The publication of the 2012 Rules comes at a time when CIETAC’s influence is perhaps greater than it has ever been. Whilst many alternatives exist, CIETAC maintains a dominant position in China, where PRC law restricts offshore arbitration in certain circumstances. Furthermore, even where offshore arbitration is available, there is an increasing trend amongst PRC parties to seek to negotiate CIETAC clauses (with a Mainland seat) in their international contracts. As explained further below, the new rules will allow CIETAC to increase its influence still further, providing for the administration of proceedings outside of Mainland China for the first time, and purporting to allow CIETAC to administer proceedings brought under the rules of other arbitral institutions.

Some of the major amendments include:

1. Arbitral tribunals empowered to grant interim measures in certain circumstances

Under the PRC Arbitration Law and the PRC Civil Procedure Law, the power to grant conservatory measures – including orders for the preservation of property or the protection of evidence – is reserved to the competent Chinese court. The current position under the CIETAC Rules, therefore, which is reflected in Article 21.1 of the 2012 Rules, is that, wherever a party applies for conservatory measures pursuant to the laws of the PRC, “the secretariat of CIETAC shall forward the party’s application to the competent court designated by that party in accordance with the law“.

Under Article 21.2 of the 2012 Rules, however, an arbitral tribunal may also now order “any interim measure it deems necessary or proper in accordance with the applicable law“. This provision will apply, for example, in any CIETAC arbitration seated outside of Mainland China where the law of the seat permits arbitral tribunals to grant interim measures (such as in Hong Kong, where CIETAC has already announced plans to establish a new sub-commission later this year). It is also possible that Article 21.2 will apply to arbitrations in the Mainland wherever the type of interim relief sought falls outside of the exclusive jurisdiction of the Chinese Courts. It remains to be seen, however, whether Article 21.2 will be invoked in Mainland arbitration proceedings and, if so, whether any interim measures granted by an Arbitral Tribunal can be enforced in practice.

2. Expert witnesses required to give oral evidence if called to do so by the Arbitral Tribunal

One feature of CIETAC arbitration which has attracted plaudits and criticism in equal measure is the limited use of witness evidence in some cases. Both the existing and new CIETAC Rules afford a broad discretion to the Arbitral Tribunal to conduct the proceedings “in any way that it deems appropriate“. Article 42.3 of the 2012 Rules, however, now stipulates that expert witnesses must participate in any oral hearing and “give explanations” on their written reports if called to do so by the Tribunal. There is no similar provision for factual witnesses, but the new rules may nevertheless be of assistance in cases where the examination of experts would otherwise be limited.

3. New rules on consolidation

Currently, the CIETAC Rules make no provision for the consolidation of parallel proceedings dealing with related issues (whether between the same parties, or, for example, multiple parties under a suite of related contracts). The 2012 Rules now provide a mechanism for parallel proceedings to be consolidated into a single arbitration.

To some extent, the new CIETAC Rules mirror the provisions of the recently revised ICC Rules, which also contain detailed provisions on consolidation. Under both sets of rules, for example, consolidation will only be possible with the consent of all parties (Article 17.1 of the 2012 Rules and Article 10 of the ICC Rules). Equally, under both sets of rules, the decision as to whether to consolidate the proceedings will be taken by the institution rather than the Arbitral Tribunal. Unlike the ICC Rules, however, which provide clear guidance on the criteria which must be satisfied before any application for consolidation will be granted (Article 10, ICC Rules), the 2012 Rules provide a broad discretion to the CIETAC to take into account “any factors it considers relevant” in making the decision (Article 17.2). This may include: (i) whether all of the claims are made under the same arbitration agreement; (ii) whether the arbitrations are between the same parties; and (iii) whether one or more arbitrators have been nominated or appointed in the arbitrations (although this list is non-exhaustive). The introduction of consolidation provisions is to be welcomed: it can prove particularly useful in complex disputes involving multiple parties or multiple contracts. Users of CIETAC arbitration will therefore watch with interest to see how the institution exercises its discretion under the new Rules moving forward.

4. New rules for determining the seat of arbitration

Under the current Rules, where parties have not agreed on the seat of arbitration, it is deemed to be the city where CIETAC (or any of its sub-commissions) is located, namely a place inside Mainland China. The 2012 Rules now allow CIETAC to decide that the seat shall be a city other than the location of CIETAC (or any of its sub-commissions), which could be a city outside Mainland China (Article 7.2).

This is a significant change, at least on paper, given that the seat determines both the law governing the arbitration procedure and the courts which will retain supervisory jurisdiction over the arbitration. It remains to be seen, however, how often CIETAC will exercise its new discretion in favour of a seat outside of Mainland China.

It is worth noting, however, that arbitration outside of Mainland China is only permitted for “foreign-related” disputes. Whether a dispute is “foreign-related” is therefore a key question. The Supreme People’s Court has published two judicial interpretations which indicate that disputes with one or more of the following three elements will be considered as “foreign-related” (and it should be noted that Hong Kong is deemed a “foreign” jurisdiction for these purposes): (i) at least one of the parties is “foreign“; (ii) the subject matter of the contract is or will be wholly or partly outside Mainland China; and (iii) there are other legally relevant facts “as to occurrence, modification or termination of civil rights and obligations” which occurred outside Mainland China.

5. Broader provisions on the language of the arbitration

Under the current Rules, in the absence of party agreement on the language of the arbitration, the arbitration must be conducted in Chinese. The 2012 Rules allow CIETAC to determine that the language of arbitration shall be “any other language… having regard to the circumstances of the case” (Article 71.1). This is a welcome development, particularly for disputes where all of the relevant documents (including the underlying contract) may have been written in a language other than Chinese. As with the other changes to the rules, however, only time will tell how often this discretion is invoked in practice.

6. Default provision for administration by CIETAC Beijing

Unlike many other arbitral institutions, CIETAC proceedings are administered by different “sub-commissions“, located in various cities in Mainland China (and which will soon include a sub-commission in Hong Kong). Parties are advised to stipulate in their arbitration agreement which particular sub-commission they wish to administer their dispute. Previously, where the clause did not include any such designation, the party commencing proceedings was entitled to express a particular preference. The other party, however, had the right to object, which would occasionally cause delay as parties would often prefer for the dispute to be administered by different entities. The 2012 Rules, therefore, provide that if a CIETAC arbitration clause does not specify a particular sub- commission, CIETAC Beijing will administer the arbitration (Article 2.6). The new provision is welcome, and serves as a useful reminder that it is important to state the relevant CIETAC entity expressly and in full when drafting a CIETAC clause (and in this regard it is important to refer to the relevant sub-commission explicitly; a simple reference to “CIETAC arbitration in Shanghai” may not be enough and, under the 2012 Rules, may lead to the dispute being administered by CIETAC Beijing).

7. Use of other arbitration rules in CIETAC administered arbitrations

One potentially controversial development in the 2012 Rules concerns Article 4.3, which provides that: “where the parties agree to refer their dispute to CIETAC for arbitration but have agreed on … the application of other arbitration rules” CIETAC “shall perform the relevant administrative duties“. In other words, CIETAC will not only administer ad hoc arbitrations under, for example, the UNICTRAL Rules, but will also administer proceedings commenced under the rules of other arbitral institutions. This potentially brings CIETAC into conflict with, for example, the ICC, which has recently amended its rules to make clear that only the ICC Court is authorised to administer ICC arbitration proceedings (Article 1(2) ICC Rules). It is best practice, in any event, to avoid arbitration clauses which seek to allow one arbitral institution to administer proceedings brought under the rules of another institution. This may not only lead to uncertainty in the conduct of the proceedings, but can also expose the award to challenge (as evidenced by the case of Insigma Technology Co Ltd v Alstom Technology Ltd [2009] SGCA 24, where SIAC purported to administer a dispute brought under the ICC Rules).

8. Changes to the appointment of arbitrators in multi-party disputes

CIETAC has also amended its rules regarding the appointment of arbitrators in multi-party cases. Under the new Rules, where there are multiple claimants and/or multiple respondents in any proceedings, and the multiple claimants and/or respondents are unable to jointly nominate an arbitrator, CIETAC will appoint all members of the tribunal and designate the presiding arbitrator (Article 27.3). Previously, CIETAC would only appoint the arbitrator for the party in default. The objective of the new rule – which also reflects current practice at the ICC and SIAC (amongst others) – is to minimise the risk of a challenge to the arbitral award on the grounds of unfair treatment (as occurred in the well-known decision of the French Cour de Cassation in Siemens AG/BKMI Industrienlagen GmBH v Dutco Construction Company).

9. New provisions regarding mediation in CIETAC arbitrations

Article 45.8 of the 2012 Rules allows CIETAC to “assist” with the settlement of disputes through the process of mediation part-way through arbitral proceedings, if requested to do so by the parties. It is not yet clear how this rule will operate in practice, however, as the new Rules do not provide any indication of who will be responsible for the mediation (i.e. whether this is to be conducted by the administrative staff of CIETAC or whether professional mediators will be engaged by CIETAC on the parties’ behalf).

It is common practice in China for arbitral tribunals to facilitate the settlement of disputes by way of mediation or conciliation. Under both the new and existing CIETAC Rules, arbitral tribunals have a wide discretion to conduct so-called ‘arb-med’ procedures in any manner they consider appropriate. Arb-med can be effective in helping parties to settle complex disputes at a relatively early stage, saving considerable time and costs as a consequence. Although many common law practitioners remain sceptical of such processes, they can work well in particular cases, albeit that an evaluative rather than facilitative mediation may be more appropriate depending on the circumstances of the dispute.

