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International Arbitration News, Trends and Cases

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.

What the International Arbitration Bill, 2016 will mean for arbitrations in South Africa

During the next few months, the International Arbitration Bill, 2016 will be presented to the South African National Assembly.

The Bill, once enacted, is set to place South Africa on the main international arbitration stage by aligning the administration of arbitrations in South Africa to the Model Law of the United Nations Commission on International Trade Law (UNCITRAL).

Previously, arbitrations were subject to the Arbitration Act (Act No. 42 of 1965), unless otherwise agreed.

In terms of the Bill, any international commercial dispute which the parties have agreed to submit to arbitration under an arbitration agreement, and which relates to a matter which the parties are entitled to dispose of by agreement to be determined by arbitration will be administered under the UNCITRAL model, subject to the exclusions listed under clause 7.

Clauses 16, 17 and 18 of the Bill incorporate the wording of the Recognition and Enforcement of Foreign Arbitral Awards Act, 1977, which was a stand-alone piece of legislation, directly into the Bill. The applicability of the Recognition and Enforcement of Foreign Arbitral Awards Act will be repealed in its entirety once the Bill comes into effect as legislation.

The applicability of the Arbitration Act 42, of 1965 which has been the governing statute in respect of arbitrations for 51 years, is excluded in section 4 of the Bill. The Bill provides that subject to subsection (2), the Arbitration Act (Act No. 42 of 1965), is not applicable to an arbitration agreement, arbitral award or reference to arbitration covered by this Act. Section 2 of the Arbitration Act, 1965 (Matters not subject to arbitration) applies for purposes of Chapter 3 of the Bill.

The Bill, subject to the provisions of section 12 of Promotion and Protection of Investment Act, 2015, binds public bodies and applies to any arbitration in terms of an arbitration agreement to which a public body is a party.

Any international commercial dispute which the parties have agreed to submit to arbitration under an arbitration agreement and which relates to a matter which the parties are entitled to dispose of by agreement may be determined by arbitration, and will be subject to the application of the Bill.

Such dispute will be excluded only where the dispute is not capable of determination by arbitration under any law of the Republic; or the arbitration agreement is contrary to the public policy of the Republic.

Arbitration may also not be excluded solely on the ground that an enactment confers jurisdiction on a court or other tribunal to determine a matter falling within the terms of an arbitration agreement.

According to clause 12, parties to an arbitration agreement may refer a dispute covered by the arbitration agreement to conciliation, before or after referring the dispute to arbitration, subject to the terms of the agreement. Conciliation is defined as including mediation.

The parties to an arbitration agreement who intend to settle their dispute by conciliation may, subject to the Bill, agree to use the UNCITRAL Conciliation Rules set out in Schedule 3.

The Bill also grants arbitrators immunity and their institutions and representatives for acts or omissions arising during the course of the discharge or purported discharge of that arbitrator’s functions as arbitrator, unless the act or omission is shown to have been done in bad faith.

These changes are deemed necessary as it brings South Africa’s arbitration laws in line with international norms and standards. The force of law will still be overseen by the executive powers within South Africa but the arbitral procedures between international parties will be governed by the laws outlined in UNCITRAL.

The Bill aims to promote the uniformity of national laws pertaining to international arbitration proceedings. The passing of this Bill would improve the access to justice for companies doing business outside the country and foreign companies in South Africa and an essential tool for doing business across borders; this is seen as one of the Department of Trade and Industry’s motives behind the Bill being promulgated into legislation. Besides the Bill aligning South African international arbitration law with international best practice it should inter alia establish South Africa as a venue of choice for international arbitrations in Africa and bring in an influx of foreign spending in the country.

The enactment of the Bill is a positive for step forward for arbitration in South African and it will facilitate the desirability of using South Africa as a seat for international arbitrations in the future.

