Dentons

Resolution A/67/L.28 on the Status of Palestine at the United Nations was passed with an overwhelming majority at the General Assembly on November 29, 2012. The Palestinian Authority’s status has thus been upgraded from a United Nations permanent observer entity to that of a non-member observer State. Although the Resolution does not necessarily mean that all States, including Israel and the other eight that voted against it and the forty one that abstained, must recognize Palestine as a State, it does mean that Palestine will have access to various United Nations agencies and will be recognized as a sovereign State by most nations. Resolution A/67/L.28 may thus foreshadow future treaties to be signed between Palestine and other States and indicate a shift in the options available to foreign investors looking to resolve commercial disputes in Palestine.

A. Protecting Foreign Investment: Current Practices

States have traditionally recognized the importance of foreign direct investment and simultaneously sought to ensure the protection of their own investors in foreign nations. As such, States have negotiated and ratified bilateral and multilateral treaties in order to promote and attract foreign investment, guaranteeing foreign investors access to fair and impartial mechanisms for dispute resolution should conflicts arise.

A current trend in such treaties is to allow investors of one State to bring claims directly against the government of another State before an international arbitration tribunal, allowing investors to bypass local remedies, which may otherwise be skewed against foreign parties. Investors are instead permitted to initiate a claim against a State under mutually agreed-to arbitration rules, such as those issued by the United Nations Commission on International Trade Law (“UNCITRAL”) or the International Centre for Settlement of Investment Disputes (“ICSID”).

B. The Unique Context of Palestine

Israel and Palestine are each among the other State’s largest trade partners, with nearly US $5 billion in annual trade between the two partners. What this means is that a strong and continuous link between Israeli and Palestinian businesses occurs every day. However, unlike investment between sovereign nations, there is currently no foreign investment protection treaty in place between Israel and Palestine. Unlike the case of disputes that arise within the context of foreign investment amongst other nations, Israel does not recognize Palestine as a State and thus has no investment treaties in place with Palestine.

Moreover, unlike the case of disputes that arise between two parties situated within a domestic context, Israeli and Palestinian companies do not each have equal access to one another’s courts: it can be difficult for Palestinian companies to participate in Israel-based judicial proceedings. Israeli companies may have difficulty in enforcing judgments in Palestinian territories. Moreover, the Israeli courts are sometimes perceived by Palestinians as biased. These are among the classic problems that have spurred many States to ratify foreign investment protection treaties, but such a solution will remain unachievable in the case of Israel and Palestine, unless and until Israel recognizes Palestine as a sovereign State.

C. Will Resolution A/67/L.28 Have Any Impact on Foreign Investment in Palestine?

1. Overview
Resolution A/67/L.28 enters into a complex and unsettled question of international law: At what point does a territory become a sovereign State within the international community? Although the distinction has narrowed recently, there are two distinct theories that provide guidance: (i) the declarative theory; and (ii) the constitutive theory.

2. The Declarative Theory
The declarative theory is the prevailing theory for the recognition of State sovereignty. It holds that an entity is recognized as a State when it satisfies the following objective criteria for Statehood, which were laid down in article 1 of the Montevideo Convention of on the Rights and Duties of States (1933): (i) permanent population; (ii) defined territory; (iii) effective government; and (iv) capacity to enter into relations with other States.

There is a great deal of controversy as to whether Palestine meets these criteria. In addition to the question of Palestine’s “defined territory,” the element that faces the most objection is the question of effective government. Given the rift between Fatah and Hamas, many critics argue that there is no Palestinian government with effective and consolidated control over all of Palestine’s territory.

3. The Constitutive Theory
Yet even if Palestine were not to meet the elements of the declarative theory test, it may qualify for Statehood under the constitutive theory, which holds that an entity is a State if recognized as such by the international community. “Recognition” refers to the formal acknowledgement by other States that an entity is a State. The vote of the General Assembly, while not having per se legal force, will demonstrate the extent to which Palestine Statehood holds the support of the international community. The Resolution is thus instrumental in determining whether the criteria set forth under the constitutive theory have been fulfilled.

4. Will the General Assembly Vote Change the On-the-Ground Situation?
Many commentators have rightfully pointed out that despite Resolution A/67/L.28, the on-the-ground situation in Palestine will remain largely unchanged. For example, Israel, which will not recognize Palestine as an independent State, will continue to occupy the West Bank. Nations that opposed or abstained from Palestine’s Statehood vote will refuse to recognize Palestine as a State or recognize Palestinian diplomatic missions or consulates.

However, there is one important consequence that Resolution A/67/L.28 will have: some or many of the nations that voted for the Resolution will likely enter into diplomatic relations with Palestine. This means more than just recognizing Palestinian diplomatic missions; it likely means ratifying treaties with Palestine, setting up trade missions and, perhaps also, ratifying treaties establishing alternative dispute resolution mechanisms to protect foreign investors. This is perhaps what is most needed between Palestine and Israel, given their abundant bilateral trade but scarce options for effectively resolving disputes. The irony herein lies in the fact that the businesses that most need such a treaty will not benefit from the Resolution, given Israel’s non-recognition of Palestinian statehood.

D. Solutions Implemented by Spontaneous Civil Society Initiatives

Where governments fail to break through an impasse, one may often find solutions spontaneously implemented by civil society. Such has been the case of alternative dispute resolution between Israeli and Palestinian companies. Oren Shachor, a retired Israeli military general and head of the International Chamber of Commerce of Israel, and Samir Hulleileh, chief executive of a large Palestinian conglomerate, recognized the need for a neutral dispute-resolution mechanism between Israeli and Palestinian companies. Their initial encounters focused on meeting a challenge that Israeli and Palestinian businesses faced. Through perseverance, an initiative known as the Jerusalem Arbitration Center was born. The Center, which began operations this year, aims to nurture the peaceful resolution of commercial disputes through a neutral and independent forum to serve Palestinians and Israelis.

Unless Palestine achieves recognition by Israel as a sovereign State, and treaties are concluded to ensure fair judicial mechanisms for resolving commercial disputes between Israeli and Palestinian companies, it is civil society initiatives such as the Jerusalem Arbitration Center that will provide the best chance for the peaceful resolution of commercial disputes.

E. The Jerusalem Arbitration Center: A Glimmer of Hope

What is remarkable about the Jerusalem Arbitration Center is that, in the words of Professor Catherine Rogers of Penn State Law, it is “seeking to bring peaceful dispute resolution to disputants from jurisdictions that are openly hostile to each other and that lack formal diplomatic relations.” The Center, despite a host of legal and logistical challenges, including chilled relations between the Israeli and Palestinian governments, provides a glimmer of hope and support in a land marked by conflict.

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Arnold & Porter LLP

Getting over the skepticism.  Since the International Bar Association adopted its Rules for Investor-State Mediation last October, there has been an uptick in discussions regarding the topic, including a mock mediation panel presented this spring during the American Society of International Law’s Annual Meeting.  Nonetheless, investor-State mediation still faces skepticism from many arbitration professionals, both because of the limited track record of mediation and conciliation in this arena (e.g., only 6 concluded and 3 pending ICSID conciliation proceedings) and because of the political realities inherent in “settling” by any means a claim against a State, which requires individual officials to take ownership and responsibility for a decision that may involve concessions or payments.

It is worth remembering, however, that investor-State arbitration faced similar skepticism just a few decades ago.  According to the ICSID website, while only 18 arbitration cases were registered at ICSID in its first 20 years (1965-1984), the next 20 years saw 150 new cases (1985-2004), and a further 242 cases were registered in the following 8 years alone (2005-2012).   Meanwhile, in the business world, use of mediation has grown alongside arbitration, to the extent that many commercial agreements even require efforts to mediate as a precursor to commencing arbitration.  The track record for mediation in the commercial arena has been stellar:  according to the ICC’s 2012 Statistical Report, 16 out of 21 new cases (76%) that were filed in 2012 under the ICC ADR Rules were settled by mediation, with two more settled by conciliation, one by a combination of neutral evaluation and mediation, and the remaining two withdrawn before the settlement technique had been fixed.

While investor-State disputes present special challenges, there is no reason to assume that over time mediation or conciliation might not emerge, similarly, at least as a palatable option to attempt before commencing what may turn out to be lengthy arbitration proceedings.  The first step may be from States (like Canada) that already have proven amenable to early negotiations to try to settle certain claims, while vigorously defending against others.  If a State is willing in principle to contemplate the amicable resolution of claims, it is not too much of a leap to imagine that it might be willing to attempt non-binding procedures to assist in that resolution.