10. New criteria for the selection of arbitrators by the CIETAC Chairman

Article 28 of the 2012 Rules describes the criteria which the Chairman of CIETAC may take into consideration when appointing arbitrators in the absence of party agreement. In addition to the law of the contract and the place and language of the arbitration (and any other factors considered to be relevant), the Chairman will also be able to take into account the “nationalities of the parties“. The 2012 Rules do not, however, require that the presiding or sole arbitrator be of a different nationality to the parties. If this is desirable, therefore, parties should make express provision for this in their arbitration agreements.

11. Increased threshold for CIETAC’s summary procedure

Under the existing CIETAC Rules, parties may apply for a “summary procedure” (effectively a form of fast-track arbitration) if the amount in dispute falls below a certain threshold (currently RMB 500,000). Cases heard under the summary procedure will be determined by a sole arbitrator unless otherwise agreed by parties and the time limit for rendering an award is 3 months from the constitution of the tribunal, as opposed to 6 months under the standard procedure.

Under the 2012 Rules, the relevant threshold for the summary procedure has been increased to RMB 2 million. Furthermore, if the amount in dispute later exceeds the threshold because of, for example, amendments to claims or counterclaims, the summary procedure will continue to apply unless otherwise agreed by the parties. This marks a departure from the existing Rules, where cases exceeding the RMB 500,000 threshold would automatically be transferred to the standard procedure unless otherwise agreed.

Conclusion

The changes introduced with the 2012 Rules seek to address the growing complexity of contemporary arbitration proceedings, affording parties greater autonomy and flexibility in some respects such as more freedom for parties to agree on the seat and language of arbitration, whilst also codifying and clarifying several important aspects of CIETAC’s existing practice. The new Rules reflect CIETAC’s ambition and its desire to compete with other major international arbitration institutions, all of which have witnessed a significant increase in China-related business over recent years.

Only time will tell how the new provisions will be applied in practice. Whilst many of the changes are welcome, it remains important to draft CIETAC arbitration clauses carefully. Amongst other things, it is important to make express provision for the language of the arbitration and the CIETAC sub-commission which will administer the proceedings (preferably Beijing or Shanghai, which have more experienced case administrators). In cases involving non-Chinese parties, it is also helpful to provide expressly that the sole arbitrator or chairman be of a nationality different from the parties and that the parties be permitted to appoint arbitrators from outside of the CIETAC panel.

With thanks for invaluable contributions to May Tai, Jessica Fei and Weina Ye (Herbert Smith, Beijing), Simon Chapman (Herbert Smith, Hong Kong) and Tracy Wu (Herbert Smith, Shanghai)

The Geneva Convention regulates issues such as the appointment of arbitrators (Article IV), objections to jurisdiction (Article V), and the applicable law (Article VII). However, it is the Geneva Convention’s provisions in relation to enforcement that are its most prominent feature. In particular, Article IX(2) of the Geneva Convention which limits the application of Article V(1)(e) of the New York Convention.

Article V(1)(e) of the New York Convention provides that recognition and enforcement of an award may be refused if the award has been set aside in the country in which it is made. However, Article IX(2) of the Geneva Convention provides that the fact the award has been set aside will only be relevant if the reason it was set aside was one of an exhaustive list of reasons set out in Article IX(1) of the Geneva Convention. The list of reasons in Article IX(1) of the Geneva Convention essentially mirror the grounds set out in Article (V)(1)(a) to (d) of the New York Convention (party incapacity; lack of notice and a right to be heard; issues beyond the scope of the arbitration agreement; and irregularity in the composition of the tribunal or the procedure). Notably, however, the exceptions set out in Article V(2) of the New York Convention do not appear in Article XI(1) of the Geneva Convention (namely: (i) lack of arbitrability; and (ii) public policy). Therefore, if an award has been set aside in the country of origin on the basis of these reasons (or, indeed, any other reason not set out in Article IX(1) of the Geneva Convention), the enforcing state’s courts may not refuse enforcement of the award on this basis.

Despite the limitations imposed by Article XI of the Geneva Convention, it is important to note that an enforcing state that is party to the New York Convention and the Geneva Convention can still refuse to enforce should the laws of the enforcing state provide that the subject matter of the dispute cannot be resolved by arbitration, or that enforcement would be contrary to public policy. Rather, the limiting factor in the Geneva Convention is that unless an award was set aside in the country of the arbitration for one of the reasons listed in Article IX(1), then the fact it was set aside cannot be used as a reason to refuse enforcement.

There are also two other notable features of the Geneva Convention. First, the Geneva Convention explicitly provides that “legal persons of public law” can validly conclude arbitration agreements (Article II). The term “legal persons of public law” has a wide scope and includes public corporations, the state itself and any of its independent state agencies as well as any federal states. This provision overrides any contradictory law within the home state’s jurisdiction, although it is possible for contracting states to make a reservation on this issue (to date, only Belgium has done so).

Second, the Geneva Convention contains provisions that may help overcome the problem of defective/pathological arbitration agreements (Article IV). In particular, the Geneva Convention provides a mechanism for determining certain details of ambiguous and unclear arbitration agreements, including: (i) whether the parties to an arbitration agreement have to refer their dispute to ad-hoc or institutional arbitration; and (ii) as regards institutional arbitration, which institution a dispute must be referred to.

Nonetheless, as set out at the beginning of this blog, the significant limitation of the Geneva Convention is the fact that its application depends not only on both the state of the award’s origin and the state of enforcement being signatories, but also that all parties to an arbitration agreement must have their place of residence or seat in a contracting state. Coupled with the fact that the Geneva Convention has been ratified by only 31 states, the Geneva Convention’s application is, in reality, severely limited.

However, on 20 July this year, the Arbitrazh Court of Kemerovo Oblast in Siberia relied on the Geneva Convention to recognise a partial ICC award that had been set aside in the country of the seat of the arbitration (Turkey). The decision is a timely reminder of the potential benefits of the Geneva Convention in promoting the enforcement of arbitral awards should all the relevant factors necessary to trigger the Geneva Convention apply.

Ciments Francais, a French company, Sibirskiy Cement, a Russian company, and Cimento Istanbul, a Turkish company, signed an SPA in 2008 under which Sibirskiy Cement undertook to buy shares in various Turkish companies controlled by Ciments Français. Sibersky paid a €50 million advance. The deal fell through and Ciments Français filed for arbitration under the ICC Rules with its seat in Istanbul. The tribunal rendered a partial award which declared that the agreement was valid and Clements Français was entitled to retain the €50 million advance.

The award was subsequently set aside by a Turkish court on three grounds set out in the 2001 Turkish arbitration law. These grounds were: (i) that the arbitrators exceeded their authority by ruling on matters that fell outside the scope of the arbitration; (ii) that the case overran the time limits in the ICC Rules; and (iii) that the award violated Turkish public policy.

Despite the Turkish court ruling, Ciments Français applied to the Arbitrazh Court for recognition of the partial award. Under Article 13(4) of the Arbitrazh Procedure Code of the Russian Federation, if an international treaty signed by the Russian Federation establishes rules other than those which are provided for by the law, the Arbitrazh Court shall apply those rules of the international treaty. In this scenario, the two relevant treaties were the New York Convention and the Geneva Convention.

As set out above, under Article IX(2) of the Geneva Convention, where states are party to both the New York Convention and the Geneva Convention, the provisions of the Geneva Convention regarding recognition and enforcement of awards that have been set aside will prevail. Accordingly, the Arbitrazh Court concluded that none of the grounds for setting aside the award were present in Article IX(I) of the Geneva Convention. It therefore found in favour of Ciments Français and recognised the partial award.

The decision is significant for two main reasons. First, it is the first known instance where a Russian court has agreed to recognise an ICC award which has been annulled at the place of arbitration. This brings Russia (historically a jurisdiction that is perceived as hostile to international arbitration) into line with a select number of jurisdictions which have done so (notably France and the Netherlands). While the decision does not go as far as the French Hilmarton and Putrabali decisions, or the Dutch Yukos decision, it is nevertheless significant as it demonstrates that the Russian courts take the view that local standards of annulment at the place of arbitration shall not prevail if they are contrary to the applicable international standards – this is a very arbitration friendly position.

Second, the decision provides a rare examination of the interrelationship between the New York Convention and the Geneva Convention. It demonstrates that despite the Geneva Convention’s limitations, it can be a powerful tool to be used in enforcement proceedings should circumstances dictate that it applies. However, at the same time, the decision also highlights a notable disparity between the Geneva Convention and the New York Convention.

Mike McClure, Herbert Smith Moscow

The following states are signatories to the Geneva Convention: Albania, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Burkina Faso, Croatia, Cuba, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Kazakhstan, Latvia, Luxembourg, Macedonia, Moldova, Montenegro, Poland, Romania, the Russia Federation, Serbia, Slovakia, Slovenia, Turkey and Ukraine.

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

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

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

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

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

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

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

Justin D’Agostino
Partner
Herbert Smith, Hong Kong

Martin Wallace
Registered Foreign Lawyer
Herbert Smith, Hong Kong

Overview

The new Ordinance will be of considerable interest (and importance) to all parties and practitioners dealing with or considering arbitration in Hong Kong. In this blog we provide a brief overview of certain key features of the new regime including:

1. the abolition of the distinction between ‘domestic’ and ‘international’ arbitration (and the transitional provisions which apply in the context of domestic proceedings);

2. the influence of the Model Law;

3. the availability of interim measures (including the basis on which the Hong Kong Courts may grant interim measures in support of foreign arbitral proceedings);

4. the new codified obligation of confidentiality;

5. the promotion of alternative dispute resolution (including the specific provisions of the Ordinance relating to so-called ‘med-arb’ and ‘arb-med’); and

6. the particular provisions which apply with regard to the enforcement of arbitral awards (including awards rendered in Mainland China).

