at the request of the public prosecutor in relation to the interests legally defended.

In both annulment proceedings (Case numbers 43/2016 and 63/2016), the parties requested termination because an out-of-court settlement had been reached during the pendency. In the first case, the request was based on article 19.2 of the Spanish Civil Procedural Law, Law 1/2000 dated 7 January 2000 (“LEC”) (transaction), while in the second it was based on Article 22.1 LEC (extra-procedural satisfaction).

The arguments given by the Court to reject the parties’ request to termite the proceeding for the annulment of an arbitral award could be summarized as follows: it concluded that the transaction, waiver or withdrawal (as putting into practice the principle that the parties set the scope of the case and the judge is limited by the relief sought) in proceedings for the annulment of an arbitral award that deals with a matter not subject to parties decision making (“indisponible”), cannot be accepted by the Court when the appeal is based on any of the reasons that the court could assess ex officio (i.e. those established in Article 41.2 Arbitration Act, and sections b), e) and f) of Article 41.1 referred to above).

Therefore, for the TSJM, only appeals for the annulment of an arbitral award based on the other grounds of Article 41.1 could be subject to the parties’ discretion (i.e. transaction, waiver, withdrawal, etc).

Art. 41:
1. The award may be annulled only if the party requesting the annulment claims and proves:
A) That the arbitration agreement does not exist or is not valid.
C) That the arbitrators have resolved on matters not subject to their decision.
D) That the designation of the arbitrators or the arbitration procedure has not respected the agreement between the parties, unless such agreement is contrary to an imperative regulation of this Law, or, in the absence of such agreement, that have not been adjusted to this law.

To support its decisions, the TSJM considered that, once an appeal for the annulment of an arbitral award has been filed based on the grounds referred to (Article 41.2 Arbitration Act, sections b), e) and f) of Article 41.1) the parties cannot decide on it, thus depriving the court of undeniable jurisdiction. The reason is that there are general interests that deserve protection, such as the preservation of public order and, in particular, the need for the arbitration procedure to be carried out in accordance with the most basic requirements of hearing and contradiction. General interests that, according to the TSJM, the court has a legally imposed duty to safeguard ex officio.¹⁾To support its grounds, TSJM refers to previous judgements dated 17 September 2015 [PROV 2015, 242025]. 23 October 2015 [JUR 2015, 301853] and 2 November 2016 [AC 2016, 1939].

The TSJM itself recognizes that this assessment clearly emphasizes judicial control over arbitration, although in this case the justification would lie in the fact that the ex officio examination proceeds on those grounds that go beyond the simple will of the parties and their decision-making powers. Thus, the TSJM recalls that the annulment of an arbitral award can only be agreed by the competent Court, and not by means of a transaction by the parties.

The rulings were subject to a dissenting vote by one of the judges, who considers that the principle that the parties limit the scope of the case and that the judge is limited by the relief sought, cannot be restricted except by legislation.

According to this dissenting opinion, the protection of general interests is guaranteed in any case through the mechanisms for rejection of the transaction established in section 2 of article 19 LEC, since the Court must analyse whether the transaction reached by the parties is illegal. This judge understands that to deny the parties the possibility to waive, withdraw or compromise in proceedings for the annulment of an award infringes the legal provisions of article 19 LEC, and could cause damage to any of the parties if a judgment was finally rendered contrary to what was agreed in good faith in the transaction. Finally, the dissenting opinion concludes by listing other negative consequences which, in this judge’s view, this ruling entails for: the parties, which do not obtain satisfaction for their interests; the Administration of Justice, which is forced to artificially enlarge the procedure without any effect; and for arbitration, by introducing a further obstacle in exercising action for the annulment of the award.

There are many other negative effects that could be raised. Nevertheless, we could not agree more with this dissenting opinion.

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Moazzam Khan and Shweta Sahu

YSIAC

India has long been regarded as an unappealing centre for arbitration – be it as the seat of arbitration or as the place of final enforcement of the arbitral award. Indian judiciary is often quoted to be over interfering in matters of arbitration and enforcement. If fact could replace fiction, in the last decade, Shylock would have a hard time enforcing his rights to his money with little hope of claiming a pound of Antonio’s flesh. The Indian courts wouldn’t shy from reopening and rehashing the proceedings already happened before the Duke of Venice, a twist in the tale that could make Shakespeare rewrite the famous climax and make Portia’s wit of little consequence indeed. While this reputation may have been well-deserved in the decade past, the ground reality since has seen a galactic shift. The legislature and judiciary have together taken upon themselves to ensure this course correction.

In this article we bust the myth that is an enforcement defiant India in context of foreign awards.

A. The ever-shrinking scope of resisting enforcement of foreign awards in India:

The legislature and judiciary have restricted resistance to enforcement of a foreign award only on established grounds under Section 48 of the Arbitration and Conciliation Act 1996 (“Act”) and, in keeping with the view of arbitrally-progressive jurisdictions, have held that executing courts cannot review the award on merits.

