As reported yesterday, the recent tragedies in Bangladesh factories have resulted in a major breakthrough with the signing of the Accord on Fire and Building Safety in Bangladesh. Thus far, leading retailers such as H&M, Marks & Spencer, Tesco, Sainsbury’s, Benetton, and Calvin Klein are on board. Notably absent from the list are leading U.S. retailers such as Wal-Mart and Gap.

As noted in my previous post, I have been arguing for years that international arbitration could serve as an important procedural tool for promoting human rights in global supply chains. I applaud the commitment of these retailers to join with leading labor rights groups and enter into a binding agreement to improve working conditions in Bangladesh factories.

I do take issue with the drafting of the arbitration agreement, which clearly could have benefited from a quick review by a lawyer with international arbitration experience. Here’s the relevant language:

Any dispute between the parties to, and arising under, the terms of this Agreement shall first be presented to and decided by the SC [seven-member Steering Committee], which shall decide the dispute by majority vote of the SC within a maximum of 21 days of a petition being filed by one of the parties. Upon request of either party, the decision of the SC may be appealed to a final and binding arbitration process. Any arbitration award shall be enforceable in a court of law of the domicile of the signatory against whom enforcement is sought and shall be subject to The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention), where applicable. The process for binding arbitration, including, but not limited to, the allocation of costs relating to any arbitration and the process for selection of the Arbitrator, shall be governed by the UNCITRAL Model Law on International Commercial Arbitration 1985 (with amendments as adopted in 2006).

Note the peculiarities. There is no governing law clause, no arbitration seat, and no arbitration rules. If a party refuses to arbitrate, there will be no obvious court for the petitioner to file a motion to compel arbitration. Instead the arbitration proceedings are to be governed by the UNCITRAL Model Law on International Commercial Arbitration as a sort of free-floating “anational” governing clause. I suppose that makes the UNCITRAL Model Law the chosen arbitration rules, but I’ve never seen the Model Law function in this fashion. If that’s what the clause does, then any court where an action is brought can compel arbitration and the arbitral panel will be empowered to fill in most of the gaps, including determining the arbitration seat, the governing law, and the scope of its jurisdiction (See Articles 8, 16, 20, 28). Not ideal, but it may do the trick.

Second, the arbitration clause has a peculiar scope. Only disputes “arising under” the Agreement are subject to arbitration, apparently limiting the scope to breach of contract and excluding disputes relating to third-party injuries that relate to the agreement. The scope appears to be further limited by the fact that arbitration is an appellate function only, which may mean that the arbitral tribunal is limited to reviewing legal or factual errors of the Steering Committee.

Third, there is a question as to whether decisions of the Steering Committee are subject to enforcement pursuant to the New York Convention. It appears that only the arbitration awards rendered following an appeal of the Steering Committee decision are subject to such enforcement. This may mean that an appeal is necessary simply to create a binding mechanism for enforcing the parties’ obligations.

My hunch is that despite these errors, if a dispute arises from this agreement the parties will muddle through and find a way to make the dispute resolution clause work. Perhaps in the near term they can clarify these ambiguities when they develop the Implementation Plan mandated by the agreement.

So it’s probably not a pathological arbitration clause, but it could have benefited from a good scrubbing.

The Singapore International Arbitration Centre (“SIAC”) has issued new rules that came into force on April 1, 2013. The rules changes are accompanied by new Practice Notes for cases administered by SIAC under its rules and the UNCITRAL rules that also came into force on the same date. While the changes do not reflect a significant overhaul of the prior version of the institution’s rules, they do contain important changes of which practitioners should be aware.

The 2013 rules are the fifth set of rules issued by SIAC, which promulgated previous versions in 1991, 1997, 2007, and 2010. The SIAC rules are one of several sets of arbitral rules to be updated in the last few years; other recent updates include the CIETAC rules (2012), the ICC rules (2012), the Swiss rules (2012), and the UNCITRAL rules (2010).

SIAC’s new rules are significant in part because of the institution’s substantial and growing caseload involving parties from around the world. According to its website, SIAC registered 235 cases during 2012 (the largest number of cases ever registered in a single year at SIAC) involving parties from 39 jurisdictions and was handling a total of 525 active cases at year’s end. The largest number of cases filed at SIAC in 2012 involved parties from Singapore, China, India, Indonesia, the United States, and Hong Kong. However, SIAC’s caseload extends well beyond the Asia-Pacific region, also including parties from Bermuda, the British Isles, the British Virgin Islands, Cayman Islands, Cyprus, Denmark, France, Germany, Liberia, Mauritius, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Arab Emirates, and the United Kingdom.

The most salient changes to the new rules are detailed below.

Court of Arbitration

The new SIAC rules establish a Court of Arbitration (“Court”) that takes over case administration functions from SIAC’s Board of Directors (“Board”), which will now focus on corporate and business development matters. The Court is comprised of 16 members from jurisdictions around the world with Dr. Michael Pryles serving as the Founder President of the Court.

The responsibilities of the Court under the new rules include rendering decisions on challenges to arbitrators (Rule 13) and jurisdictional challenges (Rule 25). The President of the Court will have responsibility for determining applications for expedited procedures (Rule 5) and appointment of arbitrators (Rules 6-10) and emergency arbitrators (Schedule 1). While the SIAC rules now use terminology similar to that of the ICC International Court of Arbitration, the SIAC Court does not exercise the more involved review function of its ICC counterpart.

Commencement of the Arbitration

The new rules give the SIAC Registrar the power to determine when an arbitration has commenced. Under Rule 3.3, the Registrar is now responsible for determining that a notice of arbitration is in “substantial compliance” with Rule 3.1, which sets out the requirements for notices of arbitration.

Time Limits

Changes in the new SIAC rules to time limits are minimal but important. A new Rule 2.5 has been added that permits the Registrar to “extend or shorten any time limits prescribed under” the rules. In addition, Rule 9 on multi-party appointment of arbitrators has been amended to give parties 28 days or a time period set by the Registrar to make a joint appointment (absent an agreement by the parties) calculated from the date on which the Registrar received the notice of arbitration rather than the date of the filing of the notice of arbitration as had been the standard in the previous version of the rules.

Investment Arbitration

In a nod to the growing number of investment arbitration cases being heard at arbitral institutions other than ICSID, Rule 3.1(d) of the new SIAC rules notes that the notice of arbitration must include a reference to the contract “or other instrument [e.g., investment treaty]” underlying the dispute.

Substitute Arbitrators

Rule 14.1 now allows a substitute arbitrator to be appointed in cases involving the “removal” of an arbitrator. Previously, the rules provided for the appointment of a substitute arbitrator only in the event of a “death” or “resignation” of an arbitrator.

Party Representatives

The new rules loosen the regulation of party representatives by SIAC and arbitral tribunals comprised under it. Whereas the former version of Rule 20 provided that “[a]ny party may be represented by legal practitioners or any other representatives, subject to such proof of authority as the Registrar or the Tribunal may require,” the new version of Rule 20 dispenses with the proof requirement and simply provides that “[a]ny party may be represented by legal practitioners or any other representatives.” This is an important change that reaffirms the fundamental principles of party autonomy and the freedom of a party to choose its own counsel in international arbitral proceedings.

Witness Interviews

In direct recognition of the various approaches taken by different jurisdictions to witness preparation, Rule 22.5 of the new SIAC rules expressly permits witness interviews. The former version of Rule 22.5 stated that “[s]ubject to the mandatory provisions of any applicable law, it shall be proper for any party or its representatives to interview any witness or potential witness prior to his appearance at any hearing.” The new rule has discarded the mandatory law exception and now states that “[i]t shall be permissible for any party or its representatives to interview any witness or potential witness (that may be represented by that party) prior to his appearance at any hearing.” While the new Rule 22.5 would not override applicable mandatory national law prohibiting witness interviews in an international arbitration (which, in any event, would arguably be inconsistent with the New York Convention), it nevertheless reflects the practice and expectations of parties and tribunals in international arbitration.

