It is rather interesting to read in the news about how some governments have chosen to “fund” their own government. One government went so far as to simply clear out the checking accounts of small businesses and not-for-profit organizations (”NGOs”). Another government, not necessarily seeking funding but presumably disagreeing with the purpose and/or presence of the affected NGO went and seized all of its property and no longer allowed it to remain in its territory.

I am sure that many possible motivators exist for governments to go after organizations not seeking profit but instead seeking to pursue some social or other mission within its borders. Then I was left wondering – would these organizations benefit from investment treaty protections? Obvious hurdles would exist based on jurisdictional reasons, such as whether their investment in the foreign country satisfies the definitions found in investment treaties. In other words, do their investments need to be for a commercial purpose versus just contributing to the economical development of the foreign country at question? Another issue of concern is whether the definition of “national” encompasses organizations which are not-for-profit. Are these also “companies”?

I found a rather interesting article on the matter co-authored by Luke Eric Peterson and Nick Gallus. I found their analysis both thorough and clear with respect to the jurisdictional hurdles in question. What I found interesting, however, was a lack of discussion on the all important practical questions – is it worth it? What would really be the damages and how much of these damages would justify the expense involved in arbitrating the claim?

I see an obvious difference with human rights claims. Then it can simply be a matter of principle and stopping governments from harming basic rights, etc of people. However, when it comes to looking more to the monetary aspect of an NGO’s presence in a foreign country – would the investment (if found as one under the relevant treaty and/or ICSID rules) be large enough to arbitrate? The article does mention NGOs acting as investors in order to receive returns that may be invested back into the NGO and help it further its cause. Should such an investment reach a substantial level (not looking, of course, at the cause and state action aspects also necessary to violate a treaty and at the specific clauses which may be involved) as to justify the rising costs of arbitration. Therefore, it is likely a possible good route for NGO’s to consider in the sense of an added protection, but practically speaking is it realistic?

Another practical consideration not mentioned is the relationships between the NGOs and the governments themselves. It is logical to assume that should a foreign government directly target an NGO, the relationship is already looking bad. Does that automatically mean, however, that the NGO won’t seek to improve its relationship? But what about those actions which qualify for possible treaty protection but do not target a specific organization? Would the NGO want to “rock the boat” with the government any further than necessary? Examples of such actions are what are referred to frequently in reports issued by The International Center for Not-For-Profit Law. It frequently refers to governments changing laws which control how, when and from whom an NGO may receive funding. This type of action may arguably lead to damages in the form of loss funding, etc. Of course, an entirely separate analysis is required to even determine whether past damages precedence would include these, but before even getting that far an NGO may simply not want to further affect its own direct relationship (and hopefully some influence) with the government.

I find the topic fascinating and the article which Luke Eric Peterson and Nick Gallus wrote excellent and thorough with respect to the jurisdictional legal areas. What I am wondering is, would NGOs truly seek this path?

Often viewed as one of the leading locations for international arbitrationss, why doesn’t the state of New York have a separate arbitration act for international arbitrations? Is it simply unnecessary? It is interesting to note in my 2 previous articles, that other states have found it absolutely necessary. Recently, as previously discussed, the state of Florida enacted the UN Model Law on International Commercial Arbitrations (“Model Law”), following the lead of 5 other U.S. states and several leading world jurisdictions. I already discussed some of the points made with respect to replacing the Federal Arbitration Act with the Model Law in my previous articles, but what about New York?

I recently sat in a meeting in which local arbitration professionals were discussing this very topic, briefly. It made me think, why not? As a newly relocated international arbitration practitioner to NYC after spending some years practicing with the Europeans, I thought it was an interesting idea. Certainly, as I heard frequently from my civil law counterparts in Europe, using New York (and even the U.S. altogether) makes many clients and their attorneys apprehensive, to put it lightly. I think most, if not all, of the readers will already know why: discovery. The fear of the fishing games breaking into mainstream international commercial arbitrations located in the US or even using US arbitrators is very real. While practicing abroad, even US attorneys who had spent years practicing abroad would express those same concerns. Sometimes the concerns were expressed to them by clients, others were directly concerned themselves.

