Recent international arbitration developments

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

1. UK - High Court clarifies what constitutes taking a step in court proceedings where a stay is sought
2. France - French courts cannot interfere with arbitration once tribunal constituted
3. Investment Treaty - Temporal arguments exclude majority of construction company's claims under Turkey/Jordan BIT
4. US - Supreme Court limits ability to pursue class arbitration without specific agreement
5. FG Hemisphere (HK) - Court of Final Appeal to clarify state immunity law in Hong Kong
6. LCIA India unveils arbitration rules

1. UK - High Court clarifies what constitutes taking a step in court proceedings where a stay is sought

In Bilta v Nazir, the High Court  provided useful guidance on what will constitute taking a step in proceedings under Section 9(3) of the Arbitration Act 1996 (the Act) and the interaction of that section with CPR Part 11. Section 9 provides that a party to proceedings, which have been brought in breach of an arbitration agreement, may apply for a stay. However, this is subject to the provision that "an application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim". CPR Part 11 provides that any application to dispute the High Court's jurisdiction must be made within 14 days of filing an acknowledgement of service of the claim.

Although it was probably not a point of doubt, this decision confirms that Section 9 of the Arbitration Act displaces CPR Part 11 in cases where one party asserts the existence of an arbitration agreement such that an application for a stay of proceedings under Section 9 need not be made within the time limit set down in CPR Part 11.

Lord Justice Sales also held that, in principle, the applicant had satisfied the test in Section 9 and was therefore entitled to a stay. He indicated that, absent binding authority, he would have held that the right to seek a stay would only be lost upon service of a substantive defence on the merits. In his view, such an approach would accord with the ethos and important policy objectives of the Act, "namely that a party to an arbitration agreement should have a full opportunity to investigate a claim against him, to ask for further details from the claimant and to consider his position in light of full information about the claim as to whether he wishes to have it referred to arbitration or not".

However, binding Court of Appeal authority (Capital Trust and Patel v Patel), precluded Sales LJ from deciding along these lines, as it established that what counted as a step in the proceedings for the purposes of Section 9 continued to be governed by old case law which predates the 1996 Act. In line with that authority, a step in the proceedings which would preclude a Section 9 application is one which impliedly affirms the correctness of the court proceedings and the willingness of the applicant to go along with a determination by the courts instead of by an arbitral tribunal. Therefore, Sales LJ held that the quality of any procedural step taken by a Section 9 applicant in court proceedings must be examined objectively in the light of the whole context known to both parties, including any reservations the applicant may have made as to its Section 9 rights, whether made known to the court or not.

The Judge's indicated preferred approach may be considered preferable to that ultimately taken, as it would provide greater clarity for parties: a Section 9 right would not be lost until service of a substantive defence in the court proceedings. Unless and until the question is again reviewed by a higher court, however, the test established by the older authorities will apply. While this test may be considered less clear-cut and more likely to give rise to unpredictable results, the approach of the courts in support of arbitration remains robust. Nevertheless, parties should take care to assert any Section 9 right (and/or reservation in respect thereof) as soon as possible once proceedings are commenced.

Bilta (in liquidation) v Nazir and others [2010] EWHC 1086 (Ch)

2. France - French courts cannot interfere with arbitration once tribunal constituted

In a recent decision, the Paris Court of First Instance endorsed its pro-arbitration stance, holding that French courts cannot interfere with arbitral proceedings.

Elf Neftegaz (a subsidiary of Elf Aquitaine) entered into a cooperation agreement with various Russian entities to research, explore and exploit hydrocarbons in Russia. The contract contained an ad hoc arbitration clause with a seat in Paris.

After Elf Neftegaz was dissolved, a dispute arose between the parties to the agreement. The Russian entities applied to the President of the Commercial Court of Nanterre to appoint a representative of the dissolved company to represent it in the arbitration proceedings which they were about to initiate. This was done by court order and Mr Carboni was appointed as an ad hoc representative of Elf Neftegaz. When the Russian entities commenced proceedings, they appointed Mr Kamara as an arbitrator. Mr Carboni appointed Mr Mattei as an arbitrator for Elf Neftegaz. The co-arbitrators selected Mr Reiner as the chairman of the tribunal. Then, upon Elf Aquitaine and Total's requests, the order pursuant to which the ad hoc representative has been appointed was retracted. Since Mr Reiner had been designated by Mr Carboni who had been appointed by a withdrawn order, Elf Aquitaine and Total seized the Paris Court of First Instance of Paris, in an emergency summary proceeding, requesting the court (under Article 809 of the French Code of Civil Procedure) to enjoin the arbitrators not to pursue the arbitration proceedings.

