International Arbitration

Transcription

1 CHAPTER 1 International Arbitration 1.01 Introduction A 2013 Report on the Future of Commercial Arbitration 1 reflects dissatisfaction with arbitration as a means of dispute resolution, and declining use of arbitration between 1997 (the benchmark year) and Some of the criticisms of the process lying behind this trend include risk and uncertainty of arbitration, judicialization, loss of speed and efficiency, and concern with the quality of arbitrators. The Report does not disaggregate data between domestic U.S. commercial arbitration and international commercial arbitration. Whether comparable concerns might prevail in the international context, the countervailing considerations that potential users must weigh are different. If two U.S. parties do not agree to arbitrate their disputes, the default option is litigation in the U.S. courts. Similarly for two French parties in the French courts, two Brazilian parties in the Brazilian courts, and two Indian parties in the Indian courts. In the case of a cross-border transaction, however, between a Chinese manufacturer and a European customer, in the absence of an agreement to arbitrate, the default option may leave one party with no choice but to litigate in the home courts of its counter-party. Depending on the jurisdiction involved, for other reasons as well, this can be an unappealing option. So when criticisms are leveled at the international arbitration system that it is too slow and too expensive, that the process has come to look too much like traditional litigation (and particularly litigation as practiced in the U.S. courts), and somewhat inconsistently that it provides limited rights of appeal, all of which have a ring of authenticity one must consider the alternative to international arbitration. In the House of Commons on November 11, 1947, Winston Churchill said: No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time. A similar characterization can be made of international arbitration. Despite its flaws and weak points and recognizing that there is room for improvement, in most instances international arbitration remains the preferable alternative to resolve cross-border 1 Stipanowich, A Report on the Future of Commercial Arbitration: Challenges and Opportunities, (presented at the October 2013 annual meeting of the College of Commercial Arbitrators). 1-1

2 disputes. If the General Counsel of a company goes into the arbitration process hoping for a quick and cheap resolution (and putting these attributes above others), she may well be disappointed. If the General Counsel instead focuses on different features of the system, she will have the focus right. What then are the positive, driving features that lead sophisticated parties to agree to arbitrate their disputes? There are three primary reasons to arbitrate, and several subsidiary reasons. First and foremost, international arbitration provides the parties with a neutral forum in which to resolve their disputes. A U.S. company in a contract to build a power plant in Venezuela has every reason to prefer an arbitral forum to the courts of Venezuela for resolution of disputes that may arise. Likewise for the Venezuelan customer with respect to courts in the U.S., although the concerns of the Venezuelan customer should be substantially less acute. The Indian courts are notorious for their inability to bring cases to conclusion in any type of reasonable time frame. And Chinese courts enjoy a modest reputation for treating non-chinese companies fairly. The independence and fairness of courts in North America and Europe are for the most part recognized, although the U.S. jury system is not free from (well-deserved) criticism, but the perception of counterparties on questions of the independence and fairness of those courts may not be as rosy as the views of North American and European companies of their home courts. The natural way to balance the conflicting interests and perceptions and to provide for a forum that is, and equally important is perceived to be, neutral is to agree to arbitrate. Neutrality is achieved in the international context through a number of protections and guarantees. Under most arbitration regimes, tribunal members must be independent and impartial and must remain independent and impartial throughout the proceedings. Arbitral institutions that administer arbitration proceedings enforce the independence and impartiality requirements when arbitrators are selected to constitute a tribunal or when a sitting arbitrator is challenged during the procedure for lack of independence and impartiality. In cases where there are no administering institutions, public courts at the seat of the arbitration may intervene upon application to assure a proceeding free from bias. And at the conclusion of the arbitration, the losing party may seek to annul the award (or to resist enforcement of the award) on the basis that an arbitrator was not independent or impartial. Independence and impartiality can be further enhanced by application of the neutral nationality rule, which is found in most bodies of international arbitration rules. The neutral nationality rule requires that the President or the Sole Arbitrator, as the case may be, not have the nationality of any of the parties to the dispute, unless the parties agree otherwise. In many cases, the parties do in fact waive the neutral nationality rule. Good international arbitrators will not be swayed because they have the same nationality as one of the parties to the case. Nonetheless, in certain jurisdictions, there may be cause for concern, and the neutral-nationality rule provides one more level of protection, and comfort, to assure a neutral tribunal. Other bells and whistles can further contribute to the actual and the perceived neutrality of the arbitral process. For example, the parties may agree to a seat of arbitration, which has no connection to any of the parties. And since the parties may select the law that will be applicable to the merits of

