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

Recently, the Singapore High Court in Doshion Ltd v Sembawang Engineers and Constructors Pte Ltd [2011] SGHC 46 (“Doshion”) rightly held that no injunction would lie in such an instance. It is a decision to be welcomed.

In that case, the two parties were parties to arbitration proceedings under certain construction contracts (“the Sub-Contracts”). The arbitration was scheduled to start on 28 February 2011. The claimant contended that an oral settlement was reached between the solicitors for the parties on 15 February 2011 and the arbitration proceedings should be terminated as of that date. The defendant denied the existence of any settlement.

The defendant characterised the claimant’s argument as one where the tribunal had become functus officio because of the settlement. The defendant cited a recent English High Court decision of Martin Dawes v Treasure & Son Ltd [2010] EWHC 3218 (“Dawes”) and contended that the issue of whether an arbitrator was functus went to the jurisdiction of the arbitrator, which was a matter for the arbitrator to decide.

In finding for the defendant, the Singapore High Court’s reasoning was built on three pillars:

(a) the arbitrator was not functus since the tribunal had not even begun to hear the dispute;

(b) adopting the commercially sensible approach in Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, that an dispute over the existence of an settlement agreement would be caught by the ambit of the arbitration agreement in the Sub-Contracts; and

(c) in any event, any dispute about the scope of an arbitration agreement was a matter for the arbitral tribunal based on the doctrine of kompetenz-komptenz.

It was not strictly necessary for the defendant to characterize the plaintiff’s argument as one relating to functus officio – the plaintiff faced an uphill task from the get go. Section 6 of Singapore’s International Arbitration Act (the Act incorporates the Model Law) requires a court to refer the dispute to arbitration unless the agreement was “null and void, inoperative or incapable of being performed”. In Tjong Very Sumito v Antig Investments Pte Ltd [2009] SGCA 41, the Singapore Court of Appeal astutely held that in line with its prevailing philosophy of judicial non-intervention in arbitration, the Court would interpret the word “dispute” in Section 6 broadly, and would readily find that a dispute existed unless the defendant had unequivocally admitted that the claim was due and payable. In circumstances where the defendant prevaricates (ie, first making an admission and then later purporting to deny the claim on the ground that the admission was mistaken, or fraudulently obtained, or was never made), the matter would ordinarily still be referred to arbitration. The Court’s approach is commendable in giving full effect to the parties’ specified mode of dispute resolution.

When we apply this reasoning to Doshion, whether any alleged settlement was reached before or during the arbitral hearing would not, as a matter of principle, affect the question of which fora decides whether the settlement exists. It is important to ask the right question. That question is whether the underlying dispute remains unresolved. Any settlement would be in relation to the underlying dispute arising out of the Sub-Contracts. Accordingly, any dispute about the settlement originates from the underlying dispute. To answer the question, any dispute about the settlement means that the underlying dispute remains unresolved. So unless the defendant unequivocally admits the claim or acknowledges that there has been a settlement such that there is no longer a dispute, the Court will refer the matter to arbitration. Conceptually, since any prevarication by the defendant on the admission of the claim would be a matter to be referred to arbitration, any prevarication by the defendant on the settlement of the claim must have the same outcome.

This reasoning based on first principles would have been sufficient to dispose of Doshion. The claimant did not, and presumably could not, show that there had been a waiver of the arbitration agreement or an agreement to end the tribunal’s jurisdiction.

The going only gets tougher for the claimant if it embarks on the functus officio route. Akenhead J in Dawes rejected the argument that a tribunal becomes functus once a settlement has been reached during arbitral proceedings.

In Dawes, the claimant (Dawes) engaged a contractor (Treasure) to carry out construction works at his country estate. Disputes arose and Treasure commenced arbitration proceedings before Mr Ian Salisbury. After the parties had pleaded their respective cases, they agreed upon a settlement. However, the scope of the settlement was not documented in a consent order or final award. Subsequently, Dawes issued his own arbitration notice in respect of related disputes but appointed a different arbitrator. Treasure asked Mr Salisbury to rule that he retained jurisdiction in relation to the “new” dispute, and that it had been compromised by the settlement agreement. The first arbitrator ruled in favour of Treasure on both points, which was challenged by Dawes on the ground that Mr Salisbury was already functus officio after the settlement.

