International arbitration

April 2010

Editorial

In this edition we bring news of developments in sovereign immunity in Hong Kong, highlight the significant changes to international arbitration in Bahrain and consider the new IBA  rules of evidence.

Ruth Cowley and Miranda Joseph in Hong Kong analyse the Court of Appeal decision in FG Hemisphere v DRC. It highlights the need for clear waivers of sovereign immunity in transactions with states – they used to waive immunity in any forum and to relate to both the contract itself and the enforcement of any consequent judgment or award. Patrick Bourke and Adam Vause describe the revolutionary impact of the new Bahrain Chamber for Dispute Resolution (BCDR) on the way in which international disputes are handled in the Kingdom. The government has introduced a form of statutory arbitration, so that disputes that would previously have come within the jurisdiction of the Bahrain courts must now be referred to BCDR arbitration. Finally, Joe Tirado and Alexandra Howe provide a guide to the changes in the latest draft of the IBA rules on evidence.

Legal update

Midgulf International Ltd v Groupe Chiminique Tunisien (2010) EWCA Civ 66

In this case the Court of Appeal issued an anti-suit injunction restraining Tunisian court proceedings brought in breach of an arbitration agreement. Where there is a valid English arbitration agreement it will be a repudiatory breach for a party to ask a foreign court to declare that no such agreement exists, and a party can be restrained from instituting or continuing proceedings in a foreign court when it is “necessary in the interests of justice” to do so. In particular, this case confirms that it is possible to obtain antisuit injunctions, in support of arbitration proceedings, to restrain parties from issuing proceedings in non-EU Member States.

Shashoua & Anor v Sharma (2010) EWCA Civ 15

In 2009 the High Court issued an anti-suit injunction restraining proceedings in the Indian courts challenging pre-existing interim arbitral awards. The injunction was issued to cover any attempts to challenge the recognition or enforcement of the awards in the Indian courts under Article V of the New York Convention.

The appeal, expected to be heard by the Court of Appeal in April 2010, will address whether it is permissible:

  • for an anti-suit injunction to restrain a party from resisting the recognition or enforcement of an award under Article V of the New York Convention, and
  • to impose a successful application to the English court as a condition of resisting enforcement under Article V of the New York Convention.

The outcome of the appeal will be relevant to successful parties in arbitration who are concerned that the unsuccessful party will seek to use the New York Convention to avoid the consequences of the award.

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Sovereign immunity in Hong Kong

The Hong Kong Court of Appeal (CA) was recently asked to assist with enforcement of Swiss arbitral awards against state-related entities. In considering the applications, the Hong Kong courts had to consider whether a foreign state which is not a party to the New York Convention waives state immunity by referring a dispute to arbitration in a New York Convention country.

The CA also had to address whether, as a Special Administrative Republic of China, Hong Kong follows the general common law approach to the doctrine of state immunity from jurisdiction and execution (the restrictive doctrine), or whether it is bound by the PRC  position – that unless waived, states are immune from adjudication of the courts of other states.

This article examines the CA’s decision in FG Hemisphere Associates LLC v Democratic Republic of Congo and the position of state immunity in Hong Kong. This is important for all entities dealing with states in respect of arbitration proceedings where the state is not a signatory to the New York Convention.

Background

In the 1980s, a Yugoslav company, Energoinvest, entered into construction contracts to be carried out in the Democratic Republic of Congo (the DRC). The DRC entered into credit agreements with Energoinvest whereby the DRC was financed by Energoinvest for a large percentage of the works’ cost. The DRC defaulted on its repayment obligations, and Energoinvest began arbitration proceedings, which took place in Switzerland (a New York Convention country) and resulted in two final awards in favour of Energoinvest, amounting to US$ 11.725 million and US$22.525 million respectively plus interest.

In November 2004, Energoinvest assigned the entire benefit of principal and interest payable by the DRC under the awards to FG Hemisphere Associates LLC (FG) (a US distressed debt fund). FG recovered part of the arbitral awards through enforcement proceedings in other jurisdictions.

“FG claimed that the Entry Fees were payable to the DRC by the Hong Kong companies”

The New York Convention requires courts of contracting states (the majority of developed countries) to give effect to arbitration agreements and to recognise and enforce awards made in other contracting states, subject to specific limited exceptions. However, as the DRC is not a signatory to the New York Convention, enforcement of the awards in the DRC was not a viable option. Therefore, FG sought to find assets belonging to the DRC in a New York Convention signatory state, with a view to bringing enforcement proceedings in that country.