Is this a reality? Not in truly international arbitrations with experienced international arbitrators and practitioners, but the fear remains. However, that is not the purpose of this article – yet it is connected. Why not enact the Model Law? Whether it is truly necessary due to the FAA, institutional arbitration rules and other mechanisms that prevent much of New York law playing a large role in the international arbitration itself….still, would it send a good message? Likely yes. So, what am I advocating here? Not just creating a separate international arbitration act to re-enforce the message that the state of New York is a serious player in the international arbitration arena, but to enact specifically the Model Law.

As my previous articles mentioned, the Model Law attempts to reflect a sort of marriage between the civil law and common law perspectives. It is a “known entity”, a familiar environment if you will for those unfamiliar with the realities of choosing the US, and specifically, the state of New York as the situs for the international arbitration.

Could it happen? I heard comments from those arbitration practitioners that were concerned with the reality of getting it through the legislator, but what I did not hear were substantive expressions of concern that it was a bad idea. I cannot say they do not exist anymore than I could read these practitioners’ minds. I can say, no solid argument was presented, but it wasn’t the main purpose of the meeting either. So – what are the reasons? In this economy, are we not all trying to “send the right message”? For that purpose alone – marketing – is it not a viable idea? Please, share your comments to this experienced practitioner, freshly minted in NYC.

Many leading jurisdictions in international arbitration have adopted all or part of the UN Model Law on International Commercial Arbitration (“Model Law”). The question that remains is: Why Hasn’t the United States?

The Federal Arbitration Act does provide many similarities to the Model Law. They both address enforcement of an arbitral award, grounds for setting aside the arbitral award, who has power to determine an arbitral tribunal’s competence, etc. However, it is also within these same categories that the FAA and the Model law differ. Wouldn’t aligning the FAA to the more commonly used Model Law provide greater transparency with the international community?

I have heard many arguments against aligning the FAA with the Model law. Some argue that the FAA’s relationship with the several state arbitration laws make it unnecessary or even inappropriate to modify the FAA to match the Model law. Others argue that with over 80 years of case law history, why change it now? Finally, often when parties opt for institutional rules, any discrepancies are cleared out, resulting in the same or almost the same outcome.

These are viable arguments for sure. Possibly, it wouldn’t be necessary to modify the FAA. However, there is still a matter of perception. Although the United States still enjoys large numbers of international arbitrations being filed here, many attorneys and their respective clients hold a fearful opinion of conducting an international arbitration within the United States. This may very well be premised on the idea of fishing discovery techniques and the fear of those practitioners who do not truly appreciate the difference between the developed hybrid international arbitration system and those more common law influenced domestic arbitration proceedings.

Nonetheless, knowing that the FAA laws also vary in several ways or even leaves items open for the attorneys/clients to then be concerned with state provisions can create a psychological negative reaction. Local counsel, of course, provides the assistance necessary in understanding and applying the FAA and, if appropriate, state laws; however, the decision to arbitrate and under what rules can be made possibly years in advance by other attorneys when the original arbitration clause is inserted in the applicable agreement.
Key areas in which the FAA and the Model Law differ are with respect to the actual grounds available for setting aside an award, who determines the tribunal’s competence, the power to modify or correct an award and appointing arbitrators. Under the Model Law, there are four grounds for setting aside an award which the FAA fails to address altogether, such as when the subject matter of the dispute falls outside of the scope of the arbitration agreement or violating public policy (which has successfully been used in some model law countries). The FAA, in turn, has grounds which the Model Law does not based on corruption and fraud or the “manifest disregard of the law” provision.

Ultimately, although I agree that utilizing institutional procedural rules can truly assist in rectifying any areas of difference, I feel that there are negative perceptions of conducting an international arbitration in the United States. Although possibly ill-founded, the opinion remains and foreign parties often work hard to navigate the choice of law and location for an arbitration agreement away from the United States. The fact that the United States has several years of history, and otherwise appears to flow well, may not greatly influence attorneys who are not comfortable with or sufficiently educated about the benefits of conducting international arbitrations in the United States.

This year, the State of Florida, with significant help from the many international practitioners working in Florida, proposed and passed a bill changing the Florida Arbitration Act to substantially match the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). On May 12, 2010, Governor Crist signed into law Bill CS/HB 821 modifying Florida Statutes Chapter 684. Effective on July 1, 2010, Florida has joined the 6 other US states in becoming a Model Law jurisdiction (Illinois, Texas, California, Connecticut, Oregon, and Louisiana).

