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to section 40E(3) of Hong Kong’s old Arbitration Ordinance (Cap. 341) (which was then in force, but has since been superseded by section 95 of the new Arbitration Ordinance, Cap. 609).

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

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

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

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

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

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

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

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

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

For contract negotiators, these clauses continue to pose some perplexing questions on the proper allocation of transaction’s risk between an investor and a host state. For the arbitration community, it’s worth considering how these clauses work, what they do for investors, and how they could—and should—be adjudicated in arbitration.

There are two basic types of stabilization clauses. “Freezing clauses” act exactly as they sound—they “freeze” the law at the time the contract is executed for that particular investor. Any future changes in legislation or regulation are not applied to the contract. A potentially more nuanced varietal of the stabilization clause is the “economic equilibrium clause,” which comes in two versions. Under a rigid economic equilibrium clause, future changes in law would apply to the investor, but the host State would indemnify the investor for its compliance with the new legislation. Under a more flexible equilibrium clause, the host state and the investor would commit to conducting future negotiations with the goal of recalibrating the original allocation of risks or losses/gains, based on the reality of the new legislation.

At the 10,000 foot view, the purpose of stabilization clauses is pretty straightforward. They are risk allocation tools, designed to increase the predictability of the regulatory environment in which the investor will be operating. Stability clauses are used throughout the world and in a variety of industries, and are often used as a means to mitigate risks with respect to a host state’s future fiscal regulations.

What the Ruggie study pointed to, however, was the disparity in the way stability clauses are used, depending on the particular host state involved. The report found a fairly stark difference in the way that stability clauses are used in contracts from OECD-member states and in non-OECD-member states. OECD states tend use the clauses fairly consistently, and tend to limit the investor’s protection from the application of new laws to only those laws that are arbitrary or discriminatory. Investors tend to assume the risk that they will be subject to new laws of general application.

But when it comes to non-OECD states, stability clauses tend to be all over the place. More of them are generic and across-the-board, precluding the application of or providing compensation for compliance with both arbitrary/discriminatory new laws and bona fide new laws across a state’s full regulatory spectrum.

Some of this differential treatment can be explained. Investors are particularly sensitive to risk allocation when it comes to big-scale long-term investments, particularly in developing countries. Obsolescence bargaining can be a justifiable fear, especially when the other party is an emerging economy. No investor wants to make a large up-front investment or rely on non-recourse funding without some reassurance that the host state will maintain a stable, predictable regulatory environment for their investment. This is particularly the case when the host state has an under-developed regulatory environment, where there could be changes in leadership, or where current governments—populist and undemocratic alike—inspire less than full confidence that they will refrain from opportunistic regulatory behavior in the future.

At the same time, stabilization clauses—and particularly freezing clauses—can cut broadly in the investor’s favor. Ruggie notes that there have been a number of cases in which a broadly-worded stabilization clause permitted the investor to avoid compliance with all new laws that might affect the investor—including regulations that promote a host state’s environmental, social or human rights goals.

The most troublesome forms of these clauses have the potential to strip states of their sovereign regulatory power. They could force a state to forego its international human rights or environmental commitments, or to pay a heavy price if they do so. And they potentially provide a windfall to investors eager to take advantage of a lax regulatory environment and shift some costly externalities onto the public.

Public outcry has led some investors to revisit their contracts and reduce the scope of their stabilization clauses. This was the case for the Mittal Steel’s Mineral Development Agreement, which it had originally negotiated with Liberia under the state’s shaky post-conflict transitional government. But the full picture on these clauses—how many investors have insisted on them, and in which states—remains obscured by confidentiality provisions.

As a few academics have argued (here and here), even the less egregious stabilization clauses have the potential to put host states on the line to compensate an investor for changes in regulation, even when those regulatory changes would not rise to the level of an expropriation under international law. In other words, even if an investor would not be able to claim compensation under the prevailing “substantial deprivation” standard for expropriation, that same investor could seek compensation for a host state’s breach of the contract’s stabilization clause. Even if the new regulation was non-discriminatory and of general application, the state could be penalized for applying it to the investor.

This raises some interesting implications for arbitrators. As one study points out, while stabilization clauses involving nationalization have been upheld by tribunals in the past, there is yet to be a publicly-available decision suggesting how a tribunal might respond to a freezing clause that would limit a state’s capacity to regulate for the public good. And even for less egregious freezing clauses, it’s worth considering the propriety of forcing a developing state to pay for new legislation that is nondiscriminatory, of general application, and for the common good. Most likely, the remedy the investor would obtain for a breach of the stabilization clause would be lower than it would be if the investor had been able to persuade a tribunal that expropriation had occurred. Even then, it’s worth questioning whether the penalty—and the regulatory chill it could lead to—makes sense.

Although the Tribunal’s finding that it can hear mass claim has garnered the most interest, various aspects of the Decision have sparked debate.  The Tribunal held that the Claimants’ security entitlements in Argentinean bonds are investments for the purposes of Article 25, ICSID Convention and protected under the Argentina-Italy BIT.  Another controversy arises from the fact that the Decision was issued by the majority of the Tribunal without the simultaneous release of the dissenting opinion. The dissenting opinion, which the Decision states is “Forthcoming”, has yet to be released.

On 15 September 2011, the Argentine Republic filed a request for the disqualification of the majority of the Tribunal (Professors Pierre Tercier (President) and Albert Jan van den Berg), alleging that the two arbitrators could not be relied on to exercise independent judgment.   The disqualification request criticizes the two arbitrators in particularly strident language, arguing that the transmission of the Decision: “(a) without the dissenting opinion of the other arbitrator, (b) without his consent, and (c) without even waiting for a draft of said opinion” together with the majority’s rejection of Argentina’s request for provisional measures “is a manifestation of an absolutely inappropriate conduct” (para. 20).

