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International Arbitration News, Trends and Cases

The USMCA enters into force: a glimpse into its investment chapter

On July 1, 2020, the United States-Mexico-Canada Agreement (USMCA) entered into force, and replaced the North America Free Trade Agreement (NAFTA).

USMCA contains an investment chapter: Chapter 14. Like NAFTA, USMCA encompasses substantive protections as well as mechanisms to settle disputes arising out of violations of such investment protections. Chapter 14 does not apply to measures covered by Chapter 17 – Financial Services. Some of Chapter 14’s highlights include the following:

Chapter 14 applies only to the U.S. and Mexico

Although USMCA appears as a tri-partite treaty, Chapter 14 applies only to the U.S. and Mexico. In other words, Chapter 14 only protects Mexican nationals that invest in the U.S. and U.S. nationals investing in Mexico. However, existing investments in Canada and investments made by Canadian investors will be protected under the existing NAFTA regime for three (3) years after the USMCA goes into effect. Additionally, Mexico and Canada have concluded the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Thus, Mexican and Canadian investors/investments will benefit from the investment protections and dispute settlement mechanisms established in the CPTPP.

Two protection schemes

Chapter 14 protects investments as follows:

  • General Investments. Protected investors will benefit from the following substantive protections, regardless of the sector: (i) National Treatment1 (post-established investment), (ii) Most Favored Nation (post-established investment), and (iii) Direct Expropriation. The USMCA does not protect pre-established investment activities.
  • Covered Government Contracts. Investors that have a written agreement in a covered sector will benefit from the protections of the General Investments, plus: (i) Minimum Standard of Treatment, (ii) Transfers, (iii) Performance Requirements, (iv) Senior Management and Boards of Directors, and (v) Indirect Expropriation (even though the term “tantamount to expropriation” has been removed). Covered sectors include oil and gas production, telecommunications, transportation, certain infrastructure, and power generation.

Exhaustion of local remedies and statute of limitation

In sharp contrast to NAFTA, USMCA Chapter 14 expressly requires claimants to exhaust local remedies prior to initiating arbitration, except when “recourse to domestic remedies was obviously futile or manifestly ineffective.” Chapter 14 also requires claimants to obtain a final decision from respondent’s court of last resort or that thirty (30) months have elapsed from the date claimant initiated local proceedings.

Each system of protection grants different time limits for the submission of disputes to arbitration. In relation to General Investments, claimants should submit disputes to arbitration no more than four (4) years from the date on which claimant learned of the breach. With respect to Covered Government Contracts, no claims shall be submitted to arbitration if less than six (6) months have elapsed from the events giving rise to the claim and more than three (3) years have elapsed from the date on which the claimant learned of the breach.

Legacy Investment claims

Under USMCA, Annex 14-C, investments made during NAFTA’s life and those that remain when USMCA goes into effect will be protected under NAFTA for three (3) years after NAFTA’s end. Arbitrations that started under the provisions of NAFTA 1994 will continue and remain unaffected when the above term expires.

Changing of hats discussion

During the UNCITRAL thirty-fifth session, States expressed in the Report of Working Group III concerns regarding the conflict of interest created by some arbitrators acting with “triple” or even “quadruple” hatting. The USMCA, Annex 14-D, Article 6, provides that arbitrators need to comply with the IBA Guidelines on Conflicts of Interest and they must refrain from “changing hats;” that is, arbitrators cannot act as counsel, appointed expert, or witness in a pending arbitration under this Chapter. Further, challenges to arbitrators will be governed by the procedure set in the UNCITRAL Arbitration Rules.

No preamble

It is important to note that the USMCA does not contain a Preamble, like other recent FTAs involving the U.S., stating that the protections provided to foreign investors in the USMCA shall be no more substantial than those provided under U.S. or domestic law.

* * *

Other departures from the NAFTA text deserve some comment, but at this stage the main differences are pointed out above. We will be following up on this matter as it will have a huge impact on future investment proceedings. For more information, please contact one of our team members.

Force majeure claims in future waves of COVID-19: four key actions

As countries emerge from lockdown, talk turns to The Return of COVID-19. Here’s how to succeed in future force majeure claims and stop your projects becoming what sounds like a second-rate horror movie:

1. Decide COVID-19’s status as a force majeure event

Is a subsequent COVID-19 wave a new event or a continuation of the first?

The World Health Organisation still says COVID-19 is a pandemic. This might mean it’s a single continuing event. However, the project may be getting back to normal when it feels the impact. Read your contract and consider how the right to relief is defined. For example, the 2010 FIDIC Pink Book (but not the 1999 and 2017 Red, Yellow and Silver Books or the 2008 Gold Book) refers to performance of substantial obligations being prevented. This suggests a subsequent wave is likely to be a fresh event. Best practice is to send a new notice when you’re aware of the further impact of a subsequent wave.

2. Identify the event actually affecting performance

Is a subsequent wave not the event disrupting performance at all?

If the pandemic is the cause, then its impact depends where the project, labour force and supply chain are located. During the first wave, strategies differed across jurisdictions and there remains little consensus on the best approach. Some sites were allowed to continue to operate; others were closed and workers quarantined. Responses to subsequent waves are unlikely to be more coherent.

Alternatively, is the new event that is actually causing delay not the virus itself but the reintroduction of government restrictions (perhaps after a local outbreak in a workers’ dormitory) which require physical distancing and self-isolation, workplace closures or the suspension of transport links which usually provide free passage for people and materials?

Being clear which of these two broad categories of causal event you’re relying on means you can establish:

– the performance of which contractual obligations are affected by the event and the extent they are being prevented, hindered or delayed. Many contracts demand this level of substantiation. A by-product is a more tailored set of detailed records, which you must maintain to prove causation;

– when the event starts and stops affecting performance. Note that the end of one event as restrictions are lifted may herald the beginning of another notifiable event (such as the imposition of safe working rules when activity resumes). In your notice of an event ending, reserve your rights should it reoccur following subsequent waves (for example, the reinstatement of previously-issued stringent measures); and

– whether you have a claim at all – the contract wording is critical here: remember that the event may have made the project slow down and cost more, but not necessarily impossible; some contracts and jurisdictions require that the event be the sole cause of delayed performance to allow relief.

3. Work together to introduce precautions now

Although COVID-19 and related causes should meet stipulations in signed contracts that the event was unforeseeable, claims in subsequent waves will have a better chance of success where project participants can show they have learned lessons from previous waves. Underprepared employers and contractors may be seen not to have reasonably mitigated the impact of measures likely to be re-imposed in the near future in light of the disease’s ongoing presence. Many are encountering cross-border supply chain difficulties. Those higher up the chain may have little sympathy with contractors who have run into problems as a result of “just in time” arrangements.

Review working practices, which may involve thinking about dividing teams, providing personal protective equipment, and introducing hygiene products and sanitation facilities, temperature checking, control of access, and safe eating and sleeping accommodation. This exercise is fact sensitive and depends on the contract.

The gap between previous and subsequent waves is also significant. Employers can’t expect contractors to have done as much to avoid the effects of a second wave if it occurs weeks rather than months after the first. For example, masks may currently be hard to secure at short notice for certain site locations.

Project participants must communicate openly now and raise issues early as they decide what precautions are needed. Can you keep projects on track by performing contractual obligations unaffected by the event? Engage with supply chains to understand their contingency planning. This requires many organisations to bolster crisis management procedures and teams perhaps on a scale never seen before so that all options and alternative claims (maybe for disruption or changes in law) can be considered properly.

Whether there is positive collaboration or not, every party must comprehensively document how they carefully contemplated each option (such as alternative supplies and work forces) and why one was implemented over others. For example, local materials could be ruled out if they don’t comply with the contractually specified quality.

