The declaratory award (on the tribunal’s jurisdiction) was made pursuant to an arbitration agreement contained in a bill of lading for the carriage of African Fertilizer’s cargo from Romania to Nigeria. The English court had given the claimant, Shipsnavo, leave to enforce the arbitration award and to enter judgment again the defendant, African Fertilizers.

The English court had previously issued an injunction restraining African Fertilizer from continuing an arbitration in Romania, as well an interim declaration that such arbitration proceedings, together with court proceedings commenced in Romania, were both in breach of the arbitration agreement.

Shipsnavo had sought an order for enforcement under s66 of the Arbitration Act 1996 because it was concerned that, should African Fertilizer be successful in its Romanian court proceedings, then it would seek to enforce that judgment under Article 34 of the Brussels Regulation 44/2001, notwithstanding the arbitration award. If Shipsnavo had already obtained an English judgment, then it could seek to resist the recognition of an irreconcilable judgment of the Romanian court.

African Fertilizers resisted the application on the ground that the English court had no jurisdiction to make such an order because the material terms of the award were in purely declaratory terms.

First, it argued that enforcement of an award of a purely declaratory nature is not possible (notwithstanding the ruling – albeit on appeal – in West Tankers). Second, it argued that a judgment entered under s66 of the 1996 Act does not constitute a judgment within the meaning of Article 34 of the Brussels Convention, relying on the ECJ case Solo Kleinmotoren v Boch.

The first limb raised questions of the distinction between “recognition” and “enforcement” in the context of New York Convention awards. African Fertilizers argued that the West Tankers decision was incorrect, that Shipsnavo really intended simply “recognition” of their award in order to defend any adverse Romanian court judgment, and enforcement was not appropriate. The court disagreed, aligning itself with the West Tankers decision and giving primacy to the party’s right to the benefit of the award. The court preferred the plain meaning of “enforce” in s66 of the Act, and cited both textbooks and case law in support of its jurisdiction to enforce a declaratory award.

The second limb was also rejected. The court distinguished the Solo Kleinmotoren decision as being a case about a court approved settlement, in which the ECJ held that a settlement agreement recorded in a court order is not a judgment for the purposes of Article 34(3). Beatson J commented that a settlement is essentially contractual, and while the “submission to arbitration is consensual, the outcome of the arbitration and contents of the award are not”. Further, there were public policy considerations. Citing Briggs on Civil Jurisdiction, Beatson J noted that an English court could not give “leave to enforce an arbitral award and then be required to recognise and enforce a foreign judgment which undermined or contradicted that arbitral award”.

However, there are public policy considerations not considered by the court. Shipsnavo’s objective in seeking to enforce the declaratory award was to pre-empt the enforcement of any irreconcilable judgment that may be given by the Romanian court. What happens if the Romanian courts do find in favour of African Fertilizers? The parties could each have irreconcilable judgments from England and Romania, arising from the same agreement.

While the pro-arbitration stance of the English courts is welcome, this approach can result in inconsistent judgments within Europe. It may be that the current proposals to reform the Brussels Regulation will go some way to temper this risk. The European Parliament’s Legal Affairs Committee (LAC) has proposed maintaining the arbitration exception to the Regulation, but with clarifications for the interface between arbitration and the courts. The first reading of the LAC’s report is reported to take place on 18 April 2012 and the process can take several years to pass through the European parliament. Are those reforms appropriate? And meanwhile, are there risks for the health of the inter-twining systems of justice that are arbitration and litigation?

In Bhatia, the court held that the Indian courts could intervene to order interim measures of protection even in relation to arbitrations seated outside India. The court’s jurisdiction was invoked by a party seeking interim measures of protection in relation to an ICC-administered arbitration seated in Paris. Although section 9 of India’s Arbitration Act expressly empowers Indian courts to grant interim relief, this provision is contained in Part I of the Act which was designed to apply only where an arbitration is seated in India. The Supreme Court was thus faced with a situation where it could not order interim measures of protection since the arbitration clause provided for a Paris seat. Faced with this legal hurdle, the Supreme Court adopted a result-driven approach and held that the general provisions of Part I would also apply also to offshore arbitrations, unless the parties impliedly or expressly excluded the applicability of the Act.

The ratio in Bhatia was subsequently extended to permit the Indian courts to reopen and set aside awards rendered in arbitrations seated outside India, and even appoint arbitrators in such arbitrations. The judgment has been subjected to much criticism in India and beyond for authorising Indian courts to exercise long-arm jurisdiction and for introducing substantial uncertainty in offshore arbitrations involving Indian parties. Indeed, in a sign of judicial discomfort with the broad scope of the Bhatia ruling, the Supreme Court itself and various High Courts in the country have subsequently sought to narrow down the scope of the decision. They have also displayed a greater willingness in recent years to infer implied exclusions of the Indian Arbitration Act in relation to arbitrations seated outside India.

Nevertheless, in order to mitigate the risk of excessive judicial intervention, it has now become standard market practice in India-related international commercial transactions to exclude the application of Part I in arbitrations seated outside India.

Although legislative intervention has been proposed to remedy the ill-effects of the Bhatia ruling, most recently in a Consultation Paper circulated by the Indian Ministry of Law and Justice, such attempts have failed to take off in any meaningful way.

In these circumstances, the Supreme Court’s decision to reconsider its own ruling in Bhatia is a welcome step. The court also adopted a refreshingly novel approach by inviting interested parties to intervene in order to assist the court as amicus curiae. In response to this invitation, LCIA India, the Singapore International Arbitration Centre and the Nani Palkhivala Arbitration Centre have all intervened in the proceedings.

The hearing commenced this week with observations from the court to the effect that (i) it was of the prima facie view its earlier judgment in Bhatia International should be reconsidered, and (ii) it was keen to ensure that foreign investors should not be deterred by the prospect of long-winded litigation in relation to India-related commercial contracts. The court also indicated it was in favour of recommending to Parliament that all matters relating to enforcement of awards be heard directly by the Supreme Court which would cut through the delays caused by enforcement issues having to pass through multiple layers of the Indian court system (as is presently the case).

The Indian Supreme Court has been criticised (sometimes unfairly) in the past for being arbitration-unfriendly. In Bharat Aluminium v Kaiser Aluminium, it now has an excellent opportunity to change that perception, and firmly put the development of Indian jurisprudence on a pro-arbitration trajectory.

(Promod Nair is a partner at J Sagar Associates in Bangalore)

In a decision issued on 23 November 2011, the Swiss Federal Supreme Court gave some welcome guidance on the rules of immunity applicable to the enforcement of ICSID awards in Switzerland (Decision 5A_681/2011 dated 23 November 2011 – The published decision is redacted but mentions the date of the ICSID award and the defendant State).

The Court rejected an appeal of the Geneva Debt Collection Office’s (the “DCO”) refusal to attach assets held in Geneva by the International Air Transport Association (IATA) in the name of Kyrgyzaeronavigatsia, a Kyrgyz State company. The applicant (probably the claimant in the underlying ICSID arbitration, Turkish company Sistem Muhendislik Insaat Sanayi ve Ticaret A.S) had sought the attachment in order to enforce an ICSID award issued on 9 September 2009 against the Kyrgyz Republic in connection to a hotel operation project (ICSID Case No. ARB(AF)/06/1).

