When doing business in Latin America, arbitration can be a viable alternative to litigation in resolving contract and relationship disputes between parties. Gowling WLG legal experts from Canada and the UK offer practical guidance on arbitration options and approaches.
CPD/CLE
This seminar contains one hour of substantive content toward the mandatory CPD requirements of the Law Society of Upper Canada and the Law Society of British Columbia. It will also count towards the mandatory continuing education requirement of the Barreau du Québec.
Transcript
France Tenaille: Good afternoon, my name is France Tenaille and as the leader of Latin American Practice of Gowling WLG I would like to welcome you all to our International Arbitration Webinar. We have a large group attending from various parts of the world and we want to thank you all for making the time today to attend this online event. Following the combination between Gowlings and Wragge Lawrence Graham & Co, a very large and experienced group of arbitration lawyers came together under one roof in offices around the world and with this experience in most corners of the globe, the group of experts that are going to speak to you today are going to not only update you on important traits in arbitration around the globe but most importantly they are going to give you practical advice that you can start using today to manage your business risk, your cost and your benefit. I am now going to turn the station over to Bob Armstrong who is the head of the Commercial Litigation Group in Canada. Bob?
Bob Armstrong: Thank you France. Please accept my welcome as well.
It goes without saying that Dispute Resolution is an increasingly important part of all contracts and corporate transactions so the audience we have today includes General Counsel, corporations then there is people outside Counsel and you all know from personal experience that that is true. You may or may not know that the trend in the world is to use arbitration as the preferred option for the contracting parties, especially when they are in foreign countries or dealing with foreign government to manage their dispute resolution. As some of the world has faced increasing challenges and we have seen that in this hemisphere and other hemispheres our clients and lawyers are looking for predictable and reliable mechanisms for dispute resolution and that is the context for this webinar. We believe that you and your clients at the end of this discussion will be more completely informed about what thinking you should have around arbitration and the thought is that you should have it at the beginning of a transaction rather than waiting until a dispute has arisen.
We are going to discuss today a few important aspects of arbitration and the trends. The first thing will be we will discuss with you the impact of investment treaties and how that impacts you and your clients, we are going to have a full discussion of a very important development in this field which is third party funding which creates significant opportunities for you and your clients to be creative and to manage your risk and your cause. And then we are going to talk a bit about the changing environment with respect to the enforcement of arbitral awards which is equally important in the event that you are trying to recover on a judgment that you may have obtained. Our goal really today is to continue a dialogue that we began with you a long time ago and develop a long lasting partnership between you and our firm. We only have an hour and we are going to keep to that because you have very busy schedules. So we are dividing the discussion into three parts with three speakers and I will have some comments at the end and answering some questions. I should tell you that if you have questions there is a question prompt on your screen and you can send them to us and we will either answer then at the end of this webinar or we will send you a written response at the end of the webinar. So there is the agenda, I am not going to take you through it right now because my colleagues are going to take you through these individual items but I wanted you to be able to see that and be aware that we have a comprehensive agenda for today. Let me just conclude my comments by introducing you to three of my partners and you will see their pictures are coming up, Gordon Bell and Tom Price are in England as we speak, Mark Crane and I and Florence are in Toronto. In essence Gordon Bell, Tom Price and Mark Crane and myself are four lawyers with very substantial experience in conducting international arbitrations around the world, I added it up if you add us all up and some of us including me are older than others, we have over 100 years of experience. Gordon, Tom and Mark are experts in particular, among other things, in construction, engineering, natural resources, infrastructure, my own expertise relates primarily to fraud, financial services, construction and government procurement. With these three speakers you have a depth of experience that represents the depth of experience in our firm and they are going to speak to you now about that experience and the impact of the trends in arbitration on you, your clients and your world. So I am going to ask that Gordon Bell in England start off the discussion about international arbitration and our experience. Gordon.
Gordon Bell: Thanks Bob.
As Bob said, we are going to talk a little bit about investment treaty arbitration as well as funding of arbitration, but where I would like to start is a slightly more general introduction to international arbitration itself and really in the context of international commercial arbitration where, as you will know, parties enter into a contract which tends to contain an arbitration agreement so we will start with international commercial arbitration first.
So, a short reminder or, for those who are not yet familiar with the topic of arbitration itself, a simple definition is "a private binding enforceable dispute resolution process which may be chosen by parties as an alternative to litigation before national courts". And you will see from the slide that I have highlighted four or five words in in that text and I will just explain a little bit about each of them to begin with.
So the first is private. Arbitration is private in two or three ways. It is private because it only involves those parties who have agreed to arbitrate – there cannot usually be third parties who take part in arbitration; it is private between two parties. It is also private in the sense that it is not something which is public; it is not like a court room where the public can come in and watch. There is an exception to that when we talk about investment treaties a little bit later but, in general, it is a forum where you do not have an audience other than the representative of the parties. And, in the third sense that it is private, it is confidential and I will talk about confidentiality in a moment.
It is binding. This is not a form of mediation, it is not a form of conciliation, it is a dispute resolution process that should bring to an end the dispute, and the resolution will be binding on the parties, subject to the possibility of challenge and appeal which, again, we will talk about a little bit later.
