September 2010 | TALKINGPOINT | LITIGATION & DISPUTE RESOLUTION
FW moderates a discussion between Richard Smith at Allen & Overy, Tim Portwood at Bredin Prat, and Michael D. Nolan at Milbank, Tweed, Hadley and McCloy LLP, on the benefits of arbitration as a means of resolving international disputes.
FW: Have you seen an increase in international disputes in the last 12 months or so?
Nolan: Arbitrations increased significantly in 2009 according to arbitration institutions such as LCIA and the ICC. LCIA arbitrations increased by approximately 40 percent through November 2009 by comparison to the same period in 2008. ICC arbitrations increased by approximately 25 percent for the 2009 calendar year. ICSID, an arbitration institution dealing with disputes between investors and host states brought primarily pursuant to international investment treaties, did not follow this trend. After peaking in 2007, arbitrations filed with the Centre decreased 44 percent in 2008 and increased only slightly in 2009. Nineteen new ICSID cases had been filed going into September of this year, or at a rate still behind 2007. The ICSID figures do not necessarily mean that investor-state arbitrations are on the decline, however, especially as we see comparatively more investor-state cases being brought to ad hoc arbitration instead of ICSID. We have seen a change in the fee structure of both contractual and investor-state arbitrations. Third party financing and contingent fee arrangements have become more common in both settings. Further, especially in the investor-state context, clients, especially on the state side, have become more aggressive in seeking some sort of fee capping arrangements.
Portwood: The much expected tsunami of international disputes caused by the financial crisis has not, in our experience, appeared. There has been an increase in international insolvencies and restructurings as companies with cross-border activities have found it difficult or impossible to cope with the crisis. Because of their regulated nature, these insolvency or restructuring matters often find themselves embroiled in court room battles raising interesting conflicts of jurisdictions (in Europe, governed by EU Regulation). Likewise we have seen an increase in attempts by companies to find ways out of unprofitable contracts. Whilst there has been an increase in pre-contentious instructions, when push comes to shove the cost and uncertainties (especially concerning enforcement) of international litigation mean that these instructions do not usually result in full blown litigation. One area of practice which has proven to be an exception to this general trend is regulatory matters as regulatory authorities have generally become more proactive in their investigations, including investigations with a cross-border element.
Smith: The growth of international trade over the last decade or more and the impact of the financial crisis have resulted in an increase in disputes referred to international arbitration. We have noted this particularly in the energy, construction and commodities sectors where the number of price reviews and disputes arising from major construction projects and long term supply contracts has grown significantly. We have also seen an increase in the number of insurance disputes, including D&O, civil and professional liability, political risk and trade credit claims. Many of these disputes have resulted in arbitration. Since the Russia financial crisis in 1998, more arbitration clauses have been included in a range of financial contracts, including derivatives contracts. As a result, we are also seeing significantly more financial disputes finding their way to arbitration.
FW: What are some of the recurring themes at the centre of these conflicts?
Portwood: In our experience, if there has been a recurring theme in the disputes that we have been handling over the last 12 months or so it has been the unwinding of commercial relationships that for one reason or another have gone sour. In the context of these disputes, we have been frequently called upon to advise on jurisdictional issues where one or other of the parties has attempted to prolong the agony by challenging a foreign court’s jurisdiction or by challenging the validity of an arbitration or other ADR agreement.
Smith: We handle a large array of disputes but the recurring themes in many of these include the inability of parties to continue financing projects, the cancellation of long term contracts following the decline in commodity prices and, in some cases, insolvency. Allegations of fraud, negligence and financial mis-selling (many fuelled by increased consumer activism) underlie a number of the insurance claims we are handling. We are also seeing increasing numbers of parties in the commercial sector exercising their rights to arbitrate under investment treaties and bringing arbitration claims against states and related ‘political risk’ insurance claims against their insurers.