3 the dispute, they may, if they wish, choose a body of law that is not related to any party to the dispute. Thus, for example, French and Argentine parties could agree to arbitrate in Geneva and to apply New York law to the merits of the dispute. Second, parties may select experienced decision-makers who are well suited to decide their case. In the public courts, a party commences litigation and is assigned a judge, often on a random basis. In the international arbitration context, the parties have considerable freedom to determine the specific individuals who will decide their case. A common structure is for each party (or side) to nominate an arbitrator and then for the two party-appointed arbitrators to nominate the President of the tribunal. Thus, for example in the arbitration rules of the International Chamber of Commerce (ICC), in the case of a three-member tribunal, each party nominates one arbitrator, and the ICC Court of Arbitration appoints the President (unless the parties specify an alternative procedure for appointing the President). Often the parties in fact specify that the two party-appointed arbitrators will attempt to nominate jointly the President, failing which the ICC Court of Arbitration will, as a default procedure, make the appointment. While these issues will be discussed at greater length below, the point for present purposes is that the parties have an opportunity in international arbitration to play an important role in picking the individuals who will decide their case. They can therefore have in mind people with experience and other special qualities that are particularly relevant to the specific dispute at hand. For example, if the context of the dispute is in the energy sector, the parties can orient their search to people with the requisite background. The parties can even specify in advance of any dispute in their agreement to arbitrate future disputes certain criteria that arbitrators must have to qualify for service on a tribunal, although most arbitration specialists counsel against criteria that are too narrowly drawn. In all events, parties can avoid the luck of the draw, and mitigate the variability in quality and relevant experience, that are normally unavoidable in the public courts. The system of arbitral appointments has come in for criticism, and some of it is justified. Some observers have criticized the system of party-nominated arbitrators as suggesting that the nominee is to one degree or another beholden to the nominating party, notwithstanding obligations of independence and impartiality. Others have noted the issue of repeat appointments of arbitrators whether by parties or by law firms, as implying (rightly or wrongly) that the arbitrator will favor the side that nominated him. One way around this problem, proposed by Jan Paulsson and seconded by others, is for the institutions to remove the nominating process from the hands of the parties and make the appointments directly from a list that it would maintain. In its default procedure, the International Centre for Dispute Resolution (ICDR) seeks to mitigate any impression that arbitrators nominated by parties are beholden to the nominating parties by providing the parties with a list of arbitrator candidates for the parties to strike and rank, with the highest commonly ranked arbitrators by both sides to be appointed by the institution. In effect, in this system, neither party (or side) nominates an arbitrator as such. On the other hand, in periodic surveys conducted by Queen Mary School of International Arbitration at the University of London and White & Case,

4 the survey participants from the user community have expressed a distinct and overwhelming preference for the system of party appointed arbitrators. It is likely, therefore, that the right of a party to nominate a co-arbitrator is a feature of the system that will remain in place. The third primary reason to select international arbitration over traditional litigation is that the end result the award is final, enforceable, and transportable. The award is final in the sense that it is not subject to appeal. Instead, the losing party may seek to annul the award in the courts at the seat of the arbitration. However, the grounds for annulment are typically narrow and do not include claims that the tribunal s fact finding was erroneous or that the tribunal misapprehended the law or did not understand the contractual dispositions. Rather, the grounds for annulment often follow those set forth in the UNCITRAL Model Law on International Commercial Arbitration (Model Law), which was adopted by the United Nations Commission on International Trade Law in 1985 and amended in In general terms, the Model Law and the national arbitration laws of individual States contemplate annulment in limited circumstances when, for example, there is a gross procedural abuse that deprives a party of equal treatment and an opportunity to present its case, when the tribunal lacks jurisdiction over the claims, when the tribunal is not constituted in accordance with the parties agreement, or when the award violates public policy or decides claims that do not present arbitrable subject matter. The award is enforceable in the sense that, absent voluntary compliance by the losing party, the prevailing party may have the award enforced in court in a relatively streamlined procedure where there are only narrow and limited exceptions to enforceability. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) obligates its Contracting States to enforce awards in accordance with its criteria and provides only narrow and limited exceptions to enforceability. The exceptions to enforcement of awards are akin to those listed above which constitute grounds for annulment of an award under the Model Law. All of these issues are dealt with below in greater detail and nuance. Finally, the award is transportable in the sense that the prevailing party may take it to any New York Convention Contracting State where assets of the losing party may be found and seek enforcement of the award in the public courts in accordance with New York Convention criteria. A neutral forum, control over the selection of arbitrators, and a final, enforceable and transportable award these are the main reasons to arbitrate. Other subsidiary advantages of arbitration include relative confidentiality and freedom to tailor the proceedings to the needs of the parties. Speed and cost containment when they happen are welcome, but those should not be the main reasons in the international context to agree to arbitrate. As the prior discussion suggests, the foundation of international commercial arbitration is contract. Subject to limited exceptions, a party is not 2 United Nations Commission on International Trade Law, Model Law on International Commercial Arbitration, G.A. Res. 40/72 (Dec. 11, 1985), amended by G.A. Res. 61/33 (Dec. 4, 2006).

