Whilst that focussed principally on the implications for, and efficacy of, the type of award in issue the purpose this post is, in contrast, to look again at the argument that initially prevailed before the tribunal and what it would have meant for English arbitrations more generally had Flaux J accepted it.

The basis upon which the tribunal ruled that it could not make any award of damages will strike many as highly controversial.
The starting point was the reasoning of the ECJ that it deployed to outlaw the grant of an anti-suit injunction by one EU Member State court against proceedings brought in another in breach of an arbitration clause. In doing so the ECJ held that, although the proceedings for relief in the former came within the arbitration exclusion of Council Regulation 44/2001 (the “Regulation”), this did not mean they could be permitted to otherwise undermine the effectiveness of the Regulation. In the ECJ’s view an anti-suit injunction did this as it restricted the ability of the first seised court to rule on its own jurisdiction and interfered with a litigant’s right to a form of judicial protection to which it was entitled.

In the tribunal’s view (which is set out at paragraphs 22-26 of Flaux J’s judgment and was largely relied upon by the insurers before him) the “underlying theme” of the ECJ’s decision was that the right to bring proceedings before an EU Member State court in accordance with the Regulation is therefore to be given pre-eminence. That being the case, a decision by a tribunal with seat in England which would effectively punish a party for so doing could not be sustained. The Regulation accordingly constrained the ability of the tribunal to act for essentially the same reasons that an English court is precluded from granting the anti-suit injunction.

One can find great difficulties with this conclusion. Primarily, there is the arbitration exclusion to consider. Surely, it wholly covers the proceedings before the tribunal – which should therefore be free from any constraints. Crossing that threshold is an entirely different proposition from the matters that were before the ECJ.

Buttressing that argument are the observations made by AG Kokott at paragraphs 70-73 of her opinion (with which the ECJ did not disagree). She acknowledged that a consequence of arbitration’s place outside the Regulation was that parallel proceedings within the EU before an arbitral tribunal and a Member State court can arise and that this could lead to inconsistent rulings on jurisdiction and the merits of the case. Indeed, rectifying that exact situation was what that she saw as being the goal of the anti-suit injunction (albeit such being an impermissible means of achieving it).

These objections, which formed the thrust of West Tankers’ arguments before Flaux J, were, for the tribunal, not enough to displace its view of the width of the ECJ’s ruling.

Correctly, it is suggested, Flaux J disagreed with the tribunal. His primary conclusion (see paragraphs 51-68 of his judgment) was that the tribunal had erred in law and that it was not barred from making the award of damages. In particular, he held that there absolutely nothing in the reasoning of either the AG or ECJ to support the far-reaching conclusion that the tribunal itself fell within the scope of the ECJ’s decision.

In Flaux J’s opinion, not only was it the AG’s clear view (as evidenced by those parts of her opinion mentioned above) that a tribunal was simply not affected by the Regulation, it was, additionally, wrong to suggest that there could be any meaningful difference between living with the possibility of inconsistent decisions on the merits or jurisdiction, which the AG expressly recognised, and allowing the tribunal to award damages as a result of a breach of the arbitration clause. The latter was merely a manifestation of the aforesaid state of affairs. More generally, there was nothing in the reasoning of the ECJ itself to suggest that the type of constraints imposed on a national court by its decision should also extend to an arbitral tribunal.

Flaux J’s decision is clearly to be welcomed. If the insurers’ (and tribunal’s) position had been accepted it would not only have negated the ability of an English tribunal to grant the type of relief in issue but would have left it with difficult questions as to what else it cannot do if proceedings are brought in another EU Member State court. In that latter regard it is perhaps arguable, given the direct subject matter of the damages award, that distinguishing between other action taken and the award of damages for breach might not carry the difficulties that Flaux J suggested (at paragraph 74 of his judgment). Having said that, it is understandable why the judge would want to emphasise such a point in order to help ensure that any need for a tribunal to address such problems was avoided entirely.

Such problems would, of course, be the natural consequence of accepting an argument which amounts to little more than requiring the arbitration exclusion to be overridden by the Regulation even in those proceedings to which it should most clearly find application. The emergence of such arguments is perhaps no surprise given the use of similar reasoning by the ECJ in its decision. More happily, it appears that the English courts are more than ready to sensibly interpret the more difficult aspects of the ECJ’s ruling and to reaffirm the remaining boundaries between the courts and arbitration in this sphere.

The judgment is available here.

Background to the English court’s decision

The protracted history of this dispute will be familiar to many arbitration practitioners worldwide, and particularly to those in Europe. It all began in August 2000, when a vessel owned by West Tankers, under charter to Erg, collided with Erg’s jetty in Syracuse, Italy. The charter party was governed by English law and contained an agreement to arbitrate any disputes in London.

Erg claimed compensation from its insurers and also commenced arbitration proceedings in London against West Tankers for the excess in damages above that covered by the insurance. Sometime later, the insurers brought proceedings against West Tankers before an Italian court to recover the sums they had paid to Erg, despite the existence of the arbitration clause. The dispute gained considerable renown when West Tankers’ application for an anti-suit injunction restraining the insurers from pursing the Italian court proceedings was refused following a landmark ruling from the ECJ which held that such relief would not be compatible with the Brussels Regulation.

West Tankers subsequently secured a favourable award from the arbitral tribunal holding that it was under no liability to either Erg or Erg’s insurers. It then successfully sought to obtain a judgment in terms of that award, using section 66 of the Arbitration Act 1996 (the ‘Act’). In the latest proceedings, it sought from the tribunal an award of damages for the breach of the arbitration agreement as well as an indemnity for the costs of defending the Italian proceedings. The tribunal declined jurisdiction to make this award, which prompted West Tankers to file an appeal with the English Court on a point of law under section 69 of the Act. It is that decision which is the subject of the latest judgment of the English court. To date, the Italian court has not yet ruled on whether it has jurisdiction to hear the dispute.

The decision of the English court

In finding that the majority of the tribunal had erred in law, Flaux J determined that there was nothing in the ECJ’s judgment (or the Opinion of the Advocate General on which it was based) which deprived the tribunal of jurisdiction to award relief for breach of the obligation to arbitrate. He relied heavily on the recognition by the ECJ of the possibility of parallel arbitration and court proceedings. Bearing in mind the fact that a tribunal and a court may reach inconsistent decisions on the merits and/or the scope and effect of the agreement to arbitrate, he held that there would be no qualitative difference between inconsistent judgments and an award of damages for breach of the arbitration agreement. In fact, a damages award would be an extension and consequence of the declarations made in the previous award as to the merits of the dispute.

Flaux J considered that the tribunal’s decision had been based on a misunderstanding of the principles underlying the ECJ’s decision as regards the application of the Brussels Regulation to arbitration. He acknowledged that arbitrators are bound to apply EU law but clarified that arbitration is excluded from the scope of the Brussels Regulation by Article 1(2)(d). In his view, the obligation to uphold the principle of effectiveness and mutual trust between Member State Courts in the context of the Brussels Regulation lies on ‘national authorities’ (which does not include private tribunals). As such, the tribunal was not obliged to defer to the Italian courts in the same way that an English court would need to under the Brussels Regulation.

