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International Arbitration News, Trends and Cases

ArbitralWomen: Winning Communication

You’re the voice, try and understand it, make a noise and make it clear.” John Farnham

On 2 February 2017, Hogan Lovells hosted a joint event with ArbitralWomen entitled “Winning Communication” in which a panel, including Julianne Hughes-Jennett, partner at Hogan Lovells, Tessa Wood, Senior Voice & Communication Coach at City Academy, Wendy Miles QC, global head of arbitration at Boies, Schiller and Flexner, and expert accountant Liz Perks, partner at Haberman Ilett, answered questions posed by Kate Wilford, senior associate at Hogan Lovells.

Julianne began by explaining the genesis of the event. She had been struck by an article concerning women in President Barack Obama’s White House and the “amplification method” used by them in order to be heard, whereby when a woman spoke, a second woman would repeat the first woman’s comment. This led Julianne to question how women are “heard” in the arbitration community, in which statistically women remain under-represented.

This chimed with statistics provided by, Liz Perks, of a study on female quantum experts in International Centre for Settlement of Investment Disputes (ICSID) arbitrations. The study found that of a total of 176 named quantum experts in public ICSID awards, where damages were awarded (and therefore quantum experts had been used), only eight included the participation of female experts. Of these eight, three had been signed jointly with a male expert. This left only five expert reports signed solely by women. The numbers speak for themselves. Wendy Miles QC noted that in her time as an arbitrator, she had never heard from a female quantum expert.

As advocates, Wendy Miles QC noted that, “our tools are our words, our minds, and our voices”. The discussion focussed on how women can maximise their potential by not only finding their voices but ensuring that their voices are heard.

Tessa opened with some introductory remarks, explaining that one’s physicality is intimately connected to the quality of one’s voice. The “armour of tension”, in which people often unconsciously shroud themselves, can result in a higher pitch, which is anything but persuasive. This effect can be heightened in the case of women, who naturally tend to be smaller than men.

This can result in the following tendencies:

  • Not wanting to take up a lot of space vocally and therefore speaking too quickly.
  • Wishing to be “liked” with the result that one may smile more than necessary, which can have an effect on one’s tone.
  • Uplifting at the end of a sentence, resulting in a sense that the speaker is in constant questioning mode, uncertain of what she is saying or lacking in confidence.

These are, of course, not only particular to women, but they did resonate with the audience on the evening.

However, Tessa emphasised that one’s voice is like a fingerprint: you should not seek to change its essential quality, but rather improve and maximise its potential. Liz agreed that “authenticity” is key, perhaps more so for experts. So, while a woman should not necessarily seek to change the pitch of her voice from high to low à la Margaret Thatcher, weaknesses can be addressed. For example, speaking more slowly has a variety of benefits, including commanding attention.

The primary “secret” to enhancing one’s voice (male or female!) is breathing and breath. Tessa stated that,”breath is the power house of the voice”. As many will know but few actually do, it is essential to breathe from one’s diaphragm, not from one’s upper chest.

Rashda Rana SC, President of ArbitralWomen, stepped in with the age old advice concerning preparation: “The key is to know your story”. If you know your story inside out, you will necessarily be authentic and this will give you time to focus on delivery. Julianne agreed that the first step was “substance and being prepared – if you get this right, it is always going to be easier to present”.

Overall, the discussion was positive with a few female advocates expressing the view that they considered, as women, that they were more likely or just as likely to be heard. One barrister commented that, in fact, certain habits that are deemed to be particularly female are just part of the arsenal available to a woman as an advocate. It is a woman’s ability to adapt these tools that should actually put her at an advantage over men when communicating.

What was particularly striking about the event was the willingness and openness with which delegates, whatever their stature and age, shared their knowledge and experiences for the benefit of all.

The question remains: do we “fix” the women or do we “fix” the system? In truth, it’s a little of both. Wendy Miles QC urged all to spend time developing one’s voice. Julianne suggested that there is merit for sensitivity training on this issue in the profession, perhaps as part of unconscious bias training.

This blog post was co-authored by Julianne Hughes-Jennett at Hogan Lovells and Francesca Albert at Practical Law Arbitration, and first published on the Practical Law Arbitration blog http://arbitrationblog.practicallaw.com.

The DIFC Courts – a “conduit jurisdiction” no more?

As we predicted in our Annual Seminar on Recent Developments in the UAE Dispute Resolution Landscape, back in November 2016, the use of the DIFC Courts as a “conduit jurisdiction” has been called into question.

There has been much discussion in the Dubai legal community and beyond about the use of the DIFC Courts as a conduit jurisdiction for the recognition and enforcement of both foreign and domestic arbitral awards following the line of decisions in Banyan Tree v Meydan Group LLC, DNB Bank ASA v Gulf Eyadah, and the Oger Dubai LLC v Daman Real Estate Capital Partners Ltd. These and other cases led to the formation of the Judicial Tribunal created by Decree No.19/2016 (“Decree“). The Judicial Tribunal’s purpose is to review and resolve “conflicts of jurisdiction” between the DIFC Courts and the Dubai Courts. The JT is made up of four Judges from the Dubai onshore Courts and three from the DIFC Courts.