Thirdly it is enforceable and, in this sense, when an award is given by a tribunal it is immediately enforceable, potentially around the world through the New York convention. Again, we will pick up on the enforceability of an award later in the webinar.
It is chosen by the parties in the sense that nobody can compel somebody to arbitrate - you have to choose to arbitrate but, once you have chosen to arbitrate, courts will, if necessary, compel people to abide by that agreement. Now you choose to arbitrate not normally after the dispute has arisen but at the outset so that when you are entering into a substantive contract somewhere in that contract, usually towards the end, there will be an arbitration clause which will say all disputes will be referred to arbitration and that, in itself, is an agreement: that is the arbitration agreement. That agreement is separate, even though it is in part of the substantive contract, it is a separate agreement itself.
It is an alternative to the national court so, as again most of you will know, if you have a contract without an arbitration provision the default position is that you will have your dispute referred to the national court (depending on which court would apply), so arbitration takes you out of the jurisdiction of national courts.
The autonomy of the parties is crucial. It is for the parties to decide how to arbitrate and normally they do so by adopting some of the rules of arbitration that exist, sometimes institutional rules, sometimes not but, as Bob said, for some industries and for some companies, international arbitration has now become the chosen method of resolution of international disputes and is conducted all over the world against very different legal and very different cultural backgrounds. It is fair to say that no two arbitrations are the same: it is very different arbitrating a dispute in Paris to an arbitration in London or in Toronto, Miami or Caracas. The rules will be different, the culture and the expectations of the tribunal members will be different in each of those jurisdictions.
What disputes are arbitrated? Well again, in international commercial arbitrations, the type of disputes are commercial in nature and tend to be construction or infrastructure, energy, oil and gas, insurance, shipping, commodities and IP and I am sure those on the webinar will have other examples. What is interesting from this list is that each of these areas provide their own specialism; it is not just knowing the international arbitration rules and international law that helps with an arbitration it is also understanding the industry and the focus of clients in those industries and that is important for a slide that comes up in a moment when we talk about arbitrators.
Now unsurprisingly given the number of countries in this world there is very limited standardisation of international arbitration laws. However many States, including most in Latin America, have adopted or at least based their arbitration laws on the UNCITRAL model law, the "UN" in "UNCITRAL" being the United Nations. Now the UNCITRAL model law as with many other arbitration laws really have at their heart three main objectives. The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without a necessary delay or expense. The parties are free to agree how disputes are resolved, subject only to such safeguards as are necessary in the public interest and there should be limited intervention of the courts.
Now what are the perceived advantages of arbitration and what are the growing tensions in international arbitration? Well if you had asked me to give this webinar ten or 15 years ago I would certainly have said that speed and cost were two of the main advantages of arbitration, however, it is all relative and it is relative to the time it may take for court proceedings, for example. So, in certain jurisdictions, court proceedings can last just 12-18 months, in some jurisdictions it can last five to six years and others 20 or 25 years. Arbitrations tend to take somewhere between 18 months and three years. It varies depending on the context of the dispute.
Cost: arbitration used to be relatively inexpensive but I have to say that it has been hijacked certainly in the last ten years by lawyers; it is an area where lawyers now practice in a way that is not dissimilar to court proceedings. So, in some jurisdictions there are lots of witness statements, there are lots of expert reports, there are discovery or disclosure applications. The feeling amongst many practitioners is arbitration has moved a little bit too far away from what was the intention of arbitration which was a fast and relatively cheap way of resolving disputes to something which can be quite time consuming and more expensive. So, there is a debate as to whether speed and costs are now advantages or in fact disadvantages.
Confidentiality, I mentioned: you cannot generally publish awards. That is seen as an advantage by some.
Neutrality is very important, the neutrality here being the arbitrators. You will have impartial and independent arbitrators and many clients would prefer to be involved in choosing arbitrators than being left to have a judge of a national court which they may not have chosen. Neutrality is important.
The expertise and competence of the tribunal is very important. As I mentioned, most disputes tend to be in the construction, oil and gas, energy sectors and you can choose an arbitrator or arbitrators who are competent and expert in that field as opposed to having a generalist who may be a judge of a high court.
And then, finally, enforcement, again very important because through the New York convention, which we will come on to, you can enforce your award more readily than you can with a judgment of a national court.
I have mentioned that sometimes the rules can be with arbitral institutions. Some of you will be familiar with these institutions, for example the ICC in Paris, the LCIA in London, the AAA in the US, SIAC in Singapore, with two Canadian chambers and then, of course, you have the regional centres throughout the world including South America. Their role varies. Sometimes it is just to help administer arbitrations but it also helps with the appointment and, some rules, including the ICC, the court of the ICC will help scrutinise the awards - not to change them but to make sure that they are consistent.
And finally, I ask the question, are the institutions reacting to the criticism, cost and speed being two of them? Well, a number of the institutions have changed their rules over the last few years to bring in fast track procedures particularly in relation to interim and conservative measures, they have dealt with that issue. They are also dealing with the transparency in relation to arbitrators where there was a feeling that certain arbitrators were taking too many appointments and therefore not able to progress the proceedings as quickly as they might, and again the institutions are dealing with that. The final issue though, on costs - the institutions have some of the burden in relation to reducing the costs because the fees of certain institutions are quite high but, generally, the high cost of the arbitration tend to be the fees of the lawyers rather than the institutions themselves.