The change also brings the SIAC rules into line with other leading rules on arbitral procedure that expressly recognize the permissibility of interviewing witnesses prior to hearings, including Rule 25.2 of the Swiss Rules of International Arbitration, which provides that “[i]t is not improper for a party … to interview witnesses, potential witnesses, or expert witnesses,” and Rule 4.3 of the IBA Rules on the Taking of Evidence in International Arbitration, which similarly provides that “[i]t shall not be improper for a Party … to interview its witnesses or potential witnesses and to discuss their prospective testimony with them.”

Additional Powers of Tribunals

Rule 24 of the new SIAC rules broadens the powers of tribunals. The former version of Rule 24(e) provided that “the Tribunal shall have the power to … order the parties to make any property or item available, for inspection in the parties’ presence, by the Tribunal or any expert.” The presence requirement and the qualification that the tribunal or any expert must be able to perform the inspection have been eliminated. Rule 24(e) now broadly provides that “the Tribunal shall have the power to … order the parties to make any property or item available for inspection.”

Rule 24(n) is a completely new provision made in response to the Singapore Court of Appeal’s decision in PT Prima International Development v. Kempinski Hotels SA [2012] SGCA 35. Rule 24(n) provides that “the Tribunal shall have the power to … decide, where appropriate, any issue not expressly or impliedly raised in the submissions filed under Rule 17 [written submissions] provided such issue has been clearly brought to the notice of the other party and that other party has been given adequate opportunity to respond.” This provision thus empowers a tribunal to act in a situation where a new issue has arisen, for example, during document disclosure or at a hearing, so long as there is notice and an opportunity to be heard on the new issue.

Jurisdiction Challenges

Rule 25.1 has been amended to create a two-step procedure for addressing a challenge made to the jurisdiction of SIAC prior to the constitution of a tribunal. Under the new version of the rule, the challenge will go first to the Registrar, who will determine if the objection should be referred to the Court. If the Registrar refers the matter to the Court and the Court determines that “it is prima facie satisfied” that there is a valid arbitration agreement, then the case goes forward without prejudice to the tribunal’s competence to rule on its own jurisdiction. The previous rule had a one-step process, i.e., a Committee of the Board (the predecessor to today’s Court in terms of case-administration matters) decided the matter without having a preliminary decision made by the Registrar.

Further, the term “scope” has been deleted from Rule 25.1. As a result, a party cannot raise an objection (prior to the appointment of the tribunal) that the scope of an arbitration agreement does not cover a claim or counterclaim. Parties were able to do so under the previous version of the rules.

Rule 36.1, which is an entirely new addition to the rules, provides that “the decisions of the President, Court and Registrar with respect to all matters relating to an arbitration shall be conclusive and binding upon the parties and the Tribunal” and that they “shall not be required to provide reasons for such decisions.” Rule 36.2, which is also new, goes on to provide that “the parties shall be taken to have waived any right of appeal or review in respect of any decisions of the President, the Court and the Registrar to any state court or other judicial authority.”

Publication of Awards

Rule 28.10 is another entirely new provision providing that “SIAC may publish any award with the names of the parties and other identifying information redacted.” This provision will prove to be very helpful to practitioners and academics but, at the same time, potentially unappealing for parties.

Post-Award Interest

Under Rule 28.7, tribunals established under the SIAC rules are now permitted to award post-award interest. The earlier version of this rule permitted interest to be awarded “ending not later than the date of the award.” The change makes the SIAC rules consistent with amendments to §§ 12(5) and 20 of Singapore’s International Arbitration Act made in 2012.

Costs

A new addition to Rule 30.2 permits the Registrar to fix separate advances on arbitration costs for claims and counterclaims. In addition, the term “apart from the costs of arbitration” has been deleted in Rule 33, which relates to legal and other costs. This change was made because Rule 31 already permits tribunals to apportion the costs of arbitration among parties, making the term in Rule 33 redundant and unnecessary.

Gary B. Born, Michelle Glassman Bock, and Thomas R. Snider

In Omnipharm Limited v Merial [2013] EWCA Civ 2, the Court of Appeal of England and Wales (CA) upheld a first instance decision to revoke one of Merial’s patents on grounds of insufficiency.  The CA also dismissed Merial’s appeal against an order to pay 40% of Omnipharm’s costs and awarded costs to Merial in relation to applications made for preserving Omnipharm’s security for costs.

The patents in question were EP 0,881,881 (the ‘881) and GB 2,317,564 (the ‘564), which related to “spot‑on” formulations of parasiticide fipronil for protecting animals against ticks and fleas.

Background

Prior to the action Omnipharm had requested acknowledgements of non‑infringement from Merial in relation to four fipronil spot‑on formulations. No acknowledgements were forthcoming and Omnipharm commenced proceedings to revoke the patents on grounds of obviousness and insufficiency and to secure declarations of non‑infringement.

At first instance, the ‘881 was upheld in an amended form, albeit that Merial had admitted in its defence that three of the four formulations did not infringe this patent.

The insufficiency attack against the ‘564 succeeded.  The judge noted that the examples provided in the specification did not disclose any formulation details save that there should be a crystallisation inhibitor, an organic solvent and an organic co‑solvent present.  As there was no teaching as to how these elements are to be selected or combined, the ‘564 was found to lack sufficiency.

Merial was ordered to pay 40% of Omnipharm’s costs.

The Appeal

On appeal, Merial argued that the judge had failed to recognise that there is no requirement for a patent to include specific examples.  The CA upheld the judge’s view that the absence of proper exemplification of the formulation rendered the patent’s teaching inadequate to guide the skilled person to success and provided no assistance beyond the teaching of the prior art and the common general knowledge.

Merial also submitted that the judge’s conclusions were inconsistent with the evidence of formulation experts, arguing that the experts considered that implementing the inventions would be routine.  The CA, however, agreed with the judge’s view that a relevant theory of “dermal distribution” would not form part of the common general knowledge. The CA was satisfied that the judge had a proper evidential basis upon which to find the ‘564 insufficient as there was disagreement between the parties’ experts on key points.

On the issue of costs, Merial argued that the result failed to fairly reflect who had won and lost. On one hand, Omnipharm were successful in receiving declarations for non‑infringement in respect of three formulations.  On the other hand Merial maintained the ‘881 which covered its commercial formulations.  The CA found that the judge had recognised that “giving too much weight to a decision about the overall winner might cause an unjust result” and had, therefore, appreciated the complexities involved when deciding the “overall winner”.  The appeal on costs was dismissed.

Comment

The CA confirmed the sufficiency of the ‘881 because the examples were worked through formulations, yet the ‘564 was held insufficient as it lacked such properly exemplified formulations.  One must therefore be careful to properly exemplify any such formulation in a patent specification and not merely provide lists and ranges without guidance on how to arrive at an end formulation.  This is especially warranted where the result of such a formulation is based on unclear science.

and Oleg Temnikov

I. Bureau Veritas v. Republic of Paraguay

In the recent Further decision on objections to jurisdiction dated October 9, 2012 the tribunal in Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Paraguay (ICSID Case No. ARB/07/9) dismissed BIVAC’s claim based on violation of the fair and equitable standard by reasoning that the dispute relates to mere refusal to pay invoices under a pre-shipment inspection contract and that, in doing so, Paraguay has not acted “in a manner that is qualitatively different from an ordinary contracting party.” The tribunal thus upheld the traditional distinction between mere breach of contract and treaty breach stating that “[s]omething more than mere breach of contract is needed.” (para. 246)

II. The traditional conception of the contract-treaty divide

Under the dogmatic conception of the contract-treaty divide, “the breach by a State of a contract does not as such entail a breach of international law. Something further is required… such as a denial of justice by the courts of the State…” (Comm. 6 to Art. 4 ILC’s Articles on State responsibility; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Decision on annulment, 3 July 2002, para. 95; etc.) In this regard, the BIVAC tribunal noted that it does not exclude the possibility that:

“a substantial breach of a contract could, as such, give rise [sic] a breach of [the FET standard]… [but] even [assuming that such a situation could] arise, the continued unhindered availability of a contractually agreed forum… would be a significant factor imposing an additional hurdle for a claimant to overcome.” (para. 246)

III. Can the investor succeed on a claim for expropriation or breach of the FET standard based on the host State’s refusal to pay?

