"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Wednesday, March 30, 2011

Global Process Systems v. Syarikat Takaful Malaysia Berhad ( UK SC, 2011)

Petroleum exploration is a technology-intensive activity. One of the chief equipments used in petroleum operations are drilling rigs. While, rigs built for drilling on land (onshore) are less complex, offshore (in the sea/ ocean) rigs are much more complex and expensive.

The rig in dispute in this case was a self elevating mat supported jack up rig. Jack up rigs are rigs which are self-elevating. These form one of the most popular offshore rigs used throughout the world. Essentially, a jack up rig floats in the water and the legs are jacked up. Once the destination (the drilling site) is reached, the legs of the rig go underwater into the sea bed and elevate the jack up rig floor to a certain height depending upon the depth of the sea water and the length of the legs of the rig. The figure here shows a jack-up rig that is jacked up.

When the drilling operations in a particular location is complete and the rig needs to move to a different location, the rigs are jacked down and are moved to different locations by the use of tugs. Where the next location is too far, the rig is taken on a barge. The below figure shows a jacked down rig on a barge.

Jack up rigs can be either mat type or independent leg type. In case of independent leg type, the tip of the legs consist of spud-cans. Spud-cans cylindrical steel shoes with pointed edges. These penetrate into the sea-bed and make the legs stable.

Jack-up rigs can also have mats instead of spud-cans. Mats consist of a flat surface which is laid on the sea bed and are attached to the edge of the legs.

The legs of the mat supported jack-up rig is cylindrical and is made of steel. Below is an example of how mat type jack up rigs look from the sea bed

In the present case, the legs were of 312 feet in length each and weighted about 312 tonnes. The rig was transported to convert it into a Mobile Offshore Production Unit. The rig was transported on a barge. Usually Production Platforms are fixed structures on the sea. However, it might be advantageous to use a movable platform from cost, convenience and re-use perspectives. Such a movable platform is known as a Mobile Offshore Production Unit.

While the legs were being transported on the barge with the legs extending in the air (see the second figure of the post. The legs are independent leg type. However in our case, the legs were of the mat type rig.

During the voyage, all the three legs broke of and fell into the sea. Syaikit Takaful Malaysia Berhad (STMB) who owned the rig made a claim with its insurers for the loss caused to STMB. Insurers rejected the claim. STMB sued the insurers before the commercial court. The insurers argued that the insurer was not liable for the loss because the loss was caused due to inherent vice. The insurers contended that since the loss not caused by any an unexpected accident or casualty, therefore the loss was proximately caused by inherent vice. This ground of inherent vice was relied upon by the insurers as it was an exception to insurer liability under the contract. Section 55(2)(c) of the English Marine Insurance Act, 1906 also provided:
“Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or for any loss proximately caused by rats or vermin, or for any injury to machinery not proximately caused by maritime perils.”
The central argument of the insurers was that the loss was proximately caused by inherent vice in the rig. The court had to consider the validity of this argument. 

The judgement can be downloaded from here. The decision of the court will be analysed in a subsequent post.

(all images from Rigzone- http://www.rigzone.com/training/insight.asp?insight_id=339&c_id=24)

Tuesday, March 29, 2011

Canoro Resources: Transfer of Operatorship in the Amguri PSC

Earlier this month, we did a descriptive comment on the case of Canoro Resources v. Union of India (posts are here and here). 

To recap, the Government of India had terminated the Production Sharing Contract in respect of Canoro Resources as it had not obtained permission from the Government for an indirect assignment of participating interest. Canoro filed an application for interim measure under Section 9 of the Arbitration and Conciliation Act, 1996 for preventing the Goverment from not giving effect to the termination letter. The Delhi High Court rejected the application.

The Telegraph reports that the Delhi High Court has directed the Oil and Natural Gas Corporation Limited  (ONGC) to take over the operations in the Amguri Block. Now, this issue as to what happens after the PSC is terminated in respect of one party is important and may form precedent in future cases. 

The said news report suggests that the Ministry of Petroleum and Natural Gas had requested the court to for an interim measure ordering Canoro Resources to hand over the operatorship to Assam Company Limited, a partner to the consortium that consisted of Canoro Resources Ltd. (Canoro), Assam Company Limited (ACL) and Joshi Technologies International, with ONGC having the power to monitor the operations.

The High Court, however, passed an order asking ONGC to take over the possession of the Block and to operate the Block. the order can be obtained from this link. The next hearing is on 6 April 2011. We'll follow this case for the interesting issues that arise consequent to termination of the Production Sharing Contract.

The latest Model Production Sharing Contract published by the Government gives some indication:
"PROVIDED THAT where the Contractor comprises two or more Parties, the Government shall not exercise its rights of termination pursuant to Article 30.3, on the occurrence, in relation to one or more, but not all, of the Parties comprising the Contractor, of an event entitling the Government to terminate the Contract,
a) if any other Party or Parties constituting the Contractor (the non-Defaulting Party or Parties) satisfies the Government that it, or they, is/are willing and would be able to carry out the obligations of the Contractor.
(b) where the non Defaulting Party or Parties with the consent of the Government has/have acquired the Participating Interest of the Defaulting Party pursuant to the provisions of the Operating Agreement and has/have procured and delivered to the Government a guarantee or guarantees as referred to in Article 29.1 in respect of the Participating Interest of the Defaulting Party acquired by the non Defaulting Party or Parties.
 It is submitted that many Joint Operating Agreements (those agreements entered into between the members of the consortium forming the Contractor to govern their relationship inter se) do not contain detailed provisions in case such event happens. I am not sure if the Model JOA of the Association of International Petroleum Negotiators (2002) contains a provision governing such an event. JOAs ought to contain provisions to cover a situation where one of the parties is a defaulting party under the PSC.

Thursday, March 24, 2011

Enforcement of Foreign Awards: India Catching Up with the International Trend?

Two recent  judgements by the Delhi High Court on the enforcement of foreign awards are worth noting.We'll do a detailed post on one of the two and give the link to the other. We'll cover the other in brief in this month's roundup of arbitration cases.

EX.P. 386/08 & E.A. Nos.451/2010, 704-705/2009 & 77/2010
High Court of Delhi
Date of Judgement: 11 January 2011
High Court of Delhi

Penn Racquet Sports (Penn) is a company based in USA. Major International Ltd. (Major) is an Indian company. Under the Trademark Licence Agreement (TLA) entered into between Penn and Major, the trademark “Penn” was licenced to Major for certain purposes and for the same Major had to pay annual royalty. The annual royalty was to be paid in quarterly instalments. Default in payment attracted interest.

Clause 17 stated that the agreement would be governed by Austrian laws. Clause 18 of the TLA provided for reference of disputes to arbitration administered by ICC.

Major defaulted in payments and consequently, Penn terminated the contract. Disputes arose and were referred to Ms. Gabrielle Nater-Bass, the sole arbitrator. The arbitrator decided in favour of Penn.

Mayor argued before the Delhi High Court that the award was contrary to public policy.

