Arbitrability, Separability of Disputes and Stay of Proceedings

By Richard Morgan (FCIArb   Barrister)

The Federal Court decision in WDR Delaware Corporation v. Hydrox Holdings Pty Ltd; In the Matter of Hydrox Holdings Pty Ltd[1]  (27 September 2016) offers valuable insight into the scope for disputes to be held to be arbitrable, and justifying a stay of proceedings, even for domains traditionally reserved for courts like the winding up proceedings in this case.   The decision explores the arbitrability of disputes where they occur within the purview of a statute such as the Corporations Act, the attendant considerations of public policy and the rights of third parties who may not be parties to the arbitration clause.

Foster J held that the mere fact that a winding up order was being sought and founded upon an “oppression action” did not alter the characterisation of the real controversy  as being an inter partes dispute.  Although it was for the Court and the Court alone to decide whether a corporation should be wound up, issues alleged to amount to oppression within the meaning of the Corporations Act were arbitrable.  Those issues were separable from the ultimate question of whether the corporation should be wound up.  In such circumstances, where court proceedings were advancing disputes within the scope of an arbitration clause, they could be stayed.

The First Plaintiff WDR Delaware Corporation (WDR) was incorporated in Delaware in the United States of America.  The Second Plaintiff, Lowe’s Companies, Inc (Lowe’s) was incorporated in North Carolina.  WDR was a wholly owned subsidiary of Lowe’s.  The Second Defendant, Woolworths Limited was listed on the Australian Securities Exchange.  In 2009 Lowe’s and Woolworths formed a Joint Venture Agreement (JVA) to establish and operate a chain of home improvement and hardware stores known as “Masters”.

The joint venture was to operate through a special purpose corporation, Hydrox Holdings Pty Ltd (Hydrox).  WDR held one third of the shares in Hydrox.  Woolworths held the remaining two thirds.  Hydrox was the corporate vehicle for the conduct of the Masters joint venture.  The Masters venture was not a success.  Disputes arose between WDR and Lowe’s on the one hand, and Woolworths on the other.

Lowe’s and WDR approached the Court on an ex parte basis and sought the early return of an Originating Process claiming a declaration that the affairs of Hydrox had been conducted in a manner oppressive to, unfairly prejudicial to or unfairly discriminatory against WDR, and an order pursuant to s.233(1)(a) of the Corporations Act 2001 or alternatively pursuant to s.461(1)(k) of the Corporations Act that Hydrox be wound up.

Foster J observed that s.233(1) empowered the Court to make one or more of ten types of orders of which a winding up order was only one.

Woolworths responded with an application seeking, inter alia, an order that the proceedings be stayed pursuant to:

  • 7(2) of the International Arbitration Act 1974 (Cth) (the IAA);
  • art 8(1) of the UNCITRAL Model Law on International Commercial Arbitration, as given effect by s.16(1) of the IAA;
  • 23 of the Federal Court of Australia Act 1976 (Cth); and/or the implied powers of the Court.

Woolworths contended that the arbitration clause in the JVA provided that disputes   which comprised the subject matter of the proceedings must be determined by arbitration and that all of the disputes raised by the Plaintiffs in the proceeding were “capable of settlement by arbitration” within the meaning of that phrase in s.7(2)(b) of the IAA and also within art 8(1) of the UNCITRAL Model Law on International Commercial Arbitration.

Foster J held that s.7 of the IAA was engaged, because both WDR and Lowe’s were domiciled or ordinarily resident in the USA which is a New York Convention country (see s.7(1)(d)).  Although neither the Plaintiffs nor Woolworths submitted that an arbitrator appointed under the JVA could make an order winding up Hydrox, the Plaintiffs argued that no part of the proceeding was arbitrable.  Woolworths submitted that all of the Plaintiff’s claims, i.e. those pertaining to oppression allegations other than the winding up order itself were arbitrable.

The Plaintiff’s case for oppression was based upon various allegations such as Woolworths with its domination of Hydrox failed to provide information sought before Hydrox board meetings; or it purported to require the Lowe’s nominee directors to vote on resolutions without sufficient information

The parties were also in dispute concerning the exercise by WDR of a put option requiring the purchase price of its shares in Hydrox by Woolworths to be determined pursuant to a methodology in the JVA and the circumstances surrounding the exercise by Woolworths of its call option under the JVA requiring WDR to sell its shares in Hydrox to Woolworths.  The exercise by each party of its option triggered the necessity for Independent Expert Valuations. WDR gave notice of dispute for the purpose of the arbitration clause as to whether the independent expert valuation obtained by Woolworths was valid within the meaning of the JVA.  Woolworths similarly gave notice of arbitration for the same reasons.  WDR commenced an arbitration (though Woolworths did not) on the put option and independent valuation dispute and Woolworths lodged a Defence and Counterclaim.

Foster J held that there was a “policy of minimal curial intervention” in matters governed by arbitration agreements (Robotunits Pty Ltd v. Mennel[2]).  In a stay application Courts were not entitled to delve into the merits of a case any more than they were in the context of enforcement or setting aside proceedings (Robotunits[3]).  There was a special need to have regard to international case law when construing and applying the IAA, the New York Convention and the Model Law (TCL Air Conditioner (Zhongshan) Co Ltd Limited v. Castel Electronics Pty Ltd).[4]

The word “matter” in s.7(2)(d) of the IAA connoted that matters to be determined in any given proceeding were distinct from the proceeding itself and multiple matters may exist within the one legal proceeding.  In Tanning Research Laboratories Inc v. O’Brien[5] Deane and Gaudron JJ (at 351-352) had held that, unlike Ch III of the  Australian Constitution, “matter” in s.7(2) of the IAA did not mean “the whole matter”.  Foster J held that the “matter” for the purposes of s.7 of the IAA may or may not comprise the whole subject matter of any given proceeding.  The Court had to identify the “matter”.

The Plaintiffs argued that the Court was being asked to exercise a power, namely winding up a corporation, a pre-condition to which was the formation of an opinion as to the appropriateness of the relief, which necessarily concerned evaluation of the allegations put forward in the oppression proceedings.  Foster J observed that the issue of arbitrability went beyond the scope of an arbitration agreement.  It involved a consideration of the inherent power of the national legal system to determine what issues are capable of being resolved through arbitration in accordance with nation’s domestic law alone (Comandate Marine Corp v. Pan Australia Shipping Pty Ltd).[6]  For a matter to be non-arbitrable there had to be a “sufficient element of legitimate public interest in the subject matter making the enforceable private resolution of disputes concerning them outside the national court’s system inappropriate”.

The Plaintiffs accepted that some claims for relief under the Corporations Act were arbitrable including claims for purely inter partes relief under s.233 (ACD Tridon Inc v. Tridon Australia Pty Ltd[7] per Austin J; Robotunits[8]; Re 700 Form Holdings Pty Ltd[9]; and Brazis v. Rosati[10]). They submitted that a claim for a winding up order was not arbitrable at all.

Foster J followed the decision in Tanning Research Laboratories Inc v. O’Brien.[11]  It held that the question of whether the debt was due and if so, in what amount, was arbitrable notwithstanding that it was raised in a context which directly involved application of the Corporations legislation and even though the ultimate decision of whether or not to reverse the liquidator’s rejection of a debt could only be made by the Court.

Foster J referred with approval to Fulham Football Club (1987) Limited v. Richards[12] where the Court held that although only the Court could wind up the company, the arbitration clause covered the issues in dispute which might form the grounds upon which a winding up order might later be made.  In Fulham Football Club Patten LJ referred to in Re Pevril Gold Mines Limited[13] where it was said that an agreement between shareholders to resolve a dispute which might later justify a winding up order on the just and equitable ground would not, if the subject of an arbitration clause, infringe the company law statute or be void on grounds of public policy.

In Tomolugen Holdings Limited v. Silica Investments Limited[14] the Singapore Court of Appeal followed Fulham Football Club and Re Quiksilver Glorious Sun JV Limited[15] where a distinction was made between the substantive dispute, i.e. the commercial disagreement and the order which was ultimately sought.

As to separability of disputes, Foster J considered  ACD Tridon Inc v. Tridon Australia Pty Ltd[16] where one group of claims made in the proceeding fell within the wording of the relevant arbitral agreement but  four others did not. The court  distinguished A Best Floor Sanding Pty Ltd v. Skyer Australia Pty Ltd[17] where Warren J declined an application for an order staying a winding up proceeding on the grounds that an arbitration clause purporting to give that power was null and void, because it had the effect of obviating the statutory regime for the winding up of a company. However, the public policy considerations held by Warren J to be applicable to the disputed claim to wind up a company did not prevent the parties from referring to arbitration a claim for some merely inter partes relief under the oppression provisions of the Corporations Act.

In conclusion, Foster J held that the case was a dispute solely between the shareholders of Hydrox involving the way in which those shareholders performed their contractual and other obligations inter partes.  There was no public interest element in the determination of those disputes.  No one had suggested that Hydrox was insolvent.  No creditor had sought leave to participate in the proceeding.  The mere fact that a winding up order had been sought did not alter the characterisation of the real controversy between the parties as being an inter partes dispute.

Other than the relief sought as to a winding up order, the questions of fact and law marking out the substantive controversy between the parties were all matters which were capable of resolution by arbitration.  Foster J held that if, at the end of the arbitral process the award or awards did not address satisfactorily or comprehensively all of the grounds relied upon by the Plaintiffs in support of their claims for relief in the present proceedings, then they could supplement them with any available evidence in support of a winding up application.  Having regard to the fact that there were two extant arbitrations already on foot between the same parties concerning central aspects of the JVA and upon an intimation by Senior Counsel for the Plaintiffs that his clients would not wish to proceed with the hearing of the winding up application until such time as the arbitrable matters had been determined by arbitration, Foster J granted a stay of the whole of the present proceedings.

WDR Delaware v Hydrox Holdings has already been referred to in Four Colour Graphics Australia Pty Ltd v Gravitas Communications Pty Ltd [18] and applied in In the matter of Infinite  Plus Pty Ltd[19] (“Infinite Plus”), another shareholder oppression claim. The most noteworthy aspect of the latter is the demonstrated breadth and flexibility of the discretion to stay a part of the proceedings even if non- arbitrable. In WDR Delaware v Hydrox Holdings, the application for the winding up order sought was non-arbitrable, but was stayed pending the outcome of the arbitrable disputes involving the oppression claim.