The authors do not deny the traditional view of the contract-treaty divide. However, we find it more intellectually challenging to argue here for the investor who is faced with such an “additional hurdle”. Can he succeed on a claim of expropriation or breach of the FET standard that is a treaty claim? Moreover, it turns out that under the dogmatic view, a State may escape international responsibility by merely refusing to pay under a contract instead of taking covert measures which fall squarely into the definition of expropriation.

At the outset, we make the clarification that we are dealing here with the scenario in which the underlying contract qualifies as protected investment under the applicable BIT, the BIT does not contain an umbrella clause and the contract contains a forum selection clause referring all disputes to the host State’s courts. (Cf. Siemens A.G. v. the Argentine Republic, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 249)

3.1. The test of puissance publique is irrelevant

Previous tribunals dealing with the question of whether breach of contract may amount to expropriation or breach of the FET standard have applied a test of puissance publique, that is, they have sought to satisfy themselves that the State, in breaching the contract, acted in sovereign capacity (by e.g. enacting a law or decree attempting to expropriate or annul the debt) rather than as mere contracting party. (SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on jurisdiction, 29 January 2004, para. 161; etc.)

In the words of the Consortium RFCC v. Morocco tribunal:

“a State may perform a contract badly, but this will not result in a breach of treaty provisions, unless it be proved that the state… has gone beyond its role as a mere party to the contract, and has exercised the specific functions of a sovereign.” (ICSID Case No. ARB/00/6, Award, 22 December 2003, para. 65 translated in Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 53)

Thus, the BIVAC tribunal held that, in refusing to pay, Paraguay acted as mere contracting party. (para. 246) On the facts, however, it seems strange to qualify the conduct of investigations and the establishment of a special Commission as ordinary commercial acts. (paras. 51, 60)

In any event, international law does not distinguish for the purposes of State responsibility whether the State acted as holder of jure imperii or not. (See Comm. 6 to Art. 4 of the ILC’s Articles on State responsibility) Notably, the tribunal in Bayindir Insaat Turizm Ticaret ve Sanayi A.Ş. v. Pakistan determined that:

“the test of ‘puissance publique’ would be relevant only if Bayindir was relying upon a contractual breach… In the present case, Bayindir… pursues exclusively Treaty Claims. When an investor invokes a breach of a BIT by the host State… the alleged treaty violation is by definition an act of ‘puissance publique’.” (ICSID Case No. ARB/03/29, Decision on jurisdiction, 14 November 2005, para. 183)

Similarly, in Impregilo S.p.A. v. Pakistan, the tribunal determined that:

“Only the State in the exercise of… puissance publique and not as a contracting party, may breach the obligations assumed under the BIT.” (ICSID Case No. ARB/03/3, Decision on jurisdiction, 22 April 2005, para. 260)

However, when making this statement the tribunal was speaking of Impregilo’s claims regarding unforeseen geological conditions which are outside the sovereign activity or even the control of the State. (para. 268; Cf. para. 284)

On the other hand, the case mostly cited in support of the view that “mere non-performance of a contractual obligation is not to be equated with a taking of property” is Waste Management. (Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, para. 174) Close examination or the text of the award shows, however, that the tribunal did not deny that “the outright refusal by a State to honour a money order or similar instrument… may well constitute… an actual expropriation.” (para. 168) The tribunal went on to distinguish the case at hand in that “[t]he question here is not one of final refusal to pay (combined with effective obstruction and denial of legal remedies)…” (para. 176; as to ‘denial of legal remedies’ see infra 3.3.) Rather, the tribunal referred to the Mexican financial crisis which affected payment under the contract. (para. 112)

3.2. The intention of the host State shall be taken into account

Some tribunals have looked to the intention of the State. Thus, the investor’s claim in Waste Management could have succeeded had it shown evidence of “sectoral or local prejudice.” (para. 115; see also, Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 278; Eureko B.V. v. Poland (Netherlands-Poland BIT ad hoc arbitration) Partial Award, 19 August 2005, para. 233) Be that as it may, our main proposition is that, even without providing evidence of the State’s motivation, the investor may overcome the aforesaid jurisdictional hurdle.

3.3. Recourse to local courts is not a pre-condition for treaty claims

Under the dogmatic view as above described, “[a] mere refusal to pay a debt is not an expropriation of property… where remedies exist in respect of such a refusal.” (SGS v. Philippines, para. 161) The problem with this proposition is that, absent contrary stipulation in the BIT, the exhaustion of local remedies is not a prerequisite to an ICSID tribunal’s jurisdiction, rather the idea was to dispose of this requirement. (See Article 26 ICSID Convention)

Therefore, a forum selection clause found in the underlying contract – providing for the jurisdiction of the host State’s courts in contractual matters – shall not obstruct the investor’s treaty claims. (See e.g. Vivendi v. Argentina, para. 101)

Importantly, the Committee in Helnan International Hotels A/S v. Egypt has held:

“[Such a requirement would] do by the back door that which the Convention expressly excludes by the front door… [I]t would empty the development of investment arbitration of much of its force and effect, if, despite a clear intention of States parties not to require the pursuit of local remedies as a pre-condition to arbitration, such a requirement were to be read back in… It would leave the investor only with a complaint of unfair treatment based upon denial of justice.” (ICSID Case No. ARB/05/19, Decision on annulment, 14 June 2010, paras. 47, 53)

Similarly, the tribunal in Alpha Projektholding GmbH v.Ukraine observed:

“Whether Claimant could have enforced its rights in local courts… is not relevant… Claimant chose to seek a remedy through international arbitration instead, as it is entitled to do.” (ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 411)

In this regard, the BIVAC tribunal’s reasoning that “a substantial breach of a contract could constitute a violation of a treaty [so far as there is] preliminary determination” by the competent local court (para. 274) is to be criticized for dismissing the investor’s claim without a second thought.

3.4. The investor’s legitimate expectations include the host State’s obligation to observe contractual obligations

As to the FET standard, in finding no arguable case under it, the BIVAC tribunal noted that “the Claimant has not been able to cite any authority for the proposition that international law imposes any obligation as such on a State to pay moneys owing under a contract.” (para. 270) Such a sweeping statement shall be measured against other decisions in which there is support for the proposition that observance of contracts falls into investor’s legitimate expectations. Thus, the tribunal in Toto Costruzioni Generali S.P.A. v. Lebanon observed that “[l]egitimate expectations may follow from… representations made by the host state, or from its contractual commitments.” (ICSID Case No. ARB/07/12, Award, 7 June 2012, para. 159)

Moreover, the tribunal in Noble Ventures, Inc. v. Romania stated:

“[The FET] standard… can be consider[ed] to be a more general standard which finds its specific application in inter alia the duty… to observe contractual obligations towards the investor.” (ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 182)

Further, the tribunal in Impregilo S.p.A. v. Argentina dismissed Impregilo’s claim based on the FET standard stating that “the existence of legitimate expectations and the existence of contractual rights are two separate issues.” (para. 292) But the sole reason upon which the tribunal based its pronouncement was the test of puissance publique (para. 294) and we already showed above why this reasoning is not persuasive.

IV. The need for reconsideration

The above survey of arbitral practice shows that the existing inconsistency of decisions and the preconception that a host State’s refusal to pay under a contract does not amount to expropriation or breach of the FET standard deserve further clarification.

This will also affect the question of admissibility of claims and stay of proceedings in cases such as SGS Société Générale de Surveillance S.A. v. Pakistan (ICSID Case No. ARB/01/13, Decision on jurisdiction, 6 August 2003), SGS v. Philippines and BIVAC. The preferred approach is that in SGS v. Paraguay where the tribunal held that treaty claims are not co-extensive with contract claims “they are not necessarily disposed of by the four corners of the Contract.” (SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case No. ARB/07/29, Decision on jurisdiction, 12 February 2010, para. 173) The tribunal, therefore, declined to stay proceedings awaiting the decision of the national court, otherwise it would be “at risk of failing to carry out its mandate” (para. 172) which is a ground for annulment under Article 52(1)(b) ICSID Convention.