1. Abolition of the distinction between domestic and international proceedings

One of the most significant changes introduced by the new legislation, and one which will be celebrated by most practitioners and parties alike, is the abolition of the dual regime for ‘international’ and ‘domestic’ arbitrations. Under the previous legislation, and in keeping with the practice adopted in many other major arbitral centres (including Singapore), a distinction was drawn between ‘international’ and ‘domestic’ arbitrations, with different provisions of the previous Arbitration Ordinance (Cap. 341) applying accordingly.

In practice, what this new reform means is that practitioners no longer need concern themselves with analysing the characteristics of the parties and the dispute in order to work out which particular provisions apply to any given arbitration. Instead, the intention is that all arbitrations in Hong Kong will be governed by a single unified regime based on the Model Law, and the drafting of arbitration agreements seated in Hong Kong need not differentiate international from domestic proceedings.

There is a caveat to this. Under pressure from certain sectors (most notably the construction industry), Hong Kong legislators chose to retain the key features of the ‘domestic’ regime in a series of ‘opt-in’ provisions set out in Schedule 2 of the new Ordinance. These will apply in place of certain of the Model Law-based provisions, where parties so choose. These specialised ‘opt-in’ provisions include, for example: (i) the ability of the courts to determine preliminary points of law; (ii) appeals to the courts allowed on questions of law arising from arbitral awards; (iii) challenges to awards permitted on grounds of serious irregularity; and (iv) provision for the consolidation of arbitrations or hearings. These features may, of course, be of use to many users of arbitration depending on their particular circumstances, but a distinguishing feature of the Hong Kong legislation (and one which sets it apart from other jurisdictions, notably England & Wales) is that these are ‘opt-in’ provisions; parties will only be subject to the greater court intervention prescribed under Schedule 2 if they expressly provide for this in their arbitration agreement.

A further caveat which is important to note – albeit one which is transitional in nature – is that the various ‘opt-in’ provisions set out in Schedule 2 will apply automatically to all arbitration agreements which provide for ‘domestic arbitration’ and which are entered into before or within six years of the new Ordinance coming into effect. In the longer term, however, it is anticipated that parties in the construction industry will be the primary users of the ‘opt-in’ system, albeit that other international parties may choose to avail themselves of this regime should they wish.

2. The influence of the Model Law

As noted above, the drafters of the new Ordinance have opted to rely heavily on the internationally-recognised and accepted framework of the Model Law. The new Ordinance generally follows the Model Law’s headings and chapters, which, in turn, mirror the chronological steps of a typical arbitration procedure. The Ordinance states clearly which features of the Model Law have been adopted (whether in whole or in part) and which aspects of the Ordinance are unique to Hong Kong.

The fact that the Ordinance draws heavily on the Model Law is a positive development which reflects Hong Kong’s position as a leading centre for arbitration. The Model Law (which was last updated in 2006) establishes certain minimum standards for national arbitration legislation. Amongst other things, the Model Law describes the (limited) circumstances in which domestic courts should be permitted to intervene in the arbitral process, confirming that arbitral tribunals are empowered to grant a wide-range of interim measures and rule on their own jurisdiction (the principle of kompetenz-kompetenz). The Model Law also provides that parties should be free to agree upon the procedure of any arbitration (subject to certain fundamental safeguards) and provides an outline framework which can be adopted in the absence of agreement (including provision for what is to happen in the event of default by any party). These features can all be found in the new Hong Kong Ordinance.

It would not be correct, however, to suggest that the Ordinance follows the Model Law slavishly. In certain instances, the language of the Model Law has been modified in order to impose a slightly different standard. For example, Article 18 of the Model Law provides that parties should have a “full” opportunity to present their respective cases, whereas the equivalent provision in the Hong Kong Ordinance (Section 46) provides that parties should have a “reasonable” opportunity to do so. In other instances, the provisions of the Model Law have been replaced entirely with bespoke clauses which reflect the peculiarities of arbitration in the region (the regime for the enforcement of arbitral awards being one such example, as described in greater detail below). Generally speaking, however, Hong Kong has adopted many of the salient features of the Model Law with little or no amendment. In that respect, the new Ordinance can be said to reflect best international practice.

3. Interim measures

One of the central themes underpinning the new legislation is the notion of minimal court intervention, with provisions of the new Ordinance vesting as much power as possible with arbitral tribunals. Adopting the Model Law’s provisions regarding interim measures, arbitral tribunals seated in Hong Kong are able to grant temporary measures, for example, to preserve assets or evidence, or to maintain or restore the status quo – and the Ordinance expressly confirms that this power includes the granting of injunctions. In addition, and again in line with the Model Law, Hong Kong arbitral tribunals can award preliminary orders preventing parties from frustrating any interim measure.

Separately, arbitral tribunals seated in Hong Kong are empowered inter alia to award security for costs and direct the discovery of documents or delivery of interrogatories – retaining the ‘general powers’ of an arbitral tribunal provided under the previous regime. Moreover, and an important feature of the new legislation, arbitral tribunals may make peremptory orders, which in other jurisdictions are a useful but underused resource of arbitral tribunals, specifying time limits for parties’ compliance in order to assist with the enforcement of their orders or directions.

Section 45 of the Ordinance also empowers the Hong Kong Courts to grant certain interim measures in support of arbitral proceedings – whether seated in Hong Kong or not – albeit that the Courts may decline to grant such relief if it is considered more appropriate for the interim measure sought to be granted by the arbitral tribunal. Furthermore, the Hong Kong Courts may only grant interim measures in support of proceedings seated outside of Hong Kong if: (a) the arbitral proceedings are capable of giving rise to an arbitral award which may be enforced in Hong Kong; and (b) the interim measure sought belongs to a type or description of interim measure which may be granted in Hong Kong.

4. Confidentiality

A feature of the new legislation likely to prove attractive to many parties is the inclusion of express provisions in relation to confidentiality. Although confidentiality is often perceived as a major advantage of arbitration, it is not always guaranteed. In certain jurisdictions (including, for example, Singapore and England & Wales) an obligation of confidentiality is said to be ‘implied’ into the arbitration agreement between the parties, albeit that the precise boundaries of this obligation are somewhat uncertain. In other jurisdictions, notably Australia, the concept of imposing any obligation of confidentiality in arbitral proceedings by law has been rejected by the national courts.

The new Hong Kong Ordinance expressly prohibits parties from disclosing any information relating to the arbitral proceedings or the award, subject to the usual exceptions regarding disclosure to professional advisors or disclosure required by law. In addition, and marking another significant change from the previous regime, the default position under the new Ordinance is that court proceedings relating to arbitration are to be conducted in closed court. Parties with arbitrations seated in Hong Kong can therefore assume that duties of confidentiality will bind their proceedings without the need for any additional drafting in this regard.

5. Mediation

A further specialised feature of the new Ordinance, and one which has been borrowed and enhanced from the old regime, is that express provision is made for both ‘med-arb’ (where a mediator is appointed to try and resolve the dispute before arbitral proceedings are commenced) and ‘arb-med’ (where the arbitral tribunal assumes the role of mediator part way through the proceedings in an effort to bring about an early settlement). These provisions follow the spirit of the recent Civil Justice Reform in Hong Kong in promoting ADR (at present, if a litigant in the Hong Kong courts fails unreasonably to engage in mediation, they face potentially adverse costs consequences) and set Hong Kong apart from other leading arbitration centres.

Under the Ordinance, a member of an arbitral tribunal is permitted to serve as a mediator after arbitration proceedings have begun, provided that all parties give their written consent. The Ordinance provides that, in these circumstances, the proceedings are to be stayed in order to afford the mediation the maximum chance of success – although if the mediation fails, the arbitrator-mediator is required to disclose to all parties any confidential information obtained during the mediation which he considers to be “material to the arbitral proceedings”. This latter requirement may deter some parties from engaging in frank discussions during any mediation (particularly during any caucus sessions with the arbitrator-mediator), which may impede the effectiveness of the overall process. Furthermore, parties should also be wary of anything which might jeopardise the enforceability of a subsequent arbitral award; whilst the Ordinance states that the existence of the ‘arb-med’ process will not in itself give rise to a ground for challenge if the relevant provisions of the legislation are respected, recent case law from the Hong Kong Courts illustrates that awards may be set aside on grounds of public policy if the ‘arb-med’ process is conducted in such a manner as to create an impression of bias (Gao Haiyan v Keeneye Holdings Ltd [2011] HKEC 514).

6. Enforcement of arbitral awards

One final feature of the new Ordinance which is worth flagging concerns the regime for the enforcement of arbitral awards, which departs from the provisions of the Model Law in favour (largely) of the enforcement procedure established under the previous regime. The key point is that arbitral awards are enforceable in the same manner as a court judgment but leave of the court is required. Moreover, separate provisions in the new Ordinance distinguish between: (i) awards rendered in Mainland China; (ii) awards rendered in New York Convention states (referred to in the Ordinance as “Convention Awards”); and (iii) other awards (e.g. awards rendered in Taiwan). Whilst the evidentiary requirements are the same for all three categories of award (the party seeking enforcement must produce an original or certified copy of both the award and the underlying arbitration agreement), the rules which govern enforcement will depend on the place in which the award was rendered. For example, subject to certain limitations, awards rendered in Mainland China may not be enforced in Hong Kong if an application for enforcement is also outstanding on the Mainland (Section 93 of the Ordinance). These features illustrate that, whilst the Hong Kong Ordinance largely reflects international practice, there are certain aspects of the legislation which are tailored to the particular circumstances of the region.

Conclusion

Hong Kong is already a major centre for international arbitration in Asia. As the gateway to China, enjoying the rule of law and New York Convention signatory status, Hong Kong is a natural option for international parties looking to trade in the region. The reforms introduced by the new Ordinance, couple with the recently promulgated HKIAC Administered Arbitration Rules and the opening by the ICC of a branch of its Secretariat in Hong Kong, are likely to enhance further Hong Kong’s position as a major hub for dispute resolution in the Asia-Pacific region and as an important centre for international arbitration more generally.

