Arbitration Report Issue 02 - 2015 This issue includes:
Award Enforcement Abroad After Annulment at Seat When is Referral to a Dispute Adjudication Board a Precondition to Court or Arbitration Proceedings? Binding a Non-Signatory: Example of the Application of Equitable Estoppel in the U.S. Determining Market Value for Lawful Expropriation: The Tidewater Case and more. NOTE FROM THE EDITOR
Dear Readers,
In this issue of the Baker Botts Arbitration Report, we highlight topics of current interest for arbitration parties and practitioners, including recent efforts to increase transparency and offer faster options for arbitration. The Report offers up-to-date insight on wide-ranging topics, from drafting arbitration agreements, to enforcing arbitral awards, to valuing expropriated assets.
Transparency remains a key theme for reform of arbitration procedures. The Report discusses the 2014 U.N. Convention on Transparency in Treaty-based Arbitration, which will expand the application of the UNCITRAL Rules on Transparency in investor-State arbitrations. We also highlight updates to the International Bar Association Guidelines on Conflicts of Interest in International Arbitration, which are a resource for arbitrators and parties on disclosure of potential conflicts. Transparency provisions have also been a point of discussion in negotiations between the U.S. and E.U. on the Transatlantic Trade and Investment Partnership (TTIP). The Report examines the latest discussions of the TTIP arbitration regime.
The availability and use of expedited procedures has been another focus for arbitral institutions. The Report reviews the newly-introduced Financial Services Expedited Arbitration Procedure, which is intended to provide a faster, finance-tailored arbitration alternative. We also consider a Singapore court’s ruling that the Expedited Procedure Rules contained in the 2010 SIAC Arbitration Rules could override the arbitration provisions in a contract pre-dating those rules.
Regarding the interpretation and enforcement of arbitration agreements, the Report highlights certain recent national court decisions. It includes discussion of a Swedish decision enforcing an arbitration agreement providing for one arbitral institution’s rules to be administered by a different arbitral institution; a U.S. court determination that, in some cases, an agreement to arbitrate with one corporate entity can imply an agreement to arbitrate with another, related entity; and a pair of English and Swiss cases considering whether provisions for referral to a Dispute Adjudication Board serve as precondition to court or arbitration proceedings.
With respect to the enforcement of arbitral awards, the Report notes the impact of the E.U.’s Recast Brussels Regulation on jurisdiction and enforcement of judgments in civil and commercial matters. Changes to the Brussels Regulation help clarify the boundaries between Member State courts’ jurisdiction to act thereunder and their jurisdiction to act in support of arbitration under the 1958 New York Convention and national laws. In the Report, we also consider a U.S. decision confirming that even arbitration awards that are incorrect as a matter of law are enforceable, and a series of U.S. and English decisions regarding whether an award that has been annulled at the arbitration seat may be enforced elsewhere.
Finally, the Report touches on an important issue in investor-State arbitrations, namely determining the market value for lawfully expropriated assets.
We hope that this cross-section of recent developments in international arbitration provides an insightful sampling of current trends and future directions.
Jonathan Sutcliffe Editor September 2015
Award Enforcement Abroad After Annulment at Seat — 6
When is Referral to a Dispute Adjudication Board a Precondition to Court or Arbitration Proceedings? — 8
Updated 2014 IBA Guidelines on Conflicts of Interest in International Arbitration — 11
The Recast Brussels Regulation and Arbitration — 13
Update on the Adoption of the UN Convention on Transparency in Treaty-based Arbitration — 15
Binding a Non-signatory: Example of the Application of Equitable Estoppel in the U.S. — 16
Determining Market Value for Lawful Expropriation: The Tidewater Case — 18
Arbitration Clause Pointing To Two Different Institutions Held Enforceable, Not Pathological— 21
Do the SIAC Rules Permit Appointment of a Sole Arbitrator Where the Arbitration Agreement Provides for Three? Singapore High Court Says Yes — 22
Arbitration Under the Transatlantic Trade and Investment Partnership — 24
U.S. Appeals Court Confirms That Even Arbitration Awards Incorrect as Matter of Law are Enforceable— 26
New Financial Services Expedited Arbitration Procedure Aims to Promote Arbitration Among Providers — 28
Editor Jonathan Sutcliffe, Partner, Dubai
The following contributed articles to this issue of the Arbitration Report: Jay Alexander, Partner, London; Andrew Behrman, Partner, New York; Ryan Bull, Partner, Washington; Chris Caulfield, Partner, London; Derek Craig, Senior Associate, New York; Alejandro Escobar, Partner, London; Dorine Farah, Senior Associate, London; Dr. Ernesto Féliz De Jesús, Associate, London; Laurie Frey, Associate, London; Dr. Johannes Koepp, Partner, London; Noah Mink, Associate, Washington; Joshua Packman, Associate, Washington; Juliana Pechincha, Associate, New York; Fernando Rodriguez, Visiting Intern, London; Izabella Sarkisyan, Senior Associate, Moscow; Edward Schorr, Partner, New York; Cameron Sim, Associate, London; Kiran Unni, Barrister, London; Natasha Zahid, Associate, Dubai. AWARD ENFORCEMENT ABROAD AFTER ANNULMENT AT SEAT The enforcement of an award that has been annulled at the arbitration seat continues to be a controversial issue in international arbitration. Should the enforcement court follow the decision of the seat court? Can the enforcement court reach a different outcome?
The “territorial” or “traditional” position gives primary weight to courts of the seat of the arbitration. In most cases, therefore, pursuant to Article V(1)(e) of the New York Convention, arbitration awards that have been set aside at the seat of the arbitration are not enforced in other countries unless the party seeking enforcement can show serious impropriety by the seat court.
Courts in the United States have, almost without exception, adopted this approach, holding that an annulment decision of the court in the primary jurisdiction will generally be respected, and the annulled award will not be enforced in U.S. courts. TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3 928 (D.C. Cir. 2007); Baker Marine (Nig.) Ltd. v. Chevron (Nig.) Ltd., 191 F.3d 194 (2d Cir. 1999). The party seeking enforcement of an annulled award must show “adequate reason” for refusing to recognize the judgment (Baker Marine (Nig.) Ltd., 191 F.3d at 197) and “extraordinary circumstances” (TermoRio S.A. E.S.P., 487 F.3d at 938) must be present. United States courts therefore impose an extremely high burden on the party seeking enforcement of an annulled award, requiring the party to show that the annulment decision “violate[s] ... basic notions of justice.” (Id. at 939.)