But what is the practical effect of this decision?

Flaux J gave permission to appeal and commented that this case is likely to go further. Nonetheless, until any successful appeal, there is scope for a party faced with parallel proceedings in the EU in breach of an arbitration agreement to seek recompense from an arbitral tribunal for that breach, so as to put it (so far as possible) in the position it would have been had the parallel proceedings not been pursued. This would effectively allow it to seek compensation for the legal costs involved in defencing the parallel proceedings to the extent that was not ultimately recovered in the Italian proceedings.

Therefore, where proceedings before a court of a Member State run parallel with arbitration proceedings, the threat of being liable for compensatory damages should the national court decline jurisdiction may discourage parties from pursuing so-called ‘torpedo’ actions in future.

Does this decision represent progress for arbitration?

Alongside the previous judgment of the English court relating to section 66 of the Act, this is, in many ways, a result which represents progress for arbitration in Europe: parties who find themselves engaged in proceedings in a forum they have not selected will be comforted to know that this remedy may represent a deterrent for their counterparty. It also serves to limit the anti-arbitration ramifications of the ECJ’s decision regarding the anti-suit injunction by effectively rendering the Italian proceedings academic even though they cannot be injuncted.

However, it is questionable whether the advantages of this decision are confined to those who seek enforcement locally. Pending the reform of the Brussels Regulation, there is still little clarity on the interface between the jurisdiction of arbitral tribunals and the jurisdiction of the courts. This decision does not fully address what happens in the scenario whereby the court of a Member State accepts jurisdiction (notwithstanding the arbitration agreement), and issues a judgment which is inconsistent with that of an arbitral tribunal. In those circumstances, depending on where the relevant assets are located, the party who has been awarded damages may be left with no option but to return to the same national court which issued an inconsistent judgment in order to enforce this award. This could lead a court of a Member State to be asked to enforce an award which effectively seeks to undermine its own judgment. The question is then whether that court would be able to resist enforcement, and on what grounds. The New York Convention is likely to compel recognition and enforcement of the award, unless the dissatisfied party can rely on the public policy exception contained within Article V(2)(b). The way in which the court in question would interpret the public policy exception is, of course, an open question. Although generally seen as a last resort, this ground may be a convenient route for the dissatisfied party to negate entirely the effect of this latest judgment.

So, whilst it is on the one hand encouraging that a party faced with parallel proceedings in breach of an arbitration agreement may be entitled to compensation for its troubles in a private forum, it is not yet clear whether this decision will have the teeth required to ensure that it is effective.

In Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd., 2012 SCC 9, the Supreme Court unanimously upheld the decision of the Ontario Court of Appeal and dismissed the appeal in a short decision.

The Supreme Court said that “when another forum – an arbitration panel, a tribunal or another court – has the exclusive jurisdiction to deal with the claim, [an Ontario court] will not take jurisdiction, based upon agreement or statute.” Relying on its previous decision in Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27, the Supreme Court held that “unless there is a ‘strong cause’ as to why a domestic court should exercise jurisdiction, order and fairness are better achieved when parties are held to their bargains.”

The dispute arose following the unsuccessful brief tenure of the Ottawa Rapidz, a professional baseball team of the Can-Am League that played its home games in a stadium owned by the City of Ottawa.

Due to financial losses it sustained during the 2008 season, the baseball team, which was ultimately owned by Momentous.ca, notified the League that it would not be able to continue to operate and applied under the League’s by-laws to withdraw voluntarily. The League’s Board of Directors rejected the application, terminated its membership and drew down a letter of credit the team had been required to post.

The team and its related companies sued the League, its principals, and the City of Ottawa before the Ontario Superior Court of Justice claiming that the League illegally terminated its membership and had no right to draw down the letter of credit.

Only after filing a statement of defence contesting the merits of the claim did the League and its principals ask the Superior Court of Justice to rule that it did not have jurisdiction over the dispute based on the choice of forum and arbitration clauses in the League’s by-laws and agreements signed by team. According to the by-laws and agreements, all disputes with the League were to be resolved in the State of North Carolina by means of arbitration.

In bringing its motion, the respondents relied upon Rule 21.01(3)(a) of the Ontario Rules of Civil Procedure in which a defendant may apply to have an action stayed or dismissed on the ground that the Ontario court does not have jurisdiction over the subject matter of the dispute. Noticeably absent from the rule is a timeframe in which a defendant must bring the motion.

The Ontario Superior Court of Justice and the Ontario Court of Appeal held that the team and its related parties failed to show “strong cause” why the parties should not be bound the forum selection and arbitration clauses in their agreements.

The Supreme Court ruled that that a motion to stay or dismiss an action on the ground that the court does not have jurisdiction over the subject matter of the dispute must be brought promptly. However, it went on to rule that nothing requires the motion to be brought before delivery of a statement of defence and a statement of defence that specifically pleads a forum selection clause does not amount to consent to the court assuming jurisdiction.

Given that the appellants did not argue that there was any reason, apart from the delivery of a statement of defence, to displace the forum that the parties had chosen to resolve their disputes, the Supreme Court held that the action was properly dismissed.

This is yet another decision in a series of decisions by the Supreme Court of Canada further supporting Canada as an arbitration-friendly jurisdiction and one that readily enforces arbitration and other dispute resolution agreements.

Barry Leon and John Siwiec, Perley-Robertson, Hill & McDougall LLP

There has been increasing use of arbitration to resolve disputes involving competition law issues in recent years. However, it is surprising that the number is not even greater given that arbitral processes are particularly suited to this type of complex, multi-jurisdictional dispute. Claimants can be nervous that the validity of such awards might be challenged on public policy grounds, however, in practice there are only limited circumstances in which a civil claim based upon competition law is likely to also engage public policy concerns. Indeed, a recent paper from the Organisation for Economic Co-operation and Development (“OECD“) concludes that the tide is turning and that arbitration is likely to take greater prominence as part of the toolkit for resolving disputes involving allegations that competition law has been infringed.

The OECD Competition Committee conducted a hearing in October 2010 on the role of arbitration in competition policy and practice and has now published its report on that hearing ( http://www.oecd.org/dataoecd/58/40/49294392.pdf) along with two publications drafted by experts in the field that were discussed at the hearing. The paper sets out the key findings of the Committee as to the advantages and disadvantages of arbitration for both claimants and defendants in the context of a competition law dispute, commenting upon: the arbitrability of competition claims; the duty of arbitrators to apply competition law; the ability of national courts to review an arbitral award; and the use of arbitration clauses in merger remedies. The OECD concludes that concerns that arbitration might somehow undermine effective enforcement of competition law or that challenges to arbitral awards on competition law issues might subvert established principles on the review of awards are unjustified.

