Following nine years of fruitlessly attempting to enforce an ICC award in India against state-owned mining company, Coal India, over the supply of equipment and development of a coal mine, White Industries Australia Limited (‘White’) commenced UNCITRAL proceedings in Singapore against India under the Australia-India BIT. The claim was for failure to provide investors with an ‘effective means of asserting claims and enforcing rights’ owing to undue delay in the Indian courts. This claim was brought using the Kuwait-India BIT, whose obligations were imported via a Most Favoured Nation clause contained in the Australia-India BIT. Kuwaiti investments were allegedly treated more favourably by India than those of Australian investors as a result of this wording. In addition, White brought a claim for denial of justice, in breach of the fair and equitable treatment standard in the Australia-India BIT.

White also complained more generally of the Indian courts’ willingness to engage in the extensive and protracted review of foreign arbitral awards, contrary to their obligations under the New York Convention – a recognised issue where arbitration seated outside India involves an Indian party and the parties have not excluded Part I of the Indian Arbitration Act 1996.

The delay they alleged was both in enforcement and setting aside proceedings; enforcement proceedings brought by White in the High Court of New Delhi and set aside proceedings brought by Coal India in the High Court of Calcutta. The enforcement proceedings were eventually stayed pending a decision on the set-aside proceedings. White applied to have the set-aside application dismissed and pursued its appeal to the Indian Supreme Court where it waited for a date to be set for more than five years.

The UNCITRAL Tribunal delivered its award in November 2011, granting White the amount due under the original ICC award plus interest. Effectively, therefore, the treaty arbitration afforded White a second bite at the proverbial cherry, to recover damages in relation to its original claim.

In the context of the set-aside proceedings, the tribunal accepted White’s assertion that delays in the court system (the nine year jurisdictional claims) amounted to a breach of the obligation to provide ‘effective means to assert justice and enforce rights’, although not a ‘denial of justice’, which it considered (following Chevron-Texaco v. Ecuador) to be a more demanding standard under the BIT.

However, in the context of the enforcement proceedings, the tribunal did not accept either of these claims. Its argument was that White had not taken all measures available to prevent delay. With regard to White’s complaints about the Indian courts’ failure to adhere to their New York Convention obligations, the Tribunal was unsympathetic. It held that White should have known the attitude of the Indian judiciary towards implementing the Convention and should have been aware of India’s ‘seriously overstretched judiciary’. Such presumed knowledge meant that there could have been no legitimate expectation on White’s part that the Indian courts would comply voluntarily with its obligation to enforce. The nuances of India’s legal system were taken into account and it was decided, in context, that the time taken to process the claims was not excessive.

Therefore, the decision is something of a double-edged sword. On the one hand it provides a remedy of last resort to investors with a presence in countries such as India where judicial interference in the enforcement of arbitral awards is commonplace. In so doing, it, builds on the decisions in the cases of Saipem S.p.A v. The People’s Republic of Bangladesh (ICSID Case No ARB/05/7), and more recently Chevron Corporation (USA) and Texaco Petroleum Company (USA) v. The Republic of Ecuador (UNCITRAL arbitration): Partial Award on the Merits of 30 March 2010.), both of which upheld claims of judicial delays as amounting to an infringement of the rights of an investor.

However, it is unlikely to open the floodgates for claims relating to delays in enforcement. Several hurdles would need to be overcome in any comparable case:

First, the relevant BIT relied upon by the investor would need to include ‘effective means’ wording, or, as was the case in White v. India, a Most Favoured Nation clause capable of importing such wording into the BIT.

Second, the Tribunal in question would need to accept that an arbitral award falls within the definition of an ‘investment’ under the respective BIT, which remains a contentious issue. In White v. India, for example, the Tribunal held that the ICC award fell within the definition of ‘investment’ not as an investment per say, but as a ‘crystallisation of White’s rights and obligations’. However, there is, of course, no formal doctrine of precedent within investment arbitration so it cannot be assumed that the same conclusion would be drawn, even in like circumstances.

Third, the counter-argument raised by the UNCITRAL tribunal – that there could be no legitimate expectations in respect of enforcement in the Indian courts could apply in most similar scenarios where a court system is subject to systemic delays.