The orders by Gleeson JA  in Infinite Plus  included an order for the stay of the proceedings  to operate against a co-plaintiff who was not a party to the  shareholder agreement containing the arbitration clause. Gleeson JA referred to Casceli v Natuzzi S.p.A,[20] itself  quoting from Merkel J in Recyclers of Australia [21]:

“ the basis for the discretion is that the spectre of two separate proceedings-one curial, one arbitral, proceeding in different places with the risk of inconsistent findings on largely overlapping facts, is undesirable”     .

Thus, it would seem that if arbitrability of a dispute can be shown, the mandatory language in s. 7(2) of the IAA and Article 8(1) of the Model Law will lead not only to the stay of those disputes but may also lead to the exercise of a discretion , based on the court’s inherent power to control its own process, involving claims beyond the strict scope of the arbitration clause.

[1] [2016] FCA 1164.

[2] [2015] VSC 268.

[3] Id at 306 [14].

[4] (2014) 232 FCR 361.

[5] (1990) 169 CLR 322.

[6] [2006] FCAFC 192; (2006) 157 FCR 45.

[7] [2002] NSWSC 896 at [192].

[8] at 325-320 [55]-[69].

[9] [2014] VSC 385.

[10] (2014) 102 ACSR 626.

[11] (1990) 169 CLR 332.

[12] [2012] Ch 333.

[13] [1898] 1 CH 122.

[14] [2015] SFGA 57.

[15] [2014] HKCFI 1306; (2014) 4 HKLRV 759.

[16] [2002] NSWSC 896.

[17] [1999] VSC 170.

[18] [2017] FCA (9 March 2017).

[19] [2017] NSWSC 470 (27 April 2017).

[20] [2012] FCA 691.

[21] Recyclers of Australia Pty Ltd v Hettinga Equipment Inc [2000] FCA 547@ [65],[66].

Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan – liability under a BIT despite domestic court’s findings of corruption and illegality

By Nudrat Piracha (George Washington University)

Investment arbitrations have in the recent years attracted criticism for second guessing decisions affecting interests of States and their decisions relating to public policy issues. This has led many to call into question the legitimacy of the investor-State dispute settlement system. The decision on liability rendered in the ICISD proceedings brought by Tethyan Copper Company (“TCC”) against Pakistan in relation to the termination of TCC’s operations pertaining to the mining of copper reserves on 20 March 2017 is a case in point. The tribunal found violations of the Agreement between Australia and the Islamic Republic of Pakistan on the Promotion and Protection of Investments (Islamabad, 7 February 1998) (“Australia-Pakistan BIT”) by Pakistan, despite the Pakistan Supreme Court’s findings that the investment was tainted by corruption and that the CHEJVA (defined below) was void.

Balochistan, a province of Pakistan, is a land enriched and embedded with rare, exotic and valuable minerals. To engage in the exploration of gold and copper in the Reko Dek area in the Chagai District, on 29 July 1993, the Balochistan Development Authority (“BDA”), along with BHP Minerals Intermediate Exploration Inc. (“BHP”) became parties to the “Chagai Hills Exploration Joint Venture Agreement” (“CHEJVA”). The CHEJVA was on 4 March 2000 converted into a tripartite agreement, through an addendum entered into between the Governor of Balochistan (“GOB”), BDA and BHP. On 28 April 2000, BHP entered into an Option Agreement with Mincor Resources, establishing an exploration alliance, giving exploration and acquiring mineral rights from BHP to Mincor, against a consideration of $100. Mincor created a specialised company, TCC, which was granted an Exploration License to operate in the designated area. Mincor was also granted the right to assign its rights under the Agreement to TCC at any time.

Subsequently, a Novation Agreement was entered into between TCC, GOB, BDA and BHP on 1 April 2006. The recitals re-stated that GOB, through the Chairman of BDA and BHP, were parties to the CHEJVA, and provided that the parties agreed to substitute TCC with BHP as a party to the Agreement. The Novation Agreement further provided that TCC, in replacing BHP, would enjoy rights and benefits accorded to BHP under the CHEJVA, and that the percentage interests of GOB and TCC would be 25% and 75% respectively. Registered with the Board of Investment, TCC incorporated a local subsidiary (“TCCP”) and, in December 2007, the Islamabad High Court approved the union of both companies under the scheme of arrangement and all licences and properties were transferred to TCCP.

However, in 2006, Maulana Abdul Haq and others filed Constitution Petition No. 892 of 2006 in the High Court of Balochistan to challenge the legality of the CHEJVA along with the lack of timely completion (this case is reported here (“Reko Dek Case”). The petitioners sought declarations that the transactions based upon the CHEJVA were illegal. The High Court in its judgment dated 26 June 2007 dismissed the Petition and found the CHEJVA and other acts of GOB/BDA to be legal and valid.

Other petitioners filed Constitution Petitions directly before the Supreme Court of Pakistan under Art 184(3) of the Constitution, questioning the validity of the grant of licence(s) to BHP/TCC on the grounds of absence of fairness, violation of laws and risks to the vital interests of the Province of Balochistan. This was followed by a Civil Petition for Leave to Appeal No. 796 of 2007 against the judgment of the Balochistan High Court. All of the petitions and miscellaneous applications were heard together and disposed of in a single judgment.

Pursuant to a special meeting held on 14 November 2011, an application for the grant of a Mining Lease by TCC was dismissed by the Mines Committee constituted under BMR 2002 along with the challenge to the decision by TCC through filing an administrative appeal before the Secretary, Department of Mines & Minerals, Government of Balochistan. TCC argued that the local laws were biased towards BHP and non-transparent. TCC did not challenge the orders before the High Court of Balochistan under Art. 199 of the Constitution, but filed simultaneous ICC and ICSID arbitrations against the Governments of Balochistan and Pakistan. Upon obtaining interim orders from the courts in Pakistan, the Supreme Court of Pakistan sought to enjoin the ICC and ICSID tribunals from proceeding. However, both tribunals declined to stay their proceedings, issuing interim awards and granting certain conservatory measures.

Under Art 16 of the CHEJVA, the law applicable to the Agreement was the law of Pakistan but the parties agreed to adhere to certain principles of international law as well. On 7 January 2013, the Supreme Court of Pakistan declared the CHEJVA void for illegality on public policy grounds. It was firstly held that the laws of Pakistan took precedence to decide the legality of the agreement. The Supreme Court relied on the case of Inceysa v. El Salvador (ICSID Case No ARB/03/26) in which it was held that a contract made in violation of the host country’s law would not benefit from the protections of the relevant BITs or the rights granted by them, including the right to arbitration.

The Supreme Court, citing the ICSID decision in World Duty Free v. Kenya (ICSID Case No ARB/00/7), noted that the safeguard mechanism offered to investors under the Australia-Pakistan BIT were subject to the investment being “in accordance with laws and investment policies applicable from time to time.” Hence, the Australia-Pakistan BIT required that investments be made in accordance with the law of Pakistan. Where investments are not made in accordance with that law, the investor was not entitled to any protection under the BIT. A similar approach was adopted in Tokios Tokeles v Ukraine (ICSID Case No ARB/02/18), which was also cited by the Supreme Court. In that decision, it was observed that it was a common requirement in modern BITs for “investments [to have] be[en] made in compliance with the laws and regulations of the host state”.

The Supreme Court also found that parties were not parties to any valid arbitration agreement. Consequently, it was for the courts (and not an arbitral tribunal) to decide the legality of the arbitration agreement contained within the CHEJVA. In this regard, the court found the transaction to be tainted by corruption, and those involved in finalizing the same on behalf of the government to have been in positions of conflict. For instance, the signatory of the CHEJVA on behalf of the government, Mr. Ata Muhammad Jaffer had held the dual positions of Chairman BDA and Additional Chief Secretary at the relevant time, which created a conflict of interest. He had demonstrated visible haste in executing the agreement to the detriment of the government, and had been convicted for corruption under the Balochistan Civil Servants (Efficiency and Discipline) Rules 1983 for “living beyond his means”. In relation to the evidence of irregularities and corruption made available to the court, the Supreme Court noted that “[t]he Government examined the same and decided not to defend the said acts [of corruption and irregularities] and accordingly it decided to render full assistance to this Court from the record that was filed”, and further observed that “this record made shocking disclosures of extensive irregularities and corruption”.

The Supreme Court further observed that it had broad authority under Art 184(3) of the Constitution to oversee the actions of the other State organs such as the Executive and Legislature under the principle of trichotomy of powers. Arising from the verdicts of the historic cases of Miss Benazir Bhutto v. Federation of Pakistan (PLD 1988 SC 416), the Supreme Court emphasised the need for an independent and vigilant system of judicial administration where all acts and actions leading to infringement of fundamental rights are nullified and the rule of law upheld in society. It further observed that a court cannot confer validity or immunity to a mala fide action or shield such action from judicial scrutiny.

Further, the Supreme Court ruled that various recitals in the CHEJVA, the Addendum, the Novation Agreement, Mincor Option, Alliance Agreement were void and unenforceable as a matter of Pakistani contract law as they were contrary to public policy. Dismissing TCC’s arguments that this illegality did not affect the Novation Agreement, the Supreme Court stated that a necessary element for the execution of a valid novation is the validity of the original agreement that is to be substituted. Where an agreement is void, all subsequent alterations, variations or novations based upon such agreement will also be invalid under Pakistani law.

In its judgment, the Supreme Court noted that the executive authority of Balochistan acted in a non-transparent, arbitrary and unreasonable manner in the disposal of public property, thereby failing to obtain the best competitive price for the said mineral resources. Tenders were not floated nor any competitive bids invited, making the entire process of awarding the CHEJVA to BHP uncompetitive, non-transparent and illegal.

The decision of the ICSID tribunal has not been made public and the grounds on which the tribunal dispensed with the States concerns are not thus publicly known. The damages will be decided by the tribunal in a separate quantum phase.

 

Non-core insolvency claims: straddling the line between arbitrability and non-arbitrability

By Julia Dreosti (Principal, Lipman Karas) and Patrick Leeson (Associate, Lipman Karas)

It is trite to say that insolvency matters are non-arbitrable.[i]  However, an emerging line of authority suggests a nuanced and fact sensitive enquiry is nevertheless necessary to properly ascertain the essential character of the dispute.  The mere fact that certain relief sought in a dispute invokes aspects of statutory insolvency regimes (e.g. a winding-up order), which relief cannot be granted by an arbitrator, does not in and of itself render the underlying dispute non-arbitrable. This is especially the case in a non-insolvency context.

