INTERNATIONAL ARBITRATION
THE ISDS LANDSCAPE IS CHANGING AND WE MUST MAKE SURE CHANGES ARE BASED ON CONSTRUCTIVE DIALOGUE, INNOVATION AND INFORMED DECISION-MAKING.
THIS ISSUE
MESSAGE FROM THE EDITOR
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IN CONVERSATION WITH LUIS MARTINEZ Vice President of the International Centre for Dispute Resolution JOÃO BOSCO LEE Independent Arbitrator and member of the ICC International Court of Arbitration
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MICHAEL HWANG SC Chief Justice of the Courts of the Dubai International Financial Centre (DIFC)
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MARKET COMMENTARY COLOMBIA: A THRIVING ENVIRONMENT FOR ARBITRATION ISDS PROVISIONS IN FREE TRADE AGREEMENTS – MUCH ADO ABOUT NOTHING NEW? THE ENFORCEMENT OF INTERNATIONAL ARBITRAL AWARDS IN THE US: 2014 US SUPREME COURT REVIEW ARBITRATION AGREEMENTS – GETTING IT RIGHT FROM THE KICK-OFF ALLEGATIONS OF BRIBERY & CORRUPTION – CAN THEY DERAIL AN ARBITRATION? REPORT ON CLYDE & CO CHINA CLUB PANEL DISCUSSION: REGIONAL PERSPECTIVES IN INTERNATIONAL CONSTRUCTION ARBITRATION
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NEWS IN BRIEF PEOPLE MOVES MARKET ACTIVITY
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NOTABLE CASES
FORTHCOMING EVENTS
INTERNATIONAL ARBITRATION 1/3LY
MESSAGE FROM THE EDITOR 01
MESSAGE FROM THE EDITOR I am delighted to present the third issue of Clyde & Co’s International Arbitration 1/3LY. The launch of the third issue coincides with the IBA’s 18th Annual International Arbitration Day in Washington DC, where we will celebrate the 50th anniversary of ICSID and discuss some of the most pressing issues in investment arbitration.
As the birthplace of the New York Convention and the home of ICSID, the USA has provided some of the cornerstones of international arbitration and made a substantial contribution to the founding and development of the discipline. In this issue we look at the continued development of the USA’s main arbitral centre, the International Centre for Dispute Resolution (ICDR), in an interview with its Vice President, Luis Martinez. We also turn our attention to the establishment of Latin America as a hub for international arbitration in an interview with Brazilian arbitrator and practitioner, João Bosco Lee; and an article charting the development of international arbitration in Colombia. ICSID’s 50th anniversary necessarily prompts an appraisal of one of the hottest topics on the international arbitration agenda: investment arbitration. In an article which analyses Investor-to-State Dispute Settlement (ISDS) provisions, Devika Khanna asks whether or not ISDS clauses in treaties are a threat to state sovereignty or a necessary prerequisite for foreign investment. As the discipline continues to grow, it is imperative that we reflect on developments and assess whether or not some of the negative rhetoric in the mainstream media is justified.
Elsewhere in this issue we cover developments in other corners of the globe. Sapna Jhangiani and Michael Hwang, Chief Justice to the Courts of the Dubai International Financial Centre (DIFC), discuss the emergence of Singapore as a legal hub in the Asia-Pacific region. On behalf of Clyde & Co, I would like to express my gratitude to Luis Martinez, João Bosco Lee and Michael Hwang for sharing their unique experiences and expert opinions with us and our readers. I also wish to thank my colleagues from the firm’s global arbitration group for their interviews and articles. BRIAN DUNNING, PARTNER, CLYDE & CO
BRIAN DUNNING AND LUIS MARTINEZ DISCUSS THE INTERNATIONAL CENTRE FOR DISPUTE RESOLUTION’S
NEW RULES: WHY THEY WERE INTRODUCED; THE DRAFTING AND DEVELOPMENT PROCESS; AND HOW THEY ARE BEING RECEIVED IN PRACTICE.
THEY ALSO TOUCH ON THE ROLE OF MEDIATION IN RESOLVING DISPUTES AND ITS UPTAKE AMONGST PARTIES IN THE AMERICAS.
BRIAN DUNNING
LUIS MARTINEZ
INTERNATIONAL ARBITRATION 1/3LY
IN CONVERSATION WITH LUIS MARTINEZ 03
IN CONVERSATION WITH LUIS MARTINEZ VICE PRESIDENT OF THE INTERNATIONAL CENTRE FOR DISPUTE RESOLUTION Brian Dunning, Partner at Clyde & Co, discusses the International Centre for Dispute Resolution’s (ICDR) new rules with its Vice President, Luis Martínez
CHANGES TO THE ICDR RULES: WHAT AND WHY?
didn’t give a party full opportunity to present its case, even though application of these guidelines has never resulted in a vacatur. In fact, there are two reported cases—one in New York and one in New Jersey—where courts rejected vacatur attempts in cases where arbitrators relied on our guidelines to limit discovery. As well as our desire to incorporate our discovery guidelines in the Rules, we were also keen to look at user feedback about the Rules over the last five or six years. Common complaints were timing and cost, so we wanted to address those things. We also wanted to promote more mediation. And, of course, we wanted to try to introduce the expedited international procedures which we are very excited about. We felt that they should automatically be in place in cases of USD 250 thousand or less but we also wanted to design them in a way that parties could easily apply them, by agreement, in larger cases. For cases of USD 100 thousand or less the presumption is that the award will be made on the documents alone. BRIAN That is good news, indeed. As you surely know, there is a serious need for a place to resolve disputes in that range without having to endure massive discovery or spend a fortune on attorneys. My own experience is that the courts are ill-equipped to handle those kinds of cases because the breadth and cost of discovery is often the same for small cases as it is for large cases, and it still takes a lot of time to get those cases resolved. LUIS And, on that score, the expedited rules establish an accelerated time frame. We’ve retained the well-known ICDR/ AAA strike and rank method for selection of arbitrators (where the ICDR provides a list of names, each party strikes out some names and ranks the remainder in order of preference), but it’s a shortened list with accelerated time frames for turn-around.
