Arbitral Implications for the Oil and Gas Sector

On 12 December 2015, the Paris Agreement (or the "Agreement") on climate change was signed by 195 States and the EU, provoking scenes of euphoria among the delegates involved. The Agreement sets out how the great majority of the world's countries shall tackle climate change from 2021. While the parties agreed on the "urgent need" to reduce greenhouse gas (or "GHG") emissions and on making progressively greater reductions into the future, overall, the language of the Agreement is often vague and aspirational. But this does not mean it is toothless; the significance of the Agreement cannot and should not be reduced to the black letter. Given the current deference accorded by tribunals to State regulatory actions, the Agreement may serve as a springboard for further climate change-related regulatory measures by States and those States may well invoke (and be well advised to invoke) the Agreement in defence to claims of unfair treatment by international investors. Many of the measures likely to be taken have implications for the oil and gas industry and deserve attention.

A deferential approach to a State's right to regulate may be in the ascendancy

Bilateral and multilateral investment treaties are by definition geared to the protection of the rights of investors confronted with state action. But that being said, recent arbitration awards show that the pendulum may well have swung more towards States whose "inherent right" to regulate has in many decisions been expressly recognized.[1] Whereas in the past many investment case decisions were seen to accord investors substantive protections whatever the State's motivation for the measures complained of, this seems to have changed. It has been observed that tribunals now tend to accord States greater leeway in regulating their economies consistent with longer term goals.[2]

As will be seen, the essence of many recent decisions seems fixed upon the investor's expectations when entering into the investment in the first place and whether those expectations were reasonable.[3] This case-law suggests that an investor cannot close its eyes to the possibility that the host state may indeed regulate the sector in which it finds itself, at cost to the investor.

The roots of the current trend can be seen as early as a decade ago. In Saluka v Czech Republic, for example, it was held that a State is not liable to pay compensation to a dispossessed foreign investor when, in the normal exercise of its regulatory powers, it adopts in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.[4]

More recently, in the pending Perenco v Ecuador arbitration, it was decided that where oilfield operators suspend operations due to State regulation, the State can validly intervene in the operations of the oil blocks to maintain their continuity of operation. The basis of that decision was the tribunal's finding that Ecuador had demonstrated the potential production losses and various technical problems that could have ensued had operations been suspended. The tribunal also held that the intervention in the operations could not be said to have interfered with the rights of management and control over the blocks – and could not amount to an expropriation - since the claimant had voluntarily surrendered such rights on a temporary basis.[5] The Perenco arbitration also stands for the notion that oilfield operators can be held to higher environmental standards after their initial investment where this is consistent with national and international law. [6] In another case concerning claims of expropriation and unfair treatment in relation to the operation of an oil refinery, the tribunal held that:

"The stability of the legal framework has been identified as an emerging standard of fair and equitable treatment in international law. However, the State maintains its legitimate right to regulate, and this right should also be considered when assessing the compliance with the standard of fair and equitable treatment."[7]

This view echoes the dicta of the tribunal in Parkerings v Lithuania which held that:

"It is each State's undeniable right and privilege to exercise its sovereign legislative power. A State has the right to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilization clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment. As a matter of fact, any businessman or investor knows that laws will evolve over time."[8]

EnCana Corporation v Ecuador is another example. That case concerned participation contracts for the exploration and exploitation of oil and gas reserves with an Ecuadorian State-owned entity. The company's claims involved VAT refunds to which the claimant's subsidiaries were allegedly entitled under Ecuadorian laws and regulations. In denying the Claimant's arguments concerning indirect expropriation, the tribunal held that issues of indirect expropriation would arise only if the impugned tax law was "extraordinary, punitive in amount or arbitrary in its incidence".[9] It decided that it was for Ecuador to determine for the future the regime of its tax law, taking into account its international obligations.[10] Similarly, in finding for the State in Nations Energy v. Panama, the tribunal held that the State had the right to regulate the conditions under which tax credits can be used.[11]

In light of the above, States anxious to ensure the Agreement achieves its aims – as they all profess to be – may well be encouraged by any apparent flexibility accorded to them in the arbitral arena. This is not a bad thing, but a tension may obviously exist where an investor finds itself subject to new measures not contemplated when undertaking the underlying investment.

Many measures potentially taken in line with the Agreement will affect the oil and gas sector

As well as the above approach by tribunals, the scientific and political momentum which climate change action has attained – and the growing legal status of climate change principles e.g., the Urgenda case in the Netherlands – make a range of regulatory measures foreseeable.[12] First and foremost are emission reduction targets. For example, the US Clean Power Plan (currently being challenged by 29 States and State Agencies) sets State-specific CO2 emissions reduction targets mainly concerning existing coal-fired power plants.[13] The US also plans to adopt regulations to reduce methane emissions in the oil and gas sector, as stated in the US nationally determined contribution (a requirement for parties under the Agreement) published on 31 March 2015. Fiscal measures like carbon tax are also likely to feature. The awards in EnCana and Nations Energy are instructive in terms of how a tribunal may deal with claims relating to such tax or other fiscal measures that States may deploy under the umbrella of climate change regulation. Measures taken could also take the form of reductions to subsidies or export credits available to carbon-intensive industries such as the oil and gas industry.

It should be noted that even in the areas expected to benefit from the Paris Agreement, such as renewables, uncertainty lies. This has been amply demonstrated by the claims brought against Spain, Italy and the Czech Republic under the ECT, as a result of those States having offered economic incentives for electricity generation by renewable means only to then scale back the relevant benefits when the global financial crisis struck in 2008. This is noteworthy in the context of tax credit systems such as the renewable energy tax credits adopted in the US in December 2015.[14]

In the recent Charanne decision for example, and consistent with the trend outlined above, the tribunal held that Spain's modification of its feed-in tariff regime for solar energy producers did not violate its FET obligations towards the claimants and did not constitute an expropriation. The company was still in operation and turning a profit and the claimants' rights were in the company not in its returns.[15] As such, no expropriation had occurred.[16] Dismissing the FET claim, the tribunal found that Spain had not made specific commitments to the investors and their legitimate expectations could thus not be said to have been violated. Spanish law and court decisions indeed permitted Spain to modify its solar energy regulations and neither the government documents enticing the investment nor administrative registration of the project guaranteed any specific return.