In its very first decision Cassation No. 1/2016 (Judicial Tribunal) Daman Real Capital Partners Company LLC v. Oger Dubai LLC, the Judicial Tribunal has determined whether the DIFC Courts can, in this instance, serve as a conduit jurisdiction for the onward enforcement of a domestic arbitral award in mainland Dubai. We have summarised and commented on the decision below.

Background

It is important to understand the background to the original matter before analysing the Judicial Tribunal’s determination in detail.

Oger Dubai obtained an award in an arbitration seated in onshore Dubai against Daman and sought its recognition and enforcement before the DIFC Courts. As Daman was unable or unwilling to comply with the award, Oger Dubai sought and obtained an order from the DIFC Courts for recognition of the award and that Daman be wound-up. Daman applied to the Dubai Courts to annul the arbitral award and asked the DIFC Courts to adjourn its enforcement proceedings, pending the outcome of the annulment proceedings before the Dubai Courts. The Dubai Court of First Instance, subsequently, refused to annul the arbitral award on the grounds that it lacked jurisdiction to do so, as the DIFC Courts had already made a determination on the matter. This decision was confirmed by the Dubai Court of Appeal, but the matter was appealed to the Court of Cassation, before which it is still pending. Despite the on-going proceedings in the Dubai Courts, the matter was referred to the newly formed Judicial Tribunal. On 30 June 2016, the DIFC Courts decided to stay the winding up of Daman until a decision was issued by the Judicial Tribunal as to the competent court to finally hear and determine the matter.

Judicial Tribunal Decision

In the first part of the decision, the Judicial Tribunal identified and confirmed the existence of a “conflict of jurisdiction” in this case between the DIFC Courts and the Dubai Courts. This related to the fact that enforcement proceedings have been brought before the DIFC Courts and, in parallel, annulment proceedings were filed before the Dubai Courts which are still pending.

The Judicial Tribunal emphasised that had the substantive case been brought before the DIFC Courts, there would be no conflict, as the DIFC Courts would be the only appropriate forum for the dispute. In support of this, it noted that the assets in question are located in the DIFC and Daman is a DIFC registered entity.

The Judicial Tribunal further emphasised that, for the sake of justice, pursuant to Article 4 of the Decree and to avoid contradictory judgments, such a conflict of jurisdiction should not be resolved by permitting both Courts to “entertain” the case. Only one of the Courts should be permitted to determine whether the arbitral award should be enforced or annulled.

Without giving very much substantive reasoning, the Judicial Tribunal concluded that pursuant to the procedural laws:

  1. the Dubai onshore Courts were the competent Courts to make a determination on the validity of the arbitral award; and
  2. the DIFC Courts should cease from “entertaining the case“.

Analysis

At our Annual Seminar, we predicted that UAE arbitration cases referred to the Judicial Tribunal which otherwise had no nexus to the DIFC but where the claimants were attempting to use the DIFC Courts as a “conduit jurisdiction” to ultimately enforce against assets held in onshore Dubai would likely result in the Judicial Tribunal deciding the Dubai Courts in fact had jurisdiction.  One possible factor is the Judicial Tribunal has an in-built majority of Dubai Court judges and it is noteworthy that the three DIFC Judges sitting on the Judicial Tribunal (Michael Hwang; Omar Al Muhairi; and Sir David Steel) dissented from the second part of the ruling that the DIFC Courts should refrain from entertaining the case.

This Oger Dubai case had a clear connection with the DIFC as the Respondent and the project in question were based in the DIFC. If a case with such a clear link to the DIFC can be determined in such a manner then it provides little hope to future cases brought before the Judicial Tribunal with no or a more tenuous link to the DIFC to successfully argue the DIFC Courts should have jurisdiction to give recognition where parallel proceedings are before the Dubai Courts seeking nullification. Parties should carefully consider current or future actions they wish to enforce through the DIFC Courts, lest they fall victim to the same type of outcome. It now seems inevitable that attempts to use the DIFC Courts as a “conduit jurisdiction” will ultimately fail.

The brave new era excitedly predicted by many whereby Dubai seated arbitral awards could avoid scrutiny by the Dubai Courts (and the time that entails) by using the DIFC Courts as a shortcut, is seemingly coming to an end.

The Hong Kong Court of First Instance Narrowly Construes the Arbitration Ordinance in Relation to Domestic Arbitrations and the Application of Schedule 2

In A v D [2016] CFI 1014/216 the Honourable Mimmie Chan J dismissed as “totally without merit” proceedings to set aside the decision of an arbitral tribunal and counterclaim on the alleged grounds of serious irregularity under section 4 of Schedule 2 of the Arbitration Ordinance, Cap. 609 (“the 2011 Ordinance“), imposing significant cost sanctions on the applicants.

Background

The Claimants and the Respondent were equity partners of a firm pursuant to terms set out in a letter dated 11 May 2007 (the “Agreement“). In accordance with the Agreement the Respondent gave notice of his intention to retire with effect from 15 November 2009 after which his equity was assigned back to the Claimants. Disputes subsequently arose as to the amounts due from the Respondent for outstanding loans and tax owed (i.e. the Claimants’ claim) as well as his entitlement to drawings and profit (i.e. the Respondent’s counterclaim); as a result of which the matter was referred to arbitration in May 2011 in accordance with the Agreement.