 

Heads up for 23 October 2016 – the new 12 month time limit for Indian seated arbitration

In October 2015 India’s arbitration law underwent major changes with the enactment of the Arbitration and Conciliation (Amendment) Act 2015 (“Amendment Act“).  One of the most controversial provisions in the Amendment Act was the introduction of a 12 month time limit within which an arbitral award must be rendered (section 29A).

The Amendment Act

According to section 29A all arbitrations seated in India commenced after 23 October 2015 are required to have a final award issued within 12 months of the appointment of the tribunal. For parties who have commenced an Indian seated arbitration since the Amendment Act was passed, it may therefore become necessary to consider applying for an extension if it looks likely that a final award will not be issued within the 12 month time limit.

While parties may agree to extend this period by up to six months, there is no guidance in the Amendment Act as to when or how the parties may make such application. Furthermore, if a final award is not rendered within the 12 month period (or within a 12 month + six month extension period) the arbitration will be terminated unless the period is extended by the Indian courts. The Amendment Act states that for the court to extend the time period there must be “sufficient cause” and the extension will be on “such terms and conditions” as the court deems appropriate.  Again there is little guidance in the Amendment Act as to what may constitute sufficient cause or the possible terms and conditions.

In granting an extension, and if the court finds that the delay is attributable to the arbitral tribunal, the court may also:

  • Order a reduction of the fees of the arbitrator(s) by up to 5% for each month of the delay (section 29A(4)); and
  • Substitute any arbitrator the court considers responsible for the delay with a replacement arbitrator, and have the proceedings continue from the stage already reached in the arbitration and on the basis of the evidence and material already on record (section 29A(6)).

Furthermore, if the court finds that one or more of the parties is responsible for the delay, the court may also impose cost penalties on the dilatory party (section 29A(8)).

Comment

For parties who have commenced an India seated arbitration since 23 October 2015, they should consider whether they will need to apply for a six month extension or run the risk of having the proceedings terminated. How freely the Indian courts will allow extensions to the Amendment Act’s 12 month time limit remains to be seen, however parties may wish to err on the side of caution and seek to agree to an extension before the expiry of the initial 12 month time limit, or run the risk of an award being set aside by the Indian courts or refused enforcement by an enforcement court.

Delay is a common complaint about arbitration, particularly in India, and this measure is intended to address it. To this extent section 29A is welcome. However it may open the door to questions about the status of awards issued out of time, both in India and in the New York Convention countries where enforcement is sought. It may also prove difficult in practice to achieve the deadline in complex cases, or where one party is engaged in delaying tactics. This may make extensions of time the norm rather than the exception.

Macanese Investor Succeeds in Reversing Singapore High Court’s Decision on Jurisdiction in its BIT Claim

A Macanese investor, Sanum Investments Ltd (“Sanum“), has successfully appealed a Singapore High Court decision on a tribunal’s jurisdiction to determine Sanum’s claims under the bilateral investment treaty (“BIT“) between the People’s Republic of China (“China“) and the Lao People’s Democratic Republic (“Laos“).

The Court of Appeal’s decision in Sanum Investments Ltd v Government of the Lao People’s Democratic Republic [2016] SGCA 57, which was handed down on 29 September 2016, is discussed below.

Background

While Macau was under Portuguese rule, the China-Portugal Joint Declaration (“Declaration“) was signed in 1987, which provided that Macau would be handed over to China in 1999.

China and Laos signed the BIT in 1993 but the parties did not expressly deal with the BIT’s applicability to Macau after the handover.

In 2007, Sanum formed a joint venture with a Laotian entity for investment in the gaming and hospitality industry in Laos. Disputes between Sanum and the Laotian government subsequently arose.

Sanum commenced arbitration against Laos on 14 August 2012 under the BIT, alleging, amongst other things, that the Laotian government imposed “unfair and discriminatory taxes” on Sanum.

