International arbitration newsletter - EU Law

Editorial

In this issue Barthélemy Cousin and Vincent Béglé highlight the significant changes to arbitration law in France which come into force on 1 May. Commentators have described the new Act as one that heralds one of the most liberal regimes in the world. Arbitration clauses with a French seat in existing contracts should be reviewed in light of the new legislation, which may have unintended consequences. Vincent also features on our back page.

Leading Canadian practice Ogilvy Renault joins Norton Rose Group on 1 June. The article on the UK Supreme Court decision in Dallah v Pakistan (a key decision on recognition and enforcement of foreign arbitral awards against states) is the result of a collaboration between Matthew Knowles and Ogilvy Renault partners Richard L Desgagnés and Azim Hussain.

Finally, Simon Goodall and I provide an update on the status of EU bilateral investment treaties in the light of the Lisbon treaty. There is still much uncertainty in this area.

Joseph Tirado

Norton Rose LLP Head of international arbitration and ADR

Legal update

New Hong Kong Arbitration Ordinance

A recently enacted Arbitration Ordinance is due to come into force in mid-2011, bringing together Hong Kong's current domestic and international arbitration regimes under the same rules. This is based largely on the UNCITRAL model law, subject to a few add-ons and modifications. Opt-in provisions will allow parties to agree certain procedures – for example, the consolidation of arbitration proceedings, the courts' ability to determine preliminary questions of law, and appeals against awards on questions of law, which are currently part of the domestic regime. Full details of the new Ordinance will be set out in our next issue.

Proposals to reform the Brussels Regulation

In December, the European Commission published its proposals for reforming the Brussels Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Regulation 44/2001/EC). Arbitration is currently excluded from the scope of the regulation and the proposals retain the arbitration exception. The proposals provide further support for arbitration by requiring a court seised of a dispute to stay proceedings if its jurisdiction is contested on the basis of an arbitration agreement and an arbitral tribunal has been seised of the case. This does not prevent courts from declining jurisdiction (when required to do so by national law) where there is an arbitration agreement. A consultation process is now underway.

State of Qatar and Cape Verde ratify the ICSID Convention

The convention came into force in both countries in January 2011 and has now been ratified by 146 states. For further information see our briefing An Introduction to Investment Treaty Protection in the Middle East.

The new French Arbitration Act: an ambitious liberalism

By Barthélemy Cousin and Vincent Béglé

France's position as one of the most liberal arbitration regimes in the world will be reinforced when its overhaul of the French arbitration law (Decree No. 2011-48, the "Act") comes into effect on 1 May 2011. The country traditionally favours arbitration and commentators agree that the Act's liberalism is designed to consolidate the position of Paris as one of the most frequently chosen seats for international commercial arbitration.

This revision of the arbitration sections of the French civil procedure code (CPC) will apply as much to domestic arbitration as to international arbitration. The Act, which codifies case law, introduces some remarkable innovations, aimed at simplifying and speeding up recognition and enforcement of arbitral awards.

Enforcing awards faster

The Act's most emblematic innovation is the power it gives parties to agree in advance to waive the right to set aside an international arbitral award (1522 CPC). Such a waiver, which is only available in a few countries, can be included in the arbitration agreement or the arbitration rules. This provision will apply to awards rendered by any arbitral tribunal constituted after 1 May 2011. In such a case, an international arbitral award rendered in France would become immutable, as it could not be set aside in France. In the case of fraud however, an application for revision of the award will still be possible (1502 CPC) – besides, an appeal against the grant of the exequatur order to the award will always be available (1522 CPC).

There is nothing to suggest that an express waiver by the parties, especially if made within an arbitration clause, cannot be made before the Act comes into force. Waivers of available appeals against awards are often found in arbitration clauses. From now on, particular attention will need to be given to their precise wording (the specific scope of the waiver). Arbitration clauses entered into well before this reform run the risk of creating unintended consequences. It would be prudent to check, in international contracts already entered into, the wording of waivers in any arbitration clauses where the seat is in France.

