Transnational Notes

On Monday, July 29, 2019, Professor Franco Ferrari, the Director of the Center for Transnational Litigation, Arbitration, and Commercial Law, will start teaching a special course on private international law at the prestigious Hague Academy of International Law. The course is entitled “Forum shopping despite the unification on substantive law” and will examine the reasons why the claims that the unification of substantive law prevents forum shopping is not tenable, a topic which has been the focus of Professor Ferrari’s scholarship for some time.

Founded in 1923, the Hague Academy is a center for research and teaching in public and private international law, with emphasis on further scientific and advanced studies of the legal aspects of international relations. Because the Academy does not have a permanent teaching staff, its scientific body, the Curatorium, invites academics, practitioners, diplomats, and others to give courses in the form of lectures.

The summer courses take place over six weeks, with private international law running during the second three-week session from the end of July until mid-August. The lectures are usually published in the Collected Courses of the Academy of International Law.

Ferrari joins other distinguished NYU Law faculty who have taught courses at the Hague Academy, including Professors José Alvarez, Theodor Meron, Linda Silberman, and the late Professors Thomas Franck and Andreas Lowenfeld.

Montserrat Manzano[1]
Rafael Francisco Alves[2]

In June 2018, the international community celebrated the 60^th anniversary of the adoption of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, known universally as the ‘New York Convention’. At the time of writing, the New York Convention has 159 state parties[3], including each of the developed and developing economies of Latin America. The drafters of the New York Convention intended for such regime to provide for the prima facie recognition and enforcement of foreign arbitral awards, and for the exclusive grounds that rebut this presumption, found in Article V of the Convention, to be construed narrowly by national courts.

New York University’s professor Franco Ferrari posed an interesting question from which we have started this paper: How international should international arbitration be? Should it be as international as possible, subject only to the recognition of the applicable law chosen by the parties? While it is true that Article III of the Convention provides that courts are to enforce awards in accordance with their own rules of procedure, is it imperative that the standards of procedure applied to such an exercise are international, and not domestic? Following Professor Ferrari’s premise and the New York Convention’s purpose, it would be reasonable to expect that procedure would be interpreted autonomously in relation to domestic standards in order to achieve a uniform application of the New York Convention among its signatories.[4]

This text is prepared with our reflections after the Conference on the Application of the New York Convention in Latin America held at New York University School of Law on September 13, 2018. In it, we examine examples of recent Latin American case law and analyze the extent to which those courts apply the Article V(1) New York Convention grounds for refusal of recognition/enforcement in alignment to such autonomous international standards. Our focus in this paper is directed towards the grounds enshrined in Articles V(1)(b) of the Convention, which provides in general terms for the opposition to recognition/enforcement of foreign awards on the grounds of denial of due process.

In undertaking this task, we extracted case law materials from two primary sources: the New York Convention Guide (www.newyorkconvention1958.org) and the ICCA Yearbooks on Commercial Arbitration. A cursory glance at each of these sources will reveal the limited nature of the published case law emanating from Latin America. While there are 20 Latin American signatories of the New York Convention, only 12 have had a decision regarding the application of the New York Convention published in either of the aforementioned sources; and of those 12 states, 7 have had less than five decisions published since ratifying the Convention. Unsurprisingly, the states with the most published decisions are among the most developed economies in Latin America, with the Brazilian courts the most documented by far. With that in mind, we wish to stress that this text does not purport to (i) analyze all of such decisions exhaustively or even (ii) identify definitive trends throughout Latin America as a whole. This text is merely designed to draw tentative conclusions based on what presently exists in the public sources referred to in this paper.

I. The Relationship between Domestic law and the New York Convention

Most international conventions create rights and obligations that primarily benefit and oblige sovereign states directly. The New York Convention, however, has the uncommon characteristic of being designed to apply in domestic fora. National courts apply the Convention and it is for the benefit of private entities that have been subject to a foreign arbitral award. Accordingly, while most international conventions may carry out their effect while being left solely in the realm of international law, it is essential that the New York Convention has some means of translating into the domestic arenas of its signatories.

The implementation of treaties into domestic law is not a uniform exercise across the globe. Commentators commonly dichotomize the various legal systems into ‘monists’ and ‘dualists’. For a legal system to be ‘monist’ means that not all treaties need be implemented into domestic law by a separate piece of domestic legislation for a national court to be able to apply them, they must simply be approved by the state. Such legal systems include, inter alia, those in Mexico, Chile, Colombia, China, France, Germany, the Netherlands and Switzerland. In such states national courts can be expected to apply directly those international conventions that do not require implementation, unless the legislature decides to enact an implementing law in any event. In a ‘dualist’ system, conversely, international law must be positively ‘internalized’ into the domestic system in order for the treaty to have any normative effects in the jurisdiction. Such systems include, inter alia, those in the United Kingdom and nearly all other British Commonwealth states, in addition to most Nordic states. Courts in dualist systems do not apply the treaty directly – they apply the accompanying piece of domestic law that implements it and will only ever use the treaty at most to guide the interpretation of that domestic instrument. The position in Brazil is the subject of substantial debate, as its ratification process of international treaties requires approval by both the Brazilian legislative body and then the President. Recent case law would seem to suggest, however, that Brazil is at least a moderate monist system, if not dualist.[5]

UNCITRAL research reported in 2008 found that the clear majority of signatories viewed the New York Convention as self-executing and therefore directly applicable in their national courts, however for other states implementing legislation was deemed necessary for the Convention to gain force in their jurisdictions.[6] The attitude of Latin American signatories has concurred with the majority, however in accordance with international attitudes reinforced by UNCITRAL, many have nevertheless given effect to the New York Convention by way of enacting domestic legislation. In monist Mexico, for instance, the provisions of the New York Convention are incorporated into the Mexican Commerce Code and accordingly Mexican enforcing courts regularly apply the Commerce Code in lieu of the Convention. In Brazil, the New York Convention was adopted in 2002 by a Legislative Decree[7] followed by a Presidential Decree[8] promulgating the text of the Convention within the Brazilian territory. However, Brazilian judges (particularly the Superior Court of Justice – STJ, the competent court for the exequatur of foreign arbitral awards) continues to apply, in general, Brazilian domestic law on arbitration (Law 9,307/96 – the so-called Brazilian Arbitration Act), which provides for similar grounds for the refusal of exequatur of arbitral awards[9]. Accordingly, even if the STJ still applies the Brazilian Arbitration Act in most cases, it usually follows international standards when granting exequatur to foreign arbitral awards, as will be detailed in this article.

Naturally, in monist and dualist systems there exists differing degrees of attention to the substantive provisions of the New York Convention. However, it should not be forgotten that even in the most dualist systems there remains an irreducible minimum applicability of the New York Convention, and similarly even in the most monist systems domestic norms will be required to supplement the New York Convention’s application. There will always exist lacunae in each law that the other is required to fill. Where implementing legislation is unclear, in accordance with Articles 31-33 of the Vienna Convention on the Law of Treaties (to which all 12 of the aforementioned Latin American states are party, save for Venezuela), courts are to look to the context of the New York Convention and its text as a whole in forming an interpretation. Similarly, where a court applies the New York Convention directly (as the Colombian courts regularly do), we shall see below that ambiguities in the Convention may be resolved by reference to the enforcing court’s most fundamental domestic standards. As Professor Strong summarizes, the Convention does not “operate in isolation” – but it is buttressed by “national arbitration laws, institutional rules, soft law, and persuasive authority”.[10]

II. The Enduring Prevalence of Party Autonomy

Article V(1)(b) of the New York Convention, which like all the Article V(1) grounds may only be submitted by the party opposing recognition/enforcement, provides that the court may refuse to recognize and enforce the award if:

“(b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case”.

The question of whether ‘proper notice’ has been given to the parties under Article V(1)(b) was elucidated in the historic 1977 Mexican enforcement decision in Presse Office S.A. v Centro Editorial Hoy S.A.[11] In that case, an award was issued in favor of Presse Office in an ICC arbitration seated in Paris against Hoy, and Presse Office subsequently sought enforcement before the Mexican courts (Eighteenth Civil Court of First Instance for The Federal District of Mexico). Hoy opposed enforcement under Mexican Public Policy and Article V(1)(b) of the New York Convention, as it submitted that as a principle of Mexican public policy the first notice of summons should be served personally upon a respondent – whereas Hoy served it by mail (postal service) pursuant to the ICC Arbitration Rules. The Court held that the arbitral procedure did not violate the formal requirements detailed in Article 619 of the Code of Civil Procedure and Articles 14 and 16 of the Mexican Constitution. By inserting the arbitral clause into the contract the parties were considered to have autonomously waived the formalities established by Mexican procedural legislation in order to instead be governed by the ICC Arbitration Rules and to French law.

A near identical decision was reached later that same year by the Mexican courts (Tribunal Superior de Justicia, Court of Appeals -fifth chamber- for the Federal District of Mexico), in Malden Mills Inc v Hilaturas Lourdes S.A (1977).[12]  In that case the Court overturned the Civil Court of First Instance, who denied enforcement of the award on the grounds that all notices had been served by mail, in violation of Mexican public policy. Just as in Presse Office, the Court held that the parties had waived Mexican procedural formalities when agreeing to arbitrate (in this case under the rules of the AAA).[13]

The more recent Keytrade (2013)[14] case decided by the Brazilian Superior Court of Justice confirms a party-autonomy-centric approach. In this case the complainant submitted that it had not been duly notified of the arbitration, however the Court held that, under Brazilian law, a party to a foreign arbitration residing or domiciled in Brazil may be notified of the appointment of the arbitrator or the arbitration proceeding in the manner prescribed by the procedural law of the place of arbitration (in this case, England). It held that because the English Arbitration Act does not set requirements for notification other than “by effective means”, the complainant was duly notified[LOB1] , as it appeared from the file that it had in fact received the e-mails sent to it for this purpose. The enforcing court looked to the autonomous will of the parties exercised in the arbitration agreement to determine the rules that govern the arbitral process, just as in the aforementioned Mexican cases.

This party-autonomy-centric approach is consistent with doctrine applied by enforcing courts across the globe, as occurred, for instance,  in Egyptian Concrete Company et al. v. STC Finance et al. (1996),[15] and in Kammergericht (2008).[16] It has the benefit of restricting the application of domestic standards to only those that the parties have autonomously selected when agreeing to arbitrate, and it accordingly engenders a uniform approach to the recognition and enforcement of awards globally – as the drafters of the New York Convention intended. Ultimately, the goal of the Convention is to ensure that one court enforcing a certain award follows the same process as another court enforcing that same award – and the approach described above does precisely that.

III. The Application of International Standards of Due Process

In addition to the above, Article V(1)(b) has a separate sub-ground for the opposition of recognition/enforcement:

“(b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case”.

In effect, this objection is that there was a violation of due process. It was considered by the Supreme Court of Colombia in the Petrotesting (2011) case.[17]

Petrotesting and Ross Energy were members of a consortium working together under an oil exploration and production contract with Empresa Colombia de Petróleos. As part of their relationship, the consortium members entered various agreements to regulate their respective rights and obligations to each other in the performance of the contract. Each of these agreements contained arbitration clauses providing for settlement by the ICDR. These agreements also provided for those disputes to be conducted in English, and seated in Colombia, and that any translation costs would be incurred individually by the parties. Ross Energy defaulted under the agreements due to its financial impecuniosity, and Petrotesting filed a request for arbitration before the ICDR, as per the agreements.

