The factual background to West Tankers has been widely discussed (and is summarised in paragraphs 1 to 14 of the judgment) and there is no need to do so again here. Before the Court of Appeal, West Tankers submitted that judgment be entered under s. 66(2) of the English Arbitration Act 1996 (the “Act”) against the insurers on the terms of a declaratory arbitral award. This was on the basis that such a judgment would allow West Tankers to establish the primacy of the award over any judgment by Italian courts in ongoing proceedings of the same dispute. The High Court held that “[t]he purpose of s. 66 (1) and (2) [of the Act] is to provide a means by which the victorious party in an arbitration can obtain the material benefit of the award in his favour other than by suing on it” and that “[w]here … the victorious party’s objective in obtaining an order under s. 66 (1) and (2) is to establish the primacy of a declaratory award over an inconsistent judgment, the court will have jurisdiction to make a s. 66 order because to do so will be to make a positive contribution to the securing of the material benefit of the award”.

The insurers appealed, arguing that Field J had erred in his construction of s. 66 of the Act, specifically in the meaning of the word “enforced”, and that a declaratory judgment (and in particular a negative declaratory judgment) is incapable of being “enforced” under the meaning of the section. Lord Justice Toulson, in the leading judgment, however agreed with West Tankers that a broader interpretation of the phrase ‘enforced in the same manner as a judgment to the same effect’ in s. 66 is “closer to the purpose of the Act and makes better sense in the context of the way in which arbitration works”. He rejected the insurers’ argument that in the present case the court would not be enforcing an award but only the rights determined by an award as being “an over subtle and unconvincing distinction [that] sits on shaky foundations”, emphasising that “the enforcement of any judgment or award is the enforcement of the rights which the judgment or award has established”. However, Toulson LJ emphasised that the language of s. 66 is permissive and requires the court to determine whether it is appropriate in the situation before it to enter judgment – it is not “an administrative rubber stamping exercise”.

Although Toulson LJ emphasised that the issue before the Court of Appeal “is not a question with a distinctively European flavour”, the consequences of the judgment, and more generally of the approach of the English courts, clearly are (as illustrated earlier in African Fertilisers). It remains uncertain whether the judgment falls under the arbitration exception to the Brussels Regulation 44/2001, thereby underlining the need for reform of the Regulation. As any such reform is likely to take time, there remains the real possibility that the English courts may, before any such reform, be faced with enforcement proceedings under the Regulation of an (inconsistent) judgment of the Italian courts. The questions presented by African Fertilisers remain unanswered for the time being.

Phillip Capper and Christian Blank

White & Case LLP
London

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?

As previously discussed in this blog, the Second Circuit drew criticism in 2002 by applying the forum non conveniens doctrine to dismiss an action brought by the Russian state gas company’s insurer to enforce an award not only against the Ukrainian state gas company named in the award, but also against the Ukrainian government. See Monegasque de Reassurances S.A.M. (Monde Re) v. Nak Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002); Charles H. Brower II, Reflection on Forum Non Conveniens: Monde Re Was Right?!?.

Contrary to general opinion in the field, this author supported the Second Circuit’s decision in Monde Re because the plaintiff did not only seek summary enforcement of the award against its counterparty to the arbitration, but also sought relief against a third-party government based on veil-piercing theories that would have raised difficult questions of foreign law, required the collection of evidence from government sources in foreign capitals, and drawn U.S. courts into a politically charged dispute about energy security in Europe. See Brower, supra.

At a high level of generality, the alignment of parties and the procedural history in Figueiredo called forth memories of Monde Re: the claimant brought an arbitration and received an award against a state-controlled program in Peru (“Water for All”), then sought enforcement in New York not only against the named counterparty, but also against the Republic of Peru based on veil-piercing arguments. Figueiredo Ferraz e Engenharia de Projecto Ltda. v. Republic of Peru, 655 F. Supp. 2d 361, 367 (S.D.N.Y. 2009). However, the similarity stops there. Contrary to the situation in Monde Re, the district court held that the veil-piercing arguments could be resolved without further collection of evidence because the Peruvian Ministry of Housing, Construction and Sanitation had itself: (1) made partial payments of sums due under the award; (2) asserted, in intra-governmental correspondence, that the Ministry of Economy and Finance had an obligation to satisfy the award; and (3) initiated proceedings to set aside the award in Peruvian courts. Id. at 371.

Also contrary to the situation in Monde Re, the case did not raise questions that would have drawn U.S. courts into explosive political controversies involving two or more foreign states. Given the simplicity of the issues and the absence of political baggage, the district court exercised its discretion not to dismiss the enforcement action on forum non conveniens grounds. Id. at 374-77.

In a final contrast to Monde Re, the Second Circuit reversed the district court’s denial of forum non conveniens dismissal, based almost exclusively on Peru’s interest in applying a domestic statute that prohibits state agencies from paying more than three percent of their annual operating budgets to satisfy any particular judgment. Figueiredo, 2011 WL 6188497, at *4-*5. Many observers read the Second Circuit’s decision as an unwelcome December surprise that (1) lowers the threshold for forum non conveniens dismissals in enforcement proceedings, and (2) increases opportunities for second-guessing of district courts inclined to retain jurisdiction over enforcement proceedings.

As in Monde Re, however, observers seem to have lost sight of critical facts underlying the Second Circuit’s decision in Figueiredo. These include the facts that: (1) Peru represented the legal seat of arbitration; (2) the arbitral tribunal rendered its decsion “ex aequo et bono” and awarded the claimant more than $21 million; (3) the Ministry requested a Peruvian court to set aside the award on the grounds that Peruvian law limits recovery to the amount of the contract for international arbitrations involving a non-domestic party; (4) the Peruvian court denied set-aside because the claimant “had designated itself a Peruvian domiciliary in the agreement and the arbitration,” with the result that “the arbitration was a ‘national arbitration’ involving only domestic parties”; (5) when seeking enforcement of the award in New York, the claimant described itself as a Brazilian corporation; and (6) Peru’s appellate brief stridently argued that the claimant should be deemed a Peruvian national, given the position it had taken in the agreement, the arbitration and the set-aside proceedings. Id. at *1 (emphasis added); Brief of Peru at 57-59; Reply Brief of Peru at 29. In short, one might describe the claimant’s tactics as vexatious, cloaking itself in a Peruvian flag to secure the higher measure of damages available in “national” arbitrations, then cloaking itself in a Brazilian flag to avoid the three-percent payment cap for national arbitrations.

As one reads the appellate briefs of the parties on the topic of nationality, the claimant distinguishes between corporate domicile and nationality, whereas Peru seems to equate the two—an outcome that seems consistent both with the Peruvian court’s conclusions in the set-aside proceedings and with U.S. definitions of corporate citizenship for purposes of diversity jurisdiction. Compare Brief of Figueiredo Ferraz e Engenharia de Projecto Ltda. at 70-72, with Brief of Peru at 57-59, and Reply Brief of Peru at 29. See also Figueiredo, 2011 WL 6188497, at *1; 28 U.S.C. § 1332(c)(1) (assigning citizenship to corporations based on place of incorporation and principal place of business).

While the district court’s analysis accepted the claimant’s distinction between domicile and nationality, the Second Circuit (1) emphasized the Peruvian court’s description of the arbitration as a “‘national arbitration’ involving only domestic parties,” and (2) seemed exceedingly reluctant to allow an ostensibly Peruvian entity to use enforcement proceedings to avoid the application of Peru’s statutory cap on payments when dealing with the Peruvian government in a contract both executed and performed in Peru. Compare Figueiredo, 655 F. Supp. 2d at 372, with id., 2011 WL 6188497, at *1, *5.

Whatever the proper legal designation of the claimant’s nationality, the case reveals anomalies in the New York Convention and the Federal Arbitration Act. If one assumes that the claimant donned Peruvian nationality as a matter of law, the case clearly escapes the scope of international arbitration, inasmuch as it represents a legal relationship solely between Peruvian entities, with contractual performance solely in Peru, and conduct of the arbitration proceedings solely in Peru. Viewed from that perspective, the case represents a national arbitration that falls squarely outside the scope of most instruments on international commercial arbitration.

