One aspect of Chinese arbitration law that is of enduring interest to the international arbitration community is the question of whether Chinese law permits non-Chinese arbitration institutions, such as the ICC, to administer arbitrations in China. In practice, a number of arbitrations have taken place and are currently taking place in China under the rules of the ICC and other non-Chinese institutions. Often the question of whether this is in compliance with Chinese law does not arise, for example where no damages are awarded or where the award is enforced against assets outside of China. But will the Chinese courts enforce awards resulting from Chinese arbitrations administered by foreign institutions? A recent Chinese decision has caused some speculation that this may in fact be possible, despite the traditionally-prevailing view to the contrary, but unfortunately the position remains somewhat opaque.

The starting point is Article 16 of the PRC Arbitration Law, which provides that one of the requirements for a valid arbitration clause is a designated arbitration commission. It is accepted that this provision prohibits ad hoc arbitration in China. But the Arbitration Law does not expressly state whether the designated commission must be Chinese. One pointer towards such a restrictive interpretation is the fact that another part of the Arbitration Law deals with the requirements for establishing an arbitration commission, which must be set up by the relevant department of the People’s Government at municipal level and registered at the applicable administrative department for justice. As a result, it is often accepted that the arbitration commission required under Article 16 must be Chinese.

It should be noted that Article 16 only applies to arbitrations taking place in China, and so Chinese courts will of course enforce ad hoc awards and awards rendered under the auspices of non-Chinese institutions where the place of arbitration is elsewhere.

However, in a court order dated 22 April 2009, the Ningbo Intermediate People’s Court of Zhejiang Province ordered recognition and enforcement of an ICC award issued following an arbitration sited in Beijing. The award was in favour of Duferco S.A., a Swiss company, and against a Chinese company domiciled in Ningbo.

Unfortunately, the Court’s reasoning did not involve an analysis of Article 16. The question of the validity of the arbitration agreement was raised in the enforcement proceedings, but this argument was dismissed on the procedural ground that no objection to the arbitration agreement had been raised prior to the first hearing before the arbitral tribunal (as is required by Chinese law).

The Court found that the award was a “non-domestic award” under Article I.1 of the New York Convention, and that the New York Convention was therefore applicable to the recognition and enforcement of the award, notwithstanding that it was rendered in China. Since the Court found no grounds for refusal under the Convention, it held that the award should be recognized and enforced.

The Supreme Court of China considered similar issues in its review of the earlier decision of the Wuxi Intermediate Court of Jiangsu Province dated 19 July 2006 (Züblin International GmbH vs. Wuxi Woke General Engineering Rubber Co., Ltd). The Züblin case concerned the enforcement of an ICC award under an arbitration clause which provided for arbitration under “ICC Rules, Shanghai,. The Supreme Court in Züblin similarly held that the ICC Shanghai award was a “non-domestic” award under the New York Convention, but in that case it went on to hold that recognition and enforcement should be refused on the basis that the ICC Shanghai clause was an invalid arbitration agreement under the law of the seat, i.e. the Arbitration Law of China, which requires a designated arbitration institution as a mandatory element of an arbitration agreement.

The characterisation of the Züblin and Duferco awards as “non-domestic” has been the source of some debate in China and elsewhere. The Court’s reasoning was that the award was “non-domestic” because it was made under the auspices of the ICC, a foreign arbitral institution. A problem with this finding is that “non-domestic” arbitrations are not regulated by the Arbitration Law, and so the Chinese courts would not have authority to decide on important matters such as the validity of the arbitration clause or applications for setting aside, despite China being the seat, while other national courts would consider such arbitrations to be Chinese for enforcement purposes under the New York Convention, and no other court will have the right to consider applications to set aside the award.

It should be noted that the recent Duferco case is a lower court decision and the Supreme Court was not consulted on the matter since the Supreme Court’s approval is only required for non-enforcement of foreign awards, and not where awards are to be enforced. In Duferco the non-validity point was essentially dismissed on procedural grounds, and so the previous decision in Züblin to the effect that a clause providing for ICC Shanghai was invalid is probably the more reliable statement of Chinese law. In practice, however, the situation will remain somewhat uncertain unless or until the legislature amends the Arbitration Law of China or the Supreme Court clarifies the position. In the meantime, the sensible approach remains for parties to provide either for arbitration in China under the auspices of a Chinese institution or arbitration outside China administered by a foreign institution.

Earlier this year, the Hong Kong Court of First Instance ruled that, in future, when it hears unsuccessful attempts to resist enforcement of arbitral awards under the New York Convention, it will “normally consider” awarding costs on an indemnity basis (i.e., in full, regardless whether they were reasonably incurred). This was a bold pro-enforcement statement by the Court, explicitly designed to remove any incentive for losing parties to “have a go” at avoiding enforcement. This posting considers whether the ruling goes too far in discouraging challenges to enforcement.

In A v R, the applicant obtained an award for US$3 million plus interest and costs in arbitral proceedings in Denmark. It sought to enforce the award against the respondent, a Hong Kong company. The respondent’s argument was that the award involved payment under contractual penalty clauses, invalid under both Danish and Hong Kong law, and that it would be contrary to Hong Kong public policy for the award to be enforced.

The Court rejected the argument. Referring both to English and Hong Kong authorities, it reaffirmed the pro-enforcement rationale underlying the New York Convention, and the wider importance of keeping the public policy exception within narrow limits.

So far, so familiar — courts in developed arbitration centres have good track records in rejecting unwarranted attempts to prevent enforcement of foreign arbitral awards.

The Hong Kong Court, however, went further than many of its pro-arbitration counterparts. While the traditional approach has been for the loser to pay approximately two thirds of the winner’s costs, the Court decided that the respondent should pay the applicant’s costs on an indemnity basis, essentially to punish the respondent for asserting a spurious challenge.

The Court could have stopped there and confined its ruling to the facts at issue, but continued in general terms that:

“Where a party unsuccessfully makes an application [to set aside a New York Convention award], he should in principle expect to have to pay costs on a higher basis. This is because a party seeking to enforce an award should not have had to contend with such type of challenge.”

