welcome to the sixth edition of crossing borders, enforcing against foreign...

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In this issue:

Enforcing arbitration awards: the how, the why and latest developments

Enforcing Against Foreign State Parties: Some Lessons From Abroad

Enforcing Foreign Arbitral Awards in China – A Review of the Past Twenty Years

Enforcing arbitral awards in the UAE – the law and practice as at 2016

One Arrangement, Two Systems: considerations when enforcing awards between Hong Kong and the PRC

Plotting the Course: Dealing with uncertainty–disputes post-Brexit vote

Brexit and Arbitration: shaken but not stirred

Show me the money: Impact of the Australian insolvency regime on the enforcement of obligations and awards

Case Report: landmark Spanish judgment on Article IV of the New York Convention

Case Report: English Court allows retrospective extension of time limit in LCIA award

Case Report: German Supreme Court upholds CAS arbitration agreement and award

Case Report: Murphy Exploration & Production Company-International v The Republic of Ecuador, May 16

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Crossing Borders International Arbitration Insights / kwm.com

Welcome to the sixth edition of Crossing Borders, a periodic review of developments in international arbitration across the world.

In this edition, we focus on enforcement of arbitration awards. We explore why it is important, the most common avenues available and some of the key risks and hurdles a successful party may face. In particular, we look in detail at sovereign immunity. We also explore trends in enforcement of foreign arbitral awards: in the People’s Republic of China by presenting our detailed research into 20 years of court practice; in the UAE focusing on recent developments in attitude and approach; and as between the “two systems; one arrangement” that are PRC Mainland and Hong Kong.

Next, we explore some of the key dispute resolution issues that arise following the UK’s recent vote to leave the EU for international disputes generally and arbitration specifically. Finally, we cover some recent key decisions in international arbitration, both court decisions relating to arbitration from Spain, Germany and the UK, as well as the investment treaty award in Murphy Oil v Ecuador.

The Editorial Committee

MEG UTTERBACK Partner China T +86 21 2412 6068 [email protected]

PETER PETHER Partner Australia T +61 2 9296 2416 [email protected]

DOROTHY MURRAY Partner London T +44 (0)20 7111 2127 [email protected]

PAUL STARR Partner Hong Kong T +852 3443 1118 [email protected]

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Enforcing arbitration awards: the how, the why and latest developments Dorothy Murray, Daisy Mallett, Charlotte Angwin

You may have won the substantive hearing and secured your client a substantial arbitral award, but if the opposing party refuses to honour the award, the fight is not yet over. Unless an award is complied with or enforced (and the case of damages, collected), it has only limited reputational value.

The ability – practically and legally – to enforce an award is therefore key, and must be considered from the outset of a claim. This is so assets can be identified and, if possible, secured, and potential bars to enforcement can be avoided or risks minimised.

As an introduction to the September 2016 issue of Crossing Borders, which focuses on enforcement, this article provides a brief oversight of the key issues to keep in mind.

First, the vast majority of arbitral awards made are complied with voluntarily. In many cases, the parties have a continuing commercial relationship and wish to get on with business. This is the case even with large international awards. The last Queen Mary’s Arbitration Survey to ask about enforcement, in 2008, found that 84% of participating counsel indicated that, in more than 76% of their arbitration proceedings, the non-prevailing party voluntarily complies with the arbitral award1. Similarly, in relation to ICSID Reports, the UNCTAD reported in 20142 that most States had honoured their obligations in this regard.

Parties may come under commercial or reputational pressure to honour an award, especially States in high profile investment treaty arbitration cases. For ICSID (International Centre for the Settlement of Investment Disputes) awards, the 1966 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the “ICSID Convention”), as well as many BITs, allow the exercise of diplomatic protection. Further, in many countries, arbitration is the only effective recourse a foreign investor may have against the state, so a reputation for non-compliance with awards can affect inward foreign investment. Argentina’s recently agreed and high profile settlement to pay UNCITRAL awards made in favour of BG Group and El Paso Corporation is part of a publicised plan by Argentina’s new president, Mauricio Macri, to improve Argentina’s reputation with large foreign investors3 and in response to the US’s 2012 imposition of custom tariffs by way of diplomatic support for US companies with outstanding awards.

Second, and unlike court judgments, arbitral awards benefit from a number of international treaties providing effective and robust methods of enforcement. For ICSID awards, the ICSID Convention provides that awards are to be treated as final judgments of the court of the contracting State. Other international awards are highly likely to fall within the scope of the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or “NYC”) which enables enforcement of an award in any of its 156 Contracting States. Sixty years on from its inception, the NYC is rightly regarded as one of the cornerstones of the success of international arbitration. Its only close equivalent in respect of court judgments, the Hague Convention of 30 June 1995 on Choice of Court Agreements




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terms of cross border enforcement. The enforceability of awards is one of the key reasons our clients chose arbitration and we see no reason for this to change in the foreseeable future.

1 International Arbitration: Corporate Attitudes and Practices, Queen Mary University of London 2008, pg.2

2 UNCTAD Publication, Pink Series Sequel: Investor-State Dispute Settlement, 24 July 2014.

3 See : El Paso Energy International Company v Argentine Republic (ICSID Case No. ARB/03/15) and BG Group Plc. v. The Republic of Argentina, UNCITRAL.

Third, respondent States and State entities may well seek to rely on sovereign immunity at the enforcement stage. The article “Enforcing Against Foreign State Parties: Some Lessons from Abroad” looks at the issue in more detail. In short, enforcement can be made significantly more difficult when a sovereign body is involved. Parties should not attempt to enforce their award against, inter alia, the following assets: diplomatic buildings and property, central bank assets, military property, taxes or public payments and diplomatic missions. Courts will never, or very exceptionally, enforce against these classes of assets.

Finally, attitude is everything. It is trite to note that a party seeking to enforce in a pro-arbitration court will have more, and quicker, success than in a jurisdiction that is only just developing its arbitral jurisprudence, although both may be NYC Contracting States. Attitudes change quickly, however, as the success of recent reforms in the People’s Republic of China demonstrates. We have used our exclusive access to local data to undertake extensive research into the enforcement of foreign arbitral awards in the PRC to explore developments since China signed the NYC. See the results of our investigations in “Enforcing Foreign Arbitral Awards in China – A Review of the Past Twenty Years”. Our conclusions are broadly positive, as governmental steps to improve enforcement and collection appear to be bearing fruit. As ever, the key to success is having a well-drafted arbitration agreement that complies with local law requirements, and good procedural compliance throughout the arbitral process.

What then does the future hold for the enforcement of arbitral awards? We’ve already touched on the Hague Convention, but until it gains more ground, there is simply nothing to touch the NYC in

may invoke under Article V(2) are: (a) the matter is not capable of settlement under arbitration according to the law of that country; or (b) the enforcement would be against public policy in that country. Importantly, courts may refuse to enforce awards on these grounds; they are never obliged to refuse enforcement. They must not refuse to enforce on any other grounds: these articles are the exhaustive list.

The straightforward process and clear list of grounds is not to say that enforcement is always quick and entirely predictable: different national courts of course apply the NYC differently.

Of all the grounds for non-enforcement, ground V(1)(e) (the award has been set aside or superseded by courts of the seat) has probably caused the most controversy and related case law in recent years. Some Courts (for example in France) typically allow such a “zombie” award to be enforced; whereas others take a more nuanced approach. The latest chapter in the Yukos saga was the setting aside in April 2016 by a court in The Hague of the US$ 50 billion+ Energy Charter Treaty awards obtained by Yukos against Russia in 2014 from a PCA Tribunal constituting Yves Fortier QC, Charles Poncet and Stephen Schwebel. Yukos has nevertheless pledged to continue its efforts to have the original award enforced, including in the US, but its lengthy battle for redress now faces further hurdles.

Outside of the NYC, there may be other local treaties or arrangements, such as that existing between the PRC and Hong Kong, which is explored by the article “One Arrangement, Two Systems: considerations when enforcing awards between Hong Kong and the PRC ”. Finally, a party may be able to sue on the award in domestic courts as a contractual debt.

(the “Hague Convention”), currently applies only between the EU, Mexico and Singapore. Although both the United States and the Ukraine have signed up, neither has yet ratified it. Further, while EU Member States enjoy extensive recognition and enforcement of judgments as between their courts, this ability depends on EU membership, meaning countries who seek to leave – such as Britain, face a number of uncertainties, as explained in “Plotting the course. Dealing with disputes – post Brexit vote”.

Part of the New York Convention’s success is the relative simplicity with which it can be applied: enforcement cases are subject to normal procedural rules in the relevant state and the grounds under which a court can (but is not obliged to) refuse enforcement are limited to those set out clearly in Articles V(1) and V(2) of the New York Convention. The only formality with which the party seeking to enforce must comply with is to produce an original or certified copy of the award and of the original arbitration agreement. Domestic courts can of choose decide to simplify the process even further as our case report from Spain shows.

Article V(1) of the New York Convention sets out grounds on which the respondent party may seek to rely on to resist enforcement and Article V(2) sets out two grounds which courts can invoke as a reason to refuse enforcement. Briefly, the grounds for refusal under Article V(1) are: (a) incapacity of a party or invalid arbitration agreement; (b) failure of due process in the proceedings, or the lack of notice given when the arbitrator was appointed; (c) circumstances where the tribunal has exceeded its authority or jurisdiction; (d) the composition of the arbitral authority or procedure is not in accordance with the arbitration agreement; and (e) the award has been superseded or set aside by the courts of the seat. The grounds of refusal which the courts




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as aircraft. For example, in August 2015, Miminco LLC obtained an ex parte interim injunction in the Irish High Court preventing an aircraft from leaving Dublin Airport. The aircraft was purchased by the government of the Democratic Republic of Congo to establish a new national airline. That injunction was discharged in September 2015 on the basis that the debt on which the injunction was sought was a debt of the government of Congo and not of Congo Airways. The decision provides an example of the kinds of enforcement actions that may be brought against foreign State debtors.

How to draft your agreement with a State party?

It is important when negotiating jurisdiction and governing law clauses in a contract with a State party that you think carefully about where you are likely to need to enforce that contract, and against which State entities. For example, both the UK and Australian legislations contain specific rules on contractual clauses aiming at waiving immunity in relation to jurisdiction, to enforcement, and to execution. Further, if you are negotiating with a central bank, you may wish to seek that specific state assets are designated in the contract for the purposes of execution, to assist in enforcing the contract in China or Hong Kong. Arbitration clauses will give you the greatest breadth of enforcement options.

State immunity in the UK

The classic formulation of the common law rule on foreign state immunity was developed primarily in the context of admiralty law and was stated by Lord Atkin in The Cristina:

The courts of a country will not implead a foreign sovereign, that is, they will not by their process

to arbitrations, and Australia offering a broader interpretation of exceptions relating to commercial transactions.

Which State party should you contract with?

If the identity of the specific entity that you will be contracting with is negotiable, you may wish to consider asking the State party to contract through a subsidiary, especially a commercial subsidiary. In the UK and Australia, this will place the onus on the contracting party to establish that it is a “separate entity” of a State and that it was exercising sovereignty, or acting as an agency or instrumentality of the State, in contracting. Even where you are ultimately forced to enforce a guarantee provided by the State party itself, the presence of a commercial subsidiary may increase the likelihood that a court will consider the transaction to a commercial transaction. Where your aims can be achieved by contracting with a regional authority rather than a national government, that may also be desirable.

What state-owned assets could you enforce against?

As a general rule, when you are contracting with State parties, you should identify not just where these State parties hold assets, but what kind of assets that they hold. The best assets to enforce against are immoveable property, which both the UK and Australian legislations specifically identify as assets exempt from the state immunity rules. By contrast, the worst assets to enforce against are liquid funds, which can be easily characterised by State parties as funds held or invested for a sovereign purpose (especially in Australia).

One example of assets that are likely to be available in a number of jurisdictions are moveable assets that are not money, such

national and international law. In this article we consider those questions in light of the latest developments in the United Kingdom (“UK”), China, Hong Kong, and Australia.

Where to enforce your agreement with a State party?

When negotiating a contract with a State party, you should identify what jurisdictions the State party holds assets in. When contracting with State parties that hold assets exclusively in China and Hong Kong, you should avoid giving the courts of China and Hong Kong exclusive jurisdiction to determine any disputes, as principles of absolute immunity are likely to apply. By contrast, both the UK and Australian courts offer extensive exceptions to the state immunity rules, with the UK offering a broader interpretation of exceptions relating

Enforcing Against Foreign State Parties: Some Lessons From Abroad Ian Hargreaves, Teng Haidi, Juliette Huard-Bourgois, Nicholas Baum

Parties doing business with foreign States should think carefully about the doctrine of state immunity, and how it might limit any rights they hold to enforce a judicial or arbitral decision obtained against a foreign State in the event of a dispute. Who to contract with, where the agreement might be enforced, what assets the agreement might be enforced against, and how to draft the dispute clause of the contract are all complex issues which involve questions of




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for commercial purposes;8

c. proceedings relating to an arbitration to which the foreign State has agreed in writing;9 and

d. proceedings that are with respect to immovable property within the UK.10

There are also exceptions in relation to contracts of employment, personal injury, intellectual property, membership of bodies corporate, and taxes.

