International Arbitration: The Year of The Tiger in Review

According to the Chinese Horoscope, 2022 is a Year of the Tiger, which is characterised as ‘a turbulent year’. Such a narrative certainly applies when one looks at the developments in international arbitration. Those who thought that they knew what law applies to arbitration agreements or considered arbitration under the auspices of the International Centre for Settlement of Investment Disputes (‘ICSID’) to be an autonomous and a delocalised system might need to reevaluate their thinking or at least accept that no principle is set in stone.

In this blog entry, we will discuss a selection of what has happened in the field of international arbitration over the past year, with a particular focus on Europe. Since we are entering the holiday season, developments are ‘wrapped’ in illustrative quotes. Are you able to guess them all? Happy unpacking!

“The only point on which the British agree perfectly with the French is to drive in the left lane” – Anonymous

On 28 September 2022, the French Cour de Cassation rendered a decision in the Kabab-Ji SAL v Kout Food Groupcase which diametrically opposes an earlier judgment of the UK Supreme Court on the law applicable to arbitration agreements. In the case at hand, English law was designated as the substantive applicable law. The agreement in question also included an arbitration clause identifying Paris as the seat of arbitration. The crux of the dispute before the courts was what law governed the arbitration agreement; the answer to this issue affected whether the award could be enforced against a non-signatory party (i.e., Kout Food Group). In October 2021, the UK Supreme Court ruled that the law governing the contract – English law – applies equally when determining the validity of the arbitration agreement. According to the UK Supreme Court, the fact that the parties had opted for Paris as the seat of arbitration was to no avail. Consequently, applying English law, the UK Supreme Court found that the Kout Food Group had not become a party to the arbitration agreement. In contrast, in its 2022 judgment, the French Cour de Cassation held that the choice of English law included in the contract does not equate to an express will of the parties to have the arbitration agreement governed by English law as well. The French Cour de Cassation ruled that absent such express will, the law of the seat of arbitration – in this case: French law – governs the arbitration agreement. The divergence in judgments between the UK Supreme Court and the French Cour de Cassation demonstrates yet again that arbitration agreements should be drafted with the utmost care in order to prevent possible legal uncertainty.

People should be conscious that they can change a corrupt system” – Peter Eigen

The phenomenon of corruption is (unfortunately) not a new topic affecting the realm of international business and, consequently, is an issue that arbitral tribunals have to deal with on a regular basis. It triggers a number of complex questions related to the applicable law or arbitrability as well as to the duties of arbitrators and the international community when it comes to issues of corruption.

In particular, one should reflect on the investigative duties and powers that tribunals have when dealing with corruption. Relevant questions include, for instance, whether or not the tribunal should raise corruption issues ex officio or what standard of proof should be applied when assessing the impact of corruption on the merits of a case. A related and important question relates to the standard of the post-award court review: should the court defer to the tribunal’s finding on corruption or undertake a de novo review?

Three decisions rendered in 2022 are relevant in this context.

The first two were rendered by French courts:

1. The Cour de Cassation decision in Belokon v Kyrgystan, and
2. The Paris Court of Appeal decision in Groupement Santullo Sericom v. Gabon.

The third decision was rendered by an ICSID Tribunal in the BSG Resources v Guinea arbitration.

In general, these decisions show that the fight against corruption is considered part of international public policy (see e.g., the framework of the Merida Convention (2003)) and is taken seriously.

Belokon v Kyrgyzstan

The Belokon v Kyrgyzstan case relates to the acquisition of a Kyrgyz bank by Mr. Belokon. Following political turmoil and a series of administrative and criminal measures taken by the Kyrgyz government against the bank, Mr. Belokon brought a treaty claim against Kyrgyzstan. Kyrgyzstan responded that its actions were directed at money laundering practices of the bank. In its 2014 award, the tribunal rejected the State’s defence, concluding from the evidence presented that it was, “unable to deduce or infer that the Respondent state has proved that [the bank] was involved in money laundering activities.”

