Report - 4th CARTAL Conference on International Arbitration (October 05-06, 2019)

Organised by the Centre for Advanced Research & Training in Arbitration Law [“CARTAL”]

Theme- Navigating Murky Waters: Addressing Uncertainties in International Arbitration 

Date(s)- 5th-6th October, 2019

Location- National Law University, Jodhpur, Rajasthan, India [“the University”].

The 4th CARTAL Conference on International Arbitration[“the Conference”] featured panel discussions on three topics: human rights and environment protection concerns in international investment arbitration, taking of evidence in international arbitration: Prague Rules versus IBA Rules and; institutional arbitration in India. The Conference was held in association with our institutional partners – the Asia Pacific Forum for International Arbitration (AFIA), the Bar Council Of India, the Chartered Institute of Arbitrators (India), the International Chamber of Commerce (International Court of Arbitration), the Mumbai Centre For International Arbitration(MCIA), the SAARC Arbitration Council (SARCO), the Society of Indian Law Firms (SILF) and the Vienna International Arbitral Centre of the Austrian Federal Economic Chamber (VIAC). The Conference is also supported by our knowledge partners SCC Online and Eastern Book Company.


 

Panel I: Human Rights and Environmental Protection Concerns in International Investment Law

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Ms. Dilber Devitre (Associate, Homborger, Switzerland) speaking on Human Rights and Environmental Concerns in Investment Treaty Arbitration: Recent Trends & Case lawsnoted that conversation has increased on these issues. For instance, the Global Arbitration Review has consistently reported on European countries such as Germany and Spain being involved in claims relating to investment in the energy sector and the violation of domestic environmental standards by foreign investors thereof.

While human rights have traditionally been addressed in international conventions such as the Universal Declaration of Human Rights, treaties on environmental protection do not refer to human rights and therefore, there is no direct overlap. However, human rights relating to right to health and an adequate standard of life breathe in concerns of environmental degradation as violative of human rights. On the other hand, Bilateral Investment Treaties [“BIT”] and Multilateral Investment Treaties [“MIT”] or simply, international investment agreements [“IIA”] provide for the protection of rights of an investor against State sanctions.  

IIAs have come to be criticised for being a source of investor rights only.  The first criticism is that the Investor- State Dispute Settlement [“ISDS”]regime, in itself, is not balanced in terms of the rights of State and investor. Thereby, BITs and MITs are not conducive for States to impose obligations, but only for investors to bring about claims against measures taken by States. This gives rise to the second criticism. The curtailment ofa State’s power to regulate investorsis detrimental when regulation is necessary, especially, in matters having a public purpose such as climate change and environmental concerns. In Vattenfall v. Germany (I), Vattenfall being a Swedish energy company obtained a license to open and operate an energy plant using coal in a German city.  

According to Vattenfall, delays of required government permits started when the State’s environmental ministry established “very clear requirements” for the plant, due to “the reports of the Intergovernmental Panel on Climate Change having alerted the public to the impending climate change.” Under social oppositions against the plant relating to the quality of air and water in the neighbouring river, the new government imposed additional requirements to protect the river near the plant. Public opposition to the proposed plant focused on prospective carbon emissions and water pollution.  After Vattenfall litigated in domestic courts, the coalition government issued the permits to Vattenfall, but with additional requirements to protect the Elbe River. Instead of  complying with these requirements, Vattenfall launched its investor-state claim against Germany, arguing that Hamburg’s environmental rules amounted to expropriation and a violation of “fair and equitable treatment”. When Vattenfall submitted the dispute to the International Centre for the Settlement of Investor Disputes [“ICSID”], it argued that the new government legislation amounted to expropriation and excessive regulation after considerable expenditure into the plant was made by Vattenfall. The case was eventually settled in favour of Vattenfall and the plant began its operations. This is an instance of the State not being permitted to regulate where regulation was necessary. Therefore, it was contended that investor-State arbitrations allow for investors to circumvent State sanctions.

There are three major trends that have recently been witnessed in this regard. First, the use of human rights and environmental concerns as tools for interpretation. Article 31 of the Vienna Convention on the Law of Treaties provides for the interpretation of a treaty in accordance with other treaties between the parties and conventions consented to by the State. This provision is claimed to be sufficient to provide a ‘backdoor’ for the settlement of disputes involving concern of human rights and environment. For example, in Philip Morris v. Uruguay, the Tribunal held that the legislation which required health warnings to cover 80% of cigarette packets was not an expropriatory measure. The Tribunal held that a legislation such as this was in public interest so as to discourage the consumption of tobacco i.e. a public health concern. Furthermore, while agreeing with Uruguay, the Tribunal held that, not only was the foreign investor under an obligation, but so were all domestic tobacco companies. Therefore, the Tribunal refuted arguments relating to “unfair treatment” and expropriation could not be established. 

