Arbitration report - July 2014

Issue 01 - 2014
Arbitration Report
Investment Treaty Arbitration
Updates on Most Favoured Nation
Clauses, Waiting Periods and
Domestic Litigation Requirements
U.S. Personal Jurisdiction
Limits on Actions under the
New York Convention
New Arbitration Rules Update
The Dangers of Frivolous
Challenges to Arbitration Awards
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Dual qualified in Germany and England and Wales, Johannes Koepp is:
“Praised for his ability to manage complex disputes.” (Chambers UK 2012 - Dispute Resolution: International Arbitration)
Dual qualified in the US and England and Wales, Partner Jennifer Smith is described as:
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Issue 01 - 2014 — 3
June 2014
U.S. Personal Jurisdiction Limits on Actions under the New York
Convention: First Investment Corporation of the Marshall Islands
v. Fujian Mawei Shipbuilding, Ltd. — 4
Update on Most Favoured Nation Clauses in Bilateral Investment
Treaties — 6
Frivolous Challenges to Arbitration Awards – Beware the
Consequences — 9
Potential for Depositors in Cypriot Banks to Make Claims under Bilateral Investment Treaties in Relation
to the Cyprus Banking Crisis — 11
Waiting Periods and Domestic Litigation Requirements in Investment Treaty Arbitration: A Recent
Development in Philip Morris v. Republic of Uruguay — 13
Sovereign Immunity in Recognition and Enforcement Proceedings of Arbitral Awards Made Under
Bilateral Investment Treaties — 15
The Tricky Issue of the Governing Law of Arbitration Agreements — 17
Seeking Interim Measures from Courts other than those of the Seat – U&M Mining Zambia Ltd v. Konkola
Copper Mines Plc — 19
English Courts Powers to Restrain Foreign Proceedings — 20
Third Parties’ Rights to Arbitration under the English Contracts (Rights of Third Parties) Act 1999 — 21
Dubai Court of Cassation Decision on Non-Recoverability of Counsel Fees in DIAC Arbitration — 22
U.S. Court Enforces International Arbitral Award on Public Policy Grounds notwithstanding Mexican
Court’s Nullification — 23
New Arbitration Rules Update – Key and Interesting Features — 25
Contributors
The editor of the Arbitration Report is Jonathan Sutcliffe, Partner, Dubai.
The following contributed articles to this issue of the Arbitration Report:
Dustin Appel, Associate, Houston; Chris Caulfield, Partner, London; Ravinder Bhullar, Special Counsel, Dubai; Ryan
Bull, Partner, Washington; Stephen Burke, Senior Associate, Dubai; Alex Escobar, Partner, London; Dorine Farah, Senior
Associate, London; William Franklin, Associate, Dubai; Brooks Hickman, Associate, Washington; Johannes Koepp, Partner,
London; Hayk Kupelyants, Intern, London; Mike Lennon, Partner, Houston; Faris Nasrallah, Associate, Dubai; Dominic
Pellew, Partner, London; Philip Punwar, Partner, Dubai; Izabella Sarkisyan, Senior Associate, Moscow; Jennifer Smith,
Partner, Houston; Natasha Zahid, Associate, Dubai.
U.S. PERSONAL
JURISDICTION
LIMITS ON ACTIONS
UNDER THE NEW
YORK CONVENTION:
FIRST INVESTMENT
CORPORATION OF THE
MARSHALL ISLANDS
V. FUJIAN MAWEI
SHIPBUILDING, LTD.
It is by now well-accepted that the 1958 Convention on the Recognition
and Enforcement of Foreign Arbitral Awards (the “New York Convention”)
fosters international arbitration by establishing narrow and exclusive
grounds on which a contracting state can refuse to enforce arbitral
awards made in the territory of another party to the Convention (a “Convention
award”). But are there circumstances beyond those grounds enumerated
in Articles V and VI of the Convention in which a signatory can
refuse to enforce a Convention award? The U.S. Court of Appeals for the
Fifth Circuit answered that question affirmatively in First Investment Corporation
of the Marshall Islands v. Fujian Mawei Shipping, Ltd., 703 F.3d
742 (5th Cir. 2012), holding that U.S. constitutional limits may require
courts to dismiss actions to confirm Convention awards in the U.S.
Issue 01 - 2014 — 5
First Investment involved an action to confirm an arbitral
award made in London in favor of a Marshall Islands
entity (First Investment Corporation) and against one
state-owned and one private Chinese entity. After Chinese
courts refused enforcement on the ground that the award did
not conform to the arbitration agreement, First Investment
sought confirmation against the two Chinese entities and the
People’s Republic of China (the “PRC”). The trial court dismissed
the claim, concluding that it lacked jurisdiction over
the defendants.
On appeal, First Investment presented three main reasons for
reversing the dismissal: (i) foreign entities having no contacts
with the U.S. cannot assert due process protections under the
U.S. Constitution; (ii) the Convention does not authorize personal
jurisdiction defenses to enforcement; and (iii) the Court
had jurisdiction over the defendants as alter egos of the PRC,
a sovereign state not entitled to due process rights under the
U.S. Constitution.
The Fifth Circuit rejected all three arguments. Citing a 2011
U.S. Supreme Court decision, Goodyear Dunlop Tires Operations
S.A. v. Brown, 131 S.Ct 2846 (2011), the Court held that foreign
corporations can assert the due process protections of the Fifth
Amendment of the Constitution. (The Supreme Court implicitly
reaffirmed this principle in Daimler AG v. Bauman, No.
11-965 (January 2014)). The Fifth Circuit likewise affirmed the
trial court’s determinations that the respondents were not alter
egos of the PRC and that there was no subject matter jurisdiction
over the PRC.
The Fifth Circuit also held that U.S. constitutional limits on
in personam jurisdiction apply to actions under the New York
Convention even though the Convention does not expressly
list lack of jurisdiction as a ground for refusing recognition
of a Convention Award. The Court reached this conclusion
because, in the U.S. system, the U.S. Constitution’s requirements
necessarily prevail over a treaty and the legislation implementing
it. The Fifth Circuit thus joined the Second, Third,
Fourth, Seventh and Eleventh Circuits in reaching this result.
Notably, the defendants in First Investment apparently had no
assets in the U.S. Had such assets been present, the court likely
would have had in rem or quasi in rem jurisdiction to hear the
action to confirm the Convention award. For that reason, the
holding of First Investment may have limited significance where
an award holder can show that the award debtor has assets in
the U.S.
Interestingly, the Fifth Circuit was not asked to consider whether
lack of personal jurisdiction might qualify as a procedural issue
accepted under Article III of the New York Convention. That
provision explains that contracting states “shall recognize arbitration
awards as binding and enforce them in accordance with
the rules of procedure of the territory where the award is relied
upon” (emphasis added). Arguably, Article III contemplates
that generally applicable procedural requirements—potentially
including in personam jurisdiction requirements—can limit
actions under the New York Convention even though they are
not referenced in Articles V and VI. The meaning of Article III,
however, remains unsettled. Some U.S. courts have relied on
Article III to dismiss actions to confirm Convention awards on
forum non conveniens grounds. Others, however, have held that
Article III only incorporates technical filing requirements and
not substantive limitations.
Whether through Article III of the Convention or as a matter of
U.S. constitutional law, lack of personal jurisdiction continues
to provide a potential defense in actions to confirm Convention
awards in the U.S.
Issue 01 - 2014 — 6
Today almost every country has entered into bilateral or multilateral investment treaties,
including many recent free trade agreements, for the promotion and reciprocal protection
of investments. A bilateral investment treaty (“BIT”) is essentially an agreement between
two countries containing reciprocal undertakings as to the promotion and protection of
private investments made by individuals and companies in each other’s territories. Most
BITs contain common investor protections such as the right to full compensation for
expropriation, the right to transfer funds freely out of the host nation, and the right to fair
and equitable treatment and full protection and security by the host nation’s government.
They also typically allow investors to enforce some or all of these rights directly against host
countries through binding international arbitration.
UPDATE ON
MOST FAVOURED
NATION CLAUSES
IN BILATERAL
INVESTMENT
TREATIES
Also common in many BITs is what
is known as a “most favoured nation”
(“MFN”) clause. An MFN clause
requires the state party to an investment
treaty to provide investors of the
other state party with treatment no less
favourable than the treatment it provides
to investors of third states. This includes
treatment extended under other investment
treaties. MFN clauses, therefore,
link BITs together by allowing investors
to take advantage of more favourable
treatment provided under other BITs
with the host state. Notably, without an
MFN obligation the host state potentially
retains the option of discriminating economically
among foreign investors.
A typical example of an MFN clause
is provided by Article 3 of the 1998
German Model BIT:
(1) Neither Contracting State shall subject
investments in its territory owned or controlled
by investors of the other Contracting
State to treatments less favourable than
it accords to investments of its own investors
or to investments of investors of any
third State.
(2) Neither Contracting State shall subject
investors of the other Contracting State, as
regards their activity in connection with
investments in its territory, to treatment less
favourable than it accords to its own investors
or to investors of any third State.”