The waiver/submission exception, will only apply to situations of unequivocal waiver. The English courts consider that a governing law clause does not amount to a submission to jurisdiction clause11, and a submission to jurisdiction clause does not amount to a submission to execution. Parties contracting with State parties need to ensure that any waiver of sovereign immunity clause includes both a waiver as to jurisdiction and as to execution.

Exceptions to state immunity from enforcement

The arbitration exception and the commercial transaction exception are applied differently when it comes to enforcement proceedings. Enforcement proceedings relating to an arbitral award are treated differently from enforcement proceedings relating to a foreign judgment.

Arbitration exception

In Svenska Petroleum Exploration AB v Lithuania,12 Svenska entered into a joint venture agreement with a state-owned enterprise of Lithuania containing a clause under which the parties agreed that any dispute would be submitted to the courts of Lithuania or independent arbitration in Denmark. Svenska sought to enforce an arbitration award in its favour in the UK. Lithuania argued that the arbitration

make him against his will a party to legal proceedings, whether the proceedings involve process against his person or seek to recover from him specific property or damages1

From the late 1970s the scope of the rule was then changed, significantly, by judicial decisions2, and ultimately by legislation such as the Foreign Sovereign Immunities Act 1976 (US), the State Immunity Act 1978 (UK), and the Foreign States Immunities Act 1985 (Aus). To some extent, those acts codified the recognised common law rules regarding foreign state immunity. However, in many respects those acts clarified and extended the scope of the exceptions to foreign state immunity. States that have adopted this approach practise a doctrine commonly referred to as “restricted state immunity” in contrast to “absolute state immunity”.

In UK law of sovereign immunity, there is an important distinction to make at the outset between immunity from jurisdiction and immunity from enforcement:

§ sovereign immunity from jurisdiction – this applies to the situation where a State is party to a substantive claim brought before the English Court. The question for the Court to answer will be: “Is the State party immune to the jurisdiction of the Court?” and

§ sovereign immunity from enforcement – this applies to the situation where a State is party to enforcement proceedings instituted in the UK. Because the judgment creditor must start an action in the English Court for the value of the decision he is trying to enforce, the questions posed to the Court are twofold:

(i) “Is the sovereign party immune from jurisdiction of the English Court in relation to the enforcement proceedings

instituted before it?” (this is a question of State immunity from enforcement jurisdiction); and

(ii) “Is the sovereign asset on which enforcement is sought immune from execution in England?” (this is a question of State immunity from execution).

Under the State Immunity Act 1978 (UK), a State is immune from the jurisdiction of the courts of the UK, and the property of a State is not subject to enforcement of judgment or award, except where certain statutory exceptions apply.3

Importance of the meaning of ‘separate entities’

State immunity does not apply to an entity which is distinct from the executive organs of government of the State and capable of suing or being sued (a ‘separate entity’),4 except in proceedings that relate to anything done by a separate entity in the exercise of sovereign authority where a State would have been immune.

In the recent case of Taurus Petroleum Ltd v State Oil Company of the Ministry of Oil, Republic of Iraq,5 a State Oil Company (“SOMO”) entered into certain contracts to sell crude oil and LPG to Taurus. A dispute arose and was referred to arbitration, in which Taurus was successful. Taurus applied to enforce the arbitral award by way of a third party debt order against letters of credit issued in London. SOMO argued that it was entitled to state immunity.

The English Court of Appeal rejected this sovereign immunity defence. It considered SOMO was a ‘separate entity’, on the basis that (i) it was legally distinct, (ii) was governed by a board of directors, and (iii) the State had no control over its day-to-day operations. While the exploitation of oil itself

may have been an exercise of sovereign authority, the State chose to act through an intermediary in doing so, and lost the benefit of state immunity.

In Pearl Petroleum Company Ltd v The Kurdistan Regional Government of Iraq,6 the Kurdistan regional government of Iraq granted rights to Pearl to exploit two gas fields in Kurdistan. The Heads of Agreement entered into contained a provision referring any dispute to arbitration in England. Owing to a dispute, Kurdistan ceased making payments under the agreement, and Pearl applied to the arbitral tribunal for a provisional order that the payments should continue until the dispute was resolved. When that order was granted and payments did not continue, Pearl sought to enforce the provisional order in the UK.

Before the Court, the defendant accepted that it was a separate entity from the Iraqi State, but argued it was entitled to immunity on the basis that it was exercising sovereign authority. The Court accepted that was an exercise of sovereign authority, but held that it was an exercise of the sovereign authority of Kurdistan, nor the Iraqi State. As Kurdistan was not a foreign State entitled to the protection of state immunity, the exercise of the sovereign authority could not attract immunity under the State Immunities Act 1978 (UK).

Exceptions to state immunity from jurisdiction

The primary statutory exceptions to foreign state immunity from jurisdiction in the UK are:

a. waiver/consent/submission to jurisdiction;7

b. proceedings relating to commercial transactions, or proceedings against property in use or intended to be used




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effect at the reversion of sovereignty in 1997. In Democratic Republic of Congo v FG Hemisphere Associates LLC,17 the Hong Kong Court of Final Appeal held that the absolute foreign state immunity rule practised in China was applicable in Hong Kong. The Court, pursuant to article 158(3) of the Basic Law, referred that question for consideration by the Standing Committee of the National People’s Congress, which confirmed the decision of the Court.

It is not clear whether separate entities are entitled to the benefit of absolute state immunity in Hong Kong. In Intraline Resources SDN BHD v The Owners of the Ship or Vessel Hua Tian Long,18 the judge held that ‘the concept of ‘control’ represents the modern benchmark for the attribution of Crown immunity’, and that a marine salvage organisation controlled by the Chinese State was entitled to immunity. However, that decision was expressly in the context of ‘Crown’ immunity, that is, the immunity of the sovereign State of China within Hong Kong. Although it may apply by analogy, it is not determinative of the test that will be applied in relation to foreign States. Following Democratic Republic of Congo v FG Hemisphere Associates LLC,19 that question falls to be determined by reference to the law applicable in China, including the law relating to foreign central banks.

State immunity in Australia

The general position under the Foreign States Immunities Act 1985 (Aus) is that a foreign State is immune from the jurisdiction of the courts of Australia unless a statutory exception applies,20 and the property of a foreign State is not amenable to court order unless a statutory exception applies.21 The immunity applies to a separate entity that is an agency or instrumentality of a foreign State (but is not a department or organ of the executive government of a foreign

The Chinese government has not stated its position on whether foreign separate entities are entitled to state immunity. In Intraline Resources SDN BHD v The Owners of the Ship or Vessel Hua Tian Long,16 counsel for the Chinese State before the Hong Kong courts expressly distinguished between state-owned enterprises (which enjoy independent powers of management and freedom from interference, with ownership of their assets and the capacity independently to assume civil liabilities) on the one hand, and state-controlled organisations on the other, suggesting that the latter was entitled to Crown immunity (a distinct but related immunity: see below) but that the former, implicitly, was not. It is arguable that in that case, the Chinese State recognised that state immunity would not be available to state-owned enterprises. However, the issue has not been determined.

Under article 1 of the Law of the People’s Republic of China on Judicial Immunity from Compulsory Measures Concerning the Property of Foreign Central Banks, foreign central banks are granted immunity from execution over property except in relation to property that the foreign central bank has ‘designated to be used for property preservation and execution’ or the foreign central banks or the foreign government abandon their immunity in written form.

However, the above Measures also states that where any foreign country does not grant the immunity to the properties of the central bank of China, China will not grant immunity to such country as well according to the principle of reciprocity.

Hong Kong

Although the State Immunity Act 1978 (UK) previously applied in Hong Kong (under the State Immunity (Overseas Territories) Order 1979), that act ceased to have

state immunity. The Supreme Court held that Argentina was immune on the basis that proceedings for the enforcement of that foreign judgment related only to that foreign judgment and not to the underlying commercial transaction, and thus refused to apply the commercial transaction exception.

Thus, where parties are in dispute regarding a commercial transaction that is not determined by arbitration, and not determined by the UK Courts, state immunity may counter any attempt to enforce in the UK.

State immunity in China and Hong Kong

China

The Chinese government applies an absolute foreign state immunity rule, whereby both China and other foreign states are immune from being sued, and state assets are immune from court order, in China (without prior consent). In Democratic Republic of Congo v FG Hemisphere Associates LLC,15 the Office of the Commissioner of the Ministry of Foreign Affairs set out the position of the government of China as follows:

A state and its property shall, in foreign courts, enjoy absolute immunity, including absolute immunity from jurisdiction and from execution ... The courts in China have no jurisdiction over, nor in practice have they ever entertained, any case in which a foreign state or government is sued as a defendant or any claim involving the property of any foreign state or government, irrespective of the nature or purpose of the relevant act of the foreign state or government and also irrespective of the nature, purpose or use of the relevant property of the foreign state or government.

exception in the State Immunity Act did not extend to proceedings to enforce an arbitral award, but rather applied only to proceedings relating to the conduct of the arbitration. The Court of Appeal rejected that view and held that immunity was waived under the arbitration exception even in the context of proceedings for the enforcement of the arbitral award.

In Gold Reserve Inc v the Bolivarian Republic of Venezuela,13 an American company, Gold Reserve, acquired certain mining rights in Venezuela. Following a 1998 treaty with Canada which granted Canadian investors in Venezuela certain arbitration rights against the Venezuelan government in the event of a dispute, Gold Reserve was acquired by a Canadian company, GRI. GRI sought to enforce an arbitral award in its favour in the UK, and Venezuela objected on the basis of state immunity.The Court rejected Venezuela’s defence of immunity on the basis that it had waived its immunity by agreeing to arbitration in the relevant treaty, and that there was a valid agreement to arbitrate as the claimant was a qualifying investor.

Commercial transaction exception

The ground that a State is not immune in proceedings relating to a commercial transaction entered into by the State is regarded as a key ground in resisting a claim to immunity from adjudication by a State generally. However, this ground has recently been found not to apply in the context of enforcement proceedings.

In NML Capital Limited v Republic of Argentina,14 a Cayman Island company, NML, purchased bonds issued by the Republic of Argentina, and obtained summary judgment for recovery of those bonds in the United States Federal Court in New York. NML sought to enforce that judgment in the UK, and Argentina claimed




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Russian Federation, provide examples of the lengths that State parties will put you to in order to avoid execution. However, careful decision-making and drafting at the time of contracting could limit the capacity of State parties to escape their obligations, and can help limit the time and expense of seeking compensation.

use or had been set aside. It held that accounts for:

§ running a national airline;

§ providing compensation to landholders who suffered damage as a result of phosphate mining;

§ subsidising fuel for Nauruan residents;

§ subsidising utilities for Nauruan residents;

§ providing business loans to Nauruan businesses;

§ running the Nauruan fisheries authority; and

§ holding a term deposit for future government services,

were all property that were not in use for commercial purposes.

This analysis provides a good guide for determining the likely approach to be taken by Australian courts in considering the purpose for which foreign state assets are in use. In particular, in relation to the term deposit, the High Court accepted the stated purpose of the deposit to secure funds for future government services, reasoning that is likely to be applicable to the assets of a sovereign wealth fund in Australia. In respect of a sovereign wealth fund that is a separate entity, the onus would be on the separate entity to first establish that it is acting as an agency or instrumentality of the State.

Conclusion

In many instances, it may be difficult to enforce awards or judgments against intransigent States, and recent headlines enforcement stories, such as Yukos v

clause does not amount to a submission to jurisdiction,27 and a submission to jurisdiction clause does not amount to a submission to execution. Parties contracting with State parties need to ensure that any submission clause includes a submission to execution.

The Australian approach to state immunity from enforcement

In Firebird Global Master Fund II Ltd v Republic of Nauru,28 a Nauruan statutory corporation issued bonds, and a holder of the bonds obtained judgment in the Tokyo District Court against the Republic of Nauru as guarantor for the bonds. As the Nauru does not have a central bank, it holds the large proportion of its monies in Australia in accounts with the Westpac Banking Corporation. The High Court of Australia held that although enforcement proceedings could be brought against Nauru (as the underlying transaction was a commercial transaction), the judgment could not be executed against the money held in the Westpac accounts as they were not in use exclusively for commercial purposes.

It is instructive to note two aspects to this decision:

a. First, the High Court rejected an argument that it should follow the decision of the UK Supreme Court in NML Capital Limited v Republic of Argentina.29 It held that as the underlying proceeding in Japan related to a commercial transaction, the enforcement of the judgment of the Japanese court in Australia was related to a commercial transaction.

b. Secondly, the Court (and in particular the reasons for decision of Nettle and Gordon JJ) engaged in a detailed analysis of the purpose for which certain specific Westpac accounts were in

State) in modified fashion.22

Whether a party is acting as an agency or instrumentality of a State is important

In PT Garuda Indonesia Ltd v ACCC,23 the Full Federal Court of Australia considered that whether an entity was an agency or instrumentality of a foreign State depended primarily on whether the entity was ‘carrying out the foreign State’s functions or purposes’ or ‘acting for, or being used by, the foreign State as a means to achieve some purpose or end of that State’. The Court considered that Garuda, which was 95.5% owned by Indonesia to provide air services to Indonesia, was a separate entity and was entitled to the immunity. The decision was affirmed on appeal to the High Court of Australia, although this issue was not appealed.

