Transnational Notes

Introduction

Decisions by judicial bodies, in general, are often the result of complex debate arising out of different perceptions of law and evidence. Issuing a decision, irrespective of the importance of the dispute, is most delicate a task that invariably requires not just legal skills but also, and perhaps especially, a great deal of balance and common sense.

Such a difficult equation becomes even more complex in the field of international disputes, public or private, to be adjudicated by judges or arbitrators with different legal and cultural background. The struggle endured by international adjudicators goes too many times unnoticed. The vast number of unanimous decisions rendered every day is indeed an achievement that has never been properly celebrated.

The complexity of international adjudication is particularly clear in the case of international commercial arbitration, where arbitrators coming from countries with different legal traditions are faced with complex issues to be settled under a law that they may have a limited knowledge of. Furthermore, and perhaps most importantly, they are faced with issues of a procedural nature that may be alien to their legal background.

In this context, the idea of insurmountable disagreement should neither surprise nor, indeed, concern excessively. The question, however, is whether such disagreement should be expressed through the issuance of dissenting opinions.

International Courts

Dissenting opinions have been an important feature of international courts for many years. Particularly, the dissenting opinions rendered in the jurisprudence of the International Court of Justice have played a remarkable role in the development of international law.[1] The importance of dissents before international courts, particularly the ICJ, is due to the public nature of the proceedings and the fact that such decisions often address novel issues over which no solid body of jurisprudence has yet developed. Nonetheless, and in spite of this, dissent has not been spared a share of criticism. It has been suggested, for example, that: “disastrous consequences might follow for a high judicial institution which can command observance of its judgment and opinions only by its prestige and by the persuasion which the statement of its conclusions imparts.”[2]

History is, in fact, proving the contrary. The frequent and highly regarded dissenting opinions rendered by ICJ judges, for example, if anything, have somehow added to the prestige and reliability of the Court. It has been observed in support of dissenting opinions that anonymity of the judgment may encourage a judge to vote in support of the cause of his State without incurring the embarrassment of partisanship. On the other hand, a well reasoned and earnest dissent serves the purpose of showing that the case was thoroughly assessed and evaluated.[3]

It is therefore debatable whether – as it has been suggested on the issue with regard to the ICJ’s predecessor, the Permanent Court of International Justice – when dissenting opinions multiply, contradict and attack each other on the basis of the majority decision itself and affirm contradictory and sometimes erroneous theories, the very authority and the prestige of the Court and its decisions are downgraded.[4] To the contrary, as it has been observed by a great scholar such as Sir Hersch Lauterpacht, dissenting opinions have contributed a great deal to the development of international law and, particularly, to the authority of international justice. According to Sir Hersch, moreover, dissenting opinions act as a safeguard of the independence and impartiality of the judges and provide a better understanding of the Court’s judgments.[5]

State courts

Dissenting opinions have served the important purpose of law development also under domestic law. Some of the best-known dissenting opinions rendered in the US, for example, might be described as tools through which the law managed to move to a higher and more civilized stage during time. It is often recalled in this respect the dissenting opinion rendered by Justice Harlan in 1896 in a Supreme Court racial segregation case.[6] That dissenting opinion was at the heart of the decision, almost fifty years later, in the case of Brown v. Board of Education,[7] which ended racial segregation in American schools. The importance of dissenting opinions in the US legal system has been aptly described by United States Supreme Court Chief Justice Charles Evans Hughes. In his often-quoted remark he explained that: “[a] dissent in a court of last resort is an appeal to the brooding spirit of the law, to the intelligence of a future day, when a later decision may possibly correct the error into which the dissenting judge believes the court to have been betrayed.”[8]

Similarly, in the United Kingdom, a dissenting opinion is believed to have contributed to a radical change, interestingly enough, of the law on arbitration. In the well-known Ken Ren case the then House of Lords, now Supreme Court, addressed the issue as to whether or not to make an order for security for costs in an arbitration. The Lord Justices agreed that the English courts had a discretionary power to issue any such orders. In Lord Mustill’s dissenting opinion, which Lord Browne-Wilkinson agreed upon, it was argued that an order for security for costs did not conform to the type of procedure that the parties had selected for the protection of their rights and that any court application to that effect should have been denied.[9]

Interestingly, the 1996 English Arbitration Act, which was enacted one year later the Ken Ren decision, took the power to order security for costs in arbitration away from the English courts and vested it in the arbitrators.[10]

Dissenting opinions in international arbitration

It is undeniable that dissenting opinions in international and domestic courts can contribute to the development of law. A dissenting opinion by an ICJ judge may be relied upon in subsequent ICJ cases. Similarly, a dissenting opinion by a domestic court judge may well provide guidance and inspiration to appellate or supreme court judges as well as to future court judges in similar cases.

It is, however, less obvious how dissenting opinions could serve any such purpose in international commercial arbitration, where the proceedings are predominantly confidential and awards are generally not published. Furthermore, in most jurisdictions, domestic courts cannot review the merits of arbitral awards. In other words, there is generally no appellate system in international arbitration and domestic courts’ scrutiny is mainly limited to issues of jurisdiction and due process.

What is then the role of dissent in international commercial arbitration? Should this be encouraged, tolerated or altogether prohibited?

The issue was addressed, a while ago, by the International Chamber of Commerce’s Commission on International Arbitration through the Working Party on Dissenting Opinions. In that Report it was agreed that: “[…] it is neither practical nor desirable to attempt to suppress dissenting opinions in ICC arbitrations. A minority opinion was expressed to the effect that the ICC should seek to minimize the role of dissenting opinions, but the prevailing view was that the ICC should neither encourage nor discourage the giving of such opinions.” [11] That criticism had been expressed by the French National Committee according to which (a) dissenting opinions underscore the link between the arbitrator and the party who nominates him; (b) the arbitrators no longer feel obliged to search for a unanimous decision after confronting each other’s opinions and (c) a dissenting opinion may introduce a debate on the merits of the case before the Court of Arbitration.

The ICC Commission recognized the force of the French National Committee’s arguments. However, it was noted that the vast majority was in favor of the opposite opinion and that the freedom of expression of each arbitrator should have been respected.[12]

While the policy behind the freedom for each arbitrator to issue dissenting views may be understandable, it remains to establish whether, more generally, such a freedom might serve any systemic purpose.

This is surely an issue that should not be underestimated because, irrespective of the position that one may wish to take in this respect, it is undeniable that a dissenting opinion is likely to create a certain degree of turbulence in any arbitration proceedings. It has been suggested in this regard by international arbitration specialists Larry Shore and Kenneth Figueroa that “when serving on a commercial panel, an arbitrator should strive to reach unanimity with his or her colleagues. Unanimity is an important part of the panel’s mission, and is consistent with the development of commercial arbitration.”[13]

Moreover, dissenting opinions are, by themselves, evidence of starch disagreement, if not controversy, amongst the members of arbitral tribunals. Indeed, dissenting opinions are sometimes acrimonious and filled with disheartening language towards the majority. This, however, has more to do with lack of courtesy and consideration rather than dissenting opinions. Arbitrators should never forget that they are performing judicial functions and should therefore adjust their behavior accordingly. Needless to say that disagreement might be extreme. Yet, language should not.

Having said that, the dissenting opinions the purpose of which is being taken into account, here, are those issued out of a genuine and civilized disagreement as to how the dispute should have been decided and, perhaps, how the proceedings should have been carried out. Partisanship and dishonesty are of course out of any meaningful analysis.

Having clarified this, it is observed that dissenting opinions may increase the quality of majority awards. In other words, when confronted with structured dissents, the majority may somehow feel compelled to address all controversial issues more in depth and draft the award with the utmost care. For this reason, if the dissenting opinion is genuinely meant to fulfill constructive and cooperative purposes, it should be provided to the majority arbitrators before the majority award is finalized.  Indeed, while it is true and indeed desirable that the dissenting arbitrator would have already made his or her position clear to the fellow arbitrators, providing them with the written dissent may amount to an additional and final chance to review and reconsider any controversial issues.

Moreover, dissenting opinions, instead of weakening the arbitral tribunal’s authority, can instill confidence in the process. In other words, a balanced and non-acrimonious dissenting opinion may provide evidence to the losing party that all arguments were taken into account and exhaustively analyzed by the arbitral tribunal during deliberation.

Finally, it is signaled that the last decade has registered an increasing call for publication of arbitral awards with a view to creating some kind of consistent jurisprudence on certain recurrent features of international trade law. It goes without saying that the more “public” arbitral decisions are the stronger the case for dissenting opinions would be. Indeed, what has been said with regard to dissenting opinions in international and domestic courts would become increasingly applicable and relevant to international commercial arbitration.

The peculiar case of dissenting opinions in investment arbitration

It is perhaps worth signaling a recent debate on dissenting opinions in international investment arbitration. As is well-known, investment arbitration aims at settling dispute between a foreign investor and a sovereign State. This is a special type of arbitration which, in its most frequent form, is governed by public international law. An important feature of investment arbitration is that most of the awards, in fact virtually of all them, are normally published. The publication of investment arbitral awards is part of a generally shared view according to which States’ accountability should be pursued through transparency and the general public’s access to information. As a result, it is believed that any State conduct potentially in breach of an international duty should be the object of public scrutiny. In line with this trend, ICSID amended its Rules in 2006 and, more recently, UNCITRAL launched a working Group on transparency in investment arbitration.

It has been observed, with some understandable disconcert, by the leading scholar and arbitrator Albert Jan van den Berg that dissenting opinions have been issued in about 22% of the around 150 investment arbitral awards rendered so far in this comparatively recent and expanding forum. According to data that the prominent author describes as astonishing, nearly all of those dissenting opinions were issued by the arbitrator appointed by the party that lost the case.[14]

Without entering into an “in depth” analysis about the issue raised by such a distinguished author, as far as the number of dissenting opinions is concerned, there seems to be little of a surprise or indeed of a concern. The percentage of dissenting opinions recorded in his study does not differ too much from the the data available in relation to ICJ cases, where dissenting opinions are just as frequent. Any decision relating to a novel or developing body of law will inevitably, and perhaps hopefully, entail different opinions. Moreover, it is perhaps desirable that any views about such a comparatively new and developing body or rules, such as foreign investment law, should be made available to the general public with a view to encouraging the discussion on that issue. It is well known, for example, how unsettled issues such as the scope of fair and equitable treatment provisions and the reach of MFN clauses are.

Shore & Figueroa seem to support the idea that “when serving as an arbitrator on an investment treaty tribunal, should take a different approach. The development of international investment law is usually tied to a treaty case. So an arbitrator on that side of the divide must be prepared to do precisely the opposite – and not bend his or her view to achieve unanimity. Instead an arbitrator should state his or her view both to develop the law and to demonstrate his or her thinking to the broader investment treaty community (which is very broad indeed, given that virtually every state is a member).”[15]

It is certainly also arguable that investment arbitrations should not be seen as a stage for mere academic debating. Some of the dissenting opinions issued in recent investment arbitrations share are very close to PhD thesis, sometimes stretching for hundreds of pages. It is sometimes to be wondered whether, at least as a professional courtesy to those that are somehow compelled to read, the dissenter could try and express himself or herself in a more concise and considerate fashion.

Having said that, novelty of issues and publicity of proceedings do play a role in many arbitrators’ decision to publish dissenting opinions. Irrespective of appropriateness and fashion, it is undeniable that those dissenting opinions can contribute to the analysis and the development of such new body of law.