FG commenced enforcement proceedings against the DRC in Hong Kong in 2008 targeting the fees contingently payable by Chinese state-owned (Hong Kong incorporated) companies to the DRC as “Entry Fees” (the Entry Fees) under a Cooperation Agreement and a Joint Venture Agreement between, amongst others, the DRC and the China Railways Group. China is a party to the New York Convention and thus Hong Kong is too, by virtue of its status as a Special Administrative Region of China. FG claimed that the Entry Fees were payable to the DRC by the Hong Kong companies and that as a debt from the Hong Kong companies, these fees constituted an asset of the DRC within Hong Kong. By this time, given the interest over the intervening years, the DRC was indebted to FG in the sum of around US$102 million.

FG argued that as the debt (an asset) was situated in Hong Kong, the Hong Kong court was entitled to, and should order, that the amounts payable to the DRC by the Chinese companies should be paid to FG in satisfaction of the award. In doing so, it was relying on the powers of the Hong Kong court to enforce a New York Convention foreign award as if the award were a judgment of the Hong Kong court and the Hong Kong court’s powers to garnishee moneys due from a third party to a judgment debtor.

The position of sovereign immunity in Hong Kong

Sovereign immunity is the customary international law that, subject to certain exceptions, a state is immune from the jurisdiction of the courts of another state. The general rule is applied to varying degrees in different states. The UK position on sovereign immunity applied in Hong Kong prior to 1997 (handover to the PRC) and stipulated that a foreign state is generally immune from the jurisdiction of other states’ courts and arbitration tribunals, subject to certain exceptions such as acts of a private or commercial nature. This is known as a “restrictive” approach to sovereign immunity. The PRC adheres to the “absolute” theory of sovereign immunity which provides that a state always enjoys immunity from jurisdiction and from execution and cannot be subject to the jurisdiction of a foreign court (whether in relation to commercial acts or otherwise), save where it expressly waives such protection.

Since the PRC regained sovereignty in Hong Kong, the position regarding sovereign immunity has remained unclear. Hong Kong and the PRC operate a “one state, two systems” approach under which Hong Kong has its own common law regime, separate from PRC law, except that the PRC governs Hong Kong foreign affairs/relations.

“Since the PRC regained sovereignty in Hong Kong, the position regarding sovereign immunity has remained unclear”

In FG Hemisphere, the PRC’s Ministry of Foreign Affairs issued two letters as evidence of the fact that the PRC still follows the absolute immunity approach to sovereign immunity.

Court of Appeal

The primary issue on appeal was whether the DRC enjoyed absolute immunity from both suit and execution. The CA stated that as a matter of principle, submission of the DRC to ICC arbitration did not constitute a waiver of immunity to the Hong Kong courts’ jurisdiction to consider an application for leave to enforce the arbitral awards, nor did it constitute a waiver of immunity against execution. However, overturning the Court of First Instance’s decision, the CA held (by a majority) that, rather than absolute immunity, the DRC enjoyed restrictive immunity as this continues to apply in Hong Kong after the handover on 1 July 1997 by virtue of the common law system, save to the extent that it is inconsistent with the Basic Law and with local legislation enacted on or after 1 July 1997. As the fees were commercial debts, the CA gave leave to FG Hemisphere to enforce the arbitral awards and restored the injunction against the DRC from receiving payment of the Entry Fees.

Implications

The decision has been appealed. We await the Court of Final Appeal hearing with interest, but currently, the position in Hong Kong is that the common law position of restrictive immunity forms part of Hong Kong law, despite the PRC’s position.

The case highlights the need for clear waivers of sovereign immunity in transactions with states which waive immunity in any forum and relates to both the contract itself and the enforcement of any consequent judgment or award. An agreement to arbitrate, where the arbitral body’s rules contain a sovereign immunity waiver, may not be sufficient to waive immunity, particularly where the counterparty is not itself a New York Convention signatory.

Ruth Cowley is a partner and Miranda Joseph is a trainee solicitor in the dispute resolution team. They are based in Hong Kong.

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Advancing arbitration in Bahrain

Bahrain has launched a new arbitration centre, the Bahrain Chamber for Dispute Resolution (BCDR). As part of Bahrain’s “Vision 2030”, Bahrain aims to encourage international investment by providing a modern, effective ADR service that results in final and binding resolution of disputes. The BCDR will offer and provide both arbitration and mediation services.