An example of some of the design errors of renewable energy schemes in many European countries, including Spain, has been the development of an electricity tariff deficit. This deficit occurred because the amount in feed-in tariffs paid to energy producers increased out of proportion to the regulated tariffs paid by final consumers.[17] As the substantial incentives attracted more and more investors, the amount being paid in subsidies by Spain rose hugely, and the deficit increased. The need to scale back the subsidies in order to avoid unacceptable consumer energy price increases was one of the reasons for the scale back measures taken by Spain in the Charanne case.[18] Other States will doubtlessly learn from such miscalculations when conceiving their own renewable energy schemes and the extent of such row backs will likely not therefore be as great in the future. But given the pace of technological development and the instability of many countries' economies, changes to such schemes cannot be ruled out, and investors could well be held to a standard by which they should have expected the same, and be estopped from seeking recourse.

Investors – in either carbon-intensive or carbon-friendly projects – would thus do well to undertake what may be called "climate change due diligence" before embarking on their investments. Oil and gas companies should take heed of legal developments in the host country and ideally obtain local legal advice as to the type of climate change regulation likely in that country. The recent Charanne award made clear that renewable energy investors' ignorance of indications that the investment régime in the host country may change is not necessarily an excuse. The investor should be aware of the regulatory and legal landscape before making its investment and cannot claim violation of legitimate expectations where this is not the case.

And if negotiating an investment contract, investors may thus wish to insert a stabilization clause which ensures greater protection in the event of regulatory change.[19] Care should be taken, however, not to aim too high. Full freezing clauses may never be agreed and in any event may not be enforced due to the above concern surrounding undue restriction of State sovereignty, of which national courts are also mindful. Including an economic equilibrium clause providing for negotiation and, ultimately, third party determination such as arbitration, may be a better option. This is in line with the evolution of stabilization clauses which have become less restrictive of State regulatory power and now typically aim to ensure no more than a measure of predictability and protection from arbitrary State action. It also demonstrates a collegiate approach which favours enforceability of the clause.

States, for their part, may choose to insert environmental regulation exceptions when revising investment agreements such as Model BITs.[20] By way of example, the US Model BIT 2012 has a reservation of rights clause for environmental regulation and enforcement. Article 12(3) refers to the two State parties' discretion in relation to regulatory and compliance matters and "the allocation of resources to enforcement with respect to other environmental matters determined to have higher priorities." Similarly, the national treatment provision of the Indian Model BIT 2015 permits India to distinguish between investments on environmental grounds.[21] Such provisions may not be necessary in order that measures can validly be taken but they can provide greater certainty. States will also doubtless aim to make clear that COP21 obligations shall be taken seriously and that effect shall be given to them. Proposed regulations would thus be made publicly know as soon as possible. This may help to qualify the legitimate expectations of investors and thus to reduce the scope for investor claims based on alleged violations of such expectations. In terms of stabilization clauses, should a State or state entity be prepared to agree to the same, it will no doubt resist full freezing clauses. An obligation to achieve equilibrium through negotiation and, failing that, third party determination is therefore also preferable for States as for investors.

