Herbert Smith Freehills is accepting applications for short-term internships with the firm’s international arbitration group in Hong Kong. Three paid internship positions are open for three to four months each (not extendable), beginning in or around January, May and September 2018.

Interns will work alongside our Greater China international arbitration team. They will have a varied workload, including assisting with current arbitrations and other client work; arbitration-related research; writing papers and journal articles; producing arbitration-related internal know-how, and similar projects.

For more details please refer to the HSF Careers page (click “apply now” and search Hong Kong openings):

https://careers.herbertsmithfreehills.com/cn/grads/international-arbitration-internship

Applications must be submitted online via the HSF Careers page on or before 1 September 2017.

Overview

The Hong Kong Court of First Instance (CFI) has denied leave to appeal its May 2017 decision in  Israel Sorin (IZZY) Shohat v Balram Chainrai [2017] HKEC 1118. In that decision (see our previous post), Chow J refused to stay execution of the CFI’s order to enforce an arbitral award pending the outcome of the Award Debtor (Mr Shohat)’s claim against Mr Chainrai (Award Creditor) in the Hong Kong High Court (High Court Action).

On 21 July 2017, the Award Debtor applied for leave to appeal Chow J’s decision (Leave Application), and for an interim stay of execution of the enforcement order pending the outcome of its application for leave to appeal (Stay Application).  The court also considered an application by the Award Creditor for payment out of monies that the Award Debtor had paid into court in partial satisfaction of the award (Payment Out Application).

The Court dismissed the Leave and Stay Applications. It granted the Payment Out Application, subject to a 14-day delay to allow for any further application for leave to appeal and interim stay pending appeal.

Reasons for the Court’s decisions

In support of the Leave Application, the Award Debtor argued that Chow J had erred in rejecting its demand for security from the Award Creditor pending the outcome of the High Court Action. The application for security had been sought on grounds that: a) it would be difficult to enforce a judgment against Mr Chainrai in Israel, where he lives and b) Mr Chainrai was of advanced age and might dissipate his assets as part of his estate planning.

Chow J rejected these arguments, noting that: a) Hong Kong law does not give a plaintiff a general right to seek pre-trial security over the subject matter of a claim or any costs incurred in bringing legal proceedings in Hong Kong, regardless of the defendant’s place of residence or domicile, or his solvency (see FG Skerritt Ltd v Caledonian Building Systems Ltd [201] EWHC 1898 (TCC)). Chow J had considered the potential inconvenience of enforcing a Hong Kong judgment in Israel, but was persuaded by other, “more weighty” factors to refuse the stay of execution; and b) Mr Chainrai’s advanced age, as well as the possibility that he might engage in estate planning, are “just ordinary life events”. The judge was not persuaded that they constituted good grounds for granting the stay of execution. Further, there was no evidence that Mr Chainrai would dissipate his wealth to such an extent that he would not be able to satisfy any judgment in the High Court Action. The Award Debtor had offered in open court not to pursue its stay application if Mr Chainrai (the Award Creditor) would provide security. Chow J considered the offer irrelevant to his decision on granting the stay. The Award Debtor still had to provide sufficient grounds to support his application.

Chow J dismissed both the Leave Application and the Stay Application, and granted the Payment Out Application. He ordered the Award Debtor to pay the costs of the Applications on an indemnity basis, “in accordance with the courts usual practice regarding unsuccessful applications to challenge the enforcement of arbitration awards“.

May Tai

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Kathryn Sanger

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Briana Young

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On 6 July 2017 the EU and Japan announced an agreement in principle on their Economic Partnership Agreement (“EPA“).  The scale of this agreement is eye-popping: once in effect the EPA will cover nearly 40 percent of all goods exports, 10 percent of the Earth’s population, and about 30 percent of global GDP.  The breadth of goods covered by the EPA will be similarly substantial and includes agricultural and food products, the forestry sector, industrial products, the automotive sector, electronics, and services.  While some tariffs, such as those on wine, will disappear from the moment the EPA enters into force, other tariffs – including those on imports of Japanese automobiles to Europe and imports of European chocolates to Japan – will disappear over a number of years.  The net effect will be to remove tariffs from 99 per cent of all goods traded between the EU and Japan with one study suggesting consequent increases in EU exports to Japan of 34% and Japanese exports to the EU of 29%. 

Getting to the point of agreement, even in principle, was not easy.  Within the EU the European Commission (“EC“) held dozens of meetings including more than 40 meetings held with EU governments since 2016 alone.  Negotiations with Japan have also been extensive: 4 years and 18 rounds of negotiations have elapsed since talks began.  Perhaps in light of strengthening protectionist sentiment elsewhere and in an effort to maintain a sense of legitimacy, the EC also has taken pains to document these meetings and those held with citizens and civil society.  Despite these extensive efforts, key issues remain unaddressed including – most prominently – how to address the rights of investors and how to settle investor-state disputes.

Approach to investor-state dispute settlement (“ISDS“) in the draft EU-Japan EPA

The EC-published draft negotiating text of the EPA concerning investment and investment liberalisation sets out several immediately recognisable standards for the treatment of investors by states and in some ways reflects the basic approach to investment protection visible in thousands of other investment treaties.  It provides, for example, certain obligations to ensure market access for investors of one party in the territory of the other party, as well as commonly found provisions such as National Treatment and Most-Favoured-Nation-Treatment (“MFN“).  Even these basic provisions, however, foreshadow a key gap in the in principle agreement: the draft negotiation text expressly carves out from the definition of ‘treatment’ in the MFN provision “investor-to-state disputes settlement procedures provided for in other international agreements.”  In other words, the draft negotiation text expressly attempts to prevent investors from claiming the benefit of standard ISDS procedures (i.e. binding arbitration) found in other investment agreements, and leaves wholly unresolved the question of what procedures exactly to include.

The EU’s Proposed Investment Court System

Perhaps encouraged by the successful exclusion of traditional ISDS procedures from the EU-Canada Comprehensive Economic Trade Agreement and EU-Vietnam Free Trade Agreement, the public statements of the European Commission concerning ISDS procedures and the EPA demonstrate some inflexibility on the issue of investor protection provisions.  It seems that an investment court system (“ICS“), as part of the EC’s drive towards a multilateral investment court, is the only option as “[u]nder no conditions can old-style ISDS provisions be included in the agreement“. Simply put, “[f]or the EU ISDS is dead“.  The reasons offered by the European Commission, against a background of some civil society campaigns against ISDS, include that:

1. An investment court system would create a more predictable environment for investors;
2. An investment court system would have highly qualified judges, appointed by the state parties to the agreement; and
3. An investment court system would have public oversight and transparent working methods.

This proposal, as evidenced by its exclusion from the draft negotiation text and the lack of any agreement, has not been welcomed with open arms by Japan.  Whether or not the claimed benefits would indeed materialize as described also remains unclear.

Japan’s Recent Approach to ISDS

Japan, in recent years, has tended to conclude free trade agreements of a broad scope and with a detailed investment chapter that provides for standard investor-state arbitration.  Government pronouncements have made clear on several occasions that Japan expects its investors to use these tools to protect their investments and to resolve disputes.  Japan’s approach to ISDS provisions and protections do, however, demonstrate some diversity.  This is likely in part because Japan lacks a model bilateral investment treaty upon which to base negotiations – evolution or drift therefore become natural.  The rules and institutions applicable to investor-state arbitration contained within Japan’s international investment agreements are similarly diverse: Japan has frequently agreed to the use of ICSID arbitration but has also agreed in the past to allow the use of other rules or institutions including the Kuala Lumpur Regional Centre for Arbitration and the Arbitration Institute of the Stockholm Chamber of Commerce.  Despite Japan’s past flexibility on dispute resolution provisions, however, there remains the risk that ICS may yet prove unpalatable.

Next Steps

Over the coming months Japanese and EC negotiators will meet to try to hammer out several remaining points, including the issue of investor state dispute resolution, with an eye on bringing the EPA into force in 2019.  Recent media reports have suggested that one option under consideration is to simply not include provisions on this issue in the final text of the EPA.  Whether an EPA lacking investor protection is attractive to the parties remains to be seen. What is clear is that challenges arising from the proposed ICS system remain, including:

1. a lack of detail as to how this system would work in practice, including the appointment of judges;
2. the potential for national or regional parliaments to hold hostage the ratification of any EPA including the ICS system, following the Court of Justice of the European Union’s 16 May 2017 ruling that the approval of the (nearly 40) national and regional EU parliaments is required to ratify the EU-Singapore FTA;
3. the potential cost of the ICS system to Japan in circumstances where Japanese investors rarely bring investment claims against states; and
4. the uncertain future of the ICS system and its potential impact on future trade agreements.