The exception is the Chromalloy case, which did not appear to apply the territorial approach and analyze the propriety of the annulment decision. Instead, the court enforced an arbitration award, despite the fact that the Egyptian court had annulled it, on the basis that refusing to enforce the award would violate the clear U.S. public policy in favor of final and binding arbitration of
Issue 02 - 2015 — 6 commercial disputes. Chromalloy Aeroservices, a Div. of decision. The New York court acknowledged that, under Chromalloy Gas Turbine Corp. v. Arab Republic of Egypt, the New York Convention, it had discretion to continue 939 F.Supp. 907, 913 (D.D.C. 1996). to enforce the award, notwithstanding the Malaysian decision, but held that the circumstances did not “rise In two recent cases, courts in the Southern District of to the level of violating basic notions of justice” as set forth New York applied the territorial approach but reached in TermoRio, and so vacated its original enforcement opposite conclusions. As explained below, the different decision. By contrast with the situation in Pemex, the outcomes are not a result of any difference in the nullification decision was rendered in a neutral country standard applied, but rather flow from the very different (Malaysia), and there was no retroactive application of a sets of facts. prohibition on arbitration. Rather, the Malaysian court applied an “excess of jurisdiction” standard, common to In Corporación Mexicana de Mantenimiento Integral most, if not all, enforcement regimes. (“COMMISA”) v. Pemex-Exploración y Producción, the underlying arbitration between two Mexican companies The decisions in Pemex and Thai-Lao, therefore, occurred in Mexico, under Mexican arbitration law, affirmed the application of the territorial standard and applying Mexican substantive law. The tribunal’s reiterated the high burden that standard imposes on a award was annulled in the Mexican courts on the party seeking enforcement of an award that has been ground that it violated Mexican public policy. Despite nullified at the seat. that nullification, the judge in New York enforced the award because he found that the Mexican annulment A similar approach was recently applied by an English decision violated U.S. public policy. The court found court in Malicorp Ltd v. Government of the Arab Republic that the Mexican decision was tainted by a serious flaw: of Egypt & Ors, [2015] EWHC 361 (Comm). On it retroactively applied a prohibition on arbitrability set February 19, 2015, in Malicorp, the English Commercial forth in a statute that had not been enacted at the time of Court considered (i) whether to enforce a New York the arbitration. In addition, the annulment arguably was Convention award set aside at the seat of arbitration and calculated to benefit a Mexican state-owned enterprise. (ii) whether enforcement should be refused because the losing parties had been unable to present their case in By contrast, in Thai-Lao Lignite Co. Ltd. & Hongsa the underlying arbitration. The court ultimately refused Lignite Co., Ltd v. Government of the Lao People’s to enforce a Cairo Regional Centre for International Democratic Republic, the court recognized and respected Commercial Arbitration award on two grounds: an annulment decision by a court at the arbitral seat. The (i) the award had been set aside by a previous decision arbitration arose from a project development agreement rendered by the Cairo Court of Appeal in 2012; and providing for certain mining and operation rights (ii) the award granted remedies on a basis which was between the Government of Laos and the claimants, neither pleaded nor argued by the parties. It applied the and resulted in an award in claimants’ favor. The seat “preferred approach” test previously adopted in Yukos of arbitration was Kuala Lumpur, Malaysia, and the Capital S.a.r.L v. OJSC Oil Company Rosneft. [2014] substantive law applied was New York law. EWHC 2188 (Comm). In the Yukos case, the English court held that an annulment at the seat did not render In Thao-Lao, the arbitration award was originally the arbitration award a nullity, rejecting the theoretical confirmed by the District Court for the Southern District argument raised by some commentators. Rather, it held of New York and then affirmed on appeal at the Second that when a court is asked to enforce the annulled award, Circuit Court of Appeals. Thai-Lao Lignite (Thailand) that court should analyze the annulment decision and Co., Ltd. v. Govt. of Lao People’s Democratic Republic, should give it effect (i.e., refuse to enforce the award) 924 F.Supp.2d 508, 527-28 (S.D.N.Y. 2013). After the unless the annulment decision violates basic principles award had been enforced, however, the Government of of honesty, natural justice, and domestic concepts of Laos brought a successful challenge to the arbitration public policy. award before the Malaysian High Court, which decision was affirmed by the Malaysian Court of Appeal. The The approach adopted in Malicorp resembles the Malaysian court annulled the award on the basis that the territorial approach applied in Pemex and Thai-Lao. tribunal had exceeded its jurisdiction. In both Thai-Lao and Malicorp, the reviewing courts found that no extraordinary circumstances existed that Following the setting aside of the award in Malaysia, the would justify them exercising their limited discretion to Government of Laos filed a motion for relief in New York, enforce an arbitral award set aside at the seat. Indeed, requesting that the court set aside its earlier enforcement with the exception of the Chromalloy case, which did
Issue 02 - 2015 — 7 not appear to apply the territorial approach, Pemex is the courts consider that an international arbitral award is only recent case in which a U.S. court has applied the not ‘anchored’ or ‘integrated’ in the seat of arbitration. territorial approach but nevertheless enforced an award Supporters of delocalization argue that the arbitration despite a nullification at the seat. procedures should be freed from the mandatory rules and public policy of the place of arbitration. Accordingly, There is, however, a second approach. Some courts and each enforcement court should be entitled to form its commentators have begun to consider that the annulment own view on the validity of the award, regardless of what of an award at the seat is not necessarily an obstacle to the courts at the seat of arbitration may think. enforcement in other countries. These jurisdictions adopt the “delocalized approach,” which emphasizes Although, as discussed above, courts in the United the transnational nature of an arbitral award. Courts States and England have applied the territorial in those jurisdictions are more likely to disregard the approach, it remains to be seen whether the “delocalized annulment of an award. For example, French courts have approach” makes inroads in these jurisdictions. Until enforced awards that have been set aside or suspended at and unless that happens, it appears that the nullification the seat of arbitration. The justification for the French of an arbitral award at the seat will result in an almost courts’ approach is: (i) French domestic law does not automatic refusal to enforce that arbitration award in the recognize the setting aside or suspension of the award United States and England. as a ground for refusing enforcement; and (ii) French WHEN IS REFERRAL TO A DISPUTE ADJUDICATION BOARD A PRECONDITION TO COURT OR ARBITRATION PROCEEDINGS?
Peterborough City Council v. Enterprise dispute to adjudication. It was possible for a party to Managed Services Ltd. [2014] EWHC 3193 (TCC) choose a dispute resolution procedure other than that in Enterprise Managed Services Ltd. (“EMS”) applied their nominated Book. to stay an action for a debt brought by Peterborough City Council (the “Council”) in the English High Clause 20.2 of the Contract was entitled “Appointment of Court under a contract between the two parties (the the [DAB].” Sub-clause 20.2.1 provided: “Disputes shall “Contract”). The issue was whether the Contract be adjudicated by a DAB in accordance with Sub-Clause required any dispute to be referred to adjudication by a 20.4…” (emphasis added). Dispute Adjudication Board (“DAB”) as a precondition of any action in the courts. Mr. Justice Edwards-Stuart Clause 20.4 was entitled “Obtaining [DAB]’s Decision.” held that it did, on a proper construction of the terms of Sub-clause 20.4.1 provided: “If a dispute (of any kind the Contract. whatsoever) arises between the Parties in connection with, or arising out of, the Contract or the execution of the EMS had agreed to design, supply, install, test and Works… then after a DAB has been appointed pursuant commission a solar energy plant on the roof of a building to Sub‑Clauses 20.2 and 20.3, either Party may refer the owned by the Council. The terms of the agreement were dispute in writing to the DAB for its decision…” (emphasis recorded in the Contract. The Contract was made on added). the FIDIC General Conditions of Contract for EPC/ Turnkey Projects, one of three standard forms of Clauses 20.6 and 20.7 made provision for referral of contract issued by FIDIC in 1999 (each a “Book”). a dispute regarding the DAB’s decision (if any) to the Two Books provided for a “full-term” standing DAB courts of England and Wales. appointed before the start of the works. The third Book provided for the ad hoc appointment of a DAB following Clause 20.8 was entitled “Expiry of [DAB]’s Appointment.” the issue by a party of a notice of intention to refer a Sub-Clause 20.8.1 provided: “If a dispute arises between
Issue 02 - 2015 — 8 the Parties in connection with, or arising out of, the Contract incorporated the FIDIC Conditions of Contract for or the execution of the Works and there is no DAB in place, Construction (1999) (the “Conditions”). The issue was whether by reason of the expiry of the DAB’s appointment or whether the Conditions required any dispute arising otherwise… the dispute may be referred directly to the courts between the parties to be referred to adjudication by a of England and Wales…” (emphasis added). Dispute Adjudication Board (“DAB”) as a precondition of any referral to arbitration. The Swiss Supreme Court The Council submitted that Sub-Clause 20.8 gave it a responded in the negative. unilateral right to opt out of the adjudication process. A dispute had arisen between the parties under the The judge held that the words “if a dispute arises ... and Contracts after works had been completed. B advised there is no DAB in place” applied to a situation where A of its intent to bring the dispute to the DAB. Over the contract provided for a standing DAB, yet there was the following 15 months, both parties sought and failed no DAB in place at the time when a dispute arose. The to agree the appointment of a properly constituted words did not apply to the procedure of appointing an ad DAB. Subsequently, B filed a request for arbitration hoc DAB after a dispute had arisen. If it were otherwise, with the ICC and a three-member arbitral tribunal was the detailed provisions regarding the appointment of the constituted with its seat in Geneva. DAB (Clause 20.2) and failure to agree a DAB (Clause 20.3) could have no application because, by definition, Parallel to the ICC arbitral proceedings, the parties under those provisions, there had to be a dispute in continued exchanges on the constitution of the DAB. existence before appointing a DAB could begin. Where the DAB had still not been set up after 18 months, B said that it had to initiate the arbitration procedure to The judge therefore held that the Contract required, by protect its legitimate rights. virtue of Sub-Clause 20.2.1, that the determination of the current dispute was to be by way of adjudication and, Clause 20.2 of the Conditions was entitled “Appointment only failing that, by litigation. of the [DAB].” Sub-Clause 20.2.1 provided: “Disputes shall be adjudicated by a DAB in accordance with Sub- The decision and reasoning of the judge are to be Clause 20.4…” (emphasis added). Sub-Clause 20.2.5 compared with that of the Swiss Supreme Court in the provided: “The agreement between the Parties and either following case. the sole member (“adjudicator”) or each of the three members shall incorporate by reference the General Conditions of A. SA v. B. SA, 4A_124/2014 Dispute Adjudication Agreement contained in the Appendix (Swiss Supreme Court) to these General Conditions, with such amendments as are A and B entered into two contracts under which B was to agreed between them.” carry out road works (the “Contracts”). The Contracts
Issue 02 - 2015 — 9 Clause 20.4 was entitled “Obtaining [DAB]’s Decision.” However, the mandatory rule permitted exceptions. Sub-Clause 20.4.1 provided: “If a dispute (of any kind This was clear from the text of Sub-Clause 20.8. There whatsoever) arises between the Parties in connection with, or had to remain special circumstances where a party arising out of, the Contract or the execution of the Works… wishing to submit a dispute to arbitration could do so either Party may refer the dispute in writing to the DAB without needing first to resort to the pre-arbitration for its decision…” (emphasis added). Sub-Clause 20.4.4 DAB procedure. This was an application of the principle provided: “Within 84 days after receiving such reference, or of good faith in Swiss law which also governed the within such other period as may be proposed by the DAB and procedural behavior of the parties. When the principle approved by both Parties, the DAB shall give its decision….” would be applied turned on the facts.
