This year will be a significant one for the development of international arbitration practice and procedure as trends and developments that commenced in 2016 continue to take shape. In particular:

  • Legislators and arbitral institutions are introducing reforms aimed at targeting inefficiency and escalating costs alongside new approaches to third party funding.
  • London will take steps to maintain its reputation as a pre-eminent arbitration centre post-Brexit.
  • The change of administration in the US may have profound effects on international investor state-dispute settlement mechanisms.

Upcoming legislative changes

The United Arab Emirates – development of an arbitration friendly jurisdiction

Practitioners and clients will continue to keep a close eye on the UAE, which has made strides in establishing itself as an effective and reliable arbitral jurisdiction.

However, it is hoped that developments in 2017 will counter the potentially negative impact of two developments in the past year.

First, in March 2016 the Dubai Court of Appeal refused to enforce an ICC award on the spurious ground that it was not satisfied that the UK is a signatory to the New York Convention. Although overturned on appeal, the first instance decision may undermine confidence in the willingness of local courts to enforce awards.

Secondly, in October 2016 new legislation came into force whereby arbitrators who demonstrate ‘bias’ in arbitral proceedings may face imprisonment. Many prominent local practitioners have called for the repeal of this provision and it has prompted some arbitrators to consider resignation. It may contribute to a reluctance of practitioners to accept appointments in the future and could inhibit the continued development of the region as a leading arbitral seat.

Proceedings in Russia – a streamlined approach?

This year will see the progression of cases under Russia’s new arbitration law, which came into effect on 1 September 2016.

Based in part on the UNCITRAL Model Law, its primary objective is to reduce the scope for abuse of the arbitral process, and to improve and modernise proceedings.

The law requires arbitral institutions to be registered and authorised. Institutions that fail to do so can only arbitrate disputes on an ad hoc (rather than administered) basis. This has significant consequences under Russian law, including a prohibition on resolving corporate disputes between the shareholders of Russian companies (which are now considered arbitrable at registered institutions), and a prohibition on excluding recourse to the courts against certain awards (whereas parties to institutional arbitrations can agree on the finality of the award).

Arbitrations conducted under the auspices of registered administrative bodies will also enjoy judicial support, including with regard to obtaining physical evidence and documentation during the disclosure process. Whether this serves to make Russia a more attractive seat for arbitration remains to be seen.

Barriers to enforcement against state assets in Europe

European legislators will continue to consider the possibility of enforcement of arbitral awards against state-owned assets.

In December 2016, new legislation came into effect in France which provides that arbitral awards rendered against states can only be enforced against property belonging to a foreign state with the prior authorisation of a judge. This authorisation will only be given in certain circumstances. The law is therefore likely to make enforcement against foreign state property within France more difficult.

This is particularly the case as it must also be demonstrated that a state has specifically waived its immunity from enforcement if the creditor intends to seek enforcement against state property used, or intended to be used, for its consular functions.

This year may therefore see more limited asset recovery in France. Other European countries may also follow suit. The legislation mirrors a similar, controversial, Belgian law of 2015, which establishes that assets belonging to states are protected from enforcement unless authorisation is obtained from the court. These provisions are currently being challenged before the Belgian Constitutional Court. We may see further development on this issue this year.

Institutional rules – an improvement in efficiency?

Following concerns that the duration and cost of certain arbitration proceedings are escalating, a number of institutions have amended, or announced potential future amendments to, their institutional rules. The aim is to combat inefficiency and improve transparency:

  • The ICC will introduce (from March 2017) an expedited procedure (for small claims or where the parties agree) allowing parties to benefit from a reduction in procedural steps, shorter time limits, and a specific fee scale to reduce total duration and costs.
  • The Stockholm Chamber of Commerce launched new rules from January 2017. These introduced a summary procedure intended to permit the quick dismissal of frivolous or hopeless claims. They also streamline multi-contract disputes by allowing parties to make claims arising out of multiple contracts in the same arbitration.
  • On 1 January 2017, new rules for investment arbitrations were introduced by the Singapore International Arbitration Centre,. These allow arbitration proceedings to progress notwithstanding a pending challenge to an arbitrator. They also introduce a procedure for early dismissal of claims and timelines for the submission of the draft award.
  • The DIFC-LCIA arbitration centre in Dubai introduced new rules on 1 October 2016. These allow for the consolidation of proceedings, establish efficient online filing systems and provide an accelerated process for the formation of the tribunal.

