The decision comes as a surprise in the market – not least because consulting firms ordinarily limit liability to cases of gross negligence or wilful misconduct. However, the case will not only have implications for the consulting industry. The unusual publicity it has gained raises questions concerning the conduct of arbitral proceedings generally, namely, what confidentiality obligations there are for the parties to an arbitration. The topic has repeatedly been debated in this blog (see, for example, Ileana Smeureanu’s post on the situation in the Philippines) and in the arbitration community generally. Confidentiality is, in fact, said to be one of the most important advantages of arbitration as a dispute resolution mechanism.

Practical experience such as the Märklin case shows, however, that confidentiality in arbitration is not guaranteed. Notwithstanding the long debate, numerous court decisions and legislative activity, there is still no generally accepted answer to the controversial question of whether an agreement to arbitrate implies an obligation to treat the proceedings and the attendant information as confidential. In England, there is a long line of case law according to which the confidentiality of arbitral proceedings is an implied obligation of the parties to an arbitration agreement (for a recent decision see Emmott v. Michael Wilson & Partners Ltd. [2008] EWCA Civ. 184 at [81] per Collins LJ). A similar position has been adopted by legislators elsewhere (see, for example, section 18(1) of the recent Hong Kong Arbitration Ordinance 2011 which expressly forbids the parties to disclose information relating to the arbitral proceedings).

However, senior English judges have expressed doubts as to the merits of this “confidentiality by default” rule (Associated Electric and Gas Insurance Services Ltd v. European Reinsurance Co of Zurich, [2003] UKPC 11 at [20] per Lord Hobhouse), and the English approach has, in fact, met with little sympathy elsewhere. In other jurisdictions such as Australia, Sweden and the U.S., the courts have refused to recognise an “implied confidentiality obligation”. In France, some court decisions have held that there was such an obligation (Aïta v. Ojjeh, [1986] Revue de l’Arbitrage 583; Bleustein v. Société True North et Société FCB International, [2003] Revue de l’Arbitrage 189). However, the new arbitration law of 2011 now provides specifically that in international arbitration, a duty to treat information confidentially cannot be implied from an arbitration agreement (there is an implied confidentiality for domestic arbitration under art. 1464(4) of the Nouveau Code de Procédure Civile, but under art. 1506, this does not apply in international arbitration). When the ICC prepared the edition of its new 2012 Arbitration Rules, it was decided not to include a general duty of confidentiality. Under the new rules, an arbitral tribunal may make orders to enforce confidentiality obligations (art. 22(3) ICC Rules 2012), but the legal basis for such obligations must be found elsewhere, for example, in an express agreement between the parties.

Several arguments have been put forward in favour of an implied duty of confidentiality: Allegedly, confidentiality is part of the legitimate expectations of the parties to an arbitration agreement. Moreover, it is said that the private conduct of arbitral proceedings would become meaningless if the parties were at liberty to communicate freely about the arbitration. It is also feared that, without a duty of confidentiality, parties may face what is described as “trial by press release” instead of the neutral and objective dispute resolution mechanism that arbitration is expected to provide.

The latest legislative reform in France shows, however, that these arguments are far from compelling. There is little evidence that parties to an arbitration agreement actually expect that this agreement implies a confidentiality obligation. At any rate, against the background of widely diverging approaches of statutory law and case law, it is doubtful whether such expectations are legitimate. In fact, recent research from Queen Mary University suggests that for many users, confidentiality may not be that important after all (2010 International Arbitration Survey: Choices in International Arbitration, p.30). To imply a duty of confidentiality may also conflict with the principle of party autonomy, because it leads to confidentiality by default even where the parties never considered the issue at the time when the arbitration agreement was concluded. Where parties actually wish to secure confidential treatment of the proceedings, they are free to make an express agreement to that effect, and it is universally accepted that courts and arbitral tribunals will enforce such an agreement (subject to few exceptions such as legal provisions requiring the parties to make information public or requiring the public conduct of court proceedings in support of arbitration). In such circumstances, there is no need to imply an obligation of confidentiality.

A specific feature of the Märklin case suggests that there may be another argument against an implied confidentiality obligation: in fact, AlixPartners announced that it will apply to have the partial award set aside. Most recent figures suggest that about 20% of arbitral awards are not being complied with voluntarily and have to be executed. This figure is unsatisfactorily high and shows that in many instances, arbitration fails to provide a resolution of the dispute that is accepted by all parties. One way to improve this situation is to increase the degree of transparency in arbitration. Such transparency may have positive effects on the quality of arbitral awards: it would, in fact, create an additional incentive for arbitrators to conduct the proceedings in a way that stands the test of public debate, and to make persuasive and diligent decisions. In that respect, the recent legislative reform in France has much to commend itself.

At any rate, the debate on confidentiality is far from being settled. The latest trend in case law and legislation is, however, not to imply a duty of confidentiality in an agreement to arbitrate. Against that background, potential litigants will have to determine well in advance what needs they have with regard to confidentiality, and to include appropriate and express agreements in the arbitration clause, or at least in the terms of reference set up at the beginning of the arbitral proceedings. Without express agreements of that sort, confidentiality is certainly not a feature which parties should rely on when choosing arbitration as a dispute resolution mechanism.

In a recent decision issued on 7 November 2011 on a request for annulment of a partial award on jurisdiction rendered by the Court of Arbitration for Sport (“TAS”), the Swiss Supreme Court recalled and applied its previous jurisprudence on the interpretation of pathological arbitration clauses (Case 4A_246/2011).

