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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This is to announce the March 24^th, 2014, session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “Admissibility v. Jurisdiction in International Arbitration”.

The event will take place on Monday, March 24^th, 2014, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that on the occasion of that session, Ms. Monique Sasson will give a talk on the aforementioned and that Mr. Timothy G. Nelson and Prof. Mathias Forteau agreed to act as commentators.

Monique Sasson initially qualified as an Italian Avvocato and practiced in Rome, where she appeared before arbitral tribunals and Italian courts. In 2000, she joined Herbert Smith’s international litigation/arbitration practice group in London, qualified as an English solicitor (and subsequently as a solicitor advocate), and acted for clients in a number of international arbitration cases as well as litigation matters. In 2009, Monique obtained her Ph.D. degree, and the following year Kluwer published a revised version of her doctoral thesis under the title Substantive Law in Investment Treaty Arbitration: the Unsettled Relationship between International law and Municipal Law. Monique currently resides in New York City, is a member of the New York Bar, and serves on the New York City Bar Committee on Arbitration.  She is an associate editor of Kluwer Arbitration Blog, and the Co-Managing Editor of the ITA Arbitration Report and the ITA Board of Reporters.  Monique is also the Co-Managing Editor of World Trade and Arbitration Materials, Co-Managing Editor of theITA Scoreboard of Adherence to Transnational Arbitration Treaties, and a Member at Large of the ITA Advisory Board and its Executive Committee.

Timothy G. Nelson represents clients in international disputes, including arbitration before ICSID, ICC, ICDR, and UNCITRAL. He has conducted and argued some of the larger recent Bilateral Investment Treaty (BIT) arbitrations before ICSID and UNCITRAL involving expropriation and unfair treatment of investors by host states, as well as high-profile United States litigation involving international law and arbitration. Mr. Nelson also has an active international commercial arbitration practice.

Mathias Forteau is Professor of Public International Law at the University of Paris Ouest, Nanterre-La Défense (France). He is also, since 2012, a Member of the International Law Commission of the United Nations (elected by the UN General Assembly for five years on November 2011). He is the former Secretary-General of the French Society for International Law (SFDI). He has published many books and articles on various fields of international law (especially on the law of State responsibility, the law of the United Nations and collective security, investment law, Statehood or the law of settlement of disputes) and is the co-editor of two leading French international law books the “Droit international public (Nguyen Quoc Dinh†)” (with P. Daillier and A. Pellet) (2009) and the French Commentary, article by article, of the UN Charter (with J.-P. Cot and A. Pellet) (2005). Moreover, he acted, and still acts, as Counsel and Advocate of many States before the International Court of Justice, the International Tribunal of the Law of the Sea or Arbitral Tribunals, in cases involving issues of State responsibility, boundary disputes, maritime delimitation, Statehood or investment law.

Since seating is limited, please rsvp by March 21^st, 2014, by sending an email to cassy.rodriguez@nyu.edu.

Please note that the Chatham House rule applies.

A.      The decision and its context

On 12 November 2013 the Chairman of the ICSID Administrative Council, Dr Jim Yong Kim, decided to disqualify the arbitrator appointed by the claimant, Mr. José Maria Alonso in the ICSID Case No. Arb/12/20 between Blue Bank International & Trust (Barbados) Ltd.  and the Bolivarian Republic of Venezuela (in the following “Blue Bank International v. Venezuela”) upon request by the respondent.[1] Only one month later, on 13 December 2013, he disqualified Professor Francesco Orego Vincuna in the proceedings between Burlington Resources Inc. and the Republic of Ecuador (in the following “Burlington Resources v. Ecuador).

If one takes into account that until that time challenges of arbitrators in ICSID proceedings have generally been unsuccessful[2] the sequence of two successful challenges within one month is without doubt remarkable. It immediately raises the question as to the legal value and future relevance of these decisions. Are we witnessing a profound change of attitude towards challenges within the ICSID system? Or can the success of the challenges be explained by the particular facts of the two cases which by mere chance were decided within a short time period?

The challenge of an arbitrator was originally a mechanism of last resort. It was used to prevent the participation of obviously unsuitable arbitrators, and parties thought twice before initiating such proceedings. That is also the concept underlying the ICSID Convention at its time of drafting. Pursuant to its Article 57 arbitrators can only be disqualified if there is a “manifest lack of the qualities required by paragraph 1 of Art. 14”, which include inter alia the independence and impartiality of the arbitrator.

Over the years the number of challenges has increased considerably. They have developed into a standard procedural tool employed for a number of different purposes. That applies to commercial arbitration as well as to investment arbitration. In particular in investment arbitration one may even get the impression that challenges are slowly moving from being the exception to becoming the rule. With the increasing case law, the small pool of arbitrators and comparable legal questions in particular, questions of issue conflicts are bound to arise much more frequently than in commercial arbitration.[3]

Irrespective of this it may still be noteworthy that in Blue Bank International v. Venezuela, which is the main focus of this blog, there had been objections against all members of the tribunal. The arbitrator appointed by Venezuela, Dr. Torres Bernárdez, was challenged by the claimant. Claimant considered that the repeat appointments of Dr. Bernárdez by one of the lawyers representing Venezuela as well as his previous decisions which allegedly were always in favor of the party which appointed him, made him unsuitable to act as arbitrator. There was, however, no need for a formal decision on the issue, since Mr. Bernárdez subsequently resigned. Furthermore, concerning the chairman, none of the originally proposed five persons was acceptable to both parties. Venezuela also objected to the appointment of Mr. Söderlund who had been finally selected by ICSID.

To properly evaluate the importance of the successful challenge against Mr. Alonso the decision has to be seen against the background of the particular ICSID challenge system, the previous practice as well as the considerable criticism against the investment arbitration System in general. The potential threat posed by such criticism to investment arbitration is well evidenced by the recent discussion concerning the investment protect provisions in the presently negotiated Transatlantic Trade and Investment Partnership between the US and Europe. The criticism raised has resulted in a temporary stay of the further negotiation of that chapter. A closer look at the discussion in Germany’s general press reveals that one of the biggest objections to investment arbitration is that the decisions are made by a small group of arbitrators who are closely connected to the law firms involved and have an economic interest in maintaining the system as it stands.[4] Even if that may be grossly exaggerated and interest-driven, it is hardly questionable that the legitimacy of investment arbitration depends to a considerable extent on the perception of those involved that the decisions are taken by independent and impartial arbitrators. As Mr. Bottini, who has been handling a number of the ICSID arbitrations against Argentina for the Treasury Attorney’s General office on the Argentinian side, has stated succinctly in an article, “[t]hat is why effective and transparent challenge mechanisms are fundamental for the integrity of international investment arbitration.”[5]

 B.      The particularities of the ICSID challenge regime

The ICSID challenge mechanism can primarily be found in Articles 57, 58 ICSID Convention. While Art. 58 regulates the procedure the relevant standard for challenges can be derived from Art. 57 ICSID Convention. It provides in its relevant part:

“A party may propose to a Commission or Tribunal the disqualification of any of its members on account of any fact indicating a manifest lack of the qualities required by paragraph (1) of Article 14. […]”

The qualities required by Art. 14(1) ICSID Convention are:

• High moral character
• Recognized competence in the fields of law, commerce, industry or finance and
• Reliability to exercise independent judgment.

 

In practice only the last requirement, i.e.  to “exercise independent judgment” has so far played a role. It entails a prospective standard as to whether the arbitrator will have the necessary independence and impartiality to render a decision which is not influenced by any extraneous factors.

On the basis of a primarily textual analysis the ICSID challenge mechanism differs in several respects from the mechanism found in the UNCITRAL Model Law (“ML”) or other national arbitration laws.

First, there is a potential broadening of the grounds for challenge. The ML allows challenges if the arbitrator either lacks the required independence and impartiality or the qualification agreed by the parties. Art. 12(2) provides in its pertinent part:

“An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. […]”

By contrast Art. 14 ICSID-Convention imposes, irrespective of any agreement by the parties, two additional statutory quality requirements for arbitrators, i.e. being of high moral character and having a recognized competence in the fields of law, commerce, industry or finance.  Their absence may – via the reference in Art. 57 ICSID Convention – become the basis for a challenge. The practical relevance of that difference is, however, limited. In practice challenges are usually based on the third requirement, the reliability to exercise independent judgment.

The second difference concerns the focus of the independence standard. While under the ML the arbitrator has to be independent and impartial, the ICSID Convention requires a person “who may be relied upon to exercise independent judgment”. The latter refers to a prospective act in the future. As has been stated by Professor Crawford in a presentation at a seminar at the PCA in October 2013: “It consists in evaluating the probability of a certain event – the event of the arbitrator acting independently – rather than simply whether the event will occur.”[6] By contrast the ML standard focuses more on present and past elements. Again the practical relevance is limited, if one takes into account that also the decision as to the prospective act in the future is largely based on past and present connecting factors and experiences.

The most important difference to the Model Law standard is the requirement in Art. 57 ICSID Convention that there must be a “manifest lack” of the qualities required. There is a widespread belief that due to the requirement of a “manifest lack” the ICSID Convention imposes a higher threshold for successful challenges than the ML or other national arbitration regimes.[7] The ML, for example, only requires “reasonable doubts” as to the arbitrator’s independence or impartiality and not a “manifest lack”.

In light of this difference the leading commentary on the ICSID Convention for example states that the “requirement that the lack of quality must be ‘manifest’ imposes a relatively heavy burden of proof on the party making the proposal.”[8]

There are, however, different views as to what is exactly meant by the reference of “manifest lack”. Following the decision in the first Vivendi Case, the prevailing view appears to be that the notion of “manifest lack” has an evidentiary meaning. It should exclude “reliance on speculative assumptions or arguments” and the “circumstances actually established (and not merely supposed or inferred) must negate or place in clear doubt the appearance of impartiality.”[9]

In other decisions the reference to “manifest lack” seems to have been considered to be more a question of degree. Thus not every minor lack of independence is sufficient but only those which have reached a certain threshold, i.e. are manifest.

C.      Definition of the relevant standard in Blue Bank International / Burlington Resources

In so far as the abstract definition of the applicable legal standard is concerned both decisions do not provide any new input for the discussion. The relatively short treatment of the issue in the Blue Bank decision in paras 55 – 62 has been taken over largely verbatim in the Burlington Resources decision. It largely limits itself to quote the statutory requirements and their application in previous cases without touching on any of the controversial issues surrounding the standard.

Concerning the second point mentioned above it is noteworthy that in defining the relevant standards to be derived from Art. 14(1) ICSID Convention, a ML terminology is used that “arbitrators must be both impartial and independent” (para. 58). There is no emphasis on the prospective element.

Equally it is confirmed that the reference to an “independent judgment” encompasses both elements, i.e. independence and impartiality. By reference to previous decisions the applicable legal standard is defined as an “objective standard based on a reasonable evaluation of the evidence by a third party” (para. 60).

The only part of some interest in the definition section is the very cautious treatment of the controversial question of the meaning of the word “manifest” and how the standard differs from the “reasonable doubts” standard underlying the UNCITRAL Model Law and the IBA Guidelines on Conflict of Interest. Here the Chairman limits himself to state that “a number of decisions have concluded that it means ‘evident’ or ‘obvious’ and that it relates to the ease with which the alleged lack of the qualities can be perceived” (para. 61). While the quote shows certain sympathy for that view taken in these decisions a clear endorsement would present it more obviously as the Chairman’s own understanding of the standard.

An equally cautious position is adopted concerning the question of how the standard under Art. 57 ICSID Convention differs from that under the IBA Guidelines. The decision remains vague acknowledging somehow that there might be a difference but not clarifying in any way the nature of such a difference. Concerning the IBA Guidelines which have apparently been invoked by the parties the decision merely states that “[w]hile these rules and guidelines may serve as useful references, the Chairman is bound by the standard set forth in the ICSID Convention” (para. 62).

 D.      Application of the standard

Of considerable interest is, however, the application of this abstract legal standard to the particular facts of the cases.

In Blue Bank the challenge was based on facts disclosed by Mr. Alonso in his statement of acceptance and declaration of independence. In his view the disclosed activities of other Baker & McKenzie firms did not affect his impartiality or could reasonably do so. The controversial issue concerned the partner status of Mr. Alonso in Baker & McKenzie, Madrid and the involvement of two other firms belonging to Baker & McKenzie International, in another case brought against Venezuela by Longreef, a Dutch investor, which allegedly involved comparable legal questions. The focal point of the dispute was the different value given to the exact legal relationships in the case. Unlike a number of other law firms which are fully integrated, the various national offices of Baker & McKenzie are legally and financially (largely) independent. They are bound to the other national Baker & McKenzie entities only via their joint membership in Baker & McKenzie International, a Swiss Verein and certain joint practice groups set up within the Baker & McKenzie International Framework.

Venezuela argued in its challenge that “Baker & McKenzie is structured and publicized as a global legal practice”. Therefore the various offices could not be treated a separate legal entities for the purposes of this challenge. That is even more so since they maintain joint committees to which Mr. Alonso is a member and a part of his remuneration depends on the global returns of the firm. Consequently he had an interest in the outcome of the action brought by Longreef which involved issues similar or identical to the ones Mr. Alonso had to decide, leading to doubts as to whether the decision would be free of extraneous influence.

Mr. Alonso, by contrast, considered such doubts not to be justified. In his view, due to the wide legal independence of the various member firms of the Baker & McKenzie International Framework the remaining connections did not even meet the standard for disqualification under the IBA Guidelines, let alone under the ICSID Convention. He emphasized that his remuneration depended primarily on the results achieved by Baker & McKenzie Madrid and that all offices operate with absolute autonomy. The existing joint committees such as the International Arbitration Steering Committee do give no instructions as to the management of individual cases. Personally he had had no previous contact with the parties of this arbitration and had no economic or other interest in the outcome of the arbitration by Longreef against Venezuela.