Although the Decision raises a series of interesting issues (for example, see Sarah Ganz‘s post on the Decision’s treatment of the 18-month litigation requirement in the BIT), in this post I focus on the majority’s distinction between jurisdiction and admissibility, a subject of one of my previous posts.  In its Decision, the majority of the Tribunal (the Tribunal) states that it is appropriate and necessary to distinguish issues relating to jurisdiction and admissibility (para. 248) and that the “guiding thought of the Tribunal for distinguishing issues of jurisdiction from issues of admissibility has been the following cornerstone consideration:

 If there was only one Claimant, what would be the requirements for ICSID’s jurisdiction over its claim? If the issue raised relates to such requirements, it is a matter of jurisdiction. If the issue raised relates to another aspect of the proceedings, which would not apply if there was just one Claimant, then it must be considered a matter of admissibility and not of jurisdiction.” (para. 249)

The Tribunal’s analysis thus takes a two-fold approach.  First, it analyzes the mass claims issue within the context of the Parties’ consent to arbitration (a question of jurisdiction) and second, it analyzes the admissibility of mass claims.

The Decision is perhaps the clearest example of an investment treaty tribunal distinguishing between jurisdiction and admissibility.  The Tribunal highlights at para. 247 that:

 (i)            While a lack of jurisdiction stricto sensu means that the claim cannot at all be brought in front of the body called upon, a lack of admissibility means that the claim was neither fit nor mature for judicial treatment;

(ii)            Whereby a decision refusing a case based on a lack of arbitral jurisdiction is usually subject to review by another body, a decision refusing a case based on a lack of admissibility can usually not be subject to review by another body;

(iii)            Whereby a final refusal based on a lack of jurisdiction will prevent the parties from successfully re-submitting the same claim to the same body, a refusal based on admissibility will, in principle, not prevent the claimant from resubmitting its claim, provided it cures the previous flaw causing the inadmissibility.

With respect to consent, the Tribunal rightly held that if, in principle, it had jurisdiction over one claimant, “it is difficult to conceive why and how the Tribunal could loose such jurisdiction where the number of Claimants outgrows a certain threshold.” Further, it highlighted that “the collective nature of the present proceeding derives primarily from the nature of the investment made.”:

The ICSID Convention aims at promoting and protecting investments, without however further defining the concept of investment and leaving this task to the parties through relevant instruments such as BITs … Thus, where the BIT covers investments, such as bonds, which are susceptible of involving in the context of the same investment a high number of investors, and where such investments require a collective relief in order to provide effective protection to such investment, it would be contrary to the purpose of the BIT and to the spirit of ICSID, to require in addition to the consent to ICSID arbitration in general, a supplementary express consent to the form of such arbitration. In such cases, consent to ICSID arbitration must be considered to cover the form of arbitration necessary to give efficient protection and remedy to the investors and their investments, including arbitration in the form of collective proceedings.  (para. 490).

In conclusion, the Tribunal, rightly held that “the “mass” aspect of proceedings relates to the modalities and implementation of the ICSID proceedings and not to the question whether Respondent consented to ICSID arbitration. Therefore, it relates to the question of admissibility and not to the question of jurisdiction.” (para. 492).

The Tribunal took a purposive approach to the interpretation of the ICSID Convention’s “silence” as to mass claims, holding that it would be “contrary to the purpose of the BIT and to the spirit of ICSID to interpret this silence as a “qualified silence” categorically prohibiting collective proceedings, just because it was not mentioned in the ICSID Convention” (para. 519).

With respect to the adaptations, the Tribunal identified the need to adopt mechanisms to allow a simplified verification of evidentiary materials with respect to each individual claim (para 531) and the manner of the representation of the claimants (paras. 531-532).  In finding that it had the power to adapt procedures to address the “mass claims” aspect of the case, the Tribunal states that adaptations must consider the principle of due process and a must seek a balance between the procedural rights and interests of each party (para. 519).  In assessing that balance the Tribunal considered: (i) under what conditions is it acceptable to change the method of examination from individual to group treatment; (ii) to what extent are Argentina‘s defense rights affected in comparison to 60,000 separate proceedings; and (iii) is it admissible to deprive Claimants of certain procedural rights (para. 539).

Argentina’s had argued that there are strong policy reasons why ICSID is an inappropriate forum to address issues with respect to sovereign debt restructuring.   The Tribunal flatly rejected this argument, rightly stating that “Policy reasons are for States to take into account when negotiating BITs and consenting to ICSID jurisdiction in general, not for the Tribunal to take into account in order to repair an inappropriately negotiated or drafted BIT.”

It its disqualification request, Argentina suggests that the procedural mechanisms set out in the Decision are an unjustifiable limit on Argentina’s right of defence and further evidence of the Tribunal’s alleged lack of independent and impartial judgment (paras. 25 et seq.).   Although Argentina has characterized the majority’s Decision as “egregious” and various Tribunal statements as “shocking” and “absurd”, this hyperbole should seen for what is—a regrettable attempt to appeal a tribunal decision through the guise of a disqualification request.  The majority of the Tribunal’s approach to mass claims is correct in principle and practical, objective and fair-minded in practice.  International arbitration can be an effective and efficient system of dispute resolution because of its ability to adopt flexible procedures to address myriad claims and issues.  The majority’s Decision reflects this approach and will stand the test of time.

“Public policy is often invoked by a losing party in an attempt to manipulate an enforcing court into re-opening matters which have been (or ought to have been) determined in an arbitration. The public policy ground is thereby raised to frustrate or delay the winning party from enjoying the fruits of a victory. The court must be vigilant that the public policy objection is not abused in order to obtain for the losing party a second chance at arguing a case. To allow that would be to undermine the efficacy of the parties’ agreement to pursue arbitration.”