The Court held that narrow meaning has to be attributed to the term “public policy of India” where the matter involves conflict of laws. The court referred to the decision of the Supreme Court in Smita Conductors Ltd. v. Euro Alloys Ltd. In Smitha Conductors, it was held that public policy has been:
used in a narrow sense must necessarily be construed as applied in private international law which means that a foreign award cannot be recognised or enforced if it is contrary to (1) fundamental policy of Indian law; or (2) the interests of India; or (3) justice or morality.”
The court also referred to Jindal Exports Ltd v. Fuerst Day Lawson Ltd where the Delhi High Court followed the Smita Conductors

Major did not cite any other ground under Section 48 of the Arbitration and Conciliation Act, 1996 (Act). It only contended that the arbitrator interpreted a term of the TLA wrongly. The court rejected Major’s contention for the following reasons:

  • Interpretation of contract is in the domain of the arbitrator.
  • Even in case of domestic awards, courts would not interfere with the interpretation by the arbitrator of the contract unless such interpretation is contrary to the terms of the contract.
  • The substantive law of contract is Austrian law. Thus, if Major contended that the interpretation of the contractual term by the arbitrator was erroneous, the interpretation of the term of the contract would be on the basis of Austrian law, usually proved on the basis of expert evidence. Major did not lead any expert evidence on Austrian Law relating to the interpretation of the relevant provision of law.
  • Major has attempted to interpret the relevant term of the contract on the basis of Indian law, which is not permissible.
  •  An award cannot be denied enforcement merely for the reason that it contravenes Indian law. The award should be contrary to the fundamental policy of India or because the award is contrary to interests of India or is contrary to justice or morality.
Major had also contended that the award was contrary to principles of natural justice because:
  1. the terms of reference drafted by the arbitrator were not signed by Major,
  2. Major’s counter-claim was not even taken on record by the arbitrator.
The court negated the contention of the above contentions as:
  • the arbitrator had given adequate opportunity to sign the terms of reference. Despite several reminders, Major failed to sign the same.
  • The counter claim was fixed by the ICC Court of Arbitration (ICCA) but was not paid by Major. As per the ICC Rules, if the fee for counter-claim is not paid, it is deemed to be withdrawn.
Since the argument of Major failed to convince the court, the court deemed the award enforceable. 

It  may be noted that a post in the Kluwer Arbitration blog comments that this case is a great development for the Indian arbitration industry. Check it out.

The other case that was mentioned at the beginning of this post is Anita Garg v. Glencore Grain Rotterdam B.V. & Anr. The case pertains to enforcement of a GAFTA award. A comment of the case can be found at the Indian Corp Law blog. The challenge/ enforcement of GAFTA awards in India is a fascinating topic that would form the subject-matter of a post on another day.

Monday, March 21, 2011

What Cannot be Done Directly Cannot be Done Indirectly: Canoro Resources Case

In the last post, we had seen the facts of the case of Canoro Resources v. Union of India which deals with assignment of participating interests in a Production Sharing Contract. We analyse the decision in this post. The decision is summarized below:
  • Prima facie, a transfer of shares satisfying the conditions specified in Article 29.2 requires the consent of the Government.
  • The fact that Article 29.2 does not use the term “prior” is immaterial as Article 29.3 uses the expression “detailed information on the proposed assignee or transferee, the terms of the proposed assignment or transfer”.
  • The purpose of Article 29.2 is to cover situations where participating interests are transferred through an indirect method.
  • The contracting party is supposed to give detailed information of the proposed assignee so that government can consider and dispose of the application.
  • When direct transfer of participating interests without consent is prohibited, even an indirect transfer of participating interests is also prohibited.
  • As per Article 31, a breach of Article 29.2 cannot be remedied by the contractor party.
  • Article 35 which provides that the contractor party has to inform the government of any material change in the status of the company that affects the performance of PSC obligations does not “whittle down” Article 29.2.
  • This is a fit case for lifting the corporate veil to see the economic realities behind the veil.
  • Article 31.3 provides that government has to give a notice that it intends to terminate the PSC at least 90 days before the intended date of termination. The actual termination took place beyond 90 days after the show cause notice.
  • By its nature, the PSC is determinable.
  • There are a few decisions which hold that termination is not justified in view of the expenditure undertaken. However, the termination by the Government is not, prima facie, illegal.
  • A sovereign cannot be viewed as having given up its rights permanently when it enters into a contract, specifically when an action by the Contractor threatens the national security of the interests of the state.
  • As provided in the Reliance case, petroleum is a strategic resource to the nation and an interpretation of the contract or law which affects the power of the sovereign in respect of such strategic resource would be opposed to public policy.
  • The submission that attempts for amicable settlement is a condition precedent for invoking arbitration is not correct. If it is decisive that amicable settlement would fail, there is no need to initiate attempts to amicably settle the dispute. From the facts of the dispute, it appears that Canoro had made attempts for amicable settlement.
  • It was not pleaded by the Government that MASS was an undesirable entity.
  • The government submitted that the petroleum reservoir was affected due to improper operations. Therefore the court held:
 “In the face of the allegations that the petitioner, post the indirect assignment of participating interest has caused irreparable and irretrievable damage to the oil field, leads me to prima facie conclude that Article 31.6 of the PSC cannot come in the way of the government to terminate the PSC qua the petitioner, when the valuable national resource itself is in danger of being wasted and irretrievably lost by a contractor or its assignee.”
 Thus, the court dismissed the petition for interim injunction under Section 9 of the Arbitration and Conciliation Act, 1996.

Friday, March 18, 2011

What Cannot be Done Directly Cannot be Done Indirectly: Assignment of Participating Interests

In the last post, we had noted the principle what cannot be done directly cannot be done indirectly. In this post we explain the applicability of this principle in respect of assignment of participating interests in a production sharing contract in the light of the recent case of Canoro Resources Ltd. V. Union of India.

Canoro Resources Ltd. (Canoro), Assam Company Limited (ACL) and Joshi Technologies International (Joshi) were successful bidders for developing the Amguri Oil Field. Canoro held 60% of the participating interests in the Field and was the operator for the Field. (An operator is one who performs the actual activities of exploration/ development in the Block/ Field. An operating committee is formed consisting of all the contractor parties. The operating committee takes all the important decisions pertaining to the operations in the Block/ Field.)

The PSC in respect of Canoro was terminated by the Government of India for the reason that Canoro breached the provisions pertaining to assignment of participating interests.

Canoro entered into an Investment Agreement (IA) with MASS Financial Corporation (MASS). Some terms of the IA as provided in the judgement are as follows: 
  • MASS agreed to make a private placement for 24,798,000 common shares and also to apply against the rights offering made by the [Canoro], equal to the total rights offering commitment, less the number of common shares purchased by the holders of rights pursuant to the exercise of rights under the rights offering.
  • The petitioner agreed with MASS that the funds infused by MASS would be utilized at least to the extent of US$1,500,000/- to meet the expenditures relating to the Amguri condensate recovery and gas re-injection project.
  • The balance of the proceeds from the equity financing were agreed to be used for working capital and in conjunction with the exploration and development of its oil and gas projects, such projects.
  • On the private placement being made by MASS, the [Canoro] agreed to appoint two nominee directors of MASS on its Board of Directors.
  • The Board of Directors shall be comprised of no more than five persons, and the said Board shall reflect the percentage of shareholding of MASS.
  • After the private placement closing, the name of the petitioner was agreed to be changed to one approved by MASS.
During this investment process, Canoro informed the Government of India the private placement undertaken through the IA was not a material change in the status of the company. Further, Canoro stated that MASS did not control Canoro. Canoro also informed that it would conduct a rights offering and in case the rights holders did not subscribe, the same would be offered to MASS.