4. Realise solutions won’t be straightforward

Timely and accurate notices, honest communication and extensive records will improve your position, but parties will differ in how they view subsequent waves. Take whatever action you can now, but remember claims will play out against the backdrop of broader, unresolved factors like the pandemic’s course, the status of regulations and guidance, and policy decisions about the burden the private sector should bear.

STOP PRESS… ADJUDICATION STRENGTHENED

The UK Supreme Court has upheld the right to launch a statutory adjudication of a dispute under a construction contract at any time, even if the claiming party is insolvent. In Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25, the Court unanimously held that the insolvency set-off rule does not conflict with statutory adjudication – an adjudicator still has jurisdiction and the adjudication is not futile. This case significantly helps the construction supply chain during a period when cash flow is essential, whether or not insolvency is on the horizon, and should be persuasive in upholding similar regimes elsewhere.

FIDIC COVID-19 Guidance Memorandum

The rapid spread of COVID-19 has disrupted global commerce, destabilized the world’s leading economies and affected businesses and projects across industries. The construction industry is no exception. COVID-19 has materially impacted construction projects worldwide.

Since many of the construction projects are being delivered under FIDIC standard forms of contract, the International Federation of Consulting Engineers (“FIDIC”) has recently published its COVID-19 Guidance Memorandum (see here) outlining provisions in FIDIC’s various general conditions of contract relevant to different likely scenarios that may arise as a consequence of COVID-19.

The purpose of this Client Alert is to highlight the main take-aways from the Guidance Memorandum – the importance of notices and maintaining contemporary records (i), extension of time (ii), changes in laws (iii) and Force Majeure (iv).

Importance of notices and keeping track of contemporary records

Whatever issues Contractors or Employers worldwide might be facing, it is critical that contemporary records are maintained (preferably describing and documenting the ongoing situation and issues at hand) and notice obligations are fulfilled (describing the issue at hand in sufficient detail). This will be important for any negotiations between the parties or any other amicable solutions to a claim or a dispute, as well as any formal dispute resolution proceedings between the parties.

Extension of Time

Depending on the circumstances of each case, if a Contractor suffers from difficulties in mobilizing personnel due to health and safety concerns and/or obtaining Goods due to issues in the supply chain, it may resort to the remedies foreseen in Sub-Clause 8.4(d) of the Red Book 1999, the Yellow Book 1999, the Silver Book 1999 and the Pink Book, or Sub-Clause 8.5(d) of the Red Book 2017, the Yellow Book 2017 and the Emerald Book, and Sub-Clause 9.3(d) of the Gold Book. Namely, a Contractor may request an Extension of Time (“EoT”). No financial remedy is foreseen or guaranteed, and the entitlement to a financial compensation will depend on the circumstances of each case. To be entitled to an EoT on the basis of the listed provisions, the relevant FIDIC conditions of contract require that shortages in the availability of personnel or Goods are:

  • the Contractor has diligently followed the procedures laid down by the relevant public authorities;
  • these authorities delayed or disrupted the Contractor’s work; and
  • the delay and disruption was “unforeseeable”.

Changes in Laws

One of the reasons a Contractor might be entitled to an EoT is a change to the Laws of the Country where the works are being carried out (Sub-Clause 13.7 of the Red Book 1999, the Yellow Book 1999, the Silver Book 1999 and the Pink Book, or under Sub-Clause 13.6 of the Red Book 2017, the Yellow Book 2017, the Silver Book 2017, the Emerald Book and the Gold Book). These provisions also provide for an adjustment of the Contract Price if in particular the following prerequisites are met:

  • a change in the Laws of the Country (where the Site is located; where the Permanent Works are to be executed) after the Base Date (the date 28 days prior to the latest date for submission of the Tender);
  • affecting the Contractor in the performance of obligations under the Contract;
  • the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in the Laws; and
  • gives notice to the Engineer/Employer/Employer’s Representative (depending on the respective FIDIC standard form used).

The definition of Laws in the FIDIC standard forms of contract is quite broad and covers a wide range of legislation as well as regulatory actions from “any legally constituted public authority”. It therefore can apply not only to acts of parliament but also e.g. to decrees, rules or municipal orders.

Given the numerous health and safety measures by national governments and local authorities to tackle COVID-19, it might be worthwhile for Contractors to determine whether they are entitled to an EoT and/or an adaption of the Contract Price as a result.

Force Majeure/Exceptional Event

The existing situation caused by COVID-19 (but of course – depending on the specific circumstances of the case) might also qualify as a Force Majeure as defined under Sub-Clause 19.1 of the Red Book 1999, the Yellow Book 1999, the Silver Book 1999, or the Pink Book or Sub-Clause 1.1.14 of the Gold Book 1999 or an Exceptional Event as defined under Sub-Clause 18.1 of the Red Book 2017, the Yellow Book 2017, the Silver Book 2017 or the Emerald Book or under Sub-Clause 1.1.37 of the Gold Book.

A Force Majeure or an Exceptional Event is an event or circumstance which:

  • is beyond a Party’s control;
  • the Party could not reasonably have provided against before entering into the Contract;
  • having arisen, such Party could not reasonably have avoided or overcome; and
  • is not substantially attributable to the other Party.

Sub-Clause 19.1 and Sub-Clause 18.1 provide a list of examples, which do not include pandemics or measures by governments and local authorities. However, it is important to note that the list is non-exhaustive. Therefore, depending on the particular circumstances, COVID-19 still might qualify as a Force Majeure or an Exceptional Event if the above conditions are met. If there is no outright ban on construction activities, especially the third criterion might be difficult to meet. When the relevant health and safety measures are implemented, construction works might be more difficult albeit not impossible so that the COVID-19 event could be considered as overcome.

In case the above prerequisites are met, the affected Party – upon proper notification – is excused to perform obligations which are prevented by this Force Majeure/Exceptional Event (pursuant to Sub-Clause 19.2 of the Red Book 1999, the Yellow Book 1999, the Silver Book 1999 or the Pink Book, or Sub-Clause 13.2 of the Green Book 1999, or Sub-Clause 18.2 of the Red Book 2017, the Yellow Book 2017, the Silver Book 2017, the Emerald Book or the Gold Book). The notice has to be given within 14 days after the Party became aware (or should have become aware) of the relevant event or circumstance specifying it as well as the obligations/the performance of which the Party is or will be prevented.

The Contractor may also be entitled to an EoT for any resulting delay as per Sub-Clause 19.4 of the Red Book 1999, the Yellow Book 1999, the Silver Book 1999 or the Pink Book, or Sub-Clause 7.3 of the Green Book 1999 or Sub-Clause 18.4 of the Red Book 2017, the Yellow Book 2017, the Silver Book 2017, the Emerald Book or the Gold Book. Financial entitlements on the other hand seem less likely (except potentially in the Green Book 1999) since this requires that the event or circumstance is of the kind as the first four/five sets of examples in Sub-Clause 19.1 of the Red Book 1999, the Yellow Book 1999, the Silver Book 1999 or the Pink Book, or Sub-Clause 18.1 of the Red Book 2017, the Yellow Book 2017, the Silver Book 2017 or the Emerald Book. These only cover man-made events such as wars and terrorism whereas the COVID-19 pandemic would more likely qualify as an event similar to a natural catastrophe as described in the last set of examples in the respective provisions.

Arbitrating competition law disputes: U.S. and European perspectives

After the US Department of Justice’s victory in its first-ever arbitration of an antitrust matter, Hogan Lovells partners Meghan Rissmiller, Thomas Kendra and Christian Ritz ask if arbitration represents the way forward in competition law.

