Transnational Notes

Professor Franco Ferrari, Director of the Center, and Professor Marco Torsello, professor of law at Verona University School of Law and Hauser Visiting Professor at NYU (2012, 2015), have just published a book on the 1980 United Nations Convention on Contracts for the International Sale of Goods. The Convention, which covers more than 3/4 of world trade, is in force in 80 States, including the United States and its most important trading partners.

The book, which is part of West’s Nutshell series, covers the basic rules one should be aware of, so as to avoid surprising when doing business with parties from other countries.

I.                    Introduction

In Corporación Mexicana de Mantenimiento Integral (“COMMISA”) v. Pemex-Exploración y Producción (“PEP”)[1] (Pemex) decided in August of last year, the District Court for the Southern District Court took what I described elsewhere as “an important step in the right direction”[2] by granting enforcement to an award vacated by the courts of the seat (Mexico in that case). In Thai-Lao Lignite (Thailand) Co Ltd & Hongsa Lignite (Lao Pdr) Co., Ltd v Government of the Lao People’s Democratic Republic,[3] decided barely four months later, the same court at first sight seems to have gone in the opposite direction by deferring to the annulment decision of the courts of the seat in Malaysia.

This post will analyze the Thai-Lao Lignite decision and show that the different outcome in the two cases is explained by the substantial differences in the facts.

II.                  The background

Thai-Lao Lignite is the most recent development in a complex litigation spanning across three continents.  It deals with the enforcement of an arbitral award rendered in an arbitration seated in Kuala Lumpur, Malaysia. The arbitration arose from a project development agreement providing for certain mining and operation rights (PDA) between the Government of Laos and the two companies that eventually became the petitioners in the enforcement proceedings before the District Court. The companies brought claims for improper termination and damages, which were upheld by the arbitrators, after rejection of the Government’s objections to jurisdiction.

In 2011 the award was confirmed by the District Court for the S.D.N.Y., whose decision was affirmed by the Second Circuit Court of Appeals.[4] In support of its motion to dismiss the petition for enforcement the award debtor contended, inter alia, that the arbitrators had exceeded their jurisdiction by extending it to other agreements and to non-signatories of the PDA. As discussed in Section IV below, these objections were rejected.

The award was also declared enforceable in England by the High Court of Justice, which relied on the US Court’s decision.[5] The English court held that the award debtor’s objections to jurisdiction had all been decided by the US courts and raised matters of issue estoppel. On that basis it decided that the award was to be regarded as “manifestly valid”.[6]

Enforcement was, instead, denied by the Paris Court of Appeal on grounds of excess of jurisdiction, because the arbitrators awarded compensation for losses related to a contract other than the one containing the arbitration clause.[7]

After the award had been enforced in the US, the Government of Laos brought a successful challenge before the Malaysian High Court, whose decision was affirmed by the Malaysian Court of Appeal. As recounted in the District Court’s decision under review here,[8] the ground for the annulment was the provision on excess of jurisdiction of the Malaysian Arbitration Act of 2005. The High Court held that the arbitrators had erred in assuming jurisdiction over two contracts entered into before the PDA and in admitting and adjudicating claims by non-parties to that agreement.

Following the setting aside of the award in Malaysia, the Government of Laos filed with the District Court for the S.D.N.Y a motion for relief from that court’s earlier judgment granting enforcement[9] pursuant to Federal Rule of Civil Procedure 60(b)(5)[10] and Article V(1)(e) of the New York Convention. The motion was granted by the District Court and the award is therefore no longer enforceable in the United States.

III.                The District Court’s Opinion

Wood J.’s Opinion first sets out what it considers to be the guiding principles for the exercise of the discretion to enforce a foreign arbitral award annulled at the seat, which derives from the “permissive ‘may’ in Article (V)(1)(e) of the New York Convention”.[11]

To do this, it analyzes the US case law on the enforcement of awards set aside at the seat, and in particular Chromalloy[12], Baker Marine,[13] TermoRio[14] and Pemex.[15] The Opinion reiterates the adages that the New York Convention “provides for a carefully crafted framework for the enforcement of international arbitral awards”[16] and that “Under the Convention, ‘the country in which, or under the [arbitration] law of which, [an] award was made’ is said to have primary jurisdiction over the arbitration award. All other signatory States are secondary jurisdictions …”.[17]

The District Court notes that “[i]n Baker Marine, the Second Circuit Court of Appeals held that where a court with primary jurisdiction over an arbitral award issues a decision setting aside the award, US courts will honor that decision in the absence of an ‘adequate reason’ not to do so”. It also refers extensively to TermoRio, which held that “normally a court sitting in secondary jurisdiction should not enforce an arbitral award vacated by a court with primary jurisdiction over the award, but that there are certain circumstances in which doing so may be appropriate”.[18] The discretion to refuse enforcement “is narrowly confined” and may be exercised only when the foreign judgment setting aside the award is “repugnant to fundamental notions of what is decent and just in the State where enforcement is sought” or violates “basic notions of justice”.[19] That “standard is high and infrequently met” and should be found “[o]nly in clearcut cases.”[20]

Wood J. concludes her survey of precedents citing Pemex’s approval of the TermoRio standard and its finding that the Mexican annulment decision in that case “violated basic notions of justice in that it applied a law that was not in existence at the time the parties‘ contract was formed and left Commisa without an apparent ability to litigate its claims.”[21]

The Court then proceeds to determine whether the extraordinary circumstances envisioned in TermoRio were met in the case at bar and concludes that, unlike in Pemex, they were not.

The analysis turns on whether the Malaysian proceedings or the judgments of the Malaysian courts violated basic notions of justice, so as to lead to ignore comity considerations and to disregard the Malaysian judgments.

The petitioners relied on a variety of arguments of questionable relevance. In particular they contended that the Respondent had acted inequitably in the enforcement proceedings before the US courts; that in challenging the award it had violated a covenant to abide by it; that the Malaysian Court of Appeal excused the Respondent’s initial failure to file its action within the proper deadline; that the Malaysian High Court wrongly held that the Respondent had properly objected to the arbitral tribunal’s jurisdiction and had not waived its jurisdictional objection; and that it failed to accord res judicata effect to the decisions of the US courts upholding the award.

The District Court is quick to point to the lack of substance of each one of the arguments. It notes amongst others that the petitioners’ criticisms of the Malaysian court’s decision “at best show weakness in the […] legal reasoning”, but ultimately fail to demonstrate that the judgments violated basic notions of justice. Predictably, the District Court also holds that the Malaysian courts had no obligation to grant preclusive effect to the enforcement decisions of the US courts, since such decisions are not truly decisions on the merits, but simply orders to enforce an award which are not necessarily res judicata in foreign jurisdictions.[22]

In light of these findings the District Court concludes that the circumstances at hand “simply do not amount to the extraordinary circumstances contemplated in TermoRio.”[23] In support of this conclusion it notes that the award brought for enforcement in this case had been rendered in a neutral country and did not involve an entity of the State of the seat, unlike in Pemex. It observes further that, again unlike Pemex, there was no retroactive application of a prohibition on arbitration and the private party was not left without remedy following the annulment.[24]

As Wood J. sums it up, the annulment of the award at the Malaysian seat was based on the “universally recognized ground” that the arbitrators had exceeded their jurisdiction.

IV.                Thai-Lao Lignite and Pemex compared

The outcome of Thai-Lai Lignite is the opposite of that of Pemex. While in Pemex the foreign award annulled at the seat was nonetheless confirmed by the District Court for the S.D.N.Y, in Thai-Lao Lignite the same court deferred to the foreign annulment. The foregoing summary makes it sufficiently clear that the reason for the dissimilar outcomes lies in the differences in the facts.

In Pemex the Mexican courts’ judgments were unquestionably tainted by a serious flaw, since they applied a retroactive prohibition on arbitrability. There was also a strong suspicion of political motivation, given that the award debtor was the largest and most powerful state entity of the seat. In that case it was difficult to contest that basic notions of justice had been violated. In Thai-Lao Lignite, instead, the crux was excess of jurisdiction by the arbitrators which, as the District Court remarks, is a universally recognized ground for setting aside awards. It is interesting that also the French courts, notoriously prone to enforce awards annulled at the seat,[25] refused enforcement on the same grounds.[26]

Thai-Lao Lignite does not, therefore, signal a departure from the standard laid down in TermoRio and applied in Pemex.

There is, however, one interesting peculiarity in Thai-Lao Lignite. Although the ground for annulment in Malaysia was excess of jurisdiction, the District Court does not address that issue in any detail. It simply remarks that, as mentioned above, the Malaysian High Court decided that the arbitrators exceeded their jurisdiction under the PDA by deciding over disputes concerning two contracts entered into by the parties prior to the PDA and by admitting claims by non-parties to the PDA.