In dismissing Dawes’ application, Akenhead J relied on, inter alia, Section 51 of the English Arbitration Act 1996. Section 51 provides that if parties settle the dispute during arbitral proceedings, the tribunal shall terminate the substantive proceedings and, if so requested, produce a consent award. Accordingly, Akenhead J held that the settlement of a dispute after it had been referred to arbitration, but before any final award, did not generally bring an end to the arbitrator’s jurisdiction and make him functus officio. Even if the dispute was settled “there remains a jurisdiction to terminate the substantive proceedings and to resolve issues of costs or any other matters in dispute”. That jurisdiction was otherwise not statutorily limited, and neither did parties preclude or limit such jurisdiction in their settlement.

Akenhead J also observed that Mr Salisbury “would undoubtedly still have retained jurisdiction if there had been an issue between the parties as to whether there was any settlement at all. He would still have been the arbitrator to resolve the underlying disputes which would include ruling upon a defence that the claim had been settled.”

The Model Law’s counterpart of Section 51 of the English Arbitration Act is found in Article 30 which deals specifically with settlement. The lesson taught by the two cases highlighted here is that if a party wants to put an end to a tribunal’s jurisdiction immediately after settlement, it will generally have to show an agreement to end the tribunal’s jurisdiction, whether as part of the settlement itself or as a separate agreement. Unfortunately for the claimant in Doshion, there is no shortcut.

Darius Chan (Wilmer Cutler Pickering Hale & Dorr, London) &amp

In Global, the claims were submitted by two US companies, Global and Globex, which had entered into several contracts with a private Ukrainian company for the delivery and sale of poultry products. After the Ukrainian company allegedly failed to pay for and take delivery of most of the poultry products shipped to the designated port, Global and Globex filed claims against Ukraine under the Ukraine-US BIT, seeking compensation of US$ 34.8 million. Shortly after the tribunal was constituted, Ukraine filed a preliminary objection under Rule 41(5), which permits the accelerated dismissal of claims that are “manifestly without legal merit.” Ukraine argued that the claimants’ claims were manifestly without legal merit, because the poultry contracts did not constitute or relate to an “investment” as that term is defined in the Ukraine-US BIT or understood under Article 25(1) of the ICSID Convention, but rather were pure commercial transactions, involving only the cross-border sale of goods.

Acknowledging the novelty of the summary dismissal procedure embodied in Rule 41(5), the Global tribunal was “particularly conscious of its responsibility to contribute to shaping both an understanding of the Rule itself and of the procedure which ought to be followed under it.” (Global para. 29) The tribunal first considered whether Rule 41(5) extends to jurisdictional objections. In this regard, the tribunal shared the view of the tribunal in Brandes Investment Partners, LP v. Venezuela and found no objective reasons why Rule 41(5) “should be limited to an evaluation of the merits of the case and should not also englobe an examination of the jurisdictional basis on which the tribunal’s powers to decide the case rest.” (Global para. 30 citing Brandes para. 52)

Turning to the applicable procedure under Rule 41(5), the Global tribunal observed that “Rule 41(5) is sparse in its indications to a tribunal as to the procedure to be followed when an objection is lodged,” suggesting that “it is no doubt for each individual Tribunal to fill in the gaps by exercising the general procedural powers given to it by Rule 19.” (Global para. 32) In that respect, the tribunal noted that “it would not be right to non-suit a claimant under the ICSID system without having allowed the claimant (and therefore the respondent as well) a proper opportunity to be heard, both in writing and orally,” particularly if the objection is granted. (Global para. 33) The tribunal thus permitted two rounds of written submissions, followed by two rounds of oral argument, on Ukraine’s preliminary objection.

