Introduction

Liu Li v. Tao Li and Tong Wu[1] (the Liu Li Case) caused a sensation in both China and the U.S. in 2017. It was the first time that a People’s Republic of China (PRC) court recognized and enforced a judgment rendered in the U.S. This paper aims to examine the Reciprocity Principle under the PRC law by reviewing the Liu Li Case. The paper includes five sections: (I) A brief review of the Liu Li Case; (II) How foreign court judgments are enforced under the PRC law; (III) A background of the practice of reciprocity before the Liu Li Case in China; (IV) An analysis of why the Liu Li case was enforced in a Chinese court; and (V) the problems remain to be solved after the Liu Li Case.

I. A Brief Review of the Liu Li Case

The Liu Li Case sprung from a commercial dispute between Liu Li (the Applicant) and Tao Li and Tong Wu (the Respondents). The Applicant signed a share transfer agreement with the Respondents. After the Applicant paid $125,000 to the Respondent for shares in a California company, the Respondents did not transfer anything to the Applicant. Subsequently, the Applicant filed a lawsuit against the Respondents for fraud before the Los Angeles Superior Court (the L.A. Court). The respondents were served with summons, but they were ignored. Consequently, the L.A. court rendered a default judgment in favor of the Applicant (the L.A. judgment).

The Applicant then applied to the Wuhan Intermediate People’s Court (the Wuhan Court) for recognition and enforcement of the L.A. Judgment. In order to prove that reciprocity existed between the U.S. and China, and that the U.S. had recognized Chinese judgements in the past, the Applicant submitted to the Wuhan Court a case report of Hubei Gezhouba Sanlian Indus. Co. v. Robinson Helicopter Co[2] (the Robinson Case). After the Wuhan Court reviewed the materials submitted by the Applicant, they found that the Robinson Case was a precedent as to recognition and enforcement of civil rulings of Chinese courts in the U.S. Thus it was determined that reciprocity for mutual recognition and enforcement of civil rulings existed between the two countries, which led to the Wuhan Court to recognize and enforce the L.A. Judgement.

II. How Foreign Court Judgments are Enforced under the PRC Law

In Article 281 and 282 of the PRC Civil Procedure Law (the CPL) and other relevant rules,[3] there are six requirements for enforcement of a foreign judgment in China which includes the basis requirement and five other requirements[4]. For the purpose of this paper, I will only focus on the basis requirement, which includes two bases. It requires that either (1) the country where the deciding court is located has a treaty with China, or is a signatory to an international treaty to which China is also a signatory; or (2) there is reciprocity between the countries.

With respect to the first basis, China is not a signatory to any international convention on recognition and enforcement of foreign court judgement. Meanwhile, although China has entered into bilateral judicial assistance treaties on enforcement of foreign judgment with 33 countries[5], there exists no such bilateral treaty signed between the U.S. and China.

With respect to the second basis, the PRC laws do not clearly define “reciprocity”. Theoretically speaking, there are two types of reciprocity, which includes the de facto reciprocity and the de jure reciprocity. The De facto reciprocity requires actual precedents demonstrating that the foreign country has recognized and enforced Chinese judgments in the past. The De jure reciprocity does not require actual precedents. If, by examining the foreign law there is a possibility that Chinese judgments may be enforced in the foreign court in principle, the reciprocal relationship then exists[6]. Previous PRC judgments indicate that the Chinese courts have adopted the de facto reciprocity approach.

III. A Background of the Practice of Reciprocity before the Liu Li Case in China

In the past, the De facto reciprocity had resulted in obstacles to recognize and enforce foreign judgments in China due to its strict requirements. In practice, many foreign judgements were refused because of the lack of evidence of de facto reciprocity. For example, in Gomi Akira v. Dalian Fari Seafood Ltd. (Gomi Case), a Japanese party applied to the Dalian Intermediate People’s Court (the Dalian Court) for recognition and enforcement of a judgement rendered by a Japanese court. The Dalian Court refused to enforce the Japanese judgement, holding that there existed no reciprocity relationship between Japan and China[7]. This decision was later reaffirmed by the Supreme People’s Court of China. Similarly, a Korean company petitioned to Shenzhen Intermediate People’s Court (the Shenzhen Court) for enforcement of a Korean judgment in 2011. Similarly, the Shenzhen Court refused to enforce the judgment for the same reason[8]. Up till now, PRC courts refused to recognize and enforce judgments rendered in Japan, Korea, Germany[9], England[10] and Australia[11] due to lack of evidence of de facto reciprocity.

The Chinese court’s approach to the reciprocity principle has led to other problems. The countries that were refused by the PRC courts have taken revenge on the principle of reciprocity by following suit to not enforce judgement rendered by the PRC Court. For example, Japan also adopts the principle of reciprocity for enforcement of foreign judgments. In 2004, the Osaka High Court refused to enforce and recognize a judgment rendered in China because it found the Dalian Court had previously refused to enforce the Japanese judgement in the Gomi Case[12].

However, before the Liu Li Case, the PRC courts had recognized and enforced two foreign judgments based on the reciprocity principle. The first case occurred in 2013 by the Wuhan Court, which is the same court that enforced the U.S. judgment in the Liu Li Case. In that case, the Wuhan court enforced a German judgment rendered by Montabaur District Court of Germany because the court found that Berlin High Court recognized and enforced a judgment made by the Wuxi District Court of China in 2006[13]. The second case occurred in 2016, in which the Nanjing Intermediate People’s Court (the Nanjing Court) rendered a decision to recognize and enforce a Singapore judgment based on reciprocity. The Nanjing Court held that the principle of reciprocity should be applied because the Singapore High Court enforced a civil judgment made by the Suzhou Intermediate Court in 2014[14].

IV. An Analysis of Why the Liu Li Case was Enforced in a Chinese Court

Although the Liu Li case is not the first foreign judgment enforced by the PRC court based on reciprocity, it is the first time that a PRC court ruled that mutual reciprocity exists between the U.S. and China. Given the fact that U.S. and China are the world largest and second largest economy with huge trade volume with each other, the Liu Li Case is a great significance to both countries.

It is worth mentioning that several attempts had been made to enforce U.S. judgments in China before the Liu Li case, but they all were unsuccessful. For example, in 2015, a U.S. applicant petitioned to the Nanchang Intermediate People’s Court (the Nanchang Court) for enforcement of a U.S. judgment. The applicants also claimed there was reciprocity between the U.S. and China because of the Robinson case. However, the Nanchang Court, after reviewing the Robinson case, held the U.S. and China had not established reciprocity and thus refused to enforce the U.S. judgments[15].

There comes a problem: why can the Liu Li Case get recognized and enforced? In my view, it was because the Applicant in the Liu Li case petitioned at the right place at the right time.

First, the Applicant applied for enforcement before the Wuhan court. As mentioned above, the Wuhan court was the first court which recognized and enforced the foreign judgment in China back in 2013. The Wuhan Court has been known for its enforcement of the German judgment at the time Liu Li filed his case. Therefore, the Wuhan Court, as one of the most open-minded courts in China, was more likely to keep its tradition of enforcing foreign judgments provided that it found the other country had previously enforced any PRC judgment.

Secondly and more importantly, Liu Li filed the case at the right time. The Chinese government launched “Belt and Road Initiative” in 2013. In the past four years, China has already invested billions of dollars in several South Asian countries, focusing on infrastructure investment, construction materials, railway and highway. As a result, China has emerged as one of the fastest-growing sources of foreign direct investment. This policy has been reshaping the mindset of the Chinese legislators and legal practitioners, driving them to embrace more open-minded ideas to keep in line with the international practice. As the fastest growing investor, China is more likely to get involved in litigations as the plaintiff in the future. If China keeps on sticking to the conservative and isolated view on its foreign judgment enforcement rules, it will inevitably and severely damage its domestic investors.

This advancement is encouraged by the legal professionals in China. Justice Hongyu Shen, who is one of the presiding judges in the Supreme People’s Court of the PRC (SPC), once said in her speech that “the standard of de facto reciprocity discouraged the enforcement of foreign judgment in China, which had led to numerous international parallel proceedings. In solving this problem, we could consider adopting the de jure reciprocity, by which courts can recognize reciprocity by examining the foreign law there is a possibility that Chinese judgments may be enforced in that country. In this way, we can pave the way for establishing judicial assistance with other countries[16]”.

Some newly-issued judicial opinions also point to the trend. In a judicial opinion released in 2015, the SPC suggested that courts should create a better legal environment for the Belt and Road Initiative. Courts should “accurately apply international treaties,” “enhance the credibility of PRC judgment,” and “effectively protect the lawful rights and interests of Chinese and foreign parties”.[17] With regards to judicial assistance, it indicated that “if the countries in the Belt and Road region have not concluded judicial assistance agreements with China, but promised to offer judicial benefits to us, courts may consider offering judicial assistance to the party from that country first, paving the way for the formation of reciprocal relationship.” [18] In addition, the SPC also reviews foreign-related cases tried by lower courts on regular basis and publishes those cases it deems appropriate as “Model Cases” for lower courts’ reference. The Kolmar Group case (the Singapore judgment which was enforced by Nanjing Court in 2016) was one of the Model Cases published by the SPC on May 15, 2017.

The above evidence demonstrates that Chinese law and practice, being driven by the new economic policy are evolving towards a more sophisticated level. As evidenced, China is trying to integrate itself more into the world with a view to meeting its new needs. In the process of the evolution, the PRC courts are encouraged to enforce the foreign judgments. The Liu Li case is one of the indicators of that trend. I believe we will see more foreign judgments to be recognized and enforced in China in the near future.

V. The Problems that Remain to be Solved after the Liu Li Case

While the trend of enforcing foreign judgments based on reciprocity seems to be building momentum in Chinese courts, there remains several problems to be solved. This part identities three questions arising from the Liu Li Case which deserves attention. The questions include: (1) Was the reciprocity formed between the U.S. and China or between the state of California and China? (2) If one PRC Court ruled that the reciprocity exists between the U.S. and China, are other PRC courts obligated to make the same ruling? (3) If U.S. Court refuses to enforce other PRC Judgment in the future, can PRC court revoke its recognition of the reciprocity?

1. Was the Reciprocity Formed between the U.S. and China or between the state of California and China?

In the Liu Li Case, the Wuhan court favored the view that reciprocity had been formed between the U.S. and China. First, Wuhan Court did not mention California state in its judgment. When addressing the reciprocity issue, it only referred to the U.S. as whole[19]. Second, in the Liu Li Case, the court which recognized and enforced the PRC judgment was a U.S. federal court in California. The U.S. judgment which was enforced by the Wuhan Court was in fact made by a state court in California. It is suggested that since the Wuhan court did not address this difference, the Wuhan court deemed all the U.S. courts as a whole and not by the state of California.

However, this issue is not as simple as it appears to be. It could get complicated if the state which enforces the PRC judgment is different from the state which renders the judgment to be enforced in China. For example, can I enforce a New York judgment in China on the basis that a California court used to enforce a Chinese judgment?

This problem arises out of the form of government. Contrary from China or Singapore (which are unitary countries), the U.S. is composed of federal states. Each state can enjoy considerable independence and great legislative power. In terms of enforcing the foreign judgment, states have the power to adopt any law they deem appropriate[20]. That is to say, different state may apply different rules governing the enforcement of the foreign judgment which may lead to contradict ruling on the same issue. As the enforcement standards differ from state-to-state, it is not a good idea to treat all U.S. courts as a whole. China needs more sophisticated rules defining reciprocity when dealing with a federal country like the U.S.

2. If One PRC Court Ruled that the Reciprocity Exists between U.S. and China, are other PRC courts Obligated to Make the Same Ruling?

Generally speaking, a court’s judgement is not a source of law in China and thus has no binding effect on other courts (including its lower courts). Therefore, even if the Wuhan Court clearly ruled that there exists reciprocity between the U.S. and China, it is still possible that other PRC court rules the opposite by applying the same law as the Nanchang Court did. Hence, it would be too quick to conclude that the reciprocity between these two countries is (widely) recognized in China.

However, if SPC makes the Liu Li Case as a Model Case (like what SPC did to the Kolmar Group Case) or as a Guiding Case[21], then we may deem such reciprocity is (widely) recognized all over China. But I do not think the SPC would do that in a short period. Given the complicated relationship between the U.S. and China in terms of politics and economy, China needs more time to consider this issue.

3. If U.S. Court Refuses to Enforce Other PRC Judgment in the Future, Can PRC Courts Revoke its Recognition of the Reciprocity?

There is no answer to this question under the PRC law because it lacks a clear definition of reciprocity. However, PRC courts will have to face this question sooner or later. In my view, court’s recognition on the reciprocity should be revocable, otherwise it would defeat the purpose of reciprocity. If a PRC court finds very few number of PRC judgments having been enforced in the U.S. (compared to the number of the cases that have been refused to enforce), it would be unreasonable and inappropriate for China to keep the view that reciprocity exist between the two countries. However, if such ruling is revocable, it will also lead to many unanswered questions. Some questions include: When shall we revoke the ruling? Is it based on the judge’s general feeling that greater judgments are enforced than those that are refused in the U.S., or is it based on a particular enforcing rate? These uncertainties should be figured out by China before we draw any further conclusion on the certainty of Chinese court’s enforcement of the U.S. judgment.

 

Suni Gong

Suni Gong is an LL.M. Candidate in the International Business Regulation, Litigation and Arbitration Program at the NYU Law School. He received his Juris Master degree from Tsinghua Law School in 2014 and enrolled in the International Commercial Arbitration and Dispute Resolution Program. Before coming to NYU, Suni had practiced law in Shanghai for three years, focusing on foreign-related arbitration and litigation.

 

[1] (2015) E Wuhan Zhong Min Shang Wai Chu Zi No. 00026.

[2] In Robinson case, two Chinese companies, Sanlian and Pinghu (“SP”), bought helicopters from a California company Robinson Helicopter Co. (“Robinson”). After one of the helicopters crashed in China, SP sued Robinson in the LA Court. Robinson sought to say the action on forum non conveniens grounds, arguing that the Chinese courts should rule on the case and agreed to abide by any final judgment rendered in China. The LA court granted Robinson’s motion. SP then sued Robinson in the Hubei Higher People’s Court and got a judgment in favor of it (Hubei Judgment). SP applied for enforcement of the judgment in the U.S. District Court for the Central District of California (the District Court). The District Court ruled for SP, enforcing and recognizing and the Hubei Judgment. Robinson appealed. The U.S. Court of Appeals for the Ninth Circuit affirmed. Hubei Gezhouba Sanlian Indus. Co. v. Robinson Helicopter Co., 425 Fed. Appx. 580 (9th Cir. 2011).

[3] Article 543 of the Supreme People’s Court Interpretations concerning the PRC Civil Procedural Law (2012)

[4] The other five requirements are: (1) Effectiveness: the foreign judgment has taken legal effect in the jurisdiction in which it was rendered; (2) Non-violation of Public Policy: the foreign judgment does not violate any basic principles of Chinese law, national sovereignty, security, or social public interest; (3) Proper Notice: in case of a default judgment, whether the defendant were served with proper notice of the proceedings; (4) No Conflicting Judgment: whether there is any conflicting domestic or foreign judgment; and (5) Foreign Court’s Jurisdiction: whether the foreign court has jurisdiction over the case.

[5] In fact, China has signed bilateral judicial assistance treaties with 37 countries. These treaties usually contain the provision of recognition and enforcement of judgment made in the other country. However, there are 4 exceptions: China’s bilateral treaties with Singapore, Korea, Thailand and Belgium do not include the enforcement of foreign judgement. This information was found on the official website of Ministry of Foreign Affairs of the PRC: http://www.fmprc.gov.cn/mfa_eng/

[6] Zheng Sophia Tang et al., Conflict of Laws in the People’s Republic of China 162 (2016).

[7] Gomi Akira v. Dalian Fari Seafood Ltd., (1995) Min Ta Zi No. 17.

[8] Spring Comm Ltd. V Piao Zonggen, (2011) Shen Zhong Fa Min Yi Chu Zi No.45.

[9] (2010) Min Si Ta Zi No. 81.

[10] (2010) Er Zhong Min Tezi No. 10324.

[11] (2004) Ning Min Wu Chu Zi No. 7.

[12] Osaka High Court decision of April 9 2003, Hanrei Jiho, No. 1841.

[13] (2012) E Wu Han Zhong Min Shang Wai Chu Zi No.16.

[14] Kolmar Group AG v. Jiangsu Textile Industry Import and Export Corporation, (2016) Su 01 Xie Wai Ren No.3.

[15] (2016) Gan 01 Min Chu No. 354.

[16] Hongyu Shen, Belt and Road Initiative and the Enforcement and Recognition of Foreign Judgment, 2017 Vol. 15.

[17] The Supreme People’s Court concerning Providing Judicial Services for “Belt and Road” by People’s Courts. (2015)

[18] Please note that this provision only applies to countries in the Belt and Road region, which covers some countries in Asia, Europe and Africa.

[19] The wording Wuhan Court used was: “because the court found there existed precedent enforcing a PRC judgment in the U.S., it could be deemed there exists reciprocity in terms of enforcement civil judgment”.

[20] In fact, 32 states in the U.S. have adopted the Uniform Foreign-Country Money Judgments Recognition Act as their law regulating the enforcement of foreign award while the rest states still keep their own “homemade” common law governing the recognition of foreign judgment.

[21] Since 2012, the SPC has published 87 cases tried by lower courts as the “Guiding Cases”. Under the PRC law, if PRC courts deal with a case which is similar to a Guiding Case, the courts “shall refer to the ruling of the Guiding Case”. In contrast, Model Cases do not have such legal effect.

Professor Franco Ferrari, the Director of the Center, and Professor Marco Torsello, professor of law at Verona University School of Law and Global Professor of Law (Paris), have just published the second edition of their book on the 1980 United Nations Convention on Contracts for the International Sale of Goods. The Convention, which covers more than 3/4 of world trade, is in force in 87 States, including the United States and its most important trading partners. The book, which is part of West’s Nutshell series and is aimed at both practitioners and scholars, covers the Convention’s basic rules one should be aware of, so as to avoid surprises when doing business with parties having their place of business in other countries. For more information, please click here.

Professor Ferrari, the Center’s Director, has just published the third edition of a book entitled “international contract law” in German. Like the previous two editions, the book contains article-by-article commentaries of the most important conflict of laws and substantive instruments addressing international contracts applicable in Europe, namely 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), the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG), the 1956 Convention on Carriage of Goods by Road, and the 1988 UNIDROIT Convention on International Factoring.  The 1750 page book allows practitioners and scholars to find guidance on how to solve the most intricate conflict of laws and substantive law problems falling under the purview of the aforementioned instruments. This is also why the courts of several countries, including the German Supreme Court (most recently in its decision of 7 December 2017, docket n. VII ZR 101/14), and the Austrian Supreme Court (most recently in its decision of 29 November 2017, docket n. 8Ob12/17y), have had resort to the earlier editions of the book. For more info, please click here.

Professors Linda J. Silberman, the Clarence D. Ashley Professor of Law and Co-Director of the Center, and Franco Ferrari, the Center’s Executive Director, two experts on conflict of laws, have just published an anthology on the recognition and enforcement of foreign judgments. This anthology offers a 24-article tour of the history, principles and future of the recognition and enforcement of foreign judgments. The collection of seminal pieces selected reflects the viewpoints of authors from different countries and legal systems and explores different approaches to, and comparative perspectives of, judgment recognition and enforcement. Topics covered include the special issues of the revenue rule and the role of public law, the effects of fraud, the scope of preclusion, and the impact of class actions. The collection also looks to the future, considering possible solutions to harmonizing recognition and enforcement and assessing how the development of human rights may impact judgement recognition and enforcement. Prefaced by an original and informative introduction by the editors, the anthology is an essential resource for those studying, researching or practicing in this area. For more information, please click here.

Professor Ferrari, the Center’s Director,  has just published a paper (in the Italian Rivista di diritto civile (2018), 280) on a decision by the Italian Supreme Court, rendered on 5 July 2017,  which for the first time ever recognized a US decision awarding punitive damages. In his paper, Professor Ferrari, an expert inter alia on European conflict of laws, compares the Italian decision with decisions rendered both in Germany and France and concludes that the Italian Supreme Court’s decision is basically in line with those of the Supreme Courts of Germany and France, even though the Italian Supreme Court expressly sets forth certain requirements for the recognition that prima facie are required neither under German nor under French case law.

The Italian Supreme Court’s revirement.

On July 5th, 2017, the Joint Divisions of the Italian Court of Cassation ruled in favor of the enforceability in Italy of foreign decisions[1] awarding punitive damages.[2]

Punitive damages have long been considered alien to, and incompatible with, the Italian legal system. Hence, foreign judgements awarding such damages were denied enforceability on grounds of public policy. In fact, it was held that, under Italian law, damages shall be limited to compensation for the actual loss suffered by the injured party by reason of the harmful conduct of the wrongdoer.[3]

In an obiter dictum of the judgement at hand, the Italian Supreme Court states that punitive damages are, even though alien, compatible with the Italian legal system.

The Court acknowledges that under Italian law, civil liability may serve different functions. Although its primarily purpose is to compensate the injured party, in line with its original function of restoring patrimonial loss, nowadays it may also ensure deterrence and retribution.[4]

However, the Court states that four prerequisites must be present in order to rule in favor of enforceability of judgements awarding punitive damages: (i) the foreign judges who delivered the award must have been granted such power by means of foreign legislative provisions (or equivalent sources) in similar and predictable circumstances (legality); (ii) the foreign legal system must provide a quantitative limit to the imposable amount, which cannot be entirely left to the discretion of the Court (or of a jury); (iii) proportionality between the amount of compensatory and punitive damages; and (iv) proportionality between the amount of punitive damages and the level of recklessness or malice characterizing the conduct of the wrongdoer. In other words, the ruling sets general requirements of legality, predictability and proportionality that must be met by the legal system of the award’s country of origin, in order to be granted recognition and enforceability in Italy.

As a result, punitive damages that are considered “grossly excessive” would not be in line with Italian public policy, presenting an arbitrary character and not preserving any proportionality between the loss suffered and the compensation received.

The Court then examines the recent development that took place in the U.S. in relation to punitive damages, pointing out that the US legal system now expressly repeal “grossly excessive”.

According to the Court, both the evolution in the Italian and in the U.S. now make the recognition and the enforcement of a US judgement awarding punitive damages no longer a mere theoretical possibility.

How to avoid excessive, unpredictable and inconsistent punitive damages awards: the possible approaches.

If the Court is right in acknowledging that significant progress has been made in the U.S. in an attempt to avoid excessiveness and unpredictability of these awards, it must be specified that, contrary to what the Court seems to affirm, the 1:1 ratio, allegedly set forth by the Exxon[5] case, is far from being a constitutional limitation binding all US courts.

State regulation of punitive damages varies, as states may exercise significant discretion in determining how and when to impose punitive damages. Many states have imposed statutory limits on punitive awards: some of them in the form of absolute monetary caps[6]; others in the form of a maximum ratio of punitive to compensatory damages[7]; while others still have opted for a combination of the two[8]. Particularly, those states that rely on a multiplier have adopted a variety of ratios, ranging from 5:1 to 1:1^[9].

In Exxon v. Baker, the US Supreme Court reaffirmed that to effectively serve the same purpose as criminal penalties, that is, to deter misconduct, punitive damages awards must be both “reasonably predictable in severity” and consistent in amount between similar cases.[10]

In an attempt to avoid unpredictable and inconsistent awards, the Court affirmed that three approaches are possible: (i) settling on criteria for judicial review of punitive damages; (ii) setting a hard dollar cap: (iii) pegging punitive to compensatory damages using a ratio or maximum multiple.[11]

The Court determined that linking punitive awards to compensatory damages would best serve such a desire. In establishing the proper ratio, the Court sought numerical reasonableness looking at studies examining the ratio of punitive to compensatory verdicts. These studies implied what judges and juries have deemed reasonable financial penalties in cases ranging from recklessness to malice. Such studies place the median ratio at less than 1:1, which means that, for the most part, punitive awards do not surpass compensatory awards. Therefore, the Court held a 1:1 ratio of punitive damages to compensatory damages as a “fair upper limit” under federal maritime law, which properly accomplishes the dual aims of punishment and deterrence.[12]

As mentioned earlier, the holding of this judgment has a limited scope. In Exxon, the Court examined the verdict of the lower court in the exercise of federal maritime common law authority^[13], hence reviewing the award for conformity with maritime law rather than its conformity with the outer limit allowed by due process.^[14]

Due process cases have all involved awards subject in the first instance to state law, thus providing the occasion to consider a “common-law standard of excessiveness”.^[15]

The leading case in this latter category is BMW v. Gore, which the Italian Supreme Court also referred to. In that occasion, the US Supreme Court did not fix any rigid cap but, instead, set out legal standards[16] that courts should apply when reviewing punitive damages to determine whether an award is grossly excessive and consequently unconstitutional. Those standards are: (1) the degree of reprehensibility^[17] of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.[18]

The Supreme Court stated that it has “consistently rejected the notion that the constitutional line is marked by a simple mathematical formula”.[19]

The same position was reaffirmed in State Farm v. Campbell, not referred to by the Italian Supreme Court, where the Court again declined to impose a bright-line ratio which a punitive damages award cannot exceed.[20] In fact, the Court observed that punitive damages of double, triple, or quadruple the amount of compensatory damages have been upheld by the Court on different occasions, stating that “although not binding, [these ratios] are instructive”. They demonstrate that “single-digit ratios are more likely to comport with due process”. Nonetheless, because there are no rigid benchmarks that a punitive damages award may not surpass, ratios greater than those previously upheld may comport with due process. What counts is that the precise award must be based upon the facts and circumstances of the defendant’s conduct and the harm to the plaintiff.[21]

No more “if” but… at what conditions.

After having clarified the content of the precedents quoted in the relevant judgement, it is now time to address the issue set forth by it: did the Court intend to affirm that a quantitative limitation exists under Italian law, thus binding Italian courts asked to recognize and enforce foreign judgments?[22] In other words, must a foreign judgement award punitive damages in the limit of the 1:1 ratio in order to be granted recognition and enforcement in Italy?

It is the writer’s opinion that further judgements are needed in order to clarify this blurred question. Particularly, further considerations are needed to answer the question whether setting a quantitative limitation, in the form of an absolute fixed ratio, is in fact the most effective solution to achieve predictability.

On both sides of the Atlantic, the Courts agree on the need, grounded in the rule of law itself, to ensure that punitive damages are “awarded according to meaningful standards that will provide notice of how harshly certain acts will be punished and that will help to ensure the uniform treatment of similarly situated persons”. [23] The question is then whether legal standards can secure these objectives without the rigidity that an absolute fixed numerical ratio demands.

In setting forth constitutional due process limits on the size of punitive damages awards, the US Supreme Court stated that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process” [24], thus, clearly “fores[eeing] exceptions to the numerical constraint”.[25]

According to the writer, if a need for foreseeability is undeniable and required by the rule of law, a need for flexibility is likewise undeniable.

As stated, ratios higher than single-digit ones may comport with the due process clause when particularly egregious acts resulted in a small amount of pecuniary damages, for example, where the injury is hard to detect or the monetary value of non-pecuniary damages may be difficult to determine.[26]

In Exxon, the dissenting opinion by Judge Breyer endorses the jury’s reasonable belief that Exxon knowingly allowed a relapsed alcoholic to repeatedly steer a vessel filled with millions of gallons of oil through waters that provided the livelihood for the many plaintiffs in this case. In considering such conduct, Judge Breyer observed that it was only a matter of time before a crash and spill like the one in Exxon occurred. Pointing out that “the damage easily could have been much worse”, and the “egregious” nature of Exxon’s conduct, Judge Breyer reached the conclusion that the case was “a special case, justifying an exception to the strict application of the majority’s numerical rule”.[27]

In conclusion, the conditions set forth by the Italian Supreme Court judgement at hand appear difficult to be met in the majority of the cases. Consequently, the possibility for US judgements awarding punitive damages to obtain enforcement in Italy still appears, at this stage, a theoretical one.

 

Federica Fainelli

Federica Fainelli is an LL.M. candidate in the International Business Regulation, Litigation & Arbitration program at the NYU School of Law.

[1] I.e., judgment issued by courts outside of Italy and the European Union.

[2] Cass. 16601/2017.

[3] See, inter alia: Cass. 1781/2012.

[4] This statement is made mostly on a twofold basis: a number of recently introduced Italian legal provisions that now clearly provide the right to recover damages aiming at deterring and sanctioning; some recent findings by the Constitutional Court.

[5] Exxon Shipping Co. v. Baker, 554 U.S. 471 (2008).

[6] See, e.g., Va. Code Ann. § 8.01-38.1 (Lexis 2007) ($ 350,000 cap).

[7] See, e.g., Ohio Rev. Code Ann. § 2315.21(D)(2)(a) (Lexis 2005) (2:1 ratio in most tort cases).

[8] See, e.g., Alaska Stat. § 09.17.020(f) (2006) (greater of 3:1 ratio or $ 500,000 in most actions).

[9] Exxon, 554 U.S. at 490-497.

[10] Exxon, 554 U.S. at 502.

[11] Exxon, 554 U.S. at 503-508.

[12] Exxon, 554 U.S. at 503-508.

[13] Area in which the Supreme Court of the United States has given original jurisdiction by the US Constitution.

[14] Ibidem. Due Process Clause is the Fourteenth Amendment of the US Constitution and sets for principles of fairness and notice.

[15] Exxon, 554 U.S. at 501-502.

[16] Three guideposts, the so called “Gore factors”.

[17] Reprehensibility of the harmful conduct should be determined considering whether: the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard for the health or safety of others; the target of the conduct was financially vulnerable; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, deceit, or mere accident. BMW v. Gore, 517 U.S. 559, 576-577 (1996).

[18] BMW v. Gore, 517 U.S. 559, 575 (1996).

[19] BMW, 517 U.S. at 582.

[20] State Farm v. Campbell, 538 U.S. 408, 424-425 (2003).

[21] State Farm, 538 U.S. at 424-425.

[22] See Franco Ferrari, Il riconoscimento delle sentenze straniere sui danni punitivi. Brevi cenni comparatistici all’indomani della pronunzia italiana del 5 luglio 2017, 1 Rivista di Diritto Civile [R.D.C.] 280 (2018) (It.).

[23] Exxon, 554 U.S. at 525-526 (Breyer, J., concurring).

[24] State Farm, 538 U.S. at 425.

[25] Exxon, 554 U.S. at 525-526 (Breyer, J., concurring).

[26] State Farm, 538 U.S. at 424-425.

[27] Exxon, 554 U.S. at 525-526 (Breyer, J., concurring).

The Center, together with other institutions, will host a conference around the submissions for the 2nd edition of a book entitled “Conflict of laws in international arbitration” to be co-edited by Professor Franco Ferrari, the Center’s Director, and Stefan Kröll (Bucerius Law School, Hamburg). The book will tackle the issues in relation to which a conflict of laws analysis becomes relevant and will include about 20 papers on topics ranging from the law applicable to privilege, to res iudicata, to the law applicable to the merits and post-award issues. The talks to be given at the conference, which will take place on 23 March 2018, are a means of introducing the audience to the book project. The event is graciously hosted by the University of Vienna just prior to the commencement of the 25th annual Willem C. Vis International Commercial Arbitration Moot. For the detailed program, please click here.

Professor Franco Ferrari, the Center’s Director, will give a talk in German on “forum shopping and the new rules of the German Arbitration Institution” (DIS) on the occasion of a two-day conference focusing on the new arbitration rules that came into force on 1 March 2018. In his talk, Professor Ferrari, who is an arbitration law and private international law expert, will focus on what characteristics of the new DIS rules may lead parties to choose the new rules over the rules of other arbitration institutions when opting for arbitration over litigation in courts. For the full program of the conference (held entirely in German) please click here.

I.              INTRODUCTION

Singapore’s Parliament recently passed the Civil Law Bill (Bill No. 38/2016) legalizing third-party funding in international arbitration and related proceedings.[1] In a bid to strengthen Singapore’s position as “a premier international commercial dispute resolution hub and a key arbitration seat in the world”,[2] the move is a positive one for Singapore’s burgeoning arbitration scene with the first third-party funded arbitration already underway.[3] A year on, the ethical issues raised by the potential involvement of third-party funders have not gone unnoticed,[4] and professional bodies and institutions were quick to issue guidance in the aftermath of the legislative changes. It was in this context that the former Attorney-General of Singapore on 1 November 2017 urged Singapore to assume “thought leadership” in forging an ethics code in international arbitration.[5] The contemporary ethical issues of third-party funding have led to increased calls for regulation within the international arbitration community,[6] though at the same time a cautious approach has been advocated to ensure that overzealous regulation does not stymie the benefits of third-party funding altogether.[7] The effectiveness of Singapore’s approach to ethical regulation – specifically the need for disclosure in third-party funding agreements – is worth examining, and leaves insights for the international arbitration community at large.

The relationship between the funded party, the funder, and the funded party’s counsel raises certain ethical problems unique to third-party funding. As a preliminary point, there is the perception that ethical issues are best dealt with by competent bar associations rather than by the arbitrators themselves.[8] Accordingly, while many regulatory bodies already require lawyers to respect the conduct rules at the seat of arbitration,[9] there is a dearth of regulation concerning third-party funders.[10] While the United Kingdom has a Code of Conduct for litigation funders, this has been criticized for its “voluntary and self-regulatory” nature, as well as being silent on the need for disclosure regarding any third-party arrangement.[11] More significantly, not only are these rules inapplicable to arbitration, it is unclear even if they did apply whether it is desirable to transplant litigation-regulating rules to begin with.[12]

Singapore’s approach to the need for regulation has been multi-faceted. The Law Society of Singapore (“Law Society”) and the Singapore Institute of Arbitrators (“SIArb”) make reference to each other as well as the Singapore International Arbitration Centre (“SIAC”) in their respective practice notes, directing parties to “review all of these guidelines together to obtain a comprehensive overview of current issues pertaining to third party funding”.[13] Specific issues dealt with include the ethical issues of confidentiality, exercise of control by the funder, conflicts of interest, as well as more practical considerations such as the funder’s liability for adverse cost orders and the termination of the funding agreement by the funder.[14]

On one hand, one questions whether it would have been more effective for a single institution or body to have enacted a comprehensive set of rules which apply to all funding arrangements. On the other hand, it is undeniable that each entity has its own interests and target audience, and to this end requires its own set of rules. The effect of this tapestry of rules is that it behooves all relevant stakeholders to be aware of the relevant rules which apply to their own funding arrangement.

 

II.           TO DISCLOSE OR NOT TO DISCLOSE – THAT IS THE QUESTION

The panacea to the ethical complications surrounding third-party funding – and indeed much ink has been spilled on the topic – appears to be disclosure of the funding arrangement.[15] Arguments against disclosure, which include the prolonging of proceedings and giving the opposing party a tactical advantage,[16] while not without merit, have to be weighed against the potential negative effects of non-disclosure.[17] Disclosure is generally favored given its salutary effects on resolving conflicts of interest at the outset,[18] and the loss of confidentiality is deemed to be outweighed by the potentially “catastrophic” effects that belated disclosure can otherwise have – not only on the proceedings, but at the enforcement stage as well.[19] That said, an empirical study on funders’ perspectives has revealed that the aversion to disclosure stems from funders not being parties to the arbitration agreement and the fear that the case will be treated differently simply because a funder is involved.[20] Critics of disclosure also argue that raising the issue sua sponte is “unnecessary and counter-productive”.[21] Accordingly, in crafting ethical rules for disclosure, a reasonable balance should be struck between the default position that the funding agreement is a private matter between the funder and the funded party, and the need for sufficient reasons to justify disclosure.[22] An attendant issue is the scope of disclosure – to whom and to what extent disclosure must be made. It is generally accepted that disclosure of the existence of the funding arrangement, as opposed of the terms of the agreement, [23] is sufficient.[24]

A.      Singapore’s approach

In Singapore, this has been resolutely addressed by amendments to the Legal Profession (Professional Conduct) Rules (“Professional Conduct Rules”), which now require practitioners to disclose any third-party funding relationship to the court or tribunal. Practitioners are obliged to disclose not only the existence of any funding contract, but also the identity and address of the funder.[25] Such disclosure must be made either at the date of commencement of dispute resolution proceedings or as soon as practicable after the funding contract is entered into. Disclosure of the termination of the funding is also stated as a “good practice”.[26] Additionally, the SIAC became the first major arbitration center to address the issue of third-party funding directly.[27] Under the 2017 SIAC International Arbitration Rules, the tribunal has the power to order disclosure of funding arrangements.[28]

B.      Unresolved issues

For one, the applicability of national ethical rules is attenuated in international arbitration settings, a fortiori if the advocate is not regulated by local law.[29] It is therefore unclear how this requirement will apply where no local or foreign regulated counsel is acting in the arbitration.[30] Second, while it appears that legislation compels counsel to disclose the existence of the funding agreement as the baseline, it does not go further in prescribing further disclosure. It thus suggests that lawyers are allowed to withhold information on the terms of the agreement, when disclosure of the terms may well be necessary to consider whether there are any conflicts of interest which impinge upon arbitrators’ impartiality and independence.[31] In order to deal with this, it has been argued that the role of considering these conflicts falls on institutions, which will conduct an “automatic conflicts check”.[32] To this end, institutions like the SIAC have additional powers to order disclosure of a funding arrangement and details “where appropriate”.[33] It appears then that disclosure, while possible, would require reasonable grounds before it is deemed “appropriate”.[34] This standard has naturally hitherto not been tested.

Further, ethical issues remain unresolved when arbitrations are conducted without institutional support, and the issue of extent of disclosure is further complicated by the question of to whom this disclosure is to be made. As Trusz concedes, the “automatic conflicts check” is not possible without institutional support, and her proposal of disclosure only to the arbitral institution (as opposed to the tribunal or the opposing parties) would have to be modified to making disclosure to the appointing authority.[35] Since arbitrators do not typically disclose information to the appointing authority prior to their appointment, the request for additional information by the appointing authority invariably leads to the tribunal finding out about the funding arrangement.[36] This then obviates the purported benefit of such limited disclosure – to avoid prejudicing the tribunal by making them aware of the funding arrangement – to being with. Of course, the premise that knowledge of a funding arrangement ipso facto means that arbitrators treat cases differently can be challenged.[37] Trusz’s proposal also ostensibly encourages funders seeking to avoid disclosure to opt for ad-hoc arbitrations where the disclosure requirements are less robust.

Admittedly, the SIArb’s Guidelines provide that a funder shall cooperate in disclosing to an arbitral tribunal or court “any information concerning the funding if any applicable rules or order of arbitral tribunal or court so require[s]”.[38] However, since the SIArb Guidelines are non-binding, it follows that sua sponte disclosure is not mandatory for funders under current legislation, and is only necessary at the request of the arbitral tribunal under the auspices of certain institutional regimes, like that of the SIAC. The only requirements imposed on funders are ab initio qualifying criteria.[39] As such, it appears that disclosure is far more likely to occur with rather than without institutional support.

C.       Where does this leave us?

Nonetheless, the fact that there is soft law for funders and legislation mandating legal practitioners – both local and foreign-regulated lawyers – to disclose funding arrangements, is promising. It is generally accepted that regulation has to come from national policymakers by way of legislation rather than from the creation of more “soft law”.[40] To this end, Singapore has chosen an approach which imposes the primary obligations of disclosure on legal practitioners. Comparatively, the recent amendments to the Hong Kong Arbitration Ordinance[41] place the obligation of disclosure on the funded party rather than on counsel.[42] It remains to be seen whether this difference will have any effect on incentivizing disclosure. One significant difference is that non-compliance with disclosure requirements in Hong Kong does not “render any person liable to any judicial or other proceedings”,[43] whereas failure to comply with the Professional Conduct Rules in Singapore obviously subjects the practitioner to disciplinary action.[44] This comports with the “light touch approach” recommended by the Hong Kong Law Reform Commission,[45] which was based on the approaches adopted in Australia (statutory regulation of financial and conflicts issues) and the United Kingdom (self-regulation).[46] One questions whether this is necessarily the best approach, especially since ethical considerations vary from jurisdiction to jurisdiction. Other differences with Hong Kong include the fact that its third-party funding regulations (1) apply equally to domestic and international arbitrations;[47] (2) are not limited to professional funders;[48] and (3) propose a non-obligatory code of practice to monitor funders’ compliance.[49]

 

III.        CONCLUSION

Regulating issues like the disclosure of third-party funding ensure that international arbitration no longer remains an “ethical no-man’s land”.[50] In doing so, recognizing that “[d]omestic standards for ethical conduct cannot be imported wholesale” is integral to upholding the integrity of international arbitration.[51] If Singapore is truly to adopt “thought leadership” in this area, it should not shy away from laying down a jurisdiction-specific approach to ethical regulation, confident in the strength and neutrality of its institutions to attract adherents. The current regulations on third-party funding represent a step in the right direction.

 

Ian Choo

Ian Choo is an LL.M. candidate in the International Business Regulation, Litigation & Arbitration program at the NYU School of Law. He is also a concurrent LL.B. (Honors) candidate at the National University of Singapore, under the NYU-NUS LLB/LLM Dual Degree Program.

[1] The Civil Law Act (Amendment) Act 2017 entered into force on 1 March 2017, introducing new sections 5A and 5B to the Civil Law Act (Cap. 43, Rev. Ed. 1999) which abolished the torts of maintenance and champerty and allowed third-party funding.

[2] Singapore Parliamentary Debates, Official Report vol 94 (Ms Indranee Rajah, Senior Minister of State for Law) (10 January 2017).

[3] K. C. Vijayan, “First third-party funding for Singapore arbitration case”, The Straits Times (1 July 2017).

[4] V. Frignati, Ethical Implications of Third-Party Funding in International Arbitration, 32 Arbitration International 505 (2016).

[5] K. C. Vijayan, “S’pore urged to take lead in Ethics Code for Arbitration”, The Straits Times (14 November 2017).

[6] See, e.g., J. A. Trusz., Full Disclosure? Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration, 101 Georgetown Law Journal 1649 (2013), arguing for changes to institutional arbitration rules to facilitate disclosure of third-party funding.

[7] S. Khouri, K. Hurford & C. Bowman, Third party funding in international commercial and treaty arbitration – a panacea or a plague?, 8:4 Transnational Dispute Management 1, 11 (2011); J. Clanchy, Third Party Funding in Arbitration: Breaking down Barriers and Building Bridges, 23 Croatian Arbitration Yearbook 53, 56 (2016).

[8] S. Perry, Third-party Funding: An Arbitrator’s Perspective, Global Arbitration Review (23 November 2011), available at http://globalarbitrationreview.com/article/1030794/third-party-funding-an-arbitrators-perspective.

[9] See, e.g., Article 8.5(a) of the American Bar Association Model Rules of Professional Conduct (2000), Articles 4(1) and 6(1) of the European Commission Directive 98/5/EC of 16 February 1998.

[10] B. Osmanoglu, Third-Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest 32:3 Journal of International Arbitration 325, 337 (2015).

[11] J. E. Kalicki, A. Endicott & N. Giraldo-Carrillo, Third Party Funding in Arbitration: Innovation and Limits in Self-Regulation, Kluwer Arbitration Blog (14 March 2012), available at http://arbitrationblog.kluwerarbitration.com/2012/03/14/third-party-funding-in-arbitration-innovations-and-limits-in-self-regulation-part-2-of-2/.

[12] See, e.g., M. C. Scherer, A. Goldsmith & C. Fléchet, Third-Party Funding in International Arbitration In Europe: Part 1 – Funders’ Perspectives, 2 International Business Law Journal 207, 218 (2012), where a funder sought to draw “a clear distinction between arbitration and litigation cases” as “the parties’ agreement governs the issue of disclosure and should only be disregarded in cases of possible conflicts of interest”.

[13] SIArb Guidelines for Third Party Funders, para. 1.4 (18 May 2017); Law Society Guidance Note 10.1.1, para. 3 (25 April 2017).

[14] Law Society Guidance Note, id, para. 23.

[15] Trusz, supra note 6, 1672; cf Clanchy, supra note 7, 56, querying “whether it is fair or constructive to single out the new providers for regulation while long established funders are left alone”.

[16] G. J. Shaw, Third-party funding in investment arbitration: how non-disclosure can cause harm for the sake of profit, 33 Arbitration International 109, 115 (2017).

[17] Frignati, supra note 4, 516.

[18] Ibid.

[19] S. Seidel, Third-party Investing in International Arbitration Claims: To Invest or Not to Invest? A Daunting Question in B. M. Cremades & A. Dimolitsa (eds.) Third-Party Funding in International Arbitration 16, 22 (ICC Publication, 2013).

[20] Scherer et. al,, supra note 12, 218, where funders expressed a fear of having adverse cost orders awarded against them.

[21] L. Lévy & R. Bonnan, Third-party funding: Disclosure, joinder and impact on arbitral proceedings in Third-Party Funding in International Arbitration, supra note 19, 81.

[22] J. H. Suh, Disclosure of third party funding: Hong Kong and Singapore setting the trend?, Arbitration Blog (2 October 2017), available at http://arbitrationblog.practicallaw.com/disclosure-of-third-party-funding-hong-kong-and-singapore-setting-the-trend/.

[23] In Godfrey Waterhouse v Contract Bonding Limited [2013] NZSC 89 at para. 76, the New Zealand Supreme Court overturned the Court of Appeal, holding that a funder only needed to disclose its identity, location and amenability to the court’s jurisdiction; there was no need to disclose the terms of the funding agreement or the financial standing of the funder.

[24] Frignati, supra note 4, 516, arguing that disclosing the existence of the funding agreement “level[s] the playing field”.

[25] Rule 49A(1), Legal Profession (Professional Conduct) Rules 2015.

[26] Law Society Guidance Note, supra note 13, para. 52.

[27] J. Mackojc, SIAC’s 2017 Investment Arbitration Rules: An Overview and Key Changes, Kluwer Arbitration Blog (4 February 2017), available at http://arbitrationblog.kluwerarbitration.com/2017/02/04/siacs-2017-investment-arbitration-rules-an-overview-and-key-changes/.

[28] Rule 24(l) of the SIAC Investment Arbitration Rules (2017).

[29] C. A. Rogers, Ethics in International Arbitration, 199 (Oxford University Press, 2014).

[30] Note, however, that Part 5A of the Legal Profession (Professional Conduct) Rules 2015 applies to all “regulated foreign lawyer[s]”: Rule 3(8)(iii) of the Legal Profession (Professional Conduct) Rules 2015.

[31] M. C. Scherer, Third-party Funding in International Arbitration: Towards mandatory disclosure of funding agreements? in Third-Party Funding in International Arbitration, supra note 19, 99.

[32] Trusz, supra note 6, 1676.

[33] SIAC Investment Arbitration Rules (1 January 2017); SIAC Practice Note, para. 5, (31 March 2017).

[34] Suh, supra note 22, ibid.

[35] Trusz, supra note 6, 1680.

[36] Ibid. Trusz also acknowledges that this problem is exacerbated when parties do not specify an appointing authority.

[37] Scherer et. al,, supra note 12, 218, where funders raised the concern that disclosure may lead to what the funder perceived as frivolous defences thereby raising the cost of the proceedings.

[38] SIArb Guidelines, supra note 13, para. 8.1 (emphasis added).

[39] Under section 4 of the Civil Law (Third-Party Funding) Regulations 2017 (Singapore), funders must (a) be in the “principal business” of funding dispute resolution proceedings; and (b) have a paid-up share capital or managed assets of not less than S$5 million (or foreign currency equivalent). The purpose of these criteria is so that “only professional funders whose principal business is funding claims, will be allowed” (per Senior Minister of State for Law, at note 2).

[40] W. H. van Boom, Third-party Financing in International Investment Arbitration, 52 (2011), available at https://ssrn.com/abstract=2027114.

[41] Hong Kong’s Legislative Council passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 on 14 June 2017.

[42] Section 98U, Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 [HK Arbitration Ordinance].

[43] Section 98W(1), id.

[44] Section 71(14) of the Legal Profession Act (Cap. 161, Rev. Ed. 2009) (Singapore).

[45] Hong Kong Law Reform Commission, Report on Third Party Funding for Arbitration, para. 2.10 (October 2016), available at http://www.hkreform.gov.hk/en/docs/rtpf_e.pdf.

[46] Ibid, para. 4.14.

[47] Section 98N of the HK Arbitration Ordinance, supra note 41, extends the application of its regulations to arbitrations outside Hong Kong.

[48] Section 98J, id, allows any “person” who “does not have an interest recognized by law in the arbitration” to be a funder.

[49] Section 98P, 98Q, id, sets out a number of suggested practices and standards in the proposed code of practice.

[50] Rogers, supra note 29, 18.

[51] SIArb Guidelines on Party-Representative Ethics (Consultation Draft), para. 2 (16 October 2017).

Case Note: KVC Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd and another [2017] SGHC 32

I.  Introduction

As Singapore continues to promote itself as an arbitration hub[1], “an unequivocal judicial policy of facilitating arbitration has firmly taken root in Singapore”[2]. This policy of “minimal curial intervention”[3] is founded in the “need to respect party autonomy (manifested by their contractual bargain) in deciding both the method of dispute resolution (and the procedural rules to be applied)”[4].  In line with this, Section 6 of the International Arbitration Act (“IAA”)[5] (Singapore’s codified regime governing international arbitrations) provides that the Singapore Courts must stay proceedings in respect of matters that are the subject of a valid arbitration agreement, unless it is satisfied that the arbitration agreement is “null and void, inoperative, or incapable of being performed”[6]. The Singapore High Court in KVC Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd and another (“KVC v Asian Mineral”) [7] took a further step in advancing this pro-arbitration policy by enforcing a bare intention to arbitrate, notwithstanding that the arbitration agreement was “devoid of details”[8].

II.  KVC v Asian Mineral

In KVC v Asian Mineral, the issue before the Singapore High Court, on appeal, was whether the bare arbitration clause in the parties’ contracts were “incapable of being performed” such that the proceedings before the High Court need not be stayed in favor of arbitration pursuant to Section 6(2) of the IAA.

a.  Background

The Plaintiffs (KVC Rice and Tanasan Rice) were companies incorporated in Thailand, while the Defendant (Asian Mineral) was a company incorporated in Singapore[9]. The Plaintiffs had separate contracts for the sale of rice to the Defendant, to be delivered from Thailand to Africa (the “Contract(s)”), whereby payment was to be made in Singapore in United States Dollars[10]. Both contracts between the Plaintiffs and the Defendant contained almost identical arbitration clauses. One stated that disputes would be “referred to and finally resolved by arbitration as per Indian Contract Rules”, while the other provided that disputes would be“referred to and finally resolved by arbitration as per Singapore Contract Rules”[11] (collectively referred to as the “Arbitration Clause(s)”).  Both Arbitration Clauses were silent as to the seat of arbitration and the law governing the arbitration procedure, including the means for constituting the arbitral tribunal[12]. Both Contracts did not contain a clause that provided for the governing law of the Contract[13].

Disputes arose under the Contracts, and the Plaintiffs eventually commenced the present suits against the Defendant, which the Defendant then applied to stay in favor of arbitration. The Defendant’s case was that the arbitration clauses were not unworkable, as the details of the arbitration could be agreed between the parties. In this regard, the Defendant contended that Article 11(3) of United Nations Commission on International Trade Law Model Law on International Commercial Arbitration (the “Model Law”)[14], as incorporated Singapore law by the IAA[15] gave the president of the Singapore International Arbitration Centre (“SIAC”) power to intervene to break any deadlock between the parties on the appointment of arbitrators.[16] The Plaintiffs’ case, in challenging the stay application, was that the Arbitration Clauses were “incapable of being performed”, since it did not refer to any existing or known set of procedural rules, and there was no designated seat of arbitration or governing law for the arbitration[17].

b.  The Court’s Decision in KVC v Asian Mineral

The Court’s decision was founded on its view that “a bare arbitration clause which merely provides for submission of disputes to arbitration…remains a valid and binding agreement”[18] even if the place of arbitration or method for establishing the arbitral tribunal are not specified, as long as “parties have evinced a clear intention to settle any dispute by arbitration”[19].

The Court found that these obstacles preventing the workability of the Arbitration Clauses could be removed, as a reading of Section 8 of the IAA and Article 11(3) of the Model Law[20] would not preclude the SIAC from  “step[ping] in to make the necessary appointment if parties are not able to agree on the sole arbitrator or presiding arbitrator” even where the place of arbitration was “unclear or not yet determined”[21]. The Court also found that it retained “residual jurisdiction to assist with the appointment of arbitrators…to ensure that the parties’ intention to have their dispute settled by arbitration is not defeated”[22] where there was “truly no other way to prevent injustice”[23].

III.  Clothing the Bare

While the Court-constructed framework that effectuated the otherwise unworkable Arbitration Clauses may be driven by the judiciary’s pro-arbitration policy[24], it was not supported by sound legal reasoning.

 a.  Presuming the applicable law  

First, the Court skipped over the critical preliminary choice-of-law analysis. It merely noted that the dispute “had some connection with Singapore”[25], but failed to articulate what, how, and why these connections led to its adoption of Singapore law as the legal lens for determining the validity of the Arbitration Clauses and the stay application.

An application of the prevailing choice-of-law rule in Singapore, which directs Courts to consider the “implied choice of parties as gleaned from their intentions at the time of contracting”, and the “system of law with which the arbitration agreement has the closest and most real connection”[26] in the absence of an express choice, does not indubitably point to Singapore law as the law governing the Arbitration Clauses. As the Court acknowledged itself, “the connecting factors in both [contracts] point in different directions”[27]. There is a compelling case, at least in the Contract that referenced “Indian contract rules”, that parties may have intended Indian law to govern that Arbitration Clause.

The implications of failing to properly address the threshold issue of the proper law to the Arbitration Clause on a principled basis (whether by the prevailing choice-of-law approach[28] or otherwise) are potentially far-reaching. An application of a third country’s law (whether India, or otherwise) to measure the parties’ obligations in respect of the Arbitration Clause(s)[29] may not have tolerated the strides of judicial intervention which the Singapore High Court took to circumvent the inoperative Arbitration Clauses. In fact, there is indication, from an unrebutted legal opinion tendered by the Plaintiffs’ counsel, that the Arbitration Clause which provided for arbitration per “Indian Contract Rules” would not have been enforced under Indian law[30].

With the benefit of hindsight, one may speculate that the Court simply applied the lex fori to the Arbitration Clause as neither party raised the applicable law as an issue in dispute, or could arguably be said to have consented to the applicability of Singapore law and/or waived its right to object the same: (i) the Defendant had applied for a stay pursuant to Section 6(2) of the IAA; (ii) the foreign Plaintiffs had asked the Court to impose the condition that arbitration proceed on the basis of Singapore law if the Court granted the stay[31]. Justice Vinodh Coomaraswamy recently questioned the soundness of such an approach in Dyna-Jet v Wilson Taylor Asia Pacific Ltd, where he noted that “it would be unduly parochial…to examine the parties’ arbitration agreement purely through the lens of Singapore law simply because this application is made under Singapore legislation to a Singapore court”[32]. In any event, there was no articulation or indication from the Court’s decision in KVC v Asian Mineral if this was indeed the choice-of-law analysis the Court had applied, if at all.

b.  Bending backwards to enforce bare arbitration clauses

It is trite that pathological arbitration clauses are not void ab initio[33]. Singapore Courts have given effect to arbitration agreements on the basis of an intention to arbitrate, notwithstanding that “certain aspects of the agreement may be ambiguous, inconsistent, incomplete or lacking in certain particulars”[34]. Yet, this exercise of “effective interpretation”[35] has not been without its limits. As the Singapore Court of Appeal has previously held, such agreements must be “workable agreed arbitration arrangements”, and cannot result in an “arbitration that is not within the contemplation of either party” or “prejudice to the rights of either party”[36].

KVC v Asian Mineral was the first instance where the Singapore Courts enforced an arbitration clause that was silent on the place of arbitration and mechanics for establishing the tribunal. By presuming Singapore law as the legal lens which it relied on in finding that SIAC was not precluded from invoking its “statutory appointing authority”[37], the Court arguably exceeded the limits of ‘effective interpretation’, putting in effect an arbitration process which may not necessarily have been within the contemplation of the parties at the time when they agreed on the Arbitration Clauses.

While the principle of party autonomy and in favorem validitatis are the cornerstone of the Singapore judiciary’s approach to arbitration, this is no reason to exempt arbitration agreements from the substantial requirements and principles governing contractual formation and validity in Singapore[38]. It is over-simplistic and presumptuous to rely on the mere indication of a preference for arbitration to presume the validity of an arbitration agreement[39]. In fact, as the effect of a valid arbitration agreement in international contracts mandates the displacement of the Singapore Court’s jurisdiction in favor of the tribunal[40], it is imperative that Courts only enforce the arbitration clauses that meet a minimum standard of a “sufficient model of the process …to be certain and enforceable”[41], and are “well established as to require no further affirmation”[42] as to how the parties have elected to depart from the default forum.

Moreover, the notion that a bare intention to arbitrate, without more, may be enforced with the Court’s assistance in constructing the mechanics for enforcing that intention, contradicts the cornerstone of party autonomy in arbitration that affords primacy to the party’s right to choose how they wish to resolve their disputes[43]. However desirable, Courts are not in the business of rewriting contractual bargains[44], and cannot afford to be sympathetic to slips in drafting, especially “orphan”[45] clauses that are entirely void of content or framework. In the long run, this will reduce the incentive for parties to be precise about their intentions in their agreements[46], clog the arteries of judicial administration[47], and open the floodgates for any semblance of an arbitration clause, from which the Court can find an intention to arbitrate, to suffice in staving off a stay application[48].

 

Rachel Chiu Li Hsien

Rachel Chiu Li Hsien is an LL.M. Candidate in the International Business Regulation, Litigation, and Arbitration Programme at the New York University School of Law, and advocate and solicitor from Singapore. She obtained her first degree in law from the University of Warwick in England and previously trained in the commercial disputes practice at PK Wong & Associates LLC (An Independent Member Firm of the EY’s Global Network) in Singapore.

[1] Singapore Parliamentary Debates, Official Report (31 October 1994) vol. 63, cols. 625-627. See also Harisankar, International Commercial Arbitration in Asia and the Choice of Law Determination (2013) 30 JIA 621, 625.

[2] Tjong Very Sumito v Antig Investments [2009] 4 SLR(R) 732, [28].

[3] Michelle Lee, Existence of Arbitration Agreements: The Tension between Arbitral and Curial Review (2014) 10 AIAJ 67, 88.

[4] Supra 2.

[5] International Arbitration Act Cap. 134A (Revised Edition 2002).

[6] Id., Section 6(2). See also Article 8 of the United Nations Commission on International Trade Law (“UNCITRAL”) on International Commercial Arbitration (1985) (the “Model Law”). A copy of the Model Law may be accessed here: <https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf> (last accessed December 1, 2017).

[7] KVC Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd and another [2017] SGHC 32.

[8] Id., [23], [29].

[9] Id., [3].

[10] Id., [4], [6], [32].

[11] Id., [50].

[12] Id., [7].

[13] Id..

[14] A copy of the Model Law may be accessed here: <https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf> (last accessed December 1, 2017).

[15]  Section 3(1) of the IAA incorporates the Model Law. Section 8(2) of the IAA reads as follows: “The President of the Court of the Singapore International Arbitration Centre shall be taken to have been specified as the authority competent to perform the functions under Article 11(3) and (4) of the Model Law”. Article 11(3) of the Model Law allows for the appointment of arbitrator(s) by the “Court or other authority” as specified by the state.

[16] Supra 7, [23].

[17] Id., [18].

[18] Supra 7, [29]. The Singapore High Court’s finding here is consistent with the Singapore Court of Appeal’s holding in Insigma Technology Co Ltd v Alstom Technology Ltd [2009] 3 SLR(R) 936 (“Insigma”) (at [31]).

[19] Supra 7, [29].

[20] Supra 15.

[21] Supra 7, [34], [45] – [46], [62].

[22] Id., [67].

[23] Id., [71].

[24] Alastair Henderson, et al., ‘Bare’ arbitration clauses and the extent to which the Singapore Court may assist (March 9, 2017). A copy of the article may be accessed here: <http://hsfnotes.com/arbitration/2017/03/09/bare-arbitration-clauses-and-the-extent-to-which-the-singapore-court-may-assist/> (last accessed December 1, 2017).

[25] Supra 7, [45], [71].

[26] BCY v BCZ [2017] 3 SLR 357, [40]. The Singapore High Court in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267 also adopted the approach of English Court of Appeal in Sulamerica Cia National de Seguros S.A. v Enesa Engeharia S.A. [2012] EWHC 42 (Comm). But cf.: FirstLink Investment Corp v GT Payment Pte Ltd [2014] SGHCR 12, where the Assistant Registrar of the Singapore High Court held (at [16]) that decisive weight should be given to the law of seat of arbitration in determining the parties’ implied choice of law.

[27] Supra 7, [32].

[28] Supra 26.

[29] See generally: Julian D.M. Lew, Loukas A. Mistelis, et al., Comparative International Commercial Arbitration (2003) Walters Kluwer, 411. See also A.F.M. Maniruzzaman, Choice of Law in International Contracts: Some Fundamental Conflict of Laws Issues (2000) 16(4) JIA 141, 150.

[30] Supra 7, [21].

[31] Id, [21].

[32] [2016] SGHC 238 at [31]. But cf.: Julian D.M. Lew, Loukas A. Mistelis, Stefan M. Kroll, Comparative International Commercial Arbitration (2003) Wolters Kluwer, 415: Arbitrators have found there to be an implied choice of the law applicable where parties argue their case on the basis of the same law, even though they have not expressly agreed on its application.

[33] See generally: Emmanuel Galliard, John Savage, Fouchard Galliard Goldman on International Commercial Arbitration (1999) Kluwer Law International, 262, 263. But cf.: Gary B. Born, International Arbitration: Law and Practice (2^nd Ed) (2015) Wolters Kluwer, 766.

[34] Insigma, [31].

[35] Id.

[36] Id., [31] – [34].

[37] Supra 7, [54].

[38] Nicholas Poon, Reconsidering the Enforceability of Bare Intention to Arbitrate (2017) 29 SAcLJ 540, 546.

[39] Stavros Brekoulakis, The Notion of the Superiority of Arbitration Agreements over Jurisdiction Agreements: Time to Abandon It? (2007) 24(4) JIA 341, 358.

[40] Supra 5, Section 6(2).

[41] Sulamerica Cia National de Seguros S.A. v Enesa Engeharia S.A., [2012] EWHC 42 (Comm), 10.

[42] Wilson Taylor Asia Pacific Pte Ltd v Dyna-Jet Pte Ltd [2017] SGCA 32, [23].

[43] Supra 39, 359-360. See also Supra 2.

[44] TMT Co. Ltd v The Royal Bank of Scotland plc [2017] SGHC 21, [64] – [66].

[45] Supra 7, [81].

[46] Supra 38, 549.

[47] Supra 2.

[48] Supra 38.

On February 24, 2018, NYU’s International Arbitration Association and the Center for Transnational Litigation, Arbitration and Commercial Law held the 7th Annual NYU Vis Practice Moot at Hogan Lovells US LLP.

The 7th Annual Vis Practice Moot welcomed 12 teams from selected law schools from the United States and Europe as well as many distinguished professionals and academics who acted as arbitrators, including Professor Franco Ferrari, the Center’s Director.

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

Introduction. It has been said and repeated over and over again: The arbitration is a creature of contract. A person, legal or natural, may be compelled to arbitrate only if that person consented to arbitration. No matter how often said and repeated, the international arbitration practice tells another story with almost the same amount of enthusiasm: Story of non-signatories – of those who did not sign the arbitration agreement but are somewhat affected by the results of it. Courts, arbitral tribunals, and scholars came up with different theories either to justify or to reject the extension of the arbitration agreement to those non-signatories.[1] An extensive legal literature on the issue of when and how a non-signatory may be forced to arbitrate, or force the signatories to arbitration agreement to arbitrate with the non-signatory itself, exists and continues to expand. However, the concern is not limited to the non-signatory initiating or participating in the arbitration. Despite attracting much less attention, the issue is also whether a non-signatory has any means to avoid the negative effects of an award rendered in an arbitral proceeding to which it was not party.[2] Two recent decisions from two different European countries – Belgium and France – recently opened a path for the non-signatories to initiate the extraordinary recourse of “tierce opposition” (third party opposition) either to challenge the international arbitration award itself or the court decision enforcing that award.

Belgian Decision. First, by a judgment of February 16, 2017, the Belgian Constitutional Court found that Article 1122 of the Belgian Judicial Code (JC)[3] was in violation of the Belgian Constitution in that it limited the tierce opposition to national court judgments and excluded arbitral awards. The Belgian Constitutional Court based its decision on the principles of equality and non-discrimination.[4]

In this case, a Greek company had initiated, before the Court of first instance francophone of Brussels, a tierce opposition for the annulment of an international arbitral award rendered by an ICC arbitration tribunal. One of the parties to the arbitral award challenged the admissibility of the action on the basis that the Greek company had not been party to the arbitration proceedings. The Court decided that the tierce opposition was prima facie not admissible, because the law did not provide for the possibility of tierce opposition against arbitral awards. However, the Court opined that there were sufficient elements that let the Court to refer the question to the Belgian Constitutional Court.

According to Article 1122 of the JC, any person may oppose a decision of a civil court, or of a criminal court if the decision is given on civil interests. The article does not mention arbitral awards, which appeared to mean that the tierce opposition was not possible against them. The Belgian Constitutional Court found that the difference of treatment between third parties to a court judgment and non-signatories to an arbitral award was not justified. In reaching this decision, the Belgian Constitutional Court emphasized that the non-signatories had not chosen this mechanism of settlement of disputes and could not be considered to have accepted the consequences of the award on their rights.

French Decision. A couple of months later, in a decision rendered on April 25, 2017, the Tribunal de Grande Instance de Paris admitted the right of a non-signatory to challenge the enforcement decision of an international arbitral award that affected the non-signatory negatively. The French Court based its decision on the general principles of right of access to justice and due process.[5]

A French company, producer and seller of sugar beet seeds, had business relations with a German group company. One of the companies belonging to the group had a dispute with a Belgian company as regards their sugar beet selection activities. The dispute was submitted to CEPANI arbitration. The award ordered the German company to pay damages to the Belgian company and to return to the Belgian company all germplasm and any information relating to it that were in its possession, in the possession of its subsidiaries or a third-party subcontractor. The Belgian company enforced the award in France. Upon attempts of the Belgian company to seize documents at the place of business of the French company and to get a court order against the French company to hand over the “germplasm”, the French company initiated tierce opposition against the enforcement decision.

In France, Article 1501 of the Code of Civil Procedure (CPC) gives a non-signatory the possibility to object to a domestic arbitral award before the court that would have had jurisdiction to adjudicate the dispute if there had not been any arbitration. Article 1506 of the CPC, which enumerates the provisions of the CPC to be applied also in relation to international arbitral awards, does not refer to Article 1501. This lack of reference has been construed as excluding “tierce opposition” to international arbitral awards.[6] The French Cour de Cassation had renounced the possibility of tierce opposition in the context of international arbitration in 2009, when it had stated that the tierce opposition was not open once it had been deducted that the arbitration was international.[7] A new attempt to extend tierce opposition to international arbitral awards has found life with the decision of the Tribunal de Grande Instance de Paris: By way of accepting the admissibility of a tierce opposition against enforcement decisions.[8] The French court relied on the provisions of the CPC with regard to enforcement decisions. Article 1524 of the CPC states that the enforcement decision of an international arbitral award made in France may not be subject to any recourse other than the ones exhaustively enumerated under Article 1522, which does not include tierce opposition. However, contrary to Article 1524, Article 1525, which provides for the appeal of the enforcement decision of international arbitral awards made outside France, does not prohibit other types of recourses. The French court relied on this lack of prohibition to extend tierce opposition to decisions enforcing international awards made outside France.

Tierce Opposition – General Rule. As per Article 582 of the French CPC, tierce opposition is a means to retract or reform a decision for the benefit of a third person. Article 591 of the French CPC further states that only the issues affecting the third person are retracted or reformed, and that the original decision between the parties continues to have its effects on these parties. Article 1130 of the Belgian JC, in a similar way, provides that the court annuls the decision in whole or in part, but only with regard to the third party. However, both legal systems provide an exception to the rule of relative annulment: The original decision will be annulled if the decision rendered upon tierce opposition is irreconcilable with the enforcement of the original decision.[9]

Under French law, per application of Article 583 of the CPC, any interested person may initiate tierce opposition as long as she has not been party to or represented in the proceedings that led to the decision. According to this article, two conditions should be satisfied. First, the non-signatory must have an interest in attacking the decision. Second, not only should the non-signatory not have been party to the proceedings, but the non-signatory should not have been represented in them either. The requirement of not being represented limits substantially the number of persons who may oppose arbitral awards. The French courts refused tierce opposition initiated by certain persons as they had been, according to the French courts, already represented by one of the parties to the proceeding:[10] An insurer was deemed represented by the insured, unsecured creditors by the debtor, shareholders by the company or its director, a co-debtor by the other co-debtor, joint and several guarantors by the debtor.[11] The creditors or assignees could initiate tierce opposition pursuant to Article 583 of the CPC only if the decision had been rendered in fraud of their rights or if they could invoke new grounds that the party deemed representing them could not invoke. French case law has been criticized on its approach to the issue of representation in tierce opposition, and eventually the French Cour de Cassation, in a domestic arbitration case, decided on May 5, 2015, that the guarantor, as a non-party to the arbitral proceedings, had a right to initiate tierce opposition against an arbitral award, which determined the amount of debt of the principal debtor.[12] The French Cour de Cassation, in its decision, relied on the guarantor’s right of access to a court.[13] This decision was welcomed as it had a more restrictive approach to the representation[14] and as it was considered to give hope for the extension of tierce opposition to international arbitration. [15] Article 1122 of the Belgian JC has been drafted in a different way than Article 583 of the French CPC. According to the former provision, any person who has not been duly joined to or intervened in the proceedings may oppose a decision that frustrates his rights or interests. The article clearly states that in principle, the creditors, successors in title, assignees, and persons represented in the proceedings do not have the right to tierce opposition. They may initiate tierce opposition only in exceptional circumstances.[16]

Tierce Opposition – Possible Extension to International Arbitration Awards. Even before the Belgian and French decisions, the likelihood of extending this protection to non-signatories facing an international award by use of general principles of law had been questioned.[17] Some authors had given a negative response on the basis that such extension would give the national courts a power of review that is not acceptable within the context of international arbitration and that would be against the intention of the parties,[18] legal certainty, and confidential character of the international arbitration.[19] These authors further argued that “the privity of the arbitration agreement and the res judicata effect of the arbitrator’s decision” provided enough protection for the non-signatories.[20] However, as underlined by others, the power of review of the court is legitimate as the non-signatory has never been party to the arbitration agreement and, moreover, such review will ensure the protection of the interests of the non-signatory by preventing the award from producing effects only against the non-signatory.[21] This review will not affect the situation between the parties created by the international award.[22] Moreover, the authors suggesting that the res judicata effect of the award provides enough protection to non-signatories were criticized, because the res judicata effects of the award do not preclude it from being used against[23] the non-signatories and therefore the award may still harm them. [24]

As rightly pointed out, closing the doors to a non-signatory, who has a legitimate interest in the outcome of the dispute, by both refusing its intervention to the arbitral proceedings and its right to challenge the arbitral award once it is made will leave the non-signatory without any protection vis-à-vis its rights and interests that are frustrated by the award.[25] Extension of the arbitration agreement to non-signatories is not automatic. A non-signatory may participate in an arbitral proceeding only if the non-signatory is deemed to be party to the arbitration agreement by one of the theories developed to this purpose or if all parties accept its participation. When both of these possibilities are eliminated, it is hard to provide any protection for the rights of a non-signatory closely affected by the dispute. Even though the tierce opposition action grants the national court more power than it has in respect of the request for annulment lodged by the parties as it will have the possibility to make a substantive review of the award,[26] the higher degree of scrutiny may be legitimized by the fact that the non-signatory could not participate in the arbitral proceedings and defend its own rights and interests. Moreover, the legislation along with the courts have assumed a restrictive stance as regards the persons who can initiate tierce opposition. Pro-arbitration views should not disregard the rights of non-signatories to access to justice or due process. Neither the character we wish to bestow to the international arbitration nor our doubts about the intervention of the national courts should shadow most important rights relative to the right of defense.

Duygu Kiyak

Duygu Kiyak is an LL.M. candidate in the International Business Regulation, Litigation and Arbitration program at the NYU School of Law and a Ph.D. candidate in Private International Law at Istanbul Bilgi University. She obtained her first degree in law at Galatasaray University Law Faculty. She later obtained a Master II degree in the Private International Law and International Commercial Law program at Paris 1-Sorbonne University. She also works as of counsel attorney for Guner&Tapsin Law Firm in Istanbul, Turkey.

[1] Theories such as “assignment”, “third party beneficiary”, “apparent or ostensible authority”, “equitable estoppel”, “implied consent”, “group of companies”, “alter ego”, “lifting the corporate veil”.

[2] Stavros L. Brekoulakis, The Relevance of the Interests of Third Parties in Arbitration: Taking a Closer Look at the Elephant in the Room, 113(4) Penn. St. L. Rev. 1165, 1170 (2009).

[3] Article 1122: “Toute personne qui n’a point été dûment appelée ou n’est pas intervenue à la cause en la même qualité, peut former tierce opposition à la décision, même provisoire, qui préjudicie à ses droits et qui a été rendue par une juridiction civile, ou par une juridiction répressive en tant que celle-ci statue sur les intérêts civils.”

[4] Belgian Constitutional Court decided that the impossibility imposed by Article 1122 of the Judicial Code upon a third party to oppose an arbitral award was in violation of Article 10 of the Constitution as regards the principle of equality and Article 11 of the Constitution as regards the principle of non-discrimination.

[5] “Le droit effectif au juge et l’exigence d’un procès équitable, méconnues par l’impossibilité pour le tiers lésé de faire tierce opposition à une sentence arbitrale internationale, ne peut être assuré que par cette voie de recours exceptionnelle.”

[6] Charles Jarrosson, L’autorité de la chose jugée des sentences arbitrales, Procédures nº 8-9, 2007, étude 17, § 49; Jean-Louis Delvolvé, Gerald H. Pointon, Jean Rouche, Part III, Chapter 8: Challenge of Arbitral Awards in French Cours d’Appel, in Jean Rouche, Gerald H. Pointon, et al., French Arbitration Law and Practice: A Dynamic Civil Law Approach to International Arbitration (Second Edition), 2nd edition (Kluwer Law International 2009) pp. 199, 278; Sylvain Bollée, Les effets des sentences arbitrales à l’égard des tiers, Revue de l’Arbitrage, Comité Français de l’Arbitrage 2015, Volume 2015 Issue 3) pp. 696, 701, 721-722; Christophe Seraglini, Les effets de la sentence, Revue de l’Arbitrage, Comité Français de l’Arbitrage 2013, Volume 2013 Issue 3, pp. 705, 710.

[7] The French Cour de Cassation, Chambre Civile 1, 8 October 2009, N° de pourvoi: 07-21990: “…les juges du fond, qui ont écarté la fraude reprochée à la SHLP et qui ont constaté que l’arbitrage rendu l’avait été relativement à la propriété de l’immeuble et du fonds de la Bibliothèque polonaise de Paris ainsi qu’à son exploitation à l’aide de capitaux étrangers, en ont exactement déduit son caractère international, ce dont il résultait que la voie de recours de la tierce opposition n’était pas ouverte”

[8] The extension of the tierce opposition to international arbitral awards will be valid as long as a higher French court decides otherwise.

[9] Article 591 of the French CPC and article 1130 of the Belgian JC. See also Kristof Cox, Chapter 3. Dépeçage or Consolidation of Disputes Resulting from Connected Agreements: The Role of the Judge, in Bernard Hanotiau and Eric A. Schwartz (eds), Multiparty Arbitration, Dossiers of the ICC Institute of World Business Law, Volume 7 (Kluwer Law International; International Chamber of Commerce (ICC) 2010) pp. 57, 58.

[10] Pierre Callé, L’autorité de la chose jugée et les tiers, Revue de l’Arbitrage, Comité Français de l’Arbitrage 2016, Volume 2016, Issue 1, pp. 77, 87.

[11] Sylvain Bollée, p.731.

[12] Cour de Cassation, Ch. Comm., 5 May 2015, n° 14-16.644. A subsidiary (assignor) had assigned its shares in another company to a third company (assignee). The contract for the assignment included an arbitration agreement. The parent company of the assignor provided a guarantee to the assignee for the obligations of the assignor. The guarantee did not have an arbitration clause. Upon failure of its obligations by the assignor, the assignee sued the assignor before an arbitral tribunal. The arbitral tribunal ruled in favor of the assignee. The assignee wanted to enforce the award against the parent company, joint and several guarantor of the assignor. The guarantor challenged the arbitral award by initiating tierce opposition.

[13] “[L]e droit effectif au juge implique que la caution solidaire, qui n’a pas été partie à l’instance arbitrale, soit recevable à former tierce opposition à l’encontre de la sentence arbitrale déterminant le montant de la dette du débiteur principal à l’égard du créancier”.

[14] Pierre Callé, p.89.

[15] Sylvain Bollée, p.729 ; Benoit Le Bars, Droit effectif au juge et recevabilité de la caution solidaire à former tierce opposition à l’encontre d’une sentence arbitrale, Revue des sociétés, 2016, p. 317, §17.

[16] Per Article 1122 of the Belgian JC, the successors by general title may initiate tierce arbitration if they have a different and personnel right; the assignee if there is fraud or if they have acquired the right before the date of the decision; the creditors if their debtors acted fraudulently or if they can invoke a lien, privilege, or any other right different than their credit right; persons represented if their legal, judicial, or contractual representatives acted fraudulently.

[17] Charles Jarosson, §49; Benoit Le Bars, §17.

[18] Emmanuel Gaillard and John Savage, Part 6: Chapter I – French Law, Fouchard Gaillard Goldman on International Commercial Arbitration, (Kluwer Law International 1999), §1598.

[19] Alexis Mourre, L’Intervention des Tiers a L’Arbitrage, Revista Brasileira de Arbitragem, (Comitê Brasileiro de Arbitragem CBAr & IOB; Comitê Brasileiro de Arbitragem CBAr & IOB 2007, Volume IV Issue 16) p.87.

[20] Emmanuel Gaillard and John Savage, p. 918, §1598

[21] Jean-Louis Delvolvé, et al., p. 279.

[22] Id.

[23] For the difference between relative res judicata (la relative autorité de la chose jugée under French law) and opposability (opposabilité under French law), see Pierre Callé and Sylvain Bollée.

[24] Pierre Callé, p.86.

[25] Alexis Mourre, p.88. Alexis Mourre does not support the extension of tierce opposition to international arbitration but indicates a problem that would be faced if the non-signatory with a legitimate interest is not allowed to intervene to an arbitral proceeding. He further argues that this outcome may be considered against the due process right provided by Article 6 of the European Convention of Human Rights.

[26] As the French court only recognized the admissibility of a tierce opposition to the enforcement decision, it is likely that the review in France will be limited to the enforcement decision, unless the tierce opposition is extended to international arbitral awards.

Founded in 1923, the Hague Academy is a center for research and teaching in public and private international law, with emphasis on further scientific and advanced studies of the legal aspects of international relations. Because the Academy does not have a permanent teaching staff, its scientific body, the Curatorium, invites academics, practitioners, diplomats, and others to give courses in the form of lectures. Up to now, the Hague Academy has held courses that take place in summer, over a period of six weeks. The lectures are usually published in the Collected Courses of the Academy of International Law. Starting 2019, the Hague Academy will offer “Winter Sessions”, thus allowing a much larger student body to benefit from the insights offered by the lecturers. For the program of the first Winter Session, please click here.

In mid-January, the American Society of International Law (ASIL) announced that it would award its 2018 Certificate of Merit for High Technical Craftsmanship and Utility to Practicing Lawyers and Scholars to the Encyclopedia of Private International Law co-edited and co-authored by Professor Franco Ferrari, the Center’s Director. In a memorandum, ASIL’s Book Awards Committee stated that “[t]he value and timeliness of this work to academics, international lawyers and others is difficult to over-state.” Bringing together 195 authors from 57 countries, including Professor Linda Silberman, the Co-Director of the Center,  the Encyclopedia sheds light on the current state of Private International Law around the globe, providing unique insights into the discipline and how it is affected by globalization and increased regional integration. The role and character of Private International Law has changed tremendously over the past decades. With the steady increase of global and regional inter-connectedness the practical significance of the discipline has grown. And so has the number of legislative activities on the national, international and, most importantly, the European level. The Encyclopedia is a rich and varied resource in four volumes. The first two volumes provide comprehensive coverage of topical aspects of Private International Law in the form of 247 alphabetically arranged entries. The third volume provides insightful detail on the national Private International Law regimes of 80 different countries. The fourth volume presents invaluable, and often unique, English language translations of the national codifications and provisions of Private International Law in those countries. As for its key features, here is a summary: • 247 substantive entries organized alphabetically for ease of navigation and fully cross-references, • 80 national reports; • Entries and National Reports written by the world’s foremost scholars of Private International Law; • National codifications in English collected together into a single volume for quick reference. For more information, please click here.

Professor Ferrari, the Center’s Director, has just published the third edition of a book on international contract law in German. Over the years, the book, co-authored with six German colleagues, has become the go-to-book for all things relating to international contract law, since it governs not only the most important conflict of laws instrument in force in Europe in the area of contract law (the so-called Rome-I Regulation), but also the most important uniform substantive law instruments dealing with specific types of international contracts (such as the United Nations Convention on Contracts for the International Sale of Goods [CISG] and the Convention on Transport of Goods by Road [CMR]). The earlier editions of this book have often been cited by courts of German speaking countries, including the German Supreme Court.

Professor Ferrari, the Center’s Director, will give a talk on entitled “The Hague Principles on Choice of Law in International Commercial Contracts in International Commercial Arbitration” at a conference on “Soft Law in International Arbitration” to be held at the National University of Singapore on 11 January 2018. Professor Ferrari, an expert on European private international law and international arbitration, will be joined by various colleagues, most of whom have links to NYU and the Center: Professors Giuditta Cordero-Moss, Gary Bell and Diego Fernandez Arroyo, all former scholars-in-residence of the Center; Professor Marco Torsello, a two-time visiting professor at NYU as well as a Global Professor of Law at NYU Law in Paris, and Dr. Friedrich Rosenfeld, a Global Adjunct Professor of Law at NYU Law in Paris. For the conference program, please click here.

Professor Ferrari, the Director of the Center, and Dr. Friedrich Rosenfeld, a former scholar-in-residence at the Center and currently a Global Adjunct Professor at NYU Law in Paris, a Visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius Law School in Hamburg, have just published a paper in Spanish on “Limits to Party  Autonomy in International Arbitration”. The English language abstract reads as follows: The paper examines the limitations to party autonomy in international commercial arbitration. As such, it challenges the liberalist premise that arbitration is purely a dyadic process between two rational parties based on an expression of party autonomy. The authors submit that arbitration creates a web of relationships involving the parties, the arbitrators, arbitral institutions, and the public at large. While the interests of these different stakeholders overlap in some cases, they diverge in others, thus creating tensions that at times can only be solved by limiting party autonomy. Against this background, the authors develop a taxonomy of limitations by distinguishing between limitations to party autonomy in the interest of the parties, the arbitrators, arbitral institutions as well as the public at large. It is the authors’ position that a clear understanding of these limitations is necessary to protect arbitration against legitimacy challenges and to uphold its role as the primary instrument for the resolution of business disputes.

Jan Bischoff

The application of the fair and equitable treatment (‘FET’) standard – i.e. the host State’s promise contained in almost all modern international investment agreements (‘IIAs’) to accord to the investor’s investment a fair and equitable treatment – frequently leads to problems in relation to the host State’s right to regulate. It is undisputed that, under international law, the sovereign State has a right to regulate[1]. On the other hand, it is clear that the right to regulate cannot free the host State from its obligations voluntarily entered into under IIAs concluded by it[2], to the extent the State’s freedom to legislate is compromised in some way by international law instruments (i.e., a stabilization clause). A rigid application of the FET standard could reduce the legislator’s leeway to nil if it had to fear that all later changes of legislation could violate investors’ legitimate expectations.

The arbitral tribunal in Eiser Infrastructure Ltd. et al v. Kingdom of Spain[3] constituted under the ICSID Rules was tasked to strike a balance between Spain’s right to regulate and the claimant investors’ right to be treated fairly and equitably. The underlying dispute arose from Spanish legislation guaranteeing operators of solar power plants a fixed remuneration for produced energy (i.e. it subsidized solar power plants). The respective laws were later amended when the tariff deficit (the difference between the subsidy paid to the producer and the revenues generated from the customers) became unbearable for Spain. Similar disputes about Spanish renewable energy legislation and its amendments have arisen in recent years[4].

In my opinion, the tribunal did not manage to strike the balance. The arbitrators came to the conclusion that Spain breached its obligation to treat the claimant investors in a fair and equitable manner. They referred to other awards that considered the stability of the legal framework a part of the FET standard[5]. The tribunal acknowledged host States’ right ‘to modify their regulatory regimes to meet evolving circumstances and public needs’[6] as well as Spain’s ‘legitimate public policy problem with its tariff deficit’[7]. According to the tribunal, Spain was entitled to adopt ‘reasonable measures to address the situation’. However, tribunal stressed that ‘regulatory regimes cannot be altered as applied to existing investments in ways that deprive investors who invested in reliance on those regimes of their investment’s value’[8]. After these few abstract legal remarks, the tribunal discusses the effects the new legislation had on the claimant companies, and it questions the methodology used by the new law for calculating guaranteed remuneration. It concludes that the new law ‘deprived Claimants of essentially all of the value of their investment. Doing so violated Respondent’s obligation to accord fair and equitable treatment’[9].

When reading the award, I cannot escape the impression that the tribunal mainly based its finding (i.e. that Spain breached the FET standard) on the effects the legislative changes had on the claimants’ investments. The arbitrators criticize heavily the way the remuneration is calculated under the new regime because the basis (a ‘hypothetical efficient plant’) does not take into account the claimants’ investment’s specificities[10]. They also question the methodology used to calculate the remuneration on the basis of a hypothetical plant[11]. However, it seems that the tribunal’s elaborations on inconsistencies in respondent’s conduct were not a ground for the tribunal to come to its conclusion; they are rather mere obiter dicta. Instead, the tribunal’s central argument is the effect the new legislation had on the claimants’ investment.

The effect should not be the sole factor to be considered when deciding whether a change of legislation is a breach of the FET standard or not. The so-called sole effects doctrine has been used to determine whether measures taken by a State constitute an indirect expropriation or not[12]. However, as far as general regulatory measures are concerned, the application of the sole effects doctrine has been heavily criticized recently[13], and rightly so. Instead, arbitral tribunals and legal scholars have argued in favor of the application of a proportionality test[14], in order to take into account the legitimate regulatory interest of the State. The reasoning applied by the tribunal in Eiser Infrastructure Ltd. et al v. Kingdom of Spain concerning FET, however, would undermine the attempts to strike a balance between the States’ legitimate regulatory interests and the protection from indirect expropriation. The reasoning also completely overlooks that the objective legitimate expectations of the investors must necessarily incorporate an appreciation that in the absence of stabilizing language, legislation is implemented with a clear likelihood of change.  The Eiser decision seems to ignore this legal and practical reality, which undermines its coherence.]

Instead of focusing on the effects on the investment, a proportionality test is warranted where the host State’s right to regulate and the claimant investors’ right to be treated fairly and equitably are to be balanced. This does not mean that the outcome of the dispute would have been different. Indeed, it was the very purpose of the royal decree, which offered the remuneration, to provide investors a long-term certainty that the decree would not be changed[15]. On the other hand, there is an industry generated its revenue solely on the basis of subsidies. The capital markets and the interpretation of what constitutes a reasonable return changed dramatically during the financial crisis. I therefore wonder whether it was feasible for the government to react in a way that, on the one hand, allowed it to reduce the (allegedly unbearable) fiscal burdens for the State (and hence the community) and, on the other hand, secured the individual financial interests of companies investing in renewable energies. This balancing of interests would have been the task of the tribunal; it is deplorable that it refrained from doing so.

 

Dr. Jan Asmus Bischoff studied law at Hamburg University from 2000 to 2005. After his graduation, he worked as a researcher at the Max Planck Institute for Comparative and International Private Law until 2010. In 2008, he completed his Master Degree in International Legal Studies at NYU, School of Law as a Hauser Global Scholar. In 2009, he completed his doctoral thesis on “The European Community and the Uniform Private Law Conventions” under the supervision of Prof. Dr. Dr. hc. Jürgen Basedow. In 2010, he passed the Second State Examination at the Hanseatic Regional Appelate Court, Hamburg. He is currently working as inhouse legal counsel at the privately-owned bank M.M.Warburg & CO, Hamburg.

[1] See e.g. AES Summit Generation Limited and AES-Tisza Emrömü Kft. V. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para.9.3.29; Marc Jacob and Stephan W.Schill, ‘Fair and Equitable Treatment: Content, Practice and Method’ in: Marc Bungenberg and others (eds.), International Investment Law, (Nomos/Hart 2015) 730 seq.

[2] Cf. Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, para. 298; ADC Affiliate Ltd. et al. v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, para. 423.

[3] Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Award, 4 May 2017.

[4] Cf. Charanne and Construction Investments v. Spain, SCC Case No. V 062/2012, Award, January 21, 2016, arguing that the legal framework did not create legitimate expectations that it would remain unchanged (para. 504); cf. also Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Final Award, July 17, 2016, para. 807, arguing that there was not a guaranteed rate of return; Portigon AG v. Kingdom of Spain, ICSID Case No. ARB/17/15 (not public).

[5] Eiser Infrastructure Ltd. et al v. Kingdom of Spain (supra n. 3) para. 381 seq.

[6] Id., para. 362.

[7] Id., para. 371.

[8] Id., para. 382.

[9] Id., para. 418.

[10] Id., para. 398 seqq.

[11] Id., para. 392.

[12] See Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, 2nd edition, Oxford University Press, Oxford 2012, 112-115.

[13] Id.120-123.

[14]Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12,Award,14 July 2006, 311 seq.; LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 195.

[15] See Eiser Infrastructure Ltd. et al v. Kingdom of Spain (supra n. 3) para. 112.

The Center is pleased to announce that it will co-host for the fourth time a two-day conference regarding the intersections between international commercial and international investment arbitrations. The papers presented at the conference are based on papers submitted to the soon to be published Cambridge Compendium of International Commercial and Investment Arbitration, co-edited by Professors Franco Ferrari, the Director of the Center, as well as Andrea Bjorklund and Stefan Kröll, and attempt to address the various topics from both a commercial and an investment arbitration perspective whenever appropriate in order to highlight the commonalities as well as the differences between both fields . The event will take place in Santo Domingo, on 13 and 14 November 2017. For more information, please click here.

This is to announce the November 2017 session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “Prayers for Relief in International Arbitration, Plead in Haste, Repent at Leisure”. The event will take place on Friday, November 10th, 2017, from 12.45-2.00, in Vanderbilt Hall 218.

 
It is a great pleasure to be able to announce that on the occasion of that session, Mr. Klaus Reichert will give a talk on the aforementioned topic and that Mr. Grant Hanessian agreed to act as commentator.

 

Klaus Reichert SC specializes in international arbitration and has worked on, both as lead counsel and as arbitrator (frequently as chair), in excess of 250 international disputes right across a broad spectrum of complex subject matters, industries and governing laws involving parties (often sovereigns, or state commercial entities) from all over the World. These cases involved Institutions and Rules such as ICSID, ICC, SCC, LCIA, ICDR, CAS, DIAC, DIFC-LCIA, and UNCITRAL. The venues have included Paris, Los Angeles, San Francisco, Helsinki, New York, London, Munich, Seoul, Miami, Geneva, Dublin, Dubai, Stockholm, Nassau, and Zürich. He is a member of the Court of Arbitration for Sport and the International Basketball Federation (BAT) panel of arbitrators. He was counsel for Dallah in the landmark case in the English Courts on the New York Convention against the Government of Pakistan. In 2012 he was elected to the Governing Board of the International Counsel for Commercial Arbitration (ICCA). He has served on a number of bodies in the international legal domain including the IBA (past Co-Chair of the Litigation Committee, and currently a Council Member of the Legal Practice Division), the International Commercial Arbitration Committee of the ILA, the European Users’ Council of the LCIA, and was a founder member of Arbitration Ireland – the Irish Arbitration Association. He was made a Silk (Senior Counsel) at the Bar of Ireland in 2010, and was involved as counsel in a large number of leading cases in the field of private international law before the Irish Courts. In 2008 he chaired the Host Committee for the ICCA Conference in Dublin to mark the 50th anniversary of the New York Convention.

 

Grant Hanessian, an NYU Law School graduate, heads Baker & McKenzie’s International Arbitration Practice Group in North America.  Mr. Hanessian has extensive experience as counsel and arbitrator in international commercial and investment treaty arbitrations.  He currently serves as US alternate member of the ICC International Court of Arbitration in Paris, chairman of the Arbitration Committee of the US Council for International Business (US national committee of the ICC), and a member of the ICC’s Commission on Arbitration and its Task Forces on Arbitration Involving States or State Entities and on Financial Institutions and International Arbitration (leader of Investment Arbitration and Banking & Finance work stream), Vice President (for US) of the London Court of Arbitration’s North American Users Council and a member of the American Arbitration Association—International Centre for Dispute Resolution’s International Advisory Committee and its Advisory Committee on Brazil, the International Arbitration Club of New York, the Arbitration Committee of the International Institute for Conflict Prevention and Resolution, the New York City Bar Association’s Committee on International Commercial Disputes and Club Español del Arbitraje, and is a founding board member of the New York International Arbitration Center. Mr. Hanessian writes and speaks frequently on international arbitration topics.  He is editor of ICDR Awards and Commentaries (Juris Pub. 2012) and co-editor of Comparison of International Arbitration Rules (American Bar Association Section of International Law), International Arbitration Checklists (Juris Pub., 3d ed., 2015), Gulf War Claims Reporter (ILI/Kluwer, 1998) and Baker & McKenzie’s International Litigation & Arbitration Newsletter.  Mr. Hanessian is recommended by Chambers Global and USA Guides (described as “very experienced, hugely knowledgeable and effective”), Legal 500 (described as ‘a great practitioner’ with a ‘strong commercial profile’), PLC Which Lawyer, The International Who’s Who of Commercial Arbitration and Expert Guide to Leading Practitioners in International Arbitration.

 

Please note that the Chatham House rule applies.