SecondStates leveraging human rights obligations as a defence i.e. as a shield, to oppose claims by investors. Such arguments emerged in claims against Argentina in CMS v. ArgentinaContinental Casualty Co. v. Argentina and National Grid v. Argentina wherein it claimed that all measures were a necessity with a public purpose. CMS commenced arbitration proceedings against Argentina at ICSID under the United States–Argentina BIT regarding the actions taken to defer the application of the US Producer Price Index to gas industry tariffs, Argentina’s Emergency Law and other measures adopted during the crisis. CMS claimed violations of the BIT with respect to expropriation and fair and equitable treatment. The Tribunal rejected CMS’s claims on expropriation, but ruled that Argentina had breached its obligations on fair and equitable treatment and the umbrella clause (by violating stabilization clauses in a licence). However, the Tribunal also rejected Argentina’s preliminary objection to jurisdiction and did not accept Argentina’s necessity and emergency defences relating to the severe economic, social and political crisis that unfolded in Argentina. In Continental Casualty, Argentina restricted transfers out of its territory, ‘pesified’ U.S. dollar deposits, and pesifiedand defaulted on its debt instruments. Continental claimed that, due to these measures, it suffered losses of US$46,412,000. The Tribunal held that Continental failed entirely in its claims based on freedom of transfer and the umbrella clause. The Tribunal further held that the defence of necessity in the United States–Argentina BIT precluded Argentina’s liability for breaching the BIT’s umbrella clause and for failing to ensure fair and equitable treatment. The sole claim on which Continental prevailed was that of breach of fair and equitable treatment regarding the 2004 restructuring of certain treasury bills. Therefore, while the tribunal in CMS disagreed, the Continental Casualty tribunal agreed with this contention.

Third, obligations relating to human rights and environmental concerns are used as a sword by submitting these contentions as counterclaims. To substantiate the same, the case of Cortec Mining v. Kenya was referred. Domestic laws of Kenya required mining companies to conduct an environmental impact assessment. However, the investors in this case did not comply with this requirement. The Tribunal held that the actions of the investors amounted to “improper investment” and therefore, the tribunal lacked jurisdiction to settle the dispute. This trend gives rise to certain challenges. As for the jurisdictional challenges, Cortec presents a sufficient illustration. While challenges relating to cause of actionquestion the existence of an obligation on the investor, challenges of connectednessrequired claims to be intrinsically connected to the investors claim. In Urbaser v. Argentina,when the investor was required to make an investment for clean water and sanitation and failed at doing so, the Tribunal held that the provision allowing for arbitration under the relevant contract does not sufficiently allow for submitting a counterclaim against the investors’ claims. Therefore, claims could not be adequately connected.

 

Mr. Kabir Bhalla (Barrister, King & Spalding LLP)identified three problems: which legal standards are to be applied, who makes the argument, and which forum is appropriate to hear disputes of this kind.There is a point at which investment arbitration and human rights treaties intersect. Article 1 of the European Convention on Human Rights [“ECHR”] enshrines a right to property, qualified, notably, by the proviso that the provisions shall not in any way impair the right of the State to enforce laws that control such right in the general interest, for imposition of taxes, and so on. This is quite like the way a claim against expropriation functions. Similarly, Article 14 of the ECHR which prohibits discrimination has parallels with claims for impairment of investment through unreasonable or discriminatory measures. The real question is how arbitrators, States and investors have negotiated these overlaps.In Tecmed v. United Mexican States,second paragraph of Article 1, Protocol 1, to extend the discretion State(s) have to impose certain measures. In Siemens v. Republic of Argentina, the tribunal observed that Protocol 1 permits a “margin of appreciation” not found in customary international law. 

Tecmed illustrates that non-discriminatory measures taken by states to respond to public concerns about threats to health and environmental protection may constitute expropriations and/or violate the Fair and Equitable Treatment standard. It also sets forth an expansive interpretation of the Fair and Equitable standard as imposing broad obligations on governments to act transparently and consistently in development and pursuit of their goals and regulations. 

In Phillip Morris, a very eminent tribunal including Dr. Gary Born, stated that the margin of appreciation applies to claims arising out of BITs and not just the ECHR. A contrary perspective however, is Von Pezold v. Zimbabwe, where it was emphasised that due caution must be exercised in importing concepts from other legal regimes, including European human rights law. However, two tribunals saying different things about Article 1 Protocol 1 within the space of a year,  adds uncertainty for investors in ascertaining what legal standards will apply.Moving beyond the ECHR, in Bear Creek Mining, there was a partial dissenting opinion by Professor Sands, who spoke of free-standing obligations and applying it in the context of damages and reduction of legal damages. Urbaser v. Argentina, talks about different conventions and treaties, and uses the pathway provided by Article 31(3)(c) of the VCLT. The decision emphasises that findings as to this point, must be context dependent. This further adds to the uncertainty that investors face. 