MFN clauses are usually general in their
wording and leave considerable scope to
argue competing interpretations. Some
expressly indicate whether dispute settlement
is included within their scope,
although most are silent on whether
MFN treatment includes only substantive
rules for the protection of investments
(for example, fair and equitable
treatment or protection from uncompensated
expropriation) or whether MFN
treatment extends to the procedural
or jurisdictional aspects of a BIT, like
dispute resolution.
Given the potential far reaching implications
of an MFN clause, in particular, the
likelihood of increased treaty and forum
shopping, it is important for states and
investors alike to know the protections
that are covered by a particular treaty.
The approach of arbitral tribunals on
the scope of MFN clauses, however,
Issue 01 - 2014 — 7
has not been uniform. This is illustrated
by the recent decision of Garanti
Koza v. Turkmenistan (ICSID Case No.
ARB/11/20, Decision on Jurisdiction, 3
July 2013).
Garanti Koza v. Turkmenistan concerned
a dispute between a UK construction
company and Turkmenistan over
whether the latter failed to pay for construction
work. This case is significant for
at least three reasons. First, it was the first
time a tribunal was called up to interpret
an MFN clause that contains an express
statement that it applies to the treaty’s
dispute resolution mechanism. Second,
the case marks the first time a tribunal
allowed a claimant to use an MFN clause
to invoke a state’s consent to a particular
arbitral forum found in another BIT.
Finally, although the tribunal adopted a
broad interpretation of the MFN clause
in question, its decision was not unanimous.
Turkmenistan’s party-appointed
arbitrator did not agree with the majority’s
ruling and issued a separate dissenting
opinion.
The case centered on Article 8 of the
UK-Turkmenistan BIT, the investor-state
dispute resolution provision. Article 8(1)
provides Turkmenistan’s general consent
to international arbitration. Article 8(2)
provides that with respect to the applicable
international arbitral forum, the
specific parties to the dispute “may
agree to refer the dispute” either to the
International Centre for Settlement of
Investment Disputes (“ICSID”), the
Court of Arbitration of the International
Chamber of Commerce (“ICC”) or
arbitration under the Rules of the United
Nations Commission on International
Trade Law (“UNCITRAL”), with the
default position being UNCITRAL arbitration
if the parties failed to agree within
four months from written notification of
the claim.
When Turkmenistan refused to agree to
ICSID arbitration, the claimant argued
that the BIT’s MFN clause (contained
in Article 3) should allow it to submit
the dispute to ICSID arbitration, as
that was the dispute settlement mechanism
Turkmenistan had consented to in
other treaties. Notably, Article 3 of the
UK-Turkmenistan BIT expressly provides
that it applies to Articles 1-11 of the
BIT, which includes Article 8 (the investor-
state dispute resolution provision).
The claimant argued that Turkmenistan
had consented in BITs with Switzerland,
France, Turkey and India, as well as in the
Energy Charter Treaty, to either ICSID
arbitration or UNCITRAL arbitration, at
the election of the investor. In particular,
Article 8 of the Switzerland-Turkmenistan
BIT provided more favourable treatment
to Swiss investors. Pursuant to that article,
a Swiss investor could choose to submit
a dispute with Turkmenistan either to
ICSID or UNCITRAL arbitration. A
treaty that provides consent to ICSID
arbitration is, according to the claimant,
more favourable to an investor than one
that does not, or alternatively, a treaty that
provides a choice between UNCITRAL
and ICSID arbitration is more favourable
to an investor than one that does not.
Turkmenistan’s consent to ICSID arbitration
was, therefore, established by operation
of the MFN clause.
The majority of the tribunal agreed with
the claimant and held that the MFN
provision entitled the claimant to avail
itself of the more favourable treatment
received by Swiss investors, who had the
choice to bring ICSID arbitration pursuant
to the provisions of the Switzerland-
Turkmenistan BIT. Although the majority
did not agree with the claimant that
ICSID arbitration could be described as
objectively more favourable to investors
than UNCITRAL arbitration, as each
system had its advantages and disadvantages,
it found that an investor that
was not afforded the choice between the
two systems would be at a competitive
disadvantage relative to an investor who
did have this choice. Turkmenistan’s party-
appointed arbitrator did not agree with
the majority. In her dissenting opinion, she
held that Turkmenistan had not consented
to ICSID arbitration and that an MFN
Issue 01 - 2014 — 8
clause was “not a basis for creating consent
to ICSID arbitration when none exists.”
In considering whether Turkmenistan had
consented to participate in ICSID arbitration,
the majority approached the question
in two steps: (i) whether Turkmenistan
had consented to participate in international
arbitration at all; and (ii) if so, had it
agreed to ICSID arbitration. On the first
question, the majority held that Article 8
established expressly and unequivocally
Turkmenistan’s consent to submit disputes
with UK investors to international arbitration.
On the second question, the majority
considered that, through the inclusion of
what it described as a “menu of options
concerning the arbitration process, and a
default selection”, Turkmenistan had not
consented to ICSID arbitration. Rather it
had expressed its willingness to consider
three possible kinds of arbitration whenever
it was notified by a UK investor of
a claim under the BIT, on a case-by-case
basis. The majority went on to consider,
however, that the question of whether
ICSID arbitration was available to the
claimant would depend on the terms of
both Article 8 and Article 3 of the BIT,
both of which were cast broadly.
In contrast, the dissenting arbitrator considered
that in order to determine whether
Turkmenistan had consented to arbitration,
it was necessary to interpret Article 8
as a whole, and not “as composed of segmented
and fragmented provisions”. In
her view, Article 8(1) (consent for international
arbitration in general) and Article
8(2) (providing the options of arbitral
forums) were “two sides of the same
coin”. Under the ordinary meaning of
Article 8(2), ICSID arbitration could only
be used by the foreign investor if it had
mutually agreed with the host state that it
could do so, which was not the case here.
As for Turkmenistan’s argument that an
MFN clause could not be used to “import
the State’s consent to a different arbitration
system from one treaty to another”,
the majority considered that the MFN
clause did not import consent as such, but
replaced the requirement for an agreement
under Article 8(2) with a more
favourable provision from another treaty.
As Turkmenistan had already consented
to international arbitration in Article 8(1)
of the BIT, the tribunal concluded that
there was no issue of consent here.
The majority also rejected Turkmenistan’s
argument that the general language of
Article 3(3) (that the MFN clause applied
to the provisions of Articles 1 to 11 of the
BIT) should give way to the more specific
language of Article 8 (which made it clear
that only UNCITRAL arbitration was
available in the absence of an agreement
between the parties). The majority reasoned
that an MFN clause is necessarily
drafted in general terms, and the task is
one of determining which of the treaty’s
various provisions fall to be modified by
the application of such a clause.
The dissenting arbitrator disagreed with
this analysis. In her opinion, she considered
that the application of Article 3(3)
was “subordinated” or “conditioned” to
the prior application of Article 8(2). Thus,
the foreign investor had to first be in a
dispute settlement relationship with the
host state before the MFN clause could be
applied. She therefore did not address the
question of how the MFN clause should
be applied, as in her view it was not applicable
at all. This differed from the majority’s
view that the MFN clause applied as
soon as an investor from a third state was
accorded more favourable treatment.
The Garanti Koza v. Turkmenistan case,
nevertheless, remains unique on it facts
because, unlike previous decisions on
MFN clauses, the MFN clause in question
contained an express statement that
it applied to the BIT’s dispute settlement
provision. The decision adds another layer
to the body of arbitral decisions about the
scope of MFN clauses generally.
Issue 01 - 2014 — 9
FRIVOLOUS CHALLENGES TO
ARBITRATION AWARDS
BEWARE THE CONSEQUENCES
For the past several years various courts have issued warnings against frivolous challenges
to arbitration awards. Recent decisions from the United States, Hong Kong and Sweden
demonstrate a trend for the courts to hold parties accountable for failed challenges to
arbitration awards. The Hong Kong courts have shown a willingness to sanction challenges
which are not necessarily frivolous, and the Swedish courts to hold the losing party and its
counsel jointly liable for costs as a penalty for a frivolous challenge.
Johnson Controls, Inc. v. Edman Controls, Inc. (docket Nos.
12-2308 & 12-2623, 7th Cir., March 18, 2013), concerned an
appeal of a challenge to an arbitration award that failed at the
district court level. After affirming the district court decision
and upholding the award, the U.S. Court of Appeal for the
Seventh Circuit considered an application for sanctions against
Johnson Controls. The court deemed sanctions moot because
Edman Controls would recover its costs under a contractual feeshifting
provision, but warned that “challenges to commercial
arbitral awards bear a high risk of sanctions” because “attempts
to obtain judicial review of an arbitrator’s decision undermine
the integrity of the arbitral process.” The Court of Appeal clarified
that arguments properly rejected at the first instance level
would be deemed frivolous and sanctionable unless supported
by a “reasoned colorable argument for altering the district
court’s judgment”. Taken in context, the court clearly believed
Johnson Control’s appeal to be frivolous and was implicitly
saying that most appeals of district court decisions confirming
arbitration awards are likely frivolous and sanctionable. This
decision solidifies lower U.S. court cases such as the Southern
District of New York’s decision in Digitelcom Ltd. v. Tele2Sverige
AB (No. 12 CV 3082) (RJS) (S.D.N.Y. July 25, 2012).