The issue then becomes which aspects of investor-State mediation may be most attractive to potential users, and whether any improvements in infrastructure are necessary to strengthen them.  Several aspects deserve consideration.

1. Cost and time-saver, or further delay?  The old assumption that arbitration is more time and cost efficient than traditional litigation has given way to the recognition, particularly in investor-State cases, that arbitration itself can be drawn out and immensely expensive.  Even in the purely commercial arbitration context, a 2011 Chartered Institute of Arbitrators survey of 254 arbitrations conducted between 1991 and 2010 reported an average length of 17 to 20 months, and average costs of around 2 million dollars.  Investor-State arbitrations generally are longer and more costly; Anthony Sinclair’s 2009 survey of 115 ICSID cases revealed an average 3.6 years from request to arbitration to final award, a figure that would expand significantly if initial mandatory cooling-off periods and possible annulment challenges were factored in.

The length of investor-State proceedings is due to many factors, of which a limited pool of very experienced and thus very busy arbitrators is only one.  Much of the delay is inherent in the fact that the issues tend to be complicated and the parties for understandable reasons wish to litigate them in depth.  Arbitrators likewise feel compelled to address the issues in depth in the award, not only because of the importance of their mandate, but also because of the need to “show their work” to protect against annulment challenges for “failure to state reasons,” and the likelihood that awards will become public and the tribunal’s reasoning thus be scrutinized by a broader audience.

In principle, investor-State mediation has the potential to save time and costs, because selection of only one mediator is required, less time is  required to educate the mediator on the parties’ basic positions for purposes of exploring amicable resolution than for fully arbitrating a dispute, and settlements obviate the need for a (lengthy) written decision.  The few ICSID conciliation proceedings that have been held suggest that where they are successful in brokering a settlement, this happens more quickly than an arbitration proceeding produces a final award, although still not as quickly as one might hope.

Of course, not all mediated cases result in settlement, and it is axiomatic that a failed mediation that does not obviate the need to proceed to arbitration adds to the length of the overall process.  Parties who consider settlement to be extremely unlikely may see little advantage, therefore, in trying mediation first, except insofar as it may enable them to learn (and become more realistic) about the strengths and weaknesses of their respective positions, for purposes of a later arbitration.  On the other hand, there are many investor-State cases in which settlement realistically cannot be ruled out from the beginning: the latest ICSID statistics reveal that some 24% of all concluded ICSID arbitrations between 1972 and 2012 settled during the proceedings.  For such cases, the calculus of risks and benefits of attempting an initial mediation may shift if investor-State mediation procedures can be made reliably expeditious.

2. Privacy and confidentiality.  Most investor-State arbitrations attract significant media and public attention, which can complicate any path towards amicable resolution.  Mediation offers greater alternatives to maintain confidentiality.  Article 10 of the new IBA Rules provides the general rule of thumb for investor-State mediation — that it can be as private as the parties wish it to be.  To a significant extent, the parties can agree in writing how much they would like to disclose, or not to disclose, regarding the content of the settlement or the documents relevant to the case.

Of course, the extent of confidentiality depends on whether the mechanism chosen for mediation itself results in public acknowledgement that a mediation process is underway, as for example is the case with the use of ICSID’s conciliation procedures.  Other institutions offering mediation services do not, however, maintain public registries of disputes submitted to them for this purpose.  Mediation may also be more amenable to use of ad hoc (non-administered) procedures, particularly as (unlike arbitration) it does not hinge on the eventuality of a detailed written decision that may be challenged or require enforcement against a recalcitrant party.  By definition, mediation results either in a jointly agreed outcome (for which the negotiated terms may be kept quiet or released publicly as the parties prefer), or a simple failure to agree, which does not require public release that the process even has been attempted in the first instance.

3. Compliance.  One of the perceived limits to mediation may be that unlike arbitration, it results, even when successful, simply in a contractual document (a settlement agreement) rather than a judgment or award carrying the independent imprimatur of a respected institution.  Under Article 54 of the ICSID Convention, for example, ICSID awards are to be treated as binding by all other signatory States, and enforced as if such awards represented final judgments of the highest national courts of each such State.  Outside of the ICSID process, arbitration awards carry significant weight through the provisions of the New York Convention, which limit the bases upon which they can be challenged or on which enforcement may be denied by national courts.   By contrast, settlement agreements — whether achieved through mediation or direct negotiations — do not carry the same legal force.

However, the solution to this is fairly straightforward.  As the parties in at least 15 ICSID cases have realized, an arbitral tribunal may be asked to incorporate the settlement in the form of a consent award, which then attracts all the enforceability of a final award under the ICSID Convention.  In principle, there is no reason that parties proceeding through mediation could not invoke similar procedures, by jointly agreeing on an “arbitrator” to “so order” their settlement in the form of a consent award, either within the ICSID process or in the form of another type of institutional or ad hoc award protected by the New York Convention.

4. Restoration of business relationship.  Mediation is also advocated for its ability to result in flexible solutions that may preserve an underlying business relationship, perhaps by restructuring obligations or encouraging additional commercial opportunities by way of creative compensation.  By contrast, arbitration generally results in an award of monetary damages, which may leave unchanged (or even further damage) the underlying relationship between the parties.  For investors whose ventures in a host State are irretrievably terminated, this distinction may not be a relevant factor.  But history has shown that investment arbitration is not just an exit strategy; many investors who commence investor-State arbitration in fact intend (or at least would prefer) to remain active participants in the host State market.  By avoiding a framework of “all out war,” and instead facilitating an early dialogue, mediation may function as a form of early risk management, to help preserve underlying business relationships before they are too late to mend.

5. Decision-making power.  Article 9(3)(a) of the IBA Rules states that “[a]t the mediation management conference, … each party shall either identify a representative who is authorized to settle the difference or disputes on its behalf or describe the process necessary for a settlement to be authorized.”  In some States, this may be the greatest obstacle to potential settlement through mediation or otherwise, either because investment disputes involve complex issues that range across multiple State agencies, or because political will is lacking.  It can be difficult for State officials to take personal ownership (and therefore political “heat” back home) of a decision to recommend settlement or to accept such a recommendation made at a lower level of authority.

A lesson in this regard may be learned from Canada, which uses a standing professional body within its Department of Foreign Affairs and International Trade to evaluate and defend (or settle) NAFTA and other investor-State claims, rather than relying ad hoc for evaluation on officials more closely affiliated with the ministries or agencies whose underlying conduct is at issue in individual disputes.  A recommendation of settlement by apolitical authorities charged with making professional evaluations in the broader interest of a State may be easier to achieve — and easier for politicians ultimately to accept — than expecting the very officials whose conduct has been questioned to admit that their actions have created potential vulnerabilities for the State that may be in its interest to resolve voluntarily, without long drawn-out arbitration proceedings.

Conclusion.  Investor-State arbitration has developed and matured significantly in the past few decades, and has established itself as an independent mechanism for resolution of complex public-private disputes.  At the same time, the system necessarily has challenges and limitations, particularly as it evolves more and more to resemble all-out litigation.  While not begrudging in any way the advantages of arbitration for disputes that simply cannot be resolved by other means, the time may be right to revisit the possibilities of investor-State mediation in appropriate cases, as either an alternative or a precursor to eventual arbitration.  One way to move forward in this area would be for neutral observers to begin to collect examples of “best practices” that have facilitated settlement even after commencement of arbitration, from which providers of mediation services can learn.  It would be interesting, too, to open more dialogues with States that have faced multiple investor-State arbitration claims, to explore whether there are innovations that might make the idea of using mediation more palatable to them in future.

By Jean E. Kalicki and Jean C. Choi*

*Jean Kalicki is a Partner at Arnold & Porter LLP and Adjunct Professor of Law at Georgetown University Law Center; Jean Choi is an associate at Arnold & Porter LLP.

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Kluwer Law International

Kluwer Arbitration and Kluwer Law International are delighted to announce that the inaugural Kluwer Arbitration User Forum will be held in London (at the International Dispute Resolution Centre (IDRC), 70 Fleet Street, London, EC4Y 1EU) on Tuesday 10th September.

This (free) half-day event, will be open to all London-based users of Kluwer Arbitration. With summer (supposedly) approaching, please do put this event in your calendar now. If you are a Kluwer Arbitration user (whether you are a librarian, knowledge manager, professional support lawyer, fee earner, barrister or arbitrator), this User Forum is for you.