It added:

“If the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidizing the losing party’s abortive attempt to frustrate enforcement of a valid award… Such a state of affairs would only encourage the bringing of unmeritorious challenges to an award. It would turn what should be an exceptional and high-risk strategy into something which was potentially ‘worth a go’.”

The Court then signaled its future intent:

“Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the Court will henceforth normally consider awarding costs against a losing party on an indemnity basis.”

In other words, A v R turns on its head the long-standing principle in Hong Kong that indemnity costs are restricted to cases with “special or unusual features”, and seeks instead to make such costs orders the norm for enforcement challenges.

It is suggested that the ruling may go too far, and should not be followed elsewhere without careful consideration of its implications. (Note for example that in England, by contrast, the Court of Appeal has emphatically rejected the opportunity to give guidance as to when indemnity costs should be ordered (see Excelsior Commercial and Industrial Holdings Ltd v Salisbury Ham Johnson [2002] EWCA Civ 879).)

Indemnity costs orders are generally made to censure unusual conduct of which a court disapproves, which can include bringing or defending hopeless or near-hopeless cases. That was the position before A v R and it remains so afterwards for all non-enforcement scenarios. A v R was cited in Lau Pik Ngai Ada v To Chun Fung Albert, a District Court judgment given in August 2009. Although, in theory, the A v R ruling was binding on the District Court, A v R was distinguished, with the District Court confining its effect to the enforcement of foreign arbitral awards.

Hopeless challenges to enforcement, designed only to delay or frustrate valid awards, should be, of course, firmly discouraged, and, in appropriate circumstances, should be subject to indemnity costs orders. However, the imposition of a general rule on all enforcement challenges in response to specious arguments advanced in a particular case appears an unnecessarily robust response, and is likely to be counter-productive. There is surely no reason to treat credible enforcement challenges differently from other credible claims.

The obvious counter in support of A v R is that, by referring disputes to arbitration, parties have an expectation that they will be finally settled by a binding arbitration award, and that any costs measures, heavy-handed or otherwise, that make challenges less likely are to be welcomed, not criticized.

The weakness in the argument is that it assumes that any and all challenges to finality are, in and of themselves, anti-arbitration. Regrettably, the reverse, in some cases, is true; the exceptions to enforcement permitted by the New York Convention are serious and substantial, and, importantly, exist for a reason.

Arbitration remains an essentially private method of dispute resolution. Although the vast majority of arbitral tribunals comprise experienced, highly-qualified professionals, many national laws impose no eligibility requirements on arbitrators. The risk remains that something can go horribly wrong.

All arbitration practitioners have horror stories about the problems of enforcing awards in particular jurisdictions. But the injustice of a tainted award, enforced without proper consideration of the New York Convention exceptions, is equally compelling. Enforcing courts must remain mindful of their duty to hear challenges to the bare minimum standards of the award. This new rule from the Hong Kong Courts appears to go unnecessarily far — effectively discouraging reasonable challenges to enforcement — and risks throwing the baby out with the bathwater.

Aloke Ray and Ian Higgins
White & Case LLP
Hong Kong

As arbitration continues its upward trajectory in the world of dispute resolution, eyes have remained fixed on legal developments in China. With the significant growth of international transactions involving Chinese parties, there has been an equally staggering rise in the number of disputes. In China, arbitration has quickly become an accepted method of resolving international commercial disputes.Appreciating the importance of China as an investment – and consequently an arbitration – destination, Freshfields Bruckhaus Deringer’s Cologne office recently hosted a conference on Chinese arbitration for German practitioners and members of the business community on 3 July 2009. Speaking at the event was a delegation from the China International Economic and Trade Arbitration Commission (”CIETAC”), including Xie Changquing, Secretary General, and Wang Chengjie, Deputy Secretary General. Together, they promoted the use of CIETAC, responding to traditional Western reservations towards arbitrating in China by discussing the recent changes made to the CIETAC Arbitration Rules (”Rules”), effective since 2005. Additionally, Helen H. Shi of the PRC law firm, Fangda Partners, focused her presentation on avoiding and managing disputes as a foreign investor in China.

Rise of Chinese Economy and Party Policy Favoring Foreign Investors:
The ever-growing city skylines of cities like Shenzen, Shantou, Zhuhai, and Shanghai have become quite visible measuring sticks for the West, evidencing the growth of the Chinese economy over the past few decades. China has dedicated substantial resources to establish an investment environment attractive to foreign investors, attempting to combat local protectionism and build the professional reputation and competence of the judiciary. Such efforts to revitalize the investment environment have been lauded, but further work remains to be done.

China has opened the country to foreign investors most notably by establishing Special Economic Zones like Shenzen where economic laws are more liberal than those typical to the rest of the country. In 1978, foreign investors were, in practice, confined to joint ventures with Chinese enterprises, but in 1992, wholly owned subsidiaries became the more regularly chosen vehicle, leading to a massive wave of foreign direct investment (”FDI”), reaching US$45 billion between 1997 and 1998, prior to the Thailand-centered Asian market crash.

Although FDI in China has steadily risen since the crash (US$92.4 billion and a 22.6% increase in 2007 alone), there has been close to a 20% decline since the current global crisis began. With its “socialist market economy,” China has defied every traditional economics model applied to it in the past, and is now confident in a rebound once the crisis subsides.

Chinese Arbitration Statistics:
While there are currently more than 200 local arbitration commissions in existence throughout China, CIETAC is the pre-eminent arbitration commission, also handling international cases. Such dominance is evidenced by its issuance, on average, of approximately 600 awards annually. In 2007 alone, CIETAC received 1,118 new arbitration references, a number representing twice as many new cases as received by the ICC in Paris.