Going back to the early history of international instruments on the topic, the 1923 Geneva Protocol on Arbitration Clauses applies only to agreements “between parties[] subject respectively to the jurisdiction of different contracting parties.” Geneva Protocol on Arbitration Clauses, art. 1, Sept. 24, 1923, 27 L.N.T.S. 157. The 1927 Geneva Convention on the Execution of Foreign Arbitral Awards applied only to awards “made in pursuance of an agreement . . . covered by the [1923 Geneva Protocol],” meaning an agreement between parties having diverse nationalities. Geneva Convention on the Execution of Foreign Arbitral Awards, art. 1, Sept. 26, 1927, 92 L.N.T.S. 302.

Similarly, the 1961 European Convention on International Commercial Arbitration applies only to agreements and awards “arising from international trade between physical or legal persons having . . . their habitual place of residence or their seat in different Contracting States.” European Convention on International Commercial Arbitration, art. I(1)(a), Apr. 21, 1961, 484 U.N.T.S. 364.

Likewise, in the preamble to the 1975 Inter-American (Panama) Convention on International Commercial Arbitration, states parties express their desire to “conclud[e] a convention on international commercial arbitration.” Inter-American Convention on International Commercial Arbitration, pmbl., 1438 U.N.T.S 248. While none of the operative articles expressly limits that instrument’s coverage to international commercial disputes, the limitation finds confirmation in Article 3, which provides: “In the absence of an express agreement between the parties, the arbitration shall be conducted in accordance with the rules of procedure of the Inter-American Commercial Arbitration Commission [(IACAC Rules)].” It seems unlikely that states parties, such as the United States, contemplated application of the IACAC Rules to purely domestic arbitrations in which the disputing parties failed to identify a set of arbitration rules. See H.R. Rep 101-501, reprinted in 1990 U.S.C.C.A.N. 675, 676-77 (emphasizing the Panama Convention’s role in facilitating “international commerce,” “trade,” and “foreign investment”). Cf. John P. Bowman, The Panama Convention and Its Implementation Under the Federal Arbitration Act, 11 Am. Rev. Int’l Arb. 1, 37 (2000) (“Application of the Panama Convention to international commercial arbitration permeates the Convention from beginning to end.”).

Finally, and most recently, the UNCITRAL Model Law on International Commercial Arbitration applies only to “international commercial arbitration,” defined to encompass situations where: (1) the parties have their places of business in different states; (2) the arbitration is seated outside the state in which the parties have their places of business; (3) a substantial place of contractual performance lies outside the state in which the parties have their places of business; or (4) the parties have expressly agreed that the subject matter of the dispute relates to more than one country. UNCITRAL Model Law on International Commercial Arbitration, art. 1(1), (3), U.N. Doc. A/40/17/Annex I (June 21, 1985).

In other words, on one view, Figueiredo involved relationships so squarely grounded in Peru that the resulting arbitration could not possibly have qualified for coverage by almost any of the leading instruments on international commercial arbitration—except, of course, the New York Convention.

True to its official name, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, applies to any award rendered on the territory of a foreign state (or, if the state of enforcement has adopted the reciprocity reservation, the Convention applies to any award rendered on the territory of a foreign state party). Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. I(1), (3), June 10, 1958, 330 U.N.T.S. 38.

Unlike almost every other leading instrument, the New York Convention does not require the disputing parties to have diverse nationalities or to engage in transactions that cross national borders. While the New York Convention aims primarily “to facilitate arbitration in international commerce,” and while an early ICC prototype had referred to “international awards,” concerns about a-national awards and the difficulties of defining international commerce prompted delegates to the New York Convention’s 1958 drafting conference to reorient that instrument’s coverage towards foreign awards. Albert Jan van den Berg, The New York Arbitration Convention of 1958, at 17 (1981). As a result, the New York Convention technically applies to foreign awards grounded in a single jurisdiction. Thus, for purposes of enforcement in the United States, an award falls under the Convention even if rendered in Paris between two French wine merchants under a contact for the sale of French wine. Id.

In his seminal work on the New York Convention, Albert Jan van den Berg described this phenomenon as a “harmless ‘side-effect’” that “scarcely occurs in practice” and had “not occurred in any of the reported cases.” Id. at 18. In addition, he opined that the New York Convention’s uniquely broad scope might prove useful in cases where the losing parties to domestic arbitrations possess substantial bank accounts in foreign jurisdictions. Id. While van den Berg’s assessment holds true as a general matter, one wonders if the “side-effect” remains so “harmless” when private parties exploit it to reach the assets of their own governments, thus draining the national treasury in violation of otherwise applicable national laws.

Confirming the potential for mischief in the circumstances just outlined, one need not search long for precedent rejecting the efforts of disgruntled national corporations to circumvent the limits of domestic redress against their own governments by invoking the machinery of international dispute settlement. Cf. Loewen Group, Inc. v. United States, ICSID Case No. ARB(AF)/98/3, Award ¶ 223 (June 26, 2003) (finding it “inconceivable” that states would negotiate treaties to provide their own citizens with international avenues for redress of regulatory disputes). This holds true even in the context of the New York Convention, where the only court to address the issue outside the Second Circuit invoked the forum non conveniens doctrine to dismiss an enforcement action brought by a foreign entity against its own government with respect to an arbitration involving public utilities and seated in the state of the disputing parties’ nationality. Termorio S.A. E.S.P. v. Electrificiadora del Atlantico S.A. E.S.P., 421 F. Supp. 2d 87, 103-04 (D.D.C. 2006).

Of course, the New York Convention’s unusually broad scope should not apply to cases that, like Figueiredo, arise under the Panama Convention. As mentioned above and recognized by some courts, the Panama Convention does not cover foreign awards involving parties, transactions, and arbitral proceedings grounded in a single foreign jurisdiction. See Energy Transport Ltd. v. M.V. San Sebastian, 348 F. Supp. 2d 186, 199 (S.D.N.Y. 2004) (“For example, if parties sought enforcement in the United States of an award rendered in Panama, involving only Panamanian citizens conducting a domestic transaction, the New York Convention would likely apply but the Inter-American Convention would not because of the award’s purely domestic character.”); Bowman, supra, at 39 (“Under the Panama Convention, . . . a foreign award rendered . . . in Uruguay, involving only Uruguayan citizens engaged in a domestic transaction, may not be enforceable.”).

However, this clear understanding of the Panama Convention’s scope reveals an anomaly in the FAA. Despite the obvious differences between the respective scopes of the Panama and New York Conventions, the United States inexplicably implemented the Panama Convention through a statutory provision that incorporates by reference most of the New York Convention’s implementing legislation. See 9 U.S.C. § 302. As a result, while the Panama Convention applies only to international commercial arbitration, the United States has extended its coverage by statute to awards grounded in a single foreign jurisdiction. Bowman, supra, at 39 n.104, 75. While “harmless” in most cases, this little-known “side-effect” could prove both unexpected and aggravating to foreign governments dealing with their own citizens in domestic transactions, on matters of public importance.

Given the United States’ relative lack of interest in localized disputes between foreign governments and their own nationals on matters of local importance, it seems wise for U.S. courts to preserve forum non conveniens dismissals as a possible antidote for the rare situations in which the New York Convention’s and the FAA’s unusually broad scope threatens to produce surprising results. Far from provoking allegations of treaty violations, such dismissals seem more likely to draw appreciation from states parties dealing with their own citizens on matters of the public interest.

For the reasons stated above, the Second Circuit’s decision in Figueiredo deserves more sympathetic consideration than accorded by most observers. Likewise, the forum non conveniens doctrine deserves slightly better treatment than the categorical rejection adopted by the draft Restatement on the U.S. Law of International Commercial Arbitration. By failing to leave any opening for forum non conveniens dismissals, the Restatement’s drafters run the risk that their final product will draw the same respect expressed by the majority in Figueiredo, which damned the ALI’s work by failing to mention it at all.