Two recent decisions may be a sign that the “unruly horse” is being tamed in the most unlikely of places – India and Belize.

India has long been perceived as a jurisdiction which can be problematic for enforcement of foreign arbitral awards. At least that was the recorded perception of corporate users of arbitration according to the Queen Mary/PWC 2008 survey “International Arbitration: Corporate attitudes and practices”. This perception was bolstered by the Supreme Court decisions of ONGC v Saw Pipes in 2003 and Venture Global Engineering v Satyam Computer Services Ltd in 2008. In Saw Pipes the Supreme Court took a broad approach to the meaning of public policy and held that a domestic arbitral award could be set aside on the grounds of public policy if it was “patently illegal”; i.e. contravened Indian legislation. In Venture Capital, the Supreme Court set aside another arbitral award on the same basis, but this time it was a foreign arbitral award. It held that the provisions of the Indian Arbitration Act which allow an arbitral award to be set aside on the basis of domestic public policy applied because the relief ordered was for the sale of shares in an Indian company which could only be effected under Indian law. The concern was therefore that the Indian courts would apply a broad test of public policy to foreign arbitral awards where there was a sufficient connection with India – out of keeping with the reluctance in more developed jurisdictions to invoke the public policy exception.

The recent decision of the Delhi High Court in Penn Racquet Sports v Mayor International Ltd (delivered in January 2011) appeared to buck this trend. It held that a more restrictive approach to the definition of public policy should be applied to the enforcement of foreign arbitral awards. Contrary to the approach taken by the Supreme Court in Saw Pipes and Venture Capital to the meaning of public policy, the Delhi High Court held that recognition and enforcement of a foreign award cannot be denied just because the award contravenes Indian law. Rather it must be contrary to the fundamental policy of Indian law, the interests of India or justice or morality. In reaching this conclusion, the Delhi High Court took into account a 1994 decision of the Indian Supreme Court in Renusagar Power Co Ltd v General Electric Co where the same distinction was drawn between the approach to domestic and foreign arbitral awards based on international texts and court authorities.

Does this herald a great step forward in the approach of the Indian courts to the application of the public policy exception? It is certainly a welcome development but it does not entirely resolve the fears that sprung up after the decisions of Saw Pipes and Venture Capital. The allegation in Penn Racquet Sports was that the award was contrary to public policy because the arbitral tribunal had incorrectly interpreted a term of the contract which was itself governed by Austrian law. It was therefore not an award to which it could be easily argued that it fell within the provisions of the Indian Arbitration Act which relate to domestic arbitral awards (as was the case with the award in Venture Capital). That risk may still remain for foreign awards where there is a connection with India and the scope of the Indian Arbitration Act has not been restricted to exclude a challenge to the award on the grounds it is a domestic award.

Like India, recent anti-arbitration decisions from the Belize courts have made it a jurisdiction with a question mark over it. In 2009 in Attorney General v Belize Telemedia Limited and Belize Social Development, the Belize Supreme Court issued a world wide injunction restraining the enforcement of an arbitral award before steps had even been taken to enforce it. It was held that the Attorney General was entitled to the interim injunction because he had an arguable case that an international arbitral award obtained by Belize Telemedia was contrary to public policy. The basis for this argument was that the award concerned a contract between the parties which was alleged to contravene the laws of Belize, despite the fact that the Tribunal had expressly considered these issues. In 2010 two anti-arbitration injunctions were issued by the Belize court restraining international arbitration proceedings brought against the Government of Belize under the UK-Belize Bilateral Investment Treaty (Attorney General v Jose Alpuche & others and Attorney General v The British Caribbean Bank Limited). While these injunctions did not directly relate to public policy in the context of enforcement, they failed to acknowledge the competence of the Tribunal to determine its own jurisdiction. This mirrors a classic error that may be adopted when considering the public policy exception; to accept that this allows them to review the merits of the decision of the Tribunal.

However, in December 2010, in stark contrast to the preceding decisions, the Belize Supreme Court gave a pro-enforcement decision in BCB Holdings Limited and The Belize Bank Limited v Attorney General. In this case the court specifically considered the grounds of public policy. An application had been made by BCB Holdings and The Belize Bank to enforce an international arbitral award which concerned a settlement agreement between the parties pursuant to which they had been granted certain tax treatment. The application for enforcement of the arbitral award was made under the Belize Arbitration Act which incorporated the provisions of the New York Convention. The Attorney General argued that the award should not be enforced because the underlying agreement was contrary to the laws of Belize and so fell within the public policy exception. The Belize court disagreed. Drawing on a number of international decisions and authorities, it held that the public policy exception had to be construed narrowly and that the court should avoid interfering with the Tribunal’s decision on the substantive issues. As the Tribunal had considered the illegality issues now raised by the Attorney General on enforcement, it rejected the submission that it should find the arbitral award contrary to public policy on the grounds of illegality. This decision was clearly a progressive step in keeping with an increasingly international standard approach to the public policy exception.

There is an emerging international consensus that public policy in the context of enforcement should have a restrictive interpretation. Are the recent decisions of the Indian and Belize courts a sign that this consensus is now embracing previously uncertain jurisdictions? While it might be too early to draw any firm conclusions, these decisions do represent a good indication that the self-reinforcing effect of international jurisprudence is starting to reap its rewards.