During this half-day event you will be able to:
- Receive refresher training on Kluwer Arbitration
- Be updated on recent and upcoming enhancements to Kluwer Arbitration
- Be updated on recent arbitration developments
- Interact with our authors
- Share your feedback during a dedicated feedback session

Please feel free to share this post with other Kluwer Arbitration users. The great thing about this event, is that you can bring your colleagues with you. All we ask is that everyone register their attendance in advance. As spaces are limited, please register now to avoid disappointment.

We will be confirming the final agenda for the morning over the next few weeks. But, so as not to miss out, we are offering the opportunity to pre-register for the event.

To register – CLICK HERE

We look forward to welcoming you and your colleagues on the 10th September. In the meantime, should you have any questions about the Forum, you can drop me a line at eleanor.taylor@kluwerlaw.com.

Eleanor Taylor, Product Manager, Kluwer Law International

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	International Arbitration and Forum Selection Agreements: Drafting and Enforcing - 4th edition by Gary B. Born € 85
	International Arbitration in Switzerland - 2nd Revised Edition by Elliott Geisinger, Nathalie Voser, Angelina M. Petti (eds._ € 150
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

Mattos Muriel Kestener Lawyers

The facts

On January 9, 2008, in the middle of the Amazon Rainforest, the dam of a hydroelectric power plant ruptured liberating 3.1 billion liters of water and precipitating an environmental mishap. Brazilian authorities hastily cornered the electricity generation company. The electricity generation company hastily pointed the finger at the builder of the hydroelectric power plant. The construction contract between the company and the builder had an arbitration clause. While the necessary steps for the commencement of arbitration were taken, one of the parties applied for an interim measure of protection before a state court. In due time, the arbitral tribunal asserted its jurisdiction to settle the merits of the dispute. The state court, alas, did the same.

In a nutshell, this was the seed for conflict of jurisdiction no. 111.230 brought before the Superior Court of Justice (Superior Tribunal de Justiça), the highest Brazilian court for non-constitutional matters.

The controversy

As the saying goes, better the devil you know – than the one you don’t. The familiar strife for jurisdiction between arbitrators and state courts notwithstanding, an intricate new question was raised: did the Superior Court of Justice have jurisdiction to settle the conflict of jurisdiction between the arbitral tribunal and the state court? According to the principle of compétence-compétence, isn’t the arbitrator the single individual who can trace the boundaries of his own jurisdiction during the arbitration, the parties’ agreements on the matter considered?

The Superior Court of Justice proceeded willingly to an analysis of these meta-jurisdictional issues under the scrutiny of the local arbitral community.

In one corner of the ring …

Part of the spectators denied that the Superior Court of Justice had the said jurisdiction. By virtue of Article 8 of the Brazilian Arbitration Act, the arbitrator has jurisdiction to decide, on his own initiative or at the parties’ request, the issues concerning the existence, validity and effectiveness of the arbitration agreement. In the fact that only the arbitrator is authorized to do so lies the true meaning of compétence-compétence.

Though an arbitrator’s jurisdiction may be denied by a state court that reviews his arbitral award, during the arbitral procedure the arbitrator is the one and only judge of his own jurisdiction and there is no exception to this rule. Otherwise, arbitrators would fare badly indeed when it came to ascertaining their authority before any challenger.

A small crowd pondered that, all things considered, the meddlesomeness of the Brazilian judiciary branch in arbitral matters had been very mild so far and it had best stay so.

In the three other corners of the ring …

Contrariwise, respectable voices were raised in favor of the jurisdiction of the Superior Court of Justice to rule on the conflict of jurisdiction between the arbitral tribunal and the state court. It was argued that Article 18 of the Brazilian Arbitration Act provides that the arbitrator is a judge in fact and in right, and accordingly his conflicts of jurisdiction should be settled as any other judge’s. It was also reasoned that there was too great a hazard to have contradictory awards issued by the arbitral tribunal and the state court, and the Superior Court of Justice should prevent it.

Moreover, it was said that justice delayed would be justice denied: if a prompt answer by the Superior Court did not surmount the deadlock without further ado, the parties would suffer a long wait in case the matter was conveyed before a lower state court. All in all, the Superior Court of Justice had traditionally supported arbitration and would do so again this time by recognizing that the jurisdiction was the arbitral tribunal’s by right. The same Court had already held that the jurisdiction of the state court ceased when the arbitral tribunal was constituted, and had asserted that provisional measures granted by courts could be reversed by arbitrators.

The ruling

To the dropping jaws of some and the approving nods of others, the Superior Court of Justice asserted its jurisdiction to rule on conflicts of jurisdiction between arbitrators and state courts. The Court held that the Constitution conferred to it the jurisdiction to rule on conflicts regarding not only tribunals of the judiciary branch, but also tribunals of an arbitral nature. This course of action was allegedly pursued in order to avoid an imminent vacuum of authorities empowered to overcome the dilemma, in which case there would be a twofold jurisdiction and the risk of contradictory decisions.

Eventually, the Court held that the arbitral tribunal, and not the state court, had jurisdiction to rule on the subject matter of the dispute.

Comment

This decision is viewed by some as a victory for arbitration, in accord with the Court’s traditional pro-arbitration stance. However, it is in fact a Pyrrhic victory, one with such high a cost that it will ultimately lead to defeat. Whereas a particular arbitral tribunal has had its jurisdiction confirmed, the arbitrators of Brazilian proceedings elsewhere see a black cloud hovering over their compétence-compétence prerogative. The decision issued on conflict of jurisdiction no. 111.230 opens a small window towards insecurity as it antagonizes what Emmanuel Gaillard first named the negative effect of compétence-compétence.

The Court is alien to the idea that a conflict of jurisdiction between two fora may be solved by one of them. It clings to the rooted notion that only a third, uninvolved entity could settle such a contention. However, the settlement of the conflict by one of its parties is in fact what the Brazilian Arbitration Act provides when it upholds the principle of compétence-compétence on its Article 8. At the same time, Article 32(II) of the Act confers upon the judiciary branch the authority to appreciate the arbitrator’s jurisdiction if and when annulment proceedings are initiated.

It has been repeatedly said that the conflict of jurisdiction in question had to be quickly solved by the Court before the arbitral tribunal and the state court proffered contradictory decisions. Nevertheless, the anxiety to solve this particular case might reverberate negatively over future cases. The Superior Court of Justice might be seeing the trees and missing the wood. Whether this bitter pill will have blessed effects remains yet to be seen.

It is noteworthy that more than three years have elapsed since the conflict of jurisdiction was finally appreciated. It is true that the magistrates of the Superior Court of Justice have an overwhelming workload, but the fact remains that the appreciation of the matter by the Court is not timely enough for parties who have chosen arbitration precisely as an alternative to the judiciary branch.

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Arnold & Porter LLP

Article 52(4) of the ICSID Convention identifies the provisions of the Convention that apply, mutatis mutandis, to annulment proceedings:  “[t]he provisions of Articles 41–45, 48, 49, 53 and 54, and of Chapters VI and VII . . . .”  While there is wide agreement that an annulment committee may neither “amend or replace the award by its own decision, whether in respect of jurisdiction or the merits” (Schreuer, Commentary, Art. 52, ¶ 10), nor “direct a tribunal on a resubmission how it should resolve substantive issues in dispute” (MTD v. Chile, ICSID Case No. ARB/03/9 (Decision on Annulment, 21 March 2007), ¶ 54 (Guillaume, Crawford, Ordoñez Noriega)), there does not appear to be consensus on the proper limits under Article 52(4) of an ad hoc committee’s mandate.  In other words, it is not clear whether Convention provisions that are not specifically set forth in Article 52(4) nevertheless are applicable in an annulment proceeding.  Committees have addressed the scope and effect of Article 52(4) of the ICSID Convention in various contexts, and their treatment of that provision suggests that more than just the plain language of the Article is relevant to determining its scope.

In the first annulment proceeding in Compañía de Aguas del Aconquija S.A. & Vivendi Universal v. Argentine Republic, for example, the respondent challenged the president of the ad hoc committee, Mr. Yves Fortier, claiming a conflict existed because one of Mr. Fortier’s law partners had been engaged by a predecessor of the claimants to advise on certain taxation matters that were entirely unrelated to the ICSID arbitration.  Article 57 of the Convention, governing arbitrator challenges, is not among the provisions listed in Article 52(4).  Nevertheless, the two remaining members of the committee, Professors James Crawford and José Carlos Fernández Rozas, undertook to consider whether they were competent to decide the challenge.  Despite acknowledging that “the catalogue of provisions incorporated by reference in Article 52(4) appears [to be] a considered one,” the committee found itself empowered to entertain the challenge (although it then rejected it on the merits).