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[1] - See, for example, ADC v Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, at para. 423; AWG Group Ltd. v. Argentine Republic, UNCITRAL, Decision on Liability, 30 July 2010, at para. 139; and Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award, 22 August 2012 at para. 100.
[2] - See Catherine M. Amirfar, ‘Treaty Arbitration: Is the Playing Field Level and Who Decides Whether It Is Anyway?' in Albert Jan van den Berg (ed), Legitimacy: Myths, Realities, Challenges, ICCA Congress Series, Volume 18 (© Kluwer Law International; Kluwer Law International 2015) at pp. 755 – 775; Jorge E. Viñuales, ‘Chapter VII, Investment Law and Sustainable Development: The Environment breaks into Investment Disputes', 1714, in Bungenberg, Griebel, Hobe, Reinisch, International Investment Law; and Heikki Marjosola, Chapter 32: Police Powers or the State's Right to Regulate in Meg N. Kinnear , Geraldine R. Fischer , et al. (eds), Building International Investment Law: The First 50 Years of ICSID, (© Kluwer Law International; Kluwer Law International 2015) pp. 447 – 462.
[3] - The obligation which has been most successfully relied upon by claimants in investment treaty claims is the State's obligation to accord fair and equitable treatment (or "FET") to the investor (see, for example, Rudolf Dolzer & Christopher Schreuer, Principles of International Investment Law (2nd ed, 2012) at p. 130). Such FET provisions are typically considered to encompass respect for investors' legitimate expectations, even if such wording is not present in the clause. Legitimate expectations can derive from both specific commitments and from the host State's legal system (as confirmed recently in the Charanne award, at para. 494). However, as discussed, there appears to be an increasing emphasis by tribunals on striking a balance between the expectations of the investor and the State's right to regulate.
[4] - Saluka v Czech Republic, UNCITRAL, Partial Award, 17 March 2006, at paras. 253-265.
[5] - Perenco Ecuador Limited v. Republic of Ecuador, ICSID Case No. ARB/08/6, Decision on the Remaining Issues of Jurisdiction and on Liability, 12 September 2014 (or "Perenco Jurisdiction and Liability Decision"), at para. 705.
[6] - Perenco Ecuador Limited v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim, 11 August 2015, (or "Perenco Interim Decision") at para. 347.  In general, however, such changes may only be prospective and not retrospective (para. 357).
[7] - Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, at para. 177.
[8] - Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, at para. 332. These dicta place significant emphasis on stabilization clauses and were subsequently cited in Yuri Bogdanov and Yulia Bogdanov v. Republic of Moldova, SCC Case No. V091/2012, Final Award, 16 April 2013 and a similar approach was followed recently in the award in Charanne B.V and Construction Investments S.A.R.L v The Kingdom of Spain, SCC Case No. 062/2012
[9] - EnCana Corporation v Ecuador, LCIA Case No. UN 3481, Award, 3 February 2006, at para. 177
[10] - Ibid, at para. 187.
[11] - Nations Energy, Inc. and others v. Republic of Panama, ICSID Case No. ARB/06/19, Award, 24 November 2010 [Spanish] at para. 690.
[12] - Urgenda Foundation v The State of the Netherlands (Ministry of Infrastructure and the Environment) [2015] Case C/09/456689/HA ZA 13-1396. The Hague District Court ruled that States' legal obligations on climate change extend beyond international treaties and comprise an independent duty of care toward their citizens.
[13] - The Plan was challenged by 24 US States and State agencies before the D.C. Circuit Court and then by 29 parties in the US Supreme Court which stayed the Plan on 9 February 2016. Peabody Energy Corporation, one of the largest coal companies in the world, is reported to have already sought to prevent the coming into force of the Plan in the D.C. courts and other US coal companies are expected to follow suit. See Jessica Wentz, ‘October 2015 Update to the Climate Change Litigation Chart'(Climate Change Blog, Columbia Law School, 9 October 2015)
[14] - This is also relevant to oil and gas companies like Repsol and Statoil who have begun to diversify their assets and invest in offshore windfarms.
[15] - Charanne, at paras. 459-462.
[16] - Note that only one of many series of reforms was challenged in this case and the Tribunal indicated that its findings should not influence other tribunals who may come to different conclusions on claims for FET breaches based on other State measures (at para. 542).
[17] - European Commission, ‘Electricity Tariff Deficit: Temporary or Permanent Problem in the EU?', Economic Papers 534 (October 2014), Section 3.1.
[18] - Charanne, at para. 535.
[19] - In referring to stabilization clauses, the tribunal in Perenco stated that it was "well recognized" in investment treaty arbitration that States retain the flexibility to react to changing circumstances unless their relationship with an investor has been stabilized. See Perenco, Jurisdiction and Liability Decision, at para. 586.
[20] - Ecuador is an example of a State having gone further and has inserted provisions in its Constitution which grant rights to Nature itself and includes State obligations to take precautionary measures for the protection of the environment (see Chapter 7 of the Ecuadorian Constitution).
[21] - Indian Model BIT 2015, arts 4(1) and 4(5).

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Theresa Borden is an associate in White & Case's New York office where her practice focuses on international arbitration. She is currently on secondment to the Firm's Paris office.

From more than 1,100 nominees all less than 40 years old, Law360 has named four White & Case lawyers among its "Rising Stars" for 2016. The magazine selects Rising Stars based on its evaluation of the young lawyers' career accomplishments in their respective practice areas, according to Law360.

The White & Case Rising Stars are:

• Francisco Garcia-Naranjo (Mexico City), Banking
• Brody K. Greenwald (Washington, DC), International Arbitration
• Rafael Llano-Oddone (Mexico City), International Arbitration
• Alison Weal (London), Transportation

Over the next few weeks, Law360 will print profiles of the new Rising Stars.

Garcia-Naranjo advises on corporate law, mergers and acquisitions, joint ventures and banking. Clients also seek his knowledge and experience in foreign investment transactions, project finance, public biddings, debt restructurings and bankruptcy proceedings.

Greenwald focuses on investment treaty arbitration, representing investors and sovereign states in high-stakes, complex cases. Among other significant victories, he helped develop the winning corruption defense in Metal-Tech Ltd. v. Republic of Uzbekistan—the only investment treaty case ever dismissed as a result of corruption.

Llano-Oddone is a seasoned international arbitrator and litigator who has led many of the Firm's most high-profile disputes in Latin America in recent years. Clients value his track record in large-scale commercial disputes and arbitrations, his counsel on investment-related disputes in Latin America, and his guidance on the drafting of dispute resolution clauses for complex international transactions.

Weal advises domestic and international clients on complex leasing and financing arrangements. Weal's wide-ranging transactional experience has made her a valued resource for clients seeking to execute complex, international financings. Adept at navigating the legal intricacies of major cross-border deals, she is noted for her ability to provide shrewd advice on a broad spectrum of financing issues.

Hannelore Sklar is an associate in the Firm's International Arbitration and Commercial Litigation Groups. She represents and advises private companies, foreign sovereigns and international financial institutions in the resolution of international disputes. Hannelore has represented clients in arbitrations before the International Centre for Settlement of Investment Disputes (ICSID), as well as in litigation in U.S. federal court.

During law school, Hannelore interned with the Civil Fraud Section of the U.S. Department of Justice and Chief Judge Beryl Howell of the United States District Court for the District of Columbia. Hannelore also was a Law Fellow for Legal Research and Writing, a Global Law Scholar and a member of the Georgetown Journal of International Law.

Prior to attending law school, Hannelore worked for several years at a nonprofit global leadership organization as a contractor with the U.S. Department of State, Bureau of Educational and Cultural Affairs.

Paul von Mühlendahl is an associate in the International Arbitration Group in Paris. His practice spans international investment and commercial arbitration.

Prior to joining White & Case, Paul spent several years within the arbitration department of a major international law firm in Paris, as well as at a pan-Arab professional services company. He regularly speaks at conferences and his writings on arbitration and international law matters have received multiple accolades.