The case arose out of a contract between a football club and an agent relating to the transfer of a player. The contract contained a dispute resolution clause which provided that “[t]he competent instance in case of a dispute concerning this Agreement is the FIFA Commission, or the UEFA Commission, which will have to decide the dispute that could arise between the club and the agent.” After a dispute arose between the parties, the agent initiated arbitral proceedings before the FIFA Players’ Status Committee, a body tasked with adjudicating disputes arising from transfers of professional football players. However, on the basis of its internal rules, the Committee declined jurisdiction on the grounds that the agent was a legal person and not a natural person. The agent therefore requested the Zurich High Court (Obergericht) to appoint an arbitrator, which it did. However, the sole arbitrator subsequently found that he did not have jurisdiction on the grounds that the parties had agreed to submit disputes to arbitration under the rules of a sports arbitral institution.

Finally, the agent initiated arbitration before the CAS. In a partial award issued on 17 March 2011, the CAS ruled that it had jurisdiction over the dispute. However, the football club appealed to the Swiss Supreme Court pursuant to Article 190(2)(b) of the Swiss Private International Law Act (“PILA”) to annul the partial award on the ground that the CAS had erroneously held that it had jurisdiction, one of only two grounds available to a party to challenge a partial award (Article 190(3) PILA).

The football club first disputed that the Parties had even agreed to exclude the jurisdiction of the State courts. However, the Supreme Court, interpreting the Parties intentions according to the principle of normative consensus (“Vertrauensprinzip”), found that this was not the case (para. 2.3.1). The Court noted that while the dispute resolution provision did not expressly mention arbitration, the use of the terms “competent instance” and “decide the dispute” could be understood in good faith to mean that any disputes would be decided by one of the two football bodies in a binding manner, to the exclusion of the State courts. According to the Court, the provision did not give rise to doubts which would warrant a restrictive interpretation of the Parties’ alleged intention to exclude the jurisdiction of the State courts.

Of greater interest, however, is the manner in which the Court addressed the football club’s arguments that the arbitration clause was defective to the degree that it was impossible to apply, or alternatively that it had been extinguished by the decision of the FIFA Commission not to accept jurisdiction.

The Court began by setting out the approach in Swiss law to pathological provisions in arbitration agreements, which it defined as provisions which are incomplete, unclear, or contradictory (para. 2.2.3). As the Court explained, as long as such provisions do not relate to essential elements of the arbitration agreement, such as the binding submission of disputes to an arbitral tribunal, they will not in and of themselves lead to its invalidity. Rather, Swiss law requires courts and tribunals to look for a solution, either through interpretation or if need be by means of completing the contract, which respects the fundamental will of the parties to submit their dispute to arbitration. In this sense, Swiss law imposes a broad approach to interpretation of pathological arbitration clauses, once the parties’ intention to exclude State courts in favour of arbitration is established.

On this basis, the Court ruled that the fact that neither institution identified in the arbitration clause could have, according to their own rules, decided on a dispute between the parties, did not necessarily entail the nullity of the entire arbitration clause. According to the Court, the CAS had properly sought to determine whether the designation of the institutions was so essential to the arbitration agreement that the parties would not have agreed to submit their disputes to arbitration had they known that those institutions could not assert jurisdiction (para. 2.3.2). It further found that the CAS’s determination that the parties would nevertheless have agreed to submit their disputes to arbitration was not based on abstract considerations but rather on concrete indications arising from the facts of the case. In particular, the CAS considered that the parties’ designation of two alternative football associations in the arbitration clause indicated that they were not attached to one particular institution, and that, above all, they wanted to submit their dispute to an arbitral tribunal which was familiar with issues surrounding transfers of professional football players.

Having established that the institutions designated by the parties did not constitute essential conditions of their arbitration agreement, the Court turned to determining whether submitting the dispute specifically to the CAS was consistent with the Parties’ intentions. In doing so, the Court sought to correct the partial nullity of the arbitration clause, to the extent possible, by means of filling in the missing elements. The test applied by the Court was to ask what the parties would hypothetically have agreed to had they been aware of the defects in their arbitration clause (para. 2.3.3). After a review of the facts, the Court concluded that the parties would have agreed to submit any disputes directly to the CAS. In reaching its decision, the Court was particularly influenced by the fact that, by designating FIFA and UEFA, both of which are based in Switzerland, the parties indicated their intention to submit their disputes to an arbitral tribunal with seat in Switzerland, and that they intended such disputes to be decided by a sports organisation which was familiar with the football transfer market. In this context, the Court took into consideration that decisions of the FIFA Players’ Status Committee on transfers of players could in fact be appealed to the CAS.

In sum, the Supreme Court’s decision in case 4A_246/2011 is a good example of the broad and flexible pro-arbitration approach which has characterised the Court’s jurisprudence on pathological arbitration clauses in cases in which the parties’ intention to arbitrate is established. Despite being faced with an arbitration clause with clear references to two institutions which could not adjudicate the parties’ dispute, the Court did not find the clause to be invalid as a whole, but rather engaged in an exercise of filling in the missing elements in order to ensure that the fundamental intention of the parties to arbitrate their dispute was upheld. It is also noteworthy that in the first step of its analysis, namely establishing the intention of the parties to submit their dispute to arbitration, the Court did not consider the absence of the words “arbitration” , “arbitral tribunal”, “arbitrator”, or similar terms in the dispute resolution clause (which it itself acknowledged in para 2.3.1), to be decisive.

Much to the surprise of many seasoned international arbitration practitioners, the D.C. Circuit vacated a US$ 185.3 million Final Award against Argentina, essentially nullifying a hard-fought, four-and-a-half year arbitration between the parties. The court vacated the Award on the basis that the “arbitral panel rendered a decision . . . without regard to the contracting parties’ agreement establishing a precondition to arbitration,” namely the clause in the Argentina-UK bilateral investment treaty (BIT) requiring claimants to submit disputes to the Argentine courts for 18 months before resorting to arbitration. In the underlying UNCITRAL arbitration, the tribunal had considered whether the dispute was admissible without having been first submitted to the Argentine courts. It ruled that such submission was not essential because it in this case it would have been an exercise in futility: the claimant could not have obtained relief anyway from the Argentine courts, given the Republic’s apparent interference with access to the courts and its punishment of all would-be local court litigants by excluding them from contract renegotiations. The tribunal concluded that in these circumstances, the 18-month provision could not “be construed as an absolute impediment to arbitration,” and therefore deemed BG Group’s arbitration claims admissible.

