The Singapore High Court was recently seized with an application to set aside an interim order granted by an arbitral tribunal in an arbitration governed by the SIAC Rules. While the International Arbitration Act of Singapore (IAA) was recently amended, the provisions of the IAA’s 2002 version cited by the High Court remain the same.

This judgment touches upon two highly interesting and challenging topics of international commercial arbitration. On the hand, the High Court deals with the question of whether an arbitral interim order can be considered as an award and therefore be open to setting aside proceedings. On the other hand and most importantly, the High Court goes on to explain the policy considerations of the IAA that courts in Singapore should take into account before they rule on setting aside applications.

 The plaintiffs in this case were a company incorporated in Indonesia, PT Pukuafu Indah (“PTPI”), and six of its shareholders. On the defendants’ side were Newmont Indonesia Limited (“NIL”) and the US company NVL Limited (“NVL”), which was related to NIL and was a creditor to PTPI. NIL and PTPI were apparently shareholders of an Indonesian company PT Newmont Nusa Tenggara, which operates a copper and gold mine in Indonesia.

The contractual framework of this case involved a Release Agreement dated 26 November 2009, a loan agreement between NVL and PTPI dated 25 November and a co-ordination agreement dated 25 November 2009. The dispute mainly revolved around the Release Agreement, whereby they plaintiffs were bound to discontinue two suits that had been commenced in the Indonesian courts in October 2009. The plaintiffs not only did not abide by this contractual engagement but they also decided to initiate three more suits before the South Jakarta District Court in January, March and July 2010.

As a reaction to these lawsuits, the defendants commenced SIAC proceedings in August 2010 seeking declaratory and other relief for alleged contractual breaches by the plaintiffs. The defendants, now claimants in the arbitral proceedings, applied successfully for an interim order pursuant to article 26.1 of the SIAC Rules (4^th Edition, July 2010), restraining the plaintiffs, now acting as respondents, from continuing all proceedings pending in the Indonesian courts or from commencing fresh proceedings relating to the dispute (anti-suit injunction). The hearing for this application took place in the absence of the respondents and the arbitral tribunal issued its interim order in favour of the claimants on 15 October 2010.

Subsequently, the Singapore High Court granted leave to enforce the arbitral order on March 2011 (on the basis of section 12(6) of the IAA) after PTPI and its shareholders failed to appear at the enforcement hearing. It was only on 6 May 2011 that PTPI and its shareholders (plaintiffs) filed an application to set aside the order of October 2010 before the High Court.

The High Court’s analysis does not come as a surprise as it endeavoured to look at the substance of the interim order rather than “the label given by the tribunal.” After determining that the interim order was in effect an anti-suit injunction, the High Court highlighted its interim effect. The purpose of the interim order was to “maintain the status quo” until the hearing on the merits. The order’s own content, which indicated that the injunction was granted “until further order by this Tribunal” and provided that “costs of the application for interim relief be reserved to the Final Award”, was a significant proof of its interim nature. The High Court added that it would do “great service” to the parties if the arbitral tribunal were to cite under which provision of the IAA they were issuing this order. This is because section 2 of the IAA defines the term “award” and specifically excludes the procedural orders and directions made under section 12(1) (interim injunctions are included in this list). Regardless of this omission, the High Court held that it had no jurisdiction to consider the setting aside application, as the interim order was not an award.

Taking into account that the interim and procedural nature of the tribunal’s order was established, the High Court’s judgment could have ended there. Interestingly enough, the High Court decided to make some clarifications on the policy of the IAA with respect to judicial enforcement and challenge of interlocutory orders. The High Court explained the reason behind the inception of section 12(6) of the IAA, which provides a “sui generis enforcement mechanism” to arbitral interim orders. This judicial assistance mechanism allows the conversion of arbitral interim orders into court orders so that the first ones are not mere paper decisions. It is therefore the judge’s decision that will be enforced. However, other jurisdictions have opted for the immediate enforcement mechanism through which courts can apply the same enforcement and annulment principles as if the arbitral interim orders were final awards.

The Singapore High Court saw this tension between these two mechanisms as a tension between independence and interventionism. And it clearly stated that the IAA’s overarching aim is to guarantee an independent and efficient arbitration process. As far as orders on procedural matters are concerned, the supervisory powers of the courts of the arbitral seat should be respectful of the arbitral tribunal’s procedural integrity. The High Court rightly pointed out that by limiting challenges only to awards that decide the substantive merits of the case, the risk of delay and of tactical attempts to obstruct the arbitration process is reduced. Opening the door to setting aside applications would defy the urgent purpose of an interim measure – whether this last one deals with procedural or substantive issues. The priority for recourse against such decisions should be given to the arbitral tribunals instead of the courts. On the other hand, the rights of the opposing parties can still be defended at the enforcement stage where it is possible to raise objections to the grant of the court’s leave for the enforcement of the interim order.

This judgment is a great example of how domestic courts should exercise their supervisory powers with respect to pending international arbitration proceedings. It also shows that the problem of enforceability of arbitral interim measures can be overcome with the help of sophisticated arbitration statutes and knowledgeable courts.

Link to the decision.

A recent decision of the Brazilian Superior Court of Justice (“STJ”) has ruled, for the first time, on the issue of the concurrent jurisdiction of national courts and arbitral tribunals with respect to the making of interim measures (Itarumã Participações S.A. v Participações em Complexos Bioenergéticos S.A. – PCBIOS, Resp no. 1,297,974-RJ). The decision is significant in shedding light on a topic not addressed by the Brazilian Arbitration Act. It also reassures the view that, where there is an arbitration agreement, the national courts may only intervene – in exceptional circumstances – to support arbitration.

Facts

Itamurã Participações S.A. (“Itarumã”) entered into a joint venture agreement with Participações em Complexos Bioenergéticos S.A (“PCBIOS”). This aimed to build and implement a fuel production project through a newly constituted company: Complexo Bioenergético Itarumã (“CBIO”). The contract was subject to arbitration seated in Brazil, but also provided for the possibility to resort to national courts in case of urgent matters. PCBIOS requested an interim measure (relief) from a Brazilian lower court for suspending its own rights and obligations as a shareholder of CBIO, based on alleged breach of contract by Itarumã. PCBIOS argued that the interim measure was crucial to guarantee the effectiveness of a future award in arbitral proceedings yet to be commenced.

The lower court denied on the merits PCBIOS’ application. PCBIOS appealed that decision to the Rio de Janeiro Court of Appeal (“TJ-RJ”). In its reply to PCBIOS’ appeal, Itarumã informed the TJ-RJ that after the lower court’s ruling on the interim measure but before the judgement of the appeal, the parties had by that time signed the arbitration’s terms of reference and appointed the tribunal. Therefore, the arbitration had been commenced. Itarumã furthermore argued that the subject matter of the ongoing interim measure request was subject to the exclusive jurisdiction of the arbitral tribunal. Accordingly, the appeal should be dismissed.

However, the TJ-RJ found that it had jurisdiction to decide the issue and, in turn, overturned the lower court’s decision and granted the interim measure requested by PCBIOS. The TJ-RJ reckoned that the parties agreed to resort to the national courts in case of urgent matters, and reasoned that the arbitration agreement does not prevent national courts from deciding urgent matters via interim measures. The TJ-RJ opined that, despite the arbitration agreement, the parties retain the faculty to apply to a national court for any interim measures. The decision also affirmed that deciding otherwise would be to deny a party its right to access to justice. Itarumã appealed the TJ-RJ’s decision to the STJ.