For more information, please contact Colin Trehearne, Associate, or your usual Herbert Smith Freehills contact.

Colin Trehearne

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As previously reported here and here, the Mumbai Centre for International Arbitration (MCIA) was launched in October 2016, to promote institutional arbitration in India. The MCIA has been established as a joint initiative between the government of Maharashtra in India and the domestic and international business and legal communities.

In a first, of hopefully many pro-arbitration moves, we understand that the Supreme Court of India has invoked section 11 of the amended Indian Arbitration and Conciliation Act, 2015 (the Amended Act) and instructed the MCIA to appoint an arbitrator in an international dispute between Sun Pharmaceutical Industries Ltd (Indian company) and Falma Organics Limited (Nigerian company). This decision marks the first time that an Indian court has invoked section 11 of the Amended Act to designate an institution to assist with the appointment of an arbitrator.

As previously reported here, the Indian Arbitration and Conciliation Act 1996 (the Act) was amended in 2015 with a view to streamline and modernize the arbitration landscape in India, especially to reduce the time taken in completion of arbitrations in India. One of the factors contributing to delays in arbitration in India was the time taken by the courts to appoint arbitrators when approached under section 11 of Act. Under this section, the Supreme Court of India or the various High Courts (or any person or institution designated by such courts) may appoint an arbitrator at the request of a party provided that the parties have been unable to agree on an arbitrator within thirty days from the receipt of a request by one party from the other. This process often took several years given the backlog and endemic delays in the Indian courts. By allowing the Indian courts (as compared to only the Chief Justice of the Supreme Court or various High Courts before) to appoint any person or institution as an appointing authority for arbitrators, it ensures that speedier decisions are made regarding arbitrator appointment. This is supported by the provision under the Amended Act that an application for the appointment of an arbitrator under section 11 aimed to be disposed of within 60 days from the date of service of notice.

Arbitration continues to grow India, and recent judicial pronouncements are generally viewed as being pro-arbitration. For a round-up of recent developments, please see our recent e-bulletin here.

This order by the Apex Court in India bodes well for arbitration in the country, which has historically suffered from a lack of credible arbitral institutions and has always been skewed towards adhoc arbitration rather than institutional arbitration. The support shown by the Supreme Court in recognizing the MCIA as an appointing institution lends credibility to the relatively new institution and will hopefully encourage both domestic and foreign users to use the facilities and rules of the MCIA in their commercial arrangements.

For further information, please contact Nick Peacock, Partner, Donny Surtani, Partner, Kritika Venugopal, Senior Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock

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Donny Surtani

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Kritika Venugopal

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The United States will lobby for changes to the investor-state dispute settlement (“ISDS”) provisions of the North American Free Trade Agreement (“NAFTA”) in the upcoming discussions to renegotiate the regional treaty.

ISDS reform is one of several “negotiating objectives” announced last month by the Office of the United States Trade Representative (the “USTR”), the federal agency with responsibility for US trade negotiations.  The disclosure was made public in accordance with a 2015 statute that requires the USTR to release objectives at least 30 days before the start of formal trade negotiations.  The NAFTA talks are set to begin in Washington D.C. on August 16.

On the agenda are modest proposals for increased transparency in the NAFTA ISDS process, such as the introduction of mandatory public access to NAFTA arbitration hearings, and submissions, and awards.  Those amendments would be broadly in line with the recent trend toward greater public transparency throughout the investment treaty space.  A more striking departure from current practice is suggested by the proposed introduction of a “right” of “non-governmental entities . . . to request making written submissions to a panel.” 

The remaining ISDS objectives are, as drafted, exceedingly vague.  For instance, the USTR will seek reforms to “encourage the early identification and settlement of disputes through consultation and other mechanisms” and to “establish a dispute settlement mechanism that is effective, timely, and in which panel determinations are based on the provisions of the Agreement and the submissions of the parties and are provided in a reasoned manner.”  In a similar vein, the US will call for “provisions that encourage compliance with the obligations of the Agreement.”  Quite what that entails is, for now, unclear.

The Trump Administration’s decision, announced in May, to formally begin the renegotiation process was widely expected.  Yet while President Trump has been a persistent detractor of NAFTA (“the worst trade deal maybe ever signed, anywhere”), his negative assessment of the treaty has focused largely on its purportedly detrimental effects on American industry and trade.  ISDS has figured little, if at all in the President’s periodic denouncements of NAFTA.  Rather, the critique of NAFTA arbitration has come predominantly from the left—driven mostly by concerns that corporate entities (i.e. investors) have manipulated ISDS to subvert domestic environmental, consumer, and other public interest regulation.

Chapter 11 of NAFTA contains the treaty’s principal ISDS provisions.  Those, in turn, represent fairly standard investment treaty provisions such as national treatment, most-favored-nation, and anti-expropriation clauses.  American, Canadian, and Mexican investors may bring claims under Chapter 11 against a member state under the ICSID or UNCITRAL Rules.  According to one published study, there were 77 known NAFTA claims filed after the treaty’s adoption in 1994 up to January 1, 2015.  The United States has never lost NAFTA arbitration.

It is far too soon to predict whether the surprise inclusion of ISDS in the American negotiating objectives will yield substantive changes to NAFTA. Still, compared to the many fraught economic issues presented by the upcoming renegotiation, the parties may find agreement on some limited arbitration reform much easier to come by.

For more information, please contact Christian Leathley, Partner, Conor Doyle, Law Clerk or your usual Herbert Smith Freehills contact.

Christian Leathley

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Conor Doyle

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The Singapore International Arbitration Centre (SIAC) has opened its second representative office in India in the International Financial Services Centre (GIFT IFSC) in GIFT, Gujarat, to assist in the promotion of international commercial arbitration

Pursuant to Prime Minister Modi’s push to grow India as an international arbitration hub and the push for institutional arbitration in India (see here and here), the opening of the SIAC’s second representative office is a welcome development in the Indian arbitration landscape.

This development is in accordance with the Memorandum of Agreement entered into last year by the SIAC, the Gujarat International Finance Tec-City Company Limited and GIFT SEZ Limited. Overall, the opening of the new office highlights the importance of the Indian market to the SIAC, with Indian parties consistently ranking amongst its top five foreign users in the last several years.

The new office will play a similar role to the SIAC Mumbai office (established in 2013) i.e. promoting the SIAC as a leading international arbitration institution and the use of institutional arbitration in general. Arbitrations under the SIAC Rules will continue to be administered in Singapore. It is understood that as a part of the arrangement, GIFT companies will begin incorporating SIAC clauses as their preferred method of dispute resolution in international contracts that are of a certain monetary value.

While this is only a representative office, and not a case management office, it is hoped that easy access to SIAC’s neutral and independent dispute resolution services will support GIFT’s drive to encourage parties to undertake large international financial transactions from GIFT IFSC, allowing the city to develop into a global financial hub along the lines of London, Dubai, Hong Kong, Singapore and New York.

Arbitration continues to grow throughout India, and recent judicial pronouncements are viewed as being pro-arbitration. For a round-up of recent developments, please see our recent e-bulletin here. Further, a panel constituted to review the existing Indian arbitration mechanisms has suggested reforms which includes a recommendation that foreign lawyers be allowed to advise and appear in arbitrations in India. However, this reform is being heavily opposed by the Bar Council of India. We will watch this space to see how this develops.

For further information, please contact Nick Peacock, Partner, Alastair Henderson, Partner, Donny Surtani, Partner, Kritika Venugopal, Senior Associate, or your usual Herbert Smith Freehills contact.

Alastair Henderson

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Donny Surtani

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Simon Chapman

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Nicholas Peacock

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Kritika Venugopal

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Taiwan’s Chinese Arbitration Association (“CAA“) has adopted new arbitration rules for arbitrations seated outside Taiwan. The Chinese Arbitration Association Rules, International (known as the “CAAI Rules“) came into effect on 1 July 2017 and are intended to apply to arbitrations seated outside of Taiwan. The 2001 CAA Rules will continue to apply for arbitrations seated in Taiwan.

The enactment of these Rules, coupled with the CAA’s plans to open an office in Hong Kong as part of the Hong Kong government-sponsored legal hub at the former Central Government Offices in Central, form part of the CAA’s greater ambitions to expand its offerings to arbitrations seated in jurisdictions outside Taiwan.  The CAA is hoping that these measures will allow the institution to attract more cases arising out of China’s “One Belt, One Road” plan.

