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INT ERNAT IONAL ARBI TRAT ION

THE I SDS L ANDSC APE I S CHANGING AND WE MUST MAKE SURE CHANGES ARE BA SED ON CONSTRUCT I VE DI ALOGUE , INNOVAT ION AND INFORMED DECI S ION-MAK ING.

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MESS AGE FROM THE EDI TOR

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IN CONVERS AT ION WI TH 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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MI CHAEL HWANG SC Chief Justice of the Courts of the Dubai International Financial Centre (DIFC)

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MARKE T COMMENTARY C OL OMB I A : A T HR I V I NG EN V I RONMEN T F OR A RB I T R AT I ON ISDS PROV ISIONS IN FREE TRADE AGREEMENT S – MUCH ADO ABOUT NOTHING NEW? T HE ENF OR C EMEN T OF I N T ERN AT I ON A L A RB I T R A L AWA RD S I N T HE U S : 2014 U S S UP REME C OUR T RE V I E W ARBITRATION AGREEMENT S – GET TING IT RIGHT FROM THE K I CK- OFF ALLEGATIONS OF BRIBERY & CORRUPTION – C AN THE Y DERA IL AN ARBITRATION? REPORT ON CLYDE & CO CHINA CLUB PANEL DISCUSSION : REGIONAL PERSPECTI VES IN INTERNATIONAL CONS TRUCTION ARBITRATION

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NEWS IN BRIEF PEOPLE MOVES MARKE T ACTI V IT Y NOTABLE C A SES

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MESSAGE FROM THE EDITOR 01

ME S S AGE FROM THE ED I T OR 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 andmade a substantial contribution to the founding and development of the discipline. In this issue we look at the continued development of the USA’smain arbitral centre, the International Centre for Dispute Resolution (ICDR), in an interviewwith its Vice President, LuisMartinez. We also turn our attention to the establishment of Latin America as a hub for international arbitration in an interviewwith 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 mainstreammedia is justified.

Elsewhere in this issue we cover developments in other corners of the globe. Sapna Jhangiani andMichael 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 expressmy gratitude to LuisMartinez, João Bosco Lee andMichael Hwang for sharing their unique experiences and expert opinions with us and our readers. I also wish to thankmy colleagues from the firm’s global arbitration group for their interviews and articles. BRIAN DUNNING, PARTNER, CLYDE & CO

BRI AN DUNNING AND LUI S MART INEZ DI SCUSS THE INT ERNAT IONAL CENTRE FOR DI SPUTE RESOLUT ION ’ S

NEW RULES : WHY THE Y WERE INTRODUCED; THE DRAF T ING AND DE VELOPMENT PROCESS ; AND HOW THE Y ARE BE ING RECE I VED IN PRACT I CE .

THE Y ALSO TOUCH ON THE ROLE OF MEDI AT ION IN RESOLV ING DI SPUT ES AND I T S UPTAKE AMONGS T PART IES IN THE AMERI C A S .

BR I A N DUNNING

L U I S MA R T INE Z

INTERNATIONAL ARBITRATION 1/3LY

IN CONVERSATION WITH LUIS MARTINEZ 03

IN CONVERS AT ION WI TH LUI S MART INEZ V I CE PRES IDENT OF THE INTERNAT IONAL CENTRE FOR DI SPUTE RESOLUT ION Brian Dunning, Partner at Clyde & Co, discusses the International Centre for Dispute Resolution’s (ICDR) new rules with its Vice President, Luis Martínez

CH A NGE S T O T HE I CDR RUL E S : WH AT A ND WH Y ?

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 promotemoremediation. And, of course, we wanted to try to introduce the expedited international procedures whichwe 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 away 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 bemade on the documents alone. BRI AN 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 enduremassive 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. LUI S And, on that score, the expedited rules establish an accelerated time frame. We’ve retained the well-known ICDR/ AAA strike and rankmethod 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.

BRI AN Changes to the Centre’s rules are currently big news in the arbitrationworld. Whywere the rules amended?Was it in response to specific feedback fromparties and the arbitration community? Or were the changes just part of filling gaps and observing best practices in the field? LUI S 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 fromour users. The last significant amendments weremade in 2006, whenwe 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 arbitrationwas becoming overly Americanized, particularly in relation to discovery. Our guidelines dealt with the issue inways 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 weremandatory. 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 successfullywith 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 fromour arbitrators. No arbitrator wants to have an award vacated because he