The Government issued a show cause notice as to why the PSC should not be terminated due to the fact that Canoro did not seek consent of the Government. During the course of exchange correspondences in regard to the show cause notice, Canoro contended that the shareholding of MASS became 53%. Not satisfied by the replies of Canoro, the Government terminated the PSC.

Canoro applied to the Delhi High Court under Section 9 of the Arbitration and Conciliation Act, 1996 to stay the termination of the PSC.

 Relevant Contractual Provisions

29.1 Subject to the terms of this Article and other terms of this Contract, any Party comprising the Contractor may assign, or transfer, a part or all of its Participating Interest, with the prior written consent of the Government, which consent shall not be unreasonably withheld, provided that the Government is satisfied that:

(a) the prospective assignee or transferee is of good standing, has the capacity and ability to meet its obligations hereunder, and is willing to provide an unconditional undertaking to the Government to assume its Participating Interest share of obligations and to provide guarantees in respect thereof as provided in the Contract;

(b) the prospective assignee or transferee is not a company incorporated in a country with which the Government, for policy reasons, has restricted trade or business;

(c) the prospective assignor or transferor and assignee or transferee respectively are willing to comply with any reasonable conditions of the Government as may be necessary in the circumstances with a view to ensuring performance under the Contract; and

(d) the assignment or transfer will not adversely affect the performance or obligations under this Contract or be contrary to the interests of India. 29.2 In case of any material change in the status of Companies or their shareholding or the relationship with any guarantor of the Companies, the Company(ies) shall seek the consent of the Government for assigning the Participating Interest under the changed circumstances.”

"35.1 The parties comprising the contractor shall notify the Government of any material change in their status, shareholding or relationship of that of any guarantor of the companies, in particular, where such change would impact on performance of obligations under this contract."

Contentions of the Parties:
  • Canoro had the right under the PSC to allot 53% shareholding to MASS.
  • Article 29.1 pertains to only assignment of participating interest. In this case there is no assignment of participating interest
  • Article 29.2 is only applicable when there is a material change in the status of the company and when there is a change in the control would permission from the government be necessary.
  • Article 29.1 uses the term “prior written consent”. This is absent in Article 29.2 which uses the term “consent of the Government”.
  • Even direct assignment of participating interests cannot be unreasonably withheld as stated in Article 29.1
  • MASS satisfies the conditions mentioned in 29.1(a) to (d)
  • Induction of shares of MASS would not affect the performance of the obligations under the PSC.
  • If Article 29 is read with Article 35, the result would be that the prior consent of the government is not necessary for change in shareholding.
  • It was only after the show cause notice by the Government that the shareholding of MASS rose to 53%.
  • The right of the Government to terminate the PSC is only regards the breach of Article 29.1 and not 29.2. Therefore PSC cannot be terminated without any cause.
  • As per Article 31.6, the PSC cannot be terminated during the pendency of arbitration. Since the notice invoking arbitration was sent to the Government preceding the termination notice, the government has no right to terminate the contract
  • Canoro stated that in view of the above absence of right of the government to terminate the PSC, there was a prima facie case. Further it was impossible to ascertain the damages in terms of money.
  • What cannot be done directly cannot be done indirectly. If prior written consent is required for assignment of participating interests, prior consent would also be required in case of indirect transfer of participating interests.
  • Article 29.2 read with the next two sub-clauses conveys the meaning that prior written consent is required in case of change of control of the company as per Article 29.2
  • Article 29.3 requires the Contractor to submit the details of the “proposed” assignment or transfer.
  • Article 29.5 states that no assignment or transfer would be effective until the approval of the Government is granted.
  • Article 31.(e) refers to any interest in the contract and not merely participating interest
  • Article 29.2 is breach not by an open market share issue but by private placement.
  • The IA refers to all kinds of interests owned by Canoro including participating interests.
  • This is a suitable case for lifting of the corporate veil.
  • In the national interest, injunction should not be granted due to the reasons stated in the Reliance case.
  • Even if the termination is held invalid, the petitioner can be compensated adequately by money
  • Invocation of arbitration is invalid as attempts to amicable settlement is a condition precedent.
The decision of the Delhi High Court would be analysed in the next post.

Wednesday, March 16, 2011

Assignment/ Transfer of Participating Interests

We thought of doing a detailed post on the Cairn-vedanta deal and the decision of the government on the deal. But then there's a moot problem which deals with the same. The memorial deadline was 15 March 2011 I presume. In this post, we raise certain questions, quote certain provisions and cite certain judgements concerning the problem.

The latest production sharing contract of the Government of India comes with a very badly made cover page and can be obtained from here.

NELP IX PSC contains a provision (Article 28.7) that reads:
An assignment or transfer shall not be made where the Participating Interest to be retained by the proposed assignor or the percentage interest of assignee shall be less than ten per cent (10%) of the total Participating Interest of all the constituents of the Contractor, except where the Government, on the recommendations of the Management Committee may, in special circumstances, so permit.
What does 28.2 PSC say?

 Would decisions dealing with the rationale of RoFR provisions be helpful?

Is the requirement of government consent answered by the recent Reliance judgement?

What is this principle: what cannot be done directly cannot be done indirectly?

Is this judgement Apex Corporation v. Ceco Developments Ltd relevant?

Would checking out other PSCs/ Petroleum laws be relevant for establishing the standard regulatory role of the MoPNG in granting consent to assignments participating interests directly or indirectly.

Would checking out ICSID cases be relevant?

Check out this and this links.

Check out Joshnston's books and articles. might be relevant. He is an authority on Production Sharing Agreements.

Also checkout judgements especially decided by the courts in Alberta (Canada), and Texas. You might finsdsome relevant judgement or the other.

Check out the oilfield glossaries in the Schlumberger website and other sources.

Also check out the Notice Inviting Offers(NIO) and Bid Formatfor NELP VIII (the problem is about NELP IX. Nevertheless, its worth checking out).

Check out this guideline of of DGH. 

Also, know about the role of the DGH, the PNGRB, the Ministry of Petroleum and Natural Gas in regulating the petroleum industry. Further, read the entire PSC and know about the important aspects of the PSC.