The exceptions in Australia to state immunity

The primary statutory exceptions to foreign state immunity are:

a. waiver/consent/submission to jurisdiction;24

b. proceedings that are with respect to commercial transactions, or proceedings against property ‘in use’ or ‘set aside’ for commercial purposes;25

c. proceedings for the exercise of the supervisory jurisdiction of an Australian court in respect of an arbitration to which the foreign state has agreed; and

d. proceedings that are with respect to immovable property within Australia.26

There are also exceptions in relation to contracts of employment, personal injury, intellectual property, membership of bodies corporate, bills of exchange and taxes.

Note that, as in the UK, a governing law

1 Lord Atkin, in The Cristina [1938] AC 485, 490.2 The Phillipine Admiral [1977] AC 373, Trendtex Trading Corp v Central Bank of Nigeria [1977] QB 529 (CA).3 Sections 1 and 134 Section 14.5 [2015] EWCA Civ 835.6 [2015] EWHC 3361 (Comm).7 Sections 2 and 13(3).8 Sections 3 and 13(4).9 Section 9.10 Section 6.11 Sections 2 and 13.12 [2007] QB 886.13 [2016] EWHC 153 (Comm).14 [2011] 2 AC 495.15 (2011) 14 HKCFAR 95.16 [2010] HKCFI 361.17 (2011) 14 HKCFAR 95.18 [2010] HKCFI 361.19 (2011) 14 HKCFAR 95.20 Section 9.21 Section 3022 Sections 3(3), 22 and 35.23 (2011) 192 FCR 393.24 Sections 10 and 3125 Sections 11 and 3226 Sections 14 and 3327 Sections 10 and 3128 (2015) 326 ALR 396.29 [2011] 2 AC 495.




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from 1994 to 2015.4 For the purpose of our review, we considered awards issued in Hong Kong, Macau, and Taiwan as foreign awards, though our research did not reveal any publicly reported orders on applications to enforce awards issued in Macau or Taiwan.

Our research is limited to publicly available data on applications for recognition and enforcement which resulted in a PRC court order. Historically, PRC court orders were not publicly available unless specifically designated for publication, often in furtherance of a policy objective. More recently, this has changed. In 2014, the Supreme People’s Court (SPC) implemented a regulation requiring court judgments to be published.5 However, the regulation allows courts to withhold publication if doing so would be “inappropriate”.6 The extent to which courts have withheld publication of orders on enforcement of foreign arbitral awards on the basis that these matters are confidential and publication would be inappropriate is unknown. We expect not all orders on enforcement have been published post-2014.

Our research does not include applications which were voluntarily withdrawn because, for example, the parties settled or it became apparent there were insufficient assets for enforcement. Nor does it include applications that are pending but have not resulted in a court order due to lower court review, higher court reporting, or judicial inaction, by way of example. This information is not publicly available.

More significantly, our research does not include data on actual enforcement – i.e., the amount of the award ultimately recovered. In China, recognition and enforcement of a foreign arbitral award includes two phases. First, the prevailing party must apply to the lower court for an

Survey – Enforcing Foreign Arbitral Awards in China – A Review of the Past Twenty YearsMeg Utterback, Li Ronghui and Holly Blackwell1

Over the past three decades China has become a significant player in the global market. Chinese companies are active sellers and purchasers of goods and services, investors in overseas projects, and contractors for infrastructure development, among other things. Foreign companies have established a local presence in China,

whether as a hub for manufacturing, servicing the local market, or an investment in local resources. Many of the contracts underlying these transactions include agreements to arbitrate disputes.

The parties’ preference for arbitration is often premised on a number of benefits, including the confidentiality of the proceedings, neutrality of arbitrators, and finality of the award. Perhaps the most important benefit of arbitral awards is the ease of enforcement. Unlike foreign court judgments, which are difficult to enforce absent a treaty between the forum and the enforcement country, arbitral awards are enforceable globally, including in China and 155 other countries, pursuant to the New York Convention.2

If enforcement is a key reason for selecting arbitration in China-related contracts, the question then becomes, in practice, are foreign arbitral awards rendered off-shore being enforced in China?3

We decided to undertake our own review of publicly reported cases involving applications to enforce foreign arbitral awards rendered off-shore in China. We wanted to know, among other things, the overall enforcement rate of foreign arbitral awards, how likely a foreign arbitral award is to be enforced, the extent to which enforcement rates may vary by region, the average time it takes to enforce a foreign arbitral award, and the most likely reason a PRC court may be inclined to deny enforcement of a foreign arbitral award.

Summary of our findings

Our review of publicly available cases demonstrates an overall average enforcement rate of just under 70%, with enforcement rates substantially improving in recent years. Enforcement trends appear to vary by region, with courts in some provinces demonstrating an increased willingness over courts in other regions to enforce foreign arbitral awards. The average time for a PRC court to decide whether to enforce a foreign arbitral award is just under one year. This does not include however the time for or likelihood of collecting amounts due once an order for enforcement has been issued. Procedural deficiencies such as failure to comply with the arbitral procedure are the most common reasons for denying enforcement. Violation of public policy was only cited once as a basis to deny enforcement.

Methodology adopted

We reviewed 100 orders by PRC courts on applications to recognize and enforce foreign arbitral awards. These orders span




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When looking at enforcement rates by city, Tier 1 cities generally had higher enforcement rates than lower tier cities. In Tier 1 cities including Beijing, Shanghai, and Guangzhou, the enforcement rate was just

over 76%. By comparison, enforcement rates in Tier 2 and Tier 3 and lower cities were approximately 69% and 62% respectively, as shown in Table 3.

Enforcement rates by region.7 In terms of enforcement by region, Shanghai has the highest enforcement rate in China, with an average enforcement rate of 100%. All six publicly reported orders by Shanghai courts were in favor of enforcement.

A number of other provinces share 100% average enforcement rates, with each reporting only one order on enforcement. These provinces include Dezhou, Hainan, Hebei, Heilongjiang, Ningxia, Shanxi, Sichuan, and Xiamen provinces.

67 were successful, resulting in an overall average enforcement rate of 68%.

Despite a lower than expected overall average, the number of applications and the average enforcement rate increased substantially over time. From 1994 to 2004, a total of 20 applications were accepted, resulting in an average enforcement rate of just over 37%. From 2005 to 2015, these numbers increased substantially. Over this period, a total of 78 applications were filed, resulting in an average enforcement rate of 68%. These gains were largely garnered in the last five years, with applications from 2011 to 2015 accounting for 46 of the 78 applications and an average enforcement rate of 86.4%.

Annual enforcement trends are summarized in Table 1 below. These numbers are likely reflective of increased reporting and an increased preference or willingness to arbitrate offshore, among other things, in recent years.

order to recognize and enforce the award, which gives the award the equivalent status of a court judgment. If an order in favor of recognition and enforcement is issued, the case is transferred to the enforcement division of that court for collection of amounts due pursuant to the award. Publicly available information concerning the second phase is limited and is thus beyond the scope of our review. When we discuss “enforcement” in this article, we are only addressing the first phase of the proceedings – i.e., applications to recognize and enforce foreign arbitral awards.

Finally, in two of the orders we reviewed, the result was unclear. These two orders have been removed from our analysis. Thus, our analysis is based on 98 court orders on applications to recognize and enforce foreign arbitral awards.

Results of our review

Of the 98 applications to enforce foreign arbitral awards in China that we reviewed,

Table 1 – Enforcement Rates by Year

Table 2 - Enforcement Rates by Province

Other provinces with average enforcement rates above the overall country average of 68% include Hubei (85.71%), Fujian (80%), Guangdong (78.57%), and Liaoning (75%) provinces.

Provinces with average enforcement rates less than the overall country average include Shandong (66.67%), Anhui (66.67%), Zhejiang (62.5%), Beijing (55.56%), Henan (50%), Tianjin (42.86%), and Jiangsu (40%) provinces.

Enforcement rates by province are summarized in Table 2 below.




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Table 3 – Enforcement Rates by City

We also looked to see if more experienced courts would be more likely to enforce foreign arbitral awards. We did not see a direct correlation with experience and

enforcement rates. Half of the most experienced provinces had enforcement rates below the overall country average, as shown in Table 4 below.

Table 4 - Top Ten Experienced Provinces

Enforcement rates when higher court reporting is sought. In China, if a lower court is inclined to deny enforcement, it must report to the higher court and

ultimately to the SPC if the higher court is likewise inclined to deny enforcement.

Of the 98 cases we reviewed, reporting to the SPC was sought in 39 cases. This

means lower courts were initially inclined to decline enforcement when reviewing nearly 40% of the applications presented to them. Of the 39 applications on which the SPC was consulted, the SPC directed the lower court to enforce the award on 16 occasions, resulting in an average enforcement rate of 41% when SPC review was sought.

In 14 of the 98 cases we reviewed, we were unable to determine if higher court reporting was sought. These cases are excluded from the above analysis.8

Average time for an order on enforcement. We also considered the average time for a court to issue a final order on an application for enforcement of a foreign arbitral award. We were only able to determine conclusive timing in 29 of the 98 cases we reviewed. Based on these 29 cases, it took an average of just under one year, 331 days, for the court to issue a final order on enforcement.

Of these 29 cases, 25 applications were successful. The average time for an order on these applications was 281 days.

Of the four applications that were not successful, the average time for a final order increased more than twofold to 590 days. This increase may be due to higher court reporting, though we are unable to confirm if higher court reporting was sought in these cases. The increase may also be indicative of the court’s reluctance to issue an order declining enforcement. Though not addressed in this article, anecdotal experience indicates that the amount in contention, the parties involved, and the nature of the case may delay the time for an order on an application for enforcement.

We can only confirm that higher court reporting was sought in two of the 29 cases where the time for an order on enforcement

can be determined. One case involved a 2014 application on which a final order was issued in just 113 days. The other case involved a 2007 application that endured 590 days before a final order was issued. In both cases, the applications were ultimately successful.9

Enforcement rates by institution. Our review extended to enforcement rates of awards issued by institutional and ad hoc arbitral tribunals. Institutions with the highest enforcement rates were the London Maritime Arbitrators Association, the Arbitral Tribunal of the Hamburg Commodity Exchange, and the International Arbitral Court of the Russian Federation Chamber of Commerce and Industry, with 100% enforcement rates (four of four, three of three, and three of three enforced, respectively).

A number of other institutions had enforcement rates of 100%, but these rates resulted from one application for recognition and enforcement in each case. These include the Grain and Free Trade Association, the International Arbitral Court of the Belarusian Chamber of Commerce and Industry, the International Federation of Oils, Seeds and Fats Association, the Sugar Association of London, the Singapore Commodity Exchange, the Swiss Chamber of Commerce Association for Arbitration and Mediation, and the United States Association of Food Industries.

Unsurprisingly, arbitral institutions often selected in China-related contracts had high enforcement rates. Five of the six, or 83% of, applications to enforce awards issued by the Singapore International Arbitral Center were successful. The Hong Kong International Arbitral Centre and the International Chamber of Commerce Court of Arbitration had identical enforcement rates. Seven of the nine, or 78% of, applications to enforce awards issued by




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each institution were successful.

We were surprised by the data on foreign ad hoc awards, which accounted for 18% of the cases we reviewed. Of the 18 applications to enforce foreign ad hoc awards, 10, or 56%, were successful. This demonstrates that while domestic ad hoc arbitration is not permitted in China, foreign ad hoc awards are enforceable in China.

Further, based on available data, enforcement of foreign ad hoc awards did not appear to be delayed. Of the 18 cases involving foreign ad hoc awards, conclusive timing could be determined in six cases. In these six cases, the average time for a final order on enforcement was 178 days, compared to the overall average of 331 days. All six were ultimately enforced.

Reasons for non-enforcement. We also reviewed the reasons that PRC courts have cited when they are inclined to decline enforcement of a foreign arbitral award. Of the 98 cases we reviewed, 31, or 33%, of the applications for enforcement were unsuccessful.

Legal framework for enforcement. In China, foreign arbitral awards are enforceable pursuant to the New York Convention. Under Article V(1) of the New York Convention, a PRC court may, at the request of the losing party, deny enforcement if:

a. the parties to the arbitration agreement lacked capacity or the arbitration agreement is invalid;

b. the losing party was not given proper notice of an arbitrator appointment or the arbitral proceedings or was otherwise unable to present its case;

c. the award deals with matters not contemplated by or falling within, or beyond the scope of, the terms of the

submission to arbitration;

d. the arbitral tribunal was not formed or the arbitration was not conducted in accordance with the parties’ agreement or, failing such agreement, the law of the seat of the arbitration; or

e. the award has not yet become binding or has been set aside or suspended by the courts of or under the laws of the seat of the arbitration.

