Month: March 2014

I.                    Introduction

In Corporación Mexicana de Mantenimiento Integral (“COMMISA”) v. Pemex-Exploración y Producción (“PEP”)[1] (Pemex) decided in August of last year, the District Court for the Southern District Court took what I described elsewhere as “an important step in the right direction”[2] by granting enforcement to an award vacated by the courts of the seat (Mexico in that case). In Thai-Lao Lignite (Thailand) Co Ltd & Hongsa Lignite (Lao Pdr) Co., Ltd v Government of the Lao People’s Democratic Republic,[3] decided barely four months later, the same court at first sight seems to have gone in the opposite direction by deferring to the annulment decision of the courts of the seat in Malaysia.

This post will analyze the Thai-Lao Lignite decision and show that the different outcome in the two cases is explained by the substantial differences in the facts.

II.                  The background

Thai-Lao Lignite is the most recent development in a complex litigation spanning across three continents.  It deals with the enforcement of an arbitral award rendered in an arbitration seated in Kuala Lumpur, Malaysia. The arbitration arose from a project development agreement providing for certain mining and operation rights (PDA) between the Government of Laos and the two companies that eventually became the petitioners in the enforcement proceedings before the District Court. The companies brought claims for improper termination and damages, which were upheld by the arbitrators, after rejection of the Government’s objections to jurisdiction.

In 2011 the award was confirmed by the District Court for the S.D.N.Y., whose decision was affirmed by the Second Circuit Court of Appeals.[4] In support of its motion to dismiss the petition for enforcement the award debtor contended, inter alia, that the arbitrators had exceeded their jurisdiction by extending it to other agreements and to non-signatories of the PDA. As discussed in Section IV below, these objections were rejected.

The award was also declared enforceable in England by the High Court of Justice, which relied on the US Court’s decision.[5] The English court held that the award debtor’s objections to jurisdiction had all been decided by the US courts and raised matters of issue estoppel. On that basis it decided that the award was to be regarded as “manifestly valid”.[6]

Enforcement was, instead, denied by the Paris Court of Appeal on grounds of excess of jurisdiction, because the arbitrators awarded compensation for losses related to a contract other than the one containing the arbitration clause.[7]

After the award had been enforced in the US, the Government of Laos brought a successful challenge before the Malaysian High Court, whose decision was affirmed by the Malaysian Court of Appeal. As recounted in the District Court’s decision under review here,[8] the ground for the annulment was the provision on excess of jurisdiction of the Malaysian Arbitration Act of 2005. The High Court held that the arbitrators had erred in assuming jurisdiction over two contracts entered into before the PDA and in admitting and adjudicating claims by non-parties to that agreement.

Following the setting aside of the award in Malaysia, the Government of Laos filed with the District Court for the S.D.N.Y a motion for relief from that court’s earlier judgment granting enforcement[9] pursuant to Federal Rule of Civil Procedure 60(b)(5)[10] and Article V(1)(e) of the New York Convention. The motion was granted by the District Court and the award is therefore no longer enforceable in the United States.

III.                The District Court’s Opinion

Wood J.’s Opinion first sets out what it considers to be the guiding principles for the exercise of the discretion to enforce a foreign arbitral award annulled at the seat, which derives from the “permissive ‘may’ in Article (V)(1)(e) of the New York Convention”.[11]

To do this, it analyzes the US case law on the enforcement of awards set aside at the seat, and in particular Chromalloy[12], Baker Marine,[13] TermoRio[14] and Pemex.[15] The Opinion reiterates the adages that the New York Convention “provides for a carefully crafted framework for the enforcement of international arbitral awards”[16] and that “Under the Convention, ‘the country in which, or under the [arbitration] law of which, [an] award was made’ is said to have primary jurisdiction over the arbitration award. All other signatory States are secondary jurisdictions …”.[17]

The District Court notes that “[i]n Baker Marine, the Second Circuit Court of Appeals held that where a court with primary jurisdiction over an arbitral award issues a decision setting aside the award, US courts will honor that decision in the absence of an ‘adequate reason’ not to do so”. It also refers extensively to TermoRio, which held that “normally a court sitting in secondary jurisdiction should not enforce an arbitral award vacated by a court with primary jurisdiction over the award, but that there are certain circumstances in which doing so may be appropriate”.[18] The discretion to refuse enforcement “is narrowly confined” and may be exercised only when the foreign judgment setting aside the award is “repugnant to fundamental notions of what is decent and just in the State where enforcement is sought” or violates “basic notions of justice”.[19] That “standard is high and infrequently met” and should be found “[o]nly in clearcut cases.”[20]

Wood J. concludes her survey of precedents citing Pemex’s approval of the TermoRio standard and its finding that the Mexican annulment decision in that case “violated basic notions of justice in that it applied a law that was not in existence at the time the parties‘ contract was formed and left Commisa without an apparent ability to litigate its claims.”[21]

The Court then proceeds to determine whether the extraordinary circumstances envisioned in TermoRio were met in the case at bar and concludes that, unlike in Pemex, they were not.

The analysis turns on whether the Malaysian proceedings or the judgments of the Malaysian courts violated basic notions of justice, so as to lead to ignore comity considerations and to disregard the Malaysian judgments.

The petitioners relied on a variety of arguments of questionable relevance. In particular they contended that the Respondent had acted inequitably in the enforcement proceedings before the US courts; that in challenging the award it had violated a covenant to abide by it; that the Malaysian Court of Appeal excused the Respondent’s initial failure to file its action within the proper deadline; that the Malaysian High Court wrongly held that the Respondent had properly objected to the arbitral tribunal’s jurisdiction and had not waived its jurisdictional objection; and that it failed to accord res judicata effect to the decisions of the US courts upholding the award.