Saturday, March 12, 2011

Links to Some Articles on Arbitration and Other Interesting Things

George Washington International Law Review had an India specific issue. The issue consists of the following articles:

Abhishek Singvi, India’s Constitution and Individual Rights: Diverse Perspectives

Sunit Khilani, The Constitution and Individual Rights: A Comment on Dr. Abhishek Singhvi’s India’s Constitution and Individual Rights: Diverse Perspectives

Prashant Bhushan, Sacrificing Human Rights and Environmental Rights at the Altar of “Development”

Srikanth Reddy, What Would Your Founding Fathers Think? What India’s Constitution Says—and What Its Framers Would Say—About the Current Debate Over a Uniform Civil Code

Now, before you arbitration readers conclude there is nothing in this post for you, do check out the following articles published in the said law review:

Fali S. Nariman, India and International Arbitration

Ronald J. Bettauer, India and International Arbitration: The Dabhol Experience

Interesting Arbitration Materials Published by UNCITRAL
UNCITRAL has done some astounding work on arbitration. UNCITRAL publishes monthly biography on several trade law topics, including on arbitration and conciliation. Do check out the monthly bibliography for
January 2011, and February 2011.

UNCITRAL had its first Asia conference in November 2010. The following papers (topic-wise) pertaining to arbitration were to be presented in the conference:

Jeffrey Chan Wah Teck, S.C, A Singaporean perspectiveSoogeun OH - Recursivity in Law Making

Recent work by UNCITRAL
Pyoung Keun Kang, The UNCITRAL Arbitration Rules as Revised in 2010

Current and future topics of UNCITRAL and their Implications on Asia
Jae Woo Lee, Transparency in Treaty-Based Investor-State Arbitration

Online Dispute Resolution
Qisheng HE, A Global Online Dispute Resolution System - Is China Ready to Join?

P.R. Swarup, An Indian Scenario

By the way, SSRN has specific content containing articles published in respect of the Indian Laws. Do check out the SSRN India laws eJournal

Wednesday, March 9, 2011

More on the RNRL v RIL Judgement

We had two posts (access those from here and here) on the RNRL v. RIL case before the Supreme Court. We wish to delve further into the case.

In the last two posts, we had analysed the legal doctrines that were applied by the Supreme Court and had dealt with the politico-historical aspects of petroleum exploration. These historical reasons and the public trust doctrine (refer to previous posts- links above) made the Supreme Court "grant" enormous powers to the government to regulate the petroleum industry, especially considering fuel security and sovereignty issues. We were to deal with the significant restrictions that the minority judgement (MIJ) has imposed on the enormous power given to the government to regulate the petroleum industry (two judges formed the majority while one formed the minority).

The MIJ held that since the government holds control over the petroleum resources in trust, the restraints on the Union government (government) are the following:

1. The government cannot transfer title to such resources unless it receives just and proper compensation
2. The government shall not allow deprivation of such resources to users in different sectors/ industries.
3. The government shall frame a proper conservation policy taking into account domestic availability, need for balancing present and future needs and the country’s security requirements. Extraction of such resources shall be allowed only after framing of such policy
4. The government shall periodically evaluate equitable distribution of such resources between different sectors and regions
5. The government shall frame a proper utilization policy and shall disallow a contractor from extracting and distributing such resources without permission of the government
6. An end user shall not be given a guarantee of continued access to such resources without the period specified by the government.

The MIJ declared that any action of the government which fails to take into account the above principles would be violative of Article 14 of the Constitution. Now, it must be noted that the majority judgement (MAJ) contained no such restrictions. The MAJ granted virtually a carte blanche to the government as regards regulation of the petroleum industry but placed no restrictions on the government. This blawgger feels that restrictions like the above must be placed on the government so that the government regulates the sector not on the basis of political considerations but on the basis of sectoral needs. 

More on the Reliance judgement in another post.

Tuesday, March 8, 2011

Latest Developments on the Indus Water Treaty

A Staff Report prepared for the use of the Committee on Foreign Relations, US Senate was published almost a month ago. The report titled “Avoiding Water Wars:Water Scarcity and Central Asia’s Growing Importance for Stability in Afghanistan and Pakistan” dealt with the tricky topic of water scarcity in Afghanistan and Pakistan. We summarize below certain salient points in the Report that are relevant to the Indus Water Treaty:

a) Water scarcity in Afghanistan and Pakistan has immense impact on regional stability and US Foreign Policy.

b) The US has a lot of experience on transboundary water sharing agreements and should build institutions that deal with international water law, dispute resolution, mediation, and arbitration and support institutions that support transboundary water sharing agreements [read World Bank].

c) The Indus River is most significant for Pakistan’s agricultural sector because Pakistan’s agriculture almost exclusively relies on the said river.

d) Since water regulation in India is within the domain of the States, there has been limited co-ordination between different States and this has diminished the surface and groundwater.

e) Though the Indus Water Treaty, 1960 has governed the sharing of the Indus Basin between India and Pakistan for more than half a century, experts question its effectiveness due to the tensions between India and Pakistan over the Kashmir region.

f) “Others” question the effectiveness of the Indus Water Treaty in the light of India’s need to harness the Indus basin and Pakistan’s increasing demand for water or its agricultural purposes.

g) Studies show that no single dam built by India in the Kashmir region has the effect of limiting Pakistan’s access to the Indus waters, “the cumulative effect of these projects could give India the ability to store enough water to limit the supply to Pakistan at crucial moments in the growing season”.

h) The Indus Water Treaty is threatened by lack of trust between India and Pakistan. “Any perceived reduction in water flows magnifies this distrust, whether caused by India’s activities in the Indus Basin or climate change”.

i) The Indus Water Treaty has been criticized by experts “for its inflexibility to adjust to changes in water levels". Experts question whether the treaty signed more than half a century back would adapt to new issues like increasing demand for the use of the waters for irrigation and access to hydroelectric power. If the Treaty breaks down, it might have a significant impact on the regional stability.

j) Experts have expressed concerns that India has not made available data on the water volume of the river Indus thereby increasing the mistrust Pakistan has on India. It is recommended that efficiencies should improve thereby decreasing water demand and flexibilities should be created to respond to changes in water volume etc.

The Report can be accessed from here.

Several Pakistani news papers have cited this report to argue that India is trying to gain control over the Indus basin (see, for example, this news report). India, on its side, has allowed Pakistan to survey hydroelectric projects in India so that Pakistan could verify if there was any violation of the Indus Water Treaty (See this link).

Monday, March 7, 2011

Monthly Roundup of SSRN Articles on Arbitration (February 2011)

Contract and Procedure
Christopher R. Drahozal and Peter B. Rutledge

This paper examines both the theoretical underpinnings and empirical picture of procedural contracts. Procedural contracts may be understood as contracts in which parties regulate not merely their commercial relations but also the procedures by which disputes over those relations will be resolved. Those procedural contracts regulate not simply the forum in which disputes will be resolved (arbitration vs litigation) but also the applicable procedural framework (discovery, class action waivers, remedies limitations, etc.). At a theoretical level, this paper explores both the limits on parties' ability to regulate procedure by contract (at issue in the Supreme Court's recent Rent-A-Center decision) and the scope of an arbitrator's ability to fill gaps in parties' procedural contracts (at issue in the Supreme Court's recent Stolt-Nielsen decision). At an empirical level, this paper taps a largely unexplored database of credit card contracts available at the Federal Reserve in order to examine actual practices in the use of procedural contracts.