As note previously, precisely this point had been addressed at great length in the District Court’s Opinion of August 3, 2011, which confirmed the award prior to its annulment. [27] On the first prong of the objection relating to the arbitrators’ alleged decision on matters not arising from the PDA, the Court held that the issues characterized by the Respondent as jurisdictional issues were, “at their core, not issues of arbitrability or jurisdiction at all”. Indeed, the target of the Respondents’ objections was the way in which “the Panel calculated damages and interpreted the PDA, both of which are well outside the scope of what the Court may review on petition to confirm an award under the Convention”. The arbitrators’ decision “simply reflects the Panel’s interpretation of the breadth of the term ‘total investment costs’ in the PDA, and not an extension of jurisdiction over other contracts”. On the second prong, relating to the standing of a non-party to the PDA, the District Court found that, insofar as it “concerns issues of arbitrability, […] the parties delegated decision on these issues to the Panel. Thus the Court defers to the Panel’s decision on such issues”. The Court held that, by agreeing to arbitration under the UNCITRAL Rules, the parties had also agreed to the jurisdiction of the arbitrators to decide on jurisdiction. It therefore refused to address the issue de novo and deferred to the arbitrators’ decision.

It is beyond the scope of this post to analyze these findings. It is, however, puzzling that, in the District Court’s latest decision, almost no attention was given to the contrast between the Malaysian courts’ decision on jurisdiction and the District Court’s earlier decision in the enforcement proceedings, notwithstanding that it dealt with what appears to have been an almost identical objection in the two proceedings. In the latest decision the District Court touches on the point only obliquely, where it addresses the Petitioners’ complaint that the Malaysian High Court failed to give preclusive effect to the US courts’ rulings on arbitral jurisdiction. Framed in this way it is not unsurprising that the Petitioners’ argument was given short shrift by the Court. It is difficult to imagine that the court of the seat would give res judicata effect to a foreign decision enforcing an award.

At least in the abstract, it would seem that the contrast between the foreign annulment judgment and the District Court’s own earlier decision (which had moreover been affirmed by the Court of Appeals) could have been more cogently invoked in the opposite sense. In other words, the argument could have been made that, regardless of its merits, the foreign annulment judgment could not be deferred to because of the conflict with a judgment of the forum having decided precisely the same issues.

The reason why that point was not addressed by the District Court probably lies in the relevant rules of civil procedure, that I am not qualified to discuss. It might have to do with the nature of the District Court’s earlier decision, which was “merely” a decision on enforcement and with the peculiarities of the procedure for relief from the enforcement judgment under Federal Rule of Civil Procedure 60(b)(5).

Nonetheless, it is somewhat surprising that the District Court seems not even to have blinked at the prospect of refusing to enforce an award it had previously decided to be enforceable. What is even more surprising is that, in so doing, it accepted to defer to a foreign judgment that collides frontally with its own. Admittedly, the conflict between the Malaysian judgment and the District Court’s own previous judgment turns on a delicate matter, i.e. the de novo review of the arbitrators’ decision on jurisdiction.[28] This is an issue on which positions differ, and the District Court’s view on which was not necessarily the only tenable one. Nonetheless, the District Court’s complete failure to address this conflict seems to underscore an engrained conviction that the foreign annulment judgment is almost entirely dispositive of the award’s fate, regardless of the enforcement forum’s own views on its validity. A more explicit treatment of this point would have provided food for interesting reflections on the law and policies involved in the enforcement of annulled awards.

V.                  Conclusion

Thai-Lao Lignite does not indicate a backtracking by the District Court for the Southern District of New York from the position that, in some circumstances, annulled awards can be enforced in the United States, that it adopted in Pemex. In this case, the refusal to enforce the award annulled by the Malaysian courts is easily explained by the fact that the circumstances of the foreign annulment were not as serious and prima facie objectionable as in Pemex.

Thai-Lao Lignite displays the same timid and conservative approach to the enforcement of awards annulled at the seat that characterized Pemex, with the additional peculiarity that it fails even to touch upon the contrast between the foreign annulment judgment and a decision of the forum where enforcement is sought. Upon reading the District Court’s decisions one feels the need for further analysis of the legal and policy approaches to this matter, which has significant broader implications.[29]

Luca G. Radicati di Brozolo

The author was Scholar in Residence at the Center for Transnational Litigation, Arbitration and Commercial Law in February 2014. He is a Professor of Private International Law at the Catholic University of Milan and a founding  partner of Arblit – Radicati di Brozolo Sabatini, Milan. He is a member of the ICC International Court of Arbitration, Vice-Chair of the IBA Arbitration Committee and a door tenant of Fountain Court Chambers, London. Email: Luca.Radicati@arblit.com

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Professor Franco Ferrari, the Executive Director of the Center, publishes a paper on the homeward trend and lex forism (entitled Tendance insulariste et lex forisme malgré un droit uniforme de la vente) in the latest issue of the French law journal Revue critique de droit international privé. In the paper, Professor Ferrari shows that although interpreters are generally not supposed to read the United Nations Convention on Contracts for the International Sale of Goods through the lenses of domestic law,  case-law of the various Contracting States shows that courts do not always comply with such prohibition directed at avoiding both the homeward and lex forism. Professor Ferrari then goes on to suggest how to avoid both the homeward trend and lex forism.

The editors of the Transnational Notes blog are happy to announce that some blog entries will now be  posted in a foreign language as well.

La comunidad empresarial en el Ecuador ha generado ciertas preocupaciones en relación a la recientemente promulgada Ley Orgánica de Regulación y Control del Poder de Mercado. Algunas de sus más temibles preocupaciones se basan en los excesivos poderes que la Superintendencia de Regulación y Control del Poder de Mercado tendrá una vez que se establezca. Esta Ley fue promulgada con el propósito, como fue pensado por mucho países en desarrollo cuando promulgaron sus propias leyes de competencia, que esta Ley contribuirá al crecimiento económico. El principal objetivo de la Ley es controlar y sancionar a los agentes económicos que afecten o puedan afectar a la competencia, tratando de equiparar el mercado para nuevos emprendedores. Desde un punto de vista teórico, puede ser visto como algo positivo para el bienestar de los competidores y los consumidores pero existen muchas preocupaciones que la aplicación de dicha Ley se verá sujeta a presiones políticas.

Desde el 2007, cuando Rafael Correa, de tendencia izquierdista, asumió su primera presidencia, el gobierno anuncio su deseo en redactar una Ley de Competencia. Correa estaba consternado que el Ecuador era una de los pocos países en América del Sur sin una Ley de Competencia. El interés del Presidente en tener una regulación sobre la competencia, le llevó a emitir el Decreto Ejecutivo 1614 en marzo 2009, con el propósito de hacer la Decisión 608 de la Comunidad Andina directamente aplicable y ejecutable dentro del territorio Ecuatoriano. Este Decreto Ejecutivo tuvo validez hasta que la Asamblea Nacional promulgó la Ley Orgánica de Regulación y Control del Poder de Mercado. El Decreto Ejecutivo 1614 creo la Subsecretaría de Competencia que se encontraba bajo el control del Ministerio de Industrias y Productividad. El objetivo principal de esta Subsecretaría era estimular y proteger la competencia, promoviendo la capacitación y la investigación en temas relacionado con la competencia.

En Agosto 30 del 20111, Rafael Correa presentó a la Asamblea Nacional una propuesta de Ley con el carácter de “económico urgente”. Esta propuesta de Ley era la Ley Orgánica de Regulación y Control del Poder de Mercado. La Asamblea Nacional tuvo 30 días para aprobarla, modificarla o rechazarla. En Septiembre 29, la Ley fue aprobada con modificaciones mínimas en temas relacionados con la competencia pero con mejoras substanciales en relación a derechos ciudadanos reconocidos por la Constitución. Es posible que muchas de las preocupaciones expresadas por políticos de la oposición y organizaciones económicas con respecto a la propuesta de Ley, fueran porque el texto se prestaba para ciertas dudas acerca de las intenciones verdaderas. Después de la aprobación en la Asamblea Nacional, Correa aprobó la Ley casi inmediatamente y expresó que con esto se termina el escepticismo del “mito sobre la competencia” refiriéndose que de acuerdo al texto de la Ley, todo lo que se argumentó en contra por lo políticos de la oposición y las organización económicas, fueron falsas. El ex Secretario General de la SENPLADES, la cual fue la entidad encargada de redactar la propuesta de Ley, dijo que la Ley sancionará el abuso del poder mercado que, entre otras cosas, esta causando que la inversiones directas extranjeras no entren al país. El también mencionó el hecho que el Ecuador es un país altamente concentrado. De acuerdo al CENSO económico del 2010, 90% del mercado económico esta en manos del 1% de los agentes de mercado.

Basado en declaraciones hechas por miembros del Poder Ejecutivo en relación al objeto de esta Ley, pareciera que esta Ley es perfecta y como cualquier otra Ley de Competencia solo regulará y controlará la competencia en beneficio del consumidor y la libre competencia. Entonces ¿porque muchas personas están preocupadas por la aplicación de esta reciente Ley? ¿Es que tienen temor de lo que el gobierno puede hacer con los poderes otorgados por esta Ley? Talvez, después de hacer un breve análisis de algunos de sus artículos, cualquiera puede hacer sus propias conclusiones, teniendo en cuenta la realidad política y económica del Ecuador.