V. Conclusion

As the tribunal in Robert Azinian, Kenneth Davitian, & Ellen Baca v. The United Mexican States (ICSID Case No. ARB(AF)/97/2, Award, 1 November 1999) noted “[l]abelling is… no substitute for analysis… The egregiousness of any breach is in the eye of the beholder…” (para. 90)

This analysis shows that neither the test of puissance publique, nor the existence of available local remedies is a good reason to dismiss claims for expropriation or breach of the FET standard based on the State’s ‘mere’ refusal to pay. It is hoped that arbitrators will keep an open eye and more importantly, an open mind, when facing such claims in the future.

Inna Uchkunova wishes to thank Oleg Temnikov for the little conversations which have instilled great inspiration for this and other projects.

and José Roberto Oliva Junior and Ricardo Dalmaso Marques, Pinheiro Neto Advogados

One of the segments of the infrastructure sectors in Brazil that have lately triggered the greatest amount of disputes are the power generation, distribution and trading sectors. In effect, there’s little disagreement in Brazil nowadays that, just as with other sectors that could also be mentioned here (such as oil and gas, sanitation, ports, etc.), in the power sector in general the arbitrators and the lawyers defending the interests of the litigants must have expertise in or at least deeper technical knowledge of the matter in controversy, namely as a result of the complex regulations that followed the introduction of the new regulatory framework for the Brazilian power sector through Law No. 10,847 and Law No. 10,848 of 15 March 2004.

And one of the main reasons for this phenomenon consists of the fact that the new Brazilian regulatory framework brought about great novelties and requirements to be observed by the contracting parties, which calls for more technical, speedier and effective resolution of the relevant disputes. More than that, the market’s systemic and integrated structure itself, from power generation to power trading, more than ever requires that arbitrators have ample and deep knowledge of the area, so that the decision on individual contractual disputes will rely upon the foundations and logic behind the system.

More specifically, without disregarding the legal principles that guide the Brazilian legal system, in particular the law on obligations contemplated by the Brazilian Civil Code (Law no. 10,406 of 10 January 2002), the arbitrator to whom a controversy over a power trading agreement, for instance, is submitted, will be expected to have deep knowledge of the logic behind electric power prices in the Brazilian market. The arbitrator must understand, for instance, that (i) the Brazilian generation landscape relies essentially on energy from hydroelectric plants and, therefore, depends on rainfall seasonality and (ii) as a consequence, there is a high level of uncertainty over future short-term power costs which market agents must face and cope with, which is thus a risk confined to the power sector, (iii) long-term power purchase agreements are used by market agents for the very purpose of mitigating such risk, and (iv) claims for revision of the original economic and financial conditions of agreements or allegations of acts of God or force majeure as grounds for exclusion of liability in the course of an agreement should be entertained and decided taking due account of such specific characteristics of the power market.

Notwithstanding, many other specific features of the power sector could be mentioned here, such as that power purchase agreements (PPA) usually back project finance structures –in which context, for instance, the arbitrator should be careful to pursue, preferably, measures that secure strict performance of the agreement by the defaulting party instead of declaring the agreement promptly terminated, thereby avoiding the deleterious cascade effects of an extreme measure.

As a result of all these factors, experience has shown that extrajudicial resolution of contractual disputes between several power market agents is the mechanism that better meets the need for greater expertise or at least greater knowledge of the matter by arbitrators –what has been acknowledged and even corroborated by the Brazilian Legislative Branch, considering that, in the last ten years, several laws have been enacted, revised and/or amended in order to promote the adoption of arbitration for resolution of disputes mainly in infrastructure sectors, such as electricity, energy, sanitation and transportation. It is important to note that recently, in Brazil, during the discussions about the enactment of the new Code of Civil Procedure, there has been a substantial debate related to the inclusion of provisions that will further enable and contribute to the development of arbitration –both domestic and international– within the Brazilian territory.

In the power generation sector, for example, a great diversity of investors, such as private equity, venture capital and pension funds, insist on having arbitration clauses in their agreements. Concession contracts themselves, executed with the government authorities, have contained arbitration clauses for some time –Law No. 8,987/95 of 13 February 1995, which regulates the concessions and permissions for the rendering of public services, was amended by Law No. 11,196/05 of 21 November 2005 to include arbitration as a method for resolving disputes, in its Article 23-A:

“Art 23-A. The concession agreement may provide for the use of private mechanisms for resolving disputes arising from or related to the contract, including arbitration, to be held in Brazil and in Portuguese, under the terms of Law No. 9,307 of 23 September 1996”

remembering that, although viewed with a certain mistrust not so long ago, the current majority stand in Brazil is that a State and its entities may, in fact, elect arbitration as a dispute resolution method for conflicts of an economic nature, i.e. those dealing with disposable property rights and obligations. ¹

In the power distribution sector, concession contracts in general do not mention arbitration as a dispute settlement mechanism because most of them were executed a long time ago. However, power distribution companies, on adhering to the Chamber of Electrical Energy Commercialization (Câmara de Comercialização de Energia Elétrica – CCEE) ² and executing power purchase agreements in the regulated market, are currently obliged to resort to arbitration, according to the CCEE Trading Convention (National Electric Power Agency – ANEEL Normative Resolution 109/2004). ³ In fact, arbitration as a method for resolving disputes involving power trading is not an innovation, since it has emerged together with the creation of the Power Wholesale Market (Mercado Atacadista de Energia Elétrica – MAE) (Provisional Measure – MP 29/2002 of 7 February 2002) and ratified after it was succeeded by CCEE (Law No. 10,848/2004 of 15 March 2004).

More specifically, Law No. 10,848/04, in line with Law No. 10,433/02 of 24 April 2002 (which still governed the Power Wholesale Market (Mercado Atacadista de Energia Elétrica – MAE), provides in Article 4:

“§ 5 The rules for resolving any disputes between members of the CCEE shall be established in the commercialization convention and in their by-laws, which should contain the mechanism and the arbitration agreement, pursuant to Law No. 9,307 of 23 September 1996; § 6 Public companies and mixed capital companies, their subsidiaries or controlled companies, that are holders of concession, permission and authorization are authorized to join CCEE and to adhere to the mechanism and to the arbitration agreement provided for in § 5 of this article”.

This dispute resolution method is valid and mandatory for all CCEE agents (generation, distribution and trading agents, and consumers), and is provided for in the CCEE Trading Convention.

Finally, power trading can be carried out within both the regulated contract environment (Ambiente de Contratação Regulada – ACR) and the non-regulated contract environment (Ambiente de Contratação Livre – ACL). In the first case, the relevant agreements provide for adhesion to the CCEE Trading Convention (and, therefore, mandatorily contain an arbitration clause that must be observed under penalty of fine, in accordance with the Decree No. 5,177/04, the CCEE bylaws, the ANEEL Homologation Resolution 531/2007 and the ANEEL Normative Resolution 274/2007); in the latter case, the dispute resolution method (arbitration or judicial) may be freely chosen by the parties to the agreement, but the option for arbitration has become increasingly frequent for all the reasons stated above.

Notably, the arbitration agreement provided by the CCEE Trading Convention provides for arbitration under the Rules of the FGV Arbitration Chamber in Rio de Janeiro, and, as a relevant peculiarity, expressly requires that the FGV Arbitration Chamber divulges to the entire power sector and all its agents the content of each and every one of the requests for arbitration filed and arbitral awards rendered based on it [the arbitration agreement provided by the CCEE Trading Convention] –aiming at conferring transparency and consistency to the market and the awards to be rendered as to the conflicts that arise out of it. According to the up-to-date case records, as from 2008, more than thirty (30) arbitrations have been commenced and more than ten (10) arbitral awards have been rendered in these circumstances so far.

