
news
Newletter Arbitration - 2/2008 - EN
News in Brief
a) Tribunal orders Ecuador to cease legal action against foreign oil company
b) Tribunal rejects application for provisional measures in dispute under Turkey –Azerbaijan BIT
c) Non-ICSID investment treaty arbitrations outnumber ICSID cases
d) Czech Republic seeks to annul jurisdiction ruling in UNCITRAL broadcasting dispute
e) European Treaty may revive debate over power to conclude investment agreements
f) U.S. oil companies challenge Canada under NAFTA
Decisions
a) Arbitral award Berschader & Berschader vs. Russia
b) Court decision Czech Republic vs. EMV
The Practice Corner
Assignment of arbitration clauses
NEWS IN BRIEFa) Tribunal orders Ecuador to cease legal action against foreign oil company
b) Tribunal rejects application for provisional measures in dispute under Turkey –Azerbaijan BIT
c) Non-ICSID investment treaty arbitrations outnumber ICSID cases
d) Czech Republic seeks to annul jurisdiction ruling in UNCITRAL broadcasting dispute
e) European Treaty may revive debate over power to conclude investment agreements
f) U.S. oil companies challenge Canada under NAFTA
Decisions
a) Arbitral award Berschader & Berschader vs. Russia
b) Court decision Czech Republic vs. EMV
The Practice Corner
Assignment of arbitration clauses
a) Tribunal orders Ecuador to cease legal action against foreign oil company
In a pending dispute, an ICSID Tribunal has issued an interim injunction on Ecuador ordering the Government to refrain from prosecuting representatives of the oil company City Oriente.
It seems, however, that the ruling has not yet been implemented by the Government which is still allegedly prosecuting the oil company’s representatives in Quito.
b) Tribunal rejects application for provisional measures in dispute under Turkey –Azerbaijan BIT
In an ICSID arbitration commenced under the Turkey-Azerbaijan Bilateral Investment Treaty by the Turkish group Barmek Holding, the Tribunal rejected the application for provisional measures of protection filed by the Claimant. It appears that the application involved an order for the Respondent State to release frozen funds allegedly owed to the Claimant by third parties.
The Tribunal also denied the Claimant’s request for a measure on nonaggravation of the dispute, stating that the request was vague and that the measure “would have little or no practical meaning or effect.”
c) Non-ICSID investment treaty arbitrations outnumber ICSID cases
A recently-published review of notable developments in the field of investment treaty arbitration in 2006 carried out by Investment Treaty News finds that the number of investment arbitrations taking place under commercial arbitration rules (UNCITRAL, International Chamber of Commerce, Stockholm Chamber of Commerce) appears to have surpassed the volume of such cases taking place under the aegis of ICSID.
d) Czech Republic fails in attempt to annul jurisdictional ruling in UNCITRAL broadcasting
dispute
The Czech Republic filed an application before the English courts to overturn a jurisdictional ruling rendered by an Arbitral Tribunal in favour of the Luxembourg based broadcasting company European Media Ventures S.A. (“EMV”). EMV had commenced arbitration proceedings following a rejection by Czech media regulators of a bid to have a television broadcasting license transferred to an entity controlled by EMV. According to EMV the Czech authorities’ conduct had breached the obligation undertaken under the Luxembourg-Czech Republic Bilateral Investment Treaty. The challenge was rejected (a more detailed description of the dispute is available under the “Decisions” section in this Newsletter).
e) European Treaty may revive debate over power to conclude investment agreements
The debate whether it is the European Community or individual Member States who holds the legal authority to conclude international investment agreements with non-European countries is poised to intensify along the negotiation of the new European Union Treaty.
In the past, the European Court of Justice emphasized that investment agreements with third countries are primarily the responsibility of Member States.
f) U.S. oil companies challenge Canada under NAFTA
Two U.S. oil companies have requested arbitration under NAFTA’s investment chapter arguing that Canadian demands for research and development spending are in breach of the obligations to refrain from the imposition of so-called performance requirements.
DECISIONS
a) Arbitral award
Berschader & Berschader vs. Russia SCC Case No. 080/2004
The dispute arose between two Belgian citizens (the “Claimants”), who were the major shareholders of the Belgium-incorporated Berschader International S.A. (“BI”) and the Russian Federation (“Russia”). According to the Claimants, in 1994 the Supreme Court of Russia issued a public tender for the construction in Moscow of new court facilities which was eventually won by BI. As a result, BI and the Supreme Court entered into a contract (the “Contract”) for the construction and remodelling of the Supreme Court's building complex.