The Arbitration and Proceedings to Set Aside

The arbitral tribunal ruled that the Respondent was entitled to his share of the firm’s profits and drawings only up until the effective date of his retirement (the “Ruling“). The arbitral tribunal subsequently dismissed the Claimants’ application to strike out the Respondent’s counterclaim, awarding the costs of that application against the Claimants (the “Decision and Costs Order“). The Claimants then made the present application to the Hong Kong Court of First Instance (the “Court“) to set aside the Decision and Costs Order on the grounds of an alleged serious irregularity under section 4 of Schedule 2 of the 2011 Arbitration Ordinance.  This section contains provisions pursuant to the former domestic arbitration regime, including appeals on questions of law, consolidation, and challenging an award on the basis of serious irregularity. The Respondent in turn sought a declaration that the Court had no jurisdiction in respect of the setting aside proceedings and for the action to be dismissed.

Reasoning

The Domestic Arbitration Issue

Depending upon whether an arbitration is domestic or international, different rules apply. Under the 2011 Ordinance, by operation of section 99, the provisions of Schedule 2 only apply if the parties opt in expressly for its operation. However, in the case of arbitration agreements providing that the arbitration is a domestic arbitration, by virtue of s.100 of the 2011 Ordinance, Schedule 2 applies automatically without the need for an express opt-in. In A v D there was no dispute between the parties that their partnership agreement made no such express provision. Nevertheless, the Claimants sought to argue that because the parties were Hong Kong residents and had a place of business in Hong Kong, they had subscribed to the domestic arbitration provisions under Schedule 2 without an express opt-in being necessary.

The Court rejected this argument, noting that if the intention had been for s.100 to automatically apply Schedule 2 to arbitrations between two Hong Kong entities after the 2011 Ordinance came into effect then this would have been expressly stated in its wording; moreover, the basis on which the Claimants tried to argue that the arbitration was domestic was too simple. Therefore, in view of the fact that Schedule 2 did not apply to the arbitration, Chan J held as a corollary there was no basis on which to apply the ground of irregularity to set aside the Tribunal’s decision under s.4 of Schedule 2.

Procedural Irregularity

In any event, Chan J held that the Decision and Costs Order in no way amounted to a reversal or reinterpretation of the Ruling and thus did not give rise to a procedural irregularity.

Orders

For the above reasons Chan J dismissed the application to set aside the Decision and Costs Order as “totally without merit” and awarded further costs to the Respondent on an indemnity basis, which is more generous than the most frequent party-party costs that courts tend to award as the applicants can recover all ‘reasonable’ legal expenses as opposed to just those that are strictly ‘necessary’ for conducting the arbitration.

Comments

The distinction between domestic and international arbitration in the former Arbitration Ordinance was regarded as unnecessary and problematic. It sometimes gave rise to disputes regarding the appropriate governing regime in particular cases. A significant difference between the two regimes was that the domestic regime provided the Hong Kong courts with additional powers to intervene in and assist with the arbitration process that were not available under the international regime. This included appeals on questions of law with leave of the court, consolidation of proceedings, challenging an award on the basis of serious irregularities and determination of a preliminary point of law.

By contrast, the international regime, as based on the UNCITRAL Model Law, followed the principle that the Hong Kong courts should support, but not interfere with, the arbitral process. The 2011 Ordinance, with an aim to simplify and streamline the administration and process of arbitration in Hong Kong, harmonises both domestic and international arbitration proceedings under a single unified framework. The UNCITRAL Model Law (as amended in 2006) now applies to all arbitrations commenced in Hong Kong. This new framework increases efficiency as well as provides greater certainty and consistency for both domestic and foreign parties to arbitration.

The case reiterates the narrow approach taken by the Hong Kong courts and Chan J to interpreting the 2011 Ordinance.  Parties want finality and minimal interference by the courts.  Accordingly, we do not see parties expressly adopting Schedule 2 of the 2011 Arbitration Ordinance in their arbitration agreements.
Schedule 2 is used widely in the construction industry and automatically applies to an arbitration agreement entered into at any time within a period of 6 years after the commencement of the 2011 Ordinance (i.e. before 31 May 2017) which provides that arbitration under the agreement is a “domestic” arbitration. After 31 May 2017, if the parties want appeals on questions of law and the other provisions contained in Schedule 2, they must expressly provide for it.  Use of the words “domestic arbitration” is not enough.  Finally, when making any application to set aside an award or order of an arbitral tribunal due to procedural irregularity under s.4 of Schedule 2 of the 2011 Ordinance, the applicant must state precisely the relevant ground on which it relies and provide affidavit evidence or the application will be rejected as an abuse of process.