The key features of the CAAI Rules include the following:

• Default seat of arbitration is Hong Kong (Article 19) – Unless the parties agree otherwise or the Tribunal determines that another seat is more appropriate, the seat of the arbitration is Hong Kong.
• Chinese or English can be used for the notice of arbitration (Articles 7.2 and 20) – In the absence of an express choice on the language of the arbitration, a party filing a notice of arbitration may file such notice in either Chinese or English. The institution will then make a preliminary decision on the choice of the language, which the tribunal can revise or approve as appropriate.
• Time limit on proceedings (Article 30.1) – Arbitration proceedings are generally limited to six months from the date of the tribunal’s constitution until the date the tribunal closes the proceedings. The time limit may however be extended by the CAAI upon its own initiative or the Tribunal’s reasoned request.
• Time limit on award (Article 33) – Following the closure of the proceedings, the tribunal will have six weeks to render its final award. This time limit can also be extended by the institution upon the Tribunal’s reasoned request.
• Expedited procedure for small claims (Article 41) – For claims in which the amount in dispute is less than US$ 250,000, the parties may apply to the CAAI for an expedited procedure. If the CAAI grants the application, the CAAI may shorten any time limits under the CCAI Rules and invite the parties to agree to a sole arbitrator. Once constituted, the tribunal may decide to determine the case on the basis of documents alone. The tribunal will have six weeks from the date of the closure of proceedings to issue its final award. The CAAI may extent the time limit once if exceptional circumstances justify an extension of time. The tribunal’s final award can be rendered in summary form.
• Consolidated arbitration proceedings (Articles 9 and 28) – A party may choose to submit claims arising out of or in connection with several contracts under one notice of arbitration. The CAAI will decide whether it would be appropriate to join all claims under a single arbitration in light of circumstances such as the parties’ agreement to a single arbitration, whether the claims are made under the same arbitration agreement or are made under “multiple but compatible agreements” as they relate to the same parties, involve common factual or legal questions, and the relief sought arises out of the same transaction(s). If multiple arbitrations are underway, a party may apply to the CAAI for a consolidation of the claims into a single arbitration.
• Emergency Arbitrator (Schedule 1) – For arbitration agreements concluded after the CAAI Rules came into effect, and unless the parties have expressly opted out of this provision, a party may decide, after or at the same time as the filing of the notice of arbitration and before the constitution of the tribunal, to request that urgent measures be granted by an emergency arbitrator. The appointment of the emergency arbitrator will be made within two days of the receipt of the request, and the emergency arbitrator will have fifteen days from the transmittal of the case file to render its decision on the appropriate emergency measures (if any).

As indicated in the introductory remarks of the CAAI Rules, the rules have been drawn from various arbitration rules of established institutions. Although Taiwan is not a signatory of the New York Convention, CAA awards are known to have been successfully enforced outside Taiwan pursuant to bilateral agreements, or on the basis of principles of comity and reciprocity. The enactment of the CAAI Rules in line with accepted international practices, and with Hong Kong as the default seat, is therefore a welcome effort to enhance the enforceability of CAA awards.

May Tai

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Helen Tang

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Rebecca Soquier

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Herbert Smith Freehills has published a new edition of its well-regarded Guide on dispute resolution and governing law clauses in India-related commercial contracts. The Guide is intended to assist in-house counsel who handle India-related commercial contracts on behalf of non-Indian companies and who need to have a practical understanding of the nuances of drafting dispute resolution and governing law clauses in the Indian context.

The full digital edition can be downloaded in PDF by clicking on this link.  If you would like to request a hard copy please email asia.publications@hsf.com.

We hope that you enjoy reading the sixth edition of this Guide. We would welcome your feedback.

On 21 July 2017, the Beijing No. 4 Intermediate People’s Court enforced a Hong Kong award in favour of Stonewall Resources Limited (Stonewall), an Australian listed gold mining company.  The HKIAC award is related to breach by Shandong Qixing Iron Tower Co., Ltd. (Qixing) of a share sale agreement governed by Australian law whereby Qixing had undertaken to purchase South African mining assets from Stonewall.  Notably, the disputed award was enforced in Beijing less than a year after being issued by the Hong Kong tribunal; and Stonewall is reported to have benefitted from third party funding, as a result of which its costs were reimbursed in return for 45% of the award.

The enforcement of Stonewall’s award may be of particular interest to Australian investors.  China is Australia’s largest trading partner in terms of both imports and exports. Australia is China’s sixth largest trading partner, its fifth biggest supplier of imports and its tenth biggest customer for exports. Twenty-five per cent of Australia’s manufactured imports come from China; 13% of its exports are thermal coal to China (see the article here).  We are seeing Australian clients increasingly include arbitration agreements naming Hong Kong or Singapore as the seat of arbitration in relation to both inbound and outbound investment.

Foreign arbitral awards are frequently enforced in the PRC, with the PRC courts increasingly taking a sensible and pragmatic approach to attempts to resist enforcement.  One recent study identified 98 publicly available applications to enforce arbitral awards in the PRC between 1994 and 2015 (although not all applications, particularly older applications, are public).  The number of applications has increased particularly over the last five years, during which 78 applications for enforcement were made, of which 86% were successful.  Awards issued by the HKIAC, ICC and SIAC appear to have similar success rates.  These statistics are broadly indicative of a well-functioning system in which the enforcement court provides an important check on the integrity of the award whilst recognizing that parties are choosing minimal court interference when they select arbitration.

Hong Kong is a popular neutral venue for China-related commercial arbitrations, and HKIAC has the largest caseload involving Chinese parties among all international arbitral institutions.  The enforcement of the Stonewall award sits alongside the recent enforcement in the PRC for the first time of a CIETAC Hong Kong award (see our previous blogpost here).  Awards made in Hong Kong are enforceable in the PRC under the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and Hong Kong, which essentially replicates Article V of the New York Convention and requires recognition and enforcement of Hong Kong awards in the Mainland subject to the same very narrow exceptions as are set out in the New York Convention.

Singapore is another popular venue for China-related commercial arbitrations, and in particular those involving Australian parties. Awards rendered in Singapore are enforceable in Mainland China pursuant to the New York Convention.

Brenda Horrigan

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Anne Hoffmann

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Tomas Furlong

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The Shanghai No.1 Intermediate Court (the Shanghai Court) recently refused to enforce a SIAC award under Article V(1)(d) of the New York Convention, which provides that the award may be refused if “[T]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties…”  The SIAC award was made under the expedited procedure of the 2013 SIAC Rules (5^th Edition).

The parties to the arbitration were the seller and buyer of iron ore.  On 29 October 2014, they entered into a sales contract which appended the “globaORE Standard Iron Ore Trade Agreement”.  The “globaORE Standard Iron Ore Trade Agreement” contained a clause providing for arbitration under the SIAC Rules then in force and with a three-member tribunal in Singapore.

On 14 January 2015, the seller commenced SIAC arbitration against the buyer and applied for the expedited procedure under the 2013 SIAC Rules.  The buyer opposed the application of the expedited procedure and insisted that three arbitrators be appointed pursuant to the arbitration agreement.  In the absence of party agreement, the Vice Chairman of SIAC appointed a sole arbitrator for the expedited procedure.  The buyer refused to participate in the arbitration and an award was rendered in favour of the seller on 26 August 2015 (the Award).

The seller sought to enforce the Award before the Shanghai Court.  One of the key arguments raised by the buyer in resisting enforcement was that SIAC’s appointment of a sole arbitrator was contrary to the parties’ agreement for a three-member tribunal.

The Shanghai Court upheld the buyer’s argument.  It found that the expedited procedure under the 2013 SIAC Rules did not exclude other means of composing a tribunal, nor empower the Chairman of SIAC to compel parties to accept a sole arbitrator despite their agreement to a three-member tribunal.  Despite the fact that the arbitration agreement explicitly provided for a three-member tribunal and the buyer had expressly objected, SIAC appointed the sole arbitrator and went ahead with the expedited procedure.  The Shanghai Court held that the appointment of the sole arbitrator violated the parties’ arbitration agreement. The court refused to enforce the award under Article V(1)(d) of the New York Convention.  In support of its decision, the Shanghai Court emphasised that party autonomy is the foundation of arbitration proceedings.

