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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

A Cautionary Tale for Commencing Multi-Contract Arbitrations

It’s unusual for English courts to set aside an arbitral award, but the Commercial Court did just that in the recent case of A v B [2017] EWHC 3417 (Comm). It warned parties entering arbitration not to assume a single arbitration will cover disputes between the same parties under multiple contracts.

Two issues came up:

  1. whether a single request for LCIA arbitration would include disputes under separate contracts; and
  2. what timings the respondent would have to abide by to challenge an arbitration request.

 

The dispute

A buyer and seller agreed two identical contracts for deliveries of crude oil. English law governed the contracts, and each included an LCIA arbitration clause.

When the buyer didn’t pay the price under the contracts, the seller took the dispute to the LCIA. The seller filed one request for arbitration — claiming the price of both contracts — and paid one registration fee.

In response, the buyer denied liability and reserved the right to challenge the jurisdiction of the tribunal. Seven months later, shortly before submitting their statement of defence, the buyer challenged the validity of seller’s request for arbitration. They argued that the seller should have filed two requests: one for each contract.

The tribunal dismissed the jurisdictional challenge for being brought too late.

 

One request or two?

In a turn of events, the buyer then filed proceedings against the seller. Under Section 67 of the Arbitration Act 1996, the buyer maintained that the tribunal lacked jurisdiction. This claim centred on Article 1 of the LCIA Rules, which makes clear that a request for arbitration must identify both “the dispute” and the “arbitration agreement” it relates to.

In response, the seller argued that the single request for arbitration had validly started two separate arbitrations — one under each contract. The seller pointed to section 61 of the Law of Property Act 1925 which provides that in all contracts the singular includes the plural, and vice versa, unless the context otherwise requires.

Mr Justice Philips dismissed this argument. He pointed out that the arbitral tribunal, once formed, has the power to consolidate multiple arbitrations into a single arbitration, but only where the parties agree to it (Article 22.1 of the LCIA Rules).

The seller had referred to two disputes governed by separate arbitration clauses — but in one arbitration request. This made it impossible to work out which dispute and arbitration clause were the subject of the arbitration.

The judge found the seller hadn’t shown they intended to start more than one arbitration. Instead, they had tried to refer separate disputes to a single arbitration.

 

What about the timing of the jurisdictional challenge?

The tribunal ruled that, other than in exceptional circumstances, objections known at the time the arbitration is requested must be raised by the deadline for the defendant to serve their response.

Mr Justice Philips went against the tribunal. He decided an objection may be raised at any time until the statement of defence is submitted. Objecting before the time for service of the statement of defence meant the claimant didn’t lose the right to challenge the tribunal’s jurisdiction. This was to avoid the risk of a party losing the most fundamental of objections without having even appointed an arbitrator (Article 23.3 of the LCIA Rules).

 

Lessons learned

If a dispute involves multiple contracts, claimants will need to carefully consider whether the disputes may be referred to a single arbitration. This case shows that the wording of Article 1 of the LCIA Rules as it currently stands requires the claimant to submit separate requests for arbitration in respect of each contract, unless agreed otherwise.

To be on the safe side, claimants should consider starting multiple arbitrations and then apply to consolidate them, which the LCIA Rules allow where the contracts are between the same parties under comparable arbitration agreements.

Newly published Judicial Interpretations on arbitration in China

On 29 December 2017, the Supreme People’s Court of China (SPC) published two judicial interpretations (Interpretations) which came into force on 1 January 2018. Both Interpretations sought to clarify and provide consistency to the judicial review process between domestic, foreign-related and foreign arbitrations in China. These Interpretations have the effect of guiding and regulating the lower Chinese courts’ judicial review process and are considered to be part of the SPC’s efforts to be seen as pro-arbitration.

The most important aspect of these Interpretations is the removal of the distinction between the different types of arbitrations in the judicial review process. Previously, only foreign-related or foreign awards were subject to this review system ie where the Intermediate People’s Court refuses to enforce or annul an award then it must obtain approval from the High People’s Court (who have jurisdiction to hear cases submitted by the Intermediate People’s Court). If the High People’s Court concurs with the determination of the Intermediate People’s Court, the award must be further reported to the SPC. With the Interpretations coming into force, regardless of the arbitration type, be it domestic, foreign-related or foreign arbitration, no annulment or refusal to enforce an arbitral award can take effect in China without the decision having been judicially reviewed by a higher court.