As differences arose between the parties about late payments and consequential late completion of the works, BI exercised its right under the Russian Civil Code to retain possession of the works. In August 2001, the President of the Russian Federation issued a letter to BI aimed at annulling the Contract on the grounds of delays to the completion of the construction works. BI reacted to that letter in September 2001 by notifying the Presidential Administration that the action taken by the latter amounted to a violation of the Treaty for the Encouragement and Reciprocal Protection of Investment of 1989 (the "Treaty") entered into by Russia, Belgium and Luxembourg. Further similar letters were sent by BI to the Supreme Court and the Cabinet of Ministers of the Russian Federation. It appears that the Russian Ministry of Internal Affairs shortly thereafter took physical possession of the works. The negotiations that followed such actions led to a Supplemental Agreement where it was agreed that the Supreme Court owed BI US $5,673,763 (the "Agreed Debt"). Only a fraction of such sums, however, was in fact paid. In July 2002, the Moscow Arbitrazh Court revoked BI's construction licence. In March 2003, BI was placed in bankruptcy in Belgium.
In August 2004, the Claimants submitted a Request for Arbitration to the Arbitration Institute of the Stockholm Chamber of Commerce pursuant to Article 2 and Article 10 of the Treaty. In their Request the Claimants sought a declaration that the Respondent had breached several provisions of the Treaty and claimed compensation for the damages suffered as a result of such breaches.
Russia challenged the jurisdiction of the Arbitral Tribunal on a number of grounds such as the fact that the Claimants had not observed the prearbitration settlement procedure provided for under the Treaty; the fact that the Claimants had not made "investments" and indeed were not "investors" within the meaning of the Treaty as well as the fact that the claim both fell outside the scope of the Treaty and that it constituted a fraud on BI as it had been brought independently from the receiver-ship of the bankrupt company.
The Arbitral Tribunal dismissed the claim that the arbitration had been started without observing the prearbitration procedures provided for in the Treaty as those provisions were found not to be mandatory in nature. Equally, the Tribunal dismissed the plead according to which the claim as brought by the Claimants constituted a fraud on BI. The Tribunal, however, upheld the arguments made by Russia according to which the Claimants had not made an investment protected under the Treaty and that they did not qualify as investors under the same international instrument. The Tribunal explained that, while in principle the assets connected to the claim could qualify as investments, in the instant case they fell outside of the scope of the relevant Treaty. According to the Tribunal the BI shares held by the Claimants were outside of the protection as they had been acquired by the Claimants outside the territory of the host State party to the dispute (i.e. Russia). This difficulty did not arise with regard to the Contract, the property rights and the Agreed Debt as those assets undoubtedly constituted an investment that had been made in the territory of Russia. However, as such investments had not been made by the Claimants themselves but rather by BI the Tribunal found that no protected investment had been made by the Claimants.
The Tribunal found that no protection of indirect investments was available in the instant case.
The Tribunal also dealt with the scope of the Most Favourite Nation (“MFN”) clause contained in the Treaty by rejecting the broad interpretation advocated by the Claimants which would have allowed the application of more favourable dispute resolution provisions contained in other Bilateral Investment Treaties (“BITs”) entered into by Russia with third States. Those BITs did not, unlike the Belgium-Russia Treaty, limit recourse to international arbitration to disputes for the quantification of damages related to expropriation. The Tribunal, in this regard, took a rather narrow stance favouring the interpretation adopted in previous cases such as Plama vs. Bulgaria where it was found that the protection of MFN provisions could not extend to more favourable provisions of a procedural nature such as dispute resolution clauses.
According to the Tribunal, an MFN provision in a BIT will only incorporate by reference an arbitration clause from another BIT where the terms of the original BIT clearly and unambiguously so provide or where it can be otherwise clearly inferred that this was the intention of the contracting parties.
b) Court decision Czech Republic vs. European Media Ventures
High Court of Justice, Queen’s Bench Division 2007 EWHC 2851 (Comm)
In this case the Czech Republic applied to set aside an Award on Jurisdiction, dated 15 May 2007, pursuant to Section 67(1)(a) of the Arbitration Act 1996, on the grounds that the Arbitral Tribunal lacked substantive jurisdiction. The Award had been issued in arbitration proceedings between a Luxembourg company, European Media Ventures S.A. (“EMV”) and the Czech Republic pursuant to the provision of the Bilateral Investment Treaty (the “Treaty”) between the Czech Republic (then Czechoslovak Socialist Republic) and the Belgian-Luxembourg Economic Union concluded on 24 April 1989. In the arbitration, EMV claimed for loss and damage arising out of the indirect expropriation of its investment in a Czech television station ‘TV3’. In the proceedings the Czech Republic, amongst other things, contended that the Tribunal’s jurisdiction was limited to disputes as to the amount of compensation to be paid to an investor following expropriation. In other words, the Tribunal’s jurisdiction should have been limited to issues of quantification. According to the Claimant the Tribunal’s jurisdiction extended not simply to the amount of compensation, but to whether compensation should be paid to the investor.