In any case, commencing a BIT arbitration is not a quick or an easy route to obtaining enforcement of a commercial award. There is, after all, the necessary pre-requisite of long delays in enforcement in the commercial arbitration award. This will be followed by an investment treaty arbitration, the average length of which is currently over three years and at a substantial cost to the investor – costs which may not be recoverable. Even then, enforcement does not happen automatically. Despite the procedures in place, notably under the ICSID framework, when States choose not to pay, the procedure can be equally protracted and fruitless.

For those investing in India, attention must be paid to the Department of Industrial Policy and Promotion’s (DIPP) recent pronouncement that India is likely to exclude investor-state arbitration clauses from its future BITs (including the BIT that it is negotiating with the EU) on the basis that ‘the state should not get drawn into private disputes’. It is not yet suggested that this might extend to the renunciation of current BITs and/or withdrawal from the ICSID convention, as per the trend in Latin America. Nonetheless this may well impose a further limitation on remedies for some investors into India.

In White v. India the foreign investor was entitled to a second bite at the cherry in order to eventually successfully enforce a commercial arbitral award. However, given the limitations – both from the point of view of applicable investment treaty frameworks and the procedural burden, this is likely to remain a remedy of last resort.

Joanne Greenaway and Luanna Schultz, Herbert Smith LLP

Conducted by QMUL’s School of International Arbitration and sponsored by White & Case LLP, the 2012 survey aims to examine whether a “harmonised international arbitration procedure is emerging, by canvassing the views of experienced arbitration practitioners from all over the world,” comments Professor Loukas Mistelis, Director of the School of International Arbitration at QMUL.

Entitled “Current and Best Practices in the Arbitral Process,” the survey is the fourth carried out by QMUL since 2006, and seeks to conduct a major investigation into arbitration practices and trends worldwide. Corporate attitudes towards arbitration, recognition and enforcement of foreign awards, and corporate choices in arbitration in key and emerging markets were past survey themes.

There are two significant differences between this survey and those done before. First, this survey concerns the arbitral process itself, rather than corporate user attitudes towards arbitration. Second, this survey reaches out to arbitration counsel and to arbitrators, in addition to inside counsel. This should provide a much broader universe of respondents, along with greater empirical evidence for what actually occurs in arbitration and what works and what does not.

The following topics will be explored in the 2012 survey:

• Arbitrator selection: The preferred methods of selecting arbitrators, experiences in interviewing potential arbitrators and expectations regarding the conduct of such interviews.
• Organising arbitral proceedings: How procedural meetings are convened, the use of the IBA Rules on the Taking of Evidence in International Arbitration, experiences and expectations regarding the role of the tribunal secretary, methods for expediting arbitration proceedings and the use of fast-track arbitration.
• Interim measures and court assistance: The frequency of interim measures applications to tribunals and courts (including security for costs applications), the level of compliance with tribunal-ordered interim measures and the power of arbitrators to order interim measures ex parte.
• Document disclosure: The frequency of document disclosure requests, the standard that applies/should apply for disclosing documents in international arbitration and how to best manage the disclosure process.
• Fact and expert witnesses: The effectiveness of fact witness statements, experiences and views on mock cross-examination of witnesses and witness conferencing, types of expert witnesses most frequently used and the preferred method of appointing expert witnesses.
• Pleadings and hearings: The number and order of delivery of written submissions, methods of expediting pleadings and hearings, duration and mode of hearings and the effectiveness of oral closing submissions and post-hearing briefs.
• Arbitral awards and costs: The frequency of partial, interim and dissenting awards, expectations regarding the length of time to issue an award and experiences and preferences regarding costs allocation.

The questionnaire for this year’s survey can be accessed at www.arbitrationonline.org/survey. Corporate counsel, private practitioners and arbitrators are encouraged to participate.

Those who wish to contribute have until the end of May to complete their responses. Questionnaire responses may be followed by individual interviews for those willing to participate. The report is expected to be launched in September 2012.