Perhaps recognising the potential backlog of cases and the burden that  this newly established process will create, the Interpretations provide that in relation to domestic arbitrations, a review up to the level of the High People’s Courts (as opposed to the SPC) is sufficient except in two circumstances:

  1. if the parties in dispute are from different provinces of China;
  2. if grounds for the annulment or refusal of enforcement is due to the award being contrary to public policy.

Where arbitrations fall into one of the two exceptions above, then the SPC continues to be competent to finally determine the matter.

Despite the best intentions of the SPC to bring consistency to the judicial review of arbitral awards in China, the delay with the previous review system has already been subject to well-publicised criticism. It remains to be seen how much impact the Interpretations and the additional caseload will have on the efficiency of the judicial review process.

The other significant clarification provided by the Interpretations is the level of ‘party’ involvement in the judicial review process. Previously, the review process was criticised as lacking transparency and at risk that the lower courts will shift the burden of review responsibility to the higher courts. The Interpretations now expressly provide that if the higher courts, in the process of review, are unclear as to certain facts related to the case then they have the ability to clarify such matters with the parties or refer the case back to the lower courts to clarify the facts before it is once again reviewed by the higher courts.

The Interpretations also set out what supporting documentation should accompany an application for judicial review. What is interesting is that the Interpretations appear to indicate that the arbitral award to accompany any application for annulment, recognition and enforcement of the same need not be ‘legalised’ (i.e. need not comply with a specific document authentication process). What is required is merely the submission of the original award, or a certified copy, along with the application. The award is to be accompanied by a Chinese translation where it is written in a foreign language. The Interpretations, therefore, seem to replace the current practice where arbitral awards, in addition to requiring to be notarised and certified by the foreign ministry of the originating country, also needed to be ‘legalised’ by the relevant Chinese embassy as the receiving country before any official use in China [1].

Finally, the Interpretations give guidance as to the applicable law of the arbitral agreement. This was an area fraught with difficulties under the previous system, due to different courts adopting different positions when it came to interpreting the applicable law. The Interpretations now clarify that the law governing the underlying contract will not necessarily be the applicable law. Parties must expressly state the applicable law that governs a foreign-related arbitration agreement. Where the parties are silent on the applicable law, then the law of the seat of arbitration must be adopted. If there are different interpretations as to the law at the place where the arbitration institution is located and the law at the seat of arbitration then the courts shall apply the law that is most likely to result in a valid arbitration agreement.

Any decisions of the courts in the judicial review process shall take force immediately and those decisions are not subject to review, appeal or application for a retrial unless provided otherwise by the law and judicial interpretations.

It remains to be seen whether the Interpretations will achieve the goal of promoting the healthy growth of arbitration and of alternative dispute resolution in China. However, the Interpretations have been received with cautious optimism generally and are welcomed as a positive step forward.

 

 

[1] China is not a signatory to The Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents so any foreign documents meant for official use in China need to go through a legalisation (authentication) process.

The Morocco-Nigeria BIT: a new breed of investment treaty?

This blog post was first published on the Practical Law arbitration blog.

On 30 August 2017, the Moroccan Parliament ratified the Morocco-Nigeria bilateral investment treaty (“BIT“), which now awaits ratification by Nigeria. This treaty, part of a suite of agreements signed between Morocco and Nigeria at a ceremony in Casablanca in December 2016, is intended to herald a “strategic partnership” at a time when the two countries are embarking on an ambitious joint venture to construct a 4,000 km regional gas pipeline that will connect west African countries’ gas resources to Morocco and ultimately Europe.

The new BIT is particularly noteworthy as it is an example of the radical trend towards treaties that strike more of a “balance” between the interests of the contracting states and their investors in light of recent criticism of investment arbitration. Consistent with regional initiatives on investment treaty reform and in the aim of promoting sustainable development, the BIT includes several notable features safeguarding states’ discretion in enacting regulation and imposing obligations on investors. It also sets out an innovative pre-arbitration procedure for preventing and resolving disputes.