Some (the authors included) would even argue that under the present regime, it is easier to enforce a foreign award in India than a domestic one.

i. Foreign-Seated Awards – no longer open to challenge in India:

The myriad of challenges to enforcement of foreign awards in India had become a nightmare for parties seeking enforcement in India. The uncertainty associated with enforcement of foreign awards reached its zenith with Bhatia International v. Bulk Trading S.A. (2002) 4 SCC 105 which laid down that Indian courts would have jurisdiction in international commercial arbitrations, irrespective of the seat of the arbitration. The resulting jurisprudence saw Indian courts not only refusing enforcement but even setting aside foreign awards. The time was ripe for the proverbial hero to emerge and save foreign seated arbitrations from the un-welcome interventions by Indian Courts. In September 2012, a five judge bench of the Hon’ble Supreme Court of India delivered its much celebrated decision in BALCO v. Kaiser Aluminium (2012) 9 SCC 552 which ousted the jurisdiction of Indian courts in foreign-seated arbitration. Post BALCO, foreign awards cannot be challenged in India. (However, this judgment was applied prospectively, to arbitral agreements executed after 6 September 2012 i.e. the date of the judgment.)

ii. “Patent Illegality” no longer a ground of resisting enforcement of foreign awards:

The introduction of the test of “patent illegality” to the already infamous ground of “public policy”, as interpreted in ONGC v. Saw Pipes (2003) 5 SCC 705, meant that enforcement of a foreign award in India could be challenged on the basis that the foreign award was contrary to the substantive law of India or in contravention of contractual terms etc. – determinations which ought to be in the sole remit of the arbitrator.

After almost a decade, the scope of challenge was restricted in Shri Lal Mahal Ltd. v. Progetto Grano SPA (2014) 2 SCC 433 wherein “public policy” under Section 48(2)(b) of the Act was narrowly interpreted and the recourse to the ground of “patent illegality” for challenging enforcement of foreign awards was no longer available.

The pro-arbitration shift in the judicial mindset can also be gleaned from the fact that the in judgment Shri Lal Mahal Ltd., the Supreme Court (speaking through Hon’ble Mr. Justice R.M. Lodha) overruled its own ruling in Phulchand Exports Limited v. O.OO. Patriot (2011) 10 SCC 300 (an earlier judgment delivered by Justice Lodha himself – wherein the Supreme Court had ruled that a party could resist enforcement of a foreign award on grounds of “patent illegality”).

As the statute reads today, even domestic awards cannot be vitiated on grounds of being patently illegal in India-seated international commercial arbitrations. (Arbitration and Conciliation Act 1996, section 23(2A))

iii. A foreign award need not be stamped under the Indian Stamp Act:

A domestic award may be refused enforcement if it hasn’t been adequately stamped, in accordance with laws of India. However, resisting enforcement of a foreign award on the ground that it is not stamped as per the Indian law, has been shunned as a frivolous ground for delaying and obstructing enforcement of foreign awards. (See Naval Gent Maritime Ltd. v. Shivnath Rai Harnarain (I) Ltd. (2009) 163 DLT 391 (Del))

iv. Intention to arbitrate is paramount:

In a recent appeal, the Supreme Court upheld the finding of the Bombay High Court that in a foreign seated arbitration (and resultant award), an un-signed arbitration agreement would not defeat the award. (See Govind Rubber v Louids Dreyfus Commodities Asia P. Ltd. (2015) 13 SCC 477) The court preferred to give primacy to the intention and conduct of parties for construing arbitration agreements over the mandate of the parties’ signatures required in the agreement.

v. Burden of proof on the resisting party:

Similarly, in a recent ruling, the Bombay High Court placed a “higher burden on party resisting enforcement of giving necessary proof which stands on higher pedestal than evidence” than the burden on the party seeking enforcement of a foreign award, who is only expected to produce necessary evidence. (See Integrated Sales Services Ltd., Hong Kong v. Arun Dev s/o Govindvishnu Uppadhyaya & Ors. (2017) 1 AIR Bom R 715)

vi. No third party or the Government can object to enforcement of a foreign award:

With the Supreme Court taking the lead in a consistent pro-enforcement approach of foreign awards, the High Courts have also been keeping up with the pace, with the High Court of Delhi being the harbinger in this respect. In NTT Docomo Inc. v. TATA Sons Ltd (2017) SCC OnLine Del 8078, the Delhi High Court allowed enforcement of an LCIA award after rejecting the Reserve Bank of India’s objections that the underlying terms of settlement (wherein the Indian entity, Tata Sons, was required to pay $1.17 billion to NTT Docomo, a Japanese company) would be against the public policy of India. The Delhi High Court held that since RBI was not a party to the award, it could not maintain any challenge to its enforcement.

vii. Reciprocating countries for enforcement of foreign awards outnumber the ones for foreign judgments:

48 countries have been notified by the Central Government of India as “reciprocating countries” under the New York Convention, while only 12 nations have been recognized as reciprocating countries under Section 44A of the Code of Civil Procedure for execution of foreign judgments. In respect of judgments emanating from the remaining countries, the parties seeking execution would have to file a suit in India and place in evidence the underlying foreign judgment.