While the number of dissenting opinions in general does not seem to be out of line with the general practice, the fact that most dissenting opinions are issued by arbitrators appointed by the losing party may, as suggested by Prof. van den Berg, also have some additional significance.

The standing of most individuals serving as arbitrators in investment disputes is such as to rule out, out of hand, any concerns in terms of partiality or lack of neutrality.

The answer may be found in the fact that investment arbitration is characterized by the same features that often advise judges sitting in international courts to issue dissenting opinions. That is, novelty of issues, which spurs need for debating, and publicity of the decisions, which provides for a medium allowing debate to effectively take place. Arbitrators in investment disputes may therefore feel to be under an obligation to dissent.

However, investment arbitration is characterized by an additional feature that might explain the remarkable data highlighted by Prof. van den Berg. This is the fact that parties in investment arbitration, unlike parties in court proceedings, do have the right to appoint arbitrators of their choice. Understandably, parties are minded to appoint arbitrators that, based on the available information, such as lecturing and publications, might have a certain take on the issues to be settled in the proceedings. Perhaps this is not enough, by itself, to explain the startling figures highlighted by Prof. van den Berg even though it is an additional element to be taken into account to analyze the above-mentioned path in dissenting opinions. Be it as it may, it is submitted that dissenting opinions are too important a tool in the development of investment arbitration to be discouraged or indeed prohibited.

Finally, as it can be observed with regard to dissenting opinions in general, dissent is often the judge of itself. Genuine and well-reasoned dissenting opinions can do a great deal of good. Partisan and impolite ones can only harm the dissenter.

Domenico Di Pietro

Lecturer, International Arbitration, University or Rome, “Roma Tre” and Fellow, Center for Transnational Litigation and Commercial Law, New York University School of Law.

---

[1] Anand, The Role Of Individual And Dissenting Opinions In International Adjudication, International And Comparative Law Quarterly (1965), 14: 788-808.

[2] Hudson, Twenty-Eighth Year of the World Court, 44 Am. J. Int’l L. 21 (1950). This article was written mainly with reference to the work of the PCIJ but it also addressed the first few years of operation of the ICJ.

[3] Mosk & Ginsburg Dissenting Opinions In International Arbitration, Liber Amicorum Bengt Broms, 1999.

[4] Politis, How the World Court has Functioned (1926) 4 Foreign Affairs 451 (April).

[5] Lauterpacht, The Development of International Law by the International Court, 1958, 68.

[6] Plessy v. Ferguson (1896).

[7]Brown v. Board of Education, 347 U.S. 483 (1954).

[8] Hughes, The Supreme Court of the United States, 1928, 68.

[9] Chopée Levalin NV v. Ken Ren Chemicals and Fertilisers Ltd. [1995] 1 A.C. 38.

[10] See on this issue Redfern, Dissenting Opinions in International Commercial Arbitration: The Good, the Bad and the Ugly, 20 Arbitration International, 223, 242 (2004).

[11] Final Report on Dissenting and Separate Opinions of the Working Party on Dissenting Opinions and Interim and Partial Awards of the ICC Commission on International Arbitration. Adopted by the Commission on April 21, 1988. Available at www.iccdrl.com

[12] It may be argued that the publication of the French Committee’s minority might lend some evidence about the role that may be played by dissenting opinions.

[13] Shore & Figueroa, Dissents, Concurrences and a Necessary Divide Between Investment and Commercial Arbitration, 3 Global Arbitration Review. 18, 20 (2008).

[14] van den Berg, Dissenting Opinions by Party-Appointed Arbitrators in Investment Arbitration Arsanjani et al. (eds.), Looking to the Future: Essays on International Law in Honor of W. Michael Reisman.

[15] Shore & Figueroa, Dissents, Concurrences and a Necessary Divide Between Investment and Commercial Arbitration, 3 Global Arbitration Review, 18, 20 (2008).

Introduction

The debate about the law applicable to foreign investment disputes developed into an operational discussion at beginning of the twentieth century, when the number of private investments in foreign countries increased considerably. The debate gained momentum as a result of the spreading feeling that applying traditional private international law (or conflict of laws rules) rules to foreign investment disputes may not be entirely appropriate. The feeling was grounded on the observation that most foreign investment agreements were entered by sovereign States to fulfil their institutional obligations as acta jure imperii. Because of this, treating such relationships as mere commercial agreements seemed somehow inappropriate.

However, the suggestion that public international law should be applied was not received without controversy. It was indeed traditionally maintained that any legal relationship where one of the parties was not a subject of international law should not be governed by the rules of international law but rather by the domestic law of a country. This argument was supported by the famous words of the Permanent Court of Justice in the case of the Serbian Loans where it stated that: “any contract which is not a contract between States in their capacity as subjects of international law is based on municipal law of some country.”[1]

The commentators favouring the application of international law, however, observed that investment agreements should be regarded as quasi public international or internationalised contracts because of “the brooding omnipresence”[2] of international law in such transactions. It was indeed suggested that a foreign investment transaction is sui generis. For this reason, it should be regarded as a treaty or as a quasi-international self-contained instrument which, as such, should be, to the possible extent, be detached from domestic courts and domestic law.

Despite the fact that the suggestion to apply international law to foreign investment disputes involving a State was gaining currency, many doubts remained as to the feasibility of this suggestion. Indeed, many authors recognised that there was still little solid evidence that such an idea could find support within the existing international law.

The uncertain legal status of international investments led to the adoption of contractual devices which would provide for the highest possible detachment from the courts and the law of the contracting States. This was attempted through the adoption of arbitration clauses providing for international arbitration and choice of law clauses providing for international law as the law governing the contract.

However, such new approach was heavily criticised on the ground that it confused the separate domains of public and private international law. Furthermore, it was observed that in the absence of any choice of law clause providing for the application of international law, the presumption in favour of the law of the host State should still be regarded as valid and applicable.

Although the efforts to detach international investment agreements from the law of the host State was gaining momentum, by the beginning of the 1960’s there was still uncertainty as to the actual rules of international law which would be taken into account by arbitral tribunals in any given case.

An attempt to identify the rules of international law which may be considered applicable to foreign investments was made by the United Nations in 1962, when a number of resolutions relating to national sovereignty over natural resources were drafted. In particular, the General Assembly adopted a statement to the effect that “foreign investment agreements freely entered into by or between sovereign States shall be observed in good faith.”[3] However, the General Assembly’s attempt failed to achieve more than that. Indeed, the task of the United Nations proved much more complex than originally thought. As a result, no decision was eventually taken by the Commission on the production of a draft Convention on State responsibility.[4]

The ICSID Convention

Despite the somewhat unsatisfactory result of previous negotiations in the field of foreign investments, in 1962 the Executive Directors of the World Bank were asked to explore the possibility of establishing an institutional framework for the conciliation and arbitration of investment disputes between States and foreign private parties. After wide-ranging and lengthy consultations, on March 18, 1965, the Executive Directors of the World Bank submitted what would eventually become the so-called ICSID Convention to the World Bank’s Member Governments. The Convention was approved and entered into force on October 14, 1966.

Amongst other things, the Convention incorporated the International Centre for the Settlement of Investment Disputes (ICSID) which was given the task of providing administrative and operational facilities necessary for the settlement of investment disputes under the Contention. The ICSID Convention was adopted and ICSID was established because it was evident that foreign investment disputes could not be effectively resolved either in the domestic judicial forum of the host State, or in the national courts of the foreign investors. It was felt that the provision of a neutral forum for the settlement of investment disputes would improve the investment climate by reducing the “fear of political risks [which] operate as a deterrent to the flow of private foreign capital.”[5]

Rather unsurprisingly, during the drafting of the Convention it appeared necessary to reconcile the above-mentioned factions that had formed on the issue of the law applicable to investment disputes. The compromise reached by the drafters of the Convention on the issue is fully reflected in the adopted text.

The system devised by the Convention: Article 42

As is well known, the Convention contains no substantive rules of law concerning investments in a State by nationals of another State. It is indeed believed that, if an attempt had been made to provide for such rules, the Convention would not have proved equally successful. The Convention limits itself to guaranteeing party autonomy and, in case no choice is made in the relevant contract, it provides for a default choice to be qualified, or limited, through the application of international law.

Article 42 of the Convention states that:

(1) The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.

(2) The Tribunal may not bring in a finding of non liquet on the ground of silence or obscurity of the law.

(3) The provisions of paragraphs (1) and (2) shall not prejudice the power of the Tribunal to decide a dispute ex aequo et bono if the parties so agree.

Parties’ agreement

The “rules of law”

Article 42(1) provides the parties with a broad discretion as to the identification of the law governing their relationship.[6] It is interesting to note that the first sentence of Article 42(1) allows parties to agree on the “rules of law” applicable to the substance of their dispute.[7] With this rather broad term, the Convention intends to make clear that the choice of the parties is not limited to one or more national laws or legal systems, but may, for example, “incorporate” a national law in existence at a certain moment in time or exclude certain provisions of such a law. As a matter of fact, the provision is believed to be so broad and permissive that the parties are not restricted to choosing a national law or part of it at all.[8] The parties are indeed permitted to agree to have their dispute governed by general principles of law as well as rules of international conventions, even if not yet in force in the States concerned.[9]

The permissive wording of the first sentence of Article 42(1) allows the application of complex choice of law clauses, which the parties can enter into by using, for example, well known techniques such as depeçage.[10]

Application of domestic law(s)

The application of the host State law is perhaps one of the most frequent choices in investment transactions, even though the parties would normally qualify their choice by requiring the arbitral tribunal to settle the dispute by applying the law of the host State in conjunction with either another domestic law or international law. Equally, because of the dynamics of investment relationships, it is also uncommon for the parties to select the law of the foreign investor rather than the law of the host State as the governing law.

International law as the parties’ choice

A choice by the parties of international law as the only applicable law, although not frequently adopted, would be enforced by an ICSID Tribunal. This is normally done in order to provide for the highest level of internationalisation of the contract and therefore to protect the rights of the foreign investor from either a change in the domestic law of the host State. The choice of international law as the law governing the relationship between the parties has also been made in important international conventions.[11]

Absence of agreement as to the applicable law

Cases involving no agreement as to the applicable law fall under the second sentence of Article 42(1) pursuant to which the dispute is to be resolved according to the law of the State party – including its rules of conflict of laws – and international law. Several important issues have been raised in this respect. Arguably, the most problematic of all such issues is the definition and role which international law must be given in adjudicating disputes falling under the provisions of Article 42(1) second sentence.

The relationship between domestic law and international law

The wording of the final version of Article 42(1) was adopted to balance the expectations of both capital-importing countries, which opposed the idea of giving ICSID tribunals the power to determine the applicable law, and capital-exporting countries, which feared that the exclusive application of the host’s State law could disadvantage foreign investors.

One of the issues which have arisen out of the final version of Article 42(1) is how the combination of host State law and international law should work. According to leading commentators, ICSID tribunals should normally apply the law of the State party. The result of the application of that law should then be tested against international law to detect any unfair outcomes. In case of inconsistency with or violation of international law the relevant ICSID tribunal may decide not to apply the host State’s law or part of it.[12]

Several ICSID cases seem to have supported this view as to the interplay of international law and the host State’s law. It seems now settled and undisputed that the second sentence of Art. 42(1) gives international law two roles. One is complementary and comes into play in the case of lacunae in the law of the host State. The other role, the so-called corrective role, comes into play if the State’s law does not conform to the principles of international law.