In addition, under Article V(2) of the New York Convention, a PRC court may, on its own volition, deny enforcement if:

a. the subject matter of the dispute is not capable of settlement by arbitration under PRC law; or

b. recognition or enforcement of the award would be contrary to PRC public policy.

As noted, our analysis includes Hong Kong arbitral awards. Hong Kong awards are enforcement pursuant to an arrangement between the governments of Hong Kong and Mainland China.10 The bases to decline enforcement under the arrangement are consistent with the bases to decline enforcement under the New York Convention. Accordingly, our analysis below cites generally to the New York Convention.

Legal bases cited for denying enforcement. The most often cited reasons for denying enforcement were (i) lack of a valid arbitral agreement11 and (ii) failing to form the tribunal or conduct the arbitration in accordance with the parties’ agreement or the law of the seat of the arbitration.12 These reasons were each cited in eight, or 24%, of the 31 cases where applications were denied (for a total of 16 or 48%).13

The third most cited reason for denying enforcement was the losing party’s failure to receive proper notice of an arbitrator

These findings are summarized in the table below.

Table 5 – Reasons Cited for Non-enforcement of Foreign Arbitral Awards

appointment or the arbitral proceedings or inability to present its case, which accounted for six, or 18%, of the denied applications for enforcement.14

In two cases, enforcement was denied because the award dealt with matters not contemplated by or falling within, or beyond the scope of, the terms of the submission to arbitration.15

Only one application was denied on the basis that enforcement would violate PRC public policy.16

In addition to Article V of the New York Convention, PRC courts looked to other provisions of the New York Convention

and PRC law when declining enforcement. These include:

§ failure to authenticate the arbitral agreement or notarize and consularize application documents;17

§ failure to apply for enforcement within the limitation period;18

§ failure to demonstrate the respondent or its property is located in China;19 and

§ replacement of the arbitration agreement with an agreement in favor of PRC courts.20




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Conclusion

The increase in the number of foreign arbitral awards being enforced in China is encouraging. Improved enforcement rates may be attributable to better drafted arbitration agreements (only two of the seven applications denied on the basis of an invalid arbitration agreement arose after 2005), a better educated judiciary, and a more predictable and transparent legal system.

It is nonetheless difficult to parse from publicly available data the extent to which local protectionism, corruption, or interference by government authorities potentially impact enforcement. For example, applications that are pending or have ultimately been withdrawn due to judicial inaction are not visible in this data.

Publicly available data also does not reveal the extent to which amounts payable are ultimately collected. Security for enforcement is available once an order in favor of enforcement is issued, but not while an application for enforcement is pending. Thus, asset dissipation during review of an application for enforcement may still be a concern, particularly when seeking to enforce against a small, midsized, or lesser known company.

That said, the PRC government is and has been taking steps to improve enforcement and collection rates. Higher court reporting is intended to thwart non-judicial interference with enforcement. The SPC has also taken the position that only egregious violations of public policy are sufficient to deny enforcement of a foreign arbitral award.25 Finally, there are now penalties for failing to comply with a PRC court order on enforcement. Companies or individuals who intentionally avoid enforcement will be blacklisted and subject to a number of restrictions, including restricted access to financing and bans on

luxury travel and consumption of luxury and other non-basic amenities.26

If a PRC court is inclined to deny enforcement, it most likely would do so on procedural grounds. Thus, if enforcement is contemplated in China, it is critical to ensure the arbitral procedure is conducted in accordance with the arbitral rules and procedure agreed by the parties and of the place of the arbitration. It is also critical at the outset to ensure a well-drafted arbitration clause is in place, to further ensure enforcement of a favorable award.

1 With special thanks to Yu Yue, Wang Qian, and Ma Xiao for their assistance in preparing this article.

2 China acceded to the New York Convention on 22 January 1987, which became effective on 22 April 1987. When acceding to the Convention, China agreed only to recognize and enforce awards (1) made in the territory of another contracting State; and (2) concerning differences arising out of legal relationships, whether contractual or not, that are considered commercial under the national law.

3 To be specific, we have not examined foreign-related awards rendered by domestic PRC arbitral institutions.

4 Information concerning applications for recognition and enforcement in 2016 is not yet available.

5 Provisions of the Supreme People’s Court on the Issuance of Judgments on the Internet by the People’s Courts

6 Id., Article 4

7 The percentage enforcement rate by region is naturally skewed by the number of applications a particular region may have received over the time period. However, the data would at least seem to be anecdotally indicative of whether the region is favorably disposed to order enforcement of arbitral awards.

8 Of those 14 cases, six were enforced.

9 Note this data does not include the second phase – i.e., the time for actual enforcement and collection of moneys due.

10 SPC Arrangement on the Mutual Enforcement of Arbitral Awards between Mainland China and the Special Hong Kong Special Administrative Region.

The Arrangement does not expressly contemplate “recognition” prior to “enforcement”. In practice, however, an applicant will still be subject to similar recognition and enforcement proceedings. For more detail and recent practice regarding this arrangement see; “One Arrangement, Two Systems: considerations when enforcing awards between Hong Kong and the PRC”.

11 New York Convention, Article V(1)(a). Examples of circumstances giving rise to an invalid arbitral agreement include use of an incorrect company name in the contract and thus lack of a valid arbitral agreement with intended company and domestic parties entering a foreign arbitral agreement (under PRC law, only parties to a foreign-related contract may select offshore arbitration).

12 New York Convention, Article V(1)(d). Examples of circumstances giving rise to denied enforcement include failure to issue the arbitral award within the time fixed by the arbitral rules and failure to extend the time for issuing an award and notify the parties of the same.

13 In three of the cases, duplicate reasons for denied enforcement were cited. Thus, for the purpose of calculating percentages, we assume a total of 34 denied applications.

14 New York Convention, Article V(1)(b)

15 New York Convention, Article V(1)(c)

16 New York Convention, Article V(2)(b). In this case, the court concluded the matters addressed by the tribunal were not covered by the arbitration clause and were subject to the jurisdiction of PRC courts and that enforcement would infringe upon PRC judicial sovereignty. The court also relied on Article V(1)(c) to deny enforcement.

17 New York Convention, Articles 2 and IV; Provisions of the SPC on Evidence in Civil Procedure, Article 11

18 PRC Civil Procedure Law (1991), Article 219

19 New York Convention, Article 1; PRC Civil Procedure Law (1991), Articles 108(2) and 207

20 New York Convention, Articles 1, 2(3)

21 Includes 2 applications which were denied on multiple grounds

22 Includes 2 applications which were denied on multiple grounds

23 Includes 1 application which was denied on multiple grounds

24 Includes 1 application which was denied on multiple grounds

25 See, e.g., Letter of Reply of the SPC on Request for Instructions Re Application of ED&F (Hong Kong) Co Ltd for Recognition and Enforcement of Arbitral Award of London Sugar Association (declining to refuse enforcement on basis that Chinese party’s failure to conduct business in accordance with PRC was sufficient violation of public policy)

26 Several provisions of the SPC on Announcement of the List of Dishonest Persons Subject to Enforcement




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Airmec Dubai sought nullification of three NYC awards for a number of reasons arising under Article 216 of the UAE Civil Procedure Code, including: failure of the arbitral tribunal to apply the mandatory provisions of UAE law on oath-taking for witnesses; lack of capacity of the signatory of the arbitration agreement to sign on behalf of the defendant; and lack of terms of reference to arbitration.

The Dubai Court of Cassation rejected Airmec’s objections, confirming that: (i) the NYC was to be construed as mandatory internal law and applied within the UAE; (ii) the Court’s jurisdiction over foreign arbitral awards is limited to ensuring such awards do not breach the Federal Decree of accession and ensuring that the awards meet the legal requirements of Articles IV and V of the NYC.

Straight forward approach to enforcement: Dubai Court of Cassation Case No. 434 of 2014 - Al Reyami Group LLC v BTI Befestigungstechuk GmbII & Co of KG3,

In 2014, the Dubai Court of Cassation took a very straightforward approach to applying the NYC to the enforcement of an ICC arbitral award rendered in Stuttgart, Germany.

The Dubai Court of Cassation dismissed the Respondent’s arguments concerning breaches of procedural law and confirmed the award did not infringe public policy.

Recent pro-enforcement stance bolstered: Dubai Court of Cassation Commercial Appeal No. 693 of 2015

The UAE courts’ pro-arbitration stance was further bolstered by a decision handed down by the Dubai

Enforcing arbitral awards in the UAE – the law and practice as at 2016Joanne Strain, Edmund Northcott

Overview

The legal landscape of the UAE is increasingly favourable to arbitration:

§ A growing trend of pro-enforcement judgments from the local Arabic speaking courts is palpable.

§ The English speaking common law Dubai International Financial Centre (DIFC) Courts, which exist alongside

the Arabic Courts, and which adopt the UNCITRAL Model Law (designed to assist States in reforming and modernizing their laws on arbitral procedure) provide a modern legal framework for enforcement.

§ The DIFC Courts have issued decisions confirming jurisdiction beyond its territorial borders, making the DIFC Courts a popular alternative option for parties seeking to enforce awards against parties and assets in onshore Dubai.

Legal framework

Before an arbitral award can be enforced in the UAE, it must first be ratified by the Courts, so that it carries the same weight as a locally-rendered judgment. Thereafter,

an Order for Execution is required to enforce against assets in the UAE.

An order for ratification can be obtained through the local Arabic speaking Courts. Any challenge to ratification, or claim for annulment, can be advanced under the limited grounds set out in Article 216 of the UAE Civil Procedure Code (Federal Law 11 of 1992) (the “CC”). Grounds for challenge include nullity in the award or nullity in the proceedings, or if the arbitration instrument has lapsed by effluxion of time.

An order for recognition can similarly be sought through the English speaking common law Courts of the DIFC. An order for recognition can only be challenged under the grounds set out in Article 42 of the DIFC Arbitration Law which mirror the defences to enforcement found at Article V of the New York Convention (the “NYC”)1. If the assets for enforcement are in on-shore Dubai, rather than the DIFC, then an Order for Execution from the Dubai Courts will still be required.

Enforcement of New York Convention Awards2: Recent decisions with a positive trend

Abu Dhabi and Dubai judgments

Despite the UAE’s accession to the NYC, historically there were hurdles to enforcement, and certain decisions from the Courts gave rise to real concern.

However, increasingly decisions from the Courts reflect a pro-enforcement approach, in line with the expectations of the NYC.

For example:

Application of NYC as mandatory internal law confirmed: Dubai Court of Cassation Case No. 132/2012 Airmec Dubai, LLC v. Maxtel International, LLC




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Enforcement of domestic UAE arbitral awards

UAE

Reports indicate that the UAE courts have increasingly taken a favourable approach to the enforcement of UAE domestic arbitral awards.

However, any award can be challenged (i) pursuant to the grounds for nullifying awards (Article 216 of the CC, in particular

However, while the DIFC Courts have been willing to enforce foreign and domestic awards against “local” award debtors, in circumstances where the assets of the award debtor are in Dubai (on-shore), it remains to be seen how local courts will treat the DIFC Courts’ orders for enforcement. We understand that a number of execution cases are open in the Dubai courts but none have had a judgment rendered at the time of writing. Watch this space.

The DIFC Courts

The decisions of the DIFC Courts can be expected to follow a pro NYC approach at all times – the DIFC arbitration law is based on the UNCITRAL Model Law.

The DIFC Courts have made plain, in accordance with DIFC Laws, that the Courts will recognise an arbitral award, irrespective of where it was made, as binding within the DIFC, subject only to limited defences.

For example:

The DIFC Courts order enforcement of a foreign award against a debtor in “on-shore” Dubai, outside the DIFC: Egan & Eggart v. Eava & Efa (ARB 002 of 2013)5 (“Egan v Eava”)

Egan & Eggart (companies incorporated outside of Dubai) sought an order from the DIFC Courts for enforcement of a foreign arbitral award against Eava & Efa located in “on-shore” Dubai (i.e., outside the DIFC free-zone), pursuant to Articles 42 and 43 of the DIFC Arbitration Law.

Finding in favour of Egan & Eggart, the DIFC Courts noted that the DIFC is an autonomous jurisdiction, and that the provisions of the CC list not apply. Article 5(1)(A)(e) of the Judicial Authority Law provides that the DIFC Courts have jurisdiction over any claim in accordance with DIFC Laws and Article 42 of the DIFC Arbitration Law provides that “an arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the DIFC and, upon application in writing to the DIFC Court”.

This judgment of the DIFC Courts has been relied upon in a number of other cases, including Fiske & Firmin v Firuzeh, ARB 001 of 2014.

Court of Cassation in Commercial Appeal No. 693/2015.

The Respondent sought to appeal the Order for Ratification of English arbitral awards in the UAE Court of Cassation, on the grounds that he had not been properly served with the arbitration notice and that the signatory to the agreement was not authorised.

The Court of Cassation dismissed the appeal, and held that: (i) the Respondent’s attendance at the hearings constituted sufficient notice of the arbitration; and (ii) the Respondent had failed to adduce any evidence before the trial court that the signatory lacked capacity to bind him when entering into the agreement in question.