5 bound to arbitrate unless it has agreed in writing to arbitrate. Nonetheless, sometimes the question arises when two parties have agreed in writing to arbitrate whether third parties related to one or the other contracting parties, which have not formally agreed to arbitrate, may nonetheless be bound by the arbitration agreement. Arbitration tribunals and national courts have developed a number of doctrines where non-signatories to a written arbitration agreement may nonetheless find themselves bound by that agreement. For example, under a theory of piercing the corporate veil, a non-signatory to the arbitration agreement may find itself obligated to arbitrate even though it is not a party to the underlying commercial contract or the arbitration agreement within it. For example, assume a commercial contract with an arbitration clause between Italian Company A and Dutch Company B. Italian Company A may wish to name the parent company of Dutch Company B as a respondent in an arbitration proceeding for any of a number of reasons (e.g., Dutch Company B is impecunious or the parent company may have relevant documents in its control). If the parent company so dominates and controls Dutch Company B that it can fairly be said that Dutch Company B is the alter ego of the parent company and injustice would result from not binding the parent company to the agreement to arbitrate, then under the corporate veil piercing doctrine the parent company may find itself ensnared in the arbitration even though it is not a signatory to the agreement. Many other theories and doctrines have developed to achieve the same result in varying circumstances. These include principles of agency, estoppel, and succession (where the signatory to the agreement, for example, has been acquired). Tribunals and public courts tend to be cautious in applying these various theories to bind a non-signatory to an arbitration agreement, but there are numerous examples where this has been done, and sometimes on somewhat attenuated grounds, for example, under what is known as the group of companies doctrine recognized by the French Cour de Cassation in the Dow Chemical case, discussed in Chapter 5 below. Still, and notwithstanding these exceptions, contract remains the sine qua non underpinning of the international commercial arbitration system. The question therefore arises at which point in time should parties make their agreement to arbitrate. In most instances, parties include arbitration clauses binding them to arbitrate in their underlying business agreements. These clauses represent an agreement to arbitrate future disputes that arise under (or relate to) the commercial agreement in which the arbitration clause is included. Because these clauses reflect agreements to arbitrate future disputes, those disputes may arise many years down the road in connection with contract performance. Arbitration clauses in commercial agreements are generally considered to have a separate existence independent of the business agreement in which they are embedded. 3 The separability of the arbitration clause is an essential element of the international commercial arbitration architecture, guaranteeing the right to arbitrate a dispute when the counterparty, for example, claims the underlying contract is invalid because it was, say, procured by fraud. 3 See Chapter 3.