An eminent tribunal with extensive experience of investor state cases was constituted under the UNCITRAL Rules and Singapore was designated as the seat of arbitration. Laos disputed the Tribunal’s jurisdiction on two main grounds:

  1. The BIT did not extend to protect a Macanese investor; and
  2. In the alternative, Sanum’s claims are not arbitrable under the BIT as they are not a “dispute involving the amount of compensation for expropriation [which] cannot be settled through negotiation“.

The Tribunal dismissed Laos’ jurisdictional challenges on 13 December 2013. Laos appealed to the Singapore High Court under section 10(3) of the International Arbitration Act (Cap 143A) which allows for appeals on points of jurisdiction. On 20 January 2015, the High Court overruled the Tribunal.  Sanum then appealed to the Court of Appeal on 20 July 2015.

Court of Appeal’s decision

A five-member Court of Appeal overturned the decision of the High Court and upheld the Tribunal’s finding that it had jurisdiction to hear Sanum’s claims. In doing so it applied the customary international law rule known as the “moving treaty frontier” rule (“MTF Rule“) which “presumptively provides for the automatic extension of a treaty to a new territory as and when it becomes a part of that State“. The Court ruled, inter alia, that this presumption was not displaced because the handover of Macau was a foreseeable event at the creation of the BIT given that the Declaration predated the entry into the BIT.

Applying the public international law principle of the critical date doctrine, the Court of Appeal also did not accord any evidentiary weight to diplomatic notes exchanged between China and Laos in 2014, in which the Chinese embassy in Laos agreed that the BIT did not extend to Macau. The Court considered that no weight should be put on those notes as they came into existence after the critical date, being the date on which the arbitration proceedings were initiated, and they were adduced to contradict a position which was established by the pre-critical date evidence – namely that the BIT did apply to Macau.

The Court of Appeal also rejected the Laotian government’s narrow interpretation of the BIT by which Laos contended that the sole type of dispute which may be resolved by arbitration was the amount of compensation for expropriation. Taking a broader and more investor-friendly construction of the BIT, the Court ruled that any claim which includes a dispute over the amount of compensation for expropriation may be submitted to arbitration.

The Court also considered the issue of de novo review of the Tribunal’s award on jurisdiction. Notwithstanding the Tribunal’s expertise on this issue, the Court of Appeal considered that the High Court was not required to defer to the findings of the Tribunal. It concluded that it was “not bound to accept or take into account the arbitral tribunal’s findings on the matter”, irrespective of the arbitrators’ “eminence”, and that the “cogency and quality of their reasoning” should instead inform the lower court’s evaluation of the matter. The Court of Appeal further held that as Singapore was the seat of the arbitration, the Singapore courts were “not only competent to consider these issues, but… obliged to do so“.

Comment

The Court of Appeal’s decision may be seen as pro-investor.

Although Singapore is not a party to the relevant BIT, its courts were prepared to reject the views of one of the signatories (expressed in the diplomatic notes) as to its construction in favour of applying public international law norms by way of the MTF Rule and the critical date doctrine. The same observation holds to its broad and inclusive construction of the BIT.

Its ruling on the de novo standard of review is a welcome confirmation of the Singapore courts’ role as the competent court in not only commercial arbitrations, but also investor-state arbitration. It is a welcome sign that the Court adopted its own path to jurisdiction and did not defer to the eminent international arbitration names in the Tribunal (though it did ultimately reach the same conclusion on jurisdiction).

Singapore is undoubtedly keen to welcome more investor-state cases. The Singapore International Arbitration Centre is poised to release its first set of investment arbitration rules in due course. The Court’s appointment of J Christopher Thomas QC of the National University of Singapore and Locknie Hsu of Singapore Management University to make amicus curiae submissions reflects a desire to maintain the highest standards of jurisprudence.

It is reflective of the potential difficulties with investor-state arbitration that this matter – filed in 2012 in one of the world’s most arbitration friendly seats – has only reached the jurisdiction stage.   Those seeking recourse in investor state arbitration need to be prepared for what may be a long game.

