
news
Newletter Arbitration - 1/2007 - EN
News in Brief
a) Exxon starts arbitration against Venezuela
b) Bolivia denounces ICSID Convention
c) European Court of Justice to rule on anti-suit injunctions in arbitration
d) Pantechniki pursues Albania at ICSID
e) U.S.A. and Mexico complain over Chinese subsidies
f) Permanent Court of Arbitration in Singapore
Decisions
a) Arbitral awards LG&E v. Argentina, ICSID
b) Court decisions Fiona Trust v. Yuri Privalov
The Practice Corner:
Can you validly incorporate in your contract an arbitration clause contained in another document?
NEWS IN BRIEFa) Exxon starts arbitration against Venezuela
b) Bolivia denounces ICSID Convention
c) European Court of Justice to rule on anti-suit injunctions in arbitration
d) Pantechniki pursues Albania at ICSID
e) U.S.A. and Mexico complain over Chinese subsidies
f) Permanent Court of Arbitration in Singapore
Decisions
a) Arbitral awards LG&E v. Argentina, ICSID
b) Court decisions Fiona Trust v. Yuri Privalov
The Practice Corner:
Can you validly incorporate in your contract an arbitration clause contained in another document?
a) Exxon starts arbitration against Venezuela
Exxon Mobil is said to have commenced arbitration proceedings against Venezuela as a consequence of Venezuela’s takeover of the oil company’s assets. The takeover was part of the nationalisation process undertaken by the Venezuelan President Chavez.
The request of arbitration is believed to have been filed with the International Centre for Settlement of Investment Disputes (ICSID).
b) Bolivia denounces ICSID Convention
Last May the World Bank received a written notice of denunciation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) from the Republic of Bolivia.
In accordance with Article 71 of the ICSID Convention, the denunciation will take effect six months after the receipt of Bolivia’s notice, i.e., on November 3, 2007. As required by Article 75 of the ICSID Convention, the World Bank has informed all ICSID signatory States of the Republic of Bolivia’s denunciation. It is not clear whether such withdrawal is compatible with Bolivia’s standing offer under several Bilateral Investment Treaties to settle disputes with foreign investors before ICSID.
c) European Court of Justice to rule on anti-suit injunctions in arbitration
Adecision of the European Court of Justice is awaited in the case C-185/07 on the issue whether a court of a Member State may grant an injunction to restrain commencing or prosecuting proceedings in breach of an arbitration agreement before a court of a Member State which has jurisdiction under EC Regulation 44/2001.
The question has been referred to the ECJ under article 234 of the European Treaty by the House of Lords in the well known case West Tankers v. RAS.
d) Greek construction company brings arbitration against Albania at ICSID
The Greek construction company Pantechniki S.A. has commenced an arbitration under the aegis of ICSID against the Republic of Albania. The Greek investor seems to be claiming that Albania failed to protect its property during the financial crisis that took place in Albania in the late 1990’s (the so-called Pyramids’ crisis) when several riots happened and mobs of protesters looted and destroyed property. The disturbance came as a reaction to the heavy financial loss that many had experienced following the collapse of risky pyramid financial schemes. The Greek investor claims that Albania has breached the provisions of the
Bilateral Investment Treaty entered into between Greece and Albania.
e) U.S.A. and Mexico complain over Chinese subsidies
The U.S.A. and Mexico have complained in two separate actions before the WTO that China has provided subsidies to its industry in the form of tax refunds and reductions that are allegedly prohibited by WTO rules. The two actions will be heard jointly. China has said that it would defend its position and is confident that its measures are not in breach of WTO obligations.
Several countries have reserved their third party rights in the dispute.
f) Permanent Court of Arbitration in Singapore
The PCA has established facilities in Singapore. The Secretary-General of the PCA, Mr. Tjaco van den Hout signed an agreement with the Deputy Prime Minister and Minister for Law of Singapore, Prof. Shunmugam Jayakuma, last September.
DECISIONS
a) Arbitral awards
LG&E v. Argentina (ICSID Case No. ARB/02/1) Selected issues Damages to be awarded for breaches of a BIT other than expropriation.