In addition to the classes he regularly teaches at the Paris Bar School and Sciences Po Paris, Paul is a member of a number of professional associations.

Rosy is an associate in the dispute resolution group of the firm's London office and specialises in international arbitration. She joined the firm as a trainee in 2015 and recently spent six months with the international arbitration group in Paris.

Rosy has experience across a range of industries including the infrastructure, transport and energy sectors.

Rosy is committed to pro bono work and recently won an appeal in the Social Entitlement Chamber of the First Tier Tribunal through the Legal Advice Centre (University House) in Bethnal Green. She also received a White & Case pro bono award in 2016 for her work with Inclusion Ghana.

Dr. Dimitar Kondev is an Associate working in the International Arbitration Group in Paris. His practice includes construction law in general, construction disputes and international commercial arbitration. He has experience in various sectors, including commercial development, energy and infrastructure.

Prior to joining White & Case, Dimitar gained experience as a senior associate at one of the largest law firms in Bulgaria where he provided legal advice on all aspects and all stages of large-scale construction projects.

Dimitar is the author of the monograph "Multi-Party and Multi-Contract Arbitration in the Construction Industry" (Wiley Blackwell, 2017) and has published several articles on construction law and dispute resolution.

Dimitar is registered as dispute adjudicator under the Bulgarian list of FIDIC dispute adjudication experts.  He has developed a course in international construction law at the Aarhus University, Denmark, which he has been teaching since 2015.  He has also taught on EU law. 

Jonathan Chevry is an Associate in the Firm's International Arbitration Group in Paris. His practice includes both investor-State and commercial arbitration.

Jonathan has also been active in White & Case pro bono work in the area of public international law and is involved with the Philip Jessup International Moot Court Competition.

Jonathan holds a PhD in international law from the European University Institute in Florence. His thesis addresses the interactions between international investment law and other branches of international law, including WTO. He frequently speaks on investor-state dispute resolution at conferences and has lectured on international arbitration and international law at various universities.

Prior to joining White & Case, Jonathan worked for the French Ministry of Economic affairs and acquired experience within the international arbitration department of a global law firm in Paris.

White & Case Paris is pleased to announce the organization of the 2018 White & Case Paris Vis Pre-Moot on 14 March 2018. As with the previous editions of the Pre-Moot, the event will provide an opportunity for teams from around the world to prepare for the rounds of the Annual Willem C. Vis International Commercial Arbitration Moot Court Competition in Vienna. The selected teams will engage in two rounds of oral pleadings, followed by feedback sessions from our diverse pool of practitioners. The event will be followed by a cocktail reception at our offices, which will provide the participants with networking opportunities with the members of the Paris arbitration community.

Registration details for the event can be found below.

Registration

Teams wishing to register their interest to participate, please register here.
If you wish to volunteer as an arbitrator at the event, please register here.

Organizing Committee

• Anaïs Harlé, Associate, International Arbitration at White & Case (Paris)
• Fadi Hajjar, Associate, International Arbitration at White & Case (Paris)
• Manu Thadikkaran, Associate, International Arbitration at White & Case (Paris)
• Poorvi Satija, Associate, International Arbitration at White & Case (Paris)

Date and Provisional Timetable

Wednesday, 14 March 2018
Offices of White & Case Paris

14:00 – 14:30 Team registration and welcome
14:30 – 16:30 Round 1
16:30 – 16:45 Break
16:45 – 18:45 Round 2
18:45 – 21:00 Cocktail reception

William is an associate in the Moscow Dispute Resolution practice. He is qualified to practice law in England and Wales and specializes in international arbitration and commercial litigation. William's experience includes representing clients in commercial and investment arbitrations conducted under the LCIA, ICC and UNCITRAL rules.

Global law firm White & Case LLP has opened a new office in Tashkent, the capital of Uzbekistan.

"Our new office in Tashkent underlines our commitment to our Uzbek clients, and to our international clients who are taking advantage of increasing opportunities to invest in the country," said White & Case Chairman Hugh Verrier.

White & Case has a long history of advising clients in Uzbekistan. The Firm has been active in the country for more than 25 years, including representing the Uzbekistan government and overseas investors on significant arbitration and trade matters. The focus of the new office on disputes and large, complex, cross-border matters aligns with the Firm's 2020 growth strategy.

"Uzbekistan is increasingly open for business following the election of President Shavkat Mirziyoyev, and we will continue to work with the government, state-owned entities and private sector clients," said White & Case partner Carolyn Lamm, a member of the Firm's Washington, DC disputes team that has advised the Uzbek government and foreign investors on international arbitration and trade matters since the early 1990s.

"We also anticipate that there will be further opportunities for our arbitration, project finance and M&A/corporate lawyers to advise on deals and disputes in sectors including oil & gas, petrochemicals, power, infrastructure, construction, mining, telecoms and automotive."

A number of partners including Lamm, New York-based litigation lawyer Scott Hershman and London-based project finance lawyer Kamilla Azamat – an Uzbek national who has experience advising on transactions in Uzbekistan and strong contacts in the country – will spend significant time in the new office. It is also expected that a small number of Uzbek-qualified lawyers will join the office in due course. The Firm's operation in Tashkent will be supported by White & Case lawyers in the Washington, DC, New York, London, Moscow and Astana offices, among others.

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On 16 January 2018,¹ the Paris Court of Appeal reaffirmed its greater control over international arbitral awards by setting aside an ICC arbitral award in MK Group v. Onix on international public policy grounds because of a fraudulently obtained administrative approval for the sale of a gold mining company’s shares.

Background

A Laotian gold mining company, Dao Lao, was created in 2003 by Russian company MK Group (holding a 70% stake) and Laotian company Lao Geo Consultant (holding a 30% stake). In 2010, MK Group agreed to sell a 60% stake in Dao Lao to Ukrainian company Onix. In 2011, MK Group, Lao Geo Consultant, Onix, the Laotian Ministry of Planning and Investment and the Laotian Ministry of Natural Resources and Environment entered into a memorandum of understanding pursuant to which the share transfer was approved subject to Onix first investing USD 12.5 million in the project.