Commitment to sustainable development

In a nutshell, the overarching theme of the BIT is “sustainable development”, a phrase which features three times in the preamble and several more times throughout the operative provisions. For instance, Article 24 (Corporate Social Responsibility) stipulates that:

… investors and their investments should strive to make the maximum feasible contributions to the sustainable development of the Host State and local community”.

Moreover, the definition of investment includes a condition that the investment contributes to the host state’s sustainable development. This means that states could potentially raise objections regarding sustainability in any dispute, even at the jurisdictional stage.

Reaffirming states’ right to regulate

In line with the focus on sustainability, the BIT guarantees the host state:

… the right to take regulatory or other measures to ensure that development in its territory is consistent with the goals and principles of sustainable development and with other legitimate social and economic policy objectives”.

This reaffirmation of the “right to regulate” – also mentioned in the preamble to the treaty – addresses a growing concern that investment arbitration could have a chilling effect on states’ powers to regulate in the public interest. It is also in line with recommendations by the UN Conference on Trade and Development (UNCTAD), which has called for carve-outs in investment treaties for the protection of health or the environment in its Road Map for International Investment Agreement Reform.

Similarly, the BIT further provides that each state has the right to take:

… in a non-discriminatory manner, any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment… is undertaken in a manner sensitive to environmental and social concerns”.

This appears to confer a broad margin of discretion on each state to introduce new regulatory measures which it “considers appropriate”.

Investor obligations

Consistent with its stated aim to seek “an overall balance of the rights and obligations among the State Parties, the investors, and the investments”, the BIT departs from more traditional investment treaties in imposing a broad range of obligations on investors as well as on states.

Among these obligations, the treaty requires investors to:

  • Conduct social impact assessments for potential investments (Article 14(2)).
  • Apply the precautionary principle in assessing the environmental impact of their investments (Article 14(3)).
  • Take measures to combat corruption (Article 17).
  • Uphold human rights, act in accordance with core labour standards and comply with environmental management standards (Article 18).
  • Meet or exceed nationally and internationally accepted standards of corporate governance (Article 19).
  • Comply with all applicable laws and operate through “high levels of socially responsible practices” (Article 24).

While the BIT confirms that breach of anti-corruption laws may expose foreign investors to prosecution in the host state, investors may also be subject to civil actions in their home state where acts or decisions made in relation to the investment lead to significant damage, personal injuries or loss of life in the host state.

Creation of a Joint Committee and “disputes prevention” provisions

The treaty is also innovative in its dispute resolution provisions. Specifically, it establishes a “disputes prevention” mechanism, overseen by a Joint Committee composed of representatives from the two states, whose primary role is to supervise the implementation and enforcement of the treaty. While the notion of a Joint Committee is not unique – the Comprehensive Economic and Trade Agreement (“CETA“) signed between EU and Canada last year establishes a similar committee – its role in “disputes prevention” is novel.

Under Article 26(1):

… before initiating an eventual arbitration procedure, any dispute between the Parties shall be assessed through consultations and negotiations by the Joint Committee”.

Despite the reference to “any dispute between the Parties” (that is, between Morocco and Nigeria), these provisions appear to be aimed at investor-state disputes. A state may trigger the procedure by submitting a “specific question of interest” from an investor, after which the Joint Committee will meet (with the participation “whenever possible” of investor representatives) and attempt to resolve the dispute. If no settlement can be reached within six months:

… the investor may, after the exhaustion of local remedies or the domestic courts of the host State, resort to international arbitration mechanisms”.

Analysis

The Morocco-Nigeria BIT bears the hallmarks of two trends in investment treaties:

  • The perceived and much-commented “backlash” against investment arbitration as it has developed.
  • A growth in the number of intra-African agreements, aimed at boosting trade and investment within the continent.

Morocco is a prime example, in recent years concluding new BITs with Mali, Guinea-Bissau, Rwanda and Ethiopia. Certain features of the BIT merit closer examination.

Notably, several of the obligations imposed on investors can also be found in the 2008 Supplementary Act of the Economic Community of West African States (“ECOWAS“), which aims to harmonise investment protections within the 15-member regional bloc. Nigeria is a founding member of ECOWAS, whereas Morocco applied to join earlier this year. The inclusion of these obligations in the Nigeria-Morocco BIT suggests regional efforts at reform are now being followed by national governments. However, while the BIT specifies that breach of investor obligations may lead to liability before domestic courts, it does not expressly address whether such claims may also be raised by a respondent state in arbitration. International tribunals do appear increasingly to admit counterclaims by states, so this may nevertheless remain a possibility.