B. The legislative intent: Arbitration and Conciliation (Amendment) Act 2015

Consistent with the pro-enforcement approach adopted by Indian courts, the recent legislative changes to the Act vide the Arbitration and Conciliation (Amendment) Act 2015 clarify the extent to which a foreign award can be said to be in conflict with the public policy of India. Subsequent to these amendments, only the following cases amount to violation of “public policy” under Section 48 of the Act:

i. the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81 of the Act; or
ii. it is in contravention with the fundamental policy of Indian law; or
iii. it is in conflict with the most basic notions of morality or justice.

The tests for these grounds have been summed by the Supreme Court in Associate Builders v. Delhi Development Authority (2014) (4) ARBLR 307 (SC). It has been further clarified that “the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.” Such amendments are to be seen as strong measures in response to the infamous perception of India being liberal to the challenges to enforcement of arbitral awards on grounds of “public policy”.

Furthermore, subsequent to these amendments, even after making of the arbitral Award, a successful party which is entitled to seek the enforcement of the award can apply to the court under section 9 of the Act, for protection by grant of interim measures, pending enforcement of the foreign award. (See, Arbitration and Conciliation Act 1996, section 2(2) proviso)

C. Protectors of the Realm: Commercial Courts in India

The Indian legal system continues to face criticism on account of the time taken in disposal of cases. Thus, with the objective to accelerate disposal of high value commercial disputes, Commercial Courts, Commercial Division and Commercial Appellate Division of High Court Act, 2015 (“Commercial Courts Act”) was enacted.

Under this regime, specialized commercial courts were set up for speedy and effective dispute resolution of all commercial disputes.

The Commercial Courts Act also provided that proceedings emanating from arbitrations (both foreign and domestic), where the subject matter is a commercial dispute, would also be heard and disposed of by the Commercial Courts (Commercial Courts Act, section 10). The statute amended the application of the extant Code of Civil Procedure 1908 to commercial disputes, provided for a mechanism for speedy resolution, and a much needed requirement of appointment of only those judges which have experience in dealing with commercial disputes. (Commercial Courts Act, sections 4, 5)

“Change is the end result of all true learning”

Liberalization of policies and clarified norms of doing business in India have made investments more lucrative and attractive. However, to truly sustain its growing global credibility, India needed to deal with the elephant in the room.

His Lordship Justice D. Desai in 1982, of the Supreme Court of India had, in relation to the then extant arbitral laws, observed that “the way in which the proceedings under the Act are conducted and without exception challenged in Courts, has made Lawyers laugh and legal philosophers weep” (Guru Nanak Foundation v Rattan Singh (1982) SCR (1) 842). India has since come a long way. In face of the legislative and judicial changes brought in and the evident shift in the judicial mindset, India’s current reputation of being enforcement unfriendly is largely undeserving and a remnant of the decade past – the Bhatia Raj. India is no longer emerging as a pro-arbitration and pro-enforcement jurisdiction. It has already arrived. Sit-up and take notice!

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Sai Anukaran

Non-arbitrability of disputes is a ground for setting aside the arbitral awards under Sections 34(2)(b) and 48(2) of the Arbitration and Conciliation act 1996 (the “Act”), the award is against the public policy of India. Arbitrability, here, refers to the objective arbitrability of the disputes, i.e., whether the national law imposes any restriction on the resolution of the dispute by the arbitral tribunal.  However, in Indian law confusion has arisen as to whether the courts can at a pre-arbitration stage, i.e., at the time of referring parties to arbitration in pursuant to a valid arbitration agreement decide upon the arbitrability of the dispute. The Supreme Court of India in the Case of Booz Allen Hamilton v. SBI Home Finance ((2011) (5) SCC 532), held that:

Where the issue of `arbitrability’ arises in the context of an application under section 8 of the Act in a pending suit, all aspects of arbitrability have to be decided by the court seized of the suit, and cannot be left to the decision of the Arbitrator. Even if there is an arbitration agreement between the parties, and even if the dispute is covered by the arbitration agreement, the court where the civil suit is pending, will refuse an application under section 8 of the Act, to refer the parties to arbitration, if the subject matter of the suit is capable of adjudication only by a public forum or the relief claimed can only be granted by a special court or Tribunal. (Emphasis in italics added).

The Supreme Court further carved out a non-exhaustive list of six disputes that are incapable of being subject to private arbitration:

• Disputes relating to rights and liabilities which give rise to or arise out of criminal offenses;
• Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
• Guardianship matters;
• Insolvency and winding up matters;
• Testamentary matters (grant of probate, letters of administration and succession certificate);
• Eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction.

Further, the Supreme Court in Shri Vimal Kishor Shah v. Jayesh Dinesh Shah & Ors (Civil Appeal No. 8614 of 2016) further carved out a seventh category of dispute that is incapable of being subject to private arbitration: disputes arising out of trust deeds and under the Trust Act.

The 2015 amendment to Section 8 of the Act has, however, created uncertainty with respect to the court’s power to decide upon arbitrability of dispute at the pre-arbitration stage.