Decision

The STJ granted leave to appeal, and presented the question for consideration as whether a national court has the jurisdiction to make interim measures after the constitution of the arbitral tribunal. Reversing the TJ-RJ`s decision, the STJ ruled that it is only in temporary circumstances, for example where the arbitral tribunal is unable to act or has not yet been constituted, that national courts may interfere with disputes subject to the jurisdiction of an arbitration tribunal. In addition, the STJ held that by the time those temporary circumstances cease to exist, the application for interim measure shall immediately be referred to the arbitral tribunal that is eventually constituted.

The STJ further ruled that any arbitral tribunal, upon receiving the application for interim measure from the national court, shall re-examine the interim measure granted (or denied), in order to decide whether to uphold, amend or revoke the national court’s decision. Furthermore, the STJ’s judgment suggested a “best approach” to be taken by the Brazilian court judges in deciding applications for interim measures of the sort concerned in this case. The recommended method includes that, at the time of referring the case to the arbitral tribunal, the court should highlight that a decision on interim measures is a preliminary ruling conditioned to the arbitral tribunal’s ratification. And, if not ratified, the decision becomes ineffective.

The Legal Position

This is the first instance where the STJ, Brazil’s ultimate authority with respect to legal issues arising from arbitration, scrutinized the boundaries separating the jurisdiction of the Brazilian courts and of arbitral tribunals to rule on interim measures. It is significant that the STJ’s reasoning results in the non-existence of a concurrent jurisdiction. Instead, the STJ emphasized that the national courts may only have jurisdiction to grant interim measures in exceptional and temporary circumstances. And this jurisdiction shall be neither extended nor concomitant with the arbitral tribunal’s jurisdiction. The court’s reasoning has already been followed in a more recent case (Petróleo Brasileiro S.A. Petrobras v Tractebel Energia S.A, STJ, Ag Rg MC no. 19.266-MS).

Conclusion

The precedent set by the STJ has particular importance for international arbitrations conducted in Brazil. The authorisation (or express order) given to an arbitral tribunal to review a national courts’ decision deals with the presumed hesitancy of foreign parties to arbitrate against Brazilian parties in proceedings seated in Brazil. The guarantee that, in due course, the tribunal shall have exclusive jurisdiction to rule on interim measures removes the concerns some may have had of the local courts favouring Brazilian parties.

Also, depending on the relief sought, seeking the national courts directly for interim measures, before the constitution of the tribunal, may be more efficient than applying to the emergency arbitrator. Brazilian courts have the innate power to grant ex parte interim measures; while the emergency arbitrator provisions provide for the need to listen to the other party before granting such measures.

The Brazilian Arbitration Act, enacted in 1996, is vague with respect to interim measures. Fortunately, the STJ has helped to overcome the legal uncertainty by rendering a series of decisions addressing the issue. This particular ruling confirms the STJ’s pro-arbitration stance, and guarantees the exclusive jurisdiction of a duly appointed arbitral tribunal with respect to the grant of interim measures. The ruling seems to be the last missing brick in the framework for such measures in Brazil. This is a significant step forward to encourage foreign parties to arbitrate in Brazil.

The good news is that the Supreme Court of India has overruled the severely criticized decisions in Bhatia International vs. Bulk Trading and Venture Global vs. Satyam Computers. In short, the Supreme Court held that the intention of legislature was clear that the territoriality principle was adopted in India as recommended under the UNCITRAL Model Law. Indian courts would, therefore, have no juisdiction over international commercial arbitration held outside India.

The Court held that seat was the centre of gravity of arbitration. Choice of seat would ipso facto amount to the choice of lex arbitri. Courts of seat would have exclusive jurisdiction in matters related to appointment, interim measures, challenge and other like provisions contained in Part I of the Indian Arbitration Act.

Court refused to add words to the Act to allow interim measures under S. 9 (analogous to Art 9 of the Model Law) in case of arbitration seated outside India. It also rejected the argument that parties could file a suit under the civil procedure for interim protection in case of foreign seated arbitration. Court held that as the law stands today, parties may well be rendered remediless in such situation – but this was a lacunae for the legislature to address and not the court. It noted that statutory interpretation could not be guided by attempt to avoid harship.

Court also clarified that if parties chose a seat and a different arbitration law, court will interpret whether the choice of seat (in light of all circumstances) amount to a choice of venue or juridical seat. If the court concludes that parties intended to chose the juridical seat by indicating the place, the law of that place will be the law of arbitration. The other law indicated in such agreements will only apply to the extent it is not contrary to  the mandatory law of seat. This brings Indian law in sync the English law, which has often been cited as the ideal solution in such situation by commentators.

But, there is bad news as well. In many ways, the bad news overshadows the good for now. In the last paragraph of the decision, the Court has held that the law as laid down in this decision would be applicable only to arbitration agreements entered into after 6th September 2012. Such wide prospective overruling may turn to be counterproductive. While acknowledging the legal error, it is baffling why the Court opened doors for it to remain applicable in future, without limitation, to all agreements entered into until yesterday.

Take for example a concession agreement for 30 years entered on 5th September 2012 which provides for arbitration seated in London. In the 25th year (2027), parties refer their disputes to arbitration. An award under such arbitration would be subject to challenge in Indian courts (due to the wide prospective overruling) following the ratio in Venture Global. I do not see any rational for this.

Having said that, there was definitely a need to provide for such a solution for applicability of S. 9 (interim measures). Since the overruling renders parties remediless, that part of the decision could have been made applicable only to agreements entered into after the date of the decision – so that parties could be said to have made an informed choice.

The decision of the constitutional bench is the best thing that has happened to Indian arbitration since the enactment of the 1996 Act which adopted the Model Law. The decision has gone beyond its narrow reference and clarified many minor issues of great implication. In more ways than one, it has aligned Indian arbitral regime to transnational standards. Hopefully, some clarification on the scope of the prospective overruling will clear the clouds that still threaten to linger in the otherwise clearing sky.

Text of the decision

In a recent decision, a Court of Appeal in Brazil has corrected an arbitration-related decision, on the validity of arbitration clauses, which had raised a red flag among practitioners and scholars. The revised national court’s position places Brazil back on the pro-arbitration track.

Facts

Inepar S.A. Indústria e Construções (Inepar), the contractor, entered into an agreement with Itiquira Energética S.A. (Itiquira), the employer, for the construction of a hydroelectric power plant in the State of Mato Grosso, Brazil. The dispute resolution clause provided for ICC arbitration, with Brazil as the seat and Brazilian law as the governing law.

Disagreements between the parties started in 2001. Inepar sought to revise the amount owed to it under the contract given unexpected conditions that had results in extra costs and delays. Itiquira responded by terminating the agreement on account of Inepar’s delays.

Subsequently, Inepar filed a request for arbitration. There were no irregularities in the arbitral process: the parties properly undertook all required procedural steps, the arbitral proceedings were properly carried out, and the tribunal rendered an award in September 2005. The Tribunal awarded Itiquira damages amounting to approximately US$176 million (current figures). Inepar filed a request for correction in accordance with Art. 30 of the Brazilian arbitration law, although the Tribunal’s additional award in December 2005 did not alter the substance of the award. At no point during the arbitral process did either party object to the validity of the arbitration agreement or the tribunal’s jurisdiction.

Itiquera initiated proceedings to enforce the award (Lawsuit No 1,536/2006, 19^th Civil Court of the City of Curitiba, Paraná, Brazil). Inepar objected to the enforcement proceedings and as well filed parallel lawsuit to vacate the award. In both actions Inepar challenged the validity of the award, inter alia, based on the non-existence of a submission agreement signed by the parties before initiating the arbitral proceedings, which, according to Inepar, is required under Brazilian arbitration law before parties may undertake arbitration.