The introduction of the BCDR will significantly change the way that many high value disputes are dealt with in Bahrain. In the circumstances described below, the new legislative regime introduces a form of statutory arbitration, so that disputes that would previously have come within the jurisdiction of the Bahrain courts must now be referred to BCDR arbitration.

“Non-Bahraini lawyers are permitted to appear before any BCDR tribunal, but must be accompanied by a Bahraini lawyer”

Legislative Decree No. (30) for the year 2009 (the Decree) established the BCDR and sets out the circumstances in which the BCDR has, or can assume, jurisdiction over a dispute.

Jurisdiction

The BCDR has jurisdiction over the following disputes:

  • Disputes falling within the scope of Section 1 of the Decree (Section 1 cases), namely all claims exceeding BD500,000 (approximately US$ 1.3 million) which are:
    • commercial and international (eg, involving a non-Bahraini party or substantial obligations outside Bahrain) in nature; or
    • involve a party licensed by the Central Bank of Bahrain (Section 1 of the Decree)
  • Disputes falling within the scope of Section 2 of the Decree (Section 2 cases), namely all claims which the parties have agreed in writing to refer the dispute for resolution by arbitration or mediation under the BCDR Rules.

Features

  • Non-Bahraini lawyers are permitted to appear before any BCDR tribunal, but must be accompanied by a Bahraini lawyer in any case under Section 1.
  • Each party is in theory able to nominate an arbitrator, subject to the proviso that all Section 1 cases must be heard by a Bahraini judge (in the case of a sole arbitrator tribunal) or by at least two Bahraini judges (in the case of a three-person tribunal). No such restrictions apply in relation to consensual arbitration under Section 2. To address a drafting anomaly, the BCDR’s current proposal is that in Section 1 cases where each side nominates an arbitrator, provided the Chairman of the tribunal is a Bahraini judge this will be sufficient to satisfy the requirement for the panel to comprise a majority of Bahraini judges.
  • Awards issued in Section 1 cases will be a “final judgment issued by the courts of Bahrain”. It will be interesting, therefore, to see whether such awards will be regarded in other jurisdictions as arbitral awards or as Bahraini court judgments for the purposes of enforcement. It seems likely that the lack of an ‘agreement’ by the parties to arbitrate will mean that Section 1 awards will not be treated as being compliant with the provisions of the New York Convention. The intention is that awards issued in Section 2 cases will be readily enforceable under the New York Convention.
  • The BCDR is a joint initiative between the Government of Bahrain and the American Arbitration Association (AAA). The AAA provides training and support to the BCDR and the Rules of its international arm (the International Centre for Dispute Resolution (ICDR)) have in large part been adopted in the BCDR Rules. The ICDR Rules are tried and tested, and are generally regarded as of international standard.
  • The parties are free to choose the language to be used in the proceedings (although Arabic will be the language used in the absence of the parties’ agreement).
  • Interestingly, the BCDR Rules provide a mechanism for an emergency arbitrator to issue interim awards on urgent applications prior to the constitution of the tribunal, but they also permit parties to apply to a judicial authority for these purposes. Once the tribunal has been constituted, the tribunal may grant such interim measures as it deems necessary, including attachment orders and travel ban orders, at the request of any party.

Limited appeals

Awards issued in Section 1 and Section 2 cases are final and binding on the parties. However, parties may challenge an award issued by a BCDR tribunal before the Cassation Court (the highest court in Bahrain) in a limited number of circumstances which vary depending on whether the arbitration is statutory or consensual.

Significantly, in relation to arbitrations under Section 2, parties can choose to exclude the Bahraini courts from having the right to review or overturn an award by agreeing in writing:

  • to choose a foreign law for the dispute
  • not to apply to Bahrain’s courts to set aside the award
  • that any such application should be brought before the competent authority in another state.

In conclusion

The BCDR should enable parties to resolve their disputes in Bahrain in an efficient and timely manner before a neutral tribunal. Due to its mandatory application for Section 1 cases, the BCDR will have an opportunity in the near future to demonstrate how its procedures will work in practice, and we are aware that it is already dealing with a number of such cases.

Patrick Bourke is head of the dispute resolution team in the Middle East and is based in Dubai. Adam Vause is a senior associate in the dispute resolution team in Bahrain.

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Evidence: revised IBA rules

Institutional – or ad hoc – rules provide the framework for any arbitration but do not address the issue of how evidence should be gathered and presented.

