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

In two decisions both dated 11 January 2010, published on 16 April 2010 (cases 4A_256/2009 and 4A_258/2009), the Swiss Federal Supreme Court dismissed two appeals regarding the irregular constitution of an arbitral tribunal by stating that the complainant failed to sufficiently substantiate his allegations.

Background

In 2006, two ICC arbitrations were initiated. They had the same factual background, but were based on different (yet interconnected) agreements. In the first arbitration (dealt with in the decision 4A_256/2009), AY (”AY”), a company incorporated under the laws of the Czech republic, initiated an arbitration against X (”X”), a Czech citizen. In the second arbitration (dealt with in the decision 4A_258/2009), X (Respondent in the first arbitration) initiated an arbitration against Y (”Y”), a Czech citizen, sole owner of AY (Claimant in the first arbitration).

In both arbitrations, the arbitral tribunal was composed of arbitrator Q (”Q”) (nominated by X), arbitrator P (”P”) (nominated by AY in the first arbitration and by Y in the second) and of the Chairman O (”O”) (nominated by the co-arbitrators). The tribunal decided not to consolidate the proceedings.

After the tribunal rendered the awards, X appealed before the Federal Supreme Court against both awards. In both proceedings, X argued that P and O were biased and that, therefore, there was no guarantee that the arbitral tribunal was impartial and independent of the parties.

Decision

The Federal Supreme Court dismissed both appeals.

As to P’s lack of independence, X argued that, end of Mai 2007, the Czech media reported that P had been nominated as arbitrator by Y or by persons connected with Y in approximately ten different arbitration proceedings. In fact, P had become the “house arbitrator” (”Hausschiedsrichter”) of Y. With respect to two (out of ten) proceedings, X personally knew of such nominations as he was acquainted with the proceedings. X further argued that in one further ICC arbitration between AY and a certain Mr. Z, P’s nomination had not been confirmed.

X had challenged P’s nomination as co-arbitrator in both arbitrations for lack of independence before the ICC Secretariat pursuant to Article 11 of the ICC Rules. The ICC Court nevertheless confirmed P’s nomination without stating the grounds for dismissal of the challenge submitted by X.

The Federal Supreme Court held that X’s appeal was insufficiently substantiated and that X failed to sufficiently show circumstances giving rise to justifiable doubts as to the independence of P. X’s assertion that P had “recently” been nominated in numerous cases of Y or by persons connected with Y was based solely on a newspaper article of 20 May 2007 which was too vague to serve as evidence in an evidentiary hearing purposed to clarify whether or not X’s assertion was true. Whether or not P lacked independence could thus not be decided based on said article. The Federal Supreme Court continued that X should have named the different arbitrations proceedings by specifying the timing and the involved parties, by stating which party had appointed P and by showing what the relationship of that party to Y or to persons connected to Y was. Also the fact that P’s nomination in another ICC arbitration between AY and a certain Mr Z had not been confirmed did not lead to any conclusions as to P’s independence in these proceedings the Federal Supreme Court concluded.

As to O’s lack of independence, X brought forward that, end of October 2008, at the occasion of an arbitration in London between a trust established by X and a company B, X learned of several interconnections of O with companies (where O served as a member of the board of directors) and with persons who were connected to or closely worked with Y. In particular, X argued that O was a member of the board of directors of a company C collecting for Y (or one of the companies controlled by Y) one of the largest claims in the Czech Republic and that said company was receiving instructions from Y. To substantiate his allegations X submitted e-mails showing the described interconnections and dependencies.

The Federal Supreme Court held that X’s arguments were insufficient to show O’s lack of independence. In particular, X had not shown to what extent the connection of the company C to Y was supposed to influence O’s impartiality and independence in these proceedings. Rather, the Federal Supreme Court held, the cooperation described by X did not go beyond an “ordinary business relationship”.

Comment

Switzerland is known as an arbitration friendly place among others because the Federal Supreme Court only rarely interferes with the work of the arbitral tribunals. In these two cases, however, the commentators cannot escape the impression that the Federal Supreme Court circumvented the actual problem by stating that the complainant did not sufficiently substantiate his allegations. It seems somehow unsatisfactory to require a strict proof regarding the question of the number and time frame of previous appointments of an arbitrator by the same party or an affiliate of it . Such proof will not be possible for the complainant. For this reason, at least if it refers to past appointments, the exact fact should be established before the course of the ICC confirmation procedure. It should also be kept in mind that, to the knowledge of the authors, situations of “house arbitrator” do exist which is sometimes used as an argument against arbitration as a method of dispute resolution.

Georg von Segesser / Petra Rihar

In a decision dated 11 February 2010, published on 29 March 2010 (case 4A_444/2009), the Swiss Federal Supreme Court dismissed an appeal against a tribunal’s decision that it had jurisdiction over a request for declaration that damages are owed due to the violation of an arbitration clause. The Supreme Court dismissed the appeal because it had not been filed in a timely manner. However, it also held that the tribunal’s declaratory judgment concerning damages for breach of an arbitration clause did not violate Swiss public policy.

Background

On 1/22 December 2004, a Swiss manufacturer of pharmaceutical products (”Manufacturer”) and an Israeli distributor of such products (”Distributor”) entered into an exclusive distributorship agreement (”Agreement”) containing an arbitration clause. On 30 Mai 2006, after having terminated the Agreement, the Manufacturer initiated arbitration proceedings in Switzerland against the Distributor requesting payment of unpaid bills and of penalties. On 20 September 2006, the Distributor filed a claim against the Manufacturer before the district court in Tel Aviv-Jaffa requesting payment based on its claim for goodwill.