This ICSID arbitration was brought by LG&E against Argentina for breach of the Argentina/U.S.A. Bilateral Investment Treaty (BIT). According to the Claimant, during the well known financial crisis that Argentina suffered between the years 2001 and 2002, the Defendant adopted certain urgent measures that had the effect of modifying the regulatory environment under which the Claimants had decided to invest in certain natural gas distribution enterprises in Argentina. More precisely the Claimant alleged that such measures constituted a breach of Argentina’s undertakings under the BIT: (a) to accord foreign investors a fair and equitable treatment; (b) not to impair, by arbitrary or discriminatory measures, the use and enjoyment of these investments; (c) to observe any obligation Argentina may have entered into with regard to investments (the “umbrella clause”); and (d) not to expropriate, directly or indirectly, Claimants’ investment without paying suitable compensation. In October 2006, the Arbitral Tribunal appointed to deal with the dispute rendered a decision with which it was decided to bifurcate the issues of liability and quantum. The Tribunal found that Argentina had breached its obligations under the BIT to accord the Claimant a fair and equitable treatment and concluded that while Argentina’s measures may not have been arbitrary, they were discriminatory in nature and thus, in breach of the BIT. The Tribunal rejected the claim that, Argentina’s measures amounted to an expropriation in breach of the BIT.
Interestingly, unlike the Arbitral Tribunal in another arbitration brought against Argentina by a US investor (CMS v. Argentina), the LG&E Tribunal found that Argentina did endure a state of necessity that, in accordance with the provisions of the BIT, excused Argentina for breaching the obligations imposed by the same BIT. According to the Tribunal, however, such state of necessity only lasted from December 2001 until April 2003. Consequently, Argentina was found liable and ordered to compensate the Claimant for the breach falling outside that period of time.
In July 2007 the LG&E Tribunal issued its decision on compensation. While adopting the established international law principle according to which compensation should wipe out the consequences of the illegal acts, the Tribunal disagreed with the system of calculation advocated by the Claimant. LG&E had argued that, in order to calculate its loss, it was necessary to compare the fair market value of its Argentine shareholdings in 2000 ($268 Million US) with the depressed share prices in October 2002 ($20 Million US). This method of calculation would have led to compensation of $248 Million (US). According to the Tribunal, however, such a method of calculation would have been suited in a case where the investors had suffered a clear expropriation, or where there had been interference with property rights of a magnitude equivalent to the total loss of the investment. In this respect the Tribunal noted that LG&E:
i) continued to hold stakes in three Argentine gas distribution firms,
ii) had not sold its Argentine assets when their value was depressed, and
iii) the assets had in the meanwhile regained value.
The Tribunal decided that the method of calculation suggested by LG&E did not reflect the “actual loss” incurred by the Claimant. The Tribunal also rejected the Claimant’s argument that it should be awarded compensation for loss of future profits. The Tribunal noted in this respect that lost future profits:
“have only been awarded when an anticipated income stream has attained sufficient attributes to be considered legally protected interests of sufficient certainty to be compensable.
Prospective gains which are highly conjectural, “too remote or speculative” are disallowed by
arbitral tribunals.”
The uncertainty concerning lost future profits in the form of lost dividends resulted from the fact that:
“Claimants have retained title to their investments and are therefore entitled to any profit that the investment generates and could generate in the future.”
As the Claimant had supported their claim to loss of profits making reference to cases where such loss had been compensated, the Tribunal observed that those cases had to be distinguished since they dealt with disputes where investors had lost title to their property or the relevant contracts or licenses had been put to an end.
b) Court decisions
England Fiona Trust & Holding Corporation & Ors v. Yuri Privalov & Ors [2007],
Selected issues
Whether disputes connected to contracts tainted by bribery could be determined by arbitration in the context of a common form of arbitration clause
The main dispute was between the Russian state-owned Sovcomflot group, as owners of various vessels (the Owners), and an individual who allegedly had successfully bribed employees of the Owners in order to obtain contracts which contained provisions highly favourable to the charterers. As a result of such allegation, a complex action was brought before the English courts by the Owners seeking damages under several heads of claim.