BRIAN Changes to the Centre’s rules are currently big news in the arbitration world. Why were the rules amended? Was it in response to specific feedback from parties and the arbitration community? Or were the changes just part of filling gaps and observing best practices in the field? LUIS Really, all of those points came into play. The American Arbitration Association (AAA) has a long-established tradition of consulting advisory groups which help us to craft rules that target the needs of particular industries. We also rely heavily on the feedback we get from our users. The last significant amendments were made in 2006, when we became the first arbitration institution to introduce access to an emergency arbitrator, which has been very successful. Then in 2008, we concluded guidelines on the exchange of information in response to the perception that arbitration was becoming overly Americanized, particularly in relation to discovery. Our guidelines dealt with the issue in ways similar to the IBA rules of evidence, although the IBA rules are only guidelines and we have asked arbitrators to treat our guidelines as if they were mandatory. We did this to avoid fishing expeditions, to ensure that document requests were narrowly tailored, and to encourage arbitrators to consider the economy of a given case. The guidelines dealt successfully with electronic discovery and privileges; and didn’t even contain the word “discovery.” But, having said that, we knew that at some point we would have to include these concepts in the rules themselves because we were getting pushback from our arbitrators. No arbitrator wants to have an award vacated because he
04 IN CONVERSATION WITH LUIS MARTINEZ
INTERNATIONAL ARBITRATION 1/3LY
AMENDING THE RULES: IDENTIFYING PARAMETERS AND FACILITATING CHANGE BRIAN Tell me a little bit about the process of amending the rules. Was there a consultation period? How did you go about actually identifying the primary areas to amend and how to amend them? How did that process work? LUIS We sat down a few years ago and identified transparency as one of the primary goals. Related to that, we knew we also had to reflect the lessons we have learned regarding current best practices in relation to administration, saving time and money and of course expediting the processes which led to the expedited procedures. BRIAN It sounds like the subject areas developed organically over time, so it was not a mystery to anybody. I suppose there was an ongoing dialogue with lawyers and other users about the things that needed tweaking and the things that were working fine. LUIS That is right. We kept track of ideas generated as a result of that dialogue and we were also keeping track of developments in the area. We have the ICDR’s divisional meetings at the end of every year to discuss issues that concern us and we also talk about future growth and key projects. The rules were one of the things that we were tracking. We don’t want to change the rules every twelve months, so we were waiting a while for the 2006 emergency relief article to have a good run—we’ve had thirty-nine cases using those rules, so far all with voluntary compliance and usually done within a month—but we also wanted to have a better feel for the application of the ICDR’s Guidelines on the Exchange of Information to see if they were achieving their desired effect and how to best position them in our international arbitration rules. The ICDR has one standing global international advisory committee. We ran the identified parameters by this committee and then we decided we should have subgroups to focus on particular tasks. The subgroups included the international expedited rules committee, the full arbitration rules committee and the last-best offer rules committee. Much of the information
The arbitrator still has to go through the process of conflicts and disclosures but everything apart from that is fast-tracked. In fact, we anticipate that, provided timeframes are adhered to, awards should be issued in 135 days from the date of filing. Typically in these cases we do not anticipate in-person hearings but the parties can by agreement opt for a hearing day and, of course, more hearing days when used in the larger cases. The process of appointing an arbitrator is aided by the fact that more detail is required in the initial filing to give the arbitrator an idea of likely issues and potential conflicts. (In a regular-track case, users can simply fill out the form, send us the clause, and self-determine how much detail to include.) After we confirm the appointment of the arbitrators we schedule a preparatory conference call with them within fourteen days. If we’re proceeding just on documents the process should be done within sixty days and an award should be issued within thirty days from either the closing of the final hearing or the last filed submission. The whole process, excluding extensions agreed to by the parties, has been targeted to conclude within 135 days. BRIAN That is great. Have you found parties calling you to inquire about this? LUIS Yes, we’ve had questions. Currently, there are three cases already pursuant to these rules, so we are checking them and making sure the timeframe is working. We’re planning to interview people after they have gone through the process to see what we can learn about how the rules were applied.
back fifty percent of our filing fees. We try to make sure that parties are aware of the benefits of the mediation program and understand that they are going to be offered mediation in every instance. And we hope that the possibility of a fee refund and the savings of time and money all serve to motivate the parties to try to mediate their dispute. BRIAN I read a statistic that something like eight to twelve percent of ICDR cases opt for mediation and, of those, ninety percent or so are settling. Is that about right? LUIS Yes, although it does fluctuate somewhat from year to year, it’s still not enough in the ICDR’s opinion with respect to international cases. We still see parties who refuse it for the usual reasons—they may see it as a delay to the arbitration or they might have tried it before and got nowhere. I still don’t know whether people fully value or understand the potential benefits of mediation and how much time it can save. There’s a reason why multi-nationals are including mediation as part of their employment dispute resolution processes. BRIAN In my own practice, I find that mediation is better received now than it was ten years ago, at least with US clients. Clients from other jurisdictions don’t always understand and they often reject it. Is this consistent with your experience? LUIS We aim to have clients as well as their attorneys on the administrative conference call and to make a strong pitch to foreign parties so they understand that it is not mandatory and that the parties have to reach a consensus: it’s not binding. We also have a separate website now at mediation.org which is helping. We are also one of the founders of the International Mediation Institute, which vets mediators using third parties and provides details of their qualifications and bona fides. It takes time but we are seeing changes. In Brazil, for example, there was little interest in talking about mediation ten years ago, but now they are working on a new mediation law.