Before the district court in Tel Aviv-Jaffa, the Manufacturer requested that the proceedings be suspended due to the pending arbitration concerning identical parties and claims. Before the arbitral tribunal, on 21 June 2007, the Manufacturer requested, among others, a payment of CHF 100′000 arguing that the Distributor, by filing a claim before the district court in Tel Aviv-Jaffa, violated the arbitration clause. As to the violation of the arbitration clause, the Manufacturer later amended its prayer for relief and requested that the arbitral tribunal declare that the Distributor, due to this violation of the arbitration clause, owed the Manufacturer a compensation for damages suffered (Manufacturer’s request no. 4). The Distributor requested, among others, that the tribunal deny its jurisdiction with respect to the Manufacturer’s request no. 4.

On 19 November 2008, in a Partial and Interim Award, the arbitral tribunal declared that it had jurisdiction with respect to Manufacturer’s request no. 4. No appeal was filed against this decision. On 3 August 2009, in a Second Partial and Interim Award, the arbitral tribunal, among others, confirmed its jurisdiction with respect to Manufacturer’s request no. 4. It further held that the Distributor had “breached the Arbitration Clause” contained in the Agreement “by filing its claim for goodwill in Israel on 20 September 2006″ and that the Distributor is liable to the Manufacturer for damages “incurred as a result of this breach”, provided that the Manufacturer, in later arbitral proceedings, can establish the remaining elements of its claim under Article 97 of the Swiss Code of Obligations.

The Distributor appealed against the decision of the arbitral tribunal before the Swiss Federal Supreme Court.

Decision

Before the Federal Supreme Court, the Distributor argued several reasons for setting aside the decision of the arbitral tribunal. As to the Manufacturer’s request no. 4, the Distributor argued before the Supreme Court that (i) the arbitral tribunal did not have jurisdiction and that (ii) it violated Swiss public policy as it dealt with the request for declaratory judgment although the Manufacturer did not show that it had legally relevant interest in such declaratory judgment and, (iii) as it denied the Distributor’s right to address a constitutionally guaranteed state court with its claim.

As to the jurisdiction of the arbitral tribunal regarding the Manufacturer’s request no. 4, the Federal Supreme Court held that the arbitral tribunal’s decision of 19 November 2008, where the arbitral tribunal declared that it had jurisdiction with respect to Manufacturer’s request no. 4, had not been appealed. The Distributor had filed an appeal only against the tribunal’s decision of 3 August 2009, however in this latter decision the tribunal only confirmed its respective decision of 19 November 2008 without deciding the issue of jurisdiction anew. The Distributor should have – but has not – appealed against the decision of 19 November 2008 in order to dispute the tribunal’s jurisdiction regarding the Manufacturer’s request no. 4. The Federal Supreme Court further held that the Distributor should have shown that the issue of violation of the arbitration clause is not covered by the arbitration clause itself and therefore the tribunal did not have jurisdiction to decide that issue. Instead, according to the Federal Supreme Court, the Distributor mixed the issue of the violation of the arbitration clause and of the jurisdiction over the Distributor’s goodwill claim.

The Distributor’s further argument that an arbitral tribunal may not influence the state court’s decision on costs of the proceedings and, in particular, may not punish a party for addressing a state court with its claims, also failed as the tribunal had only decided on its own jurisdiction (and not the jurisdiction of the state court) and did not try to influence the state court’s decision on costs. The Federal Supreme Court held that awarding the counterparty damages for the violation of the arbitration clause is a decision in substance and has nothing to do with the issue of jurisdiction. It could thus not be brought before the Federal Supreme Court.

As to the Distributor’s argument that the tribunal violated Swiss public policy in deciding over the request no. 4, the Federal Supreme Court held that the Distributor was right in alleging that, where Swiss law is applicable, according to the rules developed by Swiss state courts, the admissibility of a request for declaratory relief must be determined in accordance with Swiss law. However, since neither the requirements of Swiss law that need to be met for a request for a declaratory relief to be admissible before Swiss state courts nor the question of which requirements must be applied by an international arbitral tribunal constitute Swiss public policy, the Supreme Court denied to deal with Distributor’s argument that the arbitral tribunal did not properly apply said requirements.

The Distributor also argued that the tribunal violated Swiss public policy because it denied the Distributor’s right to address a constitutionally guaranteed state court with its claim. Here, the Federal Supreme Court held that with respect to arbitrable claims the parties are free to exclude the state court jurisdiction by entering into an arbitration clause. Since the Distributor and the Manufacturer validly concluded the arbitration clause, the exclusion of the state court jurisdiction was binding and the tribunal did not violate the public policy by deciding Manufacturer’s request no. 4.

Comment

With respect to the issue of jurisdiction, this decision clearly shows the importance of a timely complaint against an interlocutory award. Article 190 para. 3 of the Swiss Private International Law Act (”PILA”), which states that the time limit for lodging an appeal shall commence when the interlocutory award is communicated, does not only constitute a party’s right but also a party’s duty to appeal in a timely manner.

A further interesting issue in this case is the issue of claims for damages based on the fact that one party has, in breach of the arbitration agreement, filed a claim in another court. Although the Federal Supreme Court did not have to address this issue because of late filing of the appeal, it stated obiter dictum that an arbitral tribunal has jurisdiction for such claims. Furthermore, regarding the merits of the damage claim, it rejected the ordre public violation claim which was based mainly on the fact that the Israeli courts had accepted their jurisdiction and thus no violation of the arbitration clause could be perceived. This decision might deter parties in arbitration proceedings with seat in Switzerland to file parallel proceedings before state courts.

As to the question of which rules apply to the admissibility of declaratory relief in international arbitration (since such issue does not pertain to the public policy), the Federal Supreme Court left such question unanswered. The following comments, however, are noteworthy:

In the Swiss legal literature it is disputed whether the test for admissibility of declaratory relief pertains to the procedure or to the substance (merits) of the case. If this question is considered a procedural issue, there is some uncertainty for the users of arbitration what test (if any) applies (since the procedural rules at the seat of the arbitral tribunal do not apply automatically). If it is considered a substantive issue, under Swiss law the situation is as follows: Prayers for declaratory relief are limited to seeking a declaration on the existence or non-existence of a certain legal relationship or on the legal consequences of such legal relationship based on certain facts. Where a party is in a position to request specific performance of duties arising from the same legal relationship or payment of a certain amount of money, a request for declaratory relief is inadmissible and must be dismissed without prejudice. More specifically, where a request for specific performance is possible, the party seeking merely a declaratory relief lacks the “legally relevant interest” in such declaratory relief because the uncertainty pertaining to the legal relationship between the parties can be eliminated by way of the performance request and therefore such performance request is a valid option for obtaining an enforceable judgment granting an affirmative relief. Only where the request for performance is not possible and the uncertainty regarding the legal relationship between the parties can only be eliminated by way of a declaratory judgment, an interest in a declaratory judgment is worthy of protection under Swiss law.