Clause 20.6 made provision for referral of a dispute The Supreme Court observed there were two types of regarding the DAB’s decision (if any) to arbitration DAB: the standing DAB, which was the rule, appointed at under ICC Rules. the outset of the contractual relationship and remaining in place until the end of the works; and the ad hoc Clause 20.8 was entitled “Expiry of [DAB]’s DAB, which was an exception, and was constituted Appointment” and provided: “If a dispute arises between only when a dispute arose between parties. The DAB the Parties in connection with, or arising out of, the Contract system established by FIDIC was conceived above all to or the execution of the Works and there is no DAB in place, constitute a permanent DAB and not an ad hoc DAB. whether by reason of the expiry of the DAB’s appointment or The idea was to facilitate speedy disposition of disputes otherwise… the dispute may be referred directly to arbitration arising during the performance of a project, without under Sub-Clause 20.6 [Arbitration]…” (emphasis added). jeopardizing its continuation, by specialists appointed at commencement and able to follow its implementation to The Arbitral Tribunal made a preliminary partial award completion. upholding its jurisdiction, rejecting A’s argument that B had failed to comply with the compulsory mechanism of Here there was an ad hoc DAB. No time limit had been prior recourse to a DAB in the Conditions. A appealed agreed for its constitution. Its implementation followed to the Swiss Supreme Court. completion of the works. It was therefore more akin to an arbitral tribunal of first instance than an actual The Supreme Court upheld the Arbitral Tribunal’s DAB, and its implementation may no longer have been award, but disagreed with the Tribunal’s reasoning. necessary in view of the economy of the system. Further, the procedure to constitute the DAB had started 15 The issue was whether the pre-arbitration phase set out months before B filed its request for arbitration. This in the Conditions was mandatory and, if so, what were was a “long time” in the context of a dispute resolution the legal consequences of failing to comply with this mechanism supposed to be expeditious, and five times procedural requirement. longer than the 84 days within which the DAB procedure had normally to be conducted. B could not be blamed for The Supreme Court held that the DAB dispute “such procrastination.” resolution mechanism contemplated by Clause 20 of the Conditions was, as a general rule, “mandatory.” Finally, Sub-Clause 20.2.5 of the Conditions required It had to be completed for an arbitration procedure to parties to enter into a Dispute Adjudication Agreement begin. The Supreme Court relied on the word “shall” in (“DAA”) incorporating, by reference, the General Sub-Clause 20.2.1 that corresponded to a duty, and did Conditions of Dispute Adjudication Agreement not see why Sub-Clause 20.4.1 would be a lex specialis contained in the Appendix to the Conditions. Clause to Sub‑Clause 20.2.1 or “may” in Sub-Clause 20.4.1 2.1 of the General Conditions provided that the DAA turned the implementation of the DAB into a mere came into force when the principal, the contractor, and option. Finally, the Court reasoned that, if Clause 20.8 all members of the DAB had signed it. Failing this, there were interpreted to permit a party to resort to arbitration was no validly constituted DAB. In the instant case, whenever there was no DAB in place, irrespective of because the parties had failed to sign a DAA with all the reason, the alternate dispute resolution mechanism of its appointed members, the DAB was not “in place” devised by FIDIC would ultimately turn into “an when the arbitration request was filed. empty shell.” The Swiss Supreme Court accordingly dismissed the appeal.
Issue 02 - 2015 — 10 UPDATED 2014 IBA GUIDELINES ON CONFLICTS OF INTEREST IN INTERNATIONAL ARBITRATION In October 2014, following a two-year review process, the International Bar Association updated its Guidelines on Conflicts of Interest in International Arbitration. This was the first update to the Guidelines. Since their introduction in 2004, the Guidelines have reflected what many consider to be best practices in the international arbitration community. They have been a valuable resource to parties, counsel, arbitrators, and arbitral institutions confronting potential conflicts issues in connection with the appointment, challenge, and confirmation of arbitrators. Although they are not legally binding and do not supersede applicable arbitration rules, the Guidelines have been influential. Arbitral institutions and national courts have referred to them when resolving arbitrator challenges.
Issue 02 - 2015 — 11 The updated Guidelines are not radically different, expressly bound by the same duties of impartiality and but they include clarifications and new provisions that independence that are owed by the arbitrators. Arbitral address several important issues affecting international tribunals are responsible for making sure that these arbitration practice. This article identifies some of the duties are met by arbitral secretaries and assistants. more prominent changes, including provisions on “advance” conflict waivers, extension of impartiality Updated General Standard 6(a) appears to recognize the and independence requirements to arbitral secretaries, increasing complexity of conflict issues in the modern conflict issues relating to arbitrators who are affiliated legal services environment. Arbitrators commonly are with law firms, and disclosure of third-party funding. members of large international law firms with numerous Like the 2004 version, the updated Guidelines contain clients, and they move laterally among firms with greater two main parts. First, they set out and explain general regularity. The updated Guidelines make clear that, standards concerning the requisite impartiality and when assessing potential conflicts, an arbitrator is“ in independence of arbitrators. They also provide guidance principle considered to bear the identity of his or her law on the kinds of information that arbitrators should firm,” but “the activities of an arbitrator’s law firm … and the disclose to parties about potential conflicts. Second, relationship of the arbitrator with the law firm” should not they set out instructive lists of factual situations that be deemed automatically to create a conflict of interest likely would (or likely would not) require disclosure by or require disclosure. Rather, they should be “considered an arbitrator or disqualification of an arbitrator due to in each individual case.” The Explanation to the updated a conflict. General Standard states that a balance should be struck between the interests of parties in appointing arbitrators Clarifications on Scope of their choice, who may be partners at large firms, and The updated Guidelines now make clear that they are the importance of preserving parties’ confidence in the intended to apply both to commercial and investment impartiality and independence of arbitrators. treaty arbitration. They also make clear that they apply irrespective of whether legal or non-legal professionals In recent years, third-party funding has become more serve as arbitrators and irrespective of whether parties prevalent in international arbitration. Pursuant to are represented by lawyers or non-lawyers. updated General Standards 6(b) and 7(a), parties are required to disclose, so that potential arbitrator conflicts Updated Provisions may be properly assessed, the identities of third parties Updated General Standard 3(b) addresses “advance who provide funding for the arbitration or that may have waivers,” which are declarations by arbitrators a duty to indemnify a party to the arbitration. concerning potential conflicts of interest that could arise in the future. It appears that arbitrators’ use of advance Updated General Standard 7(b) now makes clear that waivers has become more common, perhaps as a reaction parties also have an obligation to disclose the identities to an increase in the number of arbitrator challenges by of their counsel in the arbitration and any relationships parties. The updated Guidelines now provide that an between their counsel and an arbitrator. The parties “advance declaration or waiver” will not discharge an must do so at the earliest opportunity and upon any arbitrator’s ongoing duty of disclosure. The updated change in counsel. Guidelines do not, however, address the validity and effect of advance waivers, which will depend on the Initial commentary within the international arbitration particular facts of a matter, the wording of the waiver, community about the updated Guidelines has been and the applicable law. favorable. The general view is that the drafters struck a careful balance between enhanced transparency and The updated Guidelines also address another trend, the avoidance of unnecessary rigidity, which could arbitral tribunals’ increasing use of secretaries and encourage meritless or “tactical” challenges that would assistants. Under updated General Standard 5(b), impair the efficiency and legitimacy of international arbitral or administrative secretaries and assistants of arbitration. The 2014 Guidelines can be downloaded either an arbitral tribunal or any of its members are from the IBA website, at http://www.ibanet.org/.
Issue 02 - 2015 — 12 THE RECAST BRUSSELS REGULATION AND ARBITRATION The exclusion of arbitration from the scope of Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the “2001 Brussels Regulation”) has been the subject of considerable discussion for some time. It remains to be seen whether this debate has finally reached its conclusion with the recent reform of the 2001 Brussels Regulation and the entry into force on 10 January 2015 of Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 (the “Recast Brussels Regulation”).