International law as identified and applied by ICSID Tribunals

As regards the actual rules of international law to be applied by ICSID tribunals, the Report of the Executive Directors[13] explains that the reference to international law which Article 42(1) makes reference to should be understood in the sense given by Article 38 of the Statute of the International Court of Justice (ICJ).[14]

As suggested by leading commentators, it is open to discussion whether the list of sources provided by Article 38 of the ICJ Statute actually resolves the problem of the identification of the actual rules of international law to be applied in investment disputes.[15]

The interesting aspect of the reference to Article 38(1) is that it provides ICSID tribunals with a broad range of sources on which the tribunals can rely upon to identify the most suitable rules of international law to settle the case. Indeed such reference provides ICSID tribunals with the same ample power for the identification of the actual rules of international law given to the ICJ[16] even though ICSID tribunals should exercise such power bearing in mind the peculiar nature of investment disputes and investment arbitration.

Consequences for failure to apply the law

Section VII of the Convention avails the parties to ICSID proceedings the right to file an application for the interpretation, revision or annulment of an ICSID award in the presence of certain circumstances.

An application for annulment can be brought, pursuant to Article 52(1), in the presence of one or more of the following grounds:

• that the Tribunal was not properly constituted;
• that the Tribunal has manifestly exceeded its powers;
• that there was corruption on the part of a member of the Tribunal;
• that there has been a serious departure from a fundamental rule of procedure;
• that the award has failed to state the reasons on which it is based.

The failure to identify and apply the correct applicable law is believed to amount to an excess of power for the purpose of applying Articles 50 and 52 of the ICSID Convention.

In MINE v. Guinea[17] the Ad Hoc Committee confirmed the view that failure to decide the dispute in accordance with the applicable rules of law would constitute an excess of power leading to the annulment of the award.

More recently, in the annulment proceedings related to the cases of Enron v. Argentina[18] and Sempra v. Argentina[19], the relevant Ad Hoc Committees annulled the arbitral award because the Arbitral Tribunals had exceeded their powers by failing to apply the applicable law. In those cases the Arbitral Tribunals had rendered decisions on the basis that Argentina was precluded from relying both on Article XI of the USA/Argentina BIT and the principle of necessity under customary international law. Identifying the applicable law proves particularly complex an exercise in cases, such as the two just mentioned,  arising out of bilateral investment treaties which – as opposed to those arising out of investment contracts – are often thought to require no reference to a domestic law. While this might be true generally, sometimes this may not be the case since some bilateral investment treaties do make reference to domestic law for the settlement of certain issues such as the definition of investment.

Domenico Di Pietro is a Lecturer of International Arbitration at University “Roma Tre” in Rome and Fellow of the Center for Transnational Litigation and Commercial Law of New York University School of Law. This is an abridged, revised and updated version of the author’s article Applicable Law Under Article 42 of the ICSID, in Weiler, ed., International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, 2005.

---

[1] See the Serbian Loans case 1929 BCIJ, series A, No’s 20, 21 & 41.

[2] This interesting description was made by Lillich The Law Governing Disputes Under Economic Development Agreements: Re-examining the Concept of Internationalisation in Lillich & Brower International Arbitration in the Twenty-first Century, Towards Judicialization and Uniformity, 1993 at 92.

[3] United Nation Documents A/5100 ADD1 1962).

[4] Garcia Amador’s reports appear in Yearbook of International Law Commentaries 1957, 1961.

[5] Broches, The Convention on the Settlement of Investment Disputes between States and Nationals of other States (1972) Recueil des Cours at 343.

[6] See Shihata & Parra, Applicable Substantive Law in Disputes Between States and Private Foreign Parties: The Case of Arbitration Under the ICSID Convention (1994) 9 ICSID Review, 183.

[7] The term “rules of law” (rather than “law” as in Art. 33(1) of the UNCITRAL Arbitration Rules) was subsequently used in Art. 28(1) of the UNCITRAL Model Law on International Commercial Arbitration.

[8] Broches Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 Explanatory Notes and Survey of its Application Yearbook C. A. XVIII (1993) 627.

[9] As clearly stated in the UNCITRAL Model Law on International Commercial Arbitration which adopted the ICSID formula (Report of the Commission, U.N. Doc. A/40/17, para. 232).

[10] The principle of parties’ freedom allows the use of the so-called depeçage technique which consists in subjecting the contract to certain provisions of different domestic laws.

[11] The applicable law provision provided by Article 1131 of the NAFTA for example reads: “A Tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law.”

[12] See Broches, Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 Explanatory Notes and Survey of its Application Yearbook C. A. XVIII (1993) at 627.

[13] International Bank for Reconstruction and Development. Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965) at 13, 1 ICSID Reports 25.

[14] This provisions, which is considered a most authoritative statement of the sources of international law, reads at paragraph 1: The Court whose function is to decide in accordance with international law such disputes as are submitted to it shall apply:

(a)           international conventions whether general or particular establishing rules expressly recognised by the contesting states;

(b)           international custom as evidence of a general practice accepted as law;

(c)            the general principles of law recognised by civilised nations;

(d)           subject to the provisions of Article 59, judicial decisions and the teaching of the most highly qualified publicists of the various nations as subsidiary for the determination of rules of law.

[15] Schreuer, The ICSID Convention: A Commentary, 2001, at 610. See also the 2009, second edition, by the same author with Malintoppi, Reinish and Sinclair.

[16] Kahn, The Law Applicable to Foreign Investments: The Contribution of the World Bank Convention on the Settlement of Investment Disputes, 44 Indiana Law Journal 1 (1968) at 28.

[17] Maritime International Nominees Establishment v Government of Guinea, 5 ICSID Review (1990) at 95.

[18] ICSID Case No. ARB/01/3, annulment proceedings

[19] ICSID Case No. ARB/02/16, annulment proceedings

The Argentinian financial crisis in 2001 and the entailing legislation provoked a considerable number of ICSID arbitral proceedings. But disputes at the very heart of the crisis, those concerning the Argentinian default on its state bonds, were left to be decided by domestic courts in New York, London or Frankfurt, the jurisdiction of which was based on choice of forum clauses contained in the terms and conditions of the debt instruments.

However, in its recent Decision on Jurisdiction of August 4, 2011, the ICSID arbitral tribunal in the case Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5 (available at: http://italaw.com/documents/AbaclatDecisiononJurisdiction.pdf) held that it has jurisdiction to rule on a dispute concerning Argentina’s sovereign debt restructuring despite the choice of forum clauses. This award is remarkable in two regards: First, it is the first ICISD award concerning sovereign debt restructuring. Second, it is also the first mass arbitration ever, involving on the side of the claimants over 180,000 persons. For the purpose of this article, only the first aspect will be elucidated and the second – despite the interesting questions it involves – left to a later discussion.

A. The facts underlying the dispute are as follows: On December 23, 2001, Argentina publicly announced that it would default on over USD 100 billion of its bond debt denominated in foreign currencies, which were owed to foreign and domestic creditors. In order to restructure its debt, Argentina made the so-called Exchange Offer 2005: Argentina offered its creditors new bonds either with a lower principal or a lower interest rate. By law of February 11, 2005, the Government was prohibited to re-enter into the exchange process with respect to those bonds that were eligible for the exchange and that were not exchanged though. By February 25, 2005, approximately 75% of all bond holdings participated in the exchange.

On September 14, 2006, a group of 180,000 Italian holders of Argentinian bonds that did not participate in the Exchange Offer 2005 filed a Request for Arbitration with the International Center for the Settlement of Investment Disputes (“ICSID”). They claimed that Argentina had breach the bilateral investment treaty concluded between Argentina and Italy in 1990 (“the BIT”), which contained an ICSID arbitration clause. Due to the large number of claimants, the claim was administered by the Task Force Argenina (“TFA”), an associazione non riconosciuta under Italian law. After Argentina made another exchange offer in 2010, approximately 120,000 claimants withdrew from the arbitration.

B. In its Decision on Jurisdiction of August 4, 2011, the Tribunal (Tercier, Abi-Saab, van den Berg) held that it has jurisdiction over the dispute. It rejected the preliminary objections raised by Argentina concerning its jurisdiction and the admissibility of the claim.

Argentina’s first objection concerning jurisdiction was that the claims raised by the claimants were not “treaty claims”, i.e. that they did not concern a breach of the BIT. According to Argentina, deferring payments due under the bonds was a mere breach of contract, which could not amount to a violation of Argentina’s obligations under the Argentina-Italy BIT (para. 307).  However, the Tribunal reasoned that, for purposes of determining jurisdiction, it was not necessary to establish that the BIT was breached. Rather, it only had to establish whether – on the basis of the facts brought forward by the claimants – a breach of the BIT could be established prima facie (para. 311). This prima facie standard would only not apply to the assessment of the facts, but also the “determination of the meaning and scope of the relevant BIT provisions invoked”. The Tribunal found that the facts alleged by the claimants could constitute an unfair and inequitable treatment, an expropriation as well as discrimination (para. 314).

Although the Tribunal agreed that it has no jurisdiction to rule on mere contractual claims, which had to be brought before the state courts having jurisdiction, the claims at stake could not be considered merely contractual. It reasoned that the Emergency Law adopted by Argentina “had the effect of unilaterally modifying Argentina’s payment obligations” (para. 321). Therefore, also the choice of forum clauses in the terms and conditions of the debt instruments were irrelevant (para. 499). It is worth noting that the Tribunal did not discuss Argentina’s argument that the bonds were not governed by Argentinian law (but Swiss or New York law) and that thus the Argentinian legislation was unable to affect the claimants’ rights.

The Tribunal further reasoned that the deferral of payments was not justified by contractual or legal provisions like force majeure. Argentina tried to justify its non-performance by referring to its situation of insolvency. However, the Tribunal was not convinced by this argument since the debt contracts contained no provisions in this regard. Although insolvency could constitute a justification for non-payment under domestic law, this would not apply to the situation at hand: the Tribunal pointed out that Argentina was – by adopting the Emergency Law – acting as a sovereign. No international insolvency regime for States would exist, although the Tribunal acknowledged that some legal principles concerning the insolvency of states had evolved. However, these questions would concern the merits of the dispute and not a matter of jurisdiction (para. 323).

Second, Argentina contested that the dispute arose out of an investment as required by the BIT and Art. 25 ICSID Convention. In particular, Argentina argued that the bonds were subscribed to by certain banks and sold to intermediary banks, which then divided and distributed security entitlements in the bonds to their individual customers (like the claimants). The security entitlements could not be considered an investment. The Tribunal was not convinced by this argument: it found that the security entitlements had no value independent of the bonds; the process of distribution happened electronically, there was no physical transfer of title. But the bonds themselves constituted obligations and thus an investment as defined by the BIT (para. 356). As to Art. 25 ICSID Convention, the Tribunal rejected the so-called Salini criteria and contented itself by finding that there was an investment in the sense of the ICSID Convention because there was a contribution on behalf of claimants. It defined as contribution a value that is protected under the BIT (para. 365).

Argentina raised further objections concerning the specific nature of this dispute. It argued that its consent to arbitration contained in the BIT could not be construed in such a way as to include disput-es concerning sovereign debt restructuring. Since Argentina could have limited the scope of its consent under Art. 25(4) ICSID Convention, but did not so, the Tribunal refuted Argentina’s first contention (It is worth noting that some investment agreements, like for instance the Chile-US FTA, Annex 10-B, limit the scope of the protection to national treatment and MFN as far as debt restructuring is concerned).

In the following, the Tribunal elaborated on the specific procedural questions arising out of the fact that, initially, there were 180,000 claimants and that nearly 120,000 of them had withdrawn from the dispute after the Exchange Offer 2010.