El preámbulo de la Ley menciona que de acuerdo a la Constitución del Ecuador, es una obligación principal del Estado, el promover la competencia, con el propósito de proveer igual acceso al “buen vivir”. También se menciona que de acuerdo a la Constitución del Ecuador, es un deber del Estado, el asegurar un comercio justo como un medio de acceso a productos y servicios de calidad, promoviendo la reducción de distorsiones con los intermediarios de productos.

De lo expresado en el párrafo superior, puede ser interesante si la Ley produce esos efectos, pero todo dependerá como la nueva agencia de competencia, que es una Superintendencia con los poderes para controlar y regular la competencia, aplica la Ley. Los factores principales sobre los cuales la Ley Orgánica de Regulación y Control del Poder de Mercado se basa son: Abuso de poder de mercado por cualquier agente económico; sancionar los carteles, control sobre las adquisiciones y en la habilidad del Poder Ejecutivo para proponer restricciones a la competencia.

La Ley provee la creación de una Superintendencia para remplazar a la Subsecretaria que fue creada por el Decreto Ejecutivo 1614. Esta Superintendencia tendrá la autoridad de controlar, investigar e imponer sanciones en hechos relacionados a la competencia. Un aspecto positivo incluido por la Asamblea Nacional es que la Superintendencia estará bajo el control de la Función de Transparencia y Control Social. Esto sigue una característica internacional de tener una agencia de competencia separada del Gobierno. Por otro lado, el Ejecutivo presentará la lista de candidatos de donde los miembros de la Función de Transparencia y Control Social tendrán que seleccionar a uno para que actúe como Superintendente. Es la esperanza de todo ecuatoriano que esta person sea instruida en temas de competencia y especialmente que sea una persona honesta y seria que no se deje influenciar por el Gobierno.

Después de todo, los poderes de la Superintendencia y la aplicación de la Ley dependerán de él. La Ley también provee la creación de una Junta de Regulación que estará encargada de promulgar la regulación relacionada a la competencia. La Junta de Regulación estará conformada por Ministros de áreas relacionadas, aunque durante los cortos 30 días de debate en la Asamblea Nacional, hubo una propuesta que se debería incluir a académicos y profesionales, así como también a representantes del Gobierno.

Puesto que esta es la Ley de competencia es la más reciente en el mundo, también se incluye ciertas figuras novedosas como una política de “indulgencia” para un agente económico involucrado en un cartel. Este podrá beneficiarse de esta medida, si es que cuenta y esta dispuesto a contribuir con evidencia de la conducta anticompetitiva a la Superintendencia, antes que una investigación sobre determinada conducta haya empezado.

Otro aspecto que puede ser considerado como una medida novedosa, es que esta Ley también incluye una obligación de notificación a la Superintendencia antes de realizarse una adquisición de una compañía o un negocio. Esta notificación tiene que ser realizada en caso que la adquisición cumpla ciertas condiciones específicas. Sobre esta notificación existe un Silencio Administrativo Positivo, con respecto a la decisión que la Superintendencia tiene que emitir. Esto quiere decir que la Superintendencia tiene 30 días para responder, si es que no lo hace, se considera una aprobación.

Con respecto a las sanciones, la Superintendencia puede imponer multas a los agentes económicos por conductas anticompetitivas. Estas multas pueden variar dentro de una escala desde un 8% sobre el volumen del negocio total de la empresa por infracciones categorizadas como leves, hasta un 10% por infracciones graves y hasta un 12% por infracciones muy graves. Si la Superintendencia no puede determinar el volumen del negocio total, la multa puede ser un valor entre los 13,200.00 dólares americanos hasta más de 10 millones dependiendo de las infracciones. (No hay límite). Si la infracción es categorizada como muy grave, una multa de 132,000.00 dólares americanos puede ser impuesta en los representantes legales y en cualquier otra persona que haya sido parte de la junta de directores que haya votado a favor de la decisión por la cual se genero la medida anticompetitiva. Es importante mencionar que no hay sanciones penales por medidas anticompetitivas.

Finalmente, basado en el interés publico como el desarrollo de sectores estratégicos, el suministro de servicios públicos y para estimular la economía popular, el Presidente Ecuatoriano puede emitir Decretos Ejecutivos contradiciendo el propósito de lo que se establece en esta Ley, limitando la competencia y estableciendo precios. Estas ordenes son temporales y sujetas al consejo del Superintendente, quien solo puede recomendar su suspensión, pero la ultima decisión permanece en el Presidente. Esto otorga a Correa poderes extensos para restringir la competencia especialmente con respecto a las empresas estatales.

Revisando algunas de las leyes (Ej.: Código de la Producción y la Ley de Economía Popular y Solidaria) promulgadas en los anos pasados, existe una tendencia para promover la producción interna y fortalecer el mercado interno (al menos esto es lo que la Subsecretaria de Planificación y Desarrollo opinan). Con la promulgación de esta Ley de Competencia puede parecer que Rafael Correa esta planeando la mejor manera de abrir el Ecuador al mercado libre. En sus primeros años como Presidente, paró todas las negociaciones con los Estados Unidos y con la Unión Europea sobre Tratados de Libre Comercio. Antes de eso, cuando fue Ministro de Economía en la presidencia anterior a la de él, denuncio abusos realizados por el Banco Mundial y el Fondo Monetario Internacional, causando una reducción de préstamos para Ecuador. Desde que ha estado en el poder, Ecuador afortunadamente ha gozado de precios altos de petróleo, y ha obtenido prestamos financieros de China que han balanceado la necesidad de préstamos de esas dos instituciones antes mencionadas.

Capaz, y esta es mi esperanza, Correa esta planeando en estimular la producción interna, fortalecer los mercados internos y regular la competencia con la intención de abrir las fronteras al libre comercio. Al parecer, la idea es estar seguro que cuando esto suceda, los negocios ecuatorianos sean competitivos y existan leyes claras protegiendo y permitiendo inversiones. Pero una Ley o un grupo de leyes por su cuenta nunca serán suficientes. Lo que inversores y empresarios desean es un sentido de seguridad donde las reglas del juego sean favorables y la certeza de que ellas no cambiarán de una mañana a la otra.

Sobre todo, la Ley Orgánica de Regulación y Control del Poder de Mercado puede ser efectiva en cuestiones de competencia, nivelando el terreno, eliminando barreras de entrada y acabando con abusos de poder de mercado, permitiendo que empresas nacionales e internacionales entren el mercado ecuatoriano con justas y claras regulaciones que creen mayor competencia por el beneficio de todos los consumidores. Pero todos los aspectos positivos que se espera, dependerán de la aplicación de la Ley en las manos especializadas de la Superintendencia que tendrá que confrontar influencias políticas. En un país en desarrollo, como el Ecuador, donde la corrupción es un problema muy grande, donde casi no hay oposición política y los medios de comunicación se sienten amenazados por la posibilidad de acciones judiciales, seguramente en la mente de todos los ecuatorianos puede haber una preocupación que esta Ley será otro mecanismo para aplicar presión a cualquier que se oponga al régimen. Pero como ecuatoriano, quiero pensar que el tiempo ha terminado, y es momento de abrirnos al mercado libre y a inversores efectivos que incentiven la economía posicionando al Ecuador en un estándar económico y social más alto.

Agustin Acosta Cardenas is a LL.M. candidate in the program of International Business Regulation, Litigation and Arbitration at New York University School of Law, and a former lawyer of the Unit of International Affairs and Arbitration of Attorney General’s Office of the Republic of Ecuador, responsible for alleged claims based on investment contracts and Bilateral Investment Treaties.

The business community in Ecuador[1] has raised several concerns in relation to the recent enacted Regulation and Control of Market Power Statute[2]. Some of their most fearful concerns lie in the excessive power the Superintendence of Regulation and Control of Market Power will have once it is established[3].  This Statute was enacted with the purpose, as thought by many developing countries when enacting their own antitrust statutes that it will contribute to an economic growth. The main objective of the Statute is to control and sanction economic agents that affect or may affect competition, trying to level the playing field for new entrepreneurs.  From a theoretical point of view, it could be seen as positive for the welfare of competitors and consumers but there are huge concerns that its enforcement will be subject to political pressure[4].