On 9 March, the US Department of Justice Antitrust Division announced its win in an arbitration over market definition related to the merger of aluminum manufacturers Novelis and Aleris. This case marks the first – but likely not last – time that arbitration has been used by the Antitrust Division to resolve a dispute. Given the DOJ’s expressed enthusiasm for the “flexible and efficient” arbitration mechanism, and Assistant Attorney General Makan Delrahim’s characterisation of arbitration as a potential “model for future enforcement actions”, we expect the Division to continue to use arbitration to resolve future antitrust disputes.

We take this opportunity to consider Novelis and its impact on the arbitrability of future antitrust disputes in the United States and compare the circumstances in that case with the use of arbitration in antitrust disputes under European Union competition law. While arbitration has traditionally played a marginal role in antitrust enforcement, Novelis and the European experience show that arbitration can nevertheless serve as an important support to antitrust enforcement. Indeed, it may even play a more significant role in competition law disputes in the future.

The background to the Novelis dispute

Novelis originated in a civil antitrust lawsuit that the DOJ filed in September 2019 in the US District Court for the Northern District of Ohio, seeking to challenge Novelis’s proposed acquisition of Aleris. The lawsuit alleged the acquisition would combine two of only four North American producers of aluminum auto body sheet (ABS), leading to the concentration of approximately “60 percent of total production capacity and the majority of uncommitted (open) capacity with Novelis.”

Prior to filing the complaint, the DOJ agreed with the parties to pursue binding arbitration “if the parties were unable to resolve the United States’ competitive concerns with the defendants’ transaction within a certain period of time.” The Antitrust Division can arbitrate disputes pursuant to the Administrative Dispute Resolution (ADR) Act of 1996 and the Antitrust Division’s implementing regulations. The implementing regulations provide specific guidance on the appropriate use of binding arbitration and allow for ADR to be used in merger reviews.

Under the arbitration agreement, the district court supervised fact discovery, after which the case was referred to arbitration to resolve the limited issue of product market definition. The DOJ argued the relevant product market should only include aluminum ABS, while Novelis and Aleris argued it should be broader to include steel ABS. As specified in the arbitration agreement, the district court entered a hold separate stipulation and order requiring Novelis to hold separate the business to be divested. The parties were permitted to close the rest of the transaction.

Following a ten-day arbitration, the arbitrator found in favor of the Antitrust Division, holding that aluminum ABS constitutes a relevant product market. As a result of the arbitration decision, Novelis must divest Aleris’s North American aluminum ABS operations. The company must also reimburse the DOJ for costs associated with the arbitration.

Following the DOJ’s victory, Delrahim touted the use of arbitration in this case, stating that “this first-of-its-kind arbitration proved to be an effective procedure for the streamlined adjudication of a dispositive issue in a merger challenge. As demonstrated in this case, arbitration has the potential to be a powerful dispute resolution tool in the right circumstances … ”

This brings into question the extent to which arbitration is or could be used as a competition law dispute resolution mechanism in other jurisdictions, notably in the EU.

The European perspective

The relationship between European competition law and European courts or outside tribunals for merger enforcement is somewhat different than that in the US, raising an interesting parallel between the Antitrust Division’s use of arbitration in Novelis and how the European Commission or national competition authorities in EU member states could use arbitration to settle disputes arising from or in the context of EU competition law enforcement.

Under EU competition law, while the Commission constructs European competition rules and monitors the proper application of these rules, it cannot refer cases to enforcement bodies (national courts or the Court of Justice of the European Union (CJEU)), nor to an arbitral tribunal. Rather, its own decisions resulting from its investigations are themselves binding, although such decisions may be appealed to the General Court of the EU, whose decisions might be appealed once more to the CJEU.

By contrast, to enforce a transaction in the US – either to seek to block a transaction via preliminary injunction or to finalize a consent decree under the Tunney Act procedure – the Antitrust Division must file an action in US federal court. Thus, a tribunal is always involved in US antitrust enforcement. However, although authorised by DOJ regulations in 1996, the use of arbitration in Novelis to resolve a central part of the dispute between the DOJ and the parties related to enforcement is novel.

In the context of proceedings under European competition law, however, a case may not be referred to an arbitral tribunal by either the Commission or one of the parties involved for any part of enforcement, which aligns with the EU’s rule against referring cases to enforcement bodies. Indeed, this has a certain logical sense due to the inherent consensual and generally confidential nature of arbitral proceedings. An arbitration decision only has binding effect on the parties to the arbitration, so as a procedure it does not generally lend itself to enforcement procedures by public bodies.

Nevertheless, although it has not and so far cannot be used as part of the Commission’s enforcement decisions, arbitration already plays an important role in European competition law, most notably in the following two ways as set out in more detail below: as an enforcement mechanism for commitments in merger clearance procedures; and as a public policy consideration in international arbitration disputes.

Enforcing commitments in merger clearance procedures

The first role of arbitration in European competition law is in the implementation of Commission merger clearance decisions. For over 30 years, the Commission has given arbitral tribunals jurisdiction to review commitments undertaken by parties in merger approval processes. In other words, although a decision of the Commission cannot be enforced through arbitration, an agreed-upon commitment can be. And, on occasion, it is.

For example, in Elf’s 1992 acquisition of Minol, one of the commitments the Commission extracted as a condition of approval was for Elf, an oil company, to extend a legally binding offer to its competitors for use of the depot facilities of Minol, the former East German state-owned petroleum distribution network, post-close. The Commission’s remedy ensured Elf’s rivals, reliant on Minol’s network, continued to have access to throughput rights and supplies from Minol’s depots on commercially acceptable terms. The Commission stated that: “Arbitration by mutually agreed independent experts will be provided in case of disputes relating to the application of the agreement.” Mandating the use of arbitration to resolve disputes in Elf’s supply contracts with rivals achieved the Commission’s dual goals of preserving competition and avoiding ongoing monitoring of the remedy. The independent experts identified as part of the arbitration process would serve that role.

In the 2003 Newscorp/Telepiu transaction, arbitration served a similar role as in Elf/Minol – to provide a mechanism to monitor the implementation of the remedy. The Commission stated, “The submitted undertakings are to a large extent behavioural. An effective monitoring system is therefore crucial.” The commitments the parties made generally related to contracting with third parties for acquisition of TV channels, premium films, rights for national football club matches, and other worldwide sports events to preserve competition in the Italian pay-TV market. The parties had proposed a settlement resolution mechanism using both the Italian Communication Authority (ICA) and private arbitration to address disputes between the parties and third parties regarding commitments designed to preserve competition in affected markets. Notably, the agreement followed standard international arbitration procedure, making reference to the ICC Rules. In 2012, an ICC arbitral tribunal ruled on an arbitration case stemming directly from this decision, restricting the scope of the commitments undertaken by Newscorp further to its merger with Telepiu.

Arbitrating EU competition law disputes

The use of international arbitration in regard to competition law disputes goes further than just reviewing merger commitments. Following the widely acclaimed Eco Swiss decision by the European Court of Justice in 1999, it has long been settled that article 101 of the Treaty on the Functioning of the European Union (TFEU) on European competition law “constitutes a fundamental provision which is essential for the accomplishment of the tasks entrusted to the Community and, in particular, for the functioning of the internal market,” and therefore “may be regarded as a matter of public policy” for the purposes of international arbitration proceedings.

EU competition law as a “matter of public policy” in international arbitration

However, the CJEU in Eco Swiss also left open a number of questions – including whether arbitrators should always be obliged to assess competition law arguments even if not explicitly raised by the parties to the arbitration; and whether the mere rejection of competition law arguments in the oral hearing without a reflection of such assessment in the final award should be sufficient to avoid the EU public policy exception.