And I shall hand over to Tom who is going to talk a little bit about the benefits of arbitration in the United Kingdom.
Tom Price: Thank you very much Gordon. Well Gordon has given an overview there of the benefits of arbitration and I am now going to look at some of the benefits of specific arbitrating in England and commenting on some of the trends and developments here that are of relevance to the Latin American market.
I am going to start off the with the benefits of England by categorising those into soft and hard benefits. By soft I mean those benefits that are not strictly legal but benefits around how arbitration generally as a concept is carried out in England efficiently and why it is the major arbitration centre that it is. Hard benefits are more to do with the legislation around arbitration and how the courts view arbitration, whether we are in short an arbitration friendly jurisdiction legally, which indeed we are.
So I am going to take each of those in turn and then look at some of the themes.
So starting with the soft benefits, arbitration in London has a long history, it is highly developed, as Gordon reminded me last week the first Arbitration Act in the UK was in the 1600s, arbitrations have been carried out in the City of London since then as a result of the trading that goes on, all manner of goods coming from all over the world brought up the Thames from far flung parts of the globe, disputes over quality would be dealt with there and then on the quayside. That is an early form of arbitration, but what does that mean for the present? Well, not only is London home to one of the leading institutions, the LCIA, the London Court of International Arbitration, and not only is it chosen as the seat for many other institutional arbitrations as well as ad-hoc arbitrations but there is a myriad of other industry sector arbitral institutions that have their home in London because that is where the industry sectors are based. For example, the London insurance market through ARIAS and its related arbitral institutions, the London Maritime Arbitration Association and various commodities associations; cotton, coffee, grain, oil and gas to name but a few. And those institutions prosper because there are arbitrations to feed them and they make London an attractive place to arbitrate because of that expertise. It means that for virtually every type of dispute London is a natural home for the resolution of that dispute because there is an appropriately skilled arbitration framework in place. Those specialist arbitrations are supported by specialist counsel and arbitrators and experts. So this particular hub of institutions in London, that has given rise to a competitive legal market both in relation to the lawyers, the arbitrators themselves and the experts, all of that greater expertise which is available has the added spin-off of competitive cost and certainly fewer conflicts or indeed the ability to find lawyers and arbitrators who are not conflicted.
What about arbitration practice within the confines of the dispute? As you would expect with a highly sophisticated arbitration market tribunals have seen the whole range of issues both procedural and substantive. The system in England, borrowing much as it does from the English adversarial court system, means that your arbitration is likely to benefit from a rigorous analysis of the facts through document disclosure and the cross-examination of witnesses. Whilst of course arbitration indeed has as one of its features the flexibility of the parties to choose precisely what procedure they want nevertheless an arbitration in London is likely to have those strong features of disclosure and witness cross-examination and challenge.
In addition there is a vast array of support services that go with arbitration. Today with so many of the arbitrations being international requires interpreting and translation, all available there. E-disclosure providers, the rise of email and other electronic communications has made disclosure in dispute resolution probably one of the key challenges of the next ten years and getting a handle on that is very important. In arbitration there may be less disclosure than there is in court litigation but it is still important and e-disclosure providers are a key part of that. Experts also are a part of the arbitration process and many experts relevant to the dispute can be found in and around London. And finally mediation which is also a part of the dispute resolution or alternative dispute resolution process plays a part and there are numerous mediation services and providers within London who can support that part of the process.
Turning to the hard benefits, this is the law that supports the arbitration and whether we are an arbitration friendly jurisdiction. Here we are looking at the legislative landscape and what we mean by this is - are the courts generally non-interventionist, will they let the arbitration proceed and not step in to disrupt the arbitration? Indeed that has all of the features we would say of the English jurisdiction. The court is very happy and keen to support arbitration wherever it can, whether that be with interim remedies or appointing tribunals where it needs to, but it is slow to interfere with the arbitration process and it does that through the Arbitration Act 1996 which is the most recent codification of the arbitration law in the UK and by the commercial court which is the highly experienced court which supervises the arbitration processes in the UK as necessary.
To give you just two or three examples of the types of way that the legislative framework supports arbitration and Gordon touched on this earlier, once the parties have agreed to an arbitration it is not open to the parties to then go to the Court to get round that clause and the English court will grant a mandatory stay of court proceedings in support of an arbitration clause. The court will appoint a tribunal where the arbitration clause does not work or where the rules do not work. And then perhaps most importantly they will grant interim injunctive relief at the beginning before an arbitration has been commenced. The difficultly with this and it is a complex area is that the courts are reluctant to grant interim injunctive relief where it is possible to get such relief from the tribunal. Tribunals generally have power to grant injunctions but the point is they cannot always be constituted quickly enough in order to grant the relief that is needed. Nowadays with many of the institutions having emergency provisions for arbitrator appointments it is harder for a party to say they cannot get an arbitration tribunal constituted quickly enough and therefore the court must grant interim injunctive relief instead. Nevertheless in cases of very urgent relief the English court will step in. It will also assist on third party disclosure and by the same token it will be very slow to step in in relation to the removal of arbitrators or setting aside awards or appealing awards.
Finally on enforcement the regime is enforcement friendly as the UK is a party to the New York Convention so that it is relatively easy to enforce foreign awards in the UK and indeed on a practical basis it is a popular place to enforce as a result of the large number of bank accounts located here through the UK being a major financial centre.