English High Court Indicates New LCIA Rules Limit Court’s Power To Grant Interim Relief

Gerald Metals SA V The Trustees of the Timis Trust & others [2016] EWHC 2327

Summary

In an important recent decision on the intersection between emergency arbitrator provisions and applications to court for interim relief, the English High Court held that it was only entitled to provide interim relief to a party to an arbitration agreement where either an emergency arbitrator or an expeditiously formed tribunal were unable to provide the requested relief.  The court also held that there was no substantive distinction between the various tests for interim relief in the LCIA Rules and section 44 of the Arbitration Act 1996, suggesting that if the LCIA Court denies an application for interim relief, the court will too.

The facts

The claimant, Gerald Metals, applied to the LCIA Court for both an emergency arbitrator (under LCIA Rule 9B) and expedited formation of the arbitral tribunal (under LCIA Rule 9A), on the basis that it needed an urgent interim freezing order.  The LCIA Court declined both applications and so the claimant applied to the High Court for the same relief under section 44 of the Arbitration Act 1996.

The judgment

Leggatt J declined to grant the application on the basis that the court could only provide such relief where the powers of the emergency arbitrator or tribunal were “inadequate, or where the practical ability is lacking to exercise those powers“.

He also held that the tests under the LCIA Rules for (a) the appointment of an emergency arbitrator (“in case of emergency“) and (b) the expedited formation of an arbitral tribunal (“exceptional urgency“) were effectively the same as the test of “urgency” under section 44 of the Arbitration Act 1996, stating that any other interpretation would be “uncommercial and unreasonable“.  The fact that the LCIA Court had declined the claimant’s applications, therefore, made it unlikely that the court would grant them.

Comment

On the one hand this decision can be viewed as an attempt by the court to be arbitration-friendly and not allow parties a ‘second bite at the cherry’ once the LCIA Court has denied an application for interim relief.

On the other hand, the judge’s comments appear to restrict the court’s ability to assist parties to an arbitration by forcing parties to turn first to the LCIA ’emergency provisions’.  This is arguably not what the parties will have had in mind when choosing the LCIA Rules which expressly state in LCIA Rule 9.12 that “[the emergency arbitrator provisions] shall not prejudice any party’s right to apply to a state court or other legal authority for any interim or conservatory measures before the formation of the Arbitration Tribunal; and it shall not be treated as an alternative to or substitute for the exercise of such right” (emphasis added).  The judge dismissed the relevance of this provision, stating that it was only relevant to the right to apply and not to the substance of the powers.  This could be considered an overly restrictive view of this provision and one which may dampen parties’ enthusiasm for the emergency arbitrator provisions (as discussed below).

However, it was common ground between the parties that the application of the LCIA ’emergency’ provisions would not prevent a party applying for interim relief from the court where a matter is “so urgent” that a party cannot wait for an emergency arbitrator, or where an application needed to be made without notice.  While this suggests a continued role for the courts in such a situation, it is not yet clear what situations will be classified as “so urgent” to allow a party to apply straight to court.

Should parties now opt-out of emergency arbitrator provisions under LCIA Rule 9.14?

The short answer is that it will depend on the parties’ decisions regarding the seat of the arbitration and the governing law of the contract, as well as the parties’ home jurisdictions and the subject matter of the dispute – the right to seek interim relief from the court is often viewed as important for IP related disputes, for example.  In circumstances where recourse to the courts is crucial, opting out of the emergency arbitrator provisions may prevent the situation that arose in the present case.

If, however, there is a possibility of a party requiring interim relief in a jurisdiction where the local courts do not have such a concept, such as Indonesia, or from courts where any interim relief will not be granted efficiently, then there may be value in maintaining the option of recourse to an emergency arbitrator.

Next steps

We understand that the judgment is being appealed, although it is not yet known on what grounds.  While the decision in the case was surely correct on the facts (i.e. Gerald Metals should not be granted a freezing injunction), the Court of Appeal will likely wish to examine the reasoning of the judge in relation to LCIA Rule 9.12.