The trend for now sanctioning challenges to arbitration awards
is not necessarily limited to frivolous challenges, as can be
seen from a recent decision of the Hong Kong Court of Final
Appeal. In Pacific China Holdings Ltd. v. Grand Pacific Holdings
Ltd (CACV 136/2011), an arbitration award was set aside at
the first instance level but reinstated upon appeal. Costs were
sought against Pacific China Holdings (“PCH”) on an indemnity
basis (where the receiving party is likely to receive a higher
percentage of its costs than if assessed on a standard basis).
Even though PCH had an arguable case before the district
Issue 01 - 2014 — 10
court that resulted in vacation of the arbitration award (unlike
the frivolous appeal in the Johnson Controls case), the Court
of Appeal affirmed the presumption that it was fair to impose
costs on an indemnity basis in proceedings regarding arbitration
awards, unless special circumstances existed not to do so.
This differs from the normal process in civil proceedings of
imposing indemnity costs as a sanction for a vexatious challenge.
The Court of Appeal approved of the court of first
instance decision in the case of A v. R ([2009] 3 HKLRD 389),
in which the court held that “if the losing party is only made to
pay costs on a conventional party-and-party basis, the winning
party would in effect be subsidising the losing party’s abortive
attempt to frustrate enforcement of a valid award. The winning
party would only be able to recover about two-thirds of its costs
of the challenge and would be out of pocket as to one-third”.
In two Swedish cases, OFAB Ostergotlands Fastigheter AB v.
Gaftare AB (Svea Court of Appeal, case T-6147-10) and Thomas
Lundin v. Telefonaktiebolaget LM Ericsson (Svea Court of Appeal
case T 6123-12), the courts went a step further and penalized
both the parties challenging the arbitration awards and their
counsel for bringing frivolous challenges. Typically, counsel for
the losing party are not normally liable for the prevailing party’s
costs, only the losing party is. In the case of Ostergotlands, the
Court of Appeal held that, where the losing party had to pay the
successful party’s litigation costs, and the losing party’s counsel
through “negligence or recklessness” incurred costs for that
party, both counsel and the losing party could be held jointly
liable for those costs. In the Lundin case, it has been reported
that the court held that counsel would not be liable for costs just
because the grounds for challenge were weak but in that case
Thomas Lundin’s experienced counsel was said to have acted
negligently in bringing unfounded actions that would give rise
to extra costs for the opposing party. The unique aspect of these
cases is the fact that counsel was brought within the ambit of
these sanctions as a penalty.
Conclusion
These cases demonstrate that the courts are increasingly willing
to penalize attempts by losing parties to “try for a second bite at
the apple” (Johnson Controls case) without valid grounds. They
provide an important reminder to parties and counsel to give
serious consideration to the strength of challenges to awards
before launching proceedings.
Issue 01 - 2014 — 11
POTENTIAL FOR DEPOSITORS
IN CYPRIOT BANKS TO MAKE
CLAIMS UNDER BILATERAL
INVESTMENT TREATIES IN
RELATION TO THE CYPRUS
BANKING CRISIS
Depositors holding funds in excess of €100,000 in two Cypriot banks suffered heavy losses
as a result of the €10 billion bailout plan agreed by the Cyprus Government, and following
strict capital controls which prevent the withdrawal of any significant sums from Cypriot
accounts. Total losses suffered are estimated to be in excess of €4 billion.
Given the scale of the losses, affected depositors are likely to consider possible ways of
seeking recourse. As outlined below, one possible course of action is a claim against the
Cypriot government under any applicable bilateral investment treaties (“BITs”).
Issue 01 - 2014 — 12
BITS AS A POSSIBLE ROUTE TO RECOURSE
PROSPECTS OF SUCCESSFUL CLAIMS UNDER BITS
EU MEMBER STATES WHO HOLD BITS WITH CYPRUS
To date, Cyprus has signed 16 BITs, half of them with
European Union Member States. Whilst the terms of the different
BITs (and therefore the protection offered) will vary,
most BITs will provide for protection against unlawful expropriation
of property without payment of adequate compensation.
Most (if not all) BITs will also provide a mechanism
for dispute resolution, through which nationals of signatory
countries can pursue claims for compensation against the
Cypriot government.
Before bringing a claim, affected depositors will need to establish
that they qualify for protection under an applicable BIT. In
the first instance, an individual depositor should look to see if
there are any BITs in force between Cyprus and the country
of which he or she is a national. Similarly, a corporate depositor
should look for a BIT between Cyprus and the country in
which it is incorporated.
In order successfully to bring a claim against the Cypriot
government, depositors would need to show that either:
(i) the bailout conditions (through which funds held in the
two affected banks were converted to shares, some of which
are frozen and do not attract interest); or (ii) the imposition
of currency controls, constitute an unlawful expropriation
of property.
Precisely what depositors have to prove in order to succeed in
their claims will depend principally on the terms of the relevant
In light of the changes brought about by the Lisbon Treaty
and the Treaty on the Functioning of the European Union
(“TFEU”), BITs between Member States (“Intra EU BITs”)
and those between Member States and third countries
(“extra-EU BITs”) have received a considerable amount of
attention. Ultimately the European Commission will release
a model EU BIT to be used and adhered to by all Member
States. The Commission, in its explanatory memorandum on
the transitional arrangements for BITs between Member States
and third countries, stated that both BITs entered into with
countries prior to their becoming Member States and BITs
entered into with third countries will remain in force until
specifically terminated.
Difficulties may arise where individuals hold deposits through
companies that are incorporated in other countries. If the
country in which the relevant company is incorporated does not
have a valid BIT with Cyprus, an individual may still assess the
ability to bring an action if that individual’s home country does
have a BIT in place. Similarly, individuals from countries that
do not have valid BITs with Cyprus may fall within the scope of
an applicable BIT where they have invested through a company
or vehicle that is established in another country.
As many of the affected deposit holders are Russian nationals,
they will naturally look for protection under the Russia - Cyprus
BIT. Whilst this BIT has been signed, however, it has not been
ratified by Russia and so is not presently in force.
BITs, for example how the term ‘investment’ is defined and
what controls exist on the expropriation of that ‘investment’
under the BIT. Depositors are likely to face challenges in establishing
their entitlement to compensation, not least in proving
that the value of their investment was higher before the bailout
occurred than it is now. It may also be necessary for arbitral
tribunals hearing claims under BITs to determine whether any
expropriation can be justified as being in the best interests of
the public and the community as a whole.
Also potentially relevant is the ruling of the tribunal in Electrabel
S.A v. the Republic of Hungary (ICSID Case No. ARB/07/19).
In that case, the tribunal found that EU law would prevail over
any inconsistent terms of a particular BIT. As a result, claims
brought by EU nationals against Cyprus may be further complicated
by the need to consider the impact (if any) of EU law.
There are a number of provisions of EU law that are potentially
relevant to claims brought by depositors against Cyprus
(including Article 65 of the TFEU, which provides for the free
movement of capital within the EU).
Issue 01 - 2014 — 13
WAITING PERIODS AND
DOMESTIC LITIGATION
REQUIREMENTS IN INVESTMENT
TREATY ARBITRATION: A RECENT
DEVELOPMENT IN PHILIP MORRIS V.
REPUBLIC OF URUGUAY
Introduction
Bilateral Investment Treaties (“BITs”) are agreements establishing
certain international law protections for private investment
by nationals and companies of one state in another state. Most
BITs also contain clauses offering arbitration to investors. Many,
if not most, BITs refer to the International Centre for Settlement
of Investment Disputes (“ICSID”). BITs may set out conditions
to a state’s consent to arbitration with investors of another
state, including procedural requirements. For instance, a treaty
may require the investor to attempt to reach an amicable settlement
for a certain period (“waiting periods”). A treaty may also
require the investor to file a claim before the courts of the host
Domestic Litigation
BITs may also require that domestic remedies be utilized for a
certain period of time – 12 to 18 months is the typical range −
before the investor may initiate arbitration proceedings. This is not
Waiting Periods
Many BITs provide that the investor may only resort to international
arbitration after a certain period has elapsed after the
dispute has arisen. Three to 12 months is common. If the parties
do not settle within the prescribed period, the investor may
proceed to arbitration. The obligation to wait is often coupled
with an obligation to seek an amicable settlement through negotiations
in order to avert the need for arbitration. In practice,
however, where the positions are entrenched, negotiations may
have become futile by the time the parties decide to resort to
arbitration. This is why most commentators refer to this type
of stipulation as prescribing a “waiting period” rather than a
“negotiation period”.
Tribunals have had different reactions to such clauses. In the
majority of cases, they have found that the investors had complied
with the waiting periods and no issue was raised. In other cases,
state for a minimum period prior to commencing arbitration
(“domestic litigation”).