THE TREND FOR MEDIATION AND ITS BENEFITS FOR USERS
BRIAN The new Rules also include new references to mediation. Can you tell us about those? LUIS Yes, of course. The rules now also contain a formal article that puts parties on notice that they will receive an offer to mediate. You may not know this but, to my knowledge, we are the only institution that actually has a refund schedule that contemplates a mediated settlement, where for example if the parties reach a resolution or settlement in thirty days, we give
IT TAKES TIME BUT WE ARE SEEING CHANGES. IN BRAZIL, FOR EXAMPLE, THERE WAS LITTLE INTEREST IN TALKING ABOUT MEDIATION TEN YEARS AGO, BUT NOW THEY ARE WORKING ON A NEW MEDIATION LAW.
INTERNATIONAL ARBITRATION 1/3LY
LUIS There has been one consolidation request. The clarification that the ICDR’s default mechanism for arbitrator appointment is the list method has been helpful and the ICDR rules now expressly state that US discovery procedures are not appropriate for obtaining information pursuant to its international arbitration rules. See Article 21 (10). BRIAN And depositions are also specifically excluded. LUIS Yes. We also included, from the ICDR’s Guidelines, a rule about privilege and we did so in Article 22 requiring that arbitrators should just apply the highest level of protection to all parties equally. We included in these changes a new rule, Article 16, that addresses the conduct of party representatives. This rule simply says that party representatives must behave in accordance with such guidelines as ICDR implements on the subject. We have not yet done so, but guidelines are in the works. Another article that should be interesting deals with the conduct of proceedings, Article 20, which says that the parties must take steps to avoid unnecessary delay. And, under this rule, an arbitral tribunal may allocate costs, draw adverse inferences or take such other additional steps as are necessary to protect the efficiency and integrity of the arbitration— arguably this is very powerful. We also wanted to address our inability to remove arbitrators as our colleagues on the domestic side always had the power to remove them on their own initiative for any reason that
on these and other initiatives along with related articles can be found on our website at www.ICDR.org. Our first task was to survey the marketplace, including looking at what our domestic colleagues had done in the fields of commercial, construction and labor arbitrations. We invited extensive commentary from all our international advisory committees and many other users. We finally launched the rules on 1 June 2014. There were numerous versions over the eighteen-month process and now we are in the process of gathering feedback from the market place. BRIAN How is that going so far? LUIS So far the reception has been very positive. As things stand, I haven’t heard of any complaints or any tinkering that needs to be done. THE NEW RULES IN PRACTICE: JOINDER AND CONSOLIDATION, MANAGING THE PROCESS AND TIMEFRAMES FOR AWARDS
may have led to frustrate the arbitral process. The ICDR’s Rules lacked a similar provision. Our ability to remove an arbitrator was arguably limited to issues of impartiality and independence stemming from a formal challenge. Now, if needed, we can remove an arbitrator who fails or is incapable of performing the duties of an arbitrator or, for any reason, to protect the arbitral process as needed. BRIAN When you are out talking to people about the new rules, do you feel like you are selling a much improved product? LUIS Obviously I’m biased, but I get to see what is in the market place. I also know our culture, I know our team, I know our rules, and I know what our users think; so I have a high comfort level in going around and promoting this product. I see my role as educational, so a good deal of my time is spent discussing the use of arbitration and mediation in general. And that is obviously something I believe in wholeheartedly. We work with companies in developing their ADR policies, and our hallmark is flexibility: you don’t have to use the rules in one specified way; we can help you design a clause for your individual needs or industry. It is your process. We have the rules, we have the arbitrators, and we have the case counsel/ administrators from all over the world. We also have location facilities and cooperative agreements throughout the world, so I have all the tools needed to go out there and promote the ICDR but also to develop the international arbitration and mediation cultures in the countries that we operate in.
BRIAN How are the new rules working in practice? Have you come up against any stumbling blocks or encountered any opposition to the Rules?
I’M BIASED, BUT I GET TO SEE WHAT IS IN THE MARKET PLACE. I ALSO KNOW OUR CULTURE, I KNOW OUR TEAM, I KNOW OUR RULES, AND I KNOW WHAT OUR USERS THINK.
IN CONVERSATION WITH LUIS MARTINEZ 07
WITH THANKS TO THE CONTRIBUTORS OF THIS EXCHANGE...
BRIAN DUNNING, CLYDE & CO
LUIS MARTINEZ, INTERNATIONAL CENTRE FOR DISPUTE RESOLUTION Luis Martinez is Vice President of the International Centre for Dispute Resolution (ICDR), the international arm of the American Arbitration Association (AAA). As Vice President, Mr. Martinez is a key member of the ICDR’s strategy team and leads the business development of ICDR’s international arbitration and mediation services in North-East, Central and South America. Mr. Martinez is also an Honorary President of the Inter-American Commercial Arbitration Commission (IACAC). Mr. Martinez received a Bachelor’s Degree from Georgian Court College and a Juris Doctor degree from St. John’s University School of Law. He has had numerous articles published on international arbitration and has appeared as a speaker in programs throughout the world. Mr. Martinez is admitted to practice law in the State of New York and the State of New Jersey.