Matthew Gearing & Angeline Welsh, Allen & Overy LLP

Background

By decision of 11 May 2009, the famous Spanish cyclist Alejandro Valverde was given a two-year doping ban by the Anti-Doping Tribunal of the Italian Olympic Committee (“CONI”). The racer appealed against the decision to the CAS. The CONI designated its arbitrator, Prof. Ulrich Haas, who indicated in its letter of acceptance that he had been involved in the revision of the World Anti-Doping Code in 2006-2007. In its response to the claimant’s appeal, the CONI requested the participation of the World Anti-Doping Agency (“WADA”) and of the International Cycling Union (“UCI”). The request was granted by a preliminary decision of 12 October 2009. WADA’s joinder to the proceedings led the petitioner to question the independence of Prof. Haas. As a result, each arbitrator was requested to supplement his declaration of independence. Prof. Haas added that he had acted as Chair of the WADA independent observer team designated for the Athens 2004 Olympics Games. The petitioner brought a challenge against Prof. Hass.* But the Board of the International Council of Arbitration for Sport (“ICAS”) dismissed the claimant’s challenge stating that there was no element that could have raised suspicions regarding the impartiality or independence of Prof. Haas. The dispute was then referred to the CAS panel which unanimously upheld the two-year ban imposed by the CONI Anti-Doping Tribunal. Alejandro Valverde challenged the award before the Swiss Federal Tribunal on the basis of the alleged irregular constitution of the Arbitral Tribunal (art. 190(2)(a) SPILA) and violation of his fundamental procedural rights (art. 190(2)(d) SPILA).

The decision

The Swiss Federal Tribunal started by deciding on two preliminary arguments invoked by the petitioner. Firstly, it restated that, as an annulment court, its only mission is to examine whether the arguments raised to have the award set aside are founded. Therefore, the argument in connection with the constitution of the panel must be examined only in the light of the facts on which the ICAS Board based its decision. All further evidence adduced during the course of the arbitration could not be considered. Secondly, it did not see any major objection to the long-standing practice of the CAS, according to which observations on applications to challenge are drafted by the CAS Secretary General rather than by the arbitral panel that rendered the decision. However, the Court pointed out that it would be advisable for the ICAS Board to clarify this issue given the lack of codification of such practice.

The first issue examined by the Court has given rise to spirited debate between proponents of a “realistic” approach and those advocating a strict application of the standard of independence and impartiality. The question relates to the application of the standard within an arbitral panel: are all arbitrators bound by the same requirements, i.e. including party-appointed arbitrators? Whilst acknowledging that an absolute independence of all arbitral tribunal members would constitute an ideal that would rarely match reality, the Court strongly rejected the idea of “arbitrator-advocates”. The Court reasoned that such approach would indeed jeopardize the very fundamental of arbitration. In accordance with the foregoing, the Court enounced the principle that the independence and impartiality requirements are to be applied equally to all arbitral tribunal members.

Secondly, the Court examined the controversial issue of the application of a more stringent standard of impartiality and independence to CAS arbitrators in order to take into account the specificities of sports arbitration. The Court held that there was no reason to apply a different standard to CAS arbitrators. The specificities of sports arbitration, namely the limited choice of arbitrators engendered by the CAS closed list system and the requirements imposed to listed arbitrators (i.e. to have full legal training and recognized competence with regard to sport) must be taken into account. According to the Court, these peculiarities imply that CAS arbitrators may be led to have contacts with sports organizations, sports lawyers and other specialists. However, this is not sufficient ground to question their independence and impartiality and thus to apply a more stringent standard. The Court concluded by emphasizing that the independence and impartiality of an arbitrator will always depends on the concrete circumstances of each individual case. It would therefore be vain to seek to lay down immutable principles in this regard.

Finally, the Court decided another question, namely its own power to recuse an arbitrator (and not only to set aside the arbitral award). The Court admitted that its position as an annulment court did not prevent it from recusing an arbitrator, given the necessity of legal certainty and for the sake of procedural efficiency.
In the light of these clarifications, the Court analysed the decision at hand and found that the designation of Prof. Haas did not affect the regularity of the constitution of the CAS panel. The relief sought by the appellant was therefore denied, along with the alleged violation of his fundamental procedural rights.

Comment

The main conclusion to draw from this decision is the rejection of multiple standards of independence and impartiality among arbitrators: firstly, party-appointed arbitrators are to be treated the same way as chairmen and sole arbitrators; secondly, there is no reason to apply a more stringent standard to CAS arbitrators. As remarked by the Swiss Federal Tribunal, this is fully consistent with the modern approach advocated by the IBA Guidelines on Conflicts of Interest in International Arbitration and the provisions governing Swiss domestic arbitration enacted in the new Swiss Code of Civil Procedure (the new Code will come into force in January 2011). This will also strengthen the consistency of the Swiss international arbitration case law by avoiding the creation of an artificial “super independent and impartial” standard applicable only to CAS arbitrators.**

* The claimant filed a challenge against such decision before the Swiss Federal Tribunal. The Court dismissed it on the ground that the ICAS decision was not capable of appeal.
** In this regard, we point out the recent amendment of the CAS Regulations which prohibit the double-hat arbitrator/counsel role precisely to limit the risk of conflict of interests and to reduce the number of challenges of arbitrator during arbitral proceedings.

Georg von Segesser, Pierre Ducret

We have a shared concern for the harm done to the public welfare by the international investment regime, as currently structured, especially its hampering of the ability of governments to act for their people in response to the concerns of human development and environmental sustainability.

The Statement highlights a number of concerns, including that investment treaties have been given unduly pro-investor interpretations; the award of damages as a remedy of first resort poses a serious threat to democratic choice; and investment treaty arbitration as currently constituted is not a fair, independent, and balanced method for the resolution of investment disputes.

The Statement recommends that governments:

should review their investment treaties with a view to withdrawing from or renegotiating them in light of the concerns expressed above; should take steps to replace or curtail the use of investment treaty arbitration; and should strengthen their domestic justice system for the benefit of all citizens and communities, including investors.