Claim-Suppressing Arbitration: The New Rules
David S. Schwartz

Binding, pre-dispute arbitration imposed on the weaker party in an adhesion contract so-called "mandatory arbitration" should be recognized for what it truly is: claim-suppressing arbitration. Arguments that such arbitration processes promote access to dispute resolution have been refuted and should not continue to be made without credible empirical support. Drafters of such arbitration clauses are motivated to reduce their liability exposure and, in particular, to eliminate class claims against themselves. Claim-suppressing arbitration, furthermore, violates two fundamental principles of due process: It allows one party to the dispute to make the disputing rules; and it gives the adjudicative role to a decision maker with a financial stake in the outcome of key jurisdictional decisions "that is to say, arbitrators have authority to decide their own power to decide the merits, a question in which they have a financial stake. The Supreme Court has facilitated this doctrine through a series of poorly-reasoned and incoherent decisions, in which the Court's liberal wing has been particularly inept at seeing the stakes for consumer and employee plaintiffs. Exploiting Justice Breyer's incoherent line of majority opinions attempting to identify "gateway" issues, the conservative Court majority has recently insulated all questions of enforceability of arbitration clauses from judicial review and is on the verge of allowing corporate defendants to immunize themselves from class actions through use of arbitration clauses.

Are Arbitrators Above the Law? The 'Manifest Disregard of the Law' Standard
Michael H. LeRoy

Arbitration is supposed to be final and binding. But federal and state laws, and judicial doctrines, allow courts to vacate arbitrator awards. This study contemplates the role of courts when they review awards that “manifestly disregard the law” - a term that means the arbitrator knew the law but chose to ignore it. Given the norm of arbitral finality, should courts vacate these rulings?

Hall Street Associates v. Mattel, Inc., 552 U.S. 576 (2008), failed to answer this question. The parties asked a court to review their award for errors of law. This standard is not in the Federal Arbitration Act (FAA). Hall Street ruled that courts cannot review awards beyond the FAA’s express terms. The parties’ standard prompted Hall Street to ask whether courts may apply “manifest disregard of the law,” even though it is not in the FAA. Inscrutably, Hall Street answered: “Maybe the term ‘manifest disregard’ was meant to name a new ground for review, but maybe it merely referred to the [FAA’s] § 10 grounds collectively, rather than adding to them.”

I analyze “manifest disregard” by using historical and empirical methods. Common law courts vacated awards for “fraud,” “corruption,” “partiality,” or if arbitrators “exceeded powers.” The FAA enumerates these as grounds to vacate awards. In the same sequence with these terms, nineteenth century courts vacated awards for “manifest mistake” or “palpable mistake” of the law. I contend that Congress inadvertently omitted “manifest disregard” from the FAA. To answer Hall Street’s equivocation: “Manifest disregard of the law” is part of the FAA.

This sets the stage for my empirical question: Has Hall Street led courts to confirm more awards, thus promoting finality? The answer is yes. In 46.4% of federal cases and 21.8% of state cases, parties in my database argued that an award manifestly disregarded the law. Still, state appellate courts confirmed more employment awards after Hall Street was decided on March 3, 2008 - 88.9% (16/18), compared to 70.9% (73/103) from 1975 until Hall Street. Federal district courts confirmed 93.7% of awards (164/175) before Hall Street, and 90.9% (30/33) after. Federal appeals courts confirmed awards at a high rate before and after Hall Street (87.8% and 85.7%).

Unfortunately, Hall Street’s muddled analysis has split federal circuits. The Fifth and Eleventh Circuits ruled that Hall Street ended “manifest disregard,” but the Second, Sixth, and Ninth Circuits still treat it as part of the FAA. The First, Third, Fourth, and Tenth Circuits avoided ruling on the standard. In addition, state courts have differed in their reactions to Hall Street.

This fractured approach implies that the Supreme Court may reconsider its vague treatment of “manifest disregard.” The Court should affirm this standard. My findings show that review for “manifest disregard” does not erode finality. The standard translates to nanoscale review of awards. As one court put it: “There is...a way to understand ‘manifest disregard of the law’ that preserves the established relation between court and arbitrator...It is this: an arbitrator may not direct the parties to violate the law.” Judges have applied this concept for two centuries to ensure that private tribunals conform to the laws. This rationale is particularly relevant because so much arbitration has changed from a voluntary to mandatory process. Judicial review must be allowed to correct an arbitrator’s intentional flouting of the law. If “manifest disregard” is eliminated, arbitral finality will rise above the crowning principle of the American constitutional system: “No man in this country is so high that he is above the law.” (U.S. v. Lee, 106 U.S. 196, 220 (1882)).

Shifting the Paradigm of the Debate: A Proposal to Eliminate At-Will Employment and Implement a 'Mandatory Arbitration Act'
Zev J. Eigen , Nicholas Menillo and David Sherwyn

This article recasts the debate over mandatory arbitration of employment disputes as a discussion of the need to overhaul some critical elements of the way in which workplace rights disputes are adjudicated. Efforts to overhaul the system such as the Arbitration Fairness Act perpetuate the status quo of unjust cost-driven exploitation by law-breaking employers and employees alike. The authors provide an alternative two-part solution. First, we propose a "Mandatory Arbitration Act" that attempts to remedy legitimate problems like forum privacy that increase bad employers' abilities to hide from the law, while retaining significant benefits of pre-dispute arbitration like flexibility, speed, and reduced costs which augment access to justice for low wage earners. Second, we propose that employees engaged in interstate commerce can be terminated only if there is cause for the termination or severance pay given in lieu thereof. The article outlines a new employment standard that will provide employees with protection, allow employers to operate with greater certainty, and restore creditability and accountability to discrimination law.

The Limits of Procedural Private Ordering
Jaime Dodge

Civil procedure is traditionally conceived of as a body of publicly-set rules, with limited carve-outs – most commonly, forum selection and choice of law provisions. I argue that these terms are mere instantiations of a broader, unified phenomenon of procedural private ordering, in which civil procedure is no longer irrevocably defined by law, but instead is a mere default that can be waived or modified by contract. Parties are no longer merely selecting between publicly-created procedural regimes but customizing the rules of procedure to be applied by the court – from statutes of limitations, discovery obligations and the admissibility of evidence, to burdens of proof, available remedies and standard of review – before a dispute arises. The resulting conversion of procedural rules from publicly-created guarantors of procedural justice to privately-bargained commodities fundamentally alters our system of civil procedure.

But the impact transcends civil procedure, as the existing doctrine allows parties to use procedural terms not only to reinforce their substantive obligations under contract or statutory default rules, but to circumvent limits on the alienability of non-waivable rights – reducing even those substantive laws designated as mandatory to a mere set of default rules.

I argue that while procedural contracting can often enhance both private and social welfare, we should not permit its use as a mechanism for contracting around existing limits on private ordering. The Article concludes by exploring the viability of a symmetrical approach, whereby any applicable limitations upon the substance of a contract are applied with equal force both to substantive terms and procedural terms. Likewise, this approach denies enforcement to procedural contracts seeking to modify elements of procedure that have been removed from the ambit of modification via stipulation during the litigation process, creating symmetry between pre- and post-dispute contracts.