The Relationship: Competing Public Policies

Insolvency and arbitration do not coexist easily. The two processes each have their own purpose, objectives and underlying policy which are not easily reconciled.  In most common law jurisdictions insolvency proceedings are a creature of statute, administered centrally by the courts.  This is in stark contrast to the de-centralisation and party focus which defines international arbitration.  As was recognised by VK Rajah JA (as he then was) of the Singapore Court of Appeal (“SGCA”):[ii]

Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors…” 

It is important for practitioners to recognise these competing interests, both in drafting arbitration clauses as well as in contemplating how best to approach a dispute involving an insolvent or potentially insolvent company.

The general approach

It is generally accepted that insolvency proceedings are non-arbitrable. Two justifications are usually given:

  1. Arbitral tribunals lack the jurisdiction to award certain statutory relief, such as the making of a winding-up order; and
  2. A genuine public interest exists in the centralised and efficient winding-up of insolvent companies, which takes account of the interests of all stakeholders.

Based on these justifications, arbitration agreements which have the effect of obviating the public policy of the underlying statutory regime are generally considered unenforceable in their entirety.[iii]  While courts have been known to nonetheless stay winding-up proceedings in favour of arbitration in an exercise of discretion[iv], this approach lacks certainty for litigants.

A case by case approach for ‘non-core’ claims?

An emerging body of authority decided in a non-insolvency context provides a more principled approach. That approach emphasises a fact-sensitive enquiry to be undertaken in each case by which the non-arbitrability of certain ‘core’ claims does not necessarily render incidental ‘non-core’ claims non-arbitrable.  The distinction is as follows:

  • Core claims are central to the winding-up process which cannot be circumvented, e.g., those which vest in the liquidator or concern substantive rights created under the insolvency legislation.
  • Non-core claims are procedural in nature or incidental to the winding-up and may be arbitrable where they do not affect third parties.

The distinction was explored in the recent decisions of the SGCA in Tomolugen Holdings Ltd v Silica Investors Ltd [2016] 1 SLR 373 (“Tomolugen) and of the Australian Federal Court in WDR Delaware Corporation v Hydrox Holdings Pty Ltd (2016) 245 FCR 452 (“Hydrox”). These decisions bring their respective jurisdictions in line with the UK approach, mooted by Patten LJ in Fulham Football Club (1987) Ltd v Richards [2012] Ch 333 (“Fulham FC”). Under that approach, the mere fact that the tribunal cannot grant statutory relief in core proceedings (such as a winding-up application) does not itself render certain incidental non-core proceedings non-arbitrable. Instead, a fact-sensitive enquiry is required to determine how the relevant dispute should be characterised, and whether any outcome is likely to affect the interests of third parties. 

Fulham FC

Fulham FC concerned the question of whether a claim for relief for unfair prejudice under s 994 of the Companies Act 2006 was arbitrable. The decision of Patten LJ raised two issues which would be developed in the subsequent cases.

First, Patten LJ drew an important distinction between: (a) disputes in relation to the affairs of a solvent company, and (b) disputes which invoked the statutory insolvency regime and where relief may affect creditors and other third parties. His Lordship considered that while the latter were “immune from interference by members of the company whether by contract or otherwise”, non-core claims, e.g., a claim for unfair prejudice, did not enliven the same considerations.[v]

Second, Patten LJ considered that it was no bar that statutory remedies were not available through arbitration, “jurisdictional limitations on what arbitration can achieve are not decisive of the question whether the subject matter of the dispute is arbitrable.[vi] His Lordship took the view that a two-step approach was warranted, first the underlying dispute would be resolved by arbitration, only then would the parties be entitled to approach the court for the relief sought. 

Tomolugen

Tomolugen also concerned the arbitrability of an unfair prejudice claim.

Menon CJ, giving judgment, expressly approved the approach of Patten LJ. Two types of ‘core’ insolvency claim, statutory avoidance and the winding-up of an insolvent company by the courts, were expressly distinguished from the claim at Bar. His Lordship characterised the unfair prejudice claim as one which “stands on a different footing from the liquidation of an insolvent company or avoidance claims that arise upon insolvency because the former generally does not engage the public policy considerations involved in the latter two situations.[vii]  

The Court of Appeal also affirmed that the unavailability of certain statutory relief did not in and of itself render the claim non-arbitrable. The two-stage approach was endorsed as “strik[ing] a balance between, on the one hand, upholding the agreement of the parties as to how their disputes are to be resolved and, on the other, recognising that there are jurisdictional limitations on the powers that are conferred to an arbitral tribunal.[viii]

Hydrox

Hydrox concerned an application to wind up a joint venture vehicle pursuant to s 233 (oppression/unfair prejudice) or s 461 (just and equitable grounds) of the Corporations Act 2001. Although it was not contested that the making of a winding-up order itself was non-arbitrable, there was a dispute as to whether the substance of the underlying factual issues should nonetheless be referred to arbitration. It was contended that the winding-up application required the determination of incidental issues which fell within the relevant arbitration clause, namely breach of contract, corporate governance and issues of bad faith. 

Applying the reasoning of Patten LJ in Fulham FC, Foster J held that the underlying issues were themselves arbitrable, even if the making of the actual winding-up order was not. His Honour considered that arbitrability turned upon characterisation of the underlying dispute, rather than the ultimate remedy sought. The instant case was properly characterised as a private dispute between shareholders in the joint venture vehicle, capable of resolution by arbitration. In reaching this conclusion, Foster J considered it relevant that the company was not insolvent, and that the determination of the underlying issues would have no impact upon any third party. 

Following Patten LJ’s approach in Fulham FC, it was ordered that the incidental issues be referred to arbitration, with any relief to be subsequently granted by the court.

Conclusion

In summary, the above cases emphasise the emergence of a fact-sensitive approach to determining the nature of the underlying dispute in claims which seek statutory remedies often used in the insolvency context, in order to determine which side of the arbitrability line those disputes fall upon.

[i]           See for example the Australian decision: A Best Floor Sanding Pty Ltd v Syker Australia Pty Ltd [1999] VSC 170 at [18] per Warren J, and Singaporean decision: Larsen Oil and Gas Pte Ltd v Petroprod Ltd [2011] 3 SLR 414 at [45]-[46] per VK Rajah JA.

[ii]           Ibid. at [1] per VK Rajah JA.

[iii]          See A Best Floor Sanding above n ii at [11]-[15], [18] per Warren J (as she then was) citing the public interest in court adjudicated insolvency proceedings as justification for ruling null and void an arbitration agreement which expressly purported to extend to insolvency proceedings.

[iv]          See, for example, Salford Estates (No 2) Ltd v Altomart (No 2) [2015] Ch 589, where Sir Terence Etherton C (Longmore and Kitchin LJJ agreeing) determined that an claim to wind up an insolvent company was non-arbitrable, but nonetheless exercised his general discretion to stay those proceedings so that underlying issues could be determined by arbitration.

[v]           Fulham Football Club (1987) Ltd v Richards [2012] Ch 333 at [74] per Patten LJ. 

[vi]          Ibid at [84].

[vii]         Tomolugen Holdings Ltd v Silica Investors Ltd [2016] 1 SLR 373 at [84] per Sundaresh Menon CJ.

[viii]         Ibid at [103] per Sundaresh Menon CJ.

Arbitral Awards: Enforcement Challenges in Indonesia

By Tony Budidjaja (Budidjaja International Lawyers)

 

Overly Complicated Procedure

Indonesia’s present legal framework still presents challenges to anyone attempting to enforce arbitral awards in Indonesia. There are many procedural and bureaucratic issues confronting the enforcing party that are not properly addressed by Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution (“Indonesian Arbitration Law”) or the prevailing civil procedure law.

The process of enforcing arbitral awards in Indonesia, especially international arbitral awards, can be very time and costs consuming. Parties seeking to enforce arbitral awards in Indonesia can expect to face significant delays and other obstacles, due to the overly complicated enforcement procedure.

Under the present legal framework, there are at least four separate applications that must be submitted to the competent court in order to enforce arbitral awards in Indonesia. They are the (i) application for registering the award, (ii) application for court reprimand (aanmaning) on the award debtor, (iii) application for writ of executorial attachment (sita eksekusil) over specific assets of the award debtor, and (iv) application for auction order (lelang). For international arbitral awards, an application for a court enforcement order (exequatur) must also be submitted. The process is therefore likely to be lengthy and costs intensive.

 

Undue Delay

Under Article 67 of the Indonesian Arbitration Law, the registration of an international award must be conducted by submitting the award to the Registrar of the Central Jakarta District Court (which must be carried out by the arbitrator or his/her proxy), together with the following documents: (i) the original or an authenticated copy of the award and its official Indonesian translation, (ii) the original or an authenticated copy of the agreement which is the basis/underlying document of the dispute being settled in the award and its official Indonesian translation, and (iii) a statement from the Indonesian Embassy in the country whereby the award was rendered stating that the concerned country has a bilateral or multilateral treaty with Indonesia regarding the recognition and enforcement of foreign arbitral awards.

Regrettably, the Indonesian Arbitration Law does not stipulate a time limit for the court to process the registration of the award and decide on exequatur applications. In recent years, even without any opposition from award debtors, applications for the registration of international arbitral awards are rarely disposed of in less than one month because the courts are congested. If the court receives opposition or challenge from the award debtor, the court will usually take a conservative view and stay the enforcement process until the opposition or challenge has been settled, meaning it can take several months or more for the court to finally issue its decision on an exequatur application.

Although the Indonesian Arbitration Law clearly provides that a court decision granting exequatur is final and may not be appealed against, in practice it is not unusual for the award debtor to appeal against the exequatur. Although the court of appeal rarely convenes a court hearing in order to render its decision (usually decided on a documents-only basis), the court may still take a year to reach a decision. Pending a resolution of the appeal decision, the relevant arbitral award normally cannot be enforced against the award debtor (hence delaying enforcement even further).

 

Annulment Action

Pursuant to the 2006 Supreme Court’s Guidelines on Implementation of Court’s Duty and Administration, only national arbitral awards (instead of “international” arbitral awards) could be the subject of an annulment application because Indonesia is a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).

Despite the foregoing, the commencement of an award annulment action is also becoming a common dilatory tactic for the Indonesian debtor of an adverse arbitral award.