04 IN CONVERSATION WITH LUIS MARTINEZ

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AMEND ING T HE RUL E S : I DEN T I F Y ING PA R AME T ER S A ND FA C I L I TAT ING CH A NGE BRI AN Tell me a little bit about the process of amending the rules. Was there a consultation period? Howdid you go about actually identifying the primary areas to amend and how to amend them? Howdid that process work? LUI S We sat down a fewyears ago and identified transparency as one of the primary goals. Related to that, we knewwe also had to reflect the lessons we have learned regarding current best practices in relation to administration, saving time andmoney and of course expediting the processes which led to the expedited procedures. BRI AN It sounds like the subject areas developed organically over time, so it was not amystery 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. LUI S That is right. We kept track of ideas generated as a result of that dialogue andwe 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 andwe 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 twelvemonths, so we were waiting awhile 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 amonth—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 theywere 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 thenwe decidedwe 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. Muchof 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 howmuch detail to include.) After we confirm the appointment of the arbitrators we schedule a preparatory conference call with themwithin fourteen days. If we’re proceeding just on documents the process should be done within sixty days and an award should be issuedwithin thirty days fromeither 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. BRI AN That is great. Have you found parties calling you to inquire about this? LUI S Yes, we’ve had questions. Currently, there are three cases already pursuant to these rules, sowe are checking them andmaking sure the timeframe is working. We’re planning to interviewpeople 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 tomake sure that parties are aware of the benefits of themediation programand understand that they are going to be offeredmediation in every instance. Andwe hope that the possibility of a fee refund and the savings of time andmoney all serve tomotivate the parties to try tomediate their dispute. BRI AN 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? LUI S Yes, although it does fluctuate somewhat fromyear to year, it’s still not enough in the ICDR’s opinionwith respect to international cases. We still see parties who refuse it for the usual reasons—theymay see it as a delay to the arbitration or theymight have tried it before and got nowhere. I still don’t knowwhether people fully value or understand the potential benefits of mediation and howmuch time it can save. There’s a reasonwhymulti-nationals are includingmediation as part of their employment dispute resolution processes. BRI AN Inmy own practice, I find that mediation is better received now than it was ten years ago, at least with US clients. Clients fromother jurisdictions don’t always understand and they often reject it. Is this consistent with your experience? LUI S We aim to have clients as well as their attorneys on the administrative conference call and tomake 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 nowat mediation.org which is helping. We are also one of the founders of the International Mediation Institute, which vetsmediators 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 newmediation law.

T HE T REND F OR MED I AT I ON A ND I T S BENEF I T S F OR USER S

BRI AN The newRules also include new references to mediation. Can you tell us about those? LUI S Yes, of course. The rules nowalso contain a formal article that puts parties on notice that theywill receive an offer tomediate. Youmay not know this but, tomy knowledge, we are the only institution that actually has a refund schedule that contemplates amediated settlement, where for example if the parties reach a resolution or settlement in thirty days, we give

I T TAKES T IME BUT WE ARE SEE ING CHANGES . IN BRAZ IL , FOR EX AMPLE , THERE WA S L I T T LE INT EREST IN TALK ING ABOUT MEDI AT ION T EN YE ARS AGO, BUT NOW THE Y ARE WORK ING ON A NEW MEDI AT ION L AW.

INTERNATIONAL ARBITRATION 1/3LY

LUI S 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). BRI AN And depositions are also specifically excluded. LUI S Yes. We also included, from the ICDR’s Guidelines, a rule about privilege andwe 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 representativesmust 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, drawadverse 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 themon 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 themarketplace, 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 andmany other users. We finally launched the rules on 1 June 2014. There were numerous versions over the eighteen-month process and nowwe are in the process of gathering feedback from themarket place. BRI AN How is that going so far? LUI S 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. T HE NEW RUL E S IN PR A C T I CE : JO INDER A ND C ONSOL I DAT I ON , MA N A G ING T HE PROCE S S A ND T IMEF R AME S F OR AWA RDS

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 froma 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. BRI AN When you are out talking to people about the new rules, do you feel like you are selling amuch improved product? LUI S Obviously I’mbiased, 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 knowwhat our users think; so I have a high comfort level in going around and promoting this product. I seemy role as educational, so a good deal of my time is spent discussing the use of arbitration andmediation in general. And that is obviously something I believe inwholeheartedly. We work with companies in developing their ADR policies, and our hallmark is flexibility: you don’t have to use the rules in one specifiedway; 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, andwe have the case counsel/ administrators fromall 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 andmediation cultures in the countries that we operate in.

BRI AN Howare the new rules working in practice? Have you come up against any stumbling blocks or encountered any opposition to the Rules?