One of the most controversial aspects of the 2001 Brussels C-116/02) [2005] QB 1 and Turner v. Grovit (Case Regulation was in relation to the scope of the arbitration C-159/02) [2004] ECR I-3565, which curtailed the exclusion at Article 1(2)(d). Article 1(2)(d) provided: ability of national courts in Member States to grant “The Regulation shall not apply to: ... arbitration.” While injunctive relief restraining a party from pursuing court this provision was simple and clear, the lack of detail on proceedings in another Member State in breach of a how the exclusion should be applied in practice meant jurisdiction agreement. At first, the courts of certain that the boundaries between the jurisdiction of Member Member States continued to grant anti-suit injunctions State courts to act in support of arbitration in accordance to prevent parties from pursuing court proceedings with national law and their jurisdiction to act under the in another Member State in breach of an arbitration 2001 Brussels Regulation were far from clear. agreement, in view of the arbitration exception in the 2001 Brussels Regulation. However, in the controversial Matters were further complicated with the ECJ’s case of Allianz SpA v. West Tankers Inc (Case C-185/07) decisions in Erich Gasser GmbH v. MISAT Srl (Case [2009] EUECJ, the ECJ held that the grant of anti-suit
Issue 02 - 2015 — 13 injunctions restraining a party from commencing or New recital 12 restates that the Recast Brussels continuing with proceedings in the court of a Member Regulation should not apply to arbitration and, State, where those proceedings were in breach of an specifically, that it should not prevent the courts of arbitration agreement, was incompatible with the 2001 Member States from referring parties to arbitration, Brussels Regulation. from staying or dismissing proceedings in favor of arbitration, or from examining whether the arbitration In Opinion of Advocate General Case C‑536/13 ‘Gazprom’ agreement is null and void, inoperative, or incapable of OAO, Advocate General Wathelet sought to limit the being performed, in accordance with their national law. implications of the West Tankers case. The Advocate The second paragraph of recital 12 goes on to provide General had to consider whether a Member State that a ruling given by a court of a Member State as to could refuse to enforce an arbitral award containing whether or not an arbitration agreement is null and void, an anti-suit injunction because it was inconsistent with inoperative or incapable of being performed should not the 2001 Brussels Regulation. Although the Recast be subject to the rules of recognition and enforcement Brussels Regulation was not in force at that time, the laid down in the Recast Brussels Regulation, regardless Advocate General relied on its provisions to interpret of whether the court decided on this as a principal issue the 2001 Brussels Regulation. He concluded that the or as an incidental question. 2001 Brussels Regulation must be interpreted as not requiring a Member State court to refuse to recognize Recital 12 also provides that, where a court of a Member and enforce an anti-suit injunction issued by an arbitral State has determined that an arbitration agreement is null tribunal. In arriving at this conclusion, he relied on the and void, inoperative, or incapable of being performed, fourth paragraph of recital 12 of the Recast Brussels this should not preclude that court’s judgment on the Regulation, which states that the Regulation does not substance of the matter from being recognized or, as the apply to an action or: “ancillary proceedings relating to … case may be, enforced in accordance with the Recast the conduct of an arbitration procedure or any other aspects of Brussels Regulation. However, this rule is expressed to such a procedure, nor to … the … recognition or enforcement be without prejudice to the competence of the courts of of an arbitral award.” In the Advocate General’s opinion, Member States to decide on recognition and enforcement recognition and enforcement of the decisions of arbitral of arbitral awards in accordance with the New York tribunals fell exclusively within the scope of the New Convention. As explained above, it also clarifies that York Convention on the Recognition and Enforcement the Regulation will not apply to actions or ancillary of Foreign Arbitral Awards, concluded in 1958 (the proceedings relating to the conduct of an arbitration “New York Convention”). procedure or to the recognition or enforcement of an arbitral award. On 13 May 2015, the ECJ issued its judgment in Gazprom. Although it did not take into account the Recast Brussels Article 73(2) of the Recast Brussels Regulation provides Regulation, it arrived at the same conclusion as the expressly that the New York Convention will take Advocate General that the 2001 Brussels Regulation precedence over the Regulation. It seems, therefore, “must be interpreted as not precluding a court of a Member that a Member State court can recognize arbitral awards State from recognizing and enforcing, or from refusing to even if there has been a conflicting judgment in another recognize and enforce, an arbitral award prohibiting a party Member State. from bringing certain claims before a court of that Member State, since that regulation does not govern the recognition Despite this clarity, some areas of uncertainty remain. and enforcement, in a Member State, of an arbitral award For example, it is not entirely clear how the rule that issued by an arbitral tribunal in another Member State” (at the New York Convention takes precedence over the paragraph 44 of the judgment). Recast Brussels Regulation will operate in practice. Does it mean that, if a Member State court is asked to The entry into force of the Recast Brussels Regulation enforce an arbitration award from a tribunal seated in should shed further clarity on how to construe the one jurisdiction, and a conflicting judgment from the arbitration exception. Although the wording of the courts of another Member State, the enforcing court can arbitration exception in Article 1(2)(d) remains enforce the award and refuse to enforce the judgment? unchanged in the Recast Brussels Regulation, it is It is also unclear, by way of further example, whether amplified and reinforced by recital 12 and a new anti-suit relief may be available now that the arbitration Article 73(2). exclusion has been reinforced.
Issue 02 - 2015 — 14 UPDATE ON THE ADOPTION OF THE UN CONVENTION ON TRANSPARENCY IN TREATY-BASED ARBITRATION As reported in the last issue of this Arbitration Report, on 1 April 2014, the United Nations Commission on International Trade Law (UNCITRAL) Rules on Transparency in Treaty-based Investor-State Arbitration (“the Transparency Rules”) came into effect. The Transparency Rules form part of the attempt to fend off increasing criticism, particularly from NGOs, leveled against the perceived clandestine nature of treaty-based, investor- State arbitration. They do so by imposing various duties on the parties and the arbitral tribunal, including disclosure duties concerning the provision of documents to a publicly accessible repository of published information, setting out standards for submissions by third persons and non-disputing parties to the relevant treaty, and increasing public access to the hearing itself.
The Transparency Rules were drafted as a stand- alone instrument available for use in all investor-State arbitrations. Initially, however, their application was only mandatory in UNCITRAL arbitrations initiated pursuant to treaties concluded on or after 1 April 2014 (unless the parties to the treaty had agreed otherwise). For all other UNCITRAL arbitrations commenced under treaties concluded before that time, the Transparency Rules were only to apply if the parties to the arbitration so agreed, or if the parties to the relevant treaty had agreed to their application.
The United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (“the Convention”), formally adopted by the UN General The Convention has already been signed by several Assembly on 10 December 2014, is about to change states, namely Canada, Finland, France, Germany, this dramatically, expanding the application of the Mauritius, Sweden, the United Kingdom, and the United Transparency Rules to cover investor-State arbitrations States. This means that investor-State disputes to which initiated pursuant to treaties existing prior to 1 April those States or an investor of those States are party may 2014, irrespective of the applicable arbitration rules. be subject to the Transparency Rules, depending on In the event that, in the relevant dispute, both the ratification of the Convention by the relevant State(s). investor’s State and the respondent State have ratified It is expected that more States will become signatories the Convention, then the Transparency Rules will to the Convention in due course, although it is possible apply to the arbitration. If only the respondent State that States might carve out relevant treaties, or non- has ratified the Convention, then the investor from the UNCITRAL arbitrations, from the Convention’s scope. non-signatory State will have the option to have the In any event, the Transparency Rules will become Transparency Rules apply to the arbitration. As there increasingly familiar, and potentially a valuable weapon, are more than 3,000 such treaties, this is potentially a in investor-State arbitrations. very significant development.
Issue 02 - 2015 — 15 BINDING A NON-SIGNATORY: EXAMPLE OF THE APPLICATION OF EQUITABLE ESTOPPEL IN THE U.S. A fundamental premise of arbitration is that a party cannot be forced to arbitrate a dispute that it did not agree to arbitrate. But does an agreement to arbitrate with one corporate entity imply an agreement to arbitrate with another, related corporate entity? In a recent decision, a U.S. federal court held that—at least under some circumstances—it can, with the court compelling a party to arbitrate a dispute against a third party with which it had never signed an arbitration agreement. See Kastner v. Vanbestco Scandanavia AB, and Icebug, Inc., 2014 WL 6682440, 2014 U.S. Dist. LEXIS 165915 (D. Vt. Nov. 25, 2014).
Issue 02 - 2015 — 16 In Kastner, plaintiff Tracktion owned two U.S. patents, was equitably estopped from avoiding arbitration against which defendant Vanbestco licensed. The parties’ Icebug. The court concluded that the disputes Icebug License Agreement provided that all disputes “arising out sought to resolve through arbitration were “intertwined” of or in connection” with the agreement would be resolved with the agreement that Tracktion had made with through arbitration in Montreal, Canada, under the Vanbestco; in fact, the allegations arose directly from International Chamber of Commerce (“ICC”) Rules. the License Agreement. In light of the relationships Arbitration proceedings were to be governed by the law among the parties, the dispute, and the agreement, the of Canada. court dismissed the case and ordered arbitration.
