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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.

The long reach of US discovery: Commercial Court allows enforcement of 28 USC §1782 discovery order

In recent years, US federal procedural law has emerged as a powerful weapon in cross-border disputes. In particular, section 1782 of Title 28 of the United States Code (28 USC §1782) allows district courts in the US to order the discovery of evidence for use in foreign and international proceedings – including, according to several courts, foreign-seated arbitrations.

The recent Commercial Court decision in Dreymoor Fertilisers Overseas Pte Ltd v EuroChem Trading GmbH [2018] EWHC 2267 (Comm) is a useful example of how the English courts will exercise their supervisory authority where proceedings under section 1782 may threaten to interfere with a London-seated arbitration. In particular, it reaffirms that the courts will only restrain a foreign discovery procedure where it would lead to “unconscionable” interference with the local proceedings.

Section 1782 and its use in international arbitration

Section 1782(a) provides, in relevant part, that a US district court may order any person within its jurisdiction “to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal…” Case law has historically been divided on whether arbitral tribunals fall within the meaning of a “foreign or international tribunal” or whether the section is limited in its scope to public law courts and tribunals. However, since the US Supreme Court held in Intel Corp v Advanced Micro Devices Inc., 542 US 241 (2004) that section 1782 encompassed “quasi-judicial bodies“, there has been a growing trend towards including arbitral panels within an expansive interpretation of “tribunal”.

In multiple decisions, therefore, US courts have granted requests for pre-hearing discovery in respect of investment and commercial arbitrations seated abroad. Section 1782 has particularly proven its value in relation to third parties over whom the tribunal has no jurisdiction, but who are nevertheless susceptible to orders from a national court. Thus directors, (ex-)employees and advisers of the parties may all be the subject of a section 1782 order to produce documentary evidence or to present themselves for depositions or testimony. Compared to other legal systems – for example, sections 43 and 44 of the English Arbitration Act 1996, under which the tribunal’s consent is normally necessary before seeking judicial assistance – US law thus offers a more liberal procedure for obtaining discovery, which parties are increasingly using in arbitration.

The decision in Dreymoor v EuroChem

The interaction between US court proceedings under section 1782 and parallel arbitration proceedings in London was at the centre of the recent judgment in Dreymoor Fertilisers Overseas Pte Ltd v EuroChem Trading GmbH.

EuroChem, one of the largest fertiliser producers in the world, had entered into a series of distribution contracts with Dreymoor, a trading company headquartered in Singapore. EuroChem subsequently alleged that Dreymoor had procured these contracts by paying bribes to two of EuroChem’s former executives and filed two arbitrations in London seeking to set the contracts aside. In relation with another group of distribution contracts, EuroChem also sued Dreymoor before the courts of the British Virgin Islands (BVI). Finally, EuroChem commenced court proceedings in Cyprus (to which Dreymoor was not a party) seeking to recover the bribes which had allegedly been paid to one of its former senior employees.

EuroChem applied to the District Court for the Middle District of Tennessee seeking disclosure under section 1782 in support of these various proceedings. Its target was Mr Sandeep Chauhan, the former director of Dreymoor, whom it sought to depose and compel to produce various documents relevant to the alleged bribery. While the district court left open the question of whether section 1782 could be applied in support of the London-seated arbitrations, there was no doubt that the BVI and Cypriot court proceedings fell within its scope. The order was granted and later upheld on review.

Dreymoor subsequently applied before the English courts for an injunction restraining EuroChem from enforcing the section 1782 order. It argued that enforcement of the order would interfere with its preparation of the upcoming arbitrations in London and that it would be unfair for EuroChem to have two occasions to cross-examine Mr Chauhan, first on deposition and then at the arbitral hearing. Bryan J granted an interim injunction pending a full hearing.

In a judgment of 24 August 2018, however, Males J sitting in the Commercial Court discharged the injunction. Reviewing the case law, it was clear that the courts had a power to restrain “unconscionable” conduct and that, in principle, pursuing a section 1782 order could amount to an unconscionable interference with the fair disposal of proceedings in England. However, on the facts of the case, the threshold of unconscionability was not met, based on several factors:

  • Significantly, the district court had granted the order to obtain evidence for use in the BVI and Cypriot proceedings. While the English courts had an interest in protecting the integrity of their own proceedings and English-seated arbitrations, it was not their role to police the conduct of foreign litigations. Moreover, it could not be said that the London arbitrations were the “lead proceedings”.
  • Given that the US courts had repeatedly dismissed Dreymoor’s objections and held that non-disclosure had already prejudiced EuroChem, it would be a “serious breach of comity” to overrule their conclusions.
  • While the section 1782 order may have an effect on Dreymoor’s preparation for the arbitral hearings, this was “entirely a problem of Dreymoor’s own making” given its successful efforts to delay the enforcement of the order by over a year.
  • Although in previous cases the court had been concerned that pre-trial depositions would allow one party two bites at the cherry to cross-examine a witness, this was less of a concern in the instant case. Due to the existence of multiple proceedings in different jurisdictions, it was likely that all parties’ witnesses would be examined more than once.

As such, EuroChem should be permitted to enforce the section 1782 order against Mr Chauhan. It was, however, left to the tribunals to decide whether the evidence so obtained from Mr Chauhan should be admissible in the London arbitrations.

Commentary

The Commercial Court’s decision confirms that the “unconscionability” test outlined by the House of Lords in South Carolina Insurance Co v Assurantie Maatschappij ‘De Zeven Provincien’ NV [1987] 1 AC 24 is a relatively high threshold. The judgment can be contrasted with previous decisions in which courts issued anti-suit injunctions against section 1782 applications – notably, Omega Group Holding Ltd v Kozeny [2002] CLC 132 and Benfield Holdings Ltd v Richardson [2007] EWHC 171 (QB) – on the grounds that US discovery would interfere with the due process of court proceedings in England. One of the key differences in Dreymoor was that Mr Chauhan’s evidence was primarily sought for use in the BVI and Cyprus, suggesting that the courts are unlikely to restrain discovery where the requested evidence is intended for use outside England.

Moreover, on the facts of the case, the court was evidently unimpressed that Dreymoor had fought tooth and nail to avoid its former director giving evidence, and took comfort from the fact that the US courts had considered and rejected its objections on multiple occasions. It is notable that although Dreymoor alleged that US discovery would disrupt the arbitrations, it had also failed to inform the London tribunals of its move to restrain the section 1782 order. While the tribunal’s consent is not strictly necessary for the English courts to grant such an anti-suit or anti-enforcement injunction, the arbitrators’ opinions are likely to carry significant weight in light of their role as procedural gatekeepers. A party in Dreymoor’s position would therefore be well advised to normally consult the arbitral tribunal before making any application to the courts.

Although the court declined to exercise its power in this case, the judgment nevertheless confirms the possibility that, in appropriate cases, the English courts may restrain the use of US discovery procedures in support of London-seated arbitrations. Indeed, it appears that the scope of application of section 1782 continues to grow, with it being increasingly used to obtain e-documents hosted in or accessible from the US. Given the growing popularity of section 1782, therefore, this is unlikely to be the last time that the courts face this issue.