Notwithstanding the above, a note of caution should be sounded. There remains some measure of uncertainty, particularly as the civil law system does not apply stare decisis (i.e. case law precedent). By way of example, a recent Dubai Court of Appeal decision in 2016 bucked the trend of the mandatory application of the NYC to foreign awards, when the Court questioned whether there was sufficient evidence before it that the UK, where the award came from, was a signatory to the NYC, and refused to enforce on that basis. However, this decision was soon overturned by the Court de Cassation a few months later4.

In another such example, in Dubai Court of First Instance Case No. 531 of 2011, the Court refused recognition and enforcement of an award issued by the Singapore International Arbitration Centre on the basis that the award was not ratified in the country of origin and could therefore not be executed under Articles 235 and 236 of the CC.




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In June of this year, the Ruler of Dubai, by Decree 19 of 2016 (the “Decree”), proposed the creation of a new Committee to review matters of conflict.

In general, prior to the Decree, all matters regarding conflict, whether negative or positive, were referred to the Union Supreme Court. In a recent DIFC Court judgment, the Deputy Chief Justice Sir David Steel considered the impact of the Decree, noting it was designed to “eliminate the jurisdiction of the Union Supreme Court in respect of conflicts of jurisdiction between the courts of Dubai”8. However, he declined to rule on the application of the Decree and in particular its retroactive effect, as no conflict on jurisdiction was found to exist on the facts. It therefore remains to be seen how the Decree will function when put into practice by courts and tribunals.

Conclusion

Within the last few years there has definitely been a positive shift towards enforcement of both foreign and domestic awards within the UAE. It appears that this trend is set to continue, and strengthen.

DIFC

Banyan Tree v Meydan Group LLC

For the first time, in 2013, the DIFC Courts, in a landmark judgment, Banyan Tree v Meydan Group LLC (“Banyan Tree”),7 held that the DIFC Courts have jurisdiction to enforce a UAE (a non-NYC award) award, irrespective of the presence of assets and/or connection of the parties with the jurisdiction of the DIFC.

The reasoning adopted by the Court was similar to Egan v Eava – Article 5(1)(A)(e) of the Judicial Authority Law and Article 42 are the gateway to jurisdiction of the DIFC Courts.

Additionally, the Court held that:

1. the doctrine of forum non conveniens only applies in the DIFC where the alternative court is a foreign court (as opposed to a UAE court); and

2. the NYC is not applicable to the enforcement or recognition of UAE awards in the DIFC, as they are deemed to be “domestic” awards.

As with NYC awards recognised by the DIFC Courts, but with assets in on-shore Dubai, it remains to be seen how local courts will treat the DIFC Courts’ orders regarding recognition and enforcement of UAE awards.

Legal Update: Conflicts of Jurisdiction between Courts and Decree 19 of 2016

As the DIFC Courts have held that they have jurisdiction to consider on-shore UAE awards, not connected with the DIFC, notwithstanding that the ratification of those awards would typically fall to the local courts, there has emerged real areas of potential overlapping competence, and jurisdictional conflicts between courts.

sub-clause 216(1)(c), including being contrary to public policy or morals); and (ii) for failure to comply with the technical requirements required for a valid award, such as the award must be physically signed within the UAE; the legal representative of each party must possess a valid power of attorney to act in the proceedings; and witnesses should not be present in the evidentiary hearing except when they are giving evidence (though this is often relaxed by agreement of the parties allowing witnesses to attend the hearing after they have given evidence).

Whilst public policy grounds can be asserted as a challenge to both NYC and domestic awards, the approach of the UAE Courts indicates that a more expansionist interpretation of “public policy” might apply to domestic awards.

For example:

Public Policy defined widely - Baiti Real Estate Development v. Dynasty Zarooni Inc.6

In Baiti Real Estate, the underlying arbitration involved a property transaction whereby the owner had failed to register the property following sale, and the arbitrator held the sale to be null and void, and the contract terminated, applying Article 3 of Law No. 13 of 2008.

This award was successfully challenged under public policy grounds. The Court of Cassation held that the arbitrator did not have the power to rule on matters involving Article 3 of Law No. 13 of 2008 as they pertained to the “rules of private ownership and the circulation of wealth”, which are matters of public policy and consequently set aside the award.

1 The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in New York on 10 June 1958.

2 An award made in a foreign country which is a signatory to the NYC, hereafter a “NYC award”.

3 Judgment dated 23 November 2014.

4 Case No 384 of 2016, judgment dated 19 June 2016

5 Previously referred to X1 and X2 v Y1 and Y2

6 Appeal No. 14/2012, Real Estate Cassation.

7 Case No. ARtB 003-2013

8 Standard Chartered Bank and Investment Group Private Limited, Claim No. CFI 026/2014 dated 1 August 2016.




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Hong Kong along the lines of the pre-1997 situation.6

3. Enforcing a Hong Kong award in the Mainland

In accordance with the Arrangement, where a party fails to comply with an arbitral award made in Hong Kong, the other party may apply to the relevant People’s Court to enforce the award. This section discusses the criteria, process and practical issues regarding the enforcement of a Hong Kong award in the Mainland.

Process of enforcement

Holders of arbitral awards made in Hong Kong, whether institutional or ad hoc, can apply for enforcement in the Mainland under the Arrangement.7 The Intermediate People’s Court at the place of domicile of the respondent,8 or the place where the respondent’s property is located, has jurisdiction over the enforcement application, and the enforcement application will be governed by the relevant Mainland laws, including the Arrangement.

In order to enforce a Hong Kong award in the Mainland, an applicant must submit: (i) a written application for enforcement; (ii) the arbitral award; and (iii) the arbitration agreement. Applicants may also be required to submit a certificate of effectiveness issued by the relevant arbitration institution proving that the arbitral award has come into effect. These documents, and all other supporting documentation, have to be translated into simplified Chinese in order to be admissible in a People’s Court.

If an Intermediate People’s Court decides not to enforce an award, that Court must submit their decision to the relevant Higher People’s Court for review. If the Higher

One Arrangement, Two Systems: considerations when enforcing awards between Hong Kong and the PRCEdmund Wan, Teng Haidi, James McKenzie, Yu Qing, Jack Nelson

Introduction

The foundational instrument for the enforcement of international arbitral awards, the New York Convention (the “Convention”),1 has made arbitral awards readily enforceable across the world but, in application, the Convention remains reliant upon the divide between domestic and international arbitration awards.

Cross-border enforcement of arbitral awards within the constitutional principle of “one country, two systems” and between the People’s Republic of China (the “Mainland”) and Hong Kong in 1997 threw this limitation into sharp relief. Indeed, reunification brought about a wholly unsatisfactory state of affairs where Hong Kong awards were, for a period of time, unenforceable in the Mainland, and vice-versa. The solution to this problem, brokered between the authorities of Hong Kong and the Mainland, was a bespoke agreement, the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and Hong Kong (the “Arrangement”).

This article discusses the history behind the Arrangement and its practical, and somewhat asymmetrical, effect on the enforcement of Mainland arbitral awards in Hong Kong and on the enforcement of Hong Kong arbitral awards in the Mainland.

2. Background to the Arrangement

In 1975 the United Kingdom ratified the Convention, with application to Hong Kong taking effect in 1977.2 Ten years later, the Mainland ratified the Convention. This made Mainland arbitral awards readily enforceable as Convention awards in Hong Kong, and vice-versa. Upon the resumption of Chinese sovereignty over Hong Kong on 1 July 1997, the Chinese Government extended the application of the Convention to Hong Kong. However, issues concerning the enforcement of arbitral awards arose quickly thereafter.

In late 1997, an application in Hong Kong to enforce a Mainland arbitral award pursuant to the Convention3 was rejected on the basis that Hong Kong and China were no longer “separate parties” to the Convention.4 In Mainland China, the People’s Courts also received applications to enforce Hong Kong arbitral awards, but were reluctant to issue any decisions in the absence of a specific agreement.5 This undesirable enforcement lacuna persisted for some two years while a series of negotiations took place between the relevant Mainland and Hong Kong authorities. These negotiations culminated on 21 June 1999, when the Arrangement was finally agreed between Hong Kong’s Department of Justice and the Supreme People’s Court.

Under the Arrangement, Hong Kong’s courts agreed to enforce awards made pursuant to the Arbitration Law of the People’s Republic of China ([1994] No. 31) (the “Arbitration Law”). In turn, the People’s Courts of the Mainland agreed to enforce awards made pursuant to Hong Kong’s Arbitration Ordinance (previously Cap. 341, now Cap. 609) (the “Arbitration Ordinance”). Once effective, the Arrangement re-established the mutual enforcement of arbitral awards between the Mainland and




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the arbitral award and agreement if they are written in a language other than English or Chinese.19

Recognised Mainland arbitral authorities

Under Section 2(1) of the Arbitration Ordinance, a “Mainland award” is defined as an “arbitral award made in the Mainland by a recognised Mainland arbitral authority in accordance with the Arbitration Law of the People’s Republic of China” (emphasis added). Accordingly, not all arbitral awards are eligible for enforcement under the Arbitration Ordinance. A list of recognised mainland arbitral authorities is published and updated in the Gazette from time to time by the Secretary of Justice.20 The list includes CIETAC and the China Maritime Arbitration Commission, as well as most domestic arbitration commissions established under the Arbitration Law.21

Enforcing a Mainland award in Hong Kong

In Hong Kong, Mainland awards are enforced in a similar manner to Convention awards, and also benefit from the strong presumption in favour of enforcement that Convention awards enjoy.17 Asset preservation is readily available, and Hong Kong courts stand ready to assist the arbitral process.

An applicant can choose to enforce an award under Section 84 of the Arbitration Ordinance either by way of summary procedure, or alternatively by an action on the award on the basis that the award is a debt due.18 In both cases, the application will be heard by the Court of First Instance. As evidence for enforcement of an award, a plaintiff will have to produce: (i) the authenticated original arbitral award or a duly certified copy of it; (ii) the original arbitration agreement or a duly certified copy of it; and (iii) a certified translation of

Public policy

Article 7(5) of the Arrangement states enforcement of an arbitral award may be refused if a Mainland court finds that the enforcement would be contrary to the public interests of the Mainland.

There is no specific provision under Mainland law regarding the definition of violation of public policy. However, the Supreme People’s Court has previously ruled that “the principle of public policy should be applicable only under the circumstances that the recognition of an arbitral award would violate China’s basic legal system and cause damage to China’s fundamental social interests”.13 In other cases the Supreme People’s Court has emphasised that public interest should be strictly interpreted and limited in its use, and that violation of mandatory rules of the law, administrative rules and departmental regulations does not necessarily comprise violation of public interest.14 Accordingly, any rejection of enforcement of an arbitral award by an Intermediate People’s Court is likely to attract significant judicial scrutiny upon review.

Asset preservation

There is no specific rule regarding asset preservation pending enforcement of an arbitral award under the Arrangement.15

Nonetheless, there is one case where the Fuzhou Intermediate People’s Court granted asset preservation pending enforcement of a Hong Kong arbitral award.16 The Court reasoned that the application filed under the Arrangement should be treated as akin to an enforcement under the Civil Procedure Law, which allows for asset preservation. In the absence of further Supreme People’s Court guidance, it is unclear whether the Fuzhou Intermediate People’s Court’s pragmatic approach applies across the Mainland.

People’s Court decides to uphold the lower court’s decision to not enforce the award, it must then report this decision to the Supreme People’s Court.9 The Supreme People’s Court will then review the matter and reply with a final decision.10

Refusal of enforcement

Article 7 of the Arrangement stipulates the circumstances under which the Mainland court could refuse the application for enforcement of a Hong Kong arbitral award. As is discussed with respect to enforcement in Hong Kong below, many of the circumstances can be avoided by prudent and careful conduct during the arbitration. More problematic are the issues of: (i) arbitrability; and (ii) public policy, both of which are dealt with below.

Arbitrability

Under the Arrangement, if the relevant court finds that under the law of the place of enforcement the dispute is not arbitrable (i.e. incapable of being settled by arbitration), then the court may refuse to enforce the award. Under the Arbitration Law, only contractual disputes and other disputes over rights and interests in property between citizens, legal persons and other organizations may be arbitrated.11 Family and succession disputes, as well as administrative disputes, are specifically proscribed as not capable of being settled through arbitration.12

Therefore, if the subject matter of a Hong Kong award is clearly proven to fall out of the scope of the disputes that are capable of being settled through arbitration, the enforcement of such an award will be refused in the Mainland. Accordingly, parties seeking to enforce Hong Kong awards in the Mainland should first ensure that the relevant dispute is arbitral as a matter of Chinese law.




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apply. In the Mainland, the time limit for an application to enforce awards is two years.25 In Hong Kong, the time limit is six years.26 Accordingly, an applicant who finds themselves out of time in the Mainland may still enforce an award in Hong Kong.

Conclusion

As Chinese parties have increasingly favoured Hong Kong as their seat of arbitration, the number of enforcements under this Arrangement, and its importance to enforcement proceedings in the Mainland, has slowly but inexorably increased. The Arrangement’s importance is expected to increase further as Hong Kong continues to be the seat of choice for Chinese parties seeking a neutral venue.