After providing an overview of how arbitral tribunals have dealt
with preliminary issues arising out of these types of provisions,
we report below on the recent decision on jurisdiction given in the
ICSID case Philip Morris Brands SARL et al. v. Oriental Republic
of Uruguay (ICSID Case No. ARB/10/7, Decision on Jurisdiction,
2 July 2013). That decision considers, among other things, certain
objections based on the substantive and temporal dimensions of
the domestic litigation provision of the applicable BIT.
a requirement to exhaust local remedies; the investor is free to turn
to international arbitration once the time has elapsed. In practice,
investors have advanced arguments to avoid these provisions.
tribunals found that non-compliance with waiting periods did not
affect their jurisdiction, as they characterized such provisions as
procedural rather than jurisdictional. The decisive criterion for
disregarding the waiting periods when the investor had not complied
with them seems to have been the futility of any negotiations.
Where the evidence indicated that negotiations were unlikely to
lead to a settlement, these tribunals have taken the view that there
would be no point in declining jurisdiction and forcing the parties
to start negotiations anew.
Other tribunals have taken the opposite track. In December
2012, for instance, an ICSID tribunal declined jurisdiction over
an investment treaty dispute between a subsidiary of Murphy
Oil Corporation and the Republic of Ecuador, finding that the
claimant had not observed the waiting period before commencing
arbitration.
Issue 01 - 2014 — 14
The Philip Morris Decision
In February 2010, a group of Philip
Morris companies commenced arbitration
against the Republic of Uruguay under
the Switzerland-Uruguay BIT, challenging
two tobacco restriction ordinances passed
by the Uruguayan health authorities.
Uruguay raised jurisdictional objections to
the claim, including that Philip Morris had
not satisfied the requirement of the BIT
to litigate the dispute in the Uruguayan
courts for 18 months before commencing
arbitration. The Switzerland-Uruguay BIT
provides for a sequence of steps to be followed
by the claimants for dispute resolution.
As a first step, the parties shall as far as
possible attempt to settle the dispute amicably.
As a second step, if the parties do not
settle within six months, the dispute shall
be submitted to the competent Uruguayan
courts. If the Uruguayan courts do not pass
judgment within a period of 18 months
after the proceedings have been instituted,
the investor may, as a third and final step,
resort to international arbitration.
Phillip Morris had sought the annulment
of the Uruguayan ordinances before
administrative courts in Uruguay, alleging
violations of domestic law (but not of the
BIT). However, the Uruguayan courts did
not issue a decision within the 18-month
period prescribed by the BIT.
The government objected to the jurisdiction
of the tribunal on two grounds.
First, that the dispute the claimants had
submitted to the national courts was not
the same as the dispute submitted to arbitration.
Second, that the claimants had
initiated arbitration before the 18-month
domestic litigation prescribed by the BIT
expired. In its 2 July 2013 decision on
jurisdiction, the tribunal dismissed both
objections and found jurisdiction to hear
the dispute.
The tribunal dismissed the government’s
first objection. Interpreting the expression
“disputes with respect to investments”
in the BIT by reference to the Vienna
Convention on the Law of Treaties, the tribunal
found that it was sufficiently broad
to include any kind of disputes where the
subject matter was an investment. In particular,
the tribunal noted that the BIT
provided that the investor “may appeal to
an international tribunal which decides on
the dispute in all its aspects,” and held that
the words “in all its aspects” had to refer
to both domestic law and international
law claims. Accordingly, the tribunal concluded
that the claimants had satisfied the
domestic litigation requirement in the BIT
by submitting their domestic law claims
through their requests for annulment to
the Uruguayan courts and therefore did
not need to allege a breach of the BIT itself.
The tribunal also dismissed Uruguay’s
second objection that the claimants
had commenced arbitration before the
18-month domestic litigation period had
expired. The tribunal considered jurisdictional
decisions by other tribunals on
the same issues referred to by the parties,
but found them inapplicable as they were
based on either different language in the
treaty or different facts. The tribunal also
rejected the position expressed by previous
tribunals that domestic litigation requirements
are futile, stressing their importance
for the host state: “They offer the state an
opportunity to redress alleged violations
of the investor’s rights under the relevant
treaty before the latter may pursue claims
in international arbitrations”. Turning to
the words of the BIT, the tribunal found
that their ordinary meaning indicated
the binding character of each step of the
sequence before resorting to arbitration.
This conclusion was confirmed by the
object and purpose of domestic litigation
requirements, which are aimed at offering
the host state the opportunity to redress the
violations of the BIT. The tribunal added
that, despite its compulsory nature, the
domestic litigation requirement could be
satisfied by actions occurring after the date
the arbitration was instituted, as long as the
tribunal had not ruled on its jurisdiction.
Since the claimants had filed proceedings
before the Uruguayan courts before initiating
arbitration, the tribunal held that
they had met the objective of the domestic
litigation requirement (although the local
courts had rendered their decisions after
the expiry of the 18-month period). To
require them to start over and re-file their
arbitration once their 18 months have been
met would, in the tribunal’s opinion, have
been a waste of time and resources.
Conclusion
The decision provides useful guidance
on the application of pre-conditions to
arbitration, which often present important
jurisdictional issues. On the one
hand, the tribunal’s interpretation of
the BIT seems in line with recent arbitral
practice. Another ICSID Tribunal
concerned with a similar requirement in
the Romania-Turkey BIT endorsed the
view that the investor is not required to
assert a breach of the investment treaty
in the local courts, specifying, however,
that the disputes brought before the
local courts should be of a nature that
permits resolution to substantially the
same extent as if brought before an international
arbitral tribunal pursuant to
an investment treaty (Tulip Real Estate
Investment and Development Netherlands
B.V. v. Republic of Turkey, ICSID Case
No. ARB/11/28, Decision on Bifurcated
Jurisdictional Issue, 5 March 2013). On
the other hand, the tribunal’s approach
to the question of time limits was less
orthodox. The tribunal opted to consider
the purpose and aim of the dispute resolution
system put in the BIT, as well as
the object and purpose of the 18-month
litigation requirement. The tribunal’s
main focus seems to have been that the
local courts had the opportunity to consider
the dispute and that it had not yet
ruled on its jurisdiction.
Issue 01 - 2014 — 15
SOVEREIGN IMMUNITY
IN RECOGNITION AND
ENFORCEMENT PROCEEDINGS
OF ARBITRAL AWARDS MADE
UNDER BILATERAL
INVESTMENT TREATIES
In Walter Bau v. Government of Thailand, the German Federal Court of Justice in Civil Matters
had to consider whether, in recognition and enforcement proceedings of a foreign arbitral
award made under a bilateral investment treaty (“BIT”), a state could successfully raise a
sovereign immunity defence on the basis that the arbitral tribunal had wrongly assumed
jurisdiction. By an arbitral award under the Germany-Thailand BIT, the government of
Thailand had been ordered to pay Walter Bau around EUR 30 million. Thailand did not
pay voluntarily and Walter Bau initiated recognition and enforcement proceedings in both
the United States and Germany.
In the German proceedings, Thailand raised a sovereign immunity
defence contending that the arbitral tribunal lacked jurisdiction to
decide the dispute because there was no “approved investment”
complying with the conditions of the treaty. Thailand’s sovereign
immunity defence faced several hurdles, including that: (i) the
arbitral tribunal had determined that it had jurisdiction; (ii) the
state had not applied to the courts at the seat of arbitration to annul
the decision on jurisdiction and instead participated in the merits
phase of the arbitration; and (iii) in the BIT, the state had agreed
that the “award will be enforced according to domestic law”.
The German Federal Court of Justice, however, held that, as a
matter of principle, nothing precluded Thailand from raising a
sovereign immunity defence at this stage. The following reasons
underpinned its decision:
▪ The principle of “Kompetenz-Kompetenz” means that an arbitral
tribunal has the power to resolve finally its own jurisdiction.
An idea initially developed in Germany, it is no longer a part of
German law. As with other jurisdictions, under German law, determinations
of jurisdiction are subject to court review, both legally
and factually, including in particular with regard to awards made
in investor-state arbitrations. Whilst under the Germany-Thailand
BIT, decisions of the arbitral tribunal were meant to be “binding”
and “enforced according to domestic law,” this only applies where
a valid arbitration agreement exists. Stated differently, an arbitral
award is not “binding” on the parties where the arbitral tribunal
mistakenly assumes jurisdiction. As a result, a state is entitled to
raise a defence of sovereign immunity in recognition and enforcement
proceedings relating to such awards made without a valid
arbitration agreement.
▪ A state is not precluded from raising a defence of sovereign
immunity in circumstances where it did not challenge an award
on jurisdiction at the seat of the arbitration and instead continued
to participate in the merits phase of that arbitration.
According to the German Federal Court of Justice, this is because
an arbitral award has no binding effect in the recognition and
enforcement proceedings.
▪ A waiver of sovereign immunity is not assumed lightly and
requires clear and unequivocal language or conduct by a state
which leaves no doubt immunity has been waived. Participation
in the merits phase of an arbitration by a state without challenging
the award on jurisdiction is not sufficient to assume that a state has
waived its sovereign immunity from enforcement.