Hence, arbitration and the power market seem to have built a solid marriage in Brazil, and the arbitrator’s expertise –or at least his profound knowledge of the matter in controversy– has proved to be a decisive factor in the growing number of arbitrations in the power sector. As stated by Ms Solange David, current CCEE Legal Manager,

“[T]he resolution of controversies related to commercialization of electric energy is a doubly challengeable activity. First, due to the special characteristic of this commercialization, which does not represent simply the act of negotiating electric energy’s sale and purchase, but also the accomplishing of several norms, rules and procedures that regulate the activities of the agents acting in the electrical sector. Second, because the themes arising from these controversies may contain technical elements of such a complexity and profundity that require wide and varied knowledge of the sector, besides specialized knowledge regarding certain aspects.” (In: A arbitragem no âmbito da Câmara de Comercialização de Energia Elétrica (CCEE). Revista de Arbitragem e Mediação, São Paulo, v. 05, n. 16, p.33-37, jan./mar. 2008).

In addition, it is worth observing that the number of arbitrations tends to grow proportionally to the growth of the sector itself. The Ten-Year Energy Plan (Plano Decenal de Expansão de Energia – PDE 2020) disclosed by the Energy Research Company (Empresa de Pesquisa Energética – EPE), a planning entity reporting to the Ministry of Mines and Energy, is under public consultation. According to the PDE 2020, in the next 10 years the total power demand in Brazil is expected to increase by more than 60 percent. This increase will call for investments in the order of R$190bn in the generation sector, R$46bn in the transmission sector and another R$90bn in the distribution sector.

As a conclusion, there is no doubt whatsoever that the scenario outlined above –for obvious reasons– has encouraged extrajudicial dispute resolution professionals to enhance their technical and legal expertise in this fascinating and increasingly promising sector in Brazil.

Shanghai’s Recent Reaction

As a recent development of the ongoing conflicts within the China International Economic and Trade Arbitration (CIETAC), the CIETAC Shanghai Sub-Commission has now officially been renamed Shanghai International Economic and Trade Arbitration Commission; it will also use Shanghai International Arbitration Center (“SHIAC”) concurrently as official name. (See official announcement of the SHIAC). On 11 April 2013, SHIAC and Council for the Promotion of International Trade Shanghai jointly held a press conference and unveiling ceremony.

The Shanghai Municipal Government approved the name change, clarifying the status of the new commission. During the ceremony, Mr. Cen Furong, Chairman of CCPIT Shanghai and SHIAC, stated that that this ceremony was not just about changing names but marked the starting point of a new era.

The SHIAC has promulgated new versions of Arbitration Rules and Panel of Arbitrators, which will be effective as of 1 May 2013. For parties wishing to choose the Shanghai International Economic and Trade Arbitration Commission/SHIAC, the following model clauses are proposed:

Model Arbitration Clause I: ‘Any dispute arising from or in connection with this Contract shall be submitted to Shanghai International Economic and Trade Arbitration Commission for arbitration.’
Model Arbitration Clause II: ‘Any dispute arising from or in connection with this Contract shall be submitted to Shanghai International Arbitration Center for arbitration.’

SHIAC started using new logo and website, while the address and contact were kept unchanged. The SHIAC also announces that it accepts cases upon agreement between parties to arbitrate by Shanghai International Economic and Trade Arbitration Commission, SHIAC, and continue to accept cases upon agreements between parties to arbitrate by China International Economic and Trade Arbitration Commission Shanghai Commission/ Shanghai Sub-Commission/Shanghai Branch.

A Chronology of Events

The conflict was triggered by the introduction of the CIETAC Arbitration Rules 2012 (the CIETAC Rules 2012), which was promulgated in January 2012, approved by China Council for the Promotion of International Trade/CCPIT (China Chamber of International Commerce/CCOIC) in February 2012, and came into force on 1 May 2012. On 24 April 2012, the CIETAC made an announcement that ‘the CIETAC and its sub-commissions form an integrated arbitration commission that uses a uniform set of Arbitration Rules and Panel of Arbitrators’, and that ‘as from 1 May 2012, the CIETAC Arbitration Rules (2012) shall uniformly apply to the CIETAC and its sub-commissions.

One of the changes in the CIETAC Rules 2012 is to provide default provision for administration by CIETAC Beijing. In the past, many arbitration clauses did not explicitly state the name of the sub-commission, but simply stated that the CIETAC Rules shall apply. The common practice was that the party commencing proceedings was entitled to choose one of the sub-commissions, and the other party had the right to object, which may cause delays. Article 2(6) of the CIETAC Rules 2012 provides that ‘where the sub-commission/center agreed upon by the parties does not exist, or where the agreement is ambiguous, the Secretariat of CIETAC shall accept the arbitration application and administer the case. In the event of any dispute, a decision shall be made by CIETAC.’ As a result, if the arbitration clause did not explicitly state the name of the sub-commission, even if they have chosen the hearing should take place in Shanghai, for example, the arbitration proceedings will be administered by the CIETAC headquarters in Beijing.

Unsatisfied with the new rules, two of CIETAC’s sub-commissions, namely CIETAC’s Shanghai Sub-Commission (CIETAC Shanghai Sub-commission) and CIETAC’s South China Sub-Commission based in Shenzhen (CIETAC South China Sub-commission) declared themselves as independent arbitral institutions. CIETAC South China Sub-commission stated that it would retain the CIETAC Rules 2005, while CIETAC Shanghai Sub-commission published its own Arbitration Rules, based on the CIETAC rules 2005.

On 1 May 2012, the CIETAC issued an Open Letter to all arbitrators, making the following statements:

• the conduct of setting up its own commission by the sub-commission is null and void;
• the arbitration rules formulated by the sub-commission are null and void;
• the conduct of recruiting arbitrators by the sub-commission is null and void;
• as from 1 May 2012, where parties submit their dispute to a sub-commission of CIETAC for arbitration in accordance with an arbitration clause that provides for arbitration by that sub-commission, the said sub-commission must apply CIETAC Arbitration Rules (2012) to the case; and
• pursuant to the relevant provisions of CIETAC Rules 2012, in cases administered by CIETAC and its sub-commissions, the decisions on jurisdiction and on a party’s standing to participate in the arbitration shall be made by CIETAC or the arbitral tribunals with its authorization; the arbitrators shall be appointed by the Chairman of CIETAC (unless appointed by the parties); the challenge of arbitrators shall be decided by the Chairman of CIETAC; and any document concluding a case, such as an arbitral award, a decision on dismissing a case and a conciliation statement, shall be affixed with the seal of CIETAC.

On 1 August 2012, CIETAC released the Announcement on the Administration of Cases Agreed to be Arbitrated by CIETAC Shanghai Commission and CIETAC South China Commission, suspending CIETAC’s authorization to the CIETAC Shanghai Commission and CIETAC South China Commission for accepting and administering arbitration cases. CIETAC’s Annoucement also states that ‘as from 1 August 2012, where parties have agreed to arbitrate their disputes by the CIETAC Shanghai Commission or the CIETAC South China Commission, the parties shall submit their applications for arbitration to CIETAC and the CIETAC Secretariat shall accept such arbitration applications and administer such cases. Without CIETAC’s authorization, no institutions shall have the right to accept and administer the afore-mentioned arbitration cases’.

In response, CIETAC Shanghai Sub-Commission and CIETAC South China Sub-Commission made a Joint Statement on 4 August 2012, stating that CIETAC Shanghai Sub-Commission and CIETAC South China Sub-Commission are independent arbitration institutions, established following the approvals of Shanghai and Shenzhen Municipal Governments and that their jurisdiction ‘come from the agreement of the parties, rather than the “authorization” from any other institutions’. On 28 August 2012, another Joint Announcement was issued by the two sub-commissions, restating their position. Contrary to the Announcement of the CIETAC, the Joint Announcement declares that where an arbitration agreement refers to the disputes to CIETAC Shanghai or CIETAC South China, disputes shall be submitted to CIETAC Shanghai Sub-Commission or CIETAC South China Sub-Commission respectively.