The establishment of three new organisations points to further growth in African arbitration

Africa’s economic growth is picking up pace and is expected to reach 6.3% in East Africa and 3.4% in Sub-Saharan Africa by the end of this year.  Foreign direct investment into Africa is also expected to increase from $41.8bn to $50bn, due in part to the signing of the historic African Continental Free Trade Area (AfCFTA) agreement in March.

As international investment and trade in Africa increases, so does the number and frequency of commercial disputes, with arbitration increasingly becoming a preferred means of resolution.  The rise in arbitration in Africa can be seen by looking at the ICC’s recent caseload figures; in 2017, the institution saw the largest number of cases (87) and parties (153) from Sub-Saharan Africa in its history.

Against this background, we will look at three brand new organisations that aim to facilitate the further expansion of arbitration in Africa: the African Arbitration Association (1); the ICC’s African Commission (2); and AfricArb, a Paris-based association of lawyers (3).

1. The African Arbitration Association – an intra-African organisation to promote and strengthen arbitration in Africa

One of the most significant developments of the summer was the launch of the African Arbitration Association (AfAA), held at the headquarters of the African Development Bank (AfDB) in Côte d’Ivoire in June.  The AfAA aims to “promote, encourage, facilitate and advance” the use of international arbitration within Africa.  Although numerous initiatives have been developed to meet these aims in the past, AfAA has been launched to ensure pan-African coordination and cooperation.  The association has brought together an impressive number of African arbitral institutions, 71 in total, and will be headquartered in Rwanda at the Kigali International Arbitration Centre (KIAC).

The AfAA is a long-awaited response to calls for the establishment of a single organisation to promote the existing capacity for arbitration in Africa.  Commenting on the launch of the AfAA, Fidèle Masengo, secretary general of the KIAC, highlighted that arbitration clauses in many international contracts, particularly those financed by the African Development Bank or the World Bank, often provide for an arbitral seat in Paris, London or another Western location.  As a response to this, the AfAA intends to encourage the regionalisation of arbitration, by promoting the appointment of African practitioners, arbitrators and institutions.

The creation of the AfAA may be seen as an important step in what many have termed as the “Africanisation” of arbitration.  The organisation has been described as the “coming of age of the arbitration profession in Africa” by Judge Abdulqawi Ahmed Yusuf, President of the ICJ, a Somalian and prominent African arbitrator.  The AfAA and its awareness-raising activities also have the potential to tackle the perception that arbitration on the continent is extensively under-developed.  A report by SOAS this year identified that one of the reasons for an underrepresentation of Africa in international arbitrations is a poor perception of practitioners.  SOAS’ research showed, however, that a vast majority of respondent practitioners had specialist training (including by the CIArb) and just under half had sat as an arbitrator in at least one domestic arbitration case.

The AfAA also intends to assist African governments in strengthening the existing legislative and judicial frameworks to further facilitate arbitration. This will build on a number of recent institutional and legal developments.  In 2017, for example, South Africa modernised its legal framework via the adoption of the UNCITRAL model law in the new International Arbitration Act No.15.  Earlier this year, the Organisation for Harmonisation of Corporate Law in Africa (OHADA), revised its Arbitration Act and arbitral rules of the Joint Court of Justice and Arbitration (one of many arbitral institutions on the continent), which included measures to support investment treaty arbitration.

The AfAA aims to address some of the biggest challenges in African arbitration and the international community is eager to see exactly how it will do this.  In any event, the creation of the AfAA is a significant development in itself; it evidences the African arbitration community’s focus on raising awareness of its expertise and establishing its place in the international arbitration space.

2. The ICC’s African Commission – an effort to expand the ICC’s activities and growth on the continent

In July, the ICC announced that it will establish an African Commission to coordinate its activities and continued growth on the continent.  The Commission will be led by Ndanga Kamau (who was recently appointed Vice-President of the ICC Court) as president and Sami Houerbi (Director of ICC Dispute Resolution Services for Eastern Mediterranean, Middle-East and Africa) as secretary.  The Commission’s board will be compromised of members from 15 African jurisdictions.

Alexis Mourre, President of the ICC, explained that the “relevance of Africa for the Court’s future cannot be overstated” and that it is the region where “the development of robust and high-quality dispute resolution services is most relevant.” In addition to a rise in both cases and parties from Sub-Saharan Africa in 2017, the ICC also saw an increase in the number of arbitrators from North and Sub-Saharan Africa.  The Commission intends to further this trend through capacity-building, awareness-raising and other outreach activities.

The Commission will also work closely with the ICC Belt and Road Commission, which was launched in March to promote and develop the ICC’s offering for disputes arising out of China’s global infrastructure project.  This is in anticipation of large-scale Chinese investment in Africa in the coming years, as the number of African partners under China’s Belt and Road Initiative (BRI) continues to grow; in July, for example, Senegal became the first West African nation to enter into a cooperation agreement with China under the BRI.  The size and complexities of the BRI’s projects create the potential for a large number of high-value arbitrations on the continent.

3. AfricArb – an association of international lawyers with an enthusiasm for African arbitration

It’s not just arbitral institutions that are focusing on Africa.  Lawyers have also recognised that Africa is a distinct market, requiring specific expertise and a tailored approach.  AfricArb, a non-profit organisation launched in July, is an example of the continuing international enthusiasm for the development of African arbitration.  AfricArb was founded by a group of international practitioners, including Thomas Kendra, partner in the Hogan Lovells international arbitration team in Paris.  The organisation aims to promote the use of arbitration through the involvement of actors both inside and outside of Africa.  It will provide training and organise other events to encourage the sharing of ideas, knowledge and views.

During the launch event of AfricArb, Emilia Onyema, author of the SOAS report, pointed to its results as evidence of the extensive expertise of international arbitration in Africa.  Onyema, who is a member of the AfAA’s board of directors, explained that a concerted effort must be made to increase the representation of African practitioners in international arbitration.  While questions on how this will be achieved remain, the creation of organisations such as the AfAA and the ICC’s Africa Commission, which can draw on their institutional experience, is a significant step in the right direction.

These recent developments demonstrate the determination, of both African and international institutions and practitioners, to further strengthen African arbitration.  These, and similar organisations, will be vital in ensuring that arbitration is used as a dispute resolution mechanism across the whole of Africa, in a way that promotes and strengthens the continent’s ever growing capacity and expertise.

Latest developments in the Sanum saga: application to refuse enforcement rejected

In what has been a long-standing dispute comprising several applications before the courts of Singapore and Hong Kong, the Singapore High Court has rejected an application to refuse enforcement of an arbitral award for US$200 million in damages. The application to refuse enforcement was made pursuant to Article 36(1) of the UNCITRAL Model Law on International Commercial Arbitration (Model Law), which forms part of Singapore’s International Arbitration Act.