Justin D’Agostino, Simon Chapman and Ula Cartwright-Finch
Herbert Smith

Sweden has a long-standing tradition as a seat for international arbitration and the Swedish legal framework has generally been perceived as arbitration friendly. In 2005 that perception was somewhat damaged when the Svea Court of Appeal, in Case No. RH 2005:1 (The Titan Corporation v. Alcatel CIT SA), held that the arbitral award in question could not be challenged before the Swedish courts. The seat of arbitration was in Sweden and the Swedish Arbitration Act was applicable, but apart from these elements the arbitration had no further connection to Sweden. The Svea Court of Appeal considered the challenge proceedings to lack Swedish judicial interest.

The court’s decision was appealed, but unfortunately, the dispute was settled between the parties before potentially reaching the Supreme Court. Commentators heavily criticized the Svea Court of Appeal’s judgment under both Swedish and international legal doctrine – we have ourselves criticized the Svea Court of Appeal’s judgment in an article in a Swedish law review (Juridisk Tidskrift) – inter alia because the judgment lacks conformity with international arbitration law.

In November 2010 (Case No. NJA 2010 p 508; The Russian Federation v. RosInvestCo UK Ltd) the Supreme Court emphasized – with reference to the internationally recognized arbitration principle of party autonomy – that the parties to an arbitration agreement are free to select the applicable law to be applied in arbitral proceedings. The applicable law is usually derived from the seat of arbitration, which is typically stated in the arbitration agreement. If the parties have agreed that the seat of arbitration is in Sweden, the Swedish Arbitration Act applies. Consequently, the Supreme Court held that when the seat of arbitration is in Sweden and the Swedish Arbitration Act applies, Swedish courts are deemed to have judicial interest in the case and are therefore competent to try a challenge against an arbitral award. Thus the Titan Case no longer represents good law.

The Supreme Court’s judgment was welcomed and well received by the Swedish arbitration community. Several other 2010 Supreme Court judgments further accentuated the international perspective in arbitration cases.

Supreme Court Case No. NJA 2010 p 317 (Korsnäs AB v. AB Fortum Värme) concerned a dispute over the potential disqualification of a party-appointed arbitrator due to the fact that he had been appointed as arbitrator on numerous occasions by the law firm acting as counsel for one of the parties. Both the Svea Court of Appeal and the Supreme Court relied upon (among other sources of law) the IBA Guidelines on Conflicts of Interest in International Arbitration, notwithstanding that these guidelines had not been previously agreed upon by the parties. A similar determination had earlier been made by the Supreme Court in Case No. NJA 2007 p 841.

In Korsnäs, the Supreme Court held that appointment of the same person as arbitrator on numerous occasions by the same law firm can constitute a circumstance that may diminish confidence in the arbitrator’s impartiality. As a result, the arbitrator might be disqualified. However, the court must also consider the extent to which the person has been appointed as arbitrator by other law firms. Pursuant to the legal framework, an arbitrator’s failure to disclose circumstances that might have constituted disqualification is not an independent ground for challenge of an arbitral award; neither the Swedish Arbitration Act nor the IBA Guidelines contain any remedies in respect to an arbitrator’s failure to disclose this fact. Instead, in cases where the impartiality of an arbitrator is particularly difficult to ascertain, the effect ought to be that the arbitrator’s failure to disclose certain circumstances may lead to the disqualification of the arbitrator. This was, however, not the case in Case No. NJA 2010 p 317.

In addition, certain statements made by the Supreme Court in Case No. Ö 2782-10 (Tupperware Nordic A/S v. The Bankruptcy Estate of Facht Distribution AB) must be perceived as arbitration friendly. The case concerned an agreement designating a certain court to settle disputes between the contracting parties. The Supreme Court concluded that the legal principles regarding such agreements are equivalent to the principles applicable to arbitration agreements. An arbitration clause included in a main contract is considered to cover any dispute in relation to the main contract. The scope of the arbitration clause may however be limited by its wording. A standard arbitration clause gives the arbitral tribunal the right to try any invalidity of the main contract as long as the invalidity rests upon a contractual basis.

These 2010 judgments clearly illustrate that the Swedish Supreme Court considers it to be of great importance for the courts to accentuate the existence and applicability of international arbitration law principles. This generous approach towards both national and international arbitrations will further establish Sweden as an attractive forum for international arbitrations.

Anders Reldén, Mattias Nilsson and Linda Kahver

Parties may therefore find themselves in a tug-of-war between their preferred, compromise and worst-case seats. Which seat is ultimately selected will depend upon how big an issue the seat is for each party, how great a desire they have to get the deal done, and an array of other factors specific to each case.
Of course, other (often related) aspects of the arbitration clause may still be up for negotiation, and may help to make a seat which is otherwise unpalatable to one of the parties more acceptable. One key provision that a party might wish to include, either expressly or through the incorporation of institutional rules, is a nationality requirement – for example, to the effect that a sole arbitrator or the chairman of the arbitral tribunal may not be of the same nationality as any of the parties. Such provisions are frequently sought and accepted, and are commonly to be found in institutional rules, including the ICC Rules (Article 9.5) and LCIA Rules (Article 6.1) and the HKIAC Administered Arbitration Rules (Article 11.2) (although not the new SIAC Rules).

However, both the importance of nationality as a factor and the validity of such a clause limiting nationality in the first place may vary depending upon the seat. It is therefore important not to take a blanket approach to this issue. Markedly different considerations will apply in different parts of the world and depending upon the seat of arbitration.

The position in relation to arbitration clauses with a London seat has arguably been radically changed by the potentially far-reaching recent decision of the English Court of Appeal in Jivraj v. Hashwani [2010] EWCA Civ 712. There, the parties had entered into a joint venture agreement for investment in real estate projects, in which the arbitration clause stipulated that the arbitrators were to be “respected members of the Ismaili community and holders of high office within the community”. When the joint venture agreement was terminated and a dispute arose, Mr Hashwani appointed an arbitrator, Sir Anthony Colman. Mr Jivraj applied to the English Commercial Court for a declaration that the appointment of Sir Anthony was invalid because he was not a member of the Ismaili community. Mr Hashwani, in turn, sought an order to the effect that the requirement that the arbitrators be members of the Ismaili community was unlawful because it contravened religious equality legislation in the United Kingdom.

The relevant regulations prohibited discrimination by an employer against an employee on grounds of religion or belief. The Court of Appeal in England held that arbitrators were employees for the purposes of the regulations and that the requirement that the arbitrators be members of the Ismaili community was therefore discriminatory and unlawful. It rejected an argument that the requirement fell under an exception for “genuine occupational requirements” on the basis that the duty of the arbitrators was to determine the dispute in accordance with English law, which did not require a particular ethos or an understanding of Ismaili principles of morality, justice and fairness (though it acknowledged that it might have been possible to make out such an argument if the tribunal had been empowered to act ex aequo et bono).

The arbitration clause was therefore void. The Court of Appeal also indicated, obiter, that the offending part of the clause was not severable (such that the remainder would survive avoidance) because removing the requirement would render the arbitral process fundamentally different from that originally contemplated by the parties.

Although the case concerned the relatively narrow issue of religious discrimination, it has wider ramifications because the relevant regulations were part of (and consistent with) the wider scheme of UK anti-discrimination law, which includes prohibitions on discrimination on grounds of race, disability, sexual orientation and age. Requiring an arbitrator to hold a qualification which engages any of those issues may be discriminatory and therefore illegal, unless a relevant exception applies. The case therefore has wide ranging effect for parties from all over the world who might choose London as the seat of arbitration.

In particular, discrimination on the grounds of race includes discrimination on the grounds of nationality, and a requirement that an arbitrator should (or should not) hold a particular nationality will therefore arguably be illegal as a matter of English law.

There is therefore a serious risk that an arbitration clause with a London seat which contains such a requirement could be held to be void in its entirety (and, even if this issue was not raised during the arbitration itself, there is a risk that the alleged invalidity of the arbitration clause could be used to found an objection to enforcement later on). Ironically, this could result in a national court in England or elsewhere having jurisdiction over any dispute (unless all of the parties agreed to submit the dispute to arbitration) – a result surely even less consistent with the parties’ original wishes!

The upshot is that there is a serious risk – at least until the appeal, which is currently pending, is decided – that a nationality requirement (or, indeed, some other requirement which falls under the scope of UK anti-discrimination law) may be illegal and render the arbitration clause void in its entirety. Where parties negotiate London as an arbitral seat, it is therefore advisable that the arbitration clause should expressly exclude any provision in the chosen institutional rules which would otherwise impose any form of nationality requirement. The same potentially applies in relation to other EU jurisdictions, which are subject to the same EU equality legislation on which the UK equality regime is largely based – although the specific terms of the domestic implementing legislation would have to be considered in each case. The parties should also exercise caution, and seek full legal advice, before imposing any other form of qualification requirement upon the arbitrators.

This development in England (and its as yet untested potential ramifications for other EU jurisdictions) is unlikely to be welcome news to many users of arbitration and may seem somewhat at odds with one of the fundamental tenets of arbitration: party autonomy. Requirements that an arbitrator should (or should not) hold a particular nationality are commonly used by parties, in particular in Asia, and especially by non-Chinese parties who agree to “onshore” arbitration in mainland China under the auspices of CIETAC or one of the other Chinese arbitration commissions. CIETAC (unless the parties otherwise agree) will tend to appoint a PRC national as chairman or sole arbitrator and its practice differs in this respect from institutions like the ICC and HKIAC which usually seek to appoint a “neutral nationality” person as sole or presiding arbitrator. Non-Chinese parties therefore usually draft their arbitration clause to expressly include a nationality requirement which requires the sole arbitrator or chairman to be of neutral nationality to avoid a local majority being appointed to the tribunal.