The Paris Court of First Instance decided that arbitral proceedings are considered as pending from the moment the arbitral tribunal is constituted and that "notwithstanding the effect of the withdrawal of the order having designated the [party representative] and the irregular designation of two or three of the arbitrators, the question of the existence of this tribunal or of the regularity of its constitution falls exclusively within the jurisdiction of the arbitral tribunal, which excludes jurisdiction of the court seized in summary proceedings".

This case demonstrates that, when deciding to submit a dispute to ad hoc arbitration, parties should be particularly careful to detail the procedure for appointment of arbitrators and for any challenges to such appointments. It also shows the advantage of institutional arbitration which will deal clearly with these issues, thereby avoiding court.

From a broader perspective, this judgment is another example of the French Courts' strong reluctance to intervene in arbitration proceedings once a tribunal has been appointed, confirming the long established pro-arbitration tradition in France.

It follows in the wake of other decisions supporting the autonomy of the arbitral process. Recently, the same Court found that French judges can only grant orders pursuant to Article 809 to secure the enforcement of an arbitral award. In that case, the judges refused to issue an injunction restraining arbitrators from continuing the arbitration until the Court of Appeal had rendered a decision on jurisdiction. The Cour de Cassation has also held in an In Zone Brand case that – outside of the scope of application of international conventions or European Community law – anti-suit injunctions are not contrary to international public policy when their purpose is to enforce a jurisdiction clause.

Paris First Instance Court, 6 January 2010
Elf Aquitaine and Total v. Mattei, Lai. Kamara and Reiner

3. Investment Treaty - Temporal arguments exclude majority of construction company's claims under Turkey/Jordan BIT

ATA v Jordan concerned a claim relating to interference with an arbitration award by the Jordanian courts. A tribunal constituted under the ICSID Rules, decided that the majority of Turkish construction company, ATA's claims against Jordan related to disputes arising before the Turkey/Jordan Bilateral Investment Treaty (BIT) entered into force and were therefore inadmissible. In making its determination, the tribunal followed the restrictive reasoning in the Lucchetti v Peru decision.

However, the tribunal upheld ATA’s claim in respect of the extinguishment of the right to arbitration. This was held to be a breach of ATA's legitimate expectations and of Jordan’s fair and equitable treatment obligation and the relevant dispute was considered to arise only after the BIT came into force.

The claimant, ATA, was a Turkish construction company which built a dike on the Dead Sea for Arab Potash Company (APC), a Jordanian based entity which was, at that time, majority-controlled by the Jordanian state. The contract between ATA and APC was governed by Jordanian law (the Contract) and provided for disputes to be referred to ad hoc arbitration. A dispute arose when the dike collapsed. However, since the collapse occurred after construction, whilst APC were filling the dike with water, it was unclear who was liable for the incident and how much they were liable to pay.

Commercial arbitration

APC commenced arbitral proceedings under the Contract for more than US$50 million compensation. ATA in turn brought counterclaims for money owed under the contract. ATA argued that they were not strictly liable for construction as supervision had been APC's responsibility and the project had been under their control. The tribunal agreed with ATA in full and, in 2003, issued an award dismissing all of APC's claims and awarding ATA nearly US$6 million in damages.

Jordanian court proceedings

However, the Jordanian Court of Appeal held that the award should be set aside and annulled the arbitration agreement. Both decisions were endorsed subsequently by the Court of Cassation.

APC then commenced a further action against ATA in the Jordanian courts, again seeking damages for the dike's collapse as per its original monetary claims. It did offer to submit the action to a new commercial arbitration instead but ATA refused on the basis that it could not expect a fair process but rather a rigged arbitration.

ICSID arbitration

In 2008, ATA commenced ICSID proceedings against Jordan pursuant to the BIT, alleging that:

• Jordan had expropriated its investment by annulling its arbitral award and alleging that this automatically cancelled the arbitration agreement.

• The Jordanian courts had overstepped the grounds for reviewing an arbitral award under the Jordanian Arbitration Law. This claim fell within the right to fair and equitable treatment (FET) enshrined both in the BIT's preamble and in its Most Favoured National (MFN) clause (by importing an FET provision from treaties with third States).

• APC (and by extension, Jordan) breached ATA's legitimate expectations  that "the outcome of the arbitral process under the contract would be a final and binding award that would be free from illegitimate and unforeseeable interference by the domestic courts".

Jordan argued that the tribunal had no jurisdiction on the basis that:

• The dispute had arisen and been arbitrated and litigated for six years before the BIT entered into force (although the Court of Appeal's judgment of annulment and the Court of Cassation proceedings occurred afterwards).