Issue 01 - 2014 — 16
on its own jurisdiction runs contrary to the
appeal decision in Republic of Argentina v.
BG Group PLC (No. 11-7021 (D.C. Cir.
Jan. 17, 2012)), but consistent with the
recent U.S. Supreme Court decision in
the same matter. On March 5, 2014, the
Supreme Court overturned the Court of
Appeals and deferred to the decision of the
arbitrators on the same basis as would be
the case for arbitration under a contract,
consistent with the U.S. courts’ holdings in
the Walter Bau case.
Conclusions
Parties should be aware that in arbitration
proceedings against states, a state’s
failure to challenge an arbitral tribunal’s
findings on jurisdiction when that ruling
is made may not prevent that state from
raising such arguments again after a final
award has been issued in recognition
and enforcement proceedings. In this
regard, state parties may be treated differently
from private commercial parties.
In a dispute between private commercial
parties, an award debtor may be precluded
from raising the objection of a lack of a
valid arbitration agreement as defence to
recognition and enforcement where it has
not timely challenged a preliminary jurisdiction
ruling.
Finally, the decision of the German
Supreme Court reiterates that the principle
of “Kompetenz-Kompetenz” is no
longer fully valid under German law, with
German courts being willing to re-examine
an arbitral tribunal’s decision on its own
jurisdiction. It is worth noting that the
German courts’ treatment of the question
of “Kompetenz-Kompetenz” differs
from that of the U.S. courts in the parallel
enforcement proceedings in relation to
the Walter Bau dispute (Werner Schneider,
acting in his capacity as insolvency administrator
of Walter Bau AG (In Liquidation)
688 F.3d 68 (2d Cir. 2012)). Specifically,
in the Walter Bau case, the U.S. courts
held that the parties’ agreement on Article
20 of the UNCITRAL Rules constituted
“clear and unmistakable evidence that the
parties agreed that the scope of the arbitration
agreement would be decided by the
arbitrators”. As a result, they deferred to
the arbitral tribunal’s decision on its own
jurisdiction and did not allow Thailand to
raise a sovereign immunity defence on the
basis that the arbitral tribunal had wrongly
assumed jurisdiction. This deferential
approach to the arbitral tribunal’s decision
Issue 01 - 2014 — 17
THE TRICKY ISSUE OF
THE GOVERNING LAW OF
ARBITRATION AGREEMENTS
The law governing international arbitration agreements is one of the salient issues in the law
of arbitration. In circumstances where the parties have remained silent as to the governing
law of the main contract, it is likely that the English courts will subject the arbitration
agreement to the law of the seat of arbitration (see the recent case of Habas Sinai v. VSC
Steel [2013] EWHC 4071). The situation is more complex when the main contract contains
a choice of law clause. According to the separability doctrine, which is recognized in most
developed jurisdictions, arbitration agreements are independent from the main contract
and are thus not automatically subjected to the law proper to that main contract. As it is
uncommon for parties to specify expressly the law governing the arbitration agreement,
arbitrators and parties are sometimes left in a state of lingering uncertainty, particularly if
the arbitration agreement is unenforceable under one of the potentially applicable national
laws. Two recent English court decisions illustrate the current state of uncertainty.
In Arsanovia & Ors v. Cruz City 1 Mauritius Holdings [2012]
EWHC 3702 (Comm), the parties expressly chose Indian law
to govern the main contract and further agreed to arbitration in
London. The court treated the governing law clause as a strong
indication that it was the implied intention of the parties to
choose Indian law to govern the arbitration agreement as well.
There was no contrary indication in favour of English law, other
than the choice of London as a seat for arbitration. This was
corroborated by a provision in the arbitration clause excluding
the application of certain provisions of Indian arbitration law,
the natural inference being that the parties intended that law to
apply otherwise. As an obiter, the court stated that the choice of
Indian law might even be treated as an express choice of law in
respect of the arbitration agreement.
The case of Sulamerica CIA Nacional v. Enesa Engenharia SA
[2012] EWCA Civ 638, in contrast, is illustrative of a very
different approach. In that case, the subject insurance policies
contained a London arbitration clause, as well as an express
choice of Brazilian law to govern the insurance policy and an
Issue 01 - 2014 — 18
exclusive choice of forum agreement in
favour of Brazilian courts. The defendant
contended that the parties implicitly
opted for the Brazilian law to govern the
arbitration agreement. It relied on three
factors: (i) the choice of Brazilian law
to govern the insurance policy; (ii) the
choice of Brazilian courts; and (iii) the
connection of the insurance policy with
Brazil. The decision on the law governing
the arbitration agreement was of critical
importance in that case, given that,
under Brazilian law, the arbitration could
only be started with the consent of the
defendant. Although indicating that the
starting presumption was to apply the law
of the substantive contract, i.e., Brazilian
law, as the presumptively implied choice
of parties, the court held that two considerations
pointed strongly against
Brazilian law (and, concomitantly, in
favour of English law as having the
closest and most real connection with the
arbitration agreement): first, the choice
of the seat of the arbitration, coupled
with the inevitable acceptance of English
law to govern the conduct and supervision
of arbitration; and second, the fact
that under Brazilian law the arbitration
agreement was enforceable only with the
consent of defendants and the perceived
improbability that the parties intended it
to be governed by a law that made the
arbitration agreement so one-sided.
In an obiter in C v. D [2007] EWCA Civ
1282, the Court of Appeal had gone even
further, holding that “... it would be rare
for the law of the (separable) arbitration
agreement to be different from the law of
the seat of the arbitration. The reason is
that an agreement to arbitrate will normally
have a closer and more real connection
with the place where the parties have
chosen to arbitrate than with the place
of the law of the underlying contract in
cases where the parties have deliberately
chosen to arbitrate in one place disputes
which have arisen under a contract governed
by the law of another place”.
Analysis
It is unsurprising that the English courts
have reached different conclusions
as to whether one can treat choice of
law clauses in the main contract as an
implied choice-of-law for the arbitration
agreement. The case law of foreign
jurisdictions is equally divided on this
complex issue. Swedish, Italian and
some U.S. courts have applied the law of
the seat of arbitration to the arbitration
agreement, whereas Dutch, Swiss, Indian
and other courts have treated choice of
law clauses as an implied choice for arbitration
agreements. Various arguments
point towards each of the approaches
in respect of the role of choice of law
clauses. On the one hand, parties that
agree to arbitration in London might
be supposed to expect that the whole
‘package’ of English arbitration law will
apply to their dispute resolution mechanism.
Similarly, in the Brussels I bis
Regulation and the Hague Convention
on Choice of Court Agreements, the
choice of forum agreements are governed
by the law of the court chosen,
which is of course very similar to submitting
the arbitration agreement to the law
of the arbitral seat. On the other hand,
the application of the separability doctrine
to justify a separate law to govern
arbitration agreements and to deny that
an express choice of law clause for the
main contract should be considered as at
least an implied choice of law clause for
the arbitration agreement, might be considered
too far-fetched an extension of
the doctrine.
Whilst the decision in Sulamerica may
have been driven by an understandable
desire to uphold the validity of the
parties’ arbitration agreement, some
have doubted whether the approach
taken did justice to the parties’ intentions.
Other possibilities might exist to
avoid the application of national law
rules invalidating international arbitration
agreements. Specifically, it has been
suggested that Article II of the New York
Convention mandates the application
of uniform international standards in
determining the validity of agreements to
arbitrate falling within the Convention’s
scope. Under this view, national laws
which discriminate against international
arbitration agreements or which adopt
domestic standards of validity contravene
the Convention and cannot be
given effect. Rather, under this view the
validity of international arbitration agreements
must be determined in accordance
with evolving internationally-accepted,
neutral standards of validity.
Issue 01 - 2014 — 19
SEEKING INTERIM MEASURES
FROM COURTS OTHER THAN
THOSE OF THE SEAT – U&M
MINING ZAMBIA LTD V. KONKOLA
COPPER MINES PLC
Konkola Copper Mines Plc (“KCM”) owned a copper mine in Zambia. U&M Mining
Zambia Ltd (“U&M”) had been operating the mine for KCM. In early 2013, KCM
terminated the contract for the operation of the mine by U&M. At the same time, KCM
sought and obtained an ex parte interim injunction from the High Court of Zambia
compelling U&M to vacate the mine immediately and hand over certain equipment. U&M
commenced an LCIA arbitration in London and applied for, and was granted, an ex parte
interim anti-suit injunction by the English High Court restraining KCM from taking steps
in the injunction proceedings in Zambia.
The main issue for the English court to
decide at the on notice hearing of U&M’s
injunction application was whether
KCM had the right to apply to the local
(Zambian) court as opposed to the
English court (as the court of the seat of
arbitration) to obtain interim remedies.
Curiously, there was no English case law
that was directly on point.
The court held that KCM did have such a
right, and discharged the anti-suit injunction
([2013] EWHC 260 (Comm)). In
construing the parties’ arbitration agreement
it found that, because the parties
were Zambian and the assets were in
Zambia, and because the English court
would not always be in a position to order
effective interim relief for that reason,
the parties must have intended that the
Zambian courts would have a supportive
function in relation to the conduct of the
arbitration. It also took note of the fact
that the LCIA Rules refer, in Article
25.3, to a party’s right to apply to “any”
state court or other judicial authority for
interim or conservatory measures, suggesting
that a party may apply to courts
both at the seat and elsewhere.