Applicable Law

Brazilian arbitration law, enacted in 1996, was inspired in the French law, therefore, provides that an arbitration agreement may be concluded in an arbitration clause or a submission agreement:

Article 3. The interested parties may submit their disputes to arbitration by virtue of an arbitration agreement, which may be in the form of either an arbitration clause or a submission agreement.

Conclusion of an arbitration agreement in an arbitration clause takes place prior to the existence of a dispute (Art. 4 Brazilian arbitration law), whereas a submission agreement allows parties to a pre-existing dispute to submit that dispute to arbitration (Art. 9 Brazilian arbitration law).

A submission agreement can also serve a second purpose, which is to fill in gaps resulting from an incomplete arbitration clause. For example, an incomplete arbitration clause can prevent national court jurisdiction while failing to provide for the applicable arbitral rules or appointing authority. This second purpose is expressly stated in the law:

Article 6. If the parties fail to agree ahead of time on the form for instituting the arbitral proceedings, the interested party shall notify the other party, either by mail or through any other means of communication, with confirmation of receipt, of its intention to commence arbitral proceedings, fixing a date, time and place for the signature of the submission to arbitration.

The law distinguishes an arbitration clause from a submission agreement. The latter is required to complement the former if, and only if, the parties did not provide in the arbitration clause the means for instituting the arbitral proceedings, e.g., institutional rules.

Indeed, there is no logical rationale to require a submission agreement when an arbitration clause already establishes each of the elements necessary to proceed with the arbitration.

Decision

The first instance court rejected Inepar’s objection.  It held the arbitration clause to have the essential elements to commence arbitral proceedings, rendering unnecessary an additional submission agreement by the parties. The court relied on Art. 5 Brazilian arbitration law for guidance:

Article 5. If the parties, in the arbitration clause, select the rules of an arbitral institution or specialized entity, the arbitral proceedings shall be initiated and conducted according to such rules; the parties may also establish in the arbitration clause itself, or in a separate document, the agreed procedure for instituting the arbitral proceedings.

Inepar opposed the first instance decision (Interlocutory Appeal No 428067-1) and the matter was redirected to the Paraná Court of Appeal. On January 2008, the 18^th Civil Chamber of that court, constituted by a panel of three judges, issued a majority decision overturning the first instance’s decision on the basis that a submission agreement is always mandatory, independent of the adequacy of terms in the underlying arbitration clause. The reasoning stated:

Only after signing a submission agreement the arbitral jurisdiction takes place, that is, the existence of an arbitration clause does not suffice the requisites to submit the dispute to arbitration. (…) The award is null and void if the arbitral proceedings were initiated without observing the essential requisite: signature of the submission to agreement.

The 18^th Civil Chamber’s declaratory judgment vacated the arbitral award and dismissed the enforcement proceedings.

Contradictions in the Decision

The 18^th Civil Chamber’s decision to overturn the first instance court was surprising for four reasons:

1. The arbitration clause signed by the parties referred to the ICC arbitration rules. These rules provide steps to constitute a tribunal and commence arbitral proceedings. Just weeks prior, the São Paulo Court of Appeal had determined, based on a very similar set of facts, that an arbitration clause itself comprises an arbitration agreement. (Ap. No 1,117830-0/7, CAOA Comércio Importação e Exportação Ltda v. Renault do Brasil Ltda [2008]).

2. Inepar was the party who filed the request for arbitration. This conduct expressly provides the requisite consent to arbitrate. Further, although Brazilian law system does not contemplate the principle of estoppel, the principle of good faith prevents a party from benefiting from his or her own irregular conduct. Put differently, if the submission agreement was needed, the party pursuing arbitration had the duty to fulfil the requirement before initiating the arbitration.

3. The parties signed the terms of reference in accordance with the ICC rules. The terms of reference fulfil the requirements of a valid submission agreement, in accordance with Art. 10 of Brazilian arbitration law, as they include a full description of the parties and arbitrators, subject matter, as well as the place to render the award. Therefore, even if the submission agreement was compulsory under Brazilian law, having a valid terms of reference would suffice, by the fact this would serve as a functional submission agreement.

4. Inepar did not challenge the arbitral tribunal’s jurisdiction at any stage of the process. Inepar argued the need for a submission agreement only after the enforcement proceedings had started. Brazilian arbitration law requires that a party allege points related to annulment, invalidity or inefficacy of the arbitration agreement at the first available opportunity after start of the proceedings (Art. 20 Brazilian arbitration law). By waiting to object to jurisdiction until after conclusion of the arbitration, Inepar waived its right to such an objection and should have been prevented from resisting enforcement on such grounds. Indeed, the Superior Court of Justice, in L’aiglon S/A v. Têxtil União S/A (2005), held that “there is consent to arbitrate when the defendant, according to the evidence presented, participated in arbitral proceedings without challenging the existence of arbitration agreement”. Also, the Superior Court of Justice, in International Cotton Trading Limited Ict v. Odil Pereira Campos Filho (2007), reasoned “When the institutional arbitration rules selected by the parties are followed accordingly, it is not possible to argue a flaw invalidating the proceedings”.

Battle in the National Courts

The 18^th Civil Chamber’s decision also included a dissenting opinion, thereby permitting Itiquira to file a specialized form of appeal, applicable only to non-unanimous second instance decisions.  Fourteen appeals followed, a number that stunned even experienced Brazilian litigators.  The numerous procedural manoeuvres had the scope to verify the suitability of the appeal filed by Itiquira, according to civil procedural rules and, if positive, whether the 18^th Civil Chamber or a different Chamber would have the competence to decide the matter.

Eventually, in December 2011, the Paraná Court of Appeal decided to review its previous decision. It held a new judgment session, constituted by five judges who did not participate in the previous decision, and unanimously decided to overturn the vacatur of the arbitral award on the basis that the arbitration clause provided terms sufficient to institute arbitration. It also reasoned:

The parties previously agreed on the rules to govern the arbitral proceedings [ICC], for this reason the arbitration clause is full. … The [Brazilian] arbitration law extinguished the old concept of equating the arbitration clause with the submission agreement, both are capable of instituting the arbitral proceedings. (Appeal No 428.067-1/10).

Inepar has indicated that it will seek to appeal the Paraná Court of Appeal’s decision. To do so, however, Inepar would need to obtain a leave to appeal. This prospect seems unlikely given the Superior Court of Justice case-law contradicts Inepar’s arguments. Further, even if a special appeal (the last procedural recourse available at this juncture) was successfully filed in the Superior Court of Justice, the appeal, while pending judgment, would have no power to adjourn the enforcement of the award. Therefore, the enforcement proceedings in the first instance court will resume after a three-year-long battle in the 18^th Civil Chamber of Paraná Court of Appeal.

A Positive Outcome

Arbitration has been growing sharply in Brazil. According to the ICC Bulletin Vol. 22 No. 1 – 2011, Brazil was fifth-ranked country in terms of the number of its nationals, natural and juridical, that were involved in ICC arbitrations in 2010.  Contributing to this are relatively recent investments in Brazil intended to address the shortage in infrastructure, and the practice dictating arbitration as the dispute resolution clause in the respective agreements. However, this is also a consequence of consistent pro-arbitration interpretations rendered by Brazilian national courts, in particular the Superior Court of Justice.