The Tribunal found, in relation to the words of Art.8(1) of the Treaty, that the phrase ‘concerning compensation’ was clearly intended to limit the jurisdiction of a tribunal established under Art.8.3. Having found that this phrase operated so as to somehow limit jurisdiction it went on to identify the proper scope of that limitation stating that “it would seem to exclude from that jurisdiction any claim for relief other than compensation e.g. a claim for
restitution or a declaration that a contract was still in force.” It therefore found that the scope of the Tribunal’s jurisdiction included claims relating to the existence of an expropriation and not just to the compensation due as a consequence of an expropriation.
The Czech Republic brought a challenge against the arbitral award arguing that the Tribunal’s conclusion was short on reasoning and unsupported by authority.
The Czech Republic insisted that the terms of Article 8 of the Treaty - which permit investor-State arbitration in case of disputes “concerning compensation due by virtue of Article 3 Paragraphs (1) and (3)” – provided for arbitration only in case of disputes over the amount of compensation owing in the event of expropriation. Thus, on this view, the Tribunal lacked jurisdiction to examine whether the Czech Republic was liable for breach of Article 3 of the Treaty dealing with expropriation.
In dealing with such challenge and, more precisely, in interpreting the Treaty, the High Court borne in mind a number of preliminary matters. First, the importance of an ‘independent’ interpretation. A treaty must be given independent meaning derivable from the sources mentioned in Articles 31 and 32 of the Vienna Convention on The Law of Treaties of 1969, without taking colour from distinctive features of the legal system of any individual Contracting State. In principle therefore there can only be one true interpretation of a treaty. Secondly, as regards the ‘ordinary meaning’ to be attributed to those terms, the Court mentioned the Principle of Contemporaneity devised by Sir Gerald Fitzmaurice according to which the terms of a treaty must be interpreted according to the meaning which they possessed, or which would have been attributed to them, and in light of current linguistic usage, at the time when
the treaty was originally concluded.
In the light of these factors, Mr Justice Simon accepted that the object and purpose of the Treaty included an intention to confer on the investor a valuable right to arbitrate. While on one hand the use of the word ‘compensation’ was perceived as necessarily limiting the obligation to arbitrate to a certain extent, on the other hand, appropriate weight had to be given to broad phrases also relevant in the dispute such as ‘any disputes’ and ‘concerning’, which are similar to other common expressions contained in arbitration clauses, like ‘relating to’ and ’arising out of’ and that, in any event, are not linked to any particular aspect of ‘compensation’. It followed that the relevant dispute resolution provisions in the Treaty had the effect of encompassing every aspect of ‘compensation’ such as entitlement to compensation as well as quantification of compensation. Such an interpretation, according to Simon J. gave effect to all the words contained in the Treaty and most importantly it complied with the obligation to create conditions favourable to the making of investments by investors contained in the preamble to the Treaty.
As regards the boundaries of the arbitration clause, the Tribunal had accepted that the effect of the above mentioned limitation was to exclude from the jurisdiction any claim for relief other than compensation (i.e. a claim for restitution or a declaration that a contract was still in force). The Czech Republic had argued in this regard that the parties intended that issues relating to the recovery of damages should be dealt with by the Arbitral Tribunal, but that the questions of restitution and of declaratory judgments should not since they, as remedies in international law, are rarely ordered against a State and have never been ordered in the context of a Bilateral Investment Treaty. Simon J. on this point observed that, despite being rare, restitution and declaratory relief are nonetheless available remedies in international law and that it was very doubtful as to whether the Contracting Parties intended that claims for compensation fell within the jurisdiction of the Tribunal and claims for restitution and declarations fell without.
However that was not determinative of the issue since the task of the Court was not to search for a notional common intention but rather to give a meaning to the words used in the context in which they came to be agreed. As it was suggested by Mr Landau instructed by the Defendant this was an unusual form of words and therefore it was not surprising that the interpretive solution may be unusual.
THE PRACTICE CORNER
Assignment of arbitration clauses
Assignment of contracts is a frequent feature of business practice. More often than not assigning a contract involves the additional issue as to whether any arbitration clause contained or connected to the assigned contract is also validly assigned.
The starting point for this kind of analysis is Article II of the New York Convention which can be seen as a common denominator about the validity of arbitration agreements worldwide. According to Article II it is possible to compel a party to arbitration provided that there is ‘an agreement in writing’ to arbitrate disputes.
According to Article II(2) an arbitration agreement is deemed to be ‘in writing’ if it is found in a ‘contract… signed by the parties or contained in an exchange of letters or telegrams’.
The requirement of validity contained under Article II of the New York Convention, however, provides no definitive indication as to whether a valid arbitration agreement contained in a contract that is subsequently assigned would continue to satisfy the New York Convention’s requirements towards the signatory counterparty and the assignee. As it has been correctly observed, “there is no clear evidence that the Convention intended to address the issue and Member States of the Convention have developed different rules on the subject, so that it appears too speculative to infer an interpretative approach to the assignment of arbitral rights from the text of the New York Convention itself.