The Genentech case provided the CJEU with an opportunity to address these questions in 2016, but the court refrained from further clarifying the role and importance of competition law assessment in international arbitration. Although Advocate General Wathelet’s opinion followed a “maximalist” approach to the judicial review of national courts when it comes to the assessment of competition law arguments in arbitral awards – requesting a full review of competition law arguments even if a potential violation is not “flagrant” – the CJEU’s judgment remained silent on this question. It is not clear from the judgment why the CJEU has opted for silence on these general issues. However, it seems likely that this is due to them not being strictly linked to the questions subject to the referral for preliminary ruling, rather than the CJEU expressly avoiding further clarifying these issues.

Despite these remaining open questions, the fact that competition law constitutes public policy opens the door for international arbitral tribunals to decide matters on the basis of competition law. Just as national courts may review an arbitral award dealing with EU competition law on public policy grounds, a dispute involving two private parties relating to EU competition law may also be arbitrated.

It is therefore a relatively frequent occurrence that arbitral tribunals are called upon to apply competition law, and while most such decisions are confidential due to the nature of international arbitration, examples in the public domain include Labinal v Mors and Westland Aerospace or Jacquetin v Intercaves , where the arbitrability of competition law disputes was upheld by the French courts.

Arbitration agreements and arbitrability of competition law damages claims

While it can be said that the arbitrability of competition law is now widely accepted in the EU as well as the US, recent CJEU rulings, for example in CDC Hydrogen/Evonik Degussa, have sparked a debate as to how arbitration agreements must be drafted to cover competition law claims for damages based on a violation of European competition law rules, ie, article 101 or 102 TFEU. While article 101 constitutes the general prohibition of collusion between two or more undertakings, article 102 states that the abuse of a dominant market position by even just one undertaking through unilateral measures is prohibited as incompatible with the internal market. Although to date the CJEU has not specifically ruled on arbitration but rather on jurisdiction agreements, the reasoning can be equally deployed to understand the material scope of both jurisdiction and arbitration agreements.

In essence, the court had been asked in CDC Hydrogen Peroxide if a broadly drafted jurisdiction/arbitration clause would also extend to claims for damages arising from non-compliance with article 101 or 102 TFEU, or if it would be necessary to specifically include such claims in the clause. Interestingly, the CJEU did not develop a uniform concept but decided that specific reference was only needed where the claim is based on a violation of article 101 as claims based on article 102 tend to materialise in contractual relations. What seems clear from this position is that the court seems to be prepared to accept that claims relating to a contractual relationship might fall within the scope of a jurisdiction/arbitration clause, even though they may normally be regarded as tortious in nature. While the court seems to assume that this is typically not the case with article 101 claims, it acknowledges the fact that article 102 claims will often revolve around the question of whether one party abused its market power to dictate overly vexatious or oppressive contract terms, terms which will then form the centre of the dispute.

Yet, it is difficult to see why claims for damages based on a cartel violation under article 101 TFEU would be so materially different that they warrant an entirely different approach. In fact, cartel-related damages might as well be based on excessive prices that can be found nowhere but in the essential terms of a contractual agreement.

Remarkably, national courts have now started characterising tortious claims as contractual in nature so as to make them fit for arbitration (“contractual workaround”).

As in international dispute resolution, the proper characterisation of claims as contractual or non-contractual is just another highly complex and controversial endeavour, and the arbitration community should certainly prepare itself to hear from Luxembourg again soon.

The growing role of international arbitration in FRAND disputes

Finally, the growing importance of arbitration in cases revolving around the interface between intellectual property law and competition law marks another interesting interplay between EU competition law and international arbitration. This is due to the CJEU’s and the European Commission’s interpretation of article 102 TFEU which forces holders of standard essential patents to grant licences on fair, reasonable and non-discriminatory (FRAND) terms. However, the parties often cannot agree on what constitutes FRAND terms and turn to arbitration tribunals to resolve these issues. Hence, arbitration tribunals have to apply competition law.

The European Commission acknowledges this approach in its Samsung decision of 2014 by accepting within the final commitments arbitration in case of disagreement. Also, the CJEU in its Huawei judgment seems to regard arbitration as a feasible approach when referring to an “independent third party” in case the parties are not able to reach an agreement.

However, and as mentioned before, in these scenarios it still remains an open question if arbitration tribunals have to apply articles 101 and 102 TFEU even when the parties have not put forward competition law arguments.

Arbitration increasingly accepted

Despite the challenges of consent in regards to what are by nature public enforcement procedures, there clearly is a role for international arbitration and arbitration more generally in antitrust and competition law matters. Indeed, the DOJ’s use of arbitration in Novelis and the increasing acceptance of international arbitration to determine EU competition law issues demonstrate that arbitration can be a useful tool for regulators and private parties to settle their competition law disputes. As a result, it can be expected that the role of international arbitration in competition law disputes will continue to grow on both sides of the Atlantic.

Authored by Meghan Rissmiller, Thomas Kendra and Christian Ritz.

Originally published by Global Arbitration Review here: https://globalarbitrationreview.com/article/1225721/arbitrating-competition-law-disputes-us-and-european-perspectives

Appeals and challenges under the Arbitration Act 1996: Not so appealing anymore?

It is well-recognised that an advantage of London-seated arbitration is the limited grounds on which an arbitration award may be challenged or appealed in the English courts. The three grounds of challenge / appeal under the English Arbitration Act 1996 (the “Act”) are:

  • lack of substantive jurisdiction of the arbitral tribunal (s.67);
  • serious irregularity affecting the tribunal, the proceedings or the award that has caused or will cause substantial injustice to the applicant (s.68); and
  • appeal on a point of law (s.69).
  • The Commercial Court statistics for the court year 2018-2019 show that there has been a significant decrease in the number of applications under s.68 and s.69 (there are no statistics available for s.67 applications). Specifically, there were:
  • 19 s.68 applications, compared with 71 in 2017-2018
  • 39 s.69 applications, compared with 87 in 2017-2018.
  • The statistics also highlight the very low success rate of these applications. The minutes of the Commercial Court Users’ Group Meeting (at which the statistics were reported) record that there were “very few” successful s.68 challenges in 2018-2019, and “Teare J expressed hope that parties were hearing the message that the hurdle for these applications is high.” None of the s.69 applications were successful in 2018-2019 (there were only two successful s.69 appeals the previous year).

Why has there been such a dramatic decline in applications under s.68 and s.69 in the space of a year?

Were fewer arbitration awards issued in 2018-2019 meaning that there were less arbitral awards for parties to challenge/appeal? The caseload statistics issued by some of the major arbitral institutions that administer London-seated arbitrations (LCIA, ICC and LMAA) for the calendar year 2018 (which partly overlaps with the 2018–2019 court year to which the Commercial Court statistics relate) suggest not – there appears to have been a modest increase in arbitrations commenced and arbitral awards rendered in 2018 compared with 2017. (As regards s.69 appeals – we note that the ICC and LCIA Rules exclude the ability of parties to appeal under this section, but the LMAA Rules do not.)

Does the decline reflect party satisfaction? Perhaps the decline in s.68 and s.69 applications should be viewed as a sign that parties are happy with the arbitration process and the quality of awards being rendered by tribunals in arbitrations seated in London and are, therefore, less inclined to challenge/appeal those awards in the English courts.

And/or, are parties deciding not to bring applications because of the low chances of success? As Teare J suggested, perhaps parties are deciding against bringing applications in circumstances where the “hurdle for these applications is high.”

Are the 2018-2019 statistics evidence of a trend towards fewer appeals/challenges?