I am going to deal very quickly with themes, it is hard to discern themes in the commercial field where confidentiality prevails but what is noticeable is that cases involving Latin American parties in the LCIA is very low at 3% in 2016 up from 2.5% in 2015, much higher in ICC arbitrations and Brazil and Mexico are top users for ICC arbitrations. Finally in relation to investment treaty claims I am going to leave this for the next section, save to say there is more transparency there in relation to themes because those types of arbitrations are generally publicised and we are seeing an increasing number of such claims across the board but particularly in natural resources; you see examples in the slide on nickel and silver mining as well as telecoms and shipping.
And with that I will hand over to Mark Crane in Canada.
Mark Crane: Well thanks Tom and we have heard from Tom talking about arbitration in the UK and what I am going to do now for the next few minutes is look at arbitration through the lens of Ontario and in Canada and we heard from Bob's preliminary comments about the growth of arbitration recently and that is indeed the trend in this jurisdiction it is what our clients are selecting particularly for transnational disputes and particularly for the industry set out by Gordon in his preliminary remarks.
The first thing I want to touch on as it relates to Ontario is the implementation of its new international arbitration Act which came in to force just recently this past March and indeed there was previous international commercial legislation in Ontario and across Canada but this new legislation brings to light some new developments that are worth mentioning. It formally adopts the New York convention on the recognition and enforcement of arbitral awards which is actually appended as a schedule to the Act, practically speaking Ontario would have done so in the past and is a long time signatory to the New York convention but this formalised that relationship. The second point worth mentioning about the new legislation is that the new Act provides clarity on interim measures and preliminary orders that may be provided and in particular it provides that an arbitral tribunal may, at the request of a party, grant interim measures and this is helpful context for parties to have because quite frankly the less ambiguity about the process means that the parties can get on to this substantive dispute more quickly and with more clarity and ideally more efficiently and that is the goal that Bob set out in his preliminary remarks is you think about things at the front end when you negotiate the contract so that in the event a dispute arises down the road there is clarity as to the process and the parties can get on with it effectively. The third and final point I will make about the new legislation is the impact on the limitation period it imposes a ten year limitation period on the enforcement of article awards which is greater than in the past. The take away I will leave you with is that for parties, corporations or clients that has a presence in Ontario or is contracting in Ontario or involving Ontario or wish to have their dispute arbitrated in Ontario, take note of this new legislation make sure you refer to it in your commercial agreement and take note of its measures as I have said.
Moving on to the next slide, why Canada? And I can assure you that our history of post in arbitrations in Canada is much shorter than in the UK as Tom set out in his comments but to follow this point it is a growing jurisdiction for hosting arbitration disputes and particularly international arbitration disputes, I have listed five bullets on the slide in front of you now and I want to focus primarily on the first two, why Canada? Canada has both a common and civil law background and expertise, it is a unique jurisdiction in that respect and following up on that it would have experienced arbitrators that have practiced and have expertise in both common and civil law, that is a distinguishing feature I would say as between Canada and some of the other jurisdictions available, the second point I think worth focussing on is the Toronto stock exchange, it is a world leader in terms of being a stock market for mining, energy and resources amongst other areas and that provides a natural nexis to parts of Latin America that is rich in resources. For example in 2016 almost 50% of the global mining public finance schemes were done through the TSX and so many of these issuers already have a presence in Canada so there is already a natural connection between Canada and certain industries that carry on business in Central America or that companies here may have assets there.
You will see that the three final bullets on the sheet but I will move on to my next point on this topic and that is why are we talking about Canada and other jurisdictions and the seat for international arbitrations? The seat for the venue for the arbitration is important to consider beyond just where the parties are located because the laws governing the procedure for an arbitration are generally determined by the location of the arbitration, the venue or the seat as where it is hosted but consideration should be given to the location of the arbitration beyond merely some of the convenience factors such as where the witnesses may be located or where it may be convenient for them to travel to and locating a jurisdiction that brings comfort to all the parties to a commercial agreement is worth exploring and again following up on Bob's point it is worth considering at the start of the agreement as opposed to at the time.
One final point on this is the example of Pemex the Mexico State oil company selling certain of its assets and it has recently identified Calgary in Canada as the seat for any dispute for any arbitration that may arise from any fall outs from those commercial agreements.
On to my last point, I raise very quickly some potential restrictions at arbitration and you can see those there listed, not all matters can be arbitrated for example, in Mexico, disputes relating to land or water resources cannot be arbitrated and so before you enter into a commercial agreement give thought as to whether the subject matter of the agreement or the potential dispute can be arbitrated and draft your arbitration clause accordingly. It is worth mentioning as a comment that in order to overcome that the parties may wish to draft into their commercial agreement that any dispute arising from any portion of the agreement shall be a commercial dispute and by putting it in that language you may be able to overcome an argument that the dispute relates to a public matter should someone try to raise that down the road when the winning party is trying to enforce their award. With those comments I will pass it now off to Gordon to talk about bilateral investment treaty.
Gordon: This is a relatively new topic for some people, although to be perfectly honest it is not that new in the arbitration world.