The District Court is quick to point to the lack of substance of each one of the arguments. It notes amongst others that the petitioners’ criticisms of the Malaysian court’s decision “at best show weakness in the […] legal reasoning”, but ultimately fail to demonstrate that the judgments violated basic notions of justice. Predictably, the District Court also holds that the Malaysian courts had no obligation to grant preclusive effect to the enforcement decisions of the US courts, since such decisions are not truly decisions on the merits, but simply orders to enforce an award which are not necessarily res judicata in foreign jurisdictions.[22]

In light of these findings the District Court concludes that the circumstances at hand “simply do not amount to the extraordinary circumstances contemplated in TermoRio.”[23] In support of this conclusion it notes that the award brought for enforcement in this case had been rendered in a neutral country and did not involve an entity of the State of the seat, unlike in Pemex. It observes further that, again unlike Pemex, there was no retroactive application of a prohibition on arbitration and the private party was not left without remedy following the annulment.[24]

As Wood J. sums it up, the annulment of the award at the Malaysian seat was based on the “universally recognized ground” that the arbitrators had exceeded their jurisdiction.

IV.                Thai-Lao Lignite and Pemex compared

The outcome of Thai-Lai Lignite is the opposite of that of Pemex. While in Pemex the foreign award annulled at the seat was nonetheless confirmed by the District Court for the S.D.N.Y, in Thai-Lao Lignite the same court deferred to the foreign annulment. The foregoing summary makes it sufficiently clear that the reason for the dissimilar outcomes lies in the differences in the facts.

In Pemex the Mexican courts’ judgments were unquestionably tainted by a serious flaw, since they applied a retroactive prohibition on arbitrability. There was also a strong suspicion of political motivation, given that the award debtor was the largest and most powerful state entity of the seat. In that case it was difficult to contest that basic notions of justice had been violated. In Thai-Lao Lignite, instead, the crux was excess of jurisdiction by the arbitrators which, as the District Court remarks, is a universally recognized ground for setting aside awards. It is interesting that also the French courts, notoriously prone to enforce awards annulled at the seat,[25] refused enforcement on the same grounds.[26]

Thai-Lao Lignite does not, therefore, signal a departure from the standard laid down in TermoRio and applied in Pemex.

There is, however, one interesting peculiarity in Thai-Lao Lignite. Although the ground for annulment in Malaysia was excess of jurisdiction, the District Court does not address that issue in any detail. It simply remarks that, as mentioned above, the Malaysian High Court decided that the arbitrators exceeded their jurisdiction under the PDA by deciding over disputes concerning two contracts entered into by the parties prior to the PDA and by admitting claims by non-parties to the PDA.

As note previously, precisely this point had been addressed at great length in the District Court’s Opinion of August 3, 2011, which confirmed the award prior to its annulment. [27] On the first prong of the objection relating to the arbitrators’ alleged decision on matters not arising from the PDA, the Court held that the issues characterized by the Respondent as jurisdictional issues were, “at their core, not issues of arbitrability or jurisdiction at all”. Indeed, the target of the Respondents’ objections was the way in which “the Panel calculated damages and interpreted the PDA, both of which are well outside the scope of what the Court may review on petition to confirm an award under the Convention”. The arbitrators’ decision “simply reflects the Panel’s interpretation of the breadth of the term ‘total investment costs’ in the PDA, and not an extension of jurisdiction over other contracts”. On the second prong, relating to the standing of a non-party to the PDA, the District Court found that, insofar as it “concerns issues of arbitrability, […] the parties delegated decision on these issues to the Panel. Thus the Court defers to the Panel’s decision on such issues”. The Court held that, by agreeing to arbitration under the UNCITRAL Rules, the parties had also agreed to the jurisdiction of the arbitrators to decide on jurisdiction. It therefore refused to address the issue de novo and deferred to the arbitrators’ decision.

It is beyond the scope of this post to analyze these findings. It is, however, puzzling that, in the District Court’s latest decision, almost no attention was given to the contrast between the Malaysian courts’ decision on jurisdiction and the District Court’s earlier decision in the enforcement proceedings, notwithstanding that it dealt with what appears to have been an almost identical objection in the two proceedings. In the latest decision the District Court touches on the point only obliquely, where it addresses the Petitioners’ complaint that the Malaysian High Court failed to give preclusive effect to the US courts’ rulings on arbitral jurisdiction. Framed in this way it is not unsurprising that the Petitioners’ argument was given short shrift by the Court. It is difficult to imagine that the court of the seat would give res judicata effect to a foreign decision enforcing an award.

At least in the abstract, it would seem that the contrast between the foreign annulment judgment and the District Court’s own earlier decision (which had moreover been affirmed by the Court of Appeals) could have been more cogently invoked in the opposite sense. In other words, the argument could have been made that, regardless of its merits, the foreign annulment judgment could not be deferred to because of the conflict with a judgment of the forum having decided precisely the same issues.

The reason why that point was not addressed by the District Court probably lies in the relevant rules of civil procedure, that I am not qualified to discuss. It might have to do with the nature of the District Court’s earlier decision, which was “merely” a decision on enforcement and with the peculiarities of the procedure for relief from the enforcement judgment under Federal Rule of Civil Procedure 60(b)(5).

Nonetheless, it is somewhat surprising that the District Court seems not even to have blinked at the prospect of refusing to enforce an award it had previously decided to be enforceable. What is even more surprising is that, in so doing, it accepted to defer to a foreign judgment that collides frontally with its own. Admittedly, the conflict between the Malaysian judgment and the District Court’s own previous judgment turns on a delicate matter, i.e. the de novo review of the arbitrators’ decision on jurisdiction.[28] This is an issue on which positions differ, and the District Court’s view on which was not necessarily the only tenable one. Nonetheless, the District Court’s complete failure to address this conflict seems to underscore an engrained conviction that the foreign annulment judgment is almost entirely dispositive of the award’s fate, regardless of the enforcement forum’s own views on its validity. A more explicit treatment of this point would have provided food for interesting reflections on the law and policies involved in the enforcement of annulled awards.

V.                  Conclusion

Thai-Lao Lignite does not indicate a backtracking by the District Court for the Southern District of New York from the position that, in some circumstances, annulled awards can be enforced in the United States, that it adopted in Pemex. In this case, the refusal to enforce the award annulled by the Malaysian courts is easily explained by the fact that the circumstances of the foreign annulment were not as serious and prima facie objectionable as in Pemex.