Interestingly, the court made clear that a
party’s right to seek interim relief outside
the courts of the seat would only arise
“exceptionally”. It is not clear from the
judgment whether the wording in the
LCIA Rules referred to above would, on
its own, give rise to such a right.
Issue 01 - 2014 — 20
ENGLISH COURTS POWERS
TO RESTRAIN FOREIGN
PROCEEDINGS
Facts
AES Ust-Kamenogorsk Hydropower Plant LLP (“AES”) operated
an energy producing hydroelectric plant in Kazakhstan under
a concession agreement with Ust-Kamenogorsk Hydropower
Plant JSC (“JSC”). The concession agreement was governed by
Kazakh law, but provided for arbitration in London. In a series
of court proceedings in Kazakhstan (brought in violation of the
arbitration agreement), the Kazakh courts declared the arbitration
agreement invalid and refused to stop local proceedings. AES
obtained an interim injunction in the English courts against JSC
ordering it to stop proceedings in Kazakhstan, even though AES
had not brought arbitration proceedings and had no intention
of bringing any such proceedings. AES was concerned that JSC
would continue litigation in the Kazakh courts and accordingly
sought permanent injunctive relief from the English courts.
Judgment
The Supreme Court upheld the decisions of the lower courts
allowing AES to obtain a permanent injunction and a declaration
that JSC could not bring any proceedings otherwise than in
the agreed arbitration forum, regardless of the fact that AES did
not itself contemplate bringing any arbitration proceedings. The
Supreme Court stressed that an arbitration agreement contained
not only a positive obligation of the parties to arbitrate their disagreements
in a certain forum, but also an equally important negative
promise not to take their disputes to any other forum.
Implications
English courts have once again proved their reputation for being
arbitration friendly. Under an English arbitration clause a party
which has no claims of its own, but which is threatened with litigation
in its counterparty’s local courts, may go to the English courts
to seek to restrain an opponent from bringing foreign proceedings.
A breach of such a restraint amounts to contempt of court
and can lead to a fine or even the arrest of individuals involved
in the breach. Further, the English courts can also refuse to recognise
or enforce a foreign court judgment obtained in breach of
an injunction.
It should be noted that, within the EU, an anti-suit injunction
cannot be granted where parallel proceedings have been brought
in another EU member state.
In Ust-Kamenogorsk Hydropower Plant JSC v. AES Ust-Kamenogorsk Hydropower Plant LLP
[2013] UKSC 35, the English Supreme Court held that the English courts may grant an
anti-suit injunction when foreign court proceedings are brought in violation of an agreement
for arbitration in England, even where no arbitration is existing or proposed.
Issue 01 - 2014 — 21
THIRD PARTIES’ RIGHTS TO
ARBITRATION UNDER THE
ENGLISH CONTRACTS (RIGHTS
OF THIRD PARTIES) ACT 1999
The English Court of Appeal has recently considered the circumstances in which a third
party with rights under a contract to which it is not a party can claim the benefit of an
arbitration agreement contained in that contract (Fortress Value Recovery Fund I LLC & Ors
v. Blue Skye Special Opportunities Fund LP & Ors [2013] EWCA Civ 367).
The claimant (Fortress), brought court proceedings in England
against the defendants, some of whom were parties to a contract
(partnership deed) containing an arbitration agreement,
and some of whom were third-party fund-managers entitled
to the benefit of certain exclusions and indemnities set out in
the contract.
At first instance, the Commercial Court held that those defendants
that were a party to the contract were entitled to rely on the arbitration
clause to have the court proceedings against them stayed
pursuant to section 9 of the Arbitration Act 1996. However, the
Commercial Court did not accept that the third-party fund-managers
could invoke the arbitration agreement to have the court proceedings
against them stayed.
The Court of Appeal upheld the decision against the third-party
fund-managers, albeit on slightly different grounds. In its judgment,
the Court of Appeal did not agree with the Commercial
Court that the third-parties’ application must fail because they
were not seeking to enforce a right of action in arbitration (i.e.,
a claim for an indemnity) but instead were seeking only to have
their contractual defence (based on the exclusions) arbitrated. The
Court of Appeal held that section 1(6) of the Contracts (Rights of
Third Parties) Act 1999 precluded such a distinction.
In construing the contract, however, the Court of Appeal held that
it was easier to conclude that the parties had intended that the third
parties should be entitled to claim the benefit of a right of indemnity
on condition that they did so pursuant to the terms of the
arbitration agreement that the parties themselves were bound by.
The Court of Appeal did not feel able to go further and impute to
the parties an intention that the third parties’ contractual defences
could only be pursued and determined in arbitration proceedings.
In conclusion, the Court of Appeal observed that the situation that
had arisen could easily have been avoided by the inclusion of an
express provision in the agreement.
Issue 01 - 2014 — 22
DUBAI COURT OF CASSATION
DECISION ON NONRECOVERABILITY
OF COUNSEL
FEES IN DIAC ARBITRATION
In a judgment rendered on 3 February 2013 (Property Appeal No. 282 of 2012), the Dubai
Court of Cassation refused to enforce an award of legal fees incurred in an arbitration
conducted under the Dubai International Arbitration Centre Rules 2007 (“DIAC Rules”).
Although there is no strict doctrine of precedent in the UAE, there is a prospect that the
legal reasoning in this judgment will be relied on in the future. As such, parties may be
prevented from enforcing DIAC awards for legal costs in the UAE unless the tribunal was
expressly authorised to award legal costs by the parties.
The arbitration arose out of an agreement
involving the sale and purchase of property
in Dubai. In its final award, the tribunal
found in favour of the claimant and
ordered the respondent to pay damages,
interest, and the claimant’s costs incurred
in the arbitration. Of the costs that were
assessed, a portion comprised legal costs
(i.e., costs associated with legal representation
in the proceedings).
In the enforcement proceedings, the
respondent attempted to set aside the
award on various procedural and technical
grounds, including that the tribunal
did not have the power under the DIAC
Rules to award legal costs. The Dubai
Court of First Instance ratified the award.
On appeal by the respondent, the Court
of Appeal upheld the Court of First
Instance judgment. On further appeal by
the respondent, the Court of Cassation
affirmed the decision of both lower courts
to ratify the award. However, the Court of
Cassation found against the award of legal
costs, and delivered an analysis in respect
of an arbitrator’s power under the DIAC
Rules to award such costs.
The Court of Cassation held that, in
awarding the winning party its legal
costs, “the arbitrators have exceeded
their powers beyond that granted to them
by the DIAC Rules of Arbitration 2007
and UAE law”. Consequently, an arbitrator’s
power to determine costs “may
not be broadened by conferring on them
an absolute and unfettered discretion to
award any costs at any level and for any
reason, as they consider appropriate”.
Citing the relevant Articles and Appendix
under the DIAC Rules (Articles 2(1) and
2(4), 17(1), 30(6), 37(10) and Appendix,
Articles 2(1), 2(4) and 2(6)), the judgment
stated that, under the DIAC Rules,
recoverable fees and expenses “do not
include the legal costs paid by the parties
to their attorneys representing them”. The
Court of Cassation added that:
“Where the law is silent, fees and expenses that
are not clearly and expressly referenced in the
arbitration clause are not recoverable as incidental
costs directly related to the award”.
Following a strict reading of this judgment,
arbitrators in DIAC proceedings
may risk invalidating their awards by
awarding legal costs. However, it is important
to note that UAE court decisions do
not establish binding precedent. Further,
while the Court of Cassation expressly
referred to the DIAC Rules, the judgment
made two references to the arbitration
having been conducted under the predecessor
1994 Rules of the Dubai Chamber
of Commerce and Industry (“DCCI
Rules”). It is not clear whether these references
derive from the arbitration agreement
or the final award. They are nevertheless
noteworthy because Article 48
of the DCCI Rules appears to allow the
award of legal costs.
Arbitration practitioners had been aware
of uncertainty under the DIAC Rules
regarding the recoverability of legal costs.
Despite that, there have been numerous
awards for legal costs in DIAC arbitrations,
which reportedly have been
enforced in the UAE. However, in light of
this judgment, and absent any amendment
to the DIAC Rules in this regard, parties
would be well advised to incorporate in
their arbitration agreements (or terms of
reference) that the tribunal has the power
to award legal costs in DIAC arbitrations.
Absent such express power, there will, in
light of the judgment, remain a degree of
uncertainty regarding the prospects of
enforcing such awards in the UAE.