The second problem was the question of who makes an argument, referencing briefs and submissions made by an amicus curiae. The key challenge to effective amicus participation, is the fact that under the relevant rules, they are prevented from making submissions, if even one-party objects. Rule 37 of the ICSID Rules also imposes a duty on the tribunal to ensure that the non-disputing party submission does not disrupt the proceeding or unfairly prejudice or burden any party. While in some cases, such as Biwater Gauff and Methanex, amicus submissions have been accepted, several other cases also evidence a more negative trend in this respect, in many instances, simply by virtue of procedural rules. For instance, in Pac Rim Cayman, the amicus did not have the right to access the record or evidence. In cases where seventy percent of the decision often depends on facts, he argued, such requirements are prohibitive and lead to the failure of amicus submissions.

 

The third and final problem of deciding the appropriate forum arises often, on the construction of the BIT itself, as the dispute does not fall within the ambit envisioned; such as inBiloune v. Ghana. In this case, the investor had been arrested and held in custody for 13 days without charge and finally deported to Togo from Ghana. The claimant sought redress also for these alleged violations of human rights. The UNCITRAL arbitration was based on Article 15(2) of the agreement between the investor and the host state. The tribunal affirmed that customary international law requires that a state accord foreign nationals a minimum standard of treatment and that international law endows all individuals with inviolable human rights.Second, there may be cases of concurrent jurisdiction. In this regard, Article 26 of the ICSID Convention, and Article 35(2)(b) of the ECHR were highlighted. However, in cases where there is identity- on three counts, that is, of parties, cause of action and objective of dispute, fork in the road applies and parties must choose one remedy. For example, in Amto v. Ukraine, a case under the Energy Charter Treaty, the question was whether an action before the European Court of Human Rights meant that the ECT arbitration had to be stayed. In this case, the Court was able to differentiate the two causes of action and allow concurrent proceedings.

 

Mr. Harshad Pathak (Associate, P&A Law Offices) reiterated that the central concern is to infuse a sense of balance into investment arbitration. However, as noble as these objectives may be, issues of compatibility arise.  The following two questions were sought to be addressed- whether the investment treaties in question can be used to hold the investor liable for human rights and environmental concerns; and secondly, whether a host state can file a counterclaim against an investor. 

There are three situations in which jurisdiction can be exercised. The first, and easiest basis for exercise for such jurisdiction, is express consent given by the investor. Reference is made to Burlington Resources Inc v. Republic of Ecuador, where the investor ultimately thought it preferable to enter into another arbitration agreement allowing for counterclaims by the State than have the dispute be litigated in domestic courts. 

The second source of such obligations is treaties that may or may not permit counterclaims. An example is Article 9 of Romania-Greece BIT; which came up in Spyridon Roussalis v. Romania, where the treaty itself provided only for disputes concerning the obligations of the host state. It also concerned the investor the right to submit the dispute. This example shows, therefore, that treaty provisions can very specifically limit the locus to bring claims to investors only. When such cases are common, the doors allowing a State to file a counterclaim are unlikely to open. In Urbaser v. Argentine, on the other hand, the Argentine-Spain BIT allowed for submission at the request of either party. This shows that the underlying treaty provision is crucial in determining whether the State is allowed to bring a counterclaim.

The third source of double or implied consent,can be explained with reference to Prof. Reisman’s dissent in Spyridon Roussalis, the reasoning of which was also accepted by the tribunal in the case of Antoine Goetz v. Republic of Burundi. The concept refers to instances where tribunals have found that the investor’s consent to ICSID was sufficient to imply that there was consent to a counterclaim being brought, without any need to locate consent in the underlying BIT. Article 46 of the ICSID Convention provides that counterclaims can be brought, as long as they are within the contemplation of the parties.

As for the source of an investor’s human rights and environmental obligations, there was referenceto the Burlington Resources v. Ecuador case, where contractual obligations and the domestic law of the host State were together the source of the obligation. Burlington, in its principal claim before ICSID, argued that the measures taken by Ecuador, namely ‘Law 42’, the seizure of shares, the physical takeover of the production facilities and the termination of the PSCs—constituted an expropriation. According to Ecuador, its measures were not expropriatory mainly because Burlington had no right to revenues stemming from oil prices in excess of the price assumption made by the parties. In addition, Ecuador filed counterclaims for violations of Ecuadorian environmental laws and breaches of contractual obligations by Burlington. In its decision on liability, by analysing each measure individually, the tribunal found that Law 42 was not expropriatory as such, because it did not substantially deprive Burlington of the investment as a whole. The seizure of certain fractions of the investment was also not tantamount to expropriation mainly because the investment remained profitable. However, the tribunal found that Ecuador expropriated Burlington’s investment when it took possession of the production facilities in 2009.