As can be seen from the foregoing, although the Arrangement has been effective in plugging the lacunae created by reunification of Hong Kong with the Mainland, notable limitations and asymmetries exist between Hong Kong and the Mainland in their enforcement of each other’s arbitral awards.

To avoid difficulties, parties seeking to enforce awards under the Arrangement should first consider whether the award is institutional or ad hoc, and where the relevant assets are located. Thought should then be given to the applicable limitation periods, and the availability of asset preservation. Finally, any potential grounds for refusing enforcement should be canvassed before beginning the enforcement process in either jurisdiction.

Refusal of Enforcement

The Court is empowered to refuse the enforcement of a Mainland award on the grounds listed in Section 95 of the Arbitration Ordinance, which mirror the grounds for refusal to enforce a Convention award. A few examples are: where a party to the arbitration agreement was under some incapacity; or where the arbitration agreement was invalid; or where a party was not given proper notice of the appointment of the arbitrator. Many of these instances can be cured by prudent and informed conduct during the arbitral proceedings, drafting of the arbitration agreement, and the appointment of arbitrators. Although the Court is empowered rather than required to refuse enforcement in these circumstances, refusal typically follows a finding that a relevant ground has been established as a matter of practice.

public policy” of Hong Kong. However, under this same Article, a Mainland court can refuse enforcement of a Hong Kong award if the court “holds that the enforcement of the arbitral award in the Mainland would be contrary to the public interests of the Mainland”. The actual effect of these differences has not been tested in either Mainland or Hong Kong courts. Nonetheless, a plain reading of Article 7 indicates that Mainland courts have a wider margin of discretion to refuse enforcement than that enjoyed by courts in Hong Kong.

Second, the Hong Kong courts have adopted a restrictive approach to the public policy exception in respect of both Convention awards and Mainland awards. The Keeneye case22 and subsequent Hong Kong authority23 evidence that courts will take a pro-enforcement approach and will not readily refuse to enforce Mainland arbitral awards. In particular, the public policy ground has been interpreted narrowly. The judgment also illustrates the Hong Kong court’s deference to decisions of Chinese courts in deciding whether or not to enforce a Mainland award, citing it as a “very strong policy consideration”.

Third, Article 2 of the Arrangement explicitly provides that enforcement cannot be sought in the Mainland and Hong Kong simultaneously even where respondent owns property in both regions. The rule may be circumvented where the result of enforcement proceedings in one jurisdiction is insufficient to fully satisfy the award.24 In such a case, the applicant may apply to the court of the other jurisdiction for enforcement of any outstanding liabilities, provided that the total amount recovered across both Hong Kong and the Mainland does not exceed the amount awarded.

Fourth, Article 5 states that the differing limitation periods applicable in the Mainland and Hong Kong will continue to

As with the enforcement of Hong Kong awards in Mainland China, the most problematic and highly debated ground of refusal is where it would be contrary to public policy to enforce the award. This is dealt with further in Section 4 below.

Notable asymmetries in the application of the Arrangement

Apart from the differences in arbitrability noted in Section 2 above, the Arrangement also reflects the differing negotiating power of Hong Kong and the Mainland. This is demonstrated by the various asymmetries in its application to enforcement of awards between the two territories.

First, there is an asymmetry regarding the refusal of enforcement. Under Article 7, a Hong Kong court can refuse enforcement of a Mainland award if the court “decides that the enforcement of the arbitral award in Hong Kong would be contrary to the




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1 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, effective on 7 June 1959.

2 Arbitration (Amendment) Ordinance (No. 85 of 1975).

3 Ng Fung Hong Ltd v ABC [1998] 1 HKC 213.

4 Specifically, Findlay J stated that “since the People’s Republic of China resumed sovereignty over Hong Kong on 1 July 1997, Hong Kong and Mainland China have ceased to be separate parties to the New York Convention vis-à-vis each other.”

5 “Regulations abiding Mutual Enforcement of Arbitral Awards Between the Mainland and Hong Kong”, China Law (4) 18.

6 The Arrangement was promulgated on the Mainland in January 2000, becoming effective on 1 February 2000 (see 法释[2000]3号). In coordinated legislative action, the Arrangement was incorporated into Hong Kong law by the Legislative Council in January 2000 through the Arbitration (Amendment) Ordinance 2000 (2 of 2000), becoming effective on 1 February 2000.

7 Notice of the Supreme People’s Court on Issues Related to the Enforcement of Hong Kong Arbitral Awards in Mainland China (Fa [2009] No. 415).

8 Where there are multiple respondents to an award, Article 21 of the Civil Procedure Law of the People’s Republic of China ([1991, revised 2012] No. 44) provides that “[w]here the places of domicile or places of habitual residence of several defendants in the same action are located within the jurisdictions of two or more people’s courts, both or all of such people’s courts shall have jurisdiction over the action.” Therefore all Mainland courts with jurisdiction over the place of domicile of the respondent will have jurisdiction over the enforcement application and the applicant may apply to any of these courts for enforcement.

9 Article 2 of the Notice of the Supreme People’s Court on Handling Relevant Issues about Foreign-related Arbitration and Foreign Arbitral Issues by the Supreme People’s Court (No. 18 [1995]).

10 The Civil Procedure Law of the People’s Republic of China ([1991, revised 2012] No. 44) and the Arrangement are silent with respect to timing. Generally speaking, review by an Intermediate People’s Court takes approximately one year. If that court’s decision is to be reviewed by a Higher People’s Court and then by the Supreme People’s Court, this will take at least another year.

11 Article 2, Arbitration Law.

12 Article 3, Arbitration Law.

13 Reply to the Request for Instructions on Non-Recognition of No. 07-11 (Tokyo) Arbitral Award of the Japan Commercial Arbitration Association ([2010] Min Si Ta Zi No. 32).

14 See, eg, Reply to Haikou Intermediate People’s Court Regarding the Request for Instructions on Non-Recognition and Non-Enforcement of the Arbitral Award of the Arbitration Institute of the Stockholm Chamber of Commerce [2001] Min Si Ta Zi No. 31; Reply to the case of E.D. & F. Man (Hong Kong) Limited - Application for Recognition and Enforcement of the Arbitration Award of the London Sugar Commission, [2013] Min Si Ta Zi No. 3; Reply to the Request for Instructions Re the Hong Kong Xiang Jin Grain and Oil Food Co., Limited - Application for Enforcement of the Arbitration Award of Hong Kong International Arbitration Center [2003] Min Si Ta Zi No. 9.

15 This contrasts with the specific powers of Mainland courts to grant asset preservation in respect of applications for the recognition and enforcement of the Hong Kong civil judgments, Macau arbitral awards, Macau civil judgments, Taiwan arbitral awards, and Taiwan civil judgments. See respectively Article 14 of Arrangement of the Supreme People’s Court between the Mainland and the HKSAR on Reciprocal Recognition and Enforcement of the Decisions of Civil and Commercial Cases under Consensual Jurisdiction; Article 11 of Arrangement between the Mainland and the Macau SAR on Reciprocal Recognition and Enforcement of Arbitration Awards; Article 15 of Arrangement between the Mainland and the Macau Special Administrative Region on the Mutual Recognition and Enforcement of Civil and Commercial Judgments; Article 10 of Provisions of the Supreme People’s Court on Recognition and Enforcement of the Arbitral Awards of the Taiwan Region; Article 10 of Provisions of the Supreme People’s Court on Recognition and Enforcement of the Civil Judgments of Courts of the Taiwan Region.

16 Fujian Zongheng Gaosu Information Technology Limited Co., Fujian Focus Media Limited Co., Cheng Zheng v Shidai Cayman Investment Co. (Case no.: (2014) Rong Zhi Jian Zi No. 51).

17 The Hong Kong court will consider Hong Kong case law regarding the Convention to be influential to the enforcement of Mainland awards. See Shantou Zheng Ping Xu Yueli Shu Kuao Trading Co Ltd v Wesco Polymers Ltd [2002] HKEC 76.

18 Section 92, Arbitration Ordinance.

19 Section 94, Arbitration Ordinance.

20 A list of recognised Mainland arbitral authorities is published in the Hong Kong Government Gazette and can be accessed at: http://www.gld.gov.hk/egazette/pdf/20111521/egn201115213248.pdf

21 The Supreme People’s Court issued a judicial interpretation on 5 July 2015 to clear up any residual confusion surrounding the recently established Shanghai International Arbitration Centre and the Shenzhen Court of International Arbitration, clarifying the procedure for deciding jurisdiction and enforcing awards emanating from these institutions.

22 Gao Haiyan v Keeneye Holdings Limited [2012] 1 HKLRD 627.

23 See, eg, Granton Natural Resources Company Limited v Armco Metals International Limited [2012] HKCFI 1938; Re PetroChina International (Hong Kong) Corporation Limited [2011] 4 HKLRD 604; 廣東長虹電子有限公司 v Inspur Electronics (HK) Limited [2014] HKCFI 2403. Cf 樓外樓房地產咨詢有限公司 v 何志蘭 [2015] HKCFI 664, where the Court of First Instance refused to enforce two Mainland awards after deciding that the Notice of Hearing was not properly served.

24 Section 93(2), Arbitration Ordinance (Cap. 609).

25 Article 215, Civil Procedure Law.

26 Section 4(1), Limitation Ordinance (Cap. 347).




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Plotting the Course: Dealing with uncertainty–disputes post-Brexit voteDorothy Murray, Matthew Wild

Long term, multi-party infrastructure projects can give rise to a number of disputes over time. Our infrastructure clients typically find four points at which dispute resolution (DR) choices arise:

1. Contract negotiation – the parties consider the types of disputes that are

likely to arise when selecting appropriate DR mechanisms and fora, including the quicker forms of DR such as expert determination or adjudication and the lengthier more detailed processes of litigation or arbitration.

2. Occurrence of a dispute – the contract may expressly allow for a choice to be made – between arbitration and litigation, or in the courts of country A or B – or a party may choose ADR such as mediation before starting a formal process.

3. Settlement – when opportunities for settlement arise, a party assesses the

likelihood of a successful outcome against commercial considerations, time, cost, credit risk and enforcement

4. Enforcement – where there is no voluntary compliance with a judgment or award, the winning party must consider how and where to enforce.

Here we consider the impact of the Brexit vote on each of these issues.

As a preliminary point, as of the date of writing, nothing has changed. EU law remains in effect in the UK. Looking to the future, we do not know what form Brexit will take, to what treaties the UK will accede and which EU laws it will replicate in its own domestic law. The real issue facing decision makers now is uncertainty about the position that will apply on Brexit (whenever that occurs). This uncertainty won’t be resolved any time soon.

The DR method most affected by this uncertainty is litigation, whether in the English Courts or in the courts of other EU Member States that may need to be enforced in England. The considerations as between English Courts and non-Member State courts have of course not altered.

Statutory adjudication is based on UK domestic law and will be unaffected. Contractual methods such as expert determination, the establishment of a disputes board or contractual adjudication will similarly be unaffected (at least until there is a question about how to enforce the resulting decision in the event of non-compliance).

Court proceedings are subject to three uncertainties:

§ First, jurisdiction – currently under the Recast Brussels Regulation all EU courts give effect to exclusive jurisdiction clauses in favour of other EU Member

State courts by staying proceedings to allow that court to determine the matter. If the UK leaves the EU, much depends on what treaty replaces the Brussels Regulation (if any). If questions of jurisdiction are to be determined by the court first seised, a party seeking delay could start a claim in a court known to take a long time to decide matters of jurisdiction, thereby side-tracking proceedings even if that court eventually declines to hear the claim (the so-called Italian Torpedo).

§ Second, the recognition and enforcement of judgments – currently English judgments are recognised and easily enforceable in the EU, and vice versa, thanks to the Brussels Regulation. Again, what happens post Brexit will depend on what replaces this within the UK, and as between the UK and the EU.

§ Third, service – the English civil procedure rules and the EU Service Regulation combine to make service of proceedings out of England on parties in other EU Member States relatively straightforward. Post Brexit, service is likely to be slower and more expensive, unless parties have appointed an agent for service within England.

An arbitration choice will be unaffected by Brexit. Arbitration agreements are widely recognised and enforced by EU Member States (and in many other countries) pursuant to the New York Convention, as are arbitral awards. The Arbitration Act 1996 will not be affected by Brexit, nor will the English court’s generally pro-arbitration approach.

These uncertainties feed into the decisions to be made at each of the key decision points.

1. Contract negotiation – parties drafting




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This article was first published in the September 2016 edition of Partnerships Bulletin: http://www.partnershipsbulletin.com

DR clauses now may be advised to consider arbitration rather than court litigation to avoid future uncertainties arising as to recognition of the parties’ choice of method, service and enforcement of the resulting decision. An arbitration under the LCIA Rules and seated in London could be a good alternative choice for an issue that would otherwise be heard in the English High Court. ADR and contractual DR methods are unaffected and should still be chosen where commercially appropriate. Another option we have seen are conditional clauses: in essence, English courts unless Brexit; if Brexit, arbitration.