Commentary

The Shanghai Court’s decision was vetted by the PRC Supreme People’s Court (SPC), by virtue of the “reporting system” (under which lower courts must report any decision to refuse enforcement of a foreign arbitral award to the SPC for scrutiny).  Therefore, the decision is significant and will be referred to as precedent for future decisions of PRC courts.  The SPC has indicated a strong intent to safeguard party autonomy in such cases.

SIAC’s purported power to appoint a sole arbitrator in expedited proceedings, despite the parties having agreed a three-member tribunal, was also considered by Singapore High Court in AQZ v ARA [2015] SGHC 49. This was an application to set aside an arbitral award.  A similar argument was raised by the applicant, i.e. that the arbitration should not have been conducted before a sole arbitrator (appointed, in this case, under the expedited procedure in the 2010 SIAC Rules (4^th Edition)), since the parties had expressly agreed to arbitration before three arbitrators.

The Singapore High Court rejected this argument and upheld SIAC’s appointment of a sole arbitrator.  The court adopted a “commercially sensible” construction of the arbitration agreement and decided that, by adopting the 2010 SIAC Rules into their contract, the parties had recognised the SIAC President’s power and discretion to appoint a sole arbitrator where the expedited procedure applied.  The Shanghai Court, supported by the SPC, clearly takes a different view from the Singapore High Court.

SIAC has amended its latest rules (2016, 6^th Edition), to prevent the same conflict from arising.  Article 5.3 of the new rules provides: “[B]y agreeing to arbitration under these Rules, the parties agree that, where arbitral proceedings are conducted in accordance with the Expedited Procedure under this Rule 5, the rules and procedures set forth in Rule 5.2 shall apply even in cases where the arbitration agreement contains contrary terms” (emphasis added).

The Shanghai Court has not released its decision to the public.  The information on the decision is derived from third party sources.  We will update this post if the decision becomes available.

Kathryn Sanger

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Stella Hu

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Tomas Furlong

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The respondents in an international commercial arbitration were successful in the Federal Court in Australia in setting aside parts of two partial awards and removing the sole arbitrator pursuant to Articles 12, 18 and 34 of the UNCITRAL Model Law. These articles are incorporated into Australian law by the International Arbitration Act 1974 (Cth).

The Court found that the arbitrator had conducted himself in such a manner that the applicants could no longer have confidence in him. This was mainly because the arbitrator had decided various substantive questions in a final manner without giving some of the parties an opportunity to be heard on those questions.

The Court observed that procedural difficulties were encountered due to the hiving off and determination of incomplete separate questions where issues between the parties had not been properly crystallised.

Hui v Esposito Holdings Pty Ltd [2017] FCA 648 and Hui v Esposito Holdings Pty Ltd (No 2) [2017] FCA 728 demonstrate the circumstances in which the Court may review the actions of an arbitrator and may be prepared to terminate an arbitrator’s mandate and set aside awards.

Background

Upon an application by the claimant in the arbitration, the arbitrator directed that there be a preliminary hearing in relation to certain of the claimant’s claims. It had not been contemplated that defences to those claims (such as set off defences) were within the scope of the preliminary hearing. Despite this, the claimant in its closing address sought to make submissions, for the first time, related to the set off defences. In his reasons, the arbitrator made findings concerning the availability of set off defences.

The respondents challenged the arbitrator’s reasons, in part successfully. However, the arbitrator declined an application that he recuse himself and maintained that he did not exceed his jurisdiction in deciding the set off issues.

The respondents commenced proceedings in the Federal Court of Australia to set aside the partial award and to have the arbitrator removed.

Decision

Justice Beach of the Federal Court found that it was well understood by the parties, and acceded to by the arbitrator, that the preliminary hearing would not concern the availability of set off defences or the merits of these defences. Despite this, the arbitrator entered upon and decided issues relating to the availability of those defences.

In finding that the applicants had lost a valuable opportunity to argue these defences, Justice Beach observed that:

• in order to justify set aside or remittal, real unfairness or real practical injustice must have resulted by the denial of the relevant opportunity to a party to present its case;
• real unfairness or real practical injustice can be demonstrated by showing that there was a realistic, rather than fanciful, possibility that the award may not have been made or may have differed in a material respect favourable to the party said to have been denied the opportunity. Here, this required set off defences that were reasonably arguable. The judge noted that, if the applicants’ arguments had been hopeless, then they would have lost nothing of value and no real injustice would have been caused to them by the lost opportunity. He rejected the notion that the opportunity to put an argument itself has intrinsic value irrespective of the argument’s merits; and
• the onus rests on the party seeking to set aside an award or remit it to the arbitrator for reconsideration.

The Court also considered the interaction of the ‘justifiable doubts’ standard in relation to the impartiality and independence of the arbitrator in the UNCITRAL Model Law and the ‘real danger of bias’ test in section 18A(2) of the International Arbitration Act 1974 (Cth).

Justice Beach decided that where there is no allegation of actual bias, the correct perspective for the ‘real danger of bias’ test is that of a ‘reasonable bystander’ or a ‘reasonable man’, in contrast with the perspective of the Court (cf Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2016] FCA 1131, [197]-[198] (Beach J)). The judge supported the test in Lovell Partnerships (Northern) Ltd  v AW Construction plc (1996) 91 BLR 83 that illustrates the connection between a breach of the no hearing rule and the basis on which an arbitrator breaching the rule ought be removed for prejudice.

In Lovell, Mance J (as he then was) stated that the legal test is whether a reasonable person would no longer have confidence in the arbitrator’s ability to come to a fair and balanced conclusion on the issues if the case were remitted to the arbitrator.

Observations

These decisions by the Federal Court of Australia confirm that Australia is a safe seat for international arbitrations with a judiciary that understands and safeguards the integrity of the arbitral process within the outer limits of what is prescribed in the International Arbitration Act and Model Law.

In practice, these decisions also demonstrate that parties should ensure that there is clarity around the scope of preliminary issues determination or split hearings (bifurcation), in order to ensure that each party is given an opportunity to be heard.

HSF acted for the applicant/respondent in the arbitration proceedings.

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On its face, the thrust of the UK Government’s Future Partnership Paper on Enforcement and Dispute Resolution (the Paper), published on 23 August, is to rule out the jurisdiction of the Court of Justice of the European Union (CJEU) to determine the enforcement of rights and obligations by individuals and businesses derived under the Withdrawal Agreement (and any future relationship agreement) and disputes between the EU and the UK.  Since the Paper was published, the Prime Minister has again reiterated the Government’s position that “the UK will be able to make its own laws – Parliament will make our laws – it is British judges that will interpret those laws, and it will be the British Supreme Court that will be the ultimate arbiter of those laws.”

However, as discussed below, whilst perhaps consistent with the stage of negotiations, the Paper is drafted to leave considerable room for manoeuvre, and it leaves many questions unanswered regarding enforcement of rights and obligations under the Withdrawal Agreement and any future relationship agreements and dispute resolution between the UK and the EU after Brexit.

The Paper follows the publication on 22 August of the UK Government’s Future Partnership Paper on Providing a Cross-border Civil Judicial Cooperation Framework, considered in our blog post here, which presented the UK’s position on the extent to which current EU rules on choice of law, jurisdiction and enforcement of judgments should continue to apply as between the UK and the EU Member States post-Brexit.  

State to state dispute resolution

• By what body will disputes between the UK and the EU be resolved?

The Paper’s discussion of “dispute resolution” – in the sense of resolution of disputes between the UK and the EU concerning the Withdrawal Agreement or any future relationship agreement – begins with a categorical rejection of the possibility that the CJEU would have any role. Indeed, in paragraph 29 it states “one common feature of most international agreements, including all agreements between the EU and a third country, is that the courts of one party are not given direct jurisdiction over the other in order to resolve disputes between them.” The Paper further asserts that placing the CJEU as the ultimate arbiter of disputes would be incompatible with the principle of a fair and neutral means of resolving disputes and against the principle of mutual respect for sovereignty. It continues by underlining that no state has submitted to the direct jurisdiction of a court in which it does not have representation.

Having ruled out the jurisdiction of the CJEU in determining disputes, the Paper then proceeds to consider a number of possible different options for resolution of disputes between the UK and the EU, which are “presented purely illustratively”, rather than as a position as such. Consistent with the Brexit White Paper, the Paper speculates that UK-EU disputes may be resolved by a joint committee or by arbitration, such as the mechanism in the CETA or the WTO dispute resolution procedure, both of which involve an arbitration panel. The paper is clear that there is no commitment to any of the aspects of the various models for state to state dispute resolution on which the paper draws. The implication perhaps is that the UK is open to negotiation as to which mechanism might be appropriate.