The CA in Keeneye reversed the much-discussed decision of the Hong Kong Court of First Instance (“CFI“) to refuse enforcement of a PRC arbitral award on grounds of public policy. The CFI had held that the conduct of an arbitration in which one of the arbitrators and the General Secretary of the Xian Arbitration Commission acted as mediators (a so-called “arb-med” procedure) was tainted by apprehended bias. The CFI therefore refused enforcement of the award on the basis that it would be against the public policy of Hong Kong, pursuant to section 40E(3) of Hong Kong’s old Arbitration Ordinance (Cap. 341) (which was then in force, but has since been superseded by section 95 of the new Arbitration Ordinance, Cap. 609).

The CA allowed Gao and Xie’s appeal against the CFI decision, and approved the enforcement of the award in Hong Kong on two principal grounds.

First, Keeneye had failed to raise any objection to the “arb-med” procedure during the arbitration itself, and had therefore waived its right to do so in the enforcement proceedings. This decision was underpinned by the governing arbitral rules (the Xian Arbitration Commission Arbitration Rules), which specifically provided for waiver of the right to object in such circumstances. (Similar rules on waiver exist in many institutional rules, including Article 28.1 of the HKIAC Administered Arbitration Rules, Article 39 of the new ICC Rules (which came into effect on 1 January this year), and Article 36.1 of the SIAC Rules.) On this point, the CA also emphasised the principle that a party may not keep a complaint about impropriety or bias “up his sleeve” for potential use at a later stage.

Secondly, the “arb-med” procedure adopted in the arbitration did not disclose apprehended bias giving rise to an issue of public policy in any event. This part of the CA’s decision may come as a surprise to some, given the striking factual circumstances in this case. These included the facts that (i) the mediation took place in the form of a private meeting over dinner at the Xian Shangri-la Hotel, (ii) the mediation was not held in the presence of both parties, and (iii) the mediators appeared to make a settlement proposal on their own initiative. However, in reaching its conclusion that there was no apprehended bias, the CA indicated that due consideration should be given to how mediation is typically conducted in the jurisdiction of the seat (here, the PRC). In this regard, the CA placed considerable weight upon the fact that the local court in Xian (which had supervisory jurisdiction over the arbitration) had refused an application to set aside the award – citing with approval English authority that such circumstances will be a “very strong policy consideration” for the court to take into account in deciding whether or not to enforce an award.

According to the CA, the test for determining what is contrary to public policy in Hong Kong is whether the relevant matter is contrary to “fundamental conceptions of morality and justice” in Hong Kong. Thus, if the procedure is acceptable practice in the jurisdiction in which it took place, it will not be in breach of public policy in Hong Kong unless it was so serious as to be contrary to fundamental conceptions of morality and justice.

Although this “when in Rome” approach might seem slightly troubling at first sight, the conclusion of the CA appears to be the right one. In particular, when a party consents to arbitration in a particular jurisdiction, it agrees to be bound by the rules and procedures of that seat. Whilst there is a public policy ceiling on adopted procedures beyond which the enforcing courts will be unwilling to cross, this outer limit will be narrowly construed in practice. For those engaging in “arb-med” procedures in the PRC (where practices often differ significantly from those in Hong Kong and other jurisdictions), the Keeneye judgment may provide some comfort that the mediation procedure will not in itself threaten the enforceability of any award in Hong Kong on the basis of public policy.

The CA’s recent judgment is likely to generate much (further) discussion about the development of arb-med in Hong Kong. Whilst the judgment acknowledges that arbitrators can act as mediators in the course of arbitration proceedings (a practice which is recognised expressly in section 33 of Hong Kong’s new Arbitration Ordinance, Cap. 609), the acceptable boundaries of that role in Hong Kong are far from clear. Moreover, the concept as a whole can be rather alien to common law lawyers.

It is suggested that parties and counsel should keep an open mind to the possibility of adopting arb-med in the light of the pivotal role such procedures have played in the settlement of disputes in other jurisdictions. That said, for a number of reasons (including the fact that arbitrator-mediators are compelled by Hong Kong’s arbitration legislation to disclose to all parties any confidential but materially relevant information they learned during private caucus sessions), it is likely that arb-med procedures in Hong Kong will favour an evaluative, rather than a facilitative, approach (with appropriate waivers from the parties). Such an approach would avoid the risk of any subsequent complaint about ex parte communications between a party and the arbitrator-mediator – as was featured in Keeneye.

It remains to be seen which direction the development of arb-med in Hong Kong will take. In the meantime, the Keeneye judgment serves as a powerful reminder to parties to raise any objections they may have to the arbitral procedure promptly. Failure to do so may result in a waiver of the right to object at a later date, including in the context of enforcement proceedings.

Justin D’Agostino, Martin Wallace and Ula Cartwright-Finch

Questions regarding arbitration in Dubai usually focus on enforcement in general, and, particularly, the interrelation between the civil law “onshore” regime and the common law “offshore” jurisdiction of the Dubai International Financial Centre (DIFC). Certain key developments in relation to these regimes from the last few years are set out below.

I. BACKGROUND: THE ARBITRAL REGIME OF THE DIFC

The DIFC is an example of ‘a jurisdiction within a jurisdiction’, a construct adopted in several Middle Eastern countries and adapted to provide certainty and familiarity to international business in an attempt to attract investment.

The DIFC is a financial free zone, located in the Emirate of Dubai (known as “offshore” and “onshore” Dubai respectively). In spite of its location in the centre of a civil law jurisdiction, the DIFC is an autonomous common law jurisdiction, empowered, pursuant to UAE law, to enact its own legal and regulatory framework for all civil and commercial matters. The language of the supervisory court, the DIFC Court,¹ is English.

The DIFC Arbitration Law is modelled on the UNCITRAL Model Law, as amended in 2006, and entered into force in 2008. Pursuant to this law, there is no requirement for parties to have any connection with the DIFC in order to provide for an arbitration to be seated in the jurisdiction.² In contrast, arbitrations seated in “onshore” Dubai are governed by Articles 203-218 of the UAE Code of Civil Procedure 1992, largely based on the former Egyptian Civil Procedure Law.³

In February 2008, the DIFC inaugurated the DIFC-LCIA Arbitration Centre (the Centre), which is the product (as the name suggests) of a joint venture between the London Court of Arbitration (LCIA) and the DIFC. The DIFC-LCIA Arbitration Rules (the Rules) are closely modelled on the LCIA Arbitration Rules. The Centre functions with the assistance of the LCIA Secretariat and has full access to its expertise and general systems.

II. THE ENFORCEMENT REGIME: AN UPDATE

A. Enforcement in “Onshore” Dubai

1. Awards rendered in Dubai

Pursuant to Article 215 of the UAE Code of Civil Procedure, a “domestic” arbitration award must be recognised by the local court, with the effect of converting it to a court judgment. As there is no system of precedent nor comprehensive court reporting system in the UAE, there is no consistent barometer of the Dubai Courts’ attitude to domestic awards. However, key cases are often reported at conferences or are the subject of publications by counsel. Concerns regarding the Dubai Courts’ attitude to enforcement of awards have a long history, harking back to the widely reported case of Bechtel v. the Department of Civil Aviation of the Government of Dubai in 1994, in which the Dubai Court of Cassation refused to enforce a US$ 25 million award in favour of the Claimant on the grounds that the arbitrator had failed to require the witnesses to swear an oath in the manner prescribed by the UAE Civil Procedure Code. Since 1994, arbitration practitioners in the region have developed a list of “dos and “don’ts”, in an effort to minimise the risk of annulment.⁴ Practitioners are periodically reminded of the need to follow this list. In 2009, for example, the Court of Cassation was faced with an appeal of a Court of Appeal decision to set aside an award on the basis that the arbitrator had not signed each page of the award. The Court of Cassation’s judgment confirmed that an award could be set aside if the signature of the arbitrator (or majority of the tribunal) did not appear on the pages of the award containing the final relief granted and the tribunal’s reasons for granting that relief. In this particular case, the arbitrator had signed the page setting out its decision and part of the reasoning for its decision. The Court of Cassation deemed this sufficient to uphold the validity of the award and proceeded to reverse the decision of the Court of Appeal.⁵

Recently, local practitioners have expressed confidence that the Dubai Courts’ attitude towards arbitration awards has changed since Bechtel.⁶ It is worth noting that, awards rendered under the rules of the Dubai International Arbitration Centre (DIAC) are almost always seated in Dubai, and when compared with DIAC’s large caseload, the discussion of enforcement “scare” stories is limited.