By contrast, the D.C. Circuit concluded that this entire analysis was misplaced, since in its view the BIT terms—which it analyzed principally by reference to U.S. domestic law on contractual intent to arbitrate, rather than under the Vienna Convention—were clearly designed to require prior recourse to the Argentine courts. The court found that the tribunal had exceeded its powers by permitting direct access to arbitration contrary to that expressed intent. Indeed, the court suggested that under U.S. case law, the tribunal should not have even engaged in an analysis of the feasibility or usefulness of prior resort to the Argentine courts, because as a threshold matter it had no proper authority under the BIT to admit such issues for substantive consideration.

In the most narrow sense, the D.C. Circuit’s decision did not directly repudiate the years of fairly consistent rulings by ICSID and UNCITRAL tribunals with respect to the 18-month local court requirement under similar Argentine BITs. That is because the BG Group tribunal had not relied on the BIT’s most-favored-nation (MFN) clause, upon which prior tribunals had rested their decisions, even though BG Group did argue that point. Nonetheless, the D.C. Circuit’s analysis implicitly suggests that it also might have overturned an MFN-based decision, since by the Court’s logic, the tribunals who rendered those decisions likewise would have had no authority to bypass the BIT parties’ allegedly clear intent to require local court proceedings in all circumstances. If the decision is read in this broader way, it can be seen as impugning the core logic of many prior decisions. This would include Maffezini v. Spain (ICSID Case No. ARB/97/7, 1 September 2000), where the tribunal allowed an Argentine investor to invoke (by way of an MFN clause) the Chile-Spain BIT to avoid the domestic court prerequisite in the Argentina-Spain BIT; Siemens v. Argentina (ICSID Case No. ARB/028, Decision on Jurisdiction, 3 August 2004), where the tribunal permitted a German investor to invoke the Argentina-Chile BIT to proceed directly to arbitration; National Grid plc v. Argentina (UNCITRAL, Decision on Jurisdiction, 20 June 2006), where the tribunal permitted a British investor to invoke a more favorable term in the Argentina-US BIT to avoid 18 months of litigation in the Argentine courts; and several other cases in the same line. Until the D.C. Circuit’s opinion, the jurisprudence appeared to be converging on consensus regarding the 18-month waiting requirement, even though much controversy remained about the broader application of MFN clauses in other, less procedural, contexts.

Now, with one 17-page decision, a national court not only has completely up-ended the result in one major case, but also in the process unsettled what most observers had thought to be a progression towards certainty, predictability and finality with respect to this issue. Much can—and undoubtedly will— be written about the substance of the court’s analysis. But at heart, it serves as a reminder that some degree of uncertainty is inherent in international arbitration in any forum, so long as there is any mechanism for review and challenge of arbitral awards. This is just as true for the “alternative” routes of ad hoc UNCITRAL or non-ICSID institutional arbitration as it is for ICSID arbitration, since all non-ICSID mechanisms allow for national court challenges under the New York Convention, and national courts (once vested of the matter) may be tempted to apply their own national laws, including on core issues such as arbitrability. Arguably, the uncertainty of national court review may be even greater than that of ICSID annulment review, since most national court judges are comparatively unfamiliar with investment treaty jurisprudence and may be less concerned about contributing to the growth of consensus or emerging doctrine. The choice between the two systems, thus, should not be framed as a quest for predictability and finality, but rather as something more fundamental: a decision about which decision-makers will evaluate challenges, and what rules and standard of review they will use in deciding.

By Jean E. Kalicki and Dawn Yamane Hewett

The plaintiff, Diana Kolev, bought a used Porsche from an auto dealership in California. The car developed serious mechanical problems. When the dealership refused to honor Ms. Kolev’s warranty claims, she sued the dealership and manufacturer in federal court. The dealership petitioned to compel arbitration, pursuant to a mandatory arbitration provision in the sales contract for the car. The trial court granted the motion, sending the case to binding arbitration.

Ms. Kolev appealed the district court’s order granting the petition to compel arbitration. On 20 September 2011, a divided panel of the Ninth Circuit – over a pointed dissent by Judge N. Randy Smith – reversed the district court’s decision.

The panel majority held that Ms. Kolev’s claims were not subject to arbitration, notwithstanding the mandatory arbitration clause in the sales contract for the Porsche. The court’s ruling was based on the Magnuson-Moss Warranty Act (“MMWA”), the 1975 federal law that governs consumer product warranties. The panel acknowledged that “the text of the MMWA does not specifically address the validity of pre-dispute mandatory binding arbitration.” Opinion at 1025. However, the panel then observed that under the MMWA, Congress had delegated rulemaking authority to the Federal Trade Commission (“FTC”) to implement the statute. According to the panel, the FTC “issued a rule prohibiting judicial enforcement of such provisions with respect to consumer claims brought under the MMWA.” Id.

The panel then examined whether the FTC’s rule (as the panel understood it) was valid. The panel performed the two-step “Chevron” inquiry that the United States Supreme Court has applied to judicial review of federal agency action, named after the very influential 1984 Supreme Court decision that established the standard. Under step one of the Chevron inquiry, the court examines whether Congress, in passing the statute, expressed a clear intent on the issue in question. Then, if Congress’s intent is not clear, the court examines whether the agency’s interpretation of the law is based on a permissible construction of the statute. If the construction is permissible, then the court will defer to the agency’s interpretation.