The Global tribunal further observed that, in order to meet the requirements of due process, “it would seem that the tribunal is under an obligation, not only to be sure that the claim objected to is ‘manifestly without legal merit,’ but also to be certain that it has considered all of the relevant materials before reaching a decision to that effect, with all the consequences that follow from it.” (Global para. 34) Ultimately, the tribunal concluded that, in the case at hand, it was “unable to see what further materials relevant to the question at issue, be it in the shape of legal argument or authority or in the shape of witness or documentary evidence, either Party might wish to, or be able to, bring forward at a later stage.” (Global para. 34)

With respect to the standard of review under Rule 41(5), the Global tribunal examined the meaning of the word “manifestly” stating that it had “nothing of its own to add” to the analysis made by the tribunal in Trans-Global Petroleum, Inc. v. The Hashemite Kingdom of Jordan that “the ordinary meaning of the word requires the respondent to establish its objection clearly and obviously, with relative ease and despatch.” (Global para. 35 citing Trans-Global para. 88) Applying the relevant standard, the tribunal found that neither the poultry contracts, nor the moneys expended by Global and Globex in financing their performance, “can by any reasonable process of interpretation be construed to be ‘investments’ for the purposes of the ICSID Convention,” and thus concluded that the claims advanced by Global and Globex in the arbitration were manifestly without legal merit within the meaning of Rule 41(5). (Global paras. 56-58) The tribunal declined, however, to issue an award on costs, finding that, “given the newness of the Rule 41(5) procedure and given the reasonable nature of the arguments concisely presented to it by both parties . . . the appropriate outcome is for the costs of the procedure to lie where they fall.” (Global para. 59)

In RSM, the claim was brought by RSM, a US company, and its three shareholders under the Grenada-US BIT and concerned a 1996 petroleum exploration agreement concluded by RSM and Grenada. A previous ICSID tribunal had dismissed a contractual claim brought by RSM under the same petroleum exploration agreement. In the new arbitration, the claimants argued that their claims under the Grenada-US BIT were not precluded by the findings of the previous ICSID tribunal, because, in the claimants’ view, bilateral investment treaties provide an independent source of rights. Grenada filed a preliminary objection under Rule 41(5), arguing that the claimants’ claims were manifestly without legal merit because the legal and factual contentions upon which they depended had been fully determined in the previous ICSID arbitration.

Like the Global tribunal, the tribunal in RSM agreed with the standard set out in Trans-Global and Brandes for preliminary objections under Rule 41(5). Underscoring the finality of summary dismissal under Rule 41(5), the RSM tribunal further observed that,

given the potentially decisive nature of an Article 41(5) objection, we would add that, for a tribunal faced with such an objection, it is appropriate that a claimants’ [sic] Request for Arbitration be construed liberally and that, in cases of doubt or uncertainty as to the scope of a claimant’s allegation(s), any such doubt or uncertainty should be resolved in favour of the claimant. (RSM para. 6.1.3)

Drawing from the principle of collateral estoppel and Article 53 of the ICSID Convention, the RSM tribunal held that it was bound by the conclusions of the previous ICSID tribunal and granted Grenada’s preliminary objection under Rule 41(5), concluding that “each of Claimants’ claims is manifestly without legal merit.” (RSM para. 7.2.1)

With respect to costs, the RSM tribunal observed that, in view of its conclusions that the claimants’ claims were manifestly without legal merit and that it was impermissible for the claimants to advance such claims in new ICSID proceedings, it was “appropriate that Respondent should be fully indemnified for all of its costs, reasonably incurred or borne, in this proceeding.” (RSM para. 8.3.4) Unlike the Global tribunal, the RSM tribunal appears to have taken the view that the very nature of an award pursuant to Rule 41(5) warrants an award of costs in favor of the respondent State.

The Global and RSM awards will likely encourage respondent States to use Rule 41(5) in the future to dismiss, on a summary basis, BIT claims that appear baseless on their face. These two awards show that Rule 41(5) can achieve a cost-effective and prompt result. It remains to be seen, however, whether future ICSID tribunals will be inclined to sanction unsuccessful claimants with an award of costs for asserting claims that are manifestly without legal merit.

John Willems, Kristen Young, and Noor Davies

The dispute in Fakes arose out of “various investigations and lawsuits brought against the Uzans, a prominent family in Turkey who controlled a vast group of companies in a variety of business sectors including banking, electricity, television and telecommunication.” (para. 28)  Turkish authorities ultimately froze and sold various assets held directly or indirectly by the Uzans, including Telsim Mobil Telekomunikayson Hizmetleri A.S. (Telsim), a leading Turkish telecommunications company.  The Claimant submitted that, as a result of series of share sale agreements, on 3 July 2003 he became the legal owner of 66.96% of the shares in Telsim shortly before the Turkish conduct at issue.  He claimed an astronomical US$ 19 billion in damages.