Correcting the questionable decision was imperative to avoid scratching Brazil’s image as a desirable seat of arbitration. The Paraná Court of Appeal’s position has been welcomed by the international arbitration community and represents an important step forward for arbitration in Brazil.

In the meantime, you may be interested in some background to the dispute – we refer you to this post at Practical Academic blog. Probably, there is no other more comprehensive source of information on the background available on the internet.

Readers may be interested to know that the White Industries appeal against Coal India is one of the cases pending at the Indian Supreme Court and tagged in the Bhatia International review which is considering whether Indian courts have jurisdiction to entertain challenge of foreign awards.

As reported earlier, a five judge constitutional bench of the Indian Supreme Court has started hearing arguments in the widely followed review of the Bhatia International ratio. I review here, some of the most important arguments made in favour of confirming the ratio.

This decision of a three member bench of the Supreme Court had allowed for application of Part I of the Arbitration & Conciliation Act, 1996 (“Indian Act”) to arbitration seated outside India. Before moving on with the post, let me lay some background for those not initiated with the controversy, so that you follow the issues in contention in the present review:

1. Indian Act is divided into 5 parts. For the purposes of this post, the division of Part I and II are relevant. Part I is primarily an adapted version of the Model Law – retaining the arrangement of provisions and language, with some variations in the text to adapt the Model Law as an Indian legislation. Thus, Part I contains provisions inter alia for court’s powers to grant interim relief (S.9), court’s power to appoint arbitrator (S.11), and challenge of arbitration awards (S.34). It must also be noted that while Model Law is a recommended legislation for International Commercial Arbitration, the Indian Act has adopted it for both domestic and international commercial arbitration.
2. The analogous provision to Art. 1(2), Model Law which provides for territorial application of the legislation has been modified in the Indian Act (S.2(2)). The Indian provision reads “[t]his Part shall apply to arbitration held in India”. Significantly, the word ‘only’ has been dropped. Also, exceptions for certain provisions such as Art. 9 (interim measures) in the Model Law version, so as to allow their extra-territorial application, has not been retained.
3. Relying, among many other strange things, on the omission of the word ‘only’, Bhatia International held that the provision was not a limiting provision. It held that Part I would also apply to arbitration not held in India, unless parties expressly or by implication excluded its application.
4. This decision was an attempt to delimit the application of S.9, as it was clear to the court that any other interpretation would render parties remediless – as far as obtaining interim relief in India with respect to arbitration seated outside India was concerned.
5. However, the court summarized its ratio in ruthlessly wide fashion (see ¶32). It held that Part I would apply to all arbitration. It would compulsorily apply to arbitration held in India and can be modified as far as its derogable provisions are concerned. It would also apply to international commercial arbitration held outside India unless expressly or by implication excluded.
6. While Bhatia International dealt with S.9, subsequent decisions of the Supreme Court applied the ratio to S. 11 (See Indtel Technical Services v. W.S. Atkins) for appointment of arbitrators and eventually to S. 34 (See Venture Global v. Satyam Computers), allowing foreign arbitral awards to be challenged in India.

The Bhatia International ratio has caused significant damage to the Indian arbitration regime. While the Indian government continues to endlessly moot an amendment, the Supreme Court has put it under the scanner finally. 10 days of arguments have been made and the parties arguing in favour of confirming the Bhatia ratio have completed their submissions. A brief summary and comments on some of their significant arguments:

1. Difference in the language of Art. 1(2) of the Model Law and S. 2(2) of the Indian Act clearly indicates legislative intent not to limit application of Indian Act based on place / seat of arbitration. In my opinion, this is the strongest and probably the only inevitable reason why the Indian Act, as it stands today, is difficult to be interpreted any other way than Bhatia International. The Indian Act is, to a large extent, a verbatim reproduction of the Model Law. Therefore, a specific omission must be given some meaning.  Absence of the word ‘only’ and deletion of exceptions with respect to certain provision would lead any strict interpretation to reach the result that Part I is not intended to be limited to arbitration seated in India. This is not to assert that the situation is any better for that. But then, legislative correction is best left to the legislature. It is not the role of courts.
2. Enforcement and Challenge are different remedies under the Indian Act. Even though Part II of Indian Act provides for special provisions with respect to enforcement of foreign awards, the challenge procedure being a distinct remedy will still apply to domestic awards. This argument deserves to be rejected without much ado. A basic reading of arbitration jurisprudence shows that indeed challenge and enforcement are not the same thing. But, to suggest that a court can set-aside foreign awards is to go back on the progress achieved as back as 1958 through the New York Convention. The only remedy against a foreign award is to oppose its enforcement in terms of Art. V of the New York Convention, which has been adopted by the Indian legislature in Part II of the Indian Act.
3. During the arguments, the Court remarked that allowing Part I to apply to all arbitration without reference to seat would lead to extra-territorial application of the Indian Act – which would be unconstitutional. In response it was argued that there was a distinction in the definition of ‘court’ in the Indian Act and that in the Model Law. The Indian Act defines it as the principal civil court that would have jurisdiction on the subject matter of arbitration if the same was subject matter of a suit. Thus, it was argued, allowing Part I of the Indian Act to apply to arbitration held outside India cannot be extra-territorial and would be limited by the principles of Civil Procedure Code (CPC) governing jurisdiction of courts. This is definitely a winning argument to the extent it answers the court’s concerns. However, this does not take into account that jurisdiction of court is derived from specific provision in the Indian legislation and not from the definition of ‘court’ per se. In my opinion, the definition is merely to resolve any conflict between various courts in India and to provide an objective principle to determine which court in India would have the jurisdiction – only if such powers are bestowed upon Indian courts under the Indian Act in the first place. This argument also brings to light important lacunae in the Indian Act. What happens if a Malaysian and an Australian party chose India as seat in a contract being performed in Singapore? Going by the definition of ‘court’, no Indian court shall have jurisdiction, as neither the Respondent would be subject to their jurisdiction nor the subject-matter would have arisen in the territorial limits of any Indian court’s jurisdiction. It is therefore important that in any interpretation of this definition, such aspects are taken into account.
4. An illustration cited by most counsels supporting the expansive jurisdiction of Indian courts was – if the parties chose the seat of arbitration as London but provide that the law of arbitration shall be Indian law, then Indian courts must have jurisdiction without reference to seat in order to uphold party autonomy. This illustration was cited to show that primacy of seat would otherwise lead to defeating party autonomy, which should be placed on a higher pedestal than the primacy of seat. This argument intends to turn the interpretation of the Act citing a scenario arising out of an ambiguous arbitration clause. To appreciate the fallacy of this argument, one must look only and appreciate fully the legal fiction of the ‘seat of arbitration’. Seat of arbitration denotes nothing but the law of arbitration. A choice of seat is a choice of law of arbitration, and party autonomy is not victorious, as suggested by ignoring this choice merely because an equivocal additional choice of the same law is expressed in the arbitration agreement. Unfortunately, Model Law or the Indian Act have not taken into account such a situation and there is no specific solution provided therein. However, the English Arbitration Act, 1996 had the foresight to provide for this situation specifically – and some other jurisdictions have adopted similar solution through interpretation. The English solution (see S.4(5)) is to treat seat as determinative of the law of arbitration and to take into account an additional choice as if it was an agreement between parties about a non-mandatory provision – akin to choice of institutional rules.
5. Many arguments addressed the various systems of law applicable to arbitration. In a nutshell and at the expense of oversimplification, the argument primarily focused on a strange distinction of when these laws apply. It was submitted that the law of seat applies to the procedure of arbitration and thus ceases to apply once the award is rendered. The validity of the arbitration is governed by the law of arbitration agreement – which should follow the substantive law of contract in the absence of specific choice. This would mean that effectively, the court of the proper law of contract shall have the powers to set-aside arbitral awards. I believe the genesis of such arguments lie in the strong reliance that Indian courts have had to place on conflict of law principles to determine jurisdiction post-Bhatia International. To escape the wide scope of Bhatia International, many subsequent decisions have tried to rule out jurisdiction through similar logic as in this argument. Any correction, therefore, of Bhatia International must deal with this branch of its many fallout – it must once and for all be clarified that law of arbitration governs not only the procedure but the entire process of arbitration from the stage of reference to challenge of award. Law of arbitration agreement, on the other hand, governs the validity of the arbitration agreement. In absence of a specific choice, whether law of arbitration agreement must follow the proper law of contract or the law of seat is a debate for another day – and not a straightforward one.
6. Court asked almost all counsels their view on whether a suit under CPC could be filed for interim relief in cases where the arbitration is seated outside India, if it was held that Part I was not applicable in such scenario. It seems the prima facie view of the court is that Part I should not be applicable to arbitration seated outside India. However, the prospect of leaving parties remediless by closing doors on interim measures under S. 9 is a troubling scenario, to which the court seems to suggest the solution by opening doors of interim injunction under Order 39 of CPC. I am especially concerned by implications of this solution. It is an accepted position currently that CPC does not apply to arbitration. Unless the court words an exception for interim relief for foreign seated arbitration with great care and restraint, opening the doors of CPC can lead to hitherto unknown problems – creation of a monster to deal with another. Order 39 CPC provides for an application in a suit pending before a civil court. How, then, does one approach the court in a foreign seated arbitration? By legal fiction of considering arbitration akin to a ‘suit’ under CPC? What fallout would that have? Unfortunately, these questions have not yet been either asked or answered during the proceedings.
7. One of the counsels argued that while Part I may not apply to arbitration seated outside India, S. 9 owing to the nature of relief it offered would still apply. It was submitted that S.9 was a ‘seat-neutral’ provision. It is difficult to see how that can be. The ‘seat-neutrality’ of interim measure provision (Art. 9 ML) is derived from the specific language of Art. 1(2), which is not a part of the Indian Act.