Furthermore, the Joint Committee and associated “dispute prevention” mechanism are relatively novel elements of the BIT and it will be interesting to see in practice how these are applied. Negotiations through the Joint Committee can only be triggered by one of the state parties. It seems that the onus in discussions is on the state, which “may” make submissions on behalf of an investor. In all cases, if negotiations fail to resolve the dispute within six months, there will be some time before any final arbitration, since the treaty first requires the exhaustion of local remedies.

Overall, the treaty’s emphasis on sustainable development, the sovereignty of the host state to regulate and reciprocal obligations for investors suggest that campaigns by UNCTAD, ECOWAS and other bodies to shape the next generation of BITs are bearing fruit. Such developments are likely to be well received by states, particularly in the developing world. Conversely, the proposed disputes prevention procedure remains novel, and in practice means that, although investors are granted the possibility to commence arbitration, there are various steps to complete beforehand. The BIT’s amendment provisions and the requirement for a periodic review every five years to assess its “operation and effectiveness” provide important opportunities to clarify these issues.

It remains to be seen whether the Morocco-Nigeria BIT will become a new model for investment treaties, particularly in the context of intra-African investment. For the moment, it appears to be an example of an ambitious effort to modernise the balance between investors and states in contemporary BITs.

Applying for summary procedures in international arbitration: striking the balance

This blog post was first published on the Practical Law arbitration blog.

The scope of arbitrators’ powers to order summary procedures is open to debate. Any application for summary measures requires careful consideration of the possible benefits to be gained from a successful application on the one hand, and the uncertainty associated with doing so on the other.

Do arbitrators have the power to grant summary procedures?

Whether or not arbitrators have the power to grant summary procedures in a particular case will depend, at least in the first instance, on what the parties have agreed. In some (unusual) cases, parties may have included specific provisions in the arbitration agreement itself. Notably, the arbitration clause in Travis Coal Restructured Holdings LLC v Essar Global Fund Limited (which was found to authorise summary procedures) provided:

The arbitrators shall have the discretion to hear and determine at any stage of the arbitration any issue asserted by any party to be dispositive of any claim or counterclaim, in whole or part…

This sort of express language is, however, the exception rather than the rule. Absent this degree of specificity in the arbitration clause, the question shifts to the arbitral rules the parties have selected. A few sets of rules deal with this issue explicitly, notably the Stockholm Chamber of Commerce (“SCC“) Rules (Article 39(1)), the International Centre for Settlement of Investment Disputes (“ICSID“) Arbitration Rules (Rule 41(5)), and the Singapore International Arbitration Centre (“SIAC“) Rules (Rule 29.1). There are some differences in wording and approach: the SCC Rules give tribunals the specific power to decide issues summarily and without taking every procedural step that would otherwise have been undertaken; whereas the ICSID and SIAC Rules allow a party to apply for the early dismissal of a claim (or, under the SIAC Rules, a defence) on the basis that it is manifestly without legal merit, or alternatively (under the SIAC Rules) that it is manifestly outside the jurisdiction of the tribunal.

Other rules, while not addressing summary procedures explicitly, extend broad case management powers to arbitrators, which may be sufficient authority for a tribunal to order summary procedures. These include the International Chamber of Commerce (“ICC“) Rules (Article 22.2), the London Court of International Arbitration (“LCIA“) Rules (Article 14), the UNCITRAL Arbitration Rules (Article 17), and the International Centre for Dispute Resolution (“ICDR“) Rules (Article 20.3). However, in the absence of express provisions there is room for significant debate as to what procedures a tribunal can, and should, order. Arbitrators may associate summary procedures with litigation and instinctively feel uncomfortable with ordering any procedure in the arbitral context if it may create scope for the losing party to argue that it did not have a reasonable opportunity to put its case, or otherwise to challenge the award.

Will awards granted following a summary procedure be upheld by the courts?