Brian is a Partner based in Clyde & Co’s New York office. Brian’s practice focuses on advising clients, particularly from Latin America and Southern Europe, facing litigation or arbitration in the United States and other venues. Brian has an extensive and strong network in Brazil and the wider Latin American region, and is among the few American lawyers whose focus is on advising Spanish and Latin American companies in connection with doing business in the US, and with US-headquartered companies. Correspondingly, he has a deep understanding of complex, cross-border litigation and arbitration processes. He is also familiar with the challenges faced by businesses operating in an international environment, and is a confident advisor on issues arising from this context. Brian has acted for foreign individuals, businesses and sovereigns in state and federal courts in the United States, as well as in administered and ad hoc domestic and international arbitrations under the rules of various organizations, including AAA, ICDR, ICC, UNCITRAL and ICSID. Brian also acts as the general US counsel for a number of Spanish companies.
INTERNATIONAL ARBITRATION 1/3LY
MARKET COMMENTARY 09
COLOMBIA: A THRIVING ENVIRONMENT FOR ARBITRATION
With fourteen Free Trade Agreements signed to date and more under negotiation, a booming oil and mining sector and USD100 billion budgeted for infrastructure projects over the next few years; Colombia is emerging as one of the strongest economies in the developing world and one of the most attractive destinations for investors in Latin-America. The Colombian legal system has for some time lagged behind its rapid commercial growth. Delays, a lack of specialisation and inconsistent decisions have created a need for alternative dispute resolution methods. Increasingly, that need is being met by effective arbitration. THE STORY SO FAR Colombia has, in fact, a long tradition of arbitration: a legislative framework was introduced in the 1970s and Colombia became a signatory to the New York Convention in 1979. The country has a solid legal infrastructure in place including capable local lawyers, good international connections and excellent facilities for hosting arbitrations. There is a sound and stable process governing arbitration between private parties, as well as between private parties and state entities. There is also a reasonable degree of expertise and specialisation in handling arbitration proceedings. Decisions are published and collated by professional bodies. Most of the arbitration handled in Colombia is domestic and institutional, that is to say that most of the arbitration is local and administered by one of the many arbitration centres which exist across the country. Colombia has more than one hundred arbitral institutions, although the majority of arbitrations are heard in the Chambers of Commerce of Bogotá, Medellín and Cali. The Chamber of Commerce of Bogotá (CCB) is the leading arbitration body in Colombia. With a current caseload of three hundred cases involving parties from both the private and the public sectors and claim values reaching into the hundreds of millions of dollars, the CCB has become one of the key institutions in the region. Arbitration costs are generally set by reference to the sum in dispute. The parties may agree to an ad hoc arbitration, which operates on a different costs scale and can be more cost-effective. However, ad hoc arbitration is not available in disputes involving state entities. Moreover, the procedural rules of ad hoc arbitration are the same as those that apply to institutional arbitration. For those reasons, the vast majority of arbitrations are carried out on an institutional basis.
BY NEIL BERESFORD AND RAQUEL RUBIO, PARTNER AND ASSOCIATE AT CLYDE & CO
10 MARKET COMMENTARY
INTERNATIONAL ARBITRATION 1/3LY
ONE OF THE MOST CONTROVERSIAL ISSUES IN COLOMBIAN ARBITRATIONS, PARTICULARLY IN THOSE INVOLVING STATE ENTITIES, IS THAT CHALLENGES TO AWARDS AND ARBITRATION DECISIONS ARE OFTEN MADE BY MEANS OF A CONSTITUTIONAL PETITION KNOWN AS ACCIÓN DE TUTELA .
The state contract regime does not exclude arbitration; on the contrary, it encourages arbitration and other methods of dispute resolution. The average time for a case to be resolved in the public courts is five to ten years. Arbitral disputes are usually resolved within two years. Furthermore, the annulment of awards is treated the same under private and state contracts: the grounds for annulment of the award are limited and based on procedural due process considerations; and the rules have been applied accurately by the courts when hearing annulment requests. Recent statistics published by the CCB show that less than 7% of its arbitration awards are overturned by public courts on appeal. More recently, Colombia has modernised its Arbitration Law (Law 1563 of 2012) to incorporate an international arbitration regime which mirrors the UNCITRAL Model Law and enhances the already well established domestic arbitration practice. ROOM FOR IMPROVEMENT One of the most controversial issues in Colombian arbitrations, particularly in those involving state entities, is that challenges to awards and arbitration decisions are often made by means of a constitutional petition known as acción de tutela . These proceedings may be entered by any of the parties involved in the arbitration. The basis for seeking tutela is that arbitration awards, having the same legal status of judicial decisions, may be subject to constitutional control if they reflect a manifest disregard of the law ( vía de hecho ) and there has been a breach of a fundamental right, such as due process. As a result, the legal certainty of arbitration awards can overall be compromised. Whether this shortcoming will affect the practice of international arbitration under the new Model Law provisions has yet to be seen.
