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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.

Winding-up Petition v Arbitration Clause: Hong Kong Court Dismisses Winding-up Petition in Favor of Arbitration Clause

On 2 March 2018, the Hong Kong Court of First Instance (“CFI“) issued a notable decision which signifies a development of Hong Kong law in the contexts of insolvency and arbitration.  The CFI held in Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426 that a winding-up petition issued on the ground of insolvency should generally be dismissed if there is an arbitration clause contained in an agreement giving rise to a debt relied on to support the petition.  This is a deviation from Hong Kong’s previous position whereby such petition may only be dismissed by establishing a bona fide defence on substantial grounds to the claim for the underlying debt.

Facts

The winding-up petition was issued by Lasmos Ltd (“Lasmos“) against Southwest Pacific Bauxite (HK) Ltd (“Company“), for the latter’s alleged failure to pay a US$259,700.48 service fee (“Debt“) under a management services agreement dated 24 July 2013 between the parties (“Agreement“).  The Agreement contains a clause referring the parties’ disputes to arbitration failing mediation.

The Company declined to pay the Debt on the basis that the parties had never agreed on the relevant fee and the rate to be charged.  In resisting the winding-up petition, the Company submitted that this constitutes a “bona fide dispute on substantial grounds” as to what further sums were payable to Lasmos.

Legal principles

The CFI first summarised Hong Kong’s previous position on the interplay between a winding-up petition and an arbitration clause:

  • A winding-up petition based on the ground of insolvency will not be stayed to arbitration if the debt arises under an agreement which contains an arbitration clause; to defeat the petition, the debtor must demonstrate that it has a “bona fide defence on substantial grounds to the claim for the underlying debt” (Re Sky Datamann (Hong Kong) Limited (unrep., HCCW 487/2001)).
  • In Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759, the Hong Kong CFI rejected the objection that because of its nature a just and equitable winding up cannot be stayed to arbitration. The correct approach is to identify the substance of the dispute between the parties and ask whether or not that dispute is covered by the arbitration agreement.  .

The CFI opined that these decisions had not discussed in detail whether a dispute between a petitioner and a company over a debt relied on to establish locus to present a winding-up petition is arbitrable, and observed that this was “important in determining whether a creditor should be required to arbitrate a disputed debt before presenting a petition” in recent English and Singapore decisions:

  • The English Court of Appeal held in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 (“Salford“) that a winding-up petition should be dismissed in favour of arbitration, noting that it would be “anomalous, in the circumstances, for the Companies’ Court to conduct a summary judgment type analysis of liability for an unadmitted debt, on which a winding up petition is grounded, when the creditor has agreed to refer any dispute relating to the debt to arbitration“, as that would be “entirely contrary to the parties’ agreement as to the proper forum for the resolution of such an issue and to the legislative policy of the 1996 [Arbitration] Act“. The CFI drew similarities between the English Arbitration Act and the Hong Kong Arbitration Ordinance, noting that “[a]s in England, the Legislature in Hong Kong has enacted legislation advancing a policy encouraging and supporting party autonomy in determining the means by which a dispute arising between them should be resolved“.  Salford was subsequently followed in Eco Measure Marketing Exchange Ltd v Quantum Climate Services Ltd [2015] BCC 877, leading the CFI to conclude that “the present position in England is that if an alleged debt arising under an agreement containing an arbitration clause is not admitted the petition should be dismissed“.
  • With respect to the position in Singapore, the CFI found that BDG v BDH [2016] 5 SLR 977 (“BDG“) also adopted the Salford approach, which was consistent with decisions in Singapore granting a stay of proceedings in favour of arbitration. However, while the Singapore court held in BDG that it was not concerned with the strength of the company’s defence, it wasnecessary for the company to demonstrate that there is a prima facie dispute, and that there is prima facie compliance with the dispute resolution clause.