With over 50 countries enacting the Model Law, it is a widely accepted and highly regarded model law which in turn provides greater uniformity and predictability in the international commercial arbitration context. In fact, even the list of countries which the UNCITRAL.org provides as having accepted and enacted the Model Law doesn’t provide an accurate reflection of just how universal this Model Law has become. Some countries, such as The Netherlands, were greatly influenced by its principles, enacting its core principles even if the differences remain substantial enough to not be listed on the UNCITRAL’s website.

The Model Law’s aim is to provide greater transparency for international parties seeking arbitration as its dispute resolution mechanism. Through past case law as well as incorporating both civil law and common law elements, foreign players can better understand how the process may work. Specifically, the Model Law standardizes what constitutes an arbitration agreement. It ensures existence of the compentence-compentence principle, and provides a uniform treatment of awards regardless of the country of origin, procedural rules involved, etc. amongst other standardizing attributes. With many jurisdictions having embraced the Model Law, there is a wealthy source of case law interpreting and applying its principles.

The question remains, to be addressed in my next blog: Why don’t more US states follow Florida and the other 6 states’ examples? Even more important is the question: Why the Federal Arbitration Act? Why not, instead, replace it with the Model Law? Hopefully, these questions will invoke opinions and answers as undoubtedly the practitioners worldwide have diverse and varying views on this point. My thoughts will be saved for my next blog, but I wanted to put the idea out there. If these US states and such countries as Australia and the United Kingdom (also common law jurisdictions) fell compelled to enacted its precepts, why not the United States?

The Federal Arbitration Act pre-dates the Model Law by some 60 years, being enacted in 1925. Over the years it has developed its own case law following and wealth of interpretive resources. I have heard comments that the Model Law simply wouldn’t work within the federal structure of the United States Clearly, that is not the case with the individual states (as others have already successfully incorporated the Model Law), but is that true from the federal perspective? Arguments to be considered in the next round include the argument, if it is not broken, why fix it, and why replace the FAA of 80 years of experience with something having only 25 years experience?

Earlier I discussed a possible response to a Respondent’s tactical approach to refuse to pay an advance on costs, referring to a previous article I published. This post invited a reaction from readers which I thought worth noting: What do you do when you represent the Respondent who simply cannot afford the fees? I would argue that this is typically not a concern as Respondents may be very happy for the proceedings to simply stop; however, some Respondents, although the financial underdogs, may feel they have both legitimate defenses and even valid counterclaims. Below I discuss a recent case and ask some questions about possible motivations. In this post, I hope to invoke some responses and insights from readers on this issue.

It may be that the current economic crisis is leading to new situations – Claimants avoiding multiple actions by refusing to pay costs themselves and Respondents basically going into bankruptcy trying to both defend themselves and assert valid counterclaims.

On November 19, 2009, the US Fifth Circuit Court of Appeal issued a ruling on a Respondent’s obligation to pay the arbitral costs. In this particular case, Dealer Computer Services Inc. (“DCS”) v. Old Colony Motors, Inc (No. 09-20049), the parties were involved in arbitral proceedings under the auspices of the AAA Commercial Arbitration Rules. As I understand it, they were to the point of the final oral hearing, and, thus, presumably the parties had expended a chunk of the money to cover the AAA fees and associated expenses (“deposit”). However, likely a result of the economic crisis, the Respondent Old Colony Motors ran out of money and was on the verge of bankruptcy. The arbitrators ordered DCS to cover the remaining fees, but it refused to do so, looking instead to the local trial court to force Old Colony Motors to cover its portion of the deposit. On appeal, however, the Fifth Circuit Court of Appeal held that the decision on who paid what with respect to the arbitration rested with the arbitrators.