The 3 Classifications of Chinese Arbitration:
One of the interesting – and for first-timers, slightly confusing – aspects of Chinese arbitration law is its three-tiered classification system, distinguishing between domestic, foreign-related and foreign arbitrations. These distinctions are important to understand because they affect various aspects of the arbitration, including the treatment of awards during the enforcement stage. Thus, parties must ensure that they are in compliance with their respective classification when drafting arbitration clauses.

Domestic arbitrations are exactly as they sound – arbitrations between Chinese parties involving Chinese transactions which may only be conducted within Chinese borders. Foreign-related arbitrations may be conducted both inside and outside China, and arise when at least one foreign party is involved or the transaction under which the dispute arose has a significant “foreign element” (as further defined by law), but the arbitration is conducted by a Chinese arbitral body. Foreign awards are only those arbitrations conducted completely outside of Chinese borders (including Hong Kong, as it is considered a separate jurisdiction). It is important for foreign parties to be aware that joint ventures operating within China are considered domestic legal persons for the purposes of these classifications and thus not considered foreign-related merely by the presence of a foreign equity holder.

These distinctions are clearly evident in the setting aside or non-enforcement of an award, a process which varies significantly between the three. While foreign awards and those foreign-related awards rendered outside of China are enforceable under the New York Convention or other bilateral enforcement treaties, domestic awards and those foreign-related rendered inside of China are reviewable under different legal instruments.
As such, only those awards rendered physically outside of China are covered by the New York Convention, whether the matter is foreign or foreign-related. As for those proceedings conducted inside China, enforcement is governed by Chinese domestic civil procedure, whether foreign-related or domestic (however, two different regimes will apply). In addition to enforcement, the classification of an arbitration as either foreign-related or domestic will be relevant when determining questions regarding fees and the panel of arbitrators.
Ad Hoc Arbitration in China
One of the most important, and often overlooked requirements of the Chinese Arbitration Law ( http://www.cietac.org.cn/english/laws/laws_5.htm) relates to the availability of ad hoc arbitrations. Under the current law, any arbitration that takes place inside China must be institutional, conducted by one of the 200 nationally recognized institutions. If parties proceed with an ad hoc arbitration, it will be valid only to the extent that the parties may voluntarily comply with the award, but will be unenforceable in Chinese courts. In contrast, if conducted outside of the geographical borders of China, ad hoc arbitration is permissible and such awards are enforceable in China under the New York Convention. Thus, the prohibition goes to the conducting of ad hoc proceedings in China, not to the enforcement in China of an award in an ad hoc proceeding outside of China. For practitioners, it is important to ensure that arbitration agreements do not include any ad hoc provisions to be conducted on Chinese soil.

The 2005 CIETAC Rules ( http://www.cietac.org.cn/english/rules/rules.htm) and the Concerns Raised at the Conference:
The 2005 Rules have brought CIETAC arbitration more in line with the procedures provided for by the rules of the ICC and other Western arbitral institutions. These changes have alleviated some concerns of foreign parties, evidenced by the steady increase of CIETAC arbitrations as the Rules have been revised to bring them closer in line with international standards. However, there are still a few areas where foreign parties remain worried, a fact reinforced by questions raised at the conference. Traditionally, two peculiarities of Chinese arbitration predominate discussions – (1) the integration of mediation in the arbitration process and (2) the rules which govern the selection of the arbitral tribunal – and this event was no different.

Firstly, the “Arb-Med” process is something unique to CIETAC arbitration, a concept traced to a historic focus on amicable resolution and an aversion to litigation (a cultural trait present since Confucius). Both the Arbitration Law and the 2005 Rules provide for mediation at all stages of the dispute resolution process. Article 40 of the 2005 Rules not only encourages arbitral parties to mediate, but allows for the tribunal to “approach” a reluctant party and advise reaching a settlement.

During the presentations, several concerns were raised about arbitrators effectively transforming themselves into mediators, a position that could elicit information which would not have been offered in arbitration. In this scenario, if a settlement is not reached, the arbitrator-turned-mediator can return as an arbitrator, privy to confidential information received in caucus. Although instructed to disregard all information obtained as a mediator, the receipt causes genuine angst in even the most seasoned counsel.

If a settlement is reached, it may be transformed into an enforceable award as long as there is a valid CIETAC clause. Although ICC Article 26 and Rule 30 of the Model Law also provide for similar procedures, the major difference lies in the discretion provided to the tribunal in the ICC and Model Law provisions to refuse issuing an award. Instead, the CIETAC provision, Article 40(6), states that the tribunal “will close the case and render an arbitral award,” effectively ridding the tribunal of any discretion in the matter.

The other central concern raised by the audience has to do with the nomination of arbitrators. Under the 2005 Rules, when parties cannot agree to the appointment of a chairman (common in the adversarial process), Article 22(3) allows the Chairman of the institution to decide. While an accepted practice, absent from the Rules is a nationality restriction which is included in other institutional rules like the ICC. Instead, the Chairman may appoint anyone, including a Chinese national as the chairman, even if the Chinese party has nominated a Chinese arbitrator themselves. In fact, only in a few rare instances is this not the case. Whether or not a true bias exists, the perception of the process leaves parties apprehensive.

A major change in Article 21 allows parties to nominate arbitrators from outside CIETAC’s official Panel of Arbitrators. Previously, parties could only appoint arbitrators included on the list (currently including more than 530 Chinese and 126 Western arbitrators), but today, if both parties agree and the CIETAC Chairman approves, then the parties are free to choose arbitrators from outside the list. While this does give the parties more autonomy, the presumption of panel appointment remains unless a clear provision is found in the arbitration agreement.

Another more general, but significant change is the default nature of the Rules, giving parties the power to alter the CIETAC rules as they wish, a huge step in achieving the desired party autonomy.