Thai-Lao Lignite displays the same timid and conservative approach to the enforcement of awards annulled at the seat that characterized Pemex, with the additional peculiarity that it fails even to touch upon the contrast between the foreign annulment judgment and a decision of the forum where enforcement is sought. Upon reading the District Court’s decisions one feels the need for further analysis of the legal and policy approaches to this matter, which has significant broader implications.[29]

Luca G. Radicati di Brozolo

The author was Scholar in Residence at the Center for Transnational Litigation, Arbitration and Commercial Law in February 2014. He is a Professor of Private International Law at the Catholic University of Milan and a founding  partner of Arblit – Radicati di Brozolo Sabatini, Milan. He is a member of the ICC International Court of Arbitration, Vice-Chair of the IBA Arbitration Committee and a door tenant of Fountain Court Chambers, London. Email: Luca.Radicati@arblit.com

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This is to announce the March 24^th, 2014, session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “Admissibility v. Jurisdiction in International Arbitration”.

The event will take place on Monday, March 24^th, 2014, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that on the occasion of that session, Ms. Monique Sasson will give a talk on the aforementioned and that Mr. Timothy G. Nelson and Prof. Mathias Forteau agreed to act as commentators.

Monique Sasson initially qualified as an Italian Avvocato and practiced in Rome, where she appeared before arbitral tribunals and Italian courts. In 2000, she joined Herbert Smith’s international litigation/arbitration practice group in London, qualified as an English solicitor (and subsequently as a solicitor advocate), and acted for clients in a number of international arbitration cases as well as litigation matters. In 2009, Monique obtained her Ph.D. degree, and the following year Kluwer published a revised version of her doctoral thesis under the title Substantive Law in Investment Treaty Arbitration: the Unsettled Relationship between International law and Municipal Law. Monique currently resides in New York City, is a member of the New York Bar, and serves on the New York City Bar Committee on Arbitration.  She is an associate editor of Kluwer Arbitration Blog, and the Co-Managing Editor of the ITA Arbitration Report and the ITA Board of Reporters.  Monique is also the Co-Managing Editor of World Trade and Arbitration Materials, Co-Managing Editor of theITA Scoreboard of Adherence to Transnational Arbitration Treaties, and a Member at Large of the ITA Advisory Board and its Executive Committee.

Timothy G. Nelson represents clients in international disputes, including arbitration before ICSID, ICC, ICDR, and UNCITRAL. He has conducted and argued some of the larger recent Bilateral Investment Treaty (BIT) arbitrations before ICSID and UNCITRAL involving expropriation and unfair treatment of investors by host states, as well as high-profile United States litigation involving international law and arbitration. Mr. Nelson also has an active international commercial arbitration practice.

Mathias Forteau is Professor of Public International Law at the University of Paris Ouest, Nanterre-La Défense (France). He is also, since 2012, a Member of the International Law Commission of the United Nations (elected by the UN General Assembly for five years on November 2011). He is the former Secretary-General of the French Society for International Law (SFDI). He has published many books and articles on various fields of international law (especially on the law of State responsibility, the law of the United Nations and collective security, investment law, Statehood or the law of settlement of disputes) and is the co-editor of two leading French international law books the “Droit international public (Nguyen Quoc Dinh†)” (with P. Daillier and A. Pellet) (2009) and the French Commentary, article by article, of the UN Charter (with J.-P. Cot and A. Pellet) (2005). Moreover, he acted, and still acts, as Counsel and Advocate of many States before the International Court of Justice, the International Tribunal of the Law of the Sea or Arbitral Tribunals, in cases involving issues of State responsibility, boundary disputes, maritime delimitation, Statehood or investment law.

Since seating is limited, please rsvp by March 21^st, 2014, by sending an email to cassy.rodriguez@nyu.edu.

Please note that the Chatham House rule applies.

A.      The decision and its context

On 12 November 2013 the Chairman of the ICSID Administrative Council, Dr Jim Yong Kim, decided to disqualify the arbitrator appointed by the claimant, Mr. José Maria Alonso in the ICSID Case No. Arb/12/20 between Blue Bank International & Trust (Barbados) Ltd.  and the Bolivarian Republic of Venezuela (in the following “Blue Bank International v. Venezuela”) upon request by the respondent.[1] Only one month later, on 13 December 2013, he disqualified Professor Francesco Orego Vincuna in the proceedings between Burlington Resources Inc. and the Republic of Ecuador (in the following “Burlington Resources v. Ecuador).

If one takes into account that until that time challenges of arbitrators in ICSID proceedings have generally been unsuccessful[2] the sequence of two successful challenges within one month is without doubt remarkable. It immediately raises the question as to the legal value and future relevance of these decisions. Are we witnessing a profound change of attitude towards challenges within the ICSID system? Or can the success of the challenges be explained by the particular facts of the two cases which by mere chance were decided within a short time period?

The challenge of an arbitrator was originally a mechanism of last resort. It was used to prevent the participation of obviously unsuitable arbitrators, and parties thought twice before initiating such proceedings. That is also the concept underlying the ICSID Convention at its time of drafting. Pursuant to its Article 57 arbitrators can only be disqualified if there is a “manifest lack of the qualities required by paragraph 1 of Art. 14”, which include inter alia the independence and impartiality of the arbitrator.

Over the years the number of challenges has increased considerably. They have developed into a standard procedural tool employed for a number of different purposes. That applies to commercial arbitration as well as to investment arbitration. In particular in investment arbitration one may even get the impression that challenges are slowly moving from being the exception to becoming the rule. With the increasing case law, the small pool of arbitrators and comparable legal questions in particular, questions of issue conflicts are bound to arise much more frequently than in commercial arbitration.[3]

Irrespective of this it may still be noteworthy that in Blue Bank International v. Venezuela, which is the main focus of this blog, there had been objections against all members of the tribunal. The arbitrator appointed by Venezuela, Dr. Torres Bernárdez, was challenged by the claimant. Claimant considered that the repeat appointments of Dr. Bernárdez by one of the lawyers representing Venezuela as well as his previous decisions which allegedly were always in favor of the party which appointed him, made him unsuitable to act as arbitrator. There was, however, no need for a formal decision on the issue, since Mr. Bernárdez subsequently resigned. Furthermore, concerning the chairman, none of the originally proposed five persons was acceptable to both parties. Venezuela also objected to the appointment of Mr. Söderlund who had been finally selected by ICSID.