It is hoped that both global and localised regional arbitral institutions will remain responsive to changing trends and concerns in 2017. If efforts to modernise and streamline arbitration take effect, we can anticipate improvements in the time and cost-efficiency of proceedings.

Brexit means: the strengthening of London as an arbitral seat?

As a result of Brexit, 2017 and beyond will see significant amendments to the legislative framework in which London operates as an arbitral seat. London has long been a dominant seat for arbitration, enjoying a sophisticated framework for the practical administration of disputes. (This includes the availability of high quality and specialist legal counsel, experts and arbitrators.) It also benefits from domestic legislation that protects and facilitates arbitral proceedings, the popularity of English law as the governing law of international commercial contracts and an arbitration-friendly and non-interventionist judiciary. The advantages and benefits of London-seated arbitration do not intrinsically derive from EU law and are not contingent on the UK’s ongoing membership of the EU.

Some commentators query whether London’s position is entirely safeguarded. This is particularly in light of increasing competition from other European centres such as Paris. It is felt that in some circumstances, clients may prefer to opt for the predictability of European centres and governing law of jurisdictions that will remain in the EU. By doing so they will not be subject to the potential changes and uncertainties that will result from Brexit.

However, the consensus seems to be that London will remain a pre-eminent centre of arbitration. In fact, the UK may be in a position to harness the opportunities afforded by Brexit to strengthen domestic arbitration procedures. For example, depending on the form of the eventual framework negotiated, English courts will no longer be bound by EU law and jurisdiction. They will, therefore, be at liberty to grant anti-suit injunctions restraining court proceedings commenced in EU Member States in breach of an arbitration agreement.

An Evolving Position on Third Party Funding

In a landmark case of 2016, Essar v Norscot, the English courts held that tribunals have jurisdiction to award a parties’ costs in pursuing or defending an arbitration, including the recovery of third party litigation funding costs. This is notably distinct from the position in English court proceedings where it is very unlikely that such costs would be recoverable. It remains too early to predict what the impact of this decision will be in 2017, especially as the courts established that such costs ‘may’ rather than ‘must’ be recoverable and application is at the tribunal’s discretion. However, in circumstances in which arbitration in London is exempt (at least for now) from the costs budgeting regime applicable to court, the recognition that such funding costs may be recoverable is a boost for those promoting the use of arbitration as a preferred mechanism for dispute resolution. This may serve to enhance the attractiveness of London as an arbitral seat.

These developments appear to reflect a growing international consensus. On 11 January 2017 Singapore’s parliament passed a bill proposing the introduction of third party funding in arbitral proceedings and the Hong Kong Law Reform Commission has recently recommended that third party funding is permitted in Hong-Kong seated arbitrations. As both jurisdictions have historically restricted such funding to very limited circumstances, this represents an important shift in attitude.

If the trend towards expanding the permitted scope, or recoverability, of third party funding continues throughout 2017, this may be accompanied by legislative or institutional changes. This may include parties pressing for the disclosure of third party funding arrangements at the outset of proceedings in order to enable those parties to evaluate their potential exposure to risk and costs. Indeed, provisions of the new Investment Arbitration Rules of the Singapore International Arbitration Centre enable the tribunal to order the disclosure of third-party funding arrangements and to take such arrangements into account when apportioning costs.

Due process paranoia

Throughout 2016, commentary regarding ‘due process paranoia’ has intensified. Many practitioners have voiced concern that parties are, on occasion, abusing the fundamental right to due process by using the right as a ‘sword’ in arbitral proceedings. They do this by making unreasonable demands (such as requests for prolonged extensions of time to procedural deadlines). These are accompanied by actual or implied complaints that should the tribunal not accede to such demands, the party will claim to have been denied its right to due process and may resist enforcement or appeal the award. In an effort to ensure that awards are fully enforceable and that no allegations of procedural impropriety can be sustained, some commentators think that arbitrators have become insufficiently robust in dealing with recalcitrant parties, by acceding to unreasonable demands or conduct.