After a dispute relating to voting rights in Dao Lao arose, MK Group initiated ICC arbitration on the basis of the arbitration clause included in the shareholders’ agreement with Onix, requesting the arbitral tribunal to declare that the 60% stake in Dao Lao had not been transferred to Onix because it had not invested the promised USD 12.5 million.

In 2015, the arbitral tribunal rendered an award finding that the share transfer from MK Group to Onix was validly made and that Onix owned the shares.

The ruling of the Paris Court of Appeal

MK Group challenged the award before the Paris Court of Appeal on several grounds. In particular, it argued that the award violated international public policy (1) because falsified documents had been produced before the arbitral tribunal, as one of the two versions of the memorandum of understanding did not include the condition relating to the USD 12.5 million investment, and (2) because the award violated overriding mandatory public policy provisions ("lois de police") of Laotian law.

The Paris Court of Appeal held that under the French Code of Civil Procedure it has the power to examine "in law and in fact" all of the elements which may lead to the setting aside of an arbitral award. It also explained that the notion of international public policy ("ordre public international") has to be understood as a specific conception of the French legal order, i.e. as the values and principles that France cannot ignore in an international context, and that it is only to this extent that some foreign overriding mandatory provisions may be regarded as part of international public policy.

The Court went on to refer to a 1962 resolution of the United Nations General Assembly regarding the sovereignty of nations over their natural resources. The Paris Court of Appeal inferred from this resolution that there was an "international consensus" regarding the right of States to subject the exploitation of natural resources located within their territory to a preliminary authorisation and to exert control over foreign investments made in that area, which consensus was part of international public policy.

Turning to the facts of the case, in particular to the allegations of forgery, the Court found that there was no falsification in the sense that the part relating to the USD 12.5 million financing had not been added to a version of the memorandum of understanding or deleted from the other. In fact, it found that from the very beginning Dao Lao's management – which was the same as Onix's – had established two original versions containing different terms: the English original, reflecting the shareholders’ agreement, did not make the transfer conditional upon the investment, while the Laotian original, on the other hand, did mention that condition. The Court found that this was meant to present the opposite position to the Laotian authorities and demonstrated that the investment was viewed by the Laotian authorities as a "substantial condition".

Thus, because the challenged award provided international protection to an investment made through the fraudulent acquisition of an administrative approval, it violated international public policy in a manifest, effective, and concrete manner ("manifeste, effective et concrète"). Accordingly, the Paris Court of Appeal set aside the award.

A reinforcement of international public policy

For many years, only "flagrant" violations of international public policy could result in the setting aside of an award in France. Indeed, French courts used to exert limited control over arbitral awards alleged to violate international public policy, based on a controversial use of the general principle that their role is to review the award itself and not the merits of the matter.²

In 2014, as the arbitral community was expressing doubts about the soundness of this policy, the Paris Court of Appeal signalled a return to a tighter control of arbitral awards, holding that judges hearing applications for annulment should look to all of the factual elements of a case to determine if an award violated international public policy in an "effective and concrete" manner, omitting the prior "flagrancy" requirement.³

In more recent decisions, the Paris Court of Appeal has also set out the requirement of a "manifest" violation of international public policy, which may on its face remind us of the former "flagrancy" element of the legal test. However, the overall impression remains that of a stricter control by the Court over international awards. A striking example of this is the Court's 2017 decision in Kirghizstan v. Belokon,⁴ where the Court, basing its inquiry on "red flags" (i.e. on various indicators which by their nature strongly suggest the existence of a crime), set aside an investment treaty award on the ground that its enforcement would allow the award-creditor to make profits from illegal money laundering activities. The Court found this violated international public policy in a "manifest, effective, and concrete" manner. In that case, the Court went quite far in assessing the facts at issue independently from the arbitral tribunal's findings.

The Court acted similarly in its ruling in the MK Group case on 16 January 2018. While the Court referred to the "manifest, effective and concrete" standard, it examined closely the factual circumstances of the case in order to determine whether a violation of international public policy took place, which suggests, again, that the Court’s oversight has become stricter.

Another interesting feature of this ruling is that the Paris Court of Appeal incorporated the "international consensus" reflected in a resolution of the United Nations General Assembly into international public policy, just like it had done in Kirghizstan in relation to the United Nations Convention against Corruption. It thus seems that public international law is bound to become a greater source of norms that are protected as a matter of international public policy.

Thus, the ruling issued in MK Group seems consistent with the Kirghizstan decision. The question now is whether France's highest court, the Cour de cassation, will follow suit and endorse this approach.

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¹ Paris, 16 janvier 2018, n° 15/21703.
² Paris, 23 mars 2006, Cytec, Rev. arb. 2007.100, note. S. Bollée ; Paris, 15 février 2007, Heresma.
³ Paris, 4 mars 204, Gulf Leaders, Rev. arb. 2014.955, note L.-Ch. Delanoy.
⁴ Paris, 21 février 2017, Kirghizstan, Rev. arb. 2017.915, note M. Audit et S. Bollée.

Julien Huet, an associate at White & Case, assisted in the development of this publication.

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© 2018 White & Case LLP

The Judicial Tribunal in Dubai has rendered new decisions, continuing to give priority to on-shore Dubai Courts vis-à-vis the offshore DIFC Courts.

Background

In one of our previous alerts here, we summarized the impact of Dubai's Judicial Tribunal on the DIFC Courts'"conduit jurisdiction".