However, a new arbitration law, based upon the UNCITRAL Model Law, would obviously provide greater certainty as to the boundaries of the Dubai Courts’ authority to set aside awards.

2. Awards Rendered in the DIFC

Further to Article 43 of the DIFC Arbitration Law, a party may apply for an order of the DIFC Courts recognising an arbitration award rendered in the DIFC.

Article 7 of Dubai Law No 12 of 2004 (Article 7), states that any judgment “ratified” by the DIFC Courts will be enforceable in “onshore” Dubai (and thereafter, in the other Emirates, pursuant to Federal Law No (11) of 1973 Regulating Judicial Relations between Member Emirates in the Federation) without any further review by the Dubai Courts, provided the judgment is final, has been translated into Arabic and is “appropriate for enforcement”.⁷ Recognition pursuant to Article 43 of the DIFC Arbitration Law qualifies as “ratification” for the purposes of Article 7.⁸ To date there has been no judicial guidance as to the meaning of “appropriate for enforcement”. The 2009 Protocol on Enforcement between the DIFC Courts and the Dubai Courts signed in April 2009 (the Protocol), reiterates the contents of Article 7, particularly that the Dubai Execution Court is to enforce a DIFC judgment without re-reviewing the case, and sets out the procedure by which enforcement pursuant to Article 7 is to take place.

Two key developments occurred in 2011 in relation to Article 7 and the Protocol. The first arbitration award rendered in a DIFC-seated arbitration and recognised by the DIFC Courts pursuant to Article 43, was enforced “onshore” pursuant to Article 7 and the Protocol. At the time in question, approximately 40 DIFC court judgments or orders had already been enforced pursuant to the Protocol. This sets an important precedent, and allows for tentative advice to be provided as to the practice, rather than simply the theory, of “onshore” enforcement of an “offshore” award. The award in question, Property Concepts FZE and Lootah Network Real Estate & Commercial Brokerage, was ratified by the DIFC Court of First Instance on 19 October 2010 and ordered the Defendant to pay damages of approximately US$ 7.2 million plus interests and costs.⁹

Secondly, on 31 October 2011, Dubai Law No 16 of 2011 (Law No 16), passed primarily to expand the jurisdiction of the DIFC Courts, also amended Article 7. The test for enforcement remains the same, but the procedure for enforcement as set out in the Protocol is now enshrined in law. It is worth noting that the phrase “final and appropriate for enforcement” (as per the English translation of Article 7 and the Protocol) is worded as “final and executable” in the English translation of Law No 16. However, the phrase in Arabic is the same in all three instruments, and the test therefore appears unchanged.

3. Foreign Arbitration Awards: Enforcement under the New York Convention

Following the UAE’s accession to the New York Convention (the Convention) in 2006, any arbitration awards rendered in the UAE will be enforceable in the 146 states party to the Convention subject to the limitations specified in its Article V. Conversely, the UAE has an obligation to enforce foreign arbitration awards in accordance with the terms of the Convention. Even though the focus of this discussion is Dubai, it is worth noting that the first foreign arbitration awards enforced in the UAE under the Convention were enforced by the Fujairah (one of the seven Emirates that make up the UAE) Courts in late 2010. Two London Maritime Arbitration Association awards, rendered in 2007, were enforced “in absentia” on the basis of “documents-only”. The defendant did not contest the enforcement.

Decisions of the Dubai Courts are not systematically reported. However, the existence of two enforcement actions under the Convention before the Dubai Courts are generally known amongst the local arbitration community. In the first, the Dubai Court of First Instance refused to enforce a Stockholm Chamber of Commence award with no reasons. The decision is being appealed. The second enforcement action, in respect of an award in a dispute between a subsidiary of Macsteel International, incorporated in the Jebel Ali Free Zone, and a Dubai-incorporated company, rendered under the Rules and seated in London, was upheld by the same court. As a contested action, the decision has been hailed as a key “step forward”. It is generally understood that the disputing party relied upon technical arguments that drew upon the pre-Convention enforcement regime. It is notable that not only did these arguments not prevail in the Dubai Court of First Instance, but that the Fujairah court, in its judgment, made no reference to the pre-Convention regime.

B. Enforcement in “Offshore” Dubai

As there are limited or no relevant precedents, the legal regime set out below is discussed on more of a theoretical basis, simply to complete the picture.

1. DIFC Arbitration Awards

As set out above, a DIFC award is recognised pursuant to Article 43 of the DIFC Arbitration Law (as occurred in Property Concepts FZE and Lootah Network Real Estate & Commercial Brokerage). The DIFC Courts will then proceed to enforce the award.

Subject to the parties’ agreement and any request for interpretation or correction of an award, an application for an award to be set aside (and therefore any attempt to resist recognition on this basis) must be made within three months of the applicant receiving the award.¹⁰ The grounds on which an application to set aside can be made are adopted from the UNCITRAL Model Law, as amended in 2006, and are largely limited to safeguarding the procedural integrity of the process, for example, relating to violation of due process rights. In addition, the DIFC Courts may set aside an award on their own volition if they deem that the dispute is not arbitrable under DIFC Law or the outcome of the award is contrary to the public policy of the UAE.¹¹

2. “Onshore” Dubai Arbitration Awards

Arbitration awards rendered in “onshore” Dubai would, theoretically, be enforced in accordance with Law No 16, following ratification by the Dubai Courts (Law No 16 operates equally in respect of Dubai court judgements being enforced in the DIFC as for DIFC judgments being enforced in Dubai, subject to slightly different formalities). No relevant precedent has yet been reported.

3. Foreign Arbitration Awards

The DIFC, as a financial free zone, has an obligation to comply with the international obligations of the UAE.¹² As part of the UAE, awards rendered in the DIFC also benefit from rights granted to the UAE under international law.

It has been suggested that a more certain way of enforcing foreign arbitration awards in “onshore” Dubai, rather than to seek direct enforcement under the Convention before the Dubai Courts, is to combine two of the enforcement routes described: (i) firstly, obtaining recognition of a foreign award under the Convention before the DIFC Courts where the judges are more familiar with the UAE’s international obligations under the Convention and where the grounds for refusing enforcement are drafted in line with those under the Convention (they mimic the grounds for setting aside domestic arbitration awards set out above); and (ii) secondly, enforcing the DIFC-ratified award in “onshore” Dubai pursuant to Law No 16. The developments described above would appear to support this view.

III. CHOOSING THE DIFC AS AN ARBITRAL SEAT

In light of recent developments and its geographical location, the DIFC is likely to be viewed as an attractive seat of arbitration, whether as a neutral seat for two non-UAE parties or for disputes involving one or more UAE parties. In fact, lawyers often enquire about the possibility of seating any arbitration with a Middle East connection in the DIFC. However, given the DIFC’s position as a second jurisdiction within the Emirate of Dubai, and further to a judgment rendered by the (as he then was) Deputy Chief Justice of the DIFC Courts, Michael Hwang, in July 2009, parties wishing to choose the DIFC as the juridical seat of their arbitration should be reminded of the need to express their intention in specific terms.