Second, obligations may be derived from the treaty itself. The Netherlands Model BIT and the Indian Model BIT refer to investors being subject to the law of the host State including environmental law, law relating to the conservation of natural resources, and the law relating to human rights. Though such initiatives, like the Model BITs aforementioned may be criticised for not being in line with current practice, they certainly provide some indication towards the future. For instance, a revised draft of India’s Model BIT, reduced the obligation to a general provision and included provisions for CSR.


In response to a question as to why host states should be given the leeway to bring counterclaims, the Panel emphasised that investors cannot be left completely unaccountable for their actions. The imbalance perceived in the investor state dispute settlement system must be countered.

A question was asked about the role that institutional rules can play in facilitating counterclaims, but the answer from the panellists, in agreement with each other, was that rules must remain neutral and only keep the possibility of counterclaims open. The rest must be left up to party autonomy.

With respect to whether the citizens of a host state may seek redress against the actions of investors through the judiciary instead of the executive in case of a complacent government. A second part to the question also provoked consideration of whether judicial action is holding some investor action unlawful may itself be challenged as expropriation.First, as for there being a precedent holding judicial action to amount to expropriation, the White Industriecase is highlightedSubject to the particular requirements of the system within the host state, it may be possible for citizens to take action against investors through the judiciary. This depends on, inter alia, whether the domestic judiciary is authorised to interpret or apply the country’s international obligations, in this case, BITs.



Panel II: Taking of Evidence in International Arbitration: Prague Rules versus IBA Rules

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Due to the lack of binding rules on the taking of evidence in international arbitration, parties and arbitrators have long been guided by the IBA Rules on the Taking of Evidence in International Arbitration, 2010 [“IBA Rules”]. These rules attempt to synthesise the common law and civil law traditions, by coming up with a new and neutral kind of soft law that ensures efficiency and fairness. In practice, these rules have become the default rules that parties turn to, in the absence of any real challenging alternative. It is thus, a matter of no surprise, that the emergence of the Prague Rules on the Efficient Conduct of Proceedings in International Arbitration, 2018[“Prague Rules”]has sparked heated debates in the arbitration community. The Prague Rules criticise the IBA Rules for creating an adversarial process akin to common law, and have been presented as an alternative that would help streamline arbitral procedures by allowing the tribunal a more active role, reducing the role of documentation in proceedings, and more controversially, avoiding all forms of e-discovery.

The classical distinction between these two approaches is based on the distribution of powers and duties between parties and adjudicators. Under an adversarial approach, the primary responsibility of the adjudicator is to preside over the proceedings and decide like an umpire. On the contrary, inquisitorial proceeding relies on the adjudicator having an active role in, generally, taking the initiative in the fact finding process and in the ascertainment of the law.

The Panel deliberated on the similarities and dissimilarities between the two sets of rules on taking of evidence in international arbitration, viz., the Prague Rules and the IBA Rules to assess whether the Prague Rules can serve as a better alternative to the widely used IBA Rules. 

 

Mr. Thomas Snider (Partner, Al Tamimi & Co., Dubai) has characterised the importance of fact-finding and taking of evidence in international arbitration as “70% of all arbitrations turn on facts and evidence rather than the application of principles of law”. This is why we must focus on emulating the best practices for taking of evidence in international arbitration. Thus, a comparison between the widely known and accepted IBA Rules with the newly promulgated Prague rules that intends to replace the former becomes necessary.

Adversarial and inquisitorial approaches of the common law and civil law traditions respectively, are distinguished on fact-finding and gathering of evidence. It was highlighted that the most important difference between the two approaches is reflected in the role of judges. While in an adversarial system, the entire burden of collecting and presenting evidence lies with the counsels and the judge has to merely decide based on such evidence, the roles are reversed in an inquisitorial system. In an inquisitorial approach, the judge is tasked with the finding of facts and plays a more robust and proactive role than the counsels. In the historical context of the IBA Rules, when efforts were made to unite the common and civil law traditions, this job was achieved in a rather satisfactory manner. However, there exists a prevailing view that the IBA rules have a bias towards common law owing to its common law origins. This has resulted in growing discontentment with its application amongst the civil law countries and a quest to find a more suitable alternative.

Thus, the Panel faced the questions of whether the Prague rules have really deviated from the IBA Rules? And if yes, then to what extent? Other questions included consideration of whether they have pushed the ball forward, and if they are really an alternative to the IBA rules?

 

Mr. Ajay Thomas (Independent Arbitrator and Vice Chairman, ICC India Arbitration Group)noted that the application of Prague Rules is yet to be seen in India. For an arbitrator deciding matters in domestic arbitration proceedings, the potential of the Prague Rules being adopted in India is the main uncertainty here. The IBA Rules are a classic example of soft law as they are a quasi-legal instrument whose binding force is much weaker than that of a traditional legal instrument. The test of a good soft law is the ability of that soft law to bridge the gap by building bridges and not to burn those bridges. These instruments of soft law promote gradual harmonisation, or rather, progressive harmonisation of the international law.