6 Most arbitrations are brought under arbitration clauses that are included in business agreements. On occasion, however, parties agree to arbitrate a dispute that has arisen between the parties where there is no pre-existing agreement to arbitrate. In a submission agreement, as these are known, parties agree to submit to arbitration a dispute that has already arisen. Agreements to submit existing disputes to arbitration are relatively infrequent because once a dispute has arisen, one party may consider it to be in its interest to proceed in the courts. Whether dealing with inclusion of an arbitration clause in a commercial agreement or with a submission agreement, there are a number of important considerations and issues that can be addressed in the arbitration agreement and that can affect dramatically an arbitration proceeding. The first big decision the parties must face is whether to have an administered or an ad hoc arbitration, and if the former administered by which institution. An administered arbitration proceeding is one where the parties agree to arbitrate under the auspices of a particular organization. Well-known institutions that administer international arbitrations include the ICC, the ICDR, the London Court of International Arbitration (LCIA), the Stockholm Chamber of Commerce (SCC), the Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC), to name only a few. When parties select an institution to administer their arbitration, they normally provide for the rules of that institution to apply. Indeed, some institutions, such as the ICC, will administer arbitrations only using their own rules. Other institutions, such as the ICDR, will administer an arbitration even if the parties have provided for a different (compatible) body of rules to apply, such as the rules of the United Nations Commission on International Trade Law (UNCITRAL). The UNCITRAL rules are often used when the parties have agreed to ad hoc arbitration one where an institution does not administer the case but, rather, where the parties, and the tribunal once constituted, self-administer. There are both advantages to ad hoc arbitration (for example, lower cost, at least sometimes) and disadvantages (the possible need to go to court to get a tribunal constituted or to remove an arbitrator, the lack of a mechanism independent of the tribunal for addressing arbitrator compensation). In addition to deciding on institutional versus ad hoc arbitration, the parties often decide whether the dispute will be decided by a sole arbitrator or by a tribunal of three arbitrators (failing which an institution, or a court in an ad hoc case, will decide). There are advantages and disadvantages to both. A sole arbitrator will be less expensive, and there will not be the agendas of three busy arbitrators, which have to be accommodated to schedule the hearing on the merits. In principle, a sole arbitrator can decide the case based on what she alone thinks is the right answer, unencumbered by the views of two other arbitrators. On the other hand, in complex cases, three arbitrators can debate the issues, and each acts as a check on the other to make sure the tribunal is not going off the rails. Another important issue for the parties to address in their agreement to arbitrate is selection of the seat of the arbitration. If they fail to select the seat in their agreement to arbitrate, but have agreed on applicable arbitration

7 rules, such rules typically have a default provision for determining the seat. For example, in the case of the ICC, the ICC Court decides on the seat if the parties have not. If the UNCITRAL rules apply, the tribunal determines the seat if the parties do not agree. Seat selection is about far more than choosing a convenient location for holding the arbitration. It also has important legal implications. For one, it is typically the national arbitration law at the seat of the arbitration that is the governing procedural law. It is that law which authorizes an arbitration tribunal to conduct an arbitration in that State s territory and which may lay down mandatory procedural rules that the parties and tribunal must obey. In addition, it is the courts at the seat to which the parties may apply for injunctive relief (or other interim measures) in aid of arbitration, for annulment of partial and final awards, and optionally for recognition and enforcement of partial and final awards. The choice of substantive law that will govern the merits of the parties dispute also often figures into the parties agreement to arbitrate. The parties legal obligations under their contract, or otherwise as a matter of law, are defined by the applicable substantive law. If the parties do not make a choice in their agreement, most bodies of arbitration rules provide for the tribunal to decide often through application of a conflict of laws analysis that leads to the law of the jurisdiction having the most significant connection to the parties contractual relationship. These are the core decisions institutional or ad hoc and, if institutional, which institution, selection of rules, number of arbitrators, selection of the seat, and choice of the applicable substantive law that parties normally do and should address in their agreements to arbitrate. There are, however, numerous other features that parties may wish to consider for inclusion in their agreements. These other features may include specific dispositions on the scope and types of discovery. Elaborate provisions on discovery seem increasingly to be the specialty of American corporate transactional lawyers. Whether to include such provisions at the time the parties are negotiating their business agreement will depend on disparate factors, such as which party is likely to have useful documents (e.g., potentially the acquiring company in an acquisition transaction that gives rise to a purchase price adjustment arbitration or claims for breach of representation and warranties for fraudulent inducement since the acquired company will be in the hands of the acquiring company). But often lawyers make predictions about what kind of case is likely to arise, what documents will be relevant, and which party has them, and they turn out to be dead wrong. A safe and common practice is to provide for the tribunal to be guided by the International Bar Association Rules on the Taking of Evidence in International Arbitration (IBA Rules). 4 If the parties say nothing at all about discovery, it is likely that the tribunal will look to the IBA Rules for guidance in any event. Other types of provisions that feature prominently in arbitration agreements include multi-tiered clauses, providing in case of a dispute for good 4 International Bar Association, Rules on the Taking of Evidence in International Arbitration (May 29, 2010).