• Interpreting the Withdrawal Agreement: a continuing role for CJEU jurisprudence and the CJEU?

It may be uncontroversial in the usual course that the EU’s own dispute resolution body would not be the appropriate body for resolution of state to state disputes in an agreement between the EU and a third state.

However, the paper acknowledges that some continuing role for CJEU decisions on the interpretation of EU law may be necessary, in the interests of reducing or eliminating divergence of interpretation, for example where specific aspects of an agreement, which are identical to rules of, or acts done under, EU law, are implemented. The Paper draws a distinction between CJEU jurisprudence that pre-dates, and post-dates, the UK’s exit.

In respect of pre-Agreement CJEU decisions, the Paper notes that the UK Repeal Bill will give pre-exit CJEU case law the same binding or precedent status in the UK courts as decisions of the UK Supreme Court. It further notes that the Withdrawal Agreement may state that terms which replicate EU law should be interpreted and applied in line with any relevant pre-Agreement CJEU jurisprudence.

The Paper also contemplates that any EU-UK agreement could specify account being taken of post-Agreement interpretations of EU law by the CJEU, where both parties agree that a divergence in interpretation would be undesirable. Furthermore, it is noted in paragraph 47 that in some agreements, “a two-way” requirement is implemented that takes both the interpretation of the CJEU and another court into account. The example given is the EEA Agreement, which requires the case law of the CJEU and the EFTA Court to be kept under review and divergence referred to the EEA Joint Committee. A similar system in the Withdrawal Agreement or future relationship agreement could result in a peculiar situation where the UK-EU dispute resolution body considers the interpretation of a provision of EU law replicated in the Withdrawal Agreement, drawing on the jurisprudence of both the CJEU and the UK court, and reaching a different interpretation from the CJEU’s. The interpretation of the dispute resolution body would thereafter bind both the EU and the UK in the context of their relationship. However, this interpretation would not bind the EU’s Member States, which would remain between themselves governed by the CJEU’s interpretation.

Notably, the UK has recognised in the Paper that the EU’s own law provides that the CJEU is the final arbiter on matters of interpretation of EU law.  This is a point of significance for the EU, which has sought to intervene, for example, in cases in which ad hoc tribunals determining investor-state cases are perceived to trespass on the territory of the CJEU. The circumstances of the UK’s departure from the EU put in very real prospect the spectre of similar difficulties in the context of state to state disputes under the Withdrawal Agreement.

In this context, the Paper points to the recent EU-Moldova Association Agreement, which provides for dispute resolution by an arbitral tribunal composed from a list of arbitrators. Article 403 obliges the tribunal to refer a question of EU law to the CJEU. Article 403 states “Where a dispute raises a question of interpretation of a provision of Union law referred to in paragraph 1, the arbitration panel shall not decide the question, but request the Court of Justice of the European Union to give a ruling on the question. In such cases, the deadlines applying to the rulings of the arbitration panel shall be suspended until the Court of Justice of the European Union has given its ruling. The ruling of the Court of Justice of the European Union shall be binding on the arbitration panel.”

Rights and obligations of individuals and businesses under the Withdrawal Agreement and any future relationship agreements

The Paper does not reference investors from the UK in an EU member state or vice versa specifically. Rather, the Paper refers to UK and EU individuals and businesses and recognises (in paragraph 22) that the Withdrawal Agreement or future relationship agreements between the UK and the EU may give rise to rights or obligations for individuals and businesses operating within the UK and the EU.

The UK Government’s position is that such rights or obligations would be enforced within the UK by the UK courts and ultimately by the UK Supreme Court. Meanwhile, UK individuals and businesses operating within the EU “should similarly be provided with means” to enforce their rights and obligations “within the EU’s legal order and through the courts of the remaining 27 Member States“.

The UK’s position is that any EU individual or business seeking to enforce their rights in the UK under the Withdrawal Agreement or future relationship agreement would do so without any “direct” jurisdiction of the CJEU over the UK courts. There would be no referral of any questions in relation to such agreement to the CJEU. The Paper is keen to emphasise that this would not weaken the rights of individuals, and that anyone seeking redress in the UK may rely on its long-standing commitment to the rule of law and the “clear rules applied in accordance with the law by the UK’s expert, independent and internationally respected judiciary“.

There is less clarity about how a UK individual or business will enforce its rights under the Withdrawal Agreement or any future relationship agreement in an EU Member State. Does the ability to enforce rights and obligations “within the EU’s legal order” indicate a right of direct action for a UK individual or business before the CJEU in respect of a breach by an EU institution of the agreements?  Further, in retaining the rights of UK individuals and businesses to enforce the agreement before the courts of the remaining 27 Member States, over whom the CJEU retains jurisdiction, the CJEU may still have a role in determining the interpretation of that Withdrawal Agreement or any future relationship agreement if a reference is made to it by a Member State court.

Investor-state disputes

It remains an open question whether there will be a role for investor-state dispute resolution by way of arbitration (or by an investment court system as proposed by the EU Commission and enshrined in the CETA and EU-Vietnam FTA) should either the Withdrawal Agreement or any future relationship agreement contain substantive investment protection provisions.  In such a case, the investor could avail themselves of the protection because it has made an investment which qualifies for substantive protection within the scope of that agreement (not solely because of nationality).

If the future relationship agreement does not provide for direct enforcement of substantive rights by investors, UK investors in certain jurisdictions may benefit from bilateral treaties which pre-date the EU membership of the other Member State (such as the UK-Hungary BIT), and which remain in existence.

Remedies

The Paper emphasises the necessity of remedies and safeguard measures to mitigate any negative effects from noncompliance with the Withdrawal Agreement or any future relationship agreements. The possibility to suspend or even withdraw from the agreement is also mentioned. For these remedies, the Paper refers to mechanisms available under CETA, the EEA agreement, the WTO and the EU-Australia agreement on Passenger name Records. In contrast, giving one of the Parties the ability to impose sanctions such as fines, as is now possible within the EU legal system, is referred to in the Paper as “exceptional”.

Conclusion

The Paper takes us little further forward in terms of a concrete and conclusive presentation of the UK’s position on enforcement and dispute resolution, aside from a number of definitive statements regarding the exclusion, so far as possible, of a future role for the CJEU. A number of other options are explored, although no clear picture emerges of the UK’s preferences. As the detail of the Paper, and the repeated references to the CJEU having no “direct” jurisdiction, make clear, much remains to be considered in the negotiation ahead.

For more information, please contact Andrew Cannon, Partner, Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant, Jonas Thierens, Paralegal, or your usual Herbert Smith Freehills contact.

Andrew Cannon

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In the long-running Astro v First Media dispute, the Court of Final Appeal of Hong Kong (CFA) has granted First Media leave to appeal against the Court of Appeal’s decision refusing an extension of time to apply to set aside orders for the enforcement of awards against it. Astro Nusantara International BV and others v PT First Media TBK [2017] HKCFA 50 (Court of Final Appeal of Hong Kong)

The awards that are the subject of the enforcement proceedings were made in Astro’s favour in a Singapore-seated UNCITRAL arbitration. First Media successfully resisted enforcement of the awards in Singapore, on the ground that they were made without jurisdiction. However, having belatedly decided to resist enforcement in Hong Kong, it was refused an extension of time to do so (see our previous post).

The CFA granted to leave to appeal on the following questions of law, on the ground that they are questions of general or public importance:

• What is the proper test for determining whether an extension of time should be granted for the purposes of an application to resist enforcement of an arbitral award under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)?
• In determining whether to extend time for the purposes of an application to resist enforcement of an arbitral award under the New York Convention, is the fact that the award has not been set aside by the courts of the seat of arbitration a relevant factor?

In addition, the CFA granted leave to appeal on the ground that the circumstances are exceptional, in that the judgments below entitle Astro to enforce awards in the amount of over USD130 million, even though (according to First Media) it is accepted in the Hong Kong courts that the awards were rendered without jurisdiction and Astro would not suffer prejudice if an extension of time were granted.

The appeal is to be heard on 12 and 13 March 2018.

(This post was originally published by Practical Law on 23 August 2017. Reproduced with permission.)

Kathryn Sanger

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Herbert Smith Freehills is pleased to announce the launch of a new series of blog posts which will report on the latest developments in the NAFTA renegotiations. The series will run on our Public International Law Blog which provides analysis and commentary on public international law issues.