Romania to terminate its intra-EU Bilateral Investment Treaties

On 8 September 2016, the President of Romania agreed to submit to the Romanian Parliament draft legislation approving termination of 22 bilateral investment treaties that Romania concluded with other EU Member States (“intra-EU BITs”).  The draft legislation had been initiated on 10 August 2016 by the Romanian Government in an expedited legislative procedure.

The explanatory note to the draft legislation quotes the European Commission’s view that intra-EU BITs are incompatible with EU law and refers to the infringement proceedings initiated on 18 June 2015 against five EU Member States, including Romania, requesting them to terminate their intra-EU BITs.  The note further explains that since 2011 Romania has approached a number of EU Member States with a view to terminate intra-EU BITs by consent.  However, the responses were not favorable.  Therefore, the Romanian Government considered it appropriate to proceed with terminating all of its intra-EU BITs.

Romania’s initiative comes against the background of an ongoing discussion on the future of BITs in the EU.  To date only three EU Member States (the Czech Republic, Ireland, and Italy) decided to terminate all or selected intra-EU BITs.  However, in 2016 a number of developments took place:

  • In February, Poland announced that it considers terminating its BITs (see our blog entry here).  An inter-departmental team created in May 2016 is charged with reviewing and analyzing Polish BITs (including 23 Polish intra-EU BITs).  It is expected to issue a recommendation to the Council of Ministers.
  • In April, Austria, Finland, France, Germany, and the Netherlands issued a non-paper proposing the conclusion of an EU-wide agreement that would replace pre-existing intra-EU BITs.
  • In May, Denmark was reported to propose to its counterparts terminating existing Danish intra-EU BITs.
  • Also in May, it was announced that the Court of Justice of the European Union was seized with a request for a preliminary ruling from the German Federal Court of Justice to decide whether arbitration under an intra-EU BIT runs counter to EU law.

If and when the law on termination of Romanian intra-EU BITs is adopted and enters into force, it is unlikely that any subsequent termination of BITs will have immediate effect.  Unless Romania’s counterparts consent to terminate the BITs in question, Romania will have to comply with the termination provisions provided therein.  Romania’s BITs such as, for example, those with Germany, the UK, and France would continue to remain in force until the expiration of 12 months from the date of the notice of termination.  Further, most BITs contain so-called “sunset clauses” which guarantee investment protection for several years after the treaty’s termination – 20 years in the case of Romania’s BIT with Germany, the UK, and France.  Although Romania may seek to shorten the length of post-termination investment protection, it cannot do so unilaterally, but would need to obtain the consent of the other contracting party to the BIT.

Investors in Romania should follow the events closely and ensure that their investments continue to be covered by investment protection guarantees, including, where possible, by investment treaties that will not be subject to termination.

One Step Forward, Two Steps Back – PRC Court refuses to enforce an ICC award on the ground of public policy

In Wicor Holding A.G. v. Taizhou Haopu Investments Limited (Civil Action (2015) Tai Zhong Shang Zhong Shen Zi No. 00004), the Taizhou Intermediate People’s Court refused to enforce an ICC award on the ground of public policy.

Facts

Taizhou Haopu Investment Limited (“Haopu“) entered into a joint venture agreement (“JVA“) with Wicor Holding A.G. (“Wicor“) in 1997, establishing a joint venture company (“JV“).  The parties agreed in the JVA to have their disputes arbitrated “in accordance with ICC mediation and arbitration rules“.  The JVA also provided that “if one party initiates the arbitration, the other party shall choose the seat of arbitration“.  In July 2011, Haopu commenced legal proceedings before the Taizhou Intermediate People’s Court (“IPC“) against Wicor, alleging that Wicor had breached the JVA by starting a similar business in competition with the JV.  The Taizhou IPC rendered a judgment in 2012 (“2012 Judgment“) declaring the arbitration agreement in the JVA invalid as it failed to specify an arbitral commission in breach of article 16 of the PRC Arbitration Law.  This conclusion was endorsed by the Supreme People’s Court (“SPC“).