On 22 October 2012, the South China Sub-commission changed its name to the South China International Economic and Trade Arbitration Commission (SCIA), which is also known as the Shenzhen Court of International Arbitration (SCIA). SCIA starts to adopt its own Arbitration Rules and Panel of Arbitrators as from 1 December 2012. The following model clauses are proposed on SCIA’s website, proposing the parties to choose specifically SCIA, SCIA, or SCIA under UNCITRAL Arbitration Rules.

Model Arbitration Clause 1: Any dispute arising from or in connection with this contract shall be submitted to South China International Economic and Trade Arbitration Commission (SCIA) for arbitration.

Model Arbitration Clause 2: Any dispute arising from or in connection with this contract shall be submitted to Shenzhen Court of International Arbitration (SCIA) for arbitration.

Model Arbitration Clause 3: Any dispute arising from or in connection with this contract shall be submitted to South China International Economic and Trade Arbitration Commission (SCIA) for arbitration which shall be conducted in accordance with the UNCITRAL Arbitration Rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon the parties.

On 31 December 2012, CIETAC issued an Announcement On Issues Concerning CIETAC Shanghai Sub-Commission and CIETAC South China Sub-Commission, announcing the following decisions:

• The conduct of changing its name and its institutional status of a sub-commission of CIETAC by the CIETAC South China Sub-Commission without lawful procedure is null and void by law. The arbitration rules and panel of arbitrators made by the CIETAC South China Sub-Commission in the name of South China International Economic and Trade Arbitration Commission without authorization are null and void by law.
• The CIETAC Shanghai Sub-Commission and the CIETAC South China Sub-Commission are hereby forbidden to continue in any way and any form the use of the name, brand and relevant logo of “CIETAC”, either in Chinese or English, and to conduct any further arbitration activities in the names of CIETAC Shanghai sub-commission and CIETAC South China Sub-Commission.
• Authorization to the CIETAC Shanghai Sub-Commission and the CIETAC South China Sub-Commission for accepting and administering arbitration cases is hereby terminated.
• Where parties have agreed to arbitrate their disputes by the CIETAC Shanghai Sub-Commission or the CIETAC South China Sub-Commission, the parties shall submit their requests for arbitration to CIETAC and the CIETAC Secretariat shall accept such requests and administer such cases. Without CIETAC’s authorization, no institutions shall have the right to accept or administer the afore-mentioned arbitration cases.
• When the CIETAC Secretariat accepts and administers the above-mentioned cases, unless otherwise agreed by the parties, for cases agreed to be arbitrated by the CIETAC Shanghai Sub-Commission, the place of arbitration and the place of oral hearing shall be Shanghai; for cases agreed to be arbitrated by the CIETAC South China Sub-Commission, the place of arbitration and the place of oral hearing shall be Shenzhen.
• Cases accepted and administered by the CIETAC Shanghai Sub-Commission and the CIETAC South China Sub-Commission before 1 August 2012 may be concluded in accordance with the CIETAC Arbitration Rules and under the uniform leadership of CIETAC in respect of case administration as provided in the Rules.
• Separate arrangement will be made with regard to the business operation of CIETAC’s branch offices in Shenzhen and Shanghai.

Practical Implications for Parties

In light of the uncertainty caused by CIETAC’s internal disputes, parties wishing to choose CIETAC arbitration need to act with extreme caution.

In case of negotiating new arbitration clauses, if parties wish to submit the disputes to arbitration administered by CIETAC, it will be prudent for them to stipulate explicitly CIETAC Beijing as the arbitration institution. With the arbitration administered by CIETAC Beijing, parties may still choose Shanghai or Shenzhen as the place of arbitration and venue of oral hearing. If parties wish to submit the disputes to another arbitration institution, they need to specify the name of the arbitration institution without ambiguity.

In case of existing arbitration clauses, which provide for arbitration administered by CIETAC Shanghai Sub-Commission or CIETAC South China Sub-commission, parties would be prudent to revise the clause to refer the dispute to CIETAC Beijing, or to refer to another arbitration institution without ambiguity.

Note that in Shanghai, apart from the SHIAC (which is now separated from the CIETAC), there is another independent arbitration institution named Shanghai Arbitration Commission. In Shenzhen, apart from the SCIA (which is now separated from the CIETAC), there is also an independent body named Shenzhen Arbitration Commission. Caveat! Where an arbitration agreement provides for arbitration to be submitted with an arbitration institution at a fixed locality, and there are two or more arbitration institutions at that locality, the parties may agree on the selection of one of the arbitration institutions; where the parties concerned are unable to agree on the choice of the arbitration institution, the arbitration agreement shall be invalid. (Article 6 of the Interpretation of SPC on Certain Issues Relating to the Application of the Arbitration Law of the People’s Republic of China 2006).

2.1.                        Case law examples

In SOABI v Republic of Senegal (ARB/82/1) there was a contract between the investor and the Government of Senegal. In para 5.02 of the award the Tribunal directed itself straight to Senegalese law, i.e. host State law, without any consideration of international law. The Tribunal explicitly recognised in its reasoning two connecting factors of the investment to Senegal and its national law – the project was located in the country and Senegalese parties were involved as well. The award may be interpreted as also providing support for the following conclusions:

• Where there is a nexus, especially a contractual one, between the investor and the host State, the relationship and the dispute arising out of it should be exclusively within the realm of national law of the host State.
• Even if there is a choice of law in the nexus instrument, the Tribunal may make use of private international law technique as to determine proper applicable law, which the case seems to demonstrate by the use of connecting factors to direct the project exclusively within the scope of domestic law.

In Autopista Concesionada de Venezuela v Bolivarian Republic of Venezuela (ARB/00/5) the Tribunal had to make an assessment of the applicability of international law in a dispute arising out of a concession agreement. It was acknowledged that this situation calls for a different treatment from the one under international law instruments like BITs. The nature of the dispute was contractual and the relationship was recognised as governed by domestic Venezuelan law. The Tribunal reiterated that international law should have corrective and supplementary role but not beyond this extent for that particular dispute (para 102 of the award). However, under Venezuelan domestic law, international law should have primacy over contradicting national legislation. Hence, the position of the Tribunal should not be surprising since the acknowledged role of international law in the dispute is predetermined by the general place of international law within the system of host State law – international law may in fact correct contradicting domestic law. The Tribunal refused delving into greater importance of international law in this scenario and treated the disputed as a mere contractual claim applying the status of Venezuelan law, including incorporated international law.

3                Scenario 3: basis of the investor’s claim is a public international law instrument

3.1.                        Scenario 3 bears a stark difference to Scenarios 2 and 3. If the investor relies on rights granted by virtue of a bilateral or multilateral international law instrument, then the applicable rules should be evinced from the bulk of international law. The precise scope of this bulk may be determined by reference to the Statute of the International Court of Justice, Article 38, which lays down the array of source of international law. The primary rules governing the relationship between the parties to the dispute would be, however, the particular BIT or MIT (which does not rule out the applicability of customary international law). As subsidiary and complementary rules the tribunal should apply other treaties or customary international law and, if necessary, make use of judicial decisions and doctrine. Furthermore, as the investor seeks to trigger the liability of the State for internationally wrongful acts, this calls for the application of the rules on state responsibility which are rules of public international law (e.g. International Law Commission’s Draft Articles on State Responsibility, and relevant case law).

Would there be, however, any relevance of national law of host State in this scenario?

As a matter of fact, the dispute arises out of circumstances primarily related to host State. The rights acquired by the investor are usually those stemming from relations situated within the host State. No matter whether the investor has obtained licenses, permits, authorizations, etc. from the authorities of the host State, or contracted with local natural or corporate persons, or acquired real estate rights, corporate membership, etc., all these rights of the investor, and the respective duties of the host State or third local parties are, usually, based on host State’s national law. However, a line of distinction should be drawn. The provisions of national law may be relevant as governing the outlined array of rights and duties. But the purpose of the proceedings brought before the arbitral tribunal constituted under ICSID Convention due to a BIT/MIT claim is to assess the compatibility of State’s conduct as a fact against the standards required by particular international law instrument(s). Therefore national law would not be, properly speaking, applicable law. The role of national law would be as a fact that the tribunal should treat and take into account in its consideration and application of the appropriate law. To a great extent, this role resembles the relevance of foreign law in municipal court proceedings or municipal law before international tribunals such as International Court of Justice, European Court of Human Rights, etc.