The committee noted that, unlike the closed list of Convention provisions found in Article 52(4), the corresponding Arbitration Rule (Rule 53) appears to extend all of the Arbitration Rules to an annulment proceeding.  Since being amended in 1984, Arbitration Rule 53 states:  “The provisions of these Rules shall apply mutatis mutandis to any procedure relating to the interpretation, revision or annulment of an award and to the decision of the Tribunal or Committee.”  Because an earlier iteration of Arbitration Rule 53 had extended application of only certain, enumerated rules to annulment proceedings, the Vivendi I committee held that the plenary language adopted in 1984 served “to apply all the Arbitration Rules, so far as possible, to annulment proceedings . . . .”  Compañía de Aguas del Aconquija S.A. & Vivendi Universal v. Argentine Republic, ICSID Case No. ARB/97/3 (Decision on the Challenge to the President of the Committee, 3 October 2001), ¶ 10 (Crawford, Fernández Rozas) (emphasis added).

Thus, while Article 52(4) of the Convention “does not refer to disqualification of the members of ad hoc Committees,” the committee held that Arbitration Rule 53 nevertheless empowers a committee to evaluate arbitrator challenges.  Id., ¶ 3.  According to the committee, this reading was consistent with the object and purpose of the Convention, as “[a]d hoc Committees have an important function to perform in relation to awards (in substitution for proceedings in national courts), and their members must be, and appear to be, independent and impartial.”  Id., ¶ 11.  Moreover, “the unanimous adoption of Arbitration Rule 53 [in 1984] can be seen, if not as an actual agreement by the States parties to the Convention as to its interpretation, at least as amounting to subsequent practice relevant to its interpretation.”  Id., ¶ 12.

The committee in Nations Energy Corporation et al. v. Panama also adopted this reasoning.  Although neither party questioned the committee’s competence to entertain a challenge to the committee president, the remaining members of the committee nevertheless addressed the issue in their decision.  Similar to the Vivendi I committee, the Nations committee held that Arbitration Rule 53 authorized the committee to evaluate the challenge.  Nations Energy Corporation et al. v. Panama, ICSID Case No. ARB/06/19 (Decision on Proposal for Disqualification of Stanimir A. Alexandrov, 7 September 2011) (Irarrázabal C., Gómez Pinzón).

Despite the potentially far-reaching consequences of the Vivendi I and Nations approach to Convention Article 52(4) and Arbitration Rule 53, committees have not adopted it in other contexts.

In Libananco v. Turkey, for example, the annulment applicant filed a request for provisional measures, requesting that the committee reinstate prior orders by the tribunal that prevented the respondent from engaging in “illicit espionage.”  Libananco Holdings Co. v. Turkey, ICSID Case No. ARB/06/8 (Decision on Applicant’s Request for Provisional Measures, 7 May 2012), ¶ 6 (Rigo Sureda, Danelius, Silva Romero).  Article 47, on provisional measures, is not among the provisions listed in Article 52(4) of the Convention as applying directly to annulment proceedings.  The committee noted that “[t]he fact that Article 52(4) of the ICSID Convention does not refer to Article 47 of the Convention provides considerable support for the view that the Committee has no such competence.  Moreover, it is at least doubtful whether the general reference in Article 44 of the ICSID Convention to the Arbitration Rules, as read together with Rules 39 and 53 of the Arbitration Rules, is sufficient to provide the Committee with such competence despite the absence in Article 52(4) of a reference to the specific Article dealing with provisional measures.”  Id., ¶ 15.  However, the committee found it unnecessary to decide the issue given that the applicant had failed to demonstrate that the requested measures were necessary.

In Victor Pey Casado and President Allende Foundation v. Chile, the annulment respondents introduced their own annulment claim nearly two years into an annulment proceeding initiated by Chile (the annulment applicant).  Had this claim been considered a “counter-claim” for annulment, the committee might have considered whether counter-claims — governed by Article 46 of the Convention and therefore not expressly covered by Article 52(4) — are admissible in annulment proceedings.  However, the committee dismissed the claim on other grounds, stating that it had “no hesitation in ruling that it cannot entertain the Claimants’ application which is time-barred.”  Victor Pey Casado and President Allende Foundation, ICSID Case No. ARB/98/2 (Decision on Annulment, 18 December 2012), ¶ 346 (Fortier, Bernardini, El-Kosheri).

The cases suggest that while committees in some circumstances will not view Article 52(4) as the “final word” on the scope of their powers, the Vivendi I and Nations approach based on a broad reading of Rule 53 is not without limit.  The precise contours of these provisions remain uncertain, however, and it would not be surprising if future ad hoc committees are asked to interpret them in other contexts.

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Universidad de Los Andes de Bogotá, Colombia

On April 18, 2013, the Colombian Council of State -Consejo de Estado- changed its previous case law, regarding the waiver of arbitration agreements concluded between public state entities and private contractors.

Prior to this decision, the parties could waive arbitration by presenting their case before an administrative court of law, in so far none of them invoked the existence of the arbitration agreement – i.e. Council of State: Decisions of June 16, 1997; March 16, 2005; and June 23, 2010-. This case law had consistently recognized the possibility of waiver under different grounds or scenarios, i.e. the parties’ procedural inactivity, before the administrative courts of law, regarding the existence of an arbitration agreement within the state contract.

In its recent decision, the Council of State addressed a case in which the Colombian Province of Casanare and a private contractor entered into a contract for the construction of a lagoon. The state entity terminated the contract based on the apparent illegality of the process whereby the contractor had been selected. The contract, as such, contained an arbitration agreement. The private contractor commenced litigation, against the Province of Casanare, before an administrative court of law, which rendered a final decision as to the merits of the dispute. The judicial decision was challenged by the private contractor. This led the Council of State to address the case. It decided to annul the proceedings carried out before the administrative court of law. According to the Consejo de Estado, the administrative court of law lacked jurisdiction since an arbitration clause had been inserted into the state contract. It considered that the parties’ inactivity or silence, within judicial proceedings, regarding the presence of the arbitration agreement in the construction contract, would not amount to a waiver. Thus, pursuant to the decision, the parties could only avoid arbitration by drafting a document in which they expressly eliminated said agreement. By doing so, the parties would follow the general principle of Law whereby things must be undone as they have been done. Consequently, since the parties had entered into a written state contract containing an arbitration clause, it would be necessary for them to eliminate the clause by drafting a document containing said intention.

The decision clarifies that its rationale applies to arbitration agreements covered by the previous arbitration regime, and not necessarily to those subject to the new arbitration regime, which came into force on October 12, 2012.

At first sight, the ruling seems to endorse a radical pro-arbitration approach; by verifying the presence of a written arbitration agreement within the state contract, the administrative court in question is bound to refer the parties to arbitration, no matter their subsequent conduct as to their arbitration agreement, including their procedural behavior. This, in turn, would seem apparently compatible with the Kompetenz-Kompetenz principle, pursuant to article II.3 of the New York Convention and other relevant instruments.

Nonetheless, this new ruling reflects a rigid approach to the requirement of arbitration agreements in writing. By ignoring the parties’ implied, but unambiguous, intention –reflected during litigation- to set aside their agreement to arbitrate, the decision adopts a view of the arbitration agreement “in writing” as an ad substantiam actus requirement, which necessarily demands a document for its existence or its elimination. As a result, it disregards the modern notion of arbitration agreements “in writing” as an ad probationem requirement, whereby the existence or non-existence of the arbitration clause is assessed by means of different record or evidence, including the procedural conduct of the parties –i.e. amended UNCITRAL Model Law, art. 7(5); English Arbitration Act, sec. 5-. Under a different perspective, the ruling has gone beyond article II.3 of the New York Convention, because a summary or superficial review of the issue, by the court of law, would have led the latter to retain its jurisdiction to decide the case, without referring the parties to arbitration due to the evident or “manifest non-existence” of the arbitration clause.

Anyway, the ruling’s ratio decidendi might not affect the cases involving arbitration agreements that are subject to the Colombian arbitration Law 1563 of 2012. It should be noted that this new regime modernizes arbitration rules applicable to domestic and international arbitrations in Colombia. Both the domestic and international chapters of the new Law –with slight variations- state that the agreement to arbitrate is recognized if it is contained in an exchange of statements of claim and defense in which the existence of said agreement is alleged by one party and not denied by the other –arts. 3; 20 and 69, endorsing the Model Law’s approach-. Coherently, the domestic chapter has a specific provision, whereby the inactivity, by one of the parties, to timely allege the existence of the arbitration agreement before a judge, amounts to a waiver of said agreement –art. 21-. This rule, at least within the state contracts’ scenario, contradicts the Council of State’s holding in its decision of April 18, 2013.