Some caution should be exercised before attempting to extrapolate a trend of sharply decreasing s.68 and s.69 applications by comparing the 2017-2018 and 2018-2019 statistics alone. The statistics for 2015-2016 (34 s.68 applications, one successful challenge and 60 s.69 applications, four successful appeals) and 2016-2017 (31 s.68 applications, no successful challenges and 46 s.69 applications, no successful appeals) indicate that 2017-2018 was an anomaly because it saw a significant spike in s.68 and s.69 applications.

The spike in 2017-2018 makes the decrease in 2018-2019 appear sudden and dramatic, whereas if the 2018-2019 figures are compared with the 2015-2016 and 2016-2017 figures they suggest a gentler trend of gradually decreasing applications over the last few years.

We shall have to wait for the statistics for subsequent years to see the true picture, however, in the meantime, perhaps the 2018-2019 statistics should should be viewed as: (i) demonstrating the satisfaction of parties arbitrating in London with the arbitral process and awards rendered; (ii) a sign that parties are becoming increasingly pragmatic regarding the chances of success of s.68 and s.69 applications; and, (iii) a reflection of the robust and pro-arbitration stance of the English courts.

Annabel Maltby and Georgia Davies

How Far Do Tribunals Have a Duty to Investigate Corruption? The Kenyan High Court Has Its Word

It is twelve years since an ICSID tribunal dismissed World Duty Free’s claim against the Republic of Kenya for breach of a lease agreement signed in 1989. As is well known, the claimant obtained the contract with a $2 million bribe to former President Moi, and the tribunal held, inter alia, that it could not uphold a claim based on a contract obtained through corruption, deeming it contrary to international public policy (World Duty Free Company Limited v Republic of Kenya (ICSID Case No. ARB/00/7), para. 188).

Despite this 2006 award, World Duty Free commenced arbitration again in 2008 (against the Kenya Airports Authority (”KAA”)) for alleged breaches of contracts entered into pursuant to the same 1989 lease agreement. This time, World Duty Free’s prospects looked good: an ad hoctribunal awarded it around $50 million in damages in December 2012. But the Kenyan High Court has now put an end to its short-lived success. Following an application from the KAA, it set aside the award on 5 October 2018, finding it “inimical to public policy” on the basis that damages had been awarded in relation to contracts founded in the 1989 agreement – which in turn had been obtained through corruption (Kenya Airports Authority v World Duty Free Company Limited t/a Kenya Duty Free Complex (High Court of Kenya, Nairobi, misc. application no. 67 of 2013)).

Interestingly, the bribe to former President Moi was not raised by either party in the arbitration. The High Court’s judgment, therefore, provides a useful reminder that addressing corruption often requires arbitrators to undertake a delicate balancing act, with significant consequences if the right balance is not struck. While a tribunal must not exceed the contractual limits of its power by considering matters falling outside the terms of reference, it must also ensure that its award is enforceable and therefore consistent with relevant public policy demands.

A Tribunal’s Duty to Investigate Corruption at Its Own Motion

There is no universally accepted approach to addressing corruption when it surfaces in international arbitration. While there does seem to be a general and gradual shift toward taking a more active stance than previously, arbitrators continue to grapple with issues such as finding suitable methods of applying international conventions on corruption and the possibility of establishing the existence of corruption with the concept of red flags.

However, as allegations of corruption were not raised by the KAA in its defence in the present case, Justice Torgbor (acting as sole arbitrator) considered the matter outside his jurisdiction:

There is therefore no basis… in pleading, evidence or agreement for this Arbitral Tribunal to take cognizance of an ‘ICSID judgement’ or an unlisted ICSID issue. Subject to the cautionary caveat occasioned by the Respondent’s withdrawal from the arbitral proceedings an Arbitral Tribunal does not normally roam around to find and determine issues the parties have not for themselves raised for determination“.

As Torgbor noted, a tribunal must take great care to restrict itself to considering the issues put before it. A failure to decide a case as pleaded may lead to annulment or problems with enforcement. In this case, the sole arbitrator’s reluctance to consider the bribe at his own motion is perhaps understandable given the conspicuousness of its absence from the parties’ submissions.

Nonetheless, the High Court, when considering the KAA’s application to set aside the award, judged that Justice Torgbor had erred in his decision and noted that:

Whilst arguing that the ICSID Award was not placed as formal evidence before the Torgbor Tribunal, Counsel for Kenya Duty Free nevertheless concedes that it was to be found in at least three bundles of Documents placed before the Tribunal. The language used by the Arbitral Tribunal does not suggest that it did not see and read the Award or at any rate was unaware of it“.

It went on to observe that once an allegation of corruption is brought to the attention of a tribunal, even if not pleaded, “the Tribunal ought to pause and interrogate [it]”. This direction is interesting for its breadth and clarity. It suggests that when confronted with corruption, tribunals should have the confidence to undertake at least a cursory exploration of the relevant allegations (whether raised by the parties or not).

Such logic may find traction elsewhere given the current debate on corruption in international arbitration. Indeed, the High Court’s decision fits within a wider trend of national courts indicating that arbitrators should adopt a more active stance in this regard. In a recent case before the Singapore High Court, for example, Kannan Ramesh J reiterated that, “in appropriate cases, an arbitral tribunal would be required to investigate allegations of corruption“, provided the allegations affect the issues under consideration in the arbitration (China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] SGHC 101, paras. 224 and 226). This followed a similar ruling by the Paris Court of Appeal, which suggested early last year that Tribunals seated in France have a duty to “meticulously examine” evidence of corruption when it arises (Cour d’appel de Paris, arrêt du 21 février 2017, Belokon c. Kirghizistan (15/01650)).

Meanwhile, investment tribunals have also shown a greater willingness to adopt a proactive stance since the landmark 2006 decision in Word Duty Free v Kenya. In the 2016 case of Spentex v Uzbekistan, for example, the tribunal went as far as using the cost allocation as a means of addressing corruption. It strongly urged Uzbekistan to make a donation to the UNDP anti-corruption initiative, failing which it would have been subject to an adverse costs order.

Importance of Rendering an Enforceable Award

This gradual shift toward a more active stance on corruption requires arbitrators to pay particular attention to need to render an enforceable award, which may be jeopardised if they stray outside the contractual limits of their power by deciding on unpleaded issues. Indeed, section 35(2)(a)(iv) of the Kenyan Arbitration Act provides that an award may be set aside in Kenya if it “deals with a dispute contemplated by or not falling within the terms of reference to arbitration or contains decisions on matters beyond the scope of the reference to arbitration“.

Yet arbitrators must also be alive to the risk of their awards falling foul of public policy requirements. This was underlined by the Kenyan High Court in its judgment, which noted that, “however much [Arbitral Tribunals’] awards should enjoy autonomy, they should not be tolerated as long as they are inimical to public policy” (para. 38). This principle is of course also reflected in the New York Convention.

The present case illustrates that it can be difficult for tribunals to strike the right balance between these at times competing demands. However, as the ICSID tribunal in the first round of the World Duty Free saga observed, corruption is almost universally considered to be contrary to public policy:

“in light of domestic laws and international conventions relating to corruption, and in light of the decisions taken in this matter by courts and arbitral tribunals, this Tribunal is convinced that bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy“.

With this in mind, the precedence afforded by the Kenyan High Court to the need for arbitrators to consider the issue of corruption is understandable.

Conclusion

It remains uncommon for a court to condemn a tribunal’s failure to investigate corruption at its own volition; however, the tribunal, in this case, was in the unusual position of possessing damming evidence of corruption in the well-publicised ICSID award. The wider impact of this decision may, therefore, be limited due to the factual circumstances.

Nonetheless, the High Court’s decision highlights the on-going tension between arbitrators’ nervousness at exceeding the contractual limits of their power, the arbitrator’s duty to investigate corruption at its own motion, and the need to render an enforceable award consistent with public policy. While in this case, the arbitrator was likely fully aware of Word Duty Free’s corruption, and therefore may have been overly cautious in the eyes of the Kenyan High Court, it illustrates the difficulties faced by arbitrators dealing with unpleaded allegations of corruption in the absence of explicit guidance.