The Kolev court first found, under Chevron step one, that Congress had not expressed a clear intent on the issue, because the MMWA did not specifically address binding arbitration. Next, under Chevron step two, the court found that the FTC’s supposed interpretation of the MMWA as prohibiting mandatory arbitration provisions in warranty contracts was a permissible one. Therefore, the panel deferred to the FTC’s rule that barred the enforcement of mandatory arbitration clauses in warranty agreements. Accordingly, the panel reversed the district court’s ruling compelling arbitration and remanded the case to the district court to adjudicate Ms. Kolev’s warranty claims in the first instance.

The Ninth Circuit’s decision flew in the face of the Federal Arbitration Act (“FAA”), the 1925 law that requires the enforcement of arbitration agreements and resolves any doubts about the validity of such agreements in favor of arbitration. To reach this remarkable result, the panel in Kolev made multiple errors of law and logic – many of which were pointed out in Judge Smith’s dissent.

Error One: The court’s Chevron inquiry should have ended before it began, because the FTC’s rule regarding dispute settlement mechanisms did not even apply to the mandatory arbitration agreement in the auto sale contract in this case. Thus, the Ninth Circuit’s entire opinion was based on an incorrect premise.

The MMWA “encourage[s] warrantors to establish procedures whereby consumer disputes are fairly and expeditiously settled through informal dispute settlement mechanisms.” 15 U.S.C. § 2310(a)(1). The MMWA authorizes the FTC to issue rules establishing minimum requirements for such “Mechanisms.”

However, contrary to the Kolev majority’s assumption, the MMWA does not say that all means of alternative dispute resolution are “Mechanisms” subject to the FTC rule. In fact, in its rulemaking, the FTC made clear that “nothing in the rule precludes the parties from agreeing to use some avenue of redress other than the Mechanism if they feel it is more appropriate.” 40 Fed. Reg. at 60,211. Such other avenues, according to the FTC, specifically included “binding arbitration.” Id. The Kolev majority simply ignored this discussion. Although the FTC’s Mechanism rule prohibits the use of binding arbitration in warranty agreements that contain Mechanisms, that does not mean that all arbitrations are Mechanisms.

This conclusion is further bolstered by the text of the MMWA. The MMWA provides that when a warranty agreement includes a valid Mechanism, “the consumer may not commence a civil action … unless he initially resorts to such procedure.” 15 U.S.C. § 2310(a)(3). However, the whole point of binding arbitration is that a party cannot “commence a civil action” after the arbitrator has rendered a final award. Arbitration is an alternative to proceeding in court, not a precursor to it. The notion that the MMWA’s section on Mechanisms was supposed to cover all binding arbitration betrays an apparent misconception of what arbitration is.

Error Two: Having misread the FTC regulation as barring the arbitration clause before it, the Ninth Circuit then failed to consider whether the FTC had the statutory authority to impose such a rule. As Judge Smith pointed out in dissent, the MMWA did not permit the FTC to restrict all binding arbitration provisions in warranty contracts. Rather, the law only empowered the FTC to impose requirements on pre-litigation Mechanisms as defined in the MMWA. But as discussed above, a mandatory binding arbitration clause is not necessarily a Mechanism. Thus, even if the FTC had intended to prohibit all binding arbitration – and as discussed above, it did not – it would have had no statutory authority to do so. Because the FTC lacked that authority, the court need not and should not have proceeded to the Chevron inquiry to determine whether the agency rule was permissible.

Error Three: Step one of the Chevron test is to determine whether Congress has directly spoken to the question at issue. The Ninth Circuit found that Congress had not directly spoken to the question of arbitration in the MMWA, and therefore moved onto Chevron step two.

However, the court ignored the fact that another Congressional enactment – the FAA – has spoken directly to the question of the validity of arbitration agreements. That should have been the end of the inquiry: the Kolev majority acknowledged that the text of the MMWA does not, on its face, evidence a Congressional intention to prohibit mandatory binding arbitration clauses. Thus, the clear pro-arbitration intent of the FAA should have controlled, requiring the invalidation of a rule barring all arbitration agreements.

Error Four: Finally, the Ninth Circuit upheld its reading of the FTC regulation under Chevron step two, finding that such a regulation was based on a permissible construction of the MMWA. The court put forth various rationales for its defense of a prohibition on binding arbitration provisions in warranty agreements. None of these rationales is persuasive, however, because none address the facts that (1) the MMWA does not evidence an intent to limit the FAA’s clear policy favoring arbitration, and (2) the U.S. Supreme Court has repeatedly repudiated agency hostility to the advantages of arbitration.

Implications of the Kolev Decision

The Kolev decision, however questionable its result, does raise the difficult question of how to resolve any conflict between the proverbial irresistible force of Chevron agency deference and the immovable object of the FAA’s pro-arbitration presumption. When these two strong legal principles come into tension, what wins? If a federal agency reads an ambiguous statute as allowing it to prohibit arbitration, should that interpretation be granted the normal deference afforded agencies under Chevron?

A reading of the Supreme Court’s arbitration jurisprudence suggests that when arbitrability is at issue, the strong federal policy favoring arbitration short-circuits the normal Chevron analysis. Rather, the FAA and the New York Convention limit the deference courts normally give to federal agencies in interpreting statutes. In Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987), the Supreme Court held that if a party wants to show that another federal law limits the pro-arbitration scope of the FAA, “[t]he burden is on the party opposing arbitration . . . to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue.” With respect to international agreements in particular, the Supreme Court has held that courts should recognize “subject-matter exceptions” to arbitrability only where Congress has “expressly directed the courts to do so.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 639 n.21 (1985).

Thus, under McMahon and Mitsubishi Motors, a party claiming that the federal policy favoring arbitration is trumped by another law must demonstrate a clear Congressional intent in that law to limit arbitration. Under this standard, whether the agency’s construction of the law is “permissible” under Chevron step two should make no difference. Rather, the only question is whether the statute’s text, history, or purpose shows that Congress clearly intended to curtail the arbitrability of certain disputes. If it did not, then the agency cannot take action that limits arbitration, no matter how reasonable or permissible its implementation of the law otherwise is.