Enforceability and other issues – are there still hurdles to arbitration?

Competition law as a matter of public policy does not generally deal with the compensation of private parties adversely affected by an infringement but with the investigation and punishment of infringements so as to deter such behaviour in future. As a matter of principle, it is clear that competition issues can be arbitrated without raising public policy concerns (As confirmed by Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. 723 F.2d 155 (1983), Case 126/197 Eco Swiss v Benetton [1999] ECR I-03055) and civil actions ought not to transgress upon public policy in the vast majority of cases.

Nonetheless, as civil actions may require determination of whether an infringement has occurred (an area overseen by national competition authorities and affected by the application of public policy) parties can be concerned that an arbitration award will be vulnerable on enforcement if it is inconsistent with public policy. The OECD paper notes that a court will only in very exceptional circumstances set aside or refuse to enforce an arbitral award on the basis of fundamental breach of public policy. The OECD paper also makes clear that, even if such a challenge is raised, the courts should not engage in an in-depth review of the merits of the case but simply verify that arbitrators have addressed competition law issues with reasonable diligence and not reached a conclusion that seriously contradicts public policy. We agree with the OECD position but note that arbitrators must still be live to public policy issues in this area when addressing such claims. For example an arbitral award could potentially be problematic if damages were awarded on a punitive or exemplary basis rather than simply to compensate the claimant. Whilst this measure of damages would be permissible under US law, it is contrary to the policy of the vast majority of EU Member States and so might be overruled as a matter of principle in these jurisdictions.

We consider that it may be difficult to persuade all national courts that a pre-dispute arbitration clause was intended to cover all contractual and non-contractual competition claims. National courts in some European states have tended to define the scope of choice of forum clauses by reference to the types of dispute that the parties are likely to have had in mind when agreeing the terms. Parties are unlikely to be construed to have had in mind at the time of agreeing the arbitration clause that their counterparty might be in a cartel or subjecting them to an abuse of dominance. Arbitration clauses tend to be construed more generously than choice of court clauses, but this may still be an issue. Furthermore, it is unlikely to be commercially acceptable to explicitly draft the clause to cover such a possibility, except in limited circumstances.

The OECD paper also notes that the private nature of arbitration has also led to criticism of its use in competition law claims. The concern is that those engaged in hard-core cartels will use private proceedings to prevent national authorities becoming aware of the conduct. Generally, arbitrators should not refer competition issues to national competition authorities, whether for assistance or determination, without the consent of the parties as this would violate the confidentiality of the arbitration. However, the OECD paper makes clear that arbitrators are not purely at the service of the parties and can raise competition law issues of their own motion if they consider it warranted. Further, it is clear that an agreement to arbitrate claims that anti-competitive behaviour has caused a party damage or should otherwise be stopped does not prevent a separate complaint being made by the affected party to the relevant national competition authorities. Certainly, the fact of a matter being subject to arbitration will not inhibit or prevent a national competition authority from investigating any alleged violation of competition rules. In our view, it is very unlikely that arbitration arrangements will deter those involved in a cartel from seeking leniency from competition authorities or otherwise “blowing the whistle” on a cartel, given the regulatory benefits (and penalties) attached to doing so. Arbitration of such claims is therefore unlikely to have a chilling effect on infringements coming to public attention.

We think that a more pertinent issue is that it may be easy for claimants in cartel claims to avoid the effect of arbitration clauses by suing defendants with whom they had no contractual relations and thus no arbitration agreement. A participant in a cartel is usually deemed to be jointly and severally liable for all loss caused by all participants in the cartel, and thus can be sued by the customers of other cartelists and not just by its own customers. In the US, the Second Circuit got round this problem by holding that a defendant’s arbitration clauses with its customers are binding on non-customers seeking to sue it for losses caused by a cartel (JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 163 (2d Cir. 2004). It is probably less likely that this approach would be followed in the UK and other EU jurisdictions.

In these circumstances where a defendant is jointly and severally liable for the whole loss, we consider that it may also encounter difficulties recovering contributions from the other cartelists. Defendants generally prefer to have the claimants’ total damages and the split between cartelists decided in the same proceedings and at the same time in order to avoid delay and inconsistency of approach. This may not be possible where customers claim in an arbitration as there is unlikely to be a pre-dispute arbitration agreement that can be relied on to compel the other cartelists to join the arbitration.

Another concern noted by the OECD paper is the potential limitation on the ability to compel disclosure of certain information in arbitration. National courts may be able to request assistance or information from national competition authorities in circumstances where an arbitrator cannot and courts also have specific powers over parties to litigation. However, in most jurisdictions, disclosure in litigation is in any case limited (the US and UK being notable exceptions) and arbitrators in any case are often able to ask for judicial assistance in compelling the production of documents. We do not therefore see a significant difference in pursuing civil claims by arbitration as compared to litigation when considering access to information and disclosure. However, this inability for arbitrators to refer questions to other authorities may have more significant implications. When a novel situation is encountered in a civil court, it has the ability to refer the issue to the European Court of Justice for determination, but this power does not extend to arbitrators (Nordsee v Rederei Mond [1982] ECR 1095). There is therefore a risk that principles of EU law will be applied inconsistently by different arbitrators.

When to arbitrate?

The OECD paper highlights several situations where it may be appropriate to use arbitration in a competition law context:

1. Stand-alone contractual claims – for example, where one party alleges that an exclusive supply agreement or restrictive covenant illegally restricts competition in breach of Article 101 of the Treaty of the Functioning of the European Union (TFEU) but there is no underlying regulatory finding that supports the allegation.

2. Follow-on damages claims that rely on an infringement finding by a competition authority in order to establish the liability of the defendant (meaning that the claimant need only establish the measure of damages). For instance, where a group of manufacturers have been found to have been fixing wholesale prices at a particular level, in breach of Article 101 TFEU, and an affected retailer or distributer decides to bring a follow-on damages claim for losses resulting from the inflated prices. Alternatively the manufacturer may have abused its dominant position in breach of Article 102 TFEU by engaging in predatory pricing (i.e. deliberating selling at less than cost in the short term so as to foreclose rivals from the market), in which case a competitor may bring a follow on damages claim. Both these types of claim typically involve a simple assessment of damages, in which case an expeditious, private arbitration may be more advantageous to the parties than a case in the Courts that can be prolonged by way of jurisdiction challenge and procedure delay.

3. In respect of merger remedies, where parties have been asked to make certain commitments in order to remedy competition concerns in order to clear the transaction. An example of where arbitration may be appropriate is where access commitments have been imposed, and the commitment obliges the parties to grant third parties “fair and reasonable” access to physical infrastructures or intellectual property rights to stimulate competition. Any disputes relating to the terms and conditions of those access rights, or what is “fair and reasonable”, can be dealt with by arbitration if an arbitration clause is included in the commitment agreement.