THE FUTURE: THE RISE OF INTERNATIONAL ARBITRATION IN COLOMBIA By enacting the UNCITRAL Model Law the Colombian legislator has provided a complete set of modern arbitral provisions which will improve the security and predictability of Colombia as a seat of international arbitration. Among other improvements, the international chapter: • Bars state entities from relying on their domestic laws to contest the arbitration on the basis of an alleged incapacity to arbitrate or the inarbitrability of the dispute • Allows the parties to agree to eliminate or limit the grounds for setting aside the arbitral award and expressly instructs that judges may not review the merits of the underlying dispute, the weight given by the evidentiary ruling of the arbitral tribunal or the reasoning and interpretation of the award • Stipulates that an international arbitral award granted by a tribunal sitting in Colombia shall be treated as a national award with no requirement of recognition for enforcement • For international awards from tribunals sitting outside Colombia it replaces the exequatur with a recognition procedure. In this case the only grounds to oppose recognition are limited to those found in the New York Convention Ultimately, the success of the reform will depend on how the judicial branch interprets and applies the law. However, inferring from the experiences of the international laws on which it is based, the optimism about the future application and impact of Law 1563 is not unjustified. Before the enactment of Law 1563 of 2012, Colombia lacked a modern international arbitration regime, which resulted in the referral of international arbitrations to centres such as the ICC and the ICDR outside Colombia. With the adoption of the UNCITRAL rules, that trend is set to change. The new international arbitration rules have already been adopted by the CCB. The CCB runs one of the most recognised schools of International Arbitration in the region. It is also the official ICC representative in Colombia and the only Latin American institution authorised to conduct ICSID hearings.
RECENT CLYDE & CO EXPERIENCE OF THE ARBITRATION PROCESS IN COLOMBIA INCLUDES A USD 600 MILLION CLAIM INVOLVING LONDON REINSURERS AND TWO LOCAL INSURERS AGAINST THE CENTRAL BANK OF COLOMBIA. THIS WAS A VERY COMPLEX AND TECHNICAL CASE CONCERNING THE INTERPRETATION OF A PROFESSIONAL INDEMNITY POLICY IN THE CONTEXT OF A CENTRAL BANK. THE PROCEEDINGS – WHICH INVOLVED THE DISCLOSURE OF OVER A DECADE’S WORTH OF CONTRACTUAL DOCUMENTATION BOTH IN ENGLISH AND SPANISH, A DOZEN WITNESSES AND FIVE LOCAL AND INTERNATIONAL EXPERTS – WERE COMPLETED WELL WITHIN TWO YEARS BY A TRIBUNAL OF THREE LOCAL ARBITRATORS. THE TRIBUNAL’S EXPERTISE IN THE HANDLING OF THE PROCEEDINGS IN SUCH A SENSITIVE CASE INVOLVING AN IMPORTANT NATIONAL INSTITUTION IS ONE OF THE MANY EXAMPLES OF THE MATURITY OF THE FORUM.
INTERNATIONAL ARBITRATION 1/3LY
MARKET COMMENTARY 13
ISDS PROVISIONS IN FREE TRADE AGREEMENTS – MUCH ADO ABOUT NOTHING NEW?
The free trade agreement between the European Union and Canada signed in Ottawa on 26 September 2014 – the so-called “Comprehensive Economic Trade Agreement” (CETA) – represents a turning point in the history of Europe’s approach to investment policy and arguably sets the standard for other investment agreements currently being (re)negotiated. The European Commission also holds it out as the “most progressive system to date” for Investor-to-State Dispute Settlement (ISDS). A CHANGE IN RHETORIC The provisions of CETA, signed in Ottawa on 26 September 2014, the first agreement signed by the EU within its exclusive competence over member states’ investment policy following the Lisbon Treaty, may shed some light on the likely tone of future agreements, including the anticipated Transatlantic Trade and Investment Partnership (TTIP) (between the EU and US) and the Trans-Pacific Partnership Agreement (TPP) (concerning certain Asia-Pacific States) that are set to reshape global trade and investment. However, might the recent upswing in anti-ISDS rhetoric mean that such provisions do not ultimately find their way into future agreements notwithstanding the provisions contained in CETA? In past years, the proliferation of ISDS, usually under bilateral investment treaties (BITs), has been criticised for allowing sophisticated investors from developed countries to sue unsuspecting developing states before international tribunals, with insufficient visibility to the public, even though the cases raised issues of general concern. Investors often recovered substantial amounts, usually through arbitration under the auspices of ICSID – the International Centre for the Settlement of Investment Disputes in Washington D.C. – with cases decided by arbitrators from a limited pool, most often from developed states, giving rise to accusations of bias in the system. Today the debate has shifted and the outcry against ISDS is also being heard from developed nations and their nationals. This is currently in the context of various multilateral free trade agreements, such as CETA, which contain ISDS provisions and give investors rights to sue states in which they invest. Those against the inclusion of ISDS provisions in such treaties insist that they present a sovereign risk to national governments and court systems. The new President of the EU Commission, Mr Jean-Claude Juncker, recently said that “My commission will not accept that the jurisdiction of courts in the EU member states be limited by special regimes for investor-to-state disputes. The rule of law and the principle of equality before the law must also apply in this context”. Likewise, incoming trade commissioner Ms Cecilia Malmström, who approved the EU-Canadian deal containing ISDS recently called ISDS a “toxic” element in the EU-US trade deal and a “nuclear weapon”. While the ISDS chapters in future treaties may be in the spotlight, neither politician has gone so far as to say that they will be scrapped altogether. It will be interesting to see what emerges from the Commission’s public consultation on the future of investment protection. One possibility is that the ISDS provisions will be watered down, for example to include carve-outs in relation to government measures of public interest, and/or a requirement that investors must exhaust local remedies before host states’ domestic courts before resorting to arbitration.