The applicant argued that:

  • The award was made pursuant to an arbitration agreement (or agreements) to which not all the award debtors were a party.
  • The award dealt with a dispute not contemplated by or falling within the scope of the submission to arbitration.
  • The composition of the tribunal and the seat of the arbitration were not in accordance with the agreement of the parties.

Ultimately, the court found that the applicants had done little to demonstrate the manner in which the alleged procedural irregularities had affected the arbitral procedure that was adopted, and had not produced any evidence of prejudice arising out of any procedural irregularities of the award. Accordingly, the applicants had not discharged their burden of demonstrating the seriousness of the breach. This is yet another pro-arbitration judgment delivered by the Singapore courts, again demonstrating the high threshold that must be met to refuse enforcement of an arbitral award and one which will hopefully bring the long running Sanum saga to an end. (Sanum Investments Limited v ST Group Co Ltd [2018] SGHC 141, dated 18 June 2018.)

Background

The UNCITRAL Model Law provides:

“36. Grounds for refusing recognition or enforcement

Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only:

At the request of the party against whom it is invoked, if that party furnishes to the competent
court where recognition or enforcement is sought proof that:

A party to the arbitration agreement referred to in Article 7 was under some incapacity; or the
said agreement is not valid under the law to which the parties have subjected it or, failing any
indication thereon, under the law of the country where the award was made; or

The award deals with a dispute not contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on matters beyond the scope of the submission
to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated
from those not so submitted, that part of the award which contains decisions on matters submitted
to arbitration may be recognised and enforced; or

(iv) The composition of the arbitral tribunal or the arbitral procedure was not in accordance with
the agreement of the parties or, failing such agreement, was not in accordance with the law of the
country where the arbitration took place.”

Facts
Sanum Investments Limited (Sanum), a Macanese investor was interested in pursuing business opportunities in Laos in 2007. Sanum formed a joint venture with a Laotian entity for investment in the gaming and hospitality industry in Laos. It entered into a master agreement with ST Group Co, Ltd, Mr Sithat Xaysoulivong, ST Vegas Co, Ltd and ST Vegas Enterprise Ltd (collectively the Lao respondents), which provided for three joint ventures to be created to hold and develop certain properties; two concerned the running of casinos, and the third concerned the operation of slot clubs. The underlying dispute concerned the turnover of a slot club in Thanaleng (Thanaleng slot club). Central to the determination of the jurisdictional objections was the interpretation and relevance of two dispute resolution clauses found in the master agreement and a second agreement, the participation agreement, between Sanum and ST Vegas Enterprise. The participation agreement provided for any disputes to be resolved by the arbitration rules of the Singapore International Arbitration Centre (SIAC). The master agreement contained a dispute resolution clause as follows:

“…Parties shall mediate and, if necessary, arbitrate such dispute using an internationally recognized mediation/arbitration company in Macau, SAR PRC.”

While the tribunal used the two agreements to find jurisdiction, the Lao respondents disagreed, contending that those two agreements had nothing to do with the Thanaleng slot club and that disputes concerning the Thanaleng slot club were not covered by an arbitration agreement. An award was issued by a SIAC tribunal in August 2016 in favour of Sanum. The Lao respondents were required to pay Sanum US$200 million in damages. Sanum applied to the Singapore High Court to enforce the award, and the Lao respondents made an application for the court to refuse enforcement of the award. According to the Lao respondents, the award was made pursuant to an arbitration agreement to which they all were not a party, and the award dealt with a dispute not contemplated by or falling within the scope of the submission to arbitrate.

Decision

The Singapore High Court rejected the application to refuse enforcement of the award.

The court held that the tribunal had erred in relying on the master agreement together with the participation agreement, and was satisfied that the underlying dispute in fact arose out of the master agreement alone, which contained an agreement to arbitrate.

The court also found that Sanum was only entitled to arbitrate against Mr Sithat, ST Group Ltd and ST Vegas Co Ltd and the award was binding against them alone. ST Vegas Enterprise was not a party to the arbitration agreement and the award did not bind it.

The court also considered the effect of the mediation/ arbitration clause in the master agreement, and whether these words were capable of accommodating the commencement of the arbitration under the auspices of SIAC, adopting the SIAC Rules.

The court found that the choice of selecting the institution should be given to the dissatisfied party and Sanum’s choice of SIAC as the arbitration institution was an acceptable one. However, the court also found that while the commencement of the arbitration at the SIAC was proper, the tribunal had been wrong to hold that the seat was Singapore and that the proper seat of arbitration should have been Macau.

The court considered that where the parties have evinced a clear intention to settle any dispute by arbitration, the court should give effect to such intention, even if such aspects of the agreement are ambiguous, inconsistent, incomplete or lacking in certain particulars, so long as the arbitration can be carried out without prejudice to the rights of either party and so long as this does not result in an arbitration that is not within the contemplation of either party.

Ultimately, the court said that whilst the Lao respondents relied on Article 36(1)(a)(iv) of the Model Law to seek a refusal of enforcement of the award, they had done little to demonstrate the manner in which any procedural irregularities had affected the arbitral procedure that was adopted, and had not produced any evidence of prejudice arising out of any such procedural irregularities of the award. Accordingly, the Lao respondents had not discharged their burden of demonstrating the seriousness of the breach.

Comment

In yet another pro-arbitration judgment delivered by the Singapore courts, this case again demonstrates the high threshold that must be met to refuse enforcement of an arbitral award and one which will hopefully bring the long running Sanum saga to an end.

“Attorney eyes only” order does not breach settled arbitral norms or natural justice

The Singapore High Court has refused an application to set aside an award on the basis that there had been a breach of natural justice. The central issue in the application was whether the imposition of an “attorney eyes only” order by the arbitral tribunal, restricting inspection of certain documents produced to counsel, amounted to a breach of natural justice that justified setting aside the award. The Singapore High Court rejected this argument on the basis that the tribunal had an inherent right to issue such an order, which is ingrained in both the ICC Rules and the Model Law, that it was entirely appropriate to do so, and that it caused no prejudice to the applicant. The court also rejected an argument that the first respondent had breached its implied duty to arbitrate in good faith. While the court accepted that a duty of good faith will be implied into most or all arbitration agreements, given the inherently cooperative nature of the arbitral process, it rejected an argument that the first respondent had breached this duty by employing what the applicant described as “guerrilla tactics”. The court found that there was no evidence of such tactics being employed to undermine the arbitration. The judge’s in-depth discussion and analysis of “attorney eyes only” orders raises points of wider significance for the arbitration community. The decision recognises that such orders are appropriate in circumstances where a tribunal is satisfied that such measures are necessary to protect a party’s confidential documents. The “attorney eyes only” orders in this case appear to have contained some safeguards which may reflect good practice for parties or tribunals considering such orders. (China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] SGHC 101, 26 April 2018.)

Background
Article 34 of the UNCITRAL Model Law on International Commercial Arbitration provides, in relevant part: “2. An arbitral award may be set aside by the court specified in article 6 only if: (a) the party making the application furnishes proof that:

……

(ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

….