Consistency restored as Astro v Lippo appeal dismissed

In the latest instalment of the long-running dispute between Astro and Lippo, the Hong Kong Court of Appeal (CA) has dismissed Lippo’s appeal against a 2015 first instance decision allowing the enforcement of five arbitral awards, despite a ruling of the Singaporean courts refusing enforcement on the basis that the arbitral tribunal had acted outside its jurisdiction in making the awards. Although it upheld the first instance decision, the CA notably disagreed with the High Court’s finding that Lippo did not act in good faith and reflected this in its award of 60% costs to Astro.

At first instance the judge found that First Media had not acted in good faith because it had not challenged the tribunal’s ruling on its jurisdictional objection in the Singapore courts at the time of the arbitration, but had proceeded with it and only decided to revisit this point to challenge the enforcement of the award in Hong Kong.  The CA disagreed, and found that First Media had acted in good faith as it had made an objection contemporaneously and had subsequently acted in accordance with the law of the seat of arbitration without waiving its rights.  The first instance judge had also erred in failing to place sufficient weight on the findings of the supervisory court of the seat of arbitration (the Singapore courts).  First Media was entitled to proceed with the arbitration and reserve its rights to resist enforcement despite not challenging the jurisdictional ruling pursuant to the ‘choice of remedies’ principle underlying the relevant Singaporean statute.  Good faith and the ‘choice of remedies’ principle were not mutually exclusive but complementary.  The CA also criticized the first instance judge’s approach to considering good faith in the exercise of his discretion under section 44(2) of the Arbitration Ordinance (Cap 341).

However the CA dismissed the appeal due to the “very substantial” delay in First Media’s application for an extension of time for its setting-aside application (14 months where the statutory limit was 14 days) and because the judge at first instance had not impropertly exercised his discretion by taking into account irrelevant matters, nor had he reached a “plainly wrong” conclusion.

Consequently, this decision makes clear that Hong Kong courts will generally respect decisions made by courts exercising supervisory jurisdiction at the seat of an arbitration.  However, the impact of the ruling remains a cautionary tale for award debtors who do not challenge orders to enforce awards in time.

To read the full briefing, please click here.

THE SINGAPORE COURT OF APPEAL CLARIFIES THE ARBITRABILITY OF MINORITY SHAREHOLDER CLAIMS

The Singapore Court of Appeal has overturned the High Court’s decision in Maniach Pte Ltd v L Capital Jones Ltd and another [2016] SGHC 6 (see our earlier article), which concerned a dispute between the shareholders of the international gourmet food business, Jones the Grocer.

At first instance, L Capital Jones, the majority shareholder, applied for orders that court proceedings concerning a minority shareholder oppression claim be stayed and instead be settled through arbitration, as its shareholder agreement with Maniach contained an arbitration agreement. The High Court rejected this application and held that a statutory minority shareholder oppression claim was not arbitrable and that such action must be pursued through the courts.

Unusually, a five-judge bench of the Court of Appeal was appointed, underscoring the significance of the point. The judgment, delivered by Chief Justice Sundaresh Menon, overturned the High Court’s decision and held that minority oppression claims are generally arbitrable.  However, the Court of Appeal also held that L Capital Jones had lost its opportunity to request a stay of the court proceedings because it had already taken a “step” in the proceedings as one of its subsidiaries applied to strike out the proceedings on L Capital Jones’ behalf.

Revisiting the arbitrability of minority oppression claims

The Court of Appeal said that the appeal gave it “the opportunity to revisit the question of the arbitrability of minority oppression claims with particular reference to whether there is a public policy exception to the general rules stated in our decision in Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373 (“Tomolugen”) that minority oppression claims are generally arbitrable.”

Although Maniach accepted that the Court of Appeal’s decision in Tomolugen had settled the position that minority oppression claims are generally arbitrable, it submitted that its specific oppression claim was not arbitrable because it raised issues of public policy. Maniach argued that L Capital Jones had abused the judicial process by bringing administration proceedings in bad faith and for the collateral purpose of oppressing Maniach as a minority shareholder.

The Court of Appeal disagreed and held that Maniach could not rely on the integrity of the judicial process as a reason for claiming that there were public policy considerations militating against arbitrating the present dispute. It said “the court will not ignore an arbitration agreement just because it wishes to determine whether it would be appropriate for it to issue a public rebuke against the Appellants for abusing the process of the court, especially where such rebuke would relate to matters that had no legal relevance to the dispute before it.”

The Court of Appeal was also satisfied that nothing in the dispute engaged concerns that would render the dispute non-arbitrable, and that the minority oppression dispute fell within the scope of the arbitration agreement.

The question of a stay

The Court of Appeal also agreed with the view taken by the High Court that an application to strike out the proceedings on the merits would ordinarily be a step in the proceedings and sufficient to preclude an applicant from applying for a stay. It found that L Capital Jones had taken a step in the proceedings and “[o]nce such a step is taken, it will generally be irrevocable“.

The Court was also convinced of this finding, despite it being an affiliate of L Capital Jones which had taken a step in the proceedings, rather than L Capital Jones itself.  It considered that “[i]f not for the fact that the Appellants had taken a step in the proceedings, the matter should have been submitted for arbitration.”