3.2.                        Case law examples

In El Paso Energy International v Argentine Republic (ARB/03/15) the Tribunal made an extensive pronouncement on the interplay between BIT application, international law and national law. It agreed with other Tribunals, for instance in Asian Agricultural Products v Sri Lanka (ARB/87/3), that the international law instrument granting rights to the investor, serving as basis of its claim, is the lex specialis where the determination of applicable law should start from (para 24 of the award). The application of a public international law instrument naturally calls for the application of all relevant rules of international law (e.g. on interpretation of treaties, liability for breach of treaties, etc.), thus rendering international law primary and having a leading role. Therefore, a preliminary issue that should be dealt with prior to establishing a breach of international law is to what extent State’s acts and omissions are compatible with the international standards. The nature of these acts and omissions is governed by national law and relations between the investor and the State, and any third parties, are governed by the domestic law of the host State. This is why the Tribunal concluded that:

“The fact that the BIT and international law govern the issue of Argentina’s responsibility for violation of the treaty does not exclude that the domestic law of Argentina has a role to play too. The Tribunal agrees with the Claimant that this role is to inform the content of those commitments made by Argentina to Claimant that the latter alleges to have been violated. Thus, in order to establish which rights have been recognised by Argentina to the Claimant as a foreign investor, resort will have to be had to Argentina’s law. However, whether a modification or cancellation of such rights, even if legally valid under Argentina’s law, constitutes a violation of a protection guaranteed by the BIT is a matter to be decided solely on the basis of the BIT itself and the other applicable rules of international law.” (para 135 of the award)

Similarly in Azurix Corp v Argentine Republic (ARB/30/3) the Tribunal determined that the Argentinean law should necessarily be dealt with in the decision making process for the purposes of inquiring into host State’s liability. However, the treaty basis of the claims did not allow further utilization of national law (para 67 of the award).

Is it possible that in this scenario host State law may still function as law? The relevant criterion is whether a tribunal should give rise to the legal consequences that a domestic rule of law engenders or would use the rule to be measured against a standard in an international law instrument and thus trigger the consequences envisioned in the international instrument. If such an international law instrument makes a reference to a national rule, a tribunal should treat this reference like the function of conflict rules in private international law. The international standard directs to giving rise of a domestic law rule and thus it renders it applicable – not relevant as a fact but applicable as law. This analysis seems to find support in Asian Agricultural Products v Sri Lanka where (paras 21 and 24 of the award) the Tribunal reasoned that a BIT may incorporate domestic law rules and thus render them source of law  supplementary to international law. A BIT, as in that case, may refer to certain rules or standards in host State law, which the tribunal would have to apply directly as the international law instrument requires so.

Conclusion

Article 42 (1) of ICSID Convention should be perceived, as demonstrated by this analysis, as a general source of powers of the arbitral tribunal regarding the pool of rules from which the tribunal may select the particular rules appropriate for application in the concrete factual situation. Which rules would be proper for application is thus premised on the factual circumstances (and the cause of action) and are not a priori determined by the ambit of the provision of the Convention. The case law examples demonstrate a differentiated approach of Tribunals and one of the criteria for such diversity may exactly be the cause of action relied upon by the investor. Neither domestic law nor international law provide for conclusive result as to proper applicable law determination. It is important to note the distinction between Scenarios 1 and 2, on one hand, and Scenario 3, on the other. If international law is applied on equal basis with national law in Scenarios 1 and 2, this would in fact “internationalise” investor-State relations, especially contracts, while such relations by their nature are primarily absorbed into a domestic law system. The true “internationalisation” is in Scenario 3, which is engendered by the treaty basis of the claim and the basis of the protected rights.

However, the actual need to amend the Brazilian Arbitration Law is under debate. Rumors in the corners of the Brazilian law firms suggest that the establishment of the Committee and the amendment of the Law have a political substrate, rather than a real reason based on the evolution of the judicial system in Brazil and the application of the Law. Arbitration practitioners suggest that there is no such necessity to amend the Arbitration Law, which since its entry into force has been a real success. The Law was the object of a constitutionality challenge in front of the Brazilian Supreme Court (Supremo Tribunal Federal) in 1996. On 12 December 2001, the Supreme Court ruled that the Arbitration Law does not breach the constitutional principle of free access to justice, since the parties voluntarily agree to submit a dispute to arbitration and, moreover, they preserve the right to challenge the arbitral award in the state courts.

The suggested amendments of the Arbitration Law concern, among others, the submission to arbitration of corporate disputes, the participation of public entities in arbitration and the arbitration of consumer disputes. In addition, the Committee plans to deal with mediation, which has no regulation under the Brazilian law. As to the arbitration of corporate disputes, the Committee will have to discuss whether there is a need for the Brazilian Arbitration Law to address the issue as to whether minority shareholders are obliged or not to comply with the arbitration clause contained in the corporate statute (articles of association). Salomão also mentioned the possibility to tackle the question of the competent organ to grant provisional measures. According to the president of the Committee, although the judiciary ruled that the courts are competent to grant provisional measures before the commencement of arbitration, there are still many issues to be clarified.

The Committee, consisting of nineteen members, judges, lawyers and academics, will present at the end of the month a “diagnosis” of the Brazilian Arbitration Law and arbitration in Brazil, in general, which shall deal with the following matters: public administration and public entities, corporate disputes, consumer law, labour law, international arbitration, provisional measures, third-party arbitration, appointment of arbitrators, evidence in arbitration, recognition and enforcement of foreign arbitral awards, competence-competence issues. The Committee also suggested the implementation of a web page to accompany the works of the Committee and to ensure the participation of those interested in the amendment process.

This week 170 garment workers in Bangladesh died after the Rana Plaza building collapsed. A few months ago 112 garment workers in Bangladesh died after the Tazreen Fashions garment factory was destroyed by fire. Both tragedies were the result of inadequate fire and safety standards.

These tragedies could not have come at a worst time for major retailers that purchase garments from these factories. For months the International Labor Rights Forum and other labor rights groups have encouraged garment retailers to sign a binding agreement that would create a system of rigorous inspections, transparency and oversight. Thus far, they have had limited success, with only the parent company of Tommy Hilfiger and Calvin Klein brands and one German retailer signing on.

The agreement, the Bangladesh Fire and Building Safety Agreement, would establish a nine-member Oversight Committee, with four members appointed by Bangladesh and international labor groups, four members appointed by business representatives chosen by companies sourcing from Bangladesh, and one member mutually chosen by the other eight. Corporations that sign on to the MOU would help fund the costs of improving fire and safety standards in the factories where they source their supplies. As reported by the New York Times here,

The companies would bear the costs of improvements through higher prices for clothes and grants to workers who miss workdays because of renovations. The cost of the inspection program to each company would vary by the firm’s size, but it would be capped at $500,000 a year…. Labor groups say a roughly 3 percent annual increase in prices paid to the factories would be sufficient to make the needed improvements.

A key provision in the Agreement is binding arbitration. Specifically, the Agreement requires the Oversight Committee to develop a plan for the implementation and administration of the Bangladesh fire and safety program that includes “[a] process for binding and legally enforceable arbitration of disputes between parties to this MOU with respect to this MOU and the program….”

In other words, labor unions and participating corporations would sign a binding agreement to improve the working conditions of Bangladeshi garment workers, and any corporation that failed to comply with its funding or other obligations under the MOU could be the subject to international arbitration enforceable under the New York Convention in that corporation’s home country.