The degree of procedural alteration permitted is thus a function of the contracting parties’ right to modify or waive the underlying substantive right that gives rise to the claim at issue; the procedural contract is then treated as an ex post stipulation, for purposes of determining the judicial enforceability of the particular modification. In this way, the symmetrical approach permits procedural contracting to further the parties’ legitimate ends, while preventing its use as a method for circumventing limitations on private ordering.

Iura Novit Curia and Due Process
Julian Lew

A recent survey of 817 international commercial arbitrations revealed that ninety one different laws or systems where applicable in those cases. The choice of applicable law is of great importance in international arbitration but in most cases the question of "which law applies?" is resolved by the parties express choice of law. By contrast the process by which the arbitrator ascertains sufficient knowledge of the content of that applicable law is rarely considered. This article explains the different ways in which an arbitrator may learn the rules of law that it must apply to the specific issues that arise before the Tribunal. Approaches to this issue differ in national courts both within common law and within civil law legal systems, with some adopting the principle of iure novit curia - the court knows the law - and others relying on the parties to plead and prove the law to the court. In international arbitration there is no uniform practice applied to this issue. This paper suggests that in international arbitration neither approach to the content of laws question prevails. Subject to due process requirements and in absence of agreement of the parties, arbitrators are free to develop procedures appropriate to the needs of the specific arbitration.

Afterthoughts: International Commercial Contracts and Arbitration
Luke R. Nottage

This article mainly responds to Professor Bonell’s three proposals to expand usage of the UNIDROIT Principles of International Commercial Contracts (UPICC). As UPICC are primarily opt-in rules, they can be more ambitious than the United Nations Sales Convention (CISG). They also needed to be, being designed for all commercial contracts - including many more relational contracts. This imparts a somewhat different 'vibe' to UPICC, creating one impediment to the proposal for a UN Declaration urging interpretation of CISG in light of UPICC. As a formal reasoning based legal system, particularly in contract law, Australia also still struggles with such soft law initiatives. More promising will be law reform clarifying that courts, not just arbitrators in proceedings with the seat in Australia governed by the UNCITRAL Model Law on International Commercial Arbitration, are free to apply 'rules of law' - including UPICC - as the governing law. Elevating UPICC into a Model Law for International Commercial Contracts would also be useful. Australia could then adopt or adapt provisions as the basis for more comprehensive reform of its contract law. This would better mesh with burgeoning relational transactions, and many norms (such as good faith) could also extend to domestic dealings.

Revelation and Reaction: The Struggle to Shape American Arbitration
Thomas Stipanowich

In this article, Professor Stipanowich explores recent decisions by the U.S. Supreme Court and the implications for the respective domains of courts of law and arbitration tribunals regarding so-called “gateway” determinations surrounding the enforcement of arbitration agreements and the contracts of which they are a part. The decisions address the complex interplay between federal substantive law focusing on questions of arbitrability, a body of law defined and expanded by the Court under the Federal Arbitration Act (FAA), and the law of the states and bring into play competing judicial philosophies of contractual assent and contrasting views about the balance between policies promoting the autonomy of contracting parties and judicial policing of overreaching in the context of contracts of adhesion.

According to Prof. Stipanowich, the Court’s current jurisprudence, which may be seen as establishing and expanding a “second tier” of the “revealed” substantive law of arbitrability under the FAA first given shape and substance in the 1980s, is a flashpoint for special concerns associated with standardized contracts directing consumers and employees to arbitrate. Prof. Stipanowich believes that this will inevitably add momentum to current efforts to enact national legislation outlawing pre-dispute arbitration agreements in consumer, employment and other classes of contracts, with possible negative consequences for business-to-business arbitration.

In part I of his article, Prof. Stipanowich offers a short history of the evolution of Supreme Court decisions concerning the “revelation” and expansion of federal substantive law under the Federal Arbitration Act (FAA). Parts II and III then discuss recent Supreme Court cases reflecting the Court’s continuing reliance on the wellspring of divined federal law as a basis for promoting party autonomy in arbitration while limiting lower courts’ ability to police such agreements. Part IV briefly explores the dynamic political response to the extreme, non-nuanced pro-arbitration position developed in modern Court jurisprudence. Finally, Prof. Stipanowich concludes the article by calling for carefully crafted legislation or administrative regulations limiting the use of arbitration agreements in adhesion contracts or establishing due process standards for such agreements.

Disputes Related to Healthcare Across National Boundaries: The Potential for Arbitration
Amar Gupta Sr. , Deth Sao and David A. Gantz

Trade in international health services has the potential to play a leading role in the global economy, but its rapid growth is impeded by legal barriers. Advances in technology and cross-border movement of people and health services create legal ambiguities and uncertainties for businesses and consumers involved in transnational medical malpractice disputes. Existing legal protections and remedies afforded by traditional judicial frameworks are unable to resolve the following challenges: (1) assertion of personal jurisdiction; (2) choice of forum and law considerations; (3) appropriate theories of liability for injuries and damages arising from innovations in medical care and delivery of health services; and (4) enforcement of foreign judgments. Such legal uncertainties and ambiguities call for a uniform means of redress that is more flexible and predictable than litigation in a court room. Given such needs, arbitration offers a potential solution, as it is a private streamlined adjudication process that has been successfully utilized on an international level to resolve several of the above mentioned legal quandaries. The voluntary, flexible, and legally binding nature of arbitration agreements across jurisdictions makes this form of dispute resolution more efficient and adaptive to changes in the health services industry than litigation. With careful construction of an approach that accounts for arbitration costs, reasonable recovery amounts, and complementary mechanisms such as no-fault compensation, international arbitration of medical malpractice disputes will reallocate the legal risks borne by businesses and consumers more fairly and efficiently.

Relationship Between FDI Inflows and Bilateral Investment Treaties/International Investment Treaties in Developing Economies: An Empirical Analysis
Aishwarya Padmanabhan

Bilateral Investment Treaties (BITs) or International Investment Agreements (IIAs) - often perceived as admission tickets to investments - are agreements signed between two countries under which each country binds itself to offer treaty based protection to investments and investors of the other country. This treaty based protection includes not expropriating foreign investment unless there is a public purpose and accompanied by compensation; national treatment; most favoured nation treatment; treating investors and investments in a fair and equitable manner; allowing free repatriation of profits; and providing an investor-state dispute settlement system (also known as investment treaty arbitration) under which foreign investors can directly bring a case at an international arbitral tribunal like the International Convention for the Settlement of Investment Disputes (ICSID) without the consent of their state if the investor feels that the host country violated the BIT or IIA.

Large numbers of BITs/IIAs are being signed with great alacrity by developing countries, like India and other developing countries, in a bid to attract more FDI inflows. The rationale behind signing these treaties is that it is believed by these countries that they will result in increased foreign investment flows into the country.