Since 2007, when the leftist Rafael Correa assumed his first presidency, the government announced its desire on drafting a competition Statute[5]. Correa was distressed that Ecuador was one of the few countries in South America without an antitrust law[6]. The President’s interest in having competition regulation led him to issue the Executive Order 1614 in March 2009, with the purpose of making Decision 608 of the Andean Community directly applicable and enforceable within Ecuador’s territory. This Executive Order was valid until the National Assembly finally promulgated the Regulation and Control of Market Power Statute[7]. The Executive Order 1614, created an Undersecretary of Competition that was under the control of the Ministry of Industries and Productivity. The objective of this entity was to stimulate and protect competition, promoting capacitation and investigation in competition matters.[8]

On August 30, 2011, Rafael Correa presented to the National Assembly a proposed Statute with an “urgent economic status”[9]. This proposed draft Statute was the Regulation and Control of Market Power Law[10]. The National Assembly had 30 days to approve, modify or reject it.[11] On September 29, the Statute was approved with minor modifications in relation to competition matters but with substantial improvements in relation to citizens’ rights recognized by the Constitution. It is possible that many of the concerns expressed by the political opposition and economic organizations with regard to the proposed Statute were because the text gave rise to serious doubts about its true intentions[12]. After the approval in the National Assembly, Correa signed it into law almost immediately and later said that this ends the skepticism of “the myth of competition”[13] meaning that according to the words of the Statute everything that was argued by the political opposition and economic organizations were false.  The former Secretary-General of the SENPLADES[14], which was the entity in charge of drafting the proposal, said that the Statute will sanction the abuse of market power that, inter alia, is causing direct foreign investment not to enter the country[15].  He also addressed the fact that Ecuador is a highly concentrated country. According to the 2010 economic census, 90% of the economic market is in hands of 1% of economic agents.[16]

Based on declarations made by officials of the Executive Branch in relation to the purpose of this Statute, it would seem that this Statute is perfect and as any other competition Statute it will only regulate and control competition matters to the benefit of consumers and free competition. So why are many people worried about the enforcement of this recent Statute [17]? Is it that they are scared of what the government can do with the powers granted by this Statute? Maybe, after doing a brief analysis of some of its provision, anyone can make their own conclusions, having in mind the political and economic reality of Ecuador.

The preamble of the Statute mentions that according to Ecuador’s Constitution it is a primary obligation of the State to promote competition, with the purpose of providing equitable access to “good living” (buen vivir)[18]. It is also said that according to Ecuador’s Constitution it is a duty of the State to ensure fair trade as a means of access to goods and quality services, promoting the reduction of distortions in the intermediation of products[19].

From what is mentioned in the paragraph above, it would be interesting if the Statute produce those effects, but it all will depend how the new competition agency, which is a Superintendence with the power to control and regulate competition, enforces the Statute. The key principles in which the Statute focus are the following: Abuse of market power[20] by any economic agent; sanctioning of cartels; controlling mergers, and finally on the ability of the Executive Power to propose restrictions to competition.

The Statute provides for the creation of a Superintendence to replace the Undersecretary that was created under the Executive Order 1614. This Superintendence will have the authority to control, investigate and impose sanction in matters related to competition.  One positive aspect included by the National Assembly is that the Superintendence will be under the Control of the Transparency and Social Control Power[21]. This follows the international features of having a competition agency separated from the Government. On the other hand, the Executive will submit a list of candidates from where the members of Transparency and Social Control Power have to appoint one to act as the Superintendent.  It is in the hope of every Ecuadorian that this person is qualified in competition matters and especially that he or she is an honest and serious person who will not be influenced by the Government.

After all, the powers[22] of the Superintendence and the enforcement of the Estatute will depend on him. The Statute also provides for the creation of the Board of Regulation that will be in charge of promulgating regulations in relation to competition. The Board of Regulation will be formed by Ministers from related areas, although during the short 30 days of debate in the National Assembly, there was a proposal that they should include academics and professionals as well as government officials.

Since this is the newest competition statute worldwide, it also includes certain innovative features such as a leniency policy for an economic agent involved in a cartel. An economic agent can benefit from this policy, if he or she tells and is willing to contribute with evidence of the anticompetitive conduct to the Superintendence, before an investigation of the alleged conduct starts.

Another aspect that could be considered conforming to these innovative features is that this Statute also includes a mandatory pre-mergers notification to the Superintendence. This notification has to be made if the effects of the merger meet certain specified conditions. There is Positive Administrative Silence, with regards to the decision that the Superintendence has to render, meaning that the Superintendence has 30 days to respond, and if it does not, it will be considered as an approval.

As for sanctions, the Superintendence could impose fines to economic agents for anticompetitive conducts. These fines range within a scale of up to 8% of year turnover for offenses categorized as minor offenses, up to 10% for serious offenses and up to 12% for very serious offenses. If the Superintendence is not able to determine a year turnover, then the fine amount can be a sum between $13.200.00 U.S. dollars to more than $10 million depending of the offenses (there is no limit). If offenses are categorized as very serious, a fine of $132.000.00 U.S. dollars could be imposed on the legal representatives and on anyone who was part of the Board of Directors and voted in favor of the decision that generated the anticompetitive conduct. It is important to mention that there are no criminal penalties for anticompetitive conducts.

Finally, based on public interest like development of strategic sectors, to supply public services and to stimulate popular economy, the Ecuadorian President can issue an Executive Order contradicting the purpose of what is stated in this Statute, limiting competition and establishing prices. These orders are temporary and subject to the advice of the Superintendence, which can only recommend their suspension, but the last call remains on the President. This gives Correa extensive powers to restrict competition especially with regard to the State’s own enterprises.

Reviewing some of the laws (i.e. Code of Production and the Statute of Popular and Solidarity Economy)[23] enacted in the last years, there is a trend to promote internal production and strengthen the internal market (at least that is what the Under Secretariat of Planning and Development believes[24]).  With the promulgation of this competition Statute it may be seen that Rafael Correa is planning the best way to open Ecuador to free market. In his first years as president he put an end to all negotiation with the United States and with the European Union on free trade agreements. Before that, when he was Minister of Economy in the presidency before his term, he denounced abuses made by the World Bank and the International Monetary Fund, causing a reduction of loans to Ecuador. Since he has been in power, Ecuador has fortunately enjoyed high oil prices, and has obtained loan agreements from China that balanced the need of external loans from these two entities.

Perhaps, and this is my hope, Correa is planning on stimulating internal production, strengthening the internal market, and regulating competition with the intention to open borders to free trade.  It seems the idea is to make sure that when this happens, Ecuadorian businesses will be competitive and there will be clear Statutes protecting and allowing investments. But a Statute or groups of Statutes for themselves will never be enough. What investors and businessmen want is a sense of security where the rules of the game are favorable and the certainty that they will not change from one morning to the other.

Overall, the Regulation and Control of Market Power Law can be effective regarding competition matters, leveling the ground, eliminating entry barriers and ending abuse of market power, allowing national and international corporations to enter the Ecuadorian market with fair and clear regulations that create more competition for the benefit of all consumers. But all the positive aspects that are expected will depend on its application at the hands of a specialized Superintendence that will have to confront political influences. In a developing country, such as Ecuador, where corruption is a huge problem, where there is almost no political opposition, and media companies feel threatened because of the possibility of judicial actions, certainly in the mind of many Ecuadorians there could be a concern that this Statute will be another method to apply pressure to anyone who opposes the regime. But as an Ecuadorian I want to think that time has come to an end and that it is the moment to open to free trade and effective investors who will incentive the economy positioning Ecuador in a higher economic and social standard.

Agustin Acosta Cardenas is a LL.M. candidate in the program of International Business Regulation, Litigation and Arbitration at New York University School of Law, and a former lawyer of the Unit of International Affairs and Arbitration of Attorney General’s Office of the Republic of Ecuador, responsible for alleged claims based on investment contracts and Bilateral Investment Treaties.

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[1] Roberto Aspiazu, Executive director of the Ecuadorian Business Committee. “La ley antimonopolio amplia la fijación oficial de precios”, published on “El comercio”, November 4, 2011.

[2] Regulation and Control of Market Power Law. Official Registry Supplement No. 555 published on October 13, 2011. Approved by the National Assembly on September 29, 2011. There were 67 votes in favor, 23 against it and 33 abstentions.

[3] Roberto Aspiazu. Above note 1

[4] Miguel Carmigniani. “Ley Antimonopolio III”, published on “El Comercio”, October 27, 2011.

[5] The economist, The Americas view. “An uncompetitive competition law”, published on October 21, 2011. http://www.economist.com/node/21533281

[6] Ibid.

[7] Official Registry No. 558 published on March 27, 2009. Executive Order No. 1614 issued on March 14, 2009.

[8] Ministry of Industries and Productivity. Web page:

http://www.mipro.gob.ec/index.php?option=com_content&view=article&id=1361&Itemid=202

[9] Constitution of the Republic of Ecuador. Official Registry No. 449 published on October 20, 2008. Article 140. “The President may send to the National Assembly bills qualified as urgent in economic matters. The Assembly will approve, modify or deny them within a maximum period of thirty days from receipt…

If within the prescribed period the Assembly does not approve, modify or deny the project rated as urgent in economic matters, the President of the Republic can promulgate it with an Executive Order…”

[10] National Assembly. Document No. T-634-SNJ-11-1104 http://www.asambleanacional.gov.ec/tramite-de-las-leyes.html

[11] Constitution of the Republic of Ecuador. Above note 9.

[12] This chart explains some changes made to protect constitutional rights of citizens.