It is expected that the Council of State, when asked to rule upon this matter under the new law, will not adopt a “differential” treatment, based on the nature of the parties or of the interests involved. A formalistic approach to arbitration agreements involving state entities, would disregard the general principle of good faith and the spirit of flexibility applicable to the assessment of arbitration agreements under the new arbitration regime. Colombian Law, as many other national laws, is still a dualist system of arbitration. However, its contents reflect the 2006 amendment to the UNCITRAL Model Law, including the flexible approach to the notion of arbitration agreements “in writing”.

Santiago Talero is an attorney-at-law, arbitrator and professor, and the author of the Book “Arbitraje Comercial Internacional: instituciones básicas y derecho aplicable” (stalero@cable.net.co).

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University of Portsmouth,
for ITA

Over the last two decades the world has witnessed a spectacular growth of investor-state dispute resolution by arbitration (i.e. from a few dozen in 1992 shooting up to 514 cases by the end of 2012). But that trend could stall in the foreseeable future with the realization of the users that international arbitration (investor-state arbitration, in particular) is increasingly becoming formalized and akin to be ‘liti-arbitration’ or ‘arbitral litigation’, losing its fundamentals that make it attractive to the international business community. In the case of investor-state arbitration various issues have been raised with wider implications beyond the field of arbitration itself as concerns have been expressed about the role of arbitrators vis-à-vis the respondent state’s public interest in regulating various matters including environmental protection, low-carbon investments, social and human rights, etc.; dire economic consequences flowing from arbitrators’ decisions who lack in democratic legitimacy of a domestic or international judicial institution; and inconsistency in arbitral interpretation of investment treaty obligations, hence unpredictability in arbitral decisions on similar or identical issues. Added to this list of concerns may be the growing phenomenon of third-party funding of investor-state arbitration pushing up the costs and the increasing tendency of amicus briefs leading investor-state arbitration to be more confrontational and non-confidential.

The adverse impact of excessive investor-state arbitral awards has recently prompted some resource-rich Latin American countries such as Bolivia, Ecuador and Venezuela to withdraw from the ICSID and to intend to discard the existing BITs to which they are parties. Argentina has also threatened to do so. Australia has discarded investor-state arbitration in favour of its domestic courts. Various interest groups including the U.S. State Legislators have lately urged in their Open Letters the negotiators of the ongoing Trans-Pacific Partnership (TPP) to reject investor-state arbitration. One may wonder if there seems to be a progressive revolution in the field of investor-state dispute resolution.

In some recent ADR surveys in the USA, Europe and Asia-Pacific [e.g., Cornell/Pepperdine/CPR (Fortune 1000 corporations) (2011) , CPR survey (the Asia-Pacific Region) (2011) and IMI (International Corporate Users Survey) (January-March 2013) it is shown that as an alternative dispute resolution mechanism mediation is increasingly attracting more favourable support in business for various reasons such as cost control, efficiency in time management, privacy, confidentiality, preservation of relationship, informality and flexibility. The phenomenon is true at both domestic and international levels. One survey has noted that binding arbitration has reached its “tipping point” . It is also noteworthy that the settlement rate of investor-state disputes at ICSID before any final award is rendered is estimated approximately at 30%-40% percent. It points in the direction that there is a good prospect of investor-state dispute settlement by mediation which needs to be explored further.

In response to the growing desire to switch to non-arbitration ADR, namely mediation, well-known institutions such as the OECD and the IBA have taken the initiative to propagate such an alternative. Under the auspices of the OECD a series of symposia took place on investor-state mediation in the past few years and lately on 4 October 2012 the IBA adopted a set of rules on the subject entitled “IBA Rules for Investor-State Mediation” (hereinafter the IBA Mediation Rules). There is more to follow from various other sources, national and international, in the days ahead.

However, two principal issues may prove to be stumbling blocks for the progress of investor-state mediation, viz., (i) the failure to understand the type of mediation that is desirable in investor-state disputes; and (ii) the state authorities’ disinclination to mediation for palpable political risk (e.g. being blamed for bowing to the foreign party’s pressure or for any dubious deal, etc.) to be faced in their country. It has to be acknowledged that investor-state disputes are not the same as international commercial disputes nor are the mechanisms in which they are often settled. In the former there could be issues of public interest or the tax payers’ concern which is not the case in the latter.

In respect of investor-state dispute settlement it may not always be appropriate to conduct mediation in the same style as in international commercial disputes. There is a garden variety of mediation styles such as facilitative mediation, evaluative mediation, deal making mediation, deal mending mediation, transformative mediation, settlement mediation, expert advisory mediation, wise counsel mediation, and tradition-based mediation [See Nadja Alexander, “The Mediation Meta Model: Understanding Practice Around the World”, 26 Conflict Resol. Q. 97 (2008)]. Out of these varieties, as far as an investor-state dispute is concerned, regard must be had to the ones that cater for the accountability of dispute resolvers (state authority or representatives) to the tax payers. Evaluative mediation, which is often called ‘legal mediation’, may be closer to satisfying these requirements. Such mediation is right based and not interest based. In an evaluative mediation the third-party neutral looks at the disputing parties’ positional briefs and evaluates them objectively in light of his / her expertise to predict how they would fare in a legally binding decision or arbitration and accordingly makes suggestions to the parties (preferably individually in private) which accord with their legal rights and obligations, industry norms, or other objective social standards. It has, at least, a psychological effect on the concerned state representatives in terms of confidence-building that they stand upon some credible platform in respect of their negotiation with the foreign investor for dispute settlement. It may provide them with some legitimacy for their negotiation, hence a shield for deflecting any political criticism later on. It may be recalled that in the first ICSID conciliation case between Tesoro Petroleum Corporation and the Government of Trinidad and Tobago, the conciliator (Lord Wilberforce) conducted, in essence, evaluative mediation between the parties. The ICSID conciliation process thus differs from interest-based mediation (facilitative) but is closer to legal mediation as reflected in that case. However, only in a handful of cases (i.e. 6 cases so far) was the ICSID conciliation resorted to. The reasons for this least recourse to conciliation are often mentioned as: (i) inadequate publicity and efforts to popularize the ICSID conciliation mechanism; (ii) the ICSID conciliation process is unlike any traditional mediation (i.e. interest based); and (iii) there are fewer experts readily available for ICSID conciliation, etc. In order to redress these, the ICSID has lately entertained the idea of introducing the traditional style interest-based mediation in its dispute resolution system. However, the question remains whether traditional mediation should replace the ICSID conciliation mechanism (or evaluative mediation) for the settlement of investor-state disputes.

It is true that often evaluative mediation in certain circumstances may not lead to the resolution of a dispute because the stronger party as evaluated, be it the state / state entity or the foreign investor, could be less willing to give in. At this juncture comes the need for assisted negotiation by a mediator. Thus, the mediator who has evaluated the parties’ positions can assist the parties to reach a ‘win-win’ solution acceptable to both parties. Here is the crunch point! Having had their respective positions evaluated the disputing parties can look around to find out where their respective interests lie and can weigh and balance them to reach a solution themselves in which process the mediator can play a crucial facilitative role. For example, if the dispute is about environmental regulatory expropriation as the foreign investor’s cost of running the business runs excessively high for fulfilling the regulatory requirements, the state party might agree to extend the duration of the project by a reasonable number of years or by any other method to allow the foreign investor’s investment balance sheet in a longer term bearable. In an investment dispute various closely related but non-investment issues concerning labour, human rights, environment and climate change, etc., which investor-state arbitral tribunals tend to avoid somehow can be dealt with in mediation for the mutual benefit of the disputing parties.

Given the context of investor-state disputes that concerns public policy issues, state representatives’ accountability to the public or the tax payers, it may sound plausible that the mediator starts with the evaluation of the parties’ respective positions and then assists them to reach a solution to their disputes in their own terms. Thus, the mediator’s style could be described as evaluation-driven-facilitative mediation or evaluative-facilitative mediation (EFM). The parties need to provide in their contract the appropriate dispute mechanism in detail. However, the mediator needs to be cautious that throughout the process impartiality and confidentiality are maintained according to the parties’ wishes.

If mediation reaches an impasse, arbitration can be resorted to as a fallback (i.e. Med-Arb) with the same person as the mediator and arbitrator or a different person as the arbitrator as the parties might agree. It should be mentioned that this process should be a structured and sequential one, given the fact that the state party needs to get its position evaluated for its public accountability purposes (at least for its confidence’s sake) before it can explore an interest-based resolution (i.e. facilitative mediation) of the dispute with its counterparty.