Initially, a Geneva Court had granted the attachment in the amount of 11 million Swiss Francs and asked the DCO to enforce it. The DCO however considered that the attachment was incompatible with Article 92 of the Swiss Debt Enforcement and Bankruptcy Law (“DEBL”), which prohibits the seizure of assets of a foreign State or a foreign central bank intended for uses incumbent upon the foreign State in its exercise of its sovereign authority.

The DCO based its decision on a “verbal note” from the Kyrgyz Ministry of Transport and Communication to the Swiss Permanent Mission to the United Nations dated 17 September 2010 stating that the amounts held by IATA were exclusively allocated to activities performed in the exercise of sovereign authority, namely the surveillance of airspace.

The applicant appealed this decision by contesting the evidentiary weight to be given to this Note. However, the DCO confirmed its decision, relying on additional documents, including a fax from the Kyrgyz Embassy in Switzerland dated 1st October 2010 stating that IATA was authorised by Kyrgyzaeronavigatsia to collect charges due for use of Kyrgyz airspace, and a letter of the official representative of the Government of the Kyrgyz Republic dated 22 October 2010 stating that Kyrgyzaeronavigatsia was en entity of the Kyrgyz Ministry of Transport and Communication and that its assets were all allocated to public authority activities and therefore immune.

By decision of 15 September 2011, the Cantonal Surveillance Authority rejected the appeal on the grounds that the documents produced by the Kyrgyz Republic showed that the assets held by IATA were exclusively allocated to activities related to the exercise of sovereign authority.

The applicant appealed this decision before the Swiss Federal Supreme Court, arguing that the facts of the case had been arbitrarily established. However, the Swiss Federal Supreme Court rejected the appeal. It found that it was not arbitrary to consider that the surveillance of national airspace was a task performed by a sovereign, and hence iure imperii. Charges levied for this task were exempted from attachments pursuant to Article 92 DEBL.

In Switzerland, there is very little statutory law on the issue of State immunity. The matter is mostly governed by case law, in particular that of the Swiss Federal Supreme Court. Although Switzerland ratified the 2004 United Nations Convention on Jurisdictional Immunities of States and Their Property on 16 April 2010, the Convention is not yet in force. The Convention will only enter into force once thirty States file their instruments of ratification. Until then, the rules established by the Swiss Supreme Court prevail.

Since the beginning of the 20th century, the Swiss Supreme Court has consistently applied the concept of State immunity restrictively. Accordingly, it distinguishes between matters involving foreign States acting in their sovereign capacity (de iure imperii), and matters involving foreign States acting in a private or commercial capacity (de iure gestionis). Where the State acted de iure imperii, sovereign immunity applies and a State cannot be a party to proceedings before Swiss courts. Where the State acted de iure gestionis, however, sovereign immunity from jurisdiction may be lifted, provided the matter has an ‘appropriate’ connection with Switzerland (in German: “Binnenbeziehung”; in French “rattachement suffisant”). Such connections are deemed to be established in cases in which the claim originated or had to be performed in Switzerland, or in cases in which the debtor performed certain acts in Switzerland. However, the mere location of assets or of the claimant’s domicile in Switzerland, or the existence of an award rendered by an arbitral tribunal with seat in Switzerland, are not in themselves sufficient to create such a connection.

The Swiss Federal Supreme Court generally does not clearly distinguish between immunity from jurisdiction and immunity from execution. However, in addition to the general requirements mentioned above, assets must be intended for uses incumbent upon the State in its exercise of its sovereign authority in order to be immune from execution under Article 92(1) DEBL. Such assets include buildings used by diplomatic missions, the rolling stock of State railway companies, and cultural centres run by foreign consulates in Switzerland. With respect to funds held by foreign States, the Swiss Federal Supreme Court has made clear that they must be clearly earmarked for specific uses in the public interest in order to enjoy immunity, and therefore must be distinguishable from other assets.

The Swiss Federal Supreme Court’s application of Swiss domestic law on immunity from execution is consistent with Article 55 of the ICSID Convention, which provides that the obligation of enforcement in Article 54 shall not “be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution.” The Supreme Court did not, however, refer to the provision explicitly, as doing so was not necessary, especially since neither party in the proceedings appears to have invoked it.

In sum, pursuant to the case law, three requirements must be met in order for a Swiss court to determine that a State asset is not immune from execution, namely: (1) the foreign State must have acted in a private or commercial capacity (de iure gestionis); (2) the transaction out of which the claim against the foreign State arises must have a qualified connection to Switzerland; and (3) the asset must not be intended for uses incumbent upon the foreign State in the exercise of its sovereign authority, as such assets are excluded from enforcement proceedings pursuant to Article 92(1) DEBL. The decision at hand seems to show that a foreign State can rely on the same immunities and privileges against the enforcement of an ICSID award as it could against any other foreign decision or award. In a legal landscape with little case law and few statutory rules, this decision brings some welcome guidance in respect of the enforcement of ICSID awards.

Decision

X (a Turkish company) and Y (a Polish company) were in dispute over the question of which party was responsible for the delays in the execution of the contractual work. The dispute was brought before an ICC tribunal seated in Zurich. With respect to the disputed question, each party submitted to the arbitral tribunal a technical expert report.

In an award of 30 September 2010, the arbitral tribunal dismissed X’s claim. It partially granted Y’s counterclaim and ordered X to pay to Y EUR 6,587,442.70. In the award, the arbitral tribunal dealt with the submitted expert reports and found the expert report submitted by Y more persuasive than X’s expert report. It held X responsible for the delays in the execution of the contractual work.

X appealed against the award to the Swiss Federal Supreme Court. It argued that the arbitral tribunal, in its award, only dealt with the expert opinion submitted by Y thereby “completely suppressing” the expert opinion submitted by X. Moreover, according to X, the arbitral tribunal should have appointed an expert to receive the technical expertise necessary for the assessment of the decision-relevant questions. By not doing so, the arbitral tribunal violated X’s right to equal treatment and its right to be heard (Article 190(2)(d) PILA) as well as the public policy (Article 190(2)(e) PILA)*.

The Supreme Court dismissed the appeal. It found X’s complaint that the tribunal only dealt with the expert opinion submitted by Y and thereby “completely suppressed” the expert opinion submitted by X unfounded because, before the Supreme Court, X admitted that the arbitral tribunal on pages 96-114 of its award explained in detail why it did not follow the expert opinion submitted by X but gave preference to the opinion submitted by Y.

Also, in the arbitration, X submitted its comments on the expert report filed by Y without at the same time submitting a request that the tribunal appoint an expert to receive the technical expertise necessary for the assessment of the decision-relevant questions. Confirming its constant practice, the Supreme Court held that, if X, at that time, considered that its right to be heard or its right to equal treatment had been violated, it should have communicated its objection promptly.

Comment

This decision touches on an interesting issue, namely, when is an arbitral tribunal obliged to appoint an expert. In the present case, the tribunal did not have to decide this question (the appeal was rejected because the appellant had not pursued this request in a timely manner during the arbitration).