In each of the above scenarios, there are several key advantages for parties in using arbitration as highlighted in the OECD paper:

• Confidentiality: Unlike litigation, arbitration proceedings are conducted in private. Not only is any information disclosed as part of the proceedings confidential but so is the fact of proceedings taking place and the amount of any final award or settlement. This has clear advantages in respect of damages claims, particularly for defendants, as third parties will not be have access to information potentially helpful to their own claims or be attracted or encouraged to make a claim if an award or settlement results.

• Jurisdiction: Competition litigation before EU national courts has been marked by jurisdictional wrangles as to who may be sued and where. An arbitration clause does not allow a defendant to hide behind place of domicile or force claimants to draw innocent subsidiaries of an infringer into a claim in order to anchor it in their jurisdiction of choice. The OECD notes that this detachment from a particular legal order can also be useful by separating the arbitral proceedings from any investigation by competition authorities in particular jurisdictions.

• Flexibility over the process: The parties have the ability to choose a specialist arbitrator, or panel of arbitrators, and the legal rules and principles for the procedure itself. Given the complexity of competition cases, and the frequent need to consult expert economists and competition specialists, parties may be better able to tailor the resolution of the dispute with the aid of their choice of judges and experts on the panel.

• Speed of the procedure: the complexity of issues at play in a competition dispute can slow the litigation process significantly and arbitration can offer a faster solution (both by virtue of greater control over selection of the decision-makers by reference to availability and flexibility of the process).

• Enforceability of the arbitral award: An arbitral award will be recognised in a number of jurisdictions, due to the international conventions that govern arbitration, to an extent not possible with court judgements (which often must be recognised and subject to further proceedings to be enforced). For example, the New York Convention requires courts of the 145 contracting states to recognise and enforce arbitration awards made in other states.

Practical tips to avoid potential pitfalls

The OECD paper reassures parties contemplating arbitration of competition law claims that the risk of an arbitration award being challenged successfully on policy grounds can be minimised. Practical tips in this context include:

1. Arbitrators only have the power to determine issues that parties have agreed to arbitrate, so it is important to specify when drafting an arbitration clause or agreeing to arbitrate whether it is intended that the agreement to arbitrate encompasses claims involving competition law issues (ET Plus S.A. v Welter [2005] EWHC 2115 (Comm) [2006] 1 Lloyd’s Rep 251, paragraph 51).

2. The parties might consider when appointing an arbitrator whether that individual is competent (and confident) in determining competition law issues. It may be that, although there is a competition element to the claim, the question of whether an infringement has occurred is established and so the expertise required is in fact in determining the economic effect of such an infringement. Choosing an arbitrator equipped to address these issues and who has a clear understanding of the evidence required to form a view on them may well speed the process overall and minimise the costs of making the case.

3. Competition claims are often multi-jurisdictional and may be based on tort or an underlying contract. Conflict of laws issues accordingly can result and parties should give thought to the seat of arbitration as this may be crucial in determining the law applicable to the arbitral proceedings.

4. If the arbitration agreement involves the US, careful consideration should be given to specific issues under US law. US competition law ensures that claimants must not be deprived of their statutory rights to claim damages, including the right to claim treble damages and instigate opt-out class actions. These latter claims will be precluded from arbitration in the US if the agreement to arbitrate is silent on the issue.

Conclusion

The OECD paper clearly sets out the advantages and disadvantages of arbitration and addresses concerns regarding the enforceability of awards that determine competition law claims. Competition law disputes often involve multi-jurisdictional issues, exchange of highly confidential information on market position and turnover, and production of expert economic evidence as to the defendant’s market position and profit margin. As such, these disputes raises procedural issues that the flexibility and confidentiality of the arbitral process is uniquely suited to answer – a point that has even been acknowledged by the English Court of Appeal Attheraces [2007] EWCA Civ 38 at paragraph 7).

Therefore, as the OECD concludes, not only does the arbitration of competition claims not undermine the enforcement of competition law or principles of arbitration but arbitration can be a particularly useful method in resolving competition law claims. As such, we are likely to see a continued increase in the use of arbitration, and other alternative dispute resolution mechanisms, to determine competition law disputes.

Baker & McKenzie LLP

While it is dubious that better access to the mousetrap gives much comfort to the unlucky mouse caught in it, bilateral investment protection treaties (BITs) provide arguably the only tools “to open the mousetrap” in the context of an investor-state dispute.

This post aims succinctly to identify some of the most problematic areas for investor protection, which are rooted in the wording of Russian BITs.

(Non-) Arbitrability of disputes over the occurrence of expropriation

Most Russian BITs contain a dispute resolution clause limiting jurisdiction of arbitral tribunals to hear disputes over the fact of expropriation.

For instance, the German-Russian BIT sets forth that “a dispute relating to the amount of compensation or the method of its payment” may be referred to an international arbitral tribunal by either party. An unofficial English translation of Article 10 of the Soviet Union-Belgium/Luxemburg Economic Union Treaty provides that “any dispute between one Contracting Party and an investor of the other Contracting Party concerning the amount or mode of compensation to be paid” can be submitted to the Arbitration Institute of the Stockholm Chamber of Commerce or an ad hoc tribunal.

Read narrowly, the dispute settlement clauses quoted above exclude claims concerning the occurrence of expropriation from the mandate of arbitral Tribunals constituted under the relevant BITs. Strict construction leads to the conclusion that no claim over the amount or mode of payment may be entertained absent a national court decision on the occurrence of expropriation or an acknowledgement of the host state to that effect.

The Berschader Tribunal seems to have followed this logic as it declared that it was “satisfied that the ordinary meaning of the [dispute resolution] provision [contained in the Russia-Belgium/Luxemburg BIT] excludes from the scope of the arbitration clause: … (ii) disputes concerning whether or not an act of expropriation actually occurred”.

The Tribunal in this case failed to have reasonably expounded this affirmation. The mere observation “it can only be assumed … that a dispute concerning whether or not an act of expropriation occurred [is] to be submitted to dispute resolution procedures provided for under the applicable contract or alternatively to the domestic courts of the Contracting Party in which the investment is made” is unpersuasive.

Although the Berschader Tribunal considered the issue of (non-) arbitrability of an act of taking under the Russian-Belgium/Luxemburg BIT obiter, restrictive interpretation of a dispute resolution clause appears to gain traction in investment jurisprudence.

The Tribunal in RosInvestCo UK Ltd. v. Russia dealt with the dispute resolution provision contained in Art. 8 of the UK-Soviet Union BIT conferring jurisdiction over “any legal disputes … in relation to an investment of the [investor] either concerning the amount or payment of compensation … or concerning any other matter consequential upon an act of expropriation.” The arbitrators in this case concurred with the Berschader panel on non-inclusion of controversies over the occurrence of expropriation and its lawfulness in the scope of a respective dispute resolution clause. However, the RosInvestCo Tribunal upheld its jurisdiction on MFN ground.

Narrow reading of similarly drafted dispute settlement clauses in Russian BITs yields preposterous results, turning a state – party to a dispute with an investor – into a judge in its own case. Should the host state deny that an act of taking occurred, an investor will be left with virtually no remedy to recover his losses. Is it what drafters of Russian BITs really meant?