Observations

This is typically good news from the Singapore courts for arbitration. At a time when shareholder disputes are a hot topic, it is now settled that there is in general no public policy element in statutory minority oppression claims which would prevent them from being arbitrated.  The case is also a practical reminder that parties should be careful to ensure that any steps taken in parallel court proceedings do not prejudice their ability to submit a dispute to arbitration.

 

Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016

On 30 December 2016 the Hong Kong Government gazetted the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 (“Bill“)*.  The Bill closely follows the recommendations made by the Law Reform Commission in the Report on Third Party Funding for Arbitration (“Report“) dated 12 October 2016 (see our note here).

The Bill clarifies that the centuries-old doctrines of maintenance and champerty, which prohibit third party funding for litigation, do not apply to funding of arbitration and mediation.  It also proposes a new part (Part 10A) to be added to the Arbitration Ordinance (Cap 609) (and cross references to be incorporated into the Mediation Ordinance (Cap. 620)), which provides for a code of practice to be issued and contain other measures and safeguards aimed at preserving integrity if third party funding is used.

The Bill

Key points of the Bill include:

  • The definition of arbitration is extended to include not only arbitrations to which the Arbitration Ordinance applies, but also proceedings before the court, an emergency arbitrator or mediator that is covered by the Arbitration Ordinance.
  • The definition of third party funding of arbitration excludes the direct or indirect provision of arbitration funding by lawyers or those providing legal services, in order to avoid any conflict of interest.
  • The new law will not cover funding agreements made before the commencement of its relevant provisions.
  • Part 10A will also apply where the place of arbitration is outside Hong Kong or there is no place of arbitration to the extent that costs and expenses are provided in Hong Kong in relation to the arbitration – unlike the Arbitration Ordinance, which in general only applies when the place of arbitration is in Hong Kong.
  • An advisory body and an authorized body will be established to facilitate the regulatory framework for third party funding of arbitration in Hong Kong.
  • A code of practice (“Code“) may be issued by the authorized body setting out standards and practices to be observed with respect to, inter alia, funding agreements, internal procedures of third party funders (such as sufficient minimum capital requirements) and monitoring measures.  The Code may also specify terms to be included in the funding agreements.  A process involving public consultation must be followed prior to issuing the Code. The Code will not have legally binding effect but will be admissible in evidence where failure to comply is in question.
  • Communication of confidential information to an existing or potential third party funder is allowed and any recipient is then subject to confidentiality requirements.
  • Requirements for disclosure of the existence of any third party funding agreement to other parties, in order to avoid conflicts of interest.

The Bill stops short of any amendment to vest in arbitral tribunals the power to make an adverse costs order against a non-party, as recommended in the Report, which instead preferred to recommend that a review be conducted after the Initial Period to determine whether an amendment would be necessary.

Concluding thoughts

The Bill closely follows the recommendations of the earlier Report; as such, only limited, if any, revisions to the Bill are expected before it passes into law.

The availability of third party funding is a welcome development for arbitrations seated in Hong Kong, allowing for access to justice, levelling the playing field for settlement discussions, and allowing for companies to manage financial risk.

It will further consolidate Hong Kong’s attractiveness as a place of arbitration.

*On 10 January 2017, Singapore passed the Civil Law (Amendment) Bill 38/2016, which introduced a legal framework for third party funding in international arbitration in Singapore.

SIAC Announces Release of the SIAC Investment Arbitration Rules

Further to our previous post the Singapore International Arbitration Centre (“SIAC“) announced on 30 December 2016 the official release of the first edition of its Investment Arbitration Rules (“SIAC IA Rules 2017“), a specialised set of rules to address the unique issues present in the conduct of international investment arbitration. The SIAC IA Rules 2017 came into effect on 1 January 2017. A copy of the rules can be found here.

Mr Gary Born, President of the SIAC Court of Arbitration, commented that the rules “contain significant modifications to the SIAC Rules 2016 to reflect the special features and concerns arising in arbitration proceedings involving States, State-controlled entities and intergovernmental organisations. Both States and investors alike can be confident that, in resolving investment disputes under the SIAC IA Rules, they will be provided with a neutral, balanced, transparent and efficient procedural framework that addresses issues that ordinarily arise in international investment arbitration law. The launch of the SIAC IA Rules is yet another offering in keeping with SIAC’s standing as a global international arbitral institution.”

WHAT ARE THE KEY HIGHLIGHTS?

• Appointment of Arbitrators by the Court and Appointment of an Emergency Arbitrator (Rule 8 and Schedule 1) – A default list procedure for the appointment of the sole or presiding arbitrator and an opt-in mechanism for the appointment of an Emergency Arbitrator.

• Challenge of Arbitrators (Rule 11 and Rule 12) – Strict timelines on challenges to arbitrators (28 days) with built-in discretion for the arbitration to proceed during the challenge.

• Early Dismissal of Claims and Defences (Rule 26) – A procedure for early dismissal of claims and defences on the basis that a claim or defence is:

  • manifestly without legal merit;
  • manifestly outside the jurisdiction of the Tribunal; or
  • manifestly inadmissible.

• Third-Party Submissions and Third-Party Funding (Rule 24, Rule 29 and Rule 33) – Provisions for submissions by non-disputing parties and to enable the Tribunal to order the disclosure of third-party funding arrangements and to take such arrangements into account when apportioning costs.