However, it is worthwhile recalling that the position of the Supreme Court on this point is clear. The parties have a right to the appointment of an expert by the tribunal (such right being a part of their right to submit evidence and be heard) if the following preconditions are met: (i) the party who intends to rely on this right must have expressly requested the appointment of an expert; (ii) the request must be made in proper form and in a timely manner; (iii) if required by the tribunal, the requesting party must advance the costs of such expertise; (iv) the expert evidence must relate to facts relevant for rendering of the award; and (v) the expert evidence must be necessary and proper for proving such relevant facts.

This last precondition is met where the facts concern technical issues or matters which in some other way require special knowledge and cannot be proven otherwise, and where the arbitrators do not have such special knowledge (decision 4P.320/1994 of 6 September 1996).

Where these preconditions are met, and unless its members possess the necessary technical or other special knowledge, an arbitral tribunal violates the right of the parties to be heard if it rejects a request for the appointment of a tribunal-appointed expert (decision 102 Ia 493, unpublished note 8; decision 4P.23/1991 of 25 May 1992 note 5b).

_____
* Article 190(2) of the Swiss Federal Statute on Private International Law (PILA) permits a final award to be set aside for a limited number of reasons. Under Article 190(2)(d) PILA, an award can be set aside if the parties’ right to equal treatment or their right to be heard was violated and, under Article 190(2)(e) PILA, an award can be set aside if it violates public policy.

Georg von Segesser / Petra Rihar

In 2000, UEG Araucária, a Brazilian energy company, entered into a series of agreements with several Bechtel entities for the engineering and construction of a $210 million power plant in Araucária, Brazil. Three of the contracts contained identical arbitration and choice of law clauses. The arbitration clause provided that “[a]ny dispute, controversy, or claim arising out of or relating to the Contract, or the breach, termination or validity thereof . . . shall be finally settled by arbitration” under the ICC rules, “except as these rules may be modified herein.” Each of the contracts also had multiple New York choice-of-law clauses, one of which provided that “[t]he law governing the procedure and administration of any arbitration instituted pursuant to [the arbitration clause] is the law of the State of New York.”

In January 2008, the power plant’s steam-turbine generator failed. That September, UEG Araucária submitted a Request for Arbitration to the ICC, claiming breach of contract, negligence, and fraud by Bechtel.

Bechtel responded by filing an action in the New York state court seeking to stay the arbitration and dismiss the claims, claiming that UEG Araucária’s claims were time-barred under New York and Brazilian law. Notwithstanding the arbitration agreement between the parties, as a basis for the state court’s jurisdiction, Bechtel cited section 7502(b) of the New York Civil Practice Law and Rules, which states:

“If, at the time that a demand for arbitration was made or notice of intention to arbitrate was served, the claim sought to be arbitrated would have been barred by limitation of time had it been asserted in a court of the state, a party may assert the limitation as a bar to the arbitration on an application to the court.”

UEG Araucária removed the action to federal district court and filed a counter-application to compel arbitration of the timeliness question. The district court denied UEG Araucária’s motion to compel, finding that the contracts between UEG Araucária and Bechtel evidenced “the parties’ clear intent to select New York law for arbitration procedure . . . including the rule limiting the power of arbitrators to hear preliminary questions of timeliness.” The district court found the claims were indeed time-barred and granted Bechtel’s request for a permanent stay of the arbitration.

UEG Araucária appealed the ruling to the Second Circuit, which reversed the district court’s decision while acknowledging that “the question is a close one.” The court said its task was “to divine whether the parties intended at the time of contracting to have issues of timeliness determined by the arbitrator.” Its analysis would also be informed by the requirement under the Federal Arbitration Act to “construe the parties’ intentions ‘generously’ in favor of arbitrability.”

The appellate court acknowledged an apparent tension between the arbitration clause and the choice-of-law clauses in the contracts between the parties. The arbitration provision “tends to support the view that any disagreements about the contract—which would include disputes about whether a relevant statute of limitations bars arbitration, as well as disputes about who should decide the statute of limitations issues—shall be decided by arbitration.” However, the choice-of-law provisions “cut the other way, suggesting that, because, under New York law, a party can assert a statute of limitations in court as a bar to arbitration, . . . a party is permitted to have a court decide timeliness issues.”

The panel concluded that “the contracts in this case are at least ambiguous as to whether Bechtel and UEGA agreed to permit recourse to C.P.L.R. 7502(b).” As opposed to the broad arbitration clause, the choice-of-law provisions “make no mention of timeliness disputes or of any right of the parties to resort to the courts in any circumstances.” Moreover, as the U.S. Supreme Court recognized in Mastrobuono v. Shearson Lehman Hutton, Inc., “general choice-of-law clauses . . . may be read to address only ‘substantive rights and obligations, and not the State’s allocation of power between alternative tribunals.’” The court concluded that the contracts between UEG Araucária and Bechtel evidenced “no clear statement that a statute of limitations defense should be withheld from the arbitrator.” Lacking such clear intent, the panel resolved the ambiguity in favor of arbitration, and held that the arbitrator, not the district court, should decide the timeliness issue.

The Bechtel decision illustrates how laws like New York’s C.P.L.R. 7502(b), which carve out a particular role for courts in otherwise arbitrable disputes, are of very limited use given the capabilities of arbitrators and the expansive pro-arbitration reach of the FAA. In purporting to provide for an initial judicial role in arbitrable disputes, New York’s § 7502(b) is reminiscent of a former provision in the English Arbitration Act that allowed a claimant that had entered into an arbitration agreement to nonetheless obtain summary judgment in court before the matter was referred to arbitration. That provision, which created an unnecessary judicial barrier to resolution of claims through arbitration, was sensibly deleted in the 1996 revision of the Act. Likewise, it is unclear why a law like § 7502(b) should carve out the particular question of timeliness for a court to review, when a claim as a whole is subject to arbitration. Arbitrators are no less capable of addressing whether a claim is time-barred than they are of resolving any other legal issue.

Moreover, under the FAA as interpreted by the Second Circuit, the applicability of § 7502(b) is so narrow as to render it virtually meaningless. If any choice-of-law provision would seem to allow for application of § 7502(b), the one between Bechtel and UEG Araucária would be it: the agreements provided that New York law would govern not only the parties’ substantive legal rights, but also “the procedure and administration of any arbitration” between the parties. But the court still found that because there was no clear statement that a court should be able to resolve the timeliness issue in particular, the issue was for only the arbitrator to decide.

The Bechtel panel’s reasoning thus raises the question of what, exactly, is left for laws like § 7502(b) to do if even choice-of-law provisions that apply to the arbitral process itself do not allow for resort to them. According to the Second Circuit, for § 7502(b) to apply, the contracts would have had to provide expressly that a court could resolve a limitations question. However, if a contract had such an explicit provision, then § 7502(b) likely would not be necessary at all. After all, even if § 7502(b) did not exist, parties could still draft contractual language that generally provides for arbitration of disputes, but expressly allows a court to resolve any timeliness questions. If parties to an otherwise broad arbitration agreement really want to allow a court to resolve limitations questions, nothing is stopping them from writing that into the agreement without reference to § 7502(b). Thus, laws like § 7502(b) add little; Bechtel’s narrow construal of when § 7502(b) applies effectively limits its application to instances where its existence is unnecessary. This is probably just as well, as any broader application of such a provision might well run afoul of the FAA (although New York state courts have held in the past that § 7502(b) is not facially preempted by the FAA).