Nolan: We have seen disputes arising out of the volatility in commodities prices, and there have of course been cases resulting from the financial crisis and changed financial environment. Both factors have contributed to a growth in disputes relating to power and mining ventures. The financial crisis further was responsible for M&A disputes. Typical recent contractual project disputes have included disputes over pricing under gas supply agreements. Similar issues have been in evidence in investor-state arbitration, such as in the claim filed by Maersk against Algeria last year. I understand that arbitration concerns a claim with regard to a change in the taxation structure in the new Algerian hydrocarbons law. Recent contractual M&A disputes have involved questions over corporate debt management or over the consummation of corporate deals. One such example is the recently filed arbitration between Rusal and Interros with regard to control over the restoration of the fair value of Russian Norilsk Nickel after Norilsk came into financial difficulty.
FW: To what extent is arbitration being used more often to resolve international disputes?
Smith: Globalisation has unquestionably led to the increased use of international arbitration as a method of dispute resolution. The statistics released by arbitral institutions such as the ICC and LCIA all confirm this trend. This is accounted for, in part, by the greater use of arbitration by the financial sector. For example, arbitration clauses are now commonly found in many financial contracts, including between many major banks and financial institutions and counterparties in the emerging markets, particularly in the CIS, Central Asia, India and Latin America. For many, arbitration provides greater certainty and neutrality than bringing their claims before the local courts of the other party.
Nolan: As reported on 1 September 2010 in the Legal Intelligencer, arbitration is not as popular as it was a few years back in North America due to (perceived) cost increases and loss of efficiency in the arbitral process. We may simply be experiencing a stage of a pendulum swing in North America, but, at the moment, there does seem in some quarters to be less confidence in arbitration than there has been. On the other hand, three of the four so-called BRIC countries have an increased appetite for international arbitration, namely Brazil, India and China. For example, we have seen Asian financial institutions press for the inclusion of arbitration clauses in loan documents that their Western counterparts traditionally have subjected to litigation in a financial centre such as London or New York. This boom in Asia has led to the expansion of arbitration in Singapore which recently opened new arbitration facilities. India is also strengthening arbitration, with recent proposed amendments to the 1996 Indian Arbitration Act including “mandatory arbitration for commercial disputes worth over 50 million rupees (US$1.1 million) through a ‘default clause’ specifying institutional arbitration, and to give arbitral institutions more of a role in the appointment of arbitrators”. Practitioners in Brazil continue to report on the growth of arbitration in that market.
Portwood: We are not aware of a significant increase in the use of arbitration as the means of resolving international disputes. The choice for contracting parties between arbitration and state court litigation is made when their contract is being negotiated, long before disputes arise. Once the dispute has arisen, the likelihood of the disputing parties agreeing to change the contractual dispute resolution mechanism is very small. As a consequence, the wake of the financial crisis has very little if any direct impact on the use of arbitration over state court litigation. In our view, it is premature to opine on whether the experiences of the financial crisis will incite parties to favour the inclusion in their commercial contracts of an arbitration agreement as opposed to a state court jurisdiction clause.
Compared to other forms of dispute resolution, what are the benefits of the arbitration process for the parties involved?
Portwood: The most significant benefit of arbitration over other forms of dispute resolution is found at the enforcement stage, after the arbitral award has been issued. Over 150 countries have ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This Convention allows contracting states to oppose the enforcement of arbitral awards rendered in a foreign state only on very limited grounds and prohibits any review of the merits. As a result, the enforcement of an international arbitral award is far easier and more certain than that of a foreign court judgment. Perhaps the other most notable benefit of arbitration over court proceedings is the ability of the parties to select the member, or members, of the arbitral tribunal and thus to have some control over the expertise and quality of their tribunal. Other forms of ADR are less attractive than arbitration because frequently they do not result in a binding act that is recognised as having greater force than a simple contract.
Smith: There are many benefits to the arbitration process. Two reasons commonly cited are the benefits of the New York Convention which makes an arbitral award easier to enforce internationally than a judgment of a national court, coupled with the perceived neutrality inherent in the arbitration process compared with litigation in the courts of one of the parties. Flexibility is another significant advantage, meaning that parties can more easily tailor the arbitration procedure to their particular dispute, including, for example, fast track procedures or the requirement for the tribunal to have relevant specialist knowledge. Some parties also prefer the confidentiality of the arbitration process rather than have their commercial disputes aired in public.
