Recent international arbitration developments

This e-bulletin contains summaries of the following recent developments in international arbitration:

1. UK – Court of Appeal confirms that anti-suit injunctions in support of arbitration remain available in respect of proceedings brought outside the EU
2. Switzerland – arbitral tribunals are entitled to rely on Vienna Convention on the Sale of Goods and Unidroit Principles for the interpretation of Swiss law contracts
3. Russia – a change in approach to enforcement of arbitral awards
4. ICSID – tribunal denies provisional measures where alleged harm was not irreparable
5. India – Bombay High Court rules that an arbitral award can be partially set aside
6. Korea & India – Korea Bilateral Comprehensive Economic Partnership Agreement: the most recent example of intra-Asian trade agreements

1. UK – Court of Appeal confirms that anti-suit injunctions in support of arbitration remain available in respect of proceedings brought outside the EU

In Midgulf v Groupe Chimique Tunisien, the Court of Appeal granted an anti-suit injunction restraining Tunisian proceedings brought in apparent breach of an arbitration agreement.

Midgulf and GCT had entered into a contract for the sale of sulphur. The relationship broke down and the parties disagreed as to whether that contract included a clause providing for arbitration in London. The question turned on when and how the offer had been accepted. Midgulf commenced proceedings in the English courts for an order to appoint an arbitrator, while GCT launched an application in the Tunisian courts for a declaration that there was no arbitration agreement. At a preliminary hearing, Midgulf obtained an anti-suit injunction to restrain the Tunisian proceedings. The Judge at first instance continued the injunction (pending appeal) despite finding that there was no arbitration agreement.

The appeal was allowed and the anti-suit injunction granted. In Toulson LJ's view, an arbitration agreement did exist. Furthermore, GCT's application to the Tunisian Court for a declaration that the parties had not agreed upon arbitration was repudiatory conduct. It is arguable that, strictly speaking, such proceedings do not amount to a breach of an agreement to arbitrate. However, in circumstances where such an agreement is valid, such proceedings have the effect of undermining that agreement and party autonomy to choose the means by which a dispute is to be resolved.

This judgment confirms the decision of the Commercial Court in Shashoua v Sharma (Roger Shashoua and other v Mukesh Sharma [2009] EWHC 957 (Comm)) in May last year that anti-suit injunctions in support of arbitration proceedings remain available in so far as they restrain parties from issuing proceedings outside the EU. This contrasts with the position within Europe following the West Tankers ECJ. West Tankers relates to the effect of the Brussels Regulation and has no bearing on the compatibility of anti-suit injunctions with the New York Convention - which compatibility has long been recognised by the English courts.

This decision can be considered to be broadly supportive of party autonomy to select arbitration, particularly as compares to West Tankers and subsequent decisions relating to proceedings commenced within the EU. Nonetheless, the Court of Appeal does not seem to have given much consideration to the principle of kompetenz-kompetenz, the tribunal's ability to decide upon its own jurisdiction, in the place of the courts.

(Midgulf International Ltd v Groupe Chimique Tunisien [2010] EWCA Civ 66)

In a recent decision, the Swiss Federal Supreme Court held that an arbitral tribunal was correct to consult the Vienna Convention on the Sale of Goods ("VCSG") and the Unidroit Principles of International Commercial Contracts ("Unidroit Principles"), to establish the meaning of the term "material breach" in the parties' contract. The tribunal applied the VCSG and the Unidroit Principles, both part of international trade law (lex mercatoria) notwithstanding the parties' agreement that the contract should be governed by Swiss law.

The subject matter of the dispute was a contract for the delivery of calcium fluoride between a company owning a South African calcium fluoride mine and an international conglomerate, seated in the US, producing fluorhydric acid. The contract provided that the agreement could be terminated by either party if either party was in material breach of the Agreement and the breach remained uncured following 30 days' written notice from the non-breaching party. In addition to an arbitration clause providing for ICC arbitration in Zurich, the contract contained the following choice of law clause:

"This Agreement shall be construed and interpreted in accordance with the laws of Switzerland as applied between domestic parties provided, however, that the express agreements, understandings and provisions contained herein shall always prevail."

The mining company terminated the contract for material breach, arguing that the US company had refused to pay two of its invoices and failed to disclose some of the information necessary to determine the price for the calcium fluoride. The tribunal held that, even though the US company had failed to provide the pricing information as requested by the contract, there had been no material breach of the contract. In order to determine what constituted a "material breach", the tribunal relied on the concept of "fundamental breach" in Article 25 of the VCSG and Article 7.3.1 of the Unidroit Principles. It followed that the mining company had wrongfully terminated the contract and the tribunal awarded the US company damages. The mining company appealed to the Supreme Court, arguing that the parties had agreed that Swiss law should govern their contract and that the tribunal had violated that choice of law by relying on the VCSG and the Unidroit Principles to determine the meaning of "material breach".