Interestingly, the SPC, in confirming the Taizhou IPC’s decision, found that the law governing the JVA did not apply to the validity of the arbitration agreement. Relying on Article 16 of the Interpretation of the Supreme People’s Court concerning Some Issues on Application of the Arbitration Law of the People’s Republic of China, the SPC held that since the parties had neither agreed on the applicable laws governing the arbitration agreement, nor did they decide on a seat (since neither party had even applied for arbitration), the laws at the locality of the court (PRC laws) applied to determine the validity of the arbitration clause.  (The governing law of the JVA was PRC law, so the same result would have been reached if the SPC had decided that the governing law extended to the interpretation of the arbitration agreement.)

With respect to the failure to specify an arbitration agreement, the SPC found the reference to “ICC arbitration rules” to be insufficient to ascertain the relevant arbitral commission.

Wicor had started ICC arbitration against Haopu in November 2011 based on a different dispute arising from the JVA. As Haopu had failed to designate the seat, the ICC arbitral tribunal decided, in January 2012, on Hong Kong as the seat of arbitration.  The award was rendered in 2014 and Wicor sought to enforce it before the Taizhou IPC.  However, the Taizhou IPC refused to enforce the award on the ground of public policy.

Reasoning

Wicor argued that as the dispute arbitrated by the ICC arbitral tribunal was different from the dispute handled in the 2012 Judgment, and because the arbitration involved two private parties with no public interests, the Taizhou IPC should enforce the awards under the Arrangements of the Supreme People’s Court on the Mutual Enforcement of Arbitral Awards between the Mainland and the Special Administrative Region of Hong Kong. The Taizhou IPC rejected those arguments and found that the 2012 Judgment, which had ruled the arbitration clause to be invalid, had already taken legal effect.  Since the ICC award was rendered on the basis that the arbitration agreement was valid, enforcing the award would contradict the social and public interests of China. Haopu had also argued that the behavior of the ICC arbitral tribunal in regarding the arbitration agreement as valid had harmed the judicial sovereignty of China; the Taizhou IPC did not comment on this argument in its decision.

Comments

This case demonstrates the need for parties to unambiguously designate a “commission” to administer arbitration (see, e.g., the ICC model clause for China) in contracts having any nexus to China, even where the seat is not located in the PRC. In the present case, the failure to clearly designate a commission pursuant to the requirements of the PRC arbitration law had consequences not only for the case in which the 2012 Judgment was rendered, but also for the subsequent, unrelated arbitral proceedings in question.  The reasoning of the SPC in declaring the arbitration clause invalid appeared to be based on the circumstance that the arbitration commission could not be “ascertained” from the ICC arbitration rules.  The SPC’s decision was made on the basis of the 1998 ICC Rules (although there are also some obscure references to the 1988 rules in the referral from the Taizhou IPC).  It is doubtful whether the SPC could justify the same conclusion under the 2012 ICC Rules, since they provide, in Art 1(2), that the “[ICC] Court is the only body authorized to administer arbitrations under the Rules”.

While the result is not unexpected in light of previous, similar decisions such as the 2004 case of Züblin International vs. Wuxi Woke and the 2008 case of Hemofarm DD v. Jinan Yongning Pharmaceutical Co. Ltd (in which the public policy ground for refusal to enforce an arbitral award was used for the first time by the Chinese courts), it serves to add to the uncertainty surrounding the validity of arbitration clauses in arbitrations with a China nexus.  Consequently, despite positive developments in cases such as the 2013 case of Longlide Packaging v. BP Agnati, in which the SPC upheld the validity of an arbitration agreement providing for ICC-administered arbitration in China, the present case highlights the potential risks that still remain in arbitrations involving China and Chinese parties.