The CFI’s analysis

Comparing the different approaches taken by the Hong Kong authorities and the more recent ones in England and Singapore, the CFI concluded that the proper nature of a winding-up petition is for a creditor to recover its debt, rather than out of “some altruistic concern for the creditors of the company generally” as it would be “the most efficacious method of obtaining payment“.  The CFI noted that requiring a creditor to arbitrate a dispute without first determining whether the company has a bona fide defence on substantial grounds would, in fact, be holding a creditor to his contractual bargain – namely, to resolve any dispute by arbitration.  The CFI found comfort in the fact that doing so would not deprive a creditor of an advantage that it has under the existing authorities, as there are circumstances in which a creditor whose debt is disputed would be justified in issuing a petition before an arbitration had been concluded.  By way of an example, if a creditor can demonstrate a prima facie case for a winding up and a risk of misappropriation of assets or some other matter, a petition could be issued and stayed other than for applications relevant to the provisional liquidation pending determination of the arbitration.

Based on the foregoing, the CFI decided to depart from the previous approach in Hong Kong and held that a winding-up petition should generally be dismissed if: (a) a company disputes the debt relied on by the winding-up petitioner; (b) the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and (c) the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process and files an affirmation in accordance with Rule 32 of the Companies (Winding Up) Rules (Cap 32H) demonstrating this.

Applying the new test to the present case, since the Company disputed the Debt and required the dispute to be resolved in accordance with the arbitration clause in the Agreement, the CFI found that Lasmos’ petition should be dismissed.  In any event, the CFI found that it would have dismissed the petition since it was arguable on the facts that the parties’ discussions fell short of arriving at a binding agreement on fees resulting in the claim for a liquidated debt, i.e. there was a bona fide dispute on substantial grounds.

Conclusion

This case is significant for both creditors and debtors, in that a winding-up petition may now be dismissed based on the existence of an arbitration clause in an agreement giving rise to the debt relied on for the petition.  Previously, companies must positively establish that there is a “bona fide dispute on substantial grounds” in order to dismiss such petition.  The present position represents a lower threshold in dismissing a winding-up petition.  However, the Hong Kong courts have upheld the contractual bargain of the parties to arbitrate in dismissing a winding-up petition.

This case is a welcomed decision; it confirms the Hong Kong courts’ pro-arbitration stance, as well as bringing Hong Kong in line with the contemporary jurisprudence in England and Singapore.  In the eyes of the creditors, however, this case serves as a potential roadblock to winding up a company if there is a liquidated debt and the agreement giving rise to the debt contains an arbitration clause.  Creditors must now take into account additional factors when pursuing a winding-up petition, such as the possible costs associated with an arbitration in settling a debt dispute.

* The views and opinions expressed in this article are those of the authors and do not necessarily reflect Hogan Lovells’ position.

Late twist to the Commisimpex saga as French Supreme Court reverses its position on state immunity from execution

On 10 January 2018, the French Supreme Court issued a second decision in the Commisimpex v Democratic Republic of Congo case, shifting its position on state immunity from execution. In the light of the new Sapin II law, the court held that a waiver of immunity from execution has to be both specific and express when it comes to seizing diplomatic assets. This decision is inconsistent with the approach taken in the French Supreme Court’s previous decision on 13 May 2015 in the same case.

Introduction

State immunity from execution is a principle of international law which prevents a state’s assets held in another jurisdiction from being seized without its consent by a party seeking to execute a judgment or an arbitral award rendered against that state.

As states are becoming increasingly involved in both commercial and investment arbitration, state immunity and its influence on the practical enforcement and execution of awards has become a major concern. Winning an arbitration remains theoretical if the wining party cannot execute an award. Consequently, several legal systems have acknowledged that immunity from execution may be waived upon certain conditions, although the rules regarding the scope, validity and the efficiency of such a waiver may differ between different states. In particular, a significant issue to be determined is whether or not a simple express waiver of immunity may cover not only state assets used for commercial purposes but also any asset intended to be used for public purposes, and in particular diplomatic assets.

The concept of state immunity from execution in France was historically founded in case law. This legal landscape is changing, however, with the adoption on 9 December 2016 of a new bill on transparency, anti-corruption and modernisation (the Sapin II law), which introduced new provisions governing measures of execution against other states’ assets in France. In particular, the Sapin II law created a new article L.111-1-3 in the Civil Enforcement Procedure Code, providing that execution measures cannot be taken on property or assets used or intended to be used in the exercise of diplomatic missions, “unless there is an express and specific waiver of immunity by the states concerned.”