In Renta 4 S.V.S.A. et al. v. Russia the Tribunal rejected the flawed logic of restrictive construction, having restated the problem as follows: “The Claimants allege expropriation. Russia denies any obligation under this head. There is therefore a dispute as to whether compensation is due”.

The arbitrators declined Russia’s submission on restrictive interpretation of the Spain-Russia BIT’s dispute resolution clause providing the following reasoning: “Russia considers that the words “amount or method of payment” allow nothing but a narrow debate about quantum or timing and currency. Even that might leave a door open to say that “amount” includes “no amount” (e.g. because the asset has nil value or because no expropriation has occurred).”

The Tribunal dispensed with the Respondent’s argument of non-inclusion of the occurrence of expropriation in the arbitration scope under the Spain-Russia BIT by establishing that an act of taking is indeed a “predicate to any amount being due”.

The arbitrators offered the following explanation: “Russia argues that there is no dispute as to quantification … The flaw in Russia’s argument is that there is more than one basis on which a respondent State could say “zero”. One might be indeed a divergence as to quantification. Another could be a denial of any obligation on account of alleged expropriation … Such an obligation is the evident predicate to any amount being “due” and thus the object of the type of debate allowed under Article 10.”

The Tribunal’s stance on jurisdiction over claims of expropriation in Renta sits comfortably with the principle of effective interpretation, living up to the investors’ legitimate expectations. However, the victory of the common sense over the formalistic approach is not sealed yet.

MFN clause as a second chance for investor

By including a Most Favored Nation clause into the body of BITs, Contracting parties seek to extend the application of benefits granted to nationals of third states to nationals of a Contracting partner. MFN clauses traditionally contain the word “treatment” that pertains to the bundle of substantive and arguably other rights and privileges. Controversy exists as to whether an arbitration provision is encompassed within the term “treatment”.

The RosInvestCo Tribunal answered this question in the affirmative. The Claimants invoked a generously drafted dispute resolution clause contained in the Denmark-Russia BIT by operation of an MFN provision of the Russia-UK BIT. The Tribunal accepted jurisdiction opining that: “As seen … the provision [of Art. 3] grants MFN-protection for “investors” … regarding their management, maintenance, use, enjoyment or disposal of their investments … It is difficult to doubt that an expropriation interferes with the investor’s use and enjoyment of the investment, and that submission to arbitration forms a highly relevant part of the corresponding protection for the investor … in case of interference with his “use” and “enjoyment”.

The arbitrators in Berschader have approached the issue of the applicability of an MFN clause to dispute resolution in a different way. The Tribunal referred to the Maffezini Award stating that “an MFN provision in a basic treaty does not incorporate by reference dispute settlement provisions in whole or in part set forth in another treaty, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them.”

The Berschader Tribunal found no evidence of the Contracting Parties’ intention to that effect.

Without plunging into detailed analysis of the two approaches to operation of an MFN clause in regards to an arbitration provision, suffice it to say that finding of jurisdiction on MFN ground is highly case sensitive.

Indirect investments and investor status

Use of various types of “investment vehicles” and “investment conduits” has become common occurrence over the past decades. However, the wording of BITs concluded by the Soviet Union does not always accommodate modern methods of investing in a foreign economy.

Art. 1 of the Russia-Belgium/Luxemburg BIT sets forth that “the term “investment” also means indirect investments made by investors of one of the Contracting Parties in the territory of the other Contracting Party by the intermediary of an investor of a third state”.

Plain reading of this provision warrants the conclusion that an investment made by an investor through its intermediary incorporated in one of the states parties to the BIT does not enjoy protection under the Treaty.

Belgian nationals Vladimir and Moise Berschader were sole shareholders of the company Berschader International S.A. (BI) incorporated in Belgium. BI participated in the tender process for construction of new facilities of the Supreme Court of the Russian Federation and ultimately won it. Seven years later the contract was annulled by the Administration of the President of the Russian Federation. The BI’s personnel were physically ejected from the construction site. In the Supplemental Agreement the parties to the conflict agreed that the Supreme Court owed US $ 5, 673, 763 to BI. Subsequently, BI received around 6 per cent of the agreed amount. In the following two years BI was placed on bankruptcy.

The shareholders filed claims under the applicable BIT on their own behalf. Again, the Tribunal construed the BIT verbatim and found that the Claimants’ investments fall outside the ambit of the Treaty protection because BI was not incorporated “in a third state”. The decision was not unanimous as one of the arbitrators dissented.

Sedelmayer v. Russia provides a positive contrast to the unfortunate fate of the Berschader case. The Sedelmayer Tribunal found no difficulty in dispensing with Russia’s contention that Mr. Sedelmayer may not be deemed an investor under the USSR-Germany BIT for he has not made any investments in the Respondent’s territory.

Unlike the Claimants in Berschader, a national of Germany Franz Sedelmayer operated through the fully owned company SGC International, a juridical person under US law. The USSR-Germany BIT does not place any limitations on the investment vehicle nationality. It is therefore not the libertarian approach of the arbitrators to treaty interpretation but rather the language of the USSR-Germany BIT that secured the treaty protection for indirect investments.

The Foreign Investment Advisory Council’s official website (www.fiac.ru) apparently does not seek to increase awareness of the legal pitfalls lying in wait for current and potential foreign investors in Russia. A quick look at history reveals the Russian state to be continuing the legal traditions of the Soviet Union as it appears averse to the idea of being summoned to court or its equivalent let alone being held responsible for its actions. However, keeping this in mind and structuring investments in a sophisticated way might help stave off some legal problems before they arise. To put it bluntly, it is no crime to get smart about BIT-shopping.

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.

This is particularly true where the allegations of bribery are themselves in dispute, as well as where the parties have not raised any such allegation, but the facts and circumstances suggest that bribery has tainted the contract underlying the dispute. It is now well-settled that any such contract should be void as contrary to public policy and governing national laws. The enactment of the UK’s 2010 Bribery Act, and the first prosecution under that Act of a court clerk for having accepted a £500 bribe,[1] provide a suitable occasion to review the questions of bribery and international arbitration.

Arbitrability of Bribery Claims

Traditionally, arbitration was not perceived as an appropriate venue for adjudicating claims of bribery or corruption. The resistance to recognizing the arbitrability of bribery claims was based on a limited view of the tribunal’s jurisdiction, and included concerns about the tribunal’s restricted power to compel the production of evidence — particularly as compared with that of regulatory authorities that have traditionally investigated and prosecuted crimes of bribery — and the tribunal’s lack of authority to impose criminal penalties.

Where the issue of bribery was raised previously in arbitrations, the response by tribunals often was to find a lack of jurisdiction over the dispute. The most well-known example is Judge Lagergren’s ICC Award in 1963, where, acting as a sole arbitrator, he held that he did not have jurisdiction over a contract dispute because the purpose of the contract was to secure commission payments that would then be used to bribe Argentinean officials. He famously declared that having allied themselves with corruption, the parties had forfeited “any right to ask for assistance from the machinery of justice.”