The series’ opening post provides practical insights to stakeholders in key industries and focusses on the context of the negotiations and the interests and objectives laid out by the states in advance of the talks. It also offers our strategic view of what interested observers should watch for.

Part 2 looks into the (unofficial) US proposal to restructure NAFTA’s investor-state dispute settlement (ISDS) mechanism, transforming it into an “opt-in” regime under which each NAFTA state would elect whether or not to permit investors of other NAFTA parties to bring claims directly against it.

Don’t miss out on further updates, analysis and comment on the upcoming negotiation rounds.  Subscribe to our Public International Law blog by clicking here, and enter your email in the “subscribe” box.

If you have specific questions about how the NAFTA renegotiations may affect your business, please contact Christian Leathley, Partner, Timothy Hughes, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley

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Overview

Since its establishment in 1977, BANI (Badan Arbitrase Nasional Indonesia) has been the most active arbitral institution in Indonesia. With offices across the country, its own rules and procedures and over 100 Indonesian and foreign arbitrators on its list, BANI is well-established and has presided over a steady stream of domestic and international disputes. (Other arbitral institutions exist, but with more limited remits such as Islamic or capital markets transactions.)

For all its success, however (and there can be no doubt that BANI has been a positive influence in the development of Indonesian arbitration), BANI has found itself subject to criticism at various points in its history – most recently that it has been unable to keep up with developments and trends in international arbitration, due to the inflexible nature of its constitution.

September 2016 saw the unexpected establishment of BANI Pembaharuan, a new institution set up to deal with domestic and international general commercial arbitrations. Domestic commentary suggests that BANI Pembaharuan was set up with the stated intention of “institutionalising BANI, not creating a new BANI” (although there is a competing narrative that the BANI Pembaharuan was primarily created because of a disagreement between the BANI’s board members and one of the members of the Indonesian arbitration community).

BANI quickly issued a statement to the effect that it does not recognise BANI Pembaharuan and that its use of the “BANI” acronym is illegitimate. This was followed by multiple proceedings in the Indonesian courts concerning the new institution’s use of the “BANI” name.  Regrettably, this has led to uncertainty as to which institution is rightfully entitled to administer arbitrations where parties have elected to refer to their disputes to “BANI”. Unfortunately, this uncertainty is set to continue for some time, as recent rulings from different courts have been contradictory and are likely to be appealed, prolonging the confusion.

Recent developments

On 29 September 2016 the board members of BANI Pembaharuan commenced an unlawful act action against the governing board members of BANI in the South Jakarta District Court (“District Court”).

BANI responded on 1 December 2016 by filing an administrative lawsuit with the Jakarta State Administrative Court (“Administrative Court”) challenging the establishment and registration of the new institution.

We understand that the Administrative Court rendered its decision in favour of the original BANI.  However, we also understand that the District Court issued its ruling in the first half of last week and found in favour of BANI Pembaharuan, contradicting the effect of the Administrative Court ruling.

To the best of our knowledge, the written judgment of the District Court has not been issued yet. However, based on credible sources within BANI and BANI Pembaharuan, the District Court has issued, amongst others, the following:

• a declaration that the management/administration of BANI by the defendants (i.e. the governing board members of BANI) is unlawful and without legal standing;
• a declaration that the establishment of BANI Pembaharuan under the relevant deed is valid and binding;
• an order directing the defendants to transfer BANI to the plaintiffs (i.e. the board members of BANI Pembaharuan); and
• an order directing the defendants to transfer the premises of BANI to the plaintiffs;

The District Court’s decision is not immediately executable pending any appeal or application for a stay unless the District Court orders otherwise.

According to Professor M. Husseyn Umar, BANI’s Chairman, BANI is currently considering its options and will be releasing an official statement as soon as possible. We will provide an update as official statements from the two organisations are issued or when the official written judgment is released.

A separate but very much connected litigation has been commenced in the Commercial Court on 8 June 2017, where BANI Pembaharuan is requesting the cancellation of the BANI trademark in the name of the original BANI.

Risks and lessons from CIETAC

It is safe to predict that this dispute will continue for quite some time before we have any clarity.  The losing party in each proceeding is likely to try to exhaust all avenues of appeal, which will take years.  Consequently, and unfortunately, the public and the users of BANI arbitration services are left in limbo given the uncertainty as to the status of the two institutions and the validity of arbitration proceedings and awards arranged and issued by either of them during this period.

Comparisons have cautiously been made to the split within the China International Economic and Trade Arbitration Commission (CIETAC) in 2012, when CIETAC’s Shanghai and South China sub-commissions declared independence from CIETAC and established their own separate rules and panel (we covered this in a blog post at the time, here). This caused a great deal of uncertainty, in particular where arbitration agreements pre-dating the split referred disputes to “CIETAC”, and parties subject to clauses referring to “CIETAC Shanghai” or “CIETAC South China/Shenzhen” found themselves in a very uncertain situation, unable to predict where disputes would end up and vulnerable to delay tactics by opposing parties wishing to drag proceedings into Chinese courts. These difficulties were compounded by the inconsistent approach of local courts, which differed across regions in recognising (or not recognising) the new institution’s validity and jurisdiction.

During that period of uncertainty, we advised our clients to file any request for arbitration with CIETAC in Bejing where the arbitration clause referred only to CIETAC, and to amend any clause referring to CIETAC Shanghai or CIETAC Shenzhen to reflect the new entities or seek specialist legal advice where amendment is not possible.

A cautious approach

A similarly cautious approach should be adopted in Indonesia during this period of uncertainty.

With respect to existing arbitration agreements which refer disputes to “BANI” arbitration, it seems prudent – for the time being – to construe this as reference to the original BANI and not to BANI Pembaharuan.  Until September 2016, BANI was the only arbitral institution in Indonesia for the resolution of general commercial disputes, and certainly the only institution known by that name. Practically, therefore, references to “BANI” in dispute resolution clauses are unlikely to be construed as references to “BANI Pembaharuan” or anything other than the “original” BANI, at least unless there is some additional contextual evidence supporting this (rather unnatural) inference.

Nevertheless, it remains unclear if BANI (following the recent decision of the District Court) can still administer new proceedings or even continue administering existing proceedings, even if the arbitration agreements which gave rise to those proceedings were signed prior to September 2016.

Wherever possible, therefore, we recommend reviewing arbitration agreements prescribing for BANI arbitration and deciding, with the benefit of specialist legal advice, whether there is any scope for amendment to the clause.

As for new arbitration agreements, we recommend seeking specialist advice before deciding whether to refer any arbitration to BANI or BANI Pembaharuan. Additional wording may have to be included in the arbitration agreement, depending on which institution is referred to, in order to maximise the prospect of enforceability of any eventual award.

Alternatively, serious consideration may be given to alternative rules and institutions such as the SIAC, the ICC or UNCITRAL Rules, for arbitrations seated in Indonesia during the pendency of the dispute between BANI and BANI Pembaharuan.  The choice of rules and/or institution for an Indonesian-seated arbitration would depend very much on the specific circumstances of each case.

A missed opportunity?

It is unfortunate that this important development in Indonesian arbitration (the establishment of a new institution) has been overshadowed by the naming dispute, which could have been avoided by the use of a different name.

If BANI Pembaharuan had differentiated itself from BANI, it would not have been mired in this dispute and it could present a new and potentially attractive opportunity for users of arbitration in Indonesia, for example by implementing its own set of rules with different and modernised features. We understand that it has indeed prepared its own set of arbitral rules, with provisions for third-party involvement in proceedings, hybrid procedures such as med-arb, and the interpretation of arbitration agreements. These are commonly found in the rules of other international institutions and would represent a departure from the present BANI rules.

We will monitor the disputes and provide further commentary in due course.  We will also review and report further on BANI Pembaharuan’s rules and their acceptance and impact with users and the market.

For further information, please contact Alastair Henderson (Partner, Herbert Smith Freehills), Debby Sulaiman (Partner, Hiswara Bunjamin & Tandjung), Gitta Satryani (Senior Associate,Herbert Smith Freehills), Roni Marpaung (Associate, Hiswara Bunjamin & Tandjung) or your usual contact at Herbert Smith Freehills and Hiswara Bunjamin & Tandjung.

Note:

Herbert Smith Freehills and Hiswara Bunjamin & Tandjung have been formally associated since 2000, and are now the the best and longest established collaboration in the Jakarta legal market.