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or (b) the court finds that:

….

(ii) the award is in conflict with the public policy of this State.”

Section 24(a) of the International Arbitration Act (IAA) (Cap 143A, 2002 Rev Ed) provides:

“Notwithstanding Article 34(1) of the Model Law, the High Court may, in addition to the grounds set out in Article 34(2) of the Model Law, set aside the award of the arbitral tribunal if –

(a) the making of the award was induced or affected by fraud or corruption; or

(b) a breach of the rules of natural justice occurred in connection with the making of the award by which the rights of any party have been prejudiced.”

To set aside an award, an applicant must establish:

  • Which rule of natural justice was breached.
  • How it was breached.
  • In what way the breach was connected to the making of the award.
  • How the breach prejudiced its rights.

(Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86 at [29]).

Facts

The dispute between the parties arose from a contract for the construction of a coal-fired power generation plant located in Guatemala (Project) signed in 2008, between the contractor, China Machine New Energy Corporation (CMNC) and the owner, Jaguar Energy Guatemala LLC (Jaguar). The contract provided for disputes arising out of the contract to be resolved by ICC arbitration in Singapore. Significantly, the contract also provided for an expedited arbitration, with a requirement for the award to be issued 90 days after the selection of the third arbitrator; or, if the majority of the arbitrators agreed, within a further 90 days. In 2013, a dispute arose between the parties and Jaguar started the arbitration in January 2014.

The arbitration

Jaguar’s case in the arbitration was that CMNC had breached the contract, entitling Jaguar to validly terminated the contract, and that Jaguar was entitled to, amongst other relief, liquidated damages for delay and the costs of completing the Project. CMNC’s case was, among other things, that Jaguar was not entitled to liquidated damages for delay because CMNC was entitled to extensions of time. Although the contract provided for the dispute to be resolved within 90 days after the final member of the tribunal was appointed, the parties agreed to amend this requirement to provide for a hearing which would commence after the expiry of the deadline for the award being delivered. In May 2014, the parties agreed to a timetable for the arbitration. Despite this, CMNC applied for a variation to the timetable, namely that the main hearing should be brought forward by approximately eight months. CMNC relied on the fact that the parties had agreed to an expedited arbitration. Jaguar opposed CMNC’s request on the basis that it was not realistic. The tribunal rejected CMNC’s request. In the event, the arbitration took much longer to complete, with the merits hearing in July 2015 and the award being rendered in November 2015.

The attorney’s eyes only regime

Procedural Order No 2 provided for the parties’ statements of case to be accompanied by “copies of all documents which the Party concerned relies on and considers essential… and which have not previously been submitted by any Party.” On 13 August 2014, CMNC and Jaguar filed their respective statements of case. Jaguar noted in its pleading, that apart from redacting certain documents and not including witnesses’ full addresses, it was withholding production of 13 documentary exhibits. Jaguar claimed that CMNC had engaged in a series of threatening actions against Jaguar and its contractors, and Jaguar had serious concerns, that if CMNC was to discover the identity of Jaguar’s contractors and certain other sensitive material, the information could be misused to interfere with the Project or the arbitration. However, Jaguar also offered to provide un-redacted copies of witness statements and withheld documents on an “attorney eyes only” (AEO) basis to CMNC’s counsel and any experts retained by them. CMNC indicated that it was unlikely to agree to an AEO disclosure order.

The parties began the document production stage of the proceedings and CMNC demanded immediate production of the withheld documents. Jaguar invited the tribunal to issue an order allowing the parties to produce documents containing sensitive information on an AEO basis, subject to the receiving party’s right to challenge such disclosure. CMNC requested the tribunal to reject Jaguar’s request to produce documents on an AEO basis for four reasons:

  • An AEO order would be procedurally unfair.
  • CMNC would not misuse information.
  • Jaguar was inviting the tribunal to pre-judge fiercely disputed matters about CMNC’s conduct.
  • The concept of AEO disclosure, a feature of US dispute resolution, should not be imported into international arbitration.

The tribunal directed that a two-stage process would apply to the disclosure of the disputed documents. First, the documents would be disclosed to external counsel only. Second, CMNC could apply to the tribunal for certain employees to be given access to the documents that Jaguar had disclosed on an AEO basis, thereby providing a safeguard, which CMNC could resort to if its counsel needed instructions from employees on specific documents for the purpose of conducting its case in the arbitration. It appears that CMNC never applied under the second stage for its employees to be shown the AEO material. The tribunal did not regard the AEO process as one limited to domestic dispute resolution in the USA, concluding: “….it is in the experience of each of the tribunal members a process adopted in international arbitration for the purpose of preserving confidential documents disclosed in international arbitration proceedings.”

The redaction ruling

After an application by CMNC and a tribunal-convened teleconference with the parties, on 19 October 2014, the tribunal ruled that the AEO regime be lifted with respect to the 12 exhibits and other documents (the “Redaction Ruling”). Jaguar was to provide CMNC with the 12 exhibits in redacted form, and CMNC’s personnel were entitled to view those redacted documents. This ruling occurred more than eight months before the main hearing. Eventually, Jaguar produced un-redacted versions of all documents to CMNC. In its award dated 25 November 2015, the tribunal unanimously found that Jaguar had validly terminated the contract for default by CMNC and allowed Jaguar’s claim for damages of more than US$129 million (the award).

Application to set aside the award
In 2016, CMNC applied to the Singapore courts to set aside the award. The crux of CMCN’s case was that the arbitration was tainted by “procedural dysfunction”. It argued that the award should be set aside as:

  • The award was made in breach of the rules of natural justice, in breach of section 24(a) of the IAA, as the AEO regime deprived CMNC of a reasonable opportunity to present its case.
  • The tribunal had breached Article 18 of the Model Law by failing to treat the parties equally and to ensure that
    CMNC was given a full opportunity of presenting its case.
  • Jaguar breached its obligation to arbitrate in good faith, and the tribunal failed to restrain Jaguar from doing so in breach of Art 34(2)(a)(iv) of the Model Law.

CMNC submitted that the imposition of the AEO regime amounted to a breach of its right to natural justice which prejudiced its rights. It argued that the “inappropriate and indiscriminate use of an [AEO order] has the effect of denying a party adequate notice and opportunity to know the evidence against it and to meet that evidence.” Jaguar argued that, under the AEO regime, CMNC was entitled to apply for designated materials to be disclosed to its employees – a point repeatedly reiterated by the tribunal – yet failed to do so. Jaguar submitted that any disadvantage that CMNC suffered due to the AEO regime was due to its own strategic choices and failures, rather than a breach of natural justice. It also argued that even if there was a breach of natural justice, CMNC did not suffer any prejudice due to the breach.