In the past, it might have been said as a general rule that it was desirable to have a nationality requirement in most arbitration clauses, unless there were specific and compelling reasons not to do so. Such a statement must now include the important caveat that, if the seat is England, it is essential not to have such a requirement – at least until the appeal in Jivraj v. Hashwani is decided. In the meantime, parties negotiating arbitration clauses where the location of the seat is particularly contentious or likely to change at a late stage in the drafting should proceed with care.

Justin D’Agostino
Partner
Herbert Smith, Hong Kong

Martin Wallace
Legal Manager
Herbert Smith, Hong Kong

1. Professor Hess now introduces a very significant change in the Heidelberg proposal.

In his 14 February post on ConflictsofLaw.net, he had acknowledged that “the proposal of the Heidelberg Report to delete the arbitration exception entirely maybe goes too far”.

Professor Hess now proposes for the first time an alternative to the Heidelberg proposal by drafting Article 1-2 (d) of the Regulation as follows “The Regulation shall not apply to… (d) Arbitration, save supporting measures and declaratory relief proceedings as provided for under Articles 22(6), Article 27A and Article 31”.

In other words, the arbitration exception would not de deleted, as initially proposed by the Heidelberg Report, but maintained, save for ancillary proceedings (proposed new Article 22(6)), for the proposed new declaratory action (new Article 27A), as well as for provisional and conservatory measures (Article 31).

The question which immediately arises is therefore: what about court decisions which do not fall within the three limited exceptions to the exception? Will a court decision on the validity of an arbitration agreement or of an award still be excluded from the scope of the Regulation?

Normally, one would tend to answer positively to that question. If the arbitration exception is maintained (although with limited exceptions), it is hard to see why a judgment annulling an award should be recognized under the Regulation. Putrabali would thus survive to the new Regulation.

And what about a judgment on the validity of the arbitration agreement? Here, a distinction would have to be made.

In case of a judgment rendered at the seat of the arbitration in the context of the proposed new declaratory action, one would have to admit, under the amended Hess proposal, that it should be recognized under the Regulation.

If, on the contrary, the judgment is not rendered at the seat (or rendered at the seat but not in the context of a declaratory action), what would the situation be?

Then, March Rich is likely to survive.

If the main scope of the action giving rise to the judgment is the validity of the arbitration agreement, the judgment would thus presumably fall outside the scope of the Regulation.

But the situation would be more difficult in the case of an interim judgment on the validity of the arbitration agreement rendered by a court seized on the merits. There, as it is known, the Court of Appeals of Paris answered by excluding the application of the Regulation in Fincantieri (Paris, 15 June 2006, Legal Department du Ministère de la Justice de la République d’Irak v/ Sociétés Fincantieri Cantieri Navali Italiani, Finmeccanica et Armamenti e Aerospazio, Rev. Arb. 2007.90, note Bollée), while the English Court of Appeals admitted that the Regulation is applicable in Endesa (National Navigation Co c. Endesa Generacion SA, [2009] EWCA Civ 1397 ). Which of those two solutions should prevail?

Professor Hess, however, seems to follow an entirely different line of reasoning. He in fact rejects my proposal for a safeguard clause inspired from Article IX of the Geneva Convention (new Article 34A). Let me recall that my proposed clause would read as follows:

“A judgment shall also not be recognized:

(a) if it has been rendered in disregard of a valid arbitration agreement that is valid under the law of the country of recognition;
(b) as regards judgments rendered on the validity of an award, if (i) it has not been rendered by the courts of the country where the arbitration has its seat, or (ii) in case of annulment of the award, if it was not made on one of the grounds set out in Article V(1)(a) to (d) of the New York Convention”.

Such proposal was made on the assumption that the arbitration exception would be entirely deleted, with the consequence that a judgment rendered in a Member State deciding on the validity of an award would fall within the scope of the Regulation and would have to be recognized (possibly with no formalities or requirement of exequatur under the new regime).

It would however become unnecessary in case the arbitration exception is maintained with limited exceptions, as suggested by Professor Hess. In such case, a judgment deciding on the validity of an arbitral award should in fact fall outside the scope of the Regulation and have to be recognized under the general private international rules of the country of recognition.

Professor Hess, however, does not reject my proposal on the basis that it becomes unnecessary under the limited arbitration exception that he suggests.

In order to justify his rejection of such a provision, Professor Hess states that it would “completely runs counter the objective of the ongoing reform of Brussels I which shall reduce the grounds of non-recognition and replace exequatur proceedings by the principle of mutual trust”.

One has therefore to understand that, under Professor Hess proposed limited arbitration exception, a judgment rendered in a Member State on the validity of an arbitral award would have to be recognized under the principle of “mutual trust”.

Why it should be so is unclear. But if this assumption is correct, and although Professor Hess declares that he “[does] not want to discuss the issue in more detail”, the question deserves much more attention.

For example: under the New York Convention, awards may be annulled at the seat, and courts in other countries may only refuse recognition on the limited grounds provided in Article V. Let us now imagine a Member State court in a country other than the seat of the arbitration which would annul a foreign award. This is by no means an unimaginable situation. It has occurred in India and elsewhere (See recently: Venture Global Engineering v. Satyam Computer Services Ltd, Supreme Court of India, 10 January 2008). Under Professor Hess’ suggestion (if I understood him well), such a decision would have to be automatically recognized under the Regulation in all other Member States. I trust that Professor Hess will accept that this would be plainly incompatible with the New York Convention.

Second example: a court in a EU Member State where the seat of the arbitration is located and which is also a member of the Geneva Convention of 1961 annuls an award for reasons not contemplated by Article V (1) (a) to (d) of the New York Convention. Recognition of said decision is sought in another Member State which is also a party to the Geneva Convention. Based on the principle of “mutual trust”, automatic recognition would prevent the enforcement of the arbitral award, in breach of Article IX of said Convention when applicable.

It is thus evident that, if the arbitration exception is to be totally or partially deleted in a way that would include judgments on the validity of an arbitral award in the scope of the Regulation, exceptions would need to be framed in order to make the Regulation compatible with the New York and Geneva Convention and to take into account the specificities of arbitration.

2. Let us now turn to the other punctus doli of the Hess/Heidelberg proposal: the automatic lis pendens provision of Article 27 and the proposed declaratory action.

I have expressed the legitimate concern that the proposed new Article 27A will not be compatible with the negative effect of Kompetenz-Kompetenz, as it is applied for example in France.

I have accordingly proposed to vary the proposed new Article 27A of the Regulation as follows:

“A court of a Member State shall stay the proceedings once the defendant contests the jurisdiction of the court with respect to the existence and scope of the arbitration agreement (i) if a court of a Member State that is designated as the place of the arbitration is seized for declaratory relief in respect to the existence, the validity, and/or scope of that arbitration agreement, or (ii) if a judge at the seat of the arbitration has been seized to put the arbitration in motion or has been seized of a difficulty relating to the constitution of the arbitral tribunal, or (iii) if an arbitral tribunal, sitting in or outside the European Union, has been seized of said question”.

Professor Hess maintains that “French procedural law explicitly provides for declaratory relief in the context of arbitration (if the juge d’appui finds the clause is manifestly void)” and adds that “it seems to me possible that a French juge d’appui who is seized by a party under Article 22 (6) JR will stay his proceedings and send the parties to arbitration”. Professor Hess adds that “If the arbitral tribunal finds that the clause is effective, it may give an interim award. The French juge d’appui can endorse the award (by a declaratory judgment). This judgment will be recognized in all other EU-Member States and the prevalence of the arbitration proceedings will be assured”.

Such statements are a bit confusing. As explained in my blog, proceedings before the juge d’appui are my no means comparable to declaratory proceedings. The juge d’appui does not take any decision on the validity of the arbitration agreement. He just puts the arbitration in motion (for example by appointing an arbitrator) unless the arbitration agreement is manifestly null and void. If the judge is seized on the merits, he will decline jurisdiction (not stay his proceedings) and refer the parties back to arbitration unless the clause is manifestly null or inoperative. There is no possible “stay” of the proceedings before the juge d’appui. Either the arbitration agreement is manifestly null or inoperative, and he will not put the arbitration into motion, or it is not, and he will send the parties to submit their jurisdictional objections to the arbitral tribunal.

Whatever Professor Hess meant in his analysis of the situation before the French juge d’appui, he seems to be in agreement that, in presence of an action in the merits before a Member State court where it is argued that the arbitration agreement is null and void, or even manifestly null and void, a judge in another Member State where the arbitration has its seat could nevertheless put the arbitration in motion by for example appointing an arbitrator. In such a scenario, the arbitration could proceed with no need for the judge to “endorse the award by a declaratory judgment” along the lines suggested by Professor Hess.

This is welcomed and – if this understanding is correct – Professor Hess should agree that Article 27A should be amended as suggested above.

3. I also have pointed out that the proposed declaratory action will not prevent situations of lis pendens between an action in the merits in breach of an arbitration agreement and an action to enforce an award in a country other than the seat, thus de facto obliging the parties to return to the old requirement of double exequatur that he New York Convention has suppressed.

To that effect, I have proposed a new Article 27B drafted as follows: “Article 27 shall not apply to the court of a Member State requested to enforce an arbitration award”.

Professor Hess did not comment this proposed new article. I hope he is also in agreement with this proposal.

4. Finally, I would like to make some comments on Eco Swiss and the public policy defense to enforcement, as this issue seems to be at the root of our disagreements.