Georg von Segesser / Petra Rihar

Art. 207 of the Lisbon Treaty defines the new common commercial policy of the European Union, and states that it shall furthermore relate also to “foreign direct investments”. This provision has the appeal of an outright earthquake, given that the field of foreign investment, and in particular investment treaties, has always been the exclusive realm of the member states (at least in theory, the legal reality was different, though: the EU has concluded mixed free trade agreements with third states not only comprising matters of commercial policy, but also of investments). It has accordingly drawn the comments and critique of numerous scholars. Yet, to my mind it seems that this provision conceals more than it reveals: All we know so far is that the European Union will somehow take part in the foreign investment business in the future. The extent and the manner of its new role is widely unclear: The trouble starts with the term “direct foreign investment” itself, which is not defined. There are a number of other questions which are left unanswered by Article 207: What happens to existing BITs now that the competence to such treaties has – at least in part – been elevated to the EU level? Concededly, until the EU signs treaties of its own, there is little point in arguing that the member states have to cancel their existing BITs, but what happens if the EU does? Will there be parallel treaty structures in respect of direct and indirect investments? Or will there be joined treaties, negotiated and concluded by both the EU and the member states, originating from separate competences (I think, with regard to feasibility, this is the more likely option, especially with a view to the lack of competence of the EU to regulate matters of expropriation, cf. Art. 345 of the Lisbon Treaty)? When negotiating new investment treaties, will the EU take the position of an export- or an import-oriented state, given that the Union comprises both types of states?
Most of these questions require decisions to be made by the Commission and the ECJ, not so much because of legal considerations, but because the competence conferred by Art. 207 is too general and broad as to allow for a definite answer in either direction. It is this very indetermination of the competence, however, which is intriguing in that it allows for learned guesses on how the future of investment treaties in Europe could look. As an arbitration lawyer, I am personally most interested in the question of who would be liable and who would be eligible as a respondent in arbitration in the event a future EU investment treaty is breached.
If the investment treaty is signed by both the EU and the member states, i.e., a multilateral treaty (this is the scenario I would like to discuss, since it is, in my view the most probable one), there is, to my mind, a multitude of possible outcomes. The respondent and/or liable parties could possibly be:
1. only the entity which caused the breach, i.e., either the EU (in the case of a breach of EU officials, for example the competition authorities) or one or more infringing member states. This option would be inspired by a notion of the member states and the EU being coequal partners to the treaty and only severally liable.
2. The EU and the member state who breached the treaty. Such an option would, in legal terms, amount to several liability and attribution of a violation committed by a member state to the EU.
3. The EU and all of the member states, following a concept of joint and several liability.
4. The EU or the infringing member state, at the choice of the EU/member states. Such a mechanism would mirror the existing rule in s. 26 of the Energy Charter Treaty (“The communities and the member states concerned will determine who is a respondent party to arbitration proceedings (…)”.

Which will it be? I think that this depends first and foremost on the terms of the respective treaty, but which option would be desirable in terms of policy? Furthermore, in the absence of specific terms, the determination of liability and the status as respondent to investment arbitration proceedings might also require some deliberation as to the nature of the relationship between the EU and the member states in the context of multilateral investment treaties.

The ABA Journal has an interesting article on the Americanization of international arbitration. There’s nothing particularly new to our readers in this article. It’s a theme that my friend and colleague Tom Stipanowich has written about extensively. I’ve written a bit about the subject as well. But the fact that the story is being told in the largest legal publication in the United States is significant. The focus of the story is on transplanting American practices to the international arbitration arena, almost at the request of American counsel or arbitrators. Here’s a few choice quotes:

“If arbitration is to commit suicide, it will do so of its own choosing, because the parties have chosen to make it more expensive, time-consuming and more like litigation,” said Joe Profaizer of Paul, Hastings.

“The proliferation of electronically stored information is a major cost driver in U.S. litigation, and it’s becoming a major cost driver in international arbitration,” said Christopher Larus of Robins, Kaplan, Miller & Ciresi. “As more and more companies have to delve into their electronic records, it’s becoming more and more expensive.”

“The U.S. must recognize that international arbitration is international. The system must accommodate a wide variety of traditions and practices. It can’t just accommodate the American model, or people will stop using it,” says Glenn Hendrix of Arnall Golden Gregory.

So if the parties are so concerned about the Americanization of international arbitration, why don’t they fix it? That might mean (1) embracing mediation; (2) avoiding U.S. arbitrators; (3) avoiding U.S. counsel; (4) building in pre-dispute discovery limits into the contract; (5) vesting the arbitrators with greater discretion to limit discovery; (6) imposing more serious deadlines for the different stages of arbitration; (7) adopting expedited arbitration rules; (8) embracing advanced technologies for e-discovery; (9) selecting arbitrators who are particularly adept at case management; and (10) establishing more creative fee structures for resolving disputes.

These are just a few ways that one could avoid the increased costs and delays of international arbitration. I doubt that such concerns are paramount when a billion dollars is in dispute. I don’t accept the premise that the Americanization of international arbitration is always a bad thing. But for many disputes where cost and delay are significant priorities, there are ways to avoid the Americanization of international arbitration.

Roger Alford

Constructively, commercial arbitration is a judicially recognized and an enforced method of dispute resolution in the UAE.