Proposed text	Final text of the Law
The Superintendence can: “Request and require any person to display any information or any documents, including books and records, receipts, invoices, agreements, messages, faxes, personal agendas, handwritten notes, business correspondence and magnetic records including, in this case, programs or whatever means necessary for reading; as well as requesting information regarding the organization, business, shareholders, and structure formation or economic operators.”… “Make inspections, with or without notice, in any establishments, premises or property of natural persons or legal persons and examine books, records, documents, faxes, personal agendas, handwritten notes, business correspondence and goods, being able to check the development of processes and take a statement of the people who are in those places.	The Superintendence can: Article 49. “Demand that it be submitted for consideration, books and records, accounting vouchers, correspondence, records or magnetic computers including their means of reading, and any other documents relating to the conduct under investigation or  the activities inspected, without being able to claim reserve of any nature.”… “Make inspections, with or without prior notification to establishments, of natural or legal persons and examine the books, records, and any other document relating to the investigated conduct, business correspondence and property, being able to check the development of processes productive and voluntary statements may  be taken. When the place where the inspection is the domicile of a natural person a judicial authorization shall be required under the terms of this law.”
“Since there are appropriate legal remedies for the administrative actions determined by the Superintendent, they may not be subject to a protective action (constitutional amparo).”	Article 52. “A protective action proceeds over all administrative acts of the Superintendent…”

[13]The economist. Above note 5.

[14] National Secretary of Planning and Development (SENPLADES).

[15] Rene Ramirez, interview given to “El Comercio”. “La economia concentrada espanta al inversor”. Published on July 22, 2011.

[16] To have an overview of Ecuador’s market, (i.e. 61% of sales of dairy products are in 5 of 136 enterprises; 61% of sales of textiles are in 9 of 1493 enterprises; 71% of sales of milling products are in 5 of 135 enterprises; 81% of sales of non-alcoholic beverages are in 1 of 155 enterprises and 76% of sales of soaps and detergents are in 2 of 88 enterprises.) “Pulso Politico” in TC television on August 28, 2011. http://www.youtube.com/watch?v=5IVg7WlkdZg&feature=related

[17] Roberto Aspiazu. Above, note 1 and 3.

[18] This is a constitutional principle stated in the second chapter of the Constitution under the title Rights of Good Living. According to the government plan the “Good Living is based on a vision that surpasses the narrow confines of quantitative economicism and challenges the notion of material, mechanic and endless accumulation of goods. Instead the new paradigm promotes an inclusive, sustainable, and democratic economic strategy; one that incorporates actors historically excluded from the capitalist, market-driven logic of accumulation and redistribution.” http://plan2009.senplades.gob.ec/es/web/en/presentation.

[19] Constitution of the Republic of Ecuador. Official Registry No. 449 published on October 20, 2008. Articles 283-284, 335-336.

[20] Abuse of market power is considered as abuse of dominance according to what is stated in article 8 of the law. The law does not sanction having market power, it only sanctions abuse of market power that affects competition.

[21] One of the five Powers of the State (Executive Power, Judicial Power, Legislative Power, Electoral Power and the Transparency and Social Control Power). Constitution of the Republic of Ecuador. Official Registry No. 449 published on October 20, 2008. Articles 204-210.

[22] Regulation and Control of Market Power Law. Above note 2. Article 38 enumerates 31 possible powers but the last one establishes “all other powers stated in the law”. From 93 articles almost half of them give certain powers to the Superintendence. (i.e. Articles 38-41, 46-64, 73-93)

[23] Code of Production. Official Registry No. 351 published on December 29, 2010. Law of Popular and Solidary Economy. Official Registry No. 444 published on May 10, 2011.

[24] Diego Martinez, opinion given in a discussion panel at “Pulso Politico” in TC television on August 28, 2011. http://www.youtube.com/watch?v=5IVg7WlkdZg&feature=related

As mentioned in a recent post, the existence of Regulation 261/2004 opens space for multiple forum shopping strategies, especially in flights connecting an EU airport and a non-EU airport belonging to a signatory State to the Montreal Convention. A paradigmatic case would be the regular flights between the US and the EU, considering the number of daily flights connecting both regions.

In accordance to its Article 1, EU Regulation 261/2004 will apply to all flights departing from an EU airport as well as all flights departing from a third country to an EU airport, provided that the air carrier is an EU Community carrier.

Moral and emotional distress damages are some of the most relevant aspects to consider when filing a claim based on the delay or cancellation of a flight.

Often times, the importance of moral damages, in both financial and emotional terms, will be at least as important as recovering the price of the flight ticket. Therefore, it will be strategically important to know in advance whether in a particular jurisdiction (either in the EU or not) claims for moral damages are allowed at all, or if only the material losses (price of the ticket, lodging, damaged luggage) can be claimed.

U.S. courts usually interpret the Montreal Convention¾since EU Regulation 261/2004 is not likely to be applicable¾to exclude non-physical injuries, since such injuries were not covered under the Warsaw Convention, which preceded the Montreal Convention[1]. Consequently, what is not allowed by the Montreal Convention is not available at all[2]. Therefore, as one court has held, only economic loss or physical injury damages are recoverable[3].

Also in Bassam v. American Airlines, 287 Fed. App’x 309 (5th Cir. 2008), the Fifth Circuit concluded that “purely emotional injuries are not available under the Montreal Convention”[4], allowing little room for doubt.

Conversely, the ECJ explicitly admitted moral damages in the EU in its decision C-63/09, Click Air Case. However, the decision did not clarify either the burden of proof requested from the party alleging the damage or the applicable law deciding the existence of moral damages. As a consequence, the ECJ failed to set a reliable uniform interpretation in the EU.

In a recent decision handed down on 13 October 2011, the ECJ clarified that “further compensation” in Article 12 of Regulation 261/2004 is to be read to allow passengers compensation for the entirety of the material and non-material damages they suffered due to the failure of the air carrier to fulfill its contractual obligations.

However, this decision links compensation for moral damages to the conditions and within the limitations provided for by the Montreal Convention or by national law. Since the Montreal Convention does not specify any of these conditions, resort will have to be made to the domestic laws of the EU countries.

This is where the confusion remains, because depending on which EU countries have concurrent jurisdiction, moral damages will be appreciated or not, and if so, under a variable burden for the passenger.

In Spain, for instance, compensation for moral harassment can generally be claimed because the case law of the Supreme Court has established that partial breaches of contract can give rise to moral damages in accordance to Articles 1089, 1091 and 1101 of the Civil Code (judgments dated 22 May 1995 and 19 October 1996). In the particular subject matter of flights, the Supreme Court has declared in a famous decision of 31 May 2000 that, although moral damages may arise from delayed flights, this must not be confused with the usual stress and tension caused by the delay. However, some lower courts have established that moral damages are warranted even in cases where the only issue was that no special assistance was provided at the airport. Other decisions compare the situations of stress created by flight delays and cancellations to set up an iuris et de iure presumption: If delay is the cause of stress leading to moral damages, cancellation, which is more severe than delay, should always be enough for moral damages.

The Italian Supreme Court, by contrast, allows (in judgment no. 26972 dated 11November 2008)for moral damages but, unlike Spanish courts that require a very low burden of proof, requires substantial proof.

If Italian lower courts are consistent with their Supreme Court, parties seeking to obtain moral damages with a possibility to choose between both fora should logically opt for Spanish courts, where the onus probandi is less strict.

A number of similar situations may appear within other countries in the EU, and lawyers should carefully analyze where to sue. It is clear, however, that after the ECJ decision in case C-83/2010, litigants would assume less risks if, having the possibility to sue before U.S. and EU courts, they opt for the latter.

Manuel Gimenez Rasero is an attorney at Areilza abogados and was Rafael del Pino Scholar at the New York University School of Law (LL.M.’11).

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[1] Nature of cause of action under Warsaw and Montreal Conventions; convention remedy as exclusive”, in 8A Am. Jur. 2d Aviation § 149

[2] In 8A Am. Jur. 2d Aviation § 149: El Al Israel Airlines, Ltd. v. Tsui Yuan Tseng, 525 U.S. 155, 119 S. Ct. 662, 142 L. Ed. 2d 576 (1999); Mbaba v. Societe Air France, 457 F.3d 496 (5th Cir. 2006), cert. denied, 127 S. Ct. 959, 166 L. Ed. 2d 706 (U.S. 2007); Carey v. United Airlines, 255 F.3d 1044 (9th Cir. 2001); Marotte v. American Airlines, Inc., 296 F.3d 1255 (11th Cir. 2002); Auster v. Ghana Airways Ltd., 514 F.3d 44 (D.C. Cir. 2008); In re Air Crash at Lexington, KY, August 27, 2006, 501 F. Supp. 2d 902 (E.D. Ky. 2007); Bernardi v. Apple Vacations, 236 F. Supp. 2d 465 (E.D. Pa. 2002).

[3] Daniel, 59 F. Supp.2d at 992-94 (citing Eastern Airlines, Inc. v. Floyd, 499 U.S. 530 (1991)).