BY DEVIKA KHANNA, PARTNER AT CLYDE & CO
INTERNATIONAL ARBITRATION 1/3LY
SOVEREIGNTY IS ONLY AFFECTED TO THE DEGREE AGREED BY THE STATE OR SUPRANATIONAL PARTY TO THE TREATY, SO TO SAY SOVEREIGNTY IS UNDER THREAT IS INACCURATE.
ISDS AS A SHIELD OR SWORD – DOES IT MATTER? In a recent article, entitled “Why support the TPP when it will let foreign corporations take our democracies to court?” the Guardian newspaper summarised the purpose of ISDS as follows: “They were originally created to protect businesses that invested in foreign jurisdictions where there may not have been robust democracies and legal systems, so that investors would have international redress if there was a coup, a takeover of their investments or some other unforeseen negative impact on their business in the nature of sovereign risk. Over time, the reasonable shield offered by ISDS clauses has become a sword, used by multinational corporations to extract profit and market advantage, against the legitimate interests and values of a nation, its government and people.” With respect to the author of the Guardian article, Melissa Parke, this statement is problematic in many respects. Firstly, were ISDS clauses designed to be one directional? Can unforeseen negative impacts on investments only happen in “undemocratic” countries and what of an investor’s “legitimate interests” against developed states? The fact that over half of known investor-state cases last year were actually filed against developed states (mainly EU member states) shows that investor grievances know no borders. Whether used as a “shield” or a “sword” , the use of ISDS by investors arguably serves the same purpose; the protection of the investor’s investment rights as defined and subject to the limitations of the legal instrument agreed between states. Sovereignty is only affected to the degree agreed by the state or supranational party to the treaty, so to say sovereignty is under threat is inaccurate. Furthermore, the ISDS clauses in such treaties will replace the text of BITs which already exist between some member states in any event. So, in many cases, there is nothing new here, just a refinement of what has gone before, with the aim of creating a more uniform platform between the EU and third states, and to add greater clarity to hitherto uncertain terms contained in such treaties. THE INNOVATIONS IN CETA’S INVESTMENT PROTECTION CHAPTER The Guardian article goes on to claim that “The arbitration panels that decide the outcome of ISDS disputes aren’t independent: they’re made up of investment law experts, most of whom also represent investor complainants. Panellists can be an advocate one month and an arbitrator the next. They are paid by the hour. Consequently, most cases take from three to five years. ISDS has no system of precedents or appeals, so decisions can be inconsistent and unfettered”. It is unfortunate that a system by which investors have legitimately enforced their legal rights against abusive and discriminatory actions by host states has been mischaracterised in this way. While perhaps not a perfect system, allegations of bias and/or deliberate feet dragging by arbitrators, who are often nominated by the parties to the arbitration themselves, are populist, simplistic and wide of the mark. The fact that CETA, as the most recent example of ISDS provisions, clarifies certain substantive and procedural issues which have hitherto been matters left to tribunal discretion demonstrates that valid criticisms of the system have clearly been taken on board.
CETA introduces certain innovations to investment protection while at the same time maintaining a state’s rights to regulate and pursue legitimate public policy objectives. So, for instance, it spells out that measures “to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations” . This would likely prevent the type of challenge by Philip Morris which is demanding compensation from Australia for its decision to require pictures of lung-cancer victims to be displayed on cigarette packets. The preamble to CETA also points out that it is the responsibility of businesses to respect “internationally recognized standards of corporate social responsibility” . The key provisions of the investment protection chapter of CETA are set out below. QUALIFYING INVESTMENT AND INVESTOR • While “Investment” is broadly defined, “Investor” has the narrower formulation seen in certain BITs in that CETA does not protect “shelf” companies. To qualify as an investor, it is necessary to have “substantial business activities” in the territory of one of the Parties (Article X.3).
NATIONAL TREATMENT AND MOST FAVOURED NATION – NO IMPORT OF PROCEDURAL RIGHTS
• CETA does not allow investors to “import” and use more favourable dispute settlement procedures provided for in other treaties (Article X.7 – Most Favoured Nation). (The ability of investors to use Most Favoured Nation provisions in BITs to do just this has been the subject of numerous arbitral awards and academic articles). FAIR AND EQUITABLE TREATMENT (FET) IS REINED IN FET – currently the most commonly invoked protection in BITs – is a precisely defined standard in the CETA, reducing the discretion of arbitrators in the application of this standard. It will apply in one of five specified situations: • Denial of justice in criminal, civil or administrative proceedings; • Fundamental breach of due process, including a breach of transparency, in judicial and administrative proceedings; • Manifest arbitrariness; • Targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; and/or • Abusive treatment of investors, such as coercion, duress and harassment. Legitimate expectations of an investor are also limited to where a state party makes a specific representation to the investor which was relied upon in deciding whether to make or maintain the investment (Article X.9). CETA clarifies that “full protection and security” refers to the party’s obligations relating to physical security of investors (Article X.9).