The hearings are in full swing with the parties arguing against confirming Bhatia International having the floor now. Whichever way this goes, the decision in this case will define the future course of international arbitration in India. In the meantime, it seems arbitration is the last thing currently in the mind of the legislature. Thus a clean-slate reform of the law will have to wait for long. Until then, we hinge all our hopes on this five-judge bench of the Supreme Court.

In 2011, the issue of corruption at the highest levels of governance dominated political and social debates in India. Allegations of loss to the exchequer to the tune of 300 billion rupees in the 2008 allotment of 2G spectrum for mobile telephony, shocked the nation. This probably also came as a shock to a large number of foreign investors – by then having infused huge capital in telecom companies. The telecom minister was made to resign and since has been in jail. Many corporate heads of Indian telecom companies also visited prison for a brief time and are now out on bail pending final investigation and prosecution.

Some citizens and NGOs filed a writ petition in the Indian Supreme Court under Art. 32 of the Constitution alleging that the grant of 122 2G spectrum licenses in 2008, following a first-cum-first-serve policy and at 2001 prices was in violation of citizens’ fundamental rights of the Constitution. On 2^nd February 2012, the Indian Supreme Court upheld the petitioners’ contentions and cancelled all 122 licenses (the judgment in Centre for Public Interest Litigation v. Union of India is available here). The Court held that 2G spectrum is a natural resource and that “the State is the legal owner of the natural resources as a trustee of the people and although it is empowered to distribute the same, the process of distribution must be guided by the constitutional principles including the doctrine of equality and larger public good”. Noting the arbitrary manner in which cut-off dates were decided so as to benefit a few companies whose application had been filed only a day earlier, and the absolute disregard by the Department of Telecom (DoT) to the concerns expressed by the Finance Ministry and the Prime Minister’s Office, the Supreme Court noted that the allotment was arbitrary and illegal. It also rejected the DoT’s argument that pricing had to be based on 2001 prices so as to maintain a level playing field between different telecom operators, including the ones who received licenses earlier. The Supreme Court concluded from evidence placed before it that arbitrary action was taken by the DoT and the then Telecom Minister to benefit certain companies at the cost of the exchequer. Not only were the licenses of such companies that had benefited from the arbitrary action of the DoT cancelled but also fines were imposed. The telecom players have been allowed to continue their service under these licenses for 4 months. However during these 4 months, the government has been directed to re-allot the spectrum through a transparent auction process.

Immediately on grant of license, the Indian telecom companies had received huge foreign investments, in most cases by sale of equity. Three such instances recorded by the Supreme Court are:

1. Swan Telecom Capital Pvt. Ltd. (now Etisalat DB Telecom Pvt. Ltd.) which acquired the license for a fee of Rs. 15 billion (USD 316 million) and transferred 45% equity to Etisalat Mauritius Ltd. for Rs. 35 billion (USD 729 million).
2. Unitech obtained the license for Rs. 16.5 billion (USD 338 million) and transferred 60% stakes to Telenor Asia Pte. Ltd. (Singapore) for Rs. 61 billion (USD 1.2 billion).
3. Tata Teleservices transferred 27.31% equity to NTT Docomo for Rs. 129 billion (USD 2.6 billion).

All licenses of these companies now stand cancelled and they cannot continue their business unless they succeed in obtaining licenses through auction, which will of course involve huge capital infusion.

The obvious question now is whether such foreign investors can claim damages from India for Bilateral Investment Treaty violation and a failure to protect their investment. Since the exact structure of all investments is not in the public domain yet, any inquiry of this question at this stage will involve some speculation. Since one of the three transactions recorded in the Supreme Court judgment, is through a Mauritian entity – with which India has a BIT – I intend to look at a possible claim under India-Mauritius BIT.

Firstly, as far as the dispute resolution clause is concerned, since India is not a signatory to ICSID, that route is closed. Art. 8 of the BIT provides that if a dispute is not settled within 6 months amicably, the investor can at its choice either opt for an arbitration under Indian law or under the 1976 UNCITRAL Rules. It further provides that the appointing authority shall be the senior most judge of the ICJ. Therefore, consent for an international arbitration is available and the option exists.

The second question is whether a Mauritian corporation which is holding equity in an Indian company is an investor and whether such equity amounts to investment. Investor is defined in Art. 1(b) and prima facie, a corporation registered under the laws of Mauritius would qualify. Investment is defined under Art. 1(1)(a) and provides that it would mean “every kind of asset established or acquired under the relevant laws and regulations of the Contracting party in whose territory the investment is made and in particular, …, includes: (ii) shares, debentures and any other form of participation in a company;”. Ergo, equity holding satisfies the BIT condition. In my opinion, such investment also squarely meets the conditions of the Salini test.

What substantive violation can the investor invoke under the BIT? I will not consider the fair and equitable standard, for the simple reason that there is no objective basis to form even a prima facie opinion on whether such claim could exist. The domains of this standard are so flexible that without a full enquiry of facts, in a case like this, I would avoid hazarding a guess. Article 4(1) contains this protection in the following terms, “Investments and returns of investors of either Contracting Party shall at all times be accorded fair and equitable treatment in the territory of the other Contracting Party”.