The day before the preliminary hearing, Ross Energy’s representative stated that it would only participate in it if the hearing was held in Spanish, despite the arbitration clause stating that proceedings would be held in English. The parties and tribunal declined, and Ross Energy informed the tribunal and the Claimants that it declined to participate in the hearing because its impecuniosity meant that it was unable to pay for the hearings to be translated. Ross Energy’s representative stated that by insisting on the use of English, Ross Energy’s right to defend itself was denied. Months later, Ross Energy also declined to participate in the hearing on the merits.

By an award of 19 June 2006, a sole arbitrator found in favor of Petrotesting, holding that Ross Energy breached its obligations under the agreements. Petrotesting sought enforcement of the award before the Colombian Supreme Court.

Ross Energy resisted enforcement on several grounds, including “forgery”, “litispendence”, “arbitrability”, “public policy”, “excess of authority”, and in particular, “due process”. Under Article V(1)(b), Ross Energy submitted that because the proceeding had been held in English and because it did not have the financial means to pay for a translation and hire a lawyer to represent it in arbitration in the US, due process had been violated.

The Court explained that as Ross Energy’s impecuniosity and language-barrier complaints are not specifically provided for in Article V(1) of the New York Convention as grounds for refusing enforcement, enforcing courts often decide the question of due process under their legal system’s principles regarding procedure. It should be stressed that the Court considered that the application of its own legal system is strictly limited only to the system’s most “fundamental procedural guarantees”—which includes the notification to the defendant so that he can appropriately present his defense—, and not to its specific rules.[18]

Thus, in determining the standard of due process the court applied the Colombian principle of “the protection of fundamental rights”, which is derived from Article 29 of its Political Constitution. This provides that the minimum guarantees to be protected are, inter alia:

1. the right to access the administration of justice before a natural judge;
2. the right to be informed of the acts that lead to the creation, modification or extinction of a right or to the imposition of an obligation or sanction;
3. the right to express freely and openly one’s opinions;
4. the right to contradict or discuss claims or objections raised;
5. the right to the conclusion of the proceeding within a reasonable time and without unjustified delays; and, of course,
6. the right to submit evidence and discuss the evidence supplied [by the other party].

The Court held that as Ross Energy was duly informed of the commencement of the proceeding, and it was both able to and did present its case (since it both submitted a statement of reply and supplied evidence), Ross Energy was afforded the right to defend itself in the proceeding. It simply did not attend the hearings.

Also, it was held that the language difficulty faced by Ross Energy could not be deemed a violation of due process, because in the exercise of its autonomy the parties agreed in the arbitration agreement that the language to be used would be English and this was the language used to draw up the contracts between the parties. Thus, the Court held that Ross Energy could not claim to have been “surprised by a strange language”.

The Court also held that Ross Energy’s argument that it was economically impossible for it to hire a US lawyer could not be taken into account by the Court, as it was not raised in the arbitration proceeding and that the “cost of an arbitration” has not been deemed “a valid ground not to participate therein”. Ross Energy’s refusal to participate in the proceeding was based at the time solely on the language barrier – it did not mention any issue in hiring a lawyer. Moreover, the court considered that the fact that the parties agreed in their contracts that disputes would be decided by “such a specialised and reputed centre as the ICDR” meant that it could not possibly be accepted that Ross Energy was surprised by the costs of the proceedings. To do so would run contrary to the principles of pacta sunt servanda and of good faith expected between contracting parties.

Following similar reasoning, the Colombian Supreme Court laid down its judgment in the Drummond (2011) enforcement case.[19] In this case the party opposing enforcement of an ICC award rendered in Paris submitted that because it was in liquidation at the time of the arbitration the proceedings should not have been allowed to continue – as the party was unable to present its case. Just as in Petrotesting, the Court stated that the application of Article V(1) of the New York Convention to this question is not specifically provided for, and that the standards of the New York Convention are “imprecise” – so the Court once again applied the “fundamental procedural guarantees” of Colombian law to determine whether there had been a breach of due process. The Court found that the opposing party participated in the arbitration through two representatives, raised defenses and communicated to the tribunal that it was in liquidation; and that therefore “the minimum guarantees that constitute the hard core of due process were complied with”[20] in the arbitration. Further, the Court held that being represented by a liquidator is not a violation of due process.

When reading each of these cases, it is clear that the Colombian court was determined to apply the Article V(1) grounds of the New York Convention exhaustively. In Petrotesting, for instance, the Court explicitly rejected Ross Energy’s opposition on the ground of ‘res judicata’ by stating that “[t]he defence relied on is not included in the exhaustive list of Article V of the Convention. This is sufficient reason not to take it into consideration”. When the Court does consider the application of Article V(1)(b) to a case, since there is no defined “international standard”, this article was analyzed in light of the ‘fundamental procedural guarantees’ of the Colombian legal system. In doing so, it might seem that the Colombian Supreme Court has in Petrotesting and Drummond applied a domestic standard, derived from the Colombian constitution, to its application of the New York Convention grounds for refusal. As we stated earlier, however, while Article V is critical in identifying and safeguarding general principles of procedural law, it does not “operate in isolation”,[21] but rather in order to create a dispute resolution regime that prioritizes justice and consistency. As can be seen from the referred cases, Article V is applied “in tandem with national arbitration laws, institutional rules, soft law, and persuasive authority”.[22] Further, and fundamentally, research conducted by Peter Rutledge has found that the fundamental procedural rules of national constitutions and international due process norms are not mutually exclusive, but rather that the latter norms are derived from the former.[23] Thus, the Colombian Supreme Court’s limitation of its supplementation of the New York Convention to “fundamental procedural guarantees” enshrined in the Colombian constitution means that it, in reality, limited the supplementation to international standards of due process despite technically applying domestic law.

The Argentine Supreme Court of Justice decision in Milantic (2016)[24] approached the interpretation of Article V(1)(b) similarly but cast the interpretation as being supplemented by the “the Argentine international public order” rather than specifically by “fundamental procedural guarantees”. These phrases are evidently not wholly dissimilar, however, as the court stated:

“the validity and application of international conventions is carried out in our country if the resolution being executed (in this case, the award) has been the result of a process where the principles, guarantees, guidelines or canons that are established expressly in our national constitution or that may be undoubtedly derived from its provisions have been complied with”.[25]

Thus, the principle of due process given effect to in Article V(1)(b) of the New York Convention was applied in Milantic by reference to “the Argentine international public order”, which the court defines as consisting of the principles and guarantees enshrined in the Argentine Constitution. Though the Argentine court did not qualify the reference to only Argentina’s most “fundamental” constitutional norms, as the Colombian courts did in Petrotesting and Drummond, the fact that such norms must be derived from the Argentine constitution means that a largely similar approach was followed.

IV. Final reflections

The New York Convention has as its main objective the establishment of a uniform and pro-recognition enforcement regime, which Professor Ferrari asserts requires that arbitration be “as international as possible”, meaning that a nationalistic approach when interpreting the Convention shall generally be avoided, even in respect of those national provisions that transpose the New York Convention into domestic law. This, he notes, is essential so that the different interpreters of the Convention do not reach irreconcilably inconsistent conclusions. Accordingly, under his interpretation countries have a duty to analyze international arbitration by referring to “international standards” rather than domestic ones.

Crucially, however, the New York Convention cannot operate in isolation. Where ambiguities exist in the wording of the Convention, it is right that enforcing courts find solutions in light of not only Articles 31-33 of the Vienna Convention, but also in light of that jurisdiction’s most fundamental procedural guarantees enshrined in its constitution. This is so by virtue of the reality elucidated by Professor Rutledge – that international norms of due process are derived from those same fundamental principles.[26]The cases we have examined specifically regarding ground V(1)(b), the Petrotesting (2011) and Drummond (2011) cases, elucidate this reality. The Colombian Supreme Court contemporarily applied the Convention’s grounds restrictively and exhaustively – and supplemented ambiguities or lacunae in them with the most fundamental procedural principles enshrined in the Colombian Constitution, rather than any specific domestic rules. While Colombian national law was indeed applied by the court to buttress the New York Convention, those fundamental principles that it applied are considered to be the very source from which “international standards” are derived.

So how international should international law be? In our view, Professor Ferrari’s position that international law should be as international as possible holds true, but to resolve ambiguities in the Convention by resorting to domestic fundamental procedural guarantees does not frustrate that ideal. Nor, as we have explained, does applying the law autonomously chosen by the parties.

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[1] Partner of Von Wobeser y Sierra, S.C. The author wishes to acknowledge the assistance of Ana Toimil and Alex Barnes in the preparation of this article.

[2] Partner of L.O. Baptista Advogados Associados. LL.M. New York University (NYU), Class of 2010, Arthur T. Vanderbilt Scholar.

[3] Information available at https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXII-1&chapter=22&lang=en.

[4] Franco Ferrari, ‘How International should International Arbitration be? A Plea in Favour of a Realistic Answer’, 853.

[5] Rafael Alves: https://blogs.law.nyu.edu/transnational/2014/11/the-cisg-has-definitely-entered-into-force-in-brazil/

[6] UNCITRAL Report, 2008 – A/CN.9/656.

[7] Legislative Decree nº 52, 25 April 2002.

[8] Decree nº 4.311, 23 July 2002, available at http://www.planalto.gov.br/ccivil_03/decreto/2002/D4311.htm

[9] Rafael Alves, Jura Novit Arbiter under Brazilian law, in: Iura Novit Curia in International Arbitration, NYU Center for Transnational Litigation, Arbitration and Commercial Law, JurisNet, 2018, p. 50-53.

[10] S. I. Strong, ‘General Principles of Procedural Law and Jus Cogens’, Penn State Law Review (2018), 382-83.

[11] Reported in ICCA as Mexico No. 1 (Yearbook Commercial Arbitration 1979, Volume IV, pp. 301-302), Presse Office S.A. v Centro Editorial Hoy S.A., Tribunal Superior De Justicia, Eighteenth Civil Court of First Instance for The Federal District of Mexico, 24 February 1977.

[12] Reported in ICCA as Mexico No. 2 (Yearbook Commercial Arbitration 1979, Volume IV, pp.302-304), Malden Mills v. Hilaturas Lourdes SA, Tribunal Superior, Court of Appeals (5th Ch.) for the Federal District of Mexico, 1 August 1979.

[13] id. at page 303. The Mexican court stated that: “Even though it is clear that in this case the summons was not made with the formalities established in Arts. 116 and 117 of the Code of Civil Procedure, it is also clear that the parties agreed that any controversy arising from the purchase and sale agreement […] should be resolved through arbitration in the city of New York or Boston, […] in accordance with the existing Rules of the American Arbitration Association or the Arbitration Council […] It should be taken into consideration that, as in this case, if an express contract exists which provides for submission to the Rules of the American Arbitration Association, it results that the summons was made in correct form since the parties waived the formalities established by the Mexican procedural legislation regarding notices, and submitted themselves to the Rules of the American Arbitration Association, which permit notices by mail, and the lower court judge was not just in considering that the defendant should have been summoned in a different manner.”