The Reporting System:
During the presentations, one of the characteristics of Chinese arbitration receiving the most intrigue was the reporting mechanism used at the enforcement stage. The current mechanism requires an Intermediate People’s Court intending to vacate a foreign-related or foreign award to report to the relevant High People’s Court (”HPC”). If the HPC affirms, then the Supreme People’s Court (”SPC”) makes the ultimate decision. The mechanism has significantly helped to avoid biased or protectionist decisions at the local levels, a development which overcomes criticisms about the time delays in obtaining a final decision caused by such reporting. While certain panelists conceded that changes are needed to better protect the parties, the clear message of the delegation was that it has significantly improved the standards of Chinese enforcement – a position supported by the results.

China as an Arbitration Location – Enforcement Obstacles:
As the government has done much to improve the judiciary, enforcement appears to be less of a problem than generally perceived given that very few awards are actually vacated in China. In reality, the problem is often that local protectionism and Party politics create serious obstacles to recovery, a different creature than enforcement.

An enforcement order from the courts is worth its weight in… well… paper, if there is nothing to enforce that award against. Even with the significant steps taken by Chinese officials to combat local protectionism, it still poses a serious obstacle to recovery. In order to protect influential companies – especially state-run enterprises – who provide significant tax revenue, it is possible for judges to use dilatory tactics, allowing the local party time to create a “pseudo-insolvency” by siphoning off money from the liable entity to subsidiaries and partnerships out of the reach of an enforcement proceeding. Although this may not be a common occurrence, it is a possibility which must be addressed by parties looking to enter into arbitration agreements in China.

Conclusion:
In revising the 2005 Rules, CIETAC has made significant steps towards improving the acceptance of arbitrating international commercial disputes under those rules. While some foreign parties continue to harbor reservations about Chinese arbitration, CIETAC’s policy of promoting its rules outside of China and engaging in open discussions – tackling sometimes critical and difficult questions – will further assist in aligning CIETAC’s practice with internationally accepted principles. By demystifying Chinese arbitration through such candid dialogue, openly addressing such concerns in the coming years, this policy will go a long way in alleviating those concerns remaining in some Western parties.

It is well accepted that state responsibility arises under international law for denial of justice. This might occur, for example, where a state court abuses its supervisory function over an international arbitration. In the investment treaty context, a denial of justice by host state courts would normally lead to a fairly straight forward breach of the fair and equitable treatment standard or other applicable minimum standards of treatment in the investment treaty. What if, however, the treaty’s arbitration clause only provides jurisdiction for expropriation? Can state intervention in arbitral proceedings also result in expropriation? If so, under what circumstances will this occur? The 30 June 2009 award of the ICSID Tribunal in Saipem S.p.A. v. Bangladesh addresses these questions. In this brief comment, I query whether the tribunal’s reasoning with respect to its finding of expropriation is sound.

The facts are relatively straight forward. A construction contract between Saipem and Petrobangla provided for arbitration under the ICC Rules with Dhaka, Bangladesh as the seat of arbitration. A dispute arose and Saipem began an arbitration. During the arbitration, the ICC Tribunal denied several procedural requests submitted by Petrobangla relating to witness statements and evidence. Petrobangla then challenged the ICC Tribunal’s order in local courts and sought revocation of the ICC Tribunal’s authority under the Bangladeshi Arbitration Act of 1940. A local court in the so-called “Revocation Decision” revoked the authority of the ICC Tribunal on the basis that the ICC Tribunal had conducted the arbitral proceedings improperly. The ICC Tribunal continued proceedings despite the local court decision and eventually rendered an award in Saipem’s favour. Petrobangla then applied to set aside the ICC award. The High Court Division of the Supreme Court of Bangladesh denied the application on the basis that, since the ICC Tribunal’s authority had been revoked, the ICC Award was a nullity in the eye of the law: “A non-existent award can neither be set aside nor can it be enforced.”

Saipem then commenced a claim under the Bangladesh-Italy bilateral investment treaty for the expropriation of its investment (the BIT only provided jurisdiction with respect to expropriation claims). In its pleadings, Saipem stated that its claim:

relates to the expropriation by Bangladesh of (i) its right to arbitration of its disputes with Petrobangla; (ii) the right to payment of the amounts due under the Contract as ascertained in the ICC Award; (iii) the rights arising under the ICC Award, including the right to obtain its recognition and enforcement in Bangladesh and abroad; and therefore (iv) the residual value of its investment in Bangladesh at the time of the ICC Award, consisting of its credits under the Contract. All these matters are facets of the same issue. The focus of the Claimant’s case is that its right to payment under the Contract as ascertained by, and incorporated in, the ICC Award has been expropriated by the unlawful decisions of the Bangladeshi courts that revoked the authority of the ICC arbitrators and declared the ICC Award null and void, thus precluding its enforcement in Bangladesh or elsewhere. The net result of all this was, obviously, to deprive the Claimant of the compensation for [the expropriation of] its investment. (Award, para 102).

The Saipem ICSID Tribunal stated that the “primary issue in the present arbitration is whether the intervention of the courts of Bangladesh remained within the limits of their supervisory jurisdiction and whether that intervention amounted to an expropriation” (para. 116). The Saipem Tribunal found that there was an expropriation based on the following reasons:

- the Bangladeshi court actions resulted in substantially depriving Saipem of the benefit of the ICC Award (para. 129);

- the Supreme Court ruling that the ICC Award is a nullity is “tantamount to a taking of the residual contractual rights arising from the investments as crystallised in the ICC Award” (para. 129);

-given the unique circumstances of the case, “substantial deprivation of Saipem’s ability to enjoy the benefits of the ICC Award is not sufficient to conclude that the Bangladeshi courts’ intervention is tantamount to an expropriation. If this were true, any setting aside of an award could then found a claim for expropriation, even if the setting aside was ordered by the competent state court upon legitimate grounds” (para. 133);

- in order to be expropriatory, the court action must also have been illegal (para. 134);

- the Revocation Decision’s finding that the ICC Tribunal proceedings were improper lacks justification, was grossly unfair and amounts to an abuse of the supervisory jurisdiction over the arbitration process (paras. 149-161);

- the intervention also amounted to a breach of Bangladesh’s obligation to recognize arbitration agreements under Art. II(1) of the New York Convention because it completely frustrated the arbitration proceedings (para. 167); and

- the Supreme Court’s declaration that the ICC Award was “non-existent” constituted the “coup de grace” given to the arbitral process (para. 173).