By way of background, decisions of the on-shore Dubai Courts and the DIFC Courts are mutually recognized and enforced, including enforcement proceedings for arbitration awards. The DIFC Courts have adopted an expansive approach to their jurisdiction, holding that they could be used as a 'conduit' to enforce foreign and domestic (on-shore) arbitration awards (which would have been recognized by the DIFC Courts). The Judicial Tribunal was set up, in part, as a reaction to this practice of the DIFC Courts and is to decide upon conflicts of jurisdiction and judgments between the on-shore Dubai Courts and the offshore DIFC Courts.

We elaborate below on the decisions the Judicial Tribunal has rendered since our previous alert, and consider whether these decisions have reduced the jurisdiction of the DIFC Courts further.

Further Developments Through the Judicial Tribunal Decisions

The following scenarios now have to be distinguished if an award creditor seeks enforcement in the DIFC Courts:

1. Annulment Proceedings are Pending

   As long as annulment proceedings are pending before the on-shore Dubai Courts in relation to an award rendered in on-shore Dubai, the recognition and enforcement of the award cannot proceed in the DIFC Courts and has to be stayed. This applies even if there is a link to the DIFC, for example, if the dispute is related to a project located in the DIFC (as in Daman Real Capital Partners Company LLC v Oger Dubai LLC).

   Since our previous alert, the Judicial Tribunal has re-confirmed its position, relying upon the principle that the Dubai Courts have "general jurisdiction" in Ramadan Mousa Mishmish v Sweet Homes Real Estate LLC.
    

2. Formal Mediation Proceedings are Pending

   The Judicial Tribunal in Gulf Navigation Holding PSC v Jinhai Heavy Industry Co. Limited has also recently addressed for the first time the situation that settlement proceedings are pending before the Dubai Centre for Amicable Settlement of Disputes (the "Settlement Centre"), which is attached to the on-shore Dubai Courts. The Judicial Tribunal held that the recognition and enforcement of an award cannot proceed before the DIFC Courts, if such settlement proceedings are pending. The Judicial Tribunal gave preference to the Dubai Courts, although the award in question was rendered in London and the claim was initiated before the Settlement Centre a year later. Unsurprisingly, three of the seven Judicial Tribunal Justices issued dissenting opinions, arguing that the Judicial Tribunal should not have interfered with the enforcement in the DIFC Courts, on the basis of the New York Convention.
    

3. No Annulment Proceedings / Formal Mediation Proceedings are Pending

   By contrast, an award creditor can enforce the award both in the offshore DIFC Courts and the on-shore Dubai Courts where no annulment / formal mediation proceedings are pending either in the DIFC Courts or in the on-shore Dubai Courts, or where these proceedings have been concluded unsuccessfully. This appears to apply irrespective of the seat of the arbitration. This also appears to apply irrespective as to whether there is any link with the DIFC and whether there are any assets of the award debtor in the DIFC.

   The Judicial Tribunal recently confirmed this in respect of an award that was rendered in the DIFC (Assas Investments Limited v Fius Capital Limited). In this case, annulment proceedings had been concluded unsuccessfully. The award creditor initiated proceedings in the DIFC Courts to enforce the award, in parallel with execution proceedings in on-shore Dubai Courts. The Judicial Tribunal clarified that there was no conflict of jurisdiction since execution proceedings were carried out with respect to different assets, those in the DIFC and those in on-shore Dubai.

   This recent decision is consistent with two of the Judicial Tribunal's earlier decisions, where the jurisdiction of the DIFC Courts was invoked to enforce foreign awards and judgments. In both instances the cases had no connection with the DIFC, the DIFC Courts' jurisdiction was invoked to seek recognition of the foreign award and judgment, so as to simplify execution proceedings in the on-shore Dubai Courts. In these decisions, the Judicial Tribunal had held in favour of the DIFC Courts' jurisdiction since there no conflict with the jurisdiction of the on-shore Dubai Courts.

Conclusion

In its most recent decisions, the Judicial Tribunal has continued its restrictive approach towards the jurisdiction of the DIFC Courts in relation to the recognition and enforcement of awards. Notably, the Judicial Tribunal has now also given priority to the on-shore Dubai Courts in the case that mediation proceedings are pending before the Settlement Centre. Parties seeking enforcement of arbitral awards in the DIFC Courts must now be wary of attempts at settlement under the aegis of the Settlement Centre, since that may unwittingly create a conflict of jurisdiction. A party seeking enforcement of an award may therefore prefer to take recourse to informal settlement attempts instead.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP

Alexandra is an associate in White & Case's Dispute Resolution group based in London. Her practice includes international arbitration and commercial litigation across a broad range of sectors. She has also recently spent six months working in the firm's Paris office.

Alexandra has particular experience in international trade and investment disputes. Prior to joining White & Case, she completed a traineeship at the European Commission's Directorate General for Trade in the Dispute Resolution and Legal Aspects of Trade Policy unit and worked in the International Trade group of another international law firm in Brussels. She also worked as part of the standby defence team at the International Criminal Tribunal for the former Yugoslavia in The Hague.

Financing Africa: Challenges and opportunities

Compensatory damages principles in civil- and common-law jurisdictions: requirements, underlying principles and limits

White & Case Partners Clare Connellan, Elizabeth Oger-Gross and Associate Angélica André recently contributed a chapter on compensatory damages to GAR's Guide to Damage in International Arbitration.¹

Compensatory damages, as the name indicates, are intended to compensate a claimant for losses suffered as a result of the other party’s (wrongful) conduct. Those losses can be pecuniary (e.g., costs, loss of profit, related expenses) or non-pecuniary (e.g., for pain and suffering, loss of reputation).² The basic rule, in one common-law formulation, is that a claimant is entitled to ‘that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation’.³ This rule is formulated in similar terms in civil-law jurisdictions – for example, French law recognises the principle of full compensation, the objective of which is to put the injured party in the position in which it would have been had the act that gave rise to the damage not occurred.⁴