8 faith discussions between party representatives, sometimes followed by mediation, and only thereafter allowing parties to proceed to arbitration. In complicated transactions and projects where there are many contracts comprising the economic transaction or project, sometimes with different parties to different contracts, parties need to think about whether these contracts should all have compatible arbitration clauses (e.g., same institution and rules, same seat, and same number of arbitrators), and whether the clauses should provide for various parties to the project contracts to be joined in a single proceeding or for multiple proceedings to be consolidated. In the absence of such provisions adopted by the parties, such issues will be resolved by applicable rules and law, which often limit the extent to which all parties relevant to a dispute can be corralled in a single arbitration proceeding. The seeds of all manner of procedural wrangling that goes on in arbitration are often sown in what is said in the arbitration clause and what is left out of the arbitration clause. In the chapters that follow, the consequences of what the parties have provided or failed to provide are addressed in detail, as are all the various stages of the proceeding, including initiation of the case, constitution of the tribunal, interim measures, discovery, pre-hearing submissions to the tribunal, the hearing on the merits, awards, and annulment and enforcement proceedings. The legal framework in which all of this transpires international conventions, national arbitration laws, arbitration rules, and the business agreement between the parties are also addressed in detail. We have been speaking up to now about international commercial arbitration, a dispute resolution procedure that arises from contractual relationships between private parties, or sometimes between private parties and States acting in a commercial capacity. There is another whole category of arbitration, which has become increasingly prominent in recent years investment treaty arbitration, which is addressed in detail below in Chapter 13. In investment treaty cases, investors raise claims of breach of treaty obligations by the host State in which the private parties are investing. The claims typically arise under Bilateral Investment Treaties (BITs) and Multilateral Investment Treaties. BITs, as their name suggests, are treaties between two States, which provide certain guarantees to investors from one State who are making investments in the territory of the other State. So the paradigm is a claim by an investor who is a national of State A against State B for measures that State B has taken that substantially and adversely affect the value of the investor s investment or otherwise cause financial injury to the investor in violation of the substantive treaty protections in the BIT between State A and State B. The first BIT was made in 1959 between Pakistan and West Germany. There are now approximately 3,000 BITs. In addition, there are multilateral investment treaties that afford investors comparable protections to those guaranteed under BITs. Multilateral treaties include the North American Free Trade Agreement (NAFTA), the Central American Free Trade Agreement (CAFTA), and the Energy Charter Treaty (ECT).

9 The substantive protections afforded to investors under BITs and multilateral treaties include fair and equitable treatment, treatment no less favorable than that afforded to the host State s nationals or afforded to nationals of other States that have entered into investment treaties with the host State, and protection against expropriation unless the taking is for a public purpose, and prompt, adequate, and effective compensation is paid. To encourage foreign investment, investment treaties provide for dispute resolution by arbitration. Arbitration before the International Centre for Settlement of Investment Disputes (ICSID) is a typical option, and the treaties often provide for alternatives to ICSID, such as arbitration under the UNCI- TRAL rules, or ICC arbitration, for example. For an investment treaty arbitration to proceed, there must be a written agreement to arbitrate. Thus, for example, the arbitration provisions in the treaties represent the host State s standing offer to arbitrate. Upon initiating arbitration, the investor accepts the offer to arbitrate, thereby forming the requisite agreement in writing. As discussed in more detail in Chapter 13, pursuant to Article 25 of the Washington Convention, ICSID jurisdiction applies to legal disputes arising out of an investment between a Contracting State and a national of another Contracting State, which the parties agree in writing to submit to ICSID arbitration. Prior to the late 1990s, investment treaty cases were few and far between. Since that time, investment treaty arbitration has proliferated and generated a substantial body of jurisprudence addressing myriad legal issues that are commonly presented in these cases questions challenging the jurisdiction of the arbitral tribunal based, for example, on the nationality of the investor, the consent of the host State to arbitration and conditions thereto, and waiver of the right to arbitrate, as well as questions going to the scope of the substantive protections afforded under these treaties. While it is commonly said that there is no doctrine of precedent in international arbitration, and that is certainly true in commercial cases, this is increasingly less the case in the investment treaty context where tribunal decisions are routinely published and cited as support for the decision being reached in a particular case. While this is not strictly speaking a rule of stare decisis, the awards of tribunals are discussed, and invoked or distinguished, in much the same way that common law courts treat case law, so that the distinction between binding precedent and persuasive authority is increasingly blurred. It is in the investment treaty context that some of the sharpest criticism of international arbitration can be found. These cases often proceed at a glacial pace. They are incredibly expensive. Judicialization and proceduralism have reached levels worthy of a U.S. courtroom. That being said, however, for investors, what is the alternative? To try to proceed against a State in the local courts of that State? And to face a State in its courts where the State can be expected to invoke the defense of sovereign immunity, among others? To come back to Winston Churchill, investment treaty arbitration may be the worst form of dispute resolution for investors to vindicate their claims against States, except all those other forms that have been tried from time to time.