Via Article 203 (5) of the Civil Procedure Law (1992), if the parties have agreed to refer a dispute to arbitration, an action on that dispute cannot be brought before the courts.

So let us assume for present purposes that the project in question, or the relevant commercial transaction, does have an arbitration agreement in it, which is recognized by the courts and enforced.

In many ways arbitrating major disputes in the UAE can be a far more complex process than in, say, the USA or UK or Europe.

First, what needs to be understood is that the list of criticism and “adverse” features in modern comercial arbitration, enumerated by Thomas Stipanowich recently in his paper “Arbitration: The New Litigation” (Univ. Illinois Law Review 2010) are all present and accounted for in the UAE. But in the UAE their mix and relative weightings differ.

300 plus years of common law litigation process in both the USA and UK has produced such a detailed set of procedures for litigation, that their almost complete adoption into many major arbitrations, has done arbitration a great dis-service.

In these Western countries, the Medieval processing of the merchants ( the “sniff & smell” arbitrations) have now been replaced by processes quoted by Thomas as being similar to civil litigation – judicialized; formal; costly and time consuming.

We all know what the elements are, in the arbitration process, that lend themselves to this criticism. They include discovery (especially nowadays “e” discovery); accessing 3rd party documents; prehearing procedures; factual and expert reports (for both claimant and respondent); a “hearing” process of some form, including possibly oral testimony and cross- examination.

Next, and quite critically, once an award is delivered while there needs to be a clear pathway to enforcement, in some jurisdictions the relevant arbitation law will permit appeals – allowing time to run on and further costs to be incurred. It is unfair to generalise too much as there are, of course, many examples of successful arbitations. But let us accept for present purposes that in the Gulf most arbitrations over significant sums of money or complex technical issues do involve these traditionally “litigious” style of steps and processes.

Now consider a scenario under which the concept of “judicialized” did not, in effect, exist.

“Judicialized” can of course mean many things, but to western lawyers it is, perhaps, the briefest way of starting with “due process” ; moving though “natural justice and fairness” ; touching upon the independence of experts and the arbitrator(s); having the abitlity to verify facts, and ending with a comprehensive, detailed, judgment, with reasons.

Accordingly, a fair deal of the debate on arbitration reform, especially in the USA and UK has been framed on the baisis of a comparative analysis with the processes in the respective court systems. But what if, in the country of your arbitration, there were not so similar court processes? What would then be the “meates and bounds” of the arbitration debate? I would suggest far less clear and far more open to argument on the fundamentals.

The UAE is a civil law system, but one that has developed in very recent years, comparatively to the USA; UK and Europe. The Federation was only formed in 1972 and the UAE Civil Code first promulgated in 1985. A Commercial Code followed in 1993, a year after the Civil Procedures law.

The court system in the UAE copes with technical or complex construction matters by essentially referring the issues out to court appointed “experts” . In construction matters, those experts are generally engineers fluent in Arabic. The expert will submit his report to the court and the court will decide whether to adopt it or, if the findings are contested, then the court might be persuaded to refer the matter to another expert. This whole process can take 30-60 days and be entirely based on the materials submitted by both parties. Rarely, if at all, is there a hearing with oral testimony in civil cases. Accordingly, there has not been and indeed there cannot really ever be a “judicialisation” of arbitration in the UAE – if by that term we mean the processes of civil litigation in western common law and civil law systems. Accordinly, in the UAE, the responsibilities that then devolve to the relevant arbitration body and arbitrator(s) are, in my view, far more significant than in Western countries.

Put another way, for disputes arising from major projects , or complex commercial transactions , the pressure on the arbitration process to get it right and to deliver an outcome that is just, fair and within an acceptable time frame, is probably no greater anywhere than in the UAE at present – given the sheer size of the UAE’s build and investment programme.

And that is not at all to say that the arbitration institutions in the region have not risen to the challenge. They have, and continue to do so. But the sheer size and volume (and complexity) of many of the disputes in the region have never really had to be addressed by such a small artibration community.

Finally , what the GFC has thrown up in the Gulf, in the context of dispute resolution, is the role and legitimate interests of the finance/banking sector and investors. Unfortunately, the “system” in the UAE has had difficulty coping with the combination of insolvent developers; defaulting purchasers and defacto “mortgagees in possession”.

Add to that the fact that most of the building contracts and real estate sale and purchase agreements included arbitration clauses, and for some developmetns there are literally 100s of disgruntled purchasers who have to initiate individual arbitrations to try to either get their deposits and partial payments back, or to seek some form of remedy.

The challenge therefore, particulary in Abu Dhabi, for the legal profession and for the government seeking to secqure international investment, is to design and implement dispute resolution processes that recognize the relaties and limitations of the underlying court system(s) and respond to the demands for investor certainty and enforceable outcomes.

Handicapping investor-state arbitration cases is a tough business. Indeed, it’s difficult to predict when decisions will come down – much less what they will say.

The following somewhat-hastily-cobbled-together list constitutes my best guess as to the 10 most notable awards which may come down in 2010. I won’t hazard a guess as to what’s in these rulings.

Happy New Years to all readers of this blog.

Suez, Anglian Water Group, Agbar, Vivendi et.al. v. Argentina

It hasn’t been 15 years, so we aren’t in Chinese Democracy territory yet. But, the wait for the arbitral awards in these ICSID cases is starting to feel as protracted as that for the long-promised Guns n Roses album. Here’s hoping it is not as anti-climactic.

Merits hearings were held in the cases in May and June of 2007. Even allowing for the 8 months taken up with successive arbitrator challenges lodged by Argentina, and the fact that several separate concessions are at issue, the awards are starting to feel overdue.

When the verdicts do materialize it will be fascinating to see what arbitrators make of Argentina’s extensive reliance on international human rights law. Will arbitrators find that Argentina clamped down on foreign-owned water utility investments out of a genuine concern to meet its human rights obligations. And, if so, so what? In other words, does a compelling human rights rationale excuse breaches of bilateral investment treaties? Hopefully, we will find out in 2010.