Professor Hess maintains that “the objective of the NYC is certainly to provide for a uniform regime on the recognition of arbitral clauses and awards”. With due respect, I disagree. The scope of the NYC is to provide for a minimum threshold of recognition, not to unify the regime of recognition of arbitral clauses and awards.

Professor Hess then wonders “whether the EU-Member States are still free to interpret and apply the public policy exception of Article V NYC individually”. Professor Hess’ answer to that query is that: “the public policy clause of Article V (1) (c) of the New York Convention must be interpreted coherently within the EU” and that “eventually, the courts of the Member States must refer questions on the interpretation of mandatory EU law to the ECJ (Article 267 TFEU)”.

This calls for two observations.

First: as a general matter, I of course agree that, within the EU, courts should as much as possible apply EU mandatory laws in a coherent and uniform manner.

But, with due respect, this is not the issue which is debated with respect to the application of the public policy exception in the context of courts review of arbitral awards.

The true issue is that of procedural autonomy, i.e. whether Members States can be more or less intrusive in their review of arbitral awards. As I have shown in a recent study (note to SNF v Cytec, Cass. 4 June 2008, Clunet 2008, 1107), most jurisdictions in the EU would set aside an award only in case of a manifest or a flagrant breach of public policy (like in the Thalès case, a decision which is criticized by some, but which is rightly approved by most, including by such authors as Professor Schlosser, see: Articles 81 and 82 EC Treaty and Arbitration: a German perspective, Cahiers de l’arbitrage, 2009-1, p. 22,).

This is not the place to discuss whether this is appropriate and compatible with EU law. My view is that Eco Swiss permits Member States to restrict their review of awards. Eco Swiss, in deciding that courts must quash an award based on EU public policy if they would quash it based on their domestic public policy, sets a rule of equivalence according to which EU mandatory rules should not be treated differently than EU public policy. It thus permits courts to exercise limited review (or no review at all) of the compliance of an award to both domestic and EU mandatory rules.

Second: It is hard to understand why the need for a coherent and uniform enforcement of EU mandatory laws by courts within the EU is at all relevant in the context of a debate on the revision of the Regulation and the possible suppression of the arbitration exception.

The Heidelberg proposals (in their original version or as they are now amended by Professor Hess) provide no answer to that question because the scope of the Regulation is procedural and does not address issues of substance. Under the Regulation as it could to be amended by the suppression of the exequatur (an evolution that Professor Hess seem to welcome), a judgment having disregarded EU mandatory laws would have to be recognized exactly like a judgment having made a correct application of the same.

Likewise, the Regulation does not address referrals under Article 267 TFEU.

Those issues may be interesting in the context of a discussion on a new instrument providing for a uniform regional regime on arbitration, but they are entirely irrelevant to the revision of the Regulation.

The Heidelberg proposal has been followed by a Green Paper of the European Commission and by a public consultation, which has given rise to numerous reactions from the arbitration community. Many of these reactions expressed a variety of serious concerns on the impact that the extension of the scope of the Regulation to arbitration related court litigation could have. Those concerns relate to possible conflicts between the Regulation and the New York Convention due to the automatic recognition of judgments invalidating arbitration clauses and arbitral awards for reasons inconsistent with the New York Convention, as well as to the recognition of judgments inconsistent with an arbitration awards. They also relate to possible lis pendens situations between proceedings initiated in breach of an arbitral award and proceedings to set the arbitration in motion or to enforce an award. Finally, the suggestion that the lis pendens rule of Article 27 of the Regulation could be set aside in case of a declaratory action before the courts of the country where the arbitration has its seat raises legitimate concerns with respect to the negative effect of the competence-competence principle, as well as to the rush to courts that it might provoke (on these concerns, see the responses to the Commission’s public consultation, and in particular the position taken by the International Bar Association Arbitration Committee, see also our previous post on these issues).

Those concerns, according to Prof. Hess, are misplaced. In an article posted on www.conflictsoflaw.net , which will soon be also published in the 2010-1 issue of the Cahiers de l’arbitrage/The Paris Journal of International arbitration, Prof. Hess submits that they stem from a “misunderstanding” of his intentions (footnote 32). He also promises that “the implications of the proposal will be rather limited” and that “the present state of affairs will largely remain unchanged”. With due respect, this is wishful thinking. The deletion of the arbitration exception, if adopted, will on the contrary have profound and unpredictable consequences on the law of arbitration in EU Member States.

Prof. Hess’ is quite keen to convince the arbitration community that his proposal is arbitration friendly. The Heidelberg proposal would indeed be thought to offer post-West Tankers an alternative to anti-suit injunctions in order to protect arbitration against torpedo actions (“the starting point of the Heidelberg Report was the West Tankers decision of the ECJ”). Yet, it is doubtful that drafters’ primary intention was to remedy West Tankers, for the Heidelberg Report was drafted and published many months before the sinking by the ECJ of pro-arbitration anti-suit injunctions. At any rate, there are good reasons to believe that the medicine would be worst than the illness it is suppose to cure.

Prof. Hess’s confidence that his proposal is innocuous seems to be based on the assumption that “the New York Convention provides for a uniform law”, and that there is thus “a general assumption that the courts of its contracting parties will apply its provisions equally”. As all courts of the Union should be trusted in an equal manner, “there is no reason to oblige the courts of a contracting party in a regional framework to verify the validity of the agreement individually”. In other words, mutual trust between Members States would command to give the same deference to all courts decisions in the Union, which may be fine in Aldous Huxley’s best of all worlds, but is probably far from the reality of the Union. Prof. Hess himself recognises, by the way, that the distrust towards State intervention in arbitration proceedings has been caused by “the limited degree of uniformity created by the New York Convention which does not entirely eliminate differences between the national jurisdictions”, which acknowledgement is rather difficult to conciliate with the assumption that the New York Convention “provides for a uniform law”.

Be as it may, there should be no serious argument that there is indeed no “general assumption” that courts in Member States apply the New York Convention “equally”. It is indeed not the case. Quite to the contrary, there are considerable differences in the way different jurisdictions apply the New York Convention. This is, first, because the generality of the terms of the New York Convention permit courts to disregard its spirit while formally complying with its literal terms (for example by applying a wide interpretation of the concept of public policy). And, second, because the New York Convention is not a convention of uniform law (like, for example, the Vienna CISG). Its scope is not to replace the national laws on arbitration, but to provide for a minimal threshold for the enforcement of arbitration agreements and foreign arbitral awards. As such, the Convention permits Member States to apply more favourable rules. In short, the Convention’s application and interpretation falls back on national arbitration law (on the nature of the New York Convention and the more-favourable rule see A. Mourre, A propos des articles V et VII de la Convention de New York et de la reconnaissance des sentences annulées dans leur pays d’origine: où va-t’on après les arrêts Termo Rio et Putrabali ? rev. arb. vol. 2008, Iss. 2 pp. 263-298 ). On the contrary, international works such as the successful UNCITRAL Model Law are model uniform instruments with a defined aim to harmonize national arbitration legislations.

It is in any case rather doubtful that, as submitted by Prof. Hess, “the prevalence of the New York Convention would be ensured by Article 71 JR, guaranteeing the New York Convention’s priority as a so-called ‘special convention’”. If it were so, French courts would retain the possibility of enforcing in France, based on article VII of the New York Convention, an award annulled in another Member State, which is the exact contrary of what the Heidelberg report intends to achieve. Article 71 refers to special conventions relating to court jurisdiction and enforcement of judgments in special matters, which arguably does not encompass the New York Convention.

It would therefore be necessary, for the sake of clarity, to add to Article 71 an additional provision stating that: “Nothing in the present Regulation will affect the proper operation of the New York Convention”.

One of the difficulties with the Heidelberg proposals is that it ignores the variety of cultures and legal realities that characterize arbitration. The Heidelberg Report is indeed impregnated by the idea that, if there is a dispute on the validity or enforceability of the arbitration agreement, it is for the courts to decide such dispute upfront. However, such a perspective, which is present in the laws of the United Kingdom and Germany, is totally absent in the French and Swiss perspectives (and Switzerland is now about to adopt the negative effect of Kompetenz-Kompetenz regardless of the seat of the arbitration – see Georg von Segesser/Dorothee Schramm latest post for an update on the legislative works being done in this respect). The way Prof. Hess approaches the problem is telling: the Heidelberg proposal does “not intend to increase satellite or parallel litigation in cases where the arbitration clause is undisputed” [emphasis added]. And he further considers that, would the Heidelberg proposals be adopted, “when the arbitration agreement is undisputed, parties may immediately initiate arbitration proceedings without any recourse to State courts” [emphasis added]. Considering that the parties may start their arbitration if they agree that there is a valid arbitration agreement is hardly an innovative proposition. But the reverse of the medal is interesting: if there is no agreement, courts should step in before the arbitration is started. Of course, from that perspective, the suggested declaratory action fits nicely in the picture.

Prof. Hess concedes that “even if the clause is disputed, Member States shall be free to provide a system of negative competence-competence where the arbitral tribunal decides on the validity of the clause”. This is acknowledged: the Regulation as amended would not invalidate Article 1458 of the French Code of Civil Proceedings. Whilst this might provide some comfort, Prof. Hess is however totally silent on the operation of article 27 of the Regulation in case of a conflict between an action in the merits in breach of the arbitration agreement and an action to put the arbitration in motion before the juge d’appui at the seat of the arbitration (e.g. the French juge d’appui. The question is of course relevant in case of an ad hoc arbitration where the parties did not select an appointing authority).

The easy answer could of course be that the decision of the juge d’appui according to which the arbitration shall proceed is a court decision and is thus able to set aside the lis pendens principle according to the proposed new article 27A. Is that so sure?