Relevant facts

The decision rendered by the Supreme Court on 10 January 2018 is the last one of a series of decisions concerning state immunity from execution in the case of Commisimpex v Democratic Republic of Congo.

In December 2000 and January 2013, the Société Commissions import export (Commisimpex) obtained two awards against the Democratic Republic of Congo (the Congo) following International Chamber of Commerce (ICC) proceedings seated in Paris. The two awards settled disputes relating to the Congo’s outstanding debts under a number of contracts for public works performed by Commisimpex throughout the 1980s.

In 2011, in an effort to execute the first of these awards, which amounted to EUR 167,652,461, Commisimpex attempted to seize the diplomatic bank accounts held by the Congolese embassy and its delegation to the UNESCO in Paris.

Relying on the decision of the French Supreme Court in the case of NML Capital v Republique Argentine No.09-72.057 from September 2011, the Versailles Court of Appeal found in favour of the Congo, that a waiver of a state’s immunity to execution must be both express and specific if it is to be in respect of diplomatic funds (Versailles C.A, 15 November 2012, n° 11-09073). Accordingly, since the Congo had not specifically mentioned diplomatic assets in its waiver, Commisimpex could not seize the funds in the diplomatic bank accounts.

However, the Versailles Court of Appeal decision was overturned by the French Supreme Court on 13 May 2015 on the basis that “international customary law only requires an express waiver of immunity from enforcement” (Cass, civ. 1ère, 13 May 2015, n°13-17751). Accordingly, the French Supreme Court referred the case back down to the Paris Court of Appeal to rule on the merits of the legality of the seizure.

The Paris Court of Appeal followed the reasoning of the Supreme Court and held on 30 June 2016 that a waiver need only be express and not specific. It therefore deemed lawful the seizure of the Congolese embassy and UNESCO delegation bank accounts by Commisimpex.

However, only six months after the decision of the Paris Court of Appeal, on 9 December 2016, the French government adopted the Sapin II law. As described above, this law introduced Article L.111-1-3 to the French Civil Enforcement Procedure Code, requiring a waiver of immunity from execution to be both express and specific if it is to apply to diplomatic assets.

In this context, on 30 June 2016, the Congo filed an appeal to the French Supreme Court to reverse the decision made by the Paris Court of Appeal on that same date. The Congo argued that by deciding that a waiver need only be express to apply to diplomatic assets, the Paris Court of Appeal had violated the Vienna Convention on Diplomatic Relations of 18 April 1961 and customary international law.

Decision

The French Supreme Court held in favour of the Congo, reversing the decision of the Paris Court of Appeal and its own decision in the same case.

In finding that an express waiver of immunity was not sufficient without specificity for the purpose of seizing diplomatic assets, the French Supreme Court took the position set out in the Sapin II legislation, despite that legislation having not yet come into force. Interestingly though, the Supreme Court acknowledged that this new legislation “cannot apply to the present dispute” but noted that its decision was based on a reversion to “its older case law” (likely referring to the NML decision of 2011 and a second decision involving the same parties from 2013) as “enhanced by the new law”. As well as explicitly mentioning the Article L.111-1-3 of the Civil Enforcement Procedure Code in the decision, the court also referred to the Vienna Convention on Diplomatic Relations and to international customary law.

To justify further its alignment with the new law, the French Supreme Court emphasised that there was an imperious need for consistency, considering that state immunity from execution is “a subject matter affecting states’ sovereignty and the preservation of their diplomatic representations.” With this in mind, the court therefore insisted on achieving the “objective of legal coherence and certainty.” By abandoning its interpretation set out on 13 May 2015, one of the court’s main aims seems thus to put an end to the discrepancy between codified law and case law on the subject of state immunity from execution, and to restore legal predictability.

In its decision of 10 January 2018, the French Supreme Court did not refer the case back to another Court of Appeal, but confirmed on the merits that the seizure of the Congolese bank accounts should be lifted, thus bringing to an end the Commisimpex saga before the French courts.