By Paul Friedland and John Templeman
White & Case, LLP

“Where Parliament by resolution passed by not less than two-thirds of the whole number of Members of Parliament (including those not present) voting in its favour approves as being essential for the development of the national economy, any Treaty or Agreement between the Government of Sri Lanka and the Government of any foreign State for the promotion and protection of the investments in Sri Lanka of such foreign State, its nationals, or of corporations, companies and other associations incorporated or constituted under its laws, such Treaty or Agreement shall have the force of law in Sri Lanka, and otherwise than in the interests of national security no written law shall be enacted or made, and no executive or administrative action shall be taken, in contravention of the provisions of such Treaty or Agreement”.

What makes this provision intriguing is that no judicial body either in Sri Lanka or internationally has interpreted the ambit of this provision. The fact that there is uncertainty as to its meaning was clearly manifested by the passing of the “REVIVAL OF UNDERPERFORMING ENTERPRISES OR UNDERUTILIZED ASSETS ACT, No. 43 OF 2011” by the Sri Lankan government, which expropriated assets and enterprises which had been privatized or been given concession in terms of an investment agreement by the government, without any legal challenge in a domestic forum either to the passage of the bill or to the expropriation of the affected assets and enterprises, on the basis that the bill violated the provisions of article 157. Therefore, I thought this blog would be an appropriate forum to invite comments as to my thought to its ambit.

Given that article 157 uses the phrase “no written law shall be enacted or made in contravention of such Treaty or agreement”, the question arises as to whether article 157 allows for judicial review of legislation based on violation of a Bilateral Investment Treaty (BIT) provision. If this was so, it would stand in direct conflict with the constitutional provisions that incorporate the concept of parliamentary supremacy to the Sri Lankan constitution and limit the judicial review of legislation to pre-enactment judicial review. Article 80(3) of the Sri Lankan constitution states once a bill has been certified by the Speaker of the Sri Lankan parliament or the President as a duly enacted law, no court or tribunal shall inquire into or pronounce upon in any manner or call into question the validity of such an act on any grounds whatsoever. Moreover, article 84 of the constitution allows for parliament to enact legislation that is inconsistent with any provision of the constitution so long as it has been passed by the requisite majority in parliament. Therefore, to interpret the provisions of the article 157 to mean that it permits the judicial review of legislation or there is an absolute bar on enactment of laws that violate Sri Lanka’s BIT obligation would indeed be a stretch. Does this mean the provisions of article 157 are redundant? My answer is no. This is because provisions of article 157 are still applicable in interpreting legislation which is not explicitly stated to be enacted in violation in the constitution but have provisions which can be seen to be in violation of the provisions of article 157 and legislation which have been given retrospective validity by the constitution and vests discretionary powers.

In my view article 157 incorporates a more limited rule. It incorporates the rule that court should assume that legislature has enacted laws consistent with the constitution and therefore should be interpreted in the light constitutional provisions. In the context article 157 this would mean a given legislation should be interpreted consistent with Sri Lanka’s BIT obligations unless it is a legislation enacted in terms of article 84 and explicitly states that it is a legislation that has been enacted inconsistent with the provisions of article 157. This would mean legislation would have to be interpreted in light of the obligation that investment could only be expropriated for public purposes and that too after payment of prompt adequate and effective compensation. It also means the discretionary power granted by a law should be interpreted in light of fair and equitable treatment, national treatment and MFN treatment standards contained in a BIT.

The other interesting issue since BITs have the force of law, does interpretation of these BIT provisions by Arbitral Tribunals create judicial precedent that bind Sri Lankan courts. Given that the offer to arbitrate is contained in a BIT which has the force of law and therefore a tribunal created by Sri Lankan law, even the Supreme Court of Sri Lanka which is the court of last resort might be bound by their interpretation of BIT provisions. It may also mean that the award made by such a tribunal may be executed by taking out a writ of execution without need for formal enforcement proceedings as it would be in the case of an international commercial arbitration award.

Another moot point is whether, giving BITs a force of law creates a constitutional absolute right to property for foreign investors? If this is so, it would be departure from hitherto defined right to property in Sri Lanka. Firstly, the Sri Lankan constitution does not expressly recognize the right to property and secondly, land law in Sri Lanka which based on Roman Dutch law recognizes the principle of eminent domain.