[4] Bassam v. American Airlines, 287 Fed. App’x 309 (5th Cir. 2008) at 14

In Galsworthy Ltd of the Republic of Liberia v Glory of Wealth Shipping Pte Ltd [2010] SGHC 304 (“Galsworthy”), the Singapore High Court held that a losing party to an arbitration seeking to challenge an arbitral award had the “alternative and not cumulative options” of applying to set aside the award, or, applying to set aside any leave granted to enforce the award. This choice of wording is unfortunate because it gives the mistaken impression that the options described are mutually exclusive, when they are not.

The facts of the case are easy. There was a dispute over a charter party and an arbitration seated in London had issued an award against Glory of Wealth Shipping Pte Ltd (“Glory of Wealth Shipping”). Glory of Wealth Shipping applied to challenge the award before the English High Court on grounds of irregularity (“the first English application”). The opposing party, Galsworthy, applied for security of costs, which was granted by the English High Court. Glory of Wealth Shipping failed to furnish security, leading to a dismissal of their application without a hearing on the merits. Glory of Wealth Shipping also appealed against the arbitral award on a point of law, but the appeal was heard and dismissed by the English High Court.

Subsequently, Galsworthy obtained permission from the Singapore courts to enforce the award in Singapore. Glory of Wealth Shipping applied to set aside the order granting permission to enforce the award. The application was heard and dismissed by an Assistant Registrar, and failed again on appeal.

But the view of the learned Judge hearing the appeal at the High Court differed from the Assistant Registrar’s on one preliminary issue. That issue was whether Glory of Wealth Shipping was entitled to apply to set aside the order granting permission to enforce the arbitral award when it had already challenged the award before the English courts.

The Assistant Registrar was of the view that Glory of Wealth Shipping was still entitled to take up the application to set aside the leave to enforce the award and had proceeded to hear the application on its merits. The learned Judge, however, held that Glory of Wealth Shipping was not entitled to make the application because it had “elected” to proceed in the English courts and the application in the Singapore High Court amounted to “an abuse of process”.

The reasoning of the learned Judge can be summarised as follows:

(a)            Glory of Wealth Shipping’s application to set aside the order granting leave to enforce was a “considered decision on its part to avoid the need to furnish security to the English court”.

(b)            Glory of Wealth Shipping had “elected their forum of challenge and they ought to be bound by it”.

(c)            There were no exceptional circumstances permitting the derogation from the principle of comity of nations requiring the Singapore courts to be slow to undermine the orders of foreign courts.

(d)            If the application was allowed, it could result in a “duplication or conflict of judicial orders”.

(e)            If the first English application was heard on the merits and failed, Glory Wealth Shipping would be entitled to challenge the enforcement of the final award in the enforcement court if the grounds and standards between the supervising and enforcement jurisdiction are different.

The learned Judge consequently held that a party seeking challenge of an arbitral award can either apply to the curial court to set aside the award, or, apply to the enforcement court to set aside any leave granted to the opposing party to enforce. These options were, as he described, “alternative and not cumulative”.

This phrasing is inadequate because it covers too much and too little at once. It over-includes because it lends itself to the mistaken impression that the options are mutually exclusive, such that one option can no longer be exercised once the other has been elected. It under-includes because it does not explain whether one option can still be exercised if the legal grounds relied upon for the second option are different from the first.

It may be useful to set out with precision how the options of an unsuccessful party in an arbitration interact.  Generally, under the New York Convention, three general principles, which are by no means exhaustive, can be set out:

(a)            The unsuccessful party in the arbitration can resist enforcement at the enforcement jurisdiction, without having to first apply to set aside the award at the seat (see Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, per Lord Mance at [28]).

(b)            The unsuccessful party in the arbitration can apply to set aside the award at the seat, whilst at the same time, resist enforcement if enforcement is being sought in another jurisdiction. That explains why Art. VI of the New York Convention allows an enforcement court to order a stay of the enforcement proceedings if setting aside proceedings are pending at the curial court.

(c)            Regardless of whether the setting aside of an award is successful at the seat, the ruling of the curial court can create an issue estoppel in jurisdictions where such a doctrine (or its equivalent) exists (see Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, per Lord Collins at [98]). However, even if there is a successful annulment, the unsuccessful party in the arbitration may still find itself having to defend enforcement proceedings because certain courts may still enforce an award that had already been set aside (see Pabalk Ticaret Sirketi v Norsolor, Cour de cassation, 9 October 1984, 1985 Rev Crit 431; Hilmarton Ltd v OTV, Cour de cassation, 23 March 1994 (1995) 20 Yb Comm Arb 663; République arabe d’Egypte v Chromalloy Aero Services, Paris Cour d’appel, 14 January 1997 (1997) 22 Yb Comm Arb 691; Soc PT Putrabali Adyamulia v Soc Rena Holding, Cour de cassation, 29 June 2007 (2007) 32 Yb Comm Arb 299; Chromalloy Aeroservices v Arab Republic of Egypt, 939 F Supp 907 (DDC 1996).

The foundation of these principles stems from the way setting aside proceedings and enforcement proceedings are in fact designed as two separate and independent juridical proceedings. One may, and more critically, may not affect the other if, for instance, a result has already been reached in one or if setting aside proceedings are already pending.

Consequently, if a party aborts a setting aside proceeding before it is heard, that should not prejudice its application to defend enforcement proceedings in another jurisdiction. It is fully within that party’s prerogative to take the view that any security for costs ordered against it in the setting aside proceedings would not justify carrying through with the setting aside proceedings. In such a circumstance, it is entirely within that party’s option to terminate the setting aside proceedings, and respond to enforcement proceedings only when enforcement proceedings are commenced by the successful party in the arbitration.

It is therefore difficult to see how an “abuse of process” happened in Galsworthy. A possible abuse of process could arguably be made out in the rare instance where the unsuccessful party withdraws setting aside proceedings at the very last minute after a hearing of the merits when it became clear that it was losing that application, so as to avoid a final judgment which may have preclusive effect on subsequent enforcement proceedings. But even then, any abuse was of the process in the court of the seat, and not at the court of enforcement.

By dint of reasoning, the language of “election” used by the Singapore High Court in Galsworthy was unfortunate. There was no obligation on Glory Wealth Shipping to challenge the award in England, and even if it did so but aborted it ostensibly because of a security for costs order, that in itself does not affect its separate and independent right to defend enforcement proceedings in Singapore.

Darius Chan is an Associate at WilmerHale, London.

I am a bit surprised that the Supreme Court’s recent decisions in the stream of commerce cases have not been receiving more attention in the blog-o-sphere.  The issues are important, and the Court’s resolution of the cases contains some interesting developments in the law as well as some important signals of where future fights may lay [Disclosure – I filed briefs on behalf of an amicus in both cases.  The views expressed here are my own and do not reflect those of my client.]

For readers familiar with the cases, you can skip this paragraph which simply provides a bit of background.  The Court decided two cases – Goodyear and Nicastro.  Goodyear presented the question whether a state court could exercise general jurisdiction over foreign companies based on the flow of those companies’ goods (through intermediaries) into the state (the underlying facts involved forum state residents who were killed in a bus accident in France).  Nicastro presented the more standard question, created by the Supreme Court’s fractured opinion in Asahi – namely the conduct necessary to support specific jurisdiction based on the stream of commerce theory (the underlying facts involved a forum resident, injured in the forum state, by a machine manufactured in England and sold into the forum state by an independent US disributor with nationwide distribution rights).

In Goodyear, it was clear from the get-go that the Supreme Court was going to reverse and hold that the stream of commerce theory did not support general jurisdiction.  In doing so, the Court did a couple of interesting things.  First, and perhaps most importantly, the Court really narrowed the “continuous and systematic” contacts theory of general jurisdiction; the Court basically indicated that the theory was only available in an extraordinary case (like Perkins) where a foreign corporation relocated all of its operations to the US out of necessity.  Second, the Court explicitly linked purchases from the forum state (which had been at issue in Helicopteros) with sales to the forum state (at issue in Goodyear).  Prior decisions had suggested that, for export promotion reasons, purchaes from the forum state should be less likely to establish minimum contacts – Goodyear suggested there was no reason to treat the other differently.  Third, though the statement is technically dicta, the Court seemed to imply that a corporation could be subject to general jurisdiction not only in its state of incorporation but also in the state where it maintained its principal place of business (where that is a different state).  This strikes me as a rather radical statement- albeit dicta – especially becaues the Court offered no guidance on how to determine that place (particularly strange since, just last term, it had resolved a longstanding circuit split on that question in the context of determining the PPOB for diversity purposes).