Just like appealing against the court exequatur, although there is no written law on such matter, the filing of an application for the annulment of an arbitral award would automatically stay the enforcement of the award. The enforcement courts usually stay the enforcement process until the annulment proceeding is totally completed and resolved.

If the annulment action is not successful, it is not uncommon to see the award debtor then commence another court proceeding (although it is frivolous) in an attempt to set aside the award or at least to terminate or suspend the enforcement process.

The problem can be worse if further related or overlapping proceedings are commenced (e.g., where a fresh action stemming from the underlying contract is brought), as the court would then stay the enforcement process until it is certain that there would not be a conflict between decisions made in the fresh proceedings and the arbitral award. The award debtors can also prolong the proceedings as long as they want simply by filing an appeal to the higher court.

That means that an award debtor can successfully put off payment of his debt to the award creditor for at least another two to three years simply by commencing a civil action against the arbitral tribunal and/or the award creditor.

As a result, a party who was successful in obtaining a favorable arbitral award and even exequatur from the court may be frustrated when seeking to have the award effectively enforced in Indonesia. It may be a tragedy to see that an arbitral award that has been recognized and declared to have executorial force in Indonesia can be stayed or frustrated for several years. In light of this, one will not be so surprised to see an award creditor who failed to recover sums awarded in the arbitration fall into financial distress.

The development of this disturbing practice prompted Indonesia’s Supreme Court (being the highest court of appeal, which has long been struggling to reduce the courts’ workload) to issue Circular Letter Number 4 of 2016 on 9 December 2016 (“Letter”), in order to eliminate such bad practice. According to the Letter, which serves as a guideline that should bind all lower courts, there shall be no legal recourse (appeal or civil review to the Supreme Court) against court decisions that rejected petitions of arbitral award annulment: only decisions that annulled arbitral awards can be appealed.

 

Lack of Arbitration Specialized Judges and Unnecessary Court Interference

The efficiency of enforcing arbitral awards in Indonesia is further hampered by the fact that Indonesia currently has no specially trained judges who can be assigned to handle arbitration related cases. Besides, the court staff assigned to assist in handling arbitral award registration and enforcement matters generally show no strong understanding of arbitration.

Indonesia is also well known for its unnecessary court interference in matters related to arbitral awards, although the situation is now gradually improving.

Although the Indonesian Arbitration Law does not contain any express provision regarding the procedure and grounds for refusal of enforcement of arbitral awards, in reality there have been a number of precedents which show courts refusing to quickly and effectively enforce an arbitral award, and even refusing to honour the parties’ validly made arbitration agreement.

As a matter of legal principle, the Indonesian Arbitration Law provides that the existence of a valid arbitration agreement precludes parties from submitting their disputes to the court. In addition, the court before which an action is brought in a matter which is the subject of a valid arbitration agreement is obliged to reject the action as inadmissible (except for certain matters as specifically stipulated in the Indonesian Arbitration Law, such as the appointment of an arbitrator in the event that the parties fail to agree, or where there is no previously agreed procedure on the appointment of an arbitrator).

 

Conclusions and Recommendation

Although there are many challenges that Indonesia has to overcome with respect to the enforcement of arbitral awards, I am confident that this will change in the coming years if Indonesia’s Supreme Court, being the highest court in the country, is committed to creating such a change.

As arbitration will continue to become increasingly important as a result of the growth of cross-border disputes, the courts should be committed to supporting arbitration, by ensuring a cost-effective and efficient mechanism for the judicial enforcement of arbitral awards.

Given that the Indonesian legal regime for the enforcement of arbitral awards is still less developed thereby causing Indonesia to become less attractive as a venue for arbitration, I recommend the adoption of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) as an amendment to the present Indonesian Arbitration Law, taking into consideration Indonesia’s national interests and needs. The adoption of the Model Law should be able to resolve many of the problems being faced in practice.

As a Contracting State to the New York Convention, Indonesia should join the others in developing and modernizing its national arbitration law.

International Investment Arbitration Across Asia: A Symposium

By Ana Ubilava (University of Sydney)

A version of this article was originally published on the Kluwer Arbitration Blog on 1 March 2017.

Recent developments in the international investment scene have also impacted the Asian region. Notably, China and Southeast Asia have emerged not just as growing foreign direct investment (FDI) recipients but also as major sources of outbound FDI. In parallel, the Asian region experienced a proliferation in international investment agreements (IIAs). Asian countries were initially hesitant toward investor-state dispute settlement (ISDS) mechanisms. Later, however, as Asian countries began encouraging inbound and then outbound FDI, they started committing to treaties with ISDS mechanisms. Unlike some countries from other regions, which changed their course of action towards ISDS provisions after their first-ever ISDS cases, most of the ASEAN member states have continued incorporating ISDS provisions even after their initial encounters with ISDS claims.

On 16 February 2017, the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS) and the Sydney Centre for International Law (SCIL) co-hosted a symposium on the theme: “International Investment Arbitration Across Asia”. The symposium, sponsored also by the Sydney Southeast Asia Centre and Herbert Smith Freehills, brought together leading experts of international investment law from Southeast Asia, North Asia, India and Oceania. The symposium re-examined the historical development of international investment treaties in the Asian region, focusing on whether and how the countries may be shifting from rule takers to rule makers. A focus was on the ASEAN(+) treaties, including the (ASEAN+6) Regional Comprehensive Economic Partnership (RCEP) at an advanced stage of negotiations, and the Trans-Pacific Partnership (TPP) Agreement, which was discussed more broadly as an urgent topic in the wake of the change of direction by the US under the new administration. Participants at the symposium also elaborated on the experiences of Asian countries with ISDS mechanisms, and the attitude towards ISDS before and after first major investor-state arbitration (ISA) cases in the region. The many speakers and discussants for the event further explored possible future trajectories of international investment treaty policymaking of Asia-Pacific countries, especially China, Japan, Korea, India, Australia and New Zealand.

Dr Luke Nottage (University of Sydney) delivered an opening speech, surveying pan-Asian FDI, major treaties (including the TPP) and ISDS patterns. Dr Nottage provided an overview of the increased inbound and outbound investments in the Asian region with a special focus on Southeast Asia. He also talked about the rule of law indicators in the ASEAN member states, corruption perceptions and consistency in their investment treaty making, as well as the timing of the first ISDS claims against ASEAN member states on the signing on IIAs. Dr Nottage suggested that these ISDS cases may have had less impact on subsequent signing bilateral investment treaties (BITs) and Free Trade Agreements (FTAs) by Asian countries compared to other parts of the world.

Dr Julien Chaisse (Chinese University of Hong Kong) joined this speech to outline the current state and future development trajectories of TPP, RCEP and the G20 Guiding Principles for Global Investment Policymaking. Dr Chaisse emphasized the importance of the TPP with regard to ISDS provisions and further elaborated on current issues with respect to the US and the TPP. He contrasted the Malaysian and Vietnamese experience, stating that their participation in TPP was a result of intensive negotiations and a huge commitment. Vietnam also incorporated parts of the TPP draft into negotiations to conclude an FTA with the EU. “TPP is not dead”, Dr Chaisse concluded, expressing his belief in the TPP at least as a benchmark for ongoing and future IIAs. With regard to RCEP, Dr Chaisse stressed that it remained an ASEAN (not Chinese) initiative, and emphasised the treaty’s complexity and importance, the success of which greatly depends on cooperation among all ten ASEAN member states. Lastly, Dr Chaisse analyzed characteristics and future implications of the G20 Guiding Principles for Global Investment Policymaking.

Deeper factors responsible for the evolving treaty practices were scrutinized by Dr Lauge Poulsen (University College London). Including reference to the Asian region, Dr Poulsen addressed motives of the governments signing up to treaties that constrain their regulatory authority and expose them to potentially expensive arbitration claims. A commonly assumed expectation of developing countries was that BITs would attract more FDI. Dr Poulsen pointed out two new empirical aspects for this, as well as risks associated with concluding such investment agreements, and questioned whether governments considered them before being bound by such agreements. This argument further led to the conclusion that although ISDS claims did not necessarily stop the process of signing the international investment treaties, they considerably slowed down the process.

Dr Shiro Armstrong (Australian National University) presented the results of the econometric study, in collaboration with Dr Nottage, which examined the impact of investment treaties and ISDS provisions on FDI. The study found that on aggregate, while both weaker and stronger ISDS provisions have a positive impact on FDI, the effect of weaker ISDS provisions is more pronounced. Dr Nottage added that disentangling the factors at play and drafting policy implications remains a complex task, and both authors expressed concerns about the quality of the existing data on FDIs and other methodological issues. Making a virtual appearance via a Skype call from Bangkok, Dr Jason Yackee (University of Wisconsin) extended such methodological concerns, after presenting his preliminary research on the correlation of Thailand’s commitments to ISDS with an increase in FDI, where results differed greatly depending on whether OECD or Thai government data was used. Dr Yackee urged participants to think outside the box to come up with new research strategies for future analysis of this controversial policy question.

Insightful observations on the ASEAN(+) treaties, including RCEP, were added by Dr Diane Desierto (University of Hawaii, by Skype from Stanford). Dr Desierto discussed strategies, norms, institutions and politics of the regional investment treaties. Dr Desierto also discussed some common features and ISDS provisions of the ASEAN in Southeast Asia as well as the risks of parallel proceedings associated with the fragmented investment treaty instruments in the Asian region. Elaborating the topic, Jurgen Kurtz (University of Melbourne) presentation focussed on South East Asian investment treaty practice. Dr Kurtz critiqued the assumption of isomorphism underpinning that practice arguing instead that unique political economy considerations (especially drivers of internalization of costs) have shaped distinctive (and at times, innovative) treaty choices. ASEAN’s bold positioning of collective investment rules however have suffered from internal contradictions, not least the puzzling practice of reverse open regionalism. Dr August Reinisch (a discussant from the University of Vienna) sketched some parallels and contrasts between ASEAN and EU investment treaty developments, particularly with regard to the approaches now to ISDS provisions agreed within EU member states as well as with the rest of the world.