"The Act's most emblematic innovation is the power it gives parties to agree in advance to waive the right to set aside an international arbitral award"

Two new provisions relate to the notification of awards, a stage that triggers various appeal time limits. Until now, notification of an award to a party required a prior "exequatur" order from the state court, followed by service of the award and the order by a bailiff. This can take several months, depending on the country in which the party to be notified is located. When the Act comes into force, the notification of the award will no longer be contingent on the prior "exequatur" order (1484, 1494, 1519, 1522 CPC). Instead, notification can be effected as soon as the ruling is rendered. Further, service by a bailiff will no longer be mandatory if the parties have agreed on another method of service, such as notifying the award by e-mail – a cheaper and faster route.

Confidentiality

Confidentiality is another important area to check in existing clauses before the Act comes into force (and for future clauses after it comes into force). The terms of the Act seem to make the confidentiality of international arbitration the exception rather than the rule. In practice, confidentiality will often be preserved through the arbitration rules, which usually provide for the confidentiality of the proceedings. In some cases, particularly ad hoc arbitrations, the confidentiality of international arbitration can only be ensured by the parties making an express provision in their clause, or by reference to certain rules.

Universal jurisdiction

The Act will expressly recognise a universal jurisdiction of the French courts in any case where a party is denied justice in an international arbitration, even if there is no link with France (1505 CPC). The "denial of justice" is not defined by the Act, but there is little doubt that this international jurisdiction will attract parties to Paris who are arbitrating in another country and unable to obtain justice because of fraud or for political reasons.

The codification of case law

The Act gives flexibility both to the form and to the content of arbitration agreements. The new wording reflects wide recognition of the validity of arbitration agreements. An international arbitration clause "is not subject to any condition as regards its form" (1507 CPC), and therefore will be effective without the need for it to be expressed in writing, provided it comes with valid evidence. However, the enforcement of an award rendered on the grounds of such an unwritten clause would not benefit from the 1958 New York Convention, requiring written arbitration agreements. In addition, the Act also gives effect to an arbitration clause appearing in a chain or group of successive or separate contracts.

An arbitration agreement which does not state the method used in appointing arbitrators will still be valid and effective. The new legislation contains supplementary rules to ensure that an arbitral tribunal is seized and arbitrators are appointed by effectively filling in gaps in the agreement and curing pathological clauses.

"there is little doubt that this international jurisdiction will attract parties to Paris who are arbitrating in another country and unable to obtain justice"

The jurisdiction of the arbitral tribunal is strengthened by the statement of the kompetenz-kompetenz principle (1448 CPC): a state court does not have any jurisdiction in a case related to an arbitration agreement, unless (i) the arbitrators have not yet been appointed and (ii) the arbitration agreement is manifestly void or inapplicable. In other words, only the arbitrators have the right to declare themselves not competent. This strict rule can be contractually modified by the parties in international disputes.

The Act creates a new position of "supporting judge" (the juge d'appui), to ensure that arbitration progresses effectively. The supporting judge has considerable powers to deal with the difficulties that can arise during the appointment of arbitrators and the constitution of the arbitral tribunal (1452-1454 CPC), the retirement of arbitrators (1456 CPC) or the interruption of their mandate as a result of resignation or some other impediment (1457 CPC). These rules can be modified by agreement between the parties for international disputes.

When the arbitral tribunal is not yet constituted and in situations of urgency, the state courts have complementary powers to impose interim or conservatory measures. To obtain evidence, the supporting judge is always competent when the evidence is held by a third party (1469 CPC). The judge's competence over evidence held by a party to the arbitration will cease as soon as the arbitral tribunal is constituted (1449 CPC).

Entry into force

The new provisions will only apply to arbitration agreements entered into after 1 May 2011. They will, in part, only apply to arbitral tribunals constituted after 1 May 2011 and, as far as their immediate enforceability is concerned, to international or foreign awards only rendered after the same date.

Conclusion

The new Act clarifies and simplifies the existing provisions considerably. Despite being very comprehensive, however, some questions still remain. For example, the reform has not been used as an opportunity to address the recent debate in France on arbitrations involving the state.
Overall the Act has achieved the objective of innovating, simplifying and strengthening French arbitration law – and has consolidated the position of Paris as an attractive arbitration seat. This reform reflects strong political support for international arbitration – directly in line with recent investments offered by the French government to the International Chamber of Commerce, aimed at anchoring the headquarters of the world's biggest arbitration institution in Paris.