More broadly, the Bechtel decision implicates the question whether certain aspects of an arbitration agreement can broaden the judicial role in a dispute. The Second Circuit’s assessment of whether § 7502(b) applied in the dispute between UEG Araucária and Bechtel is something of a mirror image to the question before the U.S. Supreme Court in its 2008 decision in Hall Street Associates, L.L.C. v. Mattel, Inc. In Hall Street, the Court addressed whether parties can agree to expand the scope of post-award judicial review beyond that expressly permitted by the FAA (the answer was no); Bechtel addressed whether a court may adjudicate certain aspects of a claim before the arbitration commences if the governing law of the arbitration agreement provides for it. In both instances, the courts limited the scope of the judicial role considerably, although not to the same degree. Unlike in Hall Street, the Bechtel panel found that parties could, theoretically, agree to have a court adjudicate part of a claim before it is referred to arbitration. This is because federal law does not restrict pre-award adjudications by courts where the underlying arbitral agreements allow for it – unlike the way the FAA, under Hall Street, does confine the bases on which courts may review final arbitral awards, even if the governing arbitration expressly purports to expand such grounds.

Bechtel illustrates that, although the scope of pre-award adjudication is not nonexistent, it is very narrow and requires clear intent by the parties. As Bechtel confirmed, a law like § 7502(b) is only applicable where it is expressly invoked in an agreement; it otherwise is not enforceable as a default rule under a particular governing law. Parties that do want to allow for the possibility of judicial involvement in certain aspects of disputes otherwise subject to arbitration would be well advised to make their particular intentions extremely clear in their agreements.

Finally, the Bechtel panel’s rejection of the application of § 7502(b) could also cause certain observers to sigh with relief. Because of New York’s economic importance and its well developed commercial law, a New York choice-of-law clause is a very common feature of international commercial agreements. When parties draft agreements that contain both New York choice-of-law clauses and arbitration clauses, it is unlikely that they are cognizant of § 7502(b) in particular. It is even less likely that many of them expect and want to supplant the arbitrator’s jurisdiction if timeliness issues ever come up in a dispute between the parties. A contrary ruling in Bechtel might have caused corporate contract drafters to think twice before reflexively choosing New York’s as the governing law of the contract. Thus, the Bechtel panel, in rendering a particular provision of New York law virtually nugatory, might ironically have been doing a favor to New York law more generally.

By Gary Born and Adam Raviv

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

One recent example of a pathological international arbitration involves the by-now infamous Dallah case. There, some ten years after a distinguished arbitral tribunal seated in Paris applied French principles of international arbitration law to conclude that the Government of Pakistan was bound by a contract, the UK Supreme Court reached the opposite result – applying the same principles of French law to deny enforcement of an arbitral award against Pakistan on jurisdictional grounds. Then, only months later, the Paris Court of Appeal reached the opposite conclusion – confirming the tribunal’s award and rejecting Pakistan’s jurisdictional objection under French law. This series of developments, involving two very eminent and experienced national courts, is very unhappy; those developments, and particularly the UK Supreme Court’s decision, contradict both the New York Convention and the objectives of the international arbitral process.

On its facts, the Dallah case is straightforward. Dallah Real Estate and Tourism Holding Company (“Dallah”), a Saudi Arabian company, entered into a Memorandum of Understanding in 1995 with the Government of Pakistan to provide housing in Saudi Arabia for Pakistani pilgrims to Mecca. Thereafter, various Pakistani Government ministers negotiated the terms of an agreement with Dallah to implement the Memorandum of Understanding. In connection with those negotiations, the President of Pakistan issued an ordinance establishing the Awami Hajj Trust (“Trust”), a separate legal entity with independent legal personality. In September 1996, the Trust entered into an agreement with Dallah (“Agreement”), containing the terms previously negotiated by the Government – including an ICC arbitration clause, but no choice of law clause. Despite its previous involvement in negotiations with Dallah, Pakistan was not a signatory to the Agreement.

The Agreement was ill-fated, lasting only four months or so. During that period, Pakistani Government ministers wrote to Dallah (on Government letterhead), addressing issues that had arisen under the Agreement and directing Dallah on how to perform the Agreement. In December 1996, three months after the Agreement was concluded, the Trust ceased to exist (because the Pakistani Government did not renew its existence). One month later, in January 1997, a Pakistani Government official wrote to Dallah (again on Government letterhead) purporting to terminate the Agreement. The Trust then sued Dallah for breach of the Agreement in Pakistani courts. Those courts eventually dismissed the Trust’s claims (on the basis that the Trust no longer existed) – after which Dallah commenced an ICC arbitration against Pakistan (in May 1998), seeking to recover substantial costs it had incurred in connection with the Agreement. Pakistan resisted, among other things, on grounds of jurisdiction.

In a jurisdictional award (in June 2001), an arbitral tribunal composed of Lord Michael Mustill, Nassim Hasan Shah and Ghaleb Mahmassani declared that Pakistan was bound by the arbitration clause in the Agreement. Sitting in Paris, the tribunal looked to French international arbitration law (which it characterized as incorporating “the transnational general principles and usages reflecting the fundamental requirements of justice in international trade and the concept of good faith in international business”). Applying these principles of French law, the tribunal held that Pakistan was the alter ego of the Trust and thus bound by both the Agreement and its arbitration clause. The tribunal subsequently made a final award (in June 2006) awarding Dallah $20 million plus legal costs.

Dallah sought enforcement of the award in England under the New York Convention and the English Arbitration Act, 1996, and, subsequently, also sought exequatur of the award in France. For its part, Pakistan resisted enforcement of the award in England, arguing under Article V(1)(a) of the Convention that there was no valid arbitration agreement between it and Dallah. In August 2009, exequatur of the award was granted in France, while the English enforcement proceedings lasted until November 2010, when the UK Supreme Court denied enforcement of the tribunal’s award ([2010] UKSC 46). (See also my previous posts of 21 August 2009 and 12 April 2010.)

The UK Supreme Court’s decision denying recognition deserves careful attention. The Court is highly respected in the field of international arbitration, with its members enjoying distinguished reputations in international matters, commercial and otherwise, while its judgment in Dallah was clearly the product of careful thought.

The Supreme Court reached its decision to deny recognition of the arbitral award following what it termed an independent investigation of whether the tribunal had jurisdiction: “[the Court must] revisit the tribunal’s decision on jurisdiction” and is “neither bound nor restricted by” the tribunal’s conclusions. Explaining that it was applying French law reflected in Dalico and related French Cour de cassation decisions, the UK Supreme Court held that there had been no “common intention” for the Government of Pakistan to be a party to the arbitration agreement. Focussing narrowly on the formal signatories and literal terms of the Agreement, the Court found that “there was no material sufficient to justify the tribunal’s conclusion” that the Government was a party to the agreement to arbitrate.

Only months after the UK Supreme Court’s decision (on 17 February 2011), the Paris Court of Appeal rejected Pakistan’s application to annul the awards against it under Article 1502(1) of the French Code of Civil Procedure (Case No. 09/28533, 09/28535 and 09/28541). Like the UK Supreme Court, the Paris Court of Appeal applied French international arbitration law (looking to the parties’ “common intentions” under Dalico and similar decisions). But, unlike the UK Supreme Court, the Paris Court of Appeal had no difficulty in concluding that Pakistan had been intended to be a party to the Agreement. The French court took a broad, pragmatic view of the parties’ conduct, focussing in particular on the Government’s (sole) involvement in negotiating the Agreement, in implementing its terms and in terminating the Agreement: the Government “behaved as if the Contract was its own; … this involvement [of the Government], in the absence of evidence that the Trust took any actions, as well as [the Government’s] behaviour during the pre-contractual negotiations, confirm that the creation of the Trust was purely formal and that [the Government] was in fact the true Pakistani party in the course of the economic transaction.”