The concept of the arbitrability of disputes involving bribery claims began to gain acceptance first with a decision of the Swiss Federal Tribunal in 1994 in National Power Corp v Westinghouse affirming an arbitral tribunal’s exercise of jurisdiction over a matter involving allegations of bribery. The contemporary approach towards the arbitrability of disputes involving allegations of bribery is reflected in Westacre Investments Inc v Jugoimport SPDR Holding Co Ltd, a dispute that arose in the late 1990s. There, despite an allegation that the agreement at issue had been procured by bribery, the tribunal asserted jurisdiction over the dispute, investigated and rejected the bribery allegations, and issued an award on the merits.

The Westacre award was challenged in the United Kingdom, where the allegations of bribery and corruption were raised again. The English court held that the award was enforceable, based on considerations including the severability of the arbitration clause, the principle of competence competence, and the public policy of encouraging the enforcement of international arbitral awards, all of which weighed in favour of upholding the award.[2]

The arbitrability of disputes involving allegations of bribery is well recognized today. Such disputes no longer appear to confront arbitrators with questions of jurisdiction. Rather, arbitrators must now address the complex questions of proof where the allegations are in dispute, and determine how to approach situations where no allegation has been raised, but the facts and circumstances suggest the underlying contract may have been contaminated by bribery, and should therefore be void.

Examples of Bribery Allegations in Arbitration

Bribery allegations may arise in a number of ways in international arbitration. Some of the most well-known examples, such as the two set forth below, occurred where respondents sought the dismissal of claims seeking the performance of contractual obligations (or damages for failure to perform). By claiming the underlying contracts had been contaminated by bribery, the respondents were seeking to have the contracts declared void, which would result in the dismissal of any claims based on those contracts. Addressing the somewhat unseemly appearance of finding in favour of a respondent that had participated in bribery and then avoided its obligations due to that bribery, one tribunal noted that “claims founded on illegality have to be dismissed for the benefit of the public and not for the advantage of the defendant.”

Set forth below are two well-known examples of bribery allegations raised by respondents in arbitration:

• In the dispute that led to Judge Lagergren’s Award in 1963 in ICC Case No. 1110, the claimant had sought to enforce its contractual entitlement to 10% commission payments for all Argentinean energy contracts awarded to the respondent. The claimant’s “major asset” was the remarkable degree of influence he had with the political appointees that awarded the contracts. Here, the tribunal found that the purpose of the agreement was to facilitate bribery to the claimant and to his entourage. This led Judge Lagergren to deny jurisdiction, finding the parties had forfeited their right to justice.

• In World Duty Free Company Limited v the Republic of Kenya, ICSID Case No. ARB/00/7, Award dated 4 October 2006, the claimant alleged, among other things, that the Kenyan government had expropriated its two duty free complexes the Nairobi and Mombassa International Airports. In response, Kenya alleged that its underlying agreement with claimant was unenforceable because it had been obtained with a “personal donation” of $2 million to the then President, a fact that the claimant had described in detail in its original submission. The tribunal retained jurisdiction and found the facts surrounding the allegation of bribery were not in dispute. Based on its conclusion that bribery was against transnational public policy, the tribunal found the contract was void and dismissed the claimant’s claim.

Issues Raised by Allegations of Bribery in an Arbitration

When an issue of bribery is raised in a proceeding, the tribunal must decide how to address those claims. That decision can be a relatively easy or an exceedingly difficult one to make. Where the facts surrounding the alleged bribery are not in dispute, such as in World Duty Free Company where the best evidence of the bribery came from the claimant’s own witness statement, the decision is relatively straightforward. In World Duty Free Company, the tribunal found that bribery had occurred, and concluded that as a result, the contract was void and the claimant’s claims must be dismissed.

Where, however, the opposing side vigorously disputes the allegations of bribery, or particularly where neither party has raised an allegation of bribery but the facts and circumstances of the case suggest the contract is likely to have been tainted by bribery, the decision becomes much more difficult.

Arbitrators must consider a number of factors when deciding how to proceed, including their duty to adjudicate the claims before them and use their best endeavours to ensure that their awards are enforceable, as well as the limitation of their jurisdiction to the issues in dispute. To investigate claims of bribery, particularly where none have been raised by the parties, may invite challenges to the arbitrator’s jurisdiction and the validity of the award on the basis of ultra vires and/or ultra petita.

Conversely, to disregard the possibility of bribery in a dispute may also undermine the enforceability of the award. Enforcing a claim based on a contract that is void due to bribery would violate public policy, and result in any award likely being set aside. The general consensus is that this is a murky area for any arbitrator, and one that may arguably be affected by the passage of the Bribery Act and its expansive jurisdiction provisions.

Of course there is also the question of how to investigate the allegations of bribery without the extensive police powers of a court or regulatory authority. Bribery may differ from traditional contract claims because it is often concealed and more difficult to detect. That being said, there is little reason why a tribunal would not be able to unearth the truth relating to bribery allegations any less ably than it does with other allegations that parties vigorously contest.

Moreover, it is well-settled that arbitrators have significant discovery tools available to them; they are able to order the disclosure of documents under many international arbitration institutions’ rules, which also provide tribunals with the authority to issue subpoenas for witnesses or documents. In addition, arbitral tribunals may also be assisted in compelling the testimony of witnesses or production of documents pursuant to the national laws of certain arbitral seats.

What Arbitrators Should Know about the Bribery Act

Bribery and corruption have been recognized as common law offenses in England since the early 1900s, but it was not until last year that the United Kingdom comprehensively addressed the issue of bribery overseas by English or multi-national companies.

In so far as arbitrators and lawyers are concerned, they must take heed of the fact that the Bribery Act significantly expands the UK’s anti-bribery laws in two ways: it does not differentiate between private and public entities, and it has an international ambit which is not restricted to UK nationals.

Arbitrators should be aware of the Bribery Act even where the governing law is not English law, the place of performance is outside the UK and the parties are not incorporated or formed in the UK, because the Bribery Act may still be relevant by virtue of its broad jurisdictional application.

The Act defines a ‘bribe’ as offering financial or other advantage to induce the person to perform improperly a relevant function or activity (or to reward the person for having done so).”[3] The Guidance issued on the Act confirms that “facilitation payments” – payments made to induce officials to perform functions they are otherwise obligated to perform – are included in the definition of Bribery under the Act (contrary to the U.S. Foreign Corrupt Practices Act 1977, which permits small facilitation payments).