The case in question, Amarjeet Singh Dhir v. Waterfront Property Investment Limited and Linarus FZE,¹³ was the first case heard by the DIFC Courts in connection with the DIFC Arbitration Law and the Centre. In spite of the Claimant’s arguments to the contrary, Michael Hwang considered that, in the circumstances and given the parties’ knowledge of the different jurisdictions, the arbitration was seated in “onshore” Dubai, pursuant to an arbitration clause which specified: (i) the applicable law as the “laws of the Emirate of Dubai”; (ii) any dispute (following a period for amicable settlement) to be resolved through arbitration conducted in accordance with “the DIFC-LCIA rules of arbitration applicable to the Dubai International Financial Centre”; and (iii) the place of arbitration as “Dubai”. In essence, the choice of the Rules will not protect a party that has not expressly stated the DIFC as the arbitral seat. Michael Hwang summarised the position as follows:

The moral of this case is that, if parties want the DIFC Arbitration Law to apply and the DIFC Court to have jurisdiction over an arbitration, they should expressly select the DIFC as the seat in their arbitration agreement.¹⁴

IV. THE DUBAI WORLD TRIBUNAL

No discussion of arbitration in the UAE would be complete without mention of one recent decision of the Special Tribunal to decide Disputes related to the settlement of the financial position of Dubai World and its subsidiaries (the Dubai World Tribunal or DWT). Although the DWT and its rulings in respect of arbitration clauses require their own blog entry to be developed fully, we set out the ruling in a recent case that exemplifies its policy in respect of arbitration agreements. The DWT is composed of three DIFC judges,¹⁵ and, therefore may also be informative as to the line such judges will take in the DIFC Courts.

By way of introduction, the DWT was established pursuant to Dubai Decree No 57 of 2009, as amended by Dubai Decree No 11 of 2010 (the Decrees), to hear disputes brought by or against Dubai World and its subsidiaries in the aftermath of Dubai World’s restructuring first announced in late 2009. The DWT formed part of a legislative insolvency package aimed at offering Dubai World’s many creditors a degree of certainty and a neutral forum to pursue their claims. The Decrees had the effect of mandatorily excluding the jurisdiction of the Dubai Courts (including the DIFC Courts) in respect of these claims. The DWT’s jurisdiction and decisions draw upon the laws of various jurisdictions: it is seated in the DIFC; many of the claims brought before the DWT arise out of contracts governed by UAE law;¹⁶ and the court procedure was determined, prior to October 2011, by the Rules of the DIFC Courts (modeled largely on the English Civil Procedure Code) and since October 2011, in accordance with the Rules of the DWT (a variation on the Rules of the DIFC Courts). Its decisions are final and not subject to appeal.

In its judgment dated 11 July 2011, in the case of Hedley International Emirates Contracting LLC v. Nakheel PJSC,¹⁷ the DWT upheld its “policy” position towards arbitration clauses, to “respect and enforce arbitration agreements made between the Corporation and its creditors” and to expect parties to continue with pending arbitration proceedings in accordance with the terms of the relevant contract.¹⁸ The DWT dismissed jurisdiction in the case on the basis that the claim in question was subject to an arbitration clause. In its decision, the DWT noted that it was bound by Article II(1) of the Convention, which prescribed that it must recognise binding arbitration agreements. More telling was the warning, in the final paragraph of its decision, that applicants in future claims presented to the DWT, but dismissed for lack of jurisdiction because they are governed by a binding arbitration agreement, would find themselves faced with an adverse costs award on an indemnity basis.

Reza Mohtashami & Merryl Lawry-White¹⁹

In 2009, Delaware became an exception to this general rule when it authorized judges from the Court of Chancery — the highest profile court in the United States specializing in business matters — “to arbitrate business disputes” when the parties so agree. 10 Del. Code § 349(a). To be eligible for Court of Chancery arbitration, the dispute must meet the following requirements: (1) the parties must agree or stipulate to arbitrate; (2) at least one party must be a “business entity”; (3) at least one party must be a business entity organized under Delaware law or having its principal place of business in Delaware; (4) no party can be a consumer; and (5) for disputes involving solely money damages, the amount in controversy must be at least $1 million. Id. § 349(a) (incorporating id. § 347(a)). In early 2010, the Court of Chancery promulgated rules governing the process and issued a standing order setting out the applicable fees ($12,000, plus $6000 for each hearing day after the first, divided equally between the parties).

The Delaware judge-arbitrator process has been in the news recently with the announcement (in disclosures under the federal securities laws) of Court of Chancery arbitrations filed by Advanced Analogic Technologies Inc. and Skyworks Solutions, Inc. arising out of a merger agreement. They ultimately settled their dispute, with the merger closing albeit on modified terms. (My understanding is that at least four additional Court of Chancery arbitrations have been filed or are pending.)

But since news of the AATI-Skyworks arbitrations became public, Court of Chancery arbitration has been subjected to numerous criticisms, all of which stem from the confidential nature of the process. See 10 Del. Code § 349(b) (providing that Court of Chancery arbitration “shall be considered confidential”). Commentators have complained that the confidential nature of the process harms investors (by reducing the information available about the dispute), other businesses (by reducing the amount of precedent on Delaware corporate law), and the public as a whole (by reducing the public accountability of the court system). Indeed, on October 25, 2011, the Delaware Coalition for Open Government filed suit in Delaware federal court seeking to enjoin Court of Chancery arbitration on the ground that it unconstitutionally deprives the public of its right of access to trials. Oral argument on dispositive motions in the case is scheduled for February 9, 2012.

In addition to important constitutional issues, Court of Chancery arbitration also raises interesting issues of arbitration law. For example, one possible benefit to parties from using Court of Chancery arbitration is that the resulting awards might be more readily enforceable overseas than Delaware court judgments. According to one commentator: “[F]or parties in disputes with foreign entities, the new statutes and arbitration rules may provide greater comfort that the arbitration award will be enforceable against a foreign entity on its home turf under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.” Lewis H. Lazarus, Court of Chancery Arbitration Likely to Become More Prevalent, Delaware Business Litigation Report (Sept. 28, 2011); see also Simpson Thatcher, Delaware Court of Chancery Arbitration Provides Option for Delaware Parties to Resolve Disputes with Foreign Counterparties 3 (Sept. 14, 2010).

For that benefit to be available, however, Court of Chancery arbitration must constitute “arbitration” within the meaning of the New York Convention. Certainly Delaware law labels the process “arbitration,” and it has many of the trappings of commercial arbitration. It is consensual and confidential. The judge-arbitrator is a specialist (rather than a generalist). And the award is final and binding, and subject only to limited court review. (Indeed, Delaware law provides that the Delaware Supreme Court has the authority to “vacate … an order” issued in a Court of Chancery arbitration, and that it shall exercise that authority “in conformity with the Federal Arbitration Act, and such general principles of law and equity as are not inconsistent with that Act.” 10 Del. Code § 349(c).)

But most if not all of these characteristics also are present when the parties consent to a bench trial in the Delaware Court of Chancery by means of a forum selection clause. That process, too, is consensual, and the decisionmaker is the same. The parties can waive the right to appeal, id § 351, and they likely can obtain some degree of confidentiality by consenting to the entry of a protective order. Of course, the extent of confidentiality in a contracted-for bench trial likely is less than in a Court of Chancery arbitration. Moreover, the award in a Court of Chancery arbitration, like a commercial arbitration award, needs to be enforced (i.e., turned into a court judgment) before creditors’ remedies can be used to collect on it. See id. (providing that the Delaware Supreme Court has the authority to “enforce an order of the Court of Chancery issued in an arbitration proceeding under this section”).

Conversely, Court of Chancery arbitration differs from commercial arbitration in at least one important respect. Unlike commercial arbitration, in which the parties pay the arbitrators (and any arbitration institution) a fee that typically varies with the amount sought, in Court of Chancery arbitration the parties pay only a filing fee to the court. The parties do not pay the judge-arbitrators; instead, the judge-arbitrators continue to be paid their usual salary by the state. (In this respect, Delaware law is like the UK Arbitration Act, under which fees for judge-arbitrators are likewise paid to the court. Tech. & Constr. Court Guide ¶ 18.2.3 (Oct. 2010).