This paper attempts to see if there is a positive and direct correlation between signing BITs/IIAs and foreign investment inflows in developing countries like India, South American and Asian countries. This hypothesis would be either proved or disproved by the researcher. Data would be collected for this purpose from the Ministry of Trade and Commerce, Foreign Ministry of the respective countries. Further, even after assuming that there is a direct and positive relationship, it would also be studied whether it is prudent for developing economies to be overly-enthusiastic in signing BITs/IIAs given the restriction on policy space accorded to the host nations because majority of BITs/IIAs are structured purely from the perspective of foreign investors, granting them extensive rights without recognizing the right of sovereign states to regulate in the national interest leaving limited manoeuvrability to the host state. This warrants a detailed discussion in order to understand the serious consequences of the investment treaty obligations on host countries. This need has been augmented in light of the increasing number of investor-state treaty disputes and arbitrations at the ICSID and how it has become important for these developing countries to learn lessons and be cautious while negotiating their BITs or IIAs by considering adding adequate safeguards that will allow them to deviate from their treaty obligations in case a situation arises and thus, avoid potential protracted litigations that could cost millions as in the famous CMS v. Argentina case in the 1990s.

Thus, the paper would conclude by not only understanding whether the hypothesis proposed was validated or not, but also provide prescriptive arguments in favour of carefully assessing the impact of BITs on foreign investment inflow before entering into negotiations and signing them by the developing countries and to also adequately reserve its right to regulate foreign investments in the BIT in view of its national interest in light of the preceding case studies in this area.

Has International Law Outgrown Trail Smelter?
Jaye Ellis

The Trail Smelter arbitration, generally considered one of the cornerstones of international environmental law, is an ambiguous and puzzling piece of legal reasoning. The famous dictum in that case appears to stand for a proposition – states are strictly liable for trans-boundary environmental damage arising on their territory – that is not generally accepted in international law. In this paper, the difficulties of reconciling the Trail Smelter arbitration with contemporary international law on environmental protection and on state responsibility are analysed, and recent developments in the field of responsibility and liability for trans-boundary damage are assessed. It is argued that the process of trying to make sense of Trail and seeking to extract lessons from this case can help us to better understand international environmental law – and in particular the difficulties that this body of law poses to the framework of international law.

Book Review: Shari’a Law in Commercial and Banking Arbitration
Tony Cole

Book Review of Abdulrahman Yahya Baamir's, 'Shari’a Law in Commercial and Banking Arbitration' (Ashgate 201'7.

Business and Human Rights: The Search for Effective Remedies
Willem van Genugten

Are John Ruggie’s Guiding Principles going far enough? Maybe yes, from the perspective of States, but for sure no from the perspective of human rights NGOs, and in between from the perspective of the present paper. It shortly discusses some core notions and shortcomings: 1) Let States share their responsibilities with the civil society, without ‘privatizing these responsibilities away.’ 2) Keep using and further developing other means of pressure upon companies, alongside the legal ones; ask States to further frame the context and the space for self-regulation; keep pressuring upon further detailing international obligations, including ongoing specifications of the concept of extraterritoriality. 3) Keep reading promises by companies into contracts. 4) Keep emphasizing that treaty bodies and Courts have to go after the real perpetrators and should not be ‘captured’ and hindered by the traditional international law paradigm. 5) Keep looking at the reliability of national legal systems and the need to have backups, preferably by other national systems or, if appropriate and needed, international ones. 6) Keep looking at practical problems such as costs, the absence of (para)legal representation, the non-accessibility of legal language. 7) Keep using ‘in between means’ such as round tables, mediation and arbitration. Emphasis upon prevention and being proactive if possible, while using proportional, low cost means first, with hard legal means as last resort. Finally, 8) Keep emphasizing the need of human rights impact assessments, in order to work evidence based. Human rights discourses are sometimes driven by morality and ideals, but the best approaches match with empirical findings.

Drawing the Right Lessons from ICSID Jurisprudence on the Doctrine of Necessity
Amin George Forji

Bilateral investment treaties (BITs) and the International Centre for the Settlement of Investment Disputes (ICSID) have over the years injected an important dynamic into public international law, that is, the replacement of a political remedy (peaceful cooperation amongst nations) by a legal one (settlement of investment disputes). The institution of ICSID and the revision of BITs in line with its rules have opened the way for direct investors’ claims and investor-state arbitration. The obvious implication of a compulsory arbitration provision is that it has made up for many shortcomings of the diplomatic protection mechanism with, “the potential for an individual investor, with or without the approval of its home government, to press a conflict that may ultimately have diplomatic implications and may affect relations between the two countries concerned”. It is however still debated whether such a mechanism guarantees fairness and equity for both investors and host states, or merely advantages one BIT signatory to the detriment of the other. Argentina has had more cases before the ICSID tribunals than any other country. Faced with an economic crisis in 2001–2002, it ran into conflict with foreign investors when it repealed the Convertibility Law on which most of its BITs had been negotiated. Could that action be justified as one taken in times of peril and in dire need, as sanctioned by international law, or was it just an outright breach of Argentina’s own contractual commitments?

Foreign Investment and Measures Adopted on Grounds of Necessity: Towards a Common Understanding
Tarcisio Gazzini

During the grave economic crisis that hit Argentina between 1999 and 2001, the Argentine government adopted a series of drastic measures which adversely and substantially affected inter alia foreign investment. These measures generated a stream of claims by foreign investors concerning alleged violations of obligations stemming from bilateral investment treaties (BITs). The paper discusses how ICSID tribunals have dealt with these necessity pleas with a view to identifying common patterns and divergences on the main substantive and procedural issues. It focuses first on the legal nature of Article XI and Article 25 of the Draft Articles on State Responsibility prepared by the United Nations International Law Commission (hereinafter Draft Article 25) as expression of customary international law, as well as their co-ordination. It also briefly discusses the alleged self-judging character of Article XI and then examines and compares the conditions that need to be satisfied in order to adopt measures on grounds of necessity under Article XI and customary international law.

Lok Adalat – A Strategic Forum for Speedy and Equitable Justice
Vijaykumar Shrikrushna Chowbe and Priya Dhanokar

Lok-Adalat has symbolized a human sensitive forum to provide amicable, speedy, cheap justice by adopting informal procedure and avoiding technicalities. Present article has attempted the history and development of Lok-Adalat in India. An analysis has been made on potential utility of Lok-Adalat as one of the ADR tools. An exploration has been made about the validity of the award of Lok-Adalat and grounds that keep it open to challenge for its judicial review. At the end, SWAT analysis of Lok-Adalat has been made and its probable solution in the form of Permanent Lok-Adalat has been discussed.

Present article, thus provide a deep insight of Lok-Adalat and its potential utility to the existing legal system which has been overburdened with pending litigations. Concluding remarks are self-explanatory demanding the adaptations of concept of Lok-Adalat to suit the changing need of poor and needy people. The suitable recommendations have been made to that effect.

Background and Overview of Current Arbitration
Rodrigo Andrés Moscoso Valderrama and Juan Carlos Villalba Cuéllar

Arbitration is the oldest settlement in the history of mankind. Today represents an alternative emotional compared to late payment of state judges and has great benefits in the field of commercial law and international law. This article aims to take a tour through the history of international arbitration in order to clarify the origins of the figure and its current development.

Contracting for State Intervention: The Origins of Sovereign Debt Arbitration
Mark C. Weidemaier

Most models of contracting behavior assume that contract terms are meant to be enforced, whether through legal or relational means. That assumption extends to dispute resolution terms like arbitration clauses. According to theory, contracting parties adopt arbitration clauses because they want to arbitrate disputes and because they believe that a counter-party who has agreed to arbitrate will keep that promise rather than incur the resulting legal or extra-legal sanction.