The parties later disagreed about the scope of the The Kastner decision illustrates that a court can compel patents and the royalty amounts due. Tracktion asserted plaintiffs to arbitrate claims against parties with which the License Agreement had been repudiated and the plaintiff does not have an express arbitration brought a patent-infringement lawsuit in U.S. federal agreement. For a party that prefers arbitration but does court against both Vanbestco and its U.S. subsidiary, not have an agreement to that effect, Kastner suggests Icebug USA. Icebug appeared in the lawsuit and moved that an argument based on equitable estoppel may be to compel arbitration. Tracktion opposed Icebug’s able to force arbitration by showing a close connection motion on the grounds that (i) its claims were not to an agreement that the adverse party has with a related subject to arbitration under the License Agreement, (ii) entity. the License Agreement, and the arbitration agreement contained therein, had been repudiated, and (iii) Icebug For a party in Tracktion’s position, meanwhile, Kastner had no basis to compel arbitration since it was not party urges caution in drafting the arbitration agreement to an arbitration agreement with Tracktion. to account for this scenario. There was no indication that Tracktion intended its contract with Vanbestco to After concluding that the License Agreement included an obligate it to arbitrate with Icebug as well. Yet the court arbitration agreement between Tracktion and Vanbestco found the issues and the parties sufficiently related to that was enforceable under the New York Convention, the agreement to order that result. And while this case the court held that arbitrators had jurisdiction to involved identical allegations against a company and its determine whether Tracktion’s claims against Vanbestco subsidiary, the decision is not necessarily limited to that were, in fact, subject to the arbitration agreement. The precise situation. court noted that, under U.S. law, courts, not arbitrators, generally decide whether a particular dispute is to be Also of note is that the court applied U.S. law to reach arbitrated unless the parties to the arbitration agreement its conclusion regarding equitable estoppel, evidently have clearly and unmistakably agreed otherwise. Here, because neither side raised choice of law issues. However, however, Tracktion and Vanbestco had agreed that the U.S. Court of Appeals for the Second Circuit has arbitrators had power to decide questions of arbitrability held that when third parties seek to estop a plaintiff from by explicitly incorporating the ICC Rules into their avoiding the impact of an arbitration agreement, just arbitration agreement. As a result, the court held that as Icebug sought to estop Tracktion from avoiding the arbitrators had to decide whether Tracktion’s claims of arbitration agreement in the License Agreement, the law patent infringement were arbitrable, and whether the governing the arbitration agreement should be applied. arbitration agreement had been repudiated. See Motorola Credit Corp. v. Uzan, 388 F.3 39, 50-51 (2d Cir. 2004). Here, it is unclear whether application While Tracktion’s claim against Vanbestco clearly of Canadian law might have produced a different result. belonged in arbitration, Tracktion had not expressly agreed to arbitrate its claims against against Icebug, Ultimately, Kastner suggests that U.S. law permits courts leaving the issue of whether Tracktion could be to take a flexible approach to interpreting and enforcing compelled to arbitrate its patent infringement claims arbitration agreements when there is the perception against Icebug for judicial decision. Applying “general that a plaintiff has sued a non-party to the arbitration principles of domestic law,” the court held that Tracktion agreement to avoid arbitration.
Issue 02 - 2015 — 17 DETERMINING MARKET VALUE FOR LAWFUL EXPROPRIATION: THE TIDEWATER CASE An ICSID Tribunal applies the DCF method as the most appropriate in the context to determine market value for outright, lawful expropriation and discusses the main variables at issue to determine the proper quantum of compensation.
Tidewater Investment SRL and Tidewater Caribe, C.A. v. basis; and (c) against the payment of prompt, adequate The Bolivarian Republic of Venezuela (ICSID Case No. and effective compensation equivalent to “the market ARB/10/5) Award (13 March 2015) value of the investment expropriated immediately before the expropriation.” The Tribunal clarified that if the Facts conditions were not met, it must treat the expropriation Tidewater Investment SRL, a company incorporated in as a breach of international law. Barbados, is the parent of the Venezuela-incorporated Tidewater Caribe, C.A. (the “Claimants”), which in Neither Party disputed that the expropriation served a turn owns the Venezuelan company, Tidewater Marine public purpose related to the internal needs of Venezuela. Service, C.A. (“SEMARCA”). From 1958, SEMARCA provided maritime support services under short-term The Claimants argued that the taking of property was contracts to Venezuela’s national oil company, Petróleos discriminatory. However, the Tribunal concluded that de Venezuela, S.A. (“PDVSA”), and to some of its Venezuela did not treat the Claimants differently than subsidiaries. other contractors in respects covered under the Reserve Law. On 8 May 2009, Venezuela enacted a law that reserved to the State the assets and services related to primary As for the requirement to pay compensation, the hydrocarbons activities (the “Reserve Law”). Venezuela Claimants argued that the Reserve Law violated Article then decreed measures to seize a substantial part 5 of the BIT because it limited compensation to the book of SEMARCA’s assets, including its headquarters, value of the relevant assets and forbade taking lost profits properties and 15 vessels. The takings ended or indirect damages into account for the valuation of SEMARCA’s business operations in Venezuela. such assets.
The Claimants filed a request for arbitration against The Tribunal found that the notion of “market value” Venezuela under the ICSID Convention and the did not prescribe a particular method of valuation. Venezuela-Barbados bilateral investment treaty (the Rather, the appropriate valuation method depends on “BIT”). Their main claim was for expropriation of the context. The Tribunal also held that its choice of the their investments without payment of “prompt, adequate, appropriate valuation was not limited by the valuation and effective compensation,” in breach of Article 5 of the system provided by the Reserve Law. It also held that the BIT. expropriation was lawful because it met the applicable standard of Article 5 of the BIT. Held The Tribunal found that the Reserve Law and associated Only the amount of compensation was left to the administrative acts expropriated the whole of the Tribunal to decide. Claimants’ investment in SEMARCA. It then turned to examine the legality of the expropriation. The Proper Quantum of Compensation The Tribunal held that the discounted cashflow (“DCF”) Legality of the Expropriation method was the most appropriate valuation method Article 5 of the BIT requires that expropriations should to determine the fair market value of the Claimants’ be carried out: (a) for a public purpose related to the investment in SEMARCA because: (a) SEMARCA internal needs of Venezuela; (b) on a non-discriminatory constituted a “going concern” with a proven track record
Issue 02 - 2015 — 18 of profitability before the taking; (b) SEMARCA had operated successfully in Venezuela for 50 years; and (c) in the five years prior to the taking, SEMARCA had recorded a substantial operating income.
The Tribunal refused to value SEMARCA at liquidation value or at book value, which it said would likely not be appropriate for valuations of proven going concerns.
The parties’ DCF valuations differed greatly, with the Claimants valuing the investment at US$ 81.68 million (excluding interest) and Venezuela at US$ 2.9 million. The Tribunal made its own findings as to each of the six variables adopted by the parties’ respective experts that had a material effect on the valuation of SEMARCA. It held as follows:
1. Scope of business: The Parties disputed whether SEMARCA’s business, as of 2009, was confined to its operations on Lake Maracaibo or whether it extended to other areas. After considering SEMARCA’s historical operations, the Tribunal added the cashflow generated by SEMARCA’s vessels outside Lake Maracaibo.
2. Accounts receivable: At the time of the taking, PDVSA owed SEMARCA US$ 40 million for services rendered. The Parties disagreed as to whether these accounts receivable should be included in the value of the company at the valuation date, with the Respondent arguing that these accounts had not been expropriated. The Tribunal held that the accounts receivable constituted a valuable asset of the business as a going concern and included them in its valuation.