What particularly interests me is a claim for expropriation. In my prima facie view, I feel such a claim will have strong foundations under international law. Art. 6 of the BIT contain provisions for expropriation. Art. 6(1) reads, “Investments of investors…shall not be nationalized, expropriated, or subject to measures having effects equivalent to nationalization or expropriation except for public purposes, under due process of law, on a non-discriminatory basis and against fair and equitable compensation”. Compensation is to be equivalent to the market value of the investment immediately before expropriation. Interestingly, an additional protection is provided under Art. 6(3) which is interesting and, in my view, leaves matters beyond doubt – “Where a Contracting Party expropriates, nationalizes or takes measures having effect equivalent to nationalization or expropriation against the assets of a company which is incorporated or constituted under the laws in force in any part of its own territory, and in which investors of the other Contracting Party own shares, it shall ensure that the provisions of paragraph (1) of this article are applied to the extent necessary to ensure fair and equitable compensation as specified therein to such investors of the other Contracting Party who are owners of those shares.” This would mean that independent of the debate on minority shareholders’ rights, under this BIT, they could file a claim.

It is a settled principle of international law that the State has a right to expropriate but with some conditions. The fundamental condition is the prompt, adequate, and effective payment of compensation. In the present case, other conditions for legal expropriation are easily satisfied, as the measure having such effect is a decision of the apex court based on sound constitutional principles.

Those not initiated in the field of international law may find it difficult to understand how a State can be asked to compensate investors for a loss they suffer as a result of a perfectly legal and equitable decision of the highest court of the land. The equations under International law are different. What may be impossible to imagine in the municipal legal context is sometimes the norm in the international legal order. Conduct of any state organ, including judiciary is considered as an act of State. The principle is enshrined in the ILC’s Articles on State Responsibility, which reflects position of customary law. In the present circumstances, the act amounting to expropriation would be a combination of arbitrary policy of the government leading to grant of licenses, which were later found to be illegal and cancelled by the Supreme Court. Despite facets of this act having been done over a period of time by independent organs / authorities, it attains identity as an act of India in international law.

It may be interesting to see some previous awards of investment tribunals, which indicate a strong prima facie case against India. In Goetz v. Burundi (1999, ICSID), revocation of a free zone status was held to have deprived the investment of all its utility and therefore an act of expropriation. In the famous case of Metaclad v. Mexico (2000, NAFTA) the Federal government had granted permit for hazardous waste landfill in a certain area. The municipal authorities, however, refused to grant permissions and the regional government declared the area as protected. The tribunal held against Mexico and noted that even an incidental interference with property which in significant part deprives the economic benefit of the property shall amount to expropriation, even if not necessarily to the benefit of the host State. This case also took into account the legitimate expectation created by the government, which was not met. In the Indian context, a legitimate expectation of any foreign investor would have been that a telecom license issued by the government following its declared policy is legal and will be subsisting and valid. That, evidently, failed. On a different note, many tribunals have held that the intention of the State is irrelevant; what matters is the economic consequence of the measure.

It is not to say that India would have no case. There is always another side to the coin. Some investment tribunals and the ECHR have taken a more balanced view when it comes to measures taken in public interest. It has been noted that if a legitimate bonafide measure is taken for public welfare and is proportionate to the need being addressed – the liability for compensation would not arise. Supreme Court’s decision being in public interest may seem to qualify, but then the question would be whether the cancellation of licenses is proportional. Also, the added complication is the fact that government and its ministers who framed the policy are facing the charge of corruption and responsible for the situation in first place.

As in most investment claims, emotions and ideology play an important role in public perception. Any action against India by an international corporation in the present case will receive negative public response. The 2G scam, as this has come to be known, has angered Indians who are happy with the decision of the Supreme Court. Another angle not to be completely ignored – while it may be difficult to prove otherwise, it may not be safe to presume that the international players were absolutely unaware of the irregularities in policy and had no role to play in the underlying corruption involved. One is reminded of the Siemens-Argentina battle where having secured a USD 218 million award, Siemens chose to drop its claim when news of bribes having been paid to secure the contract was leaked to the media. In World Duty Free v. Kenya, an ICSID panel had held that claims based on contracts acquired by corruption should not be upheld.

Of course, this analysis is based on several assumptions and presumptions and is only a speculative look at the situation that may arise as a fallout of the Supreme Court decision. I invite readers to add their views on how they believe such a potential claim could pan out.

After the recent amendments to the Rules of Arbitration of the International Chamber of Commerce, it has become clear that a new trend has been established with respect to interim measures requested prior to the constitution of the arbitral tribunal. This trend has already been espoused by a number of arbitral institutions, including AAA (ICDR), CPR, SCC, SIAC, ACICA, and P.R.I.M.E. Finance . The revised version of the Swiss Rules of International Arbitration will also include new provisions on Emergency Relief. These recent developments beg the question of the utility of such mechanism, whether demonstrated in the course or in the end of international arbitration proceedings.

Starting first with the number of emergency arbitrator requests – the arbitral institutions receive only modest numbers of such requests (see reports of SIAC, SCC , and AAA). And when such requests have been made, they have been seldom granted. One possible reason behind this rare use is the overcoming burden of proving not only the urgency of the application (as defined in article 26.2 of the UNCITRAL Arbitration Rules) in the sense of conventional interim measures requests. There needs also to be an “emergency” in the sense that the requested interim measures cannot await until the constitution of the arbitral tribunal. Thus, the period has been shortened from the time needed to deliver a final award to the time it takes to empanel the arbitrator(s). The users of this mechanism should then take into consideration this parameter before applying for emergency relief. Another consideration is also the automatic termination of the emergency arbitrator proceedings in case where a Request for Arbitration has not been filed within the designated period of time. Parties should then first substantiate their claims during the preparation of a Request for Arbitration before they file emergency relief requests.

The most delicate question to answer when interim measures are ordered by arbitrators is related to their legal effects. Especially the question of enforceability becomes thorny if we take into account the lack of coercive powers, referred to as ‘lack of imperium‘, of arbitrators to enforce their orders. Despite this inability, we should not underestimate the frequency of parties’ voluntary compliance. We should also remember that when there is no compliance, arbitrators have the power to draw adverse inferences against the recalcitrant party, when evaluating the evidence produced during the arbitral proceedings. The national courts’ judgments on the enforceability of arbitral interim measures have always dealt with the following question: How final is provisional? Regarding emergency relief orders or “awards”, the question should now be: How final is truly urgent?

To my knowledge, the only judgment that discussed the question of enforceability of an emergency arbitrator’s order is the one issued by the district judge of the Southern District Court of California. More specifically, the judge was seized with a motion to vacate what an AAA (ICDR) arbitrator denominated as an “Order re [Plaintiff’s] Request for Emergency Interim Award Pending Arbitration.” An eventual recognition that this order constitutes an award susceptible of being set aside would signify the opening of the enforcement route under the New York Convention’s umbrella. The district judge confirmed what was already established with respect to the enforceability of arbitral interim measures. First, the judge stated that “historically, for an arbitration award to be subject to judicial review, it must be final (emphasis added) and binding as to all of the issues presented to the arbitrator”. The judge then clarified that “[c]ourts go beyond a document’s heading and delve into its substance (emphasis added) and impact to determine whether the decision is final”. Based on these guiding principles, the judge went on to examine the substance of the emergency arbitrator’s order. The fact that the “order was issued in order to facilitate any consideration by the full panel of conservancy ….” and that it would “remain in effect pending review of the full arbitration tribunal”, as also foreseen by article 37.6 of the AAA (ICDR) Rules was decisive in reaching the following conclusion: “The Court concludes that the evidence does not present an “extreme” case permitting judicial review of a non-final (emphasis added) order because the interim order is expressly subject to reconsideration, modification, or vacatur by the full (arbitral) tribunal.”