A succession of experts then deliberated on the investment treaty practices of other significant Asia-Pacific countries. Dr Julien Chaisse analysed the investment policy of China, stating that “there are many rules leading to Beijing”. Reflecting on the current events in relation to Prime Minister Abe’s meeting with the President Trump, Dr Tomoko Ishikawa (Nagoya University) reviewed Japan’s current investment treaty regime. In particular, she focused on treaty practices before and after 2010, identifying novelties added by the TPP, not previously common in Japan’s practice. The case of Korea was presented by Dr Joongi Kim (Yonsei Law School). Dr Kim addressed three important areas: the extensive investment treaty practice of Korea; the ISDS cases where Korea was respondent but also now the claimant investor’s home country; and the trade and FDI inflows versus outflows. In addition, trends in the international investment regime globally and within Asia cannot be fully understood now without touching on India’s new Model BIT. Dr Prabhash Ranjan (South Asian University) explained the highly controversial ISDS and related provisions in the December 2015 Model BIT. Dr Ranjan set out the background to India’s novel approach and addressed some of the key issues of the new Indian Model BIT, recently accepted by Cambodia.

Topics presented at the symposium were not limited to “Asia” in the narrow or formalistic sense. Amokura Kawharu and Dr Luke Nottage offered a comparative study of key areas of the existing treaties for Australia and New Zealand, closely integrated economically with the Asian region and even more so bilaterally. They ended up examining the potential to facilitate more EU-style treaty innovations in the Asia-Pacific region and the influence these two countries collectively might have on such processes. The final main speaker of the symposium, Adjunct Professor Donald Robertson (Herbert Smith Freehills) addressed the relation of investment treaties with governance, focusing on principles of best-practice regulation, which sparked considerable potential for further debate.

Justin Gleeson SC, former Solicitor-General and leader of the team that successfully defended the Philip Morris claims against Australia, offered concluding remarks to sum up the symposium. He noted that despite the diversity of the objectives of the speakers, the core aim of these studies remained the same: “it is all about human wellbeing across the planet”.

The symposium therefore offered an excellent platform to share new findings and discuss ideas related to challenges and opportunities related to the investment treaty regime and associated peculiarities in the wider Asia-Pacific region. This marked a thought-provoking continuation of intellectual debate from a related previous conference on “International Investment Arbitration and Dispute Resolution in Southeast Asia” hosted by Chulalongkorn University on 18 July 2016, focusing on the experience of individual ASEAN member states. The research presented at both conferences, also related to an Australian Research Council project over 2014-7 (for Trakman, Armstrong, Kurtz and Nottage), will be brought together in a book on “International Investment Treaties and Arbitration Across Asia” to be co-edited by Dr Chaisse and Dr Nottage.

The Persisting Debate on the Valuation Date applicable in Unlawful Expropriation Cases

The AFIA Committee*

 

I- INTRODUCTION

There is consensus around the notion that lawful and unlawful expropriations must be treated differently and must lead to the application of different standards of compensation:

  • Lawful expropriation: the standard of compensation is as provided for under the language of the applicable BIT. Usually, BITs establish that (i) the investor shall be paid the FMV of the expropriated asset, and (ii) the valuation shall, for example, be performed “before the expropriation became public”, “before the impending expropriation became public” or “before expropriation, which should not reflect any diminution in value due to the expropriation[1].
  • Unlawful expropriation: the applicable standard is not normally provided under the BIT for lawful expropriation. Rather, the customary international law standard applies. The well-known PCIJ decision in the Chorzów Factory case set forth the standard of compensation for such cases, providing that compensation shall “eliminate all consequences of the international wrongful act and restore the injured party to the situation that would have existed if the act had not been committed[2]. This is known as the full reparation principle

In cases of unlawful expropriation, in order to fully compensate the damage caused, arbitral tribunals have used two different approaches, namely the ex ante and an ex post approaches:

  • Ex ante approach: the tribunal performs its valuation at the date of the expropriation, using all data available at that time. If applicable, future cash flows are projected based on the data available at the time of the expropriation.
  • Ex post approach: the tribunal performs its valuation either at the date of the award or, as is most often the case, at a date close to it, using all data available at that time (including such information as may have become available subsequent to the expropriation, which results in the tribunal having more information on which to perform the valuation). The valuation date can have a critical impact on the value attributed to an asset. By way of example, when a mining concession is valued, it is likely that a considerable amount of time will have elapsed between the actual expropriation of the concession and the date of any award, and, during this period, factors with a direct impact on the concession’s value (e.g. commodity prices, costs, interest rates, etc.) may have changed dramatically. Should these changes be considered for valuation purposes? This question is addressed below.

 

II- THE VALUATION DATE

Historically, arbitral tribunals have applied the ex ante approach to valuation for unlawful expropriations. This appears to have been the case because the date of the expropriation or the date immediately preceding it is often the date at which the expropriated assets held the greatest value.

Although the ex post approach has been used in other areas of international law, it was used in a BIT investment arbitration fairly recently for the first time. This occurred in the ADC v. Hungary case, where the tribunal concluded that “in the present, sui generis, type of case the application of the Chorzów Factory standard requires that the date of valuation should be the date of the Award and not the date of expropriation, since this is what is necessary to put the Claimants in the same position as if the expropriation had not been committed[3].

Certain scholars have endorsed this approach,[4] and several arbitral tribunals have applied it. In addition to ADC v. Hungary, the ex post method was used in El Paso v. Argentina[5], Conoco Phillips v. Venezuela[6], Yukos v. Russia[7], Quiborax v. Bolivia[8] and Burlington v. Ecuador.[9]

However, some scholars have opposed this approach[10], and other prominent arbitrators have strongly criticized it,[11] arguing that “the use of ex post information is not in line both with legal and economic principles.[12].

Below, we summarize, at a high level, some of the pros and cons of the ex ante and ex post approaches identified by the various commentators and arbitral tribunals who have addressed this issue.

EX ANTE
PROS CONS
1. The date of or immediately before the expropriation is often the date at which the expropriated assets held the greatest value, which makes its application natural.

2. There is no guarantee that, absent the expropriation, the investor would have retained the expropriated assets in the future.

3. The State should only be liable to pay those damages which are foreseeable at the time of the expropriation.

 

1. Under an ex ante valuation, by allowing the State to retain the increase in value after the expropriation (if any), the State is rewarded for its unlawful conduct.

2. An ex ante valuation is not in line with the full reparation principle. If the value of the expropriated asset increases, the investor would be undercompensated.

 

EX POST
PROS CONS
1. There is no reason why, if the value of an expropriated asset increases following the expropriation, the investor should not have the right to it. The investor would have been able to realize the additional value had the asset not been taken.

2. An ex post valuation is consistent with the full reparation principle, wiping out “all the consequences of the illegal act and reestablish[ing] the situation which would, in all probability, have existed if that act had not been committed.”[13]

3. An ex post valuation creates the right incentives for States, as they will take the necessary steps to effectuate lawful expropriations.

1. Market fluctuations after the expropriation are not necessarily foreseeable at the time of the expropriation. Under an ex post valuation, the principle of causation is left aside and the State is punished for unforeseeable events (e.g. price increases).

2. Ex post valuations are arbitrary, since the date of the award bears no relation to the facts of the case. An award rendered a year earlier or later could result in a different compensation.

 3. Ex post valuations are unfair, as they allow investors to either use the date of the award if their asset increased in value, or to use the expropriation date if their asset decreased in value (after the expropriation). This provides investors with “the best of both worlds” and leads to an uneven playing field.

4. An ex post approach may incentivize the use of dilatory tactics.

 

III- CONCLUSION

Consistency and foreseeability are long-term goals in investment arbitration, a growing field which continues to develop at high speed. As evidenced by this brief post, opposing views continue to exist on key issues such as the valuation date in cases of unlawful expropriation. Quantum is an area where achieving consistency is particularly challenging in light of the discretionary powers that arbitral tribunals enjoy.

 

* This blog post is published by the members of the AFIA Committee’s Publications Sub-Committee. It is intended as a descriptive piece and should not be interpreted as representing the views of any of the AFIA Committee members, or of their respective firms or organizations.

[1] In this regard, BIT provisions have slight differences that may impact the final valuations.

[2] Factory at Chorzów (Germany v. Poland), 1927 PCIJ (Ser. A) No. 17, note 2, p. 47.

[3] ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, para. 497 (emphasis added). The ex post approach was used earlier in non-BIT investment cases. See, for instance, AMCO Asia Corp. et al. v. Republic of Indonesia, Resubmitted case, ICSID Case No. ARB/81/1, para. 96 (“If the purpose of compensation is to put Amco in the position it would have been in had it received the benefits of the Profit-Sharing Agreement, then there is no reason of logic that requires that to be done by reference only to data that would have been known to a prudent businessman in 1980 [the date of the expropriation])”.

[4] See I. Marboe, Calculation of Compensation and Damages in International Investment Law, Oxford University Press 2009, paras. 3.274-3.275.

[5] El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award, 31 October 2011, para. 706.

[6] ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and the Merits, 13 September 2013, para. 343.

[7] Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 28 July 2014, paras. 1769 and 1826.

[8] Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, 16 September 2015, paras. 370 and 377.

[9] Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award, 7 February 2017, para. 326.

[10] See, for instance, R. Deutsch, “An ICSID Tribunal Values Illegal Expropriation Damages from Date of the Award: What Does This Mean for Upcoming Expropriation Claims? A Case note and Commentary of ADC v. Hungary.” (2007) 4 (3) Transnational Dispute Management, pp. 10-12; M. Abdala, P. Spiller and S. Zuccon, “Chorzow’s Compensation Standard as Applied in ADC v. Hungary” (2007) 4 (3) Transnational Dispute Management, pp. 8-9.

[11] Partially Dissenting Opinion of Brigitte Stern in Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, 16 September 2015, para. 44. See also, Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award, 7 February 2017, p. 125, fn. 542.

[12] Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, 16 September 2015, para. 44.

[13] Factory at Chorzów (Germany v Poland), 1927 PCIJ (Ser. A) No. 17, note 2, p.47.

Is Arbitral Justice Blind? The Conflict of Law and International Commercial Arbitration

 

By Benjamin Hayward, Lecturer in the Deakin Law School at Deakin University, Australia, and is the author of Conflict of Laws and Arbitral Discretion – The Closest Connection Test (Oxford University Press, 2017). Dr. Hayward’s teaching and research span a range of commercial law and international commercial law topics, with a particular focus on private international law, international commercial arbitration, and the international sale of goods.

A version of this article was originally published on the OUPblog on 16 February 2017.