C. The Tribunal’s decision is remarkable in several regards, as has been mentioned in the introductory remarks. Although this arbitration is the first ICISD case on the restructuring of foreign debt and although the jurisdiction of ICSID over such disputes is highly disputed in scholarly writing (an overview is provided by: Michael Waibel, Opening Pandora’s Box: Sovereign Bonds in International Arbitration, 101 Am.J.Int’l L. 711 (2007), available at SSRN: http://ssrn.com/abstract=1566482; id., Sovereign Defaults before International Courts and Tribunals 209-272 (CUP, 2011)), the Tribunal’s findings as to whether the bonds as well as the security entitlements are investments in the sense of the ICSID Convention are rather concise. Despite the fact that the Tribunal argued in favor of a “double barreled” test, which distinguishes between term “investment” used by the BIT and by Art. 25(1) ICSID Convention, it made a “contribution” that is “apt to create the value that is protected under the BIT” (para. 365) the only requirement of an investment under the ICSID Convention. Thus, the Tribunal de facto followed a subjective approach.

Bearing in mind the choice of forum clauses contained in the debt instruments, it first seems awkward that the Tribunal assumed its jurisdiction. However, the Tribunal followed a common distinction between contract and treaty claims. It is well accepted by international tribunals and scholarly writing that the mere breach of a contract between a state and an investor does not amount to a breach of an investment protection agreement. However, in case the State exercises its sovereign powers and no longer acts as a “normal” contracting party, a breach of contract can also constitute a breach of an investment treaty. Although it is not undisputed, most tribunals agree that a choice of forum clause in such a state contract can only affect contractual claims.

Thus, the Tribunal is thus in line with the rulings of other tribunals. However, one may ask whether the Tribunal’s decision is really convincing in this case.

First, the Tribunal’s finding that the dispute prima facie really concerns a breach of the treaty is largely labeling, but no analysis.

Second, the Tribunal’s approach is rather formal. Yes, Argentina enacted a law that prohibited to re-enter into the negotiation process with claimants and thus exercised sovereign powers. But from a legal perspective, the Argentinian legislation had no influence on the rights of the Claimants since a. the debt instruments were not governed by Argentinian law and b. Argentinian courts had no jurisdiction. Argentina’s creditors could still (and did so) seek legal redress in the courts of New York, London or Frankfurt. Thus, the Emergency law merely had internal effects on making-up the mind of the Argentinian state. It can be compared to a decision to default by the Board of Directors in a company directed to its chairman. The formal fact that a law was enacted can – at least in this case – not be decisive whether there was sovereign conduct. On the other hand, in case of Greek state bonds, which confer jurisdiction mostly to the courts of Athens, the situation would be different. A Greek law on debt restructuring would make it impossible to seek redress before the Greece or any other courts.

D. The decision raises several questions as to the future of sovereign debt restructuring. This is even truer in the light of the looming insolvency of Greece and other PIIGS-states (i.e. Portugal, Italy, Ireland and Spain). Will it be possible for States to restructure their foreign debts if the affected creditors can challenge these complex economic measures, which were taken in close cooperation with the World Bank, solely on the basis of legal criteria? Are ICSID Tribunals are really the pertinent forum to decide about sovereign debt restructuring?

Apparently, the Tribunal treated the abovementioned questions only superficially in order to be able to proceed to the merits of the case and to make general statements on sovereign debt restructuring under international law. Although the Tribunal did not accept the objection by Argentina, that it was insolvent, it acknowledged that there are principles under international law that govern the insolvency of states; it announced to discuss these principles during the merits-phase. Thus, one can assume that the Tribunal is aware of the relevance of its ruling for the coming state insolvencies.

Depending on the outcome, the Tribunal could set up criteria that would help to create legal certainty also for States in a state of economic necessity. One has to bear in mind that in the case of Argentina domestic courts in a dozen different jurisdictions have ruled on the admissibility of the Argentinian foreign debt restructuring measures – and thus have implicitly challenged the World Bank’s decisions. A decision on the merits then would not be the end, but the beginning of a new era of foreign debt restructuring – although there are doubts as to whether a Tribunal of three arbitrators is really a legitimate institution to re-define the law of State insolvency. Anyhow: The Tribunal has assumed this great responsibility; it remains to be seen whether it uses its power wisely.

Jan Asmus Bischoff

Dr. Jan Asmus Bischoff studied law at Hamburg University from 2000 to 2005. After his graduation, he worked as a researcher at the Max Planck Institute for Comparative and International Private Law until 2010. In 2008, he completed his Master Degree in International Legal Studies at NYU, School of Law as a Hauser Global Scholar. In 2009, he completed his doctoral thesis on “The European Community and the Uniform Private Law Conventions” under the supervision of Prof. Dr. Dr. hc. Jürgen Basedow. In 2010, he passed the Second State Examination at the Hanseatic Regional Appelate Court, Hamburg. He is currently working as an attorney (Rechtsanwalt) at Luther Rechtsanwaltsgesellschaft, Hamburg in the field of international investment law.

Introduction

Just a few weeks ago, the International Chamber of Commerce (“ICC”) revealed its new Arbitration Rules, which will enter into force on January 1st, 2012 (the “Rules”). With the revised Rules comes the introduction of a new Emergency Arbitrator Procedure, a concept previously known to other institutional arbitration rules such as those of SCC, SIAC or AAA ICDR, yet new to the arbitral process under the rules of the ICC. The framework of the new procedure is Article 29 of the Rules, which is accompanied by Appendix V setting out the procedure for obtaining relief from an emergency arbitrator.

The Need for Pre-Arbitral Interim Relief

It is generally known that the constitution of an arbitral tribunal can take a considerable amount of time. Before the arbitral tribunal is constituted, a party seeking to apply for interim relief will usually have no option other than turn to a competent state court.

In many cases, that party will find its needs met if the court grants the relief requested and such relief can be enforced accordingly. In other cases, however, applying to a state court may not be a valid option. In some instances, it might be impossible, e.g. where the parties have validly excluded any state court jurisdiction, including the power to grant interim relief.

Yet, even when not impossible, it may prove inconvenient or otherwise undesirable for a party to apply to a state court for interim relief. Applying to a state court is arguably against the parties’ initial intention to exclude such courts from their disputes, i.e. against the very reason why they entered into an arbitration agreement in the first place. This holds true especially in cases where the parties opted for arbitration because they have a particular desire for confidentiality, or chose arbitration because the nature of their relationship calls for special expertise which a state court may not have. In other instances, the relief sought may not be available from the competent state court, which will usually be bound by its own lex fori when determining the content of interim measures. Finally, the party seeking interim relief may be unwilling to resort to the state courts in the territory of its adversary and to the laws of such state after having avoided such a situation by opting for arbitration on “neutral” terrain and under “neutral” laws. This is where the ICC’s new emergency arbitrator comes in. Pursuant to Article 29(1) of the Rules, a party in need of urgent interim or conservatory measures that cannot await the constitution of an arbitral tribunal (defined as “Emergency Measures”) may make an application for such measures pursuant to the Emergency Arbitrator Rules in Appendix V.

The Key Principles governing the New ICC Emergency Arbitrator Rules

The new ICC Emergency Arbitrator Rules can be summarized in five key principles:

The first key principle of the new emergency arbitrator rules is that they apply automatically to parties having opted to arbitrate their dispute under the ICC Rules. There are, however, specific requirements that must be met in order for the “Emergency Arbitrator Provisions” as defined in Article 29(5) of the Rules (“EAP”) to apply automatically, namely that (a) the application is submitted prior to the transmission of the file to the arbitral tribunal in terms of Article 16 of the Rules (Article 29(1) of the Rules), (b) the arbitration agreement was concluded after 1 January 2012 (Article 29(6)(a) of the Rules), (c) there is no agreement on another pre-arbitral procedure providing for similar relief (Article 29(6)(c) of the Rules), and (d) there is no agreement of the parties to opt-out of the EAP (Article 29(6)(b) of the Rules). In order to allude the parties to the latter possibility, the ICC has added a new Standard Arbitration Clause to its repertoire which includes the respective “opt-out wording”.

A second key principle is that the ICC emergency arbitrator is an additional option available to the parties to an ICC arbitration agreement which corresponds to their chosen means of dispute resolution. Article 29(7) of the Rules expressly provides that the EAP are not intended to prevent any party from seeking urgent interim or conservatory measures from a competent judicial authority. This rule applies without restriction before an application has been made for Emergency Measures and “in appropriate circumstances” even thereafter.

A third key principle is that Emergency Measures are only obtainable in cases of “true” urgency. Because it was decided to apply an opt-out system for the ICC’s emergency arbitrator, it was felt necessary in order to avoid abuse of the EAP to narrow the scope of application of such rules to situations where a measure truly cannot await the constitution of an arbitral tribunal, and to explicitly stipulate such substantive prerequisite in Article 29(1) of the Rules.

The fourth key principle is that the application of the EAP is limited to signatories to the arbitration agreement or successors thereof (Article 29(5) of the Rules). The main purposes of this limitation are to provide the responding party faced with an application for Emergency Measures with a certain degree of protection and to provide an easy substitution test for the prima facie test under Article 6 of the Rules (see Article 1(5) of Appendix V). An additional benefit is that the application of the EAP to treaty-based arbitrations is excluded.

And finally, the fifth key principle is the protection of the responding party. This principle is reflected in the fact that there is no default answer to the application for Emergency Measures within a certain short deadline, that the applicant must pay a fee for the emergency arbitrator procedure to the ICC upfront (Articles 1(3)(h), 7 of Appendix V), but also that the applicant must, as a rule, file a request for arbitration within 10 days from the application, absent which the President will terminate the emergency arbitrator proceedings (Article 1(6) of Appendix V).

The emergency arbitrator’s decision is rendered in the form of an order (the “Order”; Article 29(2) of the Rules, 6(1) of Appendix V) which is binding on the Parties and which the parties undertake to comply with (Article 29(2) of the Rules, Article 6(6) of Appendix V). The Rules and Appendix V are silent on the question of enforcement of the Emergency Arbitrator’s Order. It is submitted that the Order has the same legal nature as an order for interim measures by an arbitral tribunal under Article 28(1) of the Rules. Therefore, it should be enforceable in state courts under provisions such as Articles 17H and 17I of the UNCITRAL Model Law providing for the recognition and enforcement of interim measures granted by arbitral tribunals. Whether – applying a “substance-over-form” approach – the Order could qualify as an award so as to be enforceable under the New York Convention or national legislation based thereupon, is questionable.

Conclusion

In sum, the new Emergency Arbitrator Rules are a well-drafted, well-balanced, tailor-made solution for an emergency arbitrator procedure under the auspices of the ICC. The ICC has succeeded in drafting a tool which will further the attractiveness of ICC arbitration and which will serve the parties to ICC arbitration by effectively protecting their rights for years to come.

Dr. Christopher Boog is a partner elect in Schellenberg Wittmer in Zurich and a member of its International Arbitration Practice Group. He is a member of the Zurich bar and a graduate from the Law Schools of the Universities of Fribourg (Master of Law, with honors), Amsterdam (International Law Certificate) and Zurich, where he obtained his doctorate summa cum laude. Christopher Boog was a research fellow at Columbia Law School in New York and regularly publishes and speaks on topics of international arbitration and transnational litigation.