The proposed new article 27A is clear: it says that the lis pendens principle will be set aside “if a court of a Member State that is designated as the place of the arbitration in the arbitration agreement is seized for declaratory relief in respect to the existence, the validity, and/or scope of that arbitration agreement”. First, arbitration agreements which do not provide for the seat of the arbitration would be left unprotected. But more importantly, declaratory relief is what it is (unless the Commission intends to change the concept): a declaration, in the present case a declaration that the arbitration agreement is valid or enforceable. A French juge d’appui however takes no such decision. When seized of an action to put the arbitration in motion (and the same applies if the court is seized on the merits), a French court will limit itself to ascertain that the arbitration agreement is not manifestly null and void or inoperable. And this is a very demanding standard for parties who submit that there is such a manifest nullity or inoperability: according to French case law, it can only be so if the alleged nullity or inoperability is evident and does not need any complex analysis of the facts (see recently Cass. 1st Civ. 7 June 2006, Jules Verne c/ Sté ABS, rev. arb. Vol. 2006 Iss. 4, pp. 945 – 953 , note E. Gaillard, JDI Vol. 2006 Iss. 3 pp. 1384, note A. Mourre). Courts have been as far as deciding that the juge d’appui can only declare the arbitration agreement manifestly void or inoperable if there is no possible contrary solution (on this issue, see O. Cachart, Le contrôle de la nullité ou de l’inapplicabilité manifeste de la clause compromissoire, rev. arb. Vol. 2006 Iss. 4, pp. 893 – 908). Otherwise, it is for the arbitral tribunal to decide. There is, in other words, no declaration from the French juge d’appui as to the validity or applicability of the arbitration agreement.

In sum, the proposed new article 27A will not prevent a party having first started merit proceedings in breach of the arbitration agreement, and submitting before the court seized in the merits that the arbitration agreement is manifestly void or inoperative, from relying on the lis pendens rule to impose a stay to the French juge d’appui having to decide that the arbitration agreement is not void or inoperative.

In order for the Heidelberg proposal not to hamper the operation of the negative effect of competenz-competenz, the new Article 27A would have to be drafted as follows:

“A court of a Member State shall stay the proceedings once the defendant contests the jurisdiction of the court with respect to the existence and scope of the arbitration agreement (i) if a court of a Member State that is designated as the place of the arbitration is seized for declaratory relief in respect to the existence, the validity, and/or scope of that arbitration agreement, or (ii) if a judge at the seat of the arbitration has been seized to put the arbitration in motion or has been seized of a difficulty relating to the constitution of the arbitral tribunal, or (iii) if an arbitral tribunal, sitting in or outside the European Union, has been seized of said question” (accordingly, see the IBA position paper, § 25-28).

The issue that then arises is of course that many jurisdictions, like France, take quite a liberal approach as to the applicability of the arbitration agreement to non signatories, with the consequence that the above proposition would lead to generalise in the European Union the French arbitration friendly conception that arbitral tribunals have a priority in assessing their own jurisdiction, including with respect to non signatories. Are Prof. Hess and the Commission ready to endorse that principle? That would certainly be a considerable step forward for the laws on arbitration in Europe.

Another aspect of the lis pendens conundrum regards the enforcement of awards. Presumably, Prof. Hess’ proposed Article 27A would prevent any lis pendens situation between an action in the merits in breach of the arbitration agreement and an enforcement action at the seat of the arbitration. As a matter of fact, in case of a dispute on the award’s validity at the seat of the arbitration where a party would base its argument on the invalidity of the arbitration agreement, the court would be required to decide whether said agreement is indeed valid or enforceable, and its decision would be taken as equivalent to the declaration required by the proposed article 27A. But what if enforcement is sought in another country? The proposed Article 27A would then not protect the award and the Regulation’s automatic stay provision would then have the effect of preventing a party from enforcing the award.

It would therefore be necessary to include in the Regulation a new Article 27B as follows: “Article 27 shall not apply to the court of a Member State requested to enforce an arbitration award” (accordingly, the IBA position paper, § 40).

Finally Article 34 of the Regulation would need to be amended so to avoid the automatic recognition of judgments having disregarded a valid arbitration award or annulled an arbitral award on the basis of local standards. A new article 34A would therefore need to be included, as follows:

“A judgement shall also not be recognised:

a) if it has been rendered in disregard of an arbitration agreement that is valid under the law of the country of recognition;
b) as regards judgments rendered on the validity of an award, if (i) it has not been rendered by the courts of the country where the arbitration has its seat, or (ii) in case of annulment of the award, if it was not made on one of the grounds set out in Article V (1) (a) to (d) of the New York Convention” (accordingly, see the IBA position paper, § 40).

Encore un effort, Messieurs les réformateurs….

The important consequences of the seat require parties to choose the seat carefully. Cases where no seat is chosen by the parties are not uncommon. The English High Court in Shashoua v Sharma [2009] EWHC 957 (Comm) addressed an interesting aspect of this issue: does the selection of a ‘venue’ for arbitration imply choice of the ‘seat’? This decision has been the subject of considerable commentary relating to West Tankers [2009] EUECJ C-185/07, but the ‘seat’ aspects have received relatively less attention.

Shashoua v Sharma concerned a joint venture developing an exhibition and convention centre in India. The joint venture company was incorporated in India, and the law governing the shareholders agreement was Indian law. The shareholders agreement contained an arbitration clause which provided for ICC arbitration and stated that “the venue of the arbitration shall be London, United Kingdom”. A dispute arose between the parties and an ICC tribunal was constituted in London. The tribunal made an interim award against the defendant concerning costs of several procedural applications. The claimants were granted leave to enforce the award by the English court, but the defendant challenged the jurisdiction of the English court and brought proceedings in India to set aside the award. The claimants applied for an anti-suit injunction from the English courts to restrain proceedings in India, and the defendants resisted the application on the ground that proceedings in India were justified because, according to them, the seat of arbitration was in India.

The Court of Appeal in C v D [2007] EWCA Civ 1282 had confirmed that any setting aside of an award is to be only in the courts of the seat of the arbitration, so in Shashoua v Sharma the English court first had to make a determination concerning the seat. The arbitration agreement provided for London as the ‘venue’ of the arbitration but was silent as to the ‘seat’. The Arbitration Act 1996 provides in section 3 that, in the absence of designation by the parties, the arbitral institution or the tribunal (if authorised by the parties), the seat must be determined “having regard to the parties’ agreement and all the relevant circumstances”. Cooke J concluded that the designation of London as venue of the arbitration – in an arbitration clause that provides for arbitration to be conducted in accordance with the ICC Rules – provided sufficient evidence to satisfy the court that London was the juridical seat of arbitration intended by the parties. He did not consider that other “relevant circumstances” were weighty enough to counter this inference. Indeed, he noted that there was “great force” in the argument that if the parties had intended to name a ‘venue’ that was distinct from the ‘seat’, they would have specifically named both.

In reaching the above conclusion, Cooke J rejected the two main arguments made by the defendant. First, the defendant argued that because the lex causae was Indian law, the law of the arbitration agreement must also be Indian law. Cooke J recalled his decision in C v D [2007] EWHC 1541, approved by the Court of Appeal, that the law of the arbitration agreement is much more likely to coincide with lex arbitri rather than lex causae. He considered the defendant’s argument to be circular and accorded little weight to it. Second, the defendant noted that the arbitration agreement provided for each party to bear its own costs of the arbitration – a position which is inconsistent with section 60 of the Arbitration Act 1996. Therefore, the defendant suggested, the parties could not have intended London to be the seat or English law to be the lex arbitri. Cooke J dismissed this argument as “weak” because he considered that the parties would not have contemplated this section of the Act in particular when agreeing to share costs. He also noted that there were provisions in the arbitration agreement which were inconsistent with the Indian Arbitration Act and, therefore, on the defendant’s reasoning, unhelpful to the position that the parties intended India to be the seat.

Two authorities relied on by the defendant were distinguished from the present case. In Dubai Islamic Bank PJSC v Paymentech [2001] 1 LLR 65 there was no designation of a seat or venue at all and Mr Justice Aikens determined the seat having regard to all the relevant circumstances. In Braes of Doune v Alfred McAlpine [2008] EWHC 426 there was a potential conflict between the law of the arbitration agreement and the law of the seat, and Mr Justice Akenhead was persuaded that reference to the ‘seat’ was merely a designation of the place where the arbitration was to be held, where all other references showed the parties agreeing that the seat and the curial law was that of England and Wales.

Cooke J noted that ‘London arbitration’ is a “well-known phenomenon”, and London is often chosen by foreign nationals as the seat of the arbitration with a different lex causae because of the English legislative framework and the reputation of English courts. Accordingly, he concluded:

“When therefore there is an express designation of the arbitration venue as London and no designation of any alternative place as seat, combined with a supranational body of rules [ie ICC] governing the arbitration and no other significant contrary indicia, the inexorable conclusion is, to my mind, that London is the juridical seat and English law the curial law.”

The decision in Shashoua v Sharma provides helpful guidance on the question of how much weight the English courts are prepared to accord to circumstances of a case in determining the seat of the arbitration. Certainly, the designation of a ‘venue’ will be considered as strong evidence of intention that the seat should be in the same jurisdiction. In contrast, the lex causae or the geographical connection of the facts of the case or the parties will not necessarily be regarded as conclusive.

Would the English courts have come to the same conclusion if the venue of the arbitration had been outside England (perhaps an ‘exotic’ jurisdiction not popular with English judges) and the lex causae had been English law? Conveniently, the venue of the arbitration in Shashoua v Sharma (and the seat in C v D) was London!