Our combined team of 35 specialist disputes lawyers operates across Southeast Asia from bases in four main cities (Singapore, Jakarta, Bangkok, Kuala Lumpur), providing sector-focused, client-centric dispute resolution and risk advisory services.  We are Asia Legal Business magazine’s Southeast Asia International Arbitration Law Firm of the Year 2017 and we aim to be the regional law firm of choice for complex, sensitive, high value and ‘high stakes’ matters throughout Southeast Asia, and for major international, regional and local disputes.

Alastair Henderson

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Last week, the Dubai International Financial Centre Court issued its decision in Pearl Petroleum Company Limited & Others v The Kurdistan Regional Government of Iraq. The Court upheld its earlier decision which recognised two LCIA arbitration awards totalling US$2 billion issued against the Kurdistan Regional Government of Iraq (the “KRG”) and dismissed KRG’s arguments (1) that the enforcement proceedings should be set aside on the ground that the Court did not have jurisdiction to make such orders against it, and (2) that the DIFC Court should not decide issues of immunity and its waiver.

1. Background

On 4 April 2007, KRG and Dana entered into a gas exploration and production contract governed by the law of England and Wales (the “Contract“). Dana later assigned 50% of its interest in the Contract to Crescent. In 2009, both Dana and Crescent assigned their interests in the Contract to Pearl.

Thereafter, a dispute arose between KRG and Pearl and, on 21 October 2013, Pearl began LCIA arbitration proceedings against the KRG. Ultimately the Tribunal issued two partial awards in Pearl’s favour ordering the KRG to pay Pearl approximately US$ 2 billion plus interest.

Following this, Pearl filed an application in the DIFC Courts asking the DIFC Court to: (1) recognise the two LCIA awards; (2) enforce the two LCIA awards and (3) grant permission for alternative service of the order recognising and enforcing the two LCIA awards. Pearl could then enforce such an order in Iraq through the 1983 Riyadh Arab Agreement for Judicial Cooperation (the “Riyadh Convention“).

On 29 May 2017, the DIFC Courts issued an ex parte order granting Pearl’s application (the “Recognition Order“).

2. The KRG’s Appeal

On 3 July 2017, the KRG applied to set aside the Recognition Order relying on sovereign immunity as a defence to enforcement. The KRG also asserted that the DIFC Court did not have jurisdiction to issue the Recognition Order, as the sovereign immunity defence raised public policy questions which could only be determined by the UAE’s federal legislature and courts in Abu Dhabi. In particular, KRG argued that the DIFC Court did not have jurisdiction to determine issues of immunity, the existence of the doctrine of sovereign immunity in the UAE and the DIFC, or its ambit or extent (whether absolute or restrictive) or any issues of waiver.

3. DIFC Decision

The DIFC Courts upheld the order recognising the LCIA awards for US$2 billion. (It set aside the order granting permission for alternative service, but that analysis is not the subject of this briefing).

Sovereign Immunity

The contract between Pearl and KRG was governed by the law of England and Wales and provided that “the KRG waives on its own behalf and that of [The Kurdistan Region of Iraq] any claim to immunity for itself and its assets”. KRG argued that the DIFC Court should not decide (1) whether sovereign immunity exists as a doctrine in the UAE and the DIFC, (2) what the extent of any such immunity might be and (3) any question of waiver; as these were questions to be determined at a federal level.

The DIFC Court however decided that it could enforce the Awards without having to address the nature and extent of sovereign immunity. The Court acknowledged that whether or not an entity is to be recognised as a state is a separate question, and whether the UAE recognises another state may be a matter of its foreign policy. However, there could be no doubt that the judiciary decides when it comes to construing a waiver. As the Court said “the proposition that the extent of the contractual waiver should be determined by any entity other than a court, when determining its own jurisdiction over a defendant is not tenable.”

The Court examined the parties agreed waiver of immunity and held “where a clear and unequivocal waiver from suit and enforcement has been given in a contract, there is no good reason why effect should not be given to the words used. Where the construction is governed by English law and any relevant rules, customs or practices of International law, the conclusion which the DIFC court should reach is clear. Effect must be given to the plain words and they cannot be rendered meaningless by the means that the KRG suggest. To accede to the submission of KRG here would be to render the wording meaningless. It would destroy the bargain that the parties had made and enable a state or state body to succeed on an argument that it had expressly agreed not to run.” In simple terms, there were no questions of sovereign immunity to refer to the federal legislature and courts, because any immunity which might have existed had been waived.

The Court also looked at the arbitration clause and declared “it is clear that the KRG entered into an agreement to arbitrate in London … and that in agreeing to London as the seat of the Arbitration, it also agreed to the English Court as the supervisory court. It was inherent in that agreement, in my judgment, that the KRG waived any immunity from the exercise of the Court’s supervisory powers under English law …” As a result, the DIFC Court has endorsed the principle followed in many other jurisdictions that, where a state has agreed to submit to arbitration, it has left itself open to the processes necessary to make the arbitration effective.

The decision also raised an interesting comparison between DIFC and Hong Kong. In support of its case, the KRG had relied on the decision of the Court of Final Appeal of the Hong Kong Special Administrative Region in Democratic Republic of the Congo v FG Hemisphere Associates LLC. In that case, the Hong Kong Court had held that the Democratic Republic of the Congo’s defence of sovereign immunity raised questions of public policy which could only be decided by the Chinese legislature and referred the defence to the standing committee of the Chinese National People’s Congress.

The DIFC Court found that the situation in the DIFC was very different. Hong Kong’s Basic Law required that all issues of “acts of state such as defence and foreign affairs” were to be determined by the Peoples Republic of China. DIFC has no equivalent provision.

Therefore, as the KRG had expressly waived its right to rely on the sovereign immunity defence, the Recognition Order issued by the DIFC Courts against the KRG was upheld.

4. Conclusion

This decision sends a clear message that the DIFC Court will recognise and uphold properly drafted sovereign immunity waiver clauses allowing proceedings and enforcement to continue against states seeking to raise the defence contrary to the terms of the contract. As the DIFC Courts remain a conduit to enforcement in other jurisdictions, such as onshore in the UAE and Iraq, the certainty this decision provides is welcome news for anyone contracting with a sovereign entity.

As the DIFC Court decided that the waiver to immunity applied, it also decided that it did not need to determine whether the law of the DIFC or the UAE includes the concept of state or sovereign immunity. This was something which was debated at length in the proceedings and followers of this case were hoping to receive some clarity on this issue. It is unfortunate that the DIFC Court were unable to clarify the position. This will no doubt be the subject of another dispute in the future. Until then, this case highlights the importance of the drafting of sovereign immunity waiver clauses. In particular, it is essential that parties ensure that such clauses expressly exclude immunity from both suit and execution.

For more information, please contact Craig Shepherd, Partner, Michael Hartley, Associate, or your usual Herbert Smith Freehills contact.

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Michael Hartley

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Herbert Smith Freehills is now accepting applications for two internship opportunities in our international arbitration team in London. The programme offers aspiring arbitration lawyers a chance to work closely with one of the world’s leading specialist arbitration groups.

The two paid internships are for three months each (with no extension), starting in December 2017 or March 2018.

For more details of the role, please click here.

To apply, please visit our careers Page.

Applications must be submitted on or before Friday 22^nd September.

On 6 September 2017 the Belgian Deputy Prime Minister and Minister of Foreign Affairs Didier Reynders submitted a request from Belgium to the Court of Justice of the European Union for an opinion on the compatibility of the Investment Court System (ICS) with the European Treaties.  The Belgian government has made the request in recognition of the concerns raised by the regional assembly of Wallonia about the ICS when it was considering whether or not to sign the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada.

Belgium’s press release has been careful to state that it does not take any position itself regarding the questions which have been put to the CJEU, but hopes to clarify the legal framework in which CETA has been established.

The CJEU has been asked to provide an opinion regarding the compatibility of the ICS with:

1. The exclusive competence of the CJEU to provide the definitive interpretation of European Union law
2. The general principle of equality and the ‘practical effect’ requirement of European Union law
3. The right of access to the courts
4. The right to an independent and impartial judiciary.

Regarding the right to an independent and impartial judiciary, the CJEU is asked to give consideration to certain specific elements including:

• the conditions regarding the remuneration of the members of the Tribunal and the Appeals Body.
• the appointment of members of the Tribunal and the Appeals Body.
• the release of members of the Tribunal and the Appeals Body.
• the guidelines of the International Bar Association regarding conflicts of interest in international arbitration and the introduction of a code of conduct for the members of the Tribunal and the Appeals Body.
• the external professional activities related to investment disputes of members of the Tribunal and the Appeals Body.