The amended Section 8 introduces a non-obstante clause, which reads as follows:

 . . . notwithstanding any judgment, decree or order of the supreme court or any other court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

In contrast, Section 8 of the 2006 UNCITRAL Model Law and Section 45 of the Act provide that:

. . . unless it finds that the agreement is null and void, inoperative and incapable of being performed.

This phrase, however, does not find its place in Section 8 of the Act. Thus, a plain reading of amended Section 8 appears to have rendered nugatory the interpretation of courts regarding the arbitrability of disputes at the stage of Section 8. The amended Section 8 suggests that the courts can only inquire the prima facie existence of a valid arbitration agreement and leave the rest to be determined by the arbitral tribunal by virtue of the principal of Komptenz-Komptenz as enshrined under Section 16 of the Act. The courts only have the power to set aside the arbitral award under Sections 34(2)(b) or 48(2) of the Act on the ground that the subject matter of the dispute is not arbitrable as per the public policy of India

The Supreme Court in the case of Ayyasamy v. A. Paramasivam & ors (Civil Appeal Nos. 8245-8246 of 2016, decided on 04.10.2016), while dealing with a reference with respect to an agreement entered into prior to the 2015 amendment, have held in respect of Section 8 of the Act that

while mere allegation of fraud simplicitor will not confer jurisdiction on the courts to assume jurisdiction, however, in case of serious allegations of fraud the court can sidetrack the arbitration agreement.

Thus, the Supreme Court has imposed a restriction on arbitrability on account of fraud. However, the court in its judgment has not referred to the amended Section 8 and it is not clear whether the judgment was intended to be made applicable to the amended Section 8. If that were the scenario the judgment would be per incuriam in light of the amended Section 8 of the Act.

However, an alternate argument could be that serious fraud and non-arbitrability of the dispute would in itself affect the validity of the arbitration agreement. Even in such a case, it is doubtful if the court can undertake an in-depth analysis into the question of arbitrability (even on account of serious fraud) since the amended Section 8 of the Act restricts the power of the court to undertake only a prima facie view of the validity of the arbitration agreement. Thus, the decision in Ayyasamy is per incuriam, since the court would have to delve into the merits of the dispute to determine the degree of fraud.

The full bench of National Consumer Disputes Redressal Commission (NCDRC) in Aftab Singh v. Emaar MGF Land Limited & Anr. (Consumer Case No. 701 OF 2015, Order Dated 13.17.2017) while rejecting the plea of the respondent-builder to refer consumer dispute to arbitration, reiterated the view of Supreme Court in Booz Allen and Ayyasami that disputes governed by statutory enactments creating special tribunals (such as NCDRC) for a specific public purpose cannot be mandatorily referred to arbitration. The court further held that amendment to Section 8 of the Act does not intend to nullify erstwhile statutory interpretation of the Act by the courts and the sole purpose of the amendment is to curtail wide enquiry by the courts.

The effect of the non-obstante clause on pre-arbitral jurisprudence by the courts is yet to be determined by the Supreme Court. Once the parties to a dispute have agreed to resolve their disputes through binding arbitration, the purpose of arbitration would be defeated and precious time of the parties would be wasted in the determination of the validity of arbitration agreement before the national courts. This apprehension was also taken into account by Chandrachud, J. while delivering the judgment in the case of Ayyasamy v. A. Paramasivam & ors. Therefore, the correct view would be that while non-arbitrable disputes should not be referred to arbitration, the courts under Section 8 have only a limited scope of interference and cannot undertake an in-depth analysis into the merits and arbitrability of disputes at a pre-arbitration stage. Further, a dispute should be categorized as non-arbitrable only on limited grounds, in cases of compelling public interest.

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Stephen Hunter

Last year I posted on the New Zealand High Court’s decision in Ngāti Hurungaterangi & Ors v Ngāti Wahiao [2016] NZHC 1486. The High Court rejected the plaintiffs’ claim that an arbitral award was inadequately reasoned and should be set aside. The Court described the panel’s reasoning as “undeniably sparse” but held by a “fine margin” that the requirements of natural justice had been met. That decision has now been reversed by the Court of Appeal. The Court has delivered a robust affirmation of the requirement for reasons and a stinging critique of the panel’s failure to discharge this obligation.

As I explained in my earlier post, the case arose from an agreement to return specified ancestral lands to Māori after 115 years in Crown ownership. Two Māori groups (hapū) had competing claims to exclusive beneficial ownership. The legislation giving effect to the agreement with the Crown provided for the dispute between hapū to be resolved by arbitration. The arbitral panel sat over 13 days and heard very extensive historical evidence. The panel delivered a relatively brief award determining that the land should be apportioned equally. The plaintiffs were given special leave to appeal to the High Court and subsequently to the Court of Appeal.

The Court of Appeal noted the legislative requirement for reasons in New Zealand’s Arbitration Act (reflecting the UNCITRAL Model Law) and explained the purpose and nature of that requirement. In doing so, the Court drew on the English Court of Appeal’s decision in Flannery v Halifax Estate Agencies Ltd [2000] 1 WLR 377 (CA). That decision related to the requirement for reasons in the judicial context, holding that reasons are a function of due process and therefore of justice. The New Zealand Court commented that this underlying purpose is common to both arbitral and judicial processes.