U.S. COURT
ENFORCES
INTERNATIONAL
ARBITRAL AWARD
ON PUBLIC
POLICY GROUNDS
NOTWITHSTANDING
MEXICAN COURT’S
NULLIFICATION
In a recent decision, the U.S. District Court for the Southern District of New
York confirmed an arbitral award issued by an ICC panel seated in Mexico
City, even after a Mexican appellate court issued a 486-page decision
holding the award invalid (2013 WL 4517225 (S.D.N.Y.)). According
to Judge Hellerstein’s opinion, the question to be answered was “Which
is to be given primacy, the award or the nullifying judgment”? Following
a thorough analysis of the procedural history through the Mexican court
system, the U.S. District Court held that the nullification decree violated
basic notions of justice as the Mexican court had applied a law that did
not exist at the time the parties’ contract was formed nor at the time the
dispute arose and that left the aggrieved party without recourse.
Issue 01 - 2014 — 24
The dispute arose between a subsidiary
of KBR, Corporacion Mexicana de
Mantenimiento Integral, S. de R.L. de C.V.
(“COMMISA”), and the exploration and
production arm of Mexican state-owned
petroleum company, PEMEX, over a 1997
contract to construct natural gas platforms
in the Gulf of Mexico. The contract, governed
by Mexican law, included a clause for
arbitration in Mexico City. The law under
which PEMEX was organized expressly
permitted it to agree to arbitrate disputes.
The case had an extensive procedural
history before it reached the U.S. court.
After each party accused the other
of breaching contractual obligations,
COMMISA initiated arbitration proceedings.
PEMEX, in turn, rescinded the
contract. COMMISA also challenged the
rescission in the Mexican courts on the
basis that the statute permitting rescission
was unconstitutional, as well as inapplicable
to the parties’ dispute. Ultimately,
the Mexican Supreme Court held that the
rescission statute was constitutional and
that an aggrieved party had recourse to
the courts to resolve contractual disputes
arising from the rescission. The Supreme
Court did not address whether such disputes
could be resolved in arbitration.
Meanwhile, after the arbitral tribunal
was constituted, PEMEX challenged its
jurisdiction, but not on the grounds that
the dispute was not arbitrable. The threemember
tribunal issued a preliminary
award holding that it had jurisdiction.
PEMEX moved for reconsideration on
several grounds, including for the first
time that arbitration was an impermissible
forum for deciding disputes related
to administrative rescissions. The tribunal
issued another order reaffirming its earlier
decision on jurisdiction.
In its final award, the majority of the tribunal
found for COMMISA on most
of its substantive claims and issued an
award for damages. The dissenting arbitrator
held that the panel lacked jurisdiction
because, among other reasons, there
had been a change in Mexican law during
the arbitration providing that administrative
rescissions could not be subject to
arbitration proceedings.
PEMEX ultimately prevailed at the
Mexican court of appeals after several
attempts to nullify the award. The appellate
court ruled that public policy barred
private tribunals from resolving disputes
involving administrative rescissions
because the purpose of such acts is to safeguard
the financial resources of the state.
Besides citing a 1994 Supreme Court
decision, the court also relied heavily
on a 2009 statute (enacted several years
after commencement of the COMMISA
arbitration) that forbade arbitrators
from hearing administrative rescissions.
Post-nullification, COMMISA filed a
damages claim in the Mexican administrative
court, but the court dismissed the
case on the grounds that a 45-day statute
of limitations (then long passed) barred
COMMISA’s claims.
COMMISSA next brought proceedings in
New York under the Federal Arbitration Act
and the Panama Convention to confirm
the award. The court’s analysis focused
on Article 5 of the Panama Convention
(virtually identical to provisions in the
New York Convention) and whether its
permissive phrasing gave the court discretion
to enforce the award despite the fact
that it had been held invalid under the law
applicable to the contract at the seat of
the arbitration.
A handful of U.S. courts have addressed
similar requests; most had declined to
enforce arbitral awards that had been nullified
by foreign courts at the seat. The
test articulated by the courts as to when
discretion to enforce could be invoked
notwithstanding a nullification by a competent
foreign court was where “extraordinary
circumstances” were present (NY
and Second Circuit) and when to do so
would be “repugnant to fundamental
notions of what is decent and just in the
United States” (DC Circuit). Only one
court, the DC District Court, has confirmed
an arbitral award in the U.S. that
a foreign court had rejected at the seat of
the arbitration.
Under the facts of COMMISA, the district
court found that the Mexican court’s
decision vacating the award violated “basic
notions of justice” and that deference was
therefore not required. According to the
court, “[a]pplying a law that came into effect
well after the parties entered into their contract
was troubling. But this unfairness was
exacerbated by the fact that the [Mexican
appellate court’s] decision left COMMISA
without a remedy to litigate the merits of the
dispute that the arbitrators had resolved in
COMMISA’s favor.”
The case is on appeal before the
Second Circuit.
NEW ARBITRATION
RULES UPDATE –
KEY AND
INTERESTING
FEATURES
During 2013, a number of prominent arbitral institutes
updated their arbitration rules. The International
Bar Association (“IBA”) also announced guidelines
regarding the conduct of party representatives in
international arbitration.
Issue 01 - 2014 — 26
SINGAPORE INTERNATIONAL ARBITRATION CENTRE
In terms of arbitration caseload, the Singapore International Arbitration Centre (“SIAC”)
is considered the fastest growing arbitral institute internationally. This is no doubt due to the
increasing popularity of Singapore as a seat of arbitration as well as the modern and efficient
arbitration framework provided by the SIAC Rules.
A new version of the SIAC Rules came into force on 1 April
2013, amending the 2010 version. The following is a summary
of the key new features:
▪ New Court of Arbitration established: A new Court
of Arbitration has been established that will assume responsibility
for case administration, which function has been inherited
from the Board of Directors. The Court is comprised of
16 renowned arbitration practitioners from around the world.
The Court’s role includes determining challenges to arbitrators
(Rule 13) and jurisdictional objections (Rule 25). With
the exception of decisions on jurisdiction, any decision of the
Court, its President or the Registrar relating to an arbitration
shall be “conclusive and binding” upon the parties, there is no
requirement to provide reasons for such decisions (Rule 36.1)
and the parties waive any right of appeal or review of such decision
to any state court or judicial authority (Rule 36.2).
▪ Registrar powers: The Registrar now has the discretion or
power: to extend or shorten any time limits prescribed under
the Rules (Rule 2.5); to determine whether an arbitration has
indeed commenced as a result of a notice of arbitration being in
“substantial compliance” with the Rules (Rule 3.3); if an objection
regarding the existence or validity of an arbitration agreement
is raised prior to formation of the tribunal, to determine
whether this should be referred to the Court (Rule 25.1); and
to determine separate advances on costs for claims and counterclaims
(Rule 30.2).
▪ Party representatives: It is no longer necessary for a party
representative to provide “proof of authority” in order to represent
a party (Rule 20.1).
▪ Tribunal’s powers: The Tribunal has been granted the
power to decide, where appropriate, any issue that arises in
the proceedings, but which has not expressly or impliedly been
raised in written submissions – for example, if a new issue arises
in a witness statement or expert report. The Tribunal must,
however, notify the other party of the issue and give them an
opportunity to respond (Rule 24.1(n)).
▪ The Award: The Tribunal may now award post-award
interest, thus removing a restriction that was previously in place
(Rule 28.7). SIAC has also now obtained the consent of parties
to publish any award after redacting the party names and identifying
information. The latter appears to follow an established
practice of the ICC, which publishes the substance of select
awards around three years after they have been rendered. It is
not yet clear when SIAC will choose to publish awards rendered
under its Rules.
Issue 01 - 2014 — 27
HONG KONG INTERNATIONAL ARBITRATION
CENTRE RULES ON ADMINISTERED ARBITRATION
AND HONG KONG ARBITRATION ORDINANCE
Hong Kong has historically been the most prominent arbitral seat in Asia. It now faces
increasing competition, at least in Asia, from Singapore. It is therefore hardly coincidental
that recent amendments to the Hong Kong International Arbitration Centre Rules on
Administered Arbitration (the “Rules”) bear a striking resemblance to existing provisions
of the SIAC Rules.
The new Rules, which were last updated
in 2008, came into operation on 1
November 2013. The following are key
features of the new Rules:
▪ Emergency arbitrator: A new procedure
has been introduced whereby
any party may apply for urgent interim
or conservatory relief through an “emergency
arbitrator”, before the tribunal
has been formally appointed (Article
23.1). This procedure may not be suitable
for parties who prefer to seek such
relief through national courts because of
potential difficulties in enforcing decisions
of an emergency arbitrator in a
foreign jurisdiction.
▪ Multiple parties or multiple contracts:
The tribunal now has the power
to join additional parties to ongoing proceedings
if the new party is also bound
by an arbitration agreement under the
Rules (Article 27.1).
▪ Expedited procedures: Where the
total amount in dispute does not exceed
HKD 25 million (USD 3.2 million),
either party may request that the arbitration
proceed on an expedited basis
(Article 41). Under the previous rules,
the cap was USD 250,000.
▪ Arbitrator fees: Arbitrators will now
be bound by standard terms of appointment
(see Schedules 2 and 3). Parties are now
able to agree on whether arbitrators will be
remunerated on the basis of hourly rates or
capped amounts based on a schedule (by
reference to the amount in dispute). If the
parties fail to agree on the form of remuneration,
hourly rates will apply (Article 10).