• Draft Award (Rule 30) – Timelines for the closure of proceedings and the submission of the draft Award (not later than 90 days).

• Confidentiality and Publication (Rules 37 and 38) – Provisions relating to confidentiality and the discretionary publication of key information relating to the dispute.

Hong Kong Court Shows Zero Tolerance for Unmeritorious Applications to Set Aside Arbitral Awards

In Arjowiggins HKK2 Limited v X Co [2016] HCCT 53/2015, the Honourable Madame Justice Mimmie Chan of the Hong Kong Court of First Instance gave short shrift to an application for setting aside an HKIAC award on technical and procedural grounds that she “dismissed as totally without merit.”

Background

Arjowiggins HKK2 Co Ltd (the “Claimant”) entered into a joint venture agreement in October 2005 (the “JV Agreement“) with X Co (the “Respondent”) to set up a company for the purpose of manufacturing paper products in China (the “Company”).  Under the JV Agreement the parties warranted to enter into “Related Contracts” to ensure the provision of a stable supply of water, steam, electricity, and treatment of sewerage.  To this end a separate contract was negotiated in which the Respondent agreed to supply steam to the Company (the “Steam Supply Contract“).  The JV Agreement provided that the governing law would be that of the PRC, while the arbitration clause provided for arbitration in Hong Kong in accordance with the Arbitration Rules of the Hong Kong International Arbitration Centre (“HKIAC Rules”).

Disputes duly arose in relation to the Steam Supply Contract which gave rise to proceedings in Mainland China, and in June 2010 the Weifeng Intermediate People’s Court granted an application by the Respondent to wind up the Company. Subsequently in October 2012 the Claimant commenced arbitration on the grounds that the Respondent had failed to supply steam in accordance with the JV Agreement and that said agreement was breached when the Respondent wound up the Company without unanimity of all its directors.  The majority of the arbitral tribunal found in favour of the Claimant.  The Respondent applied to the Hong Kong Court of First Instance for the award to be set aside on three predominantly technical and procedural grounds, all of which were rejected in no uncertain terms by Chan J.

Reasoning

(1) Validity of the Agreement

The Respondent’s expert argued that because the arbitration clause did not explicitly identify HKIAC as the institution of arbitration, stating merely that HKIAC Rules applied, the agreement was void under PRC law.  However, Chan J agreed with counsel for the claimant that upon detailed construction of HKIAC rules it was abundantly clear that the parties had intended HKIAC to be the institution of arbitration; the judge pointed out that even the model arbitration clause suggested by HKIAC does not explicitly refer to it as the “institution of arbitration”.  Moreover, Chan J criticised the independent expert as failing in his duty to the court by simply rearguing the case advanced by the Respondent at the Arbitration instead of assisting the court in the specialist area of PRC law.  The Court reiterated that under Article 4 of the Model Law as adopted by s.11 of the Arbitration Ordinance (Cap. 609), which is mirrored by Article 28 of HKIAC rules, if a party proceeds without stating its objection without undue delay it shall be deemed to have waived its right to object to the conduct of the arbitration.  The Respondent had participated fully in the arbitration without objecting; therefore the Court held the Respondent had waived its right to object.

(2) Jurisdiction of the Court

In relation to the Claimant’s argument that the winding up of the Company constituted a breach of the JV Agreement, the Respondent argued that as the winding up order had already been made by PRC courts, then by virtue of res judicata the arbitral tribunal had submitted to the jurisdiction of the PRC courts and thus had no jurisdiction to consider the issue of damages resulting from the winding up of the Company.  The Court rejected this argument and emphasised the fact that in addition to not objecting to the Tribunal’s jurisdiction earlier, the Steam Supply Contract was made between the Company and the Respondent, whereas the JV Agreement on which the arbitration was based was between the Respondent and the Claimant; in other words the parties, contracts and ensuing rights and obligations are separate and distinct.  Chan J described the undisputed point that only PRC courts had jurisdiction to wind up the joint venture under PRC Company Law as “totally irrelevant … to the arbitrability of the matters submitted to the Tribunal in the Arbitration”.

(3) Constitution of the Tribunal

The arbitration clause in the JV Agreement provided that each party would appoint one arbitrator, and these two arbitrators would agree to appoint a third arbitrator. In the event that a party failed to appoint or the party-appointed arbitrators could not agree on the third arbitrator within 60 days of the referral of the dispute to arbitration, then the Chairman of HKIAC would appoint that arbitrator.  The Respondent sought to rely on a narrow technical argument that the arbitral tribunal was improperly constituted because in the absence of the Respondent appointing its own arbitrator an appointment had been made by the Council as distinct from the Chairman of HKIAC.  In rejecting this submission Chan J noted that the Chairman is part of the Council that made the appointment and that no previous objections were raised.

For the avoidance of doubt Chan J stated that “[o]pposition to enforcement and recognition of awards based on unmeritorious technical points or minor procedural complaints have always been viewed with disfavour by the Hong Kong courts.” Applying the test outlined by Tang VP in the Court of Appeal authority of Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1, “the conduct complained of must be serious, even egregious” before an award can be set aside on procedural grounds.  Chan J clarified that on the facts of this case, even if there was an issue with the composition of the arbitral tribunal, the Respondent had not suffered prejudice and due process had not been undermined as a result.