In this article, I describe how this standard account cannot explain the origins of arbitration clauses in sovereign bond contracts. Drawing on original archival research and secondary sources, the article traces the routine use of arbitration clauses to U.S. dollar diplomacy in the first decades of the 20th century and shows that these early clauses were not designed to facilitate an arbitration between lender and borrower. Instead, the clauses were designed to justify intervention by capital-exporting states on behalf of disappointed citizen-investors and to convince prospective investors that the prospect of such intervention would deter default. These early arbitration clauses, then, were little more than efforts to signify and project power by capital-exporting states. The article traces the evolution of arbitration clauses over the first half of the century and concludes that lenders often hoped (typically in vain) that these clauses would enable them to harness the enforcement capacity of state actors.

Preliminary Effects of the Japanese Arbitration Act of 2003 on the Nation’s Arbitration System and the Effectiveness of Including Provisions for Expanded Judicial Review in Japan
Anthony P. Bertero

Japan is the second largest economy in the world and is home to some of the largest international companies in existence, yet it is rarely chosen as the forum for arbitration proceedings under modern international commercial contracts. Foreign companies may avoid arbitration under the Japanese Commercial Arbitration Association because of the historical power maintained by arbitrators who have, until the Arbitration Act of 2003, had judicially recognized power above and beyond those found in the UNCITRAL Model Law and United States arbitration systems.

Presumption Meets Reality: An Exploration of the Confidentiality Obligation in International Commercial Arbitration
Alexis Brown Stokes

Much has been written about the duty of confidentiality in international commercial arbitration. Most scholars and practitioners agree that a presumption of confidentiality - whether implied or explicit - exists between the parties to an international commercial arbitration. However, there is a disconnect between that presumption and the frequent realities of disclosure and publicity imposed by courts, arbitrators, and sometimes even the parties themselves. Despite the English Court of Appeal's 1997 decision in Ali Shipping v. Shipyard 'Trogir', which signaled a revived movement toward a judicially enforceable duty of confidentiality, the question of confidentiality in international arbitral proceedings is far from settled. Thus, through a comprehensive survey of relevant common law, statutory law, institutional rules, contract theory, and scholarly commentary, this article attempts to fill in the gaps between presumption and reality by shedding light on the current meaning of confidentiality in international commercial arbitration.

U.S. Anti-suit Injunctions in Support of International Arbitration: Five Questions American Courts Ask
Chetan Phull

International arbitration is an increasingly popular dispute resolution mechanism, however, the threat of foreign court intervention unremittingly remains. It is therefore important for a party seeking to enforce an arbitration agreement to know which jurisdictions are most amenable to protecting arbitration agreements, and what courts in these jurisdictions consider material in deciding whether to issue an anti-suit injunction (ASI) against the party seeking to sidestep arbitration through a foreign court order. In the United States, courts in certain jurisdictions in particular have shown a willingness to protect arbitration agreements through ASIs, in the presence of certain factors. The author has uncovered five fact-specific questions from the case law produced by these courts that are material to the courts’ issuance of ASIs. In the abstract, the questions consider: actual refusal to arbitrate and parallel foreign litigation; recognition and enforcement of an arbitration award enjoined by a “competent authority” under the New York Convention; the res judicata effect of U.S. judgments; the strong public policy in favor of arbitration; and bad faith by the party seeking to hinder arbitration. The additional element of whether an ASI to enforce an arbitration agreement is requested

Friday, March 4, 2011

Arbitration is a Service and Parties- Bleed More! Bear Service Tax!

In the budget speech a few days back, our Finance Minister (FM) proposed:
"I propose to expand the scope of legal services to include services provided by business entities to individuals as well as representational and arbitration services by individuals to business entities."
On the face of it I thought that the FM was trying to fill gaps and was proposing to levy service tax on lawyers representing parties in arbitration. How wrong can one be! (how right can one be on that on a different count- see amendment to Section 105(zzzzm)(ii) in the Finance Bill, 2011) The FM was not targeting lawyers. He was rather targeting arbitrators and consequently, the parties! If the Finance Bill becomes the law, the relevant portion of the Finance Act would read:
"105. "taxable service means any service provided or to be provided-
(iii) to any business entity, by an arbitral tribunal, in respect of arbitration."
Thus, as per Section 105(zzzzm)(iii), if any person acts as an arbitrator, he would be liable for service tax. This blawgger has the following comments:
  1. Service tax is an indirect tax. Essentially, parties would have to bear the burden of service tax though the arbitral tribunal is liable to pay tax to the authorities.
  2. The above quoted provision uses the expression "to any business entity". Thus, each party to the arbitration will have to bear service tax. Hypothetically, if the rate of service tax is 10% of the fee charged, then each party to the arbitration has to reimburse service tax to the arbitrator(s).
  3. This blawgger has all the sympathies for the ongoing arbitrations. They have to bear service tax for no fault of theirs. If they had known that the learned FM would call the "service" performed by the arbitral tribunal a taxable service, they would probably have never arbitrated at all.
  4. Already companies keep complaining that arbitration is a very costly process. Why would the FM make it more costly? I cannot fathom the reason for the amendment.
  5. Tax is a negative incentive. By charging service tax and thereby making arbitration more costly, is the learned FM trying to:
    • Encourage litigation once (if at all) the Commercial Divisions Bill is passed and each High Court gets a Commercial Division?
    • Encourage single arbitrator tribunal (with three arbitral tribunals becoming more costly)? In the alternative, the term used is "arbitral tribunal", thus referring to the tribunal as a whole rather than each of the arbitrators forming a part of the arbitral tribunal
    • Encouraging parties to involve in passive ADR mechanisms such as mediation, negotiation etc?
Wonder what was going on in the Finance Ministry when some one mooted this proposal. The Law Minister in each and every conference keeps saying that India should become a very important arbitration destination. But the motive of the FM seems to be the contrary. If the intention of the FM was to tax parties for arbitrating, this blawgger feels it is a very bad move. It is also bad for the parties who are currently arbitrating. Already arbitration in India is considered to be a very costly process. This blawgger invites the FM to read the decision of Dolphin Drilling Limited v. ONGCL and the news reports on the arbitration between Chandigarh Housing Board (CHB) and Parsvanath Builders. Posts on the Dolphin case and the CHB-Parsvanath arbitration can be accessed from here and here. Parties bleed while the arbitrators and the government make merry!

Updates: The provision quoted above states that a service provided by an arbitral tribunal to a business entity is a taxable service. Wouldn't it mean that a service provided by an arbitral tribunal to an individual is not a taxable service? For example, two brothers go for arbitration to resolve a family dispute. The service provided by the arbitral tribunal to decide the said family dispute would not be a taxable service. Similarly consumer arbitrations should ideally not be covered as regards the consumer at least (though it might make better sense for the consumer to go to the tribunals established under the Consumer Protection Act). So is the case with labour/ employment arbitrations as regards  labour/ the employee.