Does the differing source of payment make the New York Convention inapplicable to Court of Chancery arbitration? The limited American case law comes solely from jurisdictions in which judges are not permitted to act as arbitrators. Thus, the Seventh Circuit has held that a process in which a sitting judge acted as an arbitrator was more properly characterized as “an abbreviated judicial procedure rather than an unauthorized arbitral one.” DDI Seamless Cylinder Int’l, Inc. v. General Fire Extinguisher Corp., 14 F.3d 1163, 1165 (7th Cir. 1994) (Posner, J.) (adding that “[f]ederal statutes authorizing arbitration, such as 9 U.S.C. §§ 1 et seq. …, do not appear to authorize or envisage the appointment of judges or magistrate judges as arbitrators”). The California court of appeals similarly has stated:

May a sitting superior court judge conduct a private arbitration subject to confirmation under the California Arbitration Act? The answer clearly is no. Notwithstanding the parties’ characterization, the “arbitration” was nothing more than a bench trial, where the judge acted in his capacity as a judicial officer. There is nothing to be confirmed except this bedrock principle: Public judges must engage in public judging.

Heenan v. Sobati, 117 Cal. Rptr. 2d 532, 533 (Cal. App. 2002); see also Elliott & Ten Eyck P’ship v. City of Long Beach, 67 Cal. Rptr. 2d 140 (Cal. App. 1997). In those cases, however, the applicable law did not authorize the judge to serve as an arbitrator.

By comparison, Delaware law expressly authorizes Court of Chancery judges to serve as arbitrators. If Court of Chancery arbitration survives constitutional challenge, it remains to be seen whether courts will find that awards resulting from the process can be enforced under the New York Convention.

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.

For those who may have missed the previous blog posts,² these proceedings occurred further to an application to set aside a partial arbitral award rendered under the auspices of the International Chamber of Commerce, initiated by a Greek company J&P Avax SA against an Italian company Société Tecnimont SPA. Tecnimont had concluded a subcontract agreement with Avax for the construction of a propylene factory located in Greece. A dispute between the parties arose and Tecnimont instituted ICC proceedings in Paris pursuant to the arbitration clause contained in the subcontract agreement.

At the time of his appointment in 2002, the Chairman was ‘Of counsel’ at a global law firm with an office in Paris. In his declaration of independence, the Chairman disclosed that the Washington DC and Milan offices of his firm had previously worked with the parent company of Tecnimont in a concluded matter in which he had never been involved.

During the proceedings, Avax’s counsel became aware that the Chairman’s law firm was assisting a company that was later acquired by the parent company of Tecnimont. Avax then unsuccessfully challenged the Chairman’s appointment before the ICC Court of Arbitration in September 2007. The ICC dismissed the challenge for undisclosed reasons and Avax continued to participate in the arbitration while reserving its rights. A partial award on liability was rendered in favour of Tecnimont on 10 December 2007, with further information regarding the links between the Chairman’s law firm and Tecnimont’s affiliated companies coming to light thereafter.

Subsequently, Avax filed an application to set aside the award with the Paris Court of Appeal.

On 12 February 2009, the Paris Court of Appeal annulled the award and held that the arbitrator was under a continuing obligation to inform the parties of any matter that could cast reasonable doubts on his/her impartiality and independence. The Paris Court rejected Tecnimont’s argument that Avax’s application to set aside was inadmissible because it had already unsuccessfully challenged the Chairman before the ICC on the same grounds and that such challenge was in any event waived as it was made beyond the time limit of 30 days required by the ICC Rules on challenging arbitrators. The Paris Court of Appeal found that Avax had only been notified of relevant facts and circumstances after it challenged the award and after the partial award was delivered. They left open the questions of whether the ICC Rules bind the court and whether the party had waived its right to challenge the award by failing to adhere to the time limitation imposed by the ICC Rules.

The Cour de cassation³ reversed this decision, holding that almost all of the grounds for challenge were already included in the request for challenge filed with the ICC in September 2007. The Cour de cassation considered that the Paris Court modified the terms of the dispute by relying on facts that came to light after the partial award rather than relying on those submitted by the parties, a breach of Article 4 of the Code of Civil Procedure. Consequently, the Supreme Court remitted the case to the Reims Court of Appeal to decide on the validity of the award.

The Reims Court of Appeal first considered that the setting aside application was admissible because the failure to challenge the Chairman within the ICC time limitation did not prevent Avax from applying for the award to be set aside. The Reims Court of Appeal then annulled the award due to the Chairman’s failure to spontaneously and comprehensively disclose that his law firm had advised Tecnimont and related companies during the time of the proceedings.

This decision confirms: (I) the inapplicability of the ICC Rules at least for challenging arbitrators before French courts once an award is rendered and (II) the French courts’ attitude of broadening the scope of the arbitrator’s duty to update and disclose conflicts of interests.

I. The Inapplicability of the ICC Time Rules for Arbitrator’s Challenge

Article 11 of the ICC (1998) Rules provides that challenge of arbitrators must be brought within 30 days from when the party became aware of facts and circumstances giving rise to the challenge. The reasons for the ICC decisions on arbitrators’ challenges are not provided or published. That rule has not been modified by the recent revision of the ICC Rules, despite discussions on the benefits of publishing decisions concerning challenges of arbitrators.

As the Cour de cassation‘s decision that the Paris Court of Appeal modified the terms of the dispute was of a procedural nature, the Reims Court of Appeal’s view on the admissibility of the application to set aside was much anticipated.

Indeed, some commentators argued that the only motive that could justify the Cour de cassation putting forward this procedural flaw is that its correction would have an impact on the admissibility of Avax’s claim. The Cour de cassation therefore has ruled on a technical issue only to enable a future reversal of the Paris Court of Appeal’s decision. It is probably not by coincidence that the designated court is chaired by Dominique Hascher, former general counsel of the ICC Court of Arbitration and previous judge at the 1st Chamber of the Paris Court of Appeal.

On this occasion, the Reims Court of Appeal was expected to provide some explanations as to the consequences of not filing the application within the time limit set forth in the ICC Rules.

Both the Reims Court of Appeal and the Paris Court of Appeal accepted that some facts were revealed after the ICC decision on Avax’s challenge. Thus, the ratio decidendi of the case stands in its analysis of the consideration given by French courts to the ICC Rules.

The Reims Court of Appeal’s conclusions are straightforward: challenges before the ICC Court and review of an award by a judge are separate proceedings and do not serve the same purpose; the two applications are before different authorities; and the judge that deals with the award is not required to abide by the ICC time limit to challenge arbitrators. The ICC decision is of an administrative nature and does not have res judicata effect. Furthermore, the appellate judges found that the party has not waived its right to challenge the award as the party raised the issue and reserved its rights whenever possible during the arbitration proceeding. This decision means that, once an award is rendered and notwithstanding the ICC’s decision or the failure of the parties to comply with the ICC Rules on challenges during the proceeding, the judge has full liberty to decide whether arbitrators’ independence may be called into doubt provided the party shows that it did question the independence of the arbitrator and therefore did not waive its rights to challenge.

Although many commentators support efforts to ensure impartiality and independence, this case has already been criticised by some commentators for the court’s lack of consideration as to the ICC Rules with respect to time limits for challenges of arbitrators. Some view that ICC Rules should not have been so easily bypassed given that they represent contractual obligations that bind the parties and arbitrators. Another concern is that allowing the challenge to go forward means the party receives an opportunity to re-litigate the same issue before different bodies.

It is true that this case represents a rare disregard of the ICC Rules by the French courts. Nevertheless, it is the first time that the French courts deliberated the parties’ agreement to abide by the ICC Rules with respect to that specific issue. The party could have also challenged the arbitrator by virtue of Article 11 after the new information was disclosed but did not do so. However, the Article 11 time-limit is internal to the ICC procedure for arbitrators’ challenging and cannot be imposed on French courts once the award has been rendered. Moreover the party made clear that it reserved its right to challenge the arbitrator before the court. This does not imply that the Reims Court of Appeal has denied the will of the parties. Rather they deemed that failure to respect the ICC procedural time limit did not prevent recourse before national courts after the award is rendered.