This decision was quashed by the Paris Court of Appeal in 2017 and confirmed by the Cour de Cassation in 2022. In reaching their decision, the French courts showed that they will not limit the review of arbitration awards to the evidence submitted in the arbitration, nor to the arbitral tribunal’s assessment of such evidence. Importantly, the French courts also considered that the use of the “red flags” methodology is appropriate in case of corruption allegations.

Groupement Santullo Sericom v Gabon

The second relevant decision comes from the Paris Court of Appeal and was rendered after the Cour de Cassation decision in Belokon v Kyrgyzstan. In Groupement Santullo Sericom v Gabon, the underlying dispute pertained to payments due under public infrastructure projects. In an ICC arbitration, while granting claimant’s request, the tribunal rejected Gabon’s allegations that public tenders were procured by the use of corrupted means. It further considered the evidence submitted by Gabon to be circumstantial and insufficient to prove corruption. In subsequent setting aside proceedings before the Paris Court of Appeal, new evidence was submitted and contributed to the decision of the court to quash the award. In its assessment, the court applied Cour de Cassation conclusions from Belokon and relied on the “red flags methodology”.

BSG Resources v Guinea

Relevant corruption-related developments were not only dealt with by the French courts. Corruption was also at the core of the recent ICSID award in BSG Resources v Guinea. In broad terms, this case related to a dispute where BSG Resources sought compensation for expropriation for revoking its mining rights as well as discriminatory treatment. The ICSID tribunal deemed these claims inadmissible upon its finding of corruption.

The tribunal recognised that “active bribery and active trading of influence aimed at obtaining an undue advantage from a public official are prohibited as a matter of Guinean law and international law.” What is useful in the context of the issues discussed is that the tribunal in the BSG Resources v Guinea case – while confirming that the burden of proof lies on Guinea – opted for the “red flags” methodology in evaluating the applicable standard of proof. The tribunal held: “[i]n the end, what will matter is that the Tribunal is convinced or reasonably certain that corruption has occurred on the basis of an overall assessment of the record.” This brings its analysis close to the one adopted by the French courts.

It should be noted that the challenge against the tribunal’s findings in BSG Resources v Guinea is currently pending at ICSID.

“The only way of discovering the limits of the possible is to venture a little way past them into the impossible.” – Arthur C. Clarke

Over the past year, the German courts dealt at least three times with requests under Article 1032(2) of the German Code of Civil Procedure (GCCP). That article allows the German Court to intervene at an early stage of the arbitral proceedings (before constitution of the tribunal) and grant declaratory relief determining the validity or invalidity of arbitral proceedings. The unique and unprecedent character of these requests arises from the fact that they are directed against the ICSID arbitration proceedings, which are considered to be an autonomous and “delocalized” based on the ICSID Convention. Two different courts reached opposite conclusions on the issue.

On the one side of the spectrum is a decision that relates to the ICSID arbitration in Mainstream et al. v Germany. Mainstream et al. lodged a claim in an ICSID arbitration due to changes in Germany’s legislation after it had invested in wind and solar energy in Germany. Germany brought the case before the Berlin court, invoking Article 1032(2) of the GCCP.

On 28 April 2022, the Higher Regional Court of Berlin denied Germany’s request to declare Mainstream et al.’s claims against Germany under the Energy Charter Treaty (ECT) inadmissible. The court also concluded that Article 1032(2) of the GCCP is not applicable to ICSID arbitrations. Additionally, it held that the intra-EU nature of investors’ claims is insufficient to trigger the application of the mechanism prescribed in Article 1032(2) of the GCCP.

On the other side of the spectrum are decisions rendered by the Higher Regional Court of Cologne on 1 September 2022. These decisions relate to the ECT arbitration claims brought by German legal entities RWE and Uniper against the Netherlands. The Higher Regional Court of Cologne adopted a different approach than the one in Berlin. In general, the Higher Regional Court of Cologne accepted arguments raised by the Netherlands and ruled – pursuant to Article 1032(2) of the GCCP – that the ECT claims brought by RWE and Uniper are inadmissible due to the intra-EU nature of the claims. The Higher Regional Court of Cologne further reasoned that the arbitration clause in Article 26 ECT is incompatible with EU law, and the ICSID Convention nor ICSID tribunals can sufficiently safeguard EU law autonomy and the judicial monopoly of the CJEU in matters related to EU law.