[14] Reported in ICCA as Brazil No. 34, (Yearbook Commercial Arbitration 2014, Volume XXXIX, .364-366) Keytrade AG v. Ferticitrus Indústria e Comércio de Fertilizantes Ltda) Superior Tribunal de Justiça, 7 August 2013, SEC no. 4024.

[15] Egyptian Concrete Company & Hashem Ali Maher v. STC Finance & Ismail Ibrahim Mahmoud Thabet & Sabishi Trading and Contracting Company, Court of Cassation, Egypt, 27 March 1996, 2660/59.

[16] Kammergericht [KG], Berlin, Germany, 17 April 2008, 20 Sch 02/08.

[17] Reported in ICCA as Colombia No. 7 (Yearbook Commercial Arbitration 2012, Volume XXXVII, p.200-204) Petrotesting Colombia S.A. et al. v. Ross Energy S.A., Supreme Court of Justice of Colombia, 11001-0203-000-2007-01956-00, 27 July 2011.

[18] Petrotesting Colombia S.A., Southeast Investment Corporation v. Ross Energy S.A.S. / 11001-02-03-000-2012-02952-00, page 54. The Court stated: “As the standards of the New York Convention are vague and imprecise in respect of these issues, courts seized with an exequatur procedure have opted in several cases, when deciding on the recognition or enforcement of awards, for carrying out this scrutiny in the light of the procedural principles of their country, without applying specific rules but rather fundamental procedural guarantees. In the United States of North America, for example, this question was highlighted in the famous case ‘Parsons & Whittemore v. Rakta, US no. 7”.

[19] Reported in ICCA as Colombia No. 8 (Yearbook Commercial Arbitration 2012, Volume XXXVII, p.205-209), Drummond Ltd. v. Instituto Nacional de Concesiones – INCO et al., Corte Suprema de Justicia, Civil Cassation Chamber, 19 December 2011.

[20] Empresa Colombiana de Vias Ferreas Ferrovias (Colombia) v Drummond Ltd (US) / 11001-03-26-000-2003-00034-01(25261), page 42.

[21] see supra note 6.

[22] S. I. Strong, ‘General Principles of Procedural Law and Jus Cogens’, Penn State Law Review (2018), 382-83

[23] Peter B. Rutledge, Arbitration and the Constitution, 145-59 (2013).

[24] Corte Suprema de Justicia, 30 March 2016, causa A. 69.572 (Milantic Trans S.A. v. Ministerio de la Producción (Astilleros Río Santiago y otro)); not in the ICCA yearbook but full judgment accessible at: http://public.diariojudicial.com/documentos/000/067/912/000067912.pdf.

[25] id. at page 43

[26] see supra note 10.

One of the goals of the Center is capacity building in the areas on which the Center focuses. Over the years, the Center has hosted many capacity building events around the globe. From 10 to 14 June 2019, the Center, together with the Thailand Arbitration Center, once again hosted such an event, this one aimed at practitioners and government lawyers operating in Thailand and surrounding countries. The speakers included Professor Franco Ferrari, the Center’s Director, Dr. Friedrich Rosenfeld, a Global Adjunct Professor at NYU Law in Paris, as well as Mr. Darius Chan, a graduate NYU and Of Counsel with Norton Rose Fulbright (Asia) LLP.

On 10 June 2019, Professor Franco Ferrari, the Center’s director, and Dr. Friedrich Rosenfeld, currently a Global Adjunct Professor at NYU Law in Paris, a visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius Law School in Hamburg, will speak at a seminar entitled “Inherent Powers of Arbitrators” held in Seoul. The seminar, organized by the Center together with KCAB, will explore a fundamental question that commonly arises during international arbitrations: what are the boundaries of the powers of arbitrators? Are these powers limited to those explicitly provided for in the relevant laws or rules, or should there be some margin of flexibility, so that arbitrators may invoke powers which can be deduced from the characteristics and goals of their function? For the conference flyer, please click here.

Professor Franco Ferrari, the Center’s Director, has just edited the new issue of the European International Arbitration Review (“EIAR”). The EIAR is a law review that publishes monothematic issues, since Professor Ferrari took over as its editor-in-chief in 2016. The latest issue, EIAR 7.2, is dedicated to “Soft Law in International Arbitration”. Apart from contributions by Prof. José E. Alvarez (NYU) and Prof. Franco Ferrari himself, the issue features papers by authors who are all linked to NYU and the Center, more specifically, Prof. Gary Bell (a former scholar-in-residence at the Center), Mr. Ian Ming Choo (‘18), Prof. Giuditta Cordero-Moss (a former scholar-in-residence at the Center), Prof. Diego Fernandez Arroyo (a former Global Professor of Law at NYU Paris and a two-time scholar-in-residence at the Center), Prof. Caroline Kleiner (who will join the Center as scholar-in-residence), Dr. Friedrich Rosenfeld (a Global Adjunct Professor of Law at NYU Paris, who will join NYU next year as visiting professor), and Prof. Marco Torsello (a Global Professor of Law at NYU Paris and two-time visiting professor at NYU). The table of contents of issue 7.2. can be found here.

Professor Franco Ferrari, the Center’s Director, has just published a paper in the Oslo Law Review. The paper addresses the contentious relationship between uniform substantive law conventions and private international law rules in relation to contracts of carriage. In the paper, Professor Ferrari discusses why resort to private international law has to give way to the application of uniform substantive law conventions. The paper, which was presented at a  conference that took place in Oslo in May 2018, as well as other papers presented at the conference (convened by Professor Giuditta Cordero-Moss, a former scholar-in-residence at the Center) can be found here.

U.S. domestic arbitration changed its tradition of non-neutral party-appointed arbitrators. 2004 AAA/ABA Code of Ethics for Arbitrators in Commercial Disputes (the 2004 AAA/ABA Code) [1] was a symbolic step toward the international standards which typically require impartial party-appointed arbitrators. Unfortunately, the Second Circuit’s decision, Certain Underwriting Members of Lloyds of London v. Florida, 892 F.3d 501, 510 (2d Cir. 2018), turned to the opposite direction—though in a dictum—when it stated that “[e]xpecting . . . the same level of institutional impartiality applicable to neutrals [of party-appointed arbitrators] would impair the process of self-governing dispute resolution.” The court did not even sufficiently refer to the revised impartiality standards under the 2004 AAA/ABA Code. [2] This old-fashioned approach calls for criticism. [3]U.S. federal courts must neither downplay key guidelines, including ethical rules, nor create confusion in determining “evident partiality” under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2) (2012).

Facts of the Dispute                                                                           

Insurance Company of the Americas (ICA) purchased two reinsurance treaties from certain underwriters of Lloyd’s of London (the Underwriters). Each treaty contains an arbitration clause providing that “[o]ne Arbiter shall be chosen by the Reinsured [ICA], the other by the Reinsurer [the Underwriter], and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd’s London Underwriters.” [4] ICA requested coverage from the Underwriters under the treaties, but the Underwriters declined ICA’s claim. In December 2014, ICA demanded arbitration against the Underwriters. Pursuant to the arbitration clause, ICA appointed Alex Campos as its designated arbitrator. At an organizational meeting among the umpire and two party-appointed arbitrators on May 11, 2015, Campos disclaimed any appreciable link to ICA. [5] On October 19, 2015, the arbitration panel issued an award granting ICA’s claim in its entirety.

Campos did not make additional disclosures during the arbitration. However, there were undisclosed dealings between ICA and a human resources firm named Vensure Employee Services (Vensure) of which Campos was the president and CEO. Specifically, ICA and Vensure operated out of the same suite in a business park in Mesa, Arizona. A former director of ICA, John Iorillo, was the CFO of a firm that provided consulting services to Vensure. A director of ICA, Ricardo Rios, was hired as the CFO of Vensure in the summer of 2015. Rios testified as a witness at the arbitration, and Iorillo’s name was mentioned repeatedly.

The Underwriters moved to vacate the award in the District Court for the Southern District of New York. The court granted the motion to vacate on the ground that Campos’s conduct demonstrated evident partiality, rejecting ICA’s contention that evident partiality standards either do not apply or are even more relaxed in the case of party-appointed arbitrators in tripartite industry arbitrations.

Sister Circuit Decisions and the Development of Impartiality Standards

On appeal, the Second Circuit declared that the FAA imposes a heightened burden of proving evident partiality in cases in which the allegedly biased arbitrator was party-appointed. After making a questionable general remark that “party-appointed arbitrators . . . are expected to serve as de facto advocates,” the Second Circuit noted that other sister circuits “distinguish between party-appointed and neutral arbitrators in considering evident partiality,” and “this distinction is salient in the reinsurance industry, where an arbitrator’s professional acuity is valued over stringent impartiality.” [6]

Since the Lloyds court cited sister circuit cases involving two non-reinsurance arbitrations, [7] the court is possibly of the view that the distinction between party-appointed and neutral arbitrators in considering evident partiality has broad application beyond the reinsurance industry. Both cases, however, do not support this distinction. This is especially true of the Eleventh Circuit’s decision, Sunkist Soft Drinks, which is even outdated. First, a former version of AAA rules bound the parties in Sunkist Soft Drinks, and the court referred to the Canon VII of the 1977 AAA/ABA Code. [8] Second, the AAA Commercial Arbitration Rules changed the presumption of party-appointed arbitrators’ neutrality in 2003. [9] Third, Canon IX of the revised 2004 AAA/ABA Code stipulates that “all three arbitrators are presumed to be neutral and are expected to observe the same standards as the third arbitrator.” [10] In view of all these differences, under the current rules, it is unlikely that the Eleventh Circuit will maintain its logic in Sunkist Soft Drinks regarding the distinction. Thus, Sunkist Soft Drinks is not a good authority to support the Second Circuit’s contention. [11]

Does the Qualification Clause of Three Disinterested Arbitrators Expect a Non-Neutral Party-Appointed Arbitrator?

The Second Circuit introduced a view that “[p]arties are free to choose for themselves to what lengths they will go in quest of impartiality [of arbitrators].” [12] This view dominates in the U.S. [13] Since ICA and the Underwriters did not agree on rules that apply to the matter of impartiality, [14] the key issue of the Lloyds case should have been whether the parties still intended to appoint non-neutral party-appointed arbitrators despite agreeing to a contractual qualification clause directing the appointment of three disinterested arbitrators. The Lloyds court, however, did not address this issue properly in two ways. First, as mentioned, the court attempted to base its conclusion on the historical notion of non-neutral party-appointed arbitrators, misapplying the sister circuit decisions. Second, the court did not fully articulate the meaning of disinterestedness.