 

This article first appeared on the Kluwer Arbitration Blog in December 2018.

The Paris Court upholds the supranational nature of OHADA law in dismissing annulment application (CA Paris 16/25484, 20 December 2018)

The Paris Court of Appeals recently upheld an arbitral award applying OHADA law. The application to set aside the award had been brought by the State of Cameroon based on arguments made under Cameroonian law. However, the Court applied OHADA law over Cameroonian law, in the process confirming the supranational nature of OHADA law. This is therefore an interesting decision which shows the courts of a state external to OHADA confirming that law’s pre-eminent stature.

After a brief review of the facts and procedure of the Garoubé saga leading to this decision, taking us from Yaoundé to Belgium to Paris (1), we summarize the decision below (2) and review briefly its significance in upholding OHADA law (3).

1.            Facts and procedure

Projet Pilote Garoubé (“Garoubé“) was a company established in Yaoundé, Cameroon, one of the founding OHADA States. The company was therefore governed by the OHADA law on companies – the Uniform Act relating to Commercial Companies and Interest Groups.

Garoubé entered into concession agreements with Cameroon in 2001 to conduct game ranching and related farming activities. After five years, Cameroon unilaterally suspended the concession agreements. Garoubé then transferred its registered offices to Belgium, thus becoming a company governed by Belgian law.

The ensuing dispute has been ongoing for several years. Garoubé initiated arbitration proceedings on the basis of an ICC arbitration clause in the agreements. A first arbitration award was rendered but then annulled due to a conflict of interest on the part of one of the arbitrators. A second tribunal was constituted and issued two partial awards, first on jurisdiction and later on liability. These awards formed the basis of Cameroon’s request for annulment in the present case.

Amongst the various arguments made in support of its request for annulment, Cameroon argued that Garoubé’s transfer of registered office from Cameroon to Belgium – although permitted by OHADA law – was in breach of Cameroonian regulations relating to wildlife exploitation. Therefore Garoubé, in its status as a Belgian company, did not have standing to bring arbitration against Cameroon and therefore the tribunal did not have jurisdiction.

2.            The Court upholds the supranational nature of OHADA law

The Paris Court dismissed all of Cameroon’s arguments, applying a particularly strong reasoning on the superseding nature of OHADA law.

The Court endorsed the arbitral tribunal’s decision on jurisdiction holding that: “The OHADA treaty sets a supranational rule by providing for the mandatory and direct application in member States of Uniform Acts and it establishes, in addition, their supremacy over former or subsequent internal legal dispositions“. Further, it set out: “the Uniform Act relating to Commercial Companies and Interest Groups establishes that its provisions are public policy and are also immediately and directly applicable“. In other words, OHADA law provisions protecting the transfer of a company’s registered office were interpreted as overriding any contrary OHADA State regulation.

As a result, Cameroon’s regulation relating to wildlife could not prevent the transfer of Garoubé’s registered office and therefore had no effect on the arbitration agreement’s enforceability and the jurisdiction of the arbitral tribunal.

In addition, Cameroon claimed that its regulations on wildlife were overriding mandatory rules and that in by failing to take these rules into account the award had breached international public policy. The Paris Court also dismissed this argument, reminding Cameroon of the high threshold required to show a breach of international public policy under French law.

3.            Conclusion

Courts beyond the boundaries of the 17 OHADA States will rarely get the opportunity to consider the status of OHADA law. When faced with allegedly competing provisions of OHADA and local law, the Paris Court, perhaps unsurprisingly, upheld the supremacy of the international OHADA law, and in doing so used strong terms to ensure the matter remained beyond doubt.

Indeed, the strong wording used by the Court – assimilating OHADA law to public policy – suggests that it will be difficult for parties to get around OHADA law. This reference to public policy raises some of its own questions, such as whether a breach of OHADA law could form the basis for an annulment application under OHADA or New York Convention principles. Such issues remain open for clarification at a later date.

By endorsing the superseding nature of OHADA law, the Paris Court of Appeals gives effect to the OHADA Treaty’s initial promise: a “harmonized business law in order to improve companies’ business“, including by giving visibility and predictability to companies instituted under that international legal system. This decision should therefore help to ensure that other companies like Garoubé can avail themselves of OHADA law for their own benefit.

Hong Kong Arbitration Week Recap: Making Arbitration Fit for the Future

Hogan Lovells hosted an event yesterday, 30 October 2018, at its Hong Kong office, as part of the Hong Kong Arbitration Week, titled “Making Arbitration Fit for the Future”.  The event was graced by the presence of Bernard Hanotiau as the keynote speaker, followed by speeches from HKIAC’s Sarah Grimmer and Hogan Lovells’ James Kwan, Julianne Hughes-Jennett and Dan González.

Keynote Speaker: Bernard Hanotiau

Bernard Hanotiau kicked off the seminar by noting its fascinating theme of making arbitration fit for the future, which in his view is to make arbitration as efficient as possible by adapting it to match the evolution of society.  Hanotiau believes that there is still room for institutional rules to be improved from an efficiency standpoint, such as expanding grounds for complex arbitrations, introducing summary or early determination procedures and providing secured online repository where documents can be uploaded.

To make arbitration fit for the future, Hanotiau said that practitioners and arbitrators need to step up to the plate by adapting and improving their practice of the arbitral process.  This can be done by making use of modern and appropriate technology, and take the initiatives to shorten the procedure where possible.  On technology, Hanotiau highlighted its importance to shrink a large number of files, and suggested that site visits may possibly be replaced by 3D models or augmented reality very soon.

When met with an audience question on how to balance party autonomy against a party’s demand for a 40-page post-hearing briefs, Hanotiau said that the Tribunal should first discuss with the parties on the way forward.  If the parties are in total disagreement and the Tribunal considers them to be unreasonable, it will need to make a final decision.  Hanotiau thought that parties should approve of Tribunals that put their foot down to make decisions.

Innovation: Improving Institutional Rules as the Answer

HKIAC’s Sarah Grimmer then took the floor and introduced the audience to the brand new HKIAC Administered Arbitration Rules, which will come into effect on 1 November 2018.  Grimmer explained that there were three key objectives behind the amendments in essence: time and cost saving measures, efficiency in complex arbitrations and relevance to developments in international arbitration.

Some of the noteworthy amendments that Grimmer highlighted include: a cap on the total fees charged by an emergency arbitrator; introduction of an early determination procedure; imposition of a three-month time limit to render an award after close of proceedings; amended deadlines to appoint an emergency arbitrator and to render an emergency decision; possibility to file an emergency arbitrator application before commencing an arbitration; express reference to concurrent proceedings; encouraging the effective use of technology and delivery of documents through an online repository system.

Artificial Intelligence in International Arbitration

James Kwan, an international arbitration partner at Hogan Lovells’ Hong Kong office, spoke about the tongue-twisting concept of “AI in IA”.  Drawing on the 2018 Queen Mary University of London International Arbitration Survey, Kwan pointed out that there is a sentiment towards the greater use in the future of artificial intelligence (“AI“) technology, with 61% of the survey respondents noting that “increased efficiency, including through technology” is the factor that is most likely to have a significant impact on the future evolution of international arbitration. Kwan then highlighted for the audience how AI is used in international arbitration, ranging from enhancing case management to predictive justice and even having AI arbitrators.