The Chairman dismissed the arguments by Mr. Alonso. For him the sharing of a corporate name, the existence of an international steering committee and the sharing of some revenues “imply a degree of connection and overall coordination between the different firms comprising Baker & McKenzie International” that it would be justified to treat them as one entity. In light of the similarity of the issues likely to be discussed in the Longreef v. Venezuela case a “third party would find an evident or obvious appearance of lack of impartiality on a reasonable evaluation of the facts of this case” (para. 69).

E.       Evaluation of the decision

In the author’s view, assuming that the Longreef case truly involved comparable questions,   the challenge in Blue Bank was correctly decided, at least as far as the result is concerned.

The decision avoids giving the critics of the existing system of investment arbitration additional ammunition for their attack on the legitimacy of the regime. In light of the very rudimentary legal reasoning it can only be assumed that such political considerations also influenced the decision. Any other decision could perhaps have been justified on the basis of a formal application of existing standards and could have been explained to well-informed lawyers but not to the general public. That is not to advocate that legal decisions should primarily be guided by considerations of the momentary public opinion. Irrespective of that the perception of the general public cannot be ignored completely in the context of investment arbitration. In so far investment arbitration differs from commercial arbitration as is also recognized in other areas. Over the years the role of the general public has changed. It has increasingly and rightly been recognized to be a major stakeholder in investment arbitration to a much greater extent than in commercial arbitration. That is most apparent in the increased role of transparency in investment arbitration endorsed by the recent changes of the relevant arbitration rules. Consequently, the views of the general public cannot be completely disregarded in defining relevant standards for challenges which affect the legitimacy of the system. While the legal standard as such, i.e. “manifest lack of the qualities” remains unchanged the perception of what it required for an “independent judgment” have changed with the above development. Connections which may have been acceptable in the early days of ICSID when Amco v. Indonesia was decided are no longer acceptable now. In so far the standard of what is required may also differ in investment arbitration from commercial arbitration.

On the basis of a formal legal analysis Mr. Alonso was right in emphasizing that his firm, Baker & McKenzie Madrid, S.L.P. and the firms representing Longreef in the other arbitration against Venezuela, i.e. Baker & McKenzie New York and Baker & McKenzie Caracas, are separate legal entities. They are only bound to each other through their membership in Baker & McKenzie, International.

These legal niceties, however, do not influence the perception of the firm in the market. Therefore the legally separate entities are perceived to be part of the one global law firm Baker & McKenzie International. And in principle that is the way the law firm wants to be perceived and markets itself. That becomes obvious for example by having a look at the regularly published Baker & McKenzie International Arbitration Yearbook. In the copyright information for the 2012 – 2013 Yearbook it is stated that the “[l]eading lawyers of the Firm’s International Arbitration Practice Group, a division of the Firm’s Global Dispute Resolution Practice Group, report on recent developments … in the jurisdiction in which they practice”.  The impression created by this publication addressed to the market and intended to shape the market perception is that there is one “Firm” Baker & McKenzie which operates globally and has the required know-how.  The main purpose of setting up the Swiss Verein Baker & McKenzie, International, organizing Committees and Practice Groups across the boundaries of the separate legal entities is to give the market the impression that there is a Global firm with a well-known brand name and not merely a loose cooperation between befriended law firms.

In particular in investment arbitration with its increased need for transparency, it is that market perception which is relevant for the challenge standard. To put it bluntly: it is not the reasonable and well-informed lawyer who must have manifest doubts but those doubts must exist in the eyes of the reasonable layman potentially affected by the decision.

In so far it is unfortunate that the abstract legal standard for successful challenges appears to be higher in ICSID arbitration than incommercial arbitration – at least when it comes to the evidentiary side. The decision cannot be interpreted as a general legal abolishment of that standard, since the Chairman appears to have endorsed the difference between the ICSIC standard and that under the IBA Guidelines. At least it has not questioned that distinction which would have been difficult without a change of the Convention. De facto, the decision will have lowered the standard a little bit, at least through the back door. One can interpret the decision in a way that while the abstract legal standard is still “manifest lack of qualities” the relevant third person, in the eyes of which such a lack must exist is a different one: It is no longer the third person of 1965 but the third person of 2013 with a critical view of investment arbitration.

Will the underlying recalibration of the approach by ICSID pose a threat to the parties’ right to effected legal protection, which always has to be balanced against the right to challenge? It is submitted that this is not the case, as long as the decisions are based on hard and easy determinable factors, such as the partnership in a law firm.

It appears, however, likely that the decision will further reinforce the exodus of leading arbitrators from full service firms setting up their own boutiques.  That excludes at least the law firm related conflicts.

Stefan Kröll

Prof. Dr. Stefan Kröll, LL.M. (London) is an independent arbitrator in Cologne and Honorary Professor at the Bucerius Law School in Hamburg where he teaches international arbitration and litigation and international contract law. He is a director of the Willem C. Vis Arbitration Moot and a former scholar in residence of the Center for Transnational Litigation, Arbitration and Commercial Law.

Today’s international businessperson should never travel far without an arbitration agreement.  One would expect to hear that from arbitration lawyers, hungry for business (or business class flights).  Yet Australia’s courts have now joined many others in viewing arbitration as essential to international commerce, seen recently with the decision in Dampskibsselskabet Norden A/S v Gladstone Civil Pty Ltd (“Norden”).[1]  After exploring the role of this “international commercial policy” in Norden, I evaluate the ways in which the New York Convention (“NY Convention”)[2] and the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”)[3] legitimate the use of such a policy in resolving arbitration issues.  Applying this policy, I suggest an alternative approach to Norden for upholding arbitration of carriage of goods by sea disputes.

I           Norden

Norden concerned a dispute arising under a voyage charterparty for the carriage of coal from Australia to China between a Danish ship-owner and an Australian charterer, with a choice of English governing law.[4]  The dispute was referred to London arbitration in accordance with the parties’ agreement.[5]  In resisting enforcement of unfavorable awards, the Australian relied on the Carriage of Goods by Sea Act 1991 (Cth) (“COGSA”), s 11(2)(b) of which provides, inter alia, that an agreement “has no effect” insofar as it purports to “preclude or limit the jurisdiction of [an Australian] court in respect of” a sea carriage document relating to the carriage of goods from Australia.  This section does not apply to arbitration agreements with a seat in Australia.[6]  Section 11’s purpose is to protect Australian shippers from the inconvenience of litigating abroad.[7]  Similar protections are found in Argentina, Canada and South Africa.[8]

Australia has implemented its obligations under the NY Convention in the International Arbitration Act 1974 (Cth) (“IAA”), but s 2C provides that “[n]othing in this Act affects…the operation of section 11…of [COGSA]”.  A majority in Norden found that COGSA s 11 did not apply to voyage charterparties and overturned the lower court’s decision refusing enforcement of the awards.[9]  The international commercial policy played a significant role in reaching this result.  Justice Mansfield acknowledged that, although it was clearly open to construe s 11 as applying to voyage charterparties, the “better approach” was to exclude such contracts from its operation due, in part, to the longstanding acceptance that “international commercial disputes…may be settled by arbitration”.[10]  Justice Rares similarly relied upon the “policy of reocognising and encouraging private arbitration as a valuable method of settling disputes arising in international commercial relations” to narrowly construe s 11.[11]  The case highlights how the international commercial policy encourages reaching an outcome which favors arbitration when alternative constructions or resolutions of issues arise in international commercial disputes.[12]

II         The Validity of the International Commercial Policy

The international commercial policy, as applied in Norden, has both international and national aspects.  The international aspect recognizes that an “ordered efficient dispute resolution mechanism leading to an enforceable award…is an essential underpinning of commerce”,[13] the unenforceability of which would “damage the fabric of international commerce and trade”.[14]  This international aspect has been applied by courts throughout the world in, for example, broadening arbitrability,[15] or narrowing grounds for refusing enforcement of awards.[16]

The international aspect of the policy is also supported by the NY Convention.  While the text of the Convention evidences a pro-enforcement policy,[17] the travaux préparatoires indicate this arises from arbitration being essential for international commerce.  The ICC, whose Report drove the impetus for the NY Convention,[18] sought greater recognition and enforcement of arbitration awards in order to develop international trade.[19]  The philosophy of arbitration as a tool to promote trade and development was wholeheartedly adopted by the drafting committee and Conference.[20]  In interpreting the NY Convention, courts must have regard to its object and purpose.[21]  This includes the international aspect of the international commercial policy.[22]

The national aspect, on the other hand, stems from a belief that a court’s disfavor of arbitration could discourage the expansion of their nationals’ businesses or deter others from doing business with their nationals.[23]  This belief has some justification.  First, the World Bank emphasizes the enforceability of contractual promises as part of the ease of doing business in a given country, which suggests failing to enforce agreed dispute resolution mechanisms may deter business in the country.[24]  Second, the few studies undertaken on business attitudes towards arbitration indicate businesses see arbitration as the only effective dispute resolution mechanism for cross-border transactions.[25]  Finally, in this author’s experience, a party often insists on pre-dispute protections in contracts, such as bank or third party guarantees, when the other is from a country notorious for its enforcement difficulties.  These measures increase transaction costs or may deter transactions with that country entirely.  While these concerns do not form part of the NY Convention’s objects or purposes, broader policy considerations are often taken into account by courts when exercising their functions or construing legislation.[26]  It is legitimate to include this national aspect in the international commercial policy to which courts should have regard.

III        Applying the International Commercial Policy to Norden

Norden applied the international commercial policy in finding COGSA s 11 did not apply to voyage charterparties, but the award should have been enforced even if voyage charterparties were “sea carriage documents” and, therefore, covered by s 11.  While nothing in the IAA affects COGSA s 11, one must still ask whether s 11, even if applicable, requires an award made outside of Australia to be denied enforcement.[27]  The below analysis, informed by the international commercial policy, suggests not.

First, failing to enforce the awards at issue in Norden would have been contrary to Australia’s obligations under the NY Convention.  There were three arguable grounds for non-recognition of the awards in Norden, but each was unlikely to apply.  Article V(1)(a) of the NY Convention allows non-enforcement when the arbitration agreement is invalid under the law chosen by the parties to govern its validity or, failing a choice, the law of the place where the award was made.  The Norden parties chose English law to govern the main contract, from which an implication can usually be drawn that they intended English law to govern their arbitration agreement as well.[28]  Even if COGSA s 11(1) (which invalidates the choice of foreign law in a “sea carriage document”) is taken into account,[29] the arbitration agreement remains a separate contract and the chosen seat of arbitration may still imply English law as that chosen by the parties.[30]  Failing any implied choice, the validity of the arbitration agreement is still determined under English law, as the Convention defaults to the place of the award.  As English law would uphold the validity of the arbitration agreement, art. V(1)(a) of the NY Convention is not an available ground for setting aside the award.

Second, art. V(2)(a) (subject-matter inarbitrability) is also unlikely to apply because COGSA s 11(3) expressly recognizes that the subject-matter of such disputes are arbitrable; it allows disputes under “sea carriage documents” to be arbitrated in Australia.  Finally, the “public policy” exception in art. V(2)(b) is generally reserved for when enforcing the award would violate the State’s “most basic notions of morality and justice”.[31]  It is difficult to argue that the concern of protecting Australian shippers from the inconvenience of litigating overseas meets this high threshold.  Accordingly, the NY Convention requires enforcement.

Australia is a dualist system such that the NY Convention does not necessarily prevail over COGSA s 11 (and the IAA expressly provides otherwise).  However, the conflict with the NY Convention and the international commercial policy strongly suggest s 11 should, to the maximum extent possible, be construed favorably for enforcing arbitration awards.  A plausible construction of s 11 is that it simply provides parties cannot oust the jurisdiction of Australian courts over “sea carriage documents”; the position for all contracts at common law prior to statutory intervention.[32]  Thus, if a party desires to bring a dispute under a “sea carriage document” to an Australian court, the court need not stay its proceedings due to a foreign arbitration agreement.  That does not mean the arbitration agreement is itself invalid, nor that a resulting award is unenforceable in Australia.  Further, under Australian law, an award extinguishes the underlying dispute.  In enforcing an award, the court is not concerned with rights or liabilities under a “sea carriage document”, but a party’s obligation to comply with the award.[33]  As at common law, the court’s jurisdiction is not ousted contrary to COGSA s 11, because the rights and liabilities under the “sea carriage document” are subsumed with the award which the court is now asked to enforce.[34]

IV        Conclusion

This suggested alternative approach to Norden is particular to the text of Australia’s COGSA, but the analytical approach adopted may have broader application to enable the enforcement of awards in jurisdictions which seek to override choice of forum clauses in carriage of goods by sea contracts.  While there might be good policy reasons for protecting certain persons from litigating overseas, if no party seeks to avail themselves of the local courts and disputes are in fact referred to arbitration, it makes little sense to construe the legislation as invalidating the arbitration agreement or the resulting awards when the text does not expressly provide for such a result.  The international commercial policy suggests the non-enforcement of awards would have adverse effects for international and national commerce, which provides a compelling reason for courts to construe statutes which restrict recourse to arbitration narrowly.

 

Jesse Kennedy

The author is a Class of 2014 LL.M. student in the International Litigation, Arbitration and Business Regulation program at New York University.  He obtained his Bachelor of Laws with Honors from the Australian National University in Canberra.  The author was previously a judicial clerk to the Hon. Justice Gummow AC on the High Court of Australia, and an Associate working in international arbitration and transport litigation with Norton Rose Fulbright in Sydney.

I. Introduction

In judgment T 4982-11 of November 23, 2012, the Swedish Supreme Court (the “Supreme Court”) upheld an arbitral award challenged primarily on the ground that the matter was non-arbitrable since it was regulated by mandatory law at the time of the conclusion of the arbitral agreement.^[1] The Supreme Court discussed the limits of arbitrability and addressed the question of when arbitrability should be assessed. This paper evaluates the Supreme Court’s conclusions, with regard to this latter issue, which has been little explored by Swedish courts. First, the factual and procedural background is outlined, followed by a description of the Supreme Court’s decision. The decision is then evaluated before final conclusions mark the end of the paper.