3. Historical cashflow: The Tribunal considered whether SEMARCA’s cashflow for the fiscal year ending 31 March 2009 should be included in the determination of the historical cashflows of the company. The Parties’ experts started their respective calculation of historical cashflows in FY2006, but the Respondent’s experts excluded FY2009 cashflows, which they considered to be and (c) the increase in cashflows in 2009 partly disproportionately high in comparison to those of reflected higher labor costs. earlier years. 4. Equity risk: the Tribunal considered the percentage The Tribunal held that the results of FY2006 premium to be applied to the risk involved in to FY2009 should be included in its valuation investing in equities rather than risk-free U.S. because: (a) a willing buyer would have taken Treasury bonds. The Claimants’ expert maintained into account all of SEMARCA’s available current that a 5% rate was an appropriate rate; the financial data on the cashflows of the company; Respondent’s expert, a rate of 6.5%. (b) the oil industry is notoriously price-volatile;
Issue 02 - 2015 — 19 The Tribunal examined the primary data available. Interest It focused particularly on three reliable sources Article 5 of the BIT mandated the payment of interest for long-term equity risk premia, namely: the “at a normal commercial rate until the date of payment.” Ibbotson-Morningstar Report (which covers the The Parties disagreed on the rate to be adopted and period 1926-2009), the Damodaran Report (which whether interest should be simple or compounded. covers the period 1928-2009), and the Dimson- Marsh-Staunton Report (which covers the period The Respondent proposed the yield of three-month 1900-2009). As at 2009, these reports showed a U.S. Treasury bonds plus 1.33%. The Tribunal rejected long-term market risk premium of between 6.0% this rate, which it found to be the equivalent of an inter- and 6.7%. The Tribunal concluded that an equity bank rate, rather than a commercial rate available to a risk premium of 6.5% was a reasonable premium trading company. The Claimants proposed either the for the calculation of the cost of capital. U.S. prime rate + 2% or LIBOR + 4%, which, over the period 8 May 2009 to 31 March 2013, averaged 5.2%. 5. Country risk: The parties’ experts disagreed on the The Tribunal acknowledged that Tidewater Investment premium to be applied to the risk of investing in SRL could borrow at rates between 4.35% and 4.47% Venezuela. The Respondent proposed a country over the pre-award interest rate period. It applied 4.5% risk premium of 14.75% based on the Ibbotson- as the rate that most closely met the standard agreed Morningstar International Cost of Capital Report between Venezuela and Barbados in Article 5 of the BIT. for 2009. The Claimants’ expert proposed a premium of 1.5% based on his view that political The Tribunal held that interest should be compounded risk ought to be excluded from the country risk quarterly, as a commercial bank would typically premium. The Tribunal rejected this view and compound interest in this way. In this context, the adopted the Respondent’s 14.75% premium, which Tribunal noted that Article 5 of the BIT expressly it considered a reasonable and conservative rate. required a “normal commercial rate,” i.e., a rate at which the Claimants could themselves have borrowed 6. Business risk: the Respondent argued that the same sum. SEMARCA’s business was subject to a significant risk arising from its concentration on a single Costs customer—PDVSA and its subsidiaries—and, Claimants sought reimbursement of the fees of counsel therefore, an adjustment to the valuation of the and experts amounting to US$ 7,534,361.33 plus investment at an assumed rate of reduction in expenses of US$ 177,739.31. The Respondent’s costs SEMARCA’s business of 25% per annum should amounted to US$ 8,479,879 plus expenses of US$ be applied. 520,538.00. The Tribunal awarded Claimants US$ 2.5 million in costs. The Tribunal found that, although the business had a single customer, the underlying industry function Conclusion required a large developed infrastructure that could The Tidewater award offers a useful illustration of not simply be abandoned if production on Lake the methods and variables in asset valuation relevant Maracaibo were to continue. A willing buyer to determining compensation at “market value” for considering the acquisition of this business prior to an instance of outright, lawful expropriation. The six the Reserve Law would not have applied a discount variables at issue in the determination of the quantum for the risk of loss of the business to its customer. of compensation, applying a DCF method, each had a significant impact on the valuation, as reflected in the Valuation wide divergence of the parties’ respective positions. While admitting that DCF valuations were not an exact Perhaps most interesting is the Tribunal’s discussion science, the Tribunal considered that a willing buyer of equity risk, country risk and business risk, and in would have valued SEMARCA’s business operations particular the contrast between the Tribunal’s adoption at approximately US$ 30 million and would also have of a conservative rate for assessing country risk and its been prepared to pay an additional amount of US$ 16.4 refusal to accept an additional rate for business risk. million for the non-recurring accounts receivable that it Given that valuation is not an exact science, it will be would have been entitled to recover in full from PDVSA. useful to compare the guidance provided in this award The Tribunal arrived at a valuation for the purposes of to valuations undertaken in other contexts, including compensation of US$ 46.4 million. under other heads of liability.
Issue 02 - 2015 — 20 ARBITRATION CLAUSE POINTING TO TWO DIFFERENT INSTITUTIONS HELD ENFORCEABLE, NOT PATHOLOGICAL The Svea Court of Appeal in Sweden has held that parties may mix and match arbitral rules and administrative bodies, so long as the designated administrative body is willing to serve. In The Government of the Russian Federation v. I.D. Badprim S.R.L., the parties had agreed to an arbitration clause calling for arbitration under the rules of the International Chamber of Commerce (“ICC”), but administered by the entirely unrelated Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”). Holding that the parties’ basic intention to arbitrate should be upheld if possible, the court rejected a motion by the Russian Federation to annul the ensuing award. (Svea Court of Appeal, 23 January 2015, Case No. T2454-14.)
The dispute arose out of a 2007 construction contract between I.D. Badprim S.R.L. (“Badprim”), a Moldovan company, and the Federal Customs Office of the Russian Federation. In 2010, Badprim initiated arbitration proceedings in Stockholm, pursuant to an arbitration clause providing for disputes to be settled pursuant to the ICC Rules, but administered by the SCC. The SCC administered the arbitration, with its own board performing functions that the ICC Rules delegate to the ICC International Court of Arbitration.
The Russian Federation challenged the final arbitral award, arguing, inter alia, that the arbitration agreement was unenforceable because it was not possible for the ICC Rules to be applied by the SCC as the SCC lacked the necessary organizational structure.
Judgment The Svea Court of Appeal recognized that the arbitration clause appointing the SCC to administer a dispute under the ICC Rules “can be deemed contradictory” because the SCC “lacks the required organizational structure to administer an arbitration fully compliant with the ICC’s rules.” The court looked past this contradiction, however, to give effect to “the parties’ basic intentions” to resolve their disputes by arbitration, in Stockholm, before the SCC. In a separate opinion, containing a dissent on other grounds, one judge of the Court of Appeal cautioned that this finding depended on the willingness of the administering arbitral institute to administer rules of another institute.
Issue 02 - 2015 — 21 Implications Because the Badprim arbitration was begun before The decision of the Svea Court of Appeal is consistent the 2012 ICC Rules took effect, it does not answer with the 2009 ruling of the Singapore Court of Appeal the question whether this new provision of the ICC in Insigma Technology Co Ltd v. Alstom Technology Ltd Rules, expressly barring another arbitral institute from ([2009] SGCA 24). There, the Singapore court upheld administering an arbitration under the ICC Rules, would an arbitration clause providing for arbitration under render an arbitration clause like the one in the Badprim the ICC Rules, but administered by the Singapore too contradictory to be enforceable. The conclusion International Arbitration Center. reached by the Svea Court of Appeal would suggest not, although the risk may be greater that the designated In 2012, following the Insigma decision, the ICC adopted arbitral institute would decline to agree to administer an various amendments to its arbitration rules. Among those arbitration where the applicable arbitral rules expressly amendments, Article 1(2) was revised to state expressly prohibit it from doing so. In HKL Group Co Ltd. v. Rizq that the ICC’s International Court of Arbitration “is the International Holdings Pte Ltd. ([2013] SGHCR 5), the only body authorized to administer arbitrations under the Singapore High Court raised just this concern, staying Rules ....” This point is expressly reiterated on the ICC court proceedings in favor of an arbitration clause website introducing the new ICC Rules. providing for arbitration under the ICC Rules to be settled by the “Arbitration Committee at Singapore,” but conditioning that stay on the parties finding an arbitral institute in Singapore willing to administer the case. DO THE SIAC RULES PERMIT APPOINTMENT OF A SOLE ARBITRATOR WHERE THE ARBITRATION AGREEMENT PROVIDES FOR THREE? SINGAPORE HIGH COURT SAYS YES In a recent decision in the case of AQZ v. ARA [2015] SGHC 49, the Singapore High Court denied an application to set aside an arbitral award where a sole arbitrator’s award was challenged on the basis that (1) there was no valid arbitration agreement under an oral contract and, in the alternative, (2) the appointment of a sole arbitrator under the SIAC Expedited Procedure Rules was not in accordance with the agreement of the parties for three arbitrators.
The underlying arbitration involved a dispute as to SIAC 2010 arbitration rules. The President of the SIAC whether the supplier had contracted to supply a second allowed the buyer’s application and appointed a sole shipment of coal to the buyer. The parties had performed arbitrator. The arbitrator ultimately entered an award, under a written contract for one shipment, executed finding that the tribunal had jurisdiction. Even though by both parties. After the supplier failed to deliver a the agreement to a second shipment was entered orally, second shipment, the buyer commenced arbitration the parties had expressly agreed to three arbitrators in proceedings under the auspices of the Singapore the first contract, and the agreement was reached before International Arbitration Centre (“SIAC”) and applied the SIAC rules included Expedited Procedure Rules. for the arbitration to be conducted before a sole arbitrator The sole arbitrator further found that the supplier was under the Expedited Procedure Rules contained in the liable to the buyer for breach of contract.