I ’ M BI A SED, BUT I GET TO SEE WHAT I S IN THE MARKE T PL ACE . I ALSO KNOW OUR CULTURE , I KNOW OUR T E AM, I KNOW OUR RULES , AND I KNOW WHAT OUR USERS THINK .

IN CONVERSATION WITH LUIS MARTINEZ 07

W I T H T H A NK S T O T HE C ON T R I BU T OR S OF T HI S E XCH A NGE . . .

BRIAN DUNNING, CLYDE & CO

LUIS MARTINEZ, INTERNATIONAL CENTRE FOR DISPUTE RESOLUTION LuisMartinez is Vice President of the International Centre for Dispute Resolution (ICDR), the international armof the American Arbitration Association (AAA). As Vice President, Mr. Martinez is a keymember of the ICDR’s strategy team and leads the business development of ICDR’s international arbitration andmediation 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 fromGeorgian Court College and a Juris Doctor degree fromSt. 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 fromLatin 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 connectionwith doing business in the US, andwith 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.

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MARKET COMMENTARY 09

COLOMB I A : A THR I V ING EN V I RONMEN T FOR A RB I T R AT I ON

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 themany arbitration centres which exist across the country. Colombia hasmore than one hundred arbitral institutions, although themajority 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 fromboth the private and the public sectors and claimvalues 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 partiesmay agree to an ad hoc arbitration, which operates on a different costs scale and can bemore 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 A SSOCIATE AT CLYDE & CO

10 MARKET COMMENTARY

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ONE OF THE MOS T CONTROVERS I AL I SSUES IN COLOMBI AN ARBI TRAT IONS , PART I CUL ARLY IN THOSE INVOLV ING S TAT E ENT I T IES , I S THAT CHALLENGES TO AWARDS AND ARBI TRAT ION DECI S IONS ARE OF T EN MADE BY ME ANS OF A CONS T I TUT IONAL PET I T ION KNOWN A S ACCI ÓN DE TUT EL A .

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 resolvedwithin 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 hasmodernised its Arbitration Law (Law1563 of 2012) to incorporate an international arbitration regime whichmirrors the UNCITRALModel Lawand enhances the already well established domestic arbitration practice. ROOM FOR IMPROVEMENT One of themost controversial issues in Colombian arbitrations, particularly in those involving state entities, is that challenges to awards and arbitration decisions are oftenmade bymeans of a constitutional petition known as acción de tutela . These proceedingsmay 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 amanifest 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 newModel Lawprovisions has yet to be seen.

THE FUTURE: THE RISE OF INTERNATIONAL ARBITRATION IN COLOMBIA By enacting the UNCITRALModel Law the Colombian legislator has provided a complete set of modern arbitral provisions whichwill 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 judgesmay not review themerits 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 awardwith 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 reformwill depend on how the judicial branch interprets and applies the law. However, inferring from the experiences of the international laws onwhich it is based, the optimismabout the future application and impact of Law1563 is not unjustified. Before the enactment of Law1563 of 2012, Colombia lacked amodern 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 themost 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 E XPER I ENCE OF THE ARB I TRAT I ON PROCE S S IN COLOMB I A INCLUDE S A USD 60 0 MI LL I ON CL A IM INVOLV ING LONDON RE INSURERS AND T WO LOC AL INSURERS AGA INS T THE CENTRAL BANK OF COLOMB I A . THI S WA S A VERY COMPLE X AND TECHNI C AL C A SE CONCERNING THE INT ERPRE TAT I ON OF A PROFE S S I ONAL INDEMNI T Y POL I C Y IN THE CONTE X T OF A CENTRAL BANK . THE PROCEED INGS – WHI CH INVOLVED THE D I SCLOSURE OF OVER A DEC ADE ’ S WOR TH OF CONTRACTUAL DOCUMENTAT I ON BOTH IN ENGL I SH AND SPANI SH , A DOZEN WI TNE S SE S AND F I VE LOC AL AND INT ERNAT I ONAL E XPER T S – WERE COMPLE TED WELL WI THIN T WO YE ARS BY A TR I BUNAL OF THREE LOC AL ARB I TRATORS . THE TR I BUNAL’ S E XPER T I SE IN THE HANDL ING OF THE PROCEED INGS IN SUCH A SENS I T I VE C A SE INVOLV ING AN IMPOR TANT NAT I ONAL INS T I TUT I ON I S ONE OF THE MANY E X AMPLE S OF THE MATUR I T Y OF THE FORUM .