With regard to the various aspects of international arbitration that contribute significantly to the length of the arbitration, the International Arbitration Survey (2010) conducted by the Queen Mary University of London in association with White & Chase was referred. The disclosure of documents is one of the reasons behind lengthy arbitration proceedings. Emphasising on the same, a story originally narrated by Mr. Peter Rees QC was recounted wherein Mr. Rees once spotted a signboard outside a jeweller’s shop that read “Ears Pierced While You Wait” and found that this could serve as a great metaphor for the current state of international arbitration. The signboard signifies the promise of flexibility and a quick service if one was ready to wait inside the shop. However, the sign fails to specify for how much time one will be required to wait for the services to be performed. Similarly, people were lured into entering the arbitration shop based on the same promises of fast and efficient service but the reality is such that the process has become extremely slow and one that has failed to offer much flexibility. This is the context in which we need to analyse the utility of the IBA/Prague rules.

Such rules on taking of evidence are therefore required as, first, the court procedural rules are not applicable to international arbitration proceedings and secondmost institutional rules do not deal with the process of taking of evidence. Therefore, such rules are needed to fill the gap. Since these procedural rules have no binding force as such, they can be aptly compared to “a lighthouse in stormy seas” as these rules are an important source of guidance and inspiration to the parties and the tribunal in the stormy seas of international arbitration.

 

Ms. Neeti Sachdeva (Registrar & Secretary General, MCIA) discussed the Prague Rules, alluding to the wider scope of its application as opposed to the IBA Rules. The Prague Rules – as the name itself suggests, are not limited to providing just rules on taking of evidence. The Prague Rules go beyond the scope of the IBA Rules and provide for an efficient method of case management aimed at reducing time and costs involved. This has been made possible by the Prague Rules through a series of provisions that permit the arbitral tribunal to play a highly proactive role and contribute to the overall efficiency of the proceedings. For instance, Articles 3.1 and 3.2 expressly direct the tribunal “to take an active role” and hold a case management conference (known as procedural hearing in the Indian context) at the earliest to fix a procedural timetable and identify the preliminary issues, respectively. Similarly, the Rules encourage the parties to resolve their disputes on a document-only basis to provide speedy resolution. Additionally, the parties are allowed to request for document production under Article 4.3 but the power has been vested with the arbitral tribunal to accept or deny such request under Article 4.1. All of these provisions are to some extent tilted towards the practices that prevail in civil law jurisdictions. 

On the initial question of whether the Prague Rules are really bringing anything new to the table, the answer is in the negative. It is concluded that the Prague Rules are a mere codification of the best practices on how to conduct arbitration proceedings and do not add anything new to the existing practices of taking of evidence in international arbitration.

 

Ms. Meaghan Gragg (Partner, Hughes Hubbard & Reed, New York) questioned whether the Prague Rules really differ from the IBA Rules. The two rules are not identical as generally understood. The IBA Rules are limited to gathering of evidence whereas the Prague Rules are much wider in their ambit. Moreover, institutional rules supplement the law of the seat but they tend not to answer specific questions related to the taking of evidence such as document discovery or witnesses. The IBA Rules have been filling this gapfor a long time now.

The IBA Rules were adopted with the idea of bridging the gap between civil and common law traditions but they are more often than not applied in adversarial common law jurisdictions. Over time, there has been an increasing dissatisfaction with respect to the cost of arbitration proceedings and the amount of time they take. Some European countries pinpoint IBA Rules as the source of increasing cost and length of the procedure and decided to come up with a new set of rules – one not limited to the taking of evidence but one that is rather more concerned with case management. This is how the Prague Rules came into being.

The fear of the arbitral tribunal, commonly known as ‘due process paranoia’, is not an over-hyped concern. In several high value and complex international proceedings, it exists – whether justified or not; and the Prague Rules push for a more proactive role of the tribunal, hitting at the root of this paranoia.

Due Process Paranoia can be defined as a perceived reluctance by the arbitral tribunals to act decisively in certain situations for fear of the award being challenged on the basis of a party not having had the chance to present its case fully. The due process paranoia primarily emerges out of the excessive attention given to the due process requirements in case management decisions and their overly-cautious .

The contrast between the IBA Rules and the Prague Rules is brought out by  instances wherein  the Prague Rules provide for the tribunal’s proactive role such as in the case of holding of a case management conference, document discovery, etc. Similar provisions are found in the two sets of rules, as can be witnessed from the ability of the tribunal to exclude witness statement, and draw adverse inference in specific situations. However, both sets of rules have the potential to contribute significantly to increasing the efficiency of international arbitration proceedings in their own ways; the success will depend on the application by the tribunal and the appetite of the parties especially in high value complex disputes and the potential to win their case.