Despite the above mentioned action, the charterers sought to enforce their rights against the Owners. Since each of the disputed contracts provided for arbitration in London under the LMAA Rules the charterers started arbitration proceedings.
In June 2006 the Owners filed an application under Section 72 of the English Arbitration Act 1996 (EAA) seeking an order to restrain the arbitration proceedings.
The basis for the application was that the contracts, which contained the arbitration clauses, had been rescinded because of the alleged bribery. As a result there was no longer any valid and binding obligation to arbitrate.
At first instance Morison J. granted an interlocutory injunction to restrain the arbitration proceedings pending the action for bribery. This decision was appealed.
In dealing with the application the Court of Appeal entertained two main issues that seem particularly interesting in the context of international arbitration. The first issue was whether the claim that the charters had been rescinded for bribery was within the scope of the arbitration clause. The second issue was whether the doctrine of separability of arbitration agreements could be applied in the presence of issues of bribery.
i) The scope of the arbitration clause The Court of Appeal had to address the issue as to
whether there is any difference in terms of scope between clauses providing for arbitration in the presence of disputes “arising under” a contract and those providing for arbitration “arising out of”. Longmore LJ stated that:
“the time had now come for a line of some sort to be drawn and a fresh start made at any rate
for cases arising in an international commercial context. Ordinary business men would be surprised at the nice distinctions drawn in the cases and the time taken up by argument in debating whether a particular case falls within one set of words or another very similar set of words. If business men go to the trouble of agreeing that their disputes be heard in the courts of a particular country or by a tribunal of their choice they do not expect (at any rate when they are making the contract in the first place) that time and expense will be taken in lengthy argument about the nature of particular causes of action and whether any particular cause of action comes within the meaning of the particular phrase they have chosen in their arbitration clause. If any businessman did want to exclude disputes about the validity of a contract, it would be comparatively simple to say so.”
Longmore LJ therefore concluded that a dispute whether a contract could be declared null and void for alleged bribery can fall within the scope of an arbitration clause in the absence of express wording to the contrary.
ii) Application of the doctrine of separability The second interesting issue entertained by the Court of Appeal was whether the doctrine of separability should be applied in the presence of serious grounds of invalidity of the main contract such as allegations of bribery. As is well known the doctrine of separability has been adopted in the vast majority of jurisdictions. In England, such doctrine has been codified under Section 7 of the EAA according to which, unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement. The result is that the arbitration agreement remains valid and effective irrespective of any invalidity affecting the main contract unless the validity of the arbitration agreement itself is directly affected by some specific reason.
The Court of Appeal confirmed this principle observing that the application of Section 7 of the EAA is only affected in the presence of circumstances undermining the validity of the arbitration clause itself as opposed to the validity of the contracts including them. As a result, the argument made by the Owners that they would not have made any contract with the charterers at all had they been aware of the bribery was not enough to affect the validity of the arbitration clause. This because such complaint did not directly affect the arbitration agreement. Longmore LJ stressed that it was not enough to argue that a contract as a whole is impeachable for an arbitration clause to be affected. There must be an element directly affecting the validity of the arbitration agreement as such. As that specific element was missing in this case the appeal was allowed.
THE PRACTICE CORNER
Can you validly incorporate in your contract an arbitration clause contained in another document?
A considerable number of business contracts are frequently entered into by incorporation of contractual provisions contained in a separate document which the parties make reference to. Reference is generally made to model contracts drafted by trade associations, general conditions of trade elaborated by one of the parties, to a contract previously entered into between the same party or indeed to a contract entered into by one of the parties with a third party. A typical example of this situation is where the provisions of a subcontract incorporate by reference the "general conditions" of the prime contract or where, in a bill of lading, reference is made to the provisions contained in the charter-party.
Usually, the document which the parties make reference to contains, amongst other provisions, an arbitration clause.