Barthélemy Cousin is a partner and Vincent Béglé is a senior associate in our Paris dispute resolution department.

Investor-state arbitration and the EU

By Joe Tirado and Simon Goodall

In the wake of uncertainty created by the Lisbon Treaty, interventions by the European Commission are threatening to change dramatically the landscape of protective legislation for European investors.

What are BITs?

A bilateral investment treaty (BIT) is an agreement between two countries that contains reciprocal undertakings to promote and protect private investments made by individuals and companies in each other's territories. Most BITs contain obligations on the host state to ensure that foreign investors receive certain guarantees, including: fair and equitable treatment; treatment no less favourable than that provided to investors under other treaties; free transfer of funds without restrictions; and compensation in the event of unjustified expropriation.

BITs also frequently provide a mechanism for resolving disputes through international arbitration – for example, under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID). This avoids the need for investors to rely on domestic courts that might lack independence and provides a means of resolving disputes that may be faster, especially given the limited scope for appeals against awards.

The Lisbon Treaty

The Lisbon Treaty, which came into force on 1 December 2009, has extended the exclusive competence of the European Union (EU) to include foreign direct investment. Although the precise nature and scope of this competence is yet to be determined, it is clear that member states no longer have the power to negotiate and conclude BITs without the EU's approval.

BITs between member states and non-EU countries (extra-EU BITs) are expected to be replaced by EU-wide international investment agreements. In the meantime, however, legislative steps are required to clarify the status of existing BITs that are potentially incompatible with the allocation of competences within the EU.

The draft regulation

On 7 July 2010 the European Commission (the Commission) published a draft regulation dealing with transitional arrangements for existing extra-EU BITs. Under this regulation, member states could receive authorisation for existing extra-EU BITs. There are concerns, however, that the Commission would be entitled to withdraw this authorisation in a wide set of circumstances. As the Commission has recently demonstrated in bringing proceedings against the governments of Austria, Sweden and Finland, it is not averse to finding fault with extra-EU BITs.

An amended version of the draft regulation was presented in a report by the European Parliament's International Trade Commission. This proposes an additional clause that would result in the regulation expiring after a maximum of 13 years, by which time all extra-EU BITs would be replaced by EU investment agreements.

EU investment agreements

What shape EU investment agreements with third counties will eventually take is yet to be determined. However, in a set of conclusions, the European Council has stressed the need to include effective investor-state dispute settlement mechanisms and invited the Commission to carry out a detailed study on the feasibility of EU membership in international arbitration institutions.

The Commission revealed its intention to consider the feasibility of the EU acceding to the ICSID Convention, a multilateral treaty providing an impartial international forum for resolving disputes between foreign investors and States, in a policy paper released at the same time as the draft regulation. However, this is unlikely to be practicable as it would require modification to the ICSID Convention itself and would, therefore, require the consent of all contracting states. It has been suggested that the Commission may instead explore the possibility of creating its own investor-state dispute settlement mechanism, similar to the ICSID Convention.

Intra-EU BITs

The draft regulation fails to deal with BITs concluded between different Member States (intra-EU BITs). However, as the recent arbitration cases of Eastern Sugar v Czech Republic and Eureko v Slovakia reveal, the Commission is opposed to investor-state arbitration between Member States.

These cases involved challenges to the tribunal's jurisdiction on the basis that the BITs under which proceedings had been commenced ceased to be applicable once the Czech Republic and Slovakia joined the EU. In each instance the Commission submitted objections to intra-EU BITs being applicable. Although both tribunals decided that they did have jurisdiction to determine the disputes, the Commission's comments are an indication of the nature and extent of its opposition to intra-EU BITs.

The Commission argued that intra-EU BITs should be terminated as most of their provisions are superseded by EU law and applying them could lead to discrimination between Member States. It further stated that it intended to urge all Member States to take "concrete steps" and would not rule out resorting to infringement proceedings.

The Commission further claimed that investor-state arbitration mechanisms in intra-EU BITs raised "fundamental questions" about compatibility with EU law and undermined the principle of mutual trust in the administration of justice within the EU. It rejected the idea of making investor-state arbitration available to investors from all EU countries, stating that it was firmly opposed to "outsourcing" disputes involving EU law.