Expanding on the purpose of the requirement, the Court emphasised that reasons bring discipline and robustness to the decision-making process. A requirement to give reasons “concentrates the mind” and exposes the parties “to the disciplined thought pattern of the specialist adjudicator”.

The nature and extent of the duty varies with context. The most basic requirement is that reasons “must be coherent and comply with an elementary level of logic of adequate substance to enable the parties to understand how and why [the panel reached its decision]”. The reasons “must engage with the parties’ competing cases and the evidence sufficiently to justify the result.” Beyond this, the extent of the reasons required will be dictated by context and “must reflect the importance of the arbitral reference and the panel’s conclusion”.

In respect of this last point, the Court noted the significance of this particular arbitration to the parties and the fact that the arbitration was the culmination of a long and complex process. The Court drew on the decision of the Permanent Court of Arbitration on appeal from the Abyei Borders Commission. In that case, the Permanent Court had noted the significance of the issues at stake and that the degree of reasoning should be commensurate with the importance of the conclusions. Reasons “dispel any hint of arbitrariness and ensure the presence of fairness”. The New Zealand Court adopted the Permanent Court’s statements and held that they applied equally to the case at hand.

Having set out the requirements for a “disciplined thought pattern” and “an elementary level of logic”, the Court turned to the panel’s five paragraphs of reasons. The Court makes clear that these very basic requirements had not been met.

First, the award failed to set out a list of issues which would have provided an “organised framework” for the reasoning process. Instead the panel had identified “three largely uncontentious and formalistic issues”. In this regard, the Court commented that recitation of the parties’ cases is no substitute for identifying the true issues.

Second, the panel had failed to address very significant parts of the evidence. Whilst an arbitral panel is “master of the facts”, this evidentiary discretion “does not absolve the panel from stating why it preferred certain evidence”.

Third, the purported findings on significant issues were “conclusory, not reasoned”. The Court held that the “inescapable” inference was that the panel “having concluded the issue was difficult and complex, simply elected to adopt a convenient compromise, one that was not the result of any reasoned or logical process.” The Court quoted Lord Bingham in describing the award as “an irrational splitting of the difference” that could not be sustained on any grounds.

What is ultimately most significant about the Court’s judgment is not its recitation of the requirement for reasons. That has all been said before. Rather, it is the Court’s clinical analysis of the award. Mere words on the page, consisting of repetition of the parties’ arguments and conclusory findings, are not enough. The parties are entitled to see evidence of the disciplined thinking – the hard work – that should form the basis for any difficult decision. Arbitrators who avoid this and take easy shortcuts risk having their awards set aside.

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Wei Sun

When applicants seek recognition and enforcement (“R&E”) of foreign arbitral awards in PRC courts, a challenge often raised by respondents is the non-existence of the main contract between the parties, where the arbitration agreement is contained. Respondents contend that the contracts provided by the applicants as the basis for arbitration are not authentic or duly executed, thus non-existent. In particular, the lack of an original copy, of the signature by an officer authorized to sign the particular contract, and of an official stamp of the company being affixed may all call into question the authenticity and existence of the main contracts and, consequently, the arbitration agreement included therein. The note takes a closer look at the facts and the reasoning employed by PRC courts in relevant cotton arbitration cases, intending to show how PRC courts approached the issue of non-existence in R&E proceedings due to negligence occurring during execution of contracts.

Allenberg Cotton v. Jiangsu Nijiaxiang Group (2013) Wuxi, Jiangsu

Allenberg Cotton (“Allenberg”) applied to enforce an International Cotton Association (“ICA”) award (A01/2010/80) against Jiangsu Nijiaxiang Group (“Nijiaxiang”) before the Wuxi Intermediate People’s Court.

Background: The dispute arose out of a sales contract (No. 395080). The parties listed in this contract were Allenberg and Nijiaxiang, but the contract was only signed by a person named Zhang Yongzhong and not stamped by Nijiaxiang. Zhang was the general manager of Tiangong, a subsidiary of Nijiaxiang. In the past, Zhang signed one contract (No.381950) on behalf of Nijiaxiang and several contracts on behalf of Tiangong, with Allenberg. All these contracts had original paper copies and were respectively stamped by Tiangong and Nijiaxiang. However, Contract 395080 as submitted by Allenberg was a fax copy and Zhang denied that the signature was genuine.

Court decision: The court held that, first, Allenberg failed to provide further proof to establish authenticity of Zhang’s signature on Contract 385080. In particular, when the court asked if Allenberg wanted to apply for technical verification of the signature, Allenberg refused to do so. Second, all the previous undisputed contracts between Tiangong/Nijiaxiang with Allenberg were executed by placing Zhang’s signature as well as the company stamp on printed copies of contracts. In contrast, Contract 395080 was a fax copy with only Zhang’s signature, a notable deviation from the past practices. Thus, the court was unable to ascertain whether there was an arbitration agreement between the parties.