Appeals in all three cases are currently pending, with a decision of the German Bundesgerichtshof expected in the course of 2023.

“The power of the lawyer is in the uncertainty of the law” – Jeremy Bentham

This year, major case developments also took place at the Court of Justice of the European Union with its decision in the Prestige case and in the Micula saga.

London Steamship v. Spain (I)

November 2022 marks the abominable anniversary of the oil spill at the coast of Galicia after the sinking of the oil tanker Prestige. This environmental disaster triggered a number of legal disputes including criminal proceedings in Spain as well as arbitral proceedings in London. In the Spanish proceedings, the Spanish government brought an action against the insurer of the owners of the vessel. Spain eventually succeeded in its efforts when the Spanish Supreme Court rendered its final decision ordering the insurer to indemnify Spain. In 2019, Spain obtained an enforcement order for the Spanish judgment and applied to the English courts for its recognition and enforcement in England.

In parallel, however, the insurer commenced arbitral proceedings seeking declaratory relief to the effect that Spain is bound by the arbitration agreement in the insurance contract and should bring the claims in arbitration seated in London. Before the Spanish decisions became final, the arbitral tribunal rendered an award (in 2013), agreeing with the insurer, amongst others, that the Spanish claims should be referred to arbitration. Subsequently, the English court granted leave to enforce the award by handing down the “judgment in the terms of the award”.

The English court faced a difficult dilemma: whether or not to enforce the Spanish decision based on the applicable Brussels I regime whilst being mindful it was irreconcilable with an earlier (domestic) “judgment in the terms of the award”. Considering this dilemma, the court sought guidance from the CJEU.

In June 2022, the CJEU ruled that the English courts may not refuse the recognition and enforcement of the Spanish court judgment even if it contradicts a domestic judgment being entered “in terms of the award”. It is yet to be seen what the practical impact of the decision will be, in particular considering the post-Brexit reality.

Micula v. Romania (I)

The second important judgment issued on 25 January 2022 was that of the Grand Chamber of the CJEU in the ‘Micula-saga’. The case relates to ongoing efforts of the Micula brothers to enforce their 2013 ICSID award against Romania. The moment Romania wished to comply with the award and even partially paid the award, it was estopped by the intervention of the European Commission. The European Commission decided that any further payments would constitute prohibited state aid. As there is never dull moment in this case, the European Commission’s decision was successfully challenged before the General Court. The General Court held in 2021 that the EU state aid rules could not apply retroactively to the Micula brothers’ rights acquired before the succession to the EU. Therefore, the European Commission was not competent to issue its decision.

On appeal decided this year, however, the CJEU set aside the previous decision of the General Court and held that the General Court erred in law by identifying events (i.e., potential bilateral investment treaty breaches) as the timestamp for the European Commission competence. The CJEU recognised instead that the correct point of reference is the date of the arbitral award in question, which was rendered after Romania’s accession to the EU. Additionally, the CJEU emphasised the relevance of the Achmea case with regard to Romania’s consent to arbitration which – according to the CJEU – lacked any force following Romania’s accession to the European Union.

While determining that the European Commission was indeed competent to evaluate potential state aid violations, the CJEU referred the case back to the General Court to decide whether the payment of the award constitutes prohibited state aid. And so the saga continues …

“It Is Not the Strongest of the Species that Survives But the Most Adaptable” – Leon C. Megginson (also attributed to Charles Darwin)

On 21 March 2022, the ICSID Member States approved major amendments to the Regulations and Rules of ICSID, including the ICSID Arbitration Rules. The amended rules came into effect on 1 July 2022 and apply to ICSID arbitrations registered from that date onwards.