One should then ask why parties should opt for a request for emergency relief. Parties should first assess the above-mentioned chronological factor. Only truly urgent situations, like for instance the depletion of stock in a distribution agreement, should be the object of such requests. Another reason appears when parties wish to preserve the confidentiality and neutrality of the proceedings. Additionally, parties should bear in mind that the scope of interim measures ordered by national courts is more restricted than the one ordered by arbitral tribunals. Where arbitrators can apply both civil and common law tools in arbitration proceedings, national courts can issue the interim measures prescribed exclusively by their national legislation. We should also not forget that a [un]successful request for interim or emergency relief can induce party settlement. A petition to apply to the national courts of the Claimant’s country is often seen as an aggressive tactic, which endangers equally the neutrality of arbitration proceedings.

It is evident that these advantages stem from the same reasons why parties prefer arbitration over court litigation. Thus, the possibility of addressing requests to emergency arbitrators creates a more autonomous arbitral process, notably in an area where the concurrent jurisdiction of national courts can still play a positive (assistance) or negative (interference) role. However, we should note that the emergency arbitrator proceedings were not introduced to antagonize court proceedings dealing with requests for interim measures. With the enforceability problem still unsolved, emergency arbitrator procedures do not constitute a panacea but offer an alternative to arbitration users who wish to restrict any judicial interference from municipal courts.

As a final note, the current trend of introducing emergency relief mechanisms shows that the arbitral institutions are ready and willing to offer viable solutions to satisfy the need for a speedy disposition of interim measures requests. This is also noticeable by the way the arbitral institutions handled within very short timeframes such kind of requests. While the future of this trend is unpredictable, the reaction of national arbitration statutes and of international non-binding instruments, such as the UNCITRAL Model law, is highly awaited. Since the amendments of 2006, the UNICTRAL Model law contains a whole chapter (IV) on interim measures, preliminary orders and their enforceability. It is unfortunate that during the drafting sessions of these amendments the question of the emergency arbitrator procedure was not discussed. Without the approval of these instruments, this speedy tool for emergency relief is bound to lapse. Readers’ comments with respect to the way this procedure has been applied are welcome.

Rule 41 (5) came to life with the 2006 amendments to the ICSID Arbitration Rules. It is beyond the scope of this post to delve in great detail into the Rule itself. It suffices here to say that the provision was introduced to allow a party to raise an objection in limine litis that a claim is “manifestly without legal merit” and to ask a tribunal to summarily dismiss such patently frivolous claim by a reasoned award. The rationale behind this Rule was, among other things, to shorten duration of the proceedings and reduce the costs where a party is bringing a patently frivolous claim. It is interesting to see how ICSID tribunals, which confirmed frivolity of the claim, had decided on allocation of costs (Trans-Global v Jordan, Global Trading v Ukraine, RSM Production v Grenada) and what impact these decisions may have on the future application of the Rule. In this post I will explain how the proper allocation of costs in summary proceedings could influence on reducing the number of manifestly frivolous claims brought before the ICSID tribunals.

According to Article 61 (2) of the ICSID Convention and Rule 28 of the ICSID Arbitration Rules, in the absence of the parties’ prior agreement, ICSID tribunals have discretion to decide about allocation of costs of the proceedings between parties. In the vast majority of cases, the ICSID tribunals followed “pay-your-own-way” approach. The exception to the rule, ie, allocation of the costs to the loser of the proceedings, occurred in those cases where the tribunals established that a claim was manifestly without legal merit or observed bad faith from a party.

For instance, in AES v Hungary, the Tribunal stated that since “no frivolous claim was filed in the proceedings and that no bad faith was observed from the parties […] each party shall bear its own costs and expenses and share equally in the costs and charges of the Tribunal and the ICSID Secretariat.” In CDC v Seychelles, the circumstances of the case led the ICSID annulment committee to award all the costs of ICSID proceedings, as well as the claimant’s claimed costs to the respondent. The Tribunal was driven to such decision by the conclusion that the Republic’s case “was fundamentally lacking in merits.” In Phoenix v Czech Republic, the Tribunal after stating that “initiation and pursuit of this arbitration is an abuse of the international investment protection regime under the BIT, and consequently, the ICSID Convention”, awarded the costs to the defendant. Similarly, in Saba Fakes v Turkey, the Tribunal ordered the Claimant to pay not just its own legal costs and expenses but the legal costs and expenses of the Respondent as well as arbitration costs. The Tribunal stated that: “[a] party pursuing the claim which is clearly outside the scope of the Center’s jurisdiction should not be encouraged and should bear the risk to paying the full costs of such frivolous proceedings.” In Europe Cement v. Turkey, the Tribunal awarded to Respondent full costs together with the Respondent’s share of the cost in the arbitration after concluding that “the claim to jurisdiction is based on an assertion of ownership which the evidence suggests was fraudulent.”

Therefore, there is an apparent trend among the tribunals in ordinary proceedings to condition application of the “pay-your-own-way” approach by finding a manifestly frivolous claim, fraudulent behavior, abuse of process or bad faith, or initiation of “frivolous proceedings.”

By analogy, the same should apply in summary proceedings initiated under Rule 41 (5), and the tribunals who find a claim “manifestly without legal merit” should order a party who brought frivolous proceedings to bear all the costs and expenses of such proceedings. However, the practice of the Tribunals which had already dealt with the 41 (5) objection was not completely coherent.

On the one hand, the Trans Global Tribunal and the RSM Production Tribunal applied the “costs should follow the event” approach. Furthermore, the Trans-Global Tribunal was of the opinion that “[t]he introduction of Article 41(5) may have been prompted (in part) by the perception held by certain states that a respondent could not expect to recover its costs from the claimant even where the respondent’s case prevailed completely at the end of lengthy and expensive legal proceedings.” However, the practice of allocating the costs of the proceedings to a party which brought a manifestly frivolous claim before an arbitral tribunal, as seen before, was not unknown in ICSID forum even before Rule 41 (5) was introduced. The Global Trading Tribunal, on the other hand, took a different approach and stated that: “[g]iven the newness of the Rule 41(5) procedure and given the reasonable nature of the arguments concisely presented to it by both parties, that the appropriate outcome is for the costs of the procedure to lie where they fall.”(emphasis added)

What are the possible consequences of the Global Trading decision on the application of the Rule? Counsels dealing with manifestly frivolous claims have 2 possibilities. One would be to raise 41 (5) objection, minimize the costs of the proceedings but risk to share costs with a party which brought manifestly frivolous claim. The other would be not to raise 41 (5) objection, enter in the ordinary proceedings, which will necessarily be longer and more expensive than the summary proceedings, but expect to recover all the costs from the Claimant if the claim proves to be patently unfounded.

It bears noting that in Saba Fakes case, the costs of the proceedings were $2 million and in Europe Cement $4 million (therefore acceding by far costs of Trans-Global or RSM Production proceedings). In both cases the claims failed as manifestly without legal merit at the end of the ordinary proceedings and both cases were registered with the ICSID after the enactment of Rule 41 (5). With this in mind, one may argue that counsels in these cases opted for the second possibility discussed above. Moreover, 41 (5) objection was raised in only 4 cases until the date. It is true that the Rule should be invoked in only exceptional cases, but Saba Fakes or Europe Cement were certainly of a nature that would justify application of Rule 41 (5).