This is partly to allow parties maximum flexibility – a key advantage of arbitration over litigation as a means of resolving disputes. However, the lacuna can cause problems if parties, particularly from different legal traditions, have conflicting views about how the case should proceed.

“An ‘efficient, economical and fair process for the taking of evidence in international arbitration’”

A new era

The 1999 IBA  Rules on the taking of evidence in International Commercial Arbitration are intended to address this gap and have been widely successful in their acceptance and application. However, since they are now over a decade old, the IBA has decided that it is time to reflect on practical experience of their use and consider the areas in which they can be improved or refined. A Working Party of the IBA Arbitration Committee, in consultation with the arbitral community, has therefore produced the revised 2010 IBA Rules.

The foreword and preamble to the 2010 IBA Rules state that they are intended to provide an “efficient, economical and fair process for the taking of evidence in international arbitration”. As with the 1999 IBA Rules, the 2010 IBA Rules provide mechanisms for the presentation of documents, witnesses of fact and expert witnesses, inspections and the conduct of evidentiary hearings. They are designed to be used in conjunction with, and adopted together with, ad hoc or institutional rules governing international arbitrations.

Implications

The 2010 IBA Rules introduce a few key changes:

A new Article 2 provides for consultation between parties and the arbitral tribunal regarding “evidentiary issues”. Parties are encouraged to consider, at an early stage in the proceedings, the “scope, timing and manner” of the taking of evidence and the arbitral tribunal is encouraged to identify relevant issues and/or issues for which a preliminary determination may be appropriate.

The new Article 2 also recognises that, as international arbitration grows more complex, and the size of cases increases, it is important for parties to resolve their disputes in the most effective and least costly manner. If a preliminary determination of certain issues may be appropriate, the arbitral tribunal should seek to resolve such matters first, so as to avoid unnecessary work and expense.

Article 3 deals with documents that the parties wish to introduce as evidence into the arbitral proceedings. It is recognised that documents are often the most reliable form of evidence for parties in arbitration. The 2010 IBA Rules give new guidance on the disclosure of electronic documents, which are to be submitted in the form “most convenient or economical…that is reasonably usable by the recipients”, unless the parties agree otherwise. However, the rules stop short of setting out detailed procedures for dealing with electronic disclosure.

“It is recognised that expansive ‘document discovery’ is generally inappropriate in international arbitration”

Both the 1999 and the 2010 IBA Rules also give guidance on whether, and in what conditions, a party should be able to request production of documents from another party, i.e., “document discovery”. It is recognised that expansive “document discovery” is generally inappropriate in international arbitration, and requests for documents to be produced should be carefully tailored to issues that are relevant to the determination of the merits of the case.

Under a new provision in Article 3 of the 2010 IBA Rules a party requesting disclosure of electronic documents may specify, or be ordered by the arbitral tribunal to specify, particular files, search terms or other means of searching for electronic documents in an “efficient and economical manner”. It is hoped that this provision will prevent broad “fishing expeditions”, while at the same time permitting parties to request electronic documents which can be reasonably identified and which can be shown to be relevant and material to the outcome of the arbitration.

Also, under both the 1999 and the 2010 IBA Rules, an arbitral tribunal may exclude evidence for any of the reasons set out in Article 9 (Admissibility and Assessment of Evidence), one of which is legal impediment or privilege. New provisions in Article 9 of the 2010 IBA Rules include a list of criteria which the arbitral tribunal may take into account when considering whether to exclude evidence by reason of legal impediment and privilege. This includes, for example, any need to protect the confidentiality of a document and the need to maintain fairness and equality as between the parties, particularly if they are subject to different legal or ethical rules.

A useful tool

The IBA believes that the revised rules provide an effective mechanism to assist parties in the conduct of international arbitrations. In particular, they present a useful harmonisation of the procedures commonly used in international arbitration, reflecting processes initially developed in both civil law and common law systems. Parties and arbitral tribunals may adopt the 2010 IBA Rules in whole or in part, at the time of drafting the arbitration clause in a contract, or once an arbitration commences. The rules may, alternatively, simply be used as guidelines. This flexibility means that the 2010 IBA Rules present parties with a useful tool which may be adapted to the particular circumstances of each arbitration.

Joe Tirado is head of international arbitration and ADR , and Alexandra Howe is a trainee solicitor in the dispute resolution team. They are based in London.