There is little English case law on this point, and Travis Coal is the high water mark to date. The case concerned an ICC arbitration in New York. Summary judgment was granted and the unsuccessful party applied to a New York court to vacate the award, alleging failure of due process. At the same time, the successful party sought to enforce the award in England. Blair J in the English Commercial Court observed that summary judgment does not “necessarily amount to a denial of due process” (paragraph 44), that the arbitration was conducted “in an expeditious and cost-effective manner,” that “each party [had] a fair opportunity to present its case,” and that “the procedure fell within [the arbitration clause]” (paragraph 50). He therefore concluded that, on the facts of this case, the tribunal had not exceeded its powers. However, he did not enter into the broader debate on the availability of summary procedures in international arbitration.

In the case of Global International Reinsurance Co. Ltd v TIG Insurance Company 640 F.Supp.2d 519 (2009), a New York court was asked to vacate an arbitration award following a grant of partial summary judgment. The parties’ arbitration agreement provided that “[t]he arbitrator shall be relieved of all judicial formality and shall not be bound by the strict rules of law.” Following a dispositive motion, the arbitrator received written submissions and heard two days of oral argument from the parties. The arbitrator granted summary judgment without discovery or an evidentiary hearing, and the losing party objected. The New York court refused to vacate the award, ruling that the arbitration agreement had been explicit in relieving the arbitrator from the strict rules of law, and that the arbitrator had acted within his powers: “the losing party got all that it bargained for when it elected arbitration” (paragraph 1).

Striking the balance

Even if an application for summary procedures has a real prospect of success, due to the inherent uncertainty in this area, the time, cost and risk that it can add to proceedings may outweigh its intended benefits. A party considering making such an application should therefore consider the following points:

  • Arbitration agreement: Is there any relevant language in the parties’ arbitration agreement? Which rules apply and what do they provide? The more explicitly that summary procedures are authorised, the safer the application.
  • Nature of the application: What is the tribunal being asked to determine on a summary basis? Is it a limited issue or substantially the whole dispute? How straightforward is the underlying subject of the application? Some matters might be easier for a tribunal to determine summarily than others.
  • Procedure: What is the proposed procedure for dealing with the issue and is it appropriate in the circumstances of the case? There is a spectrum of potential procedures that can be ordered. In Travis Coal, the procedure that was adopted was described by Blair J as a “hybrid procedure” – it included an oral hearing and limited cross-examination of witnesses.

Arbitrator bias: should we judge a book by its cover?

This blog post was first published on the Practical Law arbitration blog.

Tribunals have a fundamental duty to act fairly and impartially under section 33(1)(a) of the English Arbitration Act (“AA 1996“). Where a party feels an arbitrator is failing in their duty, pursuant to section 24(1)(a) of the AA 1996:

A party to arbitral proceedings may… apply to the court to remove an arbitrator on any of the following grounds – that circumstances exist that give rise to justifiable doubts as to his impartiality…

English law stipulates a clear, consistent and rigorous approach to determining whether there are justifiable doubts as to an arbitrator’s impartiality, namely the common law test of apparent bias (Locabail v Bayfield). This test examines whether the fair-minded and informed observer, looking at all the facts, would consider there to be bias (Porter v Magill).

Despite this, parties may still come away from arbitral proceedings with concerns that an arbitrator is not impartial, even if such concerns are not sufficient for the court to remove the arbitrator. This problem has led to a renewed debate regarding whether we should consider alterations to the system of unilateral appointments as a solution.

Jan Paulsson and Sundaresh Menon SC, among others, have questioned the status quo. They do not suggest the abolition of party nomination but that improvements are needed, such as creating a disciplinary body for arbitrators or improving the rules on pre-appointment interviews.

Two recent English court cases have illustrated that actions creating an impression of bias may not be sufficient to meet the English law test for apparent bias.

What the English courts say

In H v L and others, H and R had been co-defendants in American proceedings. H settled the claim and sought to claim on its insurance policy with L. L argued the settlement was unreasonable and it (reasonably) had not consented to it. As the co-arbitrators could not agree on a third arbitrator, the selection was referred to the High Court under the arbitration agreement. Following a contested hearing, Flaux J selected M.