The Tribunal then addressed a number of subsidiary issues, including whether Saipem was required to exhaust local remedies. With respect to quantum, the ICSID Tribunal found that “the amount awarded by the ICC Award constitutes the best evaluation of the compensation due under the Chorzów Factory principle” given that “the expropriated rights at hand were Saipem’s residual contractual rights under the investment as crystallised in the ICC Award” (para. 202).

I now turn to the heart of the tribunal’s reasoning—that the interference in the arbitration proceedings resulted in the expropriation of Saipem’s investment. Part of the challenge of analyzing the ICSID Tribunal’s reasoning is the Tribunal’s shifting description of the expropriated investment. As noted above, Saipem had argued that the expropriated investment was:

(i) its right to arbitration of its disputes with Petrobangla;

(ii) the right to payment of the amounts due under the Contract as ascertained in the ICC Award;

(iii) the rights arising under the ICC Award, including the right to obtain its recognition and enforcement in Bangladesh and abroad; and

(iv) the residual value of its investment in Bangladesh at the time of the ICC Award, consisting of its credits under the Contract.

All these matters are facets of the same issue.

The Tribunal, for its part, describes the expropriation in three different ways:

1. “The Tribunal considers that the expropriation of the right to arbitrate the dispute in Bangladesh under the ICC Arbitration Rules corresponds to the value of the award rendered without the undue intervention of the court of Bangladesh.” (para. 204)

2. “Such a ruling is tantamount to a taking of the residual contractual rights arising from the investments as crystallized in the ICC award.” (para. 129)

3. “Such actions resulted in substantially depriving Saipem of the benefit of the ICC Award.” (para. 129)

So what exactly was expropriated? The Tribunal appears to refer to three different possibilities: (1) the right to arbitrate the dispute; (2) the residual contract rights arising from the investment as crystallized in the ICC award; and (3) the ICC Award.

With respect to the right to arbitrate, there was no finding by the Bangladeshi courts that the agreement to arbitrate was invalid. Technically, the agreement to arbitrate continued to exist after the Revocation Decision. The Tribunal notes that Saipem admitted that a new ICC arbitration could have been pursued, but given the abusive conduct of the Bangladeshi courts, the Tribunal stated this option was unrealistic and a new ICC tribunal would have been exposed to similar risks (para. 169). Thus, it might be said that the right to arbitrate was rendered so in effectual that it was worthless (expropriated). Interestingly, the tribunal equates the value of the procedural right to arbitrate with the value of the ICC Award. The tribunal appears to have assumed that Saipem would have been unsuccessful in any local court action to enforce its substantive contractual rights, or alternatively that mitigation (proceeding with local court action) was not reasonable in the circumstances.

The second formulation “residual contract rights arising from the investment as crystallized in the ICC award” is awkward. Presumably, the residual contract rights refer to the substantive claims under the contract and also the right to arbitrate. But Bangladeshi executive, legislative or judicial authorities never expropriated the substantive contract rights. Thus, we are left with the right to arbitrate. What about the crystallization of Saipem’s rights? In the ICSID Tribunal’s earlier Decision on Jurisdiction, it noted that:

This said, the rights embodied in the ICC Award were not created by the Award, but arise out of the Contract. The ICC Award crystallized the parties’ rights and obligations under the original contract. It can thus be left open whether the Award itself qualifies as an investment, since the contract rights which are crystallized by the Award constitute an investment within Article 1(1)(c) of the BIT. (para. 127).

Crystallization, however, does not create new rights—the expropriated rights remain those under the Contract. The substantive contract rights were not expropriated, while the right to arbitrate was arguably made worthless.

Finally, what about the “substantial deprivation of Saipem’s ability to enjoy the benefits of the ICC Award”? Is this case really about the expropriation of an arbitral award? Neither the Tribunal’s Decision on Jurisdiction nor the Award expressly states that the ICC Award is an investment. The Tribunal leaves open the question whether an Award is ‘credit for sums of money [...] connected with investments’ for the purposes of Article 1(1)(c) of the BIT. However, it would appear that the Tribunal essentially treated the ICC Award as an investment. With respect to the ICC Award, the Tribunal considered that although in theory the ICC Award could be enforced outside Bangladesh, this was not realistic as Petrobangla has no assets outside Bangladesh (para. 130). The tribunal concludes that “the intervention of the Bangladeshi courts culminating in the declaration of the Supreme Court that the ICC Award was “non-existent” substantially deprived Saipem of its rights and thus qualifies as a taking” (para. 130). The reference to “its rights” is unclear – is the Tribunal referring to the rights under the ICC Award or the underlying contract rights?

The ICSID Tribunal’s reasoning would have been improved by a clearer identification of the expropriated investment. Saipem was deprived of the benefits of the arbitration agreement and the resulting ICC Award. Both the arbitration agreement and the ICC Award would appear to fall within the broad definition of investment in the BIT.

With respect to the tribunal’s reasoning on expropriation, the requirement that the Bangladeshi court action be illegal is well grounded. Where a court engages in normal judicial activities such as adjudicating challenges to awards, forfeiture proceedings, or bankruptcy proceedings, the mere fact that an investor suffers a deprivation as a result of the court action will be insufficient to ground an expropriation claim. In these types of proceedings, some form of deprivation may well be a normal part of the proceedings. Expropriation requires that court proceedings breach due process or other applicable international law standards. And, as I have argued elsewhere (§6.6, Law and Practice of Investment Treaties: Standards of Treatment), unlike for claims of denial of justice, there is no requirement to exhaust local remedies where there is a breach of an independent investment treaty standard, such as expropriation.

In a judgment dated June 2, 2009, the Singapore Court of Appeal has upheld a “hybrid” arbitration clause which provided that all disputes should be resolved “by arbitration before the Singapore International Arbitration Centre in accordance with the Rules of Arbitration of the International Chamber of Commerce”.