Although this case may not present anything new, it is interesting that DCS continued to refuse to cover the deposit on Old Colony Motors’ behalf. It argued that it had paid its portion, which sufficiently covered the fees necessary to hear its claims. The problem was that Old Colony Motors had a counterclaim against DCS. In my previous blog post, the situation was considered from the perspective of the Claimant seeking to pursue the agreed upon proceedings when a Respondent, for tactical reasons, refuses to cover its portion of the costs. What about the Respondent’s perspective? What if the Respondent feels that it has valid defenses and strong counterclaim(s) against the Claimant? In other words, it has its own motivation to continue with the proceedings but fees and arbitrator’s expenses prohibit it from doing so? Are there any tactics a Respondent may employ to ensure continuation of the arbitral proceedings?

In DCS v. Old Colony Motors, mentioned above, DCS was in the business of providing computer systems to car dealerships worldwide and part of the sales agreement involved an on-going purchase arrangement of regular system updates. Old Colony Motors was one of its customers, but at some point in the business relationship, DCS claimed that Old Colony Motors had breached their agreement. It is not difficult to imagine that in light of the current economic climate and the sever hit the automobile industry took as a result, that these parties, particularly the small dealership, were in financial distress. It may have been for this reason that Old Colony Motors simply could not pay its portion of the fees.

What I ask readers of this blog is: what are some options for the Respondent? One possibility is to consider asking the arbitral tribunal to issue an interim award which orders the Claimant to pay the entire deposit (of course, some substantive argument is necessary there) and then take this interim award before the court with jurisdiction and seek enforcement. Of course, the problem with this approach, amongst other reasons, is that it costs more money.

My next question is, particularly in light of this economic crisis – is arbitration, especially through a possibly expensive arbitral institute, truly cost effective? In addition, is it difficult to get an unbiased award from arbitrators when it directly involves their fees? What about those Claimants who have several arbitrations going or are at least frequently before the same arbitral institute, and, thus, the arbitral institute receives a lot of business from the party? Normally, with respect to the final question, I wouldn’t assume it matters, but what about when the arbitral institute has a rule which states it will consider lowering fees when a party is experiencing severe hardship? Do they ever do so?

These are certainly issues which may more frequently arise when representing parties during these economically trying times.

It is interesting to consider how to handle the situation when a party refuses to pay its portion of the advance on costs. I have previously published an article on this matter and, looking to the ICC Rules, would recommend an alternative route to the traditionally referenced ones. I will consider the options that exist when the Respondent fails to pay its portion and what theories, if any, apply. The two most common theories are what I refer to as the Contract Theory Approach and the Interim Measure Approach. I do not intend to discuss in length these respective approaches – looking to articles published by leading arbitral scholars adequately covers this area. Instead, I want to suggest an alternative approach when the ICC Arbitration Rules are in play, which I covered in an article published a few years back. In all the floating commentaries I have seen, I have not noticed any mention of an alternative approach such as this one.

I will first give a quick description of what I mean by the Contract Theory Approach and the Interim Measure Approach. Under the Contract Theory Approach, proponents argue a binding agreement arose between both the parties when they chose in their arbitration agreement to submit their dispute to arbitration. When the Respondent fails to pay its portion of the advance on costs, it has effectively breached the arbitration agreement. In contrast, under the Interim Measure Approach, the paying party requests that the arbitral tribunal issue a provisional measure requesting the non-paying party to cover their portion of the advance on costs or refund the paying party. This last approach can be difficult because it is often challenging to get the provisional measure claim in front of the arbitral tribunal before the entire arbitral claim is dismissed for lack of paying the entire advance on costs; otherwise, the Claimant is forced to pay the entire advance on costs itself.

I suggest considering an alternative route, which I name the Provisional Amount Approach. This approach is designed to operate under the ICC Arbitration Rules, specifically the ICC Arbitration Rules Article 30(1) which states, “After receipt of the Request, the Secretary General may request the claimant to pay a provisional advance in an amount intended to cover the costs of arbitration until the Terms of Reference have been drawn up.”

Looking to Article 30(1), the Claimant may request that the Secretary General determine a provisional amount which Claimant can pay in lieu of the entire advance on costs, to get the case through the Terms of Reference stage. This ensures the formation of the arbitral tribunal. At this point, the Claimant may then request a provisional measure to force the Respondent to pay its portion of the advance on costs under the ICC Arbitration Rules Article 23(1).