It is noteworthy that the aforementioned IMI survey finds a wide support (in respect of dispute resolution generally) for evaluative mediation and for more proactive encouragement from arbitration tribunals and the courts to incorporate mediation into litigation and arbitration proceedings. Such a mechanism (Med-Arb) can be adopted by the disputing parties under the IBA Mediation Rules. Serious considerations may be given to include it in a new generation of bilateral investment treaties (BITs).

Last but not least, for credible and successful investor-state mediation, apart from the subject-matter expertise of the mediator along with other well-perceived qualities, the representation on the state-party side by its some heavyweight (professional or political) and popular figure in high-value or complex cases could be a plus.

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Linklaters

By Alessandro Villani and Manuela Caccialanza

One of the more debated issues in the process of the implementation and review of Regulation No. 44/2001 (“Brussels Regulation”) was the general exclusion of arbitration from the matters covered by the Brussels Regulation.

The debate about the opportunity to mitigate such exclusion arises from the subsequent difficulty in determining which courts of Member States have jurisdiction over court proceedings related to an arbitration agreement or procedure, such as proceedings for the annulment or challenge of arbitrators’ appointments,  or regarding the existence, validity or effectiveness of an arbitration clause.  Moreover, since the Brussels Regulation’s provisions about lis pendens and related actions do not apply to matters related to arbitration, this entails the risk that parallel court and/or arbitration proceedings on the same matter are commenced in different Member States, leading to conflicting decisions.  More specifically, in the current EU judicial system there is no rule preventing arbitral tribunals and/or courts of different Member States from simultaneously ruling on proceedings regarding the validity, enforceability, effectiveness or interpretation of the same arbitration agreement.

Furthermore, Member States are not obliged to recognize or enforce decisions made by other Member States related to arbitration agreements or procedures; thus, it is not uncommon for a court of a Member State to recognise the validity of an arbitration clause declared null and void by a court of another Member State, or to deny the recognition and enforcement of a judgment issued in another Member State on the validity of an arbitration clause.

By way of an example, in the Sovarex SA v. Romero Alvarez SA case, the English High Court was requested to dismiss or stay enforcement proceedings of an arbitration award, commenced pursuant to Article 66 of the Arbitration Act 1996, on the grounds that court proceedings commenced prior to the arbitration were still pending in Spain, for a declaration that the contract containing the arbitration agreement was in fact never concluded.  In the present case, the English court held that (i) the question of the existence of a concluded contract or the lack thereof had not yet been determined by the Spanish court, and (ii) the English court was the court of the seat of arbitration, therefore England was the natural forum for the dispute. Accordingly, there was no basis for staying or dismissing the award’s enforcement proceedings, since it was not governed by the Brussels Convention of 1968 (now replaced by the Brussels Regulation), thus the lis pendens provisions set out therein, obliging a court of a Member State to stay proceedings where proceedings involving the same cause of action and between the same parties have been previously brought in a different Member State, did not apply.

In the Legal Department du Ministère de la Justice de la République d’Iraq v. Fincantieri Cantieri Navali Italiani, Société Finmeccanica et Société Armamenti e Aerospazio case, the Genoa Court of Appeal found that it had jurisdiction to rule on the dispute that arose between three Italian Companies and the Ministry of Defence of the Republic of Iraq, in spite of the fact that the relevant contracts contained arbitration clauses, by holding that the arbitration clauses were invalid in accordance with the New York Convention. When enforcement of the decision was sought in France, the Republic of Iraq challenged the enforcement order made by the Court of Appeal of Paris, arguing that (i) the Brussels Convention did not apply to the decision made by the Genoa Court of Appeal, since arbitration fell outside its scope, and (ii) given the non-applicability of the Brussels Convention, the Genoa Court of Appeal did not have jurisdiction over the dispute pursuant to the bilateral convention in force between Italy and France. The Court of Appeal of Paris then reversed the enforcement order and dismissed the request for enforcement, holding that the Brussels Convention did not apply to the decision made by the Genoa Court of Appeal and such Court did not have jurisdiction over the merit of the dispute, therefore the enforcement order had to be overturned.  Again, this resulted from the exclusion of arbitration from the Brussels Convention, which (like the current Brussels Regulation) expressly prevented the courts of a Member State from denying recognition or enforcement of a decision on the grounds of lack of jurisdiction over the Member State of origin.

Such kinds of situations are quite common in the European judicial scenario, since until the anticipated introduction of common rules and regulations governing arbitration (which is still a very distant goal, due to the wide cultural differences still existing between Member States in their aptitude for arbitration), each Member State solves the relevant disputes applying, alternatively, its own national laws or the New York Convention of 1958, which, most of the time, results in an unsatisfactory solution.

The situation described above was exacerbated after the decision issued by the European Court of Justice in the West Tankers case, where the ECJ prohibited the so-called “anti-suit injunctions” that English Courts used to issue to prevent a party from commencing court proceedings in different Member States whenever the other litigant contested the court’s jurisdiction on the basis of an (English) arbitration clause.  In the West Tankers decision (following the pronouncement issued in the Turner v. Grovit case, where the ECJ had already stated the incompatibility of the “anti-suit injunctions” with the system of mutual trust between the courts of Member States established by the 1968 Brussels Convention), the ECJ pronounced that it is incompatible with the Brussels Regulation for a court of a Member State to make an order preventing a litigant from commencing or continuing court proceedings in another Member State, allegedly in breach of an arbitration agreement.  More specifically, the ECJ ruled that even if proceedings aimed at obtaining anti-suit injunctions do not properly fall within the scope of the Brussels Regulation, they nevertheless prevent a court of another Member State from exercising the jurisdiction conferred on it by the same Brussels Regulation, thus undermining its effectiveness.

As a consequence of the West Tankers decision and the abolition of anti-suit injunctions, the EU judicial system risks further favouring parallel court and arbitration proceedings as well as conflicting decisions issued in different Member States.

In order to prevent this situation, the Proposal for a Regulation of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters of December 2010 (the “Proposal”) included a specific rule on the relationship between arbitration and court proceedings, obliging a court of a Member State hearing a dispute to stay proceedings if its jurisdiction is contested on the basis of an arbitration agreement and (i) an arbitration tribunal has been convened to hear the dispute under the arbitration agreement, or (ii) court proceedings relating to the arbitration agreement have been commenced in the Member State of the seat of the arbitration.

More specifically, Article n. 29.4 of the Proposal expressly stated that “Where the agreed or designated seat of an arbitration is in a Member State, the courts of another Member State whose jurisdiction is contested on the basis of an arbitration agreement shall stay proceedings once the courts of the Member State where the seat of the arbitration is located or the arbitral tribunal have been seised of proceedings to determine, as their main object or as an incidental question, the existence, validity or effects of that arbitration agreement. […].

Where the existence, validity or effects of the arbitration agreement are established, the court seised shall decline jurisdiction”.

Such a choice was aimed, according to recital (20) of the Proposal, at improving the effectiveness of arbitration agreements “in order to give full effect to the will of the parties” and at “avoiding parallel proceedings and abusive litigation tactics”, in particular, where the agreed or designated seat of an arbitration is in a Member State.

Unluckily for advocates of arbitration, the provision contained in Article 29.4 of the Proposal did not meet the approval of the European Parliament, which in its Draft Report of 28 June 2011 on the Proposal deleted the entire provision of Article 29.4. This was consistent with the guidelines already laid down in its resolution of 7 September 2010, whereby the Parliament had strongly opposed the (even partial) abolition of the exclusion of arbitration from the scope of the Brussels Regulation, clarifying that not only arbitration proceedings, but also judicial procedures ruling on the validity or extent of arbitral competence as a principal issue or as an incidental or preliminary question, must be excluded from the scope of the new Regulation.

As a result, the current Whereas clause (12) of Regulation No. 1215/2012, that shall apply from 10 January 2015, replacing the Brussels Regulation, still provides that “This Regulation should not apply to arbitration. Nothing in this Regulation should prevent the courts of a Member State, when seised of an action in a matter in respect of which the parties have entered into an arbitration agreement, from referring the parties to arbitration, from staying or dismissing the proceedings, or from examining whether the arbitration agreement is null and void, inoperative or incapable of being performed, in accordance with their national law.