Issue 02 - 2015 — 22 The supplier applied to the Singapore High Court to that the written version of the agreement is neither signed have the award set aside on two primary grounds: (1) nor confirmed by all the parties involved.” The court the arbitrator lacked jurisdiction as there was no binding was further persuaded that the parties’ record of the contract; and (2) the constitution of the tribunal was not agreement to arbitrate in the first contract for shipment in accordance with the parties’ agreement to arbitrate. was sufficient to bind them in their subsequent oral agreement, and that the same arbitration terms would The supplier first argued that there was no binding also apply to a second shipment. The court noted that contract for the second shipment as the parties had the draft contract for a second shipment, although never negotiated, but never executed, a second contract. The signed, also included an arbitration clause. supplier further contended that, if there was a binding contract, it was an oral agreement that did not meet The supplier’s argument in the alternative was that, the requirement that an agreement to arbitrate must assuming that there was a valid arbitration clause, the be “in writing.” In particular, the supplier argued that appointment of a sole arbitrator was not in accordance the written arbitration clause, even if orally imported with the agreement of the parties. The only agreement into a second oral contract, did not meet the “in to arbitrate, contained in the first contract, was for writing” requirements of section 2(1) of the Singapore a tribunal of three arbitrators. The court analyzed International Arbitration Act (“IAA”) 2009, which, in whether the SIAC had discretion to apply the Expedited turn, refers to Article 7 of the UNCITRAL Model Law. Procedure Rules and appoint a sole arbitrator where the For its part, the buyer argued that the effect of the 2012 parties’ agreement was expressly for three arbitrators. At Amendment to the IAA was to expand the definition the time of the oral contract, the SIAC 2007 arbitration of “in writing” to refer to the content of the arbitration rules were in force. The supplier contended that, as agreement being recorded in any form so that it did not the SIAC 2007 rules did not include any expedited matter if the contract itself was oral. procedures, the parties could not have contemplated giving the SIAC President the discretion to apply the The court held that the parties had formed a binding Expedited Procedure Rules or appoint a sole arbitrator. oral contract and agreed on all of the main terms based on the same terms as the written contract for a The Singapore High Court rejected the supplier’s first shipment of coal, apart from the price per metric argument, finding that there“ is a presumption that ton of coal and the laycan period. It further held that reference to rules of a particular tribunal in an arbitration the 2012 amendments to the IAA had expanded the clause refers to such rules as are applicable at the date of definition of in“ writing” and that it was sufficient if one commencement of arbitration and not at the date of contract, party unilaterally recorded the agreement to arbitrate provided that the rules contain mainly procedural provisions. in writing. According to the court, “[i]t does not matter If the rules contain mainly substantive provisions, then
Issue 02 - 2015 — 23 those in force as at the date the contract was entered into court considers in deciding whether the breach in question is would apply.” As the SIAC 2010 rules were in force at serious and thus whether to exercise its discretionary power the time the arbitration was commenced, and the clause to set aside the award for breach.” The SIAC arbitration did not specifically reference the SIAC 2007 rules, the rules give considerable discretionary powers to the court held that the 2010 rules, including the Expedited SIAC President regarding the expedited procedures, Procedure Rules were applicable. The court further and this decision confirms that the courts are unlikely found that the Expedited Procedure Rules were mainly to interfere with the exercise of such powers unless there procedural provisions and therefore the presumption is a material or serious breach which results in prejudice still applied. being suffered by a party as a consequence of the arbitral procedures that have been adopted. As a drafting note, The key point to note about this decision is the if parties adopt the SIAC rules, and they wish to exclude “commercially sensible” approach taken by the application of the Expedited Procedure Rules, they Singapore High Court in deciding that the Expedited should make this express in the arbitration agreement. Procedure Rules can override the parties’ agreement Similarly, if parties require their arbitration tribunals to for arbitration before three arbitrators, even when the be composed of three arbitrators and wish to remove the contract predated the Expedited Procedure Rules. The discretionary power given to the SIAC President with supplier could not demonstrate that it had suffered respect to the composition of the arbitration tribunal, any prejudice as a result of the procedure that was the arbitration agreement should state this expressly. adopted, which is a “relevant factor that the supervisory ARBITRATION UNDER THE TRANSATLANTIC TRADE AND INVESTMENT PARTNERSHIP On 17 July 2015, the European Union (“EU”) and the United States concluded the tenth round of negotiations of the Transatlantic Trade and Investment Partnership (“TTIP”). The TTIP is a comprehensive free trade agreement envisioned to include an investment chapter. This treaty will likely protect foreign investments and may provide for investor- State dispute settlement (“ISDS”), including investment arbitration.
The current draft of the TTIP is not in the public State’s right to regulate in the public interest, in order domain. The following overview of the arbitration to respond to concerns by the civil society that ISDS provisions in the TTIP is based on documents released hinders this right. by the European Commission (“EC”) and the U.S. Trade Representative (“USTR”), the two bodies tasked Consequently, standards of protection under the with negotiating the treaty. However, on 8 July 2015, the TTIP may be narrower than those ordinarily found European Parliament adopted a report recommending in other IIAs. For instance, the EC has earmarked that the EC’s TTIP negotiators exclude “private” the protection against “indirect” expropriation to be investment arbitration from the investment chapter. narrowed. In general terms, “indirect” expropriation As TTIP will require the Parliament’s approval, this can occur when state measures which are not direct recommendation will likely affect the negotiations on takings (e.g., regulations) deprive an investment of the investment chapter. all or a substantial part of its economic value. For the EC, non-discriminatory regulations taken in the public Scope of Claims interest should normally not amount to a compensable TTIP may restrict the scope of the claims normally indirect expropriation. In contrast, some investor-State available to investors under international investment tribunals have held that regulations enacted for a public agreements (“IIAs”). The EC and the USTR seem purpose may be considered as compensable indirect interested in including provisions that preserve the host expropriations.
Issue 02 - 2015 — 24 Composition of Tribunals The “loser pays” principle may also discourage frivolous The TTIP may restrict the parties’ choice of arbitrators. or unmeritorious claims, the EC asserts, because it The EC has expressed an interest in restricting what confronts the claimant with the possibility that it will it perceives as vested interests of arbitrators. To this have to cover the costs of the litigation in full. effect, the EC has proposed a code of conduct for TTIP arbitrators, to clarify which situations are considered Filing of Parallel Proceedings to constitute a conflict of interest. The TTIP may TTIP may include provisions to prevent parallel also circumscribe the parties’ choice of arbitrators to a proceedings. The EC and the USTR have both pre‑established pool of arbitrators, nominated by TTIP identified the need to avoid such proceedings. Parallel Parties. proceedings are two or more distinct causes of action based on similar facts. For example, an investor and its Transparency of Proceedings host-State incorporated investment vehicle may be able The EC and the USTR have expressed an interest in to bring separate claims regarding the expropriation of including provisions on transparency. their investment in the host State. While the claims may arise from the same facts, the investment vehicle may, First, the TTIP may give public access to most materials for example, have more or different legal rights than of the arbitration and to the hearings. Among other, the parent and its claims may benefit local shareholders common types of exceptions, the TTIP may also otherwise deprived of treaty protection. contain exceptions to the disclosure of confidential business information or information whose disclosure At this stage, it is unclear how TTIP would resolve this would impede law enforcement or be contrary to the issue. The USTR seems to prefer the consolidation public interest of parallel proceedings, without elaborating on the practical difficulties of implementing such a provision. Second, the TTIP will likely enable third parties to make non-party filings before arbitral tribunals. Through Appellate Mechanism these filings, third parties amici( curiae or “friends of Finally, the EU aims to create an appellate mechanism the court”) make representations to the tribunal without within TTIP to ensure the consistency of TTIP awards becoming a party to the proceedings. Both the EC and and decisions. the USTR mention NGOs as potential examples of amici curiae in TTIP arbitral proceedings. Conclusion The negotiations of TTIP and similar free trade The EC would also like the TTIP to allow other agreements have subjected ISDS to close scrutiny. TTIP Parties to make submissions in investor-State Activists, commentators, politicians, academics and arbitrations. legal practitioners have all raised concerns about the current system of ISDS. Specifically, these concerns Review and Dismissal of Claims Deemed include the vagueness of investment protection Frivolous or Unmeritorious standards, their potential effects on key areas of The EC and the USTR would both like to include public policy (e.g., protection of the environment and provisions into the TTIP that enable tribunals to health services), the perceived lack of transparency of review and to dismiss frivolous or unmeritorious claims confidential arbitrations, and potential conflicts of expeditiously, but have not elaborated on this issue. interests of arbitrators, who may appear as counsel or experts in other proceedings. To win the public debate Costs and parliamentary approval, which currently appears The TTIP may require the losing party to bear all the uncertain, TTIP seems likely provide a modern, costs of the arbitration. For the EC, the “loser pays” transparent arbitration regime that addresses the principle remedies situations in which States have had concerns of all stakeholders. to bear substantial costs in cases in which they prevail.
Issue 02 - 2015 — 25 U.S. APPEALS COURT CONFIRMS THAT EVEN ARBITRATION AWARDS INCORRECT AS MATTER OF LAW ARE ENFORCEABLE The United States Court of Appeals for the First Circuit recently reinforced the high standard for vacatur of arbitral awards under the U.S. Federal Arbitration Act, confirming that even awards that “may have been incorrect as a matter of law” cannot be vacated on the grounds that they exceed the arbitrators’ authority. Raymond James Financial Services v. Fenyk, 780 F.3d 59 (1st Cir. 2015).