As to the latter, the Second Circuit could have made a better effort to clarify the decision. In interpreting the agreement between the litigants, the Lloyds court referred to Paragraph 2.3 of ARIAS-U.S. Practical Guide to Reinsurance Arbitration Procedure (ARIAS-U.S. Practical Guide) (2004) with a focus on a portion that states “[t]he parties and Panel should interpret arbitration clauses requiring ‘disinterested’ arbitrators to mean that arbitrators may have no financial interest in the arbitration outcome and are not under any party’s control.” [15] The court, however, did not cite further parts of the Guide. To tackle the key issue, the court could have referred to Comment A on Paragraph 2.3 of the Guide which presumed that “[a]bsent specific contractual language to the contrary, it is generally understood in the industry that party-appointed arbitrators can be initially predisposed,” since this portion supports the court’s conclusion in the context of U.S.-seated arbitrations in the reinsurance industry. Certainly, as this presumption contradicts the position of the 2004 AAA/ABA Code, one expects the court to explain that referring to industry specific guidelines [16] is more proper than referring to the 2004 AAA/ABA Code. [17] In the Lloyds decision, however, an analysis of the relationship between ARIAS-U.S. Practical Guide and the 2004 AAA/ABA Code is missing. This makes the basis of the Second Circuit’s decision less stable. [18]

Prospects and Takeaways

In its 1984 Morelite decision, the Second Circuit took the standard of whether “a reasonable person would have to conclude that the arbitrator [is] partial.”  [19] The Lloyds court, however, did not apply the Morelite standard to party-appointed arbitrators’ evident partiality. Instead, the court required heightened burden of proof. [20] While the court remanded the case, it did not articulate how the standard was heightened. The court “decline[d] to catalogue all ‘material relationship[s]’ that may bear upon the service of a party-appointed arbitrator,” and enunciated only two “baseline limits” to which a party-appointed arbitrator is subject—disinterestedness and prejudicial impact on the award. [21]Thus, even if parties agreed on party-appointed arbitrators’ non-neutrality, one cannot accurately predict how the Second Circuit will decide evident partiality in future cases.

Conversely, the following two observations are relatively definite. First, it is unlikely that the Lloyds court’s reasoning for characterizing party-appointed arbitrators’ evident partiality standards will extend to non-reinsurance industry arbitrations. Second, courts will not look to the Lloyds decision in determining the matter of arbitrators’ impartiality when parties agree on rules that govern the matter, e.g., the international or domestic arbitration rules of ICC, LCIA, AAA (including ICDR), JAMS, and CPR. [22]

In a broader context, the evident partiality standards involve greater uncertainty. As the U.S. Supreme Court has neither tackled evident partiality since Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 147–50 (1968) nor settled the standards for evident partiality, the federal circuits vary on this issue. [23] The Lloyds decision addressed evident partiality standards based on both statutory interpretation (by referring to the historical notion of non-neutral party-appointed arbitrators and sister circuit decisions) and contractual interpretation (by introducing the view that parties can waive arbitrator’s impartiality to some extent [24]). This structure of the decision prompts questions on what legal sources and standards must be considered in determining evident partiality, whether the parties intended to waive impartiality, and how these standards must be applied. As the Second Circuit took into account ARIAS-U.S. Practical Guide in interpreting an agreement, it is worth studying why courts refer to such guidelines despite their non-binding status [25] and examining how agreeing on arbitrators’ partiality deviates from multiple norms. [26]

Kei Kajiwara

Kei Kajiwara is an LLM Candidate, Hauser Global Scholar and Starr Foundation Global Law School Scholar in the International Business Regulation, Litigation and Arbitration Program at NYU School of Law. He earned his JD cum laude in 2012 from the University of Tokyo School of Law, after which he practiced law in the dispute resolution group of Nagashima Ohno & Tsunematsu in Tokyo.

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[1] The 2004 AAA/ABA Code “establishes a presumption of neutrality for all arbitrators, including party-appointed arbitrators.” The 2004 AAA/ABA Code, Note on Neutrality. The 1977 AAA/ABA Code of Ethics for Arbitrators in Commercial Disputes (the “1977 AAA/ABA Code”), the former version of the 2004 AAA/ABA Code, provided that “party-appointed arbitrators should be considered nonneutrals unless both parties inform the arbitrators that all three arbitrators are to be neutral or unless the contract, the applicable arbitration rules, or any governing law requires that all three arbitrators be neutral.” The 1977 AAA/ABA Code, Canon VII, Introductory Note, X Y.B. Comm. Arb. 131.

[2] The Second Circuit noted disclosure requirements of the 2004 AAA/ABA Code. See 892 F.3d at 506 n. 2. The court, however, did not refer to the 2004 AAA/ABA Code in explaining why it took a different standard from its 1984 decision as to party-appointed arbitrators. See infra note 19.

[3] For one of the first critical analyses of this case, see John Fellas, Evident Partiality and the Party-Appointed Arbitrator, N.Y.L.J., June 28, 2018, available at https://files.hugheshubbard.com/files/Evident-Partiality-and-the-Party-Appointed-Arbitrator.pdf.

[4] Certain Underwriting Members at Lloyd’s of London v. Ins. Co. of Am., 2017 WL 5508781, at 3 (S.D.N.Y. Mar. 31, 2017) (emphasis added).

[5] At the organizational meeting, a participant mentioned “the ARIAS rules.” 2017 WL 5508781, at 10. This does not mean that the ARIAS rules or guidelines were applicable. In fact, both Lloyds courts (the district court and the Second Circuit) did not apply any of them to the case.

[6] 892 F.3d at 508, 509.

[7] Winfrey v. Simmons Foods, Inc., 495 F.3d 549, 552 (8th Cir. 2007); Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 759 (11th Cir. 1993).

[8] See supra note 1.

[9] See R-12(b) of the Jan. 1, 2003 amended version and R-12 (b) of the July 1, 2003 amended version, https://www.adr.org/ArchiveRules (last visited Mar. 3, 2019).

[10] According to the district court in Lloyds, ICA purchased insurance treaties “[b]eginning in December 31, 2004” after the 2004 AAA/ABA Code became effective. See 2017 WL 5508781, at 1.

[11] In Winfrey, the other non-reinsurance case, “the parties signed an addendum to the contract that also contains no neutrality requirement for the party-appointed arbitrators.” The Winfrey court further noted that “it is industry custom that party arbitrators are frequently not required or expected to be neutral for ruling on disputes.” 495 F.3d at 552 (involving poultry growers and a food company as disputing parties). Considering both parties’ agreement in the case and the specific industry custom, Winfrey does not support the Lloyds decision’s reasoning either.

[12] See 892 F.3d at 508 (citing Sphere Drake Ins. v. All American Life Ins., 307 F.3d 617, 620 (7th Cir. 2002)).

[13] Institutional rules support this position. See, e.g., 2013 AAA Commercial Arbitration Rules, Rule 13(b); the 2004 AAA/ABA Code, Note on Neutrality, Canon IX. For comments on this position’s rationale and other treatments in foreign jurisdictions, see Gary B. Born, International Commercial Arbitration 1805–07, 1815–18 (2d ed. 2014).

[14] In addition to 2013 AAA Commercial Arbitration Rules and the 2004 AAA/ABA Code, see, e.g., ICDR International Arbitration Rules, Article 13(1) (2014); ICC Arbitration Rules, Article 11(1) (2017); LCIA Arbitration Rules, Article 5.3 (2014); CPR Rules for Administered International Disputes, Rule 7.1 (2019); JAMS Comprehensive Arbitration Rules and Procedures, Rule 7(c) (2014); CPR Administered Arbitration Rules, Rule 7.1 (2019); and ARIAS-U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes, Rules 2.3, 2.4, and 6.1 (2014).

[15] The Lloyds court cites Trustmark Ins. Co. v. John Hancock Life Ins. Co., 631 F.3d 869, 872–73 (7th Cir. 2011), in which the Seventh Circuit also referred to Paragraph 2.3 of ARIAS-U.S. Practical Guide to support its contractual interpretation. See 892 F.3d at 510.

[16] Considering developments after the Lloyds case as well, currently, industry-specific guidelines that support the Lloyds court’s conclusion include ARIAS-U.S. Code of Conduct, Canon II, Comments (2017) (stating that “party-appointed arbitrators may be initially predisposed toward the position of the party who appointed them (unless prohibited by the contract)”); and ARIAS-U.S. Neutral Selection Procedure (intending to “minimize the level of perceived bias inherent in utilizing party-appointed arbitrators”), https://www.arias-us.org/arias-us-dispute-resolution-process/practical-guide/neutral-selection/ (last visited Mar. 3, 2019).

[17] In this regard, Barry R. Ostrager & Mary Kay Vyskocil, Modern Reinsurance Law and Practice 538 (3d ed. 2014), one of the most influential authorities, concludes that, in the reinsurance industry, despite the 2004 AAA/ABA Code, party-appointed arbitrators are not required to be completely neutral (i.e., they can be predisposed to the positions of the parties who appointed them) unless otherwise agreed. A possible explanation for this view is that industry-specific guidelines are more tailored to parties’ specific situation. Ostrager & Vyskocil, however, refers to Comment to Canon 1 of the 2004 AAA/ABA Code on this point. See id. The Comment itself does not directly support their view, since the Comment only allows arbitrators to have views on certain general issues. That arbitrators have views on certain general issues does not mean they can be predisposed. The 2004 AAA/ABA Code prohibits party-appointed arbitrators to be predisposed unless they are excused by Canon X. See the 2004 AAA/ABA Code, Canon IX B.

[18] In Lloyds, as Fellas supra note 3, at 1 pointed out, the litigants might not have emphasized the 2004 AAA/ABA Code. Even in the insurance industry, some courts take into account the 2004 AAA/ABA Code. Borst v. Allstate Ins. Co., 291 Wis. 2d 361, 375 (2006), held, in a dictum, that the court “adopt[s] a presumption of impartiality among all arbitrators, whether named by the parties or not” under a state statute, explaining that its view is in line with the 2004 AAA/ABA Code.

[19] Morelite Const. Corp. v. New York City Dist. Council Carpenters Ben. Funds, 748 F.2d 79, 84 (2d Cir. 1984).

[20] The Second Circuit noted that “the district court’s sound findings on Campos’s improprieties are substantial under the traditional Morelite test.” 892 F.3d at 509.

[21] See 892 F.3d at 510–11. The Lloyds court explains that “disinterestedness” would be breached if the party-appointed arbitrator had a financial or personal interest in the outcome. This statement is based on a minimum consensus of disinterestedness according to ARIAS-U.S. Practical Guide, Paragraph 2.3. “Prejudicial impact on the award” is a signpost that, according to the Eighth Circuit, leads to a vacatur even in a case in which parties’ agreement authorized the selection of a party-appointed arbitrator who is “an officer, employee or shareholder of, attorney or auditor to, or otherwise interested in, either of the Parties or the matter to be arbitrated.” Delta Mine Holding v. AFC Coal Properties, 280 F.3d 815, 817, 821–22 (8th Cir. 2001).

[22] See supra note 14. Parties may also agree that guidelines, such as the 2004 AAA/ABA Code and ARIAS-U.S. Practical Guide, govern the matter. In a hypothetical scenario in which parties submit their case to AAA under 2013 AAA Commercial Arbitration Rules while they agree on ARIAS-U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes or ARIAS-U.S. Practical Guide, one might question whether there is a specific agreement regarding party-appointed arbitrators’ non-neutrality that overrides the AAA rules’ neutrality presumption. Especially, if a party raises an objection under Rule 18(c) to a party-appointed arbitrator’s qualification during such proceedings, it is hard to imagine that AAA disregards its own rules’ neutrality presumption under Rule 18(a) or Cannon IX of the 2004 AAA/ABA Code in ruling on the objection.

[23] See Born supra note 13, at 1768.

[24] See supra note 12.