Democratic Republic of Congo and ors v FG Hemisphere Associates LLC

To most clients a judgment or an arbitral award is only worth the paper it is written if it can be enforced.  Enforcement of judgments and arbitration awards against States poses particular challenges. In the former context, the English Supreme Court recently provided guidance in NML Capital Ltd v Republic of Argentina [2011] UKSC 31 (“Argentina”). In the latter context, the difficulties are exemplified by the epic 3:2 decision of the Hong Kong Court of Final Appeal in Democratic Republic of Congo v FG Hemisphere Associates LLC, FACV Nos. 5, 6 & 7 of 2010 (“Congo”). Both cases saw “vulture funds” seeking to enforce a judgment or an award against a sovereign.

While the fund in Argentina drew blood, the fund in Congo drew a blank. The Hong Kong Court of Final Appeal held that a State enjoys absolute immunity from enforcement proceedings in Hong Kong.  While Congo has already enjoyed its fair share of coverage elsewhere, this brief note sets out some thoughts on what the comparative position in Singapore is, and what the practical effects of the decision are for practitioners advising clients between Singapore and Hong Kong as a potential seat of arbitration.

Facts

In 2003, an engineering company Energoinvest obtained two ICC awards against Congo. Energoinvest transferred the benefit of the awards to a US distressed debt fund, FG Hemisphere Associates. FG sought to enforce the awards in Hong Kong. Congo resisted enforcement mainly on the grounds of State immunity. One of the issues confronting the Court of Final Appeal was whether Hong Kong applied the doctrine of:

(a) absolute immunity, where the domestic courts of one State would not normally have    jurisdiction to adjudicate upon matters in which another State is named as defendant        unless there is a waiver; or

(b) restrictive immunity, which recognizes that States do not enjoy immunity from suit      when they are engaged in purely commercial transactions, and do not enjoy immunity       from execution if the relevant assets are used for a commercial purpose.

Countries such as Australia, US and the UK have adopted the latter, whereas China adheres to the former.

Despite vigorous dissents by Bokhary PJ and Mortimer NPJ which saw the former opening his judgment with characteristic flourish on judicial independence, the majority of the Court of Final Appeal (Chan PJ, Ribeiro PJ and Sir Anthony Mason NPJ) held, inter alia, that because Hong Kong could not have a doctrine of state immunity that was inconsistent with China, the doctrine of absolute immunity applied.  A foreign State is immune from suit, enforcement and execution in Hong Kong, unless waived by that State. An effective waiver is made by an unequivocal submission “in the face of the court”. Written waiver clauses, including jurisdiction clauses and arbitration agreements, do not constitute good waiver.  Because the Court of Final Appeal found no waiver by Congo, the awards in question could not be enforced.  This ruling was upheld upon referral to the Standing Committee of China’s National People’s Congress.

The same principle applies to Crown immunity, which concerns whether a State government or a State entity is able to raise immunity before its own courts. The Hong Kong Court of First Instance held that the PRC government and PRC state entities enjoy absolute Crown immunity before Hong Kong courts: Intraline Resources Sdb Bhd v The Owners of the Ship or Vessel Hua Tian Long HCAJ 59/2008.

Whither Singapore?

The Singaporean position concerning sovereign immunity is codified in the State Immunity Act (Cap 313, 1985 Rev. Ed.). The relevant provision concerning arbitration is section 11, which very simply provides as follows:

Arbitrations.

11. —(1) Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts in Singapore which relate to the arbitration.

(2) This section has effect subject to any contrary provision in the arbitration agreement and does not apply to any arbitration agreement between States.

In the second reading of the State Immunity Bill (Hansard Vol. 39, 7 Sep 1979, Col 408 – 409), the Minister said that the Bill was meant to move Singapore away from the doctrine of absolute immunity, which according to the Minister, had been the “subject to a great deal of criticism” before the UK courts and the Privy Council. The Bill deliberately mirrored the UK State Immunity Act 1978 shorn of the provisions concerning the European Convention on State Immunity.

Consequently, Section 11 of Singapore’s State Immunity Act is in pari materia with section 9 of the UK State Immunity Act 1978.  While the former has yet to see any action, section 9 of the UK Act came under scrutiny in Svenska Petroleum Exploration AB v Government of the Republic of Lithuania and anor [2006] EWCA Civ 1529 (“Svenska”).

In that case, Svenska sought to enforce an ICC award in England against Lithuania. Counsel for Lithuania argued that section 9 of the UK Act is concerned only with proceedings relating to the conduct of the arbitration itself and does not extend to proceedings to enforce any award which may result from it.  Moore-Bick LJ rejected this interpretation. His Lordship was of the view that “if a State has agreed to submit to arbitration, it has rendered itself amenable to such process as may be necessary to render the arbitration effective” and that an application for leave to enforce an award is one aspect of the recognition of an award and “is the final stage in rendering the arbitral procedure effective”.  Execution on property belonging to the State comes under section 13 of the UK Act (mirrored by section 15 of the Singapore Act), which provides that execution on property belonging to a State can only be in respect of property “which is for the time being in use or intended for use for commercial purposes”.

Moore-Bick LJ also quoted the Lord Chancellor in the course of Parliamentary debates over the relevant provision, who explicitly said that the provision was “intended to remove the immunity currently enjoyed by States from proceedings to enforce arbitration awards against them”.

The intent of the English Parliament therefore could not have been clearer. In choosing to enact the English Act as law in Singapore, the intent of the Singapore legislature is unlikely to differ.  Consequently, if a Congo situation arises in Singapore Svenska is likely to be highly persuasive. If this is accepted, this means that in Singapore, unlike Hong Kong, a foreign State is unable to claim immunity against award enforcement proceedings.  To be complete, any subsequent execution pursuant to a successful award enforcement proceeding against a foreign State can only be on State property “being in use or intended for use for commercial purpose”.

Practical implications

One thing is now clear. Practitioners dealing with State counterparties should be slow to adopt a Hong Kong court jurisdiction clause since a State enjoys absolute immunity in Hong Kong. Conversely, State parties may be attracted to Hong Kong as a safe haven to transfer their assets.

Practitioners in Hong Kong are taking pains to explain that Congo has little impact on Hong Kong’s attractiveness as a seat of arbitration. That is because the decision does not affect in any way an arbitral tribunal’s jurisdiction over a State who is party to an arbitration agreement. An arbitration award rendered anywhere in the world, be it Singapore or Hong Kong, will encounter the same hurdle concerning sovereign immunity when sought to be enforced in Hong Kong.

Would the result in Hong Kong be different if the foreign State against which an award is rendered is also party to the New York Convention? China is a signatory to the Convention, Congo is not. The Hong Kong Court of Appeal suggested that, if an award against a foreign State which is signatory to the New York Convention is sought to be enforced in Hong Kong, that may amount to an effective waiver in the form of consent given in an international treaty.

That proposition remains to be tested. It has been pointed out that the New York Convention arguably imposes upon State signatories only an obligation to recognize and enforce foreign arbitral awards — that does not ipso facto translate into a representation by signatory States that any immunity enjoyed will be waived. The drafting history of the New York Convention does not appear to suggest otherwise. The title of the Convention itself underscores this point: it is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Another open and perhaps more pertinent point concerns the status of an arbitration seated in Hong Kong involving a foreign State party. Will the Hong Kong courts enjoy supervisory jurisdiction over that arbitration?  Practitioners observe that an arbitration clause is generally accepted as an implied waiver of immunity under customary international law. That was the view of Lady Hazel Fox CMG QC in her treatise cited by the Hong Kong Court of Appeal in Congo. But until this point is tested before the Hong Kong courts, a non-State party runs the risk of not being able to seek the judicial assistance of the Hong Kong courts in aid of an arbitration against a State party seated in Hong Kong. Even if the Hong Kong courts ultimately rule on this issue affirmatively, the delay and expense that may ensue from a State party challenging the supervisory jurisdiction of the Hong Kong courts may effectively render moot any judicial measure that was being sought, particularly if such measures are time-sensitive. To that extent parties may prefer the speed and certainty Singapore provides, ceteris paribus.

---

Darius Chan

Associate, Wilmer Cutler Pickering Hale & Dorr, London.  LL.B. (First), National University of Singapore, LL.M. (Int’l Business Regulation, Litigation & Arbitration), NYU. Advocate & Solicitor, Supreme Court of Singapore, Attorney & Counselor at law, State of New York.

1. INTRODUCTION

Having to deal with the subject of arbitration and third parties feels like the Herculean task of dealing with Lernaean Hydra, the mythical beast that had several heads, and for each head cut off it grew two more. This is because third-party claims often relate to many aspects of commercial life and types of contracts, as different as construction contracts, guarantees, and maritime and reinsurance transactions. Third-party claims may also implicate different laws and theories, including agency or assignment, third-party beneficiary, incorporation-by-reference, ratification, even corporate law and ‘group of companies’ theories. Each one of these theories and laws requires different types of inquiries from different standpoints.

Even worse: very often in practice a single set of facts will involve the application of several overlapping theories at once. A third-party parent of a wholly owned signatory subsidiary will provide a guarantee for the obligations of the subsidiary, and also will be actively involved in the performance of the contract. In addition, the officer that negotiates and signs a contract containing an arbitration clause will usually be acting as a representative of both the parent and the subsidiary.

To refer to a characteristic example in the case of Bridas et alia v Government of Turkmenistan et alia, 345 F.3d 347 (5th Cir 2003) the claimant relied alternatively upon several third-party theories, including agency, instrumentality, apparent authority, alter ego, third-party beneficiary, theory of equitable estoppel, to prove that the government of Turkmenistan was bound by an arbitration clause signed by Turkmenneft, formed and owned by the government of Turkmenistan.

The importance of the topic is further increased in practice with the number of arbitration disputes involving third parties continuously growing. Typically, claimants will try all inventive ways to reach to non-signatory parties with an interest in the dispute, and more crucially to non-signatory parties with the necessary funds to recover the damages which the tribunal may award; whereas respondents will try to find ways to avoid the prospect of being brought before an international tribunal and the prospect of being held liable for a transaction in which they have an interest but for which they want to avoid accountability altogether.

For all the above issues, the subject of international arbitration process with third parties has become one of the most pervasive problems in current international arbitration. This post attempts to first, give a very brief overview of all the different legal theories relating to third-party claims and second, raise the issue of whether the current arbitration doctrine is well-equipped to deal with this complex matter, or commercial practice has started to outgrow the doctrine.

2. LEGAL THEORIES ON THIRD-PARTIES

Overall, there are four different groups of legal bases that a party can rely upon to bring a claim against a non-signatory, and vice versa. These are:

1. General theories of contact law
2. Two or more compatible arbitration clauses
3. Applicable arbitration rules or arbitration laws allowing for third-party claims
4. Theories of implied consent

The common denominator for all third-party legal bases is of course consent. Thus the above theories are the legal constructs, allowing courts and tribunals to identify ‘common will’ of both the signatory and the non-signatory to arbitrate. More specifically, a non-signatory may be introduced in arbitration through the following general theories of contract law:

1.  Representation and apparent authority
2.  Assignment and transfer
3. Alter ego
4. Incorporation by reference
5. Third-party beneficiary

Equally, third-party claims will be possible where several parties have signed different arbitration clauses in interrelated substantive contracts, on the condition that all the arbitration clauses are first, identical (or at least compatible) in their basic terms and, second, contain cross-references expressly allowing for multiparty proceedings or third-party claims. If the several arbitration clauses fail to meet either of the above conditions, consent for third-party claims might be problematic to infer.