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MARKET COMMENTARY 13

I SDS PROV I S IONS IN FREE TRADE AGREEMENT S – 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 EUwithin 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 rhetoricmean 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 fromdeveloped 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 inWashington D.C. –with cases decided by arbitrators froma limited pool, most often fromdeveloped states, giving rise to accusations of bias in the system. Today the debate has shifted and the outcry against ISDS is also being heard fromdeveloped nations and their nationals. This is currently in the context of variousmultilateral free trade agreements, such as CETA, which contain ISDS provisions and give investors rights to sue states inwhich 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 newPresident of the EU Commission, Mr Jean-Claude Juncker, recently said that “My commissionwill not accept that the jurisdiction of courts in the EUmember states be limited by special regimes for investor-to-state disputes. The rule of lawand the principle of equality before the lawmust also apply in this context”. Likewise, incoming trade commissioner Ms CeciliaMalmström, 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 treatiesmay be in the spotlight, neither politician has gone so far as to say that theywill 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 investorsmust exhaust local remedies before host states’ domestic courts before resorting to arbitration.

BY DE VIK A KHANNA , PARTNER AT CLYDE & CO

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SOVERE IGNT Y I S ONLY AFFECTED TO THE DEGREE AGREED BY THE S TATE OR SUPRANAT IONAL PART Y TO THE TRE AT Y, SO TO S AY SOVERE IGNT Y I S UNDER THRE AT I S INACCURATE .

ISDS A S A SHIELD OR SWORD – DOES IT MAT TER? In a recent article, entitled “Why support the TPPwhen it will let foreign corporations take our democracies to court?” the Guardian newspaper summarised the purpose of ISDS as follows: “Theywere originally created to protect businesses that invested in foreign jurisdictions where theremay 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 bymultinational corporations to extract profit andmarket 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 inmany respects. Firstly, were ISDS clauses designed to be one directional? Can unforeseen negative impacts on investments only happen in “undemocratic” countries andwhat 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 EUmember states) shows that investor grievances knowno 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 somemember states in any event. So, inmany cases, there is nothing newhere, just a refinement of what has gone before, with the aimof creating amore uniformplatformbetween 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’remade up of investment law experts, most of whomalso represent investor complainants. Panellists can be an advocate onemonth and an arbitrator the next. They are paid by the hour. Consequently, most cases take from three to five years. ISDS has no systemof precedents or appeals, so decisions can be inconsistent and unfettered”. It is unfortunate that a systembywhich investors have legitimately enforced their legal rights against abusive and discriminatory actions by host states has beenmischaracterised 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 andwide of themark. The fact that CETA, as themost recent example of ISDS provisions, clarifies certain substantive and procedural issues which have hitherto beenmatters left to tribunal discretion demonstrates that valid criticisms of the systemhave clearly been taken on board.

CETA introduces certain innovations to investment protectionwhile 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 PhilipMorris which is demanding compensation fromAustralia 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. QUALIF YING 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). • CETA does not allow investors to “import” and usemore favourable dispute settlement procedures provided for in other treaties (Article X.7–Most Favoured Nation). (The ability of investors to useMost Favoured Nation provisions in BITs to do just this has been the subject of numerous arbitral awards and academic articles). FAIR AND EQUITABLE TRE ATMENT (FET) IS REINED IN FET – currently themost 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 onmanifestlywrongful 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 partymakes a specific representation to the investor whichwas relied upon in deciding whether tomake 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). NATIONAL TRE ATMENT AND MOST FAVOURED NATION – NO IMPORT OF PROCEDURAL RIGHTS

MARKET COMMENTARY 15

INDIRECT EXPROPRIATION IS CL ARIFIED 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 policymeasures to protect public health, safety or the environment do not constitute indirect expropriation, except wheremanifestly 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-monthmandatory consultation phase, similar to the “cooling off” period common tomany 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 noticemust be served by the Canadian investor and the EU then decides whether themeasures complained of shall be answered by the EU or • Specific provisions on arbitrator conflicts of interest and states that arbitrators shall complywith 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 andMITs 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 andMITs, thematter is left to the discretion of the tribunal (Article X.36). by theMember State in question (Article X.20). Other noteworthy procedural innovations include:

IS CETA SUCH A BAD EX AMPLE 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 discretionwhere 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, andwhile certain substantive protections have been curtailed, in this author’s view, on balance the agreement gives thema 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 systemwhich it is up to the informed arbitration community to seek to defend. The arbitration communitymust accept the scrutiny and analyse the criticism levelled at ISDS and seek ways tomake 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 andwemust make sure changes are based on constructive dialogue, innovation and informed decision-making.