Nolan: The main benefit of arbitration for the sort of complex cross-border disputes that readers of this publication are most concerned about is the enforceability of an award around the world. Litigation so far does not have the same ‘portability’ as an arbitration award. Because more and more project partners have a global asset base, this global enforceability of awards has significant advantages. Other advantages can include the privacy of proceedings. But the advent of internet news sources for international arbitration have led to significant leaks about even confidential commercial arbitration proceedings. Additionally, arbitration has advantages in areas with strong and developed industry customs where arbitrators will be better positioned to take such trade usage into account.
FW: Are there any downsides to arbitration? How can they be reduced or overcome?
Nolan: There are no appeals in international arbitration. This has its upsides: awards are readily enforceable around the world. But it also means that the losing party will have very little recourse to correct what it can feel to be a wrong and harsh decision. Given that the stakes in international arbitration are steadily rising, this means: a billion dollar award without recourse for correction. Arbitral institutions are now focusing on voluntary appellate procedures, with the AAA for example currently at work on such rules. It will be interesting to see whether there will be broad interest in electing an appellate mechanism and the effect on arbitral decision making of the prospect for appellate review.
Portwood: The major downside to arbitration is the length of the process. Considerable time is often spent on the constitution of the tribunal – time that is not lost in judicial proceedings. Likewise, the scope of introducing documentary requests and other steps for the production of documents is much greater than in judicial proceedings, at least in civil law systems which again can have a significant braking effect on the speed of the proceedings. Cost is often cited as another downside to arbitration, particularly over judicial proceedings in civil law systems. There is a regrettable trend in arbitration for arbitrators not to award the winning party its costs which can often make somewhat bitter the sweet pill of success. Reducing the length of arbitral proceedings is not easy. The inclusion of ‘fast track’ or specific time requirements in an arbitration agreement is dangerous since any failure by the arbitral tribunal to meet such requirements could threaten the enforceability of the resulting award. Various ‘soft law’ alternatives can be used, however, at least to indicate to the arbitral tribunal that the parties expect a high degree of efficiency and speed in the conduct of the proceedings. As to costs, it is difficult to devise a means of stopping the unfortunate trend that we are experiencing other than to make the arbitration community aware that the users (i.e., parties that have included arbitration clauses in their contracts) expect more rigour in costs awards.
Smith: ‘Summary’ procedures are generally not available in the arbitration process. This means that parties with straightforward claims will have to pursue their dispute through to a full merits hearing before they can obtain a final enforceable award even if the other party has no defence to the claim. By contrast, the local courts in many jurisdictions have the power to grant ‘summary judgment’ or to strike out a claim at an early stage in the proceedings. The inability of arbitral tribunals to consolidate different claims or to join third parties to existing claims can also present problems. This can give rise to multiple sets of proceedings, sometimes relating to the same issues, with the risk of inconsistent decisions. This difficulty can be overcome by drafting arbitration agreements with appropriate wording encompassing all the parties to a potential dispute.
FW: How much bearing does the commercial and technical expertise of an arbitrator have on the process and its outcome?
Portwood: Except in very specialised industries or sectors – such as, for example, commodities trading arbitration – in our view, the most important expertise that an arbitrator should have is in the conduct of international proceedings and not in the particular industry in question. Skilled arbitrators generally have the capacity to grasp quickly and understand the technical particularities of any industry when fact or expert evidence of such particularities is presented to them. The arbitration can, however, quickly go off track when they are being conducted by a tribunal that has little experience in handling a complex international dispute resolution process in which there is a clash of legal cultures and very different expectations from each side as to how the proceeds should be handled.