It remains to be seen how the French Cour de cassation will ultimately decide any appeal from the Paris Court of Appeal. Considering matters as they currently stand, however, the regrettable course of the Dallah case and conflict between the French and English decisions are pathological: they are contrary to both the purposes and specific terms of the New York Convention and they produce a potentially serious injustice. The most fundamental objectives of the Convention include ensuring uniform treatment of arbitral awards, and facilitating the effective enforcement of such awards, in the Convention’s Contracting States. Those goals are undermined when, a decade after an arbitral tribunal decides that parties concluded a binding agreement, courts in different Contracting States reach conflicting conclusions as to the correctness of the tribunal’s award – with a foreign court disagreeing with the courts of the arbitral seat over the application of its own law. For at least three reasons, outlined below, this is not what the drafters of the New York Convention intended, nor what parties concluding international commercial contracts and arbitration agreements intend.

First, the terms of the Convention provide a mechanism specifically designed to avoid conflicts between annulment and enforcement decisions. In particular, Article VI of the Convention (and section 103(5) of the English Arbitration Act) provides enforcement courts with authority to stay (or adjourn) decisions on enforcement pending the outcome of annulment proceedings in the arbitral seat. Dallah was a text-book example of a case where Article VI should have been applied: the Paris Court of Appeal was about to decide almost precisely the issue before the UK Supreme Court – an issue, moreover, that was governed by French law, that had already been decided by a French-seated arbitral tribunal and that involved an arbitral award that had already been granted exequatur by a first instance French court. In these circumstances, the arguments for staying English enforcement proceedings pending the French court’s decision were overwhelmingly powerful.

Article VI grants authority to recognition courts to stay enforcement actions in appropriate cases (where they “consider [it] proper”). This provides a mechanism, designed to further the Convention’s objectives of uniformity by avoiding conflicting decisions in different Contracting States, which is especially appropriate and useful in cases where the courts of the arbitral seat have particular competence on an issue. In Dallah, the decisive issue was one of French arbitration law (the law of the putative arbitral seat, indisputably applicable under Article V(1)(a)’s choice-of-law rules), which had already been decided by a French-seated tribunal; moreover, French courts had unique expertise on the relevant issues (of their own law), were seised of the issue and about to render a decision and they were undoubtedly neutral and objective. Basic principles of common sense and judicial prudence counselled that the UK Court should have awaited the imminent outcome of proceedings in the arbitral seat.

Despite this, the UK Supreme Court refused to grant a stay of recognition proceedings under Article VI, commenting in passing that “since Dallah has chosen to seek to enforce in England, it does not lie well in its mouth to complain that the Government ought to have taken steps in France.” Although the explanation is not entirely clear, it appears that the UK Supreme Court faulted Dallah for not having itself first sought exequatur in French courts before seeking recognition in England – hence, the UK Court’s refusal to stay English recognition proceedings pending Dallah’s exequatur action. That rationale ignores both the specific language and underlying objectives of Article VI – which aim to avoid exactly the conflicting decisions that Dallah produced. More fundamentally, the UK Supreme Court’s apparent rationale is impossible to reconcile with the New York Convention’s deliberate elimination of any requirement that award creditors obtain double exequatur (previously required under the Geneva Convention). Given that, an award creditor like Dallah is entirely free to seek to enforce its award abroad without first seeking exequatur in the arbitral seat. Contrary to the UK Court’s suggestion, Article VI of the Convention, and the policies of efficiency and uniformity it furthers, remain fully applicable in such circumstances.

Second, the New York Convention also provides that, in an enforcement proceeding, the party resisting enforcement bears the burden of proof, both under Article V(1)(a) and otherwise. This is made express in the introductory provisions of Article V(1) and is a fundamental element of the Convention’s basic purpose – again, specifically altering the position under the Geneva Convention. Although these principles are non-controversial, the UK Supreme Court’s decision in Dallah is very difficult to reconcile with them – with the Court instead imposing on the award creditor (Dallah) the burden of producing “material sufficient to justify the tribunal’s conclusion.” That holding misunderstands the Convention and its burden of proof: critically, it was not properly for Dallah to prove the existence of a valid agreement to arbitrate under Article V, but for Pakistan to disprove the existence of such an agreement.

Despite this, the UK Supreme Court declared that: “[t]he scheme of the New York Convention … may give limited prima facie credit to apparently valid arbitration awards based on apparently valid and applicable arbitration agreements, by throwing on the person resisting enforcement the onus of proving one of the matters set out in Article V(1) …. But that is as far as it goes in law. Dallah starts with advantage of service, it does not also start fifteen or thirty love up.” This reasoning misapprehends the meaning and purpose of Article V of the Convention.

Article V establishes the basic rule that it is for the party resisting recognition of an award to prove the applicability of an exception to the Convention’s general obligation (under Articles III and IV) to recognize foreign awards. Importantly, Article V prescribes a substantive burden of persuasion – not merely a procedural allocation of pleading roles – which can have significant consequences in many categories of cases. It is beyond debate that the Convention’s allocation of the burden of proof applies fully to all of Article V’s exceptions, including cases involving claims that there was no valid arbitration agreement under Article V(1)(a). Again importantly, this reverses the allocation of the burden of proof which exists at the stage of enforcing agreements to arbitrate, where the burden of proving the existence of such an agreement is on the party seeking to require arbitration.

The Dallah Court’s tennis analogy cannot be reconciled with the New York Convention’s allocation of the burden of proof in enforcement proceedings. Under Article V, Dallah does not merely enjoy the “advantage of service,” or even the advantage of a couple of points in one game of tennis. Rather, if the metaphor is to be pursued, Dallah had already won an entire match, which concluded with a presumptively valid arbitral award — and the question was whether the outcome of that match should be ignored in recognition proceedings. Under Article V, only where the award debtor (here, Pakistan) itself affirmatively proves that there is no valid arbitration agreement should this exceptional result be permitted. The UK Court’s conclusion that that Dallah had nothing more than the “advantage of service” and was required to provide material demonstrating the existence of a valid agreement to arbitrate is fundamentally contrary to both the plain language and obvious purpose of Article V.

Third, the Convention also requires Contracting States, like the United Kingdom, to apply the law specified in Article V(1)(a) to the validity of agreements to arbitrate – and not to apply their own local law to this issue. In Dallah, that law was indisputably French law (because, in the absence of a contrary choice by the parties, it was the law of the putative arbitral seat). Critically, however, the UK Supreme Court recited the words of the French international arbitration principles articulated in Dalico and other French decisions, but appears not to have applied the real substance of the French standards when evaluating the parties’ actual conduct and agreements.