To properly evaluate the importance of the successful challenge against Mr. Alonso the decision has to be seen against the background of the particular ICSID challenge system, the previous practice as well as the considerable criticism against the investment arbitration System in general. The potential threat posed by such criticism to investment arbitration is well evidenced by the recent discussion concerning the investment protect provisions in the presently negotiated Transatlantic Trade and Investment Partnership between the US and Europe. The criticism raised has resulted in a temporary stay of the further negotiation of that chapter. A closer look at the discussion in Germany’s general press reveals that one of the biggest objections to investment arbitration is that the decisions are made by a small group of arbitrators who are closely connected to the law firms involved and have an economic interest in maintaining the system as it stands.[4] Even if that may be grossly exaggerated and interest-driven, it is hardly questionable that the legitimacy of investment arbitration depends to a considerable extent on the perception of those involved that the decisions are taken by independent and impartial arbitrators. As Mr. Bottini, who has been handling a number of the ICSID arbitrations against Argentina for the Treasury Attorney’s General office on the Argentinian side, has stated succinctly in an article, “[t]hat is why effective and transparent challenge mechanisms are fundamental for the integrity of international investment arbitration.”[5]

 B.      The particularities of the ICSID challenge regime

The ICSID challenge mechanism can primarily be found in Articles 57, 58 ICSID Convention. While Art. 58 regulates the procedure the relevant standard for challenges can be derived from Art. 57 ICSID Convention. It provides in its relevant part:

“A party may propose to a Commission or Tribunal the disqualification of any of its members on account of any fact indicating a manifest lack of the qualities required by paragraph (1) of Article 14. […]”

The qualities required by Art. 14(1) ICSID Convention are:

• High moral character
• Recognized competence in the fields of law, commerce, industry or finance and
• Reliability to exercise independent judgment.

 

In practice only the last requirement, i.e.  to “exercise independent judgment” has so far played a role. It entails a prospective standard as to whether the arbitrator will have the necessary independence and impartiality to render a decision which is not influenced by any extraneous factors.

On the basis of a primarily textual analysis the ICSID challenge mechanism differs in several respects from the mechanism found in the UNCITRAL Model Law (“ML”) or other national arbitration laws.

First, there is a potential broadening of the grounds for challenge. The ML allows challenges if the arbitrator either lacks the required independence and impartiality or the qualification agreed by the parties. Art. 12(2) provides in its pertinent part:

“An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. […]”

By contrast Art. 14 ICSID-Convention imposes, irrespective of any agreement by the parties, two additional statutory quality requirements for arbitrators, i.e. being of high moral character and having a recognized competence in the fields of law, commerce, industry or finance.  Their absence may – via the reference in Art. 57 ICSID Convention – become the basis for a challenge. The practical relevance of that difference is, however, limited. In practice challenges are usually based on the third requirement, the reliability to exercise independent judgment.

The second difference concerns the focus of the independence standard. While under the ML the arbitrator has to be independent and impartial, the ICSID Convention requires a person “who may be relied upon to exercise independent judgment”. The latter refers to a prospective act in the future. As has been stated by Professor Crawford in a presentation at a seminar at the PCA in October 2013: “It consists in evaluating the probability of a certain event – the event of the arbitrator acting independently – rather than simply whether the event will occur.”[6] By contrast the ML standard focuses more on present and past elements. Again the practical relevance is limited, if one takes into account that also the decision as to the prospective act in the future is largely based on past and present connecting factors and experiences.

The most important difference to the Model Law standard is the requirement in Art. 57 ICSID Convention that there must be a “manifest lack” of the qualities required. There is a widespread belief that due to the requirement of a “manifest lack” the ICSID Convention imposes a higher threshold for successful challenges than the ML or other national arbitration regimes.[7] The ML, for example, only requires “reasonable doubts” as to the arbitrator’s independence or impartiality and not a “manifest lack”.

In light of this difference the leading commentary on the ICSID Convention for example states that the “requirement that the lack of quality must be ‘manifest’ imposes a relatively heavy burden of proof on the party making the proposal.”[8]

There are, however, different views as to what is exactly meant by the reference of “manifest lack”. Following the decision in the first Vivendi Case, the prevailing view appears to be that the notion of “manifest lack” has an evidentiary meaning. It should exclude “reliance on speculative assumptions or arguments” and the “circumstances actually established (and not merely supposed or inferred) must negate or place in clear doubt the appearance of impartiality.”[9]

In other decisions the reference to “manifest lack” seems to have been considered to be more a question of degree. Thus not every minor lack of independence is sufficient but only those which have reached a certain threshold, i.e. are manifest.

C.      Definition of the relevant standard in Blue Bank International / Burlington Resources

In so far as the abstract definition of the applicable legal standard is concerned both decisions do not provide any new input for the discussion. The relatively short treatment of the issue in the Blue Bank decision in paras 55 – 62 has been taken over largely verbatim in the Burlington Resources decision. It largely limits itself to quote the statutory requirements and their application in previous cases without touching on any of the controversial issues surrounding the standard.

Concerning the second point mentioned above it is noteworthy that in defining the relevant standards to be derived from Art. 14(1) ICSID Convention, a ML terminology is used that “arbitrators must be both impartial and independent” (para. 58). There is no emphasis on the prospective element.

Equally it is confirmed that the reference to an “independent judgment” encompasses both elements, i.e. independence and impartiality. By reference to previous decisions the applicable legal standard is defined as an “objective standard based on a reasonable evaluation of the evidence by a third party” (para. 60).

The only part of some interest in the definition section is the very cautious treatment of the controversial question of the meaning of the word “manifest” and how the standard differs from the “reasonable doubts” standard underlying the UNCITRAL Model Law and the IBA Guidelines on Conflict of Interest. Here the Chairman limits himself to state that “a number of decisions have concluded that it means ‘evident’ or ‘obvious’ and that it relates to the ease with which the alleged lack of the qualities can be perceived” (para. 61). While the quote shows certain sympathy for that view taken in these decisions a clear endorsement would present it more obviously as the Chairman’s own understanding of the standard.

An equally cautious position is adopted concerning the question of how the standard under Art. 57 ICSID Convention differs from that under the IBA Guidelines. The decision remains vague acknowledging somehow that there might be a difference but not clarifying in any way the nature of such a difference. Concerning the IBA Guidelines which have apparently been invoked by the parties the decision merely states that “[w]hile these rules and guidelines may serve as useful references, the Chairman is bound by the standard set forth in the ICSID Convention” (para. 62).