It remains to be seen how the future Tribunals dealing with 41 (5) objection will assess the issue of costs.  The correct way to increase the efficiency of the proceedings and prevent further frivolous claims is to penalize the party that is obviously misusing the arbitral tribunal by bringing a manifestly frivolous claim by ordering such party to pay all the costs of frivolous proceedings that it had initiated. It should make no difference whether the proceedings are initiated as ordinary or summary. This approach will hopefully prevent future parties of bringing legally untenable actions before the ICSID tribunals.

On 17 January 2012, the U.S. Court of Appeals for the District of Columbia Circuit  reversed the orders of the U.S. District Court for the District of Columbia (Republic of Argentina v BG Group PLC, 715 F.Supp.2d 108 (D.D.C.2010); Republic of Argentina v. BG Group PLC, 764 F. Supp. 2d 21 (D.D.C. 2011) at  denying the Republic of Argentina’s motion to vacate and granting BG Group’s cross-motion to confirm, the Final Award rendered against the Republic in the international investment arbitration case of BG Group PLC v The Republic of Argentina, and vacated said Award (Republic of Argentina v. BG Group PLC , D.C. Cir. Jan. 17, 2011).  The Court of Appeals heeded Argentina’s argument that the arbitral Tribunal had exceeded its authority (a ground for annulment under Section 10(a) of the Federal Arbitration Act) by ignoring the terms of the parties’ agreement in the form of the Bilateral Investment Treaty between Argentina and the U.K – holding that the Tribunal had disregarded the conditions set forth in Article 8(2)(a) of the Argentina-U.K. BIT when it dispensed BG Group with the obligation to commence litigation before Argentine courts for 18 months prior to initiating international investment arbitration proceedings.

How did the Tribunal reach its decision with respect to the 18-month litigation provision of the BIT?

Article 8(2)(a) of the BIT provides that a party may submit a dispute to international arbitration:

“(a) if one of the Parties so requests, in any of the following circumstances:

(i) where, after a period of eighteen months has elapsed from the moment when the dispute was submitted to the competent tribunal of the Contracting Party in whose territory the investment was made, the said tribunal has not given its final decision; (ii) where the final decision of the aforementioned tribunal has been made but the Parties are still in dispute;”

 The Tribunal went along the lines of Argentina’s characterization of its objection on BG’s non-compliance with Article 8(2)(a), that is, that the “failure by BG to bring its grievance to Argentine courts for 18 months renders its claims in this arbitration inadmissible” and dealt with the issue under the heading “Are BG’ Claims Admissible?” (emphasis added).  The Tribunal also accepted that Article 8(2)(a) is mandatory.  Nevertheless, it added that such provision, “[a]s a matter of treaty interpretation, […] cannot be construed as an absolute impediment to arbitration” and that “[w]here recourse to the domestic judiciary is unilaterally prevented or hindered by the host State, any such interpretation would lead to the kind of absurd and unreasonable result proscribed by Article 32 of the Vienna Convention, allowing the State to unilaterally elude arbitration […]”.  The Tribunal took into consideration the fact that Argentina, through its Emergency Law and its regulations restricted the effectiveness of remedies before Argentine courts and had excluded from the renegotiation process any licensee that brought an action before such courts.  The Tribunal therefore, applied the futility rule and found “admissible the claims brought by BG in this arbitration” (emphasis added).

How did the Court of Appeals view the Tribunal’s decision on the 18-month litigation provision of the BIT?

For the Court of Appeals, the question before it was one of arbitrability, or differently, the power of the arbitrator to determine its jurisdiction.  As such, the Court seems to have viewed the 18-month litigation requirement of Article 8(2)(a) as a jurisdictional requirement, albeit it had foregone any interpretation of Article 8(2)(a) itself.  The Court of Appeal focused on the intent of the parties and noted that “[w]here as here, the result of the arbitral award was to ignore the terms of the Treaty and shift the risk that the Argentine courts might not resolve BG Group’s claim within eighteen months pursuant to Article 8(2) of the Treaty, the arbitral panel rendered a decision wholly based on outside legal sources and without regard to the contracting parties’ agreement establishing a precondition to arbitration.”  Because the fulfillment of Article 8(2)(a) was not within the Tribunal’s jurisdiction, it seems that the Court of Appeals saw that the Tribunal had no competence to rule on its jurisdiction altogether.  The Court of Appeals therefore, implicitly discarded any question that this issue might have been one of admissibility (where the Tribunal would have jurisdiction to rule on it and to decide whether to exercise its jurisdiction at the specific time) and vacated the Tribunals’ decision on the ground that the latter had exceeded its powers.

Was the Court of Appeals’ decision mistaken?

My previous post on the recent Abaclat v Argentina decision , would give an impression that I would be in full agreement with the Court of Appeals’ decision for vacatur in the Republic of Argentina v. BG Group PLC.  Albeit my personal views regarding the nature of the 18-month litigation requirement, I believe that the Court of Appeals in this case, had two options, both of which would have probably led to a denial of the motion to vacate the award.

First, the Court of Appeals could have concluded that the Tribunal’s decision on the 18-month requirement was a decision on the admissibility of the claim and therefore, final.  This comes back to the long-debated (and difficult) distinction between the two concepts, that of jurisdiction and that of admissibility.  The definition of the distinction that prevails in the modern international investment arbitration world, is that of Jan Paulsson in his work on “Jurisdiction and Admissibility” in Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in honour of Robert Briner (2005).  Paulsson states that to understand whether a challenge pertains to jurisdiction or admissibility, one should imagine that it succeeds:

“[I]f the reason for such an outcome would be that the claim could not be brought to the particular forum seized, the issue is ordinarily one of jurisdiction and subject to further recourse.  If the reason would be that the claim should not be heard at all (or at least not yet), the issue is ordinarily one of admissibility and the tribunal’s decision is final.” (emphasis added)

The Court of Appeals therefore, could have left the Tribunal’s decision alone.

Second, the Court of Appeals could have stated that even if the Tribunal accepted Argentina’s characterization of the 18-month litigation requirement as an issue of admissibility, non-compliance with an admissibility issue in ICSID, has the same consequence as that of failing to comply with the requirements of jurisdiction, that is, the Tribunal cannot exercise jurisdiction over the dispute. This was in fact stated by the tribunal Burlington v. Ecuador when dealing with a similar issue.

In such a case, the Court of Appeals could have found that the Tribunal would only have exceeded its powers, if it dispensed BG Group with complying with the 18-month litigation requirement without applying the futility (or any other) rule permitting it to take such course.  The Tribunal however, did not do that.  It very much found and reasoned its decision that pursuing litigation before Argentine courts in the case before it would have been futile.  In fact, the International Court of Justice is of the view that futility does not require fulfillment of similar jurisdictional requirements (See Application of the International Convention on the Elimination of All Forms of Racial Discrimination, Judgment on Preliminary Objections ).  Therefore, albeit the Tribunal’s explicit characterisation of, or implicit view on the 18-month litigation requirement, an analysis of the facts (as that made by the Tribunal) could have led the Court of Appeals to the conclusion that any objection that would deprive such Tribunal with jurisdiction, would have to be overruled.

I am therefore very sceptical as to whether the Court of Appeals followed the right path in reaching its decision.  Even more so, as its decision could cause floodgates of proceedings before U.S. courts seeking the annulment of international investment awards against sovereigns who had lost the battle on jurisdiction (or admissibility) of their claims on similar issues, but where Tribunals were correct in applying long-standing international exceptions, such as the futility rule.