That conclusion is confirmed by a comparison of the substantive analyses of the UK Supreme Court and of the French courts. Thus, the UK Supreme Court largely ignored factual elements that were central to the Paris Court of Appeal’s (and arbitral tribunal’s) decisions. In particular, the UK Supreme Court largely discounted the fact that, until the day before the execution of the Agreement, all negotiations and formal correspondence (on Government letterhead) took place exclusively between Dallah and the Pakistani Government. Similarly, the Supreme Court ignored the fact that the Prime Minister of Pakistan presided over meetings of the Trust (despite holding no position in it) and that it was the Pakistani Government which both created and later terminated the Trust – the latter act dissolving Dallah’s nominal contractual counter-party. And the UK Supreme Court devoted only passing attention to the fact that the Pakistani Government was actively involved in directing performance of the Agreement and formally terminating the Agreement (again, in correspondence from Government officials on Government letterhead), while the Trust had not been involved at all in either performance or termination of the Agreement. In contrast, the Paris Court of Appeal placed substantial weight on all these circumstances, holding that the Government’s actions both before and after conclusion of the Agreement could only be explained by its status as a real party to the Agreement.

One might debate the evidentiary weight of these various factors – though they point fairly decisively against the UK Supreme Court’s conclusions. The more fundamental point, however, concerns Article V(1)(a)’s choice of¬ law rule for the law governing the arbitration agreement – often described as one of the Convention’s crowning achievements. That rule requires Contracting States not merely to formally recognize foreign standards for the validity of arbitration agreements, but also to apply the substance of those standards in practice, just as the relevant foreign courts would do so.

In Dallah, it is difficult to avoid the conclusion that the UK Supreme Court ultimately failed to appreciate the substance of French law and – to an extent, understandably – applied what amounted to a classically English approach to contract law. Lord Mance hinted at this, referring with evident discomfort to the French standard: “It is difficult to conceive that any more relaxed test would be consistent with justice and reasonable commercial expectations…”

This discomfort is not surprising. The reluctance of English courts to consider precontractual negotiations – as contrasted to the approach in many other civil and common law jurisdictions – is familiar. Equally familiar is the English courts’ emphasis on express terms of contractual agreements and hesitations to embrace notions of good faith. Those rules are fair enough in English settings – indeed, that is why parties frequently agree to English law, applied by English courts or English-seated arbitral tribunals, to govern their commercial contracts. Critically, however, these are not rules of French law – and, as the competing decisions in Dallah illustrate, the application of these English approaches to contract law can, expressly or otherwise, produce very different results from those which obtain under French law. Under Article V(1)(a), it is essential that courts not merely apply just the words, but also the substance and spirit of the legal rules specified by the Convention’s choice-of-law standards. More fundamentally, the challenges of applying foreign law confirm the wisdom of Article VI’s provisions for stays of enforcement proceedings when annulment proceedings are underway in the courts of the country where the award was made.

In sum, the Convention did not contemplate a process that permits a jurisdictional objection to be relitigated effectively from scratch in a foreign court – ten years after the arbitrators’ jurisdictional decision and fifteen years after the events in question. Instead, like commercial parties, the drafters of the New York Convention intended that international arbitration be speedy, efficient and effectively enforced; the drafters of the UNCITRAL Model Law had similar objectives, including by requiring prompt challenges to jurisdictional awards (in Article 16(3)). Regrettably, Dallah does not achieve any of these objectives: it misapplies the Convention’s provisions on burden of proof, stays of enforcement and choice of law, producing a result that frustrates the most basic objectives of the arbitral process.

By Gary B. Born and Michal Jorek

In ALC v ALF [2010] S.G.H.C. 231 (“ALC v ALF”), the High Court revoked the issue of a subpoena that had earlier been granted on an ex-parte basis (as is usually the case) on the grounds that the issue of the subpoena had been an abuse of process.

ALC v ALF is a case that fell within the domestic arbitration regime and was governed by the Arbitration Act (Cap 10) (the “Arbitration Act”). Nonetheless, the Court’s observations would likely apply in the international context, given the similarities between the Arbitration Act and the legislation governing international arbitrations, namely the International Arbitration Act (Cap 143A) (the “International Arbitration Act”).

The issue of a subpoena was sought by the defendant in ALC v ALF, this following immediately after the arbitrator’s decision to deny, after a full hearing, the defendant’s request that the plaintiff’s witnesses provide sworn testimony attesting to the adequacy of the discovery. The arbitrator did reserve the parties’ rights to present further submissions if it should turn out that discovery was inadequate.

Notwithstanding the arbitrator’s ruling, the defendant proceeded to apply for a subpoena in the Singapore High Court for the same purpose – to require an employee of the plaintiff to attend the hearing to give evidence regarding the adequacy of the plaintiff’s discovery.

In its decision to revoke the subpoena, the Court noted that the parties had agreed to a procedure where only the witnesses agreed to by the arbitrator would attend the hearing. The court considered the terms of the procedural order issued by the arbitrator, and found that the parties had clearly agreed that the arbitrator would have final say as to the calling of witnesses to the hearing.

The Court ruled that the defendant ought to have sought direction from the arbitrator before calling the plaintiff’s employee as a witness. The Court held that the defendant’s attempt to circumvent this arrangement was premature, improper and constituted an abuse of process.

ALC v ALF reaffirms the prior decisions of the Supreme Court that upheld the policy of minimal curial intervention in the arbitral process. The Court specifically held that recourse should be had to the parties’ contractual arrangement and agreement on procedures before seeking curial intervention.

The judgment does leave open for consideration the position where there is no applicable contractual arrangement or agreement on procedures – in such an event, should a party still seek the consent of the arbitral tribunal? In some cases, rules and/or legislation answer the point – see e.g., Article 27 of the UNCITRAL Model Law and section 43(2) of the English Arbitration Act 1996. Under the Arbitration Act (or indeed, the International Arbitration Act), the position remains undecided. Section 30 of Arbitration Act (and section 13 of the International Arbitration Act) does not expressly provide that an arbitral tribunal should be consulted before applying to court for a subpoena.

Whilst the judgment in ALC v ALF is undoubtedly correct on the facts, one questions whether the Court would have ruled in similar fashion had there been no agreement on directions relating to the calling of witnesses. Would the Court still have abided by the policy of minimal intervention?

The second decision in this posting concerns the powers of the Courts to order pre-arbitral discovery. In Equinox Offshore Accommodation Ltd v Richshore Marine Supplies Pte Ltd [2010] S.G.H.C 122 (“Equinox”), the Singapore High Court denied an application for pre-arbitral discovery.

The plaintiffs in Equinox had sought pre-arbitral discovery from the defendant to ascertain the viability of commencing arbitration proceedings against the defendant for overcharging the plaintiff under a commission arrangement. This discovery was sought pursuant to a provision in the agreement that allowed the plaintiff to inspect the records of the defendant. The self-same agreement had an arbitration clause.

The Court ruled that legislation did not confer on the Courts the power to order pre-arbitral discovery. Neither did the Court have inherent jurisdiction to grant such discovery. The Court again placed emphasis on minimal interference – if parties had chosen arbitration as their mode of dispute resolution, the entire conduct of the arbitration proceedings should be left to the arbitral tribunal. This ought to extend to pre-arbitral discovery as well.

The decision itself raises interesting questions. Among other issues, it would follow from the decision that the Courts do not have the power to grant pre-arbitral discovery against third parties for the purposes of ultimately commencing arbitration proceedings between the contracting parties – this may be a matter that needs to be addressed by agreement (if not also by legislation).