 D.      Application of the standard

Of considerable interest is, however, the application of this abstract legal standard to the particular facts of the cases.

In Blue Bank the challenge was based on facts disclosed by Mr. Alonso in his statement of acceptance and declaration of independence. In his view the disclosed activities of other Baker & McKenzie firms did not affect his impartiality or could reasonably do so. The controversial issue concerned the partner status of Mr. Alonso in Baker & McKenzie, Madrid and the involvement of two other firms belonging to Baker & McKenzie International, in another case brought against Venezuela by Longreef, a Dutch investor, which allegedly involved comparable legal questions. The focal point of the dispute was the different value given to the exact legal relationships in the case. Unlike a number of other law firms which are fully integrated, the various national offices of Baker & McKenzie are legally and financially (largely) independent. They are bound to the other national Baker & McKenzie entities only via their joint membership in Baker & McKenzie International, a Swiss Verein and certain joint practice groups set up within the Baker & McKenzie International Framework.

Venezuela argued in its challenge that “Baker & McKenzie is structured and publicized as a global legal practice”. Therefore the various offices could not be treated a separate legal entities for the purposes of this challenge. That is even more so since they maintain joint committees to which Mr. Alonso is a member and a part of his remuneration depends on the global returns of the firm. Consequently he had an interest in the outcome of the action brought by Longreef which involved issues similar or identical to the ones Mr. Alonso had to decide, leading to doubts as to whether the decision would be free of extraneous influence.

Mr. Alonso, by contrast, considered such doubts not to be justified. In his view, due to the wide legal independence of the various member firms of the Baker & McKenzie International Framework the remaining connections did not even meet the standard for disqualification under the IBA Guidelines, let alone under the ICSID Convention. He emphasized that his remuneration depended primarily on the results achieved by Baker & McKenzie Madrid and that all offices operate with absolute autonomy. The existing joint committees such as the International Arbitration Steering Committee do give no instructions as to the management of individual cases. Personally he had had no previous contact with the parties of this arbitration and had no economic or other interest in the outcome of the arbitration by Longreef against Venezuela.

The Chairman dismissed the arguments by Mr. Alonso. For him the sharing of a corporate name, the existence of an international steering committee and the sharing of some revenues “imply a degree of connection and overall coordination between the different firms comprising Baker & McKenzie International” that it would be justified to treat them as one entity. In light of the similarity of the issues likely to be discussed in the Longreef v. Venezuela case a “third party would find an evident or obvious appearance of lack of impartiality on a reasonable evaluation of the facts of this case” (para. 69).

E.       Evaluation of the decision

In the author’s view, assuming that the Longreef case truly involved comparable questions,   the challenge in Blue Bank was correctly decided, at least as far as the result is concerned.

The decision avoids giving the critics of the existing system of investment arbitration additional ammunition for their attack on the legitimacy of the regime. In light of the very rudimentary legal reasoning it can only be assumed that such political considerations also influenced the decision. Any other decision could perhaps have been justified on the basis of a formal application of existing standards and could have been explained to well-informed lawyers but not to the general public. That is not to advocate that legal decisions should primarily be guided by considerations of the momentary public opinion. Irrespective of that the perception of the general public cannot be ignored completely in the context of investment arbitration. In so far investment arbitration differs from commercial arbitration as is also recognized in other areas. Over the years the role of the general public has changed. It has increasingly and rightly been recognized to be a major stakeholder in investment arbitration to a much greater extent than in commercial arbitration. That is most apparent in the increased role of transparency in investment arbitration endorsed by the recent changes of the relevant arbitration rules. Consequently, the views of the general public cannot be completely disregarded in defining relevant standards for challenges which affect the legitimacy of the system. While the legal standard as such, i.e. “manifest lack of the qualities” remains unchanged the perception of what it required for an “independent judgment” have changed with the above development. Connections which may have been acceptable in the early days of ICSID when Amco v. Indonesia was decided are no longer acceptable now. In so far the standard of what is required may also differ in investment arbitration from commercial arbitration.

On the basis of a formal legal analysis Mr. Alonso was right in emphasizing that his firm, Baker & McKenzie Madrid, S.L.P. and the firms representing Longreef in the other arbitration against Venezuela, i.e. Baker & McKenzie New York and Baker & McKenzie Caracas, are separate legal entities. They are only bound to each other through their membership in Baker & McKenzie, International.

These legal niceties, however, do not influence the perception of the firm in the market. Therefore the legally separate entities are perceived to be part of the one global law firm Baker & McKenzie International. And in principle that is the way the law firm wants to be perceived and markets itself. That becomes obvious for example by having a look at the regularly published Baker & McKenzie International Arbitration Yearbook. In the copyright information for the 2012 – 2013 Yearbook it is stated that the “[l]eading lawyers of the Firm’s International Arbitration Practice Group, a division of the Firm’s Global Dispute Resolution Practice Group, report on recent developments … in the jurisdiction in which they practice”.  The impression created by this publication addressed to the market and intended to shape the market perception is that there is one “Firm” Baker & McKenzie which operates globally and has the required know-how.  The main purpose of setting up the Swiss Verein Baker & McKenzie, International, organizing Committees and Practice Groups across the boundaries of the separate legal entities is to give the market the impression that there is a Global firm with a well-known brand name and not merely a loose cooperation between befriended law firms.

In particular in investment arbitration with its increased need for transparency, it is that market perception which is relevant for the challenge standard. To put it bluntly: it is not the reasonable and well-informed lawyer who must have manifest doubts but those doubts must exist in the eyes of the reasonable layman potentially affected by the decision.

In so far it is unfortunate that the abstract legal standard for successful challenges appears to be higher in ICSID arbitration than incommercial arbitration – at least when it comes to the evidentiary side. The decision cannot be interpreted as a general legal abolishment of that standard, since the Chairman appears to have endorsed the difference between the ICSIC standard and that under the IBA Guidelines. At least it has not questioned that distinction which would have been difficult without a change of the Convention. De facto, the decision will have lowered the standard a little bit, at least through the back door. One can interpret the decision in a way that while the abstract legal standard is still “manifest lack of qualities” the relevant third person, in the eyes of which such a lack must exist is a different one: It is no longer the third person of 1965 but the third person of 2013 with a critical view of investment arbitration.