[25] A plurality in Commonwealth Coatings Corp., 393 U.S. at 149, described non-governing AAA’s rules regarding arbitrators’ qualification and disclosure as “highly significant.” Referring to this plurality opinion, some courts look to the 2004 AAA/ABA Code in formulating an evident partiality standard that applies to a case. See, e.g., New Regency Prods., Inc. v. Nippon Herald Films, Inc., 501 F.3d 1101, 1109–10 (9th Cir. 2007); Positive Software Solutions, Inc. v. New Century Mortg. Corp., 436 F.3d 495, 503 (5th Cir. 2006), rev’d en banc, 476 F.3d 278 (5th Cir. 2007). These decisions appear to think that the 2004 AAA/ABA Code is relevant to statutory interpretation of the §10(a)(2) of the FAA as opposed to contractual interpretation.

[26] In the context of international arbitration, commentators discuss various legal instruments. One of them relates to arbitrators’ inherent powers, which may include “those necessary to ensure independent and impartial adjudication.” See Andrea K. Bjorklund & Jonathan Brosseau, Sources of Inherent Powers, in Inherent Powers of Arbitrators 1, 3 (Franco Ferrari & Friedrich Rosenfeld eds., 2018). Another publication comments on ethical rules, namely, the New York Rules of Professional Conduct and the 2004 AAA/ABA Code, in studying issues related to parties’ advance waivers of potential conflicts of interest, including standards of impartiality. See International Commercial Disputes Committee (Joseph E. Neuhaus, Chair), Advance Waivers of Arbitrator Conflicts of Interest in International Commercial Arbitrations Seated in New York, 27 Am. Rev. Int’l Arb. 21, 27–28, 34–35 (2016).

On 16 March 2019, the Center for Transnational Litigation, Arbitration, and Commercial Law alongside NYU’s International Arbitration Association will host the 8th Annual NYU Vis Practice Moot.

The 8th Annual Vis Practice Moot will welcome 12 teams from selected law schools from the United States and Europe as well as many distinguished professionals and academics, who agreed to act as arbitrators, including Professor Franco Ferrari, the Center’s Director.

The Practice Moot rounds aim to provide a helpful forum for the Willem C. Vis International Commercial Arbitration Moot participants to practice their oral advocacy skills by pleading before, and receiving constructive feedback from, panels of experienced arbitrators from all around the world. The Practice Moot also enables the participating teams to meet and have a chance to plead against each other before the rounds in Hong Kong and Vienna, where more than 3000 students from about 370 law schools from around the world will compete.

The Center will once again host Italian Supreme Court Justice Francesco Cortesi, a two-time scholar-in-residence at the Center, for this coming week. Justice Cortesi, who graduated in 1994 cum laude from Bologna University School of Law, and specialized in international commercial law at Tilburg University School of Law (Netherlands) under the supervision of Professor Franco Ferrari, the Center’s Director’s who at the time was professor at Tilburg University, was appointed Judge at Court of Bologna in 1999. In 2001, he was assigned to the Court of Rimini, where he mainly dealt with disputes regarding contracts, consumer law issues and professional malpractice torts. In 2007, he moved to the Court of Forlì, where he was able to focus on those very same areas of law. During his tenure there, he also rendered some of the most relevant decisions concerning the United Nations Convention on Contracts for the International Sales of Goods, many of which have been translated into various languages, including English. In 2006, Justice Cortesi was appointed to the Government Committee for the revision of the Italian Civil Code. In January 2016, Justice Cortesi was appointed to the Italian Supreme Court, thus becoming one of the two youngest justices ever appointed to the Italian Supreme Court. Over the years, Justice Cortesi has been lecturing at the Bologna University School of Law mainly on “Commerce and the law of consumers” and “Methodology of law”.

On 21 February 2019, Professor Franco Ferrari, the Director of the Center, and Dr. Friedrich Rosenfeld, a former scholar-in-residence at the Center, currently a Global Adjunct Professor at NYU Law in Paris, a visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius Law School in Hamburg, will speak at a conference entitled “How international should international arbitration be? International standards v. domestic law in international commercial arbitration”. The event, which is co-sponsored by the Singapore International Arbitration Centre, will be hosted by Norton Rose Fulbright (Asia) LLP. For the event’s flyer, please click here.

On Monday, February 25, 2019, the Center for Transnational Litigation, Arbitration, and Commercial Law will host the February session of the Center’s Forum entitled “The Draft Hague Convention on the Recognition and Enforcement of Judgments: Light at the End of the Tunnel?”. The event, which will take place at NYU School of Law’s Furman Hall, 245 Sullivan St., Lester Pollack Colloquium Room, 9^th floor, from 6:00-8:00 pm, and will be moderated by Professor Linda Silberman, the Charles D. Ashley Professor of Law at New York University and the Co-director of the Center.

The event will be an opportunity to discuss the Hague Conference’s proposal for a world-wide Judgment Convention (the latest version of which you can find here).

On the occasion of this session, Professor Ronald Brand and Mr. David Goddard will comment on the Hague Conference’s proposal. Their comments will be based on their papers, which you may download by clicking here and here.

Ronald A. Brand is the Chancellor Mark A. Nordenberg University Professor of Law, John E. Murray Faculty Scholar, and Academic Director of the Center for International Legal Education at the University of Pittsburgh School of Law.  He has taught and lectured in many countries, and in 2011 delivered a special course on private international law at the Hague Academy of International Law.  He is a former Fulbright Scholar in Belgium, a former Fellow of the Institute of Advanced Studies at the University of Bologna, a recipient of the ABA Section on International Law’s Leonard A. Theberge Award in Private International Law, and a recipient of a Dr. Jur. honoris causa from the University of Augsburg.  Brand was a member of the U.S. Delegation to the Special Commissions and Diplomatic Conference of The Hague Conference on Private International Law that concluded the 2005 Convention on Choice of Court Agreements, and has been a member of the U.S. Delegation to the Hague Conference Special Commission on Judgments, which is preparing a Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters.

David Goddard is one of New Zealand’s leading barristers. He specializes in appellate advocacy, appearing frequently before the Court of Appeal and the Supreme Court. His more than 30 appearances in the Supreme Court include major public law and Treaty of Waitangi cases, in many of which he was counsel for the New Zealand Government. He also acts as an arbitrator in commercial disputes. In 2011, he was appointed as a member of the Commonwealth Secretariat Arbitral Tribunal. He is currently the Acting President of that Tribunal. David has an extensive involvement in law reform in New Zealand and overseas. He advises ministers and government agencies on a wide range of policy issues. He has represented New Zealand in bilateral and multilateral negotiations. He has drafted legislation and treaties in a number of fields including company law, contract law, private international law, and regulation of cross-border commercial activity. He was chair of the HCCH Judgments Project Special Commission that prepared the 2018 Draft Convention to be discussed on the occasion of the February session of the Forum. He was a drafting committee member and Vice-President of the Diplomatic Conference that adopted the Choice of Court Convention in 2003. He was one of the architects of the trans-Tasman regime for service of court proceedings and enforcement of judgments, which came into force in 2013. David is spending the 2018/2019 academic year at the NYU Hauser Law School as a Senior Global Fellow from Practice and Government.

Linda Silberman is the Charles D. Ashley Professor of Law at New York University and the Co-director of NYU’s Center for Transnational Litigation, Arbitration, and Commercial Law. Professor Silberman also holds an Honorary Professorship at Queen Mary University of London in the Centre for Commercial Law Studies.  She is a member of the U.S. Department of State Advisory Committee on Private International Law and has served on numerous U.S. State Department delegations to the Hague Conference. Professor Silberman has served as an Adviser on four different projects of the American Law Institute (ALI): the Restatement Third of the US Law on International Commercial Arbitration, the Restatement Fourth of the Foreign Relations Law of the United States, the Restatement Third on Conflict of Laws, and Intellectual Property : Principles Governing Jurisdiction, Choice of Law and Judgments in Transnational Disputes. Previously, she was co-reporter for the ALI’s Project on Recognition and Enforcement of Foreign Judgments: Analysis and Proposed Federal Statute. Professor Silberman teaches and writes in the areas of Civil Procedure, Conflict of Laws, Comparative Procedure, International Litigation, International Arbitration, and International Child Abduction. She is the 2018 recipient of the “Leonard J. Theberge Award for Private International Law” from the ABA Section on International Law.  Professor Silberman has been invited to give the general course on Private International Law at the Hague Academy of International Law in 2020.

On Monday, 18 February 2019, Professor Ferrari, the Center’s Director, will speak on “Economic Hardship under the CISG: A Hard Issue”. The talk, co-sponsored by the Center, the City University of Hong Kong, and the Hong Kong Commercial and Maritime Law Centre, will focus on how the economic crisis has affected long-term international sales agreements. Plummeting prices led to importers wanting to get out of these long-term agreements. Professor Ferrari’s talk will address the issue of whether the United Nations Convention on Contracts for the International Sale of Goods deals with economic hardship and what consequences the answer to this question triggers. For the event flyer, please click here.

I. Background

Historically, arbitration has been regarded as a flexible, efficient and cost-effective means to resolve international disputes.[1] However, the White & Case and Queen Mary University of London 2018 International Arbitration Survey concluded that high cost and lack of speed now rank as the first and fourth worst characteristics, respectively, of international arbitration. [2] Thus, while international arbitration was once renowned for swift proceedings at low costs, which made arbitration the most viable alternative to litigation before state courts, these features have now become arbitration’s main disadvantages. [3]

Improving the evidence taking and procedure control of international arbitration will be crucial to increase its efficiency. Traditionally, the IBA Rules on the Taking of Evidence in International Arbitration (the “IBA Rules”) [4] have gained wide acceptance within the international arbitration community as a mechanism to bridge the gap between the common law and civil law traditions of taking evidence. Nonetheless, a rival to the IBA rules has recently arisen in the form of the Rules on the Efficient Conduct of Proceedings in International Arbitration (the “Prague Rules”) [5], which has incited much controversy.

The working group of the Prague Rules has criticized the fact that the IBA Rules are still closer to common law traditions for taking evidence and follow a more adversarial approach regarding document production, fact witnesses, party-appointed experts and cross-examination, which causes inefficiency. The Prague Rules intend to create an inquisitorial model of procedure and facilitate more active role of arbitral tribunals to increase the efficiency of international arbitration. [6] Furthermore, they provide alternative techniques to enhance efficiency and embrace flexibility, while bestowing arbitrators with strong case management powers to heal due process paranoia. [7] However, some practitioners argue that the causes of inefficiency do not arise from common law features, but rather from the lack of robust case management. Therefore, the active role of arbitral tribunals in the Prague Rules is unlikely to increase the speed or decrease the cost of arbitration, and will, most likely, result in a lower quality of arbitral awards. [8]

“The Prague Rules are the newcomers in arbitration; and they entered the ballroom with noise.”[9] Before coming to any premature conclusion on the influence of the Prague Rules on the usage of the IBA Rules and international arbitration practice, it will be necessary to identify where precisely the rules differ.