The requirements of form such as the ‘writing requirement’ apply only to the initial conclusion of an arbitration agreement and do not apply thereafter to any assignment of the agreement. To require compliance would be cumbersome for the efficient transfer of rights and obligations, and, as a matter of policy, the form requirement does not purport to protect later assignees.”
Therefore, the formal writing requirement that applies to the initial arbitration agreement itself should be kept distinct from the requirements for an effective assignment of that agreement as may be prescribed by the law applicable to the assignment. It seems possible to conclude that the New York Convention does not explicitly address issues concerning whether assignment of a commercial agreement automatically assigns an arbitration clause contained within it, nor does it provide guidance on the recognition and enforcement of either
agreements to arbitrate or arbitral awards that have been assigned.1
It appears that those issues have been left to be resolved by the relevant applicable domestic law and the relevant domestic courts. Indeed, in this respect the combination of assignment and arbitration has the potential to give rise to complex choice of law issues which have given rise to a degree of inconsistency even within the same jurisdictions. It is indeed not uncommon to find decisions within the same legal system adopting different stances with regard to the applicable law.
Consequently, an assignment of an arbitration clause has been found to be construed in accordance with one or more of the following: the proper law of the contract assigned, the law applicable to the arbitration agreement, the law applicable to the assignment agreement itself, or even the law of the seat of the arbitration.
The available case law of a number of jurisdictions in common and civil law legal systems seems to indicate that a valid assignment of a contract may, in the presence of certain circumstances, automatically transfer to the assignee the rights to submit any disputes to arbitration.
However, this is not to be seen as a general rule as in a sizeable number of jurisdictions local courts are still inclined to subject the validity of assigned arbitration clauses to the specific consent of the assignee to be bound by the arbitration agreement or equivalent evidence. Indeed some courts have denied the automatic assignment of an arbitration agreement together with the assignment of the main contract in which the former is contained, at least in the absence of separate evidence of the express approval of the assignee, the counterparty or both. Thus, one should not presume from the foregoing that the complex issues regarding arbitration and assignment are entirely settled given the fact that the assignee is actually not a signatory to the agreement to arbitrate.
Since little guidance can be found in the relevant laws and regulations as to the validity and effect of an assignment of an agreement to arbitrate, it would seem advisable that the parties involved or affected by the assignment try to clarify the matter. The consequential issue is therefore whether appropriate drafting can have the effect of creating a valid assignment.
It is widely accepted that business operators are, and should be let, free to negotiate and include in their agreements arbitration clauses that purport to bind them and their assignments. In this regard a major role is played by the applicable national law. It is also undisputed that parties are free to expressly exclude any assignment of an arbitration agreement. Indeed, clauses prohibiting assignment of the main contract have been sometimes interpreted as having the effect to exclude assignment of the arbitration agreement.
Even in the absence of an express exclusion clause, if on a proper construction of the arbitration clause it was the parties’ intention not to allow it to be assigned, this ought to be respected. Such an intention may be evident, for example, where the agreement to arbitrate has a personal element, such as where the characteristics of the parties to the agreement were fundamental and to them agreeing a right to arbitrate disputes, or the parties indicated a particular relationship of trust to a nominated arbitrator in a special arbitration agreement. In practice it is however seldom the case that an arbitration agreement is entered on this basis. The contemporary assumption is thus that the mere presence of an arbitration clause in a contract does not prevent the contract from being assigned and an arbitration agreement itself is not presumed to be a personal covenant incapable of being assigned. To the contrary, it is commonly presumed that an arbitration agreement may be assigned and that assignees may validly take the benefit of it.
In conclusion, despite the fact that parties are not always prepared during the negotiation of a contract to take issue with the problem of assignment, it would seem advisable, in order to avoid any uncertainty in this respect, to explicitly address the issue of assignment of the arbitration agreement. Furthermore, for avoidance of doubt and in order to eradicate any chance of future uncertainty in this respect, parties to an assignment agreement regarding a contract containing an arbitration clause should expressly mention that the transfer of the contract would also include the assignment of the arbitration clause. When so doing, parties may also want to specify, if agreement can be reached on this issue and this is legally possible, which law would govern the assignment of the arbitration agreement.
1 A. Sinclair, The Assignment of Arbitration Agreements in Emmanuel Gaillard & Domenico Di Pietro eds, Recognition and Enforcement of Arbitration Agreements and Arbitral Awards - the New York Convention 1958 in Practice, 2008.
General editors prof. avv. Stefania Bariatti and avv. Domenico Di Pietro. For further information please contact arbitration@chiomenti.net
General editors prof. avv. Stefania Bariatti and avv. Domenico Di Pietro. For further information please contact arbitration@chiomenti.net