Further, tribunals may allow third-party claims pursuant to certain institutional rules or arbitration laws that expressly allow for a third party to be joined or intervene in arbitration proceedings between to signatory parties. Here, however there are very few national laws that provide for third-party claims, and when they do they largely state the obvious allowing third-party claims on the basis of unanimous consensus among all the relevant parties, including the third party (e.g. the English Arbitration Act, s.35). On the other hand, a number of institutional rules expressly provide for third-party or multiparty disputes. Most of them though will allow third-party claims only on the condition of unanimous consent of all the relevant parties, including the original and the third parties (see for example, the 2010 UNCITRAL Arbitration Rules Art.17(5)). There are only a few progressive sets of institutional rules, such as the LCIA (Art. 22.1(h)), Vienna Rules (Art. 4(2)), and most notably the Swiss Rules (Art. 4(2)) that give tribunals wide power to decide on the matter, allowing for joinder and intervention of a third party even if some of the relevant parties disagree. Finally, third-party claims may still be introduced even under institutional rules that contain no express provision to that effect. This is the case under the ICC rules, for example, where the ICC Court, under its current practice, will allow third-party claims to proceed before a tribunal, if they prima facie meet the threshold of a particular theory of contract law including the theories of agency, transfer and assignment, alter ego, and lifting the corporate veil. Of course, the ICC will be introducing in 2012 new Arbitration Rules, which -as is safely expected- will contain express provisions on third party claims.

Finally, third-party claims may be introduced on the basis of the theory of implied consent. Here the idea is that a party that has not signed an arbitration clause may nevertheless be found to have actually consented to it, if the non-signatory has been actively involved in the negotiation, participation or termination of the main contract that contains the arbitration clause. The most prominent versions of the theory of implied consent are the doctrine of arbitration estoppel developed in the US and the famous, some would say infamous, group of companies doctrine developed in the European continent.

3. CONCLUSION AND NEW CHALLENGES FOR THE FUTURE

All the above theories –firmly based on the fundamental principle of consent- work in the majority of the cases well. However there are marginal cases of third parties that cannot fit in any of the above legal theories, notwithstanding the fact that –from a business point of view- they are obviously implicated in the commercial transaction, which is the subject matter of arbitration between two other parties.

Originally, it was exactly those cases that the theory of implied consent and the doctrine of group of companies in particular were developed to address. These theories were designed to allow tribunals to assume jurisdiction over non-signatories that were crucially implicated in the dispute before the tribunal. The problem with all these theories is that sometimes tribunals find “common intention” of the signatories and the non-signatories on the basis of tenuous evidence or facts. Here, common intention to arbitration is sometimes forced out of factual circumstances that may not allow normally for it. And when tribunals do that, there is always the danger that some national courts -that is other than French national courts- will refuse to accept that implied -some times even presumed- intention to arbitrate, and will either annul or resist the enforcement of the ensuing award.

This was clearly the case in the famous Dallah v Government of Pakistan, [2010] UKSC 46 and previously in the Peterson Farms v C&M Farming, [2004] 1 Lloyd’s Rep. 603. Indeed, English courts, in Dallah, refused to accept that the non-signatory Government of Pakistan had consented to arbitration because, for example, one of its Ministers wrote a letter to Dallah on stationary with the Pakistani Government paper-head; or because the Government of Pakistan had agreed to act as the guarantor of the signatory Trust in its the financial transaction with Dallah. The English Court of Appeal and then the Supreme Court found that these too weak evidence to prove that the non-signatory had implicitly consented to arbitration, as the ICC tribunal had found. Lord Collins for the Supreme Court concluded that “there was no material sufficient to justify the tribunal’s conclusion that the Government’s behaviour showed and proved that the Government had always been, and considered itself to be, a true party to the Agreement and therefore to the arbitration agreement. On the contrary […] on the face of the Agreement the parties and the signatories were Dallah and the Trust”

Yet, for those that have read the case it is obvious that the Government of Pakistan was unmistakably implicated in the whole business transaction from the beginning to the end. This is why the Paris Cour d’appel a couple of months after the decision of the UK Supreme Court reached the opposite conclusion upholding the award on the basis that: “[The Government] behaved as if the Contract was its own;[…] this involvement of [the Government], in the absence of evidence that the Trust took any actions, as well as [the Government’s] behaviour during the pre-contractual negotiations, confirm that the creation of the Trust was purely formal and that [the Government] was in fact the true Pakistani party in the course of the economic transaction”.

And this is exactly the weakness of all the above theories and the theory of implied consent in particular: they look into the issue of third parties from a contractual point of view exclusively. However, arbitration is not only an advanced theory of contract law. It has serious jurisdictional aspects that are overlooked. From a contractual point of view, the issue of third parties is often reduced into an issue of evidence of consent, which misses the point. And the point here might be not whether a tribunal may find enough evidence that the non-signatory party has consented to the arbitration clause, but whether and how closely the non-signatory party is implicated in the main dispute before a tribunal. Thus the crucial question here is: if a third party is strongly implicated in a dispute, should a tribunal assume jurisdiction over this party on grounds that this equitable and fair to do so in order to accomplish its main goad, namely to effectively dispose of the dispute before it?

International commerce becomes increasingly complicated and companies are organized on the basis of previously unknown forms. In order to remain commercially pertinent and effective, arbitration must be able to take the new developments in international commerce into account, especially for jurisdictional purposes. We need to think that the commercial reality might soon outgrow the current contractual doctrine. Otherwise, parties with an important role in the commercial aspect of the dispute might be left outside the scope of arbitration for lack of sufficient evidence of consent.

 

 

This is a very brief overview of some of main issues concerning third parties, explored in detail in S. Brekoulakis, Third Parties in International Commercial Arbitration, (Oxford University Press 2010) (see http://ukcatalogue.oup.com/product/9780199572083.do)

Stavros L. Brekoulakis 

Attorney-at-Law and Senior Lecturer in International Dispute Resolution and Private International Law at the School of International Arbitration, Queen Mary, University of London.

The Singapore Court of Appeal issued a decision recently articulating a principled framework for the arbitrability of insolvency-related claims. It provides useful guidance on when an insolvency-related claim would be considered non-arbitrable under Singapore law. In seeking to strike the delicate balance between its robust pro-arbitration stance and its insolvency regime, the Court’s underlying philosophy strives to give the private consensual model of arbitration as much effect as possible, whilst using the tool of non-arbitrability to draw a clear line in the sand only when third-party interests are implicated under the insolvency regime.

In Larsen Oil and Gas Pte Ltd v Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) [2011] SGCA 21, the Singapore liquidators of an insolvent Cayman Islands company, Petroprod, sought to avoid a number of payments made by Petroprod to the appellant, Larsen, on the statutory grounds that those payments amounted to unfair preferences or undervalue transactions and/or was made with the intent to defraud. Larsen applied for a stay of those avoidance proceedings on the basis of an arbitration agreement between the parties that stipulated Singapore as the seat of arbitration.

After a comparative jurisprudential analysis characteristic of prevailing judicial practice, VK Rajah JA writing for the Court of Appeal astutely laid down three key principles:

1)    Disputes involving an insolvent company that arise only upon the onset of the insolvency regime, such as disputes concerning transaction avoidance and wrongful trading, are non-arbitrable.

2)    Disputes involving an insolvent company that stem from its pre-insolvency rights and obligations are non-arbitrable when the arbitration would affect the substantive rights of other creditors.

3)    Disputes involving an insolvent company that stem from its pre-insolvency rights and obligations are arbitrable when the arbitration is only to resolve prior private inter se disputes between the company and other party.

In so far as the first principle is concerned, the Court incisively reasoned that many of the statutory provisions in the insolvency regime are enacted to recoup for the benefit of the company’s creditors losses caused by the former management, and this objective would be compromised if a company’s pre-insolvency management had the ability to restrict the avenues by which the company’s creditors could enforce the very statutory remedies which were meant to protect them against the company’s management. Some of these remedies may include claims against former management who would not be parties to any arbitration agreement.

There is perhaps another way which the Court could have arrived at the same result.

One could say that the insolvency provisions the Court was concerned about, such as transaction avoidance due to unfair preference, are not claims that are derivative of the debtor’s rights; they can only be brought by a liquidator (or a trustee or debtor in possession; or one of their assignees), none of whom were parties to the arbitration agreement: see In re Bethlehem Steel Corp. v. Moran Towing Co., 390 B.R. 784 (Bankr. S.D.N.Y. 2008), citing Allegaert v. Perot, 548 F.2d 432 (2d Cir. 1977); Hagerstown Fiber Ltd. P’ship v. Carl C. Landegger, 277 B.R. 181 (Bankr. S.D.N.Y. 2002); Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3d Cir. 1989); OHC Liquidation Trust v. American Bankers Insurance Co. (In re Oakwood Homes Corp.), 2005 WL 670310 (Bankr. D. Del. 2005); Pardo v. Pacificare of Tex., Inc. (In re APF Co.), 264 B.R. 344 (Bankr. D. Del. 2001).

This is not novel and has already been foreshadowed by the Court in its earlier precedent of Ho Wing On Christopher and ors v ECRC Land Pte Ltd (in liquidation) [2006] SGCA 25, albeit in a different context concerning the recovery of costs by a successful litigant against an insolvent company in liquidation.

Indeed, in the present case the Court expressly considered the origin of the claim in elucidating the next two principles set out above. The Court observed that there were two policies militating against giving effect to arbitration agreements for disputes stemming from pre-insolvency rights and obligations.

First, because the insolvent regime is for the benefit of creditors who are not parties to the arbitration agreement, it is difficult to justify why the liquidator (or trustee) who represents the creditors should be compelled to arbitrate instead of pursuing the statutory remedies.

Second, allowing an insolvent company’s creditor to arbitrate its claim against the company in effect allows the creditor to contract out of the proof of debt process. It arguably falls foul of the principle that a company cannot contract with some of its creditors for the non-application of certain insolvency rules.

Weighing the competing policies, the Court took the final position that the right balance to be struck for disputes involving an insolvent company that stem from its pre-insolvency rights and obligations was to hold that if the resolution of a dispute through arbitration would “affect the substantive rights of other creditors”, then the dispute is non-arbitrable. Conversely, the dispute is arbitrable when it does not.

The Court reasoned that circumvention of the proof of debt process is tolerable because the process does not create new rights in the creditors or destroy old ones. Even if the claim is subsequently proved to be valid and enforceable against the liquidator (or trustee), the pool of assets available to all creditors at the time of the liquidation of the company is not affected.

The Court’s view that the proof of debt process should not operate as a complete barrier against arbitrability must be right as a matter of legal symmetry and consistency, since the Court has been granted the statutory power to permit certain actions or proceedings against a company in a liquidation, thereby allowing those creditors to derogate from the proof of debt process: see s 262(3) Companies Act (Cap. 50, 2006 Rev. Ed.) and s 148A Bankruptcy Act (Cap. 20, 2009 Rev. Ed.).

Darius Chan

Darius Chan graduated from NYU with a LL.M. in International Business Regulation, Litigation & Arbitration. He is qualified in Singapore and New York. Upon graduation he clerked at the Supreme Court of Singapore and was concurrently appointed an Assistant Registrar. He was also adjunct faculty at the law schools of National University of Singapore and Singapore Management University. Prior to the LL.M., he practised international arbitration at the chambers of Michael Hwang SC.

In 2003, Spain promulgated a new arbitration law 60/2003, (the “Act”) that encapsulated many of the modern concepts of international arbitration. The law adopted the UNCITRAL Model Law of 1985, and advanced Spain to a position whereby it is now a favourable environment for the practice of international arbitration. 