In fact, the Court in both ALC v ALF and Equinox gave primacy to the contractual agreements and arrangements between the parties. The Court in Equinox echoed the sentiment in ALC v ALF and observed that it “surely is for the parties to make the necessary contractual provision for such a pre-arbitral process of discovery”.

In conclusion, these recent decisions highlight the Singapore Courts’ careful refrain from undue interference in the arbitral process, and ought to be welcome in this regard. There is now greater clarity in the scope of the Courts’ powers in providing interim relief in aid of arbitration and parties should consider this when drafting their arbitration agreements. A failure to do so could leave parties without a proper recourse, given the Courts’ approach to applications for interim relief.

By Nandakumar Ponniya and Dian Chen

This article presents an overview of what can be reasonably expected by foreign counsel and parties when arbitrating in Brazil as regards evidence production – a question many clients and friends have been asking lately.

The following factors regulate and influence evidence production in arbitrations seated in Brazil: (i) the parties’ pre or post-dispute agreement; (ii) the Brazilian Arbitration Act; (iii) Brazilian procedural laws; and (iv) the rules of the selected arbitral institution, if applicable.

The parties to an arbitration have autonomy to choose prior to the dispute or when the arbitration has commenced not only the substantive law applicable to the merits of the dispute, but also the procedural rules which will guide the proceeding, including the rules of evidence production. The parties usually agree on these rules in the beginning of the arbitration, which will be reflected in a procedural order issued by the arbitral tribunal.

It is unusual for the parties to an arbitration – seated in Brazil or elsewhere – to adopt the broad-ranging discovery tools established by the U.S. Federal Rules of Civil Procedure, allowing, for instance, extensive document requests and witness depositions. Evidence production in arbitration usually rests in a middle ground between Civil Law and Common Law traditions.

An option is to adopt a separate set of evidentiary rules, for instance, the recently updated IBA Rules on the Taking of Evidence in International Arbitration, which in fact has already happened in some disputes in Brazil under the ICC Rules. The IBA Rules are intended to govern in an efficient and economic manner the evidence production in international arbitrations, particularly those involving parties from different legal traditions, as they provide for a comprehensive blend of Civil Law and Common Law procedures.

Despite the parties’ autonomy, they are not entirely free to define how evidence production will occur. They must ensure that evidence production complies with the law of the arbitration seat (or lex arbitri) in order to minimize the chances of judicial annulment of the arbitral award.

This is why it is important to select a seat whose laws and courts are arbitration-friendly and supportive of the types of evidence commonly used in arbitration, such as São Paulo and Rio de Janeiro.

As regards evidence production, Section 22 of the Brazilian Arbitration Act provides that either ex officio or at the parties’ request the tribunal may hear the parties or their representatives, hear witnesses, and appoint experts. Also, if an arbitrator is substituted, her substitute may request that evidence be produced again. Finally, “If a party fails, without good cause, to comply with a request to testify, the tribunal shall give due consideration to such behavior when issuing the award; if a witness is absent, the tribunal may request the judicial court of jurisdiction to compel the witness to appear before court.”

The Brazilian Arbitration Act also establishes that the Brazilian Code of Civil Procedure (“CPC”) shall apply when the Act is silent.

In a nutshell, under the CPC, evidence must be relevant, pertinent, and obtained through licit means. There is no discovery, especially considering the model of U.S. Federal Rule of Civil Procedure 26: document requests are extremely limited; a party cannot be compelled to produce evidence adversely affecting his/her interests unless strictly necessary and ordered by court; as a rule, the party who deems the evidence is necessary has the burden to present it and will only be able to compel the other party to produce it by: (i) proving that it does not possess the evidentiary piece and that the counter-party does; (ii) describing the evidence sought in detail; and (iii) proving the evidence is relevant to the case.

Expert witnesses appointed by the parties are popular and, naturally with ethical limitations, entitled to act as advocates. It is the job of the court-appointed expert – and not of the “party-appointed” expert witness – to find the effective “truth.” The role of the court-appointed expert is to interact with the expert witnesses, analyze their reports, and then present his/her independent findings to the tribunal. As such, requests for the disclosure of communications between counsel and party-appointed expert witnesses would likely be denied in an arbitration seated in Brazil. Finally, attorney-client communications are as a rule privileged.

Evidentiary rules are usually related to the principle of due process, also recognized, for instance, by the Brazilian Federal Constitution. Due process may thus be deemed to reflect Brazilian public policy, so that any incompliance with the principles described above may be grounds for the judicial annulment of the award. Therefore, when Brazil is the seat of the arbitration, parties and arbitrators shall observe the provisions and principles established by the lex arbitri (particularly the Brazilian Arbitration Act and applicable Brazilian procedural laws), and consulting with specialized counsel is recommendable.

Finally, it is worth noting that as opposed to litigation in Brazilian courts, where codified Civil Procedure precludes direct witness examination and cross-examination (counsel must ask the questions to the judge, who will then direct the questions to the witness), Common Law-style direct examinations and cross-examinations have been widely adopted in arbitrations in Brazil and in international arbitrations involving Brazilian parties, a practice which shall not represent a risk against future recognition of the arbitral award in Brazil.

The rules of international arbitral institutions such as the ICC, the ICDR, and the LCIA, and of well-established Brazilian arbitral institutions such as the Câmara de Comércio Brasil Canadá (CCBC), Câmara de Arbitragem do Mercado (CAM), Câmara de Mediação e Arbitragem do Centro das Indústrias do Estado de São Paulo – CIESP, and Centro de Arbitragem da Câmara Americana de Comércio – AMCHAM, provide solely for a generic framework of how evidence production will occur.

For instance, the CCBC Arbitration Rules provide that “The parties can submit all the evidence they deem convenient in order to instruct the proceedings and to enlighten the arbitrators. Yet, the parties shall present any other available evidences that any member of the Arbitration Tribunal may consider necessary for the understanding and settlement of the dispute. It is up to the Arbitration Tribunal to accept any evidence deemed as convenient, necessary or relevant.”

The Rules of the Câmara de Mediação e Arbitragem do Centro das Indústrias do Estado de São Paulo – CIESP provide that “The parties may present all of the evidence that they judge useful for the instruction of the proceedings and for the clarification of the arbitrators. The parties should further submit any other evidence that any member of the Arbitral Tribunal deems necessary for the understanding and resolution of the controversy. It will be the responsibility of the Arbitral Tribunal to determine the useful, necessary and pertinent proof.” The Rules of the Centro de Arbitragem da Câmara Americana de Comércio – AMCHAM provide that: “The Arbitral Tribunal shall decide on the taking of evidences requested by the parties or production of evidences it may consider applicable.”

These rules from traditional Brazilian arbitral institutions are similar, for instance, to those established by Articles 20 of the ICC Rules of Arbitration, 19 of the ICDR Arbitration Rules, and 22 of the LCIA Arbitration Rules. The framework provided by all these national and international rules leaves the parties – and, if they are silent, the arbitrators – with considerable discretion to decide what to admit as evidence.

Therefore, it is suggestible that the parties agree on the details (for instance, time-limits of the submissions; availability of witness statements; which types of evidence exactly will and will not be admitted), again ensuring compliance with the lex arbitri in order to minimize the chances of judicial annulment of the award.