• No new dispute arose when the award was annulled and the arbitration agreement extinguished.

• An interest in a damages award cannot constitute an "investment" for the purposes of the BIT. When the BIT entered into force, nothing remained of the original investment. Moreover, when the original investment was made, ATA had no expectation of BIT protection.

The tribunal concluded that the claims in connection with the annulment of the final award (both in relation to expropriation and denial of justice) were inadmissible for lack of jurisdiction "ratione temporis" (on the basis of time) because the wider dispute had already been submitted to the Jordanian Court of Appeal before the BIT entered into force. Although the claims "crystallised" when the Court of Cassation rendered its decision, following the reasoning in Lucchetti, that dispute was "legally equivalent to the contractual dispute which was initiated on 6 September 2000".

However, the tribunal also held that:

• An investment can be a "bundle of rights" and the original Contract together with the rights in the award can constitute an investment for the purpose of the BIT.
   

• The extinguishment of the arbitration agreement did constitute a treaty breach, depriving ATA of a valuable asset. The claim was not barred, since the Turkish company's right to arbitrate "was never in contention until the annulment (in 2007) whereupon the Court of Cassation extinguished that right". At that point, a dispute arose over the continuing right to arbitrate in connection with the underlying investment.

The tribunal ordered that ATA was entitled to initiate new arbitral proceedings, and that the Jordanian court proceedings in relation to the dike be "immediately and unconditionally terminated”.

The ICSID tribunal ordered Jordan to terminate on-going court proceedings against ATA and the award gives ATA the right to restart its commercial arbitration against Arab Potash Company (APC). In effect, this prevents APC from pursuing its own claim against ATA. Since no damages were awarded and the award merely aimed to reinstate the situation prior to breach, the outcome was decidedly mixed and both sides have claimed victory.

The ICSID Tribunal's analysis of what constitutes a new dispute was rigorous and led to the exclusion of the majority of claims. Therefore, even where a dispute crystallised upon the Court of Cassation delivering its final award, such as in relation to the denial of justice claim, this was not seen to give rise to a distinct dispute. The only claim which was successful on this basis was the extinguishing of the right to arbitration which deprived the investor of a valuable asset and was considered not to be connected to an earlier dispute.

The lack of clarity which remains as to the distinction between these scenarios only highlights the complexity of the area of the temporal scope of investment arbitration and the need for parties to focus on these jurisdictional hurdles. Although both parties’ cases appear in many ways to have been weak on the merits, the jurisdictional hurdles prevented the tribunal from even assessing them.

For a full analysis, please click here for our article published by PLC.

ATA Construction, Industrial and Trading Company v The Hashemite Kingdom of Jordan (ICSID Case No.ARB/08/2)

4. US - Supreme Court limits ability to pursue class arbitration without specific agreement

In a recent landmark class action case in the US, AnimalFeeds brought a class action antitrust suit against Stolt-Nielson. It did so on behalf of a class of purchasers of parcel tanker transportation services for price fixing, and that suit was consolidated with similar suits brought by other charterers. The parties agreed to submit the question of whether their arbitration agreement allowed for class arbitration to an arbitral tribunal. They stipulated that their arbitration clause was “silent” on the class arbitration issue.

The panel determined that the arbitration clause allowed for class arbitration, but the District Court vacated the award and the Second Circuit reversed. The case was then referred to the Supreme Court who held that imposing class arbitration on parties who have not agreed to authorise class arbitration is inconsistent with the Federal Arbitration Act (FAA).

The Supreme Court shunned the rationale of its earlier decision in Green Tree Financial Corp.v Bazzle (539 U.S. 444 (2003)) (Bazzle). In Bazzle  "any disputes" or "all disputes" was held to be broad enough language to include both disputes brought on behalf of an individual and those brought on behalf of a class. The reasoning given was that most arbitrators did not consider a typical arbitration clause to be silent on the issue of whether class arbitration was included within its scope, but to incorporate it implicitly.

In Stolt Nielson, the Supreme Court concluded that there can be no class action where the parties have stipulated that there is "no agreement" on the matter of class-action arbitration. They pointed out that under the FAA there was a basic precept that arbitration "is a matter of consent not coercion". Here the tribunal imposed arbitration despite the parties' stipulation that they had reached "no agreement" on that issue.  The Supreme Court found that no agreement cannot mean consent. The Supreme Court also said that the differences between bilateral and class-action arbitration were too great for arbitrators to presume that the parties' mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings. This is because class-action arbitration changes the nature of the arbitration in various ways, including the arbitrators' obligation to resolve a dispute sometimes between thousands of parties, the loss of the presumption of privacy and confidentiality, the arbitrator requirement to adjudicate the rights of absent parties, and the increased commercial stakes.