Will the underlying recalibration of the approach by ICSID pose a threat to the parties’ right to effected legal protection, which always has to be balanced against the right to challenge? It is submitted that this is not the case, as long as the decisions are based on hard and easy determinable factors, such as the partnership in a law firm.

It appears, however, likely that the decision will further reinforce the exodus of leading arbitrators from full service firms setting up their own boutiques.  That excludes at least the law firm related conflicts.

Stefan Kröll

Prof. Dr. Stefan Kröll, LL.M. (London) is an independent arbitrator in Cologne and Honorary Professor at the Bucerius Law School in Hamburg where he teaches international arbitration and litigation and international contract law. He is a director of the Willem C. Vis Arbitration Moot and a former scholar in residence of the Center for Transnational Litigation, Arbitration and Commercial Law.

Today’s international businessperson should never travel far without an arbitration agreement.  One would expect to hear that from arbitration lawyers, hungry for business (or business class flights).  Yet Australia’s courts have now joined many others in viewing arbitration as essential to international commerce, seen recently with the decision in Dampskibsselskabet Norden A/S v Gladstone Civil Pty Ltd (“Norden”).[1]  After exploring the role of this “international commercial policy” in Norden, I evaluate the ways in which the New York Convention (“NY Convention”)[2] and the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”)[3] legitimate the use of such a policy in resolving arbitration issues.  Applying this policy, I suggest an alternative approach to Norden for upholding arbitration of carriage of goods by sea disputes.

I           Norden

Norden concerned a dispute arising under a voyage charterparty for the carriage of coal from Australia to China between a Danish ship-owner and an Australian charterer, with a choice of English governing law.[4]  The dispute was referred to London arbitration in accordance with the parties’ agreement.[5]  In resisting enforcement of unfavorable awards, the Australian relied on the Carriage of Goods by Sea Act 1991 (Cth) (“COGSA”), s 11(2)(b) of which provides, inter alia, that an agreement “has no effect” insofar as it purports to “preclude or limit the jurisdiction of [an Australian] court in respect of” a sea carriage document relating to the carriage of goods from Australia.  This section does not apply to arbitration agreements with a seat in Australia.[6]  Section 11’s purpose is to protect Australian shippers from the inconvenience of litigating abroad.[7]  Similar protections are found in Argentina, Canada and South Africa.[8]

Australia has implemented its obligations under the NY Convention in the International Arbitration Act 1974 (Cth) (“IAA”), but s 2C provides that “[n]othing in this Act affects…the operation of section 11…of [COGSA]”.  A majority in Norden found that COGSA s 11 did not apply to voyage charterparties and overturned the lower court’s decision refusing enforcement of the awards.[9]  The international commercial policy played a significant role in reaching this result.  Justice Mansfield acknowledged that, although it was clearly open to construe s 11 as applying to voyage charterparties, the “better approach” was to exclude such contracts from its operation due, in part, to the longstanding acceptance that “international commercial disputes…may be settled by arbitration”.[10]  Justice Rares similarly relied upon the “policy of reocognising and encouraging private arbitration as a valuable method of settling disputes arising in international commercial relations” to narrowly construe s 11.[11]  The case highlights how the international commercial policy encourages reaching an outcome which favors arbitration when alternative constructions or resolutions of issues arise in international commercial disputes.[12]

II         The Validity of the International Commercial Policy

The international commercial policy, as applied in Norden, has both international and national aspects.  The international aspect recognizes that an “ordered efficient dispute resolution mechanism leading to an enforceable award…is an essential underpinning of commerce”,[13] the unenforceability of which would “damage the fabric of international commerce and trade”.[14]  This international aspect has been applied by courts throughout the world in, for example, broadening arbitrability,[15] or narrowing grounds for refusing enforcement of awards.[16]

The international aspect of the policy is also supported by the NY Convention.  While the text of the Convention evidences a pro-enforcement policy,[17] the travaux préparatoires indicate this arises from arbitration being essential for international commerce.  The ICC, whose Report drove the impetus for the NY Convention,[18] sought greater recognition and enforcement of arbitration awards in order to develop international trade.[19]  The philosophy of arbitration as a tool to promote trade and development was wholeheartedly adopted by the drafting committee and Conference.[20]  In interpreting the NY Convention, courts must have regard to its object and purpose.[21]  This includes the international aspect of the international commercial policy.[22]

The national aspect, on the other hand, stems from a belief that a court’s disfavor of arbitration could discourage the expansion of their nationals’ businesses or deter others from doing business with their nationals.[23]  This belief has some justification.  First, the World Bank emphasizes the enforceability of contractual promises as part of the ease of doing business in a given country, which suggests failing to enforce agreed dispute resolution mechanisms may deter business in the country.[24]  Second, the few studies undertaken on business attitudes towards arbitration indicate businesses see arbitration as the only effective dispute resolution mechanism for cross-border transactions.[25]  Finally, in this author’s experience, a party often insists on pre-dispute protections in contracts, such as bank or third party guarantees, when the other is from a country notorious for its enforcement difficulties.  These measures increase transaction costs or may deter transactions with that country entirely.  While these concerns do not form part of the NY Convention’s objects or purposes, broader policy considerations are often taken into account by courts when exercising their functions or construing legislation.[26]  It is legitimate to include this national aspect in the international commercial policy to which courts should have regard.

III        Applying the International Commercial Policy to Norden

Norden applied the international commercial policy in finding COGSA s 11 did not apply to voyage charterparties, but the award should have been enforced even if voyage charterparties were “sea carriage documents” and, therefore, covered by s 11.  While nothing in the IAA affects COGSA s 11, one must still ask whether s 11, even if applicable, requires an award made outside of Australia to be denied enforcement.[27]  The below analysis, informed by the international commercial policy, suggests not.