2. Occurrence of dispute – when selecting DR methods once a dispute has arisen, or in dealing with ongoing disputes, given future uncertainties in relation to court judgments, parties seeking resolution are advised to use the pre-Brexit period to “get on with it”, either by selecting quicker methods or by pushing for a timetable that allows for a judgment to be obtained and enforced, if necessary, before any Brexit. If there are not suitable contractually agreed options already in place, the parties could agree, for example, to appoint an expert to determine the issue, or to refer the dispute to arbitration.

3. Settlement – when weighing up the pros and cons of settlement, parties must add Brexit uncertainties (particularly as to enforcement) in to their thinking. For borderline cases, the balance may now be tipped in favour of a settlement.

4. Enforcement – a party with an English judgment to enforce in the EU, or vice versa, should not sit on that judgment and run the risk of having to comply with a more onerous and time consuming enforcement process post Brexit.

Brexit and Arbitration: shaken but not stirredCraig Pollack, Juliette Huard-Bourgois, Stuart Bruce

Last June 51.9% of the British electorate voted in favour of leaving the European Union (‘EU’), setting the UK on an entirely new course in law, politics and economics domestically, regionally and internationally. It will take months, or even years, for the UK to negotiate its new relationship with the EU. Much will remain uncertain during this transition period.

One area that is relatively safe from the legal uncertainty created by Brexit is international arbitration.

No immediate impact on international arbitration in the UK

Arbitration, both domestic and international, has never been regulated or harmonised at the EU level. Since its inception in 1968, the Brussels Regulation on Jurisdiction and the Recognition and Enforcement of Judgments has excluded arbitration from its scope of application.

As a result, Brexit will have no immediate impact on English arbitration law and procedure, including the English Arbitration Act 1996. Arbitration agreements that designate England as the seat, and arbitration awards made in England, will be enforceable in the same way that they always have been, whether in English, foreign or EU Member State courts. These




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issues are and remain governed by the New York Convention on the Recognition and Enforcement of Foreign Awards ('NY Convention’), even within the EU.

Possible side effects on commercial arbitration

While EU legislation does not directly apply to international arbitration, case law of the EU Court of Justice (‘CJEU’) has developed principles that impact on the practice of international arbitration in EU countries. The most important of these are:

1. the prohibition on EU Member States courts from ordering anti-suit injunctions directed at proceedings pending before another EU Member States court, even where those proceedings are brought in breach of an arbitration agreement (Allianz SpA and Others v West Tankers Inc, Case C-185/07); and

2. the duty for EU Member States courts to set aside or refuse to enforce an arbitral award that would be contrary to certain mandatory norms of EU law, such as the anti-trust rules provided in the Treaty on the Functioning of the EU (EcoSwiss v Benetton, Case C-126/97).

When Brexit ultimately happens, English courts will no longer be bound by CJEU’s case law, therefore:

1. anti-suit injunctions that prevent a party from pursuing abusive court proceedings in an EU Member State will be available in the English courts; and

2. like Swiss courts, the English courts will not be bound to sanction an arbitration award that is contrary to EU law. EU public policy will no longer form part of English public policy for the purposes of Article V of the NY Convention.

For certain market players and arbitration users, these possible side effects, coupled with the enduring legal certainty of English arbitration in the face of Brexit, are signs that London will continue to be, and will even strengthen its position as, a leading arbitral seat for international arbitration.

Change of direction for investor-state arbitration

It is possible that the field of investor-state arbitration will experience significant consequences of Brexit. By leaving the EU, the UK will ultimately leave the EU common trade and investment policy, which has had a considerable impact on the legal framework for investor-state arbitration involving EU Member States or EU investors.

Since the Lisbon Treaty came into force in 2009, the EU has launched massive reform efforts for its trade and investment policy and has gained exclusive competence to negotiate future free trade and investment agreements with non-EU states. Two immediate consequences of the EU’s enlarged competence have been that:

1. Bilateral Investment Agreements ('BITs’) between two EU Member States (for example, the UK-Romania BIT) became unlawful under EU law and are gradually being repealed, a direct consequence of which is the unavailability of investor-state arbitration in intra-EU investor-state disputes; and

2. the EU has negotiated free trade and investment agreements with third countries, including Singapore, Vietnam, Canada (CETA) and the USA (TTIP) and, as a consequence, pre-existing BITs between these countries and individual EU Member States (for example, the UK-Vietnam BIT) will be obsolete when these new agreements will be ratified and will come into force.

Brexit will certainly change this direction for the UK:

1. intra-EU BITs to which the UK is party will become extra-EU BITs and will no longer be unlawful under EU law. If, and until, the UK enters into a general BIT with the EU itself, those BITs will survive and will continue to guarantee access to investor-state arbitration to UK investors in the EU and to EU investors in the UK, thereby increasing legal certainty in the short term; and

2. the negotiation of free trade and investment agreements between the EU and third countries, including those with Singapore, Vietnam, Canada and the USA, will no longer be made on behalf of the UK. As a result, (i) pre-existing BITs between the UK and these countries (for example, the UK-Vietnam BIT) will survive and (ii) the UK will have to negotiate its own deal with these countries if it does not already have an agreement in place (this is the case with Canada and the US).

For pre-existing ‘mixed’ investment agreements, i.e. agreements to which both the EU itself and the Member States are parties, we can expect that Brexit will not have a significant impact as the UK should be able to remain a party in its own right. This is the case of the Energy Charter Treaty.

For those who praise the benefits of investor-state arbitration, these Brexit developments are to be welcomed. Brexit will effectively inoculate the UK from the impacts of the legal revolution the EU is orchestrating in new investment agreements, namely the replacement of investor-state arbitration with an institutional investment court.

In this context, where Brexit allows UK BITs to survive, it also allows recourse to investor-state arbitration to survive, which could well foster increases in foreign investment from and to the UK. As a result, the UK may well become a favoured destination through which to structure international investments.

Others, however, are concerned that Brexit could give rise to a cascade of claims by disappointed foreign investors against the UK. Foreign companies that chose the UK as their gateway to the EU market might consider that Brexit amounts to a breach of their legitimate expectations.

Whatever the eventual consequences, investment law activity in the UK is likely to remain buoyant.




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Show me the money: Impact of the Australian insolvency regime on the enforcement of obligations and awardsSamantha Kinsey, Louise England

Introduction

A US$12.35 million award against Legend International Holdings1 has unwittingly become caught between the United States and Australian insolvency regimes. Having filed for Chapter 11 protection in the United States some two days before the hearing of a winding-up application by an Australian court, the enforcement of the award will now effectively benefit from a temporary global stay, bringing into sharp focus the impact of insolvency appointments on the enforcement of obligations.

Enforcement against a company that is subject to the appointment of an external administrator appointed pursuant to Australian law can raise some interesting and specific issues that may not arise in other jurisdictions.

Despite careful negotiation of governing law and arbitration clauses, if a contractual counterparty becomes subject to external administration under Australian law,2 a party will no longer automatically have the benefit of these clauses. Instead, the Australian insolvency regime will intervene and the party will be required to consider:

a. what rights the party has as against the company in administration or liquidation in relation to enforcing an existing debt or claim;

b. whether the party is able to bring a new proceeding against the company and, if so, by what means; and

c. what impact the external administration may have on commencing or proceeding with an arbitration and the enforcement of an arbitral award.

This article considers the above matters in relation to companies that are subject to voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth) (Act) and liquidation.3

Stay of enforcement and proceedings during formal insolvency processes

Depending on the form of external administration a company finds itself in, certain provisions of the Act have the effect of staying proceedings and enforcement processes against a company in external administration although each is stated in slightly different terms.

The purpose of these provisions is to ensure that the role of the administrator or the liquidator is not frustrated or interfered with or distracted by other matters such as legal proceedings.4 It also prevents a particular creditor from gaining an advantage over the general body of creditors by proceeding to judgment and execution against the property of an insolvent company.5

Voluntary administration

The voluntary administration process provides a company with a "breathing space" so that it can attempt a compromise or arrangement with its creditors, with the aim of saving the company or the business and maximising the return to creditors.6

To begin or proceed with a “proceeding in a court” against the company or in relation to any of its property during the administration period, a party requires the administrator’s written consent or leave of the Court.7 It is unusual for leave to be granted to an unsecured creditor, owing to the interference such leave would cause to the orderly disposition and control of unsecured creditors.8

No enforcement process in relation to the property of the company can be begun or proceeded with during administration, except with leave of the Court.9 Restrictions may also apply to the enforcement of the following obligations during the administration period:

a. a guarantee of a company's liability given by a director or their spouse, de facto spouse or relative;10 and

b. action by a sheriff or court officer, who has received written notice of the fact of the company’s administration, to sell the company’s property under a process of execution or pay the proceeds of sale or money obtained in connection with the enforcement of an execution process.11

External administration type

Stay of enforcement Stay of proceedings

Voluntary Administration

Except with leave of the Court, no enforcement process in relation to the property of the company can be begun or proceeding with: s 440F

Secured parties may exercise their property rights in specified circumstances.

A party requires the adminstrator’s written consent or leave of the Court to begin or proceed with “proceeding in a court” against the company or in relation to any of its property: s 440D

Winding-up Except with leave of Court, a person cannot begin or proceed with an enforcement process in relation to property of the company: s 471B

Secured creditors retain the right to realise or otherwise deal with their security after winding-up: s 471C

No “action or other civil proceeding” or “proceeding in a court” is to be proceeded with or commenced against the company or in relation to the property of the company except by leave of the court: s 471B and s 500(2)

Summary of stay and enforcement provisions




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This analysis may differ if the Australian company is a party to an international arbitration at a place outside of Australia which is governed by a law other than Australian law and generally when the “proceeding” is in a foreign court.26

Enforcing an arbitral award

The recognition and enforcement of a domestic and foreign arbitral award is achieved by commencing proceedings in an Australian court.27 Accordingly, in every instance, leave of the court or, in the case of an administration, the written consent of the administrator, must be obtained prior to the enforcement of the award.28

In determining whether leave should be granted, a court may consider whether the balance of convenience lies in allowing the applicant to proceed by way of action to judgment, or whether the applicant should be left to pursue their claim by lodging a proof of debt with the liquidator.29

When an award is enforced, a judgment of an Australian court will be obtained which may facilitate the recovery by the award creditor and avoid the award creditor having to deal with the “vagaries of the proof of debt process”.30

If the Court refuses to grant leave to enforce the arbitral award against the company, the arbitral award would be provable in the administration or winding-up by way of filing a proof of debt.31 If the award is for a monetary amount, a liquidator may be willing to admit a proof of debt on the basis of the arbitral award without requiring a creditor to have the award enforced by an Australian court.

In terms of enforcement, a person cannot begin or proceed with, except with leave of the Court, an enforcement process in relation to such property.19

However, secured creditors retain the right to realise or otherwise deal with their security after winding-up,20 including the right to appoint a receiver.21 If a secured creditor needs to take proceedings in order to realise the security, the Court will usually extend leave to allow him or her to proceed against the company.

Impact of the Australian insolvency regime on arbitration

Commencing and proceeding with an arbitration

Whether a party is able to commence or proceed with an arbitration against a company that is subject to external administration without leave of the Court or the administrator’s consent will depend on which insolvency process has been commenced.

Generally, an arbitration against a company which is subject to voluntary administration will not be automatically stayed on the appointment of an administrator and no leave of the court is required to commence arbitral proceedings against the company.22 The s 440D stay provisions have been held not to capture private arbitration as it does not fall within the meaning of a “proceeding in a court”.23

If the company is in liquidation, generally a party will require leave of the Court to proceed with or commence an arbitration. The term “action or other civil proceeding” in s 500(2) has been held to include an arbitration proceeding.24 Similarly, the term “a proceeding in a court” in s 471B has been held to extend to arbitration proceedings against the company.25

It will still be necessary to seek leave of the court if the enforcement requires some action within a court proceeding, even if a person is within the exceptions to s 440B.

Liquidation

Winding-up commences the process which leads to the end of the life of an Australian company.16

No “action or other civil proceeding”17 or “proceeding in a court”18 is to be proceeded with or commenced against a company or in relation to the property of the company except by leave of the court. A creditor’s right to bring a claim against the company the circumstances giving rise to which existed prior to the appointment of the liquidator is converted into a right to lodge a formal proof of debt in the winding up of the company.

Under s 440B of the Act, secured parties may be restricted from exercising their property rights unless:

a. they have leave of the Court or written consent of the administrator;12

b. if the third party has a perfected security interest in the whole or substantially the whole of the company’s property and the secured party acts within the “decision period” (ie 13 business days from the day the notice of appointment was given to the secured party);13

c. if the secured party had begun to enforce the security interest before the administration, the secured party may continue with enforcement action;14 or

d. if the security interest is over perishable property, whether or not the security interest is substantial.15




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Potential cross-border insolvency issues

As the example of Legend International Holdings illustrates, it is also possible for an Australian-incorporated company to become subject to a formal insolvency appointment in other jurisdictions. The United States courts have, in the past, demonstrated a willingness to accept debtors’ petitions for protection under Chapter 11 of the Bankruptcy Act from Australian-incorporated companies with very limited connections to the United States with the effect that a stay applies to all claims against the company pursuant to United States bankruptcy law.