Fraport v. Philippines
A divided tribunal declined jurisdiction over Fraport’s BIT claim in 2007, having concluded that the claimant quietly circumvented local laws designed to limit foreign control. Dissenting arbitrator Bernardo Cremades’ separate opinion offered something of a road map for annulment, and Fraport headed off down that path in late 2007. Final hearings in that annulment proceeding wrapped up earlier this year, and we should see an ICSID ad-hoc committee weigh in some time next year with their view as to whether the original tribunal should have upheld jurisdiction and weighed the claimant’s failings as part of the merits phase.

Brandes Investment Partners v. Venezuela
With President Hugo Chavez seemingly bent on nationalizing anything that moves, it’s easy to lose track of the myriad resulting arbitrations. However, the Brandes case is worth watching because the claimant seeks to ground a claim for expropriation not on some contract or treaty, but on a domestic statute that purported to protect foreign investors.

Although the Venezuelan government, and its courts, have disavowed Brande’s reading of the statute in question, it falls to a panel of three ICSID arbitrators to have their say – most likely next year – on a claim arising out of the nationalization of the country’s largest telecoms company.

El Paso v. Argentina
Another contender for the Chinese Democracy award – merits hearings in this financial crisis claim were held in June of 2007. The long-running El Paso case – which was initiated in 2003, gives the appearance of dragging on past its due-date. I’m betting on a 2010 birth date. However, when you tack on the now de rigeur annulment challenge, don’t expect a final resolution of this dispute before 2012.

AES v. Hungary
Hungary finds itself caught between foreign power producers, who insist that the country live up to the terms of earlier-signed Power Purchase Agreements, and European Union bureaucrats, who have ordered the country to tear up these sweetheart pacts. While several similar arbitrations have arisen against Hungary, the AES case at ICSID is the furthest advanced and should see an award in 2010.

Much to the consternation of many investment treaty purists, the European Commission argues that bilateral investment treaties should yield to the dictates of EU law. It will be fascinating to see what arbitrators make of this argument, and whether any such holding is embraced by subsequent tribunals to grapple with the same dilemmas.

Foresti and others v. South Africa
It remains to be seen whether arbitrators in this much-publicized ICSID arbitration will need to weigh in with an award of their own. However , if they do so, it is likely to come in 2010.

Although the claimants insist that elements of South Africa’s new mining regime – including so-called Black Economic Empowerment obligations – have breached foreign investment treaty protections, they have recently signaled their desire to withdraw their case and to carry on with their investments in South Africa.

There is, however, the small matter of some 5 Million Euros expended thus far by South Africa in the defence of this landmark international claim.

Under ICSID rules, South Africa must give its assent to any withdrawal of the claim. Unless the parties can agree how to apportion the government’s legal costs, it could fall to arbitrators decide – and to draw a line under this case.

RosInvestCo v. Russian Federation
You need a Let’s Go guide to disentangle the flurry of lawsuits and arbitrations filed around the world by shareholders in the bankrupted Yukos oil company. However, of several treaty-based arbitrations pursued by blocs of Yukos Spanish, UK and Cypriot shareholders, the claim by UK-based RosInvestCo Ltd appears closest to generating an award on the merits. Arbitrators took jurisdiction over the case in October of 2007, and in 2010 we may see a tribunal at the Stockholm Arbitration Institute weigh in on the question of Russia’s liability for breach of the UK-Russia bilateral investment treaty.

Chemtura v. Canada
Hearings in this North American Free Trade Agreement (NAFTA) claim were held in September of 2009, so we may see an award before the new year is out. Canada’s phase-out of a controversial agro-chemical, lindane, is at issue in the Chemtura arbitration, with a US chemical company contending that Canadian regulators denied them due process.

The award is sure to be closely watched as arbitrators may weigh in on the conservative interpretations taken in another prominent NAFTA case, Glamis Gold v. United States, where arbitrators were asked to elucidate the so-called minimum standard of treatment owing to foreign investors under customary international law. Indeed, the fate of another stalled NAFTA claim against Canada – this one filed by Dow Chemicals following provincial bans on certain lawn pesticides – could hinge on the outcome of the Chemtura case. More generally, depending upon the tribunal’s ruling, the Chemtura award could encourage – or discourage – other companies looking for a way to challenge more stringent health or environmental regulation.

Chevron v. Ecuador (Round One)
Ostensibly a fight over a series of antiquated contract disputes, the BIT arbitration filed by Chevron in 2006 for denial of justice could loom large in the context of a much-broader fight over environmental pollution in the Ecuadorian Amazon. Indeed, Ecuador insists that any arbitral finding of denial of justice would be used by Chevron as ammunition against the enforcement of a forthcoming Ecuadorian court ruling in a multi-Billion Dollar environmental clean-up suit against Chevron.

If you’re confused, so are most of the journalists covering this drama. But stay tuned for the American Lawyer magazine’s astute International Correspondent Michael Goldhaber to bring some clarity to the murk in a forthcoming issue of the American Lawyer. In the mean time, keep your eyes out for the Chevron v. Ecuador arbitral ruling, which may emerge from the Permanent Court of Arbitration in 2010.

(The arbitration is the first of two treaty arbitrations filed by Chevron against Ecuador; the other was discussed earlier this year on this blog.)

Libananco v. Turkey
Of the various claims filed against Turkey by members (or surrogates) of the embattled Uzan family, the Libananco case is the one that really matters. Turkey has beat back several claims by entities which claimed to have owned shareholdings in a pair of contested electricity companies, however Libananco, a Cyprus-based entity controlled by an Uzan family member, claims that its shareholding bona fides are unimpeachable. Forensic experts have pored over the claimant’s ownership documents, and arbitrators have heard from both sides. In 2010, the ICSID tribunal is expected to weigh in.