The Tribunal ultimately disposed of the claim on the basis that although there were formal share sale agreements for the Telsim shares, Mr Fakes did not hold legal title over the Telsim share certificates because the parties never had any intention to transfer any rights to Mr Fakes nor did they actually transfer any rights.  In coming to this conclusion, the Tribunal highlighted four points.  The Tribunal found that the purpose of the arrangement was to use the name of Mr Fakes as “bait” to attract potential purchasers who might be hesitant to deal with the Uzans.  Second, the low purchase price (US$ 3,800) could not be reconciled with the acquisition of legal rights to the majority of shares in a major telecommunications company, even assuming the amount was paid.  Third, Mr Fakes never obtained possession of the share certificates and was not in a position to obtain possession.  Fourth, Telsim appeared to be unaware of the share transfer.  The Tribunal concluded that, as the parties did not intend to give effect to the alleged share transfer, there was no investment (para. 147).

In defining investment for the purposes of Art. 25, ICSID Convention, the Tribunal noted that two distinct approaches have been taken by tribunals.  On the one hand, some tribunals have identified a number of benchmarks, yardsticks or characteristics that can be used as examples to facilitate the recognition of the objective meaning of investment in any given case.  On the other hand, other tribunals have found that an objective definition of investment must include a certain number of elements.  The Tribunal noted that some decisions, in addition to the four criteria indentified in Salini ((i) a contribution, (ii) a certain duration, (iii) an element of risk, and (iv) a contribution to the host State’s economic development) had added a fifth criteria (regularity of profit and return) and that Phoenix Action had identified two other requirements—that the assets be invested in good faith and in accordance with host State law.  The Tribunal then noted that the ever increasing list of criteria has resulted in some tribunals taking the view that the notion of investment is to be viewed solely through the prism of consent and that, as the ICSID Convention does not define investment, consent to arbitrate an investment dispute is based on the definition of protected investment in the underlying treaty.

The Fakes Tribunal takes the minimalist middle road in this debate.  It affirms that there is an objective definition of investment in the ICSID Convention that cannot be defined simply through the parties’ consent (para. 108).  Second, it finds that the criteria of (i) contribution, (ii) a certain duration, and (iii) an element of risk, are both necessary and sufficient to define an investment within the framework of the ICSID Convention (para. 110).

Despite taking a minimalist approach to defining an objective core meaning of investment for the purposes of Art. 25, the approach in Fakes diverges from what the 30 July 2009 Award in Pantechniki S.A. Contractors & Engineers v. Albania, referred to as an “emerging synthesis”, citing Zachary Douglas’ formulation in The International Law of Investment Claims that: “The economic materialisation of an investment requires the commitment of resources to the economy of the host state by the claimant entailing the assumption of risk in expectation of a commercial return.” (Rule 23)   In Fakes, “a certain duration” is identified as a necessary criterion, while the formulation in Douglas’ Rule 23 includes expectation of commercial return but not duration.  It is unfortunate that the Tribunal in Fakes, in its attempt to set out a definitive test, did not explain in more detail why “a certain duration” is a necessary criterion mandated by the ICSID Convention.  Why should an investment that has been in a host State for a hour not obtain treaty protection?  This would seen to create a perverse incentive for states to expropriate as soon as possible.

On the issue of the definition of investment generally, I find the reasoning in Pantechniki about second-judging state choices persuasive: “For ICSID arbitral tribunals to reject an express definition desired by two States-party to a treaty seems a step not to be taken without the certainty that the Convention compels it.” (para. 42) As the ICSID drafters did not decide to define investments, in my view there are very good reasons for the arbitrator to look solely to the instrument of state consent for the definition of investment, absent very compelling reasons.