II. The Major Comparisons between the Prague Rules and the IBA Rules

Article 2 of the Prague Rules specifies that the arbitral tribunal’s role in case management conferences will be more proactive. Its responsibilities will include clarifying with the parties disputed and undisputed facts, the legal grounds, and the burden of proof, and sharing preliminary views with the parties.By contrast, the consultation process in article 2 of the IBA Rules focuses more on evidentiary matters, including witness statements, expert reports, oral testimony and the production of documents. Article 2 of the IBA Rules also emphasizes the importance of efficiency and encourages the arbitral tribunal to identify any issues that it considers relevant to the case and material to the outcome.[10]

Regarding documentary evidence, article 3 and article 4 of the Prague Rules set up the default rule that the arbitral tribunal has the power to request parties to produce documentary evidence, and the extensive production of documents should be avoided, including any form of e-discovery. [11] Still, the articles reserve any party’s right to request arbitral tribunals to order another party to produce specific documents. However, the article 3 of the IBA Rules specifies that any party may submit a request to produce directly to the other party and the arbitral tribunal. If the other party has an objection, the arbitral tribunal has the final say to resolve that dispute. Article 3.10 of the IBA rules also gives arbitral tribunals the power to request parties to produce documents.

With respect to fact witnesses, article 5 of the Prague Rules states that arbitral tribunal has the power to decide which witness is to be called for examination, and it may decide not to call the witness for examination if it considers the testimony of the witness to be unnecessary for the resolution of the dispute, or if the witness statement has already been submitted. Article 5 also does not stipulate an unconditional cross-examination approach for fact witnesses. Instead, the examination is subject to the direction of the arbitral tribunal. On the contrary, article 4 of the IBA rules requires the fact witness to appear for testimony at the evidence hearing. Otherwise, such witness’s statement shall be the disregard if such witness has no valid reason for absence.

For experts, article 6 of the Prague Rules formulates the default rule that arbitral tribunal will first appoint the expert, but the appointment will not preclude a party from submitting reports by its own appointed expert. Without mentioning the priority, Article 5 and article 6 of the IBA Rules state that both party-appointed experts and tribunal-appointed experts are permissible. [12]

Article 7 of the Prague Rules contains a noteworthy principle called Iura novit curia, which allows the arbitral tribunal to apply legal provisions not pleaded by the parties if it finds it necessary, including but not limited to public policy rules. In so doing, the arbitral tribunal shall seek the parties’ views on the legal provisions it intends to apply. The IBA Rules do not have any such principle.

Regarding hearings, article 8 of the Prague Rules encourages the arbitral tribunal to resolve the dispute on a document-only basis and organize the hearing in the most cost-efficient manner. Conversely, article 8 of the IBA Rules specifies that the witness requested should appear for testimony as well as for the direct and cross-examination process, unless the arbitral tribunal allows the use of videoconferencing or similar technology. Also, article 8.2 of the IBA Rules emphasizes that arbitral tribunal shall have complete control over the hearing. In addition, article 9 of the Prague Rules encourages the arbitral tribunal to assist in amicable settlement of dispute at any stage of the proceedings, including by acting as a mediator. This is not stipulated in the IBA Rules.

Notwithstanding the above comparisons, there are many similarities between the Prague Rules and the IBA Rules. [13] However, significant differences still exist. The mindset of the Prague Rules is to strengthen the proactive role and general power of the arbitral tribunal throughout the proceedings in a more inquisitorial manner[14], such as (1) control case management conference generally; (2) request production of documents and avoid extensive production of documents; (3) decide which witness is to be called for examination and subject the examination to the direction of arbitral tribunal rather than regular cross-examination; (4) apply legal provisions not pleaded by the parties under certain conditions; (5) first appoint the expert; (6) resolve the dispute on a document-only basis; (7) assist in amicable settlement of dispute.

Although the IBA rules reserve many characteristics of common law system, they still embrace some approaches of civil law system and emphasize the arbitral tribunal’s complete control over the hearing. The rules and procedures that commonly apply today in international arbitration reflect a mixture of common law and civil law norms; nonetheless, the system appears to be evolving more in a common law direction.[15] Actually, the reason for such circumstance is not due to the IBA Rules themselves, but the practitioners who use the IBA Rules in a more common law approach. This has become the mainstream approach in proceeding with international arbitration, given the fact that the world’s largest law firms engaged in representing parties in international arbitration proceedings tend to be Anglo-American law firms that follow the common law tradition. [16]

However, international arbitration may suffer if arbitrators become overly cautious to allow parties unlimited opportunities to present their cases, instead of trying to proactively manage the cases from the beginning. This reluctance may decrease efficiency. [17] Therefore, the controversy between the Prague Rules and the IBA Rules is not just about the competition between the common law and civil law system, or the inquisitorial and adversarial approach. The controversy also involves striking a balance between party autonomy and the arbitral tribunal’s power to enhance the efficiency of international arbitration. This efficiency issue depends on how the arbitrators choose to apply above rules and how they otherwise conduct the proceedings. [18]

III. The Influence of the Prague Rules on the Usage of the IBA Rules and International Arbitration Practice

The advent of Prague Rules is meaningful. It reminds the parties that there are different ways to structure their arbitration and there is no golden standard of one-size-fits-all kind of approach. [19] The Prague Rules have also compelled arbitration practitioners and academics to reflect on whether their usage of the IBA Rules has fallen into the trap of the common law adversarial approach, characterized by passive arbitral tribunals and due process paranoia. Thus, arbitration practitioners should avoid assuming that particular procedures under IBA Rules should be applied to all cases regardless of the individual circumstances. [20] Although party autonomy is the cornerstone of arbitration, the arbitral tribunal must not become a captive of the parties’ will and accept every bargain that it is presented with. [21] By choosing the arbitration, the parties have chosen to yield their powers to the arbitral tribunal, and they have authorized it to resolve their dispute as appropriate.

The Prague Rules provide some inspirations for international arbitration practice. When the arbitral tribunal first decides which document is necessary and requests parties to submit relevant evidence, no time-consuming and expensive pre-trial investigation and document production is needed.[22] When arbitral tribunal rather than parties examine the witnesses, the costs and time of preparation and coaching of witnesses would be saved. If the arbitral tribunal first appoints the expert, as long as neither party shows objections to the qualification of the expert, the arbitral tribunal can follow the expert opinion and no time and cost related to party-appointed expert will occur. [23] Finally, if the parties can amicably settle the dispute through a process such as mediation, this would substantially enhance efficiency for international arbitration.  

Granted, the Prague Rules will not be appropriate for every case. Their application should depend on specific factors, such as the amount in dispute and complexity of the case. Meanwhile, it sets a high standard for arbitrators to get familiar with the case materials as soon as possible and the tribunal’s front-load costs for parties may increase due to tribunal’s more devotion to proceedings. [24] The Prague Rules would adopt a more paternalistic or authoritarian approach with which the drafters, most of them from Central and Eastern Europe may be comfortable, but others may not. [25]

Whether the proactivity of the arbitral tribunal would violate party autonomy and affect the quality of arbitral award is also a cause of concern. Some practitioners may refuse to accept that under the Prague Rules the arbitral tribunal is allowed to not to call the witness for examination during the hearing but only rely on written witness statements, without giving the other party the opportunity to question the witness during examination. [26] In addition, the Prague Rules allow the arbitral tribunal to apply legal provisions not pleaded by the parties under certain conditions, which is controversial. Although many countries recognize that arbitral tribunals have the inherent power to investigate and apply legal provisions not invoked by the parties, some national courts may annul such award. [27] Furthermore, when the arbitrators disregard an express choice of law clause, it is possible that courts may set aside or refuse recognition of the award. [28]

IV. Conclusion

The Prague Rules are not the foes of the IBA Rules and they are not intended to replace the IBA rules but to supplement them. [29] The Prague Rules play a fundamental role in giving the parties more options with a tailor-made process to fit their interests and needs. More options in international arbitration is, of course, a way to promote its use. [30] The Prague Rules were formally released on 14 December 2018. It remains to be seen to what extent they will become popular. [31]

The Prague Rules are also thought-provoking. Should the current international arbitration practice under IBA Rules be a standard approach for all cases? Does the civil law approach represented by the Prague Rules contribute to the efficiency? Where to strike the balance between party autonomy and the arbitral tribunal’s power? These questions deserve serious reflections from each arbitration practitioner and academic. Also, “there is much to gain from a joint effort of arbitration practitioners and academics from different cultural and legal backgrounds, as long as their shared goal is to put all their might at the service of a more reliable, legitimate and cost-effective international arbitration.”[32]

Charles Tian

Charles Tian is an LL.M. Candidate in the International Business Regulation, Litigation and Arbitration Program at the NYU School of Law. Before coming to NYU, Charles had practiced law in Shanghai for almost four years, focusing on domestic and foreign-related arbitration and litigation.

[1] Inka Hanefeld & Aaron de Jong, Inherent Powers to Streamline the Proceedings, in INHERENT POWER OF ARBITRATORS 247, 247 (Franco Ferrari & Friedrich RosenfeldInka, eds., 2018).

[2] White & Case LLP and Queen Mary University of London 2018 International Arbitration Survey: The Evolution of International Arbitration (9 May 2018), https://www.whitecase.com/sites/whitecase/files/files/download/publications/qmul-international-arbitration-survey-2018-18.pdf.

[3] Klaus Peter Berger & J. Ole Jensen, Due process paranoia and the procedural judgment rule: a safe harbour for procedural management decisions by international arbitrators, 32 Arbitration International 415, 415–416 (2016).

[4] Rules on the Taking of Evidence in International Arbitration (29 May 2010),
https://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.

[5] Rules on the Efficient Conduct of Proceedings in International Arbitration (Prague Rules)(Draft, 1 September 2018), http://praguerules.com/upload/medialibrary/b2e/b2e26123ac310b644b26d4cd11dc67d8.pdf. (Official, 14 December 2018), https://praguerules.com/upload/medialibrary/9dc/9dc31ba7799e26473d92961d926948c9.pdf.

[6] Id.

[7] See Andrey Panov, Why the Prague Rules may be needed?, Practical Law Arbitration Blog (11 October 2018), http://arbitrationblog.practicallaw.com/why-the-prague-rules-may-be-needed/.

[8] See Michal Kocur, Why Lawyers from Civil Law Jurisdictions Do Not Need the Prague Rules, Kluwer Arbitration Blog (19 August 2018), http://arbitrationblog.kluwerarbitration.com/2018/08/19/why-lawyers-from-civil-law-jurisdictions-do-not-need-the-prague-rules/.

[9] Paula Costa e Silva, Arbitration, Jurisdiction and Culture: Apropos the Rules of Prague, Kluwer Arbitration Blog (16 July 2018), http://arbitrationblog.kluwerarbitration.com/2018/07/16/arbitration-jurisdiction-culture-apropos-rules-prague-part/.

[10] See Guilherme Rizzo Amaral, Prague Rules v. IBA Rules and the Taking of Evidence in International Arbitration: Tilting at Windmills, Kluwer Arbitration Blog (5 July 2018),
http:///2018/07/06/prague-rules-v-iba-rules-taking-evidence-international-arbitration-tilting-windmills-part-ii/.

[11] Id.

[12] Id.

[13] Id.

[14] See Duarte G. Henriques, The Prague Rules: Competitor, Alternative or Addition to the IBA Rules on the Taking of Evidence in International Arbitration? 36 ASA Bulletin 351, 354 (2018).