Giovanna a Beccara v. Argentina (Wild Card Pick: #11 for 2010, or #1 for 2011?):
Anyone holding sovereign debt in this uncertain new world may be interested to see how a group of Italian bondholders fare in their efforts to sue Argentina for losses arising out of that country’s bond default earlier this decade. This class-action style claim is one of three brought by blocs of foreign bondholders, who claim that their investments enjoy protection under Argentina’s foreign investment treaties. The Beccara case is the largest of the three pending claims at ICSID, with at least $4.4 Billion at stake. Arbitrators will convene in 2010 to hear jurisdictional arguments, so there’s an outside chance that we’ll see a jurisdictional verdict before year’s end. If not, put this one on your 2011 reading list.

Luke Eric Peterson
http://www.InvestmentArbitrationReporter.com

The concept of “moral damage” as long been recognised at international law. Article 31 of the International Law Commission (“I.L.C.”)’s Articles on State Responsibility provides that a State must make full reparation for any “injury” caused to another State by an internationally wrongful act and defines “injury” as “any damage, whether material or moral, caused by the internationally wrongful act of a State.” Until very recently, the issue of moral damages had arisen in only a handful of investor-State disputes. However, in 2008 and 2009 alone no less than five arbitration awards discussed the issue. In one such case, Desert Line Projects LLC v. Yemen the Arbitral tribunal awarded an amount of US$1 million in compensation to a corporation.

This contribution addresses another interesting question: what is the proper form of reparation to remediate moral damages suffered by a State (and not a foreign investor). This issue was discussed for the first time in the context of investor-State disputes in two separate awards both rendered in 2009.

The first case (Europe Cement Investment & Trade S.A. v. Turkey, ICSID Case No. ARB(AF)/07/2, Award, 13 August 2009) involved, a Polish company, which commenced arbitration proceedings against Turkey under the Energy Charter Treaty alleging its termination of concession agreements granted to two Turkish electricity corporations of which Europe Cement purported to be a shareholder. The Tribunal declined jurisdiction over the dispute based on the claimant’s inability to prove its ownership of shares in the corporations and further stated that the proceedings constituted an “abuse of process” by the claimant. The second case (Cementownia “Nowa Huta” S.A. v. Turkey, ICSID Case No. ARB(AF)/06/2, Award, 17 September 2009) also involved a Polish company commencing arbitration proceedings against Turkey under the same Treaty and under the exact same circumstances and breaches allegations. The Tribunal also declined jurisdiction over the dispute for the same reasons and added that this was a fraudulent claim.

In the Europe Cement case, Turkey submitted a counterclaim seeking compensation in the amount of US$1 million for moral damages it allegedly suffered to its “reputation and international standing” as a result of the “jurisdictionally baseless claim asserted in bad faith and for an improper purpose” which caused it “intangible but no less real loss.” (see, para. 118 & 177). A similar moral damages claim was also submitted by Turkey in the Cementownia case.

Both tribunals refused to award any compensation for moral damages, but based on different reasons.

The Europe Cement Tribunal noted that it was a “difficult question” to determine whether a conduct involving fraud “warrant[ed] an award of damages” (para. 181). In any event, the Tribunal held that such an inquiry was not necessary because “it [did] not consider that exceptional circumstances such as physical duress [were] present in this case to justify moral damages” (para. 181). The Tribunal therefore rejected the claim essentially based on lack of evidence.

The Cementownia Tribunal first noted that “there is nothing in the ICSID Convention, Arbitration Rules and Additional Facility which prevents an arbitral tribunal from granting moral damages” (para. 169). However, the Tribunal distinguished the present claim where the request for moral damages was “based merely on a general principle, i.e., abuse of process” from the Desert Line award where the claim was based on obligations contained in a BIT (para. 170). For the Tribunal, “it is doubtful that such a general principle may constitute a sufficient legal basis for granting compensation for moral damages” (Id.). The Tribunal therefore dismissed Turkey’s request because the Treaty did not provide any legal basis for awarding compensation for moral damages suffered by a State party.

More interestingly for the purpose of this contribution, the Europe Cement Tribunal added that any “potential reputational damage” suffered by Turkey would be “remedied by the reasoning and conclusions set out in this Award, including an award of costs” and that such an award would provide it “a form of ‘satisfaction’” (para. 181). In this case, although Turkey did formally claimed monetary compensation for the moral damages it suffered, it also added that such an award would, in any event, most likely take the form of “satisfaction” since the award would probably never be paid by the investor. The Tribunal ordered the Claimant to pay for the full costs of the proceedings (some US$3.9 millions) as well as half the arbitration costs (US$129,000). For the Tribunal, such an award of full costs in favour of the Respondent “will go some way towards compensating [it] for having to defend a claim that had no jurisdictional basis and discourage others from pursuing such unmeritorious claims” (para. 185).

In the Cementownia case, Turkey first argued that “tribunals applying international law may award to a State the remedy of satisfaction where it has suffered an intangible injury, such as injury to its reputation or prestige”, but then also added that “in investment treaty cases, compensation has been awarded where the injury was inflicted maliciously” (para. 165). Turkey therefore contended that in some circumstances monetary compensation could be the proper remedy for moral damages suffered by a State. The Tribunal noted that although “a symbolic compensation for moral damages” could show its condemnation of the abuse of process, in the present case, however, it was more appropriate “to sanction the Claimant with respect to the allocation of costs” (in the amount of close to US$5 millions). The Tribunal also declared that in any event a mere declaration would be a proper form of reparation to Turkey: “In any case, since the Arbitral Tribunal has already accepted the Respondent’s request with respect to the fraudulent claim declaration, the Respondent’s objective is already achieved” (para. 171).

Both awards confirm the principle set out in the work of the I.L.C. on State responsibility that the proper remedy for moral damages suffered by a State is, as a matter of principle, satisfaction and not monetary compensation. It is true that in both cases, the tribunals did make an award of costs in favour of Turkey, but this was simply because the alleged moral damages resulted from misconduct taking place during the arbitration proceedings. The allocation of costs on the party in bad faith is one form of sanction that can be used by a tribunal to deal with such abuse of process.