The standard of proof imposed by the Bribery Act for criminal sanctions requires the prosecution to prove an offence beyond a reasonable doubt. The Bribery Act does not change the standard of proof in civil cases, applicable in arbitration, which is proof on the balance of probabilities. Some arbitrations have held that rumour and innuendo will not fulfil the requirement, and even that a higher standard of proof may be required for bribery allegations. The latter is based on the seriousness of the allegation, its inherent improbability and the potential for subsequent criminal sanctions.[4]

Set out below is a brief overview of the relevant sections of the Bribery Act:

Section 1 targets those who offer or give bribes to another where they intend to bring about improper performance of a “relevant function or activity.” This is a very broad term and includes any function of a public nature and activity connected with a business, or which is performed in the course of a person’s employment, whether corporate or unincorporated.[5] It is irrelevant whether the function or activity has any connection with the UK or is performed in a country outside the UK.

Section 5 sets the test for deciding whether conduct has been improper.

Section 6 creates the specific offence of bribery of a foreign public official with the intention of influencing the official in the performance of his official functions and obtaining business and/or an advantage in the conduct of business by doing so.

Section 7 provides that a corporation or partnership (whether or not incorporated in the UK) that carries on a business or part thereof in the UK, commits an offence under sections 1 or 6 if a person associated with it bribes another intending to obtain or retain business for the commercial organization or an advantage in the conduct of its business. The most significant aspect of this provision is that the country in which the person is based is irrelevant for the purposes of the Bribery Act, thus widening the scope of the Bribery Act beyond the UK. Section 7 also provides a defence for commercial organizations where it can prove it had adequate procedures in place designed to prevent persons associated with it from undertaking the conduct.

Section 12 provides that the Bribery Act applies to sections 1 and 6 offences committed within the UK and outside the UK where the offending person has a “close connection with the UK”.

[1] Court Clerk Face Bribery Charge, Press Association, dated 31 August 2011
[2] Westacre Investments Inc v Jugoimport SPDR Holding Co Ltd [1998] 3 WLR 770
[3] S1(2)(a) Bribery Act
[4] R (on the application of N) v Mental Health Review Tribunal (Northern Region) [2005] EWCA Civ 1605
[5] S3(2) Bribery Act, function or activity to which bribe relates includes: (a) all functions of a public nature; (b) all activities connected with a business (which includes a trade or profession); (c) any activity performed in the course of a person’s employment; (d) any activity performed by or on behalf of a body of persons (whether corporate or unincorporated).

By Gary Born, Kirsten O’Connell & Nathalie Allen

In AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2011] EWCA Civ 647, the claimant was a Kazakh subsidiary of a US energy company and operator under a concession agreement with the Kazakh owner, a company deriving its rights from the State. In an earlier dispute, the Kazakh Supreme Court had ruled that the arbitration clause (providing for a seat in London) contained in the concession was invalid, and the owner sought to rely on this in subsequent proceedings which it brought before the Kazakh courts seeking information as to the value of the concession assets. The operator then sought and obtained from the English High Court an anti-suit injunction to prevent the owner from bringing proceedings covered by the arbitration agreement in the Kazakh courts.

There were four issues on appeal before the Court of Appeal. Of these, the first and most comprehensively examined was what was called the “jurisdictional issue”, i.e. whether the court had jurisdiction to grant the anti-suit injunction in a situation where no arbitral proceedings were afoot. At its heart was the inter-relationship between the UK’s Arbitration Act of 1996, and the broad, general powers of the courts to issue injunctive relief under the Supreme Court Act 1981. The Court described the issue as having been “floating around, recognised or unrecognised, for some time”.

The Arbitration Act (under its section 44) gives the courts powers to issue injunctive relief, such as anti-suit injunctions, “for the purposes of and in relation to arbitral proceedings”. The lower courts rejected the operator’s argument that this included a power to issue anti-suit injunctions where no actual or intended arbitration was underway, and by the time of the appeal it was common ground between the parties that the Arbitration Act contained no such power.

Instead, the parties’ disagreement centred around whether the Arbitration Act was the sole basis by which the court might award anti-suit injunctions to uphold the arbitration agreement, or whether the courts’ broader powers under the Supreme Court Act might provide a basis for the injunction.

The opening section of the Arbitration Act sets down a provision that encapsulates one of the main principles of the Act, namely that the court should not intervene except as provided in the relevant part of the Act. The owner argued accordingly that the court’s general powers were inapplicable. As often happens when courts are asked to limit the extent of their jurisdiction, the Court of Appeal, however, was unconvinced. It conceded that in situations where section 44 did apply, use of powers under the Supreme Court Act would be “wrong as a matter of principle”. But, as the parties had agreed, section 44 did not apply where no arbitral proceedings were ongoing or even in prospect. If the Arbitration Act provided that the court should not intervene except as provided in the Act, one could ask – “intervene in what?”. Since there were no arbitral proceedings to intervene in, the Court had little difficulty in finding that its own broader powers allowed it to issue the injunction.

In reaching its decision, the Court was clearly influenced by practical considerations of time and cost. In a previous decision, Vale do Rio Doce Navegacao SA v Shanghai Bao Steel Ocean Shipping Co Ltd [2000] EWHC 205 (Comm), the High Court had held that declaratory relief was a matter within the arbitral tribunal’s substantive jurisdiction and it would be proper for the tribunal to form and determine the application for relief itself, in accordance with the provision in the Arbitration Act that it is primarily for a tribunal to rule on its own substantive jurisdiction. According to the Court of Appeal however, since the Supreme Court Act gave the court jurisdiction to grant the injunction anyway, requiring the operator to commence arbitration merely to put to the tribunal a question of its own substantive jurisdiction would be “far-fetched and unrealistic” – especially so when a tribunal is not obliged to rule on its own jurisdiction.

So is the decision pro-, or anti-arbitration? There’s a case for both. On the one hand, it could be argued that the courts have seen fit to limit the principle behind section 1 of the Arbitration Act, that they should not intervene in matters governed by the Act. But, on the other hand, they did so to uphold an arbitration agreement in circumstances to which it was considered (by both parties) that the Act did not in fact extend. The Supreme Court judgment in Dallah Real Estate and Tourism Co v Ministry of Religious Affairs of the Government of Pakistan [2010] UKSC 46 is cited in the judgment, and relied upon to underscore the Court of Appeal’s view that disputes on jurisdiction are likely to come before the court at some point in any event, so why put the parties to the trouble and expense of initiating arbitral proceedings simply for the purpose of determining jurisdiction. The agreement was between two Kazakh entities, for performance in Kazakhstan, but the arbitration clause provided for a seat in London. The English courts were prepared to uphold and enforce an English arbitration agreement, even if the parties themselves were not prepared to bring an arbitration to do so.

Andrew Cannon is a Senior Associate at Herbert Smith LLP

Sovereign immunity is premised upon the principle that the courts of one State may not assume jurisdiction over another State without consent (i.e. unless sovereign immunity is validly waived in accordance with the principles discussed below). Accordingly, sovereign immunity in the Hong Kong context will be relevant where the counterparty is a State other than the PRC or a non-PRC State entity. Crown immunity, on the other hand, is premised upon the principle that the courts of a State may not assume jurisdiction over that State (the crown) without its consent. Accordingly, in Hong Kong, crown immunity will be relevant if the counterparty is the PRC or a PRC State entity. (Crown immunity does not apply to the Government of the Hong Kong SAR, against which actions can be brought under the regime set out in the Crown Proceedings Ordinance (Cap. 300)).