Under the relevant provisions of the Swiss Private International Law Act, an appeal against an arbitral award is only possible on limited grounds. The mining company argued that, in deciding the question of "material breach" by reference to the VCSG and the Unidroit Principles, the tribunal had acted in excess of its jurisdiction and decided a question which the parties had not submitted to it. The Supreme Court rejected this argument. In addition to questioning whether the mining company had relied on the correct grounds for its appeal (according to the Supreme Court, the more appropriate ground would have been violation of public policy), it held that the tribunal had properly followed the principles of contractual construction under Swiss law. Given that the term "material breach" does not exist in Swiss law, the tribunal correctly relied upon the VCSG and the Unidroit Principles to establish what the parties, as two companies engaging in international commerce, meant by this term.

The problem of a particular legal concept or term being referred to in an agreement which does not form part of the relevant applicable law is not uncommon in international arbitration. The Supreme Court's approach shows that arbitral tribunals faced with such a legal concept or term are not necessarily constrained by the parties' choice of a particular national law, but are entitled, in appropriate circumstances, to draw from international rules and principles directly aimed at the needs of international commerce.

(Swiss Federal Supreme Court, First Civil Chamber, 4A_240/2009 of 16 December 2009)

3. Russia – a change in approach to enforcement of arbitral awards

Russian courts have historically held a restrictive approach to recognition and enforcement of arbitral awards. They have often used the public policy ground under the New York Convention (Article V) as well as the Russian Arbitrazh Procedure Code (Article 244) and the Russian Civil Code (Article 1193) as a ground for setting aside an award or refusing enforcement, thereby giving recalcitrant debtors hope of an escape route. However, a recent judgment by the Federal Arbitrazh Court of the North-West district (the "December Judgment"), suggests that the approach may be softening.

The Russian Civil Code stipulates that a rule of international law might not be enforced in Russia if it obviously contradicts Russian public policy. However, the contradiction should not be one of a minor or pedantic difference between the legal, politic and economic systems of the countries involved. Owing to the lack of legislative definition, the courts have interpreted the notion of public policy in a broad sense. One issue which has often been deemed to be in contradiction of Russian public policy is that of enforcing penalties. Russian courts have sometimes regarded penalties awarded by foreign courts as being too high to comply with public policy. This is on the basis of Clause 29 of the circular of the Supreme Arbitrazh Court No. 96, dated 22 December 2005 which states that one of the tenets of public policy is the principle of proportionality in civil liability between the infringement of a right and its consequences.

In the December judgment, the approach seems to have shifted towards a higher bar for finding a breach of public policy to actions which are expressly prohibited by law or are prejudicial to the sovereignty or security of the state or its political, economic and legal system.

The case concerned a dispute which arose between a US Company and a Russian OJSC (Open Joint Stock Company). The US Company applied for the recognition and enforcement of an ICC arbitration award ordering the Russian OJSC to pay a debt and the agreed 8% annual interest rate penalty. The Federal Arbitrazh Court of first instance held upheld the arbitral award. The Russian OJSC objected to enforcement, claiming that the 8% penalty infringed Russian public policy by contravening the proportionality principle contained in Russian civil law.

The cassation court upheld the first instance decision, stating that differences between Russian and foreign laws cannot themselves be a basis for invoking public policy as a ground for refusing enforcement, otherwise foreign laws would never be applied in Russia. Although this decision may still be appealed to the Supreme Arbitrazh Court, it is nevertheless an example of positive change in Russian judicial mentality towards arbitral awards.

(Case No.F21-802/2009, 28 December 2009)

4. ICSID – tribunal denies provisional measures where alleged harm was not irreparable

In Cemex v Venezuela, the claimants sought orders for provisional measures under the ICSID Convention. They sought to restrain Venezuela from its efforts to seize vessels which had been the subject of a transfer from their Venezuelan subsidiary, Cemex Venezuela, to a third party. Cemex argued that the seizures would increase their losses claimed in the arbitration and aggravate the dispute, given that Cemex Venezuela would then be liable to the third party for the value of the transfer. In the underlying proceedings, the claimants allege that between May and August 2008, in breach of the Netherlands-Venezuela BIT and of customary international law, they were deprived of their rights of ownership over Cemex Venezuela.

Article 47 of the ICSID Convention provides ICSID tribunals with authority to order provisional measures "which should be taken to preserve the respective rights of either party". In reaching its decision whether to exercise this authority, the tribunal examined past decisions of ICSID tribunals and the ICJ with respect to provisional measures (the latter being relevant given that Article 47 of the ICSID Convention was directly inspired by a corresponding provision in the ICJ Statute).