So far, we have focussed on international commercial arbitration which, as I said at the outset, is really enshrined in contract, so you have agreed with your counterparty that you will resolve your dispute by arbitration. But, when you are investing in a different State what protections do you have if the State, rather than your counterparty, what protection do you have if the State interferes with your project?
So, for example, if you were building and planning to operate a power station in a South American or a Latin American country and you have a contract that you have put in place, a PPA, with the State Electricity Board, what happens if the Government - not the State Electricity Board - interferes with that contract? What happens if they try to expropriate, or if they change the law, meaning that the tariff that is payable under the PPA is now dramatically different and you have lost the benefit that you thought you had from the commercial arrangement? Well, what we have seen over recent times is the party who is investing in the host state has now sought additional protection through what are commonly referred to as "investment treaties". And I am going to talk a little bit about investment treaties and the arbitration provisions that we see within them.
So, as I say, cross-border investments are, they are not new, and they are becoming, I suppose, better protected but the first question is what is an investment and I have taken an example of the Ecuador and United Kingdom bilateral investment treaty of 1994. It lists what investments are. Obviously they are some form of asset but it can be mortgages, it can be stocks or shares, it can be a claim for money, it can be a contractual right to be paid, it could also be intellectual property and good will and possibly, more importantly, business concessions conferred by law for example the rights to explore natural resources, whether that be in the mining industry or in oil and gas. So those investments are listed in the Ecuador/United Kingdom treaty and they are very similar to other treaties. Investments are defined in a similar way.
Investments, of course, can benefit both the investors and the States but, historically investors going in to a new State have sought direct agreements with State Governments for their protection. So, for example, a State Support agreement (which were very common in the 1980s) whereby you would enter into the contract with the State Electricity Board but you would expect the State itself to give you the support, a) to allow you to get the permits required to build the power station and then b) to not levy discriminatory taxes against you or not to change customs duties to make it more expensive for you to build that project, and that was a common way of dealing with potential interference with the State by having a State Support agreement that would have an arbitration clause in it.
Similarly, you would have a State guarantee whereby the State would guarantee the payment being made by the State Electricity Board under the PPA. Then in the contract with the State Electricity Board you probably had change of law provisions which meant that if there was a change in law the State Electricity Board would still keep you whole in relation to your economic benefit, so a change of law provision, being similar in some respects to a stabilisation clause which would deal with other issues including currency exchange as well as the levying of taxes.
So that used to be the traditional security package for an investor going into a new State, but as I say on the final bullet, more recently foreign investors have sought to take advantage of treaties.
As I say they are not particularly new but they have become fundamental to the twenty first century business. There are a number of bilateral investment treaties and multi-lateral investment treaties between states. So I have given the example of Ecuador and the United Kingdom BIT but you also have things like the Energy Charter which has I think about 50 States that have signed up to it, or trade agreements. like the TPP that was being pushed through by the Obama government until more recently and TTIP which was the US treaty that would bring in the EU. They all contain protection for investors entering into host states. Now, because treaties are public and the disputes that come out of those treaties are public it has brought with it a rapid development of international law which defines the obligations of the host states and the foreign investors. Although it takes a lot from international commercial arbitration, in the way that the processes are conducted, there is a very different standard of liability and compensation when it comes to disputes or arbitrations under treaties.
Under investment treaties, foreign entities from a signatory State (that have made a qualifying investment) – and I defined investment earlier – if they are investing in the territory of another State they will enjoy a range of protections which in particular include protection against discrimination and expropriation without compensation, as well as a requirement of fair and equitable treatment and full protection and security of investment. So something very similar to the old fashioned State Support agreements.
In these treaties, what we now see is an arbitration agreement. It is not one that naturally binds the investor because the investor has the option – or opportunity – to take the benefit of the treaty. So if the State does something against the investor it is for the investor to invoke its rights and to arbitrate as per that treaty. The terms of the treaties that you will see are all very similar. There are moderate changes from one treaty to the next but they are all very similar and the arbitration clauses within them may refer you to ICC or UNCITRAL, being again the United Nation's set of rules for arbitration, or ICSID (which Tom will touch upon in a moment), ICSID being part of the Washington convention for dealing with state investor disputes.
As I said, because these are public disputes, particularly those that are ICSID, lots of precedents (although non-binding) are being formed. So if you were looking for international law precedents you will see them through ICSID arbitrations, whereas you will not see them in international commercial arbitrations which, as I said earlier, were confidential.
And finally, what sort of treaty disputes do we see? Well not surprisingly - and some of these may mirror what we have seen in terms of international commercial arbitrations - again mining concessions, rights to explore for oil and gas, airport or other concessions, occasionally construction projects (although there are issue as to whether a construction project is always seen as an investment) or it may just be an investment through shareholdings. So through the treaty you have a separate way of relief if something goes wrong with your project because of interference by the Government. You will still have your contract with the counter party - with the international commercial arbitration clause in it - but you may have additional benefits under a treaty provided that you take the benefit of the treaty by being in a state that has a treaty with the host State.
And we will now move back to Tom.