This chapter will provide a comparative overview of the legal principles and elements of compensatory damages in civil-law and common-law jurisdictions, with a focus on contractual damages.... Click here to download the full chapter (PDF) »

¹ Clare Connellan and Elizabeth Oger-Gross are partners at White & Case LLP. Angélica André is an associate at White & Case LLP. The authors thank Heather Clark for her contribution to the previous edition of this chapter.
² H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 2-001. As discussed below, there are restrictions on a party’s ability to recover non-pecuniary losses in common-law jurisdictions. See, e.g., Common Law Series: The Law of Damages/Part I General Principles/Chapter 4 Damages for non-pecuniary loss/E Disappointment, distress, humiliation and loss of enjoyment/Contract.
³ H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 2-002, citing Livingstone v. Rawyards Coal Co [1880] 5 App Cas. 25 at 39.
⁴ Full compensation is the authors’ translation of the French term ‘réparation intégrale’. See A. Bénabent, Droit des obligations (15th ed. L.G.D.J. Précis Domat, 2016) 680. See also H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) para. 2.03.

An extract from the second edition of GAR's Guide to Damages in International Arbitration, first published in December 2017. The whole publication is available at globalarbitrationreview.com.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.

Third-party arbitration funding in Singapore and Hong Kong is evolving rapidly. In the past year, both jurisdictions have made regulatory changes permitting third-party funding in the arbitration context. While it is early days, the combination of light statutory regulation and a rich pool of disputes means the future looks bright for third-party funding in these arbitration hubs.

White & Case lawyers Melody Chan, Matthew Secomb and Adam Wallin have authored book chapters on recent developments in arbitration funding in Singapore and Hong Kong. The chapters form part of the 2018 edition of The Third Party Litigation Funding Law Review.

Click here to download the Hong Kong chapter.

Click here to download the Singapore chapter.

The chapters are also available online: Singapore, Hong Kong.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.

A recent English High Court decision is a cautionary tale for claimants under the 2014 LCIA Rules. The Court held that a Request for Arbitration is invalid if it relates to more than one arbitration agreement. Claimants must file a separate Request for each arbitration agreement.

The decision also considers when jurisdictional objections must be raised. It concludes that an objection will be valid even if raised only in a Statement of Defence. This means that, in some cases, a jurisdictional objection may not emerge until months into the arbitration.

Decision: A v B [2017] EWHC 3417 (Comm)

Facts

B sold two shipments of crude oil to A under two separate contracts. Each contained an LCIA arbitration clause.

B commenced arbitration against A for non-payment under the contracts. It filed a single Request for Arbitration with the LCIA, setting out its payment claims under each contract. It paid a single registration fee.

More than six months after filing its Response, and a week before its Statement of Defence was due, A challenged the validity of B's Request for Arbitration. A argued that, since the Request referred to both contracts, it failed to identify the particular dispute and the particular arbitration agreement to which it related. The Request was therefore invalid under the LCIA Rules, and the tribunal had no jurisdiction.

The tribunal dismissed A's objection on the grounds that it was made too late. A applied to the English High Court to overturn the tribunal's decision.

Issues

The court considered two key questions:

I. Was the Request for Arbitration valid?

II. Did A raise its jurisdictional objection too late?

Decision

The court found that the tribunal lacked jurisdiction because the Request was invalid. A had made its jurisdictional objection in time.

The Request was invalid

The court closely analysed Article 1 of the LCIA Rules. Article 1 requires Requests for Arbitration to identify 'the full terms of the Arbitration Agreement’ and to give ‘a statement briefly summarising the nature and circumstances of the dispute'.

B accepted that an arbitration under the LCIA Rules could only encompass a dispute arising under a single arbitration agreement. It argued, however, that its single Request for Arbitration had commenced two separate arbitrations – one under each contract.

The court rejected this argument. Article 1 of the LCIA Rules refers to the 'Arbitration Agreement' and 'the dispute' in the singular. The LCIA Rules do not envisage several arbitrations being commenced under a single Request. The Court therefore refused to interpret Article 1 as referring to 'Arbitration Agreements' or 'the disputes' in the plural.

In support of its conclusion, the Court observed that:

• It was 'inconceivable' that the LCIA Rules would permit a claimant to pay only one registration fee but commence multiple arbitrations.
• The LCIA Rules allow consolidation where the parties consent. B could not bypass the need for A’s consent by commencing two arbitrations under one Request.¹
• If the words 'Arbitration Agreement’ include ‘Arbitration Agreements', the requirement for a 'written request' might be read to require several 'written requests'. How the LCIA Rules would work in that situation is unclear. It is however 'entirely clear’ that the result could not be consolidation, or concurrent hearings in multiple arbitrations, without the parties’ consent.

The court also considered the similar case of The Biz.² In that case, a claimant commenced ad hoc arbitrations under ten separate contracts by filing a single notice of arbitration. The court in The Biz concluded that the notice was valid, and that ten separate arbitrations had been commenced. The key test was what a reasonable person in the position of the respondent would have understood by the notice.

Here, the court distinguished The Biz because it did not involve arbitration under institutional rules. The court found that a reasonable person receiving a Request for Arbitration under the LCIA Rules would understand that a single arbitration had been commenced. That conclusion was supported by the wording of the Request itself, which claimed one single amount of damages, and referred throughout to 'the arbitration'.

A's jurisdictional objection was not made too late

The key issue was the meaning of 'as soon as possible' in Article 23.3 of the LCIA Rules. Article 23.3 provides that jurisdictional objections must be made 'as soon as possible but not later than the time for its Statement of Defence'.

The court's starting point was the mandatory provisions on jurisdictional objections under sections 31 and 73 of the UK’s Arbitration Act 1996. The court considered that it was 'highly unlikely' that the LCIA Rules were intended to materially diverge from those provisions.