The tribunal identified that the ICJ had consistently found that provisional measures should only be granted where there was an urgent necessity to prevent irreparable prejudice to the rights which were the subject of the dispute. However, while ICSID tribunals had traditionally followed this standard of "irreparable harm", more recent decisions had applied divergent formulations of the test. Nevertheless, the tribunal was not of the view that the various formulations differed in substance. It considered that the relevant ICSID cases could be divided broadly into two categories:

1. cases where the alleged prejudice could be readily compensated by awarding damages; and



2. cases where the alleged prejudice entailed a serious risk of destruction of a going concern that constituted an investment (i.e. the prejudice, although capable of financial compensation, was such that compensation could not fully remedy the damage suffered).

The tribunal therefore saw no reason to deviate from the traditional formulation of the applicable test. On the facts, the tribunal held that the consequence to the claimants of the seizure of the vessels would be a financial loss, which loss could be readily compensated by an award for damages. The alleged prejudice did not therefore meet the requirements of urgency and necessity. Moreover, the application having failed on those grounds, it could not be sustained on the basis of aggravation of the dispute alone.

(Cemex Caracas Investments BV v Bolivarian Republic of Venezuela (ICSID Case No ARB/08/15))
 

5. India – Bombay High Court rules that an arbitral award can be partially set aside

A full bench of the Bombay High Court has ruled in a recently reported decision that an arbitral award can be set aside either in whole or in part. In RS Jiwani v. Ircon International Ltd, the Bombay High Court ruled that through Section 34 of the Indian Arbitration and Conciliation Act, 1996 (the "Act"), the legislature had vested courts with a wide discretion to set aside an arbitral award either partially or completely. Although the decision is binding only on the Bombay High Court, it has been welcomed by practitioners in India and outside, in that it avoids the draconian outcome of losing the entire award if only part is defective. Hence even if an award is challenged in part, the remaining aspects of the award can still be enforced.

The decision overruled an earlier judgment of the Bombay High Court, Mrs Pushpa P Mulchandani v. Admiral Radhakrishin Tahiliani, which had decided that an award can be partially set aside only if Section 34 (2) (iv) of the Act is applicable and not otherwise. Section 34(2)(iv) is concerned with setting aside an award if the award deals with issues which were "not contemplated by or not falling within the terms of the submission to the arbitration, or it contains decisions on matters beyond the scope of the submissions to arbitration."

Ircon International was awarded a government contract for constructing a railway line over a bridge. Ircon subcontracted a part of the project to RS Jiwani through a tender process. Although the assigned part of the project was completed by RS Jiwani, disputes arose between the parties on the issue of delay and consequential losses and penalty. The parties went to arbitration before a sole arbitrator, who allowed 15 claims of RS Jiwani and rejected all the counterclaims of Ircon International. Ircon challenged the award before a single judge bench of the Bombay High Court. As it had not been challenged under Section 34(2)(iv), the judge set the whole award aside. The decision was appealed to a full bench of the Bombay High Court.

Considering principles of statutory interpretation and contract law, they decided that Section 34 of the Act does not prohibit the application of the principle of severability to arbitral awards under the Act. The Court rejected the contention that Section 34 should be construed rigidly and restrictedly, and ruled that the Court would have power to set aside an award partially depending on the facts and circumstances of the case. In this case, the Court ruled that it would have been unjust and inequitable if the entire award was set aside and hence only set aside the award partially.

This judgment is a welcome demonstration of support for alternative dispute resolution by the Indian courts, and a boost for arbitration in the country.

(Appeal No. 245 of 2009 in Arbitration Petition Nos. 347 0f 2005, 457 of 2006 and 370 of 2008)

6. Korea & India – Korea Bilateral Comprehensive Economic Partnership Agreement: the most recent example of intra-Asian trade agreements

A growing number of Asian economies are looking to each other for trade and investment. In this vein, a strategic trade partnership pact – the Comprehensive Economic Cooperation Agreement (the "CEPA") between India and South Korea entered into force on 1 January 2010.

The CEPA is a de facto free trade agreement adopted to facilitate comprehensive economic relations including merchandise and service trade, investment and economic cooperation. The pact is expected to increase existing trade between India and Korea (USD 15.6 billion as of 2008) by as much as USD 3.3 billion annually. It aims to grow bilateral trade primarily by decreasing tariffs, encouraging investment and promoting the exchange of skills between the two countries.

There are a number of provisions within the CEPA relating to investment protection and investor-State arbitration. Similar agreements among other Asian nations provide for a framework of "safe investment". For instance both the ASEAN-India and the ASEAN-China Framework Agreements on Comprehensive Economic Co-operation (which also came into force on 1 January 2010) have provisions for the "protection of investment" in order to promote a "liberal, facilitative, transparent and competitive investment regime".

Both India and Korea are keen to tap new markets as the impact of the global financial crisis is slowly beginning to fade. Investment protection provisions contained within the various free trade agreements in Asia will provide an impetus to investment and trade between Asian nations. These should prove to be particularly effective, at a time when Asian destinations are vying for attention for investment.