I will focus my comments in this blog on my objection to the guiding premise in the Statement’s preamble—that the regime hampers “the ability of governments to act for their people in response to the concerns of human development and environmental sustainability” and will discuss concerns regarding threats to environmental protection.

Since the mid-1990s, beginning with the first NAFTA investment arbitrations, critics have argued that investment protection standards are a threat to environmental law and protection.  Many of the critiques focused on the early NAFTA cases that involved environmental issues:  Azianian, Ethyl, Metalclad and S.D. Myers.  Later, critics highlighted the claims in Methanex and Glamis as confirming their worst fears.  Yet, these concerns simply have not been reflected in the final results of the cases.  On the whole, tribunals have done a good job distinguishing between legitimate environmental legislation and arbitrary and discriminatory government conduct. In the NAFTA context, there have only been two awards—Metalclad and S.D. Myers—where tribunals have found respondent states, Mexico and Canada respectively, in breach of NAFTA.  In Metalclad, among other things, a cacti reserve was created and Mexico had to pay for the expropriation of the investment.   In S.D. Myers, the border ban on PCB waste was motivated by pure protectionism, not environmental protection.  Although one can criticize aspects of the reasoning in both awards, the tribunals reached the correct result.  In the one other high profile environmental case under an investment treaty (Tecmed), the tribunal’s findings were that Mexico took the measures based on public pressure and not because of environmental infractions.

Overall, the trend is towards a definite rejection of claims challenging environmental measures—Methanex, Glamis and, on 2 August 2010, the award in Chemtura Corporation v. Canada, another NAFTA claim.  All of Chemtura’s claims with respect to the regulatory treatment of lindane, a pesticide primarily used on canola seed, were rejected.  Chemtura was ordered to pay the costs of the arbitration and an additional CAD 2.8 million—half of Canada’s fees and costs.  In Chemtura, the tribunal recognized that its role was not to second judge science-based decision-making (para. 133); characterized the minimum standard requirement under NAFTA as one of “regulatory fairness” (para. 179); and also recognized that valid exercises of a state’s police powers do not constitute an expropriation (para. 266).

Although I have argued elsewhere that the investment treaty regime could do more to promote sustainable development, I do not agree with the Statement’s assessment that the regime has done more harm than good.  The regime has and is serving an important and key role in securing the rule of law—a vital function in a global economy.  Although there have been a number of recent high-profile withdrawals from investment treaties and ICSID, states on the whole appear to continue to have confidence in the system.  The number of new treaties (over 100 in 2009 according to World Investment Report 2010), overwhelms the few terminations.  State support for the system is also reflected in other developments, such as negotiations on a Latin American Advisory Facility on Investor-State Disputes and UNCTAD’s work programme on international investment agreements.  It seems doubtful that many states are going to take up the call in the Statement to withdraw from the current system.  Nor, in my view, should they.

The case originated in 2000, when a Portuguese soccer player terminated his contract with Sport Lisboa E Benfica (Benfica) and transferred to the soccer club Atlético de Madrid SAD (Atlético). Based on the then applicable FIFA Regulations for the Status and Transfer of Players (FIFA Rules), Benfica claimed in 2001 a compensation from Atlético. The FIFA Special Committee upheld the claim and awarded Benfica USD 2.5 million, which decision Atlético appealed to the Commercial Court of the Canton of Zurich (Commercial Court). On the basis that the FIFA Rules were void as violating antitrust laws, the Commercial Court annulled in a decision of 21 June 2004 the decision of the FIFA Special Committee. A few months later, Benfica again sought a decision from the FIFA Special Committee as to payment of a compensation by Atlético Madrid, but this time the FIFA rejected Benfica’s claim. Benfica appealed the second FIFA decision to the CAS (i.e., not to the Commercial Court) as in the meantime the FIFA had introduced an arbitral review procedure for the decisions of the FIFA Special Committee. Notwithstanding the fact that Atlético opposed Benfica’s appeal by, inter alia, relying on the res judicata effect of the earlier judgement of the Commercial Court, the CAS upheld the appeal in part and ordered Atlético to pay a compensation in the amount of EUR 400’000. Atlético filed a petition with the Federal Supreme Court claiming that the CAS award violated public policy as it disregarded the binding effect of the previous ruling of the Commercial Court.

The Federal Supreme Court followed Atlético’s argumentation. By relying on previous case law, it confirmed that the principle of res judicata is part of procedural public policy and set aside the CAS award. The Supreme Court found that the proceedings in front of the Commercial Court did not involve an appeal against the first decision of the FIFA Special Committee, but the proceedings dealt with the annulment of a resolution of an association (the FIFA) under Article 75 of the Swiss Civil Code. Once a challenge of a resolution of an association is upheld and the resolution is annulled, this decision (as opposed to its rejection) has effect not only between the parties to the proceedings (that is the FIFA and Atlético) but erga omnes, which consequently put an end to Benfica’s claim for compensation on the ground of res judicata although Benfica was not a party to the proceedings before the Commercial Court. The fact that the FIFA subsequently introduced an arbitral review procedure for the decision of the FIFA Special Committee does not change the fact that the issue in front of the CAS had already been decided by the Commercial Court. In the same way as the Commercial Court would have been bound by its previous decision on the same issue, also the CAS obtaining jurisdiction for the second challenge could not examine anew an issue which had already been decided. The CAS award consequently disregarded the binding effect of the judgment of the Commercial Court.