They did not, however, overrule Bazzle. In a case where no specific stipulation is made as to silence on this issue, the Bazzle presumption may still exist.  A party agreeing to a standard arbitration clause could legitimately argue that the agreement was not merely silent but was intended to include class arbitration within its scope. The outcome would then depend on a tribunal's interpretation of the parties' intent.

The consent issues which Stolt Nielson raises are similar to those which English tribunals have traditionally used to reject relation class-action arbitration. It remains to be seen in the US however, whether an "any disputes" clause without more may be construed as sufficiently "silent" to block class-action arbitration.

Stolt Nielsen S.A. v. Animalfeeds International Corp. (U.S. Apr. 27, 2010)

5. FG Hemisphere (HK) - Court of Final Appeal to clarify state immunity law in Hong Kong

The Democratic Republic of Congo (DRC) was last month granted leave to appeal the Hong Kong Court of Appeal decision on state immunity law, FG Hemisphere Associates LLC v Democratic Republic of the Congo and others (CACV 373/2008 & CACV 43/2009).

Earlier this year, a majority of the Court of Appeal refused the DRC's appeal against the enforcement of two ICC arbitration awards that had been rendered against it in France and Switzerland. The US distressed debt fund, FG Hemisphere Associates LLC, sought to enforce the arbitral awards in Hong Kong by intercepting payments due to the DRC by a Chinese state-owned company.

The Court of Appeal decision, which is now being examined by the Hong Kong Court of Final Appeal, clarified several key issues relating to the law on sovereign immunity in Hong Kong. In particular, the Court concluded inter alia that:

1. the doctrine of restrictive state immunity applies in Hong Kong; and
2. a state's agreement to arbitrate does not represent a waiver of immunity from execution.

The Court of Final Appeal decision will bring welcome judicial clarification on the law of state immunity in Hong Kong and, it is hoped, further guidance to parties dealing with sovereign entities. In the meantime, the case serves as an important reminder to private parties to seek clear and express waivers of immunity from execution as well as from suit when entering into agreements with states and state-owned entities.

Please see our full analysis published by Global Arbitration Review here.

6. LCIA India unveils arbitration rules

Following the establishment of LCIA India as a centre for arbitration a year ago, on 17 April 2010, the much anticipated LCIA India Rules (the “Rules”) were launched and published on LCIA India's website http://www.lcia-india.org/.

These are only the third set of LCIA Rules in existence – the second being the DIFC-LCIA Rules which are closely modelled on the LCIA Rules for use in Dubai – and their arrival has been greeted with great enthusiasm. It will provide security and comfort to parties to bring a dispute to an institution with 116 years of experience, as well as a particular focus on this jurisdiction. The development will build on the existing popularity of the LCIA amongst Indian parties. Further, the Rules will provide a boost to the development of arbitration in India, particularly as it is already well placed given its thriving economy, widespread use of English and highly educated and respected legal profession.

It is envisaged that the ever increasing numbers of foreign investors in India as well as Indian companies involved in domestic disputes may prefer LCIA India to their current dispute resolution options, namely:

• the Indian court system, which is well-known to be a lengthy process;
  ad hoc arbitration in India, also subject to delays, expense and excessive judicial intervention;
   
• arbitration using an offshore institution, notably LCIA, ICC and SIAC in Singapore;
   
• in order to avail themselves of the Rules, parties will need to agree to insert a specific LCIA India arbitration clause in their contract (and Model clauses are provided at the end of the Rules) or agree to use them once a dispute has arisen.

India as a seat of arbitration

Whilst the Rules undoubtedly provide a more efficient means of resolving India-related disputes, not all such disputes will be resolved in India itself. Given the background of judicial interference in arbitrations seated in India, LCIA India has refrained from making New Delhi the default seat. Rather, the choice of seat will always be a deliberate one. It is expected that parties will often select a seat outside of India, thereby choosing the courts of another jurisdiction to support their arbitration insofar as they need them. Nonetheless, for convenience, hearings could still take place in India.

Despite the attractiveness of this option, it is possible (and not without precedent) that the Indian judiciary may still involve itself in a dispute outside India where an Indian party is involved. In any event, there are signs that the attitude of the judiciary itself may be evolving and the Ministry of Law and Justice has, on 9 April 2010, produced a consultation paper on changes to the 1996 Indian Arbitration Act. This development in addition to the Rules certainly provides much cause for optimism.

To view our longer e-bulletin on this topic please click here.
 

The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein.

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© Herbert Smith LLP 2010