[15] Javier Rubinstein, Reflections at the Crossroads of the Common Law and Civil Law Traditions, 5 Chicago Journal of International Law 303, 303 (2004).

[16] Andreas Respondek, How Civil Law Principles Could Help to Make International Arbitration Proceedings More Time and Cost Effective, Singapore Law Gazette (February 2017),
http://www.praguerules.com/upload/iblock/af3/af3352da3709e3340951a38dfe8d7f61.pdf.

[17] See Alexandre Khrapoutski & Andrey Panov, The Prague Rules – an alternative way of conducting international arbitration? (September 2018), http://praguerules.com/upload/iblock/142/142ae6cc924c6a2ac7959fa335ca7ad1.pdf.

[18] Michael McIlwrath, The Prague Rules: The Real Cultural War Isn’t Over Civil vs Common Law, Kluwer Arbitration Blog (12 December 2018), http://arbitrationblog.kluwerarbitration.com/2018/12/12/the-prague-rules-the-real-cultural-war-isnt-over-civil-vs-common-law/.

[19]  Khrapoutski & Panov, supra note 17.

[20] Peter Rees QC, Arbitration, elastic or arthritic? Asian Dispute Review (July 2017), https://www.harbourlitigationfunding.com/wp-content/uploads/2017/07/Peter-Rees-ADR_July2017.pdf.

[21] Henriques, supra note 14, at 353.

[22] Respondek, supra note 16.

[23] Respondek, supra note 16.

[24] Craig Tevendale, Are the Prague rules the answer?, Global Arbitration Review (7 January 2019), https://globalarbitrationreview.com/article/1178803/are-the-prague-rules-the-answer.

[25] Lawrence W. Newman & David Zaslowsky, The Russians Are Coming, and They Want to Change How We Conduct International Arbitration, New York Law Journal (23 May 2018), https://www.law.com/newyorklawjournal/2018/05/23/the-russians-are-coming-and-they-want-to-change-how-we-conduct-international-arbitration/.

[26] Kocur, supra note 8.

[27] Henriques, supra note 14, at 359.

[28] Linda Silberman & Franco Ferrari, Getting to the Law Applicable to the Merits in International Arbitration and the Consequences of Getting it Wrong, in CONFLICT OF LAWS IN INTERNATIONAL COMMERCIAL ARBITRATION 257, 312 (Franco Ferrari & Stefan Kröll, eds., 2019).

[29] Vladimir Khvalei, The Prague rules – dispelling misconceptions, Global Arbitration Review (22 November 2018), https://globalarbitrationreview.com/article/1177181/the-prague-rules-%E2%80%93-dispelling-misconceptions.

[30] Henriques, supra note 14, at 355.

[31] Khrapoutski & Panov, supra note 17.

[32] Amaral, supra note 10.

On Monday, 28 January 2019, the Center will host a seminar entitled “International Commercial Arbitral Awards: What They Are and What They Are Not.” On the occasion of this session, Professor Saadet Yüksel (from Istanbul University), Ms. Cecilia Carrara (from Legance Avvocati Associati), Professor José E. Alvarez (from NYU) as well as Dr. Friedrich Rosenfeld (from Hanefeld Rechtsanwälte) and Mr. Brian King (from NYU) will speak on issues ranging from whether arbitral awards are “possessions” under ECHR case law, whether investment tribunals and parties to investment arbitrations refer to ECHR case law, whether arbitral awards are “investments” for the purpose of investment arbitration, to whether court decisions can be turned into arbitral awards subject to the NY Convention.

The event will take place this coming Monday, 28 January 2019, from 6.00 – 8.30 pm, in the Faculty Club, NYU School of Law, D’Agostino Hall, 110 West 3rd Street.

Professor Ferrari, the Director of the Center, and Dr. Friedrich Rosenfeld, currently a Global Adjunct Professor at NYU Law in Paris, a visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius Law School in Hamburg, have just published a paper in German on “Limits to Party Autonomy in International Arbitration”. The paper is published in a book in honor of Professor Juergen Basedow, on of the former directors of the Max Planck Institute for Comparative and International Private Law and two-time scholar-in-residence at the Center.

On 12 October 2018, Professor Franco Ferrari, the Director of the Center, and Dr. Friedrich Rosenfeld, a former scholar-in-residence at the Center and currently a Global Adjunct Professor at NYU Law in Paris, a Visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius Law School in Hamburg, will give talks at a seminar on “Limitations to party autonomy in international arbitration”. The event, which is hosted by the Istanbul Arbitration Centre and moderated by Professor Ercüment Erdem, the Founder and Senor Partner of Erdem&Erdem, will focus on a paper co-authored by Professor Ferrari and Dr. Rosenfeld to be published in the forthcoming Cambridge Compendium of International Commercial and Investment Arbitration. For the event’s flyer, please click here.

One of the goals of the Center is capacity building in the areas on which the Center focuses. Over the years, the Center has hosted many capacity building events around the globe. From 11 to 15 June, the Center, together with the Thailand Arbitration Center, will once again host such an event, this one aimed at practitioners and government lawyers operating in Thailand and surrounding countries. The speakers include Professor Franco Ferrari, the Center’s Director, Dr. Friedrich Rosenfeld, a Global Adjunct Professor at NYU Law in Paris, as well as Ms. Vanina Sucharitkul, and Professor David Halloway from City University of Hong Kong.

Professor Franco Ferrari, the Center’s Director, and Professor Diego P. Fernandez Arroyo, a professor of law at Sciences-Po Law School as well as a former Global Professor at the NYU Paris Campus, convened a conference on “Soft Law in International Adjudication” that will take place this coming Wednesday in Paris. The speakers included NYU professors Jose E. Alvarez, the Herbert and Rose Rubin Professor of International Law, and Benedict Kingsbury, the Murry and Ida Becker Professor of Law and Faculty Director of NYU’s Guarini Institute for Global Legal Studies. For the full program, please click here.

Tomorrow, Professor Franco Ferrari, the Center’s Director, will give a talk on “Bridging the Gap between International Commercial and Investment Arbitration” at a two-day conference to take place at the City University of Hong Kong entitled “Conference on Dispute Resolution in Asia and Beyond: Progress and Trends” (for the full program click here). The presentation by Professor Ferrari will be based on a paper co-authored by Professor Ferrari and Dr. Friedrich Rosenfeld, a Global Adjunct Professor at NYU Law in Paris, a Visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius Law School in Hamburg, published  in the NYU Journal of Law & Business (vol. 12: 295) analyzing the interaction of between the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention) and international investment law. The starting point of their analysis are the cases in which the domestic authorities in the country where enforcement of an arbitral award is sought unduly interfere with the enforcement instead of taking the arbitration-friendly stance required by imposed by the New York Convention. In these instances, a success in arbitration proceedings may turn out to be a mere pyrrhic victory. This holds true, in particular, where all of the debtor’s assets are located in one jurisdiction. Here, a contracting state’s compliance deficit with the New York Convention cannot be mitigated by seeking enforcement in a different contracting state. In response to these shortcomings, investors have begun to exploit the linkages between the New York Convention and the regime of international investment law.

Both the promise and the peril of modern communication systems lies in the ease of information transfer: although technology has facilitated information access and sharing, it has also created opportunities to illegally obtain private or privileged information. An evidentiary dilemma arises when information thus obtained falls into the hands of a party, who thereafter seeks to use it in arbitration. How should an arbitrator regard this evidence, in light of the fact that it was illegally obtained at some point? The question of whether to admit this evidence is uniquely vexing in international arbitration. Contrary to the relative uniformity of evidence-taking rules in domestic litigation, the rules in arbitration may change depending on the parties’ agreement or choice of arbitral institution, creating a higher degree of variation.[1]

This is not merely a theoretical problem. In the wake of the WikiLeaks[2] scandal, several tribunals in investor-state arbitrations have been faced with parties seeking to use evidence initially obtained through a large-scale data breach.[3] The traditional approach under most countries’ domestic rules would hold such communications inadmissible. However, the question is less clearcut in international arbitration, where the tribunal is not bound by national law, but has the final authority over admitting evidence.[4]

This paper takes a threefold approach to examining this issue: first, it will outline the basic rules on evidence-taking in international arbitration. Second, it will turn to recent cases that have dealt with the issue of hacked or leaked information being presented as evidence. Finally, it will analyze whether this evidence should be considered or not in future cases.

Rules on Taking of Evidence in International Arbitration

Party autonomy, being a key feature of arbitration, grants the parties broad latitude to determine the rules under which their dispute will be resolved. Often, parties exercise this autonomy to determine the rules for both the taking and presentation of evidence in the arbitration.[5] However, there is significant diversity in the modes of evidence-taking in international arbitration, and where the parties do not specify the rules, the taking and presentation of evidence will be analyzed pursuant to the parties’ arbitration agreement, any applicable institutional rules, the lex arbitri; and the discretion of the arbitrator.[6] It should be noted, however, that even where the parties have spoken to the issue, in practice the arbitral tribunal will have substantial discretion to control the process of evidence taking.[7] It should be noted, of course, that it is highly unlikely that the parties would design a rule ex ante that explicitly allowed for the presentation of unlawfully obtained evidence.

One source of guidance may be the background rules on discovery. It is not common that the parties will include a provision in their arbitration agreement dealing expressly with discovery.[8] If a provision regarding discovery is included, typically it would be through incorporation of some set of institutional rules.[9] The most common set of rules used in international arbitration—such as the London Court of International Arbitration (LCIA) Rules[10] or the UNCITRAL Model Law[11]—embrace broad, permissive admissibility standards. In the investor-state context, International Centre for Settlement of Investment Disputes (ICSID)[12] adopts a discretionary approach, granting total authority to the tribunal to decide which evidence shall be admitted.[13] On the other hand, more specific guidance is found on the International Bar Asociation (IBA) Rules on the Taking of Evidence, specifically in its article 9(2) (3):

Article 9

2. The Arbitral Tribunal shall, at the request of a Party or on its own motion, exclude from evidence or production any Document, statement, oral testimony or inspection for any of the following reasons:

(b)  legal impediment or privilege under the legal or ethical rules determined by the Arbitral Tribunal to be applicable;

…

(f)  grounds of special political or institutional sensitivity (including evidence that has been classified as secret by a government or a public international institution) that the Arbitral Tribunal determines to be compelling;

3. In considering issues of legal impediment or privilege under Article 9.2(b), and insofar as permitted by any mandatory legal or ethical rules that are determined by it to be applicable, the Arbitral Tribunal may take into account:

(d) any possible waiver of any applicable legal impediment or privilege by virtue of consent, earlier disclosure, affirmative use of the Document, statement, oral communication or advice contained therein, or otherwise; and

(e) the need to maintain fairness and equality as between the Parties, particularly if they are subject to different legal or ethical rules.[14]

 

In light of the aforementioned rules, prima facie we could affirm that hacked or leaked emails would not be accepted by an international arbitral tribunal unless one of the parties were to issue a waiver. Of course, this considers only the case of a party coming into possession of information that was previously illegally obtained by another party. If the hacking or leaking had been perpetrated by one of the parties directly, it would likely be considered a bad faith action on the part of that party, pursuant to the logic of article 9(7) of the IBA Rules:

If the Arbitral Tribunal determines that a Party has failed to conduct itself in good faith in the taking of evidence, the Arbitral Tribunal may, in addition to any other measures available under these Rules, take such failure into account in its assignment of the costs of the arbitration, including costs arising out of or in connection with the taking of evidence. [15]

This could have a range of consequences, and pursuant to this provision, would likely result in the party bearing the cost of the arbitration in light of its bad faith.