In the case of Insigma Technology Co Ltd v Alstom Technology Ltd [2009] SGCA 24, Insigma failed in its application to set aside an award rendered by an eminent three-member tribunal in an arbitration that was administered by the SIAC applying the ICC Arbitration Rules.

The decision is to some extent explained by Insigma’s conduct in the matter. When Alstom initially commenced an ICC arbitration, Insigma objected to the ICC’s jurisdiction, arguing that the SIAC could administer the arbitration under the ICC Rules. This caused Alstom to enquire of the SIAC whether they would in fact administer such an arbitration, and then to withdraw the ICC arbitration and commence arbitration at SIAC, which agreed to apply the ICC Rules. Notwithstanding this background, Insigma then argued before the arbitral tribunal and the Singapore High Court and Court of Appeal that the “hybrid” arbitration clause was invalid and void for uncertainty.

While this important factual background was a significant factor in the outcome of this case, the Singapore Court of Appeal set out a number of general principles to be applied in such cases, including the following: (i) where the parties have evinced a clear intention to settle any dispute by arbitration, the court should give effect to that intention even if certain aspects of the agreement are ambiguous, inconsistent or incomplete; (ii) where a clause can be interpreted in two different ways, the interpretation enabling the clause to be effective should be adopted in preference to that which prevents the clause from being effective; (iii) as far as possible, a commercially logical and sensible construction is to be preferred over another that is commercially illogical; (iv) there was no reason why a clause providing for the rules of one arbitral institution to be applied by a similar institution should be too uncertain to be given effect to; (v) a defect in an arbitration clause does not necessarily render it unworkable, since it may often be cured by the assistance of state courts, arbitral institutions and arbitrators, and in this case the clause was rendered workable by the SIAC agreeing to administer the arbitration in accordance with the ICC Rules; and (vi) no policy considerations would bar the SIAC from agreeing to administer an arbitration under the ICC Rules.

Comment

The potential controversy inherent in the Singapore Court’s decision is whether or not the SIAC can truly administer an arbitration “under the ICC Rules” given that the ICC Rules specify steps to be taken by “the Court” which is a reference to the ICC’s International Court of Arbitration. The Court’s role under the ICC Rules includes scrutiny of the draft award under Article 27. In this case, the role of the International Court of Arbitration was performed by the SIAC Board of Directors. The Singapore Court of Appeal’s decision however upheld the clause on this modified basis since it considered that to do so achieved a result that was closer to the intention of the parties than the alternative outcome of declaring the arbitration agreement unworkable. But while the Court of Appeal held that the clause “was rendered certain and workable in the present case by the SIAC agreeing to administer the arbitration in accordance with the ICC Rules” can the uncertainty as to what the parties actually agreed by this clause really be solved by the SIAC unilaterally electing to play a role of its choice? That uncertainly is perhaps demonstrated by the SIAC first having interpreted the clause as providing for arbitration in accordance with the SIAC rules but with the essential features of ICC arbitration that the parties would like to see, such as terms of reference and scrutiny of the award, only for the tribunal later to invite the SIAC to conduct the arbitration “in accordance with the ICC Rules to the exclusion of the SIAC Rules” which the SIAC then agreed to do.

Also controversial is the Court of Appeal’s finding that “The substitution by the SIAC of the various actors … designated under the ICC Rules … was within the degree of flexibility allowed by the ICC Rules.” It is perhaps questionable whether the ICC would agree with this analysis. In practice, of course, the Singapore Court of Appeal was very substantially influenced by Insigma’s own previous assertion to the ICC that the SIAC could administer the arbitration under the ICC Rules.

While in this case the Singapore Court focused on the question of whether an arbitral institution could administer arbitrations under the rules of another institution, arbitral institutions are likely to consider whether they should do so, and what this may lead to. The SIAC’s agreement to administer the arbitration in accordance with ICC Rules potentially raises issues of comity as between arbitral institutions. A possible concern is that the Singapore Court of Appeal’s decision has endorsed this practice, which could conceivably prompt parties to write in such clauses in order to obtain “cut price” ICC (or LCIA) arbitration administered by various other institutions around the world. Parties would be ill-advised to do this however. Although in this case the arbitration clause, and the resulting award, were ultimately upheld, the complexity of this hybrid clause caused the parties to incur costs in appearing before the ICC, the SIAC, the Singapore High Court and the Singapore Court of Appeal. Moreover, it should not be assumed that other courts or arbitral institutions would follow the SIAC’s approach in this case. Hybrid institutional clauses should therefore be avoided.

Richard Hill

On 1 September 2008, the Hong Kong International Arbitration Centre (the “HKIAC”) adopted a new set of arbitration rules, entitled the Hong Kong International Arbitration Centre Administered Arbitration Rules (the “Administered Rules”). In a press release in January 2009, the HKIAC announced that it had already received cases under the Administered Rules.

The Administered Rules supersede the old HKIAC Procedures for the Administration of International Arbitration in accordance with the UNCITRAL Arbitration Rules (the “Old Procedures”).

The Administered Rules set out a comprehensive framework for HKIAC administered arbitration and it is the HKIAC’s intention that all parties wishing to agree to arbitration administered by the HKIAC should use the Administered Rules. This is evidenced by Article 1.3 of the HKIAC Rules which states:

“…1.3 These Rules supersede the HKIAC Procedures for the Administration of International Arbitration adopted with effect from 31st March 2005 (the “Procedures”) save to the extent that the parties have agreed to adopt the Procedures in an agreement made prior to 1st September 2008. Where an agreement to arbitrate made after these Rules have come into effect provides for arbitration under the UNCITRAL Rules administered by the HKIAC, the HKIAC shall be the appointing authority and the HKIAC Secretariat shall invite the parties in such a case to agree to the application of these Rules….”