MARKET COMMENTARY 15
INDIRECT EXPROPRIATION IS CLARIFIED AND LIMITED While investors remain protected in the sense that prompt, adequate and effective compensation is payable in the event of direct or indirect expropriation, CETA clarifies what constitutes indirect expropriation in order to prevent claims against legitimate public policy measures (Article X.11): • Legitimate public policy measures to protect public health, safety or the environment do not constitute indirect expropriation, except where manifestly excessive in light of their objective; and • The investor must be substantially deprived of the fundamental attributes of property such as the right to use, enjoy or dispose of the investment. PROCEDURAL INNOVATIONS INTRODUCED CETA provides an investor with a choice of several procedural routes to redress: ICSID; ICSID Additional Facility Rules; UNCITRAL Arbitration Rules or any other rules agreed by the parties (Article X.22). Before an arbitration can be commenced, there is a six-month mandatory consultation phase, similar to the “cooling off” period common to many investment treaties (Article X.21). A further step is required (of a Canadian investor) to determine the respondent – i.e. whether it is the EU or a particular Member State. A notice must be served by the Canadian investor and the EU then decides whether the measures complained of shall be answered by the EU or
IS CETA SUCH A BAD EXAMPLE TO FOLLOW? Despite the backlash against investor-state arbitration and heavy lobbying in the context of this agreement, CETA appears well-balanced, providing some clarity in certain areas previously left to tribunal discretion where specific criticisms, such as those referred to above, have been directed at the system . For those states and nationals concerned that the inclusion of ISDS provisions opens sovereign states up to challenge and/or an erosion of their sovereignty, CETA specifically safeguards the issue of a state’s capacity to govern in the public interest in certain key policy areas. For those investors concerned that CETA is an erosion of their rights as previously protected by BITs, while the definition of investor is narrower, and while certain substantive protections have been curtailed, in this author’s view, on balance the agreement gives them a good level of protection from legal and political risk when investing. IMPROVING THE IMAGE OF ISDS The populist and often ill-informed rhetoric against ISDS threatens a system which it is up to the informed arbitration community to seek to defend. The arbitration community must accept the scrutiny and analyse the criticism levelled at ISDS and seek ways to make it more acceptable, through education as to its benefits and the rigours of the process, and by continuing to increase its democratic legitimacy. The ISDS landscape is changing and we must make sure changes are based on constructive dialogue, innovation and informed decision-making.
by the Member State in question (Article X.20). Other noteworthy procedural innovations include:
• Specific provisions on arbitrator conflicts of interest and states that arbitrators shall comply with the IBA Guidelines on Conflicts of Interest in International Arbitration; • A list of arbitrators pre-agreed by the EU and Canada so that they have their say on the standards expected of arbitrators hearing such cases (Article X.25); • Introduction of transparency into the dispute resolution process by requiring that all documents will be available to the public online and that all hearings will be held in public (Article X.33); • Prohibition of parallel proceedings, e.g., through other international tribunals or domestic courts (Article X.21, X.23); • Statutory limits (usually 3 years) to bring a claim. Of all the BITs and MITs in existence, only NAFTA currently has such a provision (Article X.18); • Detailed provisions on the consolidation of two or more claims which have a question of law or fact in common and arise out of the same events or circumstances (Article X.41); • A fast track for throwing out frivolous claims, which lack legal merit or are unfounded as a matter of law (Articles X.29 and X.30); and • Provision for the payment of costs by the losing party (except in exceptional circumstances). This is a first; in all other BITs and MITs, the matter is left to the discretion of the tribunal (Article X.36).
PROTECTING INVESTORS RIGHTS
PETER HIRST EXCHANGES VIEWS WITH PROFESSOR JOÃO BOSCO LEE ON THE DEVELOPMENT OF BRAZIL AS A VENUE FOR ARBITRATION, TOUCHING ON BRAZILIAN PARTIES’ PREFERENCE FOR THE ICC ARBITRATION RULES AND THE LEVEL OF SUPPORT BY THE SUPERIOR COURT OF JUSTICE FOR THE NEW YORK CONVENTION. THEY ALSO DISCUSS THE ANTICIPATED INCREASE IN CONSTRUCTION ARBITRATIONS IN THE COUNTRY AND CONSIDER WHETHER BRAZIL CAN SUSTAIN FOREIGN INVESTMENT IN THE
ABSENCE OF A BILATERAL INVESTMENT TREATY OR
RATIFICATION OF THE ICSID CONVENTION.
PETER HIRST
JOÃO BOSCO LEE
INTERNATIONAL ARBITRATION 1/3LY
IN CONVERSATION WITH JOÃO BOSCO LEE 17
IN CONVERSATION WITH JOÃO BOSCO LEE INDEPENDENT ARBITRATOR AND MEMBER OF THE ICC INTERNATIONAL COURT OF ARBITRATION Peter Hirst, Partner at Clyde & Co, in conversation with Professor João Bosco Lee, Independent Arbitrator and member of the ICC International Court of Arbitration
BRAZIL: AN APPROPRIATE VENUE FOR ARBITRATION?
in Brazil, whereby arbitration specialists have become more available, Brazilian companies have become much more comfortable with arbitration both at home and abroad. With our national clients becoming involved in ever increasing volumes of international trade, it is inevitable that arbitration will continue to prosper. PETER What are the common seats and rules selected by Brazilian parties in international arbitration? For example, ICC statistics show that Brazilian parties are the fourth largest user, by nationality, of ICC arbitration. BOSCO That ICC statistic reflects my experience which is that currently there is a discernable preference among Brazilian parties towards ICC Arbitration Rules. There is also no doubt that Brazilian Parties have a preference for Brazil as a seat of arbitration, especially São Paulo and Rio de Janeiro. For those contracts where a Brazilian seat is not an option, the preferred choices are London and Paris in Europe; and New York and Miami in the United States. PETER Based on your experience as an arbitrator, do Brazilians parties fully understand (and comply with) principles developed by the wider international arbitration community? BOSCO The practice of international arbitration in Brazil has adopted several rules from the wider international arbitration practice such as, witness statements, cross examination and use of the Redfern schedule. Despite this, there is still some resistance to the application of some internationally recognised practices, such as discovery.