As we know, the background of the arbitrators – Civil Law or Common Law – may also influence evidence production, and should be assessed when appointing one.

Arbitrators and counsel in arbitrations seated in Brazil shall have the aforementioned principles in mind to ensure that evidence production complies thoroughly with Brazilian law, particularly if enforcement is to be sought in Brazil.

Adopting the IBA Rules on the Taking of Evidence in arbitrations seated in Brazil has also proved to be efficient, especially when the dispute involves parties and counsel from different legal traditions. This choice may also help avoid surprises and reduce the exposure to judicial interference over how evidence production will be conducted.

These rules are still not popular in arbitrations involving Brazilian parties, a culture that should change as the practice of arbitration in Brazil becomes more and more international.

Fernando Eduardo Serec and André Zanatta Fernandes de Castro for TozziniFreire

The ICC partial award had been quashed by a 12 February 2009 judgment of the Court of Appeal of Paris, because the chairman of the arbitral tribunal, a well-known international arbitrator who is part of one of the world’s largest law firms, had failed to disclose certain links between his firm and one of the parties’ group.

Tecnimont had however raised before the Court an estoppel argument based on the fact that the arbitrator had already been unsuccessfully challenged before the ICC Court of Arbitration for the very same grounds that were invoked before the Court of Appeal, and that such challenge was belated pursuant of Article 11(2) of the Rules for having been made more than 30 days after the date when the party making the challenge had been aware of the facts upon which it was based. According to Tecnimont, the consequence was that the challenging party (Avax) was precluded from objecting to the independence and impartiality of the arbitrator.

The Court of Appeal, however, did not accept this argument on the basis that the grounds for challenge would in fact not have been known to Avax before the award was rendered.

The French Supreme Court (Cour de cassation), in a judgment handed down on 4 November 2010, disagreed with such findings and held that “almost all the adduced [grounds for challenge] were included in the request for challenge notified on 14 September 2007 [to the ICC]”.

As a consequence, the Supreme Court held that the Court of Appeal had modified the terms of the dispute, in breach of article 4 of the French Code of Civil Proceedings.

Article 4 provides that “the subject matter of the dispute is determined by the parties’ allegations”; the case law of the Supreme Court consistently holds, in this respect, that a Court of Appeal which bases its decision on facts different from those submitted by the parties violates Article 4. In this case, the annulment decision rendered by the Court of appeals of Paris is quashed, but the matter is remitted to the Court of appeals of Reims, which will have to decide on the validity of the award.

The Supreme Court does not express any view as to the existence of a bias such as to justify the setting aside of the award for lack of independence and impartiality of one of the arbitrators, which constitutes in French law an irregularity in the constitution of the arbitral tribunal [Article 1502-2 of the French Code of Civil Proceedings].

As a consequence, the conclusion reached by the Court of Appeal of Paris, according to which the links between the arbitrator’s law firm and one of the parties constitutes a conflict of interest, is not criticized as such. In this respect, certain authors have wondered whether the Court of Appeal’s decision should be understood as implying that any failure to disclose relevant circumstances should as such justify a challenge (Th. Clay, rev arb 2009-3, p. 193). We do not believe that to be the case, and the reference by the court of Appeal to a “conflict of interest” simply means that the circumstances in dispute were such as to cast serious doubts in the eyes of a reasonable and informed third party as to the arbitrator’s independence and impartiality. From this perspective, the Court of Appeal findings as to the existence of an appearance of bias is, in our view, consistent with previous case law as well as with the established international arbitration practice as embodied the IBA Guidelines on conflicts of interest in international arbitration (General Standard 2.b).

Neither has the Supreme Court expressed any views as to whether non-compliance with the procedure established by the applicable institutional rules should have any bearing in setting aside proceedings.

Nevertheless, by holding that all the grounds for the challenge in dispute were present in the application made to the ICC, the Supreme Court implies (as the ground for annulment of the Paris court decision would otherwise be deprived of any relevance) that the Court of Appeal should have examined and decided Tecnimont’s argument that such challenge was belated and that Avax should therefore be considered as having waived its right to challenge.

The Court of Appeal decision, in this respect, was highly unsatisfactory. If the parties accepted institutional rules setting time-limits for challenges, why should such time-limits not be enforced by the judge? (see my 19 May 2009 blog; see also in the same sense, Th. Clay, case note op. cit., p. 196). Institutional rules accepted by the parties are incorporated in the arbitration agreement and are as such binding upon the parties. As a consequence, a breach of a provision such as the thirty-days time-limit provided in Article 11 (2) of the ICC Rules of arbitration should be treated as a waiver of the right to challenge, which waiver should prevent any later request to set aside the award on the same grounds.

It is equally unsatisfactory that the decision made by the institution on the challenge be thrown in the waste basket by the judge. Much time is devoted by the parties in arguing these matters before the institution, and institutions carefully weight the parties’ arguments to decide the challenge in the most appropriate manner. In this respect, the IBA recommendation that equal standards be applied to challenges at all stages of the proceedings in order to determine whether grounds for disqualification of an arbitrator exist or existed should be recalled. The facts and circumstances alone are relevant to that effect, and not the current stage of the proceedings or the consequences of the withdrawal (IBA Guidelines, Explanation to General Standard 3(d)). As a consequence, there would be no impediment for the Court of Appeal in setting aside proceedings to give due consideration to the reasons why a challenge was rejected by the institution.

The problem is, of course, that the ICC, like other institutions, does not provide reasons for its challenge decisions. This matter is currently being discussed in the context of the ongoing revision process of the ICC rules of arbitration. Some institutions do provide reasoned decisions, including ICSID, DIS, VIAC, LCIA, NAI and PCA. Reasoned decisions may certainly add to the burden of institutions, and in some instances slightly delay the process; they, however, add confidence in the arbitral process and, more importantly, provide the court in setting aside proceedings with useful information that it can rely on.
Going further, one can wonder whether it is satisfactory to re-litigate before the judge the same challenge discussed before the institution. Would it not be more appropriate to treat challenge decisions rendered by arbitral institutions as if they were awards? Institutional decisions on challenges are in theory of an administrative nature, and they therefore have no res judicata. The nature of those decisions can however be discussed for, at the difference other decisions made by arbitral institutions, they arguably meet the standard of jurisdictional decisions as adopted in many jurisdictions: they are made by a neutral third party (the arbitral institution) and they settle a dispute of a legal nature (whether grounds for disqualification of an arbitrator exist).

Certainly, admitting the jurisdictional nature of such decision would further increase the time and costs of the arbitration, as such an evolution would imply that the parties be granted a reasonable opportunity to present their views before the institution. However, it would spare the parties the burden of litigating twice the same issues. One could imagine that such “challenge awards” could be in turn be the subject of an immediate and expeditious judicial review. Such an evolution may require some amendments to the applicable arbitration laws, but the effort is probably worth making as it would avoid the risk, which is perfectly illustrated by Tecnimont, of having to throw away years of arbitral proceedings and millions of dollars in legal costs, which risk is even compounded when, as in Tecnimont¸ the annulled award resurrects like Lazarus out of its cave, until when it may again disappear if the Court of appeals of Reims decides that the award should be quashed anyway…

Alexis Mourre