Conclusion

The commencement of a formal insolvency process can upset the best laid plans at the time of framing contractual obligations or commencing an arbitration process. Ultimately, the ability to enforce obligations against an Australian counterparty or to enforce an arbitral award obtained as the result of an expensive arbitration process will always depend upon the solvency of that counterparty. This reinforces the importance of conducting ongoing due diligence on counterparties during the life of a contract and during the course of any arbitration process to continually assess the prospects of a formal insolvency process disrupting the status quo.

1 Handed down by the Singapore International Arbitration Centre in 2015.

2 The Australian external administration laws (Part 5 of the Act) apply to companies that are registered under the Act or a “Part 5.7” body which, in specified circumstances, may include a foreign company that carries on business in Australia.

3 Other forms of external administration under Australian law that are not considered in this article include receivership of the company’s assets, deeds of company arrangement and formal schemes of arrangement under Part 5.1 of the Act.

4 Re Capital General Corp Ltd (2001) 19 ACLC 848 at [13] (Warren J).

5 Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd R 314; Re Coastal Constructions Pty Ltd (in liq) (1994) 13 ACSR 329.

6 Crutchfield’s Voluntary Administration, Thomson Reuters (February 2016 release) [10.520].

7 Section 440D. Note that this stay does not apply to criminal proceedings or a prescribed proceeding. There are currently no ‘prescribed proceedings’ under the Corporations Regulations 2001 (Cth).

8 BBC Hardware Ltd v GT Homes Pty Ltd [1997] 2 Qd R 123 at 126 (Thomas J).

9 Section 440F; an administrator does not have the power to consent to an enforcement process being commenced or proceeded with.

10 Section 440J; the stated objective of section 440J is for directors not to be discouraged from appointing a voluntary administrator through fear that the administrator will enforce a guarantee given by the director.

11 Section 440G.

12 Section 440B(2).

13 Sections 9, 441A and 441AA.

14 Section 441B.

15 Section 441C.

16 McPhersons Law of Company Liquidation, Thomson Reuters (May 2016 release) [1.50].

17 Section 500(2).

18 Section 471B.

19 Section 471B.

20 Section 471C.

21 Smith & Judge v DCT & National Australia Bank (1979) ACLC 32, 425.

22 Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207 at [42]; Auburn Council v Austin Australia Pty Ltd (2004) 22 ACLC 766; note, however, that it may still be possible for an arbitral body to be classified as a court for the purposes of s 440D, depending on a court’s consideration of a number of matters including the constitution and functions of the arbitral body in question.

23 Auburn Council v Austin Australia Pty Ltd (2004) 22 ACLC 766 at [28]; Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207 at [42]; In the matter of THO Services Limited [2016] NSWSC 509 at [18].

24 Doran Constructions Pty Ltd (in liq) v Beresfield Aluminium Pty Ltd (2002) 54 NSWLR 146 (Santow JA at [4] – [7], [13] but see Ipp AJA at [89] – [92]).

25 Re Vassal Pty Ltd [1983] 2 Qd R 769; Mowbray College v Exhib Design & Construction Pty Ltd (in liq) (1986) 5 ACLC 478.

26 United States Surgical Corporation v Ballabil Pty Ltd (1986) 4 ACLC 639.

27 See, for example, the largely-uniform domestic legislation relating to the enforcement of domestic arbitral awards including Commercial Arbitration Act 2011 (Vic), s 35 and the provisions relating to the enforcement of a foreign arbitral award in s 8 of the International Arbitration Act 1974 (Cth).

28 Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207 at [44].

29 Eopply New Energy Technology Co Ltd v EP Solar Pty Ltd [2013] FCA 356 at [23(b)].

30 Eopply New Energy Technology Co Ltd v EP Solar Pty Ltd [2013] FCA 356 at [22(b)].

31 See, section 533.




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granted the application, finding that Claimants should be allowed to clarify the ambiguity. The judge observed that the time limit under Article 27 of the LCIA Rules would almost always expire in cases where claimants seek recognition and enforcement of an award under the New York Convention, and refusing the application would result to substantial injustice.

Case Report: German Supreme Court upholds CAS arbitration agreement and awardKarsten Rahm, Francis Bellen

In a landmark decision dated 7 June 2016 (file no. KZR 6/15) the German Supreme Court has confirmed that the Court of Arbitration for Sport in Lausanne (CAS) is a properly constituted arbitral tribunal and that an arbitration clause included in agreements between an athlete and a monopolistic international sports association referring all disputes to the CAS was generally valid.

Procedure in the lower courts

In 2009, the International Skating Union (ISU) decided to suspend Ms Claudia Pechstein, a highly honoured German speed skater and multi-olympic-medalist, because of an alleged doping infringement, when blood tests taken prior to the World Championship revealed an unusually high quantity of so called Reikulozyten in her blood. After unsuccessfully challenging the decision in arbitration proceedings before the CAS, as well as before the courts of

Case Report: landmark Spanish judgment on Article IV of the New York ConventionAlfredo Guerrero, Marlen Estevez Sanz

On 20 July 2015 the Court of Appeal of Madrid rendered a landmark decision on Article IV of the New York Convention relating to the formal conditions for the recognition and enforcement of foreign arbitral awards in Spain. This decision confirms the pro-enforcement and pro-arbitration trend of the Spanish courts, leaded by the Supreme Court.

Article IV.1.b) of the New York Convention provides that the party seeking enforcement of a foreign award needs to supply “the original [arbitration] agreement or a duly certified copy thereof”. The Spanish Court found that Article IV.1.b) should not be construed too strictly, considering that Article IV.1.b) only requires the party seeking enforcement to bring evidence of the parties’ intention to submit to arbitration. The Spanish Court accepted that there is no need to file the original, or a duly certified copy, of the arbitration agreement if the unequivocal intention of the parties could be evidenced in any other manner. For instance, in that case, the Court considered essential the fact that the party challenging the enforcement application appeared before the arbitral tribunal and accepted the jurisdiction of the tribunal.

In this decision the Court also stressed that public policy shall be construed more narrowly when applied to international matters. In the context of international arbitration, Spanish public policy only comprises the ‘essential’ principles of the

Spanish legal system, as reflected in the Spanish Constitution.

Case Report: English Court allows retrospective extension of time limit in LCIA awardDorothy Murray Felicia Hutapea (Enterprise Scheme participant and law student)

An award made in an LCIA arbitration granted Xstrata Coal Queensland Pty Ltd, Sumisho Coal Australia Pty Ltd, Itochu Coal Resources Australia Pty Ltd, and ICRA OC Pty Ltd damages, which were to be paid by the Defendant, Benxi Iron & Steel (Group) International Economic & Trading Co Ltd. Claimants sought recognition and enforcement of the Award from the Shenyang Intermediate People’s Court in China where Defendant refused to pay claiming that one Claimant (ICRA OC) was not a party to the original contract and the arbitration agreement. The Court refused enforcement on this basis.

The Tribunal had treated ICRA OC as party to the contract, arbitration agreement and claim in front of it but the Award did not explain its reasoning in this regard. While Article 27 of the LCIA Rules 1998 allows a party to seek a correction to an award, the applicable 30 day time limit had long expired by the time enforcement was refused in the People’s Republic of China.

Claimants applied to the Commercial Court of England and Wales under s79 of the Arbitration Act 1996 for a retrospective extension of time to make an Article 27 application to the Tribunal. The Court

the seat in Switzerland, Pechstein initiated further litigation in the German courts applying for a declaratory judgment that the CAS tribunal’s decision to suspend her was illegal. Pechstein also filed a claim for compensation for the loss suffered during the suspension, including compensation for pain and suffering.

The first instance German court dismissed Pechstein’s claims. She appealed and the second instance court ruled that the arbitration clause was invalid and that the German courts had jurisdiction over her compensation claim. The second instance court found that ISU was a monopolistic association which had abused its power when imposing on the athlete an arbitration clause referring all disputes to the CAS. The court determined that the arbitration proceedings with the CAS constituted an imbalance of power between the athletes and the sport associations as the lists of CAS arbitrators were mostly composed of persons closely connected to sport associations and not to athletes. For these reasons, the arbitration award rendered by the CAS constituted a violation of German public policy and was found to be null and void.

The Supreme Court’s decision and its reasoning

The Supreme Court ruled held that the arbitration clause referring all disputes to CAS and the CAS arbitration award itself were valid. The Supreme Court found that CAS arbitral tribunals were “proper” (echte) arbitral tribunals: they are independent, as CAS was not integrated in any sport association, as well as impartial. The fact that there was a potential imbalance in the CAS’s arbitrator list did not affect the impartiality of CAS tribunals. The Supreme Court refused to draw any conclusion regarding the partiality or impartiality of an arbitration tribunal by simply counting the




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the full potential revenue from those sales. The Tribunal recognised Ecuador’s right to take advantage of fluctuations in the oil market, resulting in 93% of Murphy’s damages claim being rejected. The Tribunal commented “that States retain flexibility to respond to changing circumstances unless they have stabilised their relationship with an investor. Ecuador was within its sovereign right to react to the significant change in oil prices, as many States did.” Furthermore, the Tribunal could not accept that the “Claimant could have reasonably expected that there would be no governmental response to the significant rise in oil prices.”

The breach of the BIT the Tribunal did identify was in respect of the 99% levy – this was considered to be a violation of a legitimate expectation that the terms of the PSCs would not change except within the confines of the law, and pursuant to a negotiated, mutual agreement between the parties. The Tribunal were reluctant to determine (despite being asked) exactly where the cut-off of permissible taxation/governmental levies lay between 50% and 99%, as each case will ultimately turn on its facts. Nevertheless, this ruling provides states with some comfort as Tribunals may apply a margin of appreciation in respect of measures designed to benefit from unforeseen economic variations, even where such measures are at the expense of foreign investors with international-treaty protection.

Case Report: Murphy Exploration & Production Company-International v The Republic of Ecuador, May 16Dorothy Murray, Edmund Northcott

A PCA Tribunal ruled in a partial award of 6 May 2016 on Murphy Oil Corp’s treaty claims under the Ecuador-United States of America BIT (the “BIT”). Murphy claimed for breaches of fair and equitable treatment (“FET”), the umbrella clause, full protection and security, non-impairment and expropriation. However, as the Tribunal found a breach of the FET standard it did not deem it necessary to consider Murphy’s other BIT claims. In essence, Murphy alleged that as a result of Law 42 (which imposed an increased levy on oil profits) it had been forced to sell off its stake in a drilling consortium to the Ecuadorian government at an unfairly low price.

Law 42 was implemented to capture profits flowing from rapidly increasing oil prices in the 2000s. The rate was initially set at 50% in 2006, and later raised to 99% in 2009.

The Tribunal ruled the Law 42 was not a tax, so did not fall within the tax modification clauses of the relevant production sharing contracts (“PSCs”) (and allowed the Tribunal to retain jurisdiction under the BIT).

The Tribunal rejected Murphy’s argument that the 50% rate was illegal, as it did not fundamentally alter the PSCs to breach the FET standard under the BIT; “[Murphy] was still able to earn more revenue with Law 42 at 50% than it did before the oil price rise, notwithstanding that it was not receiving

arbitrators for each “side” of the institution’s arbitrator list, noting that CAS arbitrators have, in any event, an obligation to disclose all relevant circumstances that might potentially jeopardize their impartiality.

To further support its decision, the Supreme Court weighed the constitutional rights of Pechstein (to have full access to justice and a due process of law) against the constitutional rights of ISU (to constitute itself as an association). It found that the athlete’s constitutional rights had been affected by the CAS arbitration clause but had not been violated. Additionally, the Supreme Court held that Pechstein’s rights under Article 6 of the European Convention on Human Rights had not been infringed.

The Supreme Court concluded that (i) even though ISU was a monopolistic association, it did not abuse of its position and (ii) that the CAS arbitration clause was validly made in accordance with Sec. 1025 para

2, 1032 para 1 of the German Code of Civil Procedure (ZPO).

Significance of the decision

This decision of the German Supreme Court establishes a solid basis for the arbitrability of international disputes between athletes and monopolistic sports associations and should reduce the number of such disputes brought before domestic courts. For monopolistic international sports association this is a highly welcome result. For athletes, this decision could be a disappointment because CAS arbitrations involve the shifting of the burden of proof requiring the athlete to prove that he or she has not committed any doping infringement. However, with a global sports industry composed of athletes competing internationally and being organized in international associations, it seems a reasonable and indeed necessary step not to leave the question of jurisdiction to domestic courts.

1 Murphy Exploration & Production Company-International and The Republic of Ecuador, Partial Final Award dated 6 May 2016, paragraph 278.

2 Id., paragraph 276.

3 Id., paragraph 280.




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DOROTHY MURRAY Partner, London T +44 (0)20 7111 2127 [email protected]

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Contributors:

Alfredo Guerrero

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Francis Bellen

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