First, failing to enforce the awards at issue in Norden would have been contrary to Australia’s obligations under the NY Convention.  There were three arguable grounds for non-recognition of the awards in Norden, but each was unlikely to apply.  Article V(1)(a) of the NY Convention allows non-enforcement when the arbitration agreement is invalid under the law chosen by the parties to govern its validity or, failing a choice, the law of the place where the award was made.  The Norden parties chose English law to govern the main contract, from which an implication can usually be drawn that they intended English law to govern their arbitration agreement as well.[28]  Even if COGSA s 11(1) (which invalidates the choice of foreign law in a “sea carriage document”) is taken into account,[29] the arbitration agreement remains a separate contract and the chosen seat of arbitration may still imply English law as that chosen by the parties.[30]  Failing any implied choice, the validity of the arbitration agreement is still determined under English law, as the Convention defaults to the place of the award.  As English law would uphold the validity of the arbitration agreement, art. V(1)(a) of the NY Convention is not an available ground for setting aside the award.

Second, art. V(2)(a) (subject-matter inarbitrability) is also unlikely to apply because COGSA s 11(3) expressly recognizes that the subject-matter of such disputes are arbitrable; it allows disputes under “sea carriage documents” to be arbitrated in Australia.  Finally, the “public policy” exception in art. V(2)(b) is generally reserved for when enforcing the award would violate the State’s “most basic notions of morality and justice”.[31]  It is difficult to argue that the concern of protecting Australian shippers from the inconvenience of litigating overseas meets this high threshold.  Accordingly, the NY Convention requires enforcement.

Australia is a dualist system such that the NY Convention does not necessarily prevail over COGSA s 11 (and the IAA expressly provides otherwise).  However, the conflict with the NY Convention and the international commercial policy strongly suggest s 11 should, to the maximum extent possible, be construed favorably for enforcing arbitration awards.  A plausible construction of s 11 is that it simply provides parties cannot oust the jurisdiction of Australian courts over “sea carriage documents”; the position for all contracts at common law prior to statutory intervention.[32]  Thus, if a party desires to bring a dispute under a “sea carriage document” to an Australian court, the court need not stay its proceedings due to a foreign arbitration agreement.  That does not mean the arbitration agreement is itself invalid, nor that a resulting award is unenforceable in Australia.  Further, under Australian law, an award extinguishes the underlying dispute.  In enforcing an award, the court is not concerned with rights or liabilities under a “sea carriage document”, but a party’s obligation to comply with the award.[33]  As at common law, the court’s jurisdiction is not ousted contrary to COGSA s 11, because the rights and liabilities under the “sea carriage document” are subsumed with the award which the court is now asked to enforce.[34]

IV        Conclusion

This suggested alternative approach to Norden is particular to the text of Australia’s COGSA, but the analytical approach adopted may have broader application to enable the enforcement of awards in jurisdictions which seek to override choice of forum clauses in carriage of goods by sea contracts.  While there might be good policy reasons for protecting certain persons from litigating overseas, if no party seeks to avail themselves of the local courts and disputes are in fact referred to arbitration, it makes little sense to construe the legislation as invalidating the arbitration agreement or the resulting awards when the text does not expressly provide for such a result.  The international commercial policy suggests the non-enforcement of awards would have adverse effects for international and national commerce, which provides a compelling reason for courts to construe statutes which restrict recourse to arbitration narrowly.

 

Jesse Kennedy

The author is a Class of 2014 LL.M. student in the International Litigation, Arbitration and Business Regulation program at New York University.  He obtained his Bachelor of Laws with Honors from the Australian National University in Canberra.  The author was previously a judicial clerk to the Hon. Justice Gummow AC on the High Court of Australia, and an Associate working in international arbitration and transport litigation with Norton Rose Fulbright in Sydney.

I. Introduction

In judgment T 4982-11 of November 23, 2012, the Swedish Supreme Court (the “Supreme Court”) upheld an arbitral award challenged primarily on the ground that the matter was non-arbitrable since it was regulated by mandatory law at the time of the conclusion of the arbitral agreement.^[1] The Supreme Court discussed the limits of arbitrability and addressed the question of when arbitrability should be assessed. This paper evaluates the Supreme Court’s conclusions, with regard to this latter issue, which has been little explored by Swedish courts. First, the factual and procedural background is outlined, followed by a description of the Supreme Court’s decision. The decision is then evaluated before final conclusions mark the end of the paper.

II. The factual and procedural background

On January 24, 1990, the Soviet entity, Moscow City Golf Club OOO (“City Golf”), entered into a loan agreement (the “Loan Agreement”) with a Swedish bank, Nordea Bank AB (publ.) (the “Bank”), to finance the construction of a golf course in the former Soviet Union. Under the Loan Agreement, which was governed by Swedish law and contained an arbitration clause providing for arbitration in Stockholm, the Bank was to lend to City Golf SEK 22,000,000 (USD 3,584,155.48). The loan was made through drawdowns by City Golf’s Swedish general contractor. However, when the Loan Agreement was entered into, mandatory law that prohibited, invalidated, and imposed penal sanctions on import and export of currency without due authority approval was in force in both Sweden and the former Soviet Union.^[2]

The Swedish general contractor made its drawdowns and performed the construction but City Golf later failed to repay the loan. The Bank initiated arbitration to recover the outstanding amount and on May 11, 2010, the sole arbitrator gave a final award under which the Bank was allowed to recover from City Golf. At this point, the Swedish and Soviet mandatory currency laws were no longer in force. City Golf challenged the award before the Svea Court of Appeal (the “Court of Appeal”), which upheld it.^[3]City Golf therefore appealed to the Supreme Court.

III. The decision by the Supreme Court

City Golf argued that the award was invalid since it concerned a matter that, at the time of the conclusion of the arbitration agreement, was regulated by mandatory Swedish and Soviet laws requiring authority approval for transfer of currency and therefore was non-arbitrable. City Golf alleged that approval never was granted and that Russian laws to similar effect still were in force. However, the Supreme Court deemed the dispute arbitrable and upheld the award.

The Supreme Court determined that Swedish law was applicable, not only to the Loan Agreement, but also to the arbitration agreement^[4] and made reference to Section 33 of the Swedish Arbitration Act (1999:166) (the “SAA”), under which an arbitral award is invalid “if it includes determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators.”The Supreme Court stated that generally under Swedish law, an issue may be decided by arbitrators, and is arbitrable, if it is amenable to out-of-court settlement. This follows from Section 1 of the SAA. The Supreme Court also stated that foreign mandatory provisions of economic or political nature generally do not affect arbitrability under Swedish law.