Tom: Thank you Gordon. I am going to look at the position of investment treaties in relation to the UK and Latin America. The UK has bilateral investment treaties with the majority of Latin American countries, indeed, I believe with all other than Brazil which is signed but not in force and also Costa Rica. I am not going to repeat what Gordon has said in relation to what those do, they are all broadly working the same way and they are relatively short documents as it turns out. In addition to those there are also a number of multi-lateral trade agreements to which the UK is a party primarily through the European Union although those agreements tend not to actually create binding obligations but more are around creating a framework for trade and investment and indeed, those are interesting because it is those very agreements that are likely to come to an end when the UK exits the EU in the next couple of years.
Gordon touched on the Washington Convention. This is the Convention that establishes jurisdiction for the International Centre for the Settlement of Investment Disputes, ICSID, which is where many disputes which are brought under bilateral investment treaties end up and as Gordon said, that is a publicly available resource that one can search for, the cases are put on their website and you can search for them and therefore there are plenty of figures available in relation to them and you will see on the slide that ICSID arbitrations involving South American states account for 24% of all ICSID cases, that is the second largest group after Eastern Europe and Central Asia as a single group, so South America scores second as the second highest user of ICSID. And 17% of new cases in 2016 came from South America so it is a fertile ground for this particular region.
I just want to very quickly give some examples of some of the ICSID arbitrations that have come about by bilateral investment treaties between the UK and Latin America and really just to name a couple, both of them very recently, really just to demonstrate the variety of cases that you can have. And it is the third bullet point there which is Vestey against Venezuela, not perhaps what you might have considered as the obvious investment treaty territory this is the famous Vestey meat family who had 11 of their farms misappropriated in Venezuela and brought a claim for $157million in relation to that misappropriation. The second claim that I just wanted to mention was Anglo-American also against Venezuela in which there was expropriation of a nickel mine and that claim is ongoing. So that gives you just a taste of the types of claims that might exist and the variety and with that I will pass on to Mark.
Mark: Thank you Tom. Following on from Gordon and Tom's comments from the Canadian perspective Canada like many countries is entering into an increasing number of bilateral investment treaties and other investment treaties and on the slide you have in front of you now you get a sense of some of the bilateral investment treaties that Canada shares with countries in South and Central America and in the Caribbean. Looking at the next slide you will get that the Canadian treaties with investment provisions that it has with countries in those same regions. This increasing trend to enter into these treaties will continue to grow and these treaties as Gordon said generally require investment disputes to be resolved by way of arbitration so this too is continuing to increase the trend towards arbitration. The takeaways from this I think are that investment treaties and arbitration provisions provide real peace with respect of the ability to enforce an award which provides comfort to investors or may provide comfort to investors and then apart from this tool it may become difficult to enforce a law against some jurisdictions. I have provided an example, a recent Canadian example, involving Gold Reserve which is listed on the Toronto stock exchange in the Republic of Venezuela that has been settled after a massive ICSID award was awarded and that settlement was brought about in [unclear] because of the [unclear] the enforcement provisions of the arbitration regime.
With that I am going to pass it on to Tom who will discuss third party funding in the United Kingdom.
Tom: Thank you Mark.
Third party funding has become something of a game changer in relation to international arbitration in the UK in the last five years. We are talking here about not just the funding of a party's own costs but also those of its opponent. The traditional way of funding claims is effectively to pay your lawyers yourself by hourly rates and historically no one else should have been allowed to be part of that process because it was contrary to the old principle of maintenance and champerty - effectively meddling in other people's litigation which was unlawful.
A practice has developed over the last 20 years whereby clients could enter into a conditional fee agreement with their Counsel, this was mainly for Claimants whereby they would pay their Counsel nothing if they lost and they would pay them up to double what the fee otherwise would have been if they won and if they did win they could recover that uplift from the other side because the general rule in English litigation and arbitration anyway is that the winner recovers its costs from the loser. But in addition to that they would take out something called after-the-event insurance which was an insurance policy designed to pay out for the other sides costs in the event that they lost. So if you were a Claimant and you brought a claim and you lost and you got a costs order against you, you had an insurance policy in order to pay the other side.
Conditional fee agreements are no longer popular because you cannot recover the uplift from the other side and it therefore reduces what you get because you just have to pay your lawyers more and it all comes out of your own damages.
Contingency fees have until recently been unlawful but are now lawful. We call those damage based agreements and that is where the lawyer takes a cut of the damages as payment of his fees if the client wins but they are not popular with the lawyers because you only get paid as a lawyer if you actually recover the money, there is therefore a credit risk. Only full DBAs are permitted which means that you cannot have some of your costs by an hourly rate you have to take the entire risk that you are going to win and there is a lack of clarity about how you bring these agreements to an end. So damage based agreements are not very popular either.
And I tell you all of that because it is important because if you are a claimant that has no money but you do have a claim then how are you going to fund it? And the answer is by what has grown up now being the rise of the independent third party funding market. This is where you go to a financier in the market whose sole job it is, to finance claims and what they do is they will advance basically the costs of the claim up to an agreed amount if you are the claimant and then they will take from the damages if you win, a multiple of what they have lent you. And the way that it generally works is that the multiple will generally be three times what they have lent you so if we just take an example, they lend you a million dollars to fund a claim, you win, they will take $4 million out of your damages, in other words they take the $1 million they lent you and they will take three times the $1 million so in total $4 million, out of the damages.