II. The factual and procedural background

On January 24, 1990, the Soviet entity, Moscow City Golf Club OOO (“City Golf”), entered into a loan agreement (the “Loan Agreement”) with a Swedish bank, Nordea Bank AB (publ.) (the “Bank”), to finance the construction of a golf course in the former Soviet Union. Under the Loan Agreement, which was governed by Swedish law and contained an arbitration clause providing for arbitration in Stockholm, the Bank was to lend to City Golf SEK 22,000,000 (USD 3,584,155.48). The loan was made through drawdowns by City Golf’s Swedish general contractor. However, when the Loan Agreement was entered into, mandatory law that prohibited, invalidated, and imposed penal sanctions on import and export of currency without due authority approval was in force in both Sweden and the former Soviet Union.^[2]

The Swedish general contractor made its drawdowns and performed the construction but City Golf later failed to repay the loan. The Bank initiated arbitration to recover the outstanding amount and on May 11, 2010, the sole arbitrator gave a final award under which the Bank was allowed to recover from City Golf. At this point, the Swedish and Soviet mandatory currency laws were no longer in force. City Golf challenged the award before the Svea Court of Appeal (the “Court of Appeal”), which upheld it.^[3]City Golf therefore appealed to the Supreme Court.

III. The decision by the Supreme Court

City Golf argued that the award was invalid since it concerned a matter that, at the time of the conclusion of the arbitration agreement, was regulated by mandatory Swedish and Soviet laws requiring authority approval for transfer of currency and therefore was non-arbitrable. City Golf alleged that approval never was granted and that Russian laws to similar effect still were in force. However, the Supreme Court deemed the dispute arbitrable and upheld the award.

The Supreme Court determined that Swedish law was applicable, not only to the Loan Agreement, but also to the arbitration agreement^[4] and made reference to Section 33 of the Swedish Arbitration Act (1999:166) (the “SAA”), under which an arbitral award is invalid “if it includes determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators.”The Supreme Court stated that generally under Swedish law, an issue may be decided by arbitrators, and is arbitrable, if it is amenable to out-of-court settlement. This follows from Section 1 of the SAA. The Supreme Court also stated that foreign mandatory provisions of economic or political nature generally do not affect arbitrability under Swedish law.

The Supreme Court conceded that the issue of when arbitrability is assessed depends to some extent on the circumstances of the case. However, it deemed the amenability to out-of-court settlement when the dispute was resolved to be determinative in this regard, irrespective of the amenability to out-of-court settlement when the arbitration agreement was concluded.  

The Supreme Court noted that there were no longer any Swedish mandatory currency regulations in force when dispute was resolved, which was the relevant time to assess arbitrability. The only mandatory currency regulations allegedly still in force at that point in time were Russian provisions and the Supreme Court held that those foreign provisions were not of such nature that they could affect arbitrability under Swedish law. The dispute was deemed amenable to out-of-court settlement and arbitrable.

IV. Evaluation and comments

Admittedly, the outcome of this case may not have been entirely contingent on when arbitrability was assessed. The Supreme Court did point out that the mandatory provisions did not target the creditor-debtor relationship under the Loan Agreement; only the actual transfer of currency. Even if the repayment contemplated by the Loan Agreement was proven invalid and punishable under current Swedish law, the Supreme Court may still have deemed the issue of payment liability amenable to out-of-court settlement. However, it is easy to see that had the circumstances been just slightly different, the issue might certainly have prejudiced the outcome of the entire dispute.^[5] The Supreme Court correctly found the issue relevant enough to address specifically.

The question of when a dispute needs to be amenable to out-of-court settlement in order to be arbitrable has been subject to debate.^[6]Some argue that the relevant time is when the arbitration agreement was entered into,^[7]whereas others think it is when the dispute was resolved and that arbitrability should be assessed only at that point.^[8] 

The wording of Section 1 of the SAA, which draws up the limits of arbitrability, appears inconclusive in respect of the point at which arbitrability is to be assessed. On the one hand, it stipulates that “[d]isputes concerning matters in respect of which the parties may reach a settlement may, by agreement, be referred to one or several arbitrators for resolution.”The use of present tense, “may reach a settlement,”here suggests that the relevant time is when the matter is referred to the arbitrators. However, on the other hand, the same section stipulates that “[s]uch an agreement may relate to future disputes,”which makes the words “may reach a settlement”rather seem to relate to whether the parties could settle when the arbitration agreement was concluded.

However, the Supreme Court takes a strong position that a dispute, in order to be arbitrable, only needs to be amenable to out-of-court settlement when the dispute is resolved. Although the Supreme Court expresses the caveat that the issue to some extent depends on the specific arbitration agreement and the circumstances in general, it does state that “the determining factor must be whether the parties could have reached an out-of-court settlement at the time when the dispute was resolved, irrespective of whether the arbitration clause could be deemed in breach of peremptory legislation when it was entered into.”^[9]Several arguments may be made in support of the Supreme Court’s conclusion.

Importantly, the restriction that only disputes amenable to out-of-court settlement may be referred to arbitration originates from a principle of party autonomy.^[10] Logically, if parties are free to reach a settlement they should be equally free to refer the matter to arbitration. Therefore, if a dispute currently is amenable to out-of-court settlement, it may be argued that the underlying principle of party autonomy permits either of them to refer it to arbitration even if they previously were not allowed to settle. Mandatory substantive laws change with time and it would seem reasonable that arbitrability change with them.

Also, it may be inappropriate if historical political whims were to affect present day arbitrability of disputes over old agreements. Sweden is a popular forum for “east-west arbitrations”involving parties from the former Soviet Union. The issue of when to asses arbitrability is particularly important for such arbitrations since the highly politicized law of the Soviet Union may differ much from the present law of the remaining republics. If arbitrability were to be assessed at the conclusion of the arbitration agreement, such old politicized legislation may be perpetuated within the parties’relationship. 

Admittedly, the Court of Appeal came to the opposite conclusion on the issue of when arbitrability was to be assessed. It stated that “[t]he relevant time for ruling on whether the dispute is arbitrable is the time of entry into the [L]oan [A]greement.”Already at that point, reasoned the Court of Appeal, should the parties have been able to foresee its consequences; “at least with respect to invalidity.”^[11] Given that the entry into of the Loan Agreement coincided with that of the arbitration agreement, the conclusion is not unreasonable since arbitrability is a requirement for a valid arbitration agreement.^[12] If the arbitration agreement was flawed at its conclusion due to lacking arbitrability it would therefore seem incoherent if that flaw was allowed to “heal”with time.

In support of the Court of Appeal’s view, it may also be argued that assessing arbitrability based on the conditions after the conclusion of the disputed agreement might weaken the effect of certain mandatory legislation. Some mandatory law, such as currency regulations, may be of temporary nature yet serve a valid purpose. If a party knew that once such law is repealed the party would be able to arbitrate and later obtain enforcement of an agreement forbidden by the mandatory provisions, the impetus of such legislation may be weakened.

However, the Court of Appeal did attach significance to the entry into of the Loan Agreement rather than that of the arbitration agreement, which renders these arguments in support of its conclusion weaker. In contrast, the Supreme Court’s view appears more persuasive since it gives maximum effect to party autonomy and takes into account an international trend of increasing arbitrability.^[13] The Supreme Court’s view is also more pragmatic. It would seem unnecessarily formalistic to prevent arbitration of an issue that the parties have already agreed to arbitrate and that under the current political values is amenable to out-of-court settlement. The Supreme Court’s view may be positive for Sweden’s attractiveness as a forum for international arbitrations since it favors a broad notion of arbitrability and slightly less room for finding an award invalid due to lacking arbitrability. It should also increase foreseeability as to whether a dispute is arbitrable since arbitrability will depend on current conditions rather than the conditions at the conclusion of the arbitration agreement, which may be less lucid.^[14] 

V. Conclusions

In the court proceedings between City Golf and the Bank, the Supreme Court answered the question of when arbitrability should be assessed under Swedish law. It held that a dispute is arbitrable if the matter it concerns is amenable to out-of-court settlement when the dispute is resolved. This holding by the Supreme Court is persuasive since it is pragmatic, well in line with the principle of party autonomy and with the international trend of increasing arbitrability. It is positive for Sweden since it contributes to a broader and more foreseeable notion of arbitrability, which should work to maintain Sweden’s attractiveness as a forum for international arbitrations.

 

Eric Schultz

I.      Introduction

The purpose of this article written exclusively for the “Transnational Notes” of NYU’s Center for Transnational Litigation, Arbitration and Commercial Law, directed by Professor Franco Ferrari, is to provide a brief overview of recent case law regarding the recognition of foreign arbitral awards in Brazil.

According to the Brazilian Arbitration Act (“Lei 9.307/96” or “BAA”), an arbitral award rendered outside Brazil shall be recognized by the competent authority to produce its effects within the Brazilian territory.

Since the 2004 Amendment to the Brazilian Federal Constitution[i], the Superior Court of Justice (“Superior Tribunal de Justiça” or “STJ”) is the competent authority to decide on the recognition of foreign awards in Brazil, including arbitral awards.

Such recognition is governed by three sets of rules: (i) first, international treaties adopted by Brazil, such as the Inter-American Convention on International Commercial Arbitration (1975)[ii], adopted in 1996, the Inter-American Convention on the Extraterritorial Effectiveness of Foreign Arbitral Award (1979)[iii], adopted in 1997, and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (“the New York Convention”), adopted in 2002[iv]; (ii) the BAA, already referred to; and (iii) the STJ Resolution 9, of 4 May 2005 (“Resolution 9/2005”).

II.      Case law from 1996 to 2009

In 2010, the Brazilian Arbitration Committee (“CBAr”), an academic nonprofit organization, concluded a comprehensive empirical research on judicial decisions related to arbitration matters and the application of the BAA[v].

One of the reports dealt specifically with the recognition of foreign arbitral awards, analyzing judicial decisions rendered between November 1996 and July 2009. It concluded that the STJ and the Federal Supreme Court (which was the competent authority to recognize foreign awards until 2004) were highly favorable to the recognition of foreign arbitral awards. Recognition was denied only in a small percentage of cases.

III.      Recent developments (2011-2013)

STJ’s “pro arbitration” approach is confirmed by recent case law.

We analyzed twelve arbitral awards submitted for recognition to the STJ between 2011 and 2013. Out of those awards, only one was not recognized (Kanematsu v. Advanced Telecommunications Systems), due to the lack of proof of a valid arbitration agreement. Such cases are presented in more detail below. All the cases and facts discussed below are public and may be found in the STJ’s website[vi], searching by the reference included in the footnotes.

A.     Comverse v. American Telecommunications do Brasil^[vii]

Claimant Comverse Inc.sought the recognition of the arbitral award rendered in New York City. The arbitral tribunal decided that the American Telecommunications Inc. Chile and the American Telecommunications do Brasil Ltda. – a Brazilian subsidiary of the Chilean company – should pay damages to Claimant. The Brazilian subsidiary, Respondent in the recognition proceedings, alleged that it was not a party to the original contract and was not bound by the arbitration clause. Claimant responded that, during the arbitral proceedings, counsel for the Chilean company sent a letter to the arbitral tribunal declaring that the affiliated companies (including Brazilian affiliate) (i) agreed to be bound by the arbitration clause, (ii) accepted the Arbitral Tribunal’s jurisdiction and (iii) that the counsel was going to represent them. The question was whether or not such letter could be considered a valid arbitration agreement and a valid counsel nomination.

The STJ answered those questions in the affirmative. It found that, according to Art. 38 II of BAA[viii] and article V (1) (a) of the New York Convention, the award shall be recognized if the arbitration agreement is valid “under the law to which the parties have subjected it”. The STJ clarified that the applicable law to party representation is not necessarily Brazilian law, but the rules chosen by the parties. According to the institutional arbitration rules applicable to the case, the parties were allowed to nominate their counsel by sending a letter to the arbitral tribunal. Furthermore, the representative of the Brazilian company had been present in the hearings, including when the Arbitral Tribunal and the parties decided to include the Brazilian company, as well as the other subsidiaries, in the proceedings, and never objected to the arbitral tribunal’s jurisdiction. The STJ concluded that, according to the principle of good faith, a Respondent in an arbitration proceeding cannot accept to abide by the arbitration clause and then oppose to the jurisdiction of the arbitral tribunal. The STJ also decided that the party opposing the recognition of an arbitral award bears the burden of proving the existence of grounds for such recognition to be denied, burden which was not fulfilled in the present case.

B.     Western Bulk Carriers v. A.P. Oxidos^[ix]

Western Bulk Carriers sought the recognition of the award rendered by an arbitral tribunal in London ordering A.P. Oxidos Industria e Comercia Ltda. (“Respondent”) to pay damages for breach of contract. Respondent alleged that the requirements of articles 37 of the BAA[x], 5 III and IV of the Resolution 9/2005 were not fulfilled, because only the signature of the English notary was legalized, not the signature of the arbitrator, and the arbitral award annexed to the recognition proceeding was neither complete nor translated.

First, STJ rejected the argument concerning the arbitral award since two copies had been annexed to the proceedings and one of them was complete. The STJ then analyzed the meaning of the word “authenticated” in Art. 37 I of the BAA. It reasoned that, according to case law, the recognition of the notary’s signature is valid under this article of the BAA. Secondly, the STJ acknowledged that the award had become binding on the parties. Thus, the requirements were fulfilled. Thirdly, it added that there was no violation of public policy. The arbitral award was granted recognition.

C.     LDCB v. LVL de C^[xi]

Louis Dreyfus Commodities Brasil S.A sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association. The Arbitral Tribunal decided that LVL de C (“Respondent”) should pay damages for breach of the purchase agreement of cotton. Respondent opposed to the recognition of the arbitral award alleging that the arbitration agreement was invalid due to formal requirements for standard form contracts under Art. 4 §2 of the BAA[xii]. It also alleged that it had not been duly notified (Art. 5 II of the Resolution 9/2005).