This is also the preferable policy. The United States, like other signatory countries to international arbitration conventions, has committed to recognize and enforce consensual arbitration agreements. National legislation in the United States supports this goal as well. A government agency should not be able to negate the objectives of these laws and treaties based on the flimsiest statutory grounds. The Kolev decision illustrates this problem.

In any event, the Ninth Circuit panel’s decision may not be the last word on this issue. On 4 October 2011, the parties moved the Ninth Circuit for en banc rehearing of the decision. Moreover, unless the Ninth Circuit corrects its own error, it will have created a split with the U.S. Courts of Appeals for the Fifth and Eleventh Circuits, both of which have come to the opposite conclusion regarding the enforcement of arbitration agreements under the MMWA. This split among federal circuits may eventually persuade the United States Supreme Court to weigh in on the issue and resolve this important question.

By Gary Born and Adam Raviv

Drawing on US Supreme Court decisions on class arbitration, Professor Abi-Saab finds that there is such a fundamental difference between regular bilateral arbitration and mass proceedings that “special consent” is required for mass proceedings and that this consent cannot be deduced from a simple consent to arbitration.  With respect to ICSID practice, he notes that cases of multi-party arbitration have either proceeded with the consent of the parties or without objection from the respondent.  With respect to mass claims processes in international law, he notes that the practice has been to establish a specific process for the mass claims with the consent of the parties and that the only exception to this uniform practice is the United Nations Compensation Commission, which was established by the Security Council under its Chapter VII powers.

Professor Abi-Saab then turns to a subsidiary objection.  Even if in principle Argentina’s consent to arbitration could be interpreted as consent to mass claims, he finds that the Tribunal does not have the power under the ICSID Convention and Arbitration Rules to adopt procedures for dealing with a mass claims proceeding.  He takes issue with the majority’s distinction between a modification to the arbitration rules without party consent (which, according to the majority, a tribunal may not do) and adopting procedures to address the handling of mass claims (which, according to the majority, a tribunal is entitled to do).  In Professor Abi-Saab’s view, the Tribunal has arrogated itself “the power to set aside, in large measure, the existing Rules of Procedure, and replacing them by another set of rules of its own; acting as a legislator, be it for one case.” (para. 208)

With respect to the concept of admissibility, Professor Abi-Saab appears to affirm that it has a role to play in international arbitration.  He notes that “[g]enerically, the admissibility conditions relate to the claim, and whether it is ripe and capable of being examined judicially, as well as to the claimant, and whether he or she is legally empowered to bring the claim to court.” (para. 18), but goes on to state that “none of these conditions has anything to do with the determination of the scope of consent whether to the general or the  special jurisdiction of tribunals”.  He also notes that “regardless of the classification of the objection as a plea to jurisdiction or to admissibility, the result of the non-fulfilment of the requirements should have been the same, the dismissal of the case.” (para. 25).  He thus takes issue with the approach of the majority, which he views as deciding questions of admissibility in its own discretion based on of its own subjective “balancing of interests” (para. 261).

Although the majority’s decision on consent is certainly controversial, it is sound in principle.  Unlike an arbitration clause in a typical commercial contract, offers to arbitrate in investment treaties are open to the world of qualified investors.  The offer to arbitrate is made to investors with investments.  In principle, this offer to the world should be able to be accepted by a multitude of investors.  If there is consent to arbitrate where one shareholder holds 100,000 shares, why is there not equally consent when there are 100,000 shareholders each holding one share?

Professor Abi-Saab is undoubtedly correct that the existence and scope of a Tribunal’s powers go to jurisdiction.  For example, where an investment treaty provides that a tribunal’s remedial powers are limited to the granting of damages, it would be an excess of jurisdiction for the tribunal to order restitution of property or the specific performance of a contract. However, the Dissent is misguided in finding that the Tribunal exceeded its powers in adapting procedures for a mass claim arbitration.  While it is true that the Abaclat proceedings might diverge from the usual ICSID proceedings, the ICSID Arbitration Rules provide a tribunal significant discretion in how proceedings are organized.  While denouncing the majority’s decision as “replacing” (para. 219) the ICSID Arbitration Rules, the Dissent does not provide any specific examples of where the majority’s proposed adaptation to the proceedings would be contrary to the ICSID Arbitration Rules.  In sum, the Dissent appears to equate what happens in the usual ICSID proceedings with what the ICSID Arbitration Rules require.  For example, the ICSID Rules say very little about the mechanics for taking and considering evidence.

The Dissent expresses valid concerns with the procedures the Majority proposes for the simplification of the examination of claims and whether these procedures satisfy due process.   Nevertheless, it is not possible to say ex ante that simplified procedures for the examination of evidence will necessarily breach the Respondent’s due process rights. The Majority states in conclusion that:

 … the Tribunal remains obliged to examine all relevant aspects of the claims relating to Claimants’ rights under the BIT as well as to Respondent’s obligations thereunder subject to the Parties‘ submissions.  Thus, it is the manner in which the Tribunal will conduct such examination which may diverge from usual ICSID proceedings (para. 533).

Due process is not ignored by diverging from “usual ICSID proceedings”.  The form and mechanics of proceedings are, and should be, a function of the claims to be decided and the evidence to be assessed.  As the Majority notes:

Notwithstanding the high number of Claimants involved, the Tribunal must examine not only the elements necessary to determine its jurisdiction (i.e., the nationality of the Claimants, their status of investor and the existence of their investment, etc.), but also those necessary to establish Claimants‘ claims and relating to the merits of the case (i.e., the existence of a breach by Argentina of its obligations under the BIT, the effect of such breach on Claimants‘ investment, etc.). Thus, the high number of Claimants may not serve as an excuse not to examine such elements and adaptations to the procedure may therefore not affect the object of the Tribunal‘s examination. (para. 529).