Comment

CETA is scheduled to enter into force on a provisional basis on 21 September. Belgium’s request will not affect this deadline as the ICS is a part of the CETA which does not have provisional application and will only enter into force when all EU Member States have ratified the treaty.

However, Belgium’s request may have wider ramifications. The request itself focuses on the ICS very directly. As such, it is difficult to see how the CJEU can avoid issuing an opinion on many aspects of the ICS, including a number of procedural elements. The ICS emerged from the European Commission as a proposed solution to concerns about Investor-State arbitration as a method of dispute resolution and although it has been adopted in 2 signed agreements to date, (CETA and the EU-Vietnam FTA) no such agreement has yet been ratified by all EU Member States and entered into force. Any negative views expressed by the CJEU on that flagship policy have the potential to cause further complications in this sensitive area.

Belgium’s request accordingly adds to an existing and acknowledged concern about EU competence in relation to the conclusion of trade agreements containing Investor-State dispute settlement provisions. The  ECJ ruled in May that the EU-Singapore Free Trade Agreement, which also provides for binding Investor-State dispute settlement, requires ratification by both the EU itself, and by the EU Member States individually.  Jean-Claude Juncker is expected to announce next week that the EU will proceed with separate agreements with third party states on trade and on investment, rather than combining the two into a single agreement. This is no doubt in part a recognition of the potential difficulty in obtaining approval across the EU of agreements including Investor State dispute settlement provisions.

For more information, please contact Andrew Cannon, Partner, Lode Van Den Hende, Partner, Eric White, Consultant, Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Andrew Cannon

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Lode Van Den Hende

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Eric White

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Hannah Ambrose

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Vanessa Naish

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The ICC has recently published its full statistical report: the 2016 ICC Dispute Resolution Statistics. This Report demonstrates yet another impressive year of growth for the ICC. In particular, the ICC announced that 966 new cases were filed in 2016. This represents both a record number of cases filed in a single year and an unprecedented growth of 20% from the previous year. Overall, the large caseload numbers, the geographical spread of parties involved and the size of amounts in dispute point towards the ICC maintaining its position amongst the world’s leading arbitration institutions.

We discuss below the key statistics from the Report.

Caseload

While the ICC had previously seen a steady 1%-3% increase in its caseload from 2012 to 2015, it saw a record 20% increase in its caseload in 2016. The chief reason for this growth was attributed by the ICC to continuing expansion in all continents, but with particular emphasis on a surge in cases from North and Central America and from Africa. Interestingly, there was an increase in the number of multi-party cases, with nearly half of new cases involving three or more parties (43%).

Party nationality and places of arbitration

Nearly 80% of the cases filed at the ICC last year were between parties from different countries. These disputes involved 3,099 parties from as many as 137 different jurisdictions. Filings involving parties from the Americas more than doubled, whilst there was a 50% growth in parties from Africa, and a 22% growth in parties from South and East Asia. The number of parties from Central and West Asia returned to pre-2015 levels (2015 statistics having been influenced by a case involving multiple Israeli parties), whilst the number of parties from Europe remained broadly in line with previous years.

Whilst the three most frequent nationalities of parties filing cases in 2016 were the USA, US Virgin Islands and Belize, this development was attributed to an inflow of multiparty cases involving parties from those jurisdictions. Furthermore, given the Virgin Islands and Belize are popular jurisdictions for incorporation of special purpose vehicles, it is possible that those nationalities may not be truly reflective of the nationality of the disputing parties.

The international reach of the ICC was also reflected in the choice of arbitral seats, with ICC arbitrations seated in 106 cities across the world. Interestingly, the number of African cities chosen by the parties as the place for arbitration rose from 2 to 6 (one arbitration in each of Morocco, Nigeria, South Africa, Tanzania, Egypt, and two arbitrations seated in Algeria), although the total number of African-seated cases remains strikingly low (less than 0.01% of the overall new cases filed).

Sector and size of disputes

In 2016, the ICC saw cases arising from the finance and insurance sector grow to match the number of cases relating to the construction and engineering sector, which sector has historically led to the highest percentage of ICC cases.

Equally noteworthy were the amounts in dispute. The ICC reports that, at US$112,259,575, the ICC’s average amount in dispute is higher than the average sums in dispute reported by other institutions. However, it also noted that a significant proportion of the ICC’s caseload involved disputed sums below US$5 million (39%). This is what has led to the ICC introducing an expedited procedure (see our blog post here).

Emergency arbitration

In 2016, 25 applications were made to the ICC for the appointment of an emergency arbitrator.  Six of the applications were granted in full or in part, with the remainder dismissed or withdrawn. The average time to complete the emergency proceedings was 18 days. Whilst in many court systems, a party who could establish requirements of urgency could get interim relief within a shorter period, this timescale is nonetheless impressive and demonstrates the utility of the EA procedure in circumstances in which the parties may not wish to involve the courts. It also underlines the point that the emergency arbitration procedure, a novelty only a few years ago, has now become an established part of the international arbitration landscape.

Investor-state disputes

There were 7 new ICC cases filed in 2016 based on bilateral investment treaties; six related to investments made by Turkish parties in countries in Africa and Central Asia, and the seventh related to a claim by a Spanish investor against a Central American state. The ICC also provided administrative services in an UNCITRAL arbitration brought by Spanish investors against a Latin American state, and has indicated that it will publish a revised framework for its role as appointing authority in ad hoc cases or those under the UNCITRAL Rules.

Arbitrators

• Nationality

The arbitrators appointed and confirmed to ICC tribunals in 2016 were drawn from 76 different nationalities. There was no change in the six most frequent nationalities appointed or confirmed, with arbitrators from the UK, USA, Switzerland, France, Germany and Brazil being, in that order, the nationalities with the highest percentage of appointments and confirmations.  In terms of region, arbitrators from Europe remain those most frequently appointed, representing 57% of all appointments and confirmations in 2016. 

• Gender diversity

A further noticeable development in 2016 was the increase in female arbitrators appointed, from 136 in 2015 to 209 in 2016, representing 15% of all confirmations and appointments last year. In 2016, 41% of appointments of female arbitrators were made by the parties (representing a 62% increase in party appointment of female arbitrators from 2015); 46% were made by the ICC Court; 12% were appointed as president of the tribunal by co-arbitrators; and 1% by another appointing authority. The Equal Representation in Arbitration Pledge, to which the ICC is a signatory, was launched in May 2016. It may therefore be expected to have a more significant impact on the gender diversity statistics in ICC arbitration and other institutional arbitration for 2017, and it is to be hoped that this welcome trend continues.

Awards

The Report also provides information about the awards approved by the ICC Court within 2016. The ICC notes a rise in the number of partial awards, suggesting that this “may reflect an increasing trend to bifurcate proceedings”. The statistics highlight the ICC Court’s role in scrutinising awards, with only 3 out of 479 awards in 2016 approved without any comment at all.  However, there is no data available as to the extent of the scrutiny involved, and in our experience many of the comments submitted to the tribunals in question will relate to format or formality.

The Report does not, however, contain information on the duration of ICC proceedings in total nor the amount of time it has taken ICC tribunals to render an award following the close of proceedings. Moreover, it will be interesting to see whether future Statistical Reports address the practical application of the ICC’s policies of applying discretionary reduction in the tribunal’s fees for a delay in producing awards and reducing the ICC’s own administrative fees for undue delay during the scrutiny process. These policies were introduced in introduced in January and July 2016 respectively (see our blog posts here and here).

Overall, a very strong year indeed for the ICC and one which draws out some interesting trends, particularly in terms of the varying sources of arbitral referrals to the institution.

For more information, please contact Craig Tevendale, Partner, Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Craig Tevendale

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Hannah Ambrose

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Vanessa Naish

Professional Support Consultant
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In this short video in our Observations on Arbitration series, Professional Support Consultants Vanessa Naish and Hannah Ambrose talk about the myths and realities surrounding the arbitration process.  The discussion draws out key points and common misconceptions about arbitration, touching on costs and duration, confidentiality, party autonomy, availability of interim relief, summary judgment and enforcement of arbitral awards.

For more information, please contact Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant or your usual Herbert Smith Freehills contact.

Hannah Ambrose

Professional Support Consultant
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+44 207 466 7585

Vanessa Naish

Professional Support Consultant
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+44 207 466 2112