Now that works well for large claims, if you have a claim for $50 million and you have been lent a million for the costs, you have to pay your funder $4 million but you take the balance, that's fine. For smaller cases it may not work quite so well. The funder exercises no control over the case, indeed they are not permitted to because otherwise they would be meddling in it and it is a non-recourse loan because there is no ability for the funder to come against the client other than if the client is successful and then of course the funder takes it from the damages.
There is also an ATE insurance policy usually put in place at the same time to cover your liability for the costs of the other side if you lose.
The process of obtaining the funding is that you basically say to a funder "I've got a claim, here it is", they want to know the merits, they want to make sure that the merits are good. They are not going to fund weak claims and they are generally not keen to fund 50/50 claims, nor even claims that are 55%, they like claims with prospects of 60% or more. They want claims with a large value because that makes it proportionate because there is a lot of work in working out whether to invest. They look at the economics, in other words they just want to know how much is being sought in terms of lending in comparison to the size of the claim. They want to leave the client with a sufficient amount after the funder has taken its money, they want to be able to enforce and they want to see that the case is going to be properly presented. That all sounds pretty good and it is, for the right cases and perhaps the thing to keep in mind here is that where it is particularly useful and we have talked about investment treaty claims but also commercial litigation, is special purpose vehicles that have been set up in order to do a project in a particular country, maybe there has been a expropriation or whatever and actually the SPV has nothing, it literally has nothing other than the claim, how can it effectively pursue that claim? Litigation funding is one option. It means that there is limited risk for that SPV and it obviously helps on the cash flow.
There are consequences however and the consequences are around the liability for the opponent's costs. These are really more concerns for the financier rather than the client but I am just going to mention it quickly and some of the issues are illustrated in a case called Excalibur Ventures and Texas Keystone. Excalibur was a special purpose vehicle set up in relation to an investment of an oil exploration block in Kurdistan where Excalibur was investing. They brought a claim and it was funded to the tune of $31.5 million, it was a claim which in the words of the judge resulted in a "resounding, indeed catastrophic, defeat". The judge also said that the litigation was pursued in an "egregious manner". When the defendant won, it got an order against the claimant not just for its costs but its costs on an indemnity basis, so in other words pretty much everything, there was a shortfall in relation to the funding because in fact the funder had funded the other side's costs by virtue of the fact that the defendant had asked for security for costs and the funder had provided that security but there was a shortfall. And so the defendant went against the funder, could it succeed? Normally the answer would be "No" because they are not a party to the litigation but the Court said yes they could be liable, what's more they would be liable on the indemnity basis because they would be effectively treated like the claimant in terms of the way the claims had been pursued Indeed it was worse than that, their parent company was liable as well and the final point that the Court said was that it is the case that a funder's liability is capped at the amount that it funds for the particular case, but the question is should that cap be just the amount funded for the client's costs or should it include any security it provides for the other side's costs in the face of a security for costs order and the answer is yes it will include any security it provided for the other side, that increases its liability, the cap was therefore increased. I mention all of that just to say that although litigation funding is a good thing and can help many clients, there are potential risks and pitfalls along the way.
Insurance for investigating claims is simply a further and more sophisticated form of third party funding where you can indeed obtain funding to investigate whether you have a potential claim against an overseas government and with that I am going to pass over, I think, to Mark.
Mark: Thanks Tom. Thank you for running through that, I am going to spend a few minutes talking about where third party funding is in Canada. It is a new but growing trend in Canada, it does not yet have the same duration in terms of how long it has been around in Canada but it is beginning to have rather an appeal. It must be any third party funding agreement has to be approved by the arbitrator, it being fair and reasonable and there is case law at least through the courts where these types of agreements have been refused, where they have been found to be not fair and reasonable and as chamfered as they say. The criteria in Canada an arbitrator will consider, when considering a third party funding agreement is, or the best practice in an TPF agreement should be promptly disclosed, the expectation is that when these agreements come up in the court that they must be promptly disclosed to the Court and our recommendation is that parties to an arbitration agreement do the same. The third party agreement is not privileged itself and for the reason a party should assume that it may be disclosed and it will be disclosed in due course. As Tom said consistent here in Canada a third party funder must not compromise or impair the lawyer in the client relationship and it must not diminish the party's rights to instruct and control the litigation and consistent with the UK, a third party funder may be required to post security for costs in the event their action is unsuccessful. So to wrap up on this topic of third party funding, the takeaways that we invite you to consider are third party funding agreements are a growing area, they can be used to reduce costs, they can be used to reduce the need for regular i.e. monthly cash flow that may otherwise be required under litigation or investigation of litigation or an enforcement of an award and finally, it may allow some claims to proceed that otherwise may not and on that point I am going to turn over to Gordon to discuss enforcement.
Gordon: Thanks. Yes, so enforcement is pretty much the last topic and I will only take two or three minutes on this. I have mentioned that enforcement is seen an advantage in arbitration a few times. I have mentioned the New York convention. As I have said, an arbitral award is generally final and binding. There are sometimes opportunities to appeal or challenge awards but it is quite restrictive nowadays.