The task ahead for the Abaclat Tribunal is gargantuan.  Examining all elements of the claims and ensuring that the Respondent is accorded due process will be extremely time consuming.  Even if one may well wonder if an ad hoc Tribunal of three busy arbitrators is the best mechanism to address this kind of dispute, the majority was correct to find that it can hear a mass claim.

This post is written by Andrew Newcombe as a member of the ITA Academic Council.

The dispute arose out of an arbitration clause in a joint venture agreement which provided for disputes to be resolved by three arbitrators who “shall be respected members of the Ismaili community and holders of high office within the community”. Mr Hashwani challenged the validity of this requirement on the basis that it was caught by the anti-discrimination provisions contained in the Employment Equality (Religion and Belief) Regulations 2003 (the Regulations).

At first instance, David Steel J rejected this challenge on the ground that arbitrators were not “employees” within the scope of the Regulations (which defined “employment” as “employment under…a contract personally to do any work”). He held that even if the Regulations did apply, the case fell within the GOR exception in the Regulations which applies in cases where an employer has an ethos based on religion or belief and being of a particular religion is a GOR for the position in question.

The Court of Appeal overturned this decision on the basis that an arbitrator was an employee of the appointing parties, providing services under a “contract personally to do any work”. The Court of Appeal also held that the GOR exception could not save the arbitration clause because no particular religious requirements were necessary for the discharge of the function of an English seated tribunal determining the dispute in accordance with English law.

The Supreme Court unanimously overruled the Court of Appeal decision, holding that an arbitrator’s role is not “naturally described as one of employment at all” and he is in effect a “quasi-judicial adjudicator”. The Court explained that although an arbitrator may provide services on a personal basis he “does not perform those services or earn his fees for and under the direction of the parties”; rather an arbitrator is an “independent provider of services who is not in a relationship of subordination with the parties who receives his services”.

Although the Court’s conclusion on the first issue that arbitrators are not employees was dispositive of the matter, the majority considered the GOR issue as it had been fully argued (Lord Mance, who delivered a separate judgment concurring with the majority on the employment issue, preferred not to deal with it).

The issue before the Supreme Court was whether the requirement that arbitrators be of a particular religion or belief (and by extension, other cultural or personal characteristics) can constitute a genuine, legitimate and justified requirement. Observing that this was on objective question for the Court, the majority rejected the reasoning of the Court of Appeal that an English law dispute in London under English curial law does not require an Ismaili arbitrator, as “too legalistic and technical”. The majority quoted with approval the observations of the first instance judge citing ethos of Ismaili community for dispute resolution contained within the Ismaili community, and observed that an arbitrator of the Ismaili community would bring with him or her an understanding of the parties’ conduct and moral and ethical codes which would assure the parties of an acceptable arbitration procedure in which they could have particular confidence.

The Court’s decision demonstrates an understanding that, besides the functional component in terms of application of a given national law to the dispute, arbitration has a very significant process-based dimension which is largely left to the discretion of the arbitrators by most national arbitration legislations, major institutional rules and other international codes (such as the UNCITRAL Model Law), subject only to certain safeguards necessary in the public interest. The exercise of this discretion and an arbitrator’s approach to the resolution of the dispute are bound to be influenced by a number of characteristics linked to his/her nationality, cultural background, ethos, legal training and experience. Indeed, even if, in fact, an arbitrator is not so influenced, the objective perception of the parties would always be otherwise. This point is well illustrated by the different attitudes and practices of arbitrators from diverse legal, cultural and regional backgrounds, which might manifest themselves in a predisposition towards adversarial or inquisitorial or conciliatory approach, or attitude towards confidentiality, written or oral procedures, disclosure, interpretation of contracts, treatment of witnesses and promotion of settlement etc. For instance, it has been observed that in East Asia and Middle East, social norms and values may have a greater role in shaping resolution of disputes and tendency may be to structure arbitration in a conciliatory fashion, in contrast with the Western approach which generally gives primacy to legal formality, set procedures and written agreements.

In practice, and in light of these considerations, it is a common trend for parties to incorporate requirements in their arbitration agreements which decisively influence the choice of a prospective arbitrator, ranging from nationality and language to expert knowledge or training in a specific industry, legal discipline or applicable law. By upholding the arbitration clause in Jivraj, the Supreme Court has acknowledged this practice and thereby strongly endorsed the ethos of consent and choice on which dispute settlement through arbitration is premised.

Matthew Gearing
Partner, Allen & Overy LLP

Manish Aggarwal
Associate, Allen & Overy LLP

(Allen & Overy LLP acted for the International Chamber of Commerce (the ICC) as intervener in the appeal, arguing for the Court of Appeal’s ruling to be overturned)

Given that the Court of Appeal had reached the opposite view, however, this was no foregone conclusion. The practical significance of this development should not be underestimated. The Supreme Court has delivered an important and very welcome outcome.

The facts do not need to be repeated at length, not least because by now they may be very familiar to anyone reading this blog. The parties had entered into a joint venture agreement which contained an arbitration clause. The arbitration clause provided for specific and unusual appointment criteria: “All arbitrators shall be respected members of the Ismaili community and holders of high office within the community.”

Was this a valid arbitration agreement? Mr Hashwani said not, arguing that it was void because it purported to discriminate on the grounds of religious belief. He said that the clause could not stand because the UK Equality (Religion and Belief) Regulations 2003 (giving effect to Council Directive 2007/78 EC) (the “Regulations”) prohibited employment discrimination on this basis.

At first instance, David Steel J rejected that case, essentially on the grounds that arbitrators could not properly be construed as being employees of the parties appearing before them. It is not easy to argue with that. However, the Court of Appeal then caused considerable dismay by holding that the arbitration agreement was discriminatory under the Regulations. It got worse: the Court of Appeal found itself unable to sever the discriminatory criterion from the rest of the clause, with the outcome that the arbitration agreement was void.