The good faith argument
CMNC contended that parties to an arbitration both bear an implied duty to arbitrate in good faith. It also contended that Jaguar employed “guerrilla tactics” in the arbitration that amounted to a breach of its duty to arbitrate in good faith and accordingly, a breach of the agreed arbitral procedure. Those alleged guerrilla tactics included:

  • Seizing the construction area and terminating CMNC’s access to an online document platform which the parties shared.
  • Seizing documents by securing the eviction of CMNC’s employees from the site and detaining them elsewhere by bribing government officials.
  • Harassing and interfering with CMNC’s potential witnesses before the arbitration.
  • Disclosing documents in a disordered and delayed way.

Decision

Kannan Ramesh J rejected all of CMNC’s arguments and dismissed its application to set aside the award. The court considered the general principles regarding the setting aside of an arbitral award for breach of natural justice pursuant to Article 34(2)(ii) of the Model Law and section 24 of the IAA, which are settled law. The court also noted that “it is also trite that natural justice requires that parties be afforded a reasonable opportunity of presenting their case”, which it said also means that it should have an opportunity to respond to the case against it, referring to the Soh Beng Tee decision. In addition, the court explained that Singapore courts adopt a policy of minimal curial intervention which entails that a court “will not intervene merely because it might have resolved the various controversies in play differently” (see Soh Beng Tee at paragraph 65). It said that in light of the wide power accorded to a tribunal to conduct an arbitration, a court will exercise its supervisory role over the tribunal’s exercise of this power with a “light hand” (see Triulzi Cesare SRL v Xinyi Group (Glass) Co Ltd [2015] 3 SLR 154 at paragraph 51). There must be a “radical breach of [the right to be heard] which is ‘serious or egregious’ (see ADG and another v ADI and another matter [2014], 3 SLR 481 at paragraph 116, affirmed in Triulzi at paragraph 134).

The AEO regime

The court held that the imposition of the AEO regime did not amount to a breach of natural justice. In setting out its reasons, the court, having considered expert evidence on the issue, made some general observations about AEO orders in international arbitration. It concluded that while AEO orders are not entrenched in Singapore jurisprudence, that is not the same as saying it is not an appropriate order in international arbitration. In addressing the tribunal’s power to impose an AEO order, the court referred to Article 20(7) of the 1998 version of the ICC Rules which states that “[the] Arbitral Tribunal may take measures for protecting trade secrets and confidential information”. This language is also mirrored in the second limb of Art 22(3) of the 2012 ICC Rules, which states: “Upon the request of any party, the arbitral tribunal may make orders concerning the confidentiality of the arbitration proceedings or of any other matters in connection with the arbitration and may take measures for protecting trade secrets and confidential information.” Accordingly, the court found that the tribunal was empowered to impose an AEO order. It observed, in passing, that there is no equivalent provision under the 2015 SIAC Rules, the 2014 LCIA Rules or the 2013 HKIAC Rules.

The court rejected CMNC’s contention that the AEO regime significantly undermined its opportunity to present its case. The court referred to the fact that CMNC never applied under the second stage of the regime for its employees to access the AEO designated material, despite the tribunal’s repeated reminders, and without good reason. The court also rejected CMCN’s argument that the Redaction Ruling was only a “slight reprieve”. The court explained that the Redaction Ruling in fact “cured any prejudice caused by the application of the AEO regime to the 12 exhibits and the Further Documents that were disclosed by Jaguar in redacted form”. While the court accepted that Jaguar made unauthorised redactions, CMNC could have sought the appropriate order from the tribunal in respect of those redactions.

The court considered that CMNC did not suffer any prejudice that justified setting aside the award. The thrust of CMCN’s complaint was that it did not have sufficient time to review the documents purporting to support Jaguar’s claim for costs of completion. However, the court found that that was at least partly due to its own actions.

Good Faith

The court did not accept CMNC’s good faith arguments. Importantly, the court noted that the issue of whether an arbitration agreement includes an implied duty to arbitration in good faith does not appear to have been decided in Singapore before, but referred to a passage in Gary Born, International Commercial Arbitration (Wolters Kluwer, 2nd Ed, 2014), at pages 1257 – 1259, which states that an arbitration agreement necessarily includes an implied duty to arbitrate in good faith: “…the positive obligation to participate in the resolution of disputes by arbitration also necessarily includes more general duties to participate in good faith and cooperatively in the arbitral process. This follows both from the nature of the arbitral process and from the general rule of pacta sunt servanda.”

Therefore, the court concluded that an agreement to arbitrate is an agreement to participate in a process that requires the mutual cooperation of the parties. This is not necessarily implied as it is inherent in the very nature of an arbitration agreement. However, the judgment notes that it was unclear as to whether this duty to cooperate can be assimilated to, or falls under a more general duty of good faith. This matter is not settled under Singapore law.

The court concluded at that:

“the answer will turn on the interpretation of the arbitration agreement under the governing law of the same, which will differ between arbitration agreements.” (paragraph 196, Judgment) The court also noted that not all jurisdictions recognise a general duty to perform contractual obligations in good faith, and indeed there does not seem to be such a duty under English law, or under Singapore law. Despite this, the judge held that: “a duty of good faith will be implied into most or all arbitration agreements, even if there is no general duty to perform contractual obligations in good faith under that law, given the inherently cooperative nature of the arbitral process.” (paragraph 198, Judgment) The judge proceeded on the basis that Jaguar did have an implied duty to arbitrate in good faith, but that it did not breach that duty. The judgment notes that the academic commentaries that CMNC had brought to its attention on guerrilla tactics indicate that such tactics are employed with the aim of obstructing, delaying, derailing or sabotaging an arbitration. He found no evidence that Jaguar performed any of the alleged acts with the aim of undermining the arbitration. The court added that whilst the academic commentaries suggest that an arbitral award may be set aside on the basis of guerrilla tactics employed by the successful party, none of those commentaries suggested that guerrilla tactics may justify the setting aside of an arbitral award on the ground that they reflect bad faith.

Failure to investigate allegations of corruption

The court also rejected a challenge on public policy grounds arising from the tribunal’s failure to investigate allegations of corruption. The court accepted that in certain cases tribunals bear “a duty to raise and enquire, even sua sponte, into the issue of corruption”. The judge accepted this, but held that no duty arose in this case because the allegations had no bearing on the issues in the arbitration. Finally, the court did not accept that a breach would per se render the award liable to be set aside on public policy grounds.

Comment

In rejecting CMNC’s argument that there had been a breach of natural justice, the Singapore High court has reaffirmed the high threshold that is required to set aside an arbitral award. Kannan Ramesh J’s in-depth discussion and analysis of AEO orders raises points of wider significance for the arbitration community. The decision recognises that AEO orders are appropriate in circumstances where a tribunal is satisfied that such measures are necessary to protect a party’s confidential documents. The AEO orders in this case appear to have contained some safeguards, which may reflect good practice for parties or tribunals considering such orders. The discussion as to the tribunal’s duty to investigate corruption is also of wider significance, as is the practical requirement for a connection between the allegations and the matters in dispute in the arbitration.