STJ stated that the parties had signed every page of the contract (even the page containing the arbitration clause), and that the clause seemed to be valid according to the law chosen by the parties (Art. 38 II of the BAA). Furthermore, the STJ reminded that it is not allowed to re-examine the merits of the dispute in a proceeding for recognition of foreign award. Hence, the STJ clarified that it could not, in the case at hand, define the nature of the contract, and determine whether the contract was a standard form contract or not, an issue which had not been dealt with by the arbitral tribunal. The arbitral award was granted recognition.

D.    YPFB Andina v. Univen Petroquímica^[xiii]

YPFB Andina S.A. and Univen Petroquímica Ltda. entered into a contract for the supply of natural gas during three years. According to the allegations, YPFB Andina suspended the supply of gas before the end of the three years. The arbitral tribunal decided that the contract was validly suspended in light of “force majeure” events. Univen Petroquímica Ltda. (“Respondent”) argued that the arbitral award could not be recognized in Brazil because: (i) the arbitral tribunal had been partial, (ii) public policy had been violated, and (iii) a setting aside procedure was pending in the place of arbitration.

The STJ rejected the first argument because there was nothing in the facts indicating that Respondent opposed to the arbitral tribunal when it had the opportunity to do so. As regards the suspension of the contract and the alleged public policy violation, the STJ reminded that it is not allowed to re-examine the merits of the case, since its power was limited by articles 38 and 39[xiv] of the BAA. Finally, as regards the setting aside procedure, the STJ decided that Respondent did not prove it, and therefore the argument could not be considered. The arbitral award was granted recognition.

E.     Nuovo Pignone v. Petromec^[xv]

In this case, the STJ clarified that, according to Art. 34 of the BAA[xvi], an arbitral award is considered foreign when it is rendered outside Brazil. The BAA does not take into consideration the location of the arbitration chamber which administered the arbitral proceedings. For a comprehensive analysis of this case, we refer to Daniel Aun’s article also published in the NYU “Transnational Notes”[xvii].

F.      Kanematsu v. Advanced Telecommunications Systems^[xviii]

Kanematsu USA Inc. sought the recognition of the award rendered by the AAA, which decided that the Advanced Telecommunications Systems do Brasil Ltda. (“Respondent”) should pay damages. Respondent opposed to the recognition arguing the inexistence of a contract signed by the parties and the absence of legal reasoning in the award.

The STJ denied recognition, finding that the contract between the parties had not been signed and Respondent objected to the jurisdiction of the arbitral tribunal during the arbitral proceedings. The STJ cited Plexus[xix], in which it was decided that, since the choice of arbitration is an exception, the express and clear will of the parties is mandatory. Hence, the STJ concluded that there was no proof of the existence of the arbitration agreement and that recognizing this award would be a violation of articles 37 II  and 39 II  of the BAA.

G.    GE Medical Systems v. Tecnimed Paramedics^[xx]

The recognition of this arbitral award rendered in Miami, FL, United States (SEC 853/EX) is related to two US state judgments validating the arbitration agreement, which had been also submitted for recognition to the STJ (SEC 854/EX).

Both recognition proceedings were suspended because one of the parties had previously sought the declaration of invalidity of the arbitration agreement before a Brazilian court, in the State of Rio Grande do Sul. The State Court of Appeals decided that the arbitration agreement was invalid and an appeal related to such procedure was pending in the STJ at the time both recognition proceedings were initiated. This is why, at the request of one of the parties, the STJ decided to suspend both recognition proceedings.

Later on, GE Medical Systems Information Technologies Inc. and General Electric do Brasil S.A. requested the continuation of the recognition proceedings before the STJ. In granting such request in the Regimental Appeal of SEC 854/EX, in 2011, the STJ decided that setting aside proceedings and recognition proceedings may exist and develop in parallel (no lis pendens)

The appeals against the State Court of Appeals decision to the STJ were found invalid for violation of formal procedural requirements under Brazilian law[xxi]. Therefore, the State Court of Appeals decision rendering the arbitration agreement invalid turned into res judicata.

However, in deciding SEC 854, the STJ found that such res judicata did not affect the recognition of the two US state judgments validating the arbitration agreement because the grounds (“causa de pedir”) for such lawsuits were different. Therefore, the STJ decided to grant partial recognition to the US state judgments, excluding some civil and criminal sanctions. The recognition of the arbitral award is still pending in the STJ (SEC 853/EX).

H.    Weil Brothers Cotton Inc. v. Espólio Pedro Ivo de Freitas[xxii]

Weil Brothers Cotton Inc. sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association in 2008. The arbitral award decided that the assets (“espólio”) of Pedro Ivo de Freitas  – Pedro Ivo de Freitas being deceased – should pay damages for breach of the cotton purchase agreement. Respondent’s arguments against recognition were, among others, that (i) the arbitral tribunal was not competent since there were two different contracts, (ii) the arbitration agreement contained in a standard form contract did not observe the form requirements of the BAA and, therefore, was invalid and ineffective (Art. 4 §2 of the BAA), (iii) the contract was tainted with fraud, and (iv) it was not duly notified according to Art. 39 of the BAA.

In dismissing all of Respondent’s arguments and granting the enforcement of the award, the STJ decided that (i) the arbitral tribunal was competent because the International Cotton Association was mentioned in both contracts; (ii) the STJ cannot determine the validity and effectiveness of the contract in a proceeding for recognition of a foreign award, because such analysis would entail an examination of the merits of the dispute, which is prohibited by Brazilian law, and also in light of the fact that there was a lawsuit pending in Brazil to deal with the fraud allegations; and, finally, (iii) Claimant proved the existence of Respondent’s notification and Respondent’s awareness of the arbitral proceeding.

I.       Keytrade AG v. Ferticitrus Indústria e Comércio de fertilizantes[xxiii]

Keytrade AG sought the recognition of an arbitral award rendered against Ferticitrus Indústria e Comércio de fertilizantes Ltda. (“Respondent”) by an arbitral tribunal in London. The dispute concerned “demurrage” expenses related to Respondent’s debarkment’s delay. Respondent opposed to the recognition of the award alleging that it had not been duly notified (Art. 38 III of the BAA) and that the compound interests in the sentence were a violation of public policy (Art. 39 II of the BAA).

The STJ rejected both arguments, deciding that (i) the notifications were made according to the law chosen by the parties, that is, the law of the place of arbitration (London), which allows for notification by email, fax or letter, in accordance with Art. 39 of the BAA, and the receipt of those notifications was proven; (ii) as regards the public policy argument, the STJ reminded that it is not any divergence with Brazilian law that shall suffice to fulfill the conditions of violation of public policy. The fundamental values of the Brazilian law system must be threatened to allow the STJ to re-examine the merits of the dispute, which is not the case at hand, because compound interests are also accepted in Brazil in certain types of contracts provided for in the Brazilian Civil Code (“contrato de mútuo”) and according to the requirements of Brazilian law.

J.        Mandate Holdings LLC. v. Consórcio Europa[xxiv]

Mandate Holdings LLC. sought the recognition of an arbitral award rendered against Consórcio Europa  by an arbitral tribunal seated in Los Angeles. The dispute related to the breach of the licensing agreement, containing an arbitration agreement.

Consórcio Europa (“Respondent”) argued that the arbitral award should not be recognized in Brazil because (i) there was no proof of power of attorney attributed to the vice-president of Mandate Holdings Llc., (ii) the Supreme Court of California had not recognized the award, as should be done according to the Californian civil procedure code, (iii) there was no proof that the award is the final judgment (res judicata), (iv) the contract is a standard form contract rendering the arbitration agreement invalid, and (v) Respondent had not been duly notified.

The STJ rejected all the arguments deciding that (i) the powers of the vice-president was recognized by the notary of Los Angeles; (ii) the recognition of a foreign award in Brazil is made only in accordance with Brazilian laws (the BAA and the Resolution 9/2005); (iii) according to the arbitration agreement, the award would be binding on both parties and had to be executed; (iv) the STJ cannot determine the nature of a contract in a proceeding for recognition of foreign award, since this would conduct to a re-examination of the merits of the dispute; and finally (v) a “letter rogatory” is not necessary to notify a party, since email, fax or a simple letter is enough, as long as the receipt can be proven.

K.    Queensland Cotton Corporation Ltd. v. Agropastoril Jotabasso[xxv]

Claimant, Queensland Cotton Corporation Ltd., sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association in Liverpool against Respondent, Agropastoril Jotabasso Ltda. (former Agropecuária Basso Ltda.).

Respondent alleged that the award could not be recognized because (i) it had not been duly notified, (ii) the contracts signed by the parties were not included in the records, (iii) the award was unfair, (iv) the amount claimed in the recognition proceedings was higher than the amount included in the award, and (v) Olam International Ltd. is not a legitimate successor of Claimant since there was no proof of its power of representation in the records.

In dismissing all of Respondent’s arguments and granting the enforcement of the award, the STJ made it clear that it cannot determine the nature of a contract and the fairness of an award in a proceeding for recognition of a foreign award, because such analysis would entail a re-examination of the merits of the dispute, which is prohibited by Brazilian law.

L.      Queensland Cotton Corporation Ltd. v. Espólio Pedro Ivo Freitas[xxvi]

Queensland Cotton Corporation Ltd sought the recognition of the arbitral award rendered by an arbitral tribunal under the International Cotton Association in Liverpool against the assets (“espólio”) of Pedro Ivo de Freitas (“de cujus”) (“Respondent”) – Pedro Ivo de Freitas being deceased.

Respondent opposed to the recognition alleging that it did not sign the contract containing the arbitration agreement and was never aware of the choice of arbitration.

The STJ decided that the successor of the de cujus is responsible for all debts, and there was proof of a duly notification made according the law chosen by the parties. The arbitral award was granted recognition.

 

Rafael F. Alves

LL.M. New York University, Arthur T. Vanderbilt Scholar – Class of ’10. Master of Laws, University of São Paulo. Senior Associate of the Arbitration Practice at L. O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados. Director of the Brazilian Arbitration Committee.

 

Joséphine Marmy

Master of Law at the University of Fribourg, Switzerland. Currently working as a law clerk at Baker & McKenzie Zurich. Former intern at L.O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados in São Paulo, and former assistant of Professor Pierre Tercier in Switzerland.

On October 16, 2012, the Swiss Federal Supreme Court (hereinafter “Supreme Court”) issued a decision wherein it clarified its position regarding the effect of a party’s bankruptcy on international arbitration proceedings in Switzerland.[1] The Supreme Court therewith reacted to numerous criticisms regarding its so-called Vivendi decision of March 31, 2009[2].

I.              The Vivendi decision

A.           The decision of the Supreme Court

In 2009, the Supreme Court was faced with the question of the effect of the bankruptcy of a Polish company, Elektrim SA (hereinafter “Elektrim”), on an international arbitration proceeding in Switzerland.[3] Elektrim, a defendant in the arbitration proceeding in Geneva, informed the arbitral tribunal that it had been declared bankrupt in Poland and that therefore all arbitration agreements concluded by the company ceased to exist and all arbitration proceedings ended for the company. It relied on article 142 Polish Bankruptcy Act (hereinafter “BA”), which states: “Any arbitration clause concluded by the bankrupt shall lose its legal effect as at the date bankruptcy is declared and any pending arbitration proceedings shall be discontinued.“[4] The arbitral tribunal decided to discontinue the proceeding with respect to Elektrim as the entity had lost its capacity to be a party in the arbitration proceeding pursuant to article 142 BA.[5]

The Supreme Court upheld the award over a challenge. It held that the capacity to be a party in arbitration proceedings depends on legal capacity. As the legal capacity is to be determined, based on the Swiss conflict of laws provisions, by the law governing the registration of legal entities, Elektrim’s legal capacity and the capacity to be a party in an arbitration proceeding were governed by Polish law.[6] The Supreme Court saw no reason to question the arbitral tribunal’s view that article 142 BA deprived a bankrupt party of the capacity to be a party in an arbitration proceeding and held that Elektrim had thus lost this capacity.[7]

B.            Critique

Numerous authors criticized the decision of the Supreme Court.[8] The principal criticism was that the Supreme Court had misconstrued the scope of article 142 BA by interpreting it as a norm regulating the capacity to be a party in a proceeding instead of the substantive validity of the arbitration agreement. In the latter case, the bankruptcy of Elektrim would have had no effect on the proceeding because of the principle of favor validitatis regarding arbitration agreements in article 178(2) Swiss Private International Law Act (hereinafter “PILA”).[9]

II.           Revision of Vivendi in 2012

In 2012, the Supreme Court had the chance to review the question of the effect of a party’s bankruptcy on the capacity to be a party in an international arbitration proceeding in Switzerland. In doing so, the Supreme Court approached the topic more carefully and rendered an elaborate decision clarifying its position.[10]

A.           Facts and decision of arbitral tribunal

In 2009, a controversy over an agreement, that contained an arbitration clause for arbitration in Geneva, arose between a Portuguese and a Chinese company. In August 2009, a Portuguese court declared the Portuguese company insolvent. Nearly a year later, the Chinese company initiated an ICC arbitration proceeding against the Portuguese entity.[11]

In light of its insolvency, the Portuguese entity disputed the arbitral tribunal’s jurisdiction.[12] It relied in particular on article 87(1) Portuguese Insolvency Law (hereinafter “IL”) which states: “Without prejudice to provisions contained in applicable international treaties, the efficacy of arbitral agreements relating to disputes that may potentially affect the value of the insolvency estate and to which the insolvent is party shall be suspended.”[13]

In an interim award, the arbitral tribunal concluded it had jurisdiction as the arbitration clause was valid and the parties were capable of being parties in an international arbitration proceeding in Switzerland.[14] It considered the arbitration clause to be valid based on article 178(2) PILA and case law stating that an arbitration clause survives the bankruptcy of a party under Swiss law.[15] Regarding the capacity to be a party in arbitration proceedings, the arbitral tribunal determined that Portuguese law was applicable and concluded that article 87 IL does not have any effect on the capacity of a party as it only addresses the validity of an arbitration agreement.[16]

B.            Law governing the capacity of a party in international arbitration proceedings

First, the Supreme Court determined the law governing the capacity to be a party in an international arbitration proceeding in Switzerland. In this respect, the Supreme Court noted that Chapter 12 PILA does not contain a provision regarding subjective arbitrability of non-state parties, and accordingly the capacity to be party in arbitration proceedings is to be determined based on the preliminary substantive law question of the legal capacity.[17]