The Supreme Court conceded that the issue of when arbitrability is assessed depends to some extent on the circumstances of the case. However, it deemed the amenability to out-of-court settlement when the dispute was resolved to be determinative in this regard, irrespective of the amenability to out-of-court settlement when the arbitration agreement was concluded.  

The Supreme Court noted that there were no longer any Swedish mandatory currency regulations in force when dispute was resolved, which was the relevant time to assess arbitrability. The only mandatory currency regulations allegedly still in force at that point in time were Russian provisions and the Supreme Court held that those foreign provisions were not of such nature that they could affect arbitrability under Swedish law. The dispute was deemed amenable to out-of-court settlement and arbitrable.

IV. Evaluation and comments

Admittedly, the outcome of this case may not have been entirely contingent on when arbitrability was assessed. The Supreme Court did point out that the mandatory provisions did not target the creditor-debtor relationship under the Loan Agreement; only the actual transfer of currency. Even if the repayment contemplated by the Loan Agreement was proven invalid and punishable under current Swedish law, the Supreme Court may still have deemed the issue of payment liability amenable to out-of-court settlement. However, it is easy to see that had the circumstances been just slightly different, the issue might certainly have prejudiced the outcome of the entire dispute.^[5] The Supreme Court correctly found the issue relevant enough to address specifically.

The question of when a dispute needs to be amenable to out-of-court settlement in order to be arbitrable has been subject to debate.^[6]Some argue that the relevant time is when the arbitration agreement was entered into,^[7]whereas others think it is when the dispute was resolved and that arbitrability should be assessed only at that point.^[8] 

The wording of Section 1 of the SAA, which draws up the limits of arbitrability, appears inconclusive in respect of the point at which arbitrability is to be assessed. On the one hand, it stipulates that “[d]isputes concerning matters in respect of which the parties may reach a settlement may, by agreement, be referred to one or several arbitrators for resolution.”The use of present tense, “may reach a settlement,”here suggests that the relevant time is when the matter is referred to the arbitrators. However, on the other hand, the same section stipulates that “[s]uch an agreement may relate to future disputes,”which makes the words “may reach a settlement”rather seem to relate to whether the parties could settle when the arbitration agreement was concluded.

However, the Supreme Court takes a strong position that a dispute, in order to be arbitrable, only needs to be amenable to out-of-court settlement when the dispute is resolved. Although the Supreme Court expresses the caveat that the issue to some extent depends on the specific arbitration agreement and the circumstances in general, it does state that “the determining factor must be whether the parties could have reached an out-of-court settlement at the time when the dispute was resolved, irrespective of whether the arbitration clause could be deemed in breach of peremptory legislation when it was entered into.”^[9]Several arguments may be made in support of the Supreme Court’s conclusion.

Importantly, the restriction that only disputes amenable to out-of-court settlement may be referred to arbitration originates from a principle of party autonomy.^[10] Logically, if parties are free to reach a settlement they should be equally free to refer the matter to arbitration. Therefore, if a dispute currently is amenable to out-of-court settlement, it may be argued that the underlying principle of party autonomy permits either of them to refer it to arbitration even if they previously were not allowed to settle. Mandatory substantive laws change with time and it would seem reasonable that arbitrability change with them.

Also, it may be inappropriate if historical political whims were to affect present day arbitrability of disputes over old agreements. Sweden is a popular forum for “east-west arbitrations”involving parties from the former Soviet Union. The issue of when to asses arbitrability is particularly important for such arbitrations since the highly politicized law of the Soviet Union may differ much from the present law of the remaining republics. If arbitrability were to be assessed at the conclusion of the arbitration agreement, such old politicized legislation may be perpetuated within the parties’relationship. 

Admittedly, the Court of Appeal came to the opposite conclusion on the issue of when arbitrability was to be assessed. It stated that “[t]he relevant time for ruling on whether the dispute is arbitrable is the time of entry into the [L]oan [A]greement.”Already at that point, reasoned the Court of Appeal, should the parties have been able to foresee its consequences; “at least with respect to invalidity.”^[11] Given that the entry into of the Loan Agreement coincided with that of the arbitration agreement, the conclusion is not unreasonable since arbitrability is a requirement for a valid arbitration agreement.^[12] If the arbitration agreement was flawed at its conclusion due to lacking arbitrability it would therefore seem incoherent if that flaw was allowed to “heal”with time.

In support of the Court of Appeal’s view, it may also be argued that assessing arbitrability based on the conditions after the conclusion of the disputed agreement might weaken the effect of certain mandatory legislation. Some mandatory law, such as currency regulations, may be of temporary nature yet serve a valid purpose. If a party knew that once such law is repealed the party would be able to arbitrate and later obtain enforcement of an agreement forbidden by the mandatory provisions, the impetus of such legislation may be weakened.

However, the Court of Appeal did attach significance to the entry into of the Loan Agreement rather than that of the arbitration agreement, which renders these arguments in support of its conclusion weaker. In contrast, the Supreme Court’s view appears more persuasive since it gives maximum effect to party autonomy and takes into account an international trend of increasing arbitrability.^[13] The Supreme Court’s view is also more pragmatic. It would seem unnecessarily formalistic to prevent arbitration of an issue that the parties have already agreed to arbitrate and that under the current political values is amenable to out-of-court settlement. The Supreme Court’s view may be positive for Sweden’s attractiveness as a forum for international arbitrations since it favors a broad notion of arbitrability and slightly less room for finding an award invalid due to lacking arbitrability. It should also increase foreseeability as to whether a dispute is arbitrable since arbitrability will depend on current conditions rather than the conditions at the conclusion of the arbitration agreement, which may be less lucid.^[14] 

V. Conclusions

In the court proceedings between City Golf and the Bank, the Supreme Court answered the question of when arbitrability should be assessed under Swedish law. It held that a dispute is arbitrable if the matter it concerns is amenable to out-of-court settlement when the dispute is resolved. This holding by the Supreme Court is persuasive since it is pragmatic, well in line with the principle of party autonomy and with the international trend of increasing arbitrability. It is positive for Sweden since it contributes to a broader and more foreseeable notion of arbitrability, which should work to maintain Sweden’s attractiveness as a forum for international arbitrations.

 

Eric Schultz