Further, the court proceeded to conclude that, under English law, even if Zhang’s signature on Contract 395080 was authentic, Allenberg failed to prove that Zhang was authorized to sign the contract on behalf of Nijiaxiang. The main reasons relied by the court were: (i) Allenberg failed to prove that Zhang was expressly authorized by Nijiaxiang; (ii) based on past practices, Allenberg should check if Zhang was authorized or should request Nijiaxiang to stamp the contract; (iii) except for Contract 381950 (which was also stamped), Zhang had never represented Nijiaxiang in dealing with Allenberg; and (iv) Nijiaxiang declined to ratify Zhang’s signature by applying for non-recognition.

On these grounds, the court concluded that there was no arbitral agreement and the condition for an arbitration agreement set forth in Article II of the New York Convention was not met. Thus, in accordance with Article V.1(a) of the Convention, the court refused to recognize and enforce the ICA award.

In another case Louis Dreyfus v. Jiangsu Nijiaxiang Group (2013) Wuxi, Jiangsu, the factual background and the court’s ground for non-recognition were almost the same.

ECOM Agroindustrial Asia v. Qingdao Golden Yangtze Group Penglai Textile (2014) Yantai, Shandong

ECOM Agroindustrial Asia (“ECOM”) applied to enforce an ICA award against Qingdao Golden Yangtze Group Penglai Textile (“Golden Yangtze”) before the Yantai Intermediate People’s Court.

Background: The dispute arose out of a sales contract and the corresponding confirmation letter between ECOM and Golden Yangtze, both signed and stamped. However, the contract was sent through faxing so there was no original copy. During the R&E proceeding, Golden Yangtze categorically denied the authenticity of the signature and stamp on the copy. ECOM did not provide supplementary evidence in response. Instead, ECOM argued that the authenticity of the contract was a matter of substantive law and should only be decided by the ICA tribunal and not the Chinese court.

Court Decision: The court reasoned that it had the power to determine whether there was an arbitration agreement and whether it was valid on the basis of evidence. In this case, the dispute was whether the signature on faxed copy was genuine or not. This could only be ascertained by analyzing the faxed copy and other evidence materials provided by the parties. As ECOM failed to provide any other evidence materials except for the faxed copy and an ICA statement, there was not sufficient evidence to establish that there was any arbitration agreement between the parties. Hence, the application by ECOM did not meet the requirement set forth in Article II of the New York Convention and should be denied.

In contrast, in ECOM USA v. Foshan Nanhai Zhaoli Cotton Spinning (2014) Foshan, Guangdong, the court upheld the authenticity of a contract only with a fax copy because ECOM used a witness to prove the signing of the contract, whose testimony was supported by the fax number and time of transmission on the fax copy.

Compass Cotton B.V. v. Shandong Yanggu Shunda Textile Co., Ltd (2014) Liaocheng, Shandong

Compass Cotton B.V. (“Compass Cotton”) applied to enforce an ICA award against Shandong Yanggu Shunda Textile Co., Ltd (“Shunda”) before the Liaocheng Intermediate People’s Court.

Background: The dispute arose out of a sales contract between Compass Cotton and Shunda, concluded with the help of an agent company in Shanghai. Compass Cotton only had a fax copy of the contract, signed by a person named Zhang Jie and stamped. Along with other challenges, Shunda also contested the existence of the contract. In particular, Shunda provided payroll and social security records to prove Zhang was not an employee of Shunda and sample contracts to show the stamp on the contract was not the official and registered stamp of the company. In response, Compass Cotton submitted a group of supplementary evidence. First, Compass Cotton provided two contracts between Shunda and two international companies, which were executed in the same pattern, i.e. signed by Zhang and affixed with the unofficial stamp, and records from the Qingdao Customs showing that one of the two contracts was actually carried out by Shunda and Shunda used to recognize such contracts. Second, Compass Cotton provided webpages where Zhang was listed as a representative of Shunda. Third, Compass Cotton provided Shandong precedents to establish that using an unofficial stamp did not affect the contract’s validity in international trade. In addition, the court, at the request of Compass Cotton, interviewed Zhu Xuesong, executive director of the agent company in Shanghai.

Court decision: The court affirmed the existence of contract between Compass Cotton and Shunda based on the testimony of Zhu Xuesong and the supplementary evidence submitted by Compass Cotton. As the court also found other issues in Compass Cotton’s favor, it recognized the ICA award in the end.

Suggestions for Executing Contracts

As analyzed above, arbitral awards may be denied recognition in China for omissions made during execution of the sales contracts. By observing some simple precautions, the possibility of non-recognition can be dramatically reduced.

(a) Legal Representative

Every company in China has a registered legal representative, either the general manager (CEO) or chairman of the board of the company. The legal representative, as the title indicates, does not need any further authorization to represent the company. On the other hand, other directors, officers or employees of a company can only represent the company within their respective authorizations. Thus, it is always a good idea to request the legal representative of a Chinese trade partner to sign the sales contract. If a person other than the legal representative is signing the contract on behalf of a Chinese company, it is prudent to request for a power of attorney.