Finally, the ruling is also significant for its consideration of the duty to arbitrate in good faith. Clearly challenges based on allegations of guerrilla tactics will be hard to make out. The court proceeded on the basis that the parties had implied obligations to arbitrate in good faith. Although it found no breach, this is significant given that the Singapore International Arbitration Act has no provision equivalent to Article 2A (1) of the Model Law which provides that in interpreting the Model Law, “regard is to be had to …the observance of good faith”. Given that a number of institutions have now adopted expedited procedures, it is of some note that it appears to have been common ground that a reasonable opportunity of presenting a party’s case in an expedited arbitration was not going to be the same reasonable opportunity as in a full-length arbitration. The court was evidently sceptical of a submission that a tribunal in an expedited process bore a heightened duty to police the process or that additional vigilance was required regarding due process.

A version of this Legal update was first published on Practical Law and is reproduced with the kind permission of the publishers.

Application to adjourn enforcement proceedings dismissed (Singapore High Court)

The Singapore High Court has refused an application to challenge the enforcement of a Danish Institute of Arbitration award, and dismissed an alternate argument for the adjournment of the enforcement proceedings. The applications to challenge enforcement were made pursuant to section 31(2)(c) and section 31(4)(b) of the International Arbitration Act (IAA) (Cap 143A, 2002 Rev Ed), on the basis that the applicant had been unable to properly present its case in the arbitration and that enforcement of the award would be contrary to the public policy of Singapore because of allegations of fraud committed by the respondent. However, the court found that no case for fraud had been made out and that the award should be immediately enforced.
For the first time the Singapore court also considered the application of section 31(5)(a) of the IAA, that the enforcement of the award should be adjourned pending determination of an application to set aside the award at the seat, which in this case was Denmark. The court concluded that no adjournment should be granted and noted that the approach in Singapore to an application under section 31(5)(a) is to strike a balance between the competing interests of the parties; the court will come down on the side of an outcome that is the most just or the least unjust. (Man Diesel Turbo SE v I.M. Skaugen Marine Services Pte Ltd [2018] SGHC 132, 28 May 2018).

Background

Section 31(2)(c) of the International Arbitration Act (IAA) provides:

“2. A court so requested may refuse enforcement of a foreign award if the person against whom enforcement is sought provides to the satisfaction of the court that –

(c) he was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case in the arbitration proceedings.”

Section 31(4(b) of the IAA provides:

“4. In any proceedings in which the enforcement of a foreign award is sought by virtue of this Part, the court may refuse to enforce the award if it finds that –

(b)enforcement of the award would be contrary to the public policy of Singapore.”

Section 31(5)(a) of the IAA provides:

“31 (5) – Where, in any proceedings in which the enforcement of a foreign award is sought by virtue of this Part, the court is satisfied that an application for the setting aside or for the suspension of the award has been made to a competent authority of the country in which, or under the law of which, the award was made, the court may and may –

(a) if the court considers it proper to do so, adjourn the proceedings or, as the case may be, so much of the proceedings as relates to the award.

Facts

The claimant in the arbitration, Man Diesel & Turbo SE (Man Diesel), a German manufacturer of marine engines, commenced arbitration proceedings in Denmark to compel the respondent, a Singaporean subsidiary of the Norwegian LNPG carrier group IM Skaugen SE (Skaugen), to fulfil its outstanding contractual obligations under sale and purchase agreements (SPAs) for four marine diesel engines and propellers (Shipsets). In 2008, Skaugen took delivery and paid for the first two Shipsets. However, Skaugen made several attempts at postponing the delivery for the remaining two Shipsets for various reasons. Separately, technical problems arose in relation to the first two Shipsets, and further issues arose when irregularities relating to Factory Acceptance Tests (FATs) on the diesel engines in those Shipsets came to light in 2011. Man Diesel maintained that Skaugen had simply lost interest in Shipsets 3 and 4 as a result of the 2008 global financial crisis, which affected the shipping industry, and instead viewed Skaugen’s allegations of irregularities in the FATs as an excuse to get out of the SPAs with Man Diesel.

Skaugen argued that it was not obligated to take delivery of the remaining two Shipsets as:

  • It had been fraudulently induced by Man Diesel to enter into the SPAs.
  • The SPAs had been terminated in 2012 by mutual agreement of the parties.
  • The SPAs were terminated for cause, namely for defects relating to two of the Shipsets.

Man Diesel argued in response that the defects occurred long after the expiry of the warranty period in the SPAs and that the irregularities in the FATs were irrelevant. Skaugen also applied to include a new counterclaim regarding excessive fuel consumption relating to the engines in the first two Shipsets. In support of its new counterclaim, Skaugen sought disclosure of documents relating to Man Diesel’s internal investigations of fuel consumption tests and also sought to adduce an expert report that showed that Man Diesel had manipulated the fuel consumption tests of its engines. Skaugen also requested a postponement of the oral hearing. The tribunal rejected Skaugen’s application to postpone the oral hearing. It also declared as inadmissible, and struck from the record, both Skaugen’s new counterclaim and the expert report prepared in support of the new counterclaim, and disallowed any further disclosure.

The Award

The final award was rendered with a majority decision finding that the SPA for the diesel engines had been terminated by Man Diesel on the account of Skaugen’s refusal to take delivery of engines 3 and 4, and to pay the outstanding price. It also determined that the SPA for the propellers remained valid and binding, and Skaugen was ordered to take delivery of propellers 3 and 4. Skaugen made an application to the Singapore High Court to challenge enforcement of the award, or alternatively to stay or adjourn the enforcement of the award pending the determination of Skaugen’s application in the Danish courts to set it aside.

Skaugen argued:

  • It had a strong case in the setting aside proceedings before the Danish courts. An immediate enforcement of the award would pre-empt the decision of the court of the seat.
  • The setting aside proceedings before the Danish courts would be disposed within a relatively short period of time.
  • There would be no prejudice to Man Diesel if an adjournment were granted as there were no assets in the jurisdiction against which enforcement could be sought.

Decision

The Singapore High Court rejected the application to adjourn the enforcement proceedings. A decision regarding an adjournment of the enforcement proceedings is a matter of discretion for the enforcing court and therefore, when faced with a section 31(5)(a) application, there is no threshold test. Rather, the enforcing court is required to strike a fair balance and come down on the side of an outcome that is the most just or least unjust. The court also noted that the applicant must at least show, from the strength of its arguments, that it is demonstrably pursuing a meritorious setting aside application before the court of the seat. This is aimed at guarding against attempts at frustrating or delaying the enforcement of a valid foreign award. It considered that if the setting aside application was lacking in merits, there would be little or no tangible prejudice to the award debtor if their application for an adjournment was refused. The court also noted that another factor the enforcing court is concerned with is the likely consequences of an adjournment; in particular, the likely length of delay. In this case, the court considered that the delay would be too long and the adjournment sought would therefore prejudice Man Diesel.