In the recent case of Riqo Diq, the Supreme Court again could not restrain itself from entertaining an application to interfere in the international arbitration proceedings. The dispute arose when the Government of Balochistan refused to grant lease to Tethyan Copper Company (TCC) to mine copper at Riqo Diq in Balochistan. The matter was pending before the Supreme Court when Tehyan Copper Company Australia (TTCA) initiated two arbitration proceedings against the Government of Balochistan at International Council for Commercial Arbitration (ICCA) and International Center for Settlement of Investment Disputes (ICSID). One of the parties before the Supreme Court filed an application for contempt of court against TCC and requested the Court to stay the arbitration on the ground that TCC intends to “frustrate the laws of the land through international arbitration.”

The three-member bench of the Supreme Court, headed by the Chief Justice of Pakistan, delivered the order on the application to stay the arbitration proceedings on February 7, 2012. In a fairly straight forward order, the Court directed the

Government of Balochistan… to make a request to the ICC and ICSID… not to take further steps and extend the period for nomination of the Arbitrator, so that in the meantime this Court, which is already seized of the matter since the year 2007… may dispose of the same finally.

The ruling of the Court merits a few observations.

Firstly, the Supreme Court’s order is a slight departure from the earlier rulings where the Court restrained the party that had initiated arbitration to pursue or participate in international arbitration proceedings on the ground that the international forum lacked jurisdiction. The international tribunals squarely rejected the Court’s attempts to limit their jurisdiction and to frustrate arbitration proceedings. In SGS v Pakistan (2002), the Arbitration Tribunal confronted a judgment from the Supreme Court of Pakistan restraining a Claimant from appearing in arbitration proceedings conducted under the ICSID Convention. The Tribunal thwarted the Court’s attempt to restrict the Tribunal’s jurisdiction and passed a procedural order stating that “although the Supreme Court Judgment… is final as a matter of the law of Pakistan, as a matter of international law, it does not in any way bind this Tribunal.”

The Supreme Court’s February 7th order is positive in so far as the Court implicitly recognized the jurisdiction of the international tribunals and exercised discretion. Not only the Court made no comment about the forums’ jurisdiction, it did not enjoin anyone from pursuing international arbitration. It’s is, however, not clear whether the Court passed the order “as a matter of international law” or because of the procedural reason that TCCA, the claimant in arbitration proceedings, is not directly arrayed as a party before the Supreme Court. In any case, asking a party to make a request to the arbitration tribunals to temporarily halt the proceedings is qualitatively different from restraining a Claimant before the arbitration tribunal to pursue the proceedings.

Secondly, on a critical note, it’s highly unclear what the Supreme Court wants to achieve by asking the arbitration tribunals through the Government of Balochistan “not to take further steps.” If the Court’s intention behind February 7th order is to deliver a final ruling in the Riqo Diq dispute, then there is a clear misunderstanding as far as international arbitration law is concerned. As the Tribunal in SGS v Pakistan (2002) pointed out in the procedural order, finality in domestic law is different from finality in international law. The Supreme Court may give an order which will be considered final under the law of Pakistan, but that will not cause any International Tribunal to dither in making its own finding. International Tribunals in the past have strongly resisted the efforts of the domestic courts to encroach on their authority to give a final ruling. Some tribunals have even enjoined parties from pursuing certain claims in domestic courts in search of favorable results. (Tokios Tokeless v Ukraine, Procedural Order No. 1 (2003)). In Amco v Indonesia (1984), the Tribunal stated:

an international tribunal is not bound to follow the result of a national court. One of the reasons for instituting an international arbitration procedure is precisely that parties—rightly or wrongly—feel often more confident with a legal institution which is not entirely related to one of the parties. If a national judgment was binding on an international tribunal such a procedure could be rendered meaningless.

What then does the Supreme Court aims to achieve by “finally” disposing the matter? The Court’s determination will have no bearing on the outcome of international arbitrations initiated by TCCA at ICCA and ICSID. The Supreme Court, it seems, has failed to take into account the recent trends in International Law and the fact that the State of Pakistan may have a bear the financial and economic brunt of Court’s misdirected interference in international arbitration proceedings.

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).

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* 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