 

It’s a fundamental principle of developed legal systems that justice is blind. This is often represented by the blindfolded Lady Justice. Objectivity is key to the determination of legal disputes, and parties’ rights and obligations.

International commercial arbitration plays an important role in the resolution of cross-border commercial disputes. Rather than submitting their disputes to foreign courts (which may carry significant business risks), commercial parties will often include an arbitration clause in their contracts.

Through these clauses, they agree to resolve future disputes by arbitration rather than through State courts, before an arbitral tribunal rather than a judge. The arbitration is likely to be held in a neutral country. Empirical studies carried out at the School of International Arbitration confirm arbitration’s preferred status as a dispute resolution mechanism.

What, then, of blind justice in arbitration? Does international commercial arbitration hold fast to this same objectivity ideal?

It’s well-established in international commercial arbitration that all arbitrators — even party-appointed arbitrators — must be impartial and independent. However, objectivity can be compromised by means other than bias. An analysis of the current legal framework for resolving the conflict of laws in international commercial arbitration raises serious objectivity concerns, given the wide discretions enjoyed by arbitrators in identifying the governing law for disputed contracts.

In most commercial contracts, parties choose their governing law, and these choice of law clauses are generally respected. However, statistics published by the International Chamber of Commerce demonstrate that parties don’t choose the governing law in around 16% of cases, based on the ICC’s 1990-2015 case load.

Though it’s a distinctly commercial form of justice, international commercial arbitration remains a dispute resolution process grounded in the application of law. Where parties do not themselves choose a governing law, and where a dispute arises under their contract, its identification falls to the arbitrators.

Different legal systems provide different solutions to different legal problems. The following are just a few examples where the law may differ from State to State: whether or not commercial parties owe good faith obligations; the availability of specific performance as a contractual remedy; the enforceability of agreed sums for breach; and the length of time permitted to bring proceedings under relevant statutes of limitations.

When making choices between (different) potentially applicable laws, arbitrators exercise a conflict of laws function, which stands to substantially affect the outcomes of cases. Take, for example, arbitral proceedings that are instituted after three years; where the Respondent’s State has a two year statute of limitations; and where the Claimant’s State has a four year limitation period. If the Claimant’s home law is applied, it will at least be afforded the opportunity to argue its case, but if the Respondent’s law is applied, the claim will not be allowed to proceed at all.

Given that arbitrators’ conflict of laws determinations can substantially affect the outcomes of cases, it might be surprising to know that there is often no specific test or rule for arbitrators to apply in choosing between different potentially applicable laws. Rather, arbitrators are generally empowered to apply the law deemed “appropriate” or “applicable.” The matter is otherwise left entirely within their broad discretion, to select whatever law is felt (by them) best suited to the dispute.

To take just a small number of examples: the UNCITRAL Arbitration Rules 2010 indicate in their Art. 35(1) that a tribunal “shall apply the law which it determines to be appropriate”; Art. 21(1) of the ICC Arbitration Rules 2017 instructs a tribunal to “apply the rules of law which it determines to be appropriate”; and Art. 39(1) of the ACICA Arbitration Rules 2016 requires a tribunal to “apply the rules of law which it considers applicable.”

None of these rules — or the world’s many others like them — provide sufficiently certain tests or criteria for arbitrators to apply in making conflict of laws decisions. The discretions enjoyed under these kinds of provision are so wide, that arbitrators may ground their conflict of laws decisions in any reasoning — even their subjective assessments of the merits of competing laws.

How does this comport with the ideals of objective justice? Arguably, this kind of discretionary procedure does not sit comfortably with objective dispute resolution, and thus the needs of arbitration’s users. User needs are an important consideration in the design of arbitral procedure — arbitration’s very existence, as a legal institution, is premised on serving international merchant needs.

From the parties’ perspective, arbitrators’ wide conflict of laws discretions lead to legal uncertainty, and generate transaction costs. Not only do the parties’ rights and obligations in an arbitration itself stand to be affected, but also their contractual performance before any dispute even arises, and their settlement negotiations. Uncertainty over the governing law can also impact upon the parties’ due process rights in formal arbitral proceedings.

Arbitral procedure is in a constant state of reform. States and arbitral institutions strive to innovate, and to improve their arbitral laws and rules, based on their assessment of user needs. Recent reforms have included provisions addressing complex arbitration issues such as consolidation, as in Art. 22(1)(ix)-(x) of the LCIA Arbitration Rules 2014, and also provisions regulating the early dismissal of claims and defences where “manifestly without legal merit”, as in Art. 29 of the SIAC Arbitration Rules 2016.

Is arbitral justice blind? On the current state of the law, not quite. Curtailing these wide conflict of laws discretions currently prevailing in arbitration — and replacing them with a more certain rule that would be more useful to arbitrating parties and their advisers — would be a worthy item for future attention in discussions about the ongoing reform of arbitral procedure.

The Third-Party Funding Framework: The Ever-Evolving Singapore

Christopher Bloch, Associate Counsel, SIAC; Akanksha Bhagat, Associate Counsel, SIAC

With 2016 being significant for arbitration in Singapore, 2017 is already shaping up to be another important year following the passing of the Civil Law (Amendment) Bill 2016 by the Singapore Parliament on 10 January 2017. Having come into force from 1 March 2017, the new legislation liberalizes the city-state’s legal regime by creating a framework to allow for third-party funding in certain areas of dispute resolution, including international arbitration and mediation.

The Rise of Third-Party Funding Across the Asia-Pacific Region

It is not news that jurisdictions in the Asia-Pacific region have begun supporting the use of third-party funding arrangements. In fact, the development of a third-party funding market in Australia has been ongoing for the last 25 years, and the discussions in Singapore and Hong Kong have been taking place for several years now. However, such arrangements have remained historically unenforceable due to the common law torts of champerty and maintenance, which make a person sharing in the proceeds of a lawsuit or supporting/promoting another’s suit for their personal gain punishable, respectively.

The benefits that third-party funding brings to businesses across the globe are fairly uniform, ranging from allowing impecunious parties and small-to-medium-sized businesses with limited funds and/or legal “war chests” better access to justice to permitting larger businesses to free up their balance sheets and shift the sometimes burdensome costs and risks associated with dispute resolution. Despite these benefits, however, third-party funding arrangements have been unavailable across much of Asia.

Consequently, with third-party funding only just being introduced in these jurisdictions, there is a need to determine the manner in and degree to which it will be regulated, which is as yet unclear. The issues commonly associated with and debated in relation to third-party funding will be issues in Asia as well (for example, conflict of interest, disclosure and confidentiality), and it remains to be seen how local legislation and regulation will attempt to deal with them.

Additionally, third-party funding in Singapore is only being extended to international mediation and arbitration, with funding remaining unavailable in the domestic litigation context (although as noted by the Singapore High Court in 2015 in Re Vanguard Energy Pte Ltd [2015] SGHC 156, litigation funding may be available in certain insolvency cases, under the appropriate circumstances) and a clear prohibition on legal advisors having any economic interest in the third-party funding. It is therefore narrower than the offering in certain other jurisdictions, such as Australia, where third party funders are even being permitted to invest in law firms.

The Ever-Evolving Singapore

It has become trite commentary that Singapore has emerged as a preeminent global seat for international arbitration. With high trade flows both into and out of Asia leading to an increase in the number and complexity of cross-border commercial disputes, Singapore’s excellent infrastructure and geographical connectivity have made it a global “hub of trade” and center for arbitration.

Combined with a judiciary that provides maximum support and minimal intervention in arbitral proceedings and world-renowned hearing facilities at Maxwell Chambers, Singapore has committed to staying at the leading edge of international arbitration. To carry on this commitment, and recognizing that third-party funding arrangements have become more prevalent in the international arbitration arena, the Singapore Ministry of Law submitted the Civil Law (Amendment) Bill 2016 to the Parliament, following a period of public consultation, for its first reading in November 2016.

The proposed bill sought to:

  1. abolish the common law torts of champerty and maintenance in Singapore;
  2. provide that third-party funding arrangements are no longer against public policy in certain prescribed categories of proceedings (to be defined in subsidiary legislation following enactment);
  3. specify that third-party funding may only be provided by entities that meet certain criteria set out in subsidiary legislation; and
  4. make a related amendment to Singapore’s Legal Profession Act to clarify that lawyers may introduce or refer funders to their clients, so long as they do not receive any direct financial benefit from such introduction or referral, and can act for their clients in relation to third-party funding contracts.

On 10 January 2017, the Singapore Parliament conducted a second reading of the bill and passed the Civil Law (Amendment) Bill 38/2016 which becomes enforceable upon publication in Singapore’s Government Gazette. While this is a major step in the advance of Singapore as a leading hub of international dispute resolution, the community will continue to watch for the Ministry of Law to release the regulations necessary to fully flesh out the third-party funding framework. As specified in the law:

The Minister [of Law] may make regulations necessary or convenient to be prescribed for carrying out or giving effect to this section, including –

  • prescribing the qualifications and other requirements that a Third-Party Funder must satisfy or comply with to be a qualifying Third-Party Funder;
  • prescribing the class or classes or description of dispute resolution proceedings to which this section applies; and
  • governing the provision and manner of third-party funding including the requirements that the Third-Party Funder and the funded party must comply with.

 

Moving forward, readers should watch as Singapore begins to release the subsidiary legislation and regulations envisaged by the initial law, to give a shape to the developing framework. As Singapore’s Senior Minister of State for Law, Indranee Rajah SC, stated during her speech before the Singapore Parliament on 10 January 2017: “[t]he Ministry of Law is working with arbitration institutions and practitioners to initiate the production of such ‘soft laws’”. Once crafted, these regulations and “soft laws will help to shape how funding works in practice in the jurisdiction.

What It Could Mean for Arbitration in the Region

As Singapore moves forward in shaping its framework to deal with third-party funding, Hong Kong is also on the path to amending its laws to allow for third-party funding arrangements. With these two centers of arbitration taking this step, the region is set to further benefit from the opening of the industry as the volume of work is expected to increase.

Since the appetite for third-party funding has grown in Southeast Asia, it would not be surprising if more jurisdictions were to follow suit by liberalizing their legal regimes to allow for third-party funding arrangements. This is especially true for those jurisdictions keen to develop themselves as centers of dispute resolution. As this trend continues, it would seem inevitable that there will be a visibly wider appetite for funding throughout the Asian region.