According to the I.L.C. satisfaction is the appropriate remedy for “those injuries, not financially assessable, which amount to an affront to the State.” (see, J. Crawford, I.L.C.’s Articles on State Responsibility, Introduction, Text and Commentaries, p. 231). Satisfaction is, indeed, the normal remedy for moral damages suffered by a State in the context of State-to-State disputes (see, for instance, Affaire du Manouba (France v. Italy), 1913, “Affaire du Carthage (France v. Italy), 1913, etc.). One may think, for instance, of insults to State symbols, such as the national flag, or to violation of territorial integrity, the premises of embassies and consulates, attacks on ships and aircrafts, attacks on heads of State or diplomatic and consular representatives, etc. There are very few cases where a moral damage to a State itself (as opposed to one of its nationals) has been remedied by monetary compensation and not by satisfaction. One famous example is the S.S. “I’m Alone” (Canada v. United States). Another one where an injury was remedied by both satisfaction and monetary compensation is the Rainbow Warrior arbitration between France and New Zealand.

The two ICSID cases just examined therefore confirm that in the context of investor-State disputes the proper remedy for moral damages suffered by a State is also satisfaction and not monetary compensation. In fact, this seems to be the only option available for tribunals settling disputes arising under investment treaties. These treaties essentially provide foreign investors with unprecedented substantive and procedural legal protection when they invest abroad. They typically do not provide any legal protection for the host State against the actions of investors. In this context, a mere declaration by a tribunal condemning an investor for wrongdoing seems to be the most States can truly hope for.

Patrick Dumberry
Assistant Professor
University of Ottawa (Civil Law section)

In a decision of 25 August 2009 (4A_160/2009), the Swiss Federal Supreme Court held that where a claimant by piercing the corporate veil can assert a contractual claim against the majority shareholder, all rights and obligations from the respective agreement, including the arbitration clause, become binding on the majority shareholder, thus precluding the jurisdiction of the state courts.

On 7 April 2003, the complainant (“A”), a Swedish national domiciled in Italy, and the Corporation Y (“Y”), incorporated under the laws of and having its corporate seat in British Virgin Islands (“BVI”), entered into a sales agreement (“Sales Agreement”) according to which A sold to Y the corporation X (“X”). The respondent (“B”), a Swedish national domiciled in Switzerland, was a majority shareholder in Y, and acted for and on behalf of Y. The Sales Agreement contained an arbitration clause to which Swedish law applied.
On 27 March 2007, A initiated an arbitration against Y in Sweden claiming payment of the remaining purchase price under the Sales Agreement in the amount of 13 million Swedish krona (“SEK”) plus interest. The arbitration did, however, not proceed because sometime between 2003 and 2007 B liquidated Y.
Subsequently, A filed a claim against B at B’s domicile, i.e. before the state court of the Canton of Nidwalden (Switzerland), requesting that B be ordered to pay to A the remaining purchase price. B, in turn, argued that A should have submitted its claim to arbitration (pursuant to the arbitration clause in the Sales Agreement), whereupon the court of first instance of the Canton of Nidwalden decided that it did not have jurisdiction in this matter. A appealed against this decision before the cantonal court of second instance, which dismissed A’s appeal.
In his claim before the state courts of the Canton of Nidwalden, A requested that the corporate veil of Y be pierced and that B be held responsible for the payment of the 13 million SEK. At the same time, A argued that the arbitration clause did not apply to B, because he was not a party to the Sales Agreement and because B did not succeed to the rights and liabilities under the Sales Agreement from Y. A further argued that B acted in bad faith because he liquidated Y in order to escape responsibility under the Sales Agreement, and neither B nor Y had accepted A’s request for arbitration. For that reason, the arbitration clause ceased to exist under Swedish law and B should have been held responsible before the state courts. A finally argued that B was not in a position to raise the plea of arbitration because he had filed a claim for declaratory relief against A in Sweden requesting that the state court in Sweden declare that B was not liable under the Sales Agreement.
In their reasoning, both court instances held that, because of the piercing of Y’s corporate veil, the Sales Agreement, including the arbitration clause, had become binding upon B. They further held that B did not act in bad faith when he filed a claim for declaratory relief against A in Sweden because one could not expect that B would voluntarily acknowledge that due to his behavior Y’s corporate veil had been pierced. The courts of the Canton of Nidwalden finally held that the arbitration clause did not cease to exist because A’s request for arbitration in Sweden was directed against Y and not B.
Thereupon, A appealed before the Swiss Federal Supreme Court (“Federal Supreme Court”) and requested that the decisions of the courts of both first and second instance (under the so-called Dorénaz-practice) be set aside.
On the issue of piercing of the corporate veil and the applicability of the arbitration clause to B, the Federal Supreme Court referred to its established practice according to which a corporate veil of a corporation can be pierced where (i) a corporation and its majority shareholder (either another corporate entity or a physical person) are operating as a single economic entity although they are not formally identical (due to the corporate veil), and (ii) it would be inequitable, i.e. against good faith, to uphold the legal distinction between them. The Federal Supreme Court held that where a claimant by piercing the corporate veil can assert a contractual claim against the majority shareholder, all rights and obligations from the respective agreement, including the arbitration clause, become binding on the majority shareholder. Therefore, the Federal Supreme Court concluded, the arbitration clause was binding also upon B.
The Federal Supreme Court held that the lower courts erred in reasoning that the arbitration clause did not cease to exist because A’s request for arbitration in Sweden had only been directed against Y, but not against B. B’s behavior, in particular his obstruction to the arbitration in Sweden, justified the piercing of Y’s corporate veil and was therefore to be treated as a fact with double relevance which was, for the time being, to be deemed proven. For that reason, both Y (if it were still existing) and B were bound by the arbitration clause. Hence, it was irrelevant against whom (Y or B) A’s request for arbitration in Sweden had been directed and B should have accepted A’s request for arbitration.
The Federal Supreme Court concluded that the decisions of the courts of the Canton of Nidwalden were incorrect, and remitted the decision back to the court of first instance for further consideration. In so doing, the Federal Supreme Court applied Article 7 of the Swiss Private International Law Act (“PILA”) which provides that the Swiss courts, in view of an arbitration agreement, should decline jurisdiction, unless the arbitral tribunal cannot be appointed for reasons that are obviously attributable to the defendant in the arbitration.
In the case at hand, the two lower courts in Switzerland confirmed B’s arguments and ended their analysis there, thus rejecting A’s claim. For A it seemed that, at this stage, he was not going to be able to recover the second installment without having to file for arbitration proceedings against B, i.e. the “real” buyer. The Federal Supreme Court, the third and final judicial instance, changed this rather unfortunate outcome and sent back the decision to the lower instance for further considerations. According to the Federal Supreme Court, the lower court should have to a greater extent exercised its discretion when applying Article 7 PILA. Also, it should have to a greater extent considered A’s arguments pertaining to B’s obstruction to the arbitration in Sweden with one of the possible consequences that, due to B’s obstruction, arbitration would no longer be a viable alternative and the state courts would have to take on the case.