The Administered Rules are designed for use by parties who seek the formality and convenience of an administered arbitration and are based on the UNCITRAL Arbitration Rules. The HKIAC have stated that they were inspired by the “light touch” administered approach of the Swiss International Rules of Arbitration and that during the drafting process of the Administered Rules references were made to the arbitration rules of different institutions around the world.

Main features of the Administered Rules include:

· The use of more user-friendly language;

· The allowance of more party autonomy in individual cases;

· The Administered Rules are designed especially with Chinese-foreign disputes in mind and are issued in Chinese and English versions;

· All appointments of arbitrators are subject to confirmation by the HKIAC;

· If the parties to an arbitration are of different nationalities, neither the sole arbitrator nor the chairman of a three-member arbitral tribunal shall have the same nationality as any party unless specifically agreed otherwise by all parties in writing;

· The arbitral tribunal is given a broad discretion as to how to conduct the proceedings;

· The arbitral tribunal have the power to, upon the application of a party, allow one or more third persons to be joined in the arbitration as a party, provided that such third person or persons and the applicant party have consented to such joinder in writing;

· The arbitral tribunal is to prepare a provisional timetable for the proceedings at an early stage; and

· If there is no majority, the award shall be made by the presiding arbitrator alone.

Interestingly, there is a provision in the Administered Rules (Article 26) dealing with default by the parties. In addition to the more usual provision giving the tribunal power to proceed with the arbitration despite a party’s failure to attend and present its case, there is also express provision for a kind of “default award” procedure. Under Article 26.1, if the Claimant fails to submit its Statement of Claim by the deadline set by the tribunal, and does not show sufficient cause for such failure, the tribunal ‘shall’ order the termination of the proceedings. The only situation where this may not happen is where the Respondent has brought a counterclaim and wishes the arbitration to continue.

There are also detailed provisions (at Article 36) regarding how the tribunal should determine the costs of the arbitration. In particular, Article 36.1 sets out an exhaustive list of items that are regarded as the “costs” to be determined by the tribunal in its award. Article 36.4 states that such costs should in principle be paid by the unsuccessful party, although the tribunal may make whatever apportionment it considers reasonable.

Articles 36.2 and 36.3 deal with the fees of the tribunal – in summary, the parties can choose whether the arbitrators should be compensated on the basis of agreed rates or in accordance with a fee schedule (providing for fees ranging, depending on the amount in dispute, from US$2,000 to 0.06% of the sum in dispute, per arbitrator). If the parties choose the fee schedule, the arbitrators’ fees will be fixed by the HKIAC Council in accordance with the schedule, taking into account the amount in dispute, the complexity of the subject matter, the time spent by the arbitrators and any other relevant circumstances of the case. In this regard, Article 36.3 expressly states that, in general, the Chairman will receive 40% of the total fees, while each of the other arbitrators will receive 30%.

With reference to the above, parties intending to submit a dispute to the HKIAC under the Administered Rules should ensure that they have reached some agreement in advance on how the arbitrators’ fees should be dealt with, otherwise there is a risk that the constitution of the tribunal may be delayed.

By Kim Rooney, Alex Charter and Dave Lau

On 1 May 2009, the new “Online” Arbitration Rules (the “Online Rules”) of the China International Economic and Trade Arbitration Commission (“CIETAC”) came into effect. At this stage, it appears that the Online Rules are only available in Chinese.

The Online Rules are aimed primarily at e-commerce disputes, although parties are free to agree to use them for other types of disputes (Article 1).

CIETAC has delegated the administration of arbitrations under the Online Rules to its Online Dispute Resolution Centre, an organization under CIETAC specializing in resolving internet domain name disputes and e-commerce disputes etc. using online dispute resolution methods.

In general, the Online Rules are an abbreviated version of the “main” CIETAC Arbitration Rules (the “Main Rules”), and many of its provisions are modeled closely on the Main Rules, e.g. regarding the constitution of the tribunal. Article 54 of the Online Rules also provides that the Main Rules will govern matters not covered in the Online Rules (such as challenges to the arbitrators’ appointment).

Notable features of the Online Rules include the following:

· The Online Rules (at Article 11(2)) expressly provide that a party (and its lawyers) must not unilaterally communicate with the tribunal members, and that all communications between the parties and the tribunal must go through the Secretariat. By comparison, the Main Rules are silent on this issue.

· There are elaborate provisions (in Chapter 2) regarding the electronic submission and transmission of documents, including the parties’ memorials and evidence, and notices from the CIETAC Secretariat (the “Secretariat”). Indeed, the default modes of submission/transmission to be used by the parties and the Secretariat are email, Electronic Data Interchange, facsimile etc (although other traditional modes such as the post and courier may be used depending on the circumstances of the case). There are also provisions for deemed dates and times of receipt of electronically transmitted documents.

· In relation to electronically produced, transmitted and stored evidence, Article 29 sets out various factors to be considered by the tribunal in deciding the evidence’s reliability. Factors include the reliability of the methods in producing, storing, and authenticating the evidence, as well as in maintaining its integrity. Article 29 also expressly states that a piece of electronic evidence using a reliable electronic signature has the same force and probative value as a document bearing a manuscript signature or company chop.

· Article 15 provides that CIETAC will use its reasonable endeavours to keep data communications secure and encrypted.

· Article 31 gives a power to the tribunal, where necessary, to investigate and collect relevant evidence from electronic services suppliers, logistics companies and payment banks etc. The tribunal can request the parties, and the parties have a duty, to provide assistance for and cooperate with such investigations. Any evidence collected will be provided to the parties to give them an opportunity to comment.

· Unless the parties agree otherwise, the tribunal will normally decide the dispute on the papers only (i.e. without any oral hearing) (Article 32). Where an oral hearing is necessary, the default mode of hearing is by video conference or other electronic means of communication (although traditional in-person meetings can also be used depending on the circumstances of the case) (Article 33). Witness evidence can also be given by video conference (Article 36).

· There is also provision in Article 37 for online mediation of the dispute(s) in question (by video conference or other electronic means of communication, or by in-person meetings where appropriate).