In Nicastro, oral argument suggested that the vote would likely be 6-3, and that’s what happened albeit with another badly divided opinion (de ja vu from Asahi).  A couple of issues were at play in the Court’s decision.  One issue was the proper test.  Three justices (RBG, SS, and EK) embraced the Brennan view from Asahi.  The AMK plurality is a bit tougher to read but appears to embrace a modified version of the SOC view from Asahi.  It seems to say that stream of commerce theory still requires purposeful availment (the plurality uses the term “targeting”) of the forum state, but the plurality carefully avoids repearing the “additional conduct” factors that SOC identified in Asahi.  The Breyer/Alito concurrence is the most ambiguous.  It appears to reject the New Jersey Supreme Court’s rule (which drew on the Brennan Asahi opinion) but also cites the Brennan Asahi opinion (in my view, Breyer actually reinterprets that opinion without saying he’s doing so).  A second issue is the sovereign/forum analysis.  The AMK plurality pretty clearly wants to differentiate state sovereigns from national sovereigns and basically say that national sovereigns can consider nationwide contacts but state soveriegns can consider only contacts at the forum state itself (this has important implications for legislation pending before Congress).  The RBG dissent seems more willing to let forum states consider nationwide contacts at least where the foreign mfr uses a nationwide distributor.  Again, the Breyer/Alito concurrence is hardest to read on this point and probably cannot be understood to offer up a view.  A third issue is the methodology – the AMK plurality seems to be attempting to shift the Court away from fairness-based notions of constitutional limits on personal jurisdiction (note the repeated references to Scalia’s Burnham opinion which sought to do the same).  RBG doesn’t like that at all.  And again, Breyer and Alito are mum (though I suspect this may be a point on which these two might part ways).  Finally and perhaps most significantly, it’s worth noting that none of the justices cited the Asahi/Woodson “reasonableness” test, leaving one to wonder at least whether that prong of the test continues to hold appeal for a majority of the Court.

What does the future hold?  A couple of things.  As far as Goodyear, expect to see a lot more litigation on the issue of jurisdictional imputation of contacts – that was brimming beneath the surface in Goodyear, and RBG rightly concluded that the respondents had waived the issue.  But the law is all over the place, and some circuits (like CA9) are doing some nutty thing.  Additionally, expect to see a battle for the hearts and minds of Justice Alito and the Solicitor General.  Indeed, Alito’s vote in Nicastro is the most curious one in these cases, and I cannot help but think that Alito, a former ASG, was a bit tweaked that the SG didn’t file in that case (even though it filed in Goodyear), and the Breyer opinion basically says it’s awaiting the SG’s view.  Third, look for some internet cases.  Civ pro gurus know this has been a thorny area which Asahi did not contemplate and which dcts like the Zippo decision have struggled to address.  Breyer in particular appears keenly aware of the interplay between stream of commerce theory and internet contacts.

Peter Bowman Rutledge is Professor of Law at the University of Georgia School of Law

As the European Union realizes the economic advantages of the internal market, and its Member States (fitfully) move closer to becoming a single economic entity, European patent law nevertheless remains highly national in character.  Patent protection in Europe is granted under two parallel regimes: the national patent system; and the regime of the European Patent Convention (EPC).  National patents are issued by, and afford protection within, individual states, whereas the EPC provides a centralized administration for the issuance of ‘bundled’ national patents by the European Patent Organization (EPO).  The ‘European patent’ granted by the EPO does not constitute a unitary patent extending throughout Europe, but rather grants national patent protection in each EPC state specified in the patent application.  Both regimes operate independently of the EU; in fact, the EPC regime extends to non-EU states.

The EPC seeks to harmonize European substantive patent law by providing uniform rules for European patents, including in relation to: the extent of protection (art 69); patentability (arts 52-57); and revocation (art 138).  Uniformity is thwarted, however, by the fact that implementation and interpretation of these rules is left to national law (and national courts), and there currently exists no supranational judicial mechanism for ensuring the harmonization of national patent laws.

At the same time, generously construed rules on jurisdiction commonly permit patent litigants in Europe a choice of fora, and therefore an opportunity to engage in ‘forum shopping’.   Where a suit for patent infringement (or non-infringement) involves a defendant domiciled in an EU Member State, national courts of Member States must exercise jurisdiction in accordance with the Brussels Regulation (or Lugano Convention).

Under this regime, suit may be brought before the courts of the defendant’s domicile (art 2), or in the state(s) in which an infringing product was manufactured or sold in breach of a local patent (art 5(3)).  Dutch courts have even exercised jurisdiction over foreign defendants for violations of foreign patents, under art 6(1), where the defendant companies constitute a corporate group, and the head corporation of the group is domiciled in the Netherlands (see, e.g., Expandable Grafts Partnership v. Boston Scientific B.V., F.S.R., 352 [1999]; Solvay S.A. v. Honeywell Fluorine Products Europe B.V., District Court The Hague, Case No. 09-227 [2010]).

In recent years, the ECJ has made clear that a restrictive view is to be taken of the special bases of jurisdiction of the Brussels Regulation (see, e.g., Shevill v. Presse Alliance, 1995 E.C.R. I-415; Gesellschaft für Antriebstechnik m.b.H. & Co. K.G. v Lamellen und Kupplungsbau Beteiligungs K.G., 2006 E.C.R. I-06509; Roche Nederland B.V. v. Primus, 2006 E.C.R I-06535).  Some commentators consequently expected forum shopping in European patent litigation to be significantly curtailed.  Due to what these cases left open for forum shoppers, however, forum shopping remains prevalent.

Forum shopping both reveals and exacerbates economic inefficiencies arising from discordant national patent laws in Europe.  Allowing litigants an “often outcome-determinative” choice of court – borne out in widely varying ‘win-rates’ between European fora – distorts the economic policy balance which national patent laws strike between incentivizing innovation and competition.

Thus, reform is much needed in the European patent system.  Properly structured, a ‘Community patent’, extending unitary protection across Europe, would address the legal disunity that results in forum shopping.  One commentator has noted, however, that “[t]he Community patent seems to become less acceptable the more it is needed”.  Both the Community Patent Convention of 1975, and the Luxembourg Convention of 1989, proposed a Community patent, but failed to obtain sufficient ratification by EU Member States.  In 2000, the European Commission put forward a draft Community Patent Regulation, designed to “complement” the EPC regime, but negotiations between Member States broke down in 2004.

The reasons for the failure of these proposals are manifold.  Primarily, however, each failed: (i) to develop mutually acceptable mechanisms for judicial enforcement and revocation of patent protection at the Community level; and (ii) to adequately address the cost of filing and translating patent specifications in each jurisdiction.

Most recently, in 2007, the European Commission presented a proposal for a Community Patent Regulation, under which the EPO would be responsible for granting a Community patent extending unitary protection throughout EPC member states.  At the same time, an autonomous European and Community Patents Court would be established to decide all patent actions.  In 2011, however, the ECJ held this proposed regime to be inconsistent with EU law.  The Regulation would impermissibly divest national courts of first instance jurisdiction over patent disputes, and invest the Community Patents Court with the responsibility of interpreting and applying not only the envisaged international agreement, but also Community law (see E.C.J. Opinion 1/09 of 8 March 2011).  Thus, as of 2011, a Community Patent for Europe remains elusive.

In light of these failed efforts, it is suggested that the following structural elements be considered when formulated a new Community patent regime.  Although a tenable proposal would of course need to be much more comprehensive, it is hoped that this discussion contributes to the Community Patent debate.  First, national patent regimes should be phased out in EU Member States.  Thus, only a Community patent would be available, which would be issued, infringed, or revoked as a whole.  Secondly, a new Regulation under EC Treaty Article 308 should provide substantive Community patent law, and set minimum procedural standards for European patent litigation.  Thirdly, although national courts must retain first instance jurisdiction in patent cases, these courts should be limited in number and specialized in hearing patent matters.  Fourthly, a Common Patent Court should be established as a second instance court of appeal at the Community level, attached to the ECJ Court of First Instance.  The existence of appeal courts at the Community level would further the goal of substantive harmonization of European patent law.  Moreover, the ECJ should operate as a court of referral on questions of Community patent law, from national or Community courts.

In order to limit ‘torpedo’ actions, it is further suggested that current rules on jurisdiction be buttressed by a mandatory preliminary hearing on jurisdiction in national courts.  And, if such a preliminary ruling is not made by a first-seized national court within six months of filing, an application should be available to the Community Patent Court for a binding ruling on the first-seized court’s jurisdiction.  Finally, in order to overcome the controversial matter of translation requirements, a patentee should be required, at the time of filing, to translate patent claims into the official languages of Member States.  Translations of patent specifications (a more costly enterprise), should be required only prior to the commencement of patent litigation. (Notably, technological innovation may soon resolve this issue, as automated translations are already being employed by the EPO in respect of certain languages).

As former EU Commissioner Frits Bolkestein has stated, the failure to agree on a Community patent regime “undermines the credibility of the whole enterprise to make Europe the most competitive economy in the world”.  Indeed, Europe has been criticized for being less successful than other regions at converting its “excellent scientific base” into new products and market share.  EU Member States should once again return to the negotiation table, with the knowledge that political compromise will assuredly beget significant economic reward.