Georg von Segesser / Petra Rihar

Earlier this year, the Hong Kong Court of First Instance ruled that, in future, when it hears unsuccessful attempts to resist enforcement of arbitral awards under the New York Convention, it will “normally consider” awarding costs on an indemnity basis (i.e., in full, regardless whether they were reasonably incurred). This was a bold pro-enforcement statement by the Court, explicitly designed to remove any incentive for losing parties to “have a go” at avoiding enforcement. This posting considers whether the ruling goes too far in discouraging challenges to enforcement.

In A v R, the applicant obtained an award for US$3 million plus interest and costs in arbitral proceedings in Denmark. It sought to enforce the award against the respondent, a Hong Kong company. The respondent’s argument was that the award involved payment under contractual penalty clauses, invalid under both Danish and Hong Kong law, and that it would be contrary to Hong Kong public policy for the award to be enforced.

The Court rejected the argument. Referring both to English and Hong Kong authorities, it reaffirmed the pro-enforcement rationale underlying the New York Convention, and the wider importance of keeping the public policy exception within narrow limits.

So far, so familiar — courts in developed arbitration centres have good track records in rejecting unwarranted attempts to prevent enforcement of foreign arbitral awards.

The Hong Kong Court, however, went further than many of its pro-arbitration counterparts. While the traditional approach has been for the loser to pay approximately two thirds of the winner’s costs, the Court decided that the respondent should pay the applicant’s costs on an indemnity basis, essentially to punish the respondent for asserting a spurious challenge.

The Court could have stopped there and confined its ruling to the facts at issue, but continued in general terms that:

“Where a party unsuccessfully makes an application [to set aside a New York Convention award], he should in principle expect to have to pay costs on a higher basis. This is because a party seeking to enforce an award should not have had to contend with such type of challenge.”

It added:

“If the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidizing the losing party’s abortive attempt to frustrate enforcement of a valid award… Such a state of affairs would only encourage the bringing of unmeritorious challenges to an award. It would turn what should be an exceptional and high-risk strategy into something which was potentially ‘worth a go’.”

The Court then signaled its future intent:

“Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the Court will henceforth normally consider awarding costs against a losing party on an indemnity basis.”

In other words, A v R turns on its head the long-standing principle in Hong Kong that indemnity costs are restricted to cases with “special or unusual features”, and seeks instead to make such costs orders the norm for enforcement challenges.

It is suggested that the ruling may go too far, and should not be followed elsewhere without careful consideration of its implications. (Note for example that in England, by contrast, the Court of Appeal has emphatically rejected the opportunity to give guidance as to when indemnity costs should be ordered (see Excelsior Commercial and Industrial Holdings Ltd v Salisbury Ham Johnson [2002] EWCA Civ 879).)

Indemnity costs orders are generally made to censure unusual conduct of which a court disapproves, which can include bringing or defending hopeless or near-hopeless cases. That was the position before A v R and it remains so afterwards for all non-enforcement scenarios. A v R was cited in Lau Pik Ngai Ada v To Chun Fung Albert, a District Court judgment given in August 2009. Although, in theory, the A v R ruling was binding on the District Court, A v R was distinguished, with the District Court confining its effect to the enforcement of foreign arbitral awards.

Hopeless challenges to enforcement, designed only to delay or frustrate valid awards, should be, of course, firmly discouraged, and, in appropriate circumstances, should be subject to indemnity costs orders. However, the imposition of a general rule on all enforcement challenges in response to specious arguments advanced in a particular case appears an unnecessarily robust response, and is likely to be counter-productive. There is surely no reason to treat credible enforcement challenges differently from other credible claims.

The obvious counter in support of A v R is that, by referring disputes to arbitration, parties have an expectation that they will be finally settled by a binding arbitration award, and that any costs measures, heavy-handed or otherwise, that make challenges less likely are to be welcomed, not criticized.

The weakness in the argument is that it assumes that any and all challenges to finality are, in and of themselves, anti-arbitration. Regrettably, the reverse, in some cases, is true; the exceptions to enforcement permitted by the New York Convention are serious and substantial, and, importantly, exist for a reason.

Arbitration remains an essentially private method of dispute resolution. Although the vast majority of arbitral tribunals comprise experienced, highly-qualified professionals, many national laws impose no eligibility requirements on arbitrators. The risk remains that something can go horribly wrong.

All arbitration practitioners have horror stories about the problems of enforcing awards in particular jurisdictions. But the injustice of a tainted award, enforced without proper consideration of the New York Convention exceptions, is equally compelling. Enforcing courts must remain mindful of their duty to hear challenges to the bare minimum standards of the award. This new rule from the Hong Kong Courts appears to go unnecessarily far — effectively discouraging reasonable challenges to enforcement — and risks throwing the baby out with the bathwater.

Aloke Ray and Ian Higgins
White & Case LLP
Hong Kong