A ruling given by a court of a Member State as to whether or not an arbitration agreement is null and void, inoperative or incapable of being performed should not be subject to the rules of recognition and enforcement laid down in this Regulation, regardless of whether the court decided on this as a principal issue or as an incidental question”.

As anyone can see, such a solution leaves many issues open; one of them is that, with reference to a dispute connected to an arbitration agreement, three different decisions could potentially be issued, each of them being governed by different recognition and enforcement rules: (i) the arbitral award, which shall circulate in accordance with the rules laid down in the New York Convention of 1958; (ii) the decision issued on the merits by a court of a Member State, on the basis of the acknowledged nullity, unenforceability or ineffectiveness of the arbitration clause, which shall circulate in accordance with the more favourable rules laid down in the Brussels Regulation (and later in Regulation No. 1215/2012); (iii) the decision issued by a court of a Member State upon the validity/unenforceability of the arbitration agreement, which shall not profit from the Brussels Regulation rules and circulate in accordance with the rules of the national laws of the Member State in which enforcement is sought, in a scenario entailing the risk of undermining the effectiveness of decisions in the EU judicial common area.

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Dentons

and Amgad T Husein, Dentons (Managing Partner, Saudi Arabia)

1. Overview

Since the enactment of Saudi Arabia’s new Arbitration Law in July 2012, more foreign investors have opted for arbitration in Saudi Arabia rather than in foreign forums. By simplifying dispute resolution and streamlining the enforcement of arbitral awards, the Arbitration Law has sought to bring the protection of foreign investors up to international standards. The Arbitration Law, largely modeled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, has modernized Saudi Arabia’s dispute resolution mechanism and sought to remove much of the unpredictability involved in bringing arbitral awards before the Saudi Arabian Board of Grievances for enforcement.

However, despite these reforms, some issues remain.

2. Public policy considerations and the Shari‘a

The provisions of the new Arbitration Law apply to arbitrations held under the Saudi Arbitration Law without prejudice to the provisions of the Islamic Shari‘a. The Islamic Shari‘a reservation is one that is reiterated throughout the Law, nearly a dozen times.

Perhaps the most important of the Shari‘a reservations is in Part 6 of the Law, which deals with the annulment of arbitration awards (including foreign awards). Under Article 50.2, an award can be annulled if it contains any violation to the provisions of Islamic Shari‘a and Saudi Arabian public policy or any violation to the agreement of the arbitration parties. Such an award can also be annulled if the arbitration panel is formed in violation of the Law or of the agreement of the parties or if the Arbitration Panel fails to take the conditions that should be available in the award into consideration in a way that effects the final decision (Art. 50.1).

Although the new Arbitration Law demonstrates the Saudi government’s endorsement of and embracing of a legal framework that brings certainty to the legal marketplace and to foreign investment, the continuous, repeated reservations on the basis of Islamic law and Saudi public policy do, to a certain extent, undermine this certainty.

Interpreting and predicting how a Saudi judge or arbitrator will apply the Shari‘a remains difficult and somewhat evasive. Whereas some Shari‘a principles are well-established principles rooted in tradition, others are subject to a judge’s individual view or considerations as to fair application under equity.

One thing that remains clear is that a Saudi judge could still refuse to apply a contract or a foreign arbitral award on the basis of Saudi Arabian public policy and Shari‘a considerations, as under the old Arbitration Law.

3. Saudi arbitration court in the United Kingdom?

Reports were released in late 2012 that the Saudi government, in order to further promote foreign investment in Saudi Arabia, is mulling plans to establish jointly with the British government an arbitration court in the United Kingdom to resolve disputes arising out of Saudi Arabia (see, e.g., Caroline Binham and Helen Warrell, “Saudis Seek to Establish Arbitration Court in the UK” (Financial Times, 31 Oct. 2012)). The raison d’être of such a court would be to counter investor concerns about the Saudi legal system and the time and difficulty involved in obtaining and enforcing judgments in Saudi Arabia.

If a new arbitral process will allow parties to easily and efficiently enforce foreign awards in Saudi Arabia, this would be its main strength and benefit, given the current difficulty inherent to enforcement and the onerous requirements established in the Grievances Board Law. However, nothing in the plans to set up a UK-based arbitration court would resolve the principal concern of foreign investors in Saudi Arabia: the difficulty inherent to enforcement of foreign arbitral awards in Saudi Arabia. Therefore, although arbitration in the United Kingdom may conceptually be appealing to non-Saudi investors, it remains more important for any proposed dispute resolution mechanism to allow foreign arbitration awards to be enforced in a more regular and standardized fashion. This would go a long way in encouraging further large-scale foreign investment in the Kingdom.

4. Risk mitigation

Given the current legal framework and options open to foreign investors, the best plan of action for risk mitigation remains agreeing to apply Saudi law in arbitration proceedings and then ensuring that an arbitration panel is comprised exclusively of legal experts with extensive training in the Shari‘a and Saudi law. Such experts should bring broad experience in identifying any issues that could potentially impede the certification of an award based on Saudi public policy considerations. Unless a foreign investor can enforce an arbitral award against property held outside of Saudi Arabia, such a duly-constituted panel remains the best measure that foreign investors have in ensuring no elements that may impede enforcement in Saudi Arabia make their way into the final arbitral award.

John Balouziyeh and Amgad Husein are corporate attorneys in Saudi Arabia and co-authors of the Legal Guide to Doing Business in Saudi Arabia (forthcoming).

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Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

The Danish Institute of Arbitration (“DIA”) revised its rules effective May 1, 2013, an overhaul from the prior 2008 iteration of its rules that brings the DIA rules into line with those of leading arbitral institutions. As part of these revisions, the DIA has both reorganized the structure of its rules and updated various key provisions. Among other changes, notable amendments include new provisions for the consolidation of cases and joinder of parties, new guidelines for arbitrator independence, and new provisions for the appointment of interim and emergency arbitrators.

Overall, the DIA has clearly made an effort to make its arbitral rules friendlier to international disputes. The institution’s caseload has had a distinctively Danish leaning to date. According to the DIA website, of the 117 cases received in 2011 (the most recent year for which statistics are available), 56 were domestic arbitrations and 29 were international arbitrations, with the remainder being a variety of other types of disputes. The DIA also reports that in terms of the nationality of parties as of 2011, the substantial majority were Danish, at 221 parties, with the next closest being just seven parties from the United Kingdom.

The harmonization of the new DIA rules with the prevailing rules of leading international arbitral institutions may contribute to internationalizing the DIA’s caseload and generally increasing its case traffic. The key changes in the rules are discussed in more detail below.

Commencement of an Arbitration

Articles 4 and 5 of the new DIA rules cover the commencement of an arbitration. Among other things, Article 4 provides the minimum information that must be contained within a statement of claim. The prior version of Article 4 called for arbitration to be commenced by the DIA’s receipt of a request for arbitration, which, if not accompanied by a statement of claim, had to contain certain minimum information. The new Article 4 now requires a party seeking to commence proceedings to submit a statement of claim (eliminating the “request for arbitration” language) and requires a party both to submit more information in the first instance regarding the substance of the dispute and administrative information about the parties, such as value-added tax and company registration numbers.

The new Article 4 also requires a statement of the relief or remedy sought, together with the amounts of any quantified claims and, to the extent possible, an estimation of the monetary value of any other claim. The former provisions governing requests for arbitration and statements of claim did not require this.

Article 5 governs the registration fee, which is €1,300 or the equivalent in Danish kroner, a slight increase from 7,500 Danish kroner or €1,000 under the 2008 rules. A minor but notable indication of the increasing internationalization of the DIA rules and a move away from specifically Danish processes is that the new rules set the registration fee in Euros and provide for the corresponding Danish equivalent subject to prevailing exchange rates rather than the reverse.

Security for Costs

Article 6 contains new provisions with respect to the cash deposit made as security for the estimated costs of the arbitration. At Article 6(2), where one party refuses to pay its share of the security for costs and the other party has to pay the security in full in order for the arbitration to proceed, the paying party can now request the tribunal to render a separate award for reimbursement by the defaulting party of its share of the deposit.

Under Article 6(8), upon demand by one party, the tribunal may decide that the other party must provide security for costs that the tribunal may impose on that party in a final award. If the party fails to provide the security, the tribunal can close or stay the proceedings on that party’s claims save for claims for dismissal.

Consolidation and Joinder

Article 9 addresses consolidation and joinder, issues that were not previously addressed under the 2008 DIA rules. Under the new Article 9(1), where a new statement of claim is submitted between parties that are already involved in arbitral proceedings under the DIA rules, a party may request that the cases be consolidated. The Chairman’s Committee then decides the request after consulting with the other parties and any confirmed arbitrators in either of the two cases.