On 19 July 2013, certain amendments to
the Hong Kong Arbitration Ordinance
came into force, which to some extent
correspond, and are supportive of, amendments
to the Rules. The core amendments
are as follows:
▪ Emergency arbitrator awards:
Hong Kong courts now have the express
power to enforce an award made by an
emergency arbitrator, whether made in
or outside Hong Kong (Sections 22A
and 22B).
▪ Hong Kong and Macao awards:
Ratification of a bilateral arrangement
between Hong Kong and Macao regarding
mutual recognition and enforcement of
arbitral awards (Sections 98A to 98D).
▪ Arbitration costs: Revised procedure
whereby a party may apply to the
Hong Kong courts for assessment of
arbitration costs (Section 75).
Issue 01 - 2014 — 28
AMERICAN ARBITRATION ASSOCIATION:
COMMERCIAL ARBITRATION RULES AND OPTIONAL
APPELLATE ARBITRATION RULES
A new version of the Commercial Arbitration Rules (“Arbitration Rules”) of the
American Arbitration Association (“AAA”) came into effect on 1 October 2013. These
Arbitration Rules are typically used in U.S. domestic arbitrations. The core amendments are
as follows:
▪ Interim relief: An emergency arbitrator
is now available to grant interim
relief prior to formal appointment of the
tribunal (Section R-38). This avenue was
previously available only if the parties
specifically agreed to such procedure in
their arbitration agreement.
▪ Case management: The tribunal now
has greater case management powers.
These include: convening a preliminary
meeting as soon as practicable after
appointment of the tribunal (Section
R-21), during which various procedural
“checklist” items should be addressed
(Section P-2); the tribunal and parties
are to exercise care against “importing
procedures from court systems” as
the arbitral process is intended to be
more simple, less expensive and speedy
(Section P-1); and the power to order
“appropriate sanctions” where a party
fails to comply with the Arbitration Rules
or any procedural directions (Section
R-58).
▪ Dispositive motions: Any party may
make an application for a “dispositive
motion” (such as, summary dismissal
of the dispute or strike-out of specific
claims) provided the applicant
first demonstrates that such is likely to
succeed and narrow the issues in dispute
(Section R-33).
▪ Mediation: If the amount in dispute
exceeds USD 75,000, the parties are
obliged to attempt to resolve the dispute
through mediation, which is to take place
concurrently with (and not delay) the
arbitration (Section R-9).
▪ Document production/disclosure:
The overarching principles regarding
disclosure of documents are to seek to
achieve an “efficient and economical resolution
of the dispute” while promoting
equality and fairness between the parties.
The tribunal may direct a party to disclose
documents which are the subject
of “reasonable” requests from another
party provided that such are: (i) not
available to the requesting party; (ii)
reasonably believed to exist; and (iii) relevant
and material to the outcome of a
disputed issue. With regard to electronic
documents, the tribunal shall direct that
any such document be disclosed in a
manner that is “most convenient and
economical” for the disclosing party
(Section R-22).
Further, on 1 November 2013, a new
version of the AAA Optional Appellate
Arbitration Rules (“Appellate Rules”)
came into force. These Appellate Rules
provide a mechanism whereby parties
may agree to subject their arbitral
award(s) to appeal before a AAA appeal
tribunal. Interestingly, the Appellate Rules
may be utilised regardless of whether
the underlying arbitration is conducted
under the Arbitration Rules. Appeals will
be permitted if the underlying award is
based on “an error of law that is material
and prejudicial” or “determinations of
fact that are clearly erroneous” (Section
A-10). The aggrieved party is required to
file an appeal within 30 days of receipt of
the underlying award. While any appeal
proceedings are ongoing, the award will
not be enforceable.
Issue 01 - 2014 — 29
ABU DHABI COMMERCIAL CONCILIATION AND
ARBITRATION CENTRE
The Abu Dhabi Commercial Conciliation and Arbitration Centre (“ADCCAC”) was
established in 1993, as a department of the Abu Dhabi Chamber of Commerce & Industry
(now known as the Abu Dhabi Chamber). Its old arbitration rules, or “Procedural Regulations”,
were enacted in 1993, and did not undergo any substantial development (the “1993 Rules”).
In essence, they provided for an arbitration procedure that broadly resembled UAE local
court proceedings, and were not reflective of current international arbitration best practice.
It nevertheless remained the preferred arbitral institute of many Abu Dhabi-based parties,
especially Abu Dhabi government bodies and Abu Dhabi government-controlled entities.
On 1 September 2013, a new set of
Procedural Regulations (the “2013
Rules”) came into force. The 2013 Rules
appear to have the character and detail
found in the rules of leading international
arbitral institutes. There are a
number of provisions of the 2013 Rules
that were either missing from, or were
not sufficiently clear in, the 1993 Rules.
These include the recognition of party
autonomy (Article 15), appointment of
the tribunal (Articles 8-12), the tribunal’s
power to determine its jurisdiction
(Article 22), and arbitrator fees (Articles
43 and 44).
Despite these developments, there
remain certain features of the 2013
Rules that continue to resemble UAE
local court proceedings. These include
optional “pleading sessions” (Article
24), default Arabic language absent
agreement between the parties (Article
18), and, although the tribunal has the
power to award “costs”, it is not clear
whether this includes legal fees.
One criticism that has been directed
against ADCCAC in the past relates to
its secretariat and case management. It
is hoped that with the implementation
of the 2013 Rules, there will be a corresponding
development of its reputation
among the arbitration community.
Importantly, there remains some question
regarding the status and operation
of the 2013 Rules. The 2013 Rules
appeared on the ADCCAC website
briefly, which shortly thereafter reverted
to displaying the 1993 Rules, and continued
to do so as at the date of writing
this article. The status of the 2013 Rules
therefore remains uncertain.
Issue 01 - 2014 — 30
INTERNATIONAL BAR ASSOCIATION GUIDELINES
ON PARTY REPRESENTATION IN INTERNATIONAL
ARBITRATION
On 25 May 2013, the IBA Council adopted the IBA Guidelines on Party Representation in
International Arbitration (the “Guidelines”).
The perceived need for the Guidelines arose because of the differing ethical and
professional conduct rules that apply to party representatives from different jurisdictions
and legal traditions. The Guidelines seek to establish common principles by which party
representatives in international arbitration should abide, to the extent that parties agree to
their application. In general, they seek to ensure that party representatives act with “integrity
and honesty” and are deterred from engaging in conduct that results in unnecessary delay
or expense to proceedings (including tactics designed to obstruct the arbitral process).
The following core principles are contained
in the Guidelines:
▪ Party representation: Once the
tribunal has been formed, a person
should not accept a party representative
appointment if such would create a conflict
of interest for a tribunal member.
If, however, this guideline is breached,
the tribunal may “take measures appropriate
to safeguard the integrity of the
proceedings”, including exclusion of the
proposed party representative from participating
in the proceedings.
▪ Communication with arbitrators:
Unless otherwise agreed by the parties,
a party representative should not engage
in any ex parte communications with
arbitrators regarding the arbitration.
There are exceptions, including communications
with a prospective arbitrator
nominee regarding his or her experience,
expertise and availability, communications
with a party nominated arbitrator
regarding selection of a tribunal
chairman and (where agreed between the
parties) communications with a prospective
tribunal chairman regarding his or
her experience, expertise and availability,
provided that no views on the dispute
are sought.
▪ Submissions to the tribunal: A
party representative should not make
any “knowingly false submission of fact”
to the tribunal, and should promptly
correct any such previous submission
“subject to countervailing considerations
of confidentiality and privilege”.
Witness or expert evidence known to
be false should not be submitted. If the
falsity is discovered subsequently, the
representative shall take remedial measures,
including advising the witness to
testify truthfully (including correcting or
withdrawing false evidence). In extreme
circumstances, the representative
should withdraw.
▪ Information exchange and disclosure:
Where proceedings may involve
document production, a representative
shall inform his or her client of the need
to preserve relevant documents. A representative
shall desist from requesting,
or objecting to, the production of documents
“for an improper purpose, such
as to harass or cause unnecessary delay”.
▪ Witnesses and experts: Before
seeking any information from a potential
witness, a party representative should
identify himself or herself and the party
he or she represents. It is permissible for
a representative to assist a factual/expert
witness with preparation of a statement/
report, provided that it reflects the witness’s
own account of facts/opinions, to
discuss a witness’s prospective testimony
for the purposes of preparations and
to pay a witness his or her reasonable
expenses incurred in connection with
attending to give evidence.
▪ Remedies for misconduct: The tribunal,
after having notified the parties
and given them an opportunity to
respond, may caution a representative,
draw adverse inferences from the evidence
he or she has (or the client has)
adduced and/or make an award of costs
against the party in question.
CONTACTS
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For further information about our International Arbitration & Dispute Resolution Practice, or about this publication, please contact:
Jay Alexander
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E jay.alexander@bakerbotts.com
Michael Goldberg
Arbitration Group Co-Head
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E michael.goldberg@bakerbotts.com
Jonathan Sutcliffe
Editor
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E jonathan.sutcliffe@bakerbotts.com
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