Based on article 154(1) PILA, it held that the legal capacity of a legal entity is to be determined by the law of the state under which the entity is registered.[18] Thus, the Supreme Court came to the conclusion that Portuguese law governs the legal capacity of the Portuguese entity.[19]

C.           Definition of legal capacity and its consequences

Then, the Supreme Court referred to Swiss law to define legal capacity as the capacity to be the subject of rights and duties. It further concluded that if the legal capacity of an entity is to be determined based on foreign law, it must be analyzed if the entity is capable of having rights and duties under this foreign law. If so, the entity has legal capacity and capacity to be a party in an international arbitration proceeding that is governed by Chapter 12 PILA. The Supreme Court then held that specific restrictions regarding arbitration proceedings of the law governing the entity’s registration, which do not affect the legal capacity of the entity in general, have no effect on the capacity to be a party in arbitration proceedings in Switzerland.[20]

The Supreme Court then analyzed Portuguese law and concluded that insolvent entities are subject to rights and duties until the completion of liquidation in Portugal. Thus, the entity has legal capacity and capacity to be a party in an arbitration proceeding governed by Chapter 12 PILA. Even if article 87 IL hinders a Portuguese insolvent entity to be a party in a Portuguese arbitration proceeding, this would have no effect on the capacity to be a party in an international arbitration proceeding in Switzerland, as the only decisive factor for the proceedings in Switzerland is whether the Portuguese law assigns the entity rights and duties.[21]

D.           Comments to its Vivendi decision

The Supreme Court then addressed its Vivendi decision and pointed out that this decision needs to be seen in the specific context of Polish law and can neither be generalized nor the statements therein applied to the law of other jurisdictions. In particular, that decision does not confirm in a general way that foreign insolvency laws which declare arbitration agreements ineffective in the case of a party’s insolvency result in the loss of the capacity to be a party to arbitration proceedings.[22]

E.            Conclusion regarding subjective arbitrability

The Supreme Court upheld the award by concluding that article 87(1) IL has no effect on the legal capacity and the capacity to be a party in international arbitration proceedings in Switzerland. Pursuant to the Swiss lex arbitri, article 87(1) IL only addresses the validity of the arbitration agreement. But this question is governed by article 178(2) PILA, pursuant to which an arbitration agreement is valid if it conforms to Swiss law. Since under Swiss law an arbitration agreement survives the bankruptcy of a party, article 87(1) IL has no effect on this question either.[23]

III.        Comments

This new decision raises various issues. Among them are the characterization of the insolvency problem and its consequences, the effect of the lex concursus on arbitration proceedings and limits thereto of the lex fori, the difference between capacity to be a party in a proceeding and the procedural right to bring an action, the determination of the capacity to be a party in an arbitration proceeding, the applicable law on the definition of legal capacity of a foreign entity, the reliance on provisions outside of the lex arbitri and the application of foreign insolvency law as loi d’application immédiate.

Hereinafter, the characterization of the insolvency problem and the determination of the capacity to be a party in an arbitration proceeding will be addressed. The characterization deserves particular attention as it is the starting point in an analysis of the effect of a foreign insolvency and can have a significant effect on the outcome. The determination of the capacity is of practical importance as it provides the parties with a test to predict the consequences of insolvency with respect to international arbitration proceedings in Switzerland.

A.           The characterization of the insolvency problem

The effect of foreign insolvency or bankruptcy proceedings on arbitration proceedings in Switzerland mainly depends on the characterization of the problem. “[W]hether the insolvency of a party is an issue of capacity, of the binding force and scope of the arbitration agreement or a procedural question”[24] is a decisive factor, as it determines the applicable provisions of Chapter 12 PILA and therewith the law governing the issue of the foreign insolvency.[25]

As shown in the decision, the characterization can predetermine the effect of party’s insolvency on proceedings in Switzerland: If it is an issue of the validity of the arbitration agreement, a foreign insolvency law has no effect on an arbitration proceeding in Switzerland based on article 178(2) PILA, according to which an arbitration agreement is valid if it conforms at least to Swiss law, and case law pursuant to which the bankruptcy of a party does not affect the validity of an arbitration agreement under Swiss law.[26] However, if the capacity to be a party in an arbitration proceeding in Switzerland is the issue, the answer depends on the entity’s capacity to be the subject of rights and duties pursuant to the law of the place of the registration.[27]

In Vivendi, the Supreme Court characterized the problem of insolvency as one of capacity without explicitly addressing the question of characterization.[28] The absence of any reasoning in this regard was surprising as the minority of judges took the position during the public deliberation that it was rather an issue of the validity of the arbitration agreement than one of the party’s capacity.[29]

Likewise in its new decision, the Supreme Court characterized the insolvency problem as an issue of capacity:[30] It analyzed, without addressing the process of characterization, the question of insolvency as one of the capacity to be a party in an arbitration proceeding. Only after concluding that Portuguese law does not affect the entity’s capacity, did it hold that article 87 IL solely addresses an aspect of the substantive validity of the arbitration agreement.[31]

Hence, the Supreme Court has twice characterized the insolvency issue as one of capacity. As the characterization process was not explicitly addressed in either decision, it is not clear how the Supreme Court came to this conclusion. Under the presumption that the Supreme Court conducted a characterization of the insolvency under the lex fori, as earlier case law suggests,[32] and with a focus on the legal problem at issue and not the particular provision invoked,[33] it could be concluded that the Supreme Court will also in future characterize insolvency as a capacity issue. It might, however, be the case that the Supreme Court did not want to commit itself to such a characterization at this time. Be it one way or the other, it would be helpful to have an express ruling on this question to provide potential parties with predictability.

B.            Determination of capacity to be party in international arbitration proceedings

The Supreme Court held in its new decision that the capacity of a foreign entity to be a party in international arbitration proceedings in Switzerland depends on the entity’s capacity to be the subject of rights and duties under the law governing the entity’s registration. Restrictions regarding arbitration proceedings of the foreign law that do not affect the entity’s legal capacity in general will not be considered.[34]

At least here the Supreme Court provides the parties with predictability. This straightforward test to determine the consequences of insolvency on their capacity to be a party in international arbitration proceedings in Switzerland strengthens Switzerland as a place of arbitration by providing the mentioned predictability and by limiting the reach of foreign insolvency laws[35]. Thus, if insolvency is characterized as an issue of capacity, such foreign insolvency laws cannot prevent arbitration proceedings in Switzerland as long as the entity has legal capacity in the country of registration.

 

Simon Marc Hohler

The author is an LL.M. student in the International Business Regulation, Litigation and Arbitration program at New York University School of Law, Class of 2014. After graduating from the Universities of Lucerne and Neuchatel in Switzerland in 2008 (Bilingual Master of Law; J.D. equivalent), he gained working experience in Swiss and U.S. law firms as well as at the Cantonal Court of Zug, Switzerland. After being admitted to the bar in 2011, he worked in the Litigation & Arbitration Team at Blum & Grob Attorneys at Law Ltd. in Zurich, Switzerland.

 

This is to announce the February 24^th, 2014, session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “International Commercial Arbitral Awards as Investments”.

The event will take place on Monday, February 24^th, 2014, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that on the occasion of that session, Prof. Luca G. Radicati di Brozolo will give a talk on the aforementioned and that Prof. José Alvarez, Mr. Brian King and Mr. Laurence Shore agreed to act as commentators.

Luca G. Radicati di Brozolo is a tenured professor of Private International Law at the Catholic University of Milan, where he also teaches International Arbitration and Transnational Commercial Law. He is the author of five books and a co-editor of a commentary on international arbitration, as well as of over 100 articles and other contributions on a variety of topics of public and private international law, arbitration law, the law of the European Union, competition law, telecommunications and banking law. He gave a course on Mandatory Rules and International Commercial Arbitration at the Hague Academy of International Law in 2003. Prof. Radicati di Brozolo is a founding partner of the arbitration and litigation boutique Radicati di Brozolo Sabatini in Milan, where he practices both as counsel and as arbitrator. He is a member of the International Court of Arbitration of the ICC. He was, inter alia, counsel for the claimant in ICSID Case ARB/05/07 Saipem v. People’s Republic of Bangladesh. He is a member of the ICC Court of International Arbitration. Prior to founding his firm, he was for thirty years a partner in two of the leading Italian firms, having started his professional career at the Office of the Legal Advisor of the Bank of International Settlements.

José Enrique Alvarez, a former president of the American Society of International Law and a member of the Council on Foreign Relations, has made substantial scholarly contributions to a wide range of subjects within international law, including the law-generating roles of international organizations, the challenges facing international criminal tribunals, and the international investment regime. Along with NYU colleague Benedict Kingsbury, Alvarez is the co-editor-in-chief of the leading peer-reviewed journal in the field, the American Journal of International Law. In September 2013, he was elected to the Institut de Droit International, a Nobel Prize–winning organization consisting of the world’s leading public international lawyers. Prof. Alvarez has been special adviser on international law to the prosecutor of the International Criminal Court, an attorney adviser with the Office of the Legal Adviser of the US Department of State, and has taught at Columbia, the University of Michigan, George Washington, and Georgetown law schools. He received a BA summa cum laude from Harvard University, first-class honors in jurisprudence from Oxford University’s Magdalen College, and a JD cum laude from Harvard Law School, where he was topics editor of the Harvard International Law Journal. In 2009, he delivered a series of lectures at The Hague Academy of International Law on the subject of foreign investment, subsequently published as The Public International Law Regime Governing International Investment (2011).

Brian King is a partner in the international arbitration group at Freshfields Bruckhaus Deringer. Prior to returning to New York in 2007, he headed the arbitration group in the firm’s Amsterdam office for seven years. Mr. King’s practice centers on acting as counsel or arbitrator in investment treaty and international commercial disputes. He has represented both investors and States, as well as some of the largest European and U.S. corporations. A 1990 graduate of the NYU Law School, Mr. King, who joined NYU as scholar-in-residence in November 2013, regularly speaks and publishes on arbitration-related topics.

Laurence Shore is a partner in the New York City office of Herbert Smith Freehills LLP.  He is a member of the firm’s international arbitration practice group. His law degree is from Emory University, where he was Editor-in-Chief of the Emory Law Journal (1988-89), and he holds a Ph.D. in American History from The Johns Hopkins University. Laurence’s publications include “You Can Bet the Company But Not the State: The Proper and Improper Conduct of Sovereigns in Arbitration”, World Arbitration and Mediation Review (2009); and “Arbitration, Rhetoric, Proof: The Unity of International Arbitration Across Cultures”, in Contemporary Issues in International Arbitration and Mediation: The Fordham Papers (A.W. Rovine ed., 2010). He is also the co-author of International Investment Arbitration: Substantive Principles (2007).

 

To RSVP, please send an email to Cassy Rodriguez at cassy.rodriguez@nyu.edu

On March 13, 2013, by its decision in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5 (the TCL Case), Australia’s highest court, the High Court of Australia, unanimously rejected efforts by the losing participant in an international arbitration to challenge, as unconstitutional, Australia’s adoption of the enforcement provisions of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) in Australian’s International Arbitration Act 1974 (Cth) (the IA Act).

This note summarizes the Australian Court’s decision, and considers it in the context of debates within American legal scholarship regarding the consistency of arbitration proceedings with judicial power provisions of the United States’ own Constitution, which are relevantly the same as those of the Australian Constitution.

Background to the TCL Case

The TCL Case arose out of a dispute between the Australian and Chinese parties to a distribution agreement that provided for the submission of disputes to arbitration.[1]  The distributor and claimant, Castel Electronics Pty Ltd (Castel) prevailed in the arbitration, with two awards made which obliged the Chinese manufacturer, TCL Air Conditioner (Zhongshan) Co Ltd (TCL) to pay Castel A$3,369,351 in damages, and A$732,500 in respect of legal costs.[2]

Castel applied to the Federal Court of Australia for enforcement of the arbitral awards, which TCL resisted, asserting that the Federal Court lacked jurisdiction to enforce the awards, or alternatively, that the awards should not be enforced on public policy grounds relating to alleged breaches of natural justice.[3]  TCL also, by a separate proceeding, applied to have the awards set aside, again on the basis of public policy.[4]  The Federal Court held that it had jurisdiction to enforce the awards, and that there was no justification for refusing to enforce the awards, or for setting them aside.[5]

Application to the High Court

TCL then applied to the High Court, which has original jurisdiction in matters concerning the Australian Constitution.  TCL contended that the IA Act’s adoption of Articles 35 and 36 of the Model Law,[6] in not permitting courts to refuse to enforce an award for error of law:

(a) undermined the institutional integrity of the Federal Court by requiring the Federal Court, as a repository of judicial power by Australia’s Constitution, knowingly to perpetrate a legal error by endorsing legally incorrect awards for execution as if they were judgments of the Federal Court;[7] and/or

(b)  impermissibly conferred judicial power upon the arbitral tribunal (where Australia’s Constitution requires judicial power to be exercised only by courts[8]), by allowing the tribunal “the last word” on the application of the law to the dispute the subject of the arbitration.[9]

TCL also argued that the impairment of the Federal Court’s institutional integrity was aggravated by the fact that Article 28 of Model Law, or alternatively an implied term of the relevant arbitration agreement, required an arbitral award to be correct in law.[10]

In two separate judgments, the High Court rejected all of TCL’s contentions. Chief Justice French and Justice Gageler noted the origins of Articles 35 and 36 of the Model Law in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and that it was essential therefore to construe the Model Law in the context of the objects of the New York Convention.[11]  They emphasised that the scheme designed by the New York Convention, and thus the Model Law, was directed at facilitating the contractually bargained agreement of the parties to refer their respective rights to arbitration in lieu of national courts, and that this agreement effectively superseded the original rights and obligations of the parties.[12]