This alternative route is an interesting route to consider as it accomplishes four objectives: The Claimant has managed to (1) pay less than the entire advance on costs, (2) work around any procedural issues, (3) get the merits before the arbitral tribunal, and (4) reserve the argument for the final award in case the provisional measure request fails. Moreover, the Claimant may invoke some sympathy from the arbitral tribunal who will no doubt realize the strategic games the Respondent is trying to play!

On November 30, 2009, an arbitral tribunal issued three interim awards for Yukos Universal Limited, Hulley Limited Enterprises, and Veteran Petroleum Limited v. the Russian Federation under the Energy Charter Treaty (“ECT”). These interim awards addressed the issue of jurisdiction over the Russian Federation, analyzing the Provisional Application under Article 45(1) and (2), labeling the following italicized portion of Article 45 as the “Limitation Clause”:

(1) Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations. [italics added]

(2) (a) Notwithstanding paragraph (1) any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph (1) shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository.

(b) Neither a signatory which makes a declaration in accordance with subparagraph (a) nor Investors of that signatory may claim the benefits of provisional application under paragraph (1).

(c) Notwithstanding subparagraph (a), any signatory making a declaration referred to in subparagraph (a) shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations.

In determining whether it could assert its jurisdiction over the Russian Federation, the arbitral tribunal addressed how to apply this Limitation Clause. The overall question was whether the arbitral tribunal should read Article 45(1) and 45(2) as requiring a piecemeal approach as the Russian Federation suggested (i.e. comparing each ECT provision with that of the signatory’s constitution and laws searching for inconsistencies) or follow the Claimant’s principle of provisional application approach (i.e. merely looking at the signatories’ constitution and laws to see whether the principle of provisional application itself would be inconsistent)?

When interpreting the relationships between the ECT Articles 45(1) and 45(2), the Russian Federation argued that two separate regimes existed: (a) inconsistency of laws, literally taken to mean a piecemeal comparison of each ECT provision (Article 45(1)), or (b) making a separate declaration opting out of the provisional application (Article 45(2)). The pertinent point being that the two articles were entirely separate.

In contrast, the Claimants viewed the ECT Article 45(1) as substantive, which can only be invoked by fulfilling the declaration requirement found in ECT Article 45(2). In other words, the ECT Article 45 did not create two separate regimes, but one regime with two provisions giving its substantive and procedural aspects.

To resolve this jurisdictional issue, the arbitral tribunal conducted the following analysis:

Before addressing the overall question, the arbitral tribunal considered the sub-issue of whether a declaration needed to be made, in accordance with Article 45(2) in order to invoke Article 45(1). If not, would a signatory need to give any type of notice or declaration to the other signatories to benefit from Article 45(1)’s Limitation Clause?

The arbitral tribunal relied upon Articles 31 and 32 of the Vienna Convention on the Law of Treaties (“VCLT”) to interpret the ECT provisions. Both parties argued plain meaning and looked to the travaux preparatiores, which these VCLT articles discuss. However, since the arbitral tribunal concluded that it was unambiguous that the Russian Federation’s interpretation (i.e. two regimes) was correct, looking to the travaux preparatoires was unnecessary and inappropriate. The Limitation Clause is, therefore, self-executing. Interestingly enough, the arbitral tribunal did acknowledge that following the travaux preparatoires could lead to a conclusion that only one regime existed had they been applicable.

Second, the arbitral tribunal looked at the plain meaning of the Article 45(1) coupled with the practice of other signatory states to conclude that no formal declaration of any kind was required.

Finally, the arbitral tribunal considered whether or not the Limitation Clause required a principles analysis or a piecemeal clause by clause comparison. It is at this point that the Claimants won the most important point: the award states “In the Tribunal’s opinion, by signing the ECT, the Russian Federation agreed that the Treaty as a whole would be applied provisionally pending its entry into force unless the principles of provisional application itself were inconsistent ‘with its constitution, laws or regulations”. In other words, it is only necessary to consider whether or not the signatories’ laws and constitution conflicted with the principle (i.e. the concept) of provisional application in this treaty.

Concluding that this is not the case with respect to the Russian Federation, the arbitral tribunal noted that the principle of provisional application of treaties was recognized under Russian law. Therefore, the Russian Federation could not utilize Article 45’s Limitation Clause.