Likewise, under Article 9(2), the DIA can now also consolidate proceedings where a new statement of claim is submitted in connection with a dispute already proceeding before the DIA, but where the parties in the second proceeding are not identical to those involved in the first proceeding (e.g., a new subsidiary or a different subsidiary might be a respondent in one proceeding but not the other). In rendering its decision, the Chairman’s Committee is to take various factors into consideration, including the connections between the cases and the parties and the progress of the already pending case. When cases are consolidated, the parties are deemed to have waived their right to an arbitrator, and the Chairman’s Committee may revoke the appointment of arbitrators already confirmed in order to confirm new arbitrators in the consolidated case.

Under Article 9(3), if a third party makes a request to join an arbitration or a party requests that a new third party be joined, the tribunal will decide the request, taking into account whether the arbitration agreement covers all of the parties, the connections between the cases and the parties, and the progress of the already pending case.

Appointment of Arbitrators

Article 10 covers arbitrator appointments and now provides that where the parties have not agreed upon the number of arbitrators, the dispute will be decided by a sole arbitrator. This approach is the opposite of what was provided under the 2008 rules, where, in the absence of an agreement on the number of arbitrators, the dispute would be decided by three arbitrators. While establishing a sole arbitrator as the default presumption, the new Article 10 goes on to provide that the Chairman’s Committee may ask the parties to comment on the number of arbitrators to be appointed (in the absence of an agreement) and, after weighing various factors (e.g., the amount in dispute and the complexity of the case), the Chairman’s Committee may determine that a panel of three arbitrators should be assembled.

This revision of the arbitrator appointment default rule brings the DIA rules into line with Article 12 of the ICC rules, which provides that, in the absence of the parties agreeing on the number of arbitrators, the ICC’s International Court will appoint a sole arbitrator except where the dispute appears to the Court to warrant the appointment of three arbitrators.

DIA’s new Article 11 provides that “all appointments of arbitrators are subject to confirmation by the Chairman’s Committee.” The 2008 rules provided for the appointment of all arbitrators by DIA after it heard the parties’ nominations. The prior provisions were similar to Article 5.5 of the LCIA rules, while the revised rule, under which the institution confirms rather than appoints where the parties have nominated arbitrators, is more consistent with Articles 12 and 13 of the ICC rules.

Qualifications of Arbitrators

Domicile vs. Nationality

Article 11(7) provides that if the parties are of different nationalities, the tribunal president (or the sole arbitrator if this is the case) must be of a nationality and be domiciled in a country different from those of the parties and the other arbitrators unless agreed by the parties or the Chairman’s Committee decides otherwise and there are no objections. This approach is similar to Article 13(5) of the ICC rules and Article 6.1 of the LCIA rules.

The 2008 rules addressed only the parties’ domiciles, not their nationalities. The emphasis in the new rules on nationality rather than domicile reflects the increased internationalization of arbitration practice.

Availability, Impartiality, and Independence

Article 12(1) provides that “[a]ny person appointed arbitrator shall be available, impartial, and independent.” The availability requirement is a new addition that did not appear in the 2008 rules.

Under Article 12(2), an appointed arbitrator must sign a declaration of impartiality and independence and “shall disclose in writing any circumstances which might give rise to reasonable doubts as to the arbitrator’s availability, impartiality, or independence” prior to confirmation. Under the 2008 rules, the arbitrator had to disclose “any circumstances which, in the opinion of either party to the arbitration case, may give rise to justifiable doubt as to the arbitrator’s impartiality or independence” (but not availability).

As such, the standard has changed from circumstances viewed as problematic “in the opinion of either party” (i.e., a subjective standard) to circumstances “which might give rise to reasonable doubts” (i.e., an objective standard). This new standard is in line with Article 5.3 of the LCIA rules, which requires an arbitrator to “sign a declaration to the effect that there are no circumstances known to him likely to give rise to any justified doubts as to his impartiality or independence, other than any circumstances disclosed by him in the declaration.” In contrast, Article 11(2) of the ICC rules incorporates both a subjective and an objective standard: an appointed arbitrator must disclose “facts or circumstances which might be of such a nature as to call into question the arbitrator’s independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the arbitrator’s impartiality.”

Educational Qualifications

Article 10(2) provides that the tribunal president or sole arbitrator must have a law degree but is silent on whether the other members of the tribunal must have one. The 2008 rules required the other members to “have a law degree, unless the parties propose otherwise and this is deemed by [the DIA] to be adequate in view of the nature of the case.” The move away from making a law degree the default for the other members of the tribunal is presumably in recognition of the potential benefits of having non-legal technical experts serve as arbitrators in disputes in certain industries where technical expertise is beneficial.

Arbitrator Challenges

Article 13 addresses arbitrator challenges. A provision that appeared in the 2008 rules providing that an arbitrator can challenge the appointment of another arbitrator if he finds that circumstances giving rise to justifiable doubts about impartiality or independence exist or if the arbitrator does not possess agreed upon qualifications, has been removed.

Confidentiality

Article 18(7) is a new provision stating that “upon the request of a party, the Arbitral Tribunal may make decisions concerning the confidentiality of the arbitration proceedings or of any other matters in connection with the arbitration and take measures to protect trade secrets and confidential information.” A similar provision is found in Article 22(3) of the ICC rules. The change is a move away from the 2008 DIA rules, which provided that “[t]he members of the arbitral tribunal and [the DIA] shall treat all matters relating to the arbitration case as confidential.” Under the new rule, the arbitral tribunal can now impose confidentiality requirements on the parties.

Tribunal-Appointed Experts

Article 20(1) allows the tribunal to appoint an expert without a party requesting the appointment where previously the tribunal could do so only at the request of a party.

At Articles 20(2), (3), and (4), the rules now provide that a tribunal-appointed expert must be available, impartial, and independent, i.e., the same criteria as an arbitrator. The expert also has to sign a declaration of acceptance and of impartiality and independence and to disclose all circumstances that might give rise to reasonable doubts about his or her availability, impartiality, and independence. This obligation is an ongoing one and is the same for the arbitrators as discussed above.

Interim Measures

Article 21 is an entirely new provision that provides for interim measures. Upon the request of a party, the tribunal may order another party to take such interim measures as the tribunal considers necessary regarding the subject matter of the dispute, including an order for the party to provide appropriate security in connection with that matter.

Witness Testimony

Under Article 22(2), the tribunal can now decide at the request of a party that testimony be given by “telecommunication” if appropriate. It is not clear whether videoconferencing would be included in the term “telecommunication,” but presumably it would.

Article 22(3), like its 2008 predecessor, provides that the parties must, well in advance of the oral hearing but, in any event, no later than eight days before the hearing, inform each other and the tribunal of the witnesses they intend to call and provide copies of any new documents. The new rule also states that in addition to identifying the witnesses that they intend to call, the parties must also inform the other party and the tribunal of “the subject matter and the most important themes of the witness testimony.” This requirement is similar to that set forth in Article 20.1 of the LCIA rules.

Scrutiny of the Award

Under Article 24, a tribunal must submit a draft version of the arbitral award to the Secretariat for review as soon as possible after conclusion of the oral hearing and “if possible, not later than six months from the referral of the case to the Arbitral Tribunal” so that the Secretariat can “scrutinize” the award pursuant to Article 28 of the new rules. Article 28 provides that, before the award is rendered, “the Secretariat shall scrutinize the draft award” and “may propose modifications as to the form of the award and without affecting the Tribunal’s jurisdiction, draw its attention to other issues, including issues of importance to the validity of the award and its recognition and enforcement.” A less exacting standard appeared in the 2008 rules under which the DIA was given the power to “peruse” the award rather than “scrutinize” it. The new rule is in line with ICC practice under Article 33 of the ICC rules.

Interim Arbitrator/Emergency Arbitrator

Article 32 is new and provides that “[w]here the taking of evidence or interim measures cannot await the confirmation of the arbitrators under the Rules, it may be done with assistance from an interim arbitrator or an emergency arbitrator in accordance with the provisions contained in Appendices 2 and 3.” Similar provisions are found in Article 29 of the ICC rules. The DIA rules distinguish between an interim arbitrator who serves “to resolve any disputes between the parties regarding the taking of evidence” (Appendix 2) and an emergency arbitrator who serves to “grant any interim measure that he or she deems to be necessary in view of the nature of the case” (Appendix 3). The ICC rules make no such distinction.

Gary B. Born, Michelle Glassman Bock, and Thomas R. Snider

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