In that context, the grounds for refusal to enforce in Article 36 essentially delineate the scope of the authority consensually given to the arbitral tribunal by the parties, and the role of national courts is to uphold the scope of that choice, as distinct from deciding the dispute: “Enforcement of the arbitral award is enforcement of the binding result of the agreement of the parties to submit their dispute to arbitration, not enforcement of any disputed right submitted to arbitration”.[13]  Chief Justice French and Justice Gageler posited that Article 28 reinforced the parties’ autonomous choice of dispute settlement mechanism by granting to the parties the freedom to choose whichever substantive law or rules of law they wish to have applied to their dispute.[14]  It was not the case, therefore, that Article 28 required an award to be legally correct, nor could, therefore, that requirement be implied into an arbitration agreement made in the context of the absence of legal error as a ground to refuse to enforce an award in the Model Law. Such an argument by TCL ran “counter to the autonomy of the parties to an arbitration agreement which infuses the Model Law, and of which Art 28 is a particular guarantee”.[15]

In these circumstances, there could be no difficulty with the Federal Court enforcing an award that could potentially contain a legal error.  In enforcing the award, the Federal Court was not endorsing its reasoning; rather the Court was testing the award’s adherence to the Model Law.[16] The obligations requiring the enlistment of judicial power at the Federal Court level were those created by the award, which in turn was created as a result of the parties’ agreement to refer their dispute to private arbitration.  The existing grounds for refusal to enforce – for example, where the arbitration agreement was not valid, or on the basis of public policy – provided appropriate protection to the integrity of courts in performing their recognition and enforcement roles.[17]

The existence of the autonomous agreement of the parties also disposed of TCL’s contentions that an arbitral tribunal could be impermissibly exercising judicial power. The High Court has long defined “judicial power” as having as a key characteristic the capacity to be exercised coercively, or independently of the consent of the relevant parties, and as resulting in an outcome (an order, or a judgment) which is binding without more.[18]  In both judgments, the Court contrasted this with the nature of private power exercised by arbitrators, which has as its fundamental premise the consent and agreement of the parties,[19] and which is dependent upon the assistance of the courts for its force and binding effect.[20]

Relevance to the United States

The decision should be of interest to lawyers in the United States.  The judicial power provisions of the Australian Constitution were modelled upon those contained in the United States’ Constitution.[21] While all of the relevant provisions are not identical in terms, they both enshrine, in very similar language, the key concept that judicial power is vested in courts established by the Constitution and/or the legislature.[22] Yet despite constitutional challenges to the Model Law in Australia, and also in Canada,[23] as well as to domestic arbitration legislation at state level in Australia,[24] and in some lower courts in the United States,[25] the United States Supreme Court has never had reason to consider in detail whether the Federal Arbitration Act[26] (FAA) is consistent with Article III of the United States Constitution.[27]

However, that has not prevented the issue being the subject of scholarly debate, which has proffered, generally speaking, two theories to justify the FAA’s constitutionality, at least with respect to international commercial arbitration.[28]  The first, chiefly espoused by Peter Rutledge, is that the FAA’s limited grounds for enforcement do not present a judicial integrity problem because courts have developed the ‘manifest disregard’ regime to permit themselves a quick check of the merits of the arbitrators’ decision at a very fundamental level, which, in Rutledge’s view, “rescues the FAA from constitutional infirmity”.[29] Leaving aside the questionable current status of the ‘manifest disregard’ doctrine, including whether it applies at all to international as distinct from domestic arbitration, Rutledge would find little comfort in the TCL case, which not only finds the Model Law constitutional in the absence of a limited merits review, but dismisses the historical existence of (the admittedly broader) review for error of law within English and Australian common law as “obscure in origin”[30] and “a matter for regret.”[31]

The second theory, which has been considered in detail most recently by Roger Perlstadt,[32] is also partly in conflict with the TCL Case.  This is because Perlstadt argues that the FAA potentially infringes Article III of the United States Constitution, because the disputes submitted to arbitration do require the exercise of judicial power (deciding the law and applying it to the facts as determined) in order to be resolved.[33] However, as the unconstitutionality in Perlstadt’s view lies in the non-availability to parties of the elevated levels of impartiality and independence of Article III judges (underpinned by the tenure and salary protections of the Constitution), the fact that parties of their own volition choose to waive these elevated decision-makers in favour of a less constitutionally safeguarded arbitral tribunal, is sufficient to cure the FAA’s potential inconsistency with Article III.[34]

For Perlstadt, the real debate is about the standard of the consent required to waive Article III protections: whether it should be assessed by an objective manifestation of intent consistently with contract law, or whether consent needs instead to be subjectively tested – the disputants knew and understood what they were waiving.[35]  Perlstadt’s concerns about consent lie in part with consumer arbitrations, but he also queries whether sufficient consent is given by non-signatories to arbitration agreements who may be required to arbitrate,[36] or by potentially defrauded parties who, pursuant to the separability doctrine endorsed in the United States in Prima Paint Corp v Flood & Conklin Manufacturing Co,[37] may be required to arbitrate the question of the validity of their arbitration agreement.[38]

Emphasising the fundamentally coercive nature of judicial power, the Australian High Court found, by contrast to Perlstadt, that arbitrators do not exercise judicial power. However, the court was similarly reassured that the consensual removal of the issues in dispute by the parties from the purview of courts meant that the Australian Constitution was not infringed. It is not obvious how readily the High Court’s reasoning could be applied to the domestic arbitration,[39] non-signatory and fraud scenarios identified by Perlstadt as perhaps involving ‘compromised’ consent or agreement. Assuming that at some stage an unsuccessful but enterprising arbitrating party has the opportunity and fortitude to assert FAA unconstitutionality arguments at the United States Supreme Court level, it remains to be seen how these competing explanations of judicial power and consent will be analysed.

Beverley Newbold

The author is a Class of 2014 LL.M. student in the International Litigation, Arbitration and Business Regulation program at New York University, having obtained her Bachelor of Laws degree from the University of Adelaide, Australia. She is presently on leave from her position as Partner, Dispute Resolution in the Sydney office of the Australian-based international law firm, Minter Ellison, and she has also previously worked as an associate and senior associate in the London litigation and arbitration department of Freshfields Bruckhaus Deringer.

A. Introduction

In a recent decision delivered on November 12, 2013, the Chairman of the Administrative Council of International Centre for Settlement of Investment Disputes (ICSID), disqualified the Claimant’s appointed arbitrator, Mr Jose Maria Alonso, a Spanish national from serving as arbitrator in the bilateral investment treaty arbitration commenced by Blue Bank International & Trust (Barbados) Ltd (“Blue Bank”) against the Bolivarian Republic of Venezuela (‘Venezuela’)[1] on the grounds that his law firm elsewhere is acting against Venezuela in a different arbitration.

This paper first gives an overview of the facts and the decision of the Chairman of the Administrative Council of ICSID. In the second part, an evaluation of the standards for the disqualification of an arbitrator particularly in relation to the independence and impartiality of the arbitrator is carried out through the comparison of the standard under ICSID jurisprudence with those found in the UNCITRAL Model Law and Arbitration Rules[2] and in the International Bar Association (“IBA”) Guidelines on Conflict of Interest in International Arbitration (“IBA Guidelines”). The paper concludes with an analysis of the Chairman’s decision and the recommendation of a possible solution to the lingering problem of bias challenge in ICSID proceedings.

B. Summary of Facts and Decision of the Chairman

Blue Bank had on June 25, 2012 commenced ICSID arbitration against Venezuela for alleged breach of the 1994 Agreement between the Government of Barbados and the Government of the Republic of Venezuela for the Promotion and Protection of Investments, in force since 1995. By a letter dated October 8, 2012, Blue Bank appointed Mr Jose Maria Alonso a national of Spain as arbitrator. The appointment was accepted by Mr. Alonso who submitted and circulated his declaration, statement and curriculum vitae pursuant to the Rule 6 (2) of the ICSID Arbitration Rules.

In his statement, Mr. Alonso indicated that “[H]e is a Partner at Baker & Mckenzie Madrid, SLP in charge of the Dispute Resolution department in Madrid (Spain). That Baker & Mckenzie SLP is a firm belonging to Baker & Mckenzie International (Swiss Verein) and that all the firms that form part of Baker & Mckenzie International are independent and that remuneration of Partners depends mainly on the turnover of each particular firm. He further asserted that neither himself nor Baker & Mckenzie Madrid SLP has or had any relationship with the parties in the proceedings.” However, he acknowledged being aware of ICSID arbitration against Republic of Venezuela in an unrelated matter initiated by Baker & Mckenzie New York and Baker & Mckenzie Caracas in 2011, in which both offices were representing a company called Longreef Investment. He further maintained that given the independent structure of  Baker & Mckenzie International, he would not be provided with any information, intervene or take part in said proceedings and that he considered himself completely independent and impartial as an arbitrator in the Blue Bank proceedings.

On its part, Venezuela appointed Dr. Santiago Torres Bernardez as arbitrator. He also submitted his declaration, statement and curriculum vitae and these were circulated to the parties on November 16, 2012.[3] Meanwhile, Venezuela had on November 5, 2012 submitted a proposal for the disqualification of Mr. Alonso based on his position at Baker & Mckenzie. It contended that there were justifiable doubts as to whether Mr. Alonso, who coordinates the global arbitration practice of a firm, could sign an award rejecting argument that are being defended by other partners of the same firm against the same respondent in another case.

The chairman in his decision stated that he was bound by the standard set forth in the ICSID Convention and that his decision was made in accordance with Articles 57 and 58 of the ICSID Convention.[4] He also pointed out that the applicable standard is an “objective standard based on a reasonable evaluation of the evidence by a third party” and that consequentially the subjective belief of the party requesting the disqualification is not enough to satisfy the requirement of the Convention.[5] He also acknowledged that, in regards to the meaning of the word “manifest” in Article 57 of the Convention, a number of decisions had concluded it means “evident” or “obvious” and it relates to the ease with which the alleged lack of the qualities can be perceived.[6]

Further, the Chairman noted certain undisputed facts: (i) Mr. Alonso is a Partner in Baker & Mackenzie Madrid; (ii) his firm’s New York and Caracas offices represented the claimant in a parallel arbitration proceeding against Venezuela (Longreef v. Venezuela); (iii) Mr. Alonso has no direct involvement in the parallel Longreef v. Venezuela case; and (iv) That Mr. Alonso is a member of Baker & Mckenzie’s International Arbitration Steering Committee.  The Chairman further noted that the sharing of a corporate name and the existence of an international steering committee at the global level implied a degree of connection or overall coordination between the different firms comprising Baker & Mckenzie International[7].

Without detailed explanation, the chairman held that given similarity of issues likely to be discussed in Longreef v. Venezuela and the Blue Bank case and the fact that both cases were ongoing, it was “highly probable” that Mr. Alonso would be in a position to decide issues that were relevant in Longreef v. Venezuela if he remained an arbitrator in the case.  He concluded that in view of the facts of the case, it had been demonstrated that a third party would find an evident or obvious appearance of lack of impartiality upon a reasonable evaluation of the facts in this case.[8]

C. Comparison of ICSID Standard with UNCITRAL and IBA Guidelines Standards     

The ICSID Convention and Rules Standard

An evaluation of the standard for disqualification of an arbitrator under ICSID will first require the consideration of the criteria for appointment given that a challenge proceeding will only be commenced when a party feels that the arbitrator has not met the criteria or has fallen short of the criteria required of him. In the light of the above assertion, certain provisions of the ICSID Convention and Rules will be examined.

Article 14 (1) of the ICSID Convention provides that “Persons designated to serve on the Panels shall be persons of high moral character and recognized competence in the fields of law, commerce, industry or finance, who may be  relied upon to exercise independent judgment.” (Emphasis added).

ICSID Rule 6 (2) requires the arbitrator to sign a declaration of independence and also provide a written statement of (a) his past and present professional, business and other relationships (if any) with parties and (b) any other circumstance which might cause the arbitrator’s reliability for independent judgment to be questioned by a party.  It should be noted, that the obligation to disclose to the Secretary-General of ICSID is a continuing one which lasts throughout the arbitration proceedings.[9]

On the issue of disqualification, Article 57 of the ICSID Convention provides that “a party may propose to a commission or tribunal the disqualification of any of its members on account of any fact indicating a manifest lack of the qualities required by paragraph (1) of Article 14. A party to arbitration proceedings may, in addition, propose the disqualification of an arbitrator on the ground that he was ineligible for appointment to the Tribunal.’ (Emphasis added).

Article 58 of ICSID Convention further provides that the decision to disqualify an arbitrator shall be taken by the other members of the tribunal, however where the disqualification proposal involves a sole arbitrator or a majority of them, or where the co-arbitrator cannot agree, the Chairman of  ICSID Administrative Council should decide.[10]

The UNCITRAL Model Law and Rules Standard

Article 12 of the Model Law provides that “An arbitrator may be challenged only if circumstance exist that give rise to justifiable doubts as to his impartiality or independence.”

Under the UNCITRAL Rules,[11] Articles 11-13 deal with the disclosure obligation and challenge of an arbitrator. Article 11 requires the arbitrator when approached for a possible appointment to disclose any circumstance likely to give rise to justifiable doubts as to his or her impartiality or independence. The obligation to disclose to the parties and the other arbitrators is a continuing one which is to last throughout the arbitration proceeding. (Emphasis added).

Article 12, inter alia, provides that “an arbitrator may be challenged, if circumstance exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence.” Further, Article 12(3) provides that an arbitrator that fails to act, or in the event of the de jure or de facto impossibility of performing his or her function, the procedure in respect to the challenge of an arbitrator contained in Article 13 shall apply.

Article 13 provides for the time line within which a notice of challenge to the appointment of an arbitrator is to be made. It further provides that when this notice is made, all the parties may agree to the challenge and consequentially the arbitrator may withdraw from his or her office. It is however provided that this is not to imply acceptance of the validity of the grounds of challenge.

The IBA Guidelines Standard

Under the general standard regarding impartiality, independence and disclosure, the IBA General Principle stipulates that “every arbitrator shall be impartial and independent of the parties at the time of accepting an appointment to serve and shall remain so during the entire arbitration proceeding until a final award has been rendered or the proceeding has otherwise finally terminated.”