Although this is not the first time that the Federal Supreme Court has held that the principle of res judicata is part of Swiss procedural public policy (see, e.g., the decision 4P.98/2005 of 10 November 2005, at consid. 5.1), this is the first time that the Federal Supreme Court has set aside an arbitral award on this basis. The Federal Supreme Court did so notwithstanding the fact that under Swiss law res judicata requires an identity of the parties in the previous and the subsequent proceedings which however was not the case in the proceedings before the Commercial Court and the CAS. Still, the decision should not be interpreted to open the door to the doctrine of “issue estoppel” known in the United States, under which, in certain circumstances, third parties may be precluded from re-litigating issues of fact and law that have been actually determined in the prior litigation. The Federal Supreme Court’s decision has to be read in light of the singular issue of the erga omnes effect of the previous decision of the Commercial Court, a fact which seems has not been sufficiently stressed by the Supreme Court. Taking this particularity into consideration, it remains to be seen to what extent (if at all) this decision will have the effect of weakening the principle set out under Article 186(1)bis of the PILA.

Georg von Segesser / Patrick Rohn

Recent history shows how difficult it is to ride the ‘unruly horse’; most attempts to resist enforcement on grounds of public policy fail. But it remains a live issue, as the recent decision of the English court in Heinz v EFL illustrates.

Heinz revisits the thorny question of whether an enforcing court may re-open a decision of the tribunal in relation to an issue of public policy. This, of course, brings into play two potentially conflicting principles: the finality of arbitration awards and non-enforcement of awards which violate public policy.

Unsurprisingly, this issue has come up before in England, notably in three cases all dating from around 2000 – Westacre, Soleimany and Hilmarton.

Westacre concerned an attempt to resist enforcement in England of a Swiss award, on the basis of evidence which had not been produced at the hearing. This evidence was alleged to show, first, that the award had been procured by perjury and, second, that the contract was tainted by bribery.

On the perjury point, the Court of Appeal broadly speaking adopted the test applicable in English litigation, such that so-called “fresh evidence” may only be considered if it was not available to the party at the time of the hearing and is sufficiently strong that it may reasonably be expected to have been decisive at the hearing. On the basis of the facts of that case, it refused to consider the evidence.

As to the second point, the court found that it was clear from the award that the bribery allegation was rejected by the tribunal and refused to re-open the point. The award was therefore enforced.

Soleimany was different. It concerned an English arbitration which was conducted before the Beth Din, which applies Jewish law. It was apparent from the face of the award that the contract in question related to smuggling carpets and that the arbitrator considered that illegality was irrelevant as a matter of Jewish law. The English court found that it would be against English public policy to enforce an award which in turn enforces an illegal contract, but there was no question of re-opening the arbitrator’s findings of fact or law.

In Hilmarton, the attempt to resist enforcement of another Swiss award failed. For present purposes, it is sufficient to note that the English court commented that it would be “quite wrong” for it to entertain any attempt to go beyond the arbitrator’s “explicit and vital” finding of fact that there had been no bribery or corrupt activity. That left a question as to whether enforcement could be resisted in England on grounds of illegality under the place of performance which did not offend Swiss law (as the governing law of the contract) or Swiss public policy. The court held it could not and enforced the award. (There is an entirely separate discussion about how Hilmarton and Soleimany should be reconciled.)

That brings us then to Heinz. In the arbitration (which was seated in Hungary), EFL claimed damages in relation to three distribution agreements between it and third parties. Heinz argued that these distribution agreements were “shams”, entered into solely for the purpose of inflating EFL’s damages claim. The tribunal found that Heinz had not proved this allegation and awarded EFL damages in relation to those agreements.

Having failed to have the award set aside in the Hungarian courts, Heinz sought to prevent ELF enforcing the award in England on grounds of public policy. It argued – on the basis of fresh evidence it had gathered since the award – that the distribution agreements were forgeries.

The key issue was therefore whether Heinz was entitled to rely on the fresh evidence of forgery to counter the Tribunal’s finding as to the distribution agreements – that is, the first limb of the discussion in Westacre. On the facts, this boiled down to the question of whether the evidence was reasonably available to Heinz at the time of the hearing.

ELF argued that a reasonable solicitor could have discovered this evidence during the arbitration and that the “fresh evidence” test was not therefore satisfied. The judge held, however, that it was at least arguable that the proper test is whether Heinz and its solicitors should have discovered the evidence (i.e. whether they acted reasonably). He then found that it was arguable that Heinz’s failure to investigate “the opposite camp” before the hearing did not represent a failure to act reasonably.

Pausing there for some technical background, this was a summary judgment application, which meant that ELF had to show that Heinz’s arguments had no real prospect of success. The judge’s finding that Heinz’s position was arguable was therefore sufficient to dispose of the application, such that the case will now proceed to trial.

So what does Heinz mean? On its face, it is limited to cases where a party argues, based on fresh evidence, that an award has been obtained fraudulently. It is different, therefore, to cases like Hilmarton or the bribery limb of Westacre. But the point remains that alleging perjury or fraud in obtaining an award is still another way of seeking to re-open a tribunal’s findings of fact in enforcement proceedings. As was observed in the first instance court in Westacre, it represents an open invitation for a disappointed party to re-litigate a New York Convention award at the enforcement stage.

This invitation is, however, limited to situations where the disappointed party can point to fresh evidence. Much depends, therefore, on where the line is drawn in terms of the admissibility of such evidence. This should be explored at trial in Heinz, making it one to keep an eye on.

The actual arbitration dispute arose in late 2004 in relation to a distribution agreement of 1998 between an American and a Greek company regarding medical equipment. The parties’ contractual arbitration clause called for an arbitration proceeding under the auspices of the International Center for Dispute Resolution of the American Arbitration Association. Both parties expressly submitted to arbitration after the dispute arose, and recognized the competence of the appointed sole arbitrator (the “Arbitrator”) to decide the matter.