While enhancing case management is quite innocuous, predictive justice and AI arbitrators are certainly the more heated topics.  Some of the concerns highlighted by Kwan include the failure for predictive justice to take into account the “human factor”, due process and the right to be heard.  On AI arbitrators, while the idea is tempting, Kwan said that such concept is unlikely to happen in the immediate future given the various hurdles such as: whether machines can be qualified as arbitrators; nationality and security of AI arbitrators; and whether AI arbitrators are capable to render reasoned awards or suitable to decide disputes at all, given their lack of understanding of emotions.  As such, Kwan foresees that although AI is here to stay, in its current form AI can only assist and facilitate, but is nonetheless useful and will play an increasingly significant role in arbitration.  Referring to the Terminator series, Kwan concluded that lawyers and arbitrators can be assured that their services are still needed until the judgment day comes.

Human Rights and Arbitration

Julianne Hughes-Jennett, a partner at Hogan Lovells’ London office, then took the stage to talk about the relationship between businesses and human rights (“BHR“) as well as international arbitration. Drawing from both soft laws (such as the OECD Guidelines) and hard laws (such as national legislations), Hughes-Jennett said that states have the duty to respect, fulfil and protect human rights while corporations have the responsibility to respect the same.  In the context of investment treaty claims, human rights can be used both as a sword (e.g., breach of access to justice and due process obligations) and a shield (e.g., claimant’s breach used to either mitigate the compensation owed).

Hughes-Jennett pointed out that the types of BHR disputes referred to arbitration will either involve a victim against a business, or a business against another business.  However, there are certain challenges to overcome for this type of dispute such as consent to arbitrate, applicable law, public policy, inequality of arms and spurious claims.  Notwithstanding these challenges, BHR disputes have already been filed previously, such as the arbitrations brought before the Permanent Court of Arbitration based on the Accord on Fire and Building Safety in Bangladesh.  Hughes-Jennett concluded that BHR arbitration is undoubtedly a welcome initiative, but it would be important to carefully consider the legal, practical and policy challenges as well as to continue to consult stakeholders on this matter.

Increasing Efficient Access to International Arbitration

Last, but certainly not least, Dan González (Global Head of Hogan Lovells’ International Arbitration practice) spoke about increasing efficient access to international arbitration. González  pointed out the consistency from different surveys that arbitration is the preferred tool for dispute resolution, but that the top complaints about international arbitration from these surveys include costs, delay and time taken to resolve the dispute.

On technology, he noted that electronically stored information (“ESI“) is overwhelming practitioners, as an average employee now generates around 800 megabytes of electronic information per year.  González then shared some tips for promoting better efficiency in arbitral proceedings, which include:

  • Working with the opposing counsel at an early stage. To improve efficiency, parties should try to agree on the procedural order, reduction in the number of pleadings and the discovery procedure. Parties could consider putting mediation on the schedule, as this may lead to early resolution of the dispute, or narrowing down of the issues.
  • Avoid raising every dispute with the arbitral tribunal. Parties should attempt to reach an agreement with the opposing counsel on some issues, and avoid the temptation of raising every disagreement to the Tribunal. However, González reminded the audience that it may be appropriate in some cases to raise significant disputes, which may provide an opportunity to advance one’s own case.
  • Conduct the discovery process in a more efficient manner. Counsel should only ask for the documents we need, rather than engaging in a fishing expedition. González also pointed out the need to identify key custodians, develop intelligent search terms, understand ESI and use technology assisted review (predictive coding) wherever possible.

Questions and Answers

As a parting gift to the audience, Hogan Lovells’ Kent Phillips asked each of the speakers to look into their crystal balls and predict on the future of international arbitration.

Kwan was of the view that there will be a greater influence by Chinese parties in international arbitration, which is evident from the increase in caseload across arbitral institutions such as HKIAC, SIAC and ICC.  He also said that this influence can be felt by the recent amendments to institutional rules like the “med-arb” procedure.

Both Hanotiau and Hughes-Jennett agreed with Kwan, with Hughes-Jennett noting that the bulk of her caseload now involves Chinese parties in commercial arbitrations.  Her prediction, however, is that there will be a rise in BHR disputes.  This is because there are already clauses in place for these disputes, and that it all takes is for them to spring.

González thought that more ADR processes will surface alongside international arbitration, which was traditionally thought to be a form of ADR in the United States but now became the method of dispute resolution.  While it is possible that there will be more and more mediations being conducted by necessity and to save costs, it may be challenging to conduct mediation in other parts of the world due to cultural diversity.

Finally, Grimmer shared González’s view that arbitration will continue to be utilized by more and more parties, which is clear from the arbitral institutions’ recent case load performance and improvement in case management quality.  Grimmer agreed with Kwan that Chinese parties will be engaging more frequently in the arbitral process, and that arbitration – from across the spectrum of dispute resolution – will remain absolutely strong.

New effort to control time and cost in arbitration – the Prague Rules

The draft ‘Rules on the Efficient Conduct of Proceedings of International Arbitration’ (the “Prague Rules“), which were released on 1 September 2018, makes for sombre reading for users of arbitration. It comments that “it has become almost commonplace these days that users of arbitration are dissatisfied with the time and costs involved in the proceedings”. Indeed, interviewees of the 2018 Queen Mary survey on International Arbitration said that “the default mindset that an arbitration would last for up to 18 months should be challenged”.

Set to launch in December 2018, the Prague Rules will work as guidelines, in much the same way as the IBA Rules on the Taking of Evidence in International Arbitration (“IBA Rules“), and will apply only when adopted by the parties. In general the Prague Rules appear to provide a more inquisitorial approach to the taking of evidence compared to the more adversarial style IBA Rules.

In particular, the Prague Rules Working Group identified three features of evidence-taking in arbitration – which it considers to be the main culprits causing extended time and costs – with which arbitration users are dissatisfied:

  1. Document production – which often entails broad categories of document requests leading to lengthy and tedious document disclosure processes;
  2. Too many fact and expert witnesses – which often includes witnesses who testify on irrelevant facts that do not assist the tribunal in resolving the issues in dispute; and
  3. Extended cross examination at lengthy oral hearings – which includes cross on issues the tribunal considers irrelevant.

IBA vs The Prague Rules – What are the differences?

The Prague Rules are not intended to compete with or replace the IBA Rules, but rather promote different options to suit differing parties’ needs.

The overarching difference between the two sets of rules is that the Prague Rules encourage a more active role for the tribunal in a bid to increase the efficiency and cost-effectiveness of international arbitration proceedings.

The more active role is most obviously seen in the Prague Rules’ approach to the disclosure of documentary evidence, fact and expert witnesses, hearings and settlement assistance.

Documentary Evidence

In the Prague Rules, the tribunal “shall avoid extensive production of documents, including any form of e-discovery” (Article 4.2). This is contrasted with the outcome increasingly encountered with the IBA Rules which – despite the drafters’ original intentions to reduce the scope of disclosure – often ends up with parties making broad ranging requests for documents falling into numerous categories and a lengthy and burdensome disclosure process. This can be problematic when busy arbitrators adopt a cautious approach to relevance out of lack of understanding of the case or – in order to appear even-handed – split the issues and award the requesting party something. The Prague Rules simplify this process and a party may only request specific documents (rather than categories of documents).

Fact Witnesses

Rather than the parties identifying the witnesses on whose testimony it intends to rely (IBA Rules Article 4.1), the Prague Rules dictate that after providing the parties with an opportunity to comment, the tribunal shall decide which witnesses are to be called for examination (Article 5.2). The tribunal may also decide not to call a witness for examination during the hearing, if it considers the testimony of that witness to be irrelevant for the resolution of the issues in dispute (Article 5.3).