Smith: This depends on the nature of the contract and the potential disputes which might arise. For example, if the claim concerns complex financial instruments or knowledge of how specialist markets operate, the technical knowledge of the arbitrator can potentially be very important. Likewise, in disputes which are very factually intensive – such as construction or engineering disputes – experience in the relevant field can not only assist in getting to the right result more quickly but also in deciding how best to manage the case. International arbitration also involves the laws of many different countries and it is therefore very common for at least one of the arbitrators to be a practising lawyer from the relevant jurisdiction.
Nolan: The appointment of the arbitral tribunal is one of the most important aspects of an international arbitration proceeding. It determines the arbiter who will decide the dispute. The choice of arbitrators first will have significant procedural consequences. Arbitrators have different preferences, frequently based on their own legal culture, of how they like proceedings to unfold. This includes for example the extent to which they will allow the parties to request the disclosure of documents from their respective opponent in the arbitration proceeding. Depending on the facts of each case, there will be different procedural issues that the parties should bear in mind. The consequences of the choice of arbitrators on the merits of a dispute often is dispute specific. For example, certain disputes arise in the context of accepted trade practices. Depending on how the trade practice impacts the positions of the respective parties, one party may prefer to appoint an arbitrator familiar with these trade practices and the other party may prefer to appoint an arbitrator that will approach the dispute more with a view to the applicable law than the applicable usage. In those cases, the specific experience and expertise of the arbitrator can be significant. But there are cases, largely simply contractual disputes, in which the dispute may not be affected as clearly by the substantive positions of the arbitrators.
FW: If an award has been annulled by the courts in the country of the seat of arbitration, can it still be enforced?
Smith: The New York Convention regulates the enforcement of international arbitration awards. This provides that an award may not be recognised if an award has been set aside by the courts in the country of the seat of arbitration. If an award has been set aside in the seat, the enforcing court will generally not recognise it but there have been some notable exceptions in some countries including France, Belgium, Austria and the Netherlands. For example, in the course of the ongoing litigation and arbitration involving Yukos, the Dutch Supreme Court recently held that an arbitral award set aside by a court in Moscow (the seat) could be enforced against the losing party’s assets in the Netherlands. This was on the basis that the Russian courts had not acted independently in setting aside the award. However, such outcomes are the exception rather than the norm.
Nolan: As a general matter, an award can still be enforced if it has been annulled by the courts in the country of the seat of the arbitration. As a practical matter, whether enforcement actually will be granted may depend on the jurisdiction in which enforcement is sought, the place where the award was set aside, and whether the set aside action itself was procedurally infirm. It is sometimes thought that the significant commercial jurisdiction least influenced by set asides at the seat of an arbitration is France. Until not too long ago, the United States courts similarly were thought to enforce awards irrespective of set aside. But there may have been some change in attitudes in the United States, as suggested by the decision in Termorio by the DC District Court in 2007. The Termorio court refused enforcement of the underlying award after the set aside because it gave deference to the foreign judicial proceedings. Enforcement of an award that has been set aside thus is possible, but can encounter difficulties. Pragmatically, an award creditor should be able to explain to the enforcing court what went wrong in the set aside action – and, to the extent possible, should explain the procedural infirmities of the set aside procedure.
Portwood: An arbitral award can only be annulled by the courts of the country in which the arbitration had its seat. The courts in any other country can refuse to enforce the award but they do not have the authority to annul it. There is a line of case law of the French Supreme Court that holds that the enforcement of an international arbitral award cannot be refused solely because it has been annulled by the courts in the country of the seat of arbitration. This might at first sight be surprising, since if the award has been annulled how can it continue to exist to be enforced elsewhere? The answer for the French Supreme Court lies in the international nature of the arbitral award. Such international nature means that the courts of no one country – including the courts of the seat of arbitration – have the power to extinguish the award. This line of case law has not received much recognition in other legal systems although it has been the source of much debate in arbitration circles and beyond.
FW: What can parties do during the course of an arbitration to protect their ability to enforce an eventual award in their favour?