The Claimant (the American company) filed a claim for the amount of 1.062.655,33 US$ while the Respondent (the Greek company) counter-claimed unspecified damages estimated at the time of filing to be between 1-5 million US$. The arbitration hearings took place between 15-18 August 2005 in the USA, and an interim decision was issued by the Arbitrator on the acceptance of the change of the claimant’s company name, which took place at that time. On 6 September 2005 a final reasoned arbitration award was issued. The Arbitrator decided in favor of the Claimant and determined that the total amount due to the Claimant was 1.137.117,00 US$.

When the Claimant attempted to enforce the award in Greece on the basis of the provisions of the NY Convention of 1958, it was met with resistance by the Respondent who filed various objections against its enforceability. Thus the matter went through all instances of civil courts’ jurisdictions in Greece and found its way to the highest level (Areios Pagos/ Supreme Court) in civil law matters.

The Supreme Court was called to examine various alleged legal flaws and issued a comforting decision to proponents of ADR of both domestic and international level, as it highlighted and supported the viability of enforcing foreign arbitral awards in Greece, a matter that for a number of years has been in real need of such clarification from the highest judicial body, for securing the smooth foreign arbitration awards enforcement in Greece.

The Supreme Court’s approach on the issues before it, which concentrated on whether there were any legal flaws in the earlier Court of Appeal’s ruling, was rather careful and well-balanced. The Court made it quite obvious from the beginning of its rationale that the purpose of the proceeding was not to re-examine the arbitral award on the merits, as an “appeal” against it is not allowed by law. Furthermore, the Court noted that the three-month deadline following the issuance of the foreign arbitral award had elapsed with neither party filing a request for rectification or vacation as provided by the relevant Affidavit and Rules of the International Center for Dispute Resolution of the American Arbitration Association.

As such the Court went through the various objections made by the Respondent on the issues related to the actual enforceability of the award in Greece, namely that the enforcement of the award violates the provisions of article 5(2)(b) of the NY Convention of 1958, and is against the public policy of Greece, and rejected, ab initio, the following three objections made by the Respondent holding that as per the earlier Court of Appeal’s decision that they did not relate to enforcement issues per se but rather attempted to re-examine the issues on the merits, namely:

a. that the arbitration award failed to take into account the provisions of Article 81 of the EEC which prohibits discriminative policies and hindrance of competition in terms of invoicing policies.
b. That the arbitration award violated the Directive 86/653 EC and the Greek Presidential Decree 219/1991 regarding damages afforded to distributors.
c. That the contractual party in the Distribution Agreement was a different entity to the company that acted as the Claimant in the actual arbitration proceeding.

The Court therefore turned its focus on the Respondent’s objection that

a. the arbitration award lacked reasoning and;
b. the scope of the arbitration clause did not encompass the dispute at issue and therefore that the Arbitrator lacked or exceeded its competence in determining the matter and issuing the arbitration award.

The Supreme Court focused on the earlier determination of the Court of Appeal’s decision and while it held that it partially and indirectly violated the relevant conflict of laws and public policy provisions of both the NY Convention of 1958 and the Greek Civil Code by failing to actually examine the above allegations in full prior to issuing its decision, it still affirmed the earlier ruling and held in favor of the enforcement of the foreign arbitral award as it determined that no conflict of laws or public policy considerations should preclude its enforcement. The Court found that the allegations on lack of reasoning and lack of “competence” relating to the arbitration proceeding were unsubstantiated and dismissible. In doing so the Supreme Court confirmed the enforceability and proper application of international arbitration principles and norms in the Greek jurisdiction and fortified the viability and effectiveness of international ADR proceedings in Greece.

In that respect, French law has traditionally been said to be restrictive in permitting arbitration for administrative law disputes.

In France, under Article 2060 of the Civil Code, domestic disputes involving the State, as well as public entities (such as municipalities) and public establishments may not be referred to arbitration. Article 2060 provides, to that effect, that “there can be no arbitration […] in disputes concerning public collectives and public entities”. However, this provision has since long been excluded by the Cour de cassation (highest French jurisdiction in civil matters) as far as international disputes are concerned (Cour de cassation, 1re civil chamber, 2 May 1966, Galakis). The Court held on that occasion that “the State is not prohibited from concluding arbitration agreement in international matters”.

In 1975, a new provision was added to Article 2060 of the Civil Code, whereby “certain categories of public entities of an industrial and commercial character can be authorised to arbitrate by decree”. However, pursuant to an opinion given by the Conseil d’Etat (highest French jurisdiction in administrative matters), this provision is applied in a very restrictive manner and only authorises such entities to enter into an arbitration agreement after the dispute has arisen (compromis d’arbitrage).

The question then arose of the capacity of the French State and public entities to validly enter into an arbitration agreement with the American company Walt Disney in the contracts related to the construction of the Eurodisney Park.

In its Walt Disney opinion of 6 March 1986, the Conseil d’Etat pointed out that legal entities of public law could not circumvent the rules determining the jurisdiction of the French administrative courts if the dispute touches upon rules of French administrative law that are considered as being of public policy. It came to the conclusion that the contract envisaged with Walt Disney “resorts to the French domestic legal order” and can therefore not contain a valid arbitration clause, which would be null and void as a matter of public policy.

It therefore appeared that the Walt Disney opinion tended to restrict, in spite of the Cour de Cassation’s ruling in Galakis, the arbitrability of international disputes touching upon administrative law. In fact, the Walt Disney contract was certainly to be considered as international pursuant to Article 1492 of the French Code of Civil proceedings, as it involved the interests of international trade.

Since then, there has been considerable debate on how to open arbitration in France to public law disputes. On 7 April 2006, the Ministry of Justice commissioned a working group to consider the future of arbitration in the context of administrative law. The working Group issued its report (called the Labetoulle report, by the name of its author) on 13 March 2007 (Rev. arb., 2007, Vol. 3: p. 651, on which see J.-L. Delvolvé, Une véritable révolution inaboutie, remarques sur le projet de réforme de l’arbitrage en matière administrative ; and S. Lemaire, Rapport du groupe de travail, ib.).