Owen Webb

On 7 July 2010, the European Commission published a proposal for a Regulation establishing transitional arrangements for bilateral investment agreements between Member States and third countries (COM (2010) 343 final, hereinafter: the Regulation Proposal; available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010PC0344:EN:NOT). By adopting this Regulation Proposal, the Commission reacts to the changes by the Treaty of Lisbon concerning the division of competences in the field of investment law: According to Article 207 of the Treaty on the Functioning of the European Union (TFEU), the Common Commercial Policy (CCP) now expressly extends to foreign direct investments. Since the competences in the field of the CCP are exclusive, EU Member States are generally no longer allowed to conclude new agreements concerning foreign direct investment (see Article 2 para. 1 TFEU). Furthermore, the Member States are obliged to denounce agreements, for which they have lost their competence (compare Article 351 s. 2 TFEU; see Joined Cases 3, 4 and 6/76, Cornelis Kramer and others, 1976 E.C.R. 1279, ¶ 45; concerning investment agreements compare 205/06, Commission of the European Communities v Republic of Austria, 2009 E.C.R. I-1301 (Mar. 3, 2009); Case C-249/06, Commission of the European Communities v Kingdom of Sweden, 2009 E.C.R. I-1335).

However, it would not be desirable if the Member States would have to denounce all their BITs as a consequence of the EU having acquired exclusive competences for FDI. The EU Member States have concluded an impressive number of bilateral and also multilateral investment treaties: The numbers of BITs concluded by all EU Member States range between 1000 to 1300. With a total number of 130 BITs ratified (compare http://www.bmwi.de/BMWi/Navigation/aussenwirtschaft,did=194058.html), Germany can be considered the “BIT world champion”. Besides, all EU Member States are contracting parties to the ICSID-Convention, which offers a mechanism for the settlement of investment disputes between States and investors.

In case the EU Member States would have to denounce all their BITs, EU investors would be left unprotected until the EU concludes BITs on its own.  Therefore, like in similar cases before (compare, e.g., Regulations (EC) No. 662 and 664/2009), the European Commission seeks to establish a transitional procedure by the Regulation Proposal, which allows the Member States to maintain their existing BITs concluded with third countries and even to conclude new BITs. However, this Regulation Proposal must be criticized mainly for two reasons. First, the Commission incorrectly assumes that the EU has exclusive competences for all issues covered by the Member States’ BITs. Therefore, questions of “mixity” are neither discussed by the Regulation Proposal, nor by the Communication concerning a future European International Investment Policy (COM (2010) 343 final, available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010DC0343:EN:NOT), which has been published on the same day as the Regulation Proposal. Second, the Proposed Regulation is poorly and incoherently drafted.

Concerning competences, most authors come to the conclusion – and rightly so – that Article 207 TFEU does not cover all issues addressed by current BITs (see, e.g., Markus Krajewski, External Trade Law and the Constitution Treaty, 42 Common Market Law Review 91, 112 (2005); Lorenza Mola, Which role for the EU in the development of international investment law? 15 (Society of International Economic Law Inaugural Conference, 2008), available at http://ssrn.com/abstract=1154583; Joachim Karl, The Competence for Foreign Direct Investment, 5 Journal of World Investment & Trade 413, 425 (2005); Jan Ceyssens, Towards a Common Foreign Investment Policy?, 32 Legal Issues of Economic Integration 259, 274-75 (2005)). For example, Article 207 TFEU is limited to direct investments, which require “lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity“ (see Case C-446/04, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, 2006 E.C.R. I-11573 at ¶ 181). However, current BITs generally use a broader definition of investment, which refers to all kinds of assets. In addition, it is arguable that the competences under Article 207 TFEU are limited to question of the admission of investments and do not govern the protection of admitted investments. Nevertheless, „[the]Commission is of the view that any legal uncertainty on the status and validity of these agreements, which could be detrimental for the activities of EU investments and investors abroad or foreign investments and investors in Member States, is to be avoided.“ (Regulation Proposal, at 3). It is certainly true that the investors’ major concern is not who will conclude future BITs, but whether the protection granted by existing BITs will remain in force (until replaced by an adequate standard of protection). Nevertheless, the EU cannot dispose over its own competences merely by adopting a regulation. Thus, the Draft Regulation is not a suitable instrument to create legal certainty regarding the extent of the competences of the EU or the Member States. Rather, such an attempt would contravene against the principle of conferral.

But apart from questions of competence, the Proposed Regulation may be subject to criticism. First, the legal certainty aimed at by this Regulation Proposal will be limited or may even be deceptive. Existing BITs will be – after a notification by the Member States –automatically authorized and then be published in the Official Journal (Articles 3 and 4 Regulation Proposal). The Commission may withdraw such an authorization, inter alia, in case of  a substantive conflict with the law of the Union (Article 6 para. 1 Regulation Proposal). But there is neither a binding decision by the Commission that there is no substantive conflict between the agreement and EU law, nor are there time limits for a review by the Commission. Thus, the publication of the agreement in the Official Journal as well as the fact, that the authorization has (not yet) been withdrawn, does not mean that he Commission will not do so in the future. Or worse, it can review the agreement immediately and come to the conclusion that there is no substantive incompatibility; but some years later it can change its mind and withdraw the authorization. Second, neither the grounds for a withdrawal of an authorization and the grounds for a non-authorization correspond, nor do so the grounds for withdrawing the authorization and the aspects to be assessed during the review according to Article 5. Third, Article 6 para. 1 lit. c provides a rather far reaching and indeterminate reason for withdrawal. According to this provision, the authorization can be revoked in case an agreement constitutes an obstacle to the development and the implementation of the Union’s policies relating to investment. Neither the proposal nor the explanatory memorandum explain how the “Union’s policies relating to investment” can be determined. Thus, if adopted tel quel this ground for withdrawal could constitute a carte blanche for the Commission. Fourth, the Draft Regulation sets a strict time limit for a notification by a Member State of its intention to negotiate an agreement, which does not correspond to the time limits for a review by the Commission (Article 8 ).

Despite this criticism, a transitional regime for existing BITs is urgently needed to avoid the severe consequences foreseen by Article 351 TFEU, regardless of whether the EU enjoys exclusive competences for all or only some subjects covered by current BITs (i.e. if the competence is mixed). Conversely, questions of “mixity” will arise as far as future agreements are concerned unless the Commission is willing to exclude non-direct investments from future EU BITs and to leave them unprotected. Although in theory the Member States retain the competence to conclude their own BITs limited to non-direct investments, this will hardly be a workable solution in practice.

Mixed agreements are quite a common phenomenon today. Still, their conclusion entails intricate problems resulting from the interplay of public international law and EU law. In the case of investment agreements, two issues are of particular interest: international responsibility and dispute settlement.

In general, international organizations are only liable for the conduct of their own organs. However, EU law is normally not implemented by the organs of the EU itself, but by the Member States,  which enjoy a certain discretion in implementing EU legislation. According to Article 16 of the Draft Articles on the Responsibility of International Organizations, an international organization may be responsible if it orders a state to commit an act contrary to its international obligations. However, if a Member State breaches an obligation under the BIT while implementing EU legislation without having been ordered to do so, Article 16 of the Draft Articles provides no answer. Whether the Member State itself is liable depends on the actual design of the BIT: Most modern mixed agreements delimitate the scope of rights and obligations of the EU and Member States according to the internal allocation of competences (compare, e.g., Article. 5, 6 para. 1 UNCLOS Annex IX). If such a clause is missing, the EU and its Member States are jointly liable for a breach (compare Opinion by Advocate General Jacobs, delivered on Nov. 10, 1994, Case C-316/91, Parliament/Council, 1994 E.C.R. I-625, ¶ 69). Assuming that a future EU BIT contains such a delimitation clause, neither the EU nor the Member State could be held responsible in the just mentioned case. To avoid such strange consequences, it thus will be necessary to treat the EU like a federal state and to attribute the conduct of the Member States to the EU itself (compare Article 4 para. 1 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts).

As far as dispute settlement is concerned, a direct participation of the EU as a party to the dispute in an ICSID-arbitration is not feasible because the EU is not a contracting party to the ICSID-Convention. Therefore, an investor seeking redress from the EU will have to chose the rules of another arbitral institution, although this has some disadvantages compared to ICSID. Conversely, EU investors could still choose arbitration under the ICSID-Rules as long as the EU Member States remain contracting parties to ICSID. Thus, there is a serious imbalance between the rights of EU investors and investors of third countries. It seems doubtful whether, in a future EU-BIT, third countries are willing to submit to ICSID-arbitration under these circumstances. However, the ICSID-Convention would have to be amended in order to allow a direct participation of the EU because the participation of regional organizations for economic integration is not possible so far. But the revision of a multilateral treaty is always a delicate thing.

It becomes apparent that the extension of the CCP by the Lisbon Treaty has enormous consequences for existing and future investment agreements, which the drafters did not intend. The focus of the Commission in its Regulation Proposal and the Communication on exclusive EU competences for BITs tends to obscure the intricate questions of “mixity”, which inevitably will come up in the future. The Communication would have been a proper place to create a consciousness for these problems, to shape the discussion and to propose legal solutions. Although a uniform EU foreign investment regime can be a step towards more coherency in international investment law, mixed BITs will cause complications, which can undermine the whole process. If these complications prove to be insurmountable, a revision of Article 207 TFEU should be considered. Considering the frequent amendments of Article 207’s predecessors, such a revision is not unrealistic.

Jan Asmus Bischoff

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