Further, as investment arbitration has continued its steady rise around the globe and with the advent of third-party funding in the jurisdiction, Singapore has now become well-positioned to attract investor-state disputes. Without the availability of third-party funding, the reality is that some investors (and even certain States) would be unable to bring (or defend, as the case may be) treaty claims.

The quantum of arbitration work that the region will see is likely to increase both as a result of the increased access to justice that permitting third-party funding will allow for, and the fact that the competitiveness of Singapore and Hong Kong as arbitral seats will continue its upward trajectory as a result of these amendments. Drawing on Australia’s experience introducing third-party funding (where related regulation and legislation were varied and amended for almost three years between 2009 and 2012), it is likely that the legal regime in both Singapore and Hong Kong will similarly undergo a period of fine-tuning in their respective regulatory frameworks based on actual use and experience of third-party funding in each jurisdiction. Practitioners should aim to keep abreast of the developments to ensure they are up-to-date on how their clients can best utilize the tools available in the region.

 

(Post updated on 10 March 2017)

The Language of Arbitration in Indonesia

By Prof. Dr. Huala Adolf, S.H., LL.M., Ph.D., FCBArb., Vice President, BANI Arbitration Centre

 

The language used in an arbitration does not normally pose any problems when parties to an arbitration speak the same language. However, difficulties may arise where the parties speak different languages, are of different nationalities or if the arbitrators are of different nationalities. Reasonable practical solutions can normally be found between the parties and arbitrators in these types of situations, but an additional layer of complexity arises where national laws require the national language of the state to be used in commercial transactions.

This issue has recently raised concern in Indonesia after a domestic court in Jakarta delivered a judgment regarding the use of language in contracts. Following the decision, some have questioned if the decision of the court also affects which language can be used in arbitrations conducted in Indonesia. In the author’s view, any concerns surrounding the use of language in a contract should not affect what language can be used in an arbitration.

Law No. 24 of 2009 (Language Law)

The issue of language came to the fore in 2009 when the Government promulgated Law No. 24 of 2009 on the Flag, Language, State’s Coat of Arms and National Anthem (the “Language Law”).

The Language Law consists of 74 articles divided into five main regulations concerning: (i) the national flag (articles 4 – 24); (ii) the national language (articles 25 – 45); (iii) the State’s coat of arms (articles 46 – 57); (iv) the national anthem; and (v) the criminal provisions for the violations of the provisions regarding the national flag, the nation’s coat of arms and the national anthem. The criminal provisions are silent on what penalties can be incurred for violations of the provisions regarding Indonesia’s national language.

Article 27 of the Language Law clearly states that the Indonesian language, Bahasa Indonesia, shall be used in any official state documents. The explanatory provisions of Article 27 stipulates that official state documents include, among others, state decision letters, bonds, (official) certificates, the (official) notes, identity cards (ID), agreements and court decisions.

Furthermore, Article 31 of the Language Law states that Bahasa Indonesia shall be used in a memorandum of understanding or an agreement (including agreements in international public law) which involve a state institutions, a government institution, private Indonesian entity or Indonesian citizens (paragraph 1).

Paragraph 2 article 31 of the Language Law states that if a memorandum of understanding or an agreement as stipulated in paragraph 1 above involves foreign parties, it should also be drafted in the national language of the respective party and/or in English.

This seemingly gives the assurance that English may be used in drafting an agreement (or contract) where one of the parties is not Indonesian.

PT Bangun Karya Pratama Lestari (“BKPL”) v. Nine AM Ltd (“NAM”)

However, as stated above, concerns were raised when the District Court of Jakarta Barat (west Jakarta) ruled on the legality of a contract written in English in a case between PT Bangun Karya Pratama Lestari and Nine AM Ltd.

The claimant, BKPL, is an Indonesian limited liability company. The respondent, NAM, is a US limited liability company based in Texas. BKPL issued its claim against NAM in the District Court of West Jakarta on 30 August 2012.

BKPL had entered into a loan agreement with NAM on 23 April 2013. for NAM to provide a loan of USD 4,422,000 to BKPL. BKPL was to pay the loan back in 48 instalments. After making several loan payments, BKPL filed a claim in the West Jakarta Court alleging that the loan agreement signed between BKPL and NAM was in violation of article 31 of the Language Law. BKPL also claimed that because the loan agreement violated the Language Law, the loan agreement was null and void.

NAM denied that the agreement violated the Language Law and put forward a number of arguments. Firstly, the parties had already entered into a similar agreement and the use of English had never been disputed. Secondly, the parties were subject to the pacta sunt servanda obligation when they entered and agreed to be bound by the loan agreement.

The District Court held that the loan agreement was null and void and did not have any binding force upon the parties because it did not meet the formal requirements of a valid contract, i.e. it was not drafted in the Indonesian language. The District Court was of the opinion that every contract involving an Indonesian institution, company or private individual made after the enactment of the Language Law must be made in the Indonesian language.

The decision was affirmed by the High Court of Jakarta in 2014 and reaffirmed by the Supreme Court in 2015.

The Arbitration Language

The concern surrounding the use of language in a contract should not affect what language can be used in an arbitration. Generally, the parties to an arbitration agreement have autonomy to decide which language to use. This principle is enshrined in the UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law).

Article 22 paragraph 1 of the UNCITRAL Model Law provides that: “1. The parties are free to agree on the language or languages to be used in the arbitral proceedings. Failing such agreement, the arbitral tribunal shall determine the language or languages to be used in the proceedings. This agreement or determination, unless otherwise specified therein, shall apply to any written statement by a party, any hearing and any award, decision or other communication by the arbitral tribunal.”

Article 28 of Indonesian Law No. 30 of 1999, concerning arbitration and alternative dispute resolution in Indonesia (the “Indonesian Arbitration Law”), stipulates that the Indonesian language must be used in all arbitration proceedings, although parties may choose to use another language with the consent of the arbitrator or arbitration tribunal.

In contrast to the brief article 28 of the Indonesian Arbitration Law, there are extensive provisions regarding language under the arbitration rules of the Indonesian National Board of Arbitration (the “BANI Rules”). Article 14 of the BANI Rules addresses four elements related to the language of arbitral proceedings, namely:

(1) the language of the proceedings (para. 1);

(2) the document language (para. 2);

(3) the interpreter (para. 3); and

(4) the award language (para. 4).

 

BANI Rules on the language of arbitral proceedings mirror Article 28 of the Indonesian Arbitration Law (as set out above). Paragraph 1 article 14 of the BANI Rules provide that the case examination must be conducted in the Indonesian language. However, the parties may agree to use another language subject to the approval of the arbitration tribunal. The arbitral tribunal will consider several conditions when determining whether to grant approval, including:

(1)     the existence of foreign parties in the dispute;

(2)     if the arbitrators are foreign nationals who cannot speak the Indonesian language; or

(3)     if the dispute arises from a transaction that was conducted in another language.

Paragraph 2 article 14 of the BANI Rules addresses the situation where two languages may be used. If the original documentation submitted or relied upon by the parties in the submission of the case is in a language other than the Indonesian language, then the Tribunal may determine whether or not the original documents must be accompanied by a translation into the Indonesian language. Similarly when the original document is in the Indonesian language, the Tribunal may request for it to be translated into another language.

Under paragraph 3 article 14 of the BANI Rules, if the Tribunal and/or any party requires the assistance of an interpreter during the proceedings, such an interpreter shall be provided by BANI at the request of the Tribunal. The fee incurred for the interpreter shall be borne by the parties.

It is important to note that under Article 27 of the Language Law, arbitration awards are considered to be court decisions which are subject to the Language Law. Furthermore, Indonesian Arbitration Law requires arbitration awards to be registered with the Registrar of the District Court where the respondent is domiciled. As the officer of the Court, the Registrar will only register the arbitration awards written in Indonesian language.

Hence, arbitration awards in Indonesia must be written in the Indonesian language. If the parties are foreign nationals, the award may be translated into another language as requested by the foreign party. If the language used in the arbitration is not the Indonesian language, the translation of the award into the Indonesian language is required.

 

Does ISDS Promote FDI? Asia-Pacific Insights from and for Australia and India

 

By Prof Luke Nottage (University of Sydney Law School) & A/Prof Jaivir Singh (Jawaharlal Nehru University, Delhi)

 

Treaty-based Investor-State Dispute Settlement (ISDS) keeps attracting media attention. An example is a social media campaign by the ‘GetUp!’ group, which aims generally ‘to build a progressive Australia and bring participation back into our democracy’,[1] objecting to ratification of the Trans-Pacific Partnership (TPP). This free trade agreement (FTA), signed in February 2016, encompasses Australia and 11 other Asia-Pacific economies generating around 40% of world GDP. Whether and how the TPP will be ratified and come into force has become very uncertain anyway, after the unexpected victory of Donald Trump in US presidential elections. Although Trump seems already to be backtracking on some of his pre-election positions, he had been opposed to the US ratifying the TPP and indeed favoured renegotiation of the longstanding North American FTA with Canada and Mexico.[2] Both FTAs include the option of ISDS, allowing foreign investors to bring direct claims against host states for violating substantive commitments such as non-discrimination or adequate compensation for expropriation.

 

Nonetheless, taking advantage of the extra uncertainty now surrounding the TPP, China is already trying to get Australia’s support to progress negotiations for a broader FTA, establishing a “Free Trade Area of the Asia-Pacific” (FTAAP).[3] China had been pressing for a FTAAP as it had not been included in TPP negotiations.[4] After the TPP was signed, China had also tried to accelerate negotiations for the Regional Comprehensive Economic Partnership (RCEP or “ASEAN+6”) FTA, underway since late 2012 and involving ten Southeast Asian states along with China, Japan, Korea, India, Australia and New Zealand. Ministerial statements and a leaked draft Investment Chapter indicate that ISDS provisions remain on the negotiating agenda for RCEP.[5]

 

Public opposition to ISDs therefore remains an important issue, particularly in the Asia-Pacific region. Legal professionals need to engage with this debate and understand the pros and cons of this dispute resolution procedure, especially the investor-state arbitration mechanism. On the one hand, the GetUp! Campaign against the TPP had focused on the risk of Australia being subject to ISDS claims especially from US investors, in light of their claims against Canada under the North American FTA. Yet damages awarded by arbitrators or through settlements amount to only 0.05% of US FDI in Canada,[6] and the latter’s investors bring more ISDS claims per capita than US investors.[7]

 

On the other hand, the GetUp! campaign did not adequately explain or consider why and how ISDS commitments are made. Host states have increasingly offered such protection to foreign investors in investment treaties since the 1970s. Bilateral investment treaties (BITs) proliferated especially as communist states began to open up their economies from the 1990s. Bilateral and regional FTAs, usually with investment chapters also containing with ISDS protections, were concluded after the collapse of efforts to develop a multilateral investment agreement through the World Trade Organization (WTO) and Organisation for Economic Co-operation and Development (OECD).