· The Online Rules actually provide for three different procedures – the “main” online procedure, a “summary” procedure (mainly for disputes with a value of more than RMB 100,000 but less than RMB 1,000,000) and an “expedited” procedure (mainly for disputes with a value of RMB 100,000 or less).

· The main difference between the above three procedures is the timeframes involved. For example, in the main online procedure, the Respondent has 30 days from receipt of the notice of arbitration to submit its Defence (and Counterclaim, if any), the Claimant has 20 days after that to submit its Reply, and the tribunal should make its award within 4 months of its constitution. Under the summary procedure, the timeframes are 15 days, 10 days and 2 months respectively. Under the expedited procedure, the timeframes are 10 days, 5 days and 15 days respectively. Other aspects of the rules are the same for all three procedures.

· When submitting its request for arbitration, the Claimant has to pay the arbitration fee in advance. Appendix 2 sets out two scales of fees, one for domestic cases, the other for foreign-related cases. Fees are calculated by reference to the amount claimed by the Claimant (or, where this is inconsistent with the amount in dispute, the amount in dispute). For all cases, the fees start from a minimum of RMB4,000. The top band of the fees for domestic and foreign-related cases are, respectively, RMB606,500 plus 0.4% of the amount in dispute above RMB100,000, and RMB864,000 plus 0.4% of the amount in dispute above RMB100,000. There is an additional RMB10,000 initiation fee for foreign-related cases.

· The Online Rules also provide (in Appendix 1) a model online arbitration clause (in Chinese).

By Kim Rooney and Dave Lau

The Japan Commercial Arbitration Association (the “JCAA”) introduced their International Commercial Mediation Rules (the “Rules”) on 1 January 2009. The JCAA has followed the lead of other international arbitral institutions in devising and promoting a set of mediation rules for international disputes.

Settling disputes by mediation is hardly new to Japan. In a domestic context, judges often act as de facto mediators and work hard to encourage settlement between the parties. The JCAA has also tried to play a role via its own mediation rules for domestic disputes, which have been in place for some time. However, despite these rules and a culture which generally favours settlement where possible, the JCAA felt that there was a general lack of awareness of mediation as an alternative to arbitration, particularly in an international context.

In a mediation under the Rules, the JCAA would play a secretarial role rather than being actively involved in the mediation. The JCAA would prefer the parties to nominate their own mediator. However, if they are unable or unwilling to do so the JCAA can nominate one or more mediators to handle proceedings. The JCAA do not have a ‘panel’ of mediators in the same way that they have a panel of approved arbitrators but are able to provide a mediator if requested.

As with party-led mediations the parties will have a free hand to decide, along with the mediator, how they wish the proceedings to be managed and in what form. Depending on the preference of the parties a mediator can, broadly speaking, act either as a facilitator or an evaluator. The former is probably more common in Western jurisdictions. But Japanese companies may prefer the latter approach, with a mediator taking a view on the merits of the case and trying to persuade the parties of what an appropriate settlement might look like – this is similar to the approach used by judges in the Japanese courts. Rule 9(4) expressly provides that a mediator can make a settlement proposal at any time.

The Rules are generally similar to mediation or ADR rules of other leading arbitral institutions although, as would be expected, tending more towards the civil law tradition. There is also a positive approach to ‘Arb-Med’ reflecting strong advocacy for this by certain members of the Japanese arbitration community. For example, Rule 8 expressly provides that the mediator can be an arbitrator in relation to the same dispute if the parties agree whereas most mediation rules are silent (and the HKIAC rules expressly forbid it). Rule 11 is also interesting in this context – following a settlement, it allows the parties to appoint the mediator as an arbitrator in order to make an arbitral award which incorporates the terms of the settlement. The intention of this provision is, presumably, to aid enforcement of any settlement. This can be particularly useful if the settlement contains ongoing obligations. However, there must be some doubt as to whether an arbitral award made in this way would necessarily benefit from the New York Convention. A party resisting enforcement would be able to point to the artificial nature of the ‘arbitration award’ given that the New York Convention clearly anticipates that there would be an actual arbitration. That said, consent awards as a means of settling an existing arbitration are a common feature of international arbitration and there does not seem to have been any issue in the enforcement of these. The JCAA may well have taken the view that there is little downside for parties to enshrine the settlement within an arbitration award and it was a useful option to include.

Given that Japan does not have ‘without prejudice’ privilege in the common law sense, foreign parties may also find that the provisions relating to privacy and confidentiality give them comfort about the procedure. In particular, Rule 12(3) provides that, unless otherwise agreed by the parties, “any views expressed or statements made by the other party or parties …or any proposal made by the mediator in the course of the mediation proceedings” cannot be adduced in any judicial or arbitration proceedings. Although this provision is useful, it is perhaps regrettable that the wording is not as comprehensive as in many other international rules, leaving an element of doubt as to whether everything produced in the mediation is protected from production in a future court case. Another provision which is frequently included in international mediation rules is an express prohibition on calling the mediator as a witness in subsequent proceedings. This is omitted from the Rules although the mediator and others involved in the mediation do have an express obligation of confidentiality (Rule 12(2)) which may give some comfort on this point.

Many practitioners in mature markets will take the view that separate mediation rules are not required especially since many experienced mediators would rather use their own form of mediation agreement. However, in a relatively immature mediation market, the helping hand provided by the JCAA is likely to be useful. Certainly, the presence of institutional rules helps provide reassurance to parties that there are no particular difficulties in carrying out a mediation in Japan. According to the JCAA, there has already been interest in the Rules and the first (two-day) mediation has taken place.

Hopefully the efforts of the JCAA can promote mediation in Japan and give parties another avenue for the resolution of disputes short of litigation or arbitration. There also is a need to train and develop a pool of mediators (both Japanese and foreign) in order to fully take advantage of the possibilities for mediation in Japan. This is recognised by the JCAA and we anticipate further growth in mediation over the coming years.

By Mark Goodrich and Christopher Hunt