Comment

Given the change of direction by the French Supreme Court, there is likely to be widespread discussion between commentators, academics and practitioners over the next months on this decision. In particular, concerns have already been raised in relation to the Sapin II law as to whether the specificity requirement for waivers of immunity from execution unduly restricts a state creditor’s right of access to justice, as recognised under Article 6.1 of the European Convention of Human Rights. In addition, whilst the Supreme Court justified its decision on the basis of creating legal predictability, some may find this paradoxical, since the decision may be seen as indirectly giving retroactive effect to the new Article L.111-1-3 (although it took care to refer to previous case law as the basis for the decision). It is clear, however, that parties entering into contracts with state entities will need to be extra careful when drafting and negotiating waivers of immunity from execution.

 

This post was first published on the Practical Law Arbitration blog on 12 March 2018.

CJEU judgment changes landscape for investor-State arbitration in the EU

On 6 March 2018 the Court of Justice of the European Union (“CJEU”) issued its judgment in Case C-284/16 Slovak Republic v Achmea BV.  The CJEU ruled that investor-State arbitration clauses in investment treaties concluded between EU Member States (“intra-EU investment treaties”) are incompatible with EU law.  Before this landmark judgment of the CJEU, international arbitral tribunals and courts considered such clauses to be compatible with EU law.

The underlying case

In 2012, Achmea BV, a Dutch Insurer, won a EUR 22 million arbitral award over measures taken by the Slovak Republic that in part reversed the 2004 liberalisation of the Slovak health insurance market. The seat of the arbitral tribunal was in Frankfurt, Germany. The Slovak Republic challenged the award before the German courts. Ultimately, the German Supreme Court requested a preliminary ruling from the CJEU. In particular, it asked the CJEU whether investor-State arbitration clauses in intra-EU investment treaties were compatible with EU law.

The CJEU’s landmark judgment

The CJEU held that they were not.  The CJEU considered that investor-State arbitration clauses in intra-EU investment treaties, such as the one included in Article 8 of the Slovak Republic-Netherlands Bilateral Investment Treaty (“BIT”), have an adverse effect on the autonomy of EU law.  Consequently, the CJEU found that such clauses are incompatible with EU law and in particular with Articles 267 and 344 of the Treaty on the Functioning of the European Union (“TFEU”).

The CJEU explained that the arbitral tribunal constituted under Article 8 of the Slovak Republic-Netherlands BIT may be called on to interpret or apply EU law.  Given that in the CJEU’s view the arbitral tribunal cannot be regarded as a “court or tribunal of a Member State” within the meaning of Article 267 TFEU, the arbitral tribunal has no power to make a reference to the CJEU for a preliminary ruling concerning the interpretation of EU law.  As a result, the CJEU found that by concluding the Slovak Republic-Netherlands BIT, the Slovak Republic and the Netherlands established a mechanism for settling disputes between an investor and an EU Member State which could prevent those disputes from being resolved in a manner that ensures the full effectiveness of EU law.

The implications of the judgment

The CJEU did not opine on the consequences of the incompatibility of the arbitration clause with EU law.  In particular, the CJEU did not say whether it follows from that incompatibility that the arbitral tribunal was deprived of jurisdiction.  The German Supreme Court will have to decide this question.  Principles of EU law would seem to suggest that the German Supreme Court has only limited scope in coming to its decision following the CJEU’s judgment.

The CJEU’s judgment is likely to have far-reaching consequences, not least because many arbitrations under intra-EU investment treaties are currently pending.  Arbitral tribunals will have to analyse very carefully the impact of this landmark decision on cases before them. The same is true for any investors considering and Governments of EU Member States facing such claims.

OHADA Arbitration: Reforms adopted to keep the system modern

An updated framework for arbitration

The twin pillars of OHADA – the Uniform Act on the Law of Arbitration and the Rules of Arbitration of the CCJA – have now been updated.

On 15 March 2018, three new texts adopted by the OHADA Council of Ministers will enter into force. A revised Uniform Act on Arbitration Law, the revised Rules of Arbitration of the Common Court of Justice and Arbitration (“CCJA”) and a new Uniform Act on Mediation. The revised texts were adopted by the Council in November 2017 and subsequently published in the OHADA Official Journal in December.