Orders

Chan J dismissed the Respondent’s application to set aside the Award as “totally without merit”, awarding costs to the Applicant on the highest indemnity basis, including certificate for two Counsel at trial.

Comments

The strident criticisms in the judgment of Mimmie Chan J can be interpreted as reinforcing the pro-arbitration stance of Hong Kong courts, whose role is to exercise only supervisory jurisdiction over arbitral awards to prevent grave procedural errors and injustice rather than providing an alternative forum for appeal or for attempts to have a case reheard. In this way, the case is on all fours with another recent decision of Chan J in the case of Sun Tian Gang v Hong Kong and China Gas (Jilin) Ltd [2016] HKEC 2128.  If technical arguments are advanced as grounds for setting aside an arbitral tribunal’s award the threshold is clearly very high.  As such, the Arjowiggins case is another reminder that objections must be made in a timely manner without delay during the arbitral proceedings.  Finally, the costs order serves as a reminder that the court can impose severe cost sanctions on unmeritorious applications to set aside arbitral awards.

CETA paves the way for Investment Court System

After seven years of negotiations, the European Union (EU) and Canada signed the Comprehensive Economic and Trade Agreement (CETA) on 30 October 2016. One innovative yet controversial aspect of CETA is the establishment of an international court to resolve investor-State disputes under the Agreement. As a result of demands by Belgium’s regional Walloon government, which previously threatened to block the Agreement, the introduction of this court has been deferred until the Court of Justice of the EU determines its compatibility with EU law.  Nevertheless, CETA marks the first time that the investment court proposed by the EU has been adopted in a final treaty, in response to various criticisms of the investor-State dispute settlement mechanism (ISDS).

Why is CETA moving away from “conventional” ISDS?

The current impetus can largely be attributed to the sovereign and public backlash against ISDS as it currently exists.  The proliferation of investment treaty claims (with 250 such arbitrations currently pending) and proposed “mega-regional” trade deals such as CETA, the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnerships (TPP) have cast the spotlight on ISDS.  Critics, including civil society groups and law makers, have argued:

  • ISDS is investor-friendly and there exists conflict of interest or bias on part of arbitrators, many of whom are also arbitration practitioners.  While statistics from the UN Conference on Trade and Development tell a different story – namely, that most disputes are resolved in favour of States – the perception of bias is real.
  •  ISDS has a chilling effect on new regulatory measures because the threat of investment claims – such as Vattenfall’s pending $4.6 billion claim against Germany arising out of the latter’s phase-out of nuclear power in the wake of the Fukushima nuclear disaster in Japan, and Philip Morris’ claims against Uruguay and Australia over plain tobacco packaging laws intended to reduce the rate of smoking – could discourage governments from adopting new regulations on health, environment, labour relations, etc.
  • States also object to the impact of investor claims on the public purse, as the average cost of defending an investor claim is estimated at $4.5 million – and may be much higher – with no guarantee of recovering costs even if successful.

In light of these concerns, several States, primarily in Latin America and Europe, have withdrawn from the ISDS system, either by renouncing the ICSID Convention or terminating investment treaties.

The European Commission sees an investment court as a compromise, addressing many of the criticisms while keeping States from turning away from ISDS entirely.  Having first proposed the idea in May 2015 in a concept paper, which it later submitted as a final proposal in November 2015, the European Commission’s ultimate aim is a multilateral, multi-treaty court presiding over investment disputes.

How does the EU’s proposal of an investment court differ from “conventional” ISDS?

Building upon the WTO model and pro-transparency trends in arbitration, the investment court provides several notable features, including:

  • A two-tier system consisting of a first instance tribunal and an appellate tribunal, which is authorized to set aside awards based not only on grounds for annulment outlined in the ICSID Convention, but also additional grounds such as errors of law and manifest errors of fact.
  • A first instance tribunal composed of judges randomly selected from a roster of 15 members who are prohibited from acting as counsel, party-appointed expert, or witness in an investment dispute during their terms.  An appellate body whose composition will be decided at a later stage by an inter-government committee; the European Commission’s 2015 proposal calls for six members, with three randomly selected to hear each appeal.
  • Full transparency with proceedings and key documents publicly available, in line with (and in some respects going beyond) the UNCITRAL Transparency Rules.
  • “Loser pays” system under which the losing party will bear the costs of arbitration, as well as authority of the tribunal to reject frivolous claims on a summary application.
  • Tribunals’ mandate to control the length of proceedings by requiring it to render an award within 24 months of the claim being submitted and explain any delay to this timeframe.

The EU and Canada hope that a permanent roster of pre-selected first instance tribunal members will strengthen the independence and impartiality of arbitrators, and that an appellate mechanism will lead to greater consistency in decisions.  The provisions on costs and summary judgment aim to shift the balance in favour of States.

What are the next steps?

Though the ink may have dried on CETA, an investment court is still a long way from fruition.  As a result of concessions to the Walloon government, the proposed investment court must pass two hurdles before ever holding court.