Portwood: The most obvious protection that parties should seek to obtain is some form of security over the assets of their counterparty if there is a fear that the opposing party will avoid enforcement of an unfavourable arbitral award. This means that even before an arbitration is commenced, whilst the pre-contentious phase is brewing, parties should start looking to where their opposing party has its assets – whether tangible such as buildings, moveable property, bank accounts, etc., or intangible such as contracts with third parties and IP rights – and to investigate under the laws of the place where such assets are located what conservatory measures over such assets are available. Most state laws on arbitration and the major arbitral institutions provide for and preserve the competence of state courts to order provisional or conservatory measures such as those necessary to protect against dissipation of assets. As soon as the local law allows, proceedings should be introduced to seize the relevant assets on the basis of the arbitration.
Smith: It is not possible to exclude entirely the risk of a disappointed party challenging the award in the place of enforcement. However, the grounds of possible challenge are fairly narrowly framed by the New York Convention. In anticipation of those grounds being raised, possible steps to reduce the risk of a successful challenge might include putting before the tribunal the issue of whether the dispute is one which can be referred to arbitration at all (arbitrability) or the issue of any relevant mandatory laws in the place of enforcement which might be used later to attack the award. It may feel counter intuitive to raise issues such as these but having the tribunal decide them in its award may reduce the chances of a successful challenge. Furthermore, where one party decides not to participate in the arbitration, it may be advisable for the other party to ask the tribunal to rule on its own jurisdiction over the dispute.
Nolan: Parties to international arbitrations can have recourse to interim measures of protection. Interim measures of protection are available in most arbitrations from the arbitral tribunal pursuant to the applicable arbitration rules. Interim measures of protection can issue in international arbitration when a party makes out that the effective jurisdiction of the arbitral tribunal is threatened. This standard sometimes is not viewed as requiring that the moving party show that it could not be compensated with money damages for the threatened loss – a standard frequently applied in US interim measures proceedings. Sometimes, interim measures have been granted in arbitration, on the basis of a less demanding showing that the relief sought in the arbitration could be undercut unless an interim measure is issued. Interim measures of protection also can be available ‘in aid of arbitration’ from the courts. A recent US example is the freezing of bank accounts of a subsidiary of the Venezuelan oil company, PDVSA, before arbitration proceedings had even been commenced. Court measures can be an effective tool to secure money to enforce an award and should not be forgotten. Their use, however, should be carefully considered. Some arbitrators may view resort to the courts as excessive and as infringing on their own jurisdiction. As with many things, case-by-case consideration is necessary.
Richard Smith is a partner in the International Arbitration Group of Allen & Overy LLP. He specialises in international commercial arbitration with a particular focus on shareholder, insurance and finance related disputes. Mr Smith has also conducted a number of important arbitration related cases before the English Courts relating to the enforcement of arbitration agreements and associated injunctive relief. He can be contacted on +44 (0)20 3088 3734 or by email: email@example.com.
Tim Portwood is a partner at Bredin Prat, and a French qualified English barrister. He specialises in international arbitration and international litigation. His practice also includes cross-border M&A transactions, joint ventures and private equity transactions. Born in the United Kingdom, Mr Portwood graduated from Cambridge University. He was admitted to the Bar of England and Wales in 1988 and to the Paris Bar in 1998. Mr Portwood can be contacted on + 33 1 44 35 35 35 or by email: firstname.lastname@example.org
Michael D. Nolan is a partner in the Washington, DC office of Milbank, Tweed, Hadley and McCloy LLP. Mr Nolan has represented clients or served as arbitrator in arbitrations under AAA, ICC, ICSID, UNCITRAL and other rules and is consistently listed in Euromoney Guide, Experts in Commercial Arbitration and Chambers USA for international arbitration. Mr Nolan teaches as an Adjunct Professor at the Georgetown University Law Center. He is a member of the Board of Directors of the American Arbitration Association and of the Panel of ICSID Arbitrators. Mr Nolan is a graduate of Harvard College and of the University of Chicago Law School. He can be contacted on +1 (202) 835 7524 or by email: email@example.com.
© Financier Worldwide
Allen & Overy
Michael D. Nolan
Milbank, Tweed, Hadley and McCloy LLP