Of course, the practice of arbitration is always dependent on the adherence by the local judiciary to principles embodied in the arbitration law, and the modern practice of international arbitration.  The modern practice of international arbitration essentially means that the courts should ideally observe a minimal yet efficient degree of intervention in arbitral proceedings, and once an award is rendered, the courts should display a clear and consistent understanding of the law concerning the recognition and enforcement of arbitral awards (and the interpretation of the New York Convention 1958).

This has been the challenge for most countries, in terms of being able to say they are truly arbitration-friendly. The statute book can say what it likes, but if it is not backed up by the conduct of state courts, it is worthless. In recognition of this, the international arbitration communities of numerous countries have made concerted efforts to involve the judiciary in any reform, and Spain is no different. Those efforts were realised in Spain when a new state court specialising in arbitration was established in Madrid, Spain (“Court of First Instance N° 101”). This was enacted by virtue of the Agreement of the General Council of the Judiciary, on 25 November 2010 (published in BOE No.310 of 22 December 2010). Previously, in Barcelona –the other principal centre of arbitration in Spain– a specific Section of the Court of Appeal had been granted exclusive competence in relation to actions setting aside arbitral awards rendered in the municipality of Barcelona.

The Spanish court system is divided according to Judicial Districts, which cover one or more municipalities. Each Judicial District is served by a Court of First Instance which covers civil matters.  For most major international arbitrations, the two principal seats of arbitration in Spain are Madrid and Barcelona. As between the two, the majority of Spain-based arbitrations will have Madrid as their seat, and accordingly, in issues concerning, for example, applications for interim measures, applications for assistance with the taking of evidence, and the recognition and enforcement of awards, the Madrid courts may be seized. 

The newly created court is competent for all arbitration matters that previously fell under the jurisdiction of the First Instance Courts of Madrid.  Thus, while the Act transferred the competence of arbitrations matters from the Supreme Court to the Court of First Instance, this new development sees a specialised Court of First Instance being established.    

This development is good news for Spain (and more particularly Madrid) in terms of moving towards a dedicated sitting judiciary whose attention can be focused on international arbitration (although the court does have competence to deal with non-arbitration matters as well).  Subject to the quality of decisions of the new Court, this will also hopefully raise the bar for other arbitration-friendly jurisdictions.

Article 8 of the Act specifies the circumstances in which the Court of First Instance would have had competence before this recent change.  This was derived from the seat of arbitration.  If the seat of arbitration had not yet been determined, then jurisdiction would reside with the Court of First Instance at the domicile or habitual place of residence of any of the respondents, and failing that, of the claimant, or failing that, at the selection of the claimant.

The new Court of First Instance N° 101 will have specific competence in relation to the assistance and supervision of arbitration regarding the following areas (article 8 of the Act):

1. Judicial requests for the appointment of arbitrators (article 15 of the Act);
2. Judicial assistance for the taking of evidence in support of arbitral proceedings (article 33 of the Act);
3. Orders of provisional or interim relief in support of arbitration (article 8(3) of the Act); and
4. The recognition and enforcement of arbitral awards (article 44 of the Act).

Notably, an application to set aside an arbitral award does not fall within the competence of the Court of First Instance N° 101, and remains within the competence of the Provincial Court of Appeal.  This may seem surprising to those who have read BOE No.310 of 22 December 2010, since that agreement expressly indicates that setting aside the award would seemingly fall within the competence of the Court of First Instance N° 101.  However, Spain’s Organic Law which stipulates that such an application falls exclusively within the jurisdiction of the Provincial Court of Appeal cannot be trumped by the Agreement of the General Council of the Judiciary.  Therefore, its appearance in BOE No.310 of 22 December 2010 is an error.  This has been confirmed by the judge who will preside in the Court of First Instance N° 101, Judge Begoña Pérez Sanz.

It is most welcome that a dedicated judiciary can develop Spanish jurisprudence with a sense of ownership and hopefully, a non-hostile attitude to the role international arbitration plays in the domestic and international legal order.

The only exception to the competence of the Court of First Instance N° 101 is that certain subject matter competencies remain with the Commercial Courts.  For example, intellectual property disputes, unfair competition matters, transport and some corporate disputes, even if raised in the context of an arbitration, will remain within the jurisdiction of the Commercial Courts.  This is unfortunate and rather unsatisfactory.  If the Court of First Instance N° 101 is designed to achieve consistency in the treatment of international arbitration, it undermines its own raison d’être if there is such an exception simply predicated on the subject matter of the dispute. 

Conclusion

It remains to be seen whether this anomalous competence of the Commercial Courts will be removed during the passage of the new Arbitration Act which is currently before the Spanish Parliament. In the meantime, however, this development is extremely positive for the development of international arbitration in Spain.

            Christian Leathley and Ignacio Diez-Picazo

            Christian Leathley is Of Counsel at the law firm Herbert Smith (London) and a specialist in international arbitration. He is English and New York qualified and a former graduate of NYU School of Law (LL.M in International Legal Studies). 

            Ignacio Diez-Picazo is Partner at Herbert Smith (Madrid) and Chaired Professor of Procedural Law at the Faculty of Law of the University Complutense of Madrid.

Will a court injunct arbitral proceedings if parties, before an arbitration hearing, allegedly reach a settlement agreement and a dispute subsequently arises over the existence of such an agreement? Is the tribunal functus?

Recently, the Singapore High Court in Doshion Ltd v Sembawang Engineers and Constructors Pte Ltd [2011] SGHC 46 (“Doshion”) rightly held that no injunction would lie in such an instance. It is a decision to be welcomed.

In that case, the two parties were parties to arbitration proceedings under certain construction contracts (“the Sub-Contracts”). The arbitration was scheduled to start on 28 February 2011. The claimant contended that an oral settlement was reached between the solicitors for the parties on 15 February 2011 and the arbitration proceedings should be terminated as of that date. The defendant denied the existence of any settlement.

The defendant characterised the claimant’s argument as one where the tribunal had become functus officio because of the settlement. The defendant cited a recent English High Court decision of Martin Dawes v Treasure & Son Ltd [2010] EWHC 3218 (“Dawes”) and contended that the issue of whether an arbitrator was functus went to the jurisdiction of the arbitrator, which was a matter for the arbitrator to decide.

In finding for the defendant, the Singapore High Court’s reasoning was built on three pillars:

(a) the arbitrator was not functus since the tribunal had not even begun to hear the dispute;

(b) adopting the commercially sensible approach in Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, that an dispute over the existence of an settlement agreement would be caught by the ambit of the arbitration agreement in the Sub-Contracts; and

(c) in any event, any dispute about the scope of an arbitration agreement was a matter for the arbitral tribunal based on the doctrine of Kompetenz-Komptenz.

It was not strictly necessary for the defendant to characterize the plaintiff’s argument as one relating to functus officio – the plaintiff faced an uphill task from the get go. Section 6 of Singapore’s International Arbitration Act (the Act incorporates the Model Law) requires a court to refer the dispute to arbitration unless the agreement was “null and void, inoperative or incapable of being performed”. In Tjong Very Sumito v Antig Investments Pte Ltd [2009] SGCA 41, the Singapore Court of Appeal astutely held that in line with its prevailing philosophy of judicial non-intervention in arbitration, the Court would interpret the word “dispute” in Section 6 broadly, and would readily find that a dispute existed unless the defendant had unequivocally admitted that the claim was due and payable. In circumstances where the defendant prevaricates (i.e., first making an admission and then later purporting to deny the claim on the ground that the admission was mistaken, or fraudulently obtained, or was never made), the matter would ordinarily still be referred to arbitration. The Court’s approach is commendable in giving full effect to the parties’ specified mode of dispute resolution.

When we apply this reasoning to Doshion, whether any alleged settlement was reached before or during the arbitral hearing would not, as a matter of principle, affect the question of which fora decides whether the settlement exists. It is important to ask the right question. That question is whether the underlying dispute remains unresolved. Any settlement would be in relation to the underlying dispute arising out of the Sub-Contracts. Accordingly, any dispute about the settlement originates from the underlying dispute. To answer the question, any dispute about the settlement means that the underlying dispute remains unresolved. So unless the defendant unequivocally admits the claim or acknowledges that there has been a settlement such that there is no longer a dispute, the Court will refer the matter to arbitration. Conceptually, since any prevarication by the defendant on the admission of the claim would be a matter to be referred to arbitration, any prevarication by the defendant on the settlement of the claim must have the same outcome.

This reasoning based on first principles would have been sufficient to dispose of Doshion. The claimant did not, and presumably could not, show that there had been a waiver of the arbitration agreement or an agreement to end the tribunal’s jurisdiction.

The going only gets tougher for the claimant if it embarks on the functus officio route. Akenhead J in Dawes rejected the argument that a tribunal becomes functus once a settlement has been reached during arbitral proceedings.

In Dawes, the claimant (Dawes) engaged a contractor (Treasure) to carry out construction works at his country estate. Disputes arose and Treasure commenced arbitration proceedings before Mr Ian Salisbury. After the parties had pleaded their respective cases, they agreed upon a settlement. However, the scope of the settlement was not documented in a consent order or final award. Subsequently, Dawes issued his own arbitration notice in respect of related disputes but appointed a different arbitrator. Treasure asked Mr Salisbury to rule that he retained jurisdiction in relation to the “new” dispute, and that it had been compromised by the settlement agreement. The first arbitrator ruled in favour of Treasure on both points, which was challenged by Dawes on the ground that Mr Salisbury was already functus officio after the settlement.

In dismissing Dawes’ application, Akenhead J relied on, inter alia, Section 51 of the English Arbitration Act 1996. Section 51 provides that if parties settle the dispute during arbitral proceedings, the tribunal shall terminate the substantive proceedings and, if so requested, produce a consent award. Accordingly, Akenhead J held that the settlement of a dispute after it had been referred to arbitration, but before any final award, did not generally bring an end to the arbitrator’s jurisdiction and make him functus officio. Even if the dispute was settled “there remains a jurisdiction to terminate the substantive proceedings and to resolve issues of costs or any other matters in dispute”. That jurisdiction was otherwise not statutorily limited, and neither did parties preclude or limit such jurisdiction in their settlement.

Akenhead J also observed that Mr Salisbury “would undoubtedly still have retained jurisdiction if there had been an issue between the parties as to whether there was any settlement at all. He would still have been the arbitrator to resolve the underlying disputes which would include ruling upon a defence that the claim had been settled.”

The Model Law’s counterpart of Section 51 of the English Arbitration Act is found in Article 30 which deals specifically with settlement. The lesson taught by the two cases highlighted here is that if a party wants to put an end to a tribunal’s jurisdiction immediately after settlement, it will generally have to show an agreement to end the tribunal’s jurisdiction, whether as part of the settlement itself or as a separate agreement. Unfortunately for the claimant in Doshion, there is no shortcut.

Darius Chan

Darius Chan is a candidate for the LLM in International Business Regulation, Litigation & Arbitration at NYU. He is qualified in Singapore and New York. Upon graduation he clerked at the Supreme Court of Singapore and was concurrently appointed an Assistant Registrar. He was also adjunct faculty at the law schools of National University of Singapore and Singapore Management University. Prior to the LLM, he practised international arbitration at the chambers of Michael Hwang SC.