Although international tribunals are not prone to exclude evidence on the basis of confidentiality, there is case law from the Permanent Court of International Justice in which it elected to do so.[16] For instance, in the Danube case,[17] the Court declined the admission of the history of certain articles of the Versailles treaty, since those were confidential and had not been placed before the Court by, or with the consent of, the competent authority.[18] Likewise, in the Chorzow case,[19] the Court refused to consider declarations, admissions, or proposals made by the parties in the course of prior, abortive negotiations in order to preserve the confidentiality of earlier efforts at settlement.[20]  Both of these cases represent the PCIJ’s responsiveness to certain policy concerns even when it comes to confidentiality—a normally disfavored basis for exclusion.

Having laid out some of the legal rules that prohibit the parties from using confidential information as evidence, and having discussed other circumstances under which parties may be prohibiting from using evidence, we come to the question of whether an arbitral tribunal should admit or exclude now-public information that was initially obtained via WikiLeaks.

Cases Dealing with Hacked or Leaked Emails

In the Conoco Phillips case,[21] after issuing the award, the tribunal had to deal with new evidence presented due to information available in WikiLeaks.[22] This case concerned the expropriation of oil and gas assets by the Venezuelan government. Conoco Phillips claimed that Venezuela illegally forced it to cede its majority holding in certain oil and gas projects and was unwilling to negotiate fair compensation for the government’s taking.[23] The tribunal found that Venezuela breached its obligation to negotiate in good faith in order to reach an acceptable settlement between the parties.[24] After the award was issued, Venezuela sent a letter to the tribunal contesting this decision, in which Venezuela requested a new hearing to address the ruling on lack of good faith.[25] Specifically, the letter cited new evidence, obtained via WikiLeaks, including communications between diplomatic officials in the United States Embassy in Caracas and Conoco Phillips’ executives discussing the Venezuelan government’s offer to compensate the company for expropriation using market value standards instead of their previous offer of book value.[26]

Venezuela argued that this contradicted the tribunal’s conclusion that Venezuela negotiated in bad faith.[27] Ultimately, however, the tribunal addressed neither the merits nor the admissibility question raised by this evidence: instead, it found that it did not have the power to reconsider its decision.[28] However, one of the arbitrators issued a dissenting opinion which relied on the revelations contained in the WikiLeaks cables,[29] effectively opening a new window by considering leaked information as evidence in an arbitration procedure.

In a more recent case involving the Kazakhstan government, the tribunal reached an admissibility decision that could come to be seen as a watershed. The arbitral tribunal basically stated that documents protected by legal professional privilege cannot be admitted as evidence, but others could be.[30] Caratube International Oil Company and American-national Devincci Salah Hourani, who were suing Kazakhstan over the alleged seizure of their oil exploration and production rights, wanted leaked documents that were now publicly available due to the WikiLeaks page to be considered by the tribunal as evidence.[31]

The Tribunal reasoned as follows: first, it noted that the plaintiffs alleged the documents were material and relevant to the dispute; second, it observed that the documents were now in the public domain.[32] Thus, the tribunal found that the balance tipped in favor of admitting the documents,[33] placing special emphasis on the fact that they were “lawfully available to the public.”[34] In the view of the tribunal, this precluded them from being considered privileged information.

From these decisions, one can appreciate that although the Conoco Philips tribunal avoided the analysis of the leaked emails on procedural grounds, the dissenting opinion stated that this evidence should be considered; and in the most recent decision in Caratube, the Tribunal accepted the leaked information as evidence, on the basis that this information is now public, and thus is no longer privileged or confidential.

Conclusion

Since the WikiLeaks scandal, the legal parameters for admissible evidence seem poised to change: evidence that would have been considered inadmissible due to its privileged or confidential character is now admissible because it is considered to be public information. Nevertheless, this boundary should be carefully policed, due to the fact that this evidence was unlawfully obtained at some point. Therefore, in a prima facie analysis, the fact of the evidence having been obtained illegally would weigh against admissibility in light of on public policy grounds. Under the reasoning in Caratube, what would happen if one of the parties hacks the other parties’ emails and then asks a third entity which is not part of the dispute to publish this information in order to gain publicity for the purpose of using it in an arbitration procedure (based on the argument public availability destroys the privileged or confidential status of information)? In light of the foregoing concern, evidence that was unlawfully obtained and becomes public should only be accepted by an international arbitral tribunal on the consent of both parties. This will prevent any party from trying to unlawfully obtain information and will maintain fairness and equality among the parties in the process.

 

Ricardo Calvillo Ortiz, Licenciado en Derecho (Law Degree) July, 2010 Universidad Iberoamericana, Mexico City, Mexico. Candidate for LL.M in International Business Regulation, Litigation and Arbitration in New York University School of law, May 2016.

[1] Gary Born, International Arbitration Cases and Materials, (Aspen Publishers 2011). p. 768.

[2] WikiLeaks is an international, non-profit, journalistic organization, that publishes secret information, news leaks, and classified media from anonymous sources. Its website, initiated in 2006 in Iceland by the organization Sunshine Press, claimed a database of more than 1.2 million documents within a year of its launch. https://en.wikipedia.org/wiki/WikiLeaks.of Evidence. Jessica O. Iretoni  ernational Arbitrationr diregarded.alidity of Wikileaks Cables as Evidence. Jessica O. Iretoni

[3] In 2010, WikiLeaks began disclosing over 250,000 private cables written by US diplomats, divulging candid comments from world leaders and detailing occasional US pressure tactics aimed at hot spots in Afghanistan, Iran, and North Korea. https://www.bostonglobe.com/metro/2015/11/28/this-day-history/Ahim2PrVK2h30km5V4dEFN/story.html.

[4] Jessica O. Ireton, The Admissibility of evidence in ICSID Arbitration: considering the validity of WikiLeaks Cables as Evidence. ICSID Review, Vol. 30, No. 1 (2015) p.1.

[5] Gary Born, International Arbitration Cases and Materials, (Aspen Publishers 2011). p. 768.

[6] Id.at p. 769.

[7] Id.

[8] Id at p. 775.

[9] Id.

[10] LCIA Rules Article 22.1:  The Arbitral Tribunal shall have the power … (vi) to decide whether or not to apply any strict rules of evidence (or any other rules) as to the admissibility, relevance or weight of any material tendered by a party on any issue of fact or expert opinion; and to decide the time, manner and form in which such material should be exchanged between the parties and presented to the Arbitral Tribunal.

[11]Uncitral Model Law Article 19: (1) Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.  (2) Failing such agreement, the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence.

[12] ICSID Arbitration Rules, Article 34(1): “The Tribunal shall be the judge of the admissibility of any evidence adduced and of its probative value” (These Rules are applicable to investment arbitration cases).

[13] Jessica O. Ireton, The Admissibility of evidence in ICSID Arbitration: considering the validity of WikiLeaks Cables as Evidence. ICSID Review, Vol. 30, No. 1 (2015). p.5.

[14] International Bar Association (hereinafter the IBA Rules) Rules on the Taking of Evidence in International Arbitration, adopted by a resolution of the IBA Council 29 may 2010. Article 9

[15] Id.

[16] W. Michael Reisman, and Eric E. Freedman, “The Plaintiff’s Dilemma: Illegally obtained Evidence and admissibility in international Adjudication” (1982). Faculty Scholarship Series Paper 730. http://digitalcommons.law.yale.edu/fss_papers/730, p. 742.

[17] Id at 743 (citing Jurisdiction of the European Community of the Danube between Galatz and Braila, 1927 PCIJ, ser. B, No. 14.)

[18] Id.

[19] Id.

[20] Id.

[21]ConocoPhillips Petrozuata BV, ConocoPhillips Hamaca BV and ConocoPhillips Gulf of Paria BV v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/30, decision on Jurisdiction and the Merits (3 September 2013).

[22]Jessica O. Ireton, The Admissibility of evidence in ICSID Arbitration: considering the validity of WikiLeaks Cables as Evidence. ICSID Review, Vol. 30, No. 1 (2015) p. 2

[23] Id at p.1 (Citing the ConocoPhillips Petrozuata BV, ConocoPhillips Hamaca BV and ConocoPhillips Gulf of Paria BV v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/30, Decision on Jurisdiction and the Merits (3 September 2013) para. 212.)

[24] Id. at p. 2.

[25] Id. at p. 9 (citing the Conoco Phillips, Curtis letter, September 8, 2013. p. 5).

[26] Id. at p. 9 (citing the Conoco Phillips, Curtis letter, September 8, 2013. p. 5).

[27] The Conoco Phillips, Curtis letter, September 8, 2013, p. 5: “We do not endorse everything reported in these cables, but the notion that the Republic did not negotiate in good faith because it never discussed fair market value is patently false, as both ConocoPhillips and the U.S. Government are fully aware.”

[28] ConocoPhillips Petrozuata BV, ConocoPhillips Hamaca BV and ConocoPhillips Gulf of Paria BV v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/30, decision on respondent’s request for reconsideration, (10 march 2014) para 24. The reasoning for this desicion is stated in paras.19- 23: “The overall structure and the detailed provisions of the ICSID Convention were plainly designed to provide for review or actions in respect of decisions of a tribunal only once the Award was rendered…. Section 3 of Part IV of the ICSID Convention sets out the Powers and Functions of the Tribunal, with nothing among its provisions even hinting at such a power… [I]n Section 5 … powers are conferred on the Tribunal to interpret and revise the Award and on an ad hoc Committee to annul an Award on prescribed grounds. It is in those ways and those alone that decisions such as that in September 2013 can be questioned, changed or set aside. Those provisions and that structure exclude the possibility of the proposed powers of reconsideration being read into the Convention.”

[29] Conoco Phillips, Dissenting Opinion of Georges Abi-Saab, paras. 24 and 65. “However, with the revelations of the Wikileaks cables submitted to the Tribunal as annexes to the Respondent’s letter of 8 September 2013… the ground or cause for reconsideration changes radically in dimension and importance.” “…Here we have a full narrative of the negotiations, with a high degree of credibility, … It is a narrative that radically confutes the one reconstructed by the Majority, relying almost exclusively on the assertions of the Claimants throughout their pleadings that the Respondent did not budge from its initial offer.”

[30] Alison Ross, Tribunals Rules on admissibility of hacked Kazakh emails. 22 September, 2015, Global Arbitration Review http://globalarbitrationreview.com/news/article/34166/tribunal-rules-admissibility-hacked-kazakh-emails/

[31] Id at p.3. (Citing the unpublished decision of the Caratube International Oil Company LLP v. The Republic of Kazakhstan case).

[32] Id. (Citing the unpublished decision of the Caratube International Oil Company LLP v. The Republic of Kazakhstan case).

[33] Id. (Citing the unpublished decision of the Caratube International Oil Company LLP v. The Republic of Kazakhstan case).

[34] Id. (Citing the unpublished decision of the Caratube International Oil Company LLP v. The Republic of Kazakhstan case).