The draft rules are available on the IBA website: www.ibanet.org

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Noticeboard

Singapore

Peter Cash, previously head of the commercial dispute resolution practice in Australia, will be relocating from Melbourne to Singapore. KC Lye, a specialist in aviation and energy disputes, has been promoted to partner. Peter’s move, and KC’s promotion, are part of the dispute resolution practice’s strategy for growth in the Asia Pacific region, expanding our capabilities and reach in this important market.

ICC UK Arbitration and ADR Group

Joe Tirado has been appointed to the ICC   UK  Arbitration and ADR  Group, an informal advisory group chaired by Lord Steyn.

Chambers Global 2010

In the 2010 edition of Chambers Global, our international arbitration team in Singapore was included in Band 1 with team head Guy Spooner being acknowledged as “a regionally recognised dispute resolution heavyweight”, whose style is “not to give up anything, which, when dealing with arbitrations at that level, is nothing less than clients would expect”.

ILA International Commercial Arbitration Committee

On 4 March Joe Tirado attended a meeting of the ILA International Commercial Arbitration Committee (ICAC). Joe is one of three UK delegates on the Committee, which has consultative status with a number of the United Nations specialised agencies. The ICAC is in the process of finalising its current project on confidentiality in international arbitration.

VIS East Moot

Ruth Cowley recently sat as an arbitrator at the annual VIS East Moot in Hong Kong.

Conference at Trinity Hall, Cambridge University On 19 March Joe Tirado spoke on “Cross-cultural and linguistic problems: contrasts between the civil and common law approach” at a conference organised by the Chartered Institute of Arbitrators, London Branch and SICA-FICA.

Anglo-Hispanic Arbitration Club

On 22 March Joe Tirado gave a keynote presentation entitled “Bridging the cultural divide in international arbitration” at the Anglo-Hispanic Arbitration Club lunch.

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Contacts

UK

Joe Tirado, Partner,  Norton Rose LLP
Head of international arbitration and ADR

Australia

Ron Nathans, Partner, Norton Rose Australia

Bahrain

Adam Vause, Senior associate, Norton Rose (Middle East) LLP

Belgium

Michael Jürgen Werner, Partner, Norton Rose LLP

China

Jim James, Partner, Norton Rose LLP

Czech Republic

Pavlína Beránková, Senior associate, Norton Rose v.o.s., advokátni kancelá

Germany

Jamie Nowak, Partner, Norton Rose LLP

Greece

Marie Kelly, Partner, Norton Rose LLP

Hong Kong

Ruth Cowley, Partner,  Norton Rose Hong Kong

Italy

Cecilia Buresti, Partner, Norton Rose Studio Legale

Netherlands

Yke Lennartz, Partner, Norton Rose LLP

Poland

Malgorzata Patocka-Zbikowska, Norton Rose Piotr Strawa and Partners LLP

Russia

Valentina Gluhovskaya, Partner, Norton Rose (Central Europe) LLP

Singapore

Guy Spooner, Partner, Norton Rose (Asia) LLP

Thailand

Somboon Kitiyansub, Partner, Norton Rose (Thailand) Limited

UAE

Patrick Bourke, Partner, Norton Rose (Middle East) LLP

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Focus on Singapore: KC Lye

KC Lye is a partner in our Singapore office, and specialises in aviation and energy disputes. His focus is on international arbitration.

I am a lawyer because…

I have no other marketable skills. When I left school, the only two things I could do better than most was to tell a story, and to spot a lie from a mile away. Career-wise, apart from being a dispute lawyer that’s a pretty limiting skill set. Fireman was out, for example...

What gives you greatest satisfaction, professionally?

That would be going for a hearing, and having the tribunal react in the way you predicted it would six months ago when you were planning your case.

And personally?

I am trying to house train a puppy at the moment so right now any day where she manages to find her litter tray is a good day.

How do you spend your weekends?

I like fast cars, a bad habit I picked up in my early days as a young advocate working on traffic accident cases. Unfortunately, I drive the same way I type, which is fast and with a lot of mistakes.

If you weren’t a lawyer, what would you be?

Er... starving?

Who is your hero?

I have a few. Essentially it would be anyone who has survived in this business for 40 years and who has managed to hang on to his sense of humour and most of his own hair.

What’s on your iPod?

Embarrassingly, I last added “Good Morning Baltimore” from the musical and movie Hairspray. It’s the sort of thing you need to wake you up on the drive to work.

What future do you see for Singapore as an arbitration centre?

A big one, especially in attracting arbitrations involving Indian companies.

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