PETER Brazil – the B in BRIC, and the world’s seventh largest economy – did not, until recently, have a very good reputation as a venue for arbitration. Was that deserved? BOSCO For a country to become recognised as a reliable venue for international arbitration it is necessary to have in place modern arbitration legislation, favorable case law and to be a signatory of the 1958 New York Convention. Brazil adopted the requisite legislation in 1996 but it was challenged on grounds of constitutionality before the Supreme Court which didn’t deliver its final decision on the constitutionality of the Brazilian Arbitration Law until 2001. Since this decision, arbitration has steadily become more established through milestones including Brazil’s accession to the New York Convention in 2002 and, more recently, the consolidation of case law supporting arbitration by the national courts. I would say Brazil is now definitely an important place to consider as a venue for international arbitration. PETER The number of international arbitrations involving Brazilian parties has increased over the past years and indeed Clyde & Co has seen a very considerable increase in work from Brazil. We have a team of eight Brazilian qualified attorneys in London engaged in arbitrations with seats in London, New York, Paris and Geneva. It seems obvious that arbitration has become more popular with Brazilian clients. Do you agree? BOSCO As discussed, Brazil has the necessary legal framework for the development of arbitration. Together with the economic growth and the consolidation of legal practices
THE COURTS WILL BE ASKED TO CONSIDER IMPORTANT ISSUES SUCH AS INDEPENDENCE AND IMPARTIALITY OF ARBITRATORS – WHICH HAS NOT REALLY BEEN
TESTED SO FAR – AND THE PARTICIPATION OF PUBLIC ENTITIES IN ARBITRATION.
INTERNATIONAL ARBITRATION 1/3LY
IN CONVERSATION WITH JOÃO BOSCO LEE 19
CREATING A SUPPORTIVE ENVIRONMENT FOR ARBITRATION
BOSCO The CBAr has become one of the most important academic institutions in Latin America. The idea to create the CBAr originated in 2000 when Clávio Valença Filho, Eduardo Damião Gonçalves and I returned from our post-graduate studies in France. We were greatly inspired by the Comité Français de l’Arbitrage and decided to create a similar association in Brazil which sought to raise the profile of arbitration in Brazil and encourage debate in the area. Since the beginning we had the support of well-established individuals in the arbitration community such as Carlos Nehring Neto (Advisory Member of the ICCA), Carlos Mafra de Laet (former Alternate Member of the ICC International Court of Arbitration), Luiz Fernando Teixeira Pinto (Vice President, Brazilian Committee of the ICC International Court of Arbitration), Selma Ferreria Lemes (Member of the ICC International Court of Arbitration) and Pedro Baptista Martins (co-drafter of the Brazilian Arbitration Law); together with those from a new generation of arbitration practitioners such as Adriana Pucci (Board Member of the CBAr), Adriana Braghetta (Member of the Governing Board of ICCA), Eleonora Coelho (member and former Vice President of the CBAr), Joaquim Muniz (President of the Arbitration Chamber of the Brazilian Bar), among others. PETER I understand that the new Brazilian Arbitration Law will be enacted soon. What are the main changes that will be brought about by the law if and when it’s enacted? BOSCO The new arbitration law should be approved soon. It updates the 1996 Arbitration Law by plugging certain gaps, consolidating solutions adopted by case law and correcting mistakes in the application of the law. The most interesting change is the article that refers to the participation of public entities in arbitration. Although the Bill admits their participation, there is a reference to regulation that remains undefined and may cause an insecurity for the market. As the Bill is still awaiting approval by the Senate this could still be modified. Despite this uncertainty as to the regulation of the participation of the State in arbitration, the new project of the law will not affect commercial arbitration, which should still remain the best option for the resolution of corporate disputes.
PETER At Clyde & Co, we have had some mixed experiences with the Brazilian Courts with regards to their attitude to supporting arbitration. In your opinion, is the Superior Court of Justice (STJ) – the competent court for the recognition and enforcement of foreign arbitral awards – supportive in the application of the New York Convention? BOSCO I would say that national courts are now generally supportive of arbitration. Earlier unfavorable decisions have not been followed but no doubt, with the rise in the number of arbitration cases seeking the support of the courts, we will see new challenges in the future. I believe the courts will be asked to consider important issues such as independence and impartiality of arbitrators – which has not really been tested so far – and the participation of public entities in arbitration. There are some important new cases in the courts concerning recognition and enforcement of foreign arbitral awards and on the independence of the president of an arbitral tribunal which will assist practitioners in the future. The STJ’s application of the New York Convention has naturally come under scrutiny and been the subject of a lot of activity in the Court. In recent years seminars organized by the Brazilian Arbitration Committee (CBAr), with the support of the ICCA, have been held with members of the STJ who have willingly received views from international practitioners regarding the manner in which their domestic courts have dealt with challenges to arbitral awards. PETER You talk about the CBAr in making representations to the STJ. How did the idea to create the CBAr come about? Who supported and was involved in the early days of the CBAr?
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