 

Commander Madhvendra Singh (Independent Arbitrator) noted that the prevailing view is that the IBA Rules have proved to be a majorly successful instrument in arbitration proceedings. Therefore, it is suggested that the Prague Rules must be seen as an ‘addendum to the already existing practices’. The application of the national laws of one party on taking of evidence have the potential of creating conflict between the parties involved in an international arbitration, therefore, it is best to resort to already established international set of rules on taking of evidence. The LCIA Rules and the SIAC Rules as well as the Indian Arbitration & Conciliation Act are illustrated to demonstrate how a situation like this is dealt with. For the better, the Prague allow the tribunal to encourage the parties to go for settlement proceedings before resorting to arbitration. If the parties so choose, the tribunal can also sit as a mediator and the same panel can go back to act as an arbitrator to resolve the dispute in an efficient manner.


 Majorly, the Panel answered three question that stood as- 

  1.  Are the Prague Rules different from the IBA Rules?  The panel unanimously found the answer to be in the negative.
  2. Has anyone on the panel seen the Prague Rules in practice? The answer was again in the negative.
  3. Can application of the Prague Rules be expected in the future? The panellists differed in their answers – while some answered in the negative saying that the IBA Rules are already very well-accepted and applied, others expect to see a growing use of the Prague Rules. The latter group believes that the civil law countries will lead the charge in the application of Prague Rules since the rules provide procedures that are relatively familiar to their jurisdictions and stakeholders from these countries already foster apprehensions towards relying on the IBA Rules that tend to favour the common law practices.

 

 Panel- III: Towards Institutional Arbitration in India

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Mr. Tejas Karia (Partner, Shardul Amarchand Mangaldas & Co.), labelled India as being at ‘crossroads’ in the context of institutional arbitration. India has seen the prevalence of arbitration in an ad hoc manner; and people are largely unfamiliar with institutional arbitration. H expressed his belief that the presence of members of some of the major arbitral institutions in the world boded well for the quality of discussion that could be expected from the panel. The modification to the arbitration regimes in India as a result of the Arbitration & Conciliation (Amendment) Act, 2019 [“the 2019 Amendment Act”] was elaborated as well.

First, arbitral institutions will be accredited by the Arbitration Council of India [“ACI”]; which would mean that the process of appointment that generally took between 2 to 6 months would now take much less time; and would also ensure that instead of arbitrators being appointed on the basis of the value of the arbitration (as is general practice in Supreme Court and High Court appointments), the best suited people would be selected. Second, the time limit prescribed in Section 29A has been removed for international arbitration. The intent was to remove the same for institutional arbitration as the rules have their own time limits; and this evidences an assumption that most international commercial arbitrations are institutional. However, there is criticism levelled against the fact that provisions for emergency arbitrators were not included even after having been strongly recommended. Further, the controversy surrounding the seeming exclusion of foreign lawyers as arbitrators by virtue of Schedule VIII was addressed by arguing that since Section 11(1) and 11(9) do not restrict on the basis of nationality, it is very likely that subsequent judicial decisions will clarify that there is no such exclusion.

 

Ms. Shaneen (Parikh, Partner, Cyril Amarchand Mangaldas) covered the establishment of the ACI and the surrounding controversy. It is actually a positive that these provisions have not been notified yet, in the hope that the problems within them will be corrected before becoming law.

The composition of the ACI is largely such that the members are appointed by the Central Government and headed by a former judge of the Supreme Court, High Court or an eminent practitioner. There is palpable concern about the fact that there is no provision for a foreign member to be on board, just like in most foreign arbitral institutions.

The duties and functions of the ACI include some positives such as the promotion and encouragement of all forms of ADR; but also some that raise concerns, such as the grading of arbitral institutions, especially in the manner set out by regulations– raising questions as to the level of interference with arbitration. Schedule VIII shows that its wording, possibly due to oversight rather than such intent, does lead to an exclusion of foreign arbitrators by defining advocate in the sense of the way the term is defined in the Advocates Act, 1961.

The implications of the maintenance of an electronic depository of all awards in India by the ACIprovokes a host of questions such as whether it will be an opt-in or opt-out provision, and who will be responsible for providing the awards to the ACI.

 

Ms. Shwetha Bidhuri(Head, SIAC- South Asia), called the amendments a “positive step from the outside”, as they aid India’s image as a business-friendly jurisdiction by showing that the government is actively interested in improving its attractiveness to investors and businesses. Even the provision for accreditation is necessary in India as it gives greaterclarity to those seeking to choose amongst the many institutions in a jurisdiction.