M disclosed his role in previous arbitrations involving L. H raised no objection to M’s impartiality at that stage. However, following M’s appointment, H learnt of several facts which led to it making an application to court to have M removed as an arbitrator. H argued M’s conduct gave rise to the appearance of bias due to:

  • M’s acceptance of appointments in arbitrations relating to claims brought against R arising from the same underlying American proceedings.
  • M’s failure to disclose those appointments to H.
  • M’s response to the challenge to his impartiality.

M acknowledged that “it would have been prudent for [him] to have informed [H]…”as it was important both parties “should share confidence that the dispute would be fairly determined on the evidence and the law without bias”.

Popplewell J dismissed H’s claims, finding that the fair-minded and informed observer would not have found any grounds to remove M. However, M’s acknowledgment suggests his actions gave H reasonable concerns as to his impartiality even if they were not sufficient to meet the English law test for apparent bias.

In Symbion Power LLC v Venco Imtiaz Construction Co, the court considered a challenge under section 68 of the AA 1996. However, serious concerns were also raised by the judge (apparently on her own initiative) regarding the conduct of Symbion’s party-nominated arbitrator.

Symbion’s arbitrator had sent an email to Symbion’s counsel headed “HIGHLY CONFIDENTIAL: NOT TO BE USED IN THE ARBITRATION”. It was not copied to the other party or arbitrators. The email expressed negative views about the tribunal chairman.

Jefford J stated that such unilateral contact had been wholly inappropriate because:

the ability of each party to appoint an arbitrator is intended to… give the parties confidence in the balance and fairness of the tribunal. The party-appointed arbitrators patently do not represent the party that appointed them and they are under a duty, as individual arbitrators and as a tribunal, to act fairly and impartially.

Although such a unilateral communication “may give rise to concerns that the arbitrator is not acting fairly or impartially”, it did not lead (perhaps surprisingly) to there being justifiable doubts as to the arbitrator’s impartiality, as, consistent with the English law test, this would turn on the facts of the case as a whole.

Fear of the unknown

Although the English law test was correctly applied, one can see how the parties in the above cases could nonetheless have come away with reasonable concerns as to the arbitrators’ impartiality. Such concerns may create doubt for parties as to the fairness of arbitration proceedings. It does not necessarily matter whether a party has evidence to support its doubt; the impression that some of the tribunal may be influenced against them is enough to give rise to such doubts.

These doubts often arise in part from the misconception that a party-nominated arbitrator is there to represent the relevant party. While this is clearly incorrect, it highlights the question of whether arbitration needs to take steps to address the risk that issues of apparent bias may give rise to doubts about the integrity of the arbitral process.

What can be done?

Some of Paulsson and Menon’s proposals merit serious consideration. Universal adoption of the London Court of International Arbitration (“LCIA“) default appointment rule, limiting the length of pre-nomination interviews and ensuring transcripts of such interviews are made available to the other side may increase parties’ confidence in the impartiality and fairness of arbitrators.

A disciplinary body for arbitrators would inspire greater confidence in arbitration. The proposed disciplinary system would start with an institutional investigation followed by a Charter Institute of Arbitrators (“CIArb“) investigation. CIArb could then punish any guilty arbitrator, publishing, and notifying other institutions of its findings.

However, rigorous scrutiny is required. Any proposals must strengthen arbitration and so care must be taken that they are properly implemented and cannot be used by parties as a tactical tool to delay proceedings or influence arbitrators’ decision-making.

Legal advice privilege in England and the “closest connection” test

This blog post was first published on the Practical Law arbitration blog.

English-seated arbitral tribunals have a great degree of flexibility in determining the applicable rules of privilege. Pursuant to sections 34(1) and 34(2)(d) of the Arbitration Act 1996 (“AA 1996“):

It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter”, including “whether any and if so which documents or classes of documents should be disclosed between and produced by the parties and at what stage.”

However, this flexibility is tempered by the tribunal’s obligation under section 33(1)(a) AA 1996 to act fairly and impartially as between the parties. Further, where the International Bar Association (IBA) Rules on the Taking of Evidence in International Arbitration apply, Article 9.3(e) requires the tribunal to take into account:

… the need to maintain fairness and equality as between the Parties, particularly if they are subject to different legal or ethical rules”, and Article 9.3(c) requires the Tribunal to have regard to “the expectations of the Parties and their advisors at the time the legal impediment or privilege is said to have arisen”.