PROTECTING INVESTORS RIGHTS

PE TER HIRS T EXCHANGES V IEWS WI TH PROFESSOR JOÃO BOSCO LEE ON THE DE VELOPMENT OF BRAZ IL A S A VENUE FOR ARBI TRAT ION, TOUCHING ON BRAZ IL I AN PART IES ’ PREFERENCE FOR THE I CC ARBI TRAT ION RULES AND THE LE VEL OF SUPPORT BY THE SUPERIOR COURT OF JUS T I CE FOR THE NEW YORK CONVENT ION. THE Y ALSO DI SCUSS THE ANT I CIPAT ED INCRE A SE IN CONS TRUCT ION ARBI TRAT IONS IN THE COUNTRY AND CONS IDER WHE THER BRAZ IL C AN SUS TA IN FORE IGN INVES TMENT IN THE

ABSENCE OF A BIL ATERAL INVES TMENT TRE AT Y OR

RAT IF I C AT ION OF THE I CS ID CONVENT ION.

P E T ER HI R S T

JO Ã O BOS C O L EE

INTERNATIONAL ARBITRATION 1/3LY

IN CONVERSATION WITH JOÃO BOSCO LEE 17

IN CONVERS AT ION WI TH JOÃO BOSCO LEE INDEPENDENT ARBI TRATOR AND MEMBER OF THE I CC INTERNAT IONAL COURT OF ARBI TRAT ION Peter Hirst, Partner at Clyde & Co, in conversation with Professor João Bosco Lee, Independent Arbitrator and member of the ICC International Court of Arbitration

BR A Z I L : A N A P PROPR I AT E V ENUE F OR A RB I T R AT I ON?

in Brazil, whereby arbitration specialists have becomemore available, Brazilian companies have becomemuchmore 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. PE T ER 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 reflectsmy 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 andMiami in the United States. PE T ER Based on your experience as an arbitrator, do Brazilians parties fully understand (and complywith) 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.

PE T ER 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 placemodern arbitration legislation, favorable case lawand 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 Lawuntil 2001. Since this decision, arbitration has steadily becomemore 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 nowdefinitely an important place to consider as a venue for international arbitration. PE T ER The number of international arbitrations involving Brazilian parties has increased over the past years and indeed Clyde&Co has seen a very considerable increase inwork from Brazil. We have a teamof 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 COURT S WILL BE A SKED TO CONS IDER IMPORTANT I SSUES SUCH A S INDEPENDENCE AND IMPART I AL I T Y OF ARBI TRATORS – WHI CH HA S NOT RE ALLY BEEN

T EST ED SO FAR – AND THE PART I CIPAT ION OF PUBL I C ENT I T IES IN ARBI TRAT ION.

INTERNATIONAL ARBITRATION 1/3LY

IN CONVERSATION WITH JOÃO BOSCO LEE 19

CRE AT ING A SUP P OR T I V E EN V I RONMEN T F OR A RB I T R AT I ON

BOSCO The CBAr has become one of themost important academic institutions in Latin America. The idea to create the CBAr originated in 2000when Clávio Valença Filho, Eduardo Damião Gonçalves and I returned fromour 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 (AdvisoryMember of the ICCA), CarlosMafra de Laet (former AlternateMember 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 BaptistaMartins (co-drafter of the Brazilian Arbitration Law); together with those froma new generation of arbitration practitioners such as Adriana Pucci (BoardMember of the CBAr), Adriana Braghetta (Member of the Governing Board of ICCA), Eleonora Coelho (member and former Vice President of the CBAr), JoaquimMuniz (President of the Arbitration Chamber of the Brazilian Bar), among others. PE T ER I understand that the newBrazilian Arbitration Law will be enacted soon. What are themain changes that will be brought about by the law if andwhen it’s enacted? BOSCO The newarbitration law should be approved soon. It updates the 1996 Arbitration Lawby plugging certain gaps, consolidating solutions adopted by case lawand correcting mistakes in the application of the law. Themost 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 andmay cause an insecurity for the market. As the Bill is still awaiting approval by the Senate this could still bemodified. Despite this uncertainty as to the regulation of the participation of the State in arbitration, the newproject of the lawwill not affect commercial arbitration, which should still remain the best option for the resolution of corporate disputes.

PE T ER At Clyde&Co, we have had somemixed 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 whichwill 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 heldwithmembers of the STJ who have willingly received views from international practitioners regarding themanner inwhich their domestic courts have dealt with challenges to arbitral awards. PE T ER You talk about the CBAr inmaking representations to the STJ. Howdid the idea to create the CBAr come about?Who supported andwas involved in the early days of the CBAr?

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