The Fakes Tribunal rightly stated that principles of good faith and illegality cannot be incorporated into the text of the ICSID Convention with doing violence to its language.  The requirement to interpret and apply treaties in good faith does not make it a criterion for whether there is an investment for the purposes of the ICSID Convention (para. 112-113).  Likewise, although treaty protection might be conditioned on a requirement of legality, the ICSID Convention does not impose this as a jurisdictional requirement (para. 114).

Although the reasoning in Fakes with respect to the three necessary criteria for an investment under Art. 25, ICSD Convention is not particularly satisfying, Fakes can be commended for providing a succinct and clear rejection of the attempt in Phoenix Action to add further and unwarranted jurisdictional requirements for the purposes of ICSID arbitration.

]]> http://kluwerarbitrationblog.com/blog/2010/08/03/fakes-vs-phoenix/feed/ 0 http://kluwerarbitrationblog.com/blog/2010/07/07/swiss-federal-supreme-court-denies-the-applicability-of-an-arbitration-clause-in-the-articles-of-association-to-liability-claims-against-board-of-directors-of-an-insolvent-company/ http://kluwerarbitrationblog.com/blog/2010/07/07/swiss-federal-supreme-court-denies-the-applicability-of-an-arbitration-clause-in-the-articles-of-association-to-liability-claims-against-board-of-directors-of-an-insolvent-company/#comments Wed, 07 Jul 2010 13:11:28 +0000 Georg von Segesser http://kluwerarbitrationblog.com/?p=2185 Continue reading →]]> In a decision dated 8 December 2009, published on 13 June 2010 (case 4A_446/2009, published as 136 III 107), the Swiss Federal Supreme Court held that persons acting as board of directors of a company that subsequently became insolvent cannot rely on an arbitration clause contained in the articles of association of that insolvent company for liability claims filed against them by the insolvent company’s creditors.

Background

The articles of association of corporation Y (“Y”) contain an arbitration clause which applies in case of a dispute between Y and its members of the board of directors or its shareholders. On 5 January 2004, Y was declared insolvent. In March 2007, Y’s shareholder and creditor A (“A”) filed a liability claim before the commercial court of canton of Bern requesting that the members of Y’s board of directors be ordered to pay CHF 1m. The respondent board member X (“X”), in turn, raised a plea of arbitration based on the arbitration clause contained in Y’s articles of association.

On 7 July 2009, the commercial court of canton of Bern decided that the arbitration clause did not include the dispute at hand and that the court had jurisdiction over the matter. Subsequently, X filed an appeal against the commercial court’s decision before the Swiss Federal Supreme Court.

Decision

The Federal Supreme Court dismissed X’s appeal and confirmed the commercial court’s holding that the arbitration clause did not apply. It held that by filing a liability claim against Y’s board members, A was not enforcing the rights of Y against its board members, but was enforcing the rights of Y’s creditors. For this reason, a board member could not bring forward all defenses it could have brought forward against a claim filed by Y itself. He could only bring forward the defenses he had against Y’s creditors.

The Supreme Court held that the plea of arbitration was not a defense X could bring forward against Y’s creditors. It was a defense X could only bring forward against a claim filed by Y itself. If such a defense could be brought forward against Y’s creditors, there would be a risk that, due to an arbitration clause in the articles of association, the enforcement of liability claims of creditors could be hindered. Since Y’s creditors had no influence on the content of the articles of association, they were not bound by the arbitration clause contained therein.

Comment

Liability claims against members of the board of directors can generally, in domestic and in international cases, be submitted to arbitration. This, however, is only the case where the arbitration clause satisfies the form requirements and where, e.g., the shareholders or board members – later a party to the dispute – validly consent to the respective arbitration clause. The consent requirement can be satisfied if a shareholder, when purchasing the company’s shares, or a member of the board, when accepting the appointment, at least by way of referral to the arbitration clause in the articles of arbitration consent to such arbitration clause. On the contrary, an arbitration clause is neither binding on those shareholders who purchased their shares prior to inclusion of the arbitration clause in the articles of association nor is it binding on the company’s creditors. With respect to the latter, it is established in legal literature that an arbitration clause is in particular not binding in the case of an insolvent company, where a creditor files a liability claim against the board members on behalf of all creditors of an insolvent company. The present case, published in the official Federal Supreme Court Case Reporter, confirms the existing view.

Georg von Segesser / Petra Rihar