(b) Official Stamp

Every company in China has an official stamp, which is registered at the local Administration of Industry and Commerce. Companies, however, may use other unofficial stamps, such as so-called accounting stamps, trade stamps, etc. Even if not signed or signed by a person other than the legal representative, a contract affixed with the official stamp is usually sufficient to bind the company. It’s prudent to request a Chinese trade partner to affix its official stamp on the contract.

(c) Keep records

Although, execution of contracts by faxing executed copies or emailing scanned copies can be more efficient, it could relatively hard to verify the authenticity of signatures and stamps on these copies. Records such as original fax transmission pages (showing fax number and transmission time) and email correspondences should be kept for future possible use as evidence. Similarly, it would be a good idea to keep records evidencing prior transactions with repeat trade partners.

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Léonard Stoyanov and Nadia Smahi

On 17 October 2017, the Swiss Federal Tribunal (Switzerland’s highest jurisdiction) rendered a decision (4A_53/2017) on the challenge of an award rendered in the context of an international arbitration where the arbitration clauses of the disputed contracts both contained a wording whereby the parties renounced challenging any possible future arbitral award.

I. Relevant Facts

In 2003, a State which until then had been the sole shareholder of a company (the “Company”) let the main gas company of another State take a stake (apparently minor) in the Company.
This led to the conclusion of a shareholders’ agreement.

In 2008, the gas company became the majority shareholder of the Company.

In 2009, the shareholders entered into a “GAS Master Agreement” and amended their shareholders’ agreement, thereby granting the gas company exclusive managing powers on the Company.

Both agreements contained the same dispute resolution clause, which reads as follows:

“[a]wards rendered in any arbitration hereunder shall be final and conclusive and judgment thereon may be entered into any court having jurisdiction for enforcement thereof. There shall be no appeal to any court from awards rendered hereunder”.

In 2014, the State initiated arbitration proceedings under the UNCITRAL Rules against the gas company claiming that the conclusion of the “GAS Master Agreement” and amended shareholders’ agreement was tainted with corruption. The arbitral tribunal comprised three members, including a well-renowned Professor designated by the State.

On 23 December 2016, the arbitral tribunal decided against the State.

On 1 February 2017, the State challenged the award before the Federal Tribunal by means mainly of a civil recourse (“recours en matière civile”) and in the alternative, of a request for revision (“demande de révision”). The former is the ordinary means of challenge of international arbitration awards mentioned in article 191 of the Swiss Private International Law Act (“SPILA”). The latter is an extraordinary means which is currently not referred to in the SPILA (see however first author’s article of 18 May 2017 on this blog) but which the Federal Tribunal has reckoned admissible in the context of international arbitration.

The grounds on which the civil recourse and request for revision were based were that the State had learnt in January 2017 that the arbitrator it had appointed had already acted in such capacity in an arbitration where he had been appointed (in 2013) by a company controlled by the defendant. This fact, which the arbitrator had not disclosed in the frame of the 2014-2016 arbitration, allegedly cast doubts as to his independence and impartiality. On this basis, the State aimed at having the award set aside and the arbitrator it had initially appointed recuse himself.

The gas company’s prayers for relief were to dismiss the recourse and request primarily for lack of admissibility, alternatively for lack of merits.

II. Anticipatory Renunciation to Challenge an Arbitral Award

A. Validity

The Federal Tribunal started by examining the validity of an anticipatory renunciation to challenge arbitral awards.

It first referred to article 192 (1) SPILA which provides that “[w]here none of the parties has its domicile, its habitual residence, or a place of business in Switzerland, they may, by an express statement in the arbitration agreement or in a subsequent agreement in writing, exclude all setting aside proceedings, or they may limit such proceedings to one or several of the grounds listed in Article 190, paragraph 2”. As neither party had any such link to Switzerland, they were as a matter of principle entitled to renounce their right to challenge the award.

The Federal Tribunal then (re)affirmed that an indirect renunciation was not sufficient.
The renunciation must be direct, without however having to explicitly refer to articles 190 and/or 192 SPILA. For a renunciation to be valid, the parties must univocally express their common renunciation (“de manière claire et nette”), which is notably not the case of the sole mention “sans appel” (no appeal). Determining the parties’ intent is a matter of interpretation.

In the case at hand, the Federal Tribunal was of the view that the wording of the disputed clauses showed the parties’ clear and common intent that the arbitral award could not be “appealed” against. Not only was the last sentence of the dispute resolution clause univocal but the parties’ common intent also derived from the use of the words “final” and “conclusive” and the fact that the parties limited a recourse to a State court only for enforcement purposes. The questioned remained however what “appeal” actually meant.

B. Extent of the Renunciation

1. Overview of Previous Decisions

To support its reasoning, the Federal Tribunal referred to previous decisions where it had interpreted the notion of “appeal” within the same context.

In one decision, it had highlighted two possible interpretations of the word “appeal”, i.e. one wide, the other narrow. The former encompasses any means to challenge a decision (recourse lato sensu) whereas the latter solely designates the ordinary means of challenging a decision which is generally suspensive, devolutive and reformatory (recourse stricto sensu) and is not admissible before the Federal Tribunal in relation to international arbitration. The Federal Tribunal then interpreted the wording of the arbitration clause which read “all and any rights of appeal from all and any awards insofar as such exclusion can validly be made” and held that the use of the words “rights of appeal” and “all and any” clearly ruled out any appeal lato sensu, such that the renunciation was valid and the “appeal” inadmissible.