Switzerland may be one of the world’s most important arbitral seats, even so one would scarcely expect arbitration to hold much interest for the tubercular residents of Davos in Mann’s novel Der Zauberberg or The Magic Mountain.  Yet aficionados of arbitration who persevere to the sixth chapter of his lengthy book are treated to a little exchange on the subject.  In a usually overlooked passage, the Italian Ludovico Settembrini, purporting to speak as the voice of progress, and the conservative Jesuit Leo Naphta cross swords over the merits of arbitration during an afternoon of tea and chocolate “Baumkuchen” cake in the company of the main character Hans Castorp and his cousin Joachim Ziemßen.

Mann began The Magic Mountain in 1912 only to interrupt its composition during the First World War.  The novel, which first appeared in 1924, tells of the adventures of Hans Castorp, an otherwise prosaic young German of heightened sensibilities, in the fictional Berghof sanatorium in Davos during the seven years leading up to the First World War.  The routine of sanatorium life, the medical minutiae of early twentieth-century treatment of tuberculosis and the motley constellation of its sufferers in Davos become the vehicle for the hero’s coming of age and an exploration of pre-First World War culture.  The novel is not rich in external action and reflections on the arbitral process and much else remain confined to the drawing-room.

Settembrini and Naphta do not shirk difficult subjects.  Indeed the complexity of their topics is proportionate to the impotence of two sick men trapped on a mountain top.  In a series of virtuoso rhetorical exchanges, they debate illness, the nation state, education, penal reform, free trade and the progress of human history.  Settembrini adopts the view that mankind is not only capable of progress but that the previous century has brought great progress already, while Naphta sees the human condition as unrelievedly bleak, miserable and entirely dependent on divine grace for salvation. 

Unsurprisingly given these basic positions, it is Settembrini who comes out in favour of arbitration as an effective means for solving international disputes and Naphta who condemns it as one of the vain hopes of a deluded bourgeoisie.  Settembrini looks to arbitration as a way of resolving disputes, in particular those which will inevitably arise between nation states, in a rational and peaceful fashion.  To Settembrini arbitration is a forum whose jurisprudence can transcend the constraints of national, positive law and can be derived from natural law or international law, which he conflates in a speech to Naphta:

“What I venerate as natural law or the law of nations, you are free to call ius divinum.  The main thing is that there is a higher general law that transcends the positive rights of nation states and that allows for the resolution of disputed interests through arbitral tribunals.”

Naphta’s reaction is skittishly dismissive: “Arbitral tribunals, indeed!  The very idea of them!  A bourgeois arbitral tribunal that rules on questions of life and death, divines God’s will and determines the course of history!”  Writing in the aftermath of the First World War, Mann had an easy time showing up the hopelessness of Settembrini’s belief in international arbitration.  The nation states of Europe had succumbed to war and carnage rather than appointing tribunals to resolve their disputes.  This will not have been lost on his readers. 

Settembrini’s project challenges the latterday arbitral practitioner with its unanswered questions rather than its grim historical ironies.  Almost a century after the novel was published, controversy surrounds the powers that Settembrini attributes to arbitral tribunals.  Although arbitration is widely accepted as the preferred means of resolving international commercial disputes, its legitimacy in relation to investment and interstate disputes is sometimes put in doubt.  Some jurists question whether private tribunals should decide over the interests of sovereign states at all as Settembrini envisages.

To Settembrini arbitration is superior to other forms of dispute resolution by virtue of transcending the constraints of positive law and deriving its principles directly from reason rather than statute.  Such principles are supranational since they originate in universal rationality as opposed to a given national legal tradition.  Settembrini’s bold claim foreshadows the impassioned debate surrounding the lex mercatoria as a supranational legal set of commercial principles applicable to international arbitration.  Sceptics would say the content of such principles is as obscure now as it is in Mann’s novel. 

Naphta’s cavalier dismissal of Settembrini’s “bourgeois” arbitral tribunals formulates the greatest continuous challenge to all arbitration practitioners, to show that parties, their counsel and their tribunals are able to agree to arbitrate, generate meaningful awards and implement them.  Only then can arbitration offer an alternative to the constraints of national courts and indeed change the course of history.  Whatever the challenges of arbitrating disputes successfully, arbitration is preferable to Naphta’s alternatives.  At the end of the novel, after a succession of heated arguments, Naphta challenges Settembrini to a duel, who then deliberately shoots past him.  Infuriated Naphta thereupon turns his gun on himself.  One wonders if they might not have tried ADR instead.

* The authors wish to thank King’s College London for granting them access to the German collection in the Maughan Library when they were preparing this article.

            Maxi Scherer and Daniel Greineder

Dr. Maxi Scherer is a Global Hauser Fellow at NYU Law School and Counsel in Wilmer Cutler Pickering Hale and Dorr’s Dispute Resolution team in New York/London.  She is a member of the Paris bar and a solicitor (England and Wales).  She graduated from University of Paris Panthéon-Sorbonne, France, and University of Cologne, Germany, and obtained her PhD at the University of Paris Panthéon-Sorbonne with highest honors.  Maxi Scherer teaches International Arbitration and Litigation, International Private Law, European Civil Procedure and Comparative Law. She is an adjunct professor at SciencesPo Law School Paris, Georgetown CLTS London, University of Melbourne, Pepperdine Law School London and University of Fribourg.

Daniel Greineder is an Associate in the arbitral practice of Python & Peter in Geneva and an English-qualified barrister.  Previously he worked in the Arbitration Group of Wilmer Cutler Pickering Hale and Dorr LLP in London.  Before being called to the Bar by the Inner Temple in 2005, he completed a doctoral thesis in eighteenth-century German literary theory at Magdalen College, Oxford, and  lectured on German literature at St Hilda’s College, Oxford.

On 13 January 2011, France revealed its long-awaited new arbitration law.  The décret n° 2011-48 portant réforme de l’arbitrage, was published in France’s Official Journal, alongside a report commenting on the reform.  The new law can be found at http://www.legifrance.gouv.fr/jopdf/common/jo_pdf.jsp?numJO=0&dateJO=20110114&numTexte=9&pageDebut=00777&pageFin=00781, as well as the accompanying commentary http://www.legifrance.gouv.fr/jopdf/common/jo_pdf.jsp?numJO=0&dateJO=20110114&numTexte=8&pageDebut=00773&pageFin=00777

The reform concerns both domestic and international arbitration and the new provisions will comprise Articles 1442 to 1527 of the French Code of Civil Procedure.  The new law becomes effective and applicable as of 1 May 2011, except for a number of specifically enumerated provisions which apply only if the arbitration agreement was entered into, the arbitral tribunal constituted, or the award rendered, after that date.

The French arbitration community has long lobbied for this updated of the law, the first overall reform of French arbitration legislation since the 1980s.  The reform keeps with the long-standing tradition of innovative and arbitration-friendly arbitration law in France, which has contributed to establishing Paris as one of the world’s most popular seats of arbitration.  The aim of the new law is to sustain Paris’ leading role in international arbitration.  The accompanying official report states that “after thirty years, the reform appeared necessary to consolidate case law [in the area], as well as to complement the existing text and conserve its efficacy.”  The report also specifically draws attention to the fact that the new law has “integrated some provisions inspired by foreign laws which have proven useful.”

By codifying well-established French case law, the reform also significantly enhances the accessibility of French arbitration law for foreign users and observers.  For instance, Article 1447 codifies the well-established and fundamental principle of the autonomy of the arbitration agreement, according to which the arbitration clause remains unaffected even if the underlying contract is found void.  The provision states that “[t]he arbitration agreement is independent from the contract it relates to.”

Another example of codifying existing case law can be found in Article 1466.  According to this provision, which is inspired by previous French case law as well as the common law concept of estoppel, a party who – in knowledge of the facts and without any legitimate excuse – fails to invoke an irregularity of the arbitral process in due course, is prevented from doing so at a later stage.

The new law also contains some important innovations which will surely be subject of abundant commentary.  For instance, Article 1522 contains a significant and substantial change concerning the parties’ ability to waive their right to seek annulment of an award in front of the national courts at the seat of the arbitration.  Article 1522 provides that “the parties may, by specific agreement, waive at any time their right to challenge the award [by way of annulment].”  This new provision will become effective for arbitration agreements entered into after 1 May 2011.

According to the report accompanying the new law, the parties’ waiver under Article 1522 does not affect, however, their right to appeal any decision to enforce the award in France.  The report also explains that Article 1522 was inspired by “existing foreign law.”  Indeed, a few jurisdictions with pro-arbitration statues permit the parties to waive or exclude judicial review of the award by way of annulment proceedings.  For instance, Swiss and Belgian law permit such waivers as long as the parties are foreign, i.e., have no connection to Switzerland/Belgium respectively.  Contrary to Belgian or Swiss law, however, the new French provision grants the right to exclude judicial review in annulment proceedings not only to foreign but also to French parties.

Another notable innovation is contained in Article 1526, which provides that a challenge of the award does not automatically result in suspension of enforcement proceedings.  Rather, according to Article 1526 para. 2, a suspension has to be specifically requested and is granted only if the enforcement would be highly detrimental to the rights of the party requesting the suspension.  The report accompanying the new law notes that the aim of this provision is to discourage bad faith annulment proceedings which seek to delay the enforcement of fully valid and legitimate awards.  Article 1526 will apply to awards rendered after 1 May 2011.

Finally, some changes which are not supposed to introduce any substantive modifications according to the official accompanying report, will nonetheless not go unnoticed.  For instance, one of the grounds for challenging an award has been significantly re-worded.  While Articles 1504/1502-2 previously referred to the fact that the tribunal “has rendered the award without an arbitration agreement or based on an arbitration agreement that was void or expired,” Article 1520-2 instead now allows setting aside of the award if the tribunal “has mistakenly declared itself to have or not to have jurisdiction.”

Without any attempt to draw an exhaustive list, further clarifications or changes in the new law include the fact that (i) international arbitration agreements – contrary to the solution contained in the New York Convention – do not have to meet any particular form requirements (Article 1507); and (ii) the original of the award is no longer required with the petition for seeking exequatur; rather, it is now sufficient to present a copy which fulfils “the conditions required to establish its authenticity” (Article 1515).  The new law also, among other things, re-organizes the legal definition of an arbitration agreement, clarifies the role and powers of the local French court in support for arbitration (the so-called juge d’appui), strengthens the rules on arbitrators’ impartiality and possible challenges, and simplifies remedies available against arbitral awards.

Overall, the new law has been well-received by the arbitration community.  The first reactions described the reform as innovative and trend-setting.  Interestingly, the French newspaper Les Echos has quoted the French Justice Minister, Michel Mercier, as saying that the new law is also aimed at keeping the ICC headquarters in Paris.  Mr. Mercier said that in enacting the new law, “[t]he government had paid particular attention to the situation of the international chamber of commerce.”  He concluded that Paris was the premier place in the world for arbitration and that the new law would ensure that it continued to thrive.

Maxi Scherer

Dr. Maxi Scherer is a Global Hauser Fellow at NYU Law School and Counsel in Wilmer Cutler Pickering Hale and Dorr’s Dispute Resolution team in New York/London.  She is a member of the Paris bar and a solicitor (England and Wales).  She graduated from University of Paris Panthéon-Sorbonne, France, and University of Cologne, Germany, and obtained her PhD at the University of Paris Panthéon-Sorbonne with highest honors.  Maxi Scherer teaches International Arbitration and Litigation, International Private Law, European Civil Procedure and Comparative Law. She is an adjunct professor at SciencesPo Law School Paris, Georgetown CLTS London, University of Melbourne, Pepperdine Law School London and University of Fribourg.