The case involved an employment dispute between court agreed that the arbitrators had exceeded their Fenyk, a securities broker in Vermont, and Raymond authority by awarding relief under Florida law, when the James Financial Services (“Raymond James”). When claims had been founded on a Vermont statute. Raymond James terminated its relationship with Fenyk after discovering evidence of alcoholism, Fenyk brought The First Circuit reversed. The court began by stressing claims in Vermont court for retaliation based on sexual the high standard applicable to claims that an arbitral orientation and disability in violation of Vermont law. award exceeded the authority of arbitrators: a party After Raymond James directed Fenyk to the arbitration must show that the arbitrators imposed their own view provision in the parties’ agreement, Fenyk withdrew his of policy rather than adhering to the parties’ agreement. claims from Vermont court and brought the same claims It is not enough to show that the arbitral award contains under Vermont law in an arbitration proceeding before an error, or even serious error, in legal reasoning. The FINRA. court also noted that it and other courts had vacated arbitral awards made in manifest disregard of the law, Raymond James argued that the parties’ agreement but explained that this standard had been invoked established that Fenyk’s relationship with Raymond primarily when an award contradicted unambiguous James would be governed by Florida law, and that contract language, or the arbitrator recognized the Florida’s one-year statute of limitations barred Fenyk’s applicable law, then ignored it. The court noted that claims. On the eve of the hearing, Fenyk moved to the U.S. Courts of Appeal are divided as to whether amend his complaint to bring additional claims under the manifest disregard doctrine remains viable after the federal and Florida law, but the arbitral panel denied Supreme Court’s decision in Hall Street Associates, L.L.C. Fenyk’s motion as untimely. Nevertheless, the arbitral v. Mattel, Inc., 552 U.S. 576 (2008), but concluded that panel agreed that it would apply Florida law to the it did not need to decide that issue. substance of the claims alleged by Fenyk. Ultimately, the panel awarded Fenyk $600,000 in damages plus fees The court held that Raymond James could not meet and expenses, but did not explain its reasoning. these high standards. With respect to the panel’s failure to apply Florida’s one-year statute of limitations, the Raymond James applied to the U.S. District Court for First Circuit pointed out that, at the time of the award, the District of Massachusetts to vacate the award because there was “legal uncertainty” as to the applicability of the arbitrators either exceeded the authority granted Florida’s statute of limitations to arbitral proceedings. to them, or manifestly disregarded the applicable law. That uncertainty rendered it unnecessary to decide Raymond James founded both lines of attack on two whether, in fact, the Florida limitations period applies to main issues it had identified in the award: (1) the award employment discrimination cases because even a serious granted claims under Florida law that had not been error by the panel in failing to apply the one-year statute presented to them for decision; and (2) the award granted of limitations would be insufficient to justify vacatur. claims ostensibly based on Florida law, but disregarded Moreover, the panel was clearly empowered to resolve Florida’s one-year statute of limitations. The district that issue.
Issue 02 - 2015 — 26 Although the Court of Appeals understood the district claims. In any event, even if the panel’s ultimate reliance court’s “discomfort” with the award of damages under on Florida law was erroneous, it was a choice that was Florida law, it could not conclude that the decision within the scope of authority granted to the arbitrators “willfully flouted the governing law” or “exceeded the and thus could not be disturbed by the court. bounds of the arbitrators’ authority to resolve the parties’ dispute.” Throughout the arbitration, Raymond James In its conclusion, the First Circuit reminded parties that had contended that Florida law applied, that the Florida agreements to arbitrate involve a trade: parties get the and Vermont laws were substantially equivalent, and simplicity, informality and expedition of arbitration, that Fenyk’s claims failed under both. The First Circuit but must give up the procedures and appellate review concluded that the arbitrators had applied Florida law available through the judiciary. Absent contrary as Raymond James requested, but had decided that agreement, that is the case, and parties should be aware Raymond James was liable under Florida law. That is a that even serious errors by an arbitral tribunal are decision the arbitrators were empowered to decide. The unlikely to be correctable through judicial review. As a Court acknowledged tension between the panel’s denial drafting note, parties that want the benefits of arbitration of Fenyk’s application to add Florida-law claims and its but also want to preserve the comfort of an appellate ultimate decision to grant relief based on Florida law. review procedure should consider taking advantage of That tension might be explained by a decision of the the arbitration appeal procedures offered by institutions arbitrators that Fenyk had simply mislabeled his initial such as the American Arbitration Association.
Issue 02 - 2015 — 27 NEW FINANCIAL SERVICES EXPEDITED ARBITRATION PROCEDURE AIMS TO PROMOTE ARBITRATION AMONG PROVIDERS In April 2015, the Financial Sector Branch (“FSB”) of the London-based Arbitration Club launched its Financial Services Expedited Arbitration Procedure (the “Procedure”). With the Procedure, the FSB addresses the perceived insufficiency of conventional arbitral processes and institutional arbitration rules to meet the efficiency and cost requirements of the financial services sector. The Procedure offers a tailored, faster and (likely) cheaper option for arbitration. The FSB hopes that its new Procedure will attract more financial service providers, which overwhelmingly tend to litigate their disputes in the courts, to opt for arbitration. Notably, nothing prevents parties in other industry sectors from incorporating the Procedure in their arbitration agreements, although the industry-specific qualifications for arbitrators would need to be adjusted. This update highlights the most important elements of this new Procedure.
Supplement to Institutional Arbitration Rules schedule, the Procedure limits the number of written The Procedure supplements the conventional arbitration submissions (excluding, as the LCIA Rules also do, a rules of arbitral institutions, such as the International statement of rejoinder by the respondent) and limits Chamber of Commerce (“ICC”), LCIA, and American the length of each submission (including each witness Arbitration Association (“AAA”), and is intended to be statement and expert report) to 20 single-sided pages. used together with those rules. The Procedure provides model clauses that parties may incorporate into their No Discovery or Disclosure arbitration agreements to expedite (and more rigorously Another notable element of the Procedure is that it define) the procedures under the selected institutional restricts the availability of discovery and disclosure, rules. For the most part, parties may insert these clauses which can become a very time- and cost-consuming into their arbitration agreements either separately or in aspect of an arbitration. Under the Procedure, no combination, as appropriate to their agreement. discovery or disclosure is available unless the parties choose to include optional wording in their arbitration Expedited Timeline agreement permitting the tribunal to order disclosure The Procedure’s principal feature is its accelerated where the documents requested by a party are “manifestly timetable. From the request for arbitration to the final relevant, specifically identified and the burden of production award, an arbitration proceeding under the Procedure is not excessive.” will take approximately 21 weeks if there is a sole arbitrator, and 22 weeks if there is a panel of three Limited Hearings arbitrators. To achieve this timetable, the Procedure To further expedite proceedings, the Procedure provides substantially shortens each procedural step of an for hearings only where requested by a party and arbitration, including arbitrator selection and filing of deemed “necessary” by the tribunal. It limits hearings written submissions. For example, the parties have just to matters of liability, quantum and jurisdiction, which seven days to nominate a sole arbitrator. If there will should be dealt with at a single hearing of a pre-specified be three arbitrators, the claimant must nominate the duration (e.g., one day). It may be expected that, under first arbitrator in its request, and the respondent must the Procedure, many cases will be decided solely on nominate the second within seven days in its response the basis of the parties’ written submissions, without a to the request. Moreover, to facilitate the streamlined hearing.
Issue 02 - 2015 — 28 Issue 02 - 2015 — 29 Summary Reasons for Award Another way that the Procedure hastens awards is by permitting the tribunal to state the reasons for its award in summary form, “which form shall be at the absolute discretion of the Tribunal.” Alternatively, the parties can elect in their arbitration agreement for the tribunal not to provide reasons for its award at all. In either case, the tribunal should render the award within four weeks of the last written submission or, if applicable, the hearing.
Comment—A Trend Toward Procedural Efficiency The new Procedure reflects a continuing trend to adjust arbitration procedures in response to the criticism that arbitration has become inefficient and costly. For example, as highlighted in our previous Arbitration Report, the International Centre for Dispute Resolution (“ICDR”) and LCIA recently updated their arbitration rules with a focus on procedural efficiency. In the finance sector, Netherlands-based P.R.I.M.E. Finance promulgated new arbitration rules in January 2012 that are targeted to disputes concerning complex financial transactions. Although predominantly based on the UNCITRAL rules, the P.R.I.M.E. Finance rules were adapted to meet the market need for speedier dispute resolution and allow parties to shorten procedural timeframes.
Following this trend, the Procedure offers a series of clauses that can be incorporated into an arbitration agreement to shorten or eliminate each stage of the arbitration process dramatically. The Procedure thus trades certain procedural protections for procedural efficiency. Although less likely to appeal to parties engaged in more complex and high- value transactions, the trade-off will be attractive in some commercial contexts, such as those involving straightforward transactions for which the governing law is well defined. By expanding the menu of options from which parties may pick and choose which procedural protections to retain and which to eliminate, the Procedure gives parties another tool to refine and define their arbitration clauses.
Issue 02 - 2015 — 30 CONTACTS
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