In two other cases, both involving the same parties and the same dispute resolution clause, the Federal Tribunal had to examine the validity and extent of a renunciation to challenge an award where the disputed agreement provided that “[n]either party shall be entitled to commence or maintain any action in a court of law upon any matter in dispute arising from or concerning this Agreement or a breach thereof except for the enforcement of any award rendered pursuant to arbitration under this Agreement. The decision of the arbitration shall be final and binding and neither party shall have any right to appeal such decision to any court of law”. It held that the word “appeal” had to be interpreted widely and that such clause clearly showed the parties’ common intent to exclude any challenge of the awards. Accordingly, the renunciation was held to be valid and the civil recourses inadmissible.

In a later decision, the Federal Tribunal took the view that the sentence “neither party shall seek recourse to a law court nor other authorities to appeal for revision of this decision” could not be understood in good faith otherwise than the parties’ clear common intent to exclude any right to challenge the arbitral award. The civil recourse was thus regarded as inadmissible.

Lastly, in a decision rendered in January 2017, the Federal Tribunal considered the sentence “[t]he decision of the arbitrator in any such proceeding will be final and binding and not subject to judicial review. Appeals to the Swiss Federal Tribunal from the award of the arbitrator shall be excluded […]” as a valid renunciation making the civil recourse lodged inadmissible.

2. The Case at Hand

a. The Civil Recourse

The Federal Tribunal held that the word “appeal” ought to be understood in its broad meaning in the case at hand (supra, II. B. 1.). Firstly, this resulted from the fact that no challenge of the award before an arbitral tribunal was possible under the UNCITRAL Arbitration Rules, which the parties had chosen (art. 32 (2) of the 1976 Rules). Secondly, the parties could not have wanted to solely renounce an appeal stricto sensu for none of the lex arbitri (Swiss law), the lex causae and the law of the seat of the gas company provided for such a means of recourse. Thirdly, the dispute resolution clauses which provided that the seat of the arbitral tribunal would be in Switzerland had been drafted by lawyers. Accordingly, one could only understand that the parties had renounced the only (ordinary) available means of recourse to challenge an award, i.e. the civil recourse.

As a result, the State’s civil recourse was held inadmissible.

b. The Request for Revision

The State argued that irrespective of a possibly valid renunciation to the ordinary means of challenging an award, i.e. the civil recourse, such renunciation did not encompass the extraordinary means of challenging of an award that is the request for revision (supra, I.).

The Federal Tribunal pointed out that the request for revision had been lodged within the time limit applicable to the civil recourse and that it was as a matter of principle, due to its extraordinary character, secondary in nature to the civil recourse. It then expressed the view that it was difficult to admit that a party having validly renounced the challenge of an award on the ground that the sole arbitrator was improperly appointed or the arbitral tribunal was improperly constituted (art. 190 (2) SPILA) could nonetheless invoke the same ground to challenge the award but through a request for revision. It confirmed the view it had already expressed, i.e. that deciding otherwise would deplete article 192 SPILA of its bearing. Arguing the contrary would “breach good faith to the highest degree”.

Accordingly, the request for revision was considered inadmissible as well.

III. Remarks and Conclusion

The herein commented decision, due to be published in the Federal Tribunal’s collection of its most important decisions, is interesting for arbitration practitioners in several respects.

It serves as a useful reminder on how parties located outside Switzerland may validly renounce their right to challenge arbitral awards, an option which all leges arbitrii do not feature, and is practical insofar as it summarises past decisions where the Federal Tribunal has upheld renunciation clauses. It is also enlightening in terms of the possibly unexpected consequences when agreeing on a renunciation clause, the scope of which is not limited to certain grounds for challenges (art. 190 (2) SPILA), as the renunciation may then affect not only the ordinary civil recourse – which may often be the only challenge contemplated by the parties – but also the extraordinary request for revision – which the parties may not have in mind at that time – whenever the ground asserted can be invoked within both contexts. Accordingly, parties to contracts must be careful what they wish for in terms of dispute resolution as they may just get it… and more.

Also noteworthy are the very significant costs of the decision: the State was ordered to pay the Federal Tribunal no less than CHF 200’000 of legal costs and the gas company CHF 250’000 to cover attorney fees. The fees of the Federal Tribunal are in principle capped to CHF 100’000 when the value at stake exceeds CHF 10 million. However, by way of exception, fees may go beyond that amount and up to CHF 200’000 in particular circumstances not specified in the law. The high fees in casu may certainly be attributed, at least partially, to the three exchanges of submissions.

Lastly and amusingly, the Federal Tribunal, in line with its practice, blanked out the names of the parties. It did however not blank out the dates of enactment of the arbitration laws of the lex causae (the law of the State challenging the award) and of the seat of the gas company which it referred to, thereby undermining the relevance of blank outs.

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