I have long advocated the use of international arbitration to address human rights concerns such as core labor rights. As I argued in “Arbitrating Human Rights“:

“[O]ne can anticipate that many corporations will increasingly include core human rights and environmental standards as contractual covenants in their international agreements. These contracts will also include grievance procedures, including arbitration, as a com­mon mechanism for dispute resolution. Serious noncompliance with substantive contractual obligations will trigger invocation of the dispute resolution provisions. Thus, by contracting for human rights as a substantive obligation and contracting for arbitration as a procedural guarantee, corporations throughout the globe can establish a firm basis for the promotion of human rights within their spheres of influence.”

In order to incentivize corporations that source their garments from Bangladesh, large wholesale and institutional buyers and IP holders, such as colleges and universities who purchase garments or license trademarks, can require these corporations to sign reasonable labor agreements such as the Bangladesh Fire and Building Safety Agreement as a condition in their agreements. In other words, upstream contracts can require downstream supply chain labor rights.

Tragic events like the death of 170 and 112 garment workers—a death toll that is over ninety times greater than that of the Boston marathon bombings—should be sufficient incentive to sign MOUs like that proposed in Bangladesh to improve the working conditions of garment workers who earn just over $1 a day.

and Thomas Baconin, Orange,  trainee in International Expertise & Conflict Resolution, Litigation, CSR & Real Estate

On the 15th of April in the prestigious venue of the Hotel de Ville in Paris, the non-profit organization Paris Place d’Arbitrage introduced its new ad hoc “Paris Arbitration Rules”, in front of 200 law practitioners from the arbitration community. These ad hoc rules present themselves as an alternative to the UNCITRAL rules, often considered as too heavy and as such, not satisfactory for the Parties. In light of the ever growing dissatisfaction of arbitration users with the cost and length of international arbitration proceedings, this initiative should be welcomed by the arbitration community as a positive effort to address the concerns of arbitration users.

The past few years have seen other major international arbitration institutions seeking to answer the needs of the users for faster and more efficient arbitration proceedings by introducing new sets of rules, sometimes as an alternative to their already existing ones. This new generation of rules tries to address the needs of the users, by rethinking the role of the actors of the procedure, giving more control over the procedure either to the institution, the tribunal or the Parties, fixing time limits, limiting submissions or allowing for emergency arbitrators: in its 2012 Rules, the ICC included the possibility for “emergency arbitrators”, a duty of efficiency and of disclosure of availability for the arbitrators as well as a duty of collaboration for the Parties; in 2012, the Swiss Rules also included a duty of efficiency for the Parties and amended its procedures for expedited arbitrations by focusing on the limited number of submissions; similarly, SIAC included in its 2013 Rules provisions for “expedited procedures”, while in 2010 the SCC drafted specific “expedited rules” – all expedited procedures being however designed for “small” claims.

If this diversification of rules reflects the undeniable success of international arbitration, it might also suggest that arbitration has become a product of mass consumption, further away from its original purpose of providing the Parties with a flexible, tailor-made dispute resolution method.

With the Paris Arbitration Rules, Paris Place d’Arbitrage takes a new turn, focused rather on the lightness of the Rules than the speed of the process. These Rules present themselves as a short set of rules addressed essentially to experienced international arbitration users, therefore relying on party autonomy and the trust in arbitrators empowered with a wide measure of discretion and authority. With efficiency in their center, the Paris Rules introduce a number of novel provisions.

Firstly, the Paris Rules require the Parties to evacuate from the debate all issues relative to the jurisdiction of the tribunal and the admissibility of the claim as early in the procedure as possible. Thus, the Parties are required to submit such objections in their Reply (articles 6.3, 6.4, and 8.2). Comparatively, neither institutional rules (ICC, SCC, SIAC or AAA) nor the UNCITRAL Rules segment the procedure as the Paris Arbitration Rules do.

By segmenting the proceedings, the Paris Rules prevent an ill-intentioned party from slowing down the process by submitting late objections and encourage the Parties to prepare their case upstream. The effect of provisions segmenting the procedure should be interpreted as a practical solution to a better organized resolution of the dispute, but also as a pedagogical tool towards efficiency as a common interest – if not, the premise of a new obligation to front load arguments [ie. as in the French doctrine of “concentration des moyens”] in international arbitration.

Secondly, the Paris Rules rely strongly on the authority of the Tribunal, more strongly it may seem, than any rule so far. In recent years, international Arbitration users have showed their concern with the lack of transparency when choosing arbitrators which has been weakening the already fragile trust between the average arbitration user and the well-established arbitrators. Hence, similarly to other recent Rules (ICC 2012, article 11.3; AAA 2009, article 7; SCC 2010 for expedited arbitration, article 14.3; or UNCITRAL 2010, article 11), the Paris Rules provide for a continuous duty of disclosure on the part of the arbitrators, one of the essential guarantees of the legitimacy of the arbitral process, especially in ad hoc proceedings where there is no institution overseeing it.

It is indeed the balance of powers between the Parties and the Arbitrators around which the Paris Rules are built, that make the originality of the Paris Rules. As they neither impose terms of references, nor do they set a stringent time limit for rendering an award (18 months), it is understandable that when the representatives of Paris Place d’Arbitrage underlined on April 15th that the Paris Rules were addressed to “refined” or “experienced” Parties, one should understand “to Parties able to remain in control of the procedure”.

These experienced Parties will need to keep in mind the provisions of article 1.2 which make the rules fully amendable, and always remember their ability – if not their obligation – to remain the masters of their fate. The Paris Rules expressly rely on the Parties ‘common purpose to reach an efficient and time effective solution while their very first article imposes on the Parties an express duty of cooperation – a goal which can only be achieved by shaping the dispute further upstream from the arbitration stage, by the claimant specifically.

As reminded on April 15th, the Rules suggest that Parties are invited to not simply rely on the “bare” rules, but use them to their advantage, and improve them according to their needs. This means, that Parties will necessarily have to address a number of questions prior to leaving them in the hands of the arbitrator(s).

In order to reach the objective of efficiency set in the Paris Rules, it would certainly be advisable for the Parties, like with any other set of Rules, to include an escalation clause in order to reach the contentious/arbitral stage with a precise definition of the then (hopefully) purely legal dispute; also, to include in the arbitration clause a number of preventive requirements such as the requirement to set up terms of references, the requirement from the arbitrator(s) to submit a statement of availability. Finally, efficiency of an arbitration procedure being contingent on the Tribunal’s responsiveness, and since the Paris Rules provide for a three members tribunal, Parties should consider opting for a sole arbitrator.

Notwithstanding the Appointing Authority’s power to remove or replace arbitrators when they fail to render a timely decision, trust in the Tribunal remains an essential condition of the success of the Paris Rules. The Paris Rules go so far as to allow truncated tribunals to proceed with the rendering of the award if an arbitrator from a panel of three were to fail to participate in the Tribunal’s deliberation (article 7.5); therefore avoiding the responsibility of building a trustful relationship with the arbitrator(s) would be a leap of faith no Party should be ready to make.

Thirdly, by simplifying the discovery process and limiting the content of the submissions of the Parties, the Paris Rules seem to characterize their duty of collaboration and efficiency. With the Paris Rules, the discovery process excludes metadata from the scope of discovery (article 6.8.h) and require that the submissions of the Parties be both “concise” and “focused” (article 6.7). Although the arbitrators are left with the discretion to appreciate this requirement, these provisions set a behavioral standard and a strong pedagogical message.

Fourthly, in order to add to the efficiency of the process, the Paris Rules allow for interim or emergency arbitrators, and for tribunals to grant ex parte relief. The growing trend for emergency arbitrators responds to the difficulties that may arise prior to the appointment of the Tribunal. Thus, the Paris Rules appear much more responsive to situations of emergency than the UNCITRAL Rules, therefore providing for a substantial innovation in the arbitration market. They appear to be the only ad hoc rules which provide with solutions usually found in institutional rules, making them competitive to institutional rules as well.

If one word were to characterize the Paris Rules, it would be the word “Responsibility”: these Rules should not be considered as solely addressed to so-called “refined” Parties, but equally, to “refined” Arbitrators.