II. The Broad Scope of the Arbitrators’ Disclosure Obligations

The appellate judges concluded that information concerning the links provided by the Chairman had developed throughout the course of the proceedings. The relationship between the Chairman’s law firm and one of parties to the arbitration went beyond the information disclosed in 2002 by the Chairman and was not revealed in due time.

In that respect, the Reims and Paris Courts of Appeal had similar interpretations. However, the Reims judges further elaborated on the meaning of the duty of disclosure. The Court found that arbitrators have a continuous obligation to disclose not only personal circumstances that may call their independence into question, but also factual circumstances involving the law firms to which they belong throughout the proceedings. Notwithstanding the arbitrator’s position in the firm, the obligation to disclose covers other files handled by other branches of the law firm irrespective of the subject matter of the dispute or the amount of fees invoiced for these other files. Thus, a certain degree of objectivity was required from the arbitrator, beyond his/her personal connections. After reviewing each specific link, the Court concluded that the failure to inform the parties of these facts or the incomplete information given to the parties created reasonable doubts as to the independence of the Chairman.

The Reims decision demonstrates the importance of continuous and strict conflicts checks by arbitrators, after their appointment and throughout the proceedings. This ruling is in line with the French case law on the continuation of the duty of disclosure.⁴ Indeed, under the new Article 1456 of the French Code of Civil Procedure, an arbitrator is under the duty to ‘disclose any circumstances that may affect his or her independence or impartiality’ and ‘also shall disclose promptly any such circumstance that may arise after accepting the mandate.’

This decision also confirms a current trend in French case law that broadens arbitrators’ duty of disclosure, e.g. with respect to the number of appointments of an arbitrator by one of the parties as well as to the existence of a business relationship between an arbitrator and a party’s counsel. However, this is the first time an award is annulled on the basis of connections with other offices of the arbitrator’s international law firm, rather than the arbitrator’s personal connections.

Arbitrators involved in proceedings seated in France are under a duty to continuously investigate potential conflicts and ensure that conflicts databases are regularly updated. As companies frequently change ownership and affiliates, clients should also be requested to clarify precisely their corporate structure and line of control and communicate any changes to their lawyers. Some commentators have criticised the lack of cost-efficiency of such refinement of conflict checks and updates system. The Reims Court of Appeal decision adds to the responsibilities of arbitrators but serves to ensure that arbitrators sitting in international arbitration tribunals in France remain independent and impartial throughout the proceedings. This development is crucial to maintain the credibility and quality of international arbitration.

The duty to disclose is also in harmony with the colour coded IBA Guidelines on Conflicts of Interest in International Arbitration, addresses the issue of an arbitrator’s law firm’s involvement with one of the parties. Arbitrators must disclose if their law firms are rendering services to one of the parties or affiliates without creating a significant commercial relationship and without the involvement of the arbitrator. While the rendering of services must be disclosed, it does not per se amount to a conflict of interest under the IBA Guidelines. The individual circumstance would have to be further examined.

The French courts’ approach on this matter does not differ, as the Court of Appeal specified that the facts that the matters dealt with by the law firm were unrelated to the dispute submitted to arbitration and that the amounts billed by the firm with respect to the other files was nominal and did not create an impact. Specifically, the Court stated: ‘Once a client relationship is established, that relationship is not only financial: the independence of an arbitrator is not judged depending on the scale of the fees received by his/her law firm from a party.’

Applying the IBA Guidelines, the arbitrator in the Tecnimont case would have been under the same duty to disclose his law firm’s representations of affiliates of one of the parties. However, the law firm’s representations may or may not lead to an annulment of the award as the facts would still have to be analysed under the IBA Guidelines to determine if they create a justifiable doubt as to the arbitrator’s impartiality and independence. Similarly, the Reims Court of Appeal would not automatically annul the award for failure to disclose all this information but will also analyse each specific link between the law firm and the parties to arrive at its conclusion. As the judges indicated: ‘(…) the review court’s responsibility is to assess the impact of the non-disclosure and to determine whether or not it could have caused a reasonable degree of doubt, in the minds of the parties, as to the alleged lack of impartiality.’

A pourvoi en cassation or recourse has been lodged against the Reims decision with the Cour de cassation and it is uncertain whether the Cour de Cassation will adopt the Reims Court of Appeal’s view of the ICC Rules.

By Laurence Franc-Menget and Vanina Sucharitkul, Herbert Smith LLP

As you may recall, the Dallah court – which was comprised of international law heavyweights Lords Collins and Mance, among others – found that on the jurisdictional issue of whether a valid arbitration agreement exists, an enforcing court may review an award de novo. The wisdom of this judgment has been discussed and debated at length by the international arbitration community (including here on this blog). Regardless of what side of the debate you may fall, it is important to be aware of how domestic courts are drawing from and applying Dallah to international arbitration award enforcement/challenges in their own jurisdictions. The Cargill case is a useful example.

The events leading to the Cargill dispute first started in the early 1990s when Cargill Incorporated (Cargill), an American producer of HFCS, together with its Mexican subsidiary distributor, Cargill de Mexica SA de CV (CdM), began positioning its HFCS business to expand in the Mexican market. HFCS is a low cost sugar alternative that is used to sweeten various products, including soft drinks. Per capita, Mexico consumes the second greatest amount of soft drinks in the world. In advance of the NAFTA coming into force in January 1994 and keen to capitalise on Mexico’s demand for soft drinks (and therefore HFCS), Cargill established a division of CdM in the Mexican city of Tula in order to sell HFCS in Mexico. Along these same lines, Cargill also built a new production plant in Nebraska, expanded its HFCS plants in Iowa and Tennessee, and built a new distribution centre in McAllen, Texas at the Mexican border. Cargill planned to manufacture HFCS in the US and then import it into Mexico through its facility at the border, and then distribute it to the Mexican market through CdM’s centre in Tula.

As a result of Cargill’s Mexican efforts, Mexico’s soft drink industry began using HFCS rather than Mexican sugar, thereby negatively affecting Mexico’s domestic sugar industry. Mexico sought to protect its sugar industry by enacting numerous trade barriers which adversely affected the import of HFCS and therefore Cargill and CdM’s business. Mexico’s actions in this regard were the impetus for Cargill initiating arbitration proceedings under the ICSID Additional Facility in 2005; the tribunal found that Mexico’s actions constituted breaches of various provisions of Chapter 11 of the NAFTA.

The tribunal awarded Cargill over $77 million for both damages suffered by CdM in Mexico (“down-stream losses”) and Cargill’s damages in relation to lost sales it would have made to CdM in the US (“up-stream losses”). Mexico challenged the tribunal’s jurisdiction in relation to this latter category of damages because it considered such losses to have occurred outside of Mexico and therefore that they did not relate to an investment in Mexico as required by Chapter 11 of the NAFTA. The tribunal rejected Mexico’s challenge, reasoning that Cargill’s situation had to be viewed ‘holistically’ and that Cargill’s inability to export product to its investment, CdM, was just ‘the other side of the coin’ of the inability of the investment to operate.

Unhappy with this outcome and maintaining its position that the tribunal erred in awarding damages for Cargill’s up-stream losses, Mexico sought to set aside the portion of the award in relation to the up-stream damages (unlike standard ICSID arbitration which is insulated from national law, an award rendered under the ICSID Additional Facility – such as the award here – is subject to any review or appeal provided by the law of the place of the arbitration). Given that Toronto was the seat of the arbitration, Mexico applied to the Ontario Superior Court of Justice pursuant to Article 34(2) of the UNCITRAL Model Law on International Commercial Arbitration (1985) (the “Model Law”). In particular, Mexico relied on Article 34(2)(a)(iii) to argue that the tribunal exceeded its jurisdiction by deciding an issue that was not within the submission of the parties under the provisions of Chapter 11 of the NAFTA.