It is now clear that both sovereign immunity and crown immunity are absolute under the law of Hong Kong. There is no exception for transactions and assets which are of a purely commercial rather than a sovereign nature (in contrast to the “restrictive” doctrine of sovereign immunity which is applied by many jurisdictions). An entity entitled to immunity will be able to assert it in all transactions and in respect of all assets, regardless of their commercial or sovereign character. Whilst the position in relation to sovereign immunity is technically provisional pending the consideration by the Standing Committee of the National People’s Congress (SCNPC) of certain questions referred to it by the CFA under Hong Kong’s Basic Law, it seems likely that the interpretation to be rendered by the SCNPC will endorse the overall tenor of the CFA’s provisional judgment.

The CFA in FG Hemisphere affirmed the earlier findings of the Court of Appeal (CA) in relation to waiver of sovereign immunity, holding that any waiver must be express and “in the face of the court” in order to be effective. In practice, this means that the waiver must be made at the time the court is to exercise jurisdiction. Pre-dispute contractual provisions, such as a Hong Kong court jurisdiction clause or an express waiver clause, will not, therefore, suffice to constitute a waiver of immunity. Based upon the judgment of the CFI in Intraline, it appears likely that the same principles regarding waiver will apply to crown immunity as to sovereign immunity at any stage at which the doctrine may be invoked. Where a party is dealing with a State counterparty, it is therefore advisable not to adopt a Hong Kong court jurisdiction clause – although arbitration, including in Hong Kong, will be a viable option, as discussed below. In addition, it would be prudent not to place reliance upon express waiver of immunity clauses, although these should still be included in contracts with State counterparties wherever possible, since they will be effective in many other jurisdictions. Identifying whether or not an entity is part of the State or the crown, and therefore entitled to immunity, may not always be straightforward, and it may be necessary to seek specific advice on a case-by-case basis.

The question of sovereign or crown immunity, and therefore of waiver, does not, strictly speaking, arise in relation to the jurisdiction of an arbitral Tribunal. Arbitration is a consensual process derived from a private contract between the parties, and the authority of the arbitral Tribunal flows from that contract. The adjudication of a dispute by an arbitral Tribunal does not, therefore, involve the exercise of jurisdiction by the courts of a State over any State, whether their own State (in the case of crown immunity) or a foreign State (in the case of sovereign immunity). As the CFA stated in FG Hemisphere, “when a State enters into an arbitration agreement with a private individual or company, that act does not constitute a submission to any other State’s jurisdiction. It involves merely the assumption of contractual obligations vis-à-vis the other party to the agreement.” Therefore, no immunity will be engaged by the assumption of jurisdiction by an arbitral Tribunal. It is therefore strictly a misnomer to refer to an arbitration clause as constituting an implied waiver of immunity from the arbitration proceedings themselves, although they are nevertheless commonly characterised in this way (including, for example, in the judgment of the CA). What is clear is that sovereign and crown immunity will not apply to the arbitration proceedings themselves. In this regard, section 34 of Hong Kong’s new Arbitration Ordinance (Cap. 609) expressly preserves the principle of “kompetenz-kompetenz”, which holds that it is for the arbitral Tribunal (and not, for example, the courts of the seat) to rule upon its own jurisdiction.

Although the CFA did not itself express an opinion on the question of whether or not an arbitration clause will amount to an implied waiver of the supervisory jurisdiction of the courts of Hong Kong over an arbitration seated in Hong Kong or otherwise, it cited a leading work on State immunity by Lady Hazel Fox CMG QC, an eminent commentator on this area, which concludes that “the exception for arbitration agreements operates… to remove state immunity from the first stage of arbitration in which the national courts exercise supervisory powers.” That conclusion had itself been quoted and approved (albeit in obiter remarks) by the CA, an endorsement which was not disturbed by the judgment of the CFA. It is therefore strongly arguable that the law of Hong Kong accords with customary international law on this issue and an arbitration clause will amount to an implied waiver of immunity in respect of the supervisory jurisdiction of the Hong Kong courts. Furthermore, court proceedings in support of arbitration are relatively rare in practice, and most arbitrations proceed from beginning to end without requiring the input of domestic courts. Moreover, in several important aspects of arbitral procedure, Hong Kong’s new Arbitration Ordinance (Cap. 609) shifts responsibility for functions which have traditionally been part of the supervisory role of the courts to the Hong Kong International Arbitration Centre (HKIAC) (for example, in relation to determining the number of arbitrators, appointing arbitrators and appointing mediators), further narrowing the circumstances in which it will be necessary to invoke the supervisory jurisdiction of the courts.

Whilst there is, of course, an unquantifiable risk that a State counterparty might take this point in any proceedings before the Hong Kong courts in support of an arbitration, Hong Kong remains a very attractive seat. This is particularly so in relation to PRC-related contracts, since Hong Kong is a readily acceptable venue for PRC counterparties who may otherwise be reluctant to agree an offshore seat. In practice, therefore, the judgments of the CFA in FG Hemisphere and the CFI in Intraline should not affect the choice of Hong Kong as a seat for arbitration.

The most significant impact of the FG Hemisphere and Intraline cases is in relation to enforcement and execution against assets belonging to a State or a State entity located in Hong Kong. The CFA confirmed in FG Hemisphere that an arbitration clause will not operate as an implied waiver of immunity either from enforcement proceedings in the Hong Kong courts or from execution or attachment against assets. In addition, because any effective waiver of immunity must be made “in the face of the court” , an express waiver clause will not be effective to waive immunity in respect of enforcement and execution either. The risk posed by immunity in respect of enforcement and execution will be relevant where State assets against which enforcement might be sought are located in Hong Kong, and particularly in cases in which they are the only such assets of the relevant State or State entity. However, the position will be the same regardless of the jurisdiction in which the relevant arbitral Award or court judgment was rendered. Accordingly, whilst immunity in respect of enforcement and execution is an important issue of which to be aware, it should not affect the choice of Hong Kong as a seat of arbitration. In addition, the combined effect of the FG Hemisphere and Intraline judgments upon dispute resolution in Hong Kong should not be overstated: the issue of sovereign or crown immunity will only apply in the case of contracts with States and State entities, and not those with purely commercial counterparties. With a modern arbitration regime under the new Arbitration Ordinance (Cap. 609), one of the leading arbitral institutions in the HKIAC, and reliable, supportive courts, Hong Kong continues to be an attractive venue for arbitration – particularly when dealing with PRC counterparties.

Justin D’Agostino
Partner
Herbert Smith, Hong Kong

Martin Wallace
Registered Foreign Lawyer
Herbert Smith, Hong Kong

Georg von Segesser