As there were no Singapore decisions on a section 31(5) adjournment application, the court considered it should therefore take guidance from English authorities. In this regard, the court noted that the English authorities show a number of factors that should be considered:

  • Whether the application to set aside before the court of the seat is bona fide and not simply a delay tactic.
  • The length of adjournment, the likely consequences of an adjournment and any resulting prejudice.
  • The specific circumstances of each case.

Ultimately, the court took the view that no adjournment should be granted.

The setting aside application before the seat-court

One of the factors raised by Skaugen in its application for an adjournment was that it had a strong case in the  setting aside proceedings before the Danish courts, and an immediate enforcement of the award would pre-empt the decision of the Danish courts. The substance of Skaugen’s application for setting aside the award in the Danish courts arose from the tribunal’s decision to disallow Skaugen’s new counterclaim and its related expert evidence. However, the court found that Skaugen had not shown that the tribunal had acted beyond the bounds of its discretion, nor shown how the tribunal’s rejection of the additional material was a denial of procedural justice. The court added that it is a well-accepted principle of arbitration that a tribunal is master of its own procedure and has wide discretionary powers to conduct the arbitration in any way it sees fit, subject to any procedure agreed to by the parties and that it is in a manner that is neither manifestly unfair nor contrary to natural justice.

Challenge to enforcement of the award

The grounds raised by Skaugen to resist enforcement were the same as the grounds relied upon in the setting aside application before the Danish courts. The court noted that for a challenge under section 31(4)(b) of the IAA, the court has to consider the public policy of Singapore, and the court found that Skaugen had not demonstrated that the public policy of Singapore was in any way engaged. It noted that the evidential threshold for establishing fraud is a high one as demonstrated in Prometheus Marine Pte Ltd v Ann Rita King [2018] 1 SLR at [55]. Further, the court referred to the recent decision of the English Court of Appeal in RBRG Trading (UK) Ltd v Sinocore International Co Ltd [2018] EWCA 838, (see Legal update, Enforcement of CIETAC award not contrary to public policy in case of possible attempted fraud (English Court of Appeal), which is illustrative of the high evidential requirement to prove fraud and further demonstrates the need to show a causal connection between the alleged fraud and the tribunal’s decision.

Comment

This is the first decision in Singapore concerning the application of section 31(5)(a) of the IAA. The Singapore High Court examined the circumstances in which proceedings for the enforcement of a foreign award may be adjourned and noted that whilst section 31(5)(a) does not provide a threshold test in respect of a grant of an adjournment, the approach in Singapore is to strike a balance between the competing interests and the court will come down on the side of an outcome that is the most just or least unjust. In this case, the applicant sought to set aside the award in Denmark, and if it failed in that challenge, to then resist enforcement of the award in Singapore. At the same time, it sought an adjournment of the enforcement proceedings in Singapore pending the outcome of the setting aside application in Denmark. Such conduct, the Singapore court said, brought to the surface the perennial tension between the notion of finality of an international arbitral award and the two remedies available to an award debtor, that is, to set aside an award at the seat and/or resist enforcement at the enforcement court. The court noted that the concern most often voiced is the award debtor’s deployment of one or both of these remedies as a delay tactic used when there is no valid reason to challenge the award at the seat or to resist enforcement in other jurisdictions. It is left to the enforcing court to decide whether or not to adjourn enforcement proceedings. Therefore, an applicant must therefore show that it is demonstrably pursuing a meritorious setting aside application at the seat so as to guard against delay tactics.

 

A version of this Legal update was first published on Practical Law and is reproduced with the kind permission of the publishers.

Reform of the Arbitration Act 1996 and confidentiality: it’s not all about an opt-in

In December 2017, the Law Commission launched its Thirteenth Programme of Law Reform. In it, the Law Commission suggests that it might be time to reform the English Arbitration Act 1996 (AA 1996).

Much has been written about what those reforms might entail. A popular suggestion is that it is time to reverse, through statute, the presumption that arbitration is a confidential process.

It is said by those pressing for reform that commercial arbitration suffers from both a lack of transparency and a legitimacy deficit, and that it is also too unpredictable. The proposed solution is to reform the AA 1996 by introducing an “opt-in” system, so that arbitral proceedings seated in England would only be treated as confidential where the parties have expressly provided as such.

We are unconvinced by this proposal.

In its report on the Arbitration Bill in 1996, the Departmental Advisory Committee on Arbitration Law noted that, “there is… no doubt whatever that users of commercial arbitration in England place much importance on privacy and confidentiality as essential features of English arbitration”.

In his 2016 BAILII Lecture, Lord Thomas (the then Lord Chief Justice) suggested that the importance of confidentiality in arbitration is overrated. However, the evidence suggests that this is not the case, with Queen Mary University of London’s 2015 International Arbitration Survey finding that confidentiality was selected by in-house counsel as being “the second most frequently listed valuable characteristic”.

Given the apparent importance of confidentiality to users of arbitration, it is necessary to test carefully the underlying rationale for the proposed reforms; namely, to provide greater transparency and predictability to the arbitral process. It is also necessary to assess whether an “opt-in” system would have the desired effect.

Transparency

Some strands of international arbitration are moving towards increased transparency at an exponential pace. In the field of investor-state disputes in particular, the new 2014 UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration and the ensuing Mauritius Convention on Transparency in Investment Arbitration reversed the presumptions of confidentiality and privacy in investment treaty arbitration, in favour of a presumption of openness. In investor-state dispute settlement (ISDS), there is a clear trend towards restricting confidentiality.

Should this increased transparency be applied to commercial arbitration?

Transparency helps alleviate concerns about legitimacy in disputes between investors and sovereign states. Disputes involving public bodies often involve matters of public interest. Taxpayers have a legitimate interest in knowing how their tax dollars, pounds and euros are being spent. However, such factors are, if not absent altogether, usually much more muted in commercial arbitration.

Moreover, mechanisms are already in place that allow for a certain degree of transparency in commercial arbitration.

Parties can already bring arbitration proceedings into the public eye by challenging an award before the English courts, or by commencing enforcement proceedings. There is no express rule applying confidentiality to arbitration proceedings before the courts (which includes documents on the court file). It is at the court’s discretion whether or not details of an underlying arbitration will be made publicly available.

The recent cases of Symbion Power LLC and UMS Holding demonstrate the willingness of the English courts to allow awards and other materials arising from confidential arbitration proceedings to enter the public domain.

Additionally, both the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA) already have policies of publishing anonymised awards and decisions in certain circumstances.

It is, of course, important that the legitimacy of the arbitration process is maintained so that the system continues to operate effectively. At its core, however, arbitration is a consensual mechanism for resolving disputes, which is ultimately designed to facilitate trade and commerce. In order to achieve this objective, it should meet the needs of the parties who use it. Otherwise, they may stop doing so.

Beyond academic circles, there doesn’t seem to be much concern about a lack of transparency amongst users of commercial arbitration, whose numbers are consistently growing (as confirmed by statistics published by the LCIA, the ICC and the Singapore International Arbitration Centre (SIAC)).