By Phillip Capper, Dipen Sabharwal, Clare Connellan

It is well accepted that state responsibility arises under international law for denial of justice. This might occur, for example, where a state court abuses its supervisory function over an international arbitration. In the investment treaty context, a denial of justice by host state courts would normally lead to a fairly straight forward breach of the fair and equitable treatment standard or other applicable minimum standards of treatment in the investment treaty. What if, however, the treaty’s arbitration clause only provides jurisdiction for expropriation? Can state intervention in arbitral proceedings also result in expropriation? If so, under what circumstances will this occur? The 30 June 2009 award of the ICSID Tribunal in Saipem S.p.A. v. Bangladesh addresses these questions. In this brief comment, I query whether the tribunal’s reasoning with respect to its finding of expropriation is sound.

The facts are relatively straight forward. A construction contract between Saipem and Petrobangla provided for arbitration under the ICC Rules with Dhaka, Bangladesh as the seat of arbitration. A dispute arose and Saipem began an arbitration. During the arbitration, the ICC Tribunal denied several procedural requests submitted by Petrobangla relating to witness statements and evidence. Petrobangla then challenged the ICC Tribunal’s order in local courts and sought revocation of the ICC Tribunal’s authority under the Bangladeshi Arbitration Act of 1940. A local court in the so-called “Revocation Decision” revoked the authority of the ICC Tribunal on the basis that the ICC Tribunal had conducted the arbitral proceedings improperly. The ICC Tribunal continued proceedings despite the local court decision and eventually rendered an award in Saipem’s favour. Petrobangla then applied to set aside the ICC award. The High Court Division of the Supreme Court of Bangladesh denied the application on the basis that, since the ICC Tribunal’s authority had been revoked, the ICC Award was a nullity in the eye of the law: “A non-existent award can neither be set aside nor can it be enforced.”

Saipem then commenced a claim under the Bangladesh-Italy bilateral investment treaty for the expropriation of its investment (the BIT only provided jurisdiction with respect to expropriation claims). In its pleadings, Saipem stated that its claim:

relates to the expropriation by Bangladesh of (i) its right to arbitration of its disputes with Petrobangla; (ii) the right to payment of the amounts due under the Contract as ascertained in the ICC Award; (iii) the rights arising under the ICC Award, including the right to obtain its recognition and enforcement in Bangladesh and abroad; and therefore (iv) the residual value of its investment in Bangladesh at the time of the ICC Award, consisting of its credits under the Contract. All these matters are facets of the same issue. The focus of the Claimant’s case is that its right to payment under the Contract as ascertained by, and incorporated in, the ICC Award has been expropriated by the unlawful decisions of the Bangladeshi courts that revoked the authority of the ICC arbitrators and declared the ICC Award null and void, thus precluding its enforcement in Bangladesh or elsewhere. The net result of all this was, obviously, to deprive the Claimant of the compensation for [the expropriation of] its investment. (Award, para 102).

The Saipem ICSID Tribunal stated that the “primary issue in the present arbitration is whether the intervention of the courts of Bangladesh remained within the limits of their supervisory jurisdiction and whether that intervention amounted to an expropriation” (para. 116). The Saipem Tribunal found that there was an expropriation based on the following reasons:

- the Bangladeshi court actions resulted in substantially depriving Saipem of the benefit of the ICC Award (para. 129);

- the Supreme Court ruling that the ICC Award is a nullity is “tantamount to a taking of the residual contractual rights arising from the investments as crystallised in the ICC Award” (para. 129);

-given the unique circumstances of the case, “substantial deprivation of Saipem’s ability to enjoy the benefits of the ICC Award is not sufficient to conclude that the Bangladeshi courts’ intervention is tantamount to an expropriation. If this were true, any setting aside of an award could then found a claim for expropriation, even if the setting aside was ordered by the competent state court upon legitimate grounds” (para. 133);

- in order to be expropriatory, the court action must also have been illegal (para. 134);

- the Revocation Decision’s finding that the ICC Tribunal proceedings were improper lacks justification, was grossly unfair and amounts to an abuse of the supervisory jurisdiction over the arbitration process (paras. 149-161);

- the intervention also amounted to a breach of Bangladesh’s obligation to recognize arbitration agreements under Art. II(1) of the New York Convention because it completely frustrated the arbitration proceedings (para. 167); and

- the Supreme Court’s declaration that the ICC Award was “non-existent” constituted the “coup de grace” given to the arbitral process (para. 173).

The Tribunal then addressed a number of subsidiary issues, including whether Saipem was required to exhaust local remedies. With respect to quantum, the ICSID Tribunal found that “the amount awarded by the ICC Award constitutes the best evaluation of the compensation due under the Chorzów Factory principle” given that “the expropriated rights at hand were Saipem’s residual contractual rights under the investment as crystallised in the ICC Award” (para. 202).

I now turn to the heart of the tribunal’s reasoning—that the interference in the arbitration proceedings resulted in the expropriation of Saipem’s investment. Part of the challenge of analyzing the ICSID Tribunal’s reasoning is the Tribunal’s shifting description of the expropriated investment. As noted above, Saipem had argued that the expropriated investment was:

(i) its right to arbitration of its disputes with Petrobangla;

(ii) the right to payment of the amounts due under the Contract as ascertained in the ICC Award;

(iii) the rights arising under the ICC Award, including the right to obtain its recognition and enforcement in Bangladesh and abroad; and

(iv) the residual value of its investment in Bangladesh at the time of the ICC Award, consisting of its credits under the Contract.

All these matters are facets of the same issue.

The Tribunal, for its part, describes the expropriation in three different ways:

1. “The Tribunal considers that the expropriation of the right to arbitrate the dispute in Bangladesh under the ICC Arbitration Rules corresponds to the value of the award rendered without the undue intervention of the court of Bangladesh.” (para. 204)

2. “Such a ruling is tantamount to a taking of the residual contractual rights arising from the investments as crystallized in the ICC award.” (para. 129)

3. “Such actions resulted in substantially depriving Saipem of the benefit of the ICC Award.” (para. 129)

So what exactly was expropriated? The Tribunal appears to refer to three different possibilities: (1) the right to arbitrate the dispute; (2) the residual contract rights arising from the investment as crystallized in the ICC award; and (3) the ICC Award.

With respect to the right to arbitrate, there was no finding by the Bangladeshi courts that the agreement to arbitrate was invalid. Technically, the agreement to arbitrate continued to exist after the Revocation Decision. The Tribunal notes that Saipem admitted that a new ICC arbitration could have been pursued, but given the abusive conduct of the Bangladeshi courts, the Tribunal stated this option was unrealistic and a new ICC tribunal would have been exposed to similar risks (para. 169). Thus, it might be said that the right to arbitrate was rendered so in effectual that it was worthless (expropriated). Interestingly, the tribunal equates the value of the procedural right to arbitrate with the value of the ICC Award. The tribunal appears to have assumed that Saipem would have been unsuccessful in any local court action to enforce its substantive contractual rights, or alternatively that mitigation (proceeding with local court action) was not reasonable in the circumstances.

The second formulation “residual contract rights arising from the investment as crystallized in the ICC award” is awkward. Presumably, the residual contract rights refer to the substantive claims under the contract and also the right to arbitrate. But Bangladeshi executive, legislative or judicial authorities never expropriated the substantive contract rights. Thus, we are left with the right to arbitrate. What about the crystallization of Saipem’s rights? In the ICSID Tribunal’s earlier Decision on Jurisdiction, it noted that:

This said, the rights embodied in the ICC Award were not created by the Award, but arise out of the Contract. The ICC Award crystallized the parties’ rights and obligations under the original contract. It can thus be left open whether the Award itself qualifies as an investment, since the contract rights which are crystallized by the Award constitute an investment within Article 1(1)(c) of the BIT. (para. 127).

Crystallization, however, does not create new rights—the expropriated rights remain those under the Contract. The substantive contract rights were not expropriated, while the right to arbitrate was arguably made worthless.

Finally, what about the “substantial deprivation of Saipem’s ability to enjoy the benefits of the ICC Award”? Is this case really about the expropriation of an arbitral award? Neither the Tribunal’s Decision on Jurisdiction nor the Award expressly states that the ICC Award is an investment. The Tribunal leaves open the question whether an Award is ‘credit for sums of money [...] connected with investments’ for the purposes of Article 1(1)(c) of the BIT. However, it would appear that the Tribunal essentially treated the ICC Award as an investment. With respect to the ICC Award, the Tribunal considered that although in theory the ICC Award could be enforced outside Bangladesh, this was not realistic as Petrobangla has no assets outside Bangladesh (para. 130). The tribunal concludes that “the intervention of the Bangladeshi courts culminating in the declaration of the Supreme Court that the ICC Award was “non-existent” substantially deprived Saipem of its rights and thus qualifies as a taking” (para. 130). The reference to “its rights” is unclear – is the Tribunal referring to the rights under the ICC Award or the underlying contract rights?

The ICSID Tribunal’s reasoning would have been improved by a clearer identification of the expropriated investment. Saipem was deprived of the benefits of the arbitration agreement and the resulting ICC Award. Both the arbitration agreement and the ICC Award would appear to fall within the broad definition of investment in the BIT.

With respect to the tribunal’s reasoning on expropriation, the requirement that the Bangladeshi court action be illegal is well grounded. Where a court engages in normal judicial activities such as adjudicating challenges to awards, forfeiture proceedings, or bankruptcy proceedings, the mere fact that an investor suffers a deprivation as a result of the court action will be insufficient to ground an expropriation claim. In these types of proceedings, some form of deprivation may well be a normal part of the proceedings. Expropriation requires that court proceedings breach due process or other applicable international law standards. And, as I have argued elsewhere (§6.6, Law and Practice of Investment Treaties: Standards of Treatment), unlike for claims of denial of justice, there is no requirement to exhaust local remedies where there is a breach of an independent investment treaty standard, such as expropriation.