Arbitration will remain an attractive dispute resolution forum as long as it can demonstrate that proceedings will be completed expeditiously, with awards subject to only limited grounds of appeal. Arbitral institutions may have a role in supporting tribunals to deal assertively with procedural applications, with appropriate regard given to due process. They could do this, for example, by being specific about the factors which should weigh heavily with arbitrators such as giving proper consideration to the duty to proceed expeditiously and in a cost efficient matter as weighed against any potential prejudice to a party in putting its case, when faced with procedural requests incorporating the threat of a challenge on due process grounds. Arbitrators may also benefit from improved guidance as to the grounds on which awards have previously been appealed or set aside. Given that the English courts remain arbitration-friendly, and that there do not appear to be any examples of the courts setting aside an award on the grounds of overly robust case management since the enactment of the Arbitration Act 1996, tribunals should not be afraid to reject unreasonable demands in 2017.

The Trump administration and the evolution of Investor-State Dispute Settlement

The development of international dispute resolution mechanisms may be hampered if the President-elect makes good on his promises to withdraw from the Trans-Pacific Partnership (“TPP”) (which has not yet been ratified). Or, if he renegotiates, or abandons negotiations of, the Transatlantic Trade and Investment Partnership (“TTIP”) (which remains subject to negotiation between the European Union and the United States).

A particularly unpopular provision of these treaties is that which provides for disputes to be resolved by the arbitration procedure of Investor-State Dispute Settlement (“ISDS”). Supporters of ISDS assert that it incentivises investment by reassuring investors that they have recourse to a fair and independent dispute resolution mechanism rather than before potentially biased or inefficient domestic courts.

Critics are wary of an expansion of ISDS under the TPP and TTIP. They fear that the mechanism enables potentially biased and opaque tribunals unduly to empower corporations at the expense of the sovereignty and financial security of the state.

Consequently, it is feared that law-makers might be deterred from implementing new legislation that is in the public interest but which may adversely affect corporate interests.

The negotiation of TPP and TTIP has provided an opportunity to explore how ISDS can be refined to address certain of these criticisms. Doing so would establish a more transparent model and inspire confidence in its fairness and impartiality.

The European Commission has proposed that investor disputes arising under TTIP could instead be resolved by a new public Investment Court System. Under this, investor-state disputes would be heard before a panel of 15 judges (appointed by the panel president rather than the parties), with an appeal panel comprised of six judges.

The negotiation of the TPP has facilitated the development of a more restricted and cautious approach to ISDS. This has safeguarded against potential abuses of the process and preserved the flexibility of TPP States to protect legitimate public welfare objectives (such as environmental issues). It has also ensured full transparency in cases (including a requirement to make awards available to the public) and the appointment of independent (rather than party-appointed) experts on certain matters.

It remains uncertain how the President-elect’s rhetoric will translate into policy. Given that the main target for criticism was trade agreements in principle, rather than targeted hostility towards ISDS, the EU Trade Commissioner’s concerns that TTIP “will probably be in the freezer for quite some time” seem well-grounded. As TPP contains a provision preventing its entry into force without US ratification, it may be rendered meaningless by the change in administration in the US.

The Commission’s long-term efforts to establish a permanent investment court may continue notwithstanding US policy, as the concept may be developed and established in the course of other negotiations and treaties (for example during free trade negotiations expected to commence in 2017 between New Zealand and the EU). In the event that a more refined approach to ISDS, or the establishment of a permanent investment court, is pursued in ancillary treaties, a disconnect may emerge between the resolution of disputes under those treaties and disputes arising arise under bilateral investment treaties, which commonly provide for a more traditional mechanism of resolution through ICSID or UNCITRAL proceedings with party appointed arbitrators. This could result in a conflict between, or restriction on, the availability of practitioners to sit on the investment court but also accept ICSID appointments, In such a scenario, it may prove difficult to ensure that any investment court is able to appoint available practitioners who are sufficiently experienced in such treaty or trade disputes.

In any event, the speed of the development of more refined dispute resolution procedures in other international treaties is likely to be severely hampered if the concepts developed and explored in TTIP negotiations are abandoned. In that scenario, the opportunity to develop effective arbitration under TTIP and TPP may be lost, at least in the short term.

 


 

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Media contact: Lydia Buckingham, Senior Marketing Executive, +44 (0) 20 7822 8134, lbuckingham@stewartslaw.com

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