The need to treat both parties fairly and equally therefore has to be balanced against the fact that, where (as is often the case) the parties come from different jurisdictions, they may have taken advice from their respective legal advisers (whether internal or external) on the basis that it would be protected by the rules of privilege that apply in their jurisdiction(s).

The “closest connection” test in international arbitration

One approach is simply to impose the privilege rules of either the law of the seat or the governing law of the contract and therefore require both parties to take the same approach to privilege issues that may arise during the document production process. However, tribunals are often reluctant to do so in case the outcome does not accord with the legitimate expectations of the parties at the time when the legal advice in question was given (for example, whether or not advice given by an in-house lawyer would be privileged). This may be a particular concern where the parties have chosen a seat of arbitration or a substantive governing law on the basis of its neutrality, and it has no connection to the nationality of either party or their legal advisers at the time when the advice was given.

Some tribunals therefore adopt a “closest connection test” as an alternative. This seeks to balance a number of different factors in order to determine the law applicable to privilege issues. These may include the:

  • Governing law of the contract.
  • Law of the seat of arbitration.
  • Place where the advice was given.
  • Place where it was received.
  • Jurisdiction where the lawyer giving the advice was admitted.
  • Country where the documents are held.

The approach of the English courts: the RBS Rights Issue Litigation

However, this approach now stands in sharp contrast to the decision of the English High Court in December 2016 on the availability of legal advice privilege. In the RBS Rights Issue Litigation, the High Court confirmed that the English courts will apply English law, as the lex fori, when determining questions of privilege.

The judgment in the RBS Rights Issue Litigation was concerned with the availability of legal advice privilege over records of interviews conducted by US lawyers in a fact-gathering investigation (in circumstances where litigation privilege was therefore unavailable). One of the issues that arose for determination was whether the availability of legal advice privilege fell to be determined under English law, or whether (as RBS contended) the English court should have applied US privilege rules, which would have afforded the interview records a much broader degree of protection against disclosure.

While acknowledging the long-established position (dating back to Lawrence v Campbell) that the English courts will apply English rules of privilege, as the lex fori, RBS proposed an entirely new choice of law rule:

Save where to do so would be contrary to English public policy, the English court should apply the law of the jurisdiction with which the engagement or instructions, pursuant to which the documents came into existence or the communications arose, are most closely connected.

This proposed rule was rejected by the High Court on the basis that it was established practice to apply English law as the lex fori, and there was no reason (including the regularity with which multi-jurisdictional litigation is now heard by the English courts) to depart from it. In doing so, the court recognised that this was in part driven by practical considerations: if a different test were to be applied, the English courts could be required to apply different rules of privilege depending on the particular case. There were also relevant considerations of public policy: the English system of litigation prefers “the fullest available record” of documentary evidence to be available to assist the decision-maker.

RBS’s proposed “closest connection test” focussed on the circumstances in which the advice was given, rather than taking into account the laws applicable to the dispute. It is worth noting that, on the basis of the “closest connection test” as it is understood in international commercial arbitration, an English-seated tribunal may well have concluded that notes of interviews carried out by US lawyers, (at least in part) in the USA, and which were understood to be privileged at the time when they were created, were protected by legal advice privilege.

Conclusion

It is understood that RBS will not appeal the first instance decision. This aspect of the judgment therefore potentially puts the approach of the English courts to the law governing applicable rules of privilege at odds with the approach often taken in English-seated international arbitrations. Of course, there is nothing inherently wrong in that from a legal perspective; there is no reason why parties who have agreed to arbitrate in England should be subject to the rules applicable to English court practice. Furthermore, given the relatively broad scope of privilege under English law, the instances when one party looks to assert a broader scope of privilege than that provided for under English law may be relatively rare in practice. Nonetheless, in an era where (as acknowledged in the RBS Rights Issue Litigation judgment) English law increasingly views legal advice privilege as a substantive right, and large multi-jurisdictional disputes are regularly brought to England for resolution in both litigation and arbitration (often simply because it is a neutral forum), any significant disparity in the level of protection that parties might be able to assert over their documents may be regarded by some as a surprising outcome.