The question to ask at this stage is whether these developments are enough and examine what needs to be done. A good arbitration law is always very necessary to make a jurisdiction arbitration-friendly, yet, there still remain unresolved important issues such as third-party funding and whether two Indian parties can have a foreign seat. The second most important factor is that there must be arbitration friendly judges. A collective effort is required and isolated changes cannot lead to the level of change required.

Third, the preference for institutional arbitration must be actively cultivated and a conscious effort towards sensitisation is required in this respect. Last, the most important aspect was considered to be training for arbitrators along with sensitisation on the differences between arbitration and litigation.

 

Ms. Payal Chawla(founder of JusContractusemphasised that it is crucial to study the provisions missing in the 2019 Amendment Act to be able to understand its gaps. This is mostly on the basis of Supreme Court judgments that have had to ‘bend’ the law, and the 246th Law Commission Report.

The concept of emergency award and emergency arbitrator have not been included in the amendment despite reference being made to that extent in the Justice Srikrishna Committee Report. The 246th Law Commission Report recommended the addition of the words ‘any person claiming through or under’ to the definition of the word ‘party’, based on the three-judge bench judgment in Chloro Controls; which talked about the inclusion of non-signatories to an arbitration in certain cases. In Chloro Controls, there existed a network of inter-linked agreementsthat dealt with commercial relationships betweenthe parties and the arbitration clause in the Shareholders Agreement provided for London as the seat of arbitration and English law as the governing law.There were multiple other agreements including an International Distributor Agreement, Export Sales Agreement and the like. The plaintiff filed a suit and the first defendant, Chloro Controls, filed an application under s.8 of the Arbitration and Conciliation Act. The Supreme Court held that the facts fell within the ambit of s.45 and not s.8.A liberal interpretation is given to 'person claiming through or under' (s.45) to mean multiple and multiparty agreements, though in exceptional cases. Non-signatories to arbitration can, thus, apply to domestic arbitrations and international commercial arbitrations as well, if held in India.

(…) 

67.This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, ‘intention of the parties’ is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.  

(…)

- Swatanter Kumar, J. in Chloro Controls

This is consistent with the New York Convention, where the words ‘anybody in respect of a defined legal relationship, whether contractual or not’ are used.  Similar wordings exist in Section 7 of the Arbitration and Conciliation Act. Therefore, that anomaly that the relevant wording in Section 8, but not in Section 2.

Further, in the case of Lalchand v. Rishabh Enterprises, it was stated that the ratio in Chloro Controls should be followed in domestic arbitration as well. Rishab Enterprises entered into four agreements to commission a Photovoltaic Solar Plant in Jhansi, Uttar Pradesh. One of the said agreements did not contain an arbitration clause. The cause of the dispute was allegations leveled by Rishab Enterprises that the purchase was induced by fraud for a huge amount. The appellants applied under Section 8 to refer the dispute to arbitration. An appeal was made to the Supreme Court after dismissal of the application by the High Court. The Supreme Court decreed that the parties may be referred to a single arbitration if all the agreements are inter-connected and composite and have a similar underlying commercial purpose. The Supreme Court, referring to the 246th Law Commission Report, stated that prima facie existence of an arbitration clause would be was sufficient to refer the parties to arbitration, the exception being unless it was null and void.

In Cheran Properties, it was pointed out that Section 35 makes the award binding on non-signatories as well. The parties had entered into an agreement for the transfer of shares and titles regarding which a dispute arose and the matter was referred to arbitration. Cheran was not made a party to the proceedings despite being a nominee and having received most of the shares. The arbitral award directed the return of the shares. The challenge under Section 34 of the Arbitration and Conciliation Act to this was dismissed concurrently to the Respondents approaching the NCLT to give effect to the award. The court upheld Chloro Controls and said that even though Cheran was not a signatory, it was bound by the agreement. Further, the transfer of shares took place subsequent to the express condition requiring the nominees to be bound by the share transfer agreement. However, the phrase is missing in Section 7, 9, 11 and 34; and its absence in Section 2(h) could leave the non-signatories remediless.

As for non-inclusion of Section 16(7) on the arbitrability of fraud,the decision in Radhakrishnan v. Maestro Engineers was seen to be relevant as itrelied onRussell v. Russellwhich has widely been considered to be in favour of the arbitrability of fraud- and came to the opposite conclusion. The court held that an arbitrator could not take up allegations of misappropriation and malpractice made by the appellant. Decision with regards to these would be made by the court as it involved a serious matter requiring material evidence to be produced by both parties to prove their case. The addition of this sub-clause, as recommended by the Law Commission was to legislatively overrule this decision. 