If you look at most arbitral awards, I think we find that the losing party does in fact pay although it may not pay immediately. Sometimes, it takes an effort on the creditor to go to a number of courts around the world but, with the help of the New York convention. an award that is made in a New York convention State can be enforced fairly easily in another 150 States around the world who have also signed up to the New York convention. If necessary, the Courts of those States can help turn the award into judgment which can bring with it penal notices. So, in truth, arbitral awards are much easier to enforce than judgments from national courts where you do not have the benefit of the same sort of treaty that you may have if you are a New York convention State. There are limited rights under the New York convention to challenge enforcement and I have listed them – I won't go through each of them but – they are obvious things like public policy, like an arbitrator deciding the wrong case; they are extreme cases when a tribunal or party has behaved very badly in an arbitration but they are not challenges simply because the tribunal got it wrong.
In addition to the New York convention, when it comes to treaty arbitrations enforcement can sometimes be done through the Washington convention which has provisions not dissimilar to the New York Convention. The advantage of ICSID arbitrations, of course, is that the Washington Convention and ICSID arbitrations are under the auspices of the World Bank and, when you are dealing with State governments, if it is not prepared to accept an award by an investor against the State, the chances are the World Bank will take unkindly to that. There have been a number of cases where it would appear that the World Bank has questioned future financing when debts are not being paid under ICSID arbitral awards. I will turn it back very briefly to Mark to talk about enforcement in Canada.
Bob: Thank you Gordon, it's Bob Armstrong. We are at our limit of time and I think that we would not say much in addition to your thoughtful comments so as promised we are within two minutes of our deadline so hopefully that is appreciated. We have received quite a few questions we are just not going to have time to answer them all here but we will answer them all in writing shortly and we will send everybody the questions and the answers. I have a couple of questions that are pretty general, a lot of the questions were very specific questions and probably did not apply to everybody, these two or three probably do so why don't I just tell you that the two questions here and I'm going to look to Gordon to answer the first one. Given the uncertainty and the political climate in some parts of South America and the US, do you see any particular benefits to having an arbitration clause in your agreement when dealing with those areas?
Gordon: Bob, I was hoping you would ask the question that I saw which was "has the UK got a bilateral investment treaty with Cuba" because that's an easy one. The answer is "yes, it's 1995" and if the person who sent that question wants a copy I can certainly give them a copy of that but looking at that question from you Bob I think the answer is, there is a tension in the world at the moment with international arbitration. I do not want to put that on an international plain but I think what we are seeing are a lot of the advantages of arbitration being questioned at the moment by the users of arbitration - and the users are clients, they are not the lawyers. It goes back to something I said right at the beginning which was: 10 years ago speed and cost were the two main advantages of arbitration. I think what we are seeing nowadays is many clients saying arbitration is taking too long and it's too expensive. We need to find a way of doing this differently and I think that really is incumbent on the lawyers to practice in a different way, not to treat arbitration like litigation has been treated over the last 40 or 50 years. A number of clients moved to arbitration because they did not want litigation. So we have that tension. But, at the same time, you cannot underestimate the advantages of arbitration for clients: the neutrality of the arbitrators, the expertise and the competence of the arbitrators and then the gift of the New York convention. If states want inward investment, if they want cross border transactions, things like the New York convention and the Washington convention are very, very important. I think we will continue to see clients entering into arbitration agreements because it is still the best way to resolve disputes but we as lawyers, I'm afraid, have to look at our own practice and see whether we can start to help save time and costs and maybe practice in a slightly different way.
Bob: OK thanks Gordon. Quickly the second question I think is probably for Tom. I am interested in your third party funding issue; I was not familiar with that. How may we contact you or how can we obtain more information about these products and how they can help us?
Tom: Well we can certainly; I mean we have a vast knowledge of the third party funding market. There are a number of funders that they generally operate in London but they are not all in London, some are in the US as well and we also know the brokers very well because in fact what tends to happen is that sometimes it is easier to go to a broker who then has access to all the funders who might be interested in funding. So to that specific question we can provide details of who those brokers are, who the funders are that we know very well and who we trust and very happy to provide those details.
Bob: OK. Last question is a general question, as I say the others will be answered in due course. We have had lots of dealings with foreign arbitration lawyers at home, what is it about you or your approach to arbitration that should appeal to us? Why don't I answer that if it's ok? It's Bob Armstrong. I think I would say this, there are two or three answers to that. Number 1 we have a very deep bench of experienced lawyers, and all across these industries so that is obviously important. Number 2, our approach is very deliberate, it is not black and white, we are lateral and strategic thinkers, we like to think of ourselves as a creed of problem solvers and if you find yourself with a different problem, that's the kind of relationship you would like to have with your lawyer I think. And then the last thing and in my experience the most important thing in my dealings around the world, we act in partnership with the clients, their in-house counsel, outside counsel, we are not the only people in the room that are smart and we are not coming to tell you we know everything. We want the benefit of your thinking, your experience, your knowledge, your wisdom and we will work together to find the best solution for you. We are not there to tell you just how smart we are, we are there to tell you let's collectively find the best solution and that's worked pretty well for us in our dealings.
In any event I am going to stop it there because we could go for another hour. You have our contact information, you have our website, you should feel very free to contact any of the people that were on this webinar, ask any questions you want, we are more than happy to do additional webinars for you or individuals in the future and we are going to be doing some very substantial seminars in Canada in September and more information will be coming to you about that so thank you very much for coming and for your questions and participation and I hope that this is the next step in a long relationship and I hope you have a great day. Thank you.
to read the article in full click here
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.