What next?

The draft regulation still needs to be approved by the European Council and Parliament. Since it is reportedly the subject of a rising tide of criticism from Member States and Members of the European Parliament, negotiations are likely to be prolonged over the coming months.

Joe Tirado is head of international arbitration and ADR and Simon Goodall is a solicitor in our dispute resolution department in London.

Contracting with a state entity

By Richard Desgagnés, Azim Hussain and Matthew Knowles

What happens when you contract with a state entity which no longer exists when you take it to arbitration? In Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan, the UK Supreme Court found that the circumstances did not allow Dallah to claim that the parties' common intention was for the state to be bound by its agreement with a state-owned entity.

Accordingly, the French arbitral award issued against the state could not be recognised or enforced in the UK. However, the Paris Court of Appeal concluded from both the pre-contractual and contractual dealings that the state had acted as if it was a party to the contract, and thus recognised the arbitral award as valid and binding on Pakistan so the award can now be enforced in France. It is interesting to contrast the approaches of the French and English courts to the enforcement of the same award. Whether Dallah will seek enforcement in any other countries remains to be seen.

The facts

Dallah, a Saudi Arabian company, entered into a memorandum of understanding with the Government of Pakistan to provide housing in Saudi Arabia for muslim pilgrims from Pakistan.

"it is interesting to contrast the approaches of the French and English courts to the enforcement of the same award"

The President of Pakistan passed an ordinance establishing the Awami Hajj Trust, a body corporate capable of suing and being sued. The ordinance assigned functions within the Trust to the Secretary of Pakistan's Ministry of Religious Affairs who would act as Secretary of the Board of Trustees and as the Trust's managing trustee.

On September 10, 1996 an agreement was concluded between Dallah and the Trust (the Agreement). The Agreement made no reference to the Government of Pakistan other than giving the Trust the power to transfer its contractual rights and obligations to the government. The Trust ceased to exist on December 11 1996, the expiry date under the ordinance creating the Trust.

The Agreement contained an arbitration clause providing for ICC arbitration in Paris and Dallah initiated arbitration against Pakistan's Ministry of Religious Affairs in May 1998. The government denied that it was party to any arbitration agreement and did nothing to submit to the jurisdiction of the ICC Tribunal.

"The government denied that it was party to any arbitration agreements"

During the arbitration, Dallah argued that either the Trust was the government's alter ego or the successor to the Trust or to the Trust's contractual rights and obligations prior to its demise. In June 2001, the Tribunal issued a partial award concluding that it had jurisdiction over the Government of Pakistan. Its final award held Pakistan liable for the claims made by Dallah.

Dallah changed its strategy during the recognition and enforcement proceedings and did not put forward either of the two arguments made during the arbitration. Rather, Dallah relied exclusively on the argument that it was the common intention of the parties that the government was a party to the Agreement.

The decisions

The English courts at all three levels (the Commercial Court, Court of Appeal, and Supreme Court) held that there was no common intention to consider the government a party to the Agreement. Accordingly, the courts refused recognition of the award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Article V(1)(a) of the New York Convention provides that recognition of an award may be refused where the arbitration agreement is not valid under the law to which the parties have subjected it or the law of the country where the award was made.

The French courts, both at first instance and on appeal, found that the actions of the Ministry of Religious Affairs, during the negotiation of the Agreement as well as at various times during its execution, were such that the government was to be considered an actual party to the Agreement. As a result, the ICC Tribunal had the required jurisdiction and the award against Pakistan was recognised. Paris, France being the seat of the arbitration and French law the governing law, the decision of the French Court of Appeal is significant.

Lessons learned

While contracting with state entities can be lucrative, we advise caution as expectation can turn into disappointment if the state attempts to modify the contractual relationship in a way that no private party could. There are various ways to guard against the scenario encountered by Dallah:

make the state, as well as the state-controlled entity, party to the contract
ensure that the state guarantees the obligations of the state-controlled entity
if the state refuses to be either party or guarantor, structure the transaction so that it comes under an investment treaty between that state and another state.