In Indus Mobile, the Court spoke about conferring exclusive jurisdiction to the seat; using the reasoning in of BALCO v. Kaiser. The Court, in Indus Mobile, citing BALCO, states ‘that the seat can be considered akin to the cause of action.’ The Supreme Court in Indus Mobile relied upon BALCO wherein the court held that “the term “subject matter of the arbitration” cannot be confused with “subject matter of the suit”. The term “subject matter” in Section 2(1)(e) is confined to Part I. It has a reference and connection with the process of dispute resolution. Its purpose is to identify the courts having supervisory control over the arbitration proceedings. Hence, it refers to a court that would essentially be a court of the seat of the arbitration process. In our opinion, the provision in Section 2(1)(e) has to be construed keeping in view the provisions in Section 20  which give recognition to party autonomy. Accepting the narrow construction as projected by the learned counsel for the appellants would, in fact, render Section 20 nugatory.” Once the seat is chosen, there would be exclusive jurisdiction. However, this would render the scope of Section 42 of the Act minimalistic. While in Sundaram Finance, the court took the view that enforcement of an award can be filed anywhere in the country wherever that decree can be executed; . Section 42 has to be read in light of section 32 (termination of proceeding). Section 32 states that arbitral proceedings stand terminated by the final arbitral award. Therefore, section 42, which provides for arbitral proceeding stands terminated as soon as we get the arbitral award.

Indus Mobile and Sundaram Financeattempted to do what the Act should have ideally done with respect to the seat and venue in arbitration. The 246th Law Commission Report suggested changes to Section 20 of the Arbitration Act suggesting that Section 20(1) and 20(2) be treated as seat and Section 20(3) as venue.

 

Ms. Hazel Tang(Counsel, International Chamber of Commerce, Singapore), outlined the ICC’s story in Singapore and emphasised that parallels can be drawn therefrom. She discussed the progression of institutional arbitration in Singapore, explaining that it began with a joint agreement with the Ministry of Law in Singapore so as to ensure that the  Singapore governing law would be applicable in International Arbitration. Since then, the Ministry of Law has been actively promoting arbitration in Singapore. There is an increasing popularity of Singapore as the place of arbitration in ICC arbitrations 

Interestingly, Singaporean parties are nowhere near the top ten parties in arbitration; and the popularity of a place of arbitration can, therefore, be significantly independent from the nationality of parties to the arbitration. This can be of relevance to the promotion of institutional arbitration in India as well 

The Arbitration Act was enacted in Singapore in 1956 and now there are different arbitration Acts for domestic and international arbitration. One difficulty is regarding how international arbitration is to be treated with litigation. For instance, in a historic controversy, a highly criticised court decision in Singapore hinted that foreign lawyers would be prohibited from appearing in arbitrations in Singapore. This was resolved by, first, an amendment to allow foreign lawyer representation in cases not governed by Singapore law and the contracts were governed by other foreign law as an incremental step and finally, the act was fully amended to remove the bar.

A notable suggestion gathering attention in Singapore relates to allowing of appeals from arbitral awards in a substantive sense, something generally not seen as a pro-arbitration move but being envisioned as a part of reforms towards the same.

In conclusion, the two factors whose role in the success of arbitration in Singapore is often underestimated is the availability of hearing facilities and the accessibility of a place in terms of flights, visa requirements and tax exemptions.

 

Arun Mal (Lawyer, Allen & Overy, Hong Kong) introduced the Hong Kong perspective into the discussion on institutional arbitration with the establishment of the Hong Kong International Arbitration Centre [“HKIAC”] in 1985. In its earlier mandate, the HKIAC did not administer cases. Rather, it only provided services for ad hoc arbitration. However, in 1997, HKIAC became the default body to decide the number and appointment of arbitrators. By 2008, HKIAC had published its own HKIAC Administered Arbitration Rules. Reference is made to the development of the HKIAC into “light touch” institutions which, first, do not scrutinise awards and leave it to the tribunal to render a valid award (which the tribunal is expressly obliged to do in accordance with the Rules). This helps to minimise the risk of interference with the tribunal’s decisions and avoid possible delays and additional costs associated with the scrutiny process. Second, the HKIAC has powers under the Rules to facilitate the efficient and effective running of an arbitration where necessary; if not, HKIAC will not intercede.

In addition, the HKIAC has taken up several measures to promote institutional arbitration, such as-

·    HKIAC Tribunal Secretary Service;

·    Hong Kong Arbitration Week;

·    HKIAC-PCA Cooperation Agreement 2010;

·    HKIAC Procedures for the administration of UNCITRAL Arbitrations and;

·    ‘Permanent Arbitral Institution’ status in Russia.


 This is followed by a question on immunity for arbitrators as envisioned within the Act, but not for arbitral institutions. In response, the Panel noted that this was because the primary purpose was to protect arbitrators and not exclude institutions per se. It was simply assumed that as institutions either appoint after referral by the SC or HC; or according to their rules; there is substantially less probability of them being sued. Additionally, this situation is often covered by the institutional rules; such as Article 41 of the ICC Rules.

Board

 

SCEs