Expert Witnesses

Under the Prague Rules, the tribunal also has greater control over expert witnesses. Contrasted with Article 5 of the IBA Rules (concerning party-appointed experts), the Prague Rules contain more streamlined guidance on experts, with Article 6 noting that at either the request of a party or on its own initiative, the tribunal may appoint one or more experts to present a report to the tribunal on disputed matters which require specialised knowledge. However, the tribunal’s appointment of experts does not preclude a party from submitting its own expert reports (Article 6.4).

Hearing

Article 8 of the Prague Rules provides that, to the extent possible, the dispute should be resolved on a documents-only basis. If one of the parties requests a hearing or the tribunal itself finds it appropriate, the hearing should be conducted in the most cost-efficient manner and in the shortest duration possible (including by using video, electronic or telephone communication to avoid unnecessary travel costs for arbitrators, parties and other participants). This is contrasted with the IBA Rules which assume that an oral hearing will take place.

Settlement Assistance

Perhaps the most controversial feature of the Prague Rules is that it contemplates some tribunal assistance in settlement negotiations. Article 9 notes that unless one of the parties objects, the tribunal shall assist the parties in reaching an amicable settlement of the dispute at any stage of the proceedings. The tribunal may also, to the extent permissible under the lex arbitri, express its preliminary views with regard to the parties’ respective positions in order to assist in an amiable settlement of the dispute. The tribunal (or one of its members) may also act as mediator, and may continue to act as arbitrator in the event that the matter does not settle at mediation.

Observations

The Prague Rules are the latest in a long line of initiatives aimed at addressing some of the perceived causes for two of the major reported concerns with arbitration – the time and cost involved. The Rules consider that encouraging the tribunal to be more proactive in its case management function will lead to more efficient arbitrations. This is to be encouraged.

In an age of due process paranoia we query whether the risk is that an increase in tribunal intervention may lead to an increase in arbitral awards being challenged. One of the major attractions of arbitration is party autonomy and the Prague Rules arguably strip some of that away. There is undoubtedly a fine line between tribunals driving arbitrations to be as efficient and as inexpensive as possible, and the parties having the flexibility to decide the format of dispute resolution that best suits them.

Only time will tell whether there will be user uptake of the Prague Rules, particularly in common law jurisdictions, and their December 2018 release will be watched with interest by the international arbitration community.

Hong Kong court refuses to enforce an arbitral award on the basis of violation of public policy

In Z and Y [2018] HKCFI 2342, the Hong Kong Court of First Instance (“CFI”) refused to recognize and enforce an arbitral award (“Award”) of the China Guangzhou Arbitration Commission (“Commission”) on the basis that enforcement under section 95(3)(b) of the Hong Kong Arbitration Ordinance would be contrary to the public policy of Hong Kong.  This is a rare example of the Hong Kong courts invoking such ground.  The judgment also dealt with commonplace arguments to challenge jurisdiction and enforcement, which will be of interest to arbitration users.

Background

The arbitration was commenced by the Applicant against the Respondent under a guarantee purportedly signed by the Respondent in 2014.  Under this instrument, the Respondent was to guarantee a debt of RMB 10,239,325.09 allegedly due to the Applicant by a Chinese company known as HD, accrued under 8 supply contracts whereby the Applicant sold plastic raw materials to HD.  Around the same time, HD’s affiliate company (known as MD) purportedly entered into 8 supply contracts with the Applicant, under which MD would supply to the Applicant the exact amount and types of goods supplied by the Applicant to HD.  This was essentially a back-to-back arrangement where goods passed from MD to the Applicant and then to HD.

Leave to enforce the Award was originally granted by the CFI on 28 August 2017 as part of the standard procedure in an ex parte application for leave.  The Respondent then applied to the CFI to set aside the enforcement order on the following grounds.

Illegality ground

The Respondent argued that the various supply contracts were sham arrangements to hide what was in reality loans between the Applicant and HD, the act of which contravened PRC law and constituted the criminal offence of “fraudulent contracts”.

In this regard, the Respondent adduced evidence to show that it was abnormal for the Applicant, HD and MD to have entered into their transactions for the following reasons: (a) HD and MD only purchased raw materials for their own use in their ordinary course of business; (b) the types of raw materials required and used by them were different; and (c) HD and MD were both scaling and closing down their businesses and it did not make sense for there to be purchases of such large amounts. Accordingly it was inconceivable for there to be back-to-back transactions.

In response, the Applicant merely pointed out that this illegality ground had been argued by the Respondent in the arbitration which was dismissed by the tribunal.

In examining this ground, the CFI clarified that it should neither review the merits of the Award, nor is any mistake of fact or law made by the tribunal a ground to set aside or refuse enforcement.  However, the CFI held that the tribunal had failed to give any adequate reasons as to why it had concluded that the Illegality Ground had not been established by the Respondent and should be dismissed.  The CFI found the Respondent’s case as to the sham transactions of the supply of materials to be credible, and were supported by evidence. The allegations of such unlawful loans therefore raised serious issues of illegality and possible offences under PRC law, which the CFI thought the tribunal had not thoroughly considered.

Accordingly, the CFI said that it would offend notions of fairness and justice to enforce the Award when it might be tainted by illegality, and when a significant issue brought before the tribunal for determination had not been seen to be properly considered and determined, contrary to the parties’ legitimate and reasonable expectations.

Other grounds raised by the Respondent to resist enforcement – capacity, invalid guarantee, and lack of proper notice – were rejected. However, the CFI was sympathetic to the illegality argument raised under the invalid guarantee ground, which it had addressed above.

Invalid arbitration agreement ground

The Respondent argued that there was no valid arbitration agreement as it only provided that the parties to the guarantee “may” apply to the Commission for arbitration.  Further, the guarantee was not signed by the Applicant, and there was no evidence that it had agreed to the document or become a party to the guarantee and the arbitration agreement.

The CFI held that although the arbitration clause in the guarantee stipulated that any party “may” apply for arbitration for any dispute, case law ruled that once a party applies to exercise this option, the other party would be bound to accept the reference (Hermes One Ltd v Everbread Holdings Ltd [2016] 1 WLR 4098).  As such, the CFI rejected the Respondent’s submission that there was no binding arbitration agreement because the arbitration clause was uncertain and not mandatory.

However, onto the Respondent’s argument that the guarantee was not signed by the Applicant, the CFI noted that the question of the validity of the guarantee under PRC law was not addressed in the Award.  There was no reason given to support the tribunal’s finding that there was a valid guarantee under PRC law, apart from the fact that it was signed by the Respondent as a person with legal capacity, and did not contravene any law and should be enforced.  In the CFI’s view, the tribunal’s failure to adequately explain why it upheld the validity of the guarantee casted doubt on its acceptance of the existence of a valid and binding arbitration agreement between the Applicant and the Respondent.

Commentary

The CFI ruled that it would be contrary to the public policy of Hong Kong to enforce the award since the tribunal had failed to give adequate reasons as to why it accepted the guarantee to be valid and legally enforceable, in light of the Respondent’s illegality claims.

This case constitutes one of the rare instances where an arbitral award was refused recognition on the basis of a violation of Hong Kong’s public policy.  Based on our analysis of the case, the CFI cannot be said to have invoked the public policy ground loosely.  The CFI displayed genuine concerns in recognizing and enforcing an award that, on the evidence before the court, may have been tainted by illegality which had not been thoroughly considered by the tribunal.

Without a doubt, national courts should adopt a pro-enforcement stance to uphold the sanctity of arbitration.  Courts should also treat the enforcement of awards “almost [as] a matter of administrative procedure” and be “as mechanistic as possible” (KB v S (HCCT 13/2015)).  However, safeguards exist to prevent the enforcement of awards tainted by illegality arising out of the underlying contract.  This case serves as a confident reminder that the Hong Kong courts continue to uphold the notions of fairness and justice that underpin the judicial system.