 

The extra option of treaty-based ISDS was seen as a more direct and less politicized procedure compared to inter-state dispute settlement. The latter is still typically provided in investment treaties (but hardly ever used), as well as for trade disputes under the WTO (where, for example, Australia has only been complainant in seven cases – last in 2003).[8] Credible commitments through ISDS-backed treaties were seen as particularly important for developing countries where domestic courts and legal protections did not meet international standards.

 

Yet ISDS has recently become a lightning rod for public opposition to FTAs (and economic globalization more generally), often after host states are subjected to their investment treaty claims.[9] For example, major debate emerged in India after Australia’s White Industries won a claim in 2011 under UNCITRAL Arbitration Rules as provided by the BIT with India (signed with Australia in 1999). The tribunal found that India had not satisfied the promised “effective means” for the investor to enforce a commercial arbitration award (against an Indian SOE). This and subsequent claims prompted the Indian government to finalise a revised (less pro-investor) Model BIT in December 2015.[10] It is now being used in negotiating new BITs (eg that signed with Cambodia in 2016) and indeed when proposing to terminate older-generation treaties (including with Australia).[11]

 

Similarly, Philip Morris Asia’s much larger claim initiated in 2011 under a BIT signed in 1993 with Hong Kong, for alleged expropriation of trademarks from Australia’s tobacco plain packaging legislation, led to escalating local media coverage – until the arbitral tribunal rejected jurisdiction in 2015.[12] This cause celebre also became a factor behind the Gillard Government Trade Policy Statement announcing in 2011 a major shift for Australia: eschewing ISDS in new treaties, even with developing countries.[13] This resulted in no significant FTAs being concluded, until a new Coalition Government gained power in late 2014 and reverted to including ISDS on a case-by-case assessment.[14] The current Labor Opposition maintains its objections to ISDS, creating difficulties for Australia to ratify the Trans-Pacific Partnership FTA.[15]

 

Australia’s temporary shift was partly due to politics: in 2011 the (centre-left) Gillard Labor Government was in coalition with the Greens, who are even more opposed to free trade and investment. But the stance also relied on arguments from some economists, even though they instead favour more free trade and foreign investment,[16] albeit through unilateral[17] or perhaps multilateral initiatives rather than bilateral or even regional FTAs. Developing the latter perspective,[18] a majority report of the Productivity Commission in 2010 into Australia’s FTAs had argued against the common world-wide practice of offering foreign investors extra procedural rights such as ISDS. It did concede that such extra rights might be justified, for example if they led to greater cross-border flows in foreign direct investment (FDI). Yet the Commission pointed to a few studies suggesting that, on an aggregate (world-wide) basis, ISDS-backed treaty provisions had not significantly increased flows.

 

A recent econometric study by Luke Nottage (a co-author of this posting) with Shiro Armstrong casts doubt on that observation.[19] After an extensive review of existing empirical research and associated methodological issues, their study instead found instead positive and significant impacts from ISDS provisions on FDI outflows from OECD countries over 1985-2014, using a Knowledge-Capital Model with a dynamic panel indicator (effectively addressing the problem of endogeneity in variables). This impact on FDI could be found from ISDS provisions on their own, especially when ISDS was included in treaties signed or promptly ratified with non-OECD or less developed countries. The econometric study by Armstrong and Nottage also found a positive and significant impact from ISDS provisions when combined with the Most-Favoured-Nation provision, which is a key and indicative substantive treaty commitment for foreign investors. (This aspect was tested because the “strength” of treaties can vary in terms of substantive commitments by host states: we might not expect much impact on FDI even from ISDS provisions if the substantive protections and liberalisation commitments are few.)

 

Counter-intuitively, however, the study found that in general FDI impact was even larger for weaker-form ISDS provisions. This could be due to investors historically having been impressed by a broader ‘signalling’ effect from states concluding investment treaties. Yet the impact from ISDS provisions also seems to be diminishing since 2001, when ISDS claims started to pick up world-wide and therefore investors (or at least legal advisors) could have begun to pay more attention to the details of ISDS and other treaty provisions. Reduced impact since 2001 may be related to more efforts from host states to unilaterally liberalise and encourage FDI. However, it could also be due to a saturation effect (as treaties began to be concluded with less economically important partner states), or indeed due to less pro-investor provisions being incorporated into investment treaties (influenced by more recent US practice, partly in response to ISDS claims[20]).

 

Further variables impacting on FDI (such as double-tax treaties) could be investigated, as can regional differences. Data limitations also remain, as there is now considerable FDI outflow from non-OECD countries. Nonetheless, this baseline study suggests that it has been and still may be risky to eschew ISDS provisions altogether. In particular, results indicate a strong positive effect on FDI flows from ratified investment treaties overall even from 2001. So states would have missed out on that if they had insisted on omitting ISDS, and this then became a deal-breaker for counterparty states.

 

Further econometric research underway at a Delhi-based thinktank[21] suggests that India was correct not to abandon ISDS provisions altogether in its revised Model BIT (and to retreat from an even less pro-investor earlier draft of the Model BIT[22]). While this study by Jaivir Singh (one of the co-authors of this posting) and his colleagues is still ongoing, preliminary results (using instead a gravity-type model) find that although the signing of individual BITs had an insignificant impact on FDI inflows into India, the cumulative effect of signing BITs is significant and so is the coefficient associated with the signing of FTAs. Since almost all of India’s investment treaties provide for full ISDS protections, these preliminary results suggest that ISDS can have a positive influence on foreign investment, albeit in a non-obvious compound manner.

 

Overall, these studies suggest that ISDS-backed treaty provisions liberalising and protecting FDI have had a significant impact, but in complex and evolving ways. Agreeing to dialed-back ISDS provisions and even substantive commitments (perhaps following recent EU preferences[23]) may be an acceptable way forward. This is true especially for Australia and India, as they continue negotiations bilaterally as well as through RCEP, and perhaps eventually for the FTAAP FTA.

 

[This posting draws on Nottage’s joint project researching international investment dispute management, funded by the Australian Research Council (DP140102526, 2014-7); and Singh’s ongoing project assessing the impact of investment treaties on FDI in India, for the Indian Council for Research on International Economic Relations. Singh was a visitor at the University of Sydney in October 2016.]

 

[1] https://www.getup.org.au/

[2] http://www.economist.com/news/united-states/21709921-americas-next-president-wants-pull-out-existing-trade-deals-and-put-future-ones

[3] http://www.afr.com/news/economy/trade/china-names-australia-as-key-partner-in-push-for-new-trade-bloc-20161114-gsozj5

[4] http://thediplomat.com/2015/11/as-tpp-leaders-celebrate-china-urges-creation-of-asia-pacific-free-trade-area/

[5] Kawharu, Amokura and Nottage, Luke R., Models for Investment Treaties in the Asian Region: An Underview (September 28, 2016). Sydney Law School Research Paper No. 16/87. Available at SSRN: http://ssrn.com/abstract=2845088

[6] https://www.cigionline.org/publications/experienced-developed-democracy-canada-and-investor-state-arbitration

[7] http://kluwerarbitrationblog.com/2016/11/14/are-us-investors-exceptionally-litigious-with-isds-claims/

[8] https://www.wto.org/english/tratop_e/dispu_e/dispu_by_country_e.htm

[9] Nottage, Luke R., Rebalancing Investment Treaties and Investor-State Arbitration: Two Approaches (June 14, 2016). Journal of World Investment and Trade, Forthcoming, 2016; Sydney Law School Research Paper No. 16/54. Available at SSRN: https://ssrn.com/abstract=2795396

[10] http://kluwerarbitrationblog.com/2016/01/18/unveiled-indian-model-bit/

[11] http://economictimes.indiatimes.com/news/economy/foreign-trade/india-seeks-fresh-treaties-with-47-nations/articleshow/52458524.cms

[12] Hepburn, Jarrod and Nottage, Luke R., Case Note: Philip Morris Asia v Australia (September 29, 2016). Journal of World Investment and Trade, Forthcoming; Sydney Law School Research Paper No. 16/86. Available at SSRN: http://ssrn.com/abstract=2842065

[13] Nottage, Luke R., The Rise and Possible Fall of Investor-State Arbitration in Asia: A Skeptic’s View of Australia’s ‘Gillard Government Trade Policy Statement’ (June 10, 2011). Transnational Dispute Management, Forthcoming; Sydney Law School Research Paper No. 11/32. Available at SSRN: http://ssrn.com/abstract=1860505

[14] Nottage, Luke R., Investor-State Arbitration Policy and Practice in Australia (June 29, 2016). CIGI Investor-State Arbitration Series, Paper No. 6, 2016; Sydney Law School Research Paper No. 16/57. Available at SSRN: http://ssrn.com/abstract=2802450

[15] http://blogs.usyd.edu.au/japaneselaw/2016/09/tpp_and_foreign_investment.html

[16] http://www.eaber.org/node/24527

[17]http://www.smh.com.au/comment/is-turnbull–dr-jekyll-or-mr-hyde-on-trade-20160923-grmxx2.html

[18] http://www.pc.gov.au/inquiries/completed/trade-agreements/report/trade-agreements-report.pdf

[19] Armstrong, Shiro Patrick and Nottage, Luke R., The Impact of Investment Treaties and ISDS Provisions on Foreign Direct Investment: A Baseline Econometric Analysis (August 15, 2016). Sydney Law School Research Paper No. 16/74. Available at SSRN: http://ssrn.com/abstract=2824090

[20] Alschner, Wolfgang and Skougarevskiy, Dmitriy, Mapping the Universe of International Investment Agreements (June 28, 2016). Journal of International Economic Law, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2801608

[21] http://icrier.org/

[22] http://www.iareporter.com/articles/analysis-in-final-version-of-its-new-model-investment-treaty-india-dials-back-ambition-of-earlier-proposals-but-still-favors-some-big-changes/

[23] http://afia.asia/2016/08/towards-a-european-model-for-investor-state-disputes/