In considering Mexico’s application, the Superior Court judge first addressed the issue of the standard of review to be applied when reviewing a decision of an expert NAFTA international arbitration tribunal. The Superior Court judge determined, based on Canadian legal authorities, that the relevant standard of review to be applied to issues of jurisdiction is ‘reasonableness’. In any event, the Superior Court judge determined that Mexico’s objection did not go to the jurisdiction of the tribunal but was rather an attack on the merits of the decision. Accordingly, the Superior Court said that investigating the merits of the tribunal’s decision was beyond the scope of its review. The Superior Court judge also rejected Mexico’s argument that the award was not within the range of reasonable outcomes. For these reasons, the Superior Court dismissed Mexico’s application to set aside the award.

Mexico in turn appealed this judgment, thereby raising two issues for the Ontario Court of Appeal to consider: (1) the standard of review to be applied in reviewing a decision of a Chapter 11 NAFTA arbitral panel under Article 34(2)(a)(iii) of the Model Law, and (2) whether the Superior Court judge erred in applying such standard of review.

On appeal, Mexico argued that the Superior Court erred in applying the reasonableness standard to a decision on jurisdiction and that the appropriate standard of review should have been the more onerous ‘correctness standard.’ Canada intervened on appeal and supported Mexico’s position. Cargill agreed with the Superior Court judge that the standard was reasonableness. Additionally, ADR Chambers Canada, the Canadian branch of the larger organisation ADR Chambers International, intervened to submit that domestic administrative law tests do not apply to the review of an international arbitral award, that the test was more nuanced and the grounds for appeal more limited, and that the court could not use the jurisdiction inquiry to effectively review the merits of the arbitral decision.

The Court of Appeal started its analysis by acknowledging that importing and directly applying domestic standards may not be helpful to the process of reviewing international arbitration awards. It then went on to define its objective as determining the appropriate standard of review to apply when considering whether a tribunal exceeded its jurisdiction by deciding on an issue that was not within the submission of the parties as per Chapter 11 of the NAFTA.

Next, the Court looked to Dallah for instruction. First, the Court mentioned the view in Dallah that the tribunal’s finding of jurisdiction had no legal or evidential value and that the court’s role was to reassess the issue itself (citing Lord Mance’s conclusion at paras 30-31). Second, the Court distinguished the Dallah decision by highlighting the fact that in that case the jurisdiction issue did not challenge the content of the award but rather the ability of the tribunal to adjudicate in the first place (thus allowing the court to decide the issue de novo). The Court acknowledged that the instant jurisdictional issue was different in that it concerned whether the award itself complied with the submission to arbitration or contained decisions on issues falling outside of the submission to arbitration.

The Court of Appeal, similar to Judge Collins in Dallah, noted that there was nothing in Article 34(2)(a)(iii) limiting the Court in its task of reviewing the award. The Court then cited Canadian administrative case law providing that administrative bodies must be ‘correct’ in determining questions of jurisdiction. Accordingly, the Court found that the tribunal had to be correct in that its award had to be within the scope of the submission to arbitration and the relevant provisions of the NAFTA. Thus, the Court found that the standard of review was ‘correctness’ – that the tribunal had to be correct in its determination that it had the ability to make the decision it made. That is, a decision which was reasonable was not enough – the tribunal’s decision also had to be correct.

The Court cautioned that in applying the correctness standard, a court should only intervene in cases of true jurisdictional errors (that while there is “powerful presumption” that a tribunal is correct in the context of non-jurisdictional issues, the presumption does not apply to issues of jurisdiction because it would nullify the very purpose of the review authority). Once a court concludes that the tribunal made no error in assuming jurisdiction, there is no further review of the merits of the decision.

Despite applying the correctness standard as suggested by Mexico, the Court of Appeal nonetheless found that the tribunal had acted within its jurisdiction in rendering an award for both Cargill’s up- and down-stream damages. There was therefore no reason to take the analysis any further by looking at the merits of the case, and thus Mexico’s appeal was dismissed.

This case and the Court of Appeal’s reasoning are interesting from a number of perspectives. First and most simply, this is another example of a non-English court (in this case an appellate court) which has looked to Dallah for guidance as to the correct standard to apply when reviewing an international arbitration award. It may well be a testament to the respectability of English Court judgments in the sphere of international law. In any event it is likely indicative of the broad reach of English Court judgments, especially in relation to jurisdictions with Commonwealth ties.

The Cargill case also sheds light on the standard of review to be applied to challenge proceedings pursuant to the Model Law and NAFTA (as opposed to the 1996 Arbitration Act as in Dallah). Of course, it is worth noting that the court in the instant case was, as the national court at the seat of arbitration, the court seised in respect of the challenge proceeding, whereas the English court in Dallah was merely an enforcing court who was passing judgment as to whether the arbitral tribunal seated in another jurisdiction (and governed by a foreign domestic law) had stepped outside its jurisdiction.

Regardless of which side of the Dallah fence you stand, it is and will continue to be interesting to watch how the Dallah legacy unfolds, both at the English and international jurisprudential levels.

At the time of this writing, a freezing request by German businessman Franz Sedelmayer remained under active review at a Swedish government debt enforcement agency.

Mr. Sedelmayer, you may recall, is the bearer of a real collector’s item: a vintage 1998 arbitral award in which the Russian Federation was ordered to pay some $2.35 Million (US) for helping itself to the German businessman’s St. Petersburg-based private security company.

Since 1998, Mr. Sedelmayer has made a second career out of enforcing that arbitral award. By his estimate, he has been involved in more than 70 litigations around the world, trying to identify and seize Russian assets, while defending against various legal actions brought by the Russian authorities against him.

More than one bailiff in Western Europe has broken into a cold sweat when tasked by Mr. Sedelmayer with slapping the handcuffs on Russian government assets. For a long time, the indefatigable German businessman accumulated plenty of anecdotes – including a quixotic bid to seize Russian cosmonaut gear at an international air show – but few liquid assets.

Recently, his luck has started to change, as he has begun to lay hands on certain buildings and real estate in Western Europe.

However, Mr. Sedelmayer’s latest enforcement tactic – seizing Russian funds deposited at arbitration centres and law firms – should occasion some soul-searching amongst proponents of foreign investment protection standards.

If the successful claimant in an investment treaty arbitration is reduced to targeting deposits ponied up in other more recently initiated arbitrations, the entire enterprise takes on the contours of a classic pyramid scheme: with the contributions of later entrants used to pay off earlier participants.

Not only does this enforcement model appear deeply embarrassing for devotees of investment arbitration, its limits are also plainly apparent. Even if a bailiff agrees to seize arbitration deposits, and such a seizure is not quashed by the courts on sovereign immunity grounds, it can only offer succor to those with debts small enough to be satisfied by the deposits used to finance other arbitral proceedings.

If a tiny award against a highly-globalized G8 economy can remain unpaid for more than a decade, what of those seeking larger sums from regimes that tend to stuff their cash into the sofa cushions, rather than scattering it beyond their borders?

One answer that has been bandied about in the Argentine context is for home governments – or all governments with an interest in binding dispute settlement – to bring diplomatic pressure to bear against dilatory debtors. However, this “re-politicization” of the dispute settlement process comes with all of the usual baggage. States expend precious diplomatic capital when they go to battle for investors-creditors on the foreign relations playing field. Sometimes that capital is worth spending. At other times it is not.

Another solution is to expect claimants to bear the cost of enforcement – either by carrying insurance which covers the risk of award-default, or by selling their awards at a discount to vulture funds or organizations specializing in debt-collection. This pathway may be attractive for some, but for bearers of modest awards it may be neither viable nor equitable. (Try explaining to the owner of an expropriated family business, that they should take a haircut after gambling everything and “winning” in arbitration.)

There may be no silver bullets when it comes to dealing with recalcitrant debtor states.

However, the fact that an arbitral award-creditor has been reduced to targeting deposits laid down in other arbitral proceedings strikes me as something of a watershed.

Mr. Sedelmayer’s long struggle – and his increasingly audacious tactics – remind us that it is one thing to erect a system of 3,000+ international investment treaties, but quite another thing to make it work.

As the 15th anniversary of his arbitration victory looms, it is time to take some of the energy devoted to investment treaty rule-making and to re-focus it on the vexing question of enforcement.

Luke Eric Peterson
InvestmentArbitrationReporter.com