The General Standard 2(a) provides that, “an arbitrator shall decline to accept an appointment or, if the arbitration ha[s] already commenced, refuse to continue to act as an arbitrator if he or she has any doubts as to his or her ability to be impartial or independent.”

General Standard 2(b) stipulates that “the same principle applies if facts or circumstance exist, or have arisen since the appointment, that from a reasonable third person[’s] point of view having knowledge of the relevant facts, give rise to justifiable doubts as to the arbitrator’s impartiality or independence, unless the parties have accepted the arbitrator in accordance with the requirement set out in General Standard (4). (Emphasis added).

General Standard 2(c) explains that doubts are justifiable if a reasonable and informed third party would reach the conclusion that there was a likelihood that the arbitrator may be influenced by factors other than the merit of the case as presented by the parties in reaching his or her decision.

Further General Standard 2(d) clarifies that justifiable doubts necessarily exist as to the arbitrator’s impartiality or independence if there is an identity between a party and the arbitrator; if the arbitrator is a legal representative of a legal entity that is a party in the arbitration, or if the arbitrator has a significant financial or personal interest in the matter at stake.

In addition to the above standards, the IBA guidelines provide for practical application of the general standards under four categories. The Red List which consist of “a non-waivable Red List” that contains situations in which justifiable doubts are in fact present and which should serve as a basis for the disqualification of the arbitrator. It also consist of “a waivable Red List” which contains situations in which justifiable doubts are present and which would lead to the disqualification of the arbitrator,  nevertheless the parties can waive the conflict and still allow the arbitrator to continue. The Orange list contains situation that may or may not justify a disqualification of the arbitrator. The test is usually based on a reasonable person’s point of view who when presented with the fact determines whether there are justifiable doubts as to the arbitrator’s impartiality or independence. The Green List contains those situations that will ordinarily not raise justifiable doubts and in such situations, the arbitrator should not be disqualified.

One cannot help but agree with Sam Luttrell when he posited that the inter-operation of Article 14(1) and 57 produces a rule that an ICSID arbitrator may only be challenged for bias where he or she manifestly lacks the capacity to exercise independent judgment.[12] In Amco v. Indonesia the co-arbitrators in interpreting the ICSID Convention and Rules set the following standard: “[A]rticle 57 requires that fact be alleged-necessarily, that they be proven by the party who files the proposal to disqualify – which indicate the lack of said quality: that means that as apparently conceded by the Respondent, the mere feeling of ‘non-reliability’ does not suffice, since it has to be based on facts; that those facts should indicate a manifest lack of the required quality. Now considering the high interesting semantic remarks presented by the Claimant, the undersigned note that in Random House Dictionary, there are four several synonymous words of ‘manifest’, three of them being ‘evident’, ‘obvious’, ‘plain’. That means that the facts referred to in Article 57 have to indicate not a possible lack of the quality, but a quasi-certain, or as to go far as possible, a highly probable one”[13].

The preponderance of the decisions in ICSID cases and opinions of learned authors clearly suggest that the requirement of a “manifest” lack of the prescribed qualities is arguably a higher threshold than “justifiable doubts” for the successful challenge of an arbitrator.[14] However the higher threshold standard has not been accepted as a settled position.  It was criticized and rejected by the non-challenged members of the ad hoc Committee in the subsequent case of Vivendi v. Argentina I.[15] The non-challenged members acknowledged that the “manifest lack” language could be interpreted as to set a more stringent standard for disqualification than an “appearance of bias” standard, but they explicitly rejected such an interpretation. Interestingly, they held that in a case where the facts were undisputed, the term “manifest” accorded to a reasonable doubt test: “[B]ut in cases where (as here) the facts are established and no further inference of impropriety is sought to be derived from them the question seems to us to be whether a real risk of impartiality based upon those facts (and not any mere speculation or inference) could reasonably be apprehended by either party. If (and only if) the answer is yes, can it be said that the arbitrator may not be relied on to exercise independent judgment? That is to say, the circumstance actually established (and not merely supposed or inferred) must negate or place in clear doubt the appearance of impartiality. If the facts would lead to the raising of some reasonable doubt as to the impartiality of the arbitrator or member, the appearance of security for the parties would disappear and a challenge by either party would have to be upheld.”

One would observe that the decision in the Vivendi case is a radical departure from the challenge decisions in other ICSID cases interpreting the standard for disqualification in ICSID. Not only did it reject the high threshold rule, it imported into ICSID proceedings the “appearance of bias or reasonable third party test.”  Same can also be said of the Urbaser case that applied the “reasonable third party test” too. However, one would say that the decisions in the Vivendi and Urbaser cases are not shocking or surprising, given that the non-challenged members of the ad hoc committees resorted to the use of the IBA Guidelines as the benchmark for the determination of the meaning of “manifest lack” as contained in Article 14(1) of the ICSID Convention. Karel Daele justifies this approach by arguing that the “reasonable doubts or reasonable third party” standard lowers the threshold for making a successful challenge and correspondingly, heightens the protection of the parties against an unqualified arbitrator.[16]  

In the realm of international commercial arbitration, both the UNCITRAL Model Law and Rules and the IBA Guidelines recognise justifiable doubts as a basis for challenging an arbitrator.[17]. In fact in the Explanation to General Standard 2 of the IBA Guidelines, the Working Group admitted deriving the wording impartiality or independence from the broadly adopted Article 12 of the Model law, and the use of an appearance test based on “justifiable doubts” as to the impartiality or independence of the arbitrator as provided in Article 12(2) of the UNCITRAL Model Law to be applied objectively (a reasonable third person test). It is therefore apparently clear that the Model Law has had profound effect in this area. In the words of Sam Lutrell, the consistency of the Model Law, Article 12 with General Standard 2 of the IBA Guidelines has also contributed to the export of the Model Law standard into ICSID arbitration.[18]

The author is of the opinion that while the application of the UNCITRAL and IBA Standards in ICSID cases where parties have chosen the UNCITRAL Rules or the IBA Guidelines is justifiable; there is no justification for the application of these standards to cases that are conducted strictly under the ICSID Convention and Rules. A literal reading of the relevant provisions of the various Rules under consideration in this paper shows that while the reasonable person test can be applied in commercial arbitrations or in UNCITRAL arbitrations, on the basis of the standard contained in the Model law or IBA Guidelines. Same cannot be said of  ICSID, where as pointed out earlier the preponderance of the cases have made it clear that under the ‘manifest lack of independence’ standard there need to be both a clear and actual demonstration of bias, not simply a doubt or legitimate concerns or a likelihood of bias or even appearance of bias. This approach has been recognised and followed by ICSID tribunals in previous cases. For instance, in the Perenco v. Ecuador case, the parties agreed that any challenge to the arbitrators would be resolved by the Secretary-General of the Permanent Court of Arbitration (PCA) in accordance with the IBA Guidelines. The Secretary-General in upholding the challenge to Judge Brower filed by Ecuador applied the General Standard 1 and General Standard 2 of the IBA Guidelines. But in the Suez v. Argentina, a case conducted under the ICSID Convention and Rules, the Tribunal in complying with the ICSID standard held that an objective standard was required by the Convention. In its words it posited that: “Implicit in Article 57 and its requirement for a challenger to allege a fact indicating a manifest lack of the qualities required of an arbitrator by Article 14, is the requirement that such lack be proven by objective evidence and that mere belief by the challenger of the contested arbitrator’s lack of independence or impartiality is not sufficient to disqualify the contested arbitrator.”

D. Analysis of the Decision

The ruling in Blue Bank v. Venezuela adds to the increasing number of cases that illustrate the current trend that is observed internationally towards the increase of challenges against arbitrators. This decision of the Chairman in this case is significant for a number of reasons. First, it is the second successful disqualification of an arbitrator in the history of ICSID. Also it is the first in which the decision was taken by ICSID itself.[19] Further, the decision has once again brought to the fore the questions as to what are the exact standards for the disqualification of an arbitrator in ICSID arbitration conducted under the ICSID Convention and Rules.

In the case at hand, the main contention by Venezuela is hinged on alleged direct and indirect economic interests that Mr. Alonso had in the outcome of the two cases against it, given that a favourable result in the other case in addition to a vote favorable to the Blue Bank in this case would contribute to the expansion of the practice of Baker & Mckenzie in the investment arbitration community. It was further noted that Mr. Alonso would be deciding issues similar or identical to those which Baker & Mckenzie would be arguing against Venezuela in other case.

The Chairman in his ruling stated what he considered to be the applicable standard under the ICSID jurisprudence. However in his application of the rule to the facts of the case, he concluded that given the similarity of issues likely to be discussed in the Blue Bank and Longreef cases and the fact that both cases are ongoing, it is highly probable that Mr. Alonso would be in a position to decide issues that are relevant in Longreef v. Venezuela if he remained an arbitrator in the Blue Bank case and that it has been demonstrated that a third party would find an evident or obvious appearance of lack of impartiality. One interesting element of the decision that raises concern is the fact the Chairman did not disclose the similar issues that have given rise to the high probability of Mr. Alonso being biased. It is submitted that by his conclusion, the Chairman missed the point and reached the wrong conclusion by his application of the “obvious appearance or reasonable third party test” as first enunciated in the Vivendi case. He clearly lowered the standard to reach a conclusion which will be satisfactory to the challenging party-Venezuela.[20]  Further, one speculates that the decision of the Chairman was borne out of a desperate attempt to dispel the growing apathetic feeling of parties to ICSID to the outcome of challenge proceedings under ICSID.[21]

E. Conclusion

At a point where stakeholders in ICSID arbitration are in desperate need for a solution to the ever increasing bias challenge, which has been described as becoming more dynamic and abstract, as the ‘scorched earth game’ of  international arbitration and litigation against states becomes more ‘vulgar’ and profitable.[22] The decision of the Chairman of the Administrative Council of the ICSID in the Blue Bank v. Venezuela has neither resolved the controversy nor ameliorated it. Rather, it contributed to the already complicated picture of bias challenge in ICSID.

In the author’s opinion, the time is ripe for the controversy to be put to rest. This can be achieved by amending of the ICSID Convention and Rules to bring them in consonance with the standards contained in the IBA Guidelines and the UNCITRAL Rules. This can be achieved by adopting the recommendation of the ICSID Secretariat that the disclosure requirements in Rule 6(2) be changed to reflect the “justifiable or reasonable doubts” test.[23] The author also agrees with Audley Sheppard’s[24] suggestion that a challenge proposal should be decided by an independent ad hoc committee[25] given the concern by challenging parties as to whether the remaining arbitrators will have a conflict of interest themselves when determining a challenge, in that they may have been or might expect to be challenged themselves one day and may have a subliminal desire to set the standard at a high threshold.

However, until the above proposals are implemented, it is important that calm is restored to the already troubled waters of bias challenge in ICSID arbitration by a strict adherence to high threshold of ‘manifest lack of independence’ as contained in the black letters of the ICSID Convention and rules. On the basis of the foregoing, the conclusion reached by the Chairman in the Blue Bank case is wrong and should be rejected.

Ikemefuna Stephen Nwoye

The author is an LL.M. student in the International Business Regulation, Litigation and Arbitration program at New York University School of Law, Class of 2014. He is studying as a Dean Graduate Scholar. He is also a Graduate Editor at the NYU Journal of Law and Business. Prior to the commencement of the LL.M program, he worked as an Associate in the Arbitration and Litigation Department of Nigeria’s foremost Commercial law firm Aluko & Oyebode.

In his opinion rendered on April 25^th, 2013 (in Case C-9/12), Advocate General Jääskinen cited a paper by Professor Franco Ferrari, the Executive Director of the Law School’s Center for Transnational Litigation, Arbitration and Commercial Law to show the status of the law on a given issue. Advocate General Jääskinen rendered his Opinion in relation to a preliminary ruling, from a Belgian court, concerning mainly the interpretation of the rule of special jurisdiction laid down in relation to contractual matters in Article 5(1)(a) and (b) of Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, usually referred to as ‘the Brussels I Regulation’. More specifically, the Court of Justice of the European Union was asked to rule whether a distribution agreement, pursuant to which one party purchases goods from another party in one Member State for resale in the territory of another Member State, is to be classified as ‘sale of goods’ or ‘provision of services”. In getting to its conclusion, the Advocate General relied on a paper by Professor Ferrari excluding that distribution contracts can be compared to “sales of goods”, at least under the United Nations Convention on Contracts for the International Sale of Goods.

The Center will host an Arbitration Forum, entitled “Limits to Party Autonomy in International Arbitration” on Monday, February 3, 2014,  from 6.00 – 8.00 pm, in Vanderbilt hall, room 214 (40 Washington Square South, New York, NY 10012).

The event will be moderated by the center’s Executive Director, Prof. Franco Ferrari. Our distinguished speakers include Prof. Giuditta Cordero-Moss, professor and director of the Department for Private Law at the University of Oslo,   Prof. Diego P. Fernández Arroyo,  professor and co-director of Global Governance Studies at the School of Law of Sciences Po, Paris, Mr. Stefano Azzali, Secretary General of the Milan Chamber of Arbitration and Secretary Treasurer of the International Federation of Commercial Arbitration Institutions (IFCAI) and Prof. Luca G. Radicati di Brozolo,  professor of Private International Law at the Catholic University of Milan.

Please note that all discussions taking place during the Forum are subject to the Chatham House Rule.

Since space is limited, those interested are kindly asked to R.S.V.P.  Please send an email to Cassy Rodriguez at cassy.rodriguez@nyu.edu to confirm your attendance.

On several occasions German Supreme Court cites papers by Professor Franco Ferrari

In two different rulings, the Supreme Court of Germany cited papers by Professor Franco Ferrari, the Executive Director of the Law School’s Center for Transnational Litigation, Arbitration and Commercial Law. In its October 23^rd, 2013, ruling, which was only recently made public, the German Supreme Court relied on a paper by Ferrari asserting that one of the general principles underlying the 1980 United Nations Convention on Contracts for the International Sale of Goods is that of estoppel. In a ruling of October 10^th, 2013, the German Supreme Court justified its holding by referring to a different paper authored by Ferrari, in which Ferrari argues that under the Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) issues relating to the statute of limitations are to be qualified as issues of substance.