The Labetoulle report proposed to abolish the prohibition preventing public bodies from agreeing to arbitrate, as set out in article 2060 of the Civil Code. As a result, a draft law was prepared in order to “broaden the possibility for recourse to arbitration for public bodies and to clarify the procedural regime of arbitrations involving public law” (Rapport du groupe de travail sur l’arbitrage en matière administrative, 13 mars 2007 in Rev. arb., 2007, Vol. 3, p. 651). This report was nonetheless criticized in the arbitration community for it set a special regime for the arbitration in administrative cases, distinct from that prevailing under the Code of Civil Procedure for other arbitrations. As a consequence, difficult issues of characterisation would arise, in particular in the context of an international arbitration, to define what would and what would not be an “administrative arbitration”. The Labetoulle report, however, has not so far been converted into law.

A particular and sensitive aspect of that debate is the allocation of jurisdiction between administrative and civil courts to hear challenges.

As it stands, challenges against international awards are brought before the Court of Appeal of the place of the arbitration, pursuant to Article 1505 of the Code of Civil Procedure, which court applies the rules provided for challenges by the French Court of Civil proceedings.

However, the question whether administrative courts should have jurisdiction in cases involving mandatory administrative laws has never been clearly settled.

This issue was however raised in the recent Inserm case.

A dispute arose between the French National Institute for Health and Medical Research (Inserm), a French public entity, and a Norwegian foundation, with respect to an international cooperation agreement. The agreement provided for inter alia the construction in France of a building dedicated to research in neurobiology. It included an arbitration agreement.

A dispute arose, and the French party seized a French court, which declined to hear the case because of the existence of an arbitration agreement between the parties. Subsequently, the Inserm requested the Paris First Instance Tribunal to appoint an arbitrator.

The arbitrator was appointed and rendered an award in favour of the Norwegian company. A challenge against the award was brought before the Paris Court of Appeal. The Paris Court of Appeal decided (Inserm v. Association Fondation Letten F. Saugstad, Paris Court of Appeal, 13 November 2008, Rev. arb., 2009, Vol. 2, p. 389) that it had jurisdiction to hear the challenge, but rejected it on two grounds. Firstly, it found that the prohibition for States and State entities to arbitrate was limited to domestic contracts, and secondly that, pursuant to the principle of validity of arbitration clauses admitted in French law, the prohibition to arbitrate was not part of international public policy.

However, an action was also brought in parallel by the French party before the French administrative courts, which were requested to annul the award on the basis that the arbitration agreement was null and void.

The case was directly called to the French highest administrative jurisdiction, the Conseil d’Etat.

The question was therefore to determine which of the two judicial bodies, civil or administrative, had jurisdiction to hear the matter in the last resort.

The Conseil d’Etat decided that there were reasonable doubts with respect to the allocation of jurisdiction between civil and administrative courts, and it therefore decided to raise the case to the Tribunal des conflits, which is the French jurisdiction empowered to settle a conflict of jurisdiction between civil and administrative courts.

The Tribunal des conflits rendered its judgement on 17 May 2010. That decision has given rise to a certain level of criticism in the French arbitration community (See Th. Clay, Les contorsions byzantines du Tribunal des conflits en matière d’arbitrage, JCP G, n° 21, 2010, p. 1045, and E. Gaillard, Le Tribunal des conflits torpille le droit français de l’arbitrage, ib., p. 1096).

The Tribunal des Conflits decided that “a challenge against an arbitral award rendered in France on the basis of an arbitration agreement contained in a contract concluded between an entity of French public law and a foreign company, which contract has been performed on the French territory and which concerns the interests of international trade, is to be brought before the court of appeal where the award is rendered pursuant to article 1505 of the Code of Civil Procedure even if the contract is to be characterized as administrative according to French domestic law”.

The Tribunal however added that “the situation is different where a recourse brought under the same circumstances implies that the award be reviewed according to French mandatory rules of public law on the occupation of the public domain or according to the rules governing public expenditure that are applicable to public procurement, to public partnerships or to the delegation of public services, as such agreements are subject to a mandatory administrative regime that is of public policy. A recourse with respect to those contracts is subject to the jurisdiction of the administrative court”.

In other words, a challenge against an international award concerning an international administrative contract which involves the application of the mandatory rules of French administrative law is to be brought before the administrative court rather than before the civil court as it is normally the case. With respect to that particular dispute, the Tribunal found that the civil courts have jurisdiction, but the door is left open to the administrative jurisdiction if French administrative law’s mandatory rules are at stake.

It would certainly have been preferable if the Tribunal des conflits had clearly established that all international awards, even if they relate to administrative mandatory laws, are subject to the rules for vacatur provided by the Code of Civil proceedings and to the jurisdiction of the civil courts of the place of the arbitration. After all, such is the case when mandatory rules of another nature are at stake (such, for example, as European mandatory rules), and there is no real logic to treat administrative mandatory law differently. From that perspective, the decision is certainly a missed opportunity. It is, in addition, likely to increase the procedural difficulties in challenges against contracts concluded with the French State or with French State entities and that are performed in France. Ultimately, it is likely that parties will tend to place the seat of the arbitration in those contracts out of France in order to avoid these difficulties.

It should be noted, however, that the decision does not do much more than clarifying the situation as it resulted after the Walt Disney episode. Since Walt Disney, very little difficulties arose with respect to the jurisdiction of the French civil courts to hear challenges against international awards involving French public entities, and it is to be hoped that no more will arise after the decision of the Tribunal des conflits. If this is the case, hopefully, the Labetoulle report and the Inserm case will remain a storm in a teacup.

Alexis Mourre/Alexandre Vagenheim