For example, protection may be obtained by incorporating the eventual contracting company in a jurisdiction that has a bilateral or multilateral investment treaty with the state in question. Protection may also exist if the company's owner is domiciled in such a jurisdiction. In this way, if the state harms the company's contractual rights, the company or its owner may have direct recourse against the state under the treaty, relying on causes of action such as unlawful expropriation or violation of fair and equitable treatment.

Greater protection may exist where both state parties to the investment treaty have also ratified the ICSID Convention. Under this Convention, contracting states are obliged to give effect to ICSID awards as if they were final judgments of their own national courts, with no possibility of review by those courts.

Richard Desgagnés and Azim Hussain are partners practising in commercial litigation at Ogilvy Renault in Canada, which will join Norton Rose Group from 1 June 2011. Matthew Knowles was a senior associate at Norton Rose LLP, he has now moved to client BHP Billiton as in-house counsel.

Noticeboard

Moscow office appoints new head of Russia/CIS dispute resolution

Yaroslav Klimov joins from the Moscow office of Freshfields Bruckhaus Deringer LLP where he was Counsel and headed the firm's dispute resolution team in Russia. Yaroslav's experience includes general commercial, corporate, regulatory and product liability disputes.

LCIA Court appoints Pierre Bienvenu as a vice president

Pierre Bienvenu, a senior partner at Ogilvy Renault (Ogilvy Renault will join Norton Rose Group on 1 June 2011), has been named as a vice president of the London Court of International Arbitration (LCIA). The court is the final authority for the proper application of the LCIA rules, which appoints tribunals, determines challenges to arbitrators, and controls costs.

IBA Mediation Techniques Committee

Joe Tirado has been appointed as co-chair to the IBA Mediation Techniques Committee.

DIFC Courts' Users' Committee appoints Patrick Bourke

Patrick Bourke has been appointed to the Dubai International Financial Centre Courts' Users' Committee. The Committee plays a critical role in the development of the Courts, including reviewing key performance indicators and commenting on major projects.

Panel discussion on arbitrators

Joe Tirado participated in a panel discussion on "arbitrators" as part of the School of International Arbitration, Queen Mary, University of London. Other members of the panel were John Rushton of the ICC UK, Professor Loukas Mistelis and Dr Stavros Brekoulakis.

Focus on Paris: Vincent Béglé

Vincent Béglé is a senior associate in our Paris dispute resolution department. Besides his specialisation in anti-corruption work, he has handled a broad range of commercial contracts, post M&A and joint venture disputes and has a strong track record in international arbitration in industries including mining, infrastructure and telecoms.

I am a lawyer because...

A French writer once said that the law is the most powerful of schools for the imagination. I quite like the creative lawyering that can be produced with the right blend of imagination and rigour.

What gives you greatest satisfaction, professionally?

Solving a dispute by looking at its various threads. Untying inextricable knots. Maybe I should one day consider knitting.

And personally?

It may sound dull – to have met and married my wife, and see how much love and care she provides full-time to nurture our young son – to a level I couldn't even have dreamed of.

How do you spend your weekends?

With my wife and little boy. We live on a tiny island by the river Seine, so there's an atmosphere of countryside. In winter, much of the weekend is usually spent playing with the inexhaustible kid, or preparing dinners for friends – until it's Sunday evening and I realise I must go jogging in the dark to pretend that I'm keeping one of my latest new year resolutions.

If you weren't a lawyer, what would you be doing?

I'd probably like to be a cook. Another school for the imagination. And yet, a few rules to follow...

What's on your iPod?

Sundry. You would find Avishai Cohen's jazz and some of Tchaikovsky's concertos. I'm afraid I also added – but only for the baby – some refreshing xylophone lullaby renditions of Nirvana.

And your favoured arbitration centre?

I sometimes quite like the strong flexibility and secrecy found in ad hoc arbitration – yet I naturally remain very loyal to ICC arbitration. As for seats, France and Switzerland are very liberal towards international arbitration.

What is your biggest vice?

Cheese fondue. But being a Swiss citizen, I'm not sure whether it's a vice or a genetic addiction. After carrying the equipment to the summit, I once tried to prepare a fondue on top of Mount Kilimanjaro. Until I found that there was not enough oxygen at 5,895 meters to light up the gas burner.

What is your biggest mistake?

Believing that I should avoid, at all costs, making any. But that was quite a long time ago. Fortunately I've made some progress since then...

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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