The Center, in collaboration with the New York/Washington D.C. Chapter of the Spanish Arbitration Club, will host the January 2014 Arbitration Forum, entitled “The Star Expert” on Tuesday, January 21st, 2014, from 6.00 – 8.00 pm, in Lipton Hall, D’Agostino Hall, 108 West Third  St., New York, NY 10012.

The event will be moderated by the center’s Executive Director, Prof. Franco Ferrari. Our distinguished speakers include Prof. Bernardo Cremades,  leading Spanish international arbitration practitioner, Mr. Grant Hanessian, Co-Chair of Baker & McKenzie’s International Arbitration Practice Group and Mr. Pedro Martinez-Fraga, partner in DLA Piper’s international arbitration and litigation practice.

Please note that all discussions taking place during the Forum are subject to the Chatham House Rule.

Since space is limited, those interested are kindly asked to R.S.V.P.  Please send an email to Cassy Rodriguez at cassy.rodriguez@nyu.edu to confirm your attendance.

 

The Center is proud to announce the November 2013 session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “Abusive Claims, Impecunious Claimants and Security for Costs:  the Search for a Framework”, which will take place on Monday, November 25th, 2013, from 6.00 p.m. to 8.00 p.m., in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).  The speakers will be Mr. Brian King, Mr. Domenico Di Pietro and Mr. Eric A. Schwartz.

Brian King is a partner in the international arbitration group at Freshfields Bruckhaus Deringer.  Prior to returning to New York in 2007, he headed the arbitration group in the firm’s Amsterdam office for seven years.  Mr. King’s practice centers on acting as counsel or arbitrator in investment treaty and international commercial disputes.  He has represented both investors and States, as well as some of the largest European and U.S. corporations.  A 1990 graduate of the NYU Law School, Mr. King regularly speaks and publishes on arbitration-related topics. Mr. King is also this November’s scholar-in-residence at the Center for Transnational Litigation, Arbitration and Commercial Law.

Domenico Di Pietro, who graduated in law at University of Rome La Sapienza and received his LLM from Queen Mary, University of London, practises international arbitration with Freshfields Bruckhaus Deringer in Rome and Milan. He has acted in numerous arbitrations under the rules of a great variety of arbitral institutions as well as in ad hoc proceedings. He is also active in investment arbitration, having advised and appeared in well-known ICSID cases, including annulment proceedings. Domenico has also acted in several sport disputes at the Athens and Beijing Olympics. Mr. Di Pietro lectures international arbitration at Roma Tre University. He has published extensively on international arbitration. He is qualified to practise in Italy and in England and Wales.

Eric A. Schwartz, a graduate of Dartmouth College and Yale Law School, is a partner in the New York and Paris offices of King & Spalding, where he specializes in international arbitration.  He is a former Secretary General and current Vice-President of the ICC International Court of Arbitration. Over the last 30 years, he has acted as counsel on behalf of some of the world’s largest companies, public authorities and sovereign states in international arbitration proceedings in all of the principal European arbitration venues, as well as in Africa, Asia and the US. In addition to his work as counsel, Mr. Schwartz regularly sits as an arbitrator. He has appeared as chair, sole arbitrator or co-arbitrator in proceedings under the rules of the AAA, CIETAC, ICC, ICSID, LCIA, SCC and UNICTRAL in arbitrations throughout the world.  He is also the author of dozens of articles on international arbitration practice as well as the co-author (with Yves Derains) of A Guide to the ICC Rules of Arbitration (Kluwer, 2nd ed. 2005). Mr. Schwartz is listed as one of the 25 “most highly regarded individuals” in the world in his field in Who’s Who Legal – Commercial Arbitration 2014.

Please note that all discussions taking place during the Forum are subject to the Chatham House Rule.

To rsvp, please send an email to cassy.rodriguez@nyu.edu.

On November 22, the Center – in collaboration with the Jerusalem Arbitration Center – will host a conference on “Solving Israeli-Palestinian Commercial Disputes.”

The event will be moderated by the Executive Director of the Center for Transnational Litigation, Arbitration and Commercial Law, Prof. Franco Ferrari and Prof. Maya Steinitz, University of Iowa College of Law. Speakers include Mr. Oren Shachor, ICC Israel, Ms. Yara Asad, ICC Palestine, and Mr. Mazen E. Qupty, ICC Palestine.

 

Please join us as we introduce the Jerusalem Arbitration Center at the NYU School of Law.

 

Solving Israeli-Palestinian Commercial Disputes:

Introducing the Jerusalem Arbitration Center

Friday, November 22, 2013

10:00am-12:00pm

Lester Pollack Colloquium Room, Furman Hall 900

245 Sullivan Street. New York, NY 10012

 

To RSVP, please click here

Professor Franco Ferrari, the Executive Director of the Center for Transnational Litigation, Arbitration and Commercial Law, has just edited the proceedings of the conference, hosted by the Center, entitled “Forum Shopping in the International Commercial Arbitration Context”, held at NYU from Feb. 28^th – March 2^nd, 2013. The conference brought together arbitration practitioners and arbitration scholars from the U.S. and abroad to examine the question of whether and, if so, to what extent forum shopping is relevant in the context of international commercial arbitration. The introductory talk, given by Professor Ferrari, entitled “Forum Shopping in the International Commercial Arbitration Context: Setting the Stage”, as well as the table of contents can be found by clicking here.

On October 7th, 2013, the Center hosted a seminar entitled “Interim Relief: What, Why, When, How.” The event was moderated by Prof. Franco Ferrari and featured talks by Prof. Massimo Benedettelli, Prof. George A. Bermann, Dr. Andrea Carlevaris, Mr. Domenico Di Pietro, Mr. Brian King, and Mr. Eric P.Tuchmann. For full program brochure click here

Interim Relief: What, Why, When, How?

New York University School of Law

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 fourth Global ICC Young Arbitrator’s Forum conference took place in New York City on June, 27-29 2013. The conference gathered about two hundred practicing arbitration lawyers, young and old, from the four corners of the globe. The conference was co-hosted by the Center for Transnational Litigation and Commercial Law at New York University, School of Law.

Salim Moollan, vice-president of the ICC International Court of Arbitration, opened the first day with a keynote speech addressing how to foster legitimacy in international arbitration. Following Moollan’s opening remarks, the conference continued with a debate on the challenges to the current investment arbitration system: « Defying Investment Arbitration: Moral Hazards, Perceived Injustices and the Coming of a New Age.” which this blog attempts to briefly summarize.[1]

Clash of Paradigms

Before defying a system, one must be able to define it; which is no simple task. James Morrison (Allen Linklaters, Sydney) and Maxi Scherer (Wilmer Cutler Pickering Hale and Dorr LLP and Queen Mary University of London), who moderated the debate, highlighted this difficulty by drawing a comparison to the platypus, an animal living in Australia. They argued that investment arbitration was as hard to define as this rare creature: Is it a bird? A mammal? A reptile? Or is it some strange hybrid of the three?

The platypus analogy was borrowed from Anthea Roberts’ 2013 article “Clash of Paradigms: Actors and Analogies Shaping the Investment Treaty System” (American Journal of International Law) in which she wrote that investment arbitration is a hybrid of many fields of law: while arbitration is clearly a creature of public international law, it also contains private international law dispute resolution mechanisms. As if this was not enough, investment arbitration also contains facets of public regulatory capacity, sovereign interests, and trade and human rights law. Roberts suggests that since the field of international investment law is a relatively new one, it is under-theorized. As a result, “when seeking to fill gaps, resolve ambiguities or understand the system’s nature” observers usually employ comparisons in order to clarify concepts or draw upon case-law from other sub-fields of international law. Given investment arbitration’s platypus-like diversity, one’s understanding of investment arbitration can vary wildly depending on one’s background. Lawyers trained in public international law, administrative law, human rights law, trade law or from a commercial litigation will each employ a different paradigm when dealing in investment arbitration, thereby influencing which actors they believe should prevail and which direction the system  should take.

The panelists were drawn from a variety of different backgrounds in order to provide a full spectrum of opinions concerning investment arbitration: John Crook, arbitrator and professorial lecturer at the George Washington University Law School who provided an academic perspective; Suzana Blades, Senior Counsel at ConocoPhillips, Houston who provided her view on arbitration from the investor side; Sophie Nappert, arbitrator and member of Three Verulam Buildings, London; and Anna Joubin-Bret, now in private practice but former Senior Legal Advisor on Investment, Technology and Enterprise Development of the U.N. Conference on Trade and Development (UNCTAD) each provided perspective from inside the arbitration practice mindset. Leidylin Contreras, lawyer at the Office of the legal Advisor to the President, Presidency of the Dominican Republic, gave attendees the precious perspective from the host State, which is seldom heard in these debates.

These distinguished personalities all strove to provide conference attendees with some perspective concerning the recent backlash against investment arbitration. The latters all had in mind the stir caused by the report, “Profiting from Injustice”, published in 2012 by the Corporate Europe Observatory and the Transnational Institute, which accused law firms, arbitrators and financiers of fueling an investment arbitration boom out of mere pecuniary interests and of perpetuating a deeply unfair system from which the host States and their citizens are the obvious losers.

Slightly more constructive but no less caustic was the criticism of investment arbitration made by Sundaresh Menon, Chief Justice of Singapore, at the occasion of the 2012 ICCA Congress opening session. The growing complexity and “judicialisation” of investment arbitration procedure is necessarily followed by the explosion of delays and costs; the exclusivity of the arbitral “club” consisting of a small pool of specialized arbitrators from Europe and the United States, experts in commercial law but who are out of touch with the public interests of the countries affected by their actions and who are not held accountable to the people they affect; the moral hazards necessarily entailed by such an endogamous profession, characterized by multiple hats-wearing and the tension between the role of judge and businessman is fact; the arbitral discretion in the interpretation of open-textured treaty commitments without any oversight often leads to conflicting results and a lack of coherence and predictability, all of these elements lead to a disconnect between arbitration and its users, both States and investors.

Efficiency and Consistency

As an in-house lawyer for an investing company, Suzana Blades reminded the conference attendees that arbitration should be primarily about solving disputes and that arbitrators are drifting away from this imperative. “We want a decision, not a thesis.” she said, regretting the sometimes academic posture of certain arbitrators. “At the end of the day, the goal is to solve a dispute, not to develop international law.” She also argued that arbitrators are sometimes too deferential to the parties, allowing them to create extension, bifurcations or even trifurcations (!) in the proceedings for fear of seeing their award annulled for lack of due process, the consequence being significant delays in the delivery of a biding and enforceable award. For Blades, a decision given by an arbitral panel after six or seven years of litigation is not timely. In order to reconcile investment arbitration with its users, Blades urged that investment arbitration procedure should allow arbitrators to have a bolder attitude in the process and render awards more quickly and efficiently. She also encouraged companies to develop in-house arbitration teams, able to grasp the stakes of investor-State litigation and to consider Alternative Dispute Resolution (ADR) as a serious alternative to arbitration.

Sophie Nappert, however, pointed out that we had to stop thinking about investment arbitration as a quick dispute resolution system. According to her, in disputes with so many domestic public interests at stake and so many outside actors involved, it was impossible for arbitral tribunal to deliver a short and technical award. Arbitrators thus felt compelled to elaborate lengthily on the legal grounds of the decision, in a way that will make the decision justified and satisfy the stakeholders and public opinion.

Leidylin Contreras mentioned the impression of abuse of the bilateral investment treaty system by investors, the disproportionate damages decided against developing countries that see their public policies and regulatory capacity challenged. She also emphasized the problem of inconsistent arbitration decisions stemming from diverging interpretations by arbitral panels working with the same treaty provisions and the lack of predictability the panel process entails.

Regulation and Accountability

According to Sophie Nappert, arbitration is now “out of the closet”; it is making front-page news and is now under the scrutiny of the international community. But there are many weeds in the investment arbitration garden…NGOs, academics, citizens are asking for increased accountability and transparency; namely, for the publication of awards, for the identity of the arbitrators, and information concerning the appointing process. What has been done to acknowledge these demands? Not much according to Sophie Nappert, who regretted that arbitral institutions have not taken the criticism seriously enough to take a collective stance on the matter. Nappert urged arbitral institutions to take a firmer role in the quality control of the arbitral product.

According to Anna Joubin-Bret, a possible solution lies in the development of Alternative Dispute Resolution (ADR). According to her, statistics show that 39% of ICSID cases are settled before the parties go to arbitration, demonstrating that ADR procedures are not so uncommon. “We often forget that arbitration is a sub-section of ADR.”

Contreras nuanced this point by explaining the difficulty for government officials to settle disputes using ADR because of the inevitable suspicion of corruption that will weigh on them in addition with the popular opprobrium that would necessarily stain the officials who accept to compromise rather than litigate. Very few politicians are eager to bear such a political cost.

The panelists all agreed that a good step forward would be to create a specific set of rules for investor-State mediation to be included in the relevant investment protection instrument. While there are specific rules on conciliation in the ICSID Convention, more cane be done.

The Seeds of Change

It finally appears that when it comes to discussing investment arbitration reforms, investors and States often share a common interest in having an efficient dispute resolution system. In the end, the ultimate goal for both is to put an end to a dispute and have the investor stay in the country and pursue his investment. Even though we often read that those interests as clashing, investors and States are both users of the investment arbitration system and have everything to win from seeing it improved.

The choice of launching a conference attended by young lawyers with this controversial and touchy subject matter is probably not a random choice by the ICC organizational committee. It underscores that a reform is of crucial importance to the perpetuation of investment arbitration and that there are no better people to achieve this than the upcoming generation of arbitrators.

Yael Halbron is a graduate from Sciences Po and an LL.M Candidate at Duke University School of Law.

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[1] This blog is based on the personal notes of the author; it does not reflect the opinion of the co-organizers, moderators or panelists of the ICC Global YAF event.