The present reforms deliver on a process of modernisation that was first discussed in 2009, and then gained concrete shape in July 2015 when the OHADA Permanent Secretariat announced its intention to revise the arbitration texts. The original texts date back to 1999 and as relatively recent entrants into arbitration practice, already constituted modern, workable legal frameworks. Given this strong foundation it is clear that the current revisions seek to clarify and build upon the existing texts, rather than radically rewriting the system.

Why revise?

Since 1999, OHADA has demonstrated its ambition to become a reliable actor in the field of alternative dispute settlement in Africa, facilitating and promoting the use of arbitration in its 17 Member States. It sought to provide parties the choice between ad hoc arbitration under the Uniform Act, and institutional arbitration according to the Rules of the CCJA, and provided a framework of modern rules (largely based on UNCITRAL Model Law) governing pre-arbitral, arbitral and enforcement stages.

However, despite instituting a strong legal framework, as an arbitral institution OHADA and the CCJA did not necessarily emerge as pre-eminent, particularly in light of the recent proliferation of arbitral institutions being developed across Africa. In terms of the law itself,  the main concern in OHADA arbitration has not been the substance of its acts, but the application of the relevant texts by local courts. Criticisms are often aimed at the areas which the acts did not cover, and which therefore left variation of practice within the member states.

The present revisions take into account such reflections and provide detailed provisions aiming to enhance the operational efficiencies of the system and increase predictability for parties. In particular, detailed provisions illuminate the role of the national courts in facilitating arbitral proceedings, and clarify issues relating to the constitution of the tribunal and conduct of proceedings. There may be an element of compromise visible in these revisions, however, in terms of areas left unaddressed: for example, no procedure for expedited disputes has yet been introduced. Such procedures have grown in popularity in recent years as institutions attempt to address the criticisms of the cost and delays behind arbitration and may have been a welcome further step in increasing transparency and predictability for all involved.

Scope of the revisions

Key points relevant to practitioners in the area, and entities seeking to utilise the OHADA arbitration frameworks, are as follows:

  • The introduction of a definition of the arbitration agreement (Article 3-1, Uniform Act)
  • Clarification in the constitution of the arbitral tribunal, the nomination of arbitrators and the powers granted to the arbitral tribunal. In particular, the ability of the tribunal to issue interim or conservatory measures (not present in the 1999 Uniform Act) is now expressly provided for under Article 14. Meanwhile, the CCJA Rules also provide welcome clarification in addressing the question of the constitution of the tribunal in multiparty arbitration (Article 3.1).
  • Increased transparency and the provision of deadlines for national courts to adhere to in exercising functions in support of arbitral proceedings. For example, the 1999 Uniform Act had stipulated simply that annulment proceedings were to be dealt with by national courts, with those courts’ decisions appealable before the CCJA (Article 25). The updated text addresses the issue of a slow or underperforming domestic court: specifying that the national court’s decision on annulment must be rendered within three months, failing which the annulment application can be made directly to the CCJA (which also retains its appellate function) (Article 27).
  • Arbitrator’s fees: avoiding another Getma and emphasizing the CCJA’s authority.[1] In light of the intense debate that followed the CCJA’s setting aside of a €34 million award in 2016, on the basis that the international arbitrators had been paid higher fees than those set out in the CCJA Rules, a provision has been introduced into the CCJA Rules, explicitly recognizing that the fixing of fees without the court’s approval would be null and void – without this being a ground for annulment of the award (Article 24.4).

Conclusion

While the operation of these provisions in practice remains to be tested, the reforms are a timely and welcome development in the context of the development of arbitration in Africa, a field which continues to attract growing interest. In this light, the enhancement of operational efficiencies within OHADA arbitration as provided for in the revisions are likely to enhance further the credibility of the supranational framework and attract yet more attention from the legal and business community towards arbitration in Africa.

This modernization follows on from other recent initiatives by OHADA in the arbitration sphere, including its 2017 joint-publication with the CCJA of the first comprehensive guide to the CCJA’s arbitration system, and the anticipated April 2018 opening of OHADAC’s new Centre for Arbitration and Mediation. Collectively, these initiatives demonstrate OHADA’s work – both as it strives to stay at the forefront of arbitration developments in Francophone Africa, and as it provides a welcome precedent for the establishment of localized arbitral institutions further afield.

[1] Getma International v Republic of Guinea, ICSID Case No. ARB/11/29