The amendments were among other things aimed at enhancing transparency, improving time and cost efficiency, providing broader access to ICSID arbitration, and clarifying the rules for security for costs. Three examples of amendments include:

Rule 14(1): Under the new rules, parties will have to disclose “the name and address of any non-party from which the party, directly or indirectly, has received funds for the pursuit or defence of the proceedings through a donation or grant, or in return from remuneration dependent on the outcome of the proceeding.”

Rule 53: The new rules provide for a stand-alone provision on security for costs. When deciding on a security for costs request, the arbitral tribunal must consider “all relevant circumstances”, including the party’s ability and willingness to pay an adverse cost award.

Rule 62(3): It will be assumed that the parties have given consent to the publication of an ICSID final award if they have not objected to the publication within 60 days after the award was rendered.

Quo Vadis Arbitration?

Apart from potential appeals in some of the cases analysed above, there are many policy developments observable and anticipated at international, European, and domestic levels in the years to come.

For example, on 22 November 2022, a vote was expected on the proposed modernisation of the Energy Charter Treaty (1994). An agreement in principle had already been reached in June 2022. However, reportedly due to a failure by the European Commission to gain the consensus of EU Member States – a majority of which are Contracting Parties to the ECT– the vote was called off at the very last moment. The vote is now scheduled to take place in April 2023. Proposed changes to the ECT include, for instance, provisions to align the ECT with the Paris Agreement, a provision covering the prohibition of intra-EU arbitrations, the inclusion of a narrowed definition of qualifying “investment” and “investor” and a list enumerating fair and equitable treatment (FET) violations.

It must be noted that, in parallel, multiple EU Member States have announced their intended withdrawal from the ECT. To date, the Netherlands, France, Spain, Luxembourg, Poland, Slovenia and Germany have reported such intentions. The Austrian government is also considering withdrawal from the ECT after the failed reform on 22 November 2022. It is yet to be seen if the ECT modernisation process withstands the exodus of the EU Member States.

At the European level, it will be interesting to see whether the European Commission takes any legislative action following the ‘Report with recommendations to the Commission on Responsible private funding of litigation’ (also known as the “Voss Report”) which was adopted on 13 September 2022 by the European Parliament. The “Voss Report” seeks to address the regulatory vacuum at European level when it comes to the litigation funding industry, and recommends several control mechanisms including, for example, a maximum cap (40%) on the share of the award which a funder may be entitled to or enhanced disclosure duties of the funder and the funding agreement.

Legislative reforms (at domestic level) are also underway across the Channel. The English Law Commission has just finalised public consultations on the reform of the English Arbitration Act 1996 (“the Act”), which will now be subject to policy development. While regulating third party funding is not a point on the agenda, the Law Commission considerations include:

• Strengthening an arbitrator’s immunity and extending the protection to the costs of the court proceedings that arise out of arbitration;
• Adding a non-mandatory provision allowing the tribunal to summarily dispose of claims that lack legal merits;
• Extending the courts’ orders in support of arbitration against third parties;
• Limiting the scope of the court’s review under Section 67, which deals with the scrutiny of the arbitral tribunal’s jurisdictional rulings.

It is yet to be seen how this process develops further.

Finally, several initiatives are pending at the UNCITRAL Working Group II and III. The UNCITRAL Working Group II is at the beginning of its workflow. One of the aspects it will consider – similarly to the English Law Commission – is an early dismissal and preliminary determination of claims. This is a common trend, already observable in the recent reforms of the institutional arbitration rules. Apart from this, the Working Group will also explore topics of technology-related dispute resolution and adjudication.

At the same time, UNCITRAL Working Group III is working on developing the reform of the investor-State dispute mechanism. In the upcoming January session, the UNCITRAL Working Group III will continue to work on a Code of Conduct as well as a proposal for the establishment of an appellate mechanism. The mechanism – as currently proposed – will not be limited to the challenge grounds currently available at the post-award stage, but will also include errors on interpretation of the law and manifest errors in the appreciation of the facts.

The year 2023 will be a Year of the Rabbit, which is said to be a year of hope. Let’s hope we don’t wake up in Wonderland.

This blog was first published on the JusMundi's Blog