Whether the reference has the effect of validly concluding an arbitration agreement has been the subject of debate. Obviously, much will depend on the law applicable to the arbitration clause and the attitude of the arbitral tribunals or the domestic courts called to rule on the validity of such clause.
In the absence of specific provisions as to the validity of arbitration clauses incorporated by reference under the applicable law one is left to the interpretation of the New York Convention 1958 for the enforcement of arbitral awards rendered abroad which has been ratified by the vast majority of States and, as is well known, also deals with the obligation of Contracting States to enforce arbitration agreements that fulfil certain requirements of validity.
Article II of the New York Convention, amongst other things, provides that:
Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.
The term "agreement in writing" shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.
Article II does not deal directly with incorporation of arbitration clauses by reference. Therefore, it is not immediately clear whether Article II(2) only applies to cases where the arbitration clause is contained in the documents exchanged by the parties or whether it also applies to cases where:
a) although the documents exchanged do not contain an arbitration clause, nonetheless,
they make express reference to an arbitration clause contained in another document (so-called relatio perfecta), or
b) the documents exchanged by the parties do not contain an arbitration clause but make
reference to a document containing one, although there is no express reference to it in
the exchange of documents (so-called relatio imperfecta).
Several different judicial attempts have been made to justify the compatibility of incorporation by reference and the wording adopted under Article II of the New York Convention.
The majority of decisions on the issue seem to suggest that domestic courts are inclined to uphold the validity of incorporation of arbitration clauses to which the parties have made express reference (relatio perfecta).
More uncertain is the fate of clauses incorporated by general reference to the document or set of rules in which the clauses are contained (relatio imperfecta).
Some decisions tend to affirm the validity of arbitration clauses where the document in which they are contained is either known or available to the parties.
Most decisions upholding the validity of arbitration clauses incorporated without specific reference tend to do so by placing importance on the status of the parties and particularly on whether the parties are experienced traders that are used to entering into contracts governed by certain rules or are aware of the outcome generated by the reference.
The general trend that seems to emerge from such case law is that, in the majority of cases, arbitral tribunals and State courts are not so much concerned with formalities but with the parties’ actual knowledge that, by making reference to another set of provisions, they are incorporating a binding arbitration agreement and therefore they are waiving their fundamental right to have their dispute settled before a State court.
Although such case law is believed to comply with the pro-enforcement bias of the Convention, it is not possible to assume that a similar conclusion would be reached by any courts under any circumstances. The silence of Article II of the Convention on the issue may produce inconsistent case law. As a matter of fact, some courts have denied the validity of incorporation where the reference was not specific or where it was not possible to ascertain whether the parties were in a position to foresee the outcome of the incorporation.
The Convention seems to allow the application of more favourable provisions which may have been implemented by the Contracting States. Indeed several States have recently implemented arbitration statutes that are particularly “arbitration friendly” and go well beyond the regime adopted by the New York Convention some fifty years ago.
Furthermore it also seems that the application of more favourable provisions of domestic law does not altogether exclude the application of the New York Convention. The two sources of law can be the subject of combined application if this is beneficial to enforcement.
The arbitration statutes of a number of Contracting States recognise the validity of arbitration clauses incorporated by express reference. Unfortunately, most of them are silent on the issue of general reference to a document containing an arbitration clause (relatio imperfecta). State courts, however, seem prepared to grant enforcement in the presence of evidence as to the parties' actual or deemed awareness of the existence of an arbitration clause in the document incorporated by reference.
It is therefore advisable, when dealing with complex contractual structures, to make sure that any incorporation by reference of a document containing an arbitration clause expressly acknowledges the existence of such clause.
As we have seen, it may well be that the law applicable to the arbitration clause expressly provides for the validity of arbitration clauses incorporated by reference. However, in the absence of any such regime or in the uncertainty as to the actual scope of the provisions of the applicable law, express reference to the arbitration agreement to be incorporated seems a sensible step to be taken.
General editors prof. Stefania Bariatti and avv. Domenico
Di Pietro. For further information please contact
arbitration@chiomenti.net
Di Pietro. For further information please contact
arbitration@chiomenti.net