In order to reach that decision, the Court of Appeal of course had to find that an arbitrator is an employee for the purposes of the Equality Regulations – on its face, a surprising conclusion, and one based upon the premise that an arbitrator is somehow directly employed by the parties under “a contract personally to do any work.”

By upholding Mr Jivraj’s appeal, the Supreme Court favoured the approach of the first instance judge, David Steel J, over the line taken by the Court of Appeal. The Regulations did not apply, because in English law an arbitrator is not an employed person under “a contract personally to do any work.”

An arbitrator is, instead, an “independent provider of services”, a “quasi-judicial adjudicator” [whose] “functions and duties require him to rise above the partisan interests of the parties and not to act in, or so as to further, the particular interests of either party…he must determine how to resolve their competing interests. He is in no sense in a position of subordination to the parties; rather the contrary.” No-one who has served as an arbitrator, appeared before one or submitted a dispute to arbitration could argue credibly with any of this. Lord Clarke’s summation indicates, in diplomatic and veiled terms, just how badly the Court of Appeal missed the mark: “it is in my opinion plain that the arbitrators’ role is not one of employment under a contract personally to do work.”

There was a second issue, which was, if the Regulations did indeed apply, whether or not an arbitrator ‘employee’ could be employed by reference to discriminatory religious criteria because belonging to that faith was a “genuine occupational requirement for the job”. Unsurprisingly given the anti-discriminatory purpose of the Regulations, it is not easy to satisfy this test. It is strictly applied. On these facts, however, the majority of the Supreme Court found that the test would have been satisfied – so that even if the Regulations applied, and an arbitrator was an employee, then the arbitration clause would have been upheld in any event because it would have been a “genuine occupational requirement” that the arbitrator be a respected member of the Ismaili community. Lord Mance did not express a final view on this point.

The consequences of the appeal being upheld are much less draconian than those that would have followed had it been dismissed. They can probably be shortly stated: there will be less scope to query London as a good choice as an arbitral seat; London law firm model forms will change back to their pre-Jivraj incarnation; and, if they wish to resolve their dispute through arbitration, Messrs Jivraj and Hashwani will have to identify arbitrator nominees from the Ismaili community (which, given that the case has been described by counsel for Hashwani as a ‘hot potato’ within that community, may be no easy task).

This first point raises a question of anecdotal evidence. Throughout the life of the Jivraj saga, colleagues advocating the merits of arbitral seats competing with London for business have often pointed to the Jivraj factor as a reason not to touch London with the proverbial barge pole. But was the significance of the factor always overstated? How often, in reality, was the Jivraj factor determinative in causing parties to avoid London as an arbitral seat?

As for the judgment itself, it will not be easy to find an arbitration practitioner or client who believes that the Supreme Court got it wrong on either point, but any contrary views would be very welcome.

If there is such an “employment” contract, this would be one in which:

• the “employer” cannot give instructions as to how the “employee” is to work or what outcome he is to achieve;

• the “employer” cannot remove the “employee” without an order of the Court;

• the “employee” is immune from suit; and

• the “employee” owes a duty to act fairly and equally to all his “employers”.

According to Mustill & Boyd, the appointment of an arbitrator “is not like appointing an accountant, architect or lawyer”. In fact, “it is not like anything else”.

At first instance, the English Commercial Court appears to have taken this view. In his 26 June 2009 judgment in Jivraj v. Hashwani, Mr. Justice Steel stated that the closest analogy to the role of an arbitrator is that of a judge. However, a judge does not have a contract with the parties. Where do arbitrators fit in? Do they operate in unique legal circumstances?

The Court of Appeal took a different view: in its decision of 22 June 2010, it held that there is a contract between the parties and the arbitrators, and agreed that “the precise nature of the relationship between the arbitrator and the parties to the dispute is irrelevant”.

Further, the Court of Appeal stated that appointing an arbitrator is “no different from instructing a solicitor to deal with a particular piece of legal business, such as drafting a will, consulting a doctor about a particular ailment or an accountant about a tax return”.

Following the considerable debate which ensued in the arbitration community after the Court of Appeal’s decision, we now eagerly await the decision of the U.K. Supreme Court, which heard the appeal on 6 and 7 April 2011. Much anticipation surrounds the decision. The fact that both the LCIA and the ICC acted as interveners demonstrates the degree of importance that the arbitration community gives to this case.

At issue in Jivraj v. Hashwani is whether a term in an arbitration agreement providing that all arbitrators shall have a particular religious belief is discriminatory under employment regulations (the Employment Equality (Religion or Belief) Regulations 2003). The regulations would apply if the arbitrators were considered employees of the parties, although an exception is provided in the regulations if the religion or belief is found to be a genuine occupational requirement. In this case, the parties had stipulated in their arbitration agreement that all three arbitrators shall be respected members of the Ismaili community (part of the Shia branch of Islam). One of the parties, Mr. Hashwani, tried to appoint an arbitrator who was not of the Ismaili faith, and Mr. Jivraj objected.

Whereas Mr. Justice Steel found, at first instance, that the relationship between the parties and the arbitrator is not a contract of employment for the purposes of the employment regulations, the Court of Appeal found that arbitrators are employees under the regulations because they act under “a contract personally to do any work”. Consequently, the Court of Appeal held that the term in the parties’ arbitration agreement was unlawful. It also rejected the argument that the term was a genuine occupational requirement.

Significantly, both the Commercial Court and the Court of Appeal agreed that if the religious requirement in the arbitration agreement is unlawful, then not only this term, but the whole of the parties’ agreement to arbitrate, will be void.