Section 31 of the 1996 Act does not require jurisdictional objections arising at the outset of the proceedings to be made 'as soon as possible'. Instead, objections must be made no later than the respondent's 'first step in the proceedings to contest the merits of any matter' relating to the objection.

The court rejected B's argument that A first contested the merits in its Response. The court concluded that the Response is a 'predominantly formal document'. It also noted, by reference to reports on the drafting of the 1996 Act, that the 'first step…to contest the merits' was intended to mean the Statement of Defence (or its equivalent in an arbitration not requiring formal pleadings).

The words 'as soon as possible' in Article 23.3 of the LCIA Rules do not alter the position. It was 'inconceivable' that the LCIA Rules intended to impose a strict regime for jurisdictional objections that would depart dramatically from section 31 of the 1996 Act. An absolute 'as soon as possible' requirement would mean that 'a party could lose the most fundamental of objections (such as that it was not party to the relevant agreement or that there was no LCIA arbitration clause in an agreement to which he was party) without having taken any steps in the arbitration'.

Instead, the court found that the words 'as soon as possible' merely excluded 'untimely objections'. An objection would be 'untimely' if it had not been raised by ‘the time’ of the Statement of Defence, as required by the 1996 Act. If the LCIA Rules had intended to impose a stricter requirement, they would have used far clearer words spelling out the sanction for non-compliance. This approach was consistent with the interpretation of clauses requiring prompt compliance by a longstop date in other contexts.³

The court also rejected B's argument that parties can contractually agree to shorten the time limit for jurisdictional objections. Section 73 of the 1996 Act requires jurisdictional objections (among other types of objection) to be made 'forthwith, or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of [Part 1 of the 1996 Act]'. The Court interpreted this to mean that the time limit for jurisdictional objections under section 31 will prevail over any shorter time limit in the parties' arbitration agreement.⁴

Comment

The decision highlights a potential pitfall for claimants commencing LCIA arbitrations under different contracts. Unlike the rules of some other arbitral institutions,⁵ the LCIA Rules do not expressly allow disputes under separate arbitration agreements to be started by a single Request for Arbitration. The decision may prompt the LCIA to amend its rules.

The court's message for claimants under the existing LCIA Rules is clear. Separate arbitration agreements require separate Requests for Arbitration. If separate Requests are not used, the arbitration could collapse months after being started – as happened here. This will always mean wasted time and costs. In some cases, it could also mean that applicable limitation periods have expired, such that the claimant cannot start fresh arbitrations. The safest course for claimants is therefore to file separate Requests, and seek their consolidation.

Click here to download PDF.

¹ The court focussed on Article 22(ix) of the LCIA Rules, which empowers a tribunal to consolidate arbitrations under the LCIA Rules if the parties consent. The court did not, however, refer to Article 22(x). Article 22(x) permits the tribunal to consolidate LCIA arbitrations between the same parties under the same or compatible arbitration agreements, even if the parties do not consent. The court's reasoning might nevertheless be extended to Article 22(x) on the basis that a claimant should not be permitted to bypass the need for the tribunal's consolidation order.
² [2011] 1 Lloyd's Rep 688.
³ AIG Europe (Ireland) Ltd. v Faraday Capital Ltd [2006] 2 CLC 770, involving the interpretation of a notification clause in a reinsurance contract.
⁴ The court also suggests (at para. 44 of the judgment) that, if an arbitration agreement permits jurisdictional objections to be made later than the time limit under section 31, the arbitration agreement will prevail. It is not clear how this would be consistent with the mandatory status of section 31 of the 1996 Act, which provides that jurisdictional objections 'must be raised' by the time limit set out therein.
⁵ See, eg, ICC Rules (1 March 2017), Article 9; SIAC Rules (2016), Article 6; SCC Rules (1 January 2017), Article 14; HKIAC Rules (2013), Article 29.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP

Alexandra Diehl focuses on national and international dispute resolution with a special focus on arbitration (DIS, ICC, ICSID, SCC and ad hoc). She represents German and multinational clients in all phases of disputes and has started to develop an active arbitrator practice.

At ease with the multijurisdictional intricacies of transnational fact patterns, Alexandra supports clients with complex disputes relating to Post M&A, international investment law, IP and liability issues (including lawyer and managing directors' liability). She also regularly advises clients on issues relating to private international law and cross-border taking of evidence. Moreover, she gives IP-related advice in technology-driven transactions and with regard to R&D and license agreements.

Prior to joining the firm, Alexandra worked for eight years for a major British law firm in Düsseldorf and Frankfurt.

Alexandra regularly publishes on international arbitration matters and teaches international investment law at Heinrich-Heine-University of Düsseldorf.

Marina is an Associate in the International Arbitration Group in the Sydney office, where she focuses on international arbitration and commercial litigation.

Prior to joining White & Case, Marina worked in the international arbitration group of a leading international firm in London, where her work focussed on investment arbitration. Marina has also worked and interned at the Secretariats of the Hong Kong International Arbitration Centre and the Australian Centre for International Commercial Arbitration; and spent three years working in-house for two major international insurers.

As well as her dispute resolution experience, Marina has attended a number of intergovernmental treaty negotiations at the United Nations Commission on International Trade Law and the Hague Conference on  Private International Law on investor-state dispute settlement, enforcement of foreign judgments and international mediation. She has also spent time doing legal and policy research at the International Bar Association in London.

Marina is a Specialist Editor of the Utrecht Journal of International and European Law and has published and spoken on international dispute resolution and international law topics. She also plays an active role on the steering committees of two major regional arbitration organisations, the Asia-Pacific Forum for International Arbitration and the AIDA Reinsurance and Insurance Arbitration Society (Asia).

Marina was named the 'New South Wales Young Lawyer of the Year' in 2016 by NSW Young Lawyers, part of the Law Society of New South Wales.