It therefore seems unnecessary, for the time being at least, to seek to preserve the legitimacy (and presumably also the popularity) of the arbitral process by undermining one of the features that is most valued by its users.

Predictability

It has also been argued that reversing the presumption of confidentiality would help make the arbitral process and its outcomes more predictable. It is said that one way of achieving this is to encourage a richer body of precedent, helping the development of the law in fields that traditionally rely heavily on arbitration, such as construction or shipping.

This was Lord Thomas’ point in arguing for the reform of section 69 of the AA 1996 (a subject for another day). However, it is not a reason for reversing the presumption of confidentiality because previous awards do not have precedential value.

In those circumstances, there is a risk that depriving awards of confidentiality could have the paradoxical effect of developing two parallel sources of decisions: awards given by arbitrators (without precedential value) and court judgments (that do have precedential value), potentially leading to uncertainty as to which will be preferred by arbitrators in subsequent cases. No doubt parties and their counsel would feel the need to rely on both in their submissions, which would inevitably increase the time and costs proceedings.

As regards the arbitral process itself, in our view, predictability would be better served through the development of soft law principles and guidelines (such as the International Bar Association (IBA) Rules on the Taking of Evidence in International Arbitration) than by doing away with confidentiality.

Inherent disadvantages of “opt-in” systems

Moreover, an “opt-in” system may not adequately address concerns about transparency and predictability in any event.

A default “opt-in” system is Schrodinger’s confidentiality mechanism: it simultaneously works and it doesn’t. For those parties who do not necessarily have sophisticated legal processes or whose commercial contracts are drafted without arbitration-specific advice, it will “work” in the sense that they might find themselves unwittingly deprived of a feature of arbitration they had taken for granted. The “opt-in” system also doesn’t work, in the sense that those parties who actively want to preserve confidentiality will simply opt-in and keep the “curtain of secrecy” firmly shut.

Conclusion

Reversing the presumption of confidentiality risks seriously undermining one of the most valued characteristics of English seated arbitration. Transparency and predictability are valid concerns and objectives, but they are not so pressing in commercial arbitration that such a radical change is required. Although more can be done in both respects, in our view reversing the presumption of confidentiality is too extreme and risks throwing out the baby with the bathwater.

A measured approach is especially important given the current political and economic environment, particularly in the lead up to Brexit. In post-EU times, London will need to work harder to maintain its reputation as a business-friendly and commercially-oriented arbitration hub. Reversing the presumption of confidentiality at such an uncertain time risks sending the wrong message to the market.

 

This article was first published on the Practical Law Arbitration blog. 

Court of Final Appeal extends time for First Media to challenge enforcement orders and judgment

In Astro Nusantara International B.V. and Others v. PT First Media TBK [2018] HKCFA 12; FACV 14/2017 (11 April 2018), Hong Kong’s highest court the Court of Final Appeal (“CFA“) handed down its decision on 11 April 2018 in a long-running dispute between members of a Malaysian media group (“Astro”) and First Media, a company that is a part of an Indonesian conglomerate referred to as Lippo.  The issue before the CFA concerns the refusal of the time extension to set aside the Hong Kong enforcement orders and judgment.

The saga began in 2008 when Astro commenced an arbitration against Lippo and First Media seeking monetary claims for the breakdown of their joint venture.  During the arbitration, Astro applied to join additional parties who had the main monetary claims, which was contested unsuccessfully by Lippo before the arbitral tribunal (“Joinder Decision”).  The arbitration then proceeded and awards in favour of Astro in a sum exceeding US$130 million were made.

Astro subsequently sought enforcement of the awards against First Media in Singapore and Hong Kong.  The Singapore Court of Appeal held that the Joinder Decision was made erroneously as the arbitral tribunal was not entitled to join entities that were not parties to the agreement.   Accordingly, it was found that the arbitral tribunal lacked the jurisdiction to make the awards in favour of the additional parties, and that the Singapore enforcement orders in favour of these additional parties should be set aside (“Singapore Decision”).

Around the same time, enforcement of the awards was being sought in parallel in Hong Kong.  The CFI initially granted leave for Astro to enforce the awards against the Lippo entities.  Under Hong Kong law, they had 14 days to set aside the enforcement orders.  However, no such application was made and the CFI entered judgment against them in terms of the awards.  It was only about 14 months later that First Media took out summons applying for an extension of time to apply to set aside the Hong Kong enforcement orders and judgment (“EOT Application”).

The CFI refused to exercise its discretion to grant leave for the EOT Application, on the basis that there was a very substantial delay in the EOT Application (14 months late), that First Media had made a deliberate choice to exercise a “passive remedy” and that the awards had not been set aside in Singapore (being the seat of the arbitration).  Importantly, the CFI ruled that First Media was precluded from challenging the enforcement of the award on the basis that it was in breach of its duty of good faith – by participating in the arbitration and then raising objections to jurisdiction at the enforcement stage.

First Media then appealed this decision to the Hong Kong Court of Appeal (“CA”).  The CA overturned the CFI’s findings that there was a breach of good faith, on the basis that the CFI failed to take sufficient account of the fundamental defect that the awards sought to be enforced against the additional parties who were wrongly joined by the arbitral tribunal were made without jurisdiction.  It was also appropriate for First Media to exercise its “choice of remedies” – i.e. it was open to either set aside the award or to resist enforcement once sought.  The CFI was in error in not giving proper recognition to the findings in the Singapore Decision.  The Singapore decision was of central importance because it conclusively determined there was no valid arbitration agreement between First Media and the additional parties, and raised an issue estoppel to that effect.  The CA, however, dismissed the appeal due to the reasons relied upon by the CFI, i.e. the substantial delay, the fact that a deliberate decision was taken not to apply to set aside within the prescribed time and that the awards had not been set aside at the seat of the arbitration.  The CA found that there was no improper exercise of discretion by the CFI judge in considering irrelevant matters, nor had he reached a “plainly wrong” decision.  You can revisit the CA decision in our December 2016 note “Consistency restored as Astro v Lippo appeal dismissedhere.

First Media then further appealed to the CFA which granted the appeal and set aside the decisions of the lower courts.  The CFA first found that the lower courts had erred in principle by failing to accord proper weight to the fundamentally important absence of a valid arbitration agreement, which justified the CFA’s interference with their exercise of discretion.  It then found that the lower courts had miscarried their discretionary exercise by considering the fact that the awards had not been set aside, as doing so would conflict with the “choice of remedies” principle.  Furthermore, while recognizing that a delay of 14 months is indeed substantial, it must be balanced against the fundamentally important absence of a valid arbitration agreement.  To refuse an extension would be to deny First Media a hearing where its application has “decisively strong merits”, and would involve penalising it for a delay which caused Astro no uncompensable prejudice to the extent of permitting enforcement of an award for US$130 million.  As doing so would be wholly disproportionate, the CFA accordingly allowed the appeal and granted the EOT Application to set aside the Hong Kong enforcement orders and judgment.