The ongoing debate within the arbitration community, ever since the Court of Appeal’s decision, has not focused primarily on religious belief stipulations in arbitration agreements, but rather on nationality requirements – whether arbitration agreements providing for the nationality of arbitrators could also be found void by English courts (or by other countries’ courts applying English law), on the basis that too they are discriminatory under English equality legislation (namely under the Equality Act 2010). Whereas it is unusual for an arbitration agreement to require that arbitrators have a particular religion or belief, it is very common for parties to provide for the nationality of arbitrators – either expressly or through the incorporation of institutional rules, including the ICC, LCIA and UNCITRAL rules (e.g. in order to support the arbitrator’s perceived neutrality).

Since the Court of Appeal issued its decision, many legal advisers have decided to revisit the advice they have given their clients on arbitration clauses. Some have advised their clients to err on the side of caution and disapply the nationality restrictions in institutional rules.

Although the validity of nationality stipulations is certainly an important issue, the U.K. Supreme Court may also wish to address one of the wider implications in this case, turning on the nature of the relationship between the parties and the arbitral tribunal. Much has already been written on the status of arbitrators: for example, one of the leading commentaries, Redfern and Hunter on International Arbitration, suggests the position of the arbitrator may be considered to be governed by contract, or by status. Under the former school of thought, favoured in civil law jurisdictions, the arbitrator is appointed by, or on behalf of, the parties to the arbitration to perform a service for a fee (interestingly, we should note here that the tradition of dispute resolution within the Ismaili community is apparently such that no remuneration is sought or accepted by the arbitrator). By contrast, the “status” school of thought recognizes that arbitrators perform judicial or quasi-judicial functions.

Pending the outcome of the U.K. Supreme Court decision, arbitration practitioners can hope that the Court will provide certainty and clarity with respect to the effect, if any, of English anti-discrimination regulations and legislation on the appointment of arbitrators. But it will also be most interesting to see whether the Court will take the opportunity to discuss and define the precise nature of the relationship between the parties and arbitrators under English law. The decision of the Supreme Court has the potential to confirm, or re-define, the fundamental legal status of arbitrators. The answer to this question is not merely theoretical – it may have a significant impact on the status of English law, and of London, in international commercial arbitration.

Paul Cowan & Heloise Robinson
White & Case LLP, London

Thank you for taking the time to present your firm’s international arbitration practice, and also for the copies of the brochure and monthly newsletter. The many recent wins by your firm and the published articles demonstrate convincingly that you are quality professionals with a high-standing in the community.

I’m certain it was not your intention to make us feel as though we were just fungible in-house counsel holding the purse strings of a generic company on your prospective clients list. Yet the message may not always be what was intended. I therefore thought it might be useful to provide candid feedback about how your presentation was perceived.

There is a lot to be said for understanding your audience.

Just to give one good example, we were surprised that your presentation was focused entirely on arbitration and did not mention mediation at all. We in-house folks sometimes have the impression that external counsel view our interest in the subject as a cute personal hobby. It has actually been major company initiative for more than a decade, with the emphasis only been increasing as we globalize our operations.

Our desire to see more of mediation is not exactly hidden from view. We and some of our peer companies – Northrop, Shell, Nestlé – have provided substantial resources and even funding to help start the International Mediation Institute (IMI), a successful and growing initiative to promote quality and transparency in mediation across borders. We are also active with the CPR Institute, a leading mediation think-tank, and many of the company’s lawyers speak publicly and have published about the benefits of mediation to resolve international commercial disputes, including (and especially) those subject to arbitration. A mediation requirement is often used as a risk-mitigator in the dispute clauses of our international contracts, a pre-requisite before initiating arbitration or court litigation.

It may be that there are practitioners in your firm with mediation experience, or maybe even lawyers in your group with an interest in broadening their skills. If so, we missed an opportunity to discuss how your firm might fit with our own aspirations.

As for the competitiveness of your fees, I imagine this topic comes up a lot in your pitches to in-house counsel, given the amount of time you spent discussing how you could help us “save” on costs. You might have noted that was when my colleague, the one sitting on my left, began to doze off. Or maybe that was me. It’s not that we are not interested in saving costs (although we speak in terms of cost avoidance, not savings, since whatever we spend is still money out the door); it’s just that claiming competitive hourly rates and right-sized teams is, well, apparently part of every law firm pitch.
Maybe you could be the firm that will propose something truly different to get our attention on costs? If not, then maybe just say in passing that you’re as competitive on fees as your competitors and leave it at that.

Finally, it seemed to us that much of your presentation was focused on landing the really big cases, which undoubtedly would be revenue-earning for any firm. The truth is, as we tried to explain, those cases are rare in our world. Most of our disputes are what you might call “physiological”, if that term can be applied, or simply a “cost of doing business”. They are sizeable enough to make a difference to our managerial colleagues, but in the low millions (or less) usually will not justify legal fees that run into the six figures. This is especially so when you consider that, on top of your fees, we’d still have to pay arbitrators, institutions, experts, and various incidental expenses associated with an international arbitration.

We haven’t found a good way to resource those types of cases and, to be honest, neither have your competitors, as far as we can tell, even applying the most competitive of competitive rates. Fortunately for us, most international arbitration is not fast-moving. This allows parties, if they so desire, to find solutions other than hiring the arbitration team of a law firm. We might try to settle the case on our own, or mediate, or even conduct the arbitrations in-house, without outside counsel. That’s a luxury that the timing of international arbitration affords us. It is not something we are set up to do with fast-paced disputes like injunctions in the US or adjudication proceedings in the UK. For those types of disputes, we’re almost always going to need external help.

Since the pace of arbitration lends itself to building internal company competencies, perhaps that might have been an area your skilled team could help us with? It wouldn’t mean huge revenues, but it might lead to a closer relationship.

And this takes us back to my initial example of mediation. To understand why we are strong believers and how your practice might fit with us, you would have needed to go deeper in understanding who we are as lawyers, how we operate as a company, and what kind of reputation and image we try to put forward.

I hope that you’ll take my comments as constructive ones, and meant with good intentions. You really seem to be a good team of lawyers, and I’m certain you will make another client very happy.

Fungibly yours,