First, Belgium will request a ruling from the Court of Justice of the EU (CJEU) on the compatibility of an investment court with EU law.  The extent to which the investment court can consider EU law – which is permitted under Article 8.31(2) of CETA, providing that the court “may consider, as appropriate, the domestic law of the disputing Party as a matter of fact” – may be particularly problematic, though any such consideration of EU law by the investment court would not be binding on the CJEU. The relationship between ISDS and EU law is a familiar theme for the CJEU, which has also been requested to give its opinion on the EU’s competence to enter the proposed EU-Singapore free trade deal, as well as the compatibility of intra-EU BITs with EU law (a point of contention not only for EU Member States, but also for the European Commission which has repeatedly called for the termination of existing intra-EU BITs on the basis that they are incompatible with EU law).

And second, the investment court will be excluded from the provisional application of CETA, meaning that it cannot come into effect until ratified by some 38 national parliaments and regional assemblies across the EU.  Already, some political parties and pressure groups, which see the investment court as merely the status quo in disguise, are campaigning against it.  Belgium’s regional governments have indicated that they will not ratify the ISDS provisions without further details on the code of conduct for tribunal members, the function of the appellate tribunal, and rules on easing the financial burden on small and medium enterprise investors.

Should the investment court overcome these obstacles, practitioners, investors and governments will be watching keenly to see how the new system operates in practice.  The Commission intends to expand its proposal to TTIP and other treaties, with a multilateral court as the end goal.

French Conseil d’Etat outlines its power to set aside an international arbitration award

On 9 November 2016, the French supreme administrative court (Conseil d’Etat) affirmed its power to review international arbitration awards arising from certain public law contracts, while the review of arbitral awards traditionally falls within the jurisdiction of Civil courts. In this decision, the Conseil d’Etat partially set aside an ICC award arising out of a public law contract, rendered in a Paris-seated arbitration, on the basis that it had violated a mandatory rule of administrative law. At the same time, however, the Conseil d’Etat proceeded to limit the scope of this review power.

The dispute arose from a 2004 contract awarded by Gaz de France (at that time a public agency) to STS (a construction consortium) to construct a liquefied natural gas terminal on the French Mediterranean coast. Gaz de France (now Engie) had since transferred the contract to its subsidiary Fosmax.

In accordance with the arbitration clause, a dispute arising out of a delay in the performance of STS’ obligations was submitted to an ICC tribunal. The tribunal applied French private law, and found mostly for STS against Fosmax. Fosmax subsequently applied to the Conseil d’Etat seeking annulment of the award on the basis that public law should have been applied.

The court accepts jurisdiction, but limits the nature and scope of potential review

First, the Conseil d’Etat decided that it had jurisdiction to review the award, confirming its power to review arbitral awards rendered in France, arising out of certain public contracts involving a French public entity and carried out in France, such as public procurement contracts. It thus confirmed the exception to the rule under which international arbitration awards should generally be reviewed by Civil courts.

Secondly, the Conseil d’Etat defined the strict limits of its power to review arbitral awards.

When reviewing an award, the Conseil d’Etat must first verify the lawfulness of the arbitration agreement. It then enumerated the only procedural grounds on which an award could be set aside: if the tribunal erred in the determination of its jurisdiction; if the tribunal was improperly constituted; if the tribunal exceeded its powers; if it failed to give reasons; if it failed to respect due process; or if there was a breach of public policy. The Conseil d’Etat also defined the public policy grounds, providing further limits to the review: if the object of the contract is illegal, if the consent of the parties was severely flawed, or if the award disregarded mandatory rules specific to French public entities.

In a significant departure from French civil procedure, the Court found that it could decide on the merits of the case if the award were to be set aside. However, this could only be done with the consent of the parties.

In the case at hand, the Conseil d’Etat found that although the ICC tribunal had erred in applying private law, this did not fall within one of the limited grounds for annulment it had enumerated. However, it also found that the tribunal had disregarded a mandatory rule of administrative law allowing a public entity to claim for costs for instructing a third party to carry out the work required due to a breach. Therefore, the tribunal had wrongly rejected Fosmax’s claim for payment by STS of such costs.

Similar review to the civil system

The Fosmax decision confirms that international arbitral awards involving certain public law contracts can be subject to the control of the Conseil d’Etat. In substance, however, the limited grounds for annulment are almost identical to those applied by civil courts, albeit with the addition of a specific requirement for the tribunal to give reasons for its decision.

The Conseil d’Etat‘s power to potentially review on the merits appears more controversial, being contrary to the general conception applied by French Civil courts of international arbitration awards as part of an international legal order, beyond a national courts’ review. However, this is limited to cases where consent exists, representing the parties’ freedom of choice, so any practical impact is likely to remain limited.

In sum, the decision brings clarification in the occasionally uncertain distinction between the public and private law French court systems. In practice, the limits on the Conseil d’Etat‘s jurisdiction implies that its reviews of arbitral awards are likely to remain rare. Furthermore, the general